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Non-signatory to an arbitration agreement permitted to participate in the arbitration proceedings on the basis of "Group Companies" concept


Court :
Supreme Court of India

Brief :
Hon'ble Supreme Court observed that a binding agreement for disputes to be resolved through arbitration is a sine-qua-non for referring the parties to arbitration.

Citation :
Mahanagar Telephone Nigam Ltd. (Appellant) vs. Canara Bank & Ors. (Defendant)

Mahanagar Telephone Nigam Ltd. (Appellant) vs. Canara Bank & Ors. (Defendant)
Supreme Court of India
Dated: 08/08/2019

HELD THAT

Non-signatory to an arbitration agreement permitted to participate in the arbitration proceedings on the basis of "Group Companies" concept.

BRIEF FACTS

1. In 1992, MTNL floated 17% Non-Cumulative Secured Redeemable Bonds worth Rs. 425 crores.

2. On 10.02.1992, MTNL placed bonds worth of Rs. 200 crores with Can Bank Financial Services Ltd. ("CANFINA") under an MOU agreement. The bond amount of Rs. 200 cores was placed as fixed deposit by MTNL with CANFINA.

3. CANFINA paid back Rs. 50 crores of the fixed deposit in 1992. The balance fixed deposit amount of Rs. 150 crores along with interest was not paid by CANFINA to MTNL.

4. As a consequence, MTNL did not service the interest on bonds. Against payment of Rs. 50 crores received from CANFINA, MTNL serviced the bonds of approximately Rs. 31 crore.

5. Canara bank was of view that an out-break of a security scam and CANFINA was faced with a severe liquidity crunch and Respondent No. 1 Canara Bank purchased the Bonds issued by MTNL, of the face value of Rs. 80 crores, from Respondent No. 2 - CANFINA which is its wholly owned subsidiary.

6. Canara Bank requested for registration of these Bonds but MTNL refused to transfer the Bonds on various grounds. MTNL subsequently registered a part of the face value of Rs. 40 crores, in favour of CANFINA but however retained on the ground that CANFINA had failed to pay the deposit money of Rs. 150 crores, which was payable to MTNL with an accrued interest of 12% p.a.

7. MTNL later cancelled all the Bonds inter alia on the ground that letters ofconsideration remained with CANFINA. MTNL sent a statement of accounts by adjusting the proceeds of the cancellation of bonds and attached a cheque for Rs. 5,41,17,463 as the amount payable to Canara Bank.

8. Canara Bank filed before the Delhi High Court challenging the cancellation of the Bonds. The Writ Petition was dismissed on the ground of availability of an alternative and efficacious remedy before the Company Law Board under Section 111 of the Companies Act, 1956.

9. The proceedings before the Company Law Board came to be dismissed, since the remedy was no longer available, as per the amendment of Section 111 by the Depositories Act, 1996.

10. Canara Bank filed an application for Restoration of the Writ Petition. Canara Bank made a representation to the Cabinet Secretary. A meeting was convened by the Cabinet Secretariat and attended by the representatives of MTNL, Canara Bank, and CANFINA.

11. The Committee directed Canara Bank, CANFINA and MTNL to settle the disputes through arbitration.

12. The Delhi High Court referred the disputes between the parties to the Committee on Disputes. The Writ Petition was adjourned sine die. The Delhi High Court disposed of the pending Writ Petition with the observation that the matter should be resolved by the Committee on Disputes expeditiously so that the arbitration agreement between the parties is signed as soon as possible.

13. Accordingly, Canara Bank moved the Delhi High Court under section 151, CPC for restoration of the disposed of Writ Petition. Delhi High Court restored the Writ Petition. During the course of the proceedings, the parties before the Delhi High Court agreed that these issues may be referred to arbitration.

14. The appointed Sole Arbitrator issued notice to all the three parties i.e. MTNL, Canara Bank, and CANFINA. Canara Bank raised an objection to joining CANFINA as a party to the arbitration.

15. The learned Arbitrator passed an interim award holding that CANFINA had not appeared on 16.09.2011 before the High Court, when the disputes were referred to arbitration.

16. MTNL filed C.M. No. 8100 of 2012 before the Delhi High Court seeking clarification of Order dated 16.09.2011, as to whether CANFINA ought to be impleaded as a necessary party to the arbitration agreement.

17. The Delhi Court dismissed the application as "not pressed" on the statement made by the Counsel of MTNL. MTNL filed I.A.s before the Delhi High Court for recall of the Orders passed in W.P. The Delhi High Court dismissed the Application for Recall on the ground that the application was identical to the application previously filed by MTNL.

18. Aggrieved by the Orders passed by the Delhi High Court in W.P. the Appellant - MTNL filed the Special Leave Petition.

19. There are two issues which have arisen for the consideration of Hon'ble Supreme Court:

(i) the first issue raised by the Appellant - MTNL with respect to the existence of a valid arbitration agreement between the three parties;

(ii) the second issue has been raised by Respondent No. 1 - Canara Bank that the Order are between Canara Bank and MTNL. Respondent No. 2 - CANFINA, is not a party to the arbitration agreement, and hence cannot be impleaded in the proceedings.

OBSERVATIONS AND JUDGEMENT OF SUPREME COURT

20. Hon'ble Supreme Court observed that a binding agreement for disputes to be resolved through arbitration is a sine-qua-non for referring the parties to arbitration.

21. The arbitration agreement need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration.

22. Section 7(4)(b) of the 1996 Act, states that an arbitration agreement can be derived from exchange of letters, telex, telegram or other means of communication, including through electronic means. If it can prima facie be shownthat parties are ad idem, even though the other party may not have signed a formal contract, it cannot absolve him from the liability under the agreement.

23. Arbitration agreements are to be construed according to the general principles of construction of statutes, statutory instruments, and other contractual documents. The agreement between MTNL and Canara Bank to refer the disputes to arbitration is evidenced from the various documents. The agreement between the parties as recorded in a Judicial Order, is final and conclusive of the agreement entered into between the parties.

24. The Appellant - MTNL after giving its consent to refer the disputes to arbitration before the Delhi High Court, is now estopped from contending that there was no written agreement to refer the parties to arbitration.

25. A non-signatory can be bound by an arbitration agreement on the basis of the "Group of Companies" doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties. CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings.

26. The matter is remitted to the Sole Arbitrator to continue with the arbitral proceedings, and conclude the same as expeditiously as possible.

27. Supreme Court had, however, expressed no opinion on the merits of the dispute.

 

FCS Deepak Pratap Singh
on 17 August 2022
Published in Corporate Law
Views : 32
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