Conflict between the Oppression Petition and Arbitration Clause

In the administration of the corporate affairs, the prevention of oppression and mismanagement is a very important matter. In many petitions relating to Section 397/398 under Companies Act, 1956 the Opposite Party raise the plea of arbitration agreement between the parties. Section 8 of the Arbitration and Conciliation Act 1996 mandates that any party to a legal proceedings may apply for reference of the matter in issue to arbitration if the same is subject to an arbitration agreement between the parties. As both Sections 397/398 of the companies Act, 1956 and Section 8 of the Arbitration Act 1996 apply on the same facts, this sometimes creates a conflict.

Precondition for application of Section 8

The provisions of Section 8 of the Arbitration and Conciliation Act 1996 is written in a mandatory fashion. The following pre-requisites must be satisfied before the application for reference to arbitration may be granted:

• there is an arbitration agreement;
• a party to the agreement brings an action in the court against the other party;
• subject-matter of the action is the same as the subject-matter of the arbitration agreement; and
• the other party moves the court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.

If all the conditions are satisfied, then application under Section 8 may be made. Now, the question in respect of petition under Section 397/398 is regarding the arbitrability of the matter.

Test developed by the Company Law Board to reconcile the conflicting provisions

The Company Law Board, through the case laws, have developed a practical test in order to reconcile the apparent differences in two statutes. It is a well settled principle of construction that no provision of a statute may be declared redundant and in case of conflict with two statutory provisions, harmonious construction should be resorted to.

Keeping in view this principle of statutory interpretation, the CLB has made a pioneering work in that one stable test proposition has been made. The proposition may be defined in the following manner:

If the following conditions are satisfied in respect of a Petition u/s 397/398

1. the parties to the Oppression Petition and the Arbitration Agreement must be the same;
2. the matter in the arbitration agreement must be the same as that of the Oppression Petition;
3. the arbitration agreement is of such a nature that the matter in issue in the Petition cannot be adjudicated upon without the reference to the arbitration agreement;

then the CLB has no other option but to refer the matter to arbitration provided of course the time requirement of submitting the application for arbitration is maintained.

This test has been utilized by the CLB in many cases and it has now been firmly settled in law.