Lack of Board Quorum No Ground to Halt Arbitration, Rules Bombay High Court

The Bombay High Court has ruled that a temporary lack of quorum in a company’s board of directors does not invalidate arbitral proceedings initiated by it, holding that such corporate irregularities cannot be equated with legal incapacity.

 

Justice Somasekhar Sundaresan dismissed a Section 34 petition filed by Master Drilling India Pvt Ltd challenging the arbitral tribunal’s refusal to terminate proceedings initiated by Sarel Drill & Engineering Equipment India Pvt Ltd. Master Drilling had argued that Sarel Drill’s arbitration was invalid as its board was improperly constituted when proceedings began.

 

The Court rejected this contention, observing that accepting such an argument would lead to absurd results where a company would be “paralysed” and unable to perform even basic corporate functions such as filing tax returns, executing contracts, or paying employees.

 

It held that the lack of quorum or procedural irregularities in board composition do not nullify corporate actions and that such matters should be addressed before the arbitral tribunal, not the court, under Section 34 of the Arbitration and Conciliation Act, 1996.

 

The dispute arose from a 2018 business transfer agreement between the two companies under which Master Drilling had agreed to acquire Sarel Drill’s drilling business. When the deal fell through, Sarel Drill initiated arbitration seeking damages and return of equipment. 

 

Master Drilling argued that, at the time, Sarel Drill’s board lacked the required quorum since two directors had resigned or passed away, leaving only one. Sarel Drill later regularised the board and ratified prior actions, contending that the initial irregularity did not invalidate the arbitration.

 

The arbitral tribunal rejected Master Drilling’s plea to terminate proceedings, and the High Court upheld that decision. Justice Sundaresan emphasised that arbitral tribunals are “masters of their own procedure” and that courts must maintain a limited role while arbitration is ongoing, as reflected in Sections 5 and 19 of the Arbitration Act.

 

Rejecting the “non est” argument based on the temporary absence of quorum, the Court said such an absolutist interpretation would freeze corporate functioning and contradict the spirit of Section 174 of the Companies Act, 2013.

 

Finding no merit in the petition, the Court dismissed it and ordered Master Drilling to pay ₹2 lakh in costs to Sarel Drill for obstructing the arbitration process.

 

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