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Browse Law School Education ADR: Arbitration Important Arbitration Cases

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Now let’s discuss another interesting case which is that of Mahanagar Telephone Nigam Ltd. (MTNL) v. Canara Bank—which is a 2019 SC case.

BRIEF FACTS:

MTNL floated 17 percent Non-Cumulative Secured Redeemable Bonds, through private placement, worth Rs 425 crores. On 10th February 1992, MTNL placed bonds worth Rs 200 crores with Can Bank Financial Services Ltd. “CANFINA” under an Memorandum of Understanding. Bond amount of Rs 200 cores was placed as fixed deposit by MTNL with CANFINA. CANFINA paid back Rs 50 crores of the fixed deposit in 1992. The balance fixed deposit amount of Rs 150 crores along with interest was not paid by CANFINA to MTNL. Against payment of Rs 50 crores received from CANFINA, MTNL serviced the bonds of approximately Rs 31 crores to the public. MTNL was of the view that only a sum of Rs 5.41 crores was payable to CANFINA, which was not accepted by CANFINA.

With the out-break of security scam in the secondary market and owing to severe liquidity crunch, Canara Bank purchased the Bonds issued by MTNL, of the face value of Rs 80 crores, from CANFINA which is its wholly owned subsidiary. Canara Bank requested for registration of the Bonds with MTNL. MTNL, however, refused to transfer the Bonds, on various grounds mentioned in the letter.

Canara Bank contended that it is the holder in due course, and is entitled to have the shares registered in its name, and receive the interest as and when it fell due. Canara Bank filed a writ petition before the Delhi High Court challenging the cancellation of the Bonds, and a direction to pay the Interest accrued. CANFINA was joined as a proforma party in the Writ Petition filed by the Bank.

The proceedings before the Company Law Board were dismissed, since the remedy was no longer available, as per the amendment of the Depositories Act, 1996. Canara Bank made a representation to the Committee of Disputes, which directed Canara Bank, CANFINA and MTNL to settle the disputes through arbitration by making an appropriate reference to the Permanent Machinery of Arbitration, functioning in the Department of Public Enterprises. 

Canara Bank raised an objection to the joining of CANFINA as a party to the arbitration proceedings. The arbitrator heard the parties on the issue whether CANFINA should be joined as a party to the proceedings. The learned arbitrator passed an interim award holding that since CANFINA had not appeared before the High Court, on the date of hearing when the disputes were referred to arbitration, it could not be a party to the arbitration agreement, and cannot be joined as a party to proceedings. 

MTNL filed a petition before the Delhi High Court seeking clarification of this Order. The Delhi High Court dismissed the Application for Recall, on the ground that the application was identical to the application previously filed by MTNL. Aggrieved by this, MTNL filed a Special Leave Petition in the SC.

ISSUES:

Issues were:

(i)Is there a valid arbitration agreement between the three parties?

(ii)Is CANFINA a party to the arbitration agreement, and can the Company be impleaded in the proceedings?

HELD:

The Hon’ble Supreme Court in this case has held that the arbitration agreement need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration proceedings. 

The statement of Claim and statement of Defence filed before the arbitrator constitutes evidence of the existence of an arbitration agreement, which was not denied by the other party, under Section 7(4)(c) of the 1996 Act.

The Supreme Court invoked the Doctrine of Group of Companies, which indicates the implied consent to an agreement to arbitrate, in the context of modern multi-party business transactions.

The Supreme Court therefore held in this case that–“ …where an arbitration agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group.”

Coming to the present case, the Supreme Court held that it would be a futile effort/ attempt to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated had come from a transaction between MTNL and CANFINA–the original purchaser of the Bonds from MTNL. The disputes arose on the cancellation of the Bonds by MTNL on the ground that the entire consideration had not been paid.

There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties.

The Court held that CANFINA is undoubtedly a necessary and proper party to the proceedings. Given the tripartite nature of the transaction, there can be a final resolution of disputes, only if all three parties are joined in the arbitration proceedings. 

RATIO:

The Doctrine of Group company was invoked by the Supreme Court, to bind a non-signatory to the arbitration agreement, while emphasising on the nature of multi-party business transactions, wherein it was held that where an arbitration agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group.

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