Arbitrability Of Allegations Of Oppression And Mismanagement Under The Companies Act, 2013

These said provisions indicate that the oppression and mismanagement disputes are of a regulatory nature. These provisions safeguard the interests of shareholders and ensure proper functioning of the company. Arising out of corporate governance principles, they are designed to protect corporate democracy and the rule of law within companies.

It is essential to analyse whether such disputes can be referred to arbitration or whether they fall within the exclusive jurisdiction of the NCLT.

JURISDICTION OF NCLT TO ADJUDICATE MATTERS PERTAINING TO OPPRESSION AND MISMANAGEMENT

Section 430 of the Act bars the jurisdiction of civil courts to entertain suits in respect of matters in which the NCLT is empowered to determine. Section 241 of the Act grants jurisdiction to NCLT over oppression and mismanagement claims.

The Act confers broad powers on the NCLT to ensure that companies operate within the bounds of law and in the interests of all stakeholders. The NCLT's role is distinct from that of an arbitrator. While an arbitrator resolves disputes based on party autonomy and contractual rights, the NCLT serves a quasi-judicial function and has to ensure that companies adhere to statutory obligations and principles of good governance. In this sense, the NCLT's function is regulatory, overseeing the conduct of companies to prevent abuse of power by the majority shareholders and to protect minority interests.

The Act recognizes the specialized nature of such disputes. The NCLT is empowered to take wide-ranging actions, including modifying a company's articles of association, restricting the transfer of shares, and even ordering the winding up of a company. These remedies go beyond the scope of what an arbitrator could order, further underscoring the non-arbitrable nature of such disputes.

TESTS TO DETERMINE ARBITRABILITY OF MATTERS

The Supreme Court of India has clarified through numerous judgments whether a dispute is arbitrable, that is capable of being decided in arbitration. In the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.^[1] it held that disputes involving rights in rem (against the world at large) are non-arbitrable, while disputes involving rights in personam (between specific parties) can be arbitrated. Since then, this ruling has served as a guiding principle in the determination of arbitrability. The Court also categorised following types of disputes as non-arbitrable:

1. Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
2. Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
3. Guardianship matters;
4. Insolvency and winding-up matters;
5. Testamentary matters (grant of probate, letters of administration and succession certificate); and
6. 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.

In case of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.,^[2] the Supreme Court has listed down the broad categories of such disputes that are considered non-arbitrable, i.e., they cannot be resolved through arbitration. These include penal offenses, matters related to bribery and/or corruption, and matrimonial disputes such as divorce, judicial separation, restitution of conjugal rights, child custody, and guardianship. Notably, all these disputes relate to a person's legal status. Other disputes that are non-arbitrable include testamentary matters, such as the validity of a will, probate, letters of administration, and succession, and also disputes such as consumer complaints, insolvency and bankruptcy proceedings, company matters involving oppression, mismanagement, or winding up, and issues related to trusts and beneficiaries, are governed by specific legislation.

In Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. & Ors.,^[3] the issue of oppression and mismanagement was highlighted. The case revolved around the removal of Cyrus Mistry as Chairman of Tata Sons. In this case, the NCLT held that allegations of oppression and mismanagement could not be referred to arbitration and emphasized that such disputes are statutory in nature and involve the rights of all shareholders and the public at large, thus, making them non-arbitrable. The Supreme Court also upheld this view, reiterating that oppression and mismanagement claims have a statutory underpinning and are not purely private disputes capable of being arbitrated.

Courts and judicial authorities in India have usually taken the view that claims of oppression and mismanagement are not arbitrable as they involve rights in rem and involve interests of the company and the public at large. They have coined the following tests to determine if the claim is arbitrable:

Necessary Parties Test:

This test was laid down in Sidharth Gupta v. Getit Info Services Pvt. Ltd.^[4] Under the necessary parties test, courts and judicial authorities determine two key factors: (i) whether an effective order can be issued in cases involving oppression, mismanagement, and prejudice, and (ii) whether a complete and final determination of the dispute can be made without the involvement of a party not bound by the arbitration agreement. If a party involved in the dispute who is not a signatory to the arbitration agreement does not meet the "necessary parties" test, the matter will be referred to arbitration.

