Arbitration & Other Laws

An arbitration is always a fall out of disputes. Disputes
occur for various reasons and under various laws. Hence, while dealing with an
arbitration, one needs to keep in mind the provisions of the other laws. They
more often than not, would have a bearing upon the arbitration proceedings or
the award or the validity of the same. One must always remember that an
arbitration is not an island by itself. It draws on and feeds on other laws.

One of the foremost questions which arises is the necessity
for a company to have an arbitration clause in its memorandum of association. It
is not an object of a company to refer matters to Arbitration but it is a power.
Hence, it is not necessary for a company to have an arbitration clause in its
memorandum of association, but it is definitely advisable.

The next question which arises is who can refer a matter for
arbitration on behalf of a company. A variety of persons can refer a dispute to
arbitration :

However, this would be subject to any express provisions on
this aspect in of memorandum and articles of association.

2.3 Disputes which are typical to a company and which can be
referred to ‘arbitration’ may include those arising on account of :

Oppression & Mismanagement :

S. 397 and S. 398 of the Companies Act provide for a petition to the Company
Law Board in all cases of oppression of minority by majority and mismanagement
of the affairs of the company by the majority. The question that arises, is can
the agreement between parties provide that the same would be referred to
arbitration ?

S. 8 and S. 45 of the Arbitration and Conciliation Act, 1996
provide that a judicial authority before which an action is brought in a matter
which is the subject of an arbitration agreement shall, if a party so applies
not later than when submitting his first statement on the substance of the
dispute, refer the parties to arbitration. Further, notwithstanding anything
contained in the Code of Civil Procedure, 1908, a judicial authority, when
seized of an action in a matter in respect of which the parties have made an
agreement, shall, at the request of one of the parties or any person claiming
through or under him, refer the parties to arbitration, unless it finds that the
said agreement is null and void, inoperative or incapable of being performed.
The CLB has exclusive jurisdiction for all matters u/s.397 and u/s.398 but that
does not preclude reference to arbitration. Thus, S. 8 and S. 45 are mandatory
provisions and if the petition matters are within the scope of the arbitration
agreement, then the CLB is bound to refer the issues to arbitration.

However, the CLB cannot order a reference to arbitration
unless a party to the proceedings applies for the same — EIH Ltd. v. Mashobra
Resort, 119 Comp. Cases 993 (CLB). If the oppression petition is contested by
the parties on merits without reference to arbitration, then the CLB would not
grant any stay against the petition — Suresh Jain v. Hindustan Ferro, 96 Comp.
Cases 507 (CLB).

The CLB will decide all matters of oppression and
mismanagement even which are outside the scope of the arbitration agreement —
Khandwala Securities Ltd. v. Kowa Spinning Ltd., 97 Comp. Cases 632 (CLB).

Joint venture/Shareholders’ agreement :

JV/shareholders’ agreements provide for the ‘Management and
Conduct of Business’ of a Company. A usual clause found in such agreements is
that all disputes would be referred to arbitration. A question which arises is
that can the company also be made a party to the arbitration along with the JV
partners/shareholders ?

Articles of association are the regulations which bind a
company and its shareholders. Only if the provisions of arbitration are
incorporated in the articles of association, can the company be made a party to
such proceedings :

A transfer of shares pursuant to an arbitration award is not
a case of a transfer, but it is a transmission of shares by operation of law.
Thus, it falls under the second proviso to S. 108 of the Companies Act and does
not require a transfer form for the company to register the transfer of shares.
The transfer in such a case is not based upon the volition of the parties, but
by operation of law — Dinesh Nagindas Shah v. Pankaj Aluminium Industries P.
Ltd., 102 SCL 161 (Bom.).

A Single Judge of the Bombay High Court in the case of Western Maharashtra Development Corporation v. Bajaj Auto Ltd., reported in (2010) 154 Comp. Cases 593 (Bom.), had ruled that an Arbitration Tribunal had no jurisdiction to give an award on the basis of a Shareholders’ Agreement containing restrictive clauses in the SHA. This was because the SHA itself was invalid, since the articles of a public company could not contain clauses restricting the transfer of shares and it was contrary to S. 108 of the Companies Act, 1956. Hence, the arbitration agreement which was founded on the SHA was void. The Arbitrator had ignored the express provision of S. 108 and lost sight of the very concept of free transferability of shares of a public limited company. Hence, his award was set aside. Very recently, a two-Member Bench of the Bombay High Court, in the case of Messer Holdings Ltd. v. Shyam Ruia and Others, (Appeal No. 855 of 2003) has overruled this decision of the Single Judge of the Bombay High Court. Hence, as the position now stands, an arbitration award dealing with restrictive clauses in a public limited company would be valid. This is a very important judgment since almost all PE/VC/ JV agreements as well as shareholders’ agreements contain such clauses. Thus, if any dispute arises on these clauses, the parties can apply for arbitration.

