Supreme Court Orders Arbitration in Family Dispute Over Company Shares: Sanjiv Prakash vs. Seema Kukreja (2021)

Date of the Judgment: April 6, 2021

Citation: 2021 SCC OnLine SC 190

Judges: Rohinton Fali Nariman, J., B.R. Gavai, J., Hrishikesh Roy, J.

Can a family agreement regarding company shares be nullified by a subsequent agreement with an outside investor? The Supreme Court of India recently tackled this complex question in a dispute between family members over the control of their private company. This case explores the intricacies of arbitration law, specifically focusing on whether an arbitration clause in a prior family agreement is still valid after a new agreement with a third party.

Case Background

The dispute centers around a family-owned company, initially named Asian Films Laboratories Private Limited, later renamed ANI Media Private Limited. The company was founded by Prem Prakash, who later distributed shares to his family members: his wife, Daya Prakash; his son, Sanjiv Prakash; and his daughter, Seema Kukreja. The company experienced significant growth due to Sanjiv Prakash’s efforts, attracting the interest of Reuters Television Mauritius Limited (now Thomson Reuters Corporation), which sought a long-term equity investment.

In 1996, the Prakash family entered into a Memorandum of Understanding (MoU) to manage their shareholding and control of the company. This MoU was followed by a Shareholders’ Agreement (SHA) with Reuters, which acquired 49% of the company’s shares. The SHA included clauses regarding management, deadlock resolution, and the transfer of shares. Disputes arose within the family when Prem Prakash and Daya Prakash decided to transfer their shares, leading Sanjiv Prakash to invoke the arbitration clause in the MoU, claiming a breach of his pre-emptive right to purchase shares.

The respondents, Seema Kukreja and Daya Prakash, argued that the MoU was superseded by the subsequent SHA, which contained its own arbitration clause. This disagreement led to the present case before the Supreme Court.

Timeline:

Course of Proceedings

The Delhi High Court dismissed Sanjiv Prakash’s petition under Section 11 of the Arbitration and Conciliation Act, 1996, holding that the MoU was superseded by the SHA. The High Court reasoned that the SHA, being a later agreement, novated the earlier MoU, thus nullifying the arbitration clause in the MoU. The High Court relied on Section 62 of the Indian Contract Act, 1872, and various judgments to support its view that the arbitration clause in the MoU perished with the novation of the MoU. The High Court also stated that the parties in the SHA were recognized both individually and collectively, thereby superseding the MoU.

Legal Framework

The case primarily revolves around the interpretation of Section 62 of the Indian Contract Act, 1872, which deals with novation, rescission, and alteration of contracts. According to the provision:

“If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract, need not be performed.”

The Supreme Court also considered the Arbitration and Conciliation Act, 1996, particularly Section 11, which deals with the appointment of arbitrators, and Section 16, which empowers the arbitral tribunal to rule on its own jurisdiction. The court also discussed the concept of ‘kompetenz-kompetenz’, which allows an arbitral tribunal to rule on its own jurisdiction, including objections to the validity of the arbitration agreement. The court also considered Section 43 of the Arbitration and Conciliation Act, 1996 which states that the Limitation Act, 1963 shall apply to arbitrations as it applies to court proceedings.

Arguments

Appellant’s Arguments (Sanjiv Prakash):

• The MoU was a family settlement that created a special equity between the parties and should not be treated as a mere contractual arrangement. He relied on the judgment in Kale v. Deputy Director of Consolidation, (1976) 3 SCC 119 to support this argument.
• Sanjiv Prakash argued that he was responsible for the company’s growth and the investment by Reuters. Clause 8 of the MoU, which granted him a pre-emptive right to purchase shares, was therefore crucial.
• The arbitration clause in the MoU should be applicable, and the arbitration should be conducted under the 1996 Act.
• Clause 12.1(a) of the SHA, which refers to the purchase of shares in proportions “agreed between them or otherwise,” indicates that the MoU was expressly referred to and preserved.
• Clause 28 of the SHA should be read as a whole. Clause 28.1 limits the entire agreement to the subject matter of the SHA, SPA, and ancillary agreements, which is the relationship between the Prakash family and Reuters. The MoU, on the other hand, was solely between the family members. He relied on the judgments in Barclays Bank Plc v. Unicredit Bank Ag and Anor, [2014] EWCA Civ 302, The Federal Republic of Nigeria v. JP Morgan Chase Bank, NA, [2019] EWHC 347 (Comm), and Kinsella and Anor v. Emasan AG and Anor, [2019] EWHC 3196 (Ch) to support his argument that “entire agreement” clauses should be construed strictly.
• The issue of novation is complex and depends on the construction of the MoU and the SHA in light of the surrounding circumstances.
• The fact that the Articles of Association of the company were amended soon after the MoU was entered into, shows that the MoU was acted upon.
• The judgments in Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 and Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714 were not followed by the High Court.
• The court should refer the matter to arbitration unless there is an ex facie case that no arbitration agreement exists.

