Arbitrability of Shareholder Disputes in India

The issue of arbitrability of shareholder disputes has garnered significant attention in recent years due to the growing number of corporate conflicts in India. Arbitration, as an alternative dispute resolution mechanism, offers several advantages such as speed, confidentiality, and expertise. However, the arbitrability of certain disputes, particularly those involving shareholders, has been a subject of debate.

Arbitrability of disputes has been a subject of great ambiguity in India. The crux of the problem is whether an arbitration tribunal can decide a matter, or whether it is best to delegate this responsibility to traditional courts.

While the Arbitration & Conciliation Act, 1996, does not explicitly refer to the question of arbitrability, it is reflected through certain sections. Section 2(3) of the Arbitration Act provides that “certain disputes may not be submitted to arbitration”, and Sections 34(2)(b) and 48(2) state that “the subject-matter of the dispute is not capable of settlement by arbitration under the law”. Thus, after a series of judgements, the Supreme Court has resolved the matter through the case of Vidya Drolia vs. Durga Trading Corporation.[1] The 3-judge bench of the Apex Court laid down a four-fold test for deciding the arbitrability of a dispute, as follows:

“(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

(2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;

(3) when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and

(4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).”[2]

Shareholder disputes typically arise from disagreements between shareholders regarding company affairs, corporate governance, or rights associated with their shares.[3] The question of arbitrability arises when shareholders seek to resolve their disputes through arbitration instead of approaching a court. Section 2(3) of the Arbitration and Conciliation Act, 1996 provides that certain matters, such as criminal offenses, insolvency, and matters concerning the public interest, are non-arbitrable. However, the Act does not explicitly address the arbitrability of shareholder disputes. Consequently, the courts in India have played a significant role in shaping the jurisprudence surrounding this issue.

The Supreme Court, in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[4], laid down the principle that disputes that affect the rights and obligations of third parties or involve allegations of fraud or criminal offenses may not be arbitrable. Following this principle, some courts in India have held that shareholder disputes involving allegations of fraud or oppression would not be arbitrable, as they would affect the rights of minority shareholders and the public interest.

Similarly, in the case of A. Ayyasamy v. A. Paramasivam[5], the Supreme Court reiterated that disputes involving allegations of fraud would not be arbitrable. The court recognized that certain disputes are inherently public in nature and require the application of statutory provisions for their resolution, thereby making them unsuitable for private arbitration. Apart from judicial pronouncements, certain statutes also impact the arbitrability of shareholder disputes in India.

The Companies Act, 2013, which regulates the functioning of companies, contains provisions addressing shareholder disputes. Section 244 of the Act allows shareholders to initiate proceedings before the National Company Law Tribunal (NCLT) for remedies such as oppression and mismanagement. This provision creates a statutory mechanism for resolving certain shareholder disputes outside the realm of arbitration. However, it is important to note that the presence of a statutory mechanism does not necessarily render shareholder disputes non-arbitrable.

The Supreme Court, in the Vidya Drolia[6] case held that the existence of an alternative statutory remedy does not oust the jurisdiction of an arbitral tribunal if the dispute falls within the scope of an arbitration agreement. This judgment reaffirmed the principle of party autonomy and upheld the arbitrability of certain shareholder disputes, even in the presence of a statutory remedy.

In conclusion, the arbitrability of shareholder disputes in India is a complex and evolving area of law. While the Arbitration and Conciliation Act, 1996 does not explicitly address the issue, the judiciary has provided guidance through various judgments. The nature of the rights involved, the presence of fraud or criminal allegations, and the existence of a statutory mechanism are all factors considered by the courts in determining arbitrability. It is essential for parties to carefully review their agreements, consider the specific circumstances of their disputes, and seek legal advice to determine whether arbitration is a viable option for resolving their shareholder conflicts.