Annual Arbitration Review 2018

Cheran Properties Ltd. v. Kasturi and Sons Ltd. & Ors.

Reading Time: 3 minutes

Citation:Civil Appeal 10025/2017

Coram:D Chandrachud,  M Khanwilkar, Misra

Date:April 24, 2018

Overview:

In this case, the Supreme Court interpreted provisions regarding execution of awards under the Arbitration Act with respect to the power of another forum other than the civil courts to execute particular remedies under arbitral awards. Moreover, the Court also looked at the binding nature of arbitration agreements on third parties and whether they were valid.

Facts:

Sporting Pastime India Limited (‘SPIL’) is a wholly owned subsidiary of Kasturi & Sons Limited (‘KSL’), which entered into an agreement with KC Palanisamy (‘KCP’), KSL and another entity for transfer shares. Cheran Properties Limited (Cheran) was a nominee of KCP and along with the other nominees, it would receive 95% of the shares transferred to KCP.

When a dispute arose between the parties and the matter was settled by way of arbitration, the award directed KCP and SPIL to return the documents of title and share certificates to KSL. However, Cheran, the nominee of KCP and recipient of 95% shares, was not a party to these arbitration proceedings.

KSL also initiated proceedings under Section 111 of the Companies Act for rectification of the register of SPIL before the National Company Law Tribunal (‘NCLT’) to give effect to the Award which was opposed by Cheran. The petition was allowed by the NCLT and the appeal was dismissed by the NCLAT, after which the proceedings moved to the Supreme Court.

Issues:

  • Whether an arbitral award is binding on Cheran, who is not a signatory to the arbitration agreement?
  • Whether an arbitral award relating to transfer of shares can be enforced by the NCLT under Section 111 of the Companies Act, 1956?

Analysis:

In the present case, the Court referred to its decision in the Chloro Controls case[1]which laid down the group of companies doctrine. Under this, when an arbitration agreement was entered into by a company which was part of a group of companies, the agreement could bind the non-signatory companies as well, if that was the intention realised in the arbitration agreement.

Based on the facts and circumstances of the present case, the Court held that the transfer of shares by KCP to its nominees was subject to the express condition that the nominee would abide by the terms of the share transfer agreement. Due to this fact, Cheran could not contend that the arbitration agreement would not be binding on it.

The Court also made observations regarding Section 35 of the Arbitration Act which essentially allows for an arbitration award to be made binding on the parties as well as people claiming under the parties. The Court held that because Cheran was a nominee of KCP and due to it being bound by the share transfer agreement, it would be given the same position as KCP. By virtue of this position, Cheran would therefore be bound as per Section 35 of the Arbitration Act.

Moreover, the contention put forth by Cheran that the award could not be enforced by the NCLT based of Section 36 of the Arbitration Act was also rejected by the Court. The Court referred to the case of Sundaram Finance[2]where it was held that execution proceedings could be initiated anywhere in the country where the assets of the judgement debtor were located. The Court in this case further held that in order to actually give effect to the transfer of shares, the only remedy available would be to approach the NCLT under Section 111 of the Companies Act and therefore, the action taken was the necessary one.

Conclusion:

The decision of the Supreme Court in this case to allow the NCLT to have jurisdiction for the enforcement of awards relating to transmission of shares showcases a dynamic view of the Court. This decision by the Court has therefore identified the NCLT as the court of relevant jurisdiction and competent jurisdiction and therefore, ordinary civil courts are not the only courts which can be approached. However, it is pertinent to note that this is only with respect to the transfer of shares and does not extend to any other aspect.  Moreover, the Court has also upheld its decision in the Chloro Controls case for determining circumstances where a third party could be bound by the arbitration agreement.

 

 

[1]Chloro Controls Pvt. Ltd. v. Severn Trent Water Purification Inc (2013) 1 SCC 641

[2]Sundaram Finance v. Abdul Samad, (2018) SCALE 467.

 

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