Mere Existence Of Arbitration Clause In Shareholders' Agreement Does Not Mandate Arbitration: NCLT Bengaluru

The National Company Law Tribunal at Bengaluru recently held that mere existence of an arbitration clause in a Share Subscription Agreement does not make reference to arbitration mandatory.

It further observed that issues concerning corporate governance and reliefs under the Companies Act could not ordinarily be adjudicated through arbitration.

A coram of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada observed:

“It is true that the SHA contains a clause dealing with Arbitration. Mere existence of such a clause does not make it Obligatory to make reference to Arbitration. The Issues relating to Corporate governance are issues in Rem and the relief contemplated under various provisions of the Companies Act, 2013 cannot be hoped to be provided or given under an Arbitration exercise.”

Nowon Technologies Private Limited approached the Tribunal under Section 8 of the Arbitration and Conciliation Act, 1996, seeking reference to arbitration of Tono Thomas' petition alleging oppression and mismanagement.

The company argued that Thomas had disguised a contractual dispute as an oppression and mismanagement case. It contended that his principal claims related to payment of dividends for 2009–10 to 2020–21 and redemption or purchase of his shares, with 18% interest.

Relying on Clause 23 of the Share Subscription Agreement, Nowon Technologies contended that these disputes were subject to arbitration. It also pointed out that Thomas had initially sought conversion of his preference shares into equity shares, but later withdrew the request and exercised the put option under the Agreement.

Thomas opposed the application, arguing that his petition raised allegations against several respondents, who were not parties to the Agreement. He contended that the proceedings involved statutory claims of oppression and mismanagement and could neither be referred to arbitration nor divided between the NCLT and an arbitral tribunal.

The Tribunal noted that the Agreement contained a clause dealing with arbitration. However, it held that the mere existence of such a clause did not automatically make reference to arbitration obligatory.

It then examined Clause 23 of the Agreement. The clause provided for mutual discussions between the parties in the event of differences and stated that unresolved disputes would be resolved through arbitration. It also provided for the appointment of arbitrators and Bangalore as the seat of arbitration.

However, the Tribunal said that the clause did not satisfy the requirements of a valid arbitration agreement as explained by the Supreme Court.

“Consequently, they cannot be considered to disclose a determination and obligation to go for arbitration and not only provide for the possibility of going to arbitration. When the word provides only a possibility, the same does not constitute a valid arbitration agreement.” it held

Accordingly, the Tribunal declined to refer the matter to arbitration and dismissed the application.

For Petitioner: Shivani P Murthy

For Respondent: Saji P John