Arbitration of Oppression as in Companies Act 2013: A Utopian approach.
Introduction.
Arbitration as an effective method for dispute resolution was realised even before India gained freedom as it was a speedy mode of solving disputes and that it was more confidential. In pursuance of this method to resolve disputes the Arbitration Act of 1940 was passed but with the evolution of time and development of international commerce. The Act simply failed to fulfil the needs of growing international commerce within the country with regards to speedy solving of disputes. The need for a new Act became relevant after the economic reforms of 1992, which opened the gates for massive foreign investment in India. Thus a new Act was formulated on the guidelines of the UNCITRAL model law and so came into picture the Arbitration and Conciliation Act. The Act was comprehensive in nature and although it proved a boon to the foreign investments. It largely ignored one of the other changes that were introduced by the reforms in 1992. By the year 1992, it was clear that the citizens could easily set up Companies with a lot of ease. The Companies Act of 1956 in order to represent this sentiment was amended in 1996 and then in the year 2000. In the meanwhile, no change was made to the Arbitration and Conciliation Act with regards to make company law disputes ADR friendly. For that sake even the Amendments made in the Companies Act 1956 till date do not reflect any intention of the legislature to let the Companies or their promoters or the investors to get the benefit of the Alternative dispute resolution mechanism even after throwing open the equity market’s doors to the general public, especially the quick and effective benefit of Arbitration. But then again the question is always open to debate that when such a huge amount of public fund is invested in the Companies and whose ownership is distributed over such a large geographical area is it suitable to rely on a quasi-judicial body for decisions regarding such funds and the future of a company? The Alternative Dispute Resolution System has its benefit too as in a situation where funds are involved priority should always be given to amicable solution for mutual benefit but it must also be noted that benefit thus received must not cause loss to the shareholder holding least number of shares in the company. The most vulnerable problem of the Companies Act 2013 is that it all comes down to the number of shares you hold so even if you wish to exercise minority rights you must have a certain number of shares or at least many of individual shareholders should come together to get themselves recognised as a ‘minority’. Is this always possible? Besides there is already a quasi-judicial body to deal with the matters related to the Companies National Companies Law Tribunal, then how can reference to Arbitration be made? Thus a time has come to bring about a change especially with regards to Arbitrability of oppression in order to adopt a Utopian or ideal approach towards Arbitrability of oppression.
Oppression.
The word oppression is not specifically defined in the Companies Act of 2013. The Act of 2013 under sections 241 and 242 does not make any attempt to define the word oppression but the legislators through the interpretations of the sections 397 and 398 of 1956 Act which corresponds with the above sections made provisions to identify what is oppression based on the acts which may be termed as oppressive in nature. The wordings of S. 241 of the Act of 2013 can be summarised as follows: (1) Any member of a company(a) who feels that the affairs of the company are being conducted in such a manner which are against public interest, prejudicial, oppressive with regards to any of its members or against interest of company or (b) such changes are not in the interest of any person or body towards whom the company owes a liability whether by any act changes, alters or replaces any the of directors, or brings about a change in the ownership and if such an act is prejudicial to any class of members. Then they may apply to the tribunal seeking relief against oppression as per the provisions of S.244.
Problems with regards to S.241
Since the statute does not define the word oppression the entire burden to interpret the word oppression falls on the judiciary. Justice Wanchoo in the case of Shanti Prasad Jain v. Kallinga Tubes[1] accepted the explanation given by Lord Cooper in the case of Elder v. Elder & Watson Ltd[2]. Which reads as follows: The essence of the matter seems to be that the conduct complained of should, at the lowest involve a visible departure from the standards of their dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely. The case further quoted a summary given in Meyer’s with regards to determining important considerations which will be applied for determining the scope of S. 241 of new Act which is summarised as follows: The conduct complained i) Must be such so as to oppress a minority of the members. ii) Must arise out of the predominant voting power of majority which may at times due to treating the affairs of the company as their own property. iii) There is a wide discretion with the court to provide an alternative remedy to winding up of the company. iv) It is not paramount whether the act committed is legal or illegal but whether the act is oppressive or not is of primary importance. The judiciary while interpreting the word oppression has through its interpretation made it very clear that oppression can only be claimed when the act is so eminently dangerous that it is going to affect their interest in the company as its members rather than just affecting their rights enjoyed by them as the members or the owners of the company. The Companies Act 2013 does not make any attempt to define the word oppression. The difficulty arises as the line drawn by the judiciary is so fine that it is very difficult for a person to identify what is oppression. This dilemma can be seen in the case of Rights & Issues Investment trust limited v. Style Shoes Ltd.[3] It was held that increasing the voting rights of the share held by the management was not oppression. Though prima facie it looked like a case of oppression but the court took a stand that this act was beneficial to maintain the current management. Hence it was not oppression. Similarly in another English case where a minority shareholder was removed from his position of working director. Here the court held that this was not oppression as he had suffered the loss as a director and not as a member. There are various other decisions of the court where prima facie the case looks that of oppression but from the decisions of the judiciary in all the cases brought before it that emphasis is not to be given to the act but the motive behind that act. In the case of Vijay Kumar Narang v. Prakash Coach Builders (P.) Ltd. [4]it was held that: To constitute oppression the act need not be illegal or violative of any statutory provision but the impact of the act on the complaining member is to be considered. This causes a problem as the interpretation is to be given on facts of each case by the judiciary and in the long run because of a small difference in circumstance the judge may not abide by the earlier precedents and use his own discretion. With due respect to the judiciary at times a wrong precedent may be formed and it might take years to overrule the same, besides this in the absence of definition of term oppression each and every matter will have to be referred to the National Company law Tribunal; firstly to determine whether there is oppression based on its discretion. Only after it has been established will the matter of penalty be argued upon as in S. 242 of the Act.
