'Subsequent Shareholders' Do Not Qualify As 'Association Or Body of Individuals' Under Section 2(1)(f)(iii) Of Arbitration Act: Delhi High Court

Therefore, the High Court classified the arbitration as “international commercial arbitration” because one of the shareholders was a national and habitual resident of a country outside India.

Section 2(1)(f)(iii) of the Arbitration Act defines "international commercial arbitration" as arbitration relating to disputes arising out of certain types of commercial relationships:

“international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—

• an individual who is a national of, or habitually resident in, any country other than India; or
• a body corporate which is incorporated in any country other than India; or
• an association or a body of individuals whose central management and control is exercised in any country other than India; or
• the Government of a foreign country”

Brief Facts:

Ktc India Pvt. Ltd (Petitioner) filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 in the High Court and sought the appointment of an arbitrator to resolve disputes arising from a Shareholders Agreement. A key preliminary question was whether the petition was maintainable in the court, given that one of the parties to the Agreement, Mr. Nicholas Valladares, is neither a national nor a habitual resident of India.

The Agreement involves fifteen parties with the Petitioner identified as the "Initial Shareholder" and thirteen individuals collectively termed "Subsequent Shareholders." Additionally, Destinos India Gurus Private Limited is a party to the Agreement. The Agreement's purpose was to restructure the shareholding of Destinos so that the Petitioner and Respondents hold shares in a 30:70 ratio. Due to arising disputes, the Petitioner sent a letter to the thirteen respondents and invoked arbitration. However, the parties could not agree on an arbitrator which prompted the petitioner to approach the High Court.

The Petitioner argued that the proposed arbitration does not meet the definition of "international commercial arbitration" under Section 2(1)(f) of the Arbitration Act. It claimed that the thirteen individuals named as "Subsequent Shareholders" have entered into a joint enterprise to subscribe to Destinos' shares as outlined in the Agreement forming an "association or body of individuals" under Section 2(1)(f)(iii) of the Arbitration Act. It contended that since the central management and control of this group is based in India, the arbitration should not be classified as international.

Observations by the High Court:

The High Court referred to the decision of the Supreme Court in Larsen & Toubro SCOMI Engineering BHD v. Mumbai Metropolitan Region Development Authority where the contracting parties were a consortium comprising an Indian company and a Malaysian company on one side, and the Mumbai Metropolitan Region Development Authority (MMRDA) on the other. The Indian company was designated as the "lead partner" of the consortium. The consortium filed a petition under Section 11 of the Arbitration Act before the Supreme Court on the grounds that one of the parties to the Agreement was a body corporate incorporated in Malaysia. The Supreme Court held that the consortium was an unincorporated association with its central management and control exercised in India.

In the Perkins Eastman Architects DPC v. HSCC (India) Ltd., one of the contracting parties was a consortium comprising a foreign entity incorporated in New York and an Indian entity. Disputes arose under the contract between the consortium and the respondent, HSCC India Ltd. The consortium approached the Supreme Court for the appointment of an arbitrator. The maintainability of the petition was contested on the ground that the arbitration proceedings did not constitute an international commercial arbitration. The Supreme Court allowed the petition and held that the lead member of the consortium was a foreign entity, thus satisfying the requirements of Section 2(1)(f) of the Arbitration Act. This was in contrast to the Larsen & Toubro case where the Indian entity was the lead member of the consortium.

The decision of the Supreme Court in Amway (India) Enterprises (P) Ltd. v. Ravindranath Rao Sindhia concerned individuals who were nationals and habitual residents of the United States of America and approached the High Court for the appointment of an arbitrator. The High Court relied on the judgment in Larsen & Toubro to hold that the two individuals, who were husband and wife, entered into a single agreement for operating a distributorship as a single entity. The High Court found that the individuals constituted an "association or a body of individuals" with its central management in India and, therefore, proceeded to exercise jurisdiction under Section 11 of the Act. The Supreme Court reversed this decision and held that the judgment in Larsen & Toubro was based on a final and binding judgment that made it clear that the constituents of the consortium could not rely on their status as independent entities while dealing with MMRDA.

In Meera and Co. v. CIT, the Supreme Court interpreted the term "association of persons or a body of individuals" under the Income Tax Act, 1961. It held that an "association of persons" is not distinct from a "body of individuals" and includes both human and non-human entities engaged in a joint enterprise that does not fall within other statutory categories.

The Ramanlal Bhailal Patel v. State of Gujarat case examined the definition of "association of persons or body of individuals" in the context of the Bombay General Clauses Act, 1904, and the Gujarat Agricultural Lands Ceiling Act, 1960. The Supreme Court held that these terms refer to an entity with rights and duties, not merely a group of people. They are considered an "association of persons/body of individuals" when they join for a common purpose and common action to achieve a common benefit.

After considering the terms of the Agreement, the High Court held that the Respondents cannot be held to constitute an "association or a body of individuals" to fall within Section 2(1)(f)(iii) of the Arbitration Act.

The Agreement did not provide any indication that the Respondents, collectively referred to as the “Subsequent Shareholders,” should be treated as a single entity. It held that this is not a case involving a consortium or partnership. The Agreement lists the thirteen individuals separately including their individual addresses.

The High Court held that other clauses in the Agreement also indicate that individual shareholders can make independent decisions. The arbitration clause referred to each “party” individually not to the “Subsequent Shareholders” as a group.

Therefore, the High Court held that the “Subsequent Shareholders” didn't constitute a single entity. Each shareholder subscribes to a specific number of shares, retains the right to exit the company individually under defined conditions, and undertakes individual rights and obligations.

It held that treating these shareholders as a single association under Section 2(1)(f)(iii) of the Arbitration Act would be analogous to considering shareholders in a company as a collective entity solely because of their shareholding.

The High Court held that the Respondent No. 5's status as a national and habitual resident of a country other than India meant the proposed arbitration qualifies as an “international commercial arbitration” under Section 2(1)(f)(i) of the Arbitration Act. Consequently, it held that it lacked jurisdiction to entertain the petition. Therefore, the petition was dismissed.

Case Title: M/S Ktc India Pvt. Ltd Vs Randhir Brar & Ors

Citation: 2024 LiveLaw (Del) 809

Case Number: ARB.P. 286/2023

Advocate for the Petitioner: Mr. Amit Gupta, Mr. Shiv Verma, Ms. Muskan Nagpal

Advocate for the Respondent: Mr. Amit Agrawal, Mr. Rahul Kukreja, Ms. Sana Jain, Ms. Reaa Mehta, Advocates for R-1.

Date of Judgment: 16th July, 2024

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