Delhi High Court: ‘Group of Companies’ Doctrine Not Applicable To Directors To Make Them Party To Arbitration

Delhi High Court: ‘Group of Companies’ Doctrine Not Applicable To Directors To Make Them Party To Arbitration

The petition was filed under Section 11(6) of the Arbitration and Conciliation Act, 1996

The Delhi High Court has held that directors cannot be made a party to arbitration through the 'Group of Companies' doctrine. It stated that the relationship between the company and its directors was that of the 'principal' and the 'agent' as defined under Section 182 of the Indian Contract Act.

The bench of Justice Dinesh Kumar Sharma ruled that in terms of Section 230 of the Act, the agent was not personally liable for acts carried out on behalf of the principal.

The petitioner and respondent No.1 entered two Builder-Buyer Agreements on 18 November 2016 and 08 February 2017 on the residential township project being developed by the respondent. The agreement, on behalf of respondent No.1, was signed by respondent No.2. Respondent Nos.2&3 are the directors of respondent No.1.

A dispute arose between the parties leading to the invocation of arbitration by the petitioner. Upon the failure of the parties to mutually appoint the arbitrator, the petitioner approached the High Court under Section 11(6) of the Arbitration and Conciliation (A&C) Act, 1996.

Respondent Nos.2&3 objected to the maintainability of the petition on the following grounds:

• Respondent No.3 was not a signatory to the arbitration agreement, thus, the petition against him was not maintainable.

• Respondent No.2 signed the agreement in his capacity as director of respondent No.1, so, he was acting as an agent.

• An agent could not be held personally liable for the acts carried out on behalf of the principal. Therefore, the petition was not maintainable against respondent Nos.2&3.

• Respondent Nos.2&3 must be deleted from the array of parties before the dispute is referred to arbitration.

The petitioner made the following counter-submissions:

• Respondent No.2 was a signatory to the agreement; therefore, the objection was meritless.

• Respondent No.3 was a director of respondent No.1, therefore, despite being a non-signatory, he was party to the arbitration agreement in terms of the judgment of the Constitution Bench of the Supreme Court in the Cox & Kings case, wherein the 'Group of Companies’ doctrine was given recognition.

The bench observed that the agreements were between the petitioner and respondent No.1. Those were signed by respondent No.2 on behalf of respondent No.1 in the capacity of a director.

The Court held that the proviso to Section 230 required an express agreement to the contrary to make the directors personally liable for any action. However, no such agreement existed between the parties making respondent Nos.2&3 personally liable for the acts of respondent No.1.

Thus, Justice Sharma stated that without respondent Nos.2& 3 being a party to it, the dispute was liable to be referred to arbitration.