Clever Drafting Of Purported Challenge U/S 34 A&C Can’t Convert What Is Not An Arbitral Award Into An Arbitral Award: Bombay High Court
The Bombay High Court reiterated that the proceedings filed by a company with a defective Board resolution or even in situations where a Board resolution is not even available, the lacuna was held as not being fatal to the arbitral proceedings.
Justice Somasekhar Sundaresan, Bombay High Court
The Bombay High Court observed that clever drafting of a purported challenge under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) cannot convert what is not an arbitral award into an arbitral award.
The Court observed thus in a Commercial Arbitration Petition challenging the Order of the Arbitral Tribunal in disposal of an Application invoking Section 31(6) read with Section 32(2)(c) of the A&C Act essentially repelling the contentions that the very conduct of the arbitration proceedings is untenable.
A Single Bench of Justice Somasekhar Sundaresan remarked, “… multiple nuances are involved and all of this would need a detailed examination. The Learned Arbitral Tribunal has wisely taken a view that the absolutist proposition canvassed by Master Drilling does not lend itself to an outright non-suiting of Sarel Drill at the threshold on the premise of Section 32 of the Act. I see no reason to ignore the multiple iterations of the Learned Arbitral Tribunal in explaining its approach of having taken a prima facie view in the matter and not accepting the unconditional definitive and inexorable characterisation that Master Drilling has sought to paint on the facts at hand. Clever drafting of a purported challenge under Section 34 cannot convert what is not an Arbitral Award into an arbitral award.”
The Bench said that the proposition that even for matters that do not need a Board decision, a company would stand paralysed would have far-reaching and counterproductive consequences that cannot be lightly inferred merely because a counterparty to a disputed contract seeks to blow off arbitral proceedings that have been well underway.
Senior Advocate Sharan Jagtiani appeared on behalf of the Petitioner, while Advocate Rashmin Khandekar appeared on behalf of the Respondent.
Facts of the Case
The arbitral proceedings in this case were related to a Business Transfer Agreement executed between the Petitioner company and the Respondent company. In terms of the Agreement, the business and assets of Respondent were sold to the Appellant. According to the Respondent, the Agreement lapsed owing to conditions precedent not being met due to breach attributable to the Appellant, which resulted in wrongful loss being caused. Therefore, the arbitral proceedings were related to claims by the Respondent for the Appellant to effect payment of damages, return of machinery, and rental payments. The Appellant took a stand that the very invocation and pursuit of arbitral proceedings was untenable on account of the Respondent lacking a validly constituted Board of Directors when arbitration was invoked and when an application under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) was filed.
It was further contended that without at least two directors on its Board of Directors, the Respondent was incapable of taking any decision to initiate and pursue the underlying arbitration proceedings. The Arbitral Tribunal dismissed the Appellant’s contentions in this regard taking a prima facie view that the contentions could well be considered later in the course of the arbitral proceedings. The Tribunal said that the arbitral proceedings ought not to be brought to an end outright. Hence, this was under challenge before the High Court on the premise that the absence of at least two Directors on the Board of Directors at the threshold of initiation of arbitration constitutes a foundational defect that renders Respondent incapable of taking any corporate decision whatsoever.
Reasoning
The High Court in view of the above facts, noted, “Faced with this proposition, Master Drilling would pitch the case even higher by contending that a company without more than one director would cease to have any capacity to act in any manner whatsoever. According to Mr. Jagtiani, the Board of Directors is the “corporate mind” and once denuded of a quorate Board strength, a company would be paralysed without any capacity to do anything, with the only action that the company could take is to get its Board back to quorate strength. I am afraid this extreme proposition does not appeal to me, even as it is not for this Court to rule on this at this stage of the proceedings.”
The Court was of the view that if the proposition that the company must necessarily be paralysed is accepted, the company (purportedly without a corporate mind) would never be able to file tax returns, enter into a contract, renew an existing contract, terminate a contract, and even employ any person or taken to its logical length, sign any cheque, whether for a routine payment (say pay cheques of employees) or a non-routine payment (say purchase of vital spare parts or of replacement machinery).
“Such an approach would harm the company’s stakeholders for whose protection the quorum stipulations for the Board of Directors has been legislated”, it added.
The Court reiterated that the proceedings filed by a company with a defective Board resolution or even in situations where a Board resolution is not even available, the lacuna was held as not being fatal to the arbitral proceedings.
“In the instant case, the Learned Arbitral Tribunal has not even taken a firm and conclusive view to enable the Petitioner to treat the Impugned Order as an Arbitral Award. That apart, the prima facie and preliminary view taken by the Learned Arbitral Tribunal cannot be faulted at all since all issues have been left open for consideration”, it said.
The Court observed that the extreme contention is made that nothing a company can do until its Board becomes quorate for a potential meeting would be valid in the absence of a corporate mind.
“I have dealt with that contention earlier in this judgement. In any case, the Learned Arbitral Tribunal’s prima facie stand that Sarel Drilling cannot be non-suited without this issue being examined at an appropriate stage cannot be faulted. The Learned Arbitral Tribunal has the full power and discretion to choose when to consider these issues and cannot be dictated to by any party as to how to conduct the proceedings. Clearly this issue would require evidence to be examined. I have already discussed Section 19 of the Act. There is nothing arbitrary in the approach of the Learned Arbitral Tribunal in leaving this issue for later”, it remarked.
Conclusion
The Court held that no case is made out for interference with the impugned Order, which is in any case, not an arbitral award inasmuch as it is not a final adjudication of any issue which would lead to termination of the arbitral proceedings on such issue.
“Under Section 31 of the Act, the arbitral proceedings would terminate when an Arbitral Award is rendered, bringing to an end the adjudication of the disputes presented before the Arbitral Tribunal. In the instant case, far from bringing any dispute to an end on a final basis, the Learned Arbitral Tribunal has taken a decision that it would examine the matter at a later stage in the course of a final determination that it would make as and when it adjudicates the proceedings in the manner that it chooses to conduct”, it further noted.
The Court also said that the invocation of Section 34 of the Act is misconceived and the prima facie view of the Arbitral Tribunal is validly made as an interlocutory assessment, and the decision not to non-suit Respondent is not a final adjudication.
“Even if the negative conclusion were to be treated as a final adjudication on the issue, for the reasons set out above, the view expressed in the Impugned Order is an eminently plausible view that calls for no intervention”, it concluded.
Accordingly, the High Court dismissed the Petition and imposed a cost of Rs. 2 lakhs on the Appellant.
Cause Title- Master Drilling India Private Limited v. Sarel Drill & Engineering Equipment India Private Limited (Neutral Citation: 2025:BHC-OS:20729)
Appearance:
Petitioner: Senior Advocate Sharan Jagtiani, Advocates Anirudha Mukherjee, Aviral Sahai, Shreya Som, Sushil Jethmalani, Soumya Dasgupta, Shivam Tiwari, and Aanya Anvesha.
Respondent: Advocates Rashmin Khandekar, Chirag M. Bhatia, Rakesh K. Taneja, and A.R. Shaikh.
