The Kerala High Court (Ernakulam Bench) has held that where the arbitral proceedings concern the independent contractual obligations of promoters to buy back shares from a subscribing authority, the liquidation or winding up of the company does not by itself render the arbitral proceedings invalid, nor does it establish incapacity under Section 34(2)(a)(i) of the Arbitration and Conciliation Act in relation to the promoters. Claims of this nature are not claims against the company merely because the company is under liquidation, and therefore Sections 278 and 279 of the Companies Act do not automatically bar or stay such arbitral proceedings.
The High Court further held that a stay of execution of an arbitral award cannot be granted on bare allegations; the applicant must disclose and substantiate legally recognised grounds showing invalidity in the arbitral process or conflict with public policy. Accordingly, the Court found no error in the Commercial Court’s refusal to stay execution of the arbitral award and held that the petitioner had failed to establish any valid ground for interference.
A Single Judge Bench of Justice T.R. Ravi observed that the petitioner’s principal contention based on the company being under liquidation was misplaced because the arbitral claim was not against the company but concerned the promoters’ contractual obligation to buy back the shares held by the 1st respondent. The Single Judge held that Sections 278 and 279 of the Companies Act operate only with respect to claims against the company, and a winding-up order does not automatically stay arbitral proceedings.
The Bench further observed that Section 34(2)(a)(i) of the Arbitration and Conciliation Act, relating to incapacity, did not assist the petitioner, since incapacity of the company would not affect an award passed against its promoters. It also noted that the stay application was not supported by sufficient material: apart from bare assertions of incapacity and public policy, the affidavit did not explain how the award was contrary to public policy or how the petitioner was incapacitated.
The Bench also referred to the Commercial Court’s reasoning that stay of an arbitral award would require grounds such as lack of jurisdiction, invalid arbitration agreement, incapacity, want of proper notice, inability to present the case, or conflict with fundamental public policy, none of which had been substantiated by the petitioner.
Briefly, the petitioner challenged the Commercial Court’s order refusing stay of execution of an arbitral award, and sought stay of the operation and execution of that award pending disposal of the Section 34 challenge. The dispute arose from a financial collaboration agreement under which the 1st respondent, a statutory body under the Marine Products Export Development Authority Act, subscribed to 3,60,000 equity shares of the 4th respondent company at ₹10 per share, payment having been made on Mar 16, 1994.
Under the agreement, the promoters had an option to buy back the shares at any time and were bound to buy them back on expiry of five years from commencement of commercial production, at price determinable under the agreement. Commercial production commenced on Oct 01, 1998; on failure of the promoters to buy back the shares, arbitration was initiated, a sole Arbitrator was appointed, and an award was passed on May 04, 2009. The award was challenged only in 2025, and the petitioner contended, among other things, that since the company was under liquidation, claims against the company or its directors were not maintainable and the arbitration could not validly continue after the winding-up order.
