Non - Signatory Can Be Referred To Arbitration Under ‘Doctrine Of Alter Ego’: Madras High Court

The Madras High Court has ruled that non-signatories to arbitration agreement can be referred to arbitration by invoking the ‘doctrine of alter ego’ only in exceptional cases where there is convincing evidence that the non-signatory is the ‘alter ego’ of the signatory. The bench of Justice Senthilkumar Ramamoorthy remarked that the doctrine of alter ego is applied in exceptional circumstances by piercing the corporate veil of the signatory Company in order to determine who lurked behind it at the relevant point of time. The petitioners, including Vatsala Jagannathan, entered into a Memorandum of Agreement (MoA) with the 1st respondent, M/s Tristar Accommodations Ltd, for development of petitioners’ land. General powers of attorney were executed by the respondent Company in favour of its Managing Director, on the basis of which, the Managing Director mortgaged the land in favour of the Indian Bank and availed a loan. The Indian Bank, in turn, assigned the debt to an Asset Reconstruction Company (ARC), who initiated action to enforce the security interest. Thereafter, the petitioners redeemed the mortgage by paying a sum. Contending that the respondent Company and its Managing Director acted in breach of trust, the petitioners invoked the arbitration clause contained in the MoA and filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Madras High Court, seeking reference to arbitration. The petitioner, Vatsala Jagannathan, submitted that the proceeds of the loan were misappropriated by the Managing Director and his heirs, and were not used in accordance with the MoA. The petitioners raised a claim seeking restitution of the amounts paid by them to the ARC. The petitioners argued that after the death of the Managing Director, his shares were transmitted in favour of his class I legal heirs, i.e., the 2nd, 3rd and 4th respondents, adding that the 5th respondent is the Managing Director’s sister who also holds shares in the first respondent Company. The petitioners contended that although respondents 2 to 5 are not parties to the MoA or the powers of attorney, however, they are in complete control of the respondent Company and are thus, ‘alter egos’ of the Company. It pleaded that the said non-signatories to the arbitration agreement can be referred to arbitration, by resorting to the ‘group of companies’ or the ‘alter ego’ doctrine. Referring to the relevant extract contained in the book ‘International Commercial Arbitration’ by Gary B. Born, the Court reckoned that the doctrine of alter ego is resorted to in exceptional cases to depart from the fundamental principle that only a signatory to an arbitration agreement is bound by it. The bench added that it is a significant and exceptional departure which should not be resorted to unless there is convincing evidence that the non-signatory is the alter ego of the signatory. Also, the High Court took note that in Purple Medical Solutions Pvt. Ltd. v. Miv Therapeutics Inc. & Ors., Manu/SC/0139/2015, the Supreme Court had pierced the corporate veil of the signatory to an arbitration agreement by taking into account that all acts/deeds/transactions were performed by the non-signatory. Thus, the non-signatory was held to be bound by the arbitration agreement because he was the “Chairman of the Board/ President/ CEO/ CFO/ Treasurer and Secretary” of the signatory Company. “In order to invoke and apply the doctrine of alter ego, the corporate veil of the first respondent should be pierced to see who lurked behind at the relevant point of time,” the High Court concluded. The Court added: “Since company law is founded on the status of a company as a distinct juristic entity, the corporate veil is pierced in exceptional circumstances such as the use thereof to evade tax or commit fraud.” Referring to the facts of the case, the bench noted that the 2nd respondent was a director of the respondent company when the MoA was executed and was also involved in the affairs of the company when the power of attorney was executed. However, the 3rd and 4th respondents were not shareholders or directors of the respondent Company at the relevant time. Further, the 5th respondent held only a miniscule shareholding in the Company the entire time. “…in order to decide if non-signatories to an arbitration agreement may be compelled to arbitrate, the follow-on question would be: who would have been behind the veil if it were pierced on the date or dates when the material events took place? For reasons set out above, undoubtedly, the third and fourth respondents would not have been found lurking behind the veil. As regards the fifth respondent, even today, she is a minority shareholder holding only 100 shares in the first respondent company,” the Court concluded. While reiterating that the exception on the ground of “alter ego” should be...

Non - Signatory Can Be Referred To Arbitration Under ‘Doctrine Of Alter Ego’: Madras High Court

Parina Katyal

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