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IBCInsolvency & Bankruptcy CodeWhether an Arbitration Award can be enforced through NCLT (IBC)

June 11, 2019by GLC & Partners

arbitration-hearing

In the case of Cheran Properties Ltd. Vs. Kasturi and Sons Ltd. and Ors.( Civil Appeal Nos. 10025-10026 of 2017) the issue before the Hon’ble Supreme Court was whether an Arbitration Award can be enforced by the NCLT.

Sporting Pastime Limited (SPIL) was a fully owned subsidiary of Kasturi & Sons Limited (KSL).  It entered into some agreement by which it agreed to transfer 90% of the total shares to KC Palanisamy (KCP) and out of those shares 95% will be transferred to its nominee Cheran Properties Limited. i.e. the  Appellant. Some disputes arouse and as per the agreement the matter was referred to arbitration proceedings. The appellant (Cheran Properties) was not a party to the Arbitration Proceedings. The arbitral award directed both KCP and SPIL to return he documents and the title, which was challenged by KCP under Section 34 of the Arbitration and Conciliation Act, 1996. The same was dismissed.

KSL initiated proceedings, inter alia, under Section 111 of the Companies Act, 1956 read with Sections 397,398,402 and 403, among other things, for rectification of register of SPIL.[1] The admission of the matter was challenged before the NCLAT by the appellant, which upheld the order stating that the appellant was holding the shares of KCP as its nominee and that NCLT was correct in the considering the matter under Section 111 of the Companies Act. On appeal the matter came before the Hon’ble Supreme Court of India.

The main contentions of the Appellant were that as it was not a party to the arbitration agreement the arbitral award cannot be binding on it. It also by relying on Section 7 of the Arbitration and Conciliation Act, 1996 which says arbitration agreement will only bind parties and not third party and this was also held in the cases of Indowind Energy Limited v Wescare (India) Limited[2]and S.N.Prasad, Hitek Industries (Bihar) Limited v Monnet Finance Limited[3]. It was also submitted that under Section 36 of the Arbitration Act, an arbitral award has to be enforced as a decree of a civil court and that the arbitral award could not have been enforced by pursuing proceedings before the NCLT.[4] KSL argued that the agreement specifically said that agreement specifically stated that the nominees of KCP would be bound by it.

The Hon’ble Supreme Court by applying the principles of the case Chloro Controls  which  held that “an arbitration agreement which is entered into by a company within a group of companies and may bind non-signatory affiliates, if the circumstances are such as to demonstrate the mutual intention of the parties to bind both signatories and non-signatories.” Cheran Properties specifically sought that the shares should be transferred to it in the agreement and thus the defence against the arbitral award cannot be accepted. The arbitration award directed transfer of shares and the only remedy for this is Section 111 of the Companies Act.

The Hon’ble Supreme Court also in the case of  Sundaram Finance Limited v. Abdul Samad & Anr.[5] held “that unhesitatingly of the view that the enforcement of an award through its execution can be filed anywhere in the country where such decree can be executed and there is no requirement for obtaining a transfer of the decree from the Court, which would have jurisdiction over the arbitral proceedings.” Thus, the arbitration award could be enforced through the NCLT.

[1] Civil Appeal Nos. 10025-10026 of 2017

[2] (2010) 5 SCC 306

[3] (2011) 1 SCC 320

[4] Civil Appeal Nos. 10025-10026 of 2017

[5] CIVIL APPEAL No.1650 of 2018