Corporate Irregularities and Arbitration: Understanding Whether Defects in Board Quorum Can Invalidate Arbitral Proceedings

Introduction

One such recurring problem at the intersection of corporate law and arbitration is whether defects in a company’s internal governance, such as vacancies on its Board of Directors or lack of quorum, can undermine its legal capacity to initiate or sustain arbitration. This question arises very frequently in commercial disputes where parties attempt to challenge the very initiation of arbitration by contending that the authority of the opposite party company’s board resolutions is defective.

While the Companies Act, 2013, for instance, mandates certain quorum requirements for board meetings under Section 174, the Arbitration and Conciliation Act, 1996 functions on a contrary objective-underlying principle of minimum judicial intervention and preserving the integrity of arbitral tribunals. The tension between these two regimes thus presents an important doctrinal question: Can procedural irregularities in corporate governance invalidate arbitration, or are such objections merely curable defects that do not strike at the root of the company’s capacity to act? A recent order passed by the Bombay High Court in Master Drilling India Pvt Ltd v. Sarel Drill & Engineering Equipment India Pvt Ltd serves as a timely illustration of how courts resolve this conflict and reinforces the broader jurisprudential trend favouring arbitration’s continuity even in the face of corporate technicalities.

The core legal issue is whether a company, which at one point in time does not have a quorate Board of Directors, could be said to temporarily lack the legal capacity to agree to arbitrate. This gives rise to two subsidiary questions, namely: first, whether failure to comply with Section 174(2) of the Companies Act, which limits the matters that continuing directors may decide upon once the Board has dropped below quorum, is sufficient to render decisions of the company non est; and secondly, whether any such defect would provide a proper ground for terminating an arbitration under Section 32 of the Arbitration Act, or for setting aside a tribunal’s order under Section 34.

Issue

The determination of this issue involves deciding whether lack of quorum is an incurable defect that renders every subsequent act of the corporation void ab initio, or simply an internal irregularity which can be cured once the Board is properly reconstituted. It also involves consideration of the degree of judicial intervention that is permitted during the pendency of arbitral proceedings, and particularly what scope Sections 5 and 19 of the Arbitration Act, which promote arbitral autonomy and preclude premature judicial intervention, have.

Petitioner’s Arguments (Master Drilling)

The petitioner, Master Drilling, argued that from the time Sarel Drill issued a notice under Section 21 of the Arbitration Act and filed a Section 11 petition before the High Court, its Board had only one director due to resignations and the death of a director. According to s 174(2) a company with only one director may not take any decisions except those required for the appointment of an additional director. Thus, Sarel Drill had no “corporate mind” and did not have the inherent capacity either to commence arbitration or to instruct pleaders. What occurred, so Master Drilling contended, was not a mere irregularity, but a fundamental incapacity, with the result that every step taken by Sarel Drill, including instructing the advocates, delivering notices, and advancing claims, was void ab initio.

The petitioner further added that the subsequent ratification by a properly constituted board is not permissible because an act, which could never have been validly undertaken in the first instance, cannot be cured. Consequently, the arbitral proceedings, in its view, were non est from inception and continuation of the arbitration was legally impossible, attracting Section 32(2)(c). When the arbitral tribunal refused to terminate the proceedings, Master Drilling treated the decision as an interim award and sought to challenge it under Section 34, arguing that the tribunal had ignored mandatory provisions of the Companies Act, resulting in patent illegality.

Respondent’s Arguments (Sarel Drill)

Sarel Drill responded that the lack of quorum was at best a procedural irregularity and not an incapacity that renders all corporate acts void. Emphasis was placed on the fact that the Companies Act is silent as to whether an action taken during such a period is automatically void. On the contrary, the statute contemplates that companies can continue functioning despite temporary vacancies on the board. This is in keeping with commercial realities. The respondent further presented that the board was subsequently regularized by the filing of a new director; the appointment and all previous corporate acts, including commencing the arbitration, were duly ratified by shareholders; and these steps cured any defect in procedure.  Sarel Drill also pointed out that the arbitral tribunal’s order refusing termination was, by its express terms, no more than prima facie and thus not a final determination regarding capacity, with the result that Section 34 does not apply. Perhaps more fundamentally, it recounted that Section 19 of the Arbitration Act vests a tribunal with full discretion over procedural and evidentiary matters, so that questions relating to the validity of board resolutions and the issue of director appointments are mixed questions of fact and law to be determined during the course of the arbitral proceeding. Last but not least, on the basis of judgments like United Bank of India v. Naresh Kumar, it argued that defects in authorization are routinely found to be curable.

Judgment Analysis

The Bombay High Court dismissed the challenge, holding that the tribunal’s order was not an arbitral award under Section 2(1)(c) and that courts could not intervene at this stage. The Court emphasized that Section 5 mandates minimal judicial interference, while Section 19 makes tribunals masters of their own procedure. The tribunal had consciously adopted a prima facie view, leaving all issues, including whether the board was properly constituted, whether a quorum was needed for the decisions in question, and whether subsequent ratification was valid, to be adjudicated during the evidentiary stage. This, the Court held, was fully within the tribunal’s powers.

On the substantive issue, the Court rejected Master Drilling’s absolutist position that lack of quorum automatically nullifies all corporate acts. It noted that Parliament did not stipulate such a drastic consequence in Section 174. The Court also invoked the doctrine of necessity, observing that companies cannot be brought to a halt merely because they temporarily fall below quorum.  Thus, the Court held that the tribunal acted correctly in refusing to terminate arbitration. It also held that Master Drilling’s attempt to characterize the tribunal’s interim procedural ruling as an “award” under Section 34 was an impermissible attempt to bypass the statutory limits on judicial intervention. Consequently, the petition was dismissed with costs.

Conclusion

The Master Drilling decision fortifies an important principle within Indian arbitration law: that technical failures of corporate governance seldom rise to the level of legal incapacity sufficient to defeat arbitration. In so concluding, the Court’s reasoning falls squarely within the pro-arbitration approach of the Arbitration and Conciliation Act, emphasizing continuity of arbitral proceedings and limited prematurity of judicial interference. On the larger canvas, the judgment holds that corporate irregularities-a lack of quorum for periods of time-do not render a company incapable of commencing arbitration when such defects are curable by subsequent board appointments or shareholder ratifications. It gives recognition to commercial reality, applies the doctrine of necessity, and ensures that arbitration is not derailed through procedural traps or strategic objections.