A Re-Evaluation of the Indian Arbitration Framework for O&M Suits in Quasi-Partnerships

[Sanjana is a student at National Law School of India University.]

Oppression and mismanagement (O&M) suits are legal actions brought by the members of a company against its management. It is a remedy that is usually available to minority shareholders of a company who allege unfair or unjust treatment. This remedy is statutorily provided under Sections 241 to 246 of the Companies Act 2013. A niggling question in Indian corporate law jurisprudence was whether such suits could be settled through arbitration. The Indian position on this is now clear and literature on it is saturated—that O&M suits generally cannot be arbitrated.

This article seeks to go beyond existing literature by undertaking a twofold critique of the Indian framework: it argues that the rationale behind the Indian position on non-arbitrability falls short when applied to quasi-partnerships, where O&M claims should be arbitrable. Towards this end, this article is structured into two parts. The first part explains the Indian position on the arbitrability of O&M suits and the tests developed by courts to arrive at this position. The second part extends this framework to quasi-partnerships and argues that the framework should be relaxed for such corporations. 

The Indian Position on the Arbitrability of O&M Suits

The law encourages parties, as far as possible, to settle their differences privately without using the resources of the State. However, there are certain disputes that courts have deemed as non-arbitrable. The Companies Act 2013 does not explicitly bar O&M suits from arbitration. However, courts have held that it impliedly does so by applying the following tests.

The remedies test / Booz Allen test

According to this test, if a statute confers exclusive jurisdiction upon a specific court to hear a certain dispute, such a dispute could not be subjected to arbitration as a matter of public policy. Section 241 of the Companies Act 2013 confers the National Company Law Tribunal (NCLT) with exclusive jurisdiction to hear O&M suits. In Haryana Telecom v Sterlite Industries, the Supreme Court of India held that O&M suits seek statutory remedies that only the NCLT can provide and an arbitral tribunal did not have the power to grant such reliefs. In Das Lagerway Wind Turbines v Cynosure Investments, the court held that the reliefs sought under the Companies Act 2013 is very different from the reliefs possible under an arbitration agreement. Therefore, on applying this test, courts have held that O&M suits are not arbitrable.

Rights in rem test

The legislature has the authority to reserve adjudication of certain categories of proceedings as a matter of public policy. In Booz Allen and Hamilton Inc. v SBI Home Finance, the court held that disputes involving rights in rem cannot be referred to arbitration as it affects third parties. A suit brought for the violation of personal rights that are primarily contractual is a right in personam and is therefore arbitrable. However, O&M suits are usually brought by minority shareholders alleging a breach of their rights by the management of the company, which has implications on the governance of the company and affects multiple stakeholders. Therefore, such suits cannot be resolved through private means and require judicial determination.

Bifurcation of claims test

Section 8 and Section 45 of the Arbitration and Conciliation Act 1996 (1996 Act) require judicial authorities to mandatorily refer a dispute to arbitration if the subject matter of the dispute is covered by the arbitration agreement. However, the Act does not have a provision for the bifurcation of claims if the subject matter of the dispute is partially covered by the arbitration agreement. Indian courts have interpreted this to mean that Indian arbitration law does not allow the bifurcation of claims. In Sukanya Holdings v. Jayesh Pandya, the Supreme Court held that the legislature would have explicitly allowed for the bifurcation of claims in the language of the 1996 Act if that was their intention. Therefore, in cases where both rights arising from a contract (which are arbitrable) and shareholder rights (which are non-arbitrable), are alleged to be breached, arbitration will not be permitted on applying this test. 

Necessary parties test

A sacrosanct principle of arbitration is that there must be a commonality between the parties that signed the arbitration agreement and the parties to the dispute—a party that did not sign the arbitration agreement cannot ordinarily be forced to enter into arbitration. The necessary party test was developed as a response to the addition of parties who are not signatories to the arbitration agreement as respondents in ordinarily arbitrable suits with the sole intention of defeating the arbitration clause. According to this test, if an effective order can be passed and a final determination of rights can take place without the presence of a party who is a non-signatory to the arbitration agreement, the party is not a necessary party and the dispute can be referred to arbitration. In O&M suits, a complete determination of rights cannot be made without the presence of multiple stakeholders who become necessary parties, all of whom may not be signatories to the arbitration agreement. Therefore, applying this test, arbitration cannot take place.

Totality test

This test was developed as a response to ordinarily arbitrable suits being ‘dressed up’ as O&M suits with the sole intention of ousting the arbitration clause. In Rakesh Malhotra v Rajinder Malhotra, which sums up the Indian position on the arbitrability of O&M suits, the court held that a petition must be read as a whole, including its grounds and the reliefs sought, to ensure that it is not merely ‘dressed up’ as an O&M suit to ouster an arbitration clause. 

Courts have used the above tests to arrive at the Indian position on the arbitrability of O&M suits—such suits are generally not arbitrable as arbitral tribunals do not have the competence to grant statutory reliefs unless the petition is vexatious and merely seeks to oust an arbitration clause under the guise of an O&M suit. The next section highlights how this apparently reasoned framework falls short when applied to quasi-partnerships. 

Relaxing the Framework for Quasi-Partnerships

A quasi-partnership is a company formed between individuals on the basis of mutual trust, good faith, and common management. The concept of quasi-partnerships was first developed in the House of Lords case of Ebrahimi v Westbourne Galleries. Quasi-partnerships share characteristics of traditional partnerships while operating through a corporate vehicle. Their recognition is a reflection of the law adapting to reality and acknowledging that a company established between members of a family or long-term close friends should not be regulated in the same manner as a large multi-national company. Dispute resolution for quasi-partnerships is influenced by the principles of equity and good conscience rather than being bound by the strict letter of the Companies Act 2013. 

In India, courts have generally exercised caution in terming companies as quasi-partnerships. The author argues that the Indian position of barring arbitration for O&M suits should be relaxed for the few companies that have been recognized by courts as quasi-partnerships. The primary justifications for the Indian position on the non-arbitrability of O&M suits are twofold: first, that arbitral tribunals lack the authority to grant statutory reliefs, and second, that tribunals cannot adjudicate rights in rem. However, such rationale is not applicable to the remedies typically sought in O&M claims within quasi-partnerships, such as the restoration of management rights, which are based on principles akin to partnerships and involve personal rather than public concerns. Furthermore, Section 28(2) of the 1996 Act permits arbitral tribunals to resolve disputes based on principles of equity and good faith, provided that the parties authorize this. In arbitration agreements among members of a quasi-partnership, parties are generally inclined towards equitable remedies aimed at restoring their relationship of mutual trust and good faith. The current Indian position compels parties in a quasi-partnership to resort to litigation, which risks further damaging their relationships. Conversely, allowing arbitration for disputes that do not implicate public interest would conserve time, money, and resources, while promoting the effective functioning of the company through mutual understanding. Therefore, the article argues that the Indian stance on non-arbitrability of O&M claims should be relaxed for quasi-partnerships. Such a relaxation would not require an overhaul of existing law, as the necessary framework is already provided under Section 28(2) of the 1996 Act.