Respondents’ Arguments (Seema Kukreja and Daya Prakash):

• The MoU was superseded by the SHA, as some of its material clauses were incorporated into the Articles of Association of the company on 14.05.1996.
• The MoU was never given effect to, as Daya Prakash did not continue as Managing Director after the SHA was entered into.
• After 2012, the amended Articles of Association no longer incorporated what had been included in 1996, with the consent of Sanjiv Prakash.
• The first reaction of Sanjiv Prakash was not to rely on the MoU, but to argue that the document was unstamped and inadmissible.
• Clause 11.2 of the SHA makes it clear that the MoU was superseded.
• The judgments in Union of India v. Kishorilal Gupta & Bros., (1960) 1 SCR 493, Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141, Young Achievers v. IMS Learning Resources (P) Ltd., (2013) 10 SCC 535, Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813, and Larsen & Toubro Ltd. v. Mohan Lal Harbans Lal Bhayana, (2015) 2 SCC 461 support the argument that the MoU was novated by the SHA.
• The MoU is unenforceable as any restriction on the transfer of shares of a private company, without incorporating it in the Articles of Association, is invalid. They relied on V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160 and Pushpa Katoch v. Manu Maharani Hotels Ltd., 2005 SCC OnLine Del 702 to support this argument.
• The present case is an open and shut case, and the High Court was right in dismissing the Section 11 petition.

Respondent’s Arguments (Prem Prakash):

• Supported the arguments of Shri Viswanathan (Appellant).
• The parties to the MoU were different from those to the SHA, indicating separate contracts.
• The MoU contemplated a separate agreement with Reuters to effectuate the purchase of 49% shareholding, further showing that the MoU and the agreements with Reuters were separate contracts.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a separate section. However, the core issue addressed by the court was:

1. Whether the arbitration clause in the Memorandum of Understanding (MoU) is valid and enforceable despite the execution of a subsequent Shareholders’ Agreement (SHA). Specifically, whether the SHA superseded the MoU, thus nullifying the arbitration clause in the MoU.

The sub-issue that the court dealt with under the main issue was:

• Whether the High Court was correct in deciding that the plea of doctrine of kompetenz-kompetenz and reliance on Section 11(6A) of the 1996 Act were not applicable to the case in hand.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Kale v. Deputy Director of Consolidation, (1976) 3 SCC 119 – Cited by the appellant to argue that family settlements should be treated differently from normal contracts. The court noted that the appellant relied on paragraph 9 of this judgment.
• Reliance Natural Resources Ltd. v. Reliance Industries Ltd., (2010) 7 SCC 1 – Cited by the appellant to support the argument that family settlements should be treated differently from normal contracts. The court noted that the appellant relied on paragraphs 49 and 50 of this judgment.
• Barclays Bank Plc v. Unicredit Bank Ag and Anor, [2014] EWCA Civ 302 – Cited by the appellant to argue that “entire agreement” clauses should be construed strictly. The court noted that the appellant relied on paragraphs 27 and 28 of this judgment.
• The Federal Republic of Nigeria v. JP Morgan Chase Bank, NA, [2019] EWHC 347 (Comm) – Cited by the appellant to argue that “entire agreement” clauses should be construed strictly. The court noted that the appellant relied on paragraph 37 of this judgment.
• Kinsella and Anor v. Emasan AG and Anor, [2019] EWHC 3196 (Ch) – Cited by the appellant to argue that “entire agreement” clauses should be construed strictly. The court noted that the appellant relied on paragraphs 64 to 71 of this judgment.
• Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 – Cited by the appellant to argue that the High Court should have referred the matter to arbitration. The court noted that the High Court did not follow the principles laid down in this judgment.
• Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714 – Cited by the appellant to argue that the High Court should have referred the matter to arbitration. The court noted that the High Court did not follow the principles laid down in this judgment.
• Ravinder Kaur Grewal v. Manjit Kaur, (2020) 9 SCC 706 – Cited by the respondent to support the argument that family settlements should be treated differently from normal contracts. The court noted that the respondent relied on paragraphs 25 to 28 of this judgment.
• Union of India v. Kishorilal Gupta & Bros., (1960) 1 SCR 493 – Cited by the respondent to argue that the MoU was novated. The court noted that the High Court relied on this judgment.
• Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141 – Cited by the respondent to argue that the MoU was novated. The court noted that the High Court relied on this judgment.
• Young Achievers v. IMS Learning Resources (P) Ltd., (2013) 10 SCC 535 – Cited by the respondent to argue that the MoU was novated. The court noted that the High Court relied on this judgment.
• Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813 – Cited by the respondent to argue that the MoU was novated. The court noted that the respondent relied on paragraph 23 of this judgment.
• Larsen & Toubro Ltd. v. Mohan Lal Harbans Lal Bhayana, (2015) 2 SCC 461 – Cited by the respondent to argue that the MoU was novated. The court noted that the respondent relied on paragraph 15 of this judgment.
• V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160 – Cited by the respondent to argue that the MoU would be unenforceable. The court noted that the respondent relied on paragraphs 1, 2, 7 and 8 of this judgment.
• Pushpa Katoch v. Manu Maharani Hotels Ltd., 2005 SCC OnLine Del 702 – Cited by the respondent to argue that the MoU would be unenforceable. The court noted that the respondent relied on paragraphs 5, 7 and 8 of this judgment.
• Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 – The court referred to this judgment in detail to explain the scope of powers of a court under Section 11 of the Arbitration and Conciliation Act, 1996. The court extracted paragraphs 127 to 130 and 148 of this judgment.
• Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd., 2021 SCC OnLine SC 190 – The court referred to this judgment in detail to explain the scope of powers of a court under Section 11 of the Arbitration and Conciliation Act, 1996. The court extracted paragraphs 15 to 18 of this judgment.
• Bharat Sanchar Nigam Ltd. v. Nortel Networks India Pvt. Ltd., 2021 SCC OnLine SC 207 – The court referred to this judgment to explain the scope of powers of a court under Section 11 of the Arbitration and Conciliation Act, 1996.

Legal Provisions:

• Section 62 of the Indian Contract Act, 1872 – The court discussed this section, which deals with the novation of contracts.
• Section 11 of the Arbitration and Conciliation Act, 1996 – The court discussed this section, which deals with the appointment of arbitrators.
• Section 16 of the Arbitration and Conciliation Act, 1996 – The court discussed this section, which empowers the arbitral tribunal to rule on its own jurisdiction.
• Section 43 of the Arbitration and Conciliation Act, 1996 – The court discussed this section, which states that the Limitation Act, 1963 shall apply to arbitrations as it applies to court proceedings.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Kale v. Deputy Director of Consolidation, (1976) 3 SCC 119: The court noted that the appellant relied on this case to argue that family settlements should be treated differently from normal contracts.
• Reliance Natural Resources Ltd. v. Reliance Industries Ltd., (2010) 7 SCC 1: The court noted that the appellant relied on this case to support the argument that family settlements should be treated differently from normal contracts.
• Barclays Bank Plc v. Unicredit Bank Ag and Anor, [2014] EWCA Civ 302: The court noted that the appellant relied on this case to argue that “entire agreement” clauses should be construed strictly.
• The Federal Republic of Nigeria v. JP Morgan Chase Bank, NA, [2019] EWHC 347 (Comm): The court noted that the appellant relied on this case to argue that “entire agreement” clauses should be construed strictly.
• Kinsella and Anor v. Emasan AG and Anor, [2019] EWHC 3196 (Ch): The court noted that the appellant relied on this case to argue that “entire agreement” clauses should be construed strictly.
• Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729: The court noted that the High Court did not follow the principles laid down in this judgment.
• Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714: The court noted that the High Court did not follow the principles laid down in this judgment.
• Ravinder Kaur Grewal v. Manjit Kaur, (2020) 9 SCC 706: The court noted that the respondent relied on this case to support the argument that family settlements should be treated differently from normal contracts.
• Union of India v. Kishorilal Gupta & Bros., (1960) 1 SCR 493: The court noted that the High Court relied on this judgment to hold that the MoU was novated. The Supreme Court stated that this judgment was in the context of the Arbitration Act, 1940, which had a scheme completely different from the 1996 Act.
• Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141: The court noted that the High Court relied on this judgment to hold that the MoU was novated. The Supreme Court stated that this judgment was in the context of the Arbitration Act, 1940, which had a scheme completely different from the 1996 Act.
• Young Achievers v. IMS Learning Resources (P) Ltd., (2013) 10 SCC 535: The court noted that the High Court relied on this judgment to hold that the MoU was novated. The Supreme Court stated that this judgment was in the context of the Arbitration Act, 1940, which had a scheme completely different from the 1996 Act.
• Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813: The court noted that the respondent relied on this judgment to argue that the MoU was novated. The Supreme Court stated that this judgment was in the context of the Arbitration Act, 1940, which had a scheme completely different from the 1996 Act.
• Larsen & Toubro Ltd. v. Mohan Lal Harbans Lal Bhayana, (2015) 2 SCC 461: The court noted that the respondent relied on this judgment to argue that the MoU was novated. The Supreme Court stated that this judgment was in the context of the Arbitration Act, 1940, which had a scheme completely different from the 1996 Act.
• V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160: The court noted that the respondent relied on this judgment to argue that the MoU would be unenforceable.
• Pushpa Katoch v. Manu Maharani Hotels Ltd., 2005 SCC OnLine Del 702: The court noted that the respondent relied on this judgment to argue that the MoU would be unenforceable.
• Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1: The court referred to this judgment in detail to explain the scope of powers of a court under Section 11 of the Arbitration and Conciliation Act, 1996.
• Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd., 2021 SCC OnLine SC 190: The court referred to this judgment in detail to explain the scope of powers of a court under Section 11 of the Arbitration and Conciliation Act, 1996.
• Bharat Sanchar Nigam Ltd. v. Nortel Networks India Pvt. Ltd., 2021 SCC OnLine SC 207: The court referred to this judgment to explain the scope of powers of a court under Section 11 of the Arbitration and Conciliation Act, 1996.