Winding-up petitions :

Can a petition for winding-up of a company u/s.433 of the Companies Act be referred to arbitration? Various decisions have held that an arbitration clause does not oust jurisdiction of a Court for winding-up petitions. Only disputes are referable to arbitration. A petition for winding-up is not an ‘action’. The power to order a winding-up is only under the Companies Act and only with the High Court. The Supreme Court in the case of Haryana Telecom v. Sterlite Industries Ltd., 97 Comp. Cases 683 (SC), has held that a claim in a petition for winding-up is not for money. Hence, no reference to arbitration can be made for winding-up of a company. Further, arbitration proceedings are not a bar to winding-up petitions — ABG Heavy Ind. v. Hindustan Shipyard, (2001) 105 Comp. Cases 413 (Bom.).

In Hewlett Packard v. BPL Net Com, (2002) 110 Comp. Cases 575 (Kar.), the Court held that if there is an arbitration clause in an agreement, the Court can yet entertain a winding-up petition as per its discretion. There is no automatic stay on winding-up merely because the subject-matter of dispute carries an arbitration clause. An arbitration agreement is binding on a company even after a winding-up petition. The legal status of the company continues till the company is dissolved. The only change is that instead of the Board of Directors the Liquidator steps into its shoes :

    446 of the Companies Act provides that once an order for winding-up is made, no suit/legal proceeding can be initiated against the company unless permission of Court is taken. Proceedings would also include ‘arbitration proceedings’. Thus, the leave of the Court would be required to commence arbitration proceedings against such a company — British India Corp. v. S.S. & T. Machinery, (2001) 106 Comp. Cases 467 (Kar.). The Court can declare an arbitration/ award to be null if done without its permission. Permission of the Court ordering winding-up is a must. Even a third party can plead that arbitration is null if no Court permission was obtained — Vasantha Ramanan v. Official Liquidator, (2003) 114 Comp. Cases 747 (Mad.).

VC/Private Equity Agreement :

These agreements always provide for a Deadlock Resolution between the Management Team and Venture Capital Funds. The usual clause provides that :

Arbitration and HUF :

A question which arises is that who has power to refer to arbitration on behalf of an HUF? The father/ manager/karta has power to refer disputes relating to joint family property to arbitration, provided reference is for the benefit of the family — Shantilal v. Munshilal, (1932) 56 AIR 595 (Bom). Other members of the HUF are bound by the reference and the award made thereon — Balaji v. Nana, (1903) 27 Bom 287.

An agreement between HUF members to appoint arbitrators for partition amounts to a severance of the joint status of the HUF from the date of the agreement — Kashinathsa v. Narsingsa, AIR 1961 SC 1077.

An arbitration award is liable to ‘stamp duty’ of Rs.100 under the Bombay Stamp Act, 1958. An award is defined as a decision in writing of an Arbitrator/ Umpire made on reference for submitting differences, not being an award directing a partition.

However, if it is an instrument of partition, then the duty is different. An instrument of partition includes an award by an a arbitrator directing a partition. The duty on the same is levied @ 2% on the market value of the separated share of the property. Thus, the value on which stamp duty is levied is the total market value of the property less the largest share partitioned. If all shares are equal, then deduct any one share.

Arbitration and registration :

Earlier there was a controversy on whether an ‘arbitration award’ needed to be registered under the Registration Act, 1908. However, the Supreme Court’s decisions in Sardar Singh v. Smt. Krishna Devi, AIR 1955 SC 491, Kashinathsa v. Narsingsa, AIR 1961 SC 1077, M. Chelamayya v. M. Venkatratanam, AIR 1972 SC 1121 have clarified the position as follows :

    a) If the award creates right, title and interest in immovable property, then registration is compulsory.

    b) If it is a mere declaration of a pre-existing rights or reference to past partition and not creating right in praesenti — then ‘no registration’ is required.

    c) An ‘unregistered award’ which affects or purports to affect right, title or interest in any immovable property is inadmissible as evidence.

    d) However, an unregistered award is a valid award and not a waste paper. It creates rights and obligations between the parties.

In Akbarali v. Mumtaz Hussain, AIR 1987 Bom. 39 it was held that if a right is claimed under the award or is to be enforced by way of a suit, then registration of the award is a must. In Harendra Mehta v. Mukesh Mehta, (1999) 97 Comp. Case 265 (SC), it was held that foreign awards need not be registered.

In Satish Kumar v. Surinder Kaur, AIR 1970 SC 833, the Court held that if the award affects the partition of immovable property, then it requires registration.

Conclusion:

Whether a CA appears as a representative of one of the parties as an advisor, as an arbitrator, as a valuer or as an expert, he must always bear in mind the interplay of other laws on the award. A slip-up on any one law may render the award ineffective/ unenforceable. One is reminded of Humbert Wolfe’s golden quote :

“Making innumerable statutes, men
Merely confuse what God achieved in ten ! !”