ARBITRABILITY OF OPPRESSION AND MISMANAGEMENT (‘O&M’) CLAIMS

1. Introduction to O&M Provisions and Claims in India

Oppression and Mismanagement (O&M) claim provisions were included in the Companies Act (‘CA’) to prevent the trampling of rights of minority shareholders in situations of exercise of excessive power or mala fide dealings by majority shareholders. Sections 241 to 244 of the Companies Act (‘CA’), 2013 deal with claims of oppression and mismanagement. They correspond to Sections 397-402 of the CA, 1956. It is interesting to note that no other jurisdiction has a comparable provision on mismanagement. Chapter XVI of the 2013 Act empowers members holding 1/10th of the issued share capital of the company or 1/10th of the members of the company to file a claim of “oppression” or “mismanagement” in the National Company Law Tribunal (‘NCLT’) – the statutory body conferred with special powers to deal with such cases. While these remedies were available to the minority shareholders even under the erstwhile CA, 1956, the CA, 2013, also enables members to file a petition under Chapter XVI of the said legislation if the acts of the majority shareholders are “prejudicial to his/her interest as members” or “prejudicial” to the interests of the company.

2.     Legal provisions and opinions regarding the arbitrability of O&M claims in India

In Shanti Prasad Jain v. Kalinga Tubes Ltd.¹, the SC relying on English and Scottish decisions interpreted the term “oppression” to mean a series of events that showed that the affairs of the company were being conducted in a manner that was burdensome, harsh and wrongful to the minority shareholders of the company. Furthermore, such conduct necessarily involved an element of lack of probity or fair dealing towards the minority shareholders, who had entrusted their capital to the company. But, a mere lack of confidence in the majority shareholders would not per se be regarded as “oppressive” under Indian companies’ law. The legality or illegality of actions has no bearing on whether an O&M claim can be made. Even if the action is perfectly legal, it may be “oppressive”. It is not enough to show that the conduct of the affairs of the company is “oppressive” to some members of the company. The minority shareholders of a company have to prove further that there are “just and equitable” grounds for winding up the company. The lack of definition of the terms “oppression” and “mismanagement” allow the Courts to determine claims on a case-to-case basis depending on facts and business realities. In Needle Industries (India) Ltd. v. Needle Industries Newey (India) ², the SC held that the “oppression” or “mismanagement” by which the minority shareholders are aggrieved should be continuous and last till the date of filing the petition. An exception to this was outlined in Deepak C. Shriram v. General Sales Limited and Others ³ where the Court held that if the effects of the “oppression” or “mismanagement” were permanent, then the act could be one single occurrence as well. In India, judicial authorities believe that claims of oppressive mismanagement cannot be referred to arbitration on the basis of the following tests laid down over the years:

REMEDIES TEST
In matters involving oppression and mismanagement, the NCLT has extraordinary statutory powers that regular civil courts cannot exercise. NCLT has extraordinary jurisdiction to issue orders regarding the regulation of the company’s affairs, alter the management, and make concerned persons and directors liable for their malfeasance, whereas arbitral tribunals’ jurisdiction is limited to contract terms. The arbitral tribunal’s limitations render it unsuitable for cases of oppression and mismanagement.⁴

CLAIM TEST
The Arbitration Act does not permit the bifurcation of claims, i.e., if the subject matter is partially covered by arbitration, there is no statute that permits bifurcating the cases and referring them to arbitration. Even if the subject matter is partially covered by the arbitration agreement, disputes cannot be referred to arbitration if the clause does not include mismanagement and oppression as arbitrable.⁵

NECESSARY PARTIES TEST
The courts and judicial authorities use this criterion to determine whether (i) an effective order can be issued in a petition alleging oppression, mismanagement, or prejudice; and (ii) a complete and final determination can be made without the presence of the non-signatory to the arbitration agreement. Unless a non-signatory to the arbitration agreement party to the oppression, mismanagement, and prejudice dispute satisfies the ‘necessary parties’ test, the dispute will be referred to arbitration.⁶

TOTALITY TEST
Courts and judicial authorities in India have opined that when determining whether a petition is frivolous or vexatious, one must peruse the petition with a focus on its grounds and the reliefs sought. If, after conducting such a comprehensive analysis, the NCLT/NCLAT concludes that the petition’s reliefs could be granted by an arbitral tribunal and that the petition’s primary purpose was to defeat the arbitration agreement, the parties must be referred to arbitration.⁷

3.     Tracing the cases on arbitrability of O&M claims

Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.,⁸(Relevant Paragraphs: 4, 5)

•  The petitioner had filed a winding-up petition before the HC and moved an application under Section 8 of the ACA to refer the parties to arbitration. The same was rejected by a Single Judge of the HC and was upheld by a Division Bench as well.
• The SC opined that under Section 8, judicial authorities will only refer parties to arbitration when the subject matter of the dispute is one which arbitrators have the competence to decide. Since the petition for winding up was not for money, and rather, due to insolvency, the matter was regulated by the CA which conferred jurisdiction on courts, and not arbitrators, the matter was non-arbitrable.
• Therefore, matters of winding up for reasons associated with commercial insolvency were deemed non-arbitrable.

