A full bench of the Supreme Court of India in Cheran Properties Limited v. Kasturi and Sons Limited & Ors.[1] has held that an award can be enforced even against a non-signatory to the arbitration proceedings. Further the Apex Court has ruled that such an award directing transfer of shares can be enforced through the NCLT.
Facts:
Sporting Pastime India Limited ('SPIL') a wholly owned subsidiary of Kasturi & Sons Limited ('KSL'), entered into an agreement with KC Palanisamy ('KCP'), KSL and another entity for transfer shares. The transaction was such that SPIL would transfer shares to KSL, 90% of which would then be sold to KCP and its nominees including, Cheran Properties Limited ('Cheran') which received 95% of KCP's 90% shares.
Disputes 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 and Hindcorp. Cheran the nominee of KCP and recipient of 95% shares was not party to these arbitration proceedings. The award was unsuccessfully challenged by KCP under §34 of the Arbitration and Conciliation Act, 1996 ('A&C Act').
In the interim, KSL initiated proceedings, inter alia, under §111 of the Companies Act, 1956 ('Companies Act') for rectification of the register of SPIL before the National Company Law Tribunal ('NCLT') to give effect to the Award. This was opposed by Cheran. The petition was allowed by the NCLT and an appeal against the NCLT's order was dismissed by the National Company Law Appellate Tribunal. The proceedings thereafter moved to the Supreme Court of India.
Proceedings before the Supreme Court:
Cheran relied upon the Supreme Court Judgments in Indowind Energy Limited v Wescare (India) Limited [2] and S.N.Prasad, Hitek Industries (Bihar) Limited v Monnet Finance Limited [3] to contend that it was not a signatory to the arbitration agreement and therefore not a party. It had not participated in the arbitration and therefore the award did not bind it. Cheran also relied on §36 of the A&C Act to argue that an award being enforceable as a decree of a civil court could not be enforced by pursuing a "camouflaged petition" before the NCLT.
KSL argued that the share transfer agreement specifically stipulated that KCP's nominees would be bound by it. Cheran was therefore bound by the share transfer agreement, the arbitration agreement and the award. It was also argued that only the NCLT had jurisdiction to effectively transfer shares.
Judgment:
The Supreme Court considered the ratio of its judgment in Chloro Controls to observe that an arbitration agreement entered into by a company within a group of companies could bind non-signatory affiliates, if the circumstances could demonstrate a mutual intention of the parties to bind both signatories and non-signatories. Based on the facts of this case, the Court held that the transfer of shares by KCP to its nominees (including Cheran) was subject to the express condition that the nominee would abide by the terms of the share transfer agreement. Therefore, Cheran could not contend that it wouldn't be bound by the arbitration agreement or the award.
The Supreme Court thereafter laid special emphasis on §35 of the A&C Act, which provides that an arbitration award binds parties and the persons claiming under them. The Court felt that Cheran being a nominee of KCP, as well as being bound by the share transfer agreement was a party having the same position as KCP and therefore bound by the award in terms of §35 of the A&C Act.
Cheran's contention that the Award in view of §36 could not have been enforced before the NCLT was also rejected. The Court relied on Sundaram Finance Limited v Abdul Samad[4] to conclude that execution proceedings can be initiated anywhere in the country where the assets of the judgment debtor are located. The Court further held that in order to give effect to the transfer of shares, approaching the NCLT for registration of such transfer and rectification of the register under §111 of the Companies Act was the only remedy available to KSL and therefore its actions were not only appropriate but also necessary.
Conclusion:
The Supreme Court has yet again recognized the complexity of modern transactions and passed orders keeping the commercial intent of the parties in mind. This approach of the Supreme Court is arbitration friendly and ensures that the arbitration award in the facts of this case was not rendered a mere paper decree.
The commercial and common-sense approach of the Supreme Court of India to complex commercial transactions is a positive step and likely to go a long way in protecting the integrity of arbitration and arbitration awards
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[1] (Civil Appeal No 10025-10026 of 2017)
[2] (2010) 5 SCC 306
[3] (2011) 1 SCC 320
[4] (2018) 2 SCALE 467
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