'Subsequent Shareholders' Do Not Qualify As 'Association Or Body of Individuals' Under Section 2(1)(f)(iii) Of Arbitration Act: Delhi High Court

The Delhi High Court bench of Justice Prateek Jalan has held that “subsequent shareholders,” each holding a specific number of shares and having the right to exit the company under defined conditions while undertaking individual rights and obligations, do not qualify as an "association or body of individuals" under Section 2(1)(f)(iii) of the Arbitration and Conciliation Act, 1996. Therefore, the High Court classified the arbitration as “international commercial arbitration” because one of the shareholders was a national and habitual resident of a country outside India. Section 2(1)(f)(iii) of the Arbitration Act defines "international commercial arbitration" as arbitration relating to disputes arising out of certain types of commercial relationships: “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is— an individual who is a national of, or habitually resident in, any country other than India; or a body corporate which is incorporated in any country other than India; or an association or a body of individuals whose central management and control is exercised in any country other than India; or the Government of a foreign country” Brief Facts: Ktc India Pvt. Ltd (Petitioner) filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 in the High Court and sought the appointment of an arbitrator to resolve disputes arising from a Shareholders Agreement. A key preliminary question was whether the petition was maintainable in the court, given that one of the parties to the Agreement, Mr. Nicholas Valladares, is neither a national nor a habitual resident of India. The Agreement involves fifteen parties with the Petitioner identified as the "Initial Shareholder" and thirteen individuals collectively termed "Subsequent Shareholders." Additionally, Destinos India Gurus Private Limited is a party to the Agreement. The Agreement's purpose was to restructure the shareholding of Destinos so that the Petitioner and Respondents hold shares in a 30:70 ratio. Due to arising disputes, the Petitioner sent a letter to the thirteen respondents and invoked arbitration. However, the parties could not agree on an arbitrator which prompted the petitioner to approach the High Court. The Petitioner argued that the proposed arbitration does not meet the definition of "international commercial arbitration" under Section 2(1)(f) of the Arbitration Act. It claimed that the thirteen individuals named as "Subsequent Shareholders" have entered into a joint enterprise to subscribe to Destinos' shares as outlined in the Agreement forming an "association or body of individuals" under Section 2(1)(f)(iii) of the Arbitration Act. It contended that since the central management and control of this group is based in India, the arbitration should not be classified as international. Observations by the High Court: The High Court referred to the decision of the Supreme Court in Larsen & Toubro SCOMI Engineering BHD v. Mumbai Metropolitan Region Development Authority where the contracting parties were a consortium comprising an Indian company and a Malaysian company on one side, and the Mumbai Metropolitan Region Development Authority (MMRDA) on the other. The Indian company was designated as the "lead partner" of the consortium. The consortium filed a petition under Section 11 of the Arbitration Act before the Supreme Court on the grounds that one of the parties to the Agreement was a body corporate incorporated in Malaysia. The Supreme Court held that the consortium was an unincorporated association with its central management and control exercised in India. In the Perkins Eastman Architects DPC v. HSCC (India) Ltd., one of the contracting parties was a consortium comprising a foreign entity incorporated in New York and an Indian entity. Disputes arose under the contract between the consortium and the respondent, HSCC India Ltd. The consortium approached the Supreme Court for the appointment of an arbitrator. The maintainability of the petition was contested on the ground that the arbitration proceedings did not constitute an international commercial arbitration. The Supreme Court allowed the petition and held that the lead member of the consortium was a foreign entity, thus satisfying the requirements of Section 2(1)(f) of the Arbitration Act. This was in contrast to the Larsen & Toubro case where the Indian entity was the lead member of the consortium. The decision of the Supreme Court in Amway (India) Enterprises (P) Ltd. v. Ravindranath Rao Sindhia concerned individuals who were nationals and habitual residents of the United States of America and approached the High Court for the appointment of an arbitrator. The High Court ...

'Subsequent Shareholders' Do Not Qualify As 'Association Or Body of Individuals' Under Section 2(1)(f)(iii) Of Arbitration Act: Delhi High Court

Rajesh Kumar

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