KKH Finvest Pvt. Ltd. and another Vs Ashiesh Shukla and others (Supreme Court of India)
Supreme Court: Non-Signatory Shareholder Can Be Referred to Arbitration if He Is a ‘Veritable Party’ to the Underlying Transaction
The Supreme Court allowed the appeal and held that a non-signatory to an arbitration agreement can nevertheless be referred to arbitration if, by virtue of his role, conduct and participation in the underlying transaction, he qualifies as a “veritable party” to the contract. Accordingly, the Court held that Ashiesh Shukla, though not a signatory to the Memorandum of Settlement (MoS), was bound by it and directed that the disputes involving him be decided by the same arbitral tribunal.
The dispute arose out of a Memorandum of Settlement dated 9 May 2022 executed for the acquisition of Sensorise Digital Services Pvt. Ltd. While Ashiesh Shukla was not a signatory to the MoS, he had simultaneously executed a Share Purchase Agreement (SPA) agreeing to transfer his shareholding as part of the overall settlement. The Delhi High Court had held that other management team members were “veritable parties” to the MoS but excluded Ashiesh Shukla, relying upon a clause in his SPA stating that the transfer of shares was independent of the MoS.
The Supreme Court found the High Court’s distinction to be factually unsustainable, noting that identical clauses existed in the Share Purchase Agreements executed by the other management members, who had nevertheless been held to be bound by the arbitration agreement. The Court held that there was no real distinction between Ashiesh Shukla and the other similarly placed shareholders.
Relying upon the Constitution Bench decision in Cox and Kings Ltd. v. SAP India Pvt. Ltd., the Court reiterated that the participation of a non-signatory in negotiating or performing the underlying contract is the most significant indicator of an intention to be bound by the arbitration agreement. Other relevant factors include the composite nature of the transaction, commonality of subject matter, interlinked obligations and the legal relationship between the parties.
Applying these principles, the Court held that Ashiesh Shukla’s transfer of shares was indispensable to achieving the MoS objective of transferring 100% ownership and control of the company. His Share Purchase Agreement expressly referred to the MoS and formed an integral part of the composite transaction. Consequently, he was a veritable party to the MoS notwithstanding his status as a non-signatory.
Accordingly, the Supreme Court set aside the Delhi High Court’s contrary finding, held that Ashiesh Shukla was amenable to arbitration, and referred his disputes to the same sole Arbitrator, Justice T.S. Thakur (Retd.), who was already adjudicating the connected disputes arising from the MoS.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. Leave granted.