Decision:

The Supreme Court set aside the judgment of the Delhi High Court and allowed the appeal. The Court held that the dispute should be referred to arbitration. The Court appointed Justice R.V. Raveendran, a former Judge of the Supreme Court, as the sole arbitrator to adjudicate the disputes between the parties. The Court also clarified that all issues, including the validity of the arbitration agreement, the question of novation, and the interpretation of the agreements, would be decided by the arbitral tribunal. The court also stated that the arbitral tribunal shall decide the issue of limitation.

Analysis

The Supreme Court’s decision in Sanjiv Prakash vs. Seema Kukreja is significant for several reasons:

• Limited Scope of Section 11 Jurisdiction: The judgment reinforces the principle that the court’s jurisdiction under Section 11 of the Arbitration and Conciliation Act, 1996, is limited to a prima facie review of the existence of an arbitration agreement. The court cannot delve into complex issues of novation, interpretation of contracts, or other merits-based arguments at this stage.
• Doctrine of Kompetenz-Kompetenz: The court upheld the doctrine of ‘kompetenz-kompetenz’, which empowers the arbitral tribunal to rule on its own jurisdiction. This ensures that arbitrators, who are experts in their field, have the authority to decide on the validity of the arbitration agreement and the scope of their jurisdiction.
• Importance of Arbitral Autonomy: The decision underscores the importance of respecting the autonomy of the arbitral process. The court emphasized that unless there is an ex facie case that no arbitration agreement exists, the matter should be referred to arbitration.
• Distinction between 1940 and 1996 Acts: The court clarified that the judgments under the Arbitration Act, 1940, which had a different scheme, cannot be applied to cases under the 1996 Act. This distinction is crucial for understanding the current arbitration law in India.
• Interpretation of “Entire Agreement” Clauses: The court acknowledged the appellant’s arguments regarding the strict interpretation of “entire agreement” clauses, indicating that such clauses should not automatically supersede prior agreements between different parties.
• Family Settlements: While the court acknowledged the appellant’s argument that family settlements should be treated differently, it did not decide on the merits of this argument. This leaves the issue open for the arbitral tribunal to consider.

The Supreme Court’s decision provides clarity on the role of courts in the initial stages of arbitration proceedings and underscores the importance of adhering to the principles of party autonomy and arbitral jurisdiction. The decision also highlights the need for a detailed examination of all agreements and surrounding circumstances before concluding that a prior agreement has been superseded.

Flowchart of the Case