The second problem with regards to S. 241 (1), it states that the matter in complain is to be that of public interest. The term public interest is not defined in the Companies Act. Hence again it is left for the judiciary to interpret the term public interest. The judiciary with regards to Companies law has not made any particular comment on what is public interest is, except that in the case of State of Bihar v. Kameshwar Singh.[5] It has been observed that the word public interest is not capable of being defined precisely and has no rigid meaning and is elastic and takes its colours from the statute in which it occurs, the concept varying with the time and state of society and its needs. Thus what is public interest today may not be so as to what will be a decade later. In a previously discussed case, it is clear that a legal act may be oppressive in nature. Thus this interpretation though on a case by case basis may be beneficial but subjecting such an open-ended legal terminology such as “public interest” to oppression is a dangerous proposition.
The third problem is with regards to parties to the arbitration agreement. Arbitration clause is a part of every agreement but since there are number of shareholders in a firm signing an arbitration agreement with each of the following shareholder will not be possible besides the term oppression can only be complained against when there is a compliance with Section 244 which speaks about the minimum number of shareholders or members or the minimum amount of shares held to make a complaint under Section 241. As per the current Arbitration Act, there must be an agreement between the parties to enforce the oppressive act by a certain shareholder holding the minimum number required shares under Section 244 or any number of shareholders. Hence the question largely remains unanswered so as to who shall be parties to the arbitration agreement?
The last problem is with regards to Section 2(4) of the Arbitration and Conciliation Act. This section limits the use of Arbitration and Conciliation Act to the limit whereupon it cannot encroach upon any other Act in place. So in a situation where the Companies Act provides for the adjudication by the Company Law Tribunal, then the Arbitration and Conciliation Act cannot be applied to the act of oppression committed.
Why is it necessary to Arbitrate upon Oppression?
The remedies to complaint filed under Section 241 are mentioned in Section 242, Sub-section(1) clause (b) and Clause(a) to clause (m) of Sub-section (2) excluding clause (i) will not lead to any benefit to the oppressed party rather it will only lead to loss to the members of the entire company, even those members who have not been oppressed nor are oppressing even their interests are being affected. Some may argue that clause (h) is thus an answer to this question but the fact remains that if a director is removed from the board then the goodwill of the company will be tarnished which in turn will affect the value of the shares of the company. One opinion may be that the (2)(b) is a good opportunity for the oppressed people to take their stake and leave the company if they feel oppressed but then again isn’t it wrong to make the sufferers to leave the company and depriving them of an opportunity to be a part of a profit making company only because of the acts of its directors? For that matter, even in (2)(i) clause it is not expressly mentioned but from its wordings, it may be construed that priority is to be given to the to deposit the amount recovered in Investor Education and Protection Fund over repayment to identifiable victims. But the biggest drawback of adjudicating over oppression by the Company Law Tribunal is that the matter no longer remains confidential and as a result, the parties who are neither oppressed nor oppressing also suffer as the market value of their shares goes down due to the scandal in the company. It is an agreed fact that when so many members are involved even in Arbitration the confidentiality may not remain but at least there is a hope of matter remaining confidential.
Solutions.
From the above paragraphs it is clear that judicial interpretations have been given to the word Oppression and from these interpretations, the word oppression can be safely defined in the statute itself so as to free it from the purview of public interest and thus make it arbitrable. As the Arbitration and Conciliation does not permit any matter regarding the public policy to be Arbitrated upon as in S. 34(2)(b)(ii). From the Judicial decisions, it is clear that oppression consists of four main ingredients. These are: 1) The act must be such that it causes the rights of the minority shareholders to be affected. 2) The act may be legal or illegal. 3) The act was done by the board of directors or the management for the purpose of self-benefit. 4) Any act which oppresses the rights of the minority shareholders but if such an act is done for the benefit of the Company as a whole then it is not oppression. If a definition in the Act is formulated with regards to the points mentioned above then the matters regarding oppression can become an arbitrable dispute. This solves the first two problems as mentioned in the earlier paragraphs of this essay.
