Arbitration - CLB - companies act - arbitrability - Foreign court - dispute - Section 397, 398, 402 - oppression - mismanagment - Supreme Court

1. Is a dispute brought before the Company Law Board invoking the provisions of Sections 397, 398 and 402 of the Companies Act, 1956 at all referable to a private tribunal, viz., an arbitral panel for resolution? Does a decision of a foreign court on the question of whether a dispute is covered by an arbitration agreement bind the Company Law Board? These are among the questions of law canvassed in this group of appeals.

List of Authorities & Decisions Referred/Cited
1. Haryana Telecom Ltd v Sterlite Industries (India) Ltd, (1999) 5 SCC 688.
2. Bennett Coleman & Co. v Union of India & Ors., 1977 (47) Comp Cas 92
3. Manavendra Chitnis & Anr. v Leela Chitnis Studios P. Ltd. & Ors., 1985 (58) Comp Cas 113
4. Surendra Kumar Dhawan & Anr. v R. Vir & Ors., [1977] 47 Comp Cas 276 (Delhi)
5. O.P. Gupta v Shiv General Finance (P.) Ltd. & Ors., [1977] 47 Comp Cas 279 (Delhi)
6. Das Lagerway Wind Turbines Ltd. v Cynosure Investments P. Ltd., [2009] 147 Comp Cas 149 (Mad)
7. Sporting Pastime India Ltd. & Anr. v Kasthuri & Sons Ltd., [2008] 141 Comp Cas 111 (Mad)
8. Hindustan Petroleum Corporation Ltd. v Pinkcity Midway Petroleums, AIR 2003 SC 2881
9. Vijay Sekhri & ors. v Union of India & Ors., [2011] 163 Comp Cas 195 (Delhi)
10. Everest Holding Ltd. v Shyam Kumar Shrivastava & Ors., (2008) 16 SCC 774
11. Foss v Harbottle, (1843) 67 ER 189
12. M.S.D.C. Radharamanan v M.S.D. Chandrasekarana Raja & Anr., (2008) 6 SCC 750
13. Dhulabhai & Ors. v The State of Madhya Pradesh & Anr., AIR 1969 SC 78
14. CDS Financial Services (Mauritius) Limited v BPL Communications Ltd. & Ors., [2004] 121 Comp Cas 374 (Bom)
15. Marikar (Motors) & Anr. v M.I. Ravikumar & Ors.
[1982] 52 Comp Cas 362 (Ker)
16. Pradip Kumar Sarkar & Ors. v Luxmi Tea Co. Ltd. & Ors., [1990] 67 Comp Cas 491 (Cal.)
17. Luxmi Tea Co. Ltd. v Pradip Kumar Sarkar, [1990] 67 Comp Cas 518 (SC)
18. Fuerst Day Lawson Ltd. v Jindal Exports Ltd., (2011) 8 SCC 333
19. Chloro Controls India (P) Ltd v Severn Trent Water Purification, Inc. & Ors., (2013) 1 SCC 641
20. World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte.
Ltd., AIR 2014 SC 968; JT 2014 (2) SC 444.
21. Sumitomo Corporation v CDC Financial Services (Mauritius) Ltd. & Ors., (2008) 4 SCC 91
22. Swiss Timing Limited vs. Organising Committee, Commonwealth Games 2010, Delhi., (2014) 6 SCC 677
23. N. Radhakrishnan vs. Maestro Engineers & Ors., (2010) 1 SCC 72
24. P. Anand Gajapathi Raju & Ors. v P.V.G. Raju, (2000) 4 SCC 539
25. Brijlal Ramjidas & Anr. v Govindram Gordhandas Seksaria & Ors., AIR 1943 Bom 201
26. Brijlal Ramjidas & Anr. v Govindram Gordhandas Seksaria & Ors., AIR 1947 PC 192
27. Rajeshwar Prasad Misra v State of West Bengal, AIR 1965 SC 1887;
28. P. Ramachandra Rao v State, AIR 2002 SC 1856
29. Chockalingam v Duraiswami & Ors., AIR 1928 Madras 327
30. SBP & Co. v Patel Engineering Ltd. & Anr., (2005) 8 SCC 618
31. Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 at page 546
32. Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531
33. Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan, (2005) 1 SCC 212
34. Satpal Malhotra v Puneet Malhotra, Arbitration Appeal No. 12 of 2010, decided on 14th June 2013, per R.D. Dhanuka, J.

