2021 (2) TMI 932 - Tri - Companies Law

Legal ruling: Corporate governance disputes not arbitrable under Companies Act.

The Tribunal held that the disputes and reliefs sought in the Company Petition, involving allegations of oppression and mismanagement under the Companies ... Oppression and Mismanagement - scope of arbitration clause under the MoU - seeking to direct independent forensic audit into the affairs of the Company from the F.Y, 2011-2012 till the F.Y. 2018-2019 by an appointing an independent auditor - Section 241 read with Section 242 of the Companies Act, 2013 or Sections 397 and 398 read with of the Companies Act, 1956 - HELD THAT:- In order to succeed in getting a reference of the dispute arose under Section 241-242, 244 read with Section 337, 341 of the Companies Act, 2013, the applicant would not only be liable to show that the entire gamut of the dispute falls within the purview of Arbitration Agreement but also the fact that the Company Petition is a sham and mischievous one which has been decked deliberately so as to gainfully sustain the plea of non-arbitrability of such dispute. There would also be a heavy burden cast upon the applicants to show that the Arbitration Agreement would bind the non-signatory respondents. In a case involving such complex question of law and facts, determination of the aforesaid aspect may call for deeper examination of the matter by this Tribunal. However, the applicant herein could not show that the entire gamut of he dispute falls within the purview of Arbitration Agreement. In the matter of a winding up petition, the petitioner therein M/s Haryana Telecon Limited filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, inter alia, contending that the High Court should refer the matter to arbitration. The Division Bench of the Hon’ble High Court dismissed the plea of the appellants stating that the question regarding the winding up of a company could not be referred to an arbitrator - In this case, the CP is filed for oppression and mismanagement in the Company. In addition to that serious fraud has also been alleged by the petitioners. Since those questions cannot be considered by an Arbitral Tribunal, the relief prayed for reference to an Arbitral Tribunal cannot be accepted. It would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the CP or in some cases bifurcation of the CP between the parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject matter of an action brought before the judicial authority is not allowed. Such bifurcation of a suit in two parts, one to be decided by the Arbitral Tribunal and the other to be decided by this Tribunal would inevitably delay the proceedings. The whole purpose of speedy disposal of the dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums. Application filed for referring the matter to Arbitral Tribunal in terms of Arbitration Agreement contained in clause 8 of Memorandum of Understanding (MoU) dated 31st March, 2007 is dismissed. Issues Involved:1. Whether the disputes in the Company Petition fall within the scope of the arbitration agreement.2. Whether the reliefs sought in the Company Petition can be adjudicated and granted in arbitration.3. Whether all parties to the Company Petition are parties to the arbitration agreement.4. Whether the statutory remedy for oppression and mismanagement under the Companies Act, 2013 can be referred to arbitration.Issue-wise Detailed Analysis:1. Scope of Arbitration Agreement:The respondents filed an application under Section 8(1) of the Arbitration and Conciliation Act, 1996, seeking to refer the matter to arbitration based on an arbitration clause in the 2007 Memorandum of Understanding (MoU). The applicants argued that the disputes in the Company Petition, which involve allegations of oppression and mismanagement under Sections 241-246 of the Companies Act, 2013, fall within the scope of the arbitration agreement. However, the respondents contended that the statutory remedy for oppression and mismanagement is not arbitrable and must be adjudicated by the National Company Law Tribunal (NCLT).2. Reliefs Sought in Company Petition:The reliefs sought in the Company Petition include directing an independent forensic audit, investigating the affairs of the company, declaring mismanagement, and various compensatory and injunctive reliefs. The respondents argued that these reliefs are statutory remedies under the Companies Act, 2013, and cannot be granted by an arbitral tribunal. The Tribunal agreed, noting that the reliefs sought pertain to the statutory powers of the NCLT under Sections 241 and 242, which cannot be exercised by an arbitral tribunal.3. Parties to Arbitration Agreement:The respondents argued that the 2007 MoU, which includes an arbitration clause, binds all parties involved in the Company Petition. However, the Tribunal noted that the 2007 MoU pertains to specific terms and conditions related to the settlement of disputes from a previous MoU in 1998 and does not cover the broader statutory issues of oppression and mismanagement alleged in the Company Petition. Additionally, the Tribunal highlighted that not all parties to the Company Petition are signatories to the arbitration agreement, making it inappropriate to refer the entire matter to arbitration.4. Statutory Remedy for Oppression and Mismanagement:The Tribunal emphasized that the remedy for oppression and mismanagement is a statutory remedy provided under the Companies Act, 2013, and the power to grant such reliefs is conferred exclusively on the NCLT. Citing various judicial precedents, including the Supreme Court's decision in Haryana Telecom Ltd. vs. Sterlite Industries (India) Ltd., the Tribunal held that matters involving statutory remedies and allegations of fraud cannot be referred to arbitration. The Tribunal also referred to the judgment in Sukanya Holdings Pvt. Ltd. vs. Jayesh H. Pandya, which held that bifurcation of disputes, where some are arbitrable and others are not, is not permissible.Conclusion:The Tribunal concluded that the disputes and reliefs sought in the Company Petition are not arbitrable and fall within the exclusive jurisdiction of the NCLT. The application to refer the matter to arbitration was dismissed, and the Tribunal retained jurisdiction to adjudicate the issues of oppression and mismanagement as provided under the Companies Act, 2013. The decision underscores the principle that statutory remedies for corporate governance issues cannot be supplanted by arbitration agreements.