Plea seeks to examine 'group of companies doctrine', Supreme Court refers matter to larger bench

The Supreme Court on Friday has referred the issue of examining the ‘group of companies doctrine’ to a larger bench.

A bench comprising Chief Justice of India N.V. Ramana, Justice Surya Kant and Justice A.S. Bopanna noted that "the wholesale adoption of the Swedish theory of trust into Indian law is not being advocated. Rather, the notion of how we may apply the Group of Companies Doctrine in situations where non-signatory parties are acting in a fraudulent or deceitful manner can be addressed by examining the impression that was conveyed to the contracting parties by the third party."

The bench has pronounced its judgement in a plea filed Cox Kings Limited raising the issue whether the principles of party autonomy under arbitration law and corporate personality in company law have been adequately safeguarded in outlining the scope and applicability of the doctrine being followed at present in Indian jurisprudence.

The Court said that there is a clear need for having a re­look at the doctrinal ingredients concerning the group of companies doctrine.

The Court has considered the following issues to be decided by the larger bench:

A. Whether the Group of Companies Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?

B. Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?

C. Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?

D. Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the Group of Companies Doctrine into operation even in the absence of implied consent?

It has been noted that the Doctrine is a means of grappling with complex multi­party business transactions which necessarily involve more than two parties, even if these additional parties do not finally and formally sign the contract. To that extent, the Doctrine helps to ensure that arbitration as a dispute resolution mechanism is able to adapt to this reality. Failure to do so would make arbitration an ineffective dispute resolution forum as parties which are important for the complete and proper resolution of the dispute will be left out of the adjudication.

"The Doctrine also ensures that multiplicity of proceedings are avoided. A party may be involved in the negotiation and even performance of an agreement but still be able to circumvent the arbitral process on the ground that it did not sign the contract. Such a party would then have to be proceeded against in court," the bench added.

Considering the opinion the bench observed that "In this scenario it becomes even more relevant to have a doctrine such as the Group of Companies in Indian arbitration law. A third party outside the group of companies may transact with a subsidiary due to its faith in the bona fides and commercial know­how of the parent. The third party in question relies upon the stature or presence of the larger parent company, either due to its reputation or personal familiarity with its promoters, directors or executives."

Cause Title: COX AND KINGS LIMITED Vs. SAP INDIA PRIVATE LIMITED & ANOTHER