Non - Signatory Can Be Referred To Arbitration Under ‘Doctrine Of Alter Ego’: Madras High Court

The bench of Justice Senthilkumar Ramamoorthy remarked that the doctrine of alter ego is applied in exceptional circumstances by piercing the corporate veil of the signatory Company in order to determine who lurked behind it at the relevant point of time.

The petitioners, including Vatsala Jagannathan, entered into a Memorandum of Agreement (MoA) with the 1^st respondent, M/s Tristar Accommodations Ltd, for development of petitioners’ land. General powers of attorney were executed by the respondent Company in favour of its Managing Director, on the basis of which, the Managing Director mortgaged the land in favour of the Indian Bank and availed a loan. The Indian Bank, in turn, assigned the debt to an Asset Reconstruction Company (ARC), who initiated action to enforce the security interest. Thereafter, the petitioners redeemed the mortgage by paying a sum.

Contending that the respondent Company and its Managing Director acted in breach of trust, the petitioners invoked the arbitration clause contained in the MoA and filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Madras High Court, seeking reference to arbitration.

The petitioner, Vatsala Jagannathan, submitted that the proceeds of the loan were misappropriated by the Managing Director and his heirs, and were not used in accordance with the MoA. The petitioners raised a claim seeking restitution of the amounts paid by them to the ARC.

The petitioners argued that after the death of the Managing Director, his shares were transmitted in favour of his class I legal heirs, i.e., the 2^nd, 3^rd and 4^th respondents, adding that the 5^th respondent is the Managing Director’s sister who also holds shares in the first respondent Company.

The petitioners contended that although respondents 2 to 5 are not parties to the MoA or the powers of attorney, however, they are in complete control of the respondent Company and are thus, ‘alter egos’ of the Company. It pleaded that the said non-signatories to the arbitration agreement can be referred to arbitration, by resorting to the ‘group of companies’ or the ‘alter ego’ doctrine.

Referring to the relevant extract contained in the book ‘International Commercial Arbitration’ by Gary B. Born, the Court reckoned that the doctrine of alter ego is resorted to in exceptional cases to depart from the fundamental principle that only a signatory to an arbitration agreement is bound by it. The bench added that it is a significant and exceptional departure which should not be resorted to unless there is convincing evidence that the non-signatory is the alter ego of the signatory.

Also, the High Court took note that in Purple Medical Solutions Pvt. Ltd. v. Miv Therapeutics Inc. & Ors., Manu/SC/0139/2015, the Supreme Court had pierced the corporate veil of the signatory to an arbitration agreement by taking into account that all acts/deeds/transactions were performed by the non-signatory. Thus, the non-signatory was held to be bound by the arbitration agreement because he was the “Chairman of the Board/ President/ CEO/ CFO/ Treasurer and Secretary” of the signatory Company.

“In order to invoke and apply the doctrine of alter ego, the corporate veil of the first respondent should be pierced to see who lurked behind at the relevant point of time,” the High Court concluded. The Court added: “Since company law is founded on the status of a company as a distinct juristic entity, the corporate veil is pierced in exceptional circumstances such as the use thereof to evade tax or commit fraud.”

Referring to the facts of the case, the bench noted that the 2^nd respondent was a director of the respondent company when the MoA was executed and was also involved in the affairs of the company when the power of attorney was executed. However, the 3^rd and 4^th respondents were not shareholders or directors of the respondent Company at the relevant time. Further, the 5^th respondent held only a miniscule shareholding in the Company the entire time.

“…in order to decide if non-signatories to an arbitration agreement may be compelled to arbitrate, the follow-on question would be: who would have been behind the veil if it were pierced on the date or dates when the material events took place? For reasons set out above, undoubtedly, the third and fourth respondents would not have been found lurking behind the veil. As regards the fifth respondent, even today, she is a minority shareholder holding only 100 shares in the first respondent company,” the Court concluded.

While reiterating that the exception on the ground of “alter ego” should be resorted to with considerable circumspection, the Court said: “For reasons discussed above, the petitioner has failed to establish that respondents 3 to 5 qualify as “alter egos” of the first respondent or as successors-in-interest. As a corollary, the petitioners are not entitled to join respondents 3 to 5 as parties to arbitral proceedings.”

The respondent, Tristar Accommodations, further submitted before the Court that the petitioner, Vatsala Jagannathan, had filed a suit against the Company’s Managing Director, seeking a declaration that the sale deed of the land was executed by forgery. In the said suit, the petitioner had reserved her right to file a separate suit in relation to the execution of the mortgage deed and the consequent loss caused to her. The respondent contended that by doing so, the petitioner had waived her right to refer the present dispute to arbitration.

Accepting the arguments made by the respondent, the Court said, “In an action for alleged breach of trust, the bundle of facts constituting the cause of action would be the execution of the MoA and general powers of attorney on 12.11.2008, the execution of the mortgage deed pursuant thereto and the loss caused to the petitioner as a result thereof. The first petitioner reserved her right to file a suit in respect of this cause of action.”

The Court added: “If the plea of waiver were to be examined in isolation, in a petition under Section 11, given the limited prima facie review, the question of waiver could have been relegated to the arbitral tribunal to decide. However, this objection cannot be looked at in isolation but should be viewed cumulatively against the backdrop of several non-signatories being made parties to this petition. If so viewed, the petitioners are not entitled to resolve this dispute through arbitral proceedings.”

The Court thus dismissed the petition on the ground of waiver and the presence of non-signatories to arbitration agreement.

Case Title: Vatsala Jagannathan & Anr. versus Tristar Accommodations & Ors.

Citation: 2023 LiveLaw (Mad) 29

Dated: 20.01.2023

Counsel for the Petitioner: Mr. Anirudh Krishnan, assisted by Mr. Subramanian Vaidyanathan

Counsel for the Respondent: Mr. Sricharan Rangarajan for M/s. S.V. Pravin Rathinam & Vignesh Venkat

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