Arbitrability Of Shareholder Disputes.

Malhotra V Malhotra: Bombay High Court

On 20 August 2014, the Bombay High Court rendered its judgment in Rakesh Malhotra v Rajinder Kumar Malhotra & Ors, MANU/MH/1309/2014 (Rakesh Malhotra). The case concerned a complex dispute over the control of the Supermax empire of corporate entities. The Supermax group is said to be the world’s second largest manufacturer of razor blades and related products. In 2008, a restructuring was proposed which was to put Rakesh Malhotra (Rakesh) in control of the business, while giving his father (RKM) and his brother (Rajiv) an opportunity to exit from full-time involvement in the affairs of the Supermax group.

In 2010, the parties entered into a Subscription and Shareholder Deed, and later, a Supplementary Deed. Certain business restructuring agreements followed, and Rakesh was given sole authority to represent the Malhotra family in all these transactions. RKM claimed that Rakesh betrayed this trust in him. After transfers were effected, Rakesh used his power to grant loans and to guarantee bank loans to a newly formed Indian company under Rakesh’s control. Upon finding out about Rakesh’s activities, RKM asked to have access to company records in order to gain information. The directors of the companies refused to grant RKM access as they were loyal to Rakesh.

RKM then brought four company petitions, alleging oppression and mismanagement. Rakesh filed applications invoking an arbitration agreement in the main agreement between parties, seeking reference to arbitration of all disputes. One of the questions which was before the Indian Company Law Board (CLB), which also came before the Bombay High Court, was whether the disputes between Rakesh and the other parties were arbitrable.

The CLB has special powers to grant remedies under Sections 397 (“Application to Tribunal for Relief in Cases of Oppression”), 398 (“Application to Tribunal for Relief in Cases of Mismanagement”) and 402 (“Powers of the Tribunal on Application under Section 397 or 398”) of the Indian Companies Act, which, under Indian law, are not even available to a civil court. The Bombay High Court held a fortiori that these remedial measures are not available to an arbitral forum. Although the conclusion of the Court was that there should be no reason that an arbitral tribunalcannot exercise the same powers as a civil court, this would not be true of the powers of the CLB under Sections 397, 398 and 402.

The Court went on to say that not all disputes between parties necessarily fall within an arbitration agreement simply because an arbitration agreement exists between those parties. In the case of oppression and mismanagement petitions, the facts that give rise to such complaints may not be of a contractual nature at all and may not always be relatable to an arbitration agreement.

The Court went on to cite the Indian Supreme Court in Booz Allen & Hamilton Inc v SBI Home Finance Ltd, (2011) 5 SCC 532 (Booz Allen), at para. 37, “... A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals.” Following from that reasoning, the Supreme Court went on to state at para. 41 that, “… An arbitrator whose powers are derived from a private agreement between A and B plainly has no jurisdiction to bind anyone else by a decision on whether a patent is valid, for no one else has mandated him to make such a decision, and a decision which attempted to do so would be useless.”

The Bombay High Court stated that an action in oppression or mismanagement had the “flavour” of being an in rem since the reliefs under Section 402 of the Indian Companies Act were all remedies in rem, i.e. determining title of shares etc.. Because it was held that arbitral tribunals had no power to grant relief in a similar fashion to that available under Section 402, it was held that any genuine oppression or mismanagement petition was non-arbitrable.

The Court went on to conclude that if an oppression or mismanagement petition was brought in bad faith, vexatious and “dressed up” and that the reliefs sought were such as could be resolved by a private arbitral tribunal, then an application seeking reference to arbitration would be successful.

Silica Investors V Tomolugen Holdings: Singapore High Court

This particular caveat was of greater importance in another recent Singapore decision in a similar case which also involved the question of the arbitrability of a minority oppression suit. In Silica Investors Ltd v Tomolugen Holdings Ltd and others [2014] 3 SLR 815 (Silica Investors), a dispute arose amongst various shareholders. The plaintiff alleged that it had been oppressed as a minority shareholder and commenced a minority oppression claim under Section 216 of the Singapore Companies Act, seeking reliefs which included a buyout order, an order to regulate the conduct of the company’s whose shares formed the subject matter of the dispute, and/or an order for the winding up of the company.

The Singapore High Court took a similar approach to the Bombay High Court in Rakesh Malhotra in analysing the case from the point of view of whether any relief granted would affect the world-at-large’s rights in rem, and if so the issue would be non-arbitrable. It was impossible, the Court stated, to divorce the claim from the remedies available pursuant to that claim. However, the Singapore High Court was more willing to look at the range of available remedies and to distinguish between those that an arbitral tribunal did have the power to grant versus those it did not have the power to grant. The Singapore High Court stated that, “… just because a statutory claim may be redressed or remedied by an order that is only available to the courts, that does not mean the claim is automatically rendered non-arbitrable. It may well straddle the line between arbitrability and non-arbitrability depending on the facts of the case, the manner in which the claim is framed, and the remedy or relief sought.” The Singapore High Court held that a minority oppression claim is one such claim which straddles the line between arbitrability and nonarbitrability.

On the facts of Silica Investors itself, the Singapore High Court held that since there were relevant parties who were not parties to the arbitration, and since the plaintiff had asked for reliefs which the arbitral tribunal could not grant, it followed that the claim was not arbitrable.

 

For further information, please contact:

 

Timothy Cooke, Director, Stamford Law
timothy.cooke@stamfordlaw.com.sg