Sadbhav Infrastructure Project Limited & 1 v. Company Law Board & 10,⁹ (Relevant Paragraphs: 45, 58 – 60)

•   A petition was filed under Article 226/227 of the Constitution of India raising the question – of whether matters under Sections 397, 398 r/w Sections 399, 402, 403 of the CA, 1956 (corresponding to Sections 242 and 243 of the CA, 2013) can be referred to arbitration under Section 8 of the ACA.
• The petitioner sought to resort to arbitration after some disputes arose regarding the management of the company in question and the execution of certain contracts. A Company Petition was filed before the CLB seeking reference to arbitration but was rejected on the grounds that the matter in the Company Petition was not part of the subject matter of the arbitration agreement, that the reliefs claimed in the company petition do not fall within the domain of Arbitral Tribunal, and that there is no commonality of parties between the Company Petition and the arbitration agreement. The decision of the CLB was under challenge in the present case
• On the question of whether O&M claims can be referred to arbitration – the HC held that if the subject matter of the suit was only capable of adjudication and resolution by a public forum or the relief claimed could only be granted by a Special Court or Tribunal, then no reference to arbitration would be permitted even if a valid arbitration agreement was subsisting between the parties and the subject-matter of the dispute was covered in the arbitration agreement.
• Since the CA, 1956, provided for certain powers only for the CLB with regards to penalties and liabilities, these would not be available with the arbitrator.
• The matter was deemed to be not referable to arbitration as only part of the matter involved breach of agreements between the parties and it was held to be much more than a minority oppression claim.
• Important to Note – the HC did not conclude that 0&M disputes are not arbitrable. They only held that the subject matter of the dispute under consideration should be part of the agreement and not something that is exclusively regulated by public forums if it is to be arbitrated upon.
• See similarly – Escorts Finance Ltd. v. G.R.Solvents¹⁰ – the Court held that allegations relating to amendment of AoA, failure to appoint nominees, and failure to provide requisite information were all part of the sponsorship agreement between the parties, and, thus, the petition under Section 399 of the CA, 1956 (08M provision) would be referable to arbitration.

Rakesh Malhotra v. Rajinder Kumar Malhotra,¹¹ (Relevant Paragraphs: 98 – 103, 111)

• The main question before the CLB was whether 98-103, a dispute concerning the invocation of Sections 111 397, 398, and 402 of the CA, 1956 are capable of being settled by an arbitral tribunal. The CLB had rejected the reference to arbitration under Section 45 of the ACA which led to the present appeal before the Bombay HC
• The subject matter of the dispute concerns certain issues that arose out of restructuring and transfer agreements that Rakesh Malhotra was unsatisfied with.
• The HC held that the O&M disputes are not capable of being referred to arbitration due to the nature and source of powers invoked. Since the CLB had statutory powers conferred to it under the CA, 1956 which allowed it to supplant the corporate management and regulate the future of a company’s affairs – powers that are not available to an arbitration tribunal – no reference to arbitration would be permitted.
• The HC made some interesting observations on “dressed up” O&M petitions – “A petition that is merely ‘dressed up and seeks, in the guise of an oppression and mismanagement petition, to oust an arbitration clause or a petition that is itself vexatious, oppressive, mala fide (or, at any rate, not bona fide) cannot be permitted to succeed. In assessing an allegation of ‘dressing up’, the Section 397/398 petition must be read as a whole, including its grounds and the reliefs sought. It cannot be carved up and deconstructed so as to bring some matters within the arbitration clause and leave other matters out. Where there are reliefs that are not arbitrable because they fall within Section 402 of the Companies Act, 1956, there is no question of a dismissal of the petition on the ground that there exists an arbitration clause.”
• Thus, the HC held that O&M petitions are non-arbitrable but if a petition was “mischievous, vexatious, mala fide and ‘dressed up'” as containing O&M claims, it would be referable to arbitration.

