Mahanagar Telephone Nigam Ltd Vs Canara Bank

The Group of Companies doctrine indicates the implied consent to an agreement to arbitrate, in the context of modern multi-party business transactions.

Case name:Mahanagar Telephone Nigam Ltd vs Canara Bank
Case number:Civil Appeal Nos. 6202-6205 Of 2019
Court:The Supreme Court Of India
Bench:Hon’ble Abhay Manohar Sapre, Hon’Ble Ms. Malhotra
Decided on:8 August, 2019
Relevant Act/Sections:The Arbitration and Conciliation Act, 1996
    • In 1992, Mahanagar Telephone Nigam Limited (“MTNL”) floated 17% non-cumulative secured redeemable bonds worth Rs. 425 crores. On February 10, 1992, after executing a Memorandum of Understanding with Can Bank Financial Services Limited (“CANFINA”), MTNL placed bonds worth Rs.200 crores with CANFINA through the form of a fixed deposit (“Bonds”).CANFINA paid around Rs. 50 crores of the fixed deposit, however, since the balance amount was yet to paid, MTNL serviced the Bonds to a partial extent.
    • Soon after the Bonds were subscribed, there was an outbreak of a security scam which led to a collapse of the secondary market in shares, security, and bonds. One of the consequences of the security scam was that CANFINA was facing a liquidity crunch and as a result, Canara Bank, being the parent concern of CANFINA, purchased a face value of Rs. 80 crores worth of Bonds issued by MTNL from CANFINA.
    • Canara Bank upon purchasing the Bonds from CANFINA requested MTNL to register the Bonds in their name, however MTNL refused to do the same. It was only on February 16, 2019, that MTNL informed Canara Bank that it had registered a part of the Bonds having a face value of Rs. 40 crores in favour of CANFINA, however, MTNL had retained the bond instruments due to a failure on part of CANFINA to deposit the balance money. Subsequently, MTNL cancelled the Bonds on October 20, 1993 on the ground that that the letters of consideration were with CANFINA.  Being aggrieved by the actions of MTNL, Canara Bank filed a Writ Petition to challenge the cancellation of the Bonds, wherein CANFINA was arrayed as a proforma party.
    • The High Court initially dismissed the Writ Petition on the ground that the parties had a recourse to alternate remedies and asked the Union of India to resolve the dispute as per the decision of O.N.G.C. v. Commissioner of Central Excise. Due to the other alternate remedies available to the parties to resolve their dispute, the Writ Petition was never adjudicated upon initially, and the parties were given the liberty to revive the Writ Petition in the event that the parties were not able to resolve their dispute through the use of the alternate remedies. One of the alternate remedies that the parties had resorted to was the Committee of Disputes, which the parties were referred to by the High Court on May 30, 2008.
    • The Committee of Disputes was of the opinion that all three parties must take the recourse of arbitration due to the different interlinked transactions between them and execute an arbitration agreement under the Arbitration and Conciliation Act, 1996 (“Act”) to resolve the dispute expeditiously. Canara Bank even prepared a draft arbitration agreement, which had CANFINA, MTNL and Canara Bank as the parties to the agreement and waited for MTNL to execute the agreement.
    • In the meantime, the Supreme Court through the decision of Electronics Corporation of India Ltd. v. Union of India & Ors.7 overruled the decision of O.N.G.C. v. Commissioner of Central Excise  and as a result the Writ Petition was finally revived after Canara Bank moved an application to revive the same. During the proceedings before the High Court, the parties agreed to refer the matter to arbitration on September 16, 2011 and a sole arbitrator was appointed on October 21, 2011. The sole arbitrator issued a notice to all three parties, however, Canara Bank raised an objection before the arbitrator with regards to the joinder of CANFINA as a party to the arbitration. The arbitrator passed an interim award wherein it was held that since CANFINA was not present before the High Court on September 16, 2011, when the parties were referred to arbitration, and as a result CANFINA had not agreed to be a party to the arbitration.

The issue has been raised by Respondent No. 1 Canara Bank that the Order dated 16.09.2011 and 21.10.2011 is between Canara Bank and MTNL. Respondent No. 2 CANFINA, is not a party to the arbitration agreement, and hence cannot be impleaded in the proceedings.

    • As per the principles of contract law, an agreement entered into by one of the companies in a group, cannot be binding on the other members of the same group, as each company is a separate legal entity which has separate legal rights and liabilities. The parent, or the subsidiary company, entering into an agreement, unless acting in accord with the principles of agency or representation, will be the only entity in a group, to be bound by that agreement. Similarly, an arbitration agreement is also governed by the same principles, and normally, the company entering into the agreement, would alone be bound by it.
    • A non-signatory can be bound by an arbitration agreement on the basis of the Group of Companies doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties. Courts and tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract.
    • The Group of Companies doctrine indicates the implied consent to an agreement to arbitrate, in the context of modern multi-party business transactions. The circumstances in which the Group of Companies Doctrine could be invoked to bind the non-signatory affiliate of a parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the parties. A composite transaction refers to a transaction which is inter-linked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.
    • The Group of Companies Doctrine has also been invoked in cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality. In such a situation, signatory and non-signatories have been bound together under the arbitration agreement. This will apply in particular when the funds of one company are used to financially support or re-structure other members of the group.
    • Coming to the facts of the present case, CANFINA was set up as a wholly owned subsidiary of Canara Bank. 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. Therefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings.
    • The present case is one of implied or tacit consent by Respondent No. 2 CANFINA to being impleaded in the arbitral proceedings, which is evident from the conduct of the parties. Court found that Respondent No. 2 CANFINA has throughout participated in the proceedings before the Committee on Disputes, before the Delhi High Court, before the Sole Arbitrator, and was represented by its separate Counsel before this Court in the present appeal. There was a clear intention of the parties to bind both Canara Bank, and its subsidiary CANFINA to the proceedings. In this case, there can be no final resolution of the disputes, unless all three parties are joined in the arbitration.

The appeals were partly allowed.

Court invoked the Group of Companies doctrine, to join Respondent No. 2 CANFINA i.e. the wholly owned subsidiary of Respondent No. 1 Canara Bank, in the arbitration proceedings pending before the Sole Arbitrator. The matter was remitted to the Sole Arbitrator to continue with the arbitral proceedings, and conclude the same as expeditiously as possible.

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