Invalidity Of Board Resolution Is A Procedural And Curable Defect, Cannot Lead To Rejection Of Claims And Termination Of Arbitral Proceedings: Bombay High Court

The bench of Justices K.R. Shriram and Rajesh S. Patil held that requirement of a board resolution authorizing a person to take legal action on behalf of a company is a procedural requirement and any defect in such a resolution would only be a procedural irregularity and thus it cannot be allowed to defeat a substantive right of a party.

The Court held that in view of Section 19 of the Act, an arbitrator is not bound by the CPC, however, it does not mean that the arbitrator cannot draw sustenance from the procedures as laid down under the Code. It further held that the arbitrator can in fact travel beyond CPC and only fetter on its powers is to observe the principles of Natural Justice.

The Court also distinguished between the powers enjoyed by the arbitrator under Section 19 and 28 of the Act. The Court held that whereas Section 28 talks about the law that will be applicable to the substance/merit of the dispute, the law as provided under Section 19 is the procedural law. Thus, a procedural order of the tribunal cannot be questioned for the violation of Section 28 of the Act.

The Court also held that an order of the arbitral tribunal on the invalidity of the board resolution would be an interim award under Section 31(6) of the Act and therefore amenable to challenge directly under Section 34 of the Act.

Facts

The parties entered into a shareholder’s agreement dated 25.03.2009 by which the appellant got 49% shares in the respondent no. 6 (company) and the remaining 51% is held by the remaining respondents. In consideration thereof, the appellant invested an amount of Rs. 80 crores in the company.

One Mr. Sunil Jain was nominated by the appellant as the nominee director on the board of the company. A dispute arose between the parties which accordingly was referred to arbitration before an arbitral tribunal consisting of three members. Mr. Sunil Jain verified the statement of claim on behalf of the appellant and also appeared as CW-1. However, before the arbitration proceedings could reach an outcome, the respondents filed an application under Section 31(6) r/w Section 32 of the Act for the rejection of the claims and termination of the arbitral proceedings on the ground that Mr. Sunil Jain did not have the requisite authority to invoke arbitration on behalf of the appellant or depose as witness as the board resolution that he has relied upon is not a valid document.

The tribunal accepted the said contention raised by the respondents and held that Mr. Sunil Jain has acted without authority and the document/board resolution was not valid under the law. However, the tribunal granted two weeks’ time to Mr. Jain to file a fresh resolution or prove the validity of the already filed resolution for the reason that there was no specific denial by the respondents regarding the passing of the resolution also no specific issue was framed qua the validity of the resolution, therefore, the appellant never had the opportunity to lead any evidence to prove the resolution.

Aggrieved by the decision of the tribunal allowing two-week time to cure the defect, the respondents approached the Court under Section 34 of the Act. The Court set aside the award and held that arbitral proceedings could not continue as the invalidity of the resolution means that the arbitration proceedings were initiated by a person without the authority thus the issue goes to the root of the matter. It held that invalidity of the resolution is not a curable defect. Accordingly, the Court set aside the interim award to the extent that it allowed two weeks’ time to cure the defect.

Aggrieved by the decision of the Court under Section 34, the appellant filed the appeal under Section 37 of the Act.

Grounds of Appeal

The appellant made the following broad submissions:

• The defect in the resolution is a procedural defect and hence curable.
• The substantive rights of a party cannot be defeated on account of a procedural irregularity.
• The signing and verification of the statement of claim was a matter of procedure. The same was governed by Indian Law. Matter of procedure should always be governed by law of the country, where the court / tribunal is situated. It is not in the realm of substantive law.
• The challenge under Section 34 was not maintainable as the order was not an interim award but a procedural order under Section 19 of the Act.
• Section 28 of the Arbitration Act is not applicable since it provides Rules applicable to substance of dispute. The order passed by the Arbitral Tribunal had no connection with the substance of the dispute. It was merely a procedural order. It gave appellant an opportunity to rectify the defect as was mandated by law, thus, the Court erred in relying on Section 28 to hold that the arbitrator acted in equity which is impermissible under the Section.

Analysis by the Court

The Court held that the petition under Section 34 was maintainable and relied on the judgment of the Supreme Court in Indian Darmers Cooperative Ltd v. Bhadrq Products (2018) 2 SCC 534 and its own judgment in MSEDCL v. Godrej and Boyce, 2019 SCC OnLine Bom 3920, to hold that the decision of the arbitrator on the issue whether a person is authorised to file the claim or on the issue of validity of the invocation of the arbitrator is an interim award challengeable under Section 34.

Next, the Court examined the issue whether the invalidity of the board resolution is a curable defect. The Court held that any defect in the board resolution authorizing a person to initiate arbitration is only a procedural and a curable defect, thus, it cannot be a ground for the rejection of the claims and termination of the arbitral proceedings.

The Court held that requirement of a board resolution authorizing a person to take legal action on behalf of a company is a procedural requirement and any defect in such a resolution would only be a procedural irregularity and thus it cannot be allowed to defeat a substantive right of a party.

The Court held that in view of Section 19 of the Act, an arbitrator is not bound by the CPC, however, it does not mean that the arbitrator cannot draw sustenance from the procedures as laid down under the Code. It further held that the arbitrator can in fact travel beyond CPC and only fetter on its powers is to observe the principles of Natural Justice.

The Court also distinguished between the powers enjoyed by the arbitrator under Section 19 and 28 of the Act. The Court held that whereas Section 28 talks about the law that will be applicable to the substance/merit of the dispute, the law as provided under Section 19 is the procedural law. Thus, a procedural order of the tribunal cannot be questioned for the violation of Section 28 of the Act.

Case Title: Palmview Investments Overseas Limited v. Ravi Arya, Commercial Arbitration Petiton (L) No. 25152 of 2022

Date: 02.05.2023

Counsel for the Appellant: Mr. Kevic Setalvad, Senior Advocate a/w Mr.. Vijay K Singh, Mr. Vinay J Bhanushali, Mr. Abhiraj Rao, Ms Shreya Arur, Mr. Sanmit Vaze and Mr. Jehan Lalkaka.

Counsel for the Respondents: Mr. Haresh Jagtiani, Senior Advocate a/w Mr. Suprabh Jain, Mr. Pushpvijay Kanoji and Ms Jahnavi Vora i/b Mr. Mohd Shariq for Respondent Nos 1 and 2. Mr. Sharan Jagtiani, Senior Advocate a/w Mr. Priyank Kapadia and Ms Apurva Manwani i/b Mr. Yakshay Chheda for Respondent Nos 3 to 5. Mr. Sameer Bindra i/b Khaitan & Co for Respondent No 6. Ms Chandni Dewani i/b Vashi and Vashi for Respondent Nos 7 to 11.

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