Sidharth Gupta and Ors. v. Getit Infoservices Private Limited and Ors.,¹² (Relevant Paragraphs: 18, 28)

• The Respondent filed an application before the CLB seeking reference to arbitration under Section 45 of the ACA as per the SSHA concluded between the parties and a dismissal of the Company Petition filed by the petitioner.
• The grievance of the petitioner was that Respondents were carrying out the affairs of the Company in a matter prejudicial to the interests of the Petitioner and that there has been improper and unfair valuation of certain shares that had led to dilution of the petitioner’s shareholding in the company. The reliefs claimed by the petitioner fell under Sections 402 and 403 of the CA, 1956 (O&M provisions).
• The CLB stated that – “When a party seeks reference to arbitration, an obligation is cast upon the court to see whether any prima facie case made under 397/398, if not, then it shall forthwith refer the same to arbitration, for invoking jurisdiction under sections 397 & 398, the petitioners shall show that the conduct of the parties is oppressive towards the petitioners or the company, reflecting mismanagement of the company, Here for having this Bench noticed that no malice is found in the conduct of the respondents, the allegations of the petitioners being governed by Arbitration clause, this Bench hereby holds that it is a fit case to refer to Arbitration.”
• Thus, the Board outlined that cases dealing with O&M claims are unfit for arbitration. Since no legitimate oppression claim was found herein, the parties were referred to arbitration.

Dhananjay Mishra v. Dynatron Services Private Limited and Ors.,¹³(Relevant Paragraphs: 7, 8)

•   The appeal under consideration before the NCLAT was pertaining to the dismissal of an application by the appellant to refer to the parties to arbitration under Section 8 of the ACA.
• The facts concerned claims of O&M made against the appellant due to their denial of access to their accounts, diversion of funds, and other acts.
• The NCLAT made it explicit that while the NCLT has the power to refer parties to arbitration, the only matters that would be arbitrable would be those provided for in the arbitration agreement and capable of adjudication and resolution by an arbitrator.
• It was held that the nature of reliefs that were being claimed in the Company Petition filed by the Respondent and the facts made it a fit one for ordering the winding up of the company. In view of this, it was held that an arbitrator does not have expansive enough powers to pass an order for winding up. Thus, the matter was under the exclusive domain of the NCLT as provided for in the CA, 2013.
• Additionally, the “acts of non-service of notice of meetings, financial discrepancies and non-appointment of Directors being matters specifically dealt with under Companies Act and falling within the domain of the Tribunal to consider grant of relief under Section 242 of Companies Act render the dispute non-arbitrable”.
• The NCLAT, however, did hold that if the dispute only concerned contractual matters arising out of the Mol concluded between the parties, then it could be referred to arbitration.

Sumitomo Corporation v. CDC Financial Services (Mauritius) Ltd. and Others, ¹⁴ (Relevant Paragraphs: 21 – 23)

• This is an appeal filed against an order of the Delhi HC.
• The brief facts are – a JV agreement had been entered into between three parties. Subsequently, certain disputes arose regarding the shareholding pattern and nomination of directors. One party to the JV and few other parties filed a Company Petition before the CLB under claims of O&M by the appellant. The appellant sought to seek reference to arbitration under Section 45 of the ACA but the CLB refused. The DHC was approached in appeal but the same was rejected on grounds of lack of territorial jurisdiction.
• The decision of the CLB was upheld by the SC. It was held that claims under Sections 397/398 of the CA, 1956 (O&M provisions) always relate to affairs of the company and those are non-arbitrable. This is because no arbitration had been provided for in the agreement between the parties to the JV for shareholder disputes or those pertaining to the affairs of the company.

Aruna Oswal v. Pankaj Oswal and Others,¹⁵(Relevant Paragraphs: 21, 23 – 25, 27)

• While this case does not deal with reference to, the arbitration of O&M claims, it lays down certain instances in which the CLB/NCLT will not have jurisdiction over such claims.
• The case concerned an application by a legal heir of a deceased shareholder seeking relief against O&M
• It was held that the jurisdiction of the NCLT under Sections 241 and 242 of the CA, 2013 does not extend to the determination of disputes as to succession or ownership of shares. The correct forum to approach in such instances would be a civil court.

4.     Interpretation and Analysis

Based on the Supreme Court’s reasoning in the Haryana Telecom judgment and the Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd¹⁶ judgment it could be argued that if a court or tribunal has been specifically bestowed with the authority to decide disputes or matters falling under the CA, 1956 and CA, 2013, such disputes or matters should be decided by the court so authorized, even if the parties to the dispute have entered into an arbitration agreement. Clearly, this would render such disputes non-arbitrable. To continue this line of reasoning and its application to petitions filed against oppression and mismanagement, it could be noted that Section 242 of the CA 2013 (equivalent to Section 397 of the CA) confers a unique power of observation on the NCLT as the Tribunal appointed under the CA, 2013.

