Delhi High Court Delineates Circumstances To Invoke "Group Of Companies" Doctrine

The Delhi High Court has ruled that the plea that signatures to the MoU containing an arbitration clause were obtained by threat and coercion, cannot be considered while considering an application under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) for appointment of the Arbitrator. The Single Bench of Justice Neena Bansal Krishna held that each Company is a separate legal entity which has separate legal rights and liabilities and hence, an agreement entered into by one of the Companies in a group, cannot be binding on the other members of the same group. However, the Court added that in certain exceptional circumstances, by invoking the concept of "Group of Companies", an arbitration agreement can be binding on the non-signatory Companies or a third party. The respondent no. 1 - Milan R. Parekh, and respondent no. 2- Bakul R. Parekh, carry on the business of share broking through M/s Action Financial Services (respondent no. 3), a Company registered under the Companies Act, 1956. Respondent no. 1 is the Director of respondent no. 3. The respondents agreed to take the petitioner - Esha Kedia, as their business partner. After the petitioner decided to exit from the business partnership, the parties entered into an Exit MoU followed by an Addendum to the MoU. Alleging that the respondents failed to carry out their obligations as specified in the Addendum MoU, the petitioner issued a letter to the respondents demanding the payments due to her. After the respondents denied the claims made by the petitioner, the petitioner invoked the arbitration clause contained in the Exit MoU. The petitioner filed a petition under Section 11(6) of the A&C Act before the Delhi High Court seeking appointment of an arbitrator to adjudicate the disputes between the parties. The respondent Milan R. Parekh submitted before the High Court that the MoUs were incomplete and unenforceable, and that the Exit MoU containing an arbitration clause was signed by the respondent no. 1 and 2 under threat and coercion. The respondents contended that the two MoUs were not valid and legal documents, and that the same were not executed by all the parties. They added that the stamp paper for the Addendum MoU was procured one day after its alleged execution and hence, it was not admissible in evidence. The respondents averred that though respondent no. 3 is mentioned as party in the Exit MoU and the Addendum MoU, however, it is not a signatory to the said MoUs. Hence, they contended that since the two MoUs were not signed by all the parties, the MoUs were void ab initio and were not enforceable. The petitioner Esha Kedia submitted that the issues raised by the respondents were triable issues, which must be raised in the arbitral proceedings and which were required to be proved by way of evidence. Further, the petitioner argued that the two MoUs imposed liabilities on respondent no. 1 and 2. The petitioner added that the respondent no. 1 is the Director of respondent no. 3 Company, therefore, the signature by respondent no. 1 on the MoU should be deemed to be the signature on behalf of respondent no. 3 Company. While observing that there was a binding arbitration agreement between the petitioner and the respondent no. 1 and 2, the Court ruled that the plea that the signatures to the Exit MoU containing an arbitration clause were obtained by threat and coercion cannot be considered while considering an application under Section 11 of the A&C Act for appointment of the Arbitrator. Noting that the Stamp Paper of the Addendum MoU was purchased a day after the document was allegedly executed, the Court ruled that even if the Stamp Paper was purchased subsequently after the execution of the agreement, the Court at the stage of referring the parties to arbitration has to only consider whether prima facie there exists an Arbitration Agreement in writing. "The MoU dated 14th November, 2014 and Addendum MoU dated 16thFebruary, 2016 admittedly bear the signatures of the petitioner and the respondent Nos. 1 and 2. Any challenge to the genuineness of the said document or any issue of threat and coercion in signing the said documents by respondent Nos. 1 and 2 cannot be a subject matter of adjudication in the present petition. The parties are at liberty to raise these issues before the Arbitrator", the Court said. The bench observed that since each Company is a separate legal entity which has separate legal rights and liabilities, an agreement entered into by one of the Companies in a group, cannot be binding on the other members of the same group. However, the Court added that in certain exceptional circumstances, by invoking the concept of "Group of Companies", an arbitration agreement can be binding on non-signatories. "The circumstances in which the "Group of Companies" doctrine could be invoked to bind the non-signatory affiliate of...

Delhi High Court Delineates Circumstances To Invoke "Group Of Companies" Doctrine

Parina Katyal

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