Arbitration Award Enforcement: Supreme Court Upholds NCLT's Power in Share Transfer Dispute

Legal disputes concerning arbitration and corporate governance often lead to significant rulings that shape commercial practices in India. One such case, Cheran Properties Limited vs. Kasturi and Sons Limited & Others, revolved around the enforcement of an arbitration award related to share transfers and corporate liabilities. The Supreme Court, in its judgment dated April 24, 2018, ruled in favor of the respondents and upheld the power of the National Company Law Tribunal (NCLT) to rectify the share register based on the arbitration award.

The case highlights the importance of arbitration agreements in business transactions and the jurisdiction of specialized tribunals in enforcing arbitration awards. The Supreme Court’s decision provides clarity on the applicability of arbitration to non-signatory parties under the group of companies doctrine and reinforces the binding nature of arbitration awards.

Background of the Case

The dispute originated from an agreement dated July 19, 2004, between Kasturi & Sons Limited (KSL), Cheran Properties Limited, and other parties. The agreement involved the transfer of shares in Sporting Pastime India Limited (SPIL), a wholly owned subsidiary of KSL. Under the agreement:

SPIL was to allot 240 lakh equity shares to KSL against outstanding book debts.
KSL agreed to sell 243 lakh equity shares (90% of SPIL’s shareholding) to K.C. Palanisamy (KCP) and his nominees, including Cheran Properties Limited.
KCP was required to discharge certain liabilities within 180 days of taking over SPIL.

The agreement contained an arbitration clause, specifying that disputes would be resolved through arbitration by a three-member tribunal.

Emergence of Disputes and Arbitration Proceedings

When KCP failed to fulfill his obligations, disputes arose between the parties. KSL initiated arbitration proceedings, and on December 16, 2009, the arbitral tribunal issued an award directing:

KCP and SPIL to return the share certificates and title documents related to the 2.43 crore shares of SPIL.
KSL to pay Rs. 3,58,11,000 to KCP upon receiving the shares.
Rejection of the counterclaim filed by KCP.
KCP and SPIL to bear the costs of arbitration.

KCP challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, but his petition was dismissed by a Single Judge of the Madras High Court on April 30, 2015. The Division Bench of the High Court dismissed his appeal on January 24, 2017, and the Supreme Court refused to entertain his special leave petition on February 10, 2017, making the arbitral award final.

Enforcement of the Arbitral Award Before NCLT

Following the finality of the arbitral award, KSL approached the NCLT (National Company Law Tribunal) under Section 111 of the Companies Act, 1956, seeking rectification of the share register to reflect the reversal of the share transfer.

NCLT Ruling: On March 6, 2017, NCLT allowed KSL’s petition and directed the rectification of SPIL’s share register.

NCLAT Ruling: KCP and his nominees, including Cheran Properties Limited, appealed before the National Company Law Appellate Tribunal (NCLAT), which upheld NCLT’s decision on May 3, 2017.

Arguments Before the Supreme Court

Petitioner’s Argument (Cheran Properties Limited):

The company was not a party to the arbitration agreement and therefore could not be bound by the arbitral award.
The arbitration agreement applied only to KSL, KCP, SPIL, and Hindcorp, and not to Cheran Properties.
Under Section 35 of the Arbitration and Conciliation Act, 1996, an arbitral award is binding only on the parties involved in arbitration.
The award should be enforced as a decree under Section 36 of the Act and not through NCLT proceedings.

Respondent’s Argument (KSL):

Cheran Properties Limited was a nominee of KCP and acquired shares based on the same agreement containing the arbitration clause.
The group of companies doctrine applied, making Cheran Properties bound by the arbitration award.
The arbitration award was final and enforceable, and rectification of the share register was necessary to give effect to it.
NCLT had jurisdiction under Section 111 of the Companies Act, 1956, to rectify the share register.

Supreme Court’s Observations

The Supreme Court, led by Justices Dipak Misra, A.M. Khanwilkar, and D.Y. Chandrachud, examined the issues and ruled in favor of KSL.

Key Excerpts from the Supreme Court Judgment:

“Clause 14 of the agreement dated 19 July 2004 recognizes the right of KCP to transfer his holding in SPIL to a person of his choice, provided that the proposed transferee accepts the terms and conditions of the agreement. This includes the arbitration agreement.”

The Court further held:

“The appellant (Cheran Properties) was not merely aware of the arbitration agreement but directly benefited from the share purchase agreement, making it bound by the arbitration award.”

Final Verdict

The Supreme Court ruled:

The NCLT and NCLAT were correct in directing the rectification of SPIL’s share register.
The arbitral award was binding on Cheran Properties Limited as it was a nominee of KCP.
Section 111 of the Companies Act, 1956, provided the appropriate mechanism to rectify the shareholding records.
The appeals filed by Cheran Properties Limited were dismissed.

Conclusion

This judgment clarifies the enforcement of arbitration awards in corporate disputes and the applicability of the group of companies doctrine. The ruling reinforces that even non-signatories can be bound by an arbitration award if they have derived benefits from the contract containing the arbitration clause.

The Supreme Court’s decision also reaffirms the jurisdiction of specialized tribunals like NCLT in corporate matters, ensuring that arbitration awards are effectively implemented. This judgment serves as a significant precedent for future corporate and arbitration-related disputes in India.

Petitioner Name: Cheran Properties Limited.
Respondent Name: Kasturi and Sons Limited & Others.
Judgment By: Justice Dipak Misra, Justice A.M. Khanwilkar, Justice D.Y. Chandrachud.
Place Of Incident: Chennai.
Judgment Date: 24-04-2018.

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