Iirf India Realty Xi Limited And ... vs Hbs Realtors Private Limited And ...
2021 Latest Caselaw 10290 Bom

                IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                    ORDINARY ORIGINAL CIVIL JURISDICTION
                        IN ITS COMMERCIAL DIVISION


                 ARBITRATION PETITION (L) NO.13466 OF 2021


IIRF India Realty XI Limited & Anr.               .. Petitioners
         v/s.
HBS Realtors Private Limited & Anr.               .. Respondents



Mr. Zal Andhiyarujina a/w Ms. Shruti Sardesai, Vineet Unnikrishna, Ms.
Samhita Mehra, Ms. Vaidehi Chande i/b. Cyril Amarchand Mangaldas
for the petitioners.

Dr. Birendra Saraf, Sr. Advocate, a/w Rohan Savant, Mohan Jayakar,
Nikhil Wable, Priyank Daga, Ms. Juhi Valia i/b. Jayakar & Partners for
respondent nos.1 & 2.


                                      CORAM : A. K. MENON, J.

DATED : 4TH AUGUST, 2021.

P.C. :

1. Called for admission. By consent, taken up for final hearing and

disposal.

2. In this appeal under Section 37 of the Arbitration and

Conciliation Act, 1996, the petitioners are aggrieved by order

passed by the Arbitral Tribunal dated 24 th May, 2021 under

Section 17 of the Arbitration & Conciliation Act. The petitioner

CARBP(L)-13466-21.doc wadhwa no.1 is an entity registered in Mauritius and invests in

construction and development projects in India. The 2 nd

petitioner acts as a trustee of one IFIN Realty Trust through IL&FS

Investment Managers Ltd. The two petitioners are shareholders of

the 2nd respondent holding major economic interest in respondent

no.2 by reason of an Investment Agreement dated 21 st September,

2009 and two amendments thereto. The petitioners between

them held Class 'A' and 'C' equity shares, Compulsorily

Convertible Preference Shares of different numbers in respondent

no.2. The shareholding of the petitioners collectively in

respondent no.2 is approximately 65%. Respondent no.1 is

engaged in the real estate development business and also a

shareholder of respondent no.2 holding the Class A, B & D equity

shares and some Optionally Convertible Redeemable Preference

Shares.

3. Respondent no.1 is promoted and controlled by four individuals

of the Shah family and a 5th entity Arihant Developers which is

controlled by the Shah family members. Shah family holds

97.30% of the respondent no.1. The balance shareholding is held

by an individual shareholder. Three members of the Shah family

are also Directors of the first respondent and have been in

CARBP(L)-13466-21.doc wadhwa management and control of the first respondent through the

Directors nominated by them. It transpires that the respondent

no.2 was formed as a joint venture between respondent no.1 and

the petitioners, the petitioners being financial investors. The

business of the respondent no.2 "Wondervalue" said to be its sole

business, was redevelopment of buildings of two co-operative

housing societies buildings located at Worli, Mumbai.

Apparently the development rights in the Worli project is the only

asset of respondent no.2 by virtue of Development Agreement

between the two societies and the respondent no.2. Disputes

arose between the petitioners and the respondents pertaining to

provisions of the Investment Agreement in particular clause 13.1

read with item (xi) of Schedule 12 of the Investment Agreement

that led to an application filed under Section 17 before the

Arbitral Tribunal consisting of a Sole Arbitrator. Several reliefs

are sought in that application as part of prayer clause 27. The

Tribunal rendered its decision on 24 th May, 2021 and the

petitioners are aggrieved by that order.

4. In this petition, the petitioners seek an order quashing and setting

aside findings contained in paragraphs 21, 32, 33, 35, 36, 39, 40

and 41 of the impugned order. The rest of the prayers are reliefs

CARBP(L)-13466-21.doc wadhwa seeking stay of the operative effect of the findings contained in

these paragraphs.

5. Mr. Andhyarujina, the learned counsel appearing on behalf of the

petitioners submitted that though the respondents are aggrieved

by the order under Section 17, some of the reliefs have been

worked out. In effect, prayers 27(a)(i), 27(a)(ii) and 27(a)(iii)

have been substantially worked out. These prayers are

concerning provision of; (a) copies of documentation,

correspondence including emails, notes, minutes of meetings

exchanged between the respondents with the two societies; (b)

copies of proceedings in Arbitration between the respondents and

the two societies including pleadings, minutes of meetings etc.

There is apparently a working arrangement between the parties to

ensure that all these documents are disclosed to the petitioners

including copies of documents that may be filed after the filing of

the petition and in the course of the arbitration reference.

