Recently the High Court of Bombay ruled that a defect in the board resolution authorizing a person to initiate arbitration is curable and only a procedural irregularity.
Therefore, such a defect cannot result in the rejection of claims or termination of arbitral proceedings, according to the court. Justices K.R. Shriram and Rajesh S. Patil held that the requirement of a board resolution authorizing a person to take legal action on behalf of a company is procedural and defects in it cannot defeat the substantive rights of a party.
Brief Facts:
A dispute arose in arbitration proceedings involving Arya Iron & Steel Co. Pvt. Ltd., a Mumbai-based company. The Appellant, an investment company, invested in the company and became a 49% shareholder, leading to a dispute with other shareholders. During the proceedings, the other shareholders argued that the Appellant did not have the authority to participate due to an invalid resolution. The Arbitral Tribunal allowed the claimant two options to fix the issue, which led to two petitions filed under Section 34 of the Arbitration Act. The court ruled that the Tribunal's decision went against Indian public policy and fundamental law, which was appealed in the High Court of Bombay.
Contentions of the Applicant:
The appellant while heavily relying on United Bank of India Vs. Naresh Kumar, Sheth Builders Vs. Michael Gabriel argued that filing a lawsuit with a defective board resolution or without any board resolution at all is not fatal. It is a procedural defect that can be fixed, and a substantive right should not be defeated because of a procedural irregularity. In some previous cases, there was no board resolution at all, yet the court held that it is just a procedural irregularity that can be fixed. Therefore, it was argued that the appellant is not in a worse-off position. Further, it was contended by the appellant that the signing and verification of the statement of claim is a matter of procedure that is governed by Indian law, which should be applied by the court or tribunal where the case is taking place.
Contentions of the Respondent:
The respondent's argument is that the Arbitral Tribunal's decision to allow the appellant to cure the invalidity of a board resolution is in conflict with the public policy of India and should be set aside. The respondent contends that the Tribunal's decision to extend its jurisdiction by permitting the appellant to cure the invalidity of Sunil Jain's authority is an exercise of power in equity, which is not permitted under the Arbitration Act. The respondent believes that allowing the appellant to lead evidence after choosing not to do so goes against Indian Law's fundamental policy of attaining finality to arbitral awards. Furthermore, the respondent argues that the Tribunal's decision contradicts its earlier finding that pleadings regarding the validity of the board resolution are required to be made in the statement of the claim itself since the appellant would not know what position the respondents may take in the statement of claim.
Observation by the Court:
The Court while dealing with Section 34 of the act relied on its own previous judgment in MSEDCL v. Godrej and Boyce, 2019 SCC OnLine Bom 3920, and the Supreme Court's judgment in Indian Farmers’ Cooperative Ltd v. Bhadrq Products (2018) 2 SCC 534 to hold that an interim award regarding the authorization to file a claim or the validity of invoking the arbitrator can be challenged under Section 34, and therefore, the petition under Section 34 was maintainable.
Further, the court noted that the Supreme Court in Srei Infrastructure Finance Ltd. Vs. Tuff Drilling (P) Ltd. held that the Arbitral Tribunal is not restricted from using provisions under the CPC. Therefore, the bench ruled that the Tribunal can exercise court powers beyond the CPC, as long as natural justice principles are followed. Further, the court relied on the Supreme Court case also held in Jugraj Singh Vs Jaswant Singh that the ratification of an act is retroactive to when the act was done, placing the agent in the same position as if they had the authority to do the act. Thus, the court held that the decision to allow the appellant to fix the defect was valid.
It was also held by the Court that a defect in the board resolution authorizing a person to initiate arbitration is only a procedural defect that can be cured. Therefore, it cannot be a reason for the dismissal of the claims or the termination of the arbitral proceedings.
Regarding the requirement of a board resolution authorizing legal action on behalf of a company, the Court held that any defect in such a resolution would only be a procedural irregularity and cannot defeat a substantive right of a party. The Court clarified that under Section 19 of the Act, an arbitrator is not bound by the CPC, but may draw sustenance from its procedures. The arbitrator can exceed the limits of the CPC but must observe the principles of natural justice. The Court distinguished between the powers granted to the arbitrator under Section 19 and Section 28 of the Act. While Section 28 deals with the applicable law on the substance of the dispute, Section 19 refers to procedural law. Therefore, according to the court, a procedural order of the tribunal cannot be challenged for violating Section 28 of the Act.
The decision of the Court:
The court held that the procedural order of the tribunal cannot be questioned.
Case Title: Palmview Investments Overseas Limited v. Ravi Arya
Coram: Hon’ble Justice Justices K.R. Shriram and Rajesh S. Patil
Case no.: Commercial Arbitration Petition (L) No. 25152 of 2022
Advocate for the Applicant: Mr Kevic Setalvad, Senior Advocate a/w Mr Vijay K Singh, Mr Vinay J Bhanushali, Mr Abhiraj Rao, Ms Shreya Arur, Mr Sanmit Vaze and Mr Jehan Lalkaka.
Advocate for the Respondent: Mr Haresh Jagtiani, Senior Advocate a/w Mr Suprabh Jain, Mr Pushpvijay Kanoji and Ms Jahnavi Vora i/b Mr Mohd Shariq for Respondent Nos 1 and 2. Mr Sharan Jagtiani, Senior Advocate a/w Mr Priyank Kapadia and Ms Apurva Manwani i/b Mr Yakshay Chheda for Respondent Nos 3 to 5. Mr. Sameer Bindra i/b Khaitan & Co for Respondent No 6. Ms Chandni Dewani i/b Vashi and Vashi for Respondent Nos 7 to 11.
Read Judgment @LatestLaws.com
Picture Source :
