The Telangana High Court (“Telangana HC”), vide its order dated April 14, 2024, in the case of Shameem Sultana Khan v. Faizunnissa Begum and Others [Arbitration Application No. 164 of 2023], has allowed an application for appointment of arbitrator under Section 11(6) (Appointment of arbitrators) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), in a dispute regarding settlement of accounts during winding up of a partnership firm.

Facts

A partnership deed was executed on April 1, 1994 (“Deed”), between Ms. Shameem Sultana Khan (“Applicant”) and Mrs. Faizunnissa Begum along with her family members (“Respondents”). Clause 19 of the Deed contained an arbitration clause which has been reproduced below:

“19. Should any dispute or doubt or question arise between the Partners in respect of the Partnership or its affairs in respect of any matter touching the construction or interpretation of any matter of this Deed, the same shall be referred to arbitration in accordance with the Law of Arbitration in force and applicable.”

The Applicant sent legal notices to the Respondents, seeking information, clarification and documents in relation to the firm. However, the claim of Applicant was denied. The Applicant thereupon issued another notice, informing the Respondents that the Applicant has dissolved the partnership firm under Section 43 (Dissolution by notice of partnership at will) of the Indian Partnership Act, 1932 (“Partnership Act”) and called upon the Respondents to settle their accounts.

Disputes arose between the parties regarding settlement of accounts. Subsequently, the Applicant invoked Clause 19 of the Deed and sent a notice to the Respondents, nominating a retired district judge as the sole arbitrator. The Applicant also published a notice in a daily newspaper stating that the partnership firm has been dissolved as required under Section 45 (Liability for acts of partners done after dissolution) of Partnership Act. Later, an application under Section 11(6) of the Arbitration Act was filed by the Applicant before the Telangana HC, seeking to appoint a sole arbitrator to adjudicate the dispute between the parties as per Clause 19 of the Deed.

Issue

Whether dispute related to insolvency and winding-up of partnership concerning partners’ rights and obligations is arbitrable.

Arguments

Contentions of the Applicant:

The Applicant submitted that the Respondents have not disputed the execution of the Deed and had not denied the existence of the arbitration clause. Therefore, the dispute that has arisen between the parties is required to be resolved in the manner agreed by the parties.

Contentions of the Respondents:

The Respondents submitted that the arbitrator’s power under the Deed is circumscribed and the relief to claim settlement of the accounts is outside Clause 19 of the Deed. The Respondents further argued that dispute relating to insolvency and winding up matters is a non-arbitrable dispute.

Observations of the Telangana HC

The Telangana HC observed that Section 16(1) (Competence of arbitral tribunal to rule on its jurisdiction) of the Arbitration Act provides that the arbitral tribunal may rule on its own jurisdiction. The Telangana HC also relied on Supreme Court’s (“SC”) judgment in Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited [(2020) 2 SCC 455], wherein it was held that the doctrine of competence-competence is intended to minimise judicial intervention, so that the arbitral process is not thwarted at the threshold when a preliminary objection is raised by one of the parties. It was further held that Section 16 of the Arbitration Act is an inclusive provision with a very wide ambit.

The Telangana HC also referred to a judgment by a seven-judge bench of SC in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 [2023 SCC OnLine SC 1666], where the SC held that, the scope of examination under Section 11(6A) of the Arbitration Act should be confined to the existence of an arbitration agreement on the basis of Section 7 (Arbitration Agreement) of the Arbitration Act. The SC noted that the validity of an arbitration agreement, in view of Section 7 of the Arbitration Act, should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. The SC further observed that this interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of substantive existence and validity of an arbitration agreement to be decided by arbitral tribunal under Section 16 of the Arbitration Act.

The Telangana HC held that all the objections with regard to jurisdiction of the arbitrator to deal with the claim made on behalf of the Applicant can be raised and can be urged before the arbitral tribunal itself. The Telangana HC, while referring to the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Limited [(2011) 5 SCC 532], held that the SC in this judgment, while referring to well recognized examples of non-arbitrable disputes, by way of illustration, referred to insolvency and winding-up of a company, whereas the instant dispute is between the partners under the Partnership Act.

Decision of the Telangana HC

The Telangana HC allowed the arbitration application and appointed a former judge of the SC as the sole arbitrator to adjudicate the disputes between the parties.

VA View:

In the present case, the Telangana HC reemphasized on the powers of arbitral tribunal to rule on its own jurisdiction provided under Section 16 of the Arbitration Act. The Telangana HC allowed the arbitration application of the Applicant after observing the existence of a valid arbitration agreement and also allowed the parties to raise any objections regarding the jurisdiction of the arbitrator before the tribunal itself. By doing so, the court has upheld the principle enshrined in the doctrine of competence-competence which is intended to minimize intervention by courts and to ensure that the arbitral process is not obstructed at the stage when a preliminary objection is raised by any party.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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