6. Mr. Andhyarujina submitted that certain other reliefs sought

have not been granted. These are briefly listed below.

(i) The requirement of giving 5 days advance notice to the

petitioners regarding all hearings of the arbitral tribunal allowing

them to attend the same, (ii) advance notice to the petitioners'

CARBP(L)-13466-21.doc wadhwa representatives of meetings proposed to be held by respondents

with their legal advisors to enable the petitioners representatives

to attend and that the petitioners representatives be treated as

those of respondent no.2 during meetings with legal advisors, (iii)

no decision in relation to compromise settlement, withdrawal of

any claim in arbitration be taken in arbitration nor any pleadings

filed or be sent to the respondent no.2 without prior consent of

the applicant and (iv) that no decision be taken with regard to

implementation of the project without prior consent of the

petitioners.

7. In the course of submissions, Mr. Andhyarujina has taken me

through the relevant clause in the Investment Agreement and the

impugned order. The principal grievance of the petitioners arises

from their contention that the respondent no.1 through its

promoters are colluding with the societies and a third party in

order to deprive the respondent no.2 of its only asset. According

to Mr. Andhyarujina, by virtue of the Investment Agreement, no

decision on settlement or compromise should be taken by

respondent no.2 without the consent of the petitioners. The

apprehension of the petitioners arises from the respondents

alleged attempt to cede control of the development project to a

CARBP(L)-13466-21.doc wadhwa third party developer.

8. According to Mr. Andhyarujina, the tribunal has overlooked this

conduct and has failed to correctly appreciate the meaning and

intent of the Investment Agreement and has misinterpreted the

same and has not adjudicated upon the request in prayer clause

27(a)(viii) and 27(a)(ix). Mr. Andhyarujina submitted that the

impugned findings in the specified paragraphs are liable to be set

aside. He submitted that the respondents are deliberately

surreptitiously attempting to put into effect a commercial

arrangement by which Development Agreements with the

respondent no.2 were to be terminated and development rights of

the societies are now proposed to be granted to one Oberoi Realty

Ltd. It is alleged that promoters of respondent nos.1 & 2 "are /

will be" monetarily compensated by the said developer. As a

result, the respondent no.2 will suffer an adverse award by way

of compromise or settlement. That such settlement ought to be

prevented unless it is with the consent of the petitioners. This the

tribunal has overlooked. In fact the entire purpose of the

Investment Agreement was to ensure transparency in dealings of

the respondent no.2 which is not being achieved now. The

arrangement between the respondents and the new developers

CARBP(L)-13466-21.doc wadhwa and the society is in breach of the Investment Agreement.

9. Mr. Andhyarujina then invited my attention to Clause 13 of the

Investment Agreement and the definition of "Investors' Consent".

He submitted that reserved matters were enumerated in Schedule

12 in which consent of his clients was necessary prior to dealing

in any of the reserved matters in particular material change of

business plan, material changes to development agreement

between the company and investors and/or the societies,

instigation, defense, settlement or withdrawal of any litigation by

the company and structuring and securing any third party joint

ventures and other modification which would result in change in

the business plan.

10. Mr. Andhyarujina laid emphasis on item (xi) of Schedule 12

which deals with settlement or withdrawal of litigation and

submitted that express prior written consent of the petitioner

would be required for this purpose. He therefore submits that the

petitioners are entitled to an injunction restraining the

respondents from acting in breach of the provisions by settling,

withdrawing litigation which the company had initiated and this

included arbitral proceedings as between these two societies and

CARBP(L)-13466-21.doc wadhwa respondent no.2 without the Appellants consent. Those

proceedings were before the three member arbitral tribunal and

proceedings were underway. He submitted that unless the

respondents are restrained as sought, the petitioners' interests

may be prejudiced and it very likely the respondent no.2 may

settle those arbitration disputes thereby benefiting a third party

but to the detriment of the petitioners who have invested about

Rs.196 crores in the project.

11. According to the petitioners, their investment will be put at

risk due to the unwillingness of the respondent no.2 to comply

with its obligations. Mr. Andhyarujina submitted that the arbitral

tribunal has not considered this aspect while passing the

impugned order. He therefore submitted that the order to the

extent impugned findings must be set aside. In support of his

contentions he relied upon the decision of the High Court of

Justice Business and Property Courts in Manchester in the matter

of Audas Group Limited. Relying upon this judgment, he invited

me to hold that the tribunal had erred in not appreciating the

petitioners' apprehensions and had failed to prevent breach of the

Investment Agreement.

