When is interference possible under Arbitration Act?

interference under arbitration act

The Supreme Court, in M/s Meenakshi Solar Power Pvt Ltd v M/s Abhyudaya Green Economic Zones Pvt Ltd and Ors, set aside the impugned judgment passed by the High Court of Telangana, which had dismissed the appellant’s application filed under section 11 (6) of the Arbitration and Conciliation Act, 1996.

The appellant operates thermal, solar and hydro power plants. Respondent no. 1 is the owner of a 4.128MW solar photovoltaic (PV) power project in Ranga Reddy district, Telangana. Respondent nos. 2 and 3 are promoters and 100% shareholders of respondent no. 1’s PV power project.

The appellant entered into a share purchase agreement for the power project dated 24 September 2018 with respondent nos. 1 to 3, where, respondent nos. 2 and 3 agreed to sell 100% ownership of the company of respondent no. 1, comprising all assets including land, buildings, plant and equipment along with continuity of the power purchase agreement signed with the Telangana State Southern Power Distribution Company, for INR290 million (USD3.5 million).

A tripartite agreement was entered into by the appellant through its affiliate i.e. respondent no. 4, with respondent nos. 2 and 3 and IFCI Venture Capital on 3 April 2019, recording the execution of the share purchase agreement dated 24 September 2018 with the payment of INR5 million to respondent nos. 2 and 3 keeping in terms with the said share purchase agreement. Thereafter, an addendum to the share purchase agreement was signed on 10 April 2019 between respondent nos. 1 to 3 and respondent no. 4 where the latter agreed to remit INR16.5 million to respondent nos. 1 to 3 to regularise the loan with the Corporation Bank and facilitate the transfer of the company.

Disputes arose between the appellant and the respondents, with the appellant filing an application before the commercial court under section 9 of the act seeking to restrain the respondents from alienating their shares in the company, with an ad interim injunction restraining the respondents granted. The appellant sent a letter dated 22 June 2020 invoking the arbitration clause as a means of dispute resolution in terms of clause 10 of the share purchase agreement and called on respondent nos. 1 to 3 to settle the disputes. On receiving no response, the aggrieved appellant filed an application under section 11(6) of the act which came to be dismissed vide impugned judgment and an order passed by the high court.

The Supreme Court held that the high court was not right in dismissing the petition under section 11(6) of the act by rendering a finding on novation of the share purchase agreement between the parties as the said aspect would have a bearing on the merits of the controversy. Therefore, it held that this aspect must be left to the arbitrator to decide. It further observed that issues relating to contract formation, existence, validity and non-arbitrability would be intertwined with the issues underlying the merits of the respective disputes/claims, and they would be factual and disputed for the arbitral tribunal to decide.

It was further held that the court at the referral stage can interfere only when it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute. In the context of the issue of a limitation period, it should be referred to the arbitral tribunal. Similar would be the position in case of a disputed “no-claim certificate” or defence on the plea of novation and “accord and satisfaction”.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.