The Bombay High Court in the case of HMG Industries Ltd. vs Canara Bank comprising of Justice A.K Menon reiterates that the arbitration clause under the Scheme of Compromise is not binding on the respondent bank because the under the said scheme the applicant set outs its intention to pay the entire principal dues owned by it to the name financial institutions.
Facts
The applicant is a public limited company. The respondent is a nationalized bank. A debenture trust deed was executed between the parties whereby the respondent-bank was the debenture trustee. Later, an Amended Scheme of Compromise between the applicant and the secured creditors, including debenture-holders, unsecured creditors, equity shareholders, preference shareholders and workers was sanctioned by this court. Thereby, the respondent bank raised a demand towards its fees as a Debenture Trustee. The applicant called upon the respondent to pay the damages for the losses suffered by the applicant due to the retention of the original title deeds by the respondent-bank.
The present application is filed under Section 11 of the Arbitration and Conciliation Act, 1996 seeking appointment of a Sole Arbitrator to adjudicate upon disputes between the applicant and the respondent.
Contention Made
Petitioner: Under the scheme of compromise sanctioned by the High Court, the respondent-bank was classified as sundry creditors. After the sanction of such scheme the respondent-bank was not requires continuing as Debenture Trustee. Despite that the respondent-bank continues to hold on to the original title deeds, which cause some serious losses to the applicant. However the arbitral clause was incorporates in the said Scheme of Compromise and thus the parties could be referred to arbitration.
Scheme of Compromise was entered under section 391 of the Companies Act, 1956 which was sanctioned by the High court which overrides all the agreements. Hence, the said scheme is binding on the respondent-bank as well.
Respondent: The respondent-bank provided services to the applicant as a Debenture Trustee and requested payment of fees in exchange for the services provided by the respondent-bank. There was no arbitral agreement between the applicant and respondent and thus, the application for the appointment of a sole arbitrator was not maintainable before this court. The respondent-bank was a Debenture Trustee and hence the Scheme of Compromise is not binding on Debenture Trustee.
Court Observation
The Scheme of Compromise binds the secured creditors and debenture-holders including unsecured creditors, equity shareholders, preference shareholders and workers. The Scheme makes no reference to the Debenture Trust Deed. The debenture trustee is an independent obligation of the applicant.
Judgment
The bench held that since the applicant does not satisfy the requirement mentioned under section 7 of the A&C Act which defines the term ‘arbitration agreement’, Arbitral proceedings could not be imposed on Debenture Trustee.
The arbitration clause under the Scheme of Compromise is not binding on the respondent-bank because the under the said scheme the applicant set outs its intention to pay the entire principal dues owned by it to the name financial institutions.
The court thus dismissed the application for the appointment of sole arbitrator.
Case: HMG Industries Ltd. vs Canara Bank
Citation: A.A. NO.258 of 2018
Bench: Justice A.K Menon
Decided on: 13th June, 2022
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