12. In response, Dr. Saraf submitted that in the course of

CARBP(L)-13466-21.doc wadhwa hearing, the respondents had submitted a pursis agreeing to many

of the requests of the petitioners. In particular, with reference to

prayer clause 27(a)(i) (ii), (iii) and (iv) all documents were

agreed to be provided. 48 hours advance notice of the hearings

scheduled will be provided to the petitioners' representatives. He

submitted that the petitioners already have an Observer who

attends meetings. This is disputed by Mr. Andhyarujina who says

that the Observer has resigned. Dr. Saraf contended that the

petitioners have a right to appoint a Director on the Board but

had not done so. Dr. Saraf submitted that applicants were also in

breach in not appointing a Director and hence had ignored

protection available to the applicant. He submitted that the

arbitral tribunal has considered all aspects and passed an order

that is fair and reasonable. He has taken me through the two

pursis and submitted that the arbitral tribunal has taken into this

consideration.

13. Dr. Saraf has also invited my attention to paragraphs 37

and 41 of the impugned order wherein counsel for the applicants

had acknowledged, albeit without prejudice, practical difficulties

in ensuring written consent being obtained at every stage and the

tribunal had allowed part of the request in the pursis to the extent

CARBP(L)-13466-21.doc wadhwa that the respondents will keep the applicants updated by filing all

revised applications filed and to be filed in the Societies'

Arbitration proceedings and to be furnished by the respondents to

the applicants representative. Dr. Saraf has also invited my

attention to the fact that the arbitral tribunal hearing the

Societies' Arbitration had denied the request of the applicant as

shareholder of respondent no.2 to remain present at the

arbitration hearings and to this effect reliance is placed on a

minutes of meeting dated 8th May, 2021 wherein the three

member tribunal discussed the applicants email dated 7 th May,

2021 but rejected this request, holding that the shareholders are

not entitled to attend the hearing. By that order the tribunal

upheld the respondents objections under Section 42A of the

Arbitration Act which obliges the Arbitrator to maintain

confidentiality. In these set of circumstances, Dr. Saraf submitted

that the impugned order sufficiently safeguards the Appellants.

14. Dr. Saraf submitted that this Court under Section 9 has

already passed an order dated 5 th February, 2021 granting certain

protection and granting liberty to apply for other reliefs under

Section 17 before the Arbitral tribunal and in the meantime, the

disclosures have been ordered, injunction(s) have also been

CARBP(L)-13466-21.doc wadhwa granted. This Dr. Saraf submitted that sufficiently protects the

applicants and the tribunal has correctly found that the prayer

now sought is too wide.

15. Having heard the rival contentions I find that the issue is

narrow. I need to consider whether the tribunal's order falls foul

of any of the known parameters for testing an order under Section

17. The scope of Section 37 is limited . The Court is not expected

to substitute its views for that of the tribunal. Before entering

upon the merits of the challenge it will be appropriate to consider

the provisions of the agreement itself. Clause 13 of the

Investment Agreement contains only one provision and it reads as

follows;

"13. Reserved Matters 13.1 - No action or decision relating to any of the Reserved Matters shall be taken (whether by the Board, any committee, the shareholders of the Company or any of the employees, officers or managers of the Company) unless the Investors' Consent is obtained for such action or decision. "

16. Fair reading of clause 13.1 requires to Board of Directors of

the respondent no.2, any committee shareholders of the company

or any of the employees, officers and managers to obtain the

CARBP(L)-13466-21.doc wadhwa petitioner's consent before taking any action or decision relating

to any of the Reserved matters. This requires me to consider

"Reserved Matters" which is defined as "the matters specified in

Schedule 12" to the agreement. Schedule 12 as we have already

seen lists out a number of items pertaining to corporate action in

the matters of the business of the company accounts, expenditure,

payment of dividend, its employees obligations and key

appointments and terms of service. These matters are said to

require Investors Consent. Investor Consent is defined to mean

"the prior written consent of the Investors". It is this aspect that

has engaged the attention of the arbitral tribunal.

17. The tribunal took a practical approach on the pursis filed by

both sides. The provisions of the Investment Agreement have

already been factored into the Articles of Association of

respondent no.2 which inter alia provides for the petitioners'

entitlement to nominate a Director. The petitioners have avoided

nominating a Director thus far. Mr. Andhyarujina, however,

sought to contend that the nomination of a person to be a Director

is a 'right' not an 'obligation'. The petitioners were not under any

obligation to nominate a Director. While that may be so, I believe

it is appropriate to consider the manner in which the tribunal has

CARBP(L)-13466-21.doc wadhwa this aspect because the petitioners are concerned that the

respondents may in breach of clause 13 may proceed to settle or

otherwise arrive at a compromise without seeking written

approval of the petitioners.