80. I believe Mr. Chinoy is correct when he says that there is a fundamental logical fallacy in Mr. Madon's hypothesis, which may be summarized thus: all civil suits can and must be referred to arbitration where there is an arbitration agreement. The jurisdiction of the CLB under Sections 397 and 398 of the Companies Act does not exclude the jurisdiction of a civil court for oppression and mismanagement. Therefore, all disputes before the CLB in a Section 397/398 action can and must also be referred to arbitration. In CDS Financial Services, in an action for oppression and mismanagement by a minority following the only true exception to the Foss v Harbottle rule, it was argued that the plaintiff ought to have moved the CLB in a petition under Sections 397 and 398. The Division Bench rejected this submission. What Mr. Madon suggests is, in effect, the mirror image of this argument: that the CLB can always tell a petitioner before it that he should have filed a suit; and that, had he filed the suit, the dispute might have been referred to arbitration; ergo, the action before the CLB was also so referable.

82. In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.,32 the Supreme Court considered the question of arbitrability, i.e., the distinction in law between disputes that are capable of arbitral resolution and those that are not. This decision is of immediate significance not least for its acceptance of the principle enunciated in Haryana Telecom, one from which Mr. Madon is at some pains to distance himself.

34. The term "arbitrability" has different meanings in different contexts.
The three facets of arbitrability, relating to the jurisdiction of the Arbitral Tribunal, are as under:
(i) Whether the disputes are capable of adjudication and settlement by arbitration? That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the Arbitral Tribunal) or whether they would exclusively fall within the domain of public fora (courts).
(ii) Whether the disputes are covered by the arbitration agreement? That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the "excepted matters" excluded from the purview of the arbitration agreement.
(iii) Whether the parties have referred the disputes to arbitration? That is, whether the disputes fall under the scope of the submission to the Arbitral Tribunal, or whether they do not arise out of the statement of claim and the counterclaim filed before the Arbitral Tribunal. A dispute, even if it is capable of being decided by arbitration and falling within the scope of arbitration agreement, will not be "arbitrable" if it is not enumerated in the joint list of disputes referred to arbitration, or in the absence of such joint list of disputes, does not form part of the disputes raised in the pleadings before the Arbitral Tribunal.

35. The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the Arbitral Tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by public fora (courts and tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/ dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes.

36. The well-recognised examples of non- arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

37. It may be noticed that the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject-matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property. Correspondingly, a judgment in personam refers to a judgment against a person as distinguished from a judgment against a thing, right or status and a judgment in rem refers to a judgment that determines the status or condition of property which operates directly on the property itself. (Vide Black's Law Dictionary.)

38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.
39. The Act does not specifically exclude any category of disputes as being not arbitrable. Sections 34(2)(b) and 48(2) of the Act however make it clear that an arbitral award will be set aside if the court finds that "the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force".
40. Russell on Arbitration (22nd Edn.) observed thus (p. 28, Para 2.007):

"Not all matters are capable of being referred to arbitration.

As a matter of English law certain matters are reserved for the court alone and if a tribunal purports to deal with them the resulting award will be unenforceable. These include matters where the type of remedy required is not one which an Arbitral Tribunal is empowered to give."

The subsequent edition of Russell (23rd Edn., p. 470, Para 8.043) merely observes that English law does recognise that there are matters which cannot be decided by means of arbitration.

41. Mustill and Boyd in their Law and Practice of Commercial Arbitration in England (2nd Edn., 1989), have observed thus:

"In practice therefore, the question has not been whether a particular dispute is capable of settlement by arbitration, but whether it ought to be referred to arbitration or whether it has given rise to an enforceable award. No doubt for this reason, English law has never arrived at a general theory for distinguishing those disputes which may be settled by arbitration from those which may not. ...
Second, the types of remedies which the arbitrator can award are limited by considerations of public policy and by the fact that he is appointed by the parties and not by the State. For example, he cannot impose a fine or a term of imprisonment, commit a person for contempt or issue a writ of subpoena;
nor can he make an award which is binding on third parties or affects the public at large, such as a judgment in rem against a ship, an assessment of the rateable value of land, a divorce decree, a winding-up order...."

