Winding Up Of Company Will Not Automatically Stay Arbitral Proceedings Against Promoters: Kerala High Court

The Kerala High Court has held that a company's winding up does not automatically halt arbitral proceedings or shield its promoters from contractual obligations undertaken in their personal capacity.

Justice T.R. Ravi held, “Sections 278 and 279 of the Companies Act can have operation only with regard to claims against the Company and a winding up order will not automatically operate as a stay of further proceedings before the Arbitrator. ”

It added, "The petitioner sought to place reliance on Section 34(2)(a)(i) of the Arbitration and Conciliation Act to submit that since the Company was wound up, there is an incapacity. Section 34(2)(a)(i) only says that an arbitral award may be set aside by the court if the party making the application establishes on the basis of the record of arbitral tribunal that a party was under some incapacity. As already found, the incapacity of the Company will not in any manner affect an award against its promoters."

The ruling came while dismissing an original petition filed by R. Sampathkumar challenging a Commercial Court order refusing to stay execution of a 2009 arbitral award passed in favour of the Marine Products Export Development Authority (MPEDA).

“The incapacity of the Company by itself will not render the arbitration proceedings invalid since the proceedings relate to obligations as between the promoters and the 1st respondent,” the court held.

The dispute arose from a financial collaboration agreement executed on November 18, 1993, under MPEDA's scheme for promoting seafood processing projects, under which MPEDA subscribed to 3,60,000 equity shares of ₹10 each in Sudesh Seafoods Ltd. and paid the consideration on March 16, 1994.

Under the agreement, the promoters were required to buy back MPEDA's shares after five years from commencement of commercial production, with the repurchase price to be calculated as per the agreement. Commercial production began on October 1, 1998, but the promoters failed to repurchase the shares.

MPEDA invoked arbitration, and on March 13, 2008, Justice J.M. James, a former judge, was appointed sole arbitrator. An award was passed on May 4, 2009, in MPEDA's favour.

The arbitral award was challenged in 2025, nearly 16 years later, and a stay on its execution was sought. The Commercial Court, Ernakulam, rejected the stay plea on November 20, 2025, following which the matter reached the High Court.

Before the High Court, Sampathkumar argued that since the company was under liquidation, arbitration proceedings could not have continued and the award could not be enforced. He relied on provisions of the Companies Act dealing with winding up and argued that the company's incapacity rendered the arbitral proceedings unsustainable.

MPEDA argued that the claim arose from the promoters' independent contractual obligation to repurchase the shares and was not a claim against the company in liquidation. It also contended that no grounds existed to stay enforcement of the award.

Accepting MPEDA's stand, the High Court held that the arbitral proceedings concerned obligations undertaken by the promoters personally and not liabilities of the company.

The court also noted that apart from broadly alleging incapacity and violation of public policy, no material had been produced to substantiate those claims.

Finding no infirmity in the Commercial Court's reasoning, the High Court dismissed the original petition.

For petitioner (R. Sampathkumar): Senior Advocate M. Ramesh Chander, Advocates Bejoy Joseph P.J., Govind G. Nair, Bonny Benny, Balu Tom.

For respondent (Marine Products Export Development Authority): Advocates C.S. Ajith Prakash, Amaljith, Haaris Moosa.