Kerala HC Refers Malabar Group Companies' Dispute With Shareholders Over Non-Compete Breach To Arbitration

The Kerala High Court has recently referred to arbitration a dispute between three Malabar Group companies and certain shareholders over allegations that the shareholders breached non-compete provisions in the companies' Articles of Association by becoming involved in rival jewellery businesses.

Justice S Manu was dealing with petitions filed by Malabar International Gold Designs Private Limited, Luster Gold Palace (India) Private Limited and Malabar Gold Supermarket (Kannur) Private Limited seeking appointment of an arbitrator.

The companies alleged that the respondents, who were shareholders, had become involved in competing jewellery businesses, including Win Gold LLP and Mawsim Gold Pvt Ltd.

They said this violated Article 79 of the Articles of Association, which bars shareholders from engaging in competing businesses while associated with the company and for three years after they cease to be shareholders.

According to the companies, this made the respondents “defaulting parties” under Article 80 of the Articles of Association.

The companies said they had first issued notices calling upon the respondents to comply with the Articles of Association. They later sent legal notices and invoked arbitration in December 2024.

Earlier petitions seeking appointment of an arbitrator had been rejected as premature because the companies had not first followed the dispute resolution mechanism requiring discussions before arbitration.

The companies said fresh discussions were later initiated, but no settlement could be reached, leading to the present petitions.

Opposing the pleas, the shareholders contended that the relevant provisions had been introduced through later amendments to the Articles of Association and were therefore not binding on them. They also argued that the arbitration clause was not valid or binding. They said the disputes could not be compulsorily referred to arbitration.

The Court said its role at this stage was limited to examining whether an arbitration agreement existed between the parties. It said other objections, including whether the dispute was arbitrable, could be decided by the arbitral tribunal.

“The jurisdiction of this Court under Section 11 of the Act is restricted to examine the singular question as to whether an arbitration agreement exists between the parties. All other aspects raised, including the arbitrability of the dispute are to be decided by the arbitrator, if this Court concludes that there is a valid arbitration agreement,” it held.

The Court examined Article 81 of the Articles of Association, which provides for arbitration if disputes cannot be resolved through discussions.

“As the Articles of Association encompasses such a specific provision, I am of the considered view that the disputes between the parties in these arbitration requests are liable to be referred for arbitration,” it held.

The Court said it would not examine the merits of the shareholders' objections at this stage, as doing so would exceed the limited scope of the proceedings.

“If this Court ventures to address such contentions on merits, it may amount to transgression of the constricted jurisdiction under Section 11 of the Arbitration and Conciliation Act 1996. I, therefore, refrain from making any observations on the merits of the contentions of both sides except rejecting the contention of the respondents that there is no binding arbitration agreement,” it added.

Accordingly, the court allowed the petitions and directed the Kerala High Court Arbitration Centre to nominate a retired District Judge, preferably from Kozhikode, as the sole arbitrator to adjudicate the disputes.

For Petitioners: Senior Advocate P Viswanathan, Advocates D Reetha, Akhil K.M, Anjali Nair and P.V Vinod (Bengalam)

For Respondents: Advocates C.K Karunakaran, Lakshmi P Nair, Shifna Muhammed Shukkur, Krishna Suresh, Mekha Manoj and Anirudh Indukaladharan