The Bombay High court in the case of Rakesh Malhotra Vs Rajinder Kumar Malhotra.[6] Opened the gates for referring the matter to Arbitration by the Company Law Board but such matters should not be with regards to oppression but if the term oppression is freed from the shackles of ‘public interest’ then there should not be any problem to refer matters regarding oppression to Arbitration, when there is an arbitration agreement in place. The Judgment in Rakesh Malhotra Vs Rajinder Kumar Malhotra is not the law of the land but this Judgment looks favourable with regards to promotion of Arbitration in the country, thus there is no harm in getting this principle ratified by the Supreme Court. Oppression prima facie looks like a case of fraud and in the case of Swiss Timing Limited Vs. Organising Committee, Commonwealth Games 2010[7]. The Supreme Court held that fraud as a subject matter of a dispute can be arbitrated upon and it is not against public policy to do so. Hence there should not be any problem legislatures to free the term oppression from the restrictions of public interest. Based on all the justifications made in this paragraph it will become possible for the Company Law Tribunal to refer the matter to Arbitration, besides in the form of Rakesh Malhotra Vs Rajinder Kumar there is also a precedent of High Court to support the contention where a matter before the Company Law Board may be referred to oppression. Hence by upholding this contention, the impediment imposed by the S.2(4) can be removed. This solves our problem with regards to first, second problem.
The most important problem which needs to be resolved is with regards to the third issue. That is, with regards to parties to the arbitration agreement. In the case of Rakesh Malhotra Vs Rajinder Kumar. It was easy to insert an arbitration clause in the agreement as it was all within the family but in reality, the shareholders are spread over a large geographical area and hence it becomes very difficult even to bring them together to fulfil the requirements of S.244 so as to file an application under S.241. The question of signing an Arbitration Agreement is entirely out of the picture and in the absence of laws or precedents in this regard. It leaves room for ample creativity to solve this problem.
To solve this problem first of all the amendment needs to be made to S. 5 of the Companies Act 2013 so as to insert a mandatory Arbitration clause in the Articles of Association of both public and private companies. The clause must contain the details with regards to disputes which may be arbitrated upon and shall include ‘oppression’ as one such dispute which shall be arbitrated upon. The Articles of Association must also contain the name of the permanent Arbitrator, a panel of Arbitrators or the institute of Arbitration who shall be designated as the Permanent official Arbitrators of the company.
To solve the issue of parties to the Arbitration agreement the following words may be incorporated in the proposed mandatory amendment to Section 5, “The parties to the agreement shall be any member or members of the company who come together with so as to form a group to comply with the provisions of S.244 of this Act. The other party to the dispute shall be the board of directors and or management and for the purpose of Arbitration proceeding the property of the managers and or board of directors shall be attached to any dispute to be referred to the Arbitrator, Panel of Arbitrators or Institute of Arbitration. Provision should also be made in the Act so as to make it mandatory for the company to issue a copy of Arbitration Agreement with every IPO and FPO. Any person subscribing the shares shall also sign the Arbitration Agreement and submit it along with the share subscription form. Thus every member of the company shall become a party to the Arbitration Agreement. When the shares are purchased and sold in the market it shall be presumed that they abide by the Arbitration Agreement which is an integral part of the rights anybody enjoys as the member of the company. So as not to take away the autonomy of Company Law Tribunal. The tribunal on a case by case basis shall decide whether the dispute which is sought to be arbitrated upon is in accordance with the matters to be arbitrated upon as in Arbitration Clause of Articles of Association. This will definitely lengthen the Arbitration proceeding but the primary objective here is not only to g speedily dispose of the case but also to prevent the financial loss of members not a party to the suit which will take place if the remedies to oppression as provided S.242 of the Act are resorted to.
Conclusion:
In the article issues with regards to Arbitration of oppression are discussed and how they may be solved through arbitrating over them because at times even the judiciary feels that it is not right that all the matters be adjudicated upon this can clearly be seen in the approach taken by Bombay High Court in the case of Rakesh Malhotra Vs Rajinder Kumar. But primarily why oppression is to be brought under the ambit of arbitration is to protect the interest of members who are neither oppressing nor being oppressed and to protect the value of their shares. It is utmost necessary to bring oppression under the purview of Arbitration and Conciliation Act.
Though one of the approaches, as stated in the essay, is very hypothetical but is definitely plausible and which I believe would be a Utopian or an ideal approach.
No comments:
Post a Comment