CHERAN PROPERTIES LTD VS.

KASTURI AND SONS

1. Facts of the Case:-

1. An agreement was entered between Sporting Pastime India Limited (SPIL), Kasturi Sons
and Limited (KSL), KC Palanisamy (KCP) and Hindcorp Resorts Private Limited
(Hindcorp).

2. Under the agreement, SPIL was to allot 240 lakhs equity shares to KSL against the book
debts. KSL offered to sell 243 lakhs equity shares to KCP. KCP agreed to take over the
business, shares and liabilities of SPIL as per the Agreement.

3. KCP failed to comply with its obligations under the Agreement. KSL and Hindcorp
initiated Arbitration proceedings against KCP and SPIL.

4. The Arbitral tribunal made its award directing KCP and SPIL to return the share
certificates of SPIL to KSL and Hindcorp. KSL was directed to pay an amount of INR
3,58,11,000 together with interest at 12% p.a.

5. KCP challenged this Judgement under Section 34 of the Arbitration and Concilliation

Act. The challenge was dismissed by the High Court of Madras.

6. KSL held proceedings against Cheran, a nominee of KCP to execute the award which
directed transmission of shares. KSL approached the National Company Law Tribunal,
where it was held that that Cheran is a nominee of KCP and holds shares on its behalf.

2. Issues involved:-

Whether an Arbitral award is binding on a third party?

3. Arguments advanced by both the parties:-

1. Supreme Court held that Section 35 of the Arbitration and Conciliation Act, states that an
Arbitral award is “Binding on the parties and persons claiming under them”. Besides the parties,
an arbitral award binds every person whose capacity or position is same as a party to the
proceedings. This expression includes those who claim under the award, irrespective of whether
such person was a party to the arbitration agreement or the arbitral proceedings.

2. Moreover execute the transfer of shares awarded in the arbitration proceedings, use of remedy
of the rectification of the register under Section 111-A was appropriate and necessary. Thus,
KSL was entitled to seek rectification before the NCLT by referring the provisions of Section
111-A of the Companies Act, 1956.

Obiter dicta:

“Section 35 of the arbitration and conciliation act, 1940 states about, Effect of legal proceedings
on arbitration:-

(1) No reference nor award shall be rendered invalid by reason only of the commencement of
legal proceedings upon the subject- matter of the reference, but when legal proceedings upon the
whole of the subject- matter of the reference have been commenced between all the parties to the
reference and a notice thereof has been given to the arbitrators, all further proceedings in a
pending reference shall, unless a stay of proceedings is granted under section 34, be invalid.

(2) In this section the expression” parties to the reference” includes any persons claiming under
any of the parties and litigating under the same title.

Section 111-A of the companies act 1956 tells about, Rectification of Register on transfer.

The shares or debentures and any interest therein of a company shall be freely transferable:
Provided that if a company without sufficient cause refuses to register transfer of shares within
two months from the date on which the instrument of transfer or the intimation of transfer, as the
case may be, is delivered to the company, the transferee may appeal to the Company Law Board
and it shall direct such company to register the transfer of shares.”
4. Judgement and reason behind it:-

The Court referred to the Group of Companies' Doctrine and stated that ascertaining the intention
behind the stipulation of terms of the arbitration agreement is important. The question: 'Was the
intention of the arbitration agreement to bind parties together, irrespective of whether they are
signatories or non-signatories?' must be asked. The true essence of the arbitration agreement
must be determined and whether the non - signatories had assumed an obligation to the
arbitration agreement by actions and/or words. Circumstances and the facts of the case must
indicate the existence or inexistence of the assumed obligation by the non - signatories. If there is
the existence of an assumption of the obligation by the non-signatories then the arbitration
agreement and the award generated via the arbitration agreement must bind both, signatories and
non - signatories to the arbitration agreement. The court opined that factors such as the
relationship of the signatories and non - signatories to the arbitration agreement, circumstances,
subject matter, conduct of the parties, and the composite nature of the transaction must be
ascertained while determining whether a non - signatory must be bound to an arbitration
agreement or not. The court took into account the business sense that was meant to be attributed
to the transaction while determining the intent behind the transaction. The Hon'ble Supreme
Court stated that the very fact that a non - signatory did not attend arbitration proceedings is not a
reflection of its assumption of obligation. A non - signatory may not attend the arbitration
proceedings but may still be bound by it.