Case Brief: Under Section 11(6) A&C Act, Referral Court must limit its enquiry to the question of limitation period only
Aslam Ismail Khan Deshmukh v. ASAP Fluids Pvt. Ltd. and another
Court: Hon’ble Supreme Court of India
Date of Judgment: 07.11.2024
Facts:
Aslam Ismail Khan Deshmukh (the petitioner) in this case is a Non-Resident Indian residing and working in Dubai, UAE with an experience in the drilling fluid industry. ASAP Fluids Pvt. Ltd. (respondent no. 1) is an Indian private limited company providing drilling fluids services to the oil and gas industry. Gumpro Drilling Fluids Pvt. Ltd. (respondent no. 2) specializes in oil field services and offers mud services. The petitioner, respondent no. 1, respondent no. 2, and two other individuals executed a Shareholders Agreement on 25.07.2011. Under the agreement, the petitioner was to hold 400,000 equity shares of respondent no. 1 and participate in its management. The agreement included clauses addressing pre-emption rights for new share issuance, restrictions on share transfer, a right of first refusal, and dispute resolution through arbitration. On 22.09.2011, the petitioner was informed that respondent no. 2 was holding 200,010 of the petitioner’s equity shares in respondent no. 1. This arrangement was meant to assure potential investors. The petitioner was told that these shares would be governed by the Shareholders Agreement and not sold without his consent. The petitioner entered into a Service Agreement with respondent no. 1 and its Dubai subsidiary on 18.10.2011. This agreement appointed him as a director for an initial term of three years. It also stipulated that if he terminated his employment before three years, he would transfer his shares back at no cost. On the same date, the petitioner signed a Commercial Expertise Agreement with respondent nos. 1 and 2. He agreed to transfer his commercial expertise in exchange for 400,000 equity shares, subject to a three-year lock-in period. Following disagreements, the petitioner resigned as director in July, 2013. The petitioner raised concerns over the non-issuance of share certificates for the 200,010 shares held by respondent no. 2 and the additional 200,010 shares promised in respondent no. 1. He claimed that without the certificates, he couldn’t exercise his right of first refusal to sell his shares to respondent no. 2. Despite repeated requests for the share certificates, the respondents failed to issue them. The petitioner served a Common Notice (Arbitration Notice) on 23.01.2017, demanding either the share certificates or an equivalent payment, invoking the arbitration clause of the Shareholders Agreement. After receiving no response, the petitioner filed two arbitration applications in the Bombay High Court on 03.03.2017. The respondents replied on 7.11.2017, denying the claims and appointing two arbitrators as per the agreement but disputing the inclusion of the 200,010 shares in the arbitration. The High Court dismissed the applications on 22.02.2019, deeming them “international commercial arbitration” and outside its jurisdiction. The petitioner filed the current petitions before the Hon’ble Supreme Court on 09.04.2019, under Section 11(6) of the Arbitration & Conciliation Act, 1996, seeking the appointment of an arbitral tribunal.
Issues:
1.Whether the applications under Section 11 of the Arbitration and Conciliation Act, 1996 are time-barred?
2.Whether the substantive claims for the 200,010 and 400,000 equity shares are time-barred, preventing referral to arbitration?
3.Whether the dispute concerning the 200,010 shares falls under the arbitration clause of the Shareholders Agreement?
4.Whether the petitioner is entitled to the equity shares considering his resignation before the lock-in period expired?
Judgment:
The Hon’ble Supreme Court allowed the petitions. A sole arbitrator, Mr. Mayur Khandeparkar, was appointed to adjudicate the disputes under the Shareholders Agreement. The Court directed that if the arbitral tribunal finds the petitioner’s claims time-barred, the costs of arbitration for those claims should be borne by the petitioner.
Legal Analysis:
- The Hon’ble Court analysed the scope of judicial intervention at the Section 11 stage in light of recent precedents, including Vidya Drolia v. Durga Trading Corporation (2021), Bharat Sanchar Nigam Limited v. Nortel Networks India Private Limited (2021), Arif Azim Company Limited v. Aptech Limited (2024), and In re: Interplay Between Arbitration Agreements (2023).
- The Court clarified that the referral court’s role under Section 11 is limited to examining whether the Section 11(6) application is filed within the three-year limitation period.
- The Court emphasized that detailed examination of whether the substantive claims are time-barred should be left to the arbitrator. This avoids leaving the claimant remediless and allows a subsequent review of the arbitrator’s decision.
- The Court acknowledged the potential for abuse of the limited judicial scrutiny at the Section 11 stage and suggested that the arbitral tribunal could address this by awarding costs against the party found to be abusing the legal process.
Conclusion:
The Supreme Court held that the Section 11 petitions were within the limitation period and appointed a sole arbitrator to adjudicate the disputes under the Shareholders Agreement. The Court emphasized the limited role of referral courts at the Section 11 stage, leaving the determination of the time-barred nature of the substantive claims to the arbitrator. The judgment reinforces the principle of minimal judicial intervention in arbitration proceedings while acknowledging the need to prevent abuse of the arbitration process.