18. The order of the tribunal has in my view taken a balanced

approach in having observed that prayer clause 27(a)(ix) seeks a

complete restraint from the respondents in taking any decision in

relation to the project without the prior consent of the applicant.

The tribunal has found that the prayer is too wide and could

affect a number of rights of the respondents and would travel

beyond what is contemplated in Schedule which deals with

reserved matters. What these other rights are will be considered

in due course. Rival contentions of the parties have been kept

open. The tribunal has made it clear that the observations in the

impugned order are prima facie in nature and contentions of

parties on merits are expressly kept open. I have observed that the

tribunal has also found that the petitioners were entitled to

appoint an investor director which right they have not exercised.

Reference is made to the Articles of Association which provides

for such a right to be exercised. The tribunal has found that the

petitioners could have nominated a investor director and that the

CARBP(L)-13466-21.doc wadhwa respondents would have been expected to call upon the petitioner

to appoint a investor director which also the respondents have not

done.

19. That apart, I noticed that the Petitioners between them hold

65.4% stake in the respondent no.2. Thus, on the aspect of

management of the affairs of respondent no.2, the petitioners

have an opportunity of nominating a Director on the Board of

Directors of the respondents. There is also a controversy as to

whether the Observer appointed continues to attend board

meetings. On behalf of the petitioners it was contended that the

Observer had resigned. This is sought to be controverted by Dr.

Saraf. Be that it may, the appointment of a Investor Director

would have to a great extent facilitated comprehensive

participation of the petitioners in the affairs of the respondents.

20. My attention is also to be drawn to the orders under Section

17 of the Arbitration and Conciliation Act in the Shiv Shahi

Arbitration between that society and respondent no.2. The

arbitral tribunal in that case has reportedly rejected the request of

the applicants to remain present at the hearing. Likewise in the

Shiv Prerna, Mr. Andhyarujina has taken me through the order

CARBP(L)-13466-21.doc wadhwa passed dated 9th May, 2021 in support of his contentions. My

attention was also invited to the decision of the High Court of

Justice Business and Property Courts in Manchester in relation to

Claim no.[2019] EWHC 2304 (ch). The observations of that court

pertain to conduct expected of a party to a shareholders

agreement making specific reference to the obligation to obtain

shareholder consent. The Court observed that the parties must act

in good faith with exercising powers in respect of shareholders

reserved matters, as a general principle. In the facts of that case,

the court has reiterated that parties are expected to act fairly.

Even in that case, the shareholders were entitled to appoint

Directors as long as they remain shareholders. This decision is of

no avail and do not come to Mr. Andhyarujina's assistance. In

the facts at hand, if the petitioners had exercised their right to

nominate a Director it could have been prima facie possible for

such Director to attend all litigation, including the Societies'

Arbitration. The petitioners cannot feign ignorance of this

possibility and it appears that the petitioners are hesitant to

partake in active management although they are entitled to

exercise their said right.

CARBP(L)-13466-21.doc wadhwa

21. On a query from the court, Mr. Andhyarujina submitted

that no steps had been taken to enforce their rights on the affairs

of the company under the Companies Act. If as canvassed, a

large stake is involved, it is surprising that the petitioners have not

initiated any steps in that behalf. They have also avoided

exercising their right to appoint a Director on the Board of the

company which is, allegedly, engaging in collusive and

objectionable business practices. I am also not persuaded by the

petitioners to hold that the order is in some way perverse. On the

other hand, the order has taken into consideration all the aspects

relevant at that stage and has come to a conclusion which is a

reasonable one. Absent any perversity, the view taken by the

tribunal reflects a plausible approach. Needless to mention, the

tribunal has kept all issues open at this stage and the essence of

the contest as to whether prayer clause (viii) can be granted or not

is still open. The findings in paragraphs 21, 32, 33, 35, 36, 39,

40 and 41 are all prima facie findings and in my view there is no

case made out for quashing and setting aside any findings in these

paragraphs. It is always open to the petitioners to demonstrate

before the arbitral tribunal how the prima facie findings are

incorrect or inaccurate. No case is made out for interference.

CARBP(L)-13466-21.doc wadhwa

22. Therefore, I pass the following order;

(i) Petition is dismissed.

(ii) No orders as to costs.

(A. K. MENON, J.)

Digitally signed by SANDHYA SANDHYA BHAGU BHAGU WADHWA WADHWA Date:

2021.08.04 17:12:02 +0530

CARBP(L)-13466-21.doc wadhwa