This section authorizes the NCLT to pass any order it deems appropriate if, in its opinion, the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to the public interest or prejudicial to the interests of the company and it would unfairly prejudice a petitioning member or members to wind up the company, but the facts justify that it was just and equitable that the company should be wound up. In addition, section 244 of the CA, 2013 specifies the reliefs that the NCLT has the authority to grant in such situations. In light of the Haryana Telecom decision, the Booz Allen decision, and the aforementioned sections regulating petitions for oppression and mismanagement, the following are discernible:
(a) the right provided under these sections is a right in rem;
(b) the NCLT has exclusive jurisdiction over petitions seeking relief under these sections;
(c) such disputes are non-arbitrable and cannot be referred to arbitration; and (d) bifurcation of the subject matter of an action brought before a judicial authority is not permitted.

This interpretation was affirmed and asserted in the landmark judgment of the Bombay High Court in Rakesh Malhotra v. Rajinder Kumar Malhotra ¹⁷, in which the Bombay High Court held that:
(a) a petition that is merely “dressed up” and seeks to oust an arbitration clause under the guise of an oppression and mismanagement petition, or a petition that is itself vexatious, oppressive, mala fide (or, at any rate, not bona fide) cannot be permitted to succeed;
(b) in assessing an allegation of “dressing up”, the Sections 397/398 petition must be read as a whole, including its grounds and the reliefs sought;
(c) it cannot be carved up and deconstructed so as to bring some matters within the arbitration clause and leave other matters out; and
(d) where there are reliefs that are not arbitrable because they fall within Section 402 of the CA, 195622, there is no question of a dismissal of the petition on the ground that there exists an arbitration clause.

While following this principle in Emgee Housing (P) Ltd. v. ELS Developers (P) Ltd¹⁸., the Bombay High Court at Goa held that even if there is an arbitration agreement between the parties and even if the dispute is covered by the arbitration agreement, the court/judicial authority will refuse the application under Section 8 of the ACA if the subject-matter of the dispute can only be adjudicated in a public forum.

5.     Conclusion

Broadly speaking, Indian courts have taken the view that O&M claims are not arbitrable. This is primarily due to the jurisdiction that has been accorded to the NCLT in the CA, 2013 with respect to such claims. Although there are cases that have supported the reference of O&M claims to arbitration [such as the Escorts judgment spoken of above] when the subject matter of the claim is part of the scope of the arbitration agreement between the parties, this seems to be a minority position.

-Sachin Garg
Intern
West Bengal National University of Juridical Sciences

¹ Shanti Prasad Jain v. Kalinga Tubes Ltd, [AIR 1965 SC 1535]
² Needle Industries (India) Ltd. v. Needle Industries Newey (India) [(1981) 3 SCC 333]
³ Deepak C. Shriram v. General Sales Limited and Others [(2002) 109 Comp Cas 732 (CLB): 43]
⁴ Jugnar Processors (P) Ltd. v. Rohtas Jugalkishore Gupta, [2014 SCC OnLine CLB 160]
⁵ Punita Khatter v. Explorers Travels and Tours Private Limited, [(2017) 136 CLA 0034]
⁶ Sidharth Gupta v. Getit Infoservices (P) Ltd., [2016 SCC OnLine CLB 10.]
⁷ Rakesh Malhotra v. Rajinder Kumar Malhotra, [2014 SCC OnLine Bom 1146]
⁸ Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd., [(1999) 5 SCC 688]
⁹ Sadbhav Infrastructure Project Limited & 1 v. Company Law Board & 10, [2014 SCC OnLine Guj 9159]
¹⁰ Escorts Finance Ltd. v. G.R. Solvents, [1999 SCC OnLine CLB 1]
¹¹ Rakesh Malhotra v. Rajinder Kumar Malhotra, [2014 SCC OnLine Bom 1146]
¹² Sidharth Gupta and Ors. v. Getit Infoservices Private Limited and Ors., [MANU/CL/0010/2016]
¹³ Dhananjay Mishra v. Dynatron Services Private Limited and Ors., [Company Appeal (AT) No. 389 of 2018]
¹⁴ Sumitomo Corporation v. CDC Financial Services (Mauritius) Ltd. and Others, [(2008) 4 SCC 91]
¹⁵ Aruna Oswal v. Pankaj Oswal and Others, [(2020) 8 SCC 79]
¹⁶ Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., [(2011) 5 SCC 532]
¹⁷ Rakesh Malhotra v. Rajinder Kumar Malhotra, [2019 SCC OnLine Bom 1146]
¹⁸ Emgee Housing (P) Ltd. v. ELS Developers (P) Ltd., [2016 SCC Online Bom 2391]

Disclaimer: The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official policy or position of BIMACC, any of the members of the Board, or the empanelled neutrals.