Arbitration Agreement Through Conduct & the Group of Companies Doctrine: Analysing Mahanagar Telephone Nigam Ltd. Vs Canara Bank & Ors.

Overview

The Supreme Court of India, in Mahanagar Telephone Nigam Ltd. Vs Canara Bank & Ors. (Civil Appeal Nos. 6202-6205 of 2019), delivered a significant ruling on 08/08/2019 concerning two pivotal questions in arbitration law: first, whether a valid arbitration agreement can be established even in the absence of a formally executed written document; and second, whether a non-signatory entity belonging to the same corporate group can be compelled to participate in arbitral proceedings. The Court partly allowed the appeals filed by Mahanagar Telephone Nigam Ltd. (MTNL) and invoked the Group of Companies doctrine to join Can Bank Financial Services Ltd. (CANFINA) as a necessary party to the ongoing arbitration.

Background Facts

The Bond Transaction of 1992

In 1992, MTNL floated 17% Non-Cumulative Secured Redeemable Bonds described as the VI Series (Private Placement) worth Rs. 425 crores. On 10.02.1992, MTNL placed bonds worth Rs. 200 crores with Can Bank Financial Services Ltd. (CANFINA) under an MOU agreement. The bond amount of Rs. 200 crores was placed as a 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. As a consequence, MTNL did not service the interest on bonds.

MTNL took the position that since it did not receive the entire bond amount of Rs. 200 crores, the entire deal had not gone through. Against the payment of Rs. 50 crores received from CANFINA, MTNL serviced 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.

The Securities Scam and Transfer to Canara Bank

Canara Bank's version of events pointed to the outbreak of a securities scam shortly after the bonds were subscribed, which caused a collapse of the secondary market in shares, securities and bonds. CANFINA, faced with a severe liquidity crunch, found itself unable to offload the bonds at reasonable prices. In these circumstances, Canara Bank — CANFINA's parent and wholly owned holding company — purchased bonds of face value Rs. 80 crores from CANFINA.

Canara Bank subsequently requested registration of the bonds with MTNL. However, MTNL vide letter dated 14.10.1992 refused to transfer the bonds. By a subsequent letter dated 16.02.1993, MTNL informed Canara Bank that it had registered a part of the face value of Rs. 40 crores in favour of CANFINA, while retaining the bond instruments on account of CANFINA's failure to pay Rs. 150 crores. MTNL vide letter dated 20.10.1993 eventually cancelled all the bonds.

Canara Bank vide its reply dated 13.01.1994 contended that it was the holder in due course and entitled to registration of the bonds and interest thereon. MTNL, with its letter dated 13.01.1994, attached a cheque for Rs. 5,41,17,463 as the amount it considered payable to Canara Bank. Canara Bank returned the cheque vide letter dated 10.02.1994, demanding restoration and registration of the bonds.

Litigation History and Committee on Disputes

Canara Bank filed W.P. (Civil) No. 560 of 1995 before the Delhi High Court challenging the cancellation of the bonds and seeking directions for payment of accrued interest. CANFINA was joined as a proforma party in that writ petition.

The Delhi High Court vide Order dated 09.09.1996 directed the Union of India to decide the issues between the parties in light of O.N.G.C. v. Commissioner of Central Excise, (1995) Supp. 4 SCC 541, and dismissed the writ petition on the basis that an alternative remedy existed before the Company Law Board under Section 111 of the Companies Act, 1956. Proceedings before the Company Law Board were dismissed vide Order dated 26.02.1998 since the remedy was no longer available following the amendment of Section 111 by the Depositories Act, 1996.

The writ petition was subsequently restored vide Order dated 12.05.1999. A meeting convened by the Cabinet Secretariat on 27.03.2001, attended by representatives of MTNL, Canara Bank and CANFINA, directed all three parties to settle their disputes through arbitration and prohibited further litigation.

Pursuant to the decision in Electronics Corporation of India Ltd. v. Union of India & Ors., (2011) 3 SCC 404, which overruled O.N.G.C. v. Commissioner of Central Excise (supra) on the question of mandatory Committee on Disputes clearance, Canara Bank moved for restoration of the writ petition. The Delhi High Court restored it and vide Order dated 16.09.2011 recorded the consent of both MTNL and Canara Bank to refer their disputes to a Sole Arbitrator under the Arbitration and Conciliation Act, 1996.

On 21.10.2011, Mr. Justice A.P. Shah (Retd.) was appointed as the Sole Arbitrator upon the suggestion of Canara Bank's counsel, accepted by MTNL's counsel. The Sole Arbitrator issued notice on 05.01.2012 to all three parties — MTNL, Canara Bank and CANFINA.

The Dispute Over CANFINA's Joinder

Canara Bank raised an objection to joining CANFINA as a party to the arbitration. The Sole Arbitrator, after hearing arguments on 27.03.2012, passed an interim award holding that CANFINA had not appeared before the High Court on 16.09.2011 and 21.10.2011 when the consent for arbitration was recorded, and therefore could not be joined as a party.

MTNL filed C.M. No. 8100 of 2012 before the Delhi High Court seeking clarification as to whether CANFINA ought to be impleaded. The Delhi High Court vide order dated 05.07.2013 dismissed the application as "not pressed" on the statement of MTNL's counsel.

Canara Bank filed its Statement of Claim before the Sole Arbitrator on 06.12.2013. MTNL filed I.A. Nos. 324-325 of 2014 before the Delhi High Court for recall of the earlier orders, which was dismissed vide Order dated 10.01.2014. In May 2014, MTNL filed its reply to the Statement of Claim and also made a Counter-Claim against Canara Bank. MTNL thereafter filed the present Special Leave Petitions before the Supreme Court.