Share Purchase Agreements under the Spotlight: A Karnataka High Court Decision and its Implications

In a recent decision¹, the Karnataka High Court ruled that a dispute arising from a share purchase agreement does not qualify as a “commercial dispute” under the Commercial Courts Act, 2015 (Commercial Courts Act)². This ruling, while seemingly straightforward, has sparked debate due to its potential implications for the interpretation of the statute and its impact on future commercial litigation, particularly given that the definition of “goods” under the Sale of Goods Act, 1930³ includes shares.

Background of the case

The case involved a dispute between Bhaskar Naidu, a shareholder seeking to sell his shares in a company, and Aravind Yadav, the intended buyer. The transaction was governed by a share purchase agreement, which outlined the terms of the sale. When a dispute arose between the parties, the respondent, Aravind Yadav, filed a suit for recovery of money in the Commercial Court. The petitioner, Bhaskar Naidu, challenged the jurisdiction of the Commercial Court, arguing that the dispute did not fall under the ambit of “commercial dispute” as defined in the Commercial Courts Act.

The High Court’s ruling

The Karnataka High Court, in its judgment,⁴ focused on Section 2(1)(c)(xii) of the Commercial Courts Act, 2015 which specifically lists “shareholders agreements” as a type of commercial dispute. The Court, after examining the definitions of “shareholder agreement” and “share purchase agreement”, concluded that the agreement in question was a share purchase agreement and not a shareholder agreement. Based on this narrow interpretation, the Court held that the dispute was not a “commercial dispute” and, therefore, the Commercial Court lacked jurisdiction.

Points of contention

While the Court’s ruling may seem logical at first glance, it has drawn criticism for its apparent disregard for other provisions within the definition of “commercial dispute” in the Act, especially considering the definition of “goods” under the Sale of Goods Act, 1930. The definition in the Commercial Courts Act is quite broad and encompasses a wide range of commercial transactions, including those relating to “the sale of goods or services”.

The Sale of Goods Act, 1930, in its definition of “goods,” includes “shares, stocks, debentures, debenture stock, and marketable securities”. This implies that a transaction involving the sale or purchase of shares can be considered a sale of goods under the Sale of Goods Act. Consequently, a dispute arising from such a transaction could be interpreted as a commercial dispute under the broader context of the Commercial Courts Act.

It is argued that the Court’s narrow focus on Section 2(1)(c)(xii) ignores this broader context, particularly the inclusion of “the sale or purchase of shares” within the definition of “commercial dispute”. It is contended that a share purchase agreement, being intrinsically linked to the sale or purchase of shares, and by extension, the sale of goods, should naturally fall under the purview of “commercial dispute” as defined in the Act.

Implications and the path forward

This ruling has significant implications for commercial litigation in India. It creates ambiguity regarding the classification of disputes arising from share purchase agreements, potentially leading to jurisdictional challenges and delays in resolving commercial disputes. It also raises questions about the interpretation of the Commercial Courts Act and the extent to which courts can rely on specific provisions while overlooking the broader context of the definition and related legislation. Rather than considering the nature of disputes intended to be covered by the Commercial Courts Act, the Karnataka High Court took an unexpectedly strict interpretation as to whether the dispute relating to a share purchase agreement was considered a commercial dispute.

Conclusion

The Karnataka High Court’s ruling on share purchase agreements has brought to the forefront the challenges in interpreting and applying the Commercial Courts Act particularly in light of existing legislation like the Sale of Goods Act, 1930. While the Court’s decision is based on a specific provision, it has sparked debate about the broader definition of “commercial dispute” and the Act’s overall objective. This ruling serves as a reminder of the complexities involved in commercial litigation and the need for clarity and precision in legislation. It is hoped that the legislature will take cognizance of these issues and amend the Commercial Courts Act to avoid further ambiguity and ensure the efficient resolution of commercial disputes.