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India – Rakesh Malhotra V. Rajinder Kumar Malhotra & Ors.

14 October, 2014

 

Legal News & Analysis – Asia Pacific – India – Dispute Resolution

 

The Bombay High Court, in the case of Rakesh Malhotra v. Rajinder Kumar Malhotra & Ors.has held that a petition under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 cannot be referred to arbitration unless the petition is malafide, vexatious and one that is ‘dressed up’ to avoid an arbitration clause.

 
Background

 
Since 1999, the Company Law Board (“CLB”) has taken the view that a petition under Sections 397 and 398 of the Companies Act, 1956 (the “Companies Act”) can, in appropriate cases, be referred to arbitration under Sections 8 and/or 45 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”)2. This has resulted in most petitions under Sections 397 and 398 of the Companies Act being resisted on the ground that the subject matter thereof is covered by an arbitration agreement contained in either a shareholders’ agreement between the parties or in the articles of association of the company in question.

 
The recent judgment of the Bombay High Court in Malhotra’s case attempts to tackle this situation by holding that petitions under Sections 397 and 398 of the Companies Act cannot be referred to arbitration. However, the said judgment also carves out an exception to this general rule whereby a petition under the aforesaid provisions that is vexatious, malafide and merely ‘dressed up’ to avoid an arbitration clause can nevertheless be referred to arbitration.

 
The Reasoning In Malhotra’s Case

 
While deciding the present case, the Bombay High Court placed substantial reliance on the Supreme Court’s judgment in Booz Allen & Hamilton Inc. v. SBI Home Finance Limited Ors.3 wherein it was inter alia held that (i) there are certain categories of cases which may, by necessarily implication, stand excluded from the purview of private fora (like arbitral tribunals), in which case the judicial authority before whom such an action is brought will refuse to refer the parties to arbitration under Section 8 of the Arbitration Act even if the parties have agreed upon arbitration as the forum for settlement of such disputes and (ii) all disputes relating to rights in remare required to be adjudicated by courts and public tribunals and are unsuitable for arbitration. Upon examining the wide powers that can be exercised by the CLB under Section 402 of the Companies Act whilst deciding a petition under Sections 397 and 398 of the said Act, the Bombay High Court came to the conclusion that such petitions had some avour of an action in rem and were not capable of being referred to arbitration.

 
At the same time, the Bombay High Court was conscious of the fact that a party to an arbitration agreement may mischievously, malafidely and in a vexatious manner ‘dress up’ a petition under Sections 397 and 398 of the Companies Act in a dishonest attempt to evade an arbitration clause. Accordingly, it has carved out an exception to the aforesaid general rule whereby a petition under Sections 397 and 398 of the Companies Act that is malafide, vexatious and ‘dressed up’ (i.e. seeks reliefs that can be resolved byan arbitral tribunal) can nevertheless be referred to arbitration by the CLB.

 
Effect Of The Judgment In Malhotra’s Case

 
The effect of this judgment is that the respondent seeking reference of a petition under Sections 397 and 398 of the Companies Act to arbitration must, in addition to satisfying the all the requirements of Section 8 of the Arbitration Act, also establish that the petition is malafide, vexatious and ‘dressed up’ to avoid an arbitration clause.

 
Our Observations

 
In our view, the Bombay High Court was correct in laying down the general rule that a petition under Sections 397 and 398 of the Companies Act is not arbitrable. However, the exception to the aforesaid rule whereby a malafide, vexatious and ‘dressed up’ petition can be referred to arbitration is going to be difficult to apply.

 
For instance, it is not clear if the issue of whether the exception applies is to be decided based upon (i) demurrer (i.e. assuming that all the allegations and contentions in the petition are true) as is the case in an application for rejection of plaint under Order VII Rule 11 of the Code of Civil Procedure, 1908, (ii) a prima facie examination of whether the allegations and contentions in the petition are true as is the case in an application for interim relief or (iii) the nal adjudication of the petition on merits.

 
Since the present case brings about a change in the legal position prevailing for the last 15 years, we expect the matter to be taken up to the Supreme Court. In the meantime, it will be interesting to see how the CLB interprets and applies the exception carved out in Malhotra’s case.

 

End Notes:

 
MANU/MH/1309/2014
See Naveen Kedia & Ors. v. Chennai Power Generation Ltd. &  Ors., [1999] 95 Comp Cas 640 (CLB).
(2011) 5 SCC 532.

 

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