2025 (7) TMI 1071 - HC - Indian Laws

Arbitral tribunal's order imposing personal liability on One Person Company shareholder set aside for violating limited liability principles

Saravana Prasad Versus Endemol India Private Limited & Anr. and Innovative Film Academy Pvt. Ltd. Versus Endemol India Private Limited & Anr.

The Bombay HC partially allowed appeals challenging an arbitral tribunal's order requiring a Rs. 10.40 crore deposit and extensive disclosures. The HC set ... Challenge to order passed by a Learned Arbitral Tribunal to deposit Rs. 10.40 crores in a fixed deposit in a nationalised bank and requiring expansive disclosures in the course of conduct of the arbitral proceedings - Adoption of reasonable and plausible view or not - HELD THAT:- The Learned Arbitral Tribunal has taken note of the Confirmation Letter as being the linchpin of Endemol’s arguments, and indeed also noted that Innovative has not denied having issued the Confirmation Letter. Whether the Confirmation Letter was something consciously issued or routinely issued in the course of audit confirmations sought by auditors of Endemol, the reasons for which there is no Confirmation Letter after 2022, and the implications of accounts reconciliation exercises that the parties had engaged in, are all matters that would be dealt with by the Learned Arbitral Tribunal in the course of the conduct of the arbitration. The Impugned Order contains no analysis as to why Prasad should be roped into this mix by directing him to make a deposit and to give disclosure of his personal assets and liabilities despite Innovative being a limited liability OPC. The Impugned Order is vulnerable on two counts – first, it does not provide reasons as to why it would treat Innovative and Prasad as one and the same in terms of liability owed; and second, it is directly contrary to Innovative being a limited liability company, which implies that no final relief of liability is possible against Prasad for no reason other than being the sole shareholder of Innovative. Innovative being a limited liability company totally undermines the ability to direct Prasad to meet obligations by way of interim relief since there cannot arise final relief that fastens Innovative’s liabilities on to Prasad. Therefore, the Impugned Order cannot be sustained in relation to the directions issued against Prasad – of making a deposit and providing disclosures. There is also no analysis of any contemporaneous evidence that would make Prasad contractually liable without being a party to the Agreement. If such a factual matrix had been in existence and dealt with, one could have considered that despite being ring-fenced from Innovative’s liability as its shareholder, Prasad may have some obligation to meet. Since Prasad’s liability is limited by the Companies Act, no direction against Prasad to make a deposit or make any disclosure is legally sustainable or tenable – such a direction is in direct conflict with the fundamental policy of Indian law governing OPCs, as enshrined in the Companies Act - Even a final relief against Prasad looks, prima facie, unlikely – it is left open to the course of arbitration to see if there is any other basis at all for any claim to be made against Prasad, but at this stage there is not even a prima facie case for issuing any directions involving personal liability on Prasad. Therefore, directing him to make a deposit or to make disclosures of his personal assets and liabilities (which can only be in aid of a potential future personal liability) is untenable and liable to be set aside. The Impugned Order, insofar as it directs imposition of any personal obligations on Prasad, is hereby set aside - The Impugned Order, insofar as it imposes obligations on Innovative – whether in the nature of maintaining a fixed deposit in a bank, or disclosing assets, liabilities and ownership interests of Innovative – cannot be faulted with. The captioned appeals are partially allowed. ISSUES: Whether an interim order under Section 17 of the Arbitration and Conciliation Act, 1996 directing deposit of disputed sums and expansive disclosures is sustainable.Whether the sole shareholder and director of a One Person Company (OPC) can be directed to make deposits and disclosures personally in arbitral interim proceedings.Whether the Confirmation Letter issued by the OPC admitting balance dues can be relied upon as a basis for interim measures.Whether the arbitral tribunal can impose personal liability on the sole shareholder of an OPC despite limited liability protections under the Companies Act, 2013.The scope of interference by the court under Section 37(2)(b) of the Arbitration Act with interlocutory orders under Section 17. RULINGS / HOLDINGS: The interim order directing the deposit of Rs. 10.40 crores by the OPC in a fixed deposit is a 'reasonable and just approach' and 'unworthy of interference,' balancing the need to secure dues without alienating the funds.The direction to the sole shareholder and director of the OPC to make the deposit and provide disclosures of personal assets and liabilities is 'in direct conflict with the fundamental policy of Indian law governing OPCs' and 'cannot be sustained' as it ignores the limited liability status of the OPC.The Confirmation Letter, though not conclusive of the merits, is a 'linchpin' of the claim and its issuance by the OPC is undisputed, justifying prima facie reliance for interim relief.The arbitral tribunal must not treat the OPC and its sole shareholder as one and the same for liability purposes absent specific contractual or factual basis; the Impugned Order's failure to distinguish between them renders that part of the order vulnerable.The court will not substitute its own view for the arbitral tribunal's plausible prima facie assessment unless the order is 'blatantly perverse' or 'ex facie conflict' with the record. RATIONALE: The legal framework governing OPCs under Section 2(62) of the Companies Act, 2013 creates a separate legal entity with limited liability, protecting the sole shareholder from personal liability for company obligations.Precedent from Saloman v. Saloman establishes the principle that a company is a separate juridical person distinct from its shareholders, which applies equally to OPCs.The arbitral tribunal's power under Section 17 of the Arbitration Act to grant interim measures is broad and not bound by the procedural strictures of Order 38, Rule 5 CPC; apprehension of dissipation or diminution of value suffices.The Confirmation Letter constitutes a prima facie admission of debt, justifying interim security measures, but does not preclude full examination of merits during arbitration.The court's interference under Section 37(2)(b) is limited to cases where the arbitral tribunal's order is unreasonable or untenable; here, the tribunal's directions regarding the OPC are plausible, but the extension of liability to the sole shareholder is an overreach.No evidence was presented to establish contractual or factual liability of the sole shareholder distinct from his capacity as OPC member, thus no basis exists to impose personal interim obligations on him.The ruling clarifies that observations are prima facie and do not prejudice the final adjudication of issues in arbitration.