Arbitration, Invoked Without Authority, The Defect Can't Be Ratified With Fresh Board Resolution: Bombay High Court

The Single Bench of Justice C.V. Bhadang held that once the arbitral tribunal had ruled that the specified person had no authority to invoke arbitration and depose on behalf of the claimant, in view of the fact that the alleged board resolution was not proved by it as valid, the tribunal could not have ruled that the said defect was rectifiable. The Court added that ratification can only be of an act which is otherwise valid.

The petitioners- Ravi Arya and Ravi Arya Hindu Undivided Family (HUF), referred to as the RA Group, are Promoters/Directors of AISCO. The respondent- Palm View Investment Overseas Limited (PVIL), is a Company incorporated under the British Virgin Island Laws (BVI Laws). Under a Share Purchase and Share Subscription Agreement executed between the respondent and the petitioners, the respondent PVIL was inducted as a shareholder in AISCO. After certain disputes arose between the parties, a board resolution was allegedly passed by PVIL, authorizing a person to initiate arbitration proceedings and to depose before the Arbitral Tribunal on its behalf. The authorized person subsequently invoked the arbitration clause on behalf of PVIL.

During the arbitral proceedings, the petitioners filed an application under Section 31 read with Section 32 of the A&C Act for dismissal of the respondent's claim, seeking a declaration that the statement of claim was presented on behalf of the respondent PVIL without any authority. The petitioner contended that the person allegedly authorized had no authority to invoke the arbitration clause.

The Arbitral Tribunal passed an order, granting opportunity to the claimant/PVIL to either prove that the resolution passed by it, authorizing the specific person to initiate arbitration proceedings, was valid under the BVI Laws, or to file a fresh board resolution. The respondent PVIL communicated its decision of filing a fresh resolution, to the Tribunal.

The petitioner filed a petition under Section 34 of the A&C Act before the Bombay High Court, challenging the order passed by the Tribunal.

The petitioner Ravi Arya submitted before the Court that the person allegedly authorized to act on behalf of the respondent, was not an employee of the respondent nor did it have any concern with it.

Further, the petitioner argued that the board resolution allegedly passed by PVIL, authorizing a person to initiate arbitration proceedings on its behalf, must be proved as a matter of fact by an expert witness in BVI Laws. It contended that PVIL had made no attempt to establish the legality of the board resolution, as required by Section 45 of the Indian Evidence Act, 1872. Thus, it argued that the board resolution was not proved to be valid as per the BVI laws or the Indian law.

The petitioner averred that after an application under Section 31(6) read with Section 32 of the A&C Act, for dismissal of the respondent's claim was filed by it, the Tribunal had ruled that the alleged board resolution was invalid as it was yet to be proved by the respondent as valid under the BVI laws or the Indian law. The petitioner added that the Tribunal, after coming to such a conclusion, could not have held that the illegality was curable and rectifiable.

Thus, the petitioner argued that the Tribunal, by granting the respondent an opportunity to pass a fresh resolution, had acted in equity which is in contravention of Section 28(2) of the A&C Act. It submitted that the Share Purchase and Share Subscription Agreement did not contemplate the Tribunal deciding ex aequo et bono or as an amiable compositeur.

The petitioner contended that since the very initiation of claim was without any authority, the Arbitral Tribunal was rendered funtus officio. The petitioner submitted that the resolution did not comply with the provisions of Section 45 of the Indian Evidence Act and that it was in breach of Section 149 of the Companies Act, 2013. Thus, it argued that since the resolution allegedly passed by the respondent inherently lacked authority, it could not be permitted to be proved/ratified.

The respondent- Palm View Investment Overseas Limited (PVIL), averred that the order passed by the Arbitral Tribunal did not finally decide any legal rights of the parties under the Share Purchase and Share Subscription Agreement and therefore, it was not an interim award which could be challenged under Section 34.

The Court observed that the test for deciding whether a particular award or order is an interim award, is whether it relates to 'any matter' with respect to which the arbitral tribunal may make a final arbitral award. Referring to the decision of the Apex Court in Indian Farmers Fertilizer Co-operative Limited (IFFCO) versus Bhadra Products (2018), the Court noted that the expression 'matter' is wide in nature and that it subsumes issues at which parties are in dispute.

Further, the bench ruled that the issue whether the arbitration was invoked and the Statement of Claim was filed, by a person duly authorized by the respondent, went to the root of the matter. Thus, it held that the order passed by the Tribunal was an interim award, amenable to challenge under Section 34.

The Court observed that the Tribunal had noted that Execorp, the sole Director of the Claimant/PVIL, was itself an artificial person and a Corporate Body, which was in violation of Section 149 of the Companies Act, 2013. Further, it noted that the Tribunal had held that the board resolution passed by PVIL, authorizing the specified person to initiate arbitration on its behalf, did not disclose the identity of the person who had singed on behalf of Execorp. Thus, the Tribunal had ruled that the resolution could not be treated as a valid under the Companies Act, 2013.

Further, the Court took into account that the Tribunal had concluded that the Board Resolution was not valid as per the Indian law and that there were no pleadings or evidence led by the respondent to establish the validity of the Board Resolution under the BVI Laws.

The bench ruled that once the Tribunal had held that the specified person had no authority to invoke arbitration and depose on behalf of the respondent, in view of the fact that the alleged board resolution was not proved as valid under the BVI laws, the Tribunal could not have ruled that the said defects could be rectified or remedied. While holding that ratification can only be of an act which is otherwise valid, the Court ruled that the Arbitral Tribunal had exercised jurisdiction in equity which was impermissible in view of Section 28(2) of the A&C Act.

Therefore, the Court held that the interim award/ order passed by the Tribunal was in contravention of the public policy of India and the fundamental policy of Indian law. The Court thus set aside the order passed by the Tribunal and allowed the application filed by the petitioners under Section 31 read with Section 32 of the A&C Act, seeking dismissal of the respondent's claim.

Case Title: Sushma Arya and Ors. versus Palmview Overseas Ltd. and Ors.

Dated: 01.11.2022 (Bombay High Court)

Counsel for the Petitioner: Mr. Sharan Jagtiani, Senior Advocate a/w Ms. Apurva Manwani, Mr. Priyank Kapadia i/b Yakshay Chheda and Nikhil Ghate; Mr. Haresh Jagtiani, Senior Advocate a/w Ms. Bhumika Chulani i/b Vandana Mehta

Counsel for the Respondent: Mr. Kevic Setalvad, Senior Advocate a/w Ms. Bhagyashree Ganwani for Respondent No.1; Mr. Sameer Bindra and Alok Vajpayi i/b Khaitan & Co. for Respondent No.2; Mr. Hrushi Narvekar a/w Ms. Chandni Dewani i/b Vashi and Vashi for Respondent Nos. 3 to 7

Case Title: 2022 LiveLaw (Bom) 426

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