Rakesh Malhotra v. Rajinder Kumar Malhotra

Citation: MANU/MH/1309/2014

Facts

Supremax Group, world’s second largest manufacturer of razor blades and allied products, was run by Rajindra Kumar Malhotra (“Rajindra”) and his family members. All the assets, business and plants belonging to Indian companies were later transferred to a newly incorporated company, which was under the control of Rakesh Malhotra (“Appellant”), Rajindra’s elder son after the restructuring in 2008. On the other hand some equity was held by Rajindra, his wife and his younger son in those Indian companies.

A Subscription and Shareholding Deed (“Shareholding Deed”), Supplementary Deed along with other business agreements, were executed at the time of restructuring. These deeds authorised the Appellant to represent the Rajindra in all transactions. Along with this the Appellant also became the sole bank account operating authority and deployed funds received by Indian companies held by Rajindra to, inter-alia, guarantee bank loans and other facilities to the newly formed company under his control. According to an arbitration clause contained in the Shareholding Deed, the dispute could be resolved under the rules of London Court of International Arbitration in Geneva. All the directors of the Indian companies held by Rajindra became employees of the entities controlled by the Appellant merely because of the restructuring. Therefore, no information was revealed to Rajindra related to funds deployed or other liabilities incurred due to Appellant’s actions.

Various company petitions alleging oppression and mismanagement were filed by Rajindra along with others before Company Law Board (“CLB”) in order to prevent diversion of funds under Section 397, 398, read with Section 402 of the Companies Act, 1956, seeking orders to set aside the re-structuring and removal and appointment of directors. Appellant obtained an ex-parte anti-suit injunction from the Commercial Court of Queen’s Bench Division of the Royal Courts of Justice (“UK Court”) which restrained Rajindra from proceedings before CLB at the same time. This was subsequently turned down as proceedings laid before CLB related to post-restructuring dealings and transactions. Consequently applications were filed before CLB seeking orders to refer the dispute to arbitration under Section 45 of the Arbitration & Conciliation Act, 1996 (“Act”).

It was held by CLB that in case of oppression and mismanagement, no reference could be made to arbitration and dismissed the application. An independent Observer-cum-Facilitator on the Board was also appointed by CLB. This current dispute emerged from a group of appeals filed against the CLB order on the issue whether disputes arising out of Shareholding Deed should be referred to arbitration.

Issues

• Whether disputes under Section 397 and 398 read with S. 402 of the Companies Act can ever be referred to arbitration.
• Whether decisions of foreign court was binding on Company Law Board.

Appellant’s Contentions

1. If a dispute falls in the ambit of an arbitration agreement, then without taking into consideration the kind of relief provided by arbitral tribunal, such reference must be made. The Appellant while relying on Section 45 of the Act submitted that only dispute is mentioned and no mention is made to relief or power.
2. Decision of foreign court is not conclusive and binding on CLB as it was contrary to the Supreme Court decision in Chloro Controls India (P.) Ltd. v. Severn Trent Water Purification Inc.[1] which held that in case of several agreements constituting a composite transaction, the court may, for an effective and complete implementation make reference to arbitration even of the disputes existing between signatory or non-signatory parties.
3. Sections 397 and 398 and other allied sections do not rule out the jurisdiction of civil court and also they do not confer exclusive jurisdiction on CLB. Hence an alternate remedy can be sought under Sections 397 and 398 by the same party under same agreement.

Rajindra’s Arguments

1. Private dispute resolution tribunal do not have inherent power to entertain any dispute invoking the powers under Section 402 of the Companies Act. It is quite impossible to refer some part of reliefs to an arbitral resolution and other part to be determined by the CLB. Rajindra argued that the test must be in relation to the source of power and not on basis of how the relief is sought or split up.
2. Jurisdiction of CLB under Sections 397 and 398 is statutory and therefore it cannot be ousted by an arbitration clause. The Rajindra submitted that UK court’s ruling was absolute and binding and hence the appellant could not raise the same issue in another forum as the disputes before CLB were not under purview of arbitration clause in the Shareholding Deed because it involved different parties.

HELD

The Bombay High Court held that the disputes arising out of oppression and mismanagement filed under provisions of Companies act are not capable of being referred to arbitration taking into consideration the nature and scope of the power invoked.

Section 45: “a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement“

Section 8: “a judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement“

The operative word here is “matter”. In order to refer a matter to arbitration, the “matter” dealt must be one in respect of which there is an arbitration agreement. In case of an oppression and mismanagement “action” before the CLB, the “matter” invokes CLB’s statutory powers under those sections including Section 402 and not exercisable by a civil court. Though the civil courts are vested with the power to entertain an action in oppression and mismanagement cases, this power is not the same as vested with CLB under S. 402 of the Companies Act, 1956.

Various cases were taken into consideration in analysing powers of CLB in an oppression and mismanagement cases and whether it was in the nature of an action in rem. The Bombay High Court relying on past decisions including Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.[2], which held that though petition for winding up is a matter in rem, no agreement between parties can vest an arbitral panel with such power of winding up. The Bombay High Court held that if CLB’s plenary and expansive powers are properly invoked and petitions are not mala fide, oppressive, vexatious or an attempt at dressing up to evade an arbitral clause, then a narrowly tailored arbitral proceeding or merely the existence of an arbitration agreement is not sufficient to capture the broad and far reaching reliefs that can likely be sought by parties in such cases. CLB is vested with the powers to refer disputes to arbitration if petition is mischievous, vexatious and mala fide.

The Bombay High Court held that the decision given by UK court, on the issue whether petition before CLB was covered by the aforementioned arbitration clause, was not covered by any of the exceptions to S. 13 of Code of Civil Procedure, 1908 (“CPC”). Therefore, it bound the CLB, and the CLB was not, as it held, “free to take its own view“. That being so, there is no question of any reference being made to arbitration. Conclusive and binding nature of judgment is decided based on the issues before it. The Bombay High Court held that UK Court decision was on the same issues which were before the CLB and therefore the reasoning given by the CLB for not being bound by the orders of the foreign court were untenable.

Full Text here

Author: Mahak Rathee

Publishing Editor: Vivek Verma

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[1] (2013) 1 SCC. 641

[2] (1999) 122 PLR 116