The Bombay High Court has ruled that a company's board of directors lacking in quorum temporarily, does not invalidate arbitral proceedings initiated by it [Master Drilling India Pvt Ltd v. Sarel Drill & Engineering Equipment India Pvt Ltd]..The Court held that such a corporate irregularity does not amount to legal incapacity and cannot be used to derail arbitration once it has commenced.Justice Somasekhar Sundaresan dismissed a Section 34 petition filed by Master Drilling, which sought to challenge the arbitral tribunal’s refusal to terminate proceedings on the ground that Sarel Drill had an improperly constituted board."If the proposition that the company must necessarily be paralysed is accepted, the company (purportedly without a corporate mind) would never be able to file tax returns, enter into a contract, renew an existing contract, terminate a contract, and even employ any person or taken to its logical length, sign any cheque, whether for a routine payment (say pay cheques of employees) or a non-routine payment (say purchase of vital spare parts or of replacement machinery)," the Court said.It ruled that a lack of quorum or procedural irregularity in board composition does not nullify corporate decisions and that such issues can be addressed by the arbitral tribunal during the course of arbitral proceedings and not by the court under Section 34 of the Arbitration and Conciliation Act, 1996..The judgment arose from a business transfer agreement dated September 3, 2018 between Master Drilling India Private Limited and Sarel Drill & Engineering Equipment India Private Limited, under which Master Drilling agreed to acquire Sarel Drill’s drilling business. When the transaction soured, Sarel Drill initiated arbitration seeking damages, return of machinery,= and unpaid rentals.Master Drilling objected to the very initiation of the arbitration, claiming Sarel Drill lacked a validly constituted board at that time. According to Master Drilling, two of Sarel Drill’s directors had resigned or passed away, leaving only one surviving director, Sarel J Smit. It argued that without at least two directors—as required by Section 174(2) of the Companies Act, 2013—the company had no “corporate mind” and therefore, could not validly authorise legal action.Sarel Drill countered that its board later regularised the position by inducting a new director and ratifying past actions, and that any procedural irregularity could not invalidate the arbitration.The arbitral tribunal rejected Master Drilling’s plea to terminate proceedings under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996. It held that the question of capacity could be examined later. Master Drilling then moved the High Court under Section 34, treating that order as an interim award..Justice Sundaresan held that the tribunal’s order was not an arbitral award and thus not amenable to challenge under Section 34. Citing Sections 5 and 19 of the Act, he reiterated that tribunals are masters of their own procedure and that courts must maintain a hands-off approach during pending arbitration..The Court rejected the “non est” theory flowing from a temporary lack of quorum, warning that such an absolutist view would freeze corporate functioning. "The absolute and unconditional proposition that a company would need to come to a grinding halt would fall in the realm of compelling an impossibility and contemplating a vacuum, which would only undermine the welfare of the very company whose governance is subject matter of protection under Section 174 of the Act," Justice Sundaresan said..The Court then linked this principle to corporate governance, noting that Section 174(2) of the Companies Act does not automatically invalidate actions taken without quorum.“Should Parliament have felt it necessary to stipulate the non est nature of every step taken by a company during the period when it did not have a quorate Board, the legislation would have stipulated so… The absolute and unconditional proposition that a company would need to come to a grinding halt would fall in the realm of compelling an impossibility and contemplating a vacuum, which would only undermine the welfare of the very company whose governance is subject matter of protection under Section 174 of the Act.".Hence, the Court rejected the petition and directed Master Drilling to pay ₹2 lakh in costs to Sarel Drill for impeding the arbitration..Master Drilling was represented by Senior Advocate Sharan Jagtiani with a team from Cyril Amarchand Mangaldas that comprised advocates Anuradha Mukherjee (Partner), Aviral Sahai (Partner), Shreya Som (Director), Soumya Dasgupta (Principal Associate) Sushil Jethmalani (Principal Associate), Shivam Tiwari (Senior Associate) and Aanya Anvesha (Associate)..Sarel Drill was represented by advocate Rashmin Khandekar along with advocates Chirag M Bhatia and Rakesh K Taneja, instructed by AR Shaikh..[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.