Mustill and Boyd in their 2001 Companion Volume to the 2nd Edn. of Commercial Arbitration, observe thus (p. 73):

"Many commentaries treat it as  axiomatic that 'real' rights, that  is, rights which are valid as against  the whole world, cannot be the  subject of private arbitration, although some acknowledge that subordinate rights in personam derived from the real rights may be ruled upon by arbitrators. The conventional view is thus that, for example, rights under a patent  licence may be arbitrated, but the 

validity of the underlying patent may not ... An arbitrator whose powers are derived from a private agreement between A and B plainly has no jurisdiction to bind anyone else by a decision on whether a patent is valid, for no one else has mandated him to make such a decision, and a decision which attempted to do so would be useless."

42. The distinction between disputes which are capable of being decided by arbitration, and those which are not, is brought out in three decisions of this Court. In Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [(1999) 5 SCC 688] this Court held: (SCC pp. 689-90, paras 4-5)

"4. Sub-section (1) of Section 8 provides that the judicial authority before whom an action is brought in a matter, will refer the parties to arbitration the said matter in accordance with the arbitration agreement.

This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.

5. The claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect, in a matter like this, that the company has become commercially insolvent and, therefore, should be wound up.

The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company. The matter which is pending before the High Court in which the application was filed by the petitioner herein was relating to winding up of the company. That could obviously not be referred to arbitration and, therefore, the High Court, in our opinion was right in rejecting the application."

83. Booz Allen arose in a suit that was held by the Supreme Court to be one for enforcement of a mortgage by a sale, a matter that would result in a judgment in rem, and consequently, one that was not arbitrable. To my mind, this decision alone fully answers Mr. Madon's submissions on Haryana Telecom and quite clearly supports Mr. Chinoy's postulate. Booz Allen also refers to the Supreme Court decision in Sukanya Holdings (P) Ltd v Jayesh H. Pandya to affirm that a bifurcation of a cause of action in a suit is an impermissible procedure beyond the contemplation of the Arbitration Act. It must therefore follow that where a petition under Chapter VI of the Companies Act, 1956 seeks reliefs some of which are in the nature of reliefs in rem and others that are in personam, then it is not possible or permissible to sever one from the other and disassemble such a petition.......I will leave aside the other decisions of learned Single Judges of the High Court for the present. Haryana Telecom, to my mind, though in a petition for winding up, and clearly, therefore, a matter in rem, states as a proposition that no agreement between the parties can vest an arbitral panel with the power of winding up. Similarly, no arbitration agreement can vest an arbitral tribunal with the powers to grant the kind of reliefs against oppression and mismanagement that the CLB might. Mr. Madon's submission that it matters not what the arbitral panel does with the dispute so long as the dispute is referred seems to me to strain at the boundaries of the intent of arbitration law. The idea cannot possibly be to shunt parties off the main tracks of a properly brought litigation to some siding with no destination and no way forward. It must be to provide them with an effective, quick and reasonable dispute resolution alternative.

86.................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. In Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya35 the Supreme Court inter alia said:

13. Secondly, there is no provision in the Act that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be (2003) 5 SCC 531 referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitrators.

15. The relevant language used in Section 8 is: "in a matter which is the subject of an arbitration agreement". The court is required to refer the parties to arbitration. Therefore, the suit should be in respect of "a matter" which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced -- "as to a matter" which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words "a matter" indicate that the entire subject-matter of the suit should be subject to arbitration agreement.

16. The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act. In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action, that is to say, the subject-matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.

91. The true consequence of my finding on Mr. Chinoy's submission regarding the non-arbitrability of disputes validly brought under Sections 397/398 read with  Section 402 of the Companies Act, 1956 is that it is not enough for an applicant seeking a reference to arbitration merely to show that there exists an arbitration agreement. He must, in addition, establish before the CLB that the petition is mala fide, vexatious and 'dressed up' and that the reliefs sought are such as can be resolved by a private arbitral tribunal. To hold otherwise would be to say that even a dressed up petition cannot be referred to arbitration. I see no reason why the CLB should be denuded of its powers in that situation. It is, after all, a "judicial authority" within the meaning of the Arbitration Act. The jurisdictional exclusion of Section 402 cannot be extrapolated to a mischievous and 'dressed up' petition. That would be wholly contrary to Swiss Timing, Pinkcity, Fuerst Day Lawson and others. The injustice in such a case is manifest. It must follow, therefore, that the CLB always retains the power to refer the disputes in a petition that is mischievous, vexatious, mala fide and 'dressed up' to arbitration.