Numerous companies incorporate an arbitration clause in their Articles of Association for the purpose of resolving disputes arising between the Company and the shareholders. On the contrary to this, the National Company Law Tribunal has the jurisdiction to decide upon cases and provide remedies in all company matters, including any dispute between the shareholders and the company. Section 241 of the Companies Act, 2013 also states that the National Company Law Tribunal has the exclusive jurisdiction to provide remedy in cases where either the affairs of the company are conducted in a manner prejudicial to the public interest or if the conduct of the majority shareholders is oppressive.
The arbitrability of shareholder disputes is a very important question for companies that have incorporated a mandatory arbitration clause in their Articles of Association.
The term ‘arbitrability’ is not defined under the Arbitration and Conciliation Act, 1996. But section 8 of the Arbitration and Conciliation Act, 1996 states that a judicial authority is bound to refer the parties to arbitration if the following essentials are adhered to:
- An arbitration agreement must exist between the parties.
- The dispute must arise out of the arbitration agreement.
- One of the disputants must make an application to the judicial authority, for referring the parties to arbitration.
- Such application must be made before the first statement of the parties are submitted.
Once all these conditions are fulfilled, the judicial authority is bound to refer the parties to arbitration.
In the case of Booz Allen Hamilton v. SBI Home Finance Ltd. and Ors the Supreme Court laid down a standard rule to decide whether a dispute can be referred to an arbitration tribunal or not. The question that needs to be answered is whether the action in the dispute violates a right in rem or a right in personam. Disputes relating to right in rem are non- arbitrable, and disputes relating to right in personam are arbitrable. The Supreme Court in this case also laid out a few categories of disputes that are outside the purview of arbitration. They are as follows:
- disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
- matrimonial disputes;
- guardianship matters;
- insolvency and winding up;
- testamentary matters;
- eviction or tenancy matters; and
- disputes arising between trust, trustees, and beneficiaries.
It can be concluded that if the dispute is in violation of a right in personam, and if it is outside the purview of the aforementioned seven categories, then it can be adjudicated by an arbitral tribunal. However, a right in personam emerging out of a right in rem is arbitrable. A breach of contract resulting from the insolvency of a company is one such example.
The Court in the case of Haryana Telecom v. Sterlite Industries, held that insolvency and winding up proceedings are non- arbitrable. In certain cases, it has been held that certain disputes relating to oppression of shareholders are also considered inarbitrable. However, if the judicial authority is of the opinion that the petition is filed with the intent of avoiding and escaping the arbitration clause, the court or tribunal, may refer the parties to arbitration.