Remedies Test:

The remedies test is based on the fact that NCLT has been vested with special statutory powers for granting of just and equitable reliefs. Since arbitral tribunal is created out of a contract, it has limited powers and can only adjudicate disputes in accordance with terms of the contract.

This test was developed in Jugnar Processors Pvt. Ltd. v. Rohtas Jugalkishore Gupta.^[5] This case revolved around the allegations of improper allocation of shares and the appointment of a director without proper notice to the petitioner. Thus, the petitioner sought the cancellation of additional shares allocated to Respondent Nos. 3 to 6. The court held that these disputes involved factual questions and statutory rights that could not be referred to arbitration. The tribunal's jurisdiction vested by virtue of Section 402 of the Companies Act is exclusive and cannot be superseded by an arbitration agreement. The court further ruled that since the parties involved in the arbitration agreement were not identical to those in the company petition, and since the disputes were not arbitrable, the application under Section 8 of the Arbitration Act could not be allowed.

Totality Test:

The totality test is used to determine whether a petition has been framed in such a manner so as to circumvent the arbitration clause, when in reality, the subject matter is in fact arbitrable. As per this test, the Courts must assess if the petition has been fabricated to appear as a dispute involving oppression and mismanagement in order to avoid arbitration. If it is found that the petition does not relate to matters that fall exclusively under the jurisdiction of the NCLT, it will be referred to arbitration.

This test was coined in the case of Rakesh Malhotra v. Rajinder Kumar Malhotra & Others,^[6] wherein the court ruled that if a petition is found to be a “dressed-up” attempt to bypass an arbitration clause by falsely framing it as a case of oppression and mismanagement under Sections 241 and 242 of the Companies Act, the petition must be referred to arbitration. A “dressed-up petition” is one where the petitioner aims to avoid arbitration by falsely representing a contractual dispute as one involving statutory oppression and mismanagement. When such petitions are presented, courts must examine the grounds and reliefs sought to determine if the petitioner's objective is to avoid arbitration. In case the subject matter of the dispute is found to be arbitrable and not within the exclusive jurisdiction of the NCLT, the court must refer the case to arbitration. The totality test ensures that parties do not disguise arbitrable disputes as statutory issues in order to avoid the arbitration.

Thus, the disputes relating to oppression and mismanagement are usually not arbitrable. This can be determined from the following:

1. Disputes have a statutory nature: Since the disputes pertaining to oppression and mismanagement have been provided under the Companies Act, they cannot be considered as arbitrable. Such disputes are not merely contractual disputes between two parties but rather, they involve the interests of the company as a whole and the public at large.
2. Public interest involved: Since functioning of companies and the protection of minority shareholders is a matter of public interest, the principles of corporate governance require that these disputes must be adjudicated by the NCLT that can provide such remedies that cannot be otherwise provided in an arbitration proceeding.
3. Judicial Precedents: Indian courts have laid down, that disputes pertaining to oppression and mismanagement are non-arbitrable because they involve rights
   in rem and require regulatory oversight.
4. Existence of criminal nature: Since disputes pertaining to oppression and mismanagement have a criminal element, are considered non-arbitrable.
5. Exclusive Jurisdiction of NCLT: Since the NCLT has been given exclusive jurisdiction to adjudicate claims of oppression and mismanagement under the Companies Act and the remedies it can provide are broad and regulatory in nature, such disputes cannot be referred to arbitration.

Although arbitration is an essential tool for resolving commercial disputes, it cannot be used for resolving disputes pertaining to oppression and mismanagement. The NCLT has been vested with the exclusive jurisdiction to adjudicate such disputes and the powers to ensure that companies operate in accordance with the law and in the best interests of all stakeholders.

Authors: Apeksha Lodha (Partner) and Prajjwal Gour (Associate) at Singhania & Co. Views are personal.

1. Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd, (2011) 5 SCC 532. ↑

2. N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021) 4 SCC 379. ↑

3. Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. & Ors., (2021) 9 SCC 449. ↑

4. Sidharth Gupta v. Getit Info Services Pvt. Ltd, 2016 SCC OnLine CLB 26. ↑

5. Jugnar Processors Pvt. Ltd. v. Rohtas Jugalkishore Gupta, 2014 SCC OnLine CLB 160. ↑

6. Rakesh Malhotra v. Rajinder Kumar Malhotra & Others, 2014 SCC OnLine Bom 1146. ↑