Bombay High Court

Mangal Credit And Fincorp Limited ... vs Gbl Chemical Limited on 18 June, 2025

   2025:BHC-OS:9267


                                                                                    906-CARAP-119-2024.doc



                                  IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                                        ORDINARY ORIGINAL CIVIL JURISDICTION
                                                 IN ITS COMMERCIAL DIVISION
                             COMMERCIAL ARBITRATION APPLICATION NO. 119 OF 2024

                            Mangal Credit And Fincorp Limited Through Its                  ...Applicant
                            Authorised Representative Mr. Dhirav Kishor Veera
                                  Versus
                            GBL Chemical Limited & Ors                                     ...Respondents


                            Mr. Pankaj Jain a/w Pradeep Purohit i/b P. D. Jain & Co. Jain &
                            Co., for the Applicant.
                            Mr. Chirag Mody, a/w Yash Momaya, Parag Khandhar, Tapan
                            Radkar, Anaheeta Verma i/b DSK Legal, for Respondent Nos.1 &
                            2.


                                                 CORAM       : SOMASEKHAR SUNDARESAN, J.
                                                 DATE        : JUNE 18, 2025

                       ORAL JUDGMENT :

1. This is an Application filed under Section 11 of the Arbitration

and Conciliation Act, 1996 (" the Act") seeking reference of disputes and

differences between the parties pursuant to which the four Respondents

have been designated as borrowers in respect of a loan extended by the

Applicant. The Loan Agreement is dated March 30, 2024. The

arbitration clause is contained in Clause 8.2 (found at Page 46 of the Digitally signed by ASHWINI Application). In the interest of brevity, the arbitration agreement is not ASHWINI JANARDAN JANARDAN VALLAKATI VALLAKATI Date:

2025.06.24 10:45:11 +0530

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being extracted here. Suffice it to say, that this matter falls within the

jurisdiction of this Court.

2. The primary objection from the Learned Counsel on behalf of

Respondent Nos.1 and 2 is that the factual matrix underlying the loan

agreement would demonstrate that the loan was a product of fraud.

Learned Counsel on behalf of these Respondents would even suggest

that the Applicant may be party to the fraud. Consequently, he would

submit that since fraud vitiates all solemn acts and would lead to

disputes not being arbitrable, this Application under Section 11 ought

not to be entertained at all.

3. Learned Counsel on behalf of Respondent Nos.3 and 4 would

submit that since they are behind bars, she is unable to take instructions

to make submissions on their behalf.

4. Having examined the record, it is apparent that allegations of

fraud are indeed found in the course of the conduct between the parties.

While the loan agreement is dated March 30, 2024, the loan agreement

was recalled within three days on the premise that the documentation

submitted for the borrowing being approved contained discrepancy and

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inconsistency. However, Learned Counsel for the Applicant submits that

as far as the Applicant is concerned, the loan was indeed disbursed, the

document was executed by the then Chief Executive Officer and the

whole time director, and the monies were indeed remitted into a bank

account held by Respondent No.1 with a nationalized bank for the past

one and half years.

5. Learned Counsel for Respondent Nos.1 and 2 submits that an

entire device of fraud was unearthed upon investigations, and this

discovery of such fraud is a matter of public record, since the fraud was

also disclosed to the stock exchanges, Respondent No.2 being a listed

company. He would also submit that there are judgments which would

clearly indicate that serious allegations of fraud would not be arbitrable,

particularly, the fraud goes to the very validity of the contract which

contains the arbitration clause.

6. Toward this end, he would rely upon the judgments in the

decisions in A. Ayyaswamy v. A. Paramasivam & Ors1, Rashid Raza v.

Sadaf Akhtar2 and Avitel Post Studioz Limited & Ors v. HSBC Holdings

(2016) 10 SCC 386;

(2019) 8 SCC 710;

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(Mauritious) Limited3 to contend that disputes involving serious

allegations of fraud ought not to be arbitrable. The offshoot of this

submission is that this Court sitting in the jurisdiction of Section 11

should take a note of a fact that there are serious allegations of fraud

and forthwith dismiss the Application and not permit commencement

of arbitration.

7. Having examined the record with the assistance of the

Counsel and the march of the law in terms of the scope of the

jurisdiction under Section 11 Court, I am unable to agree that, at the

threshold, the Application should be dismissed because of the existence

of allegations of fraud which are said to be serious. Indeed, the Counsel

for Respondent Nos. 3 and 4 would submit that her clients are

incarcerated on the ground of fraud, which would point to the fact that

there is a fraud, and the Cuffe Parade Police Station has filed a charge-

sheet based on the FIR lodged by Respondent Nos. 1 and 2. However,

whether these should lead to the disputes being non-arbitrable

essentially presents a mixed question of fact and law. To accept the

contentions of the Respondent Nos.1 and 2, some forum would need to

go into the veracity of the allegations and come to a finding that the case

(2021) 4 SCC 713

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of fraud made out is of such a nature that the dispute is not arbitrable at

all. For example (without meaning to pronounce upon the merits of this

case) if it is found that a listed company had lacked internal processes

which led to fraud, the implications for third party cannot become non-

amenable to arbitration merely because of the existence of the charge-

sheet in connection with the fraud, having taken place due to internal

laxity of a party to the agreement. All these present facets of merit and

mixed questions of fact and law, which will at least require a preliminary

view to be taken by the arbitral tribunal, it is not for the Section 11 Court

to examine evidence of this nature, particularly in view of Section 11(6A)

which statutorily restricts the role of this Court to "examining" the

existence of the arbitration agreement. The conscious choice of the word

"examination" as opposed to "adjudication" points to iteration by the

legislature that this Court must examine if the formal agreement is in

existence. The contention of the Applicant that the money was remitted

to a bank account which was in existence for one and half years is also

something only the arbitral tribunal can examine for its veracity and

fruitfulness.

8. In these circumstances, considering the nature and scope of

the jurisdiction of this Court, it would not be appropriate for the Section

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11 Court to delve any deeper into the facet of fraud and write a finding

about the fraud having vitiated arbitration at this stage. Needless to say,

that is a facet left to the arbitral tribunal and, given the weight of the

facts presented by Respondent Nos.1 and 2, the arbitral tribunal is

requested to treat this as a preliminary issue and rule upon it up-front,

so that the time and cost of the parties are saved. Should the tribunal

eventually come to a view that the facts present a framework that

renders the dispute not arbitrable.

9. The scope of review under Section 11 is explicitly set out in

Section 11(6A) of the Act. It is now trite law, with particular regard to

the decisions of a seven-judge bench in the Interplay Judgement4

followed by multiple others, including SBI General5 and Patel6 that the

Section 11 Court ought not to venture beyond examining the existence of

a validly existing arbitration agreement that has been formally executed.

Even questions of existential substance is a matter that falls squarely in

the domain of the arbitral tribunal, in view of Section 16 of the Act.

10. Learned Counsel for Respondent Nos. 1 and 2 also submits

In Re: Interplay Between Arbitration Agreement under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899 (2024) 6 SCC 1

SBI General Insurance Co. Ltd. Vs. Krish Spinning, 2024 SCC OnLine 1974

Ajay Madhusudan Patel Vs. Jyotindra S. Patel, 2024 SCC OnLine, 2597

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that the aforesaid judgments never opposed or dealt with a case of

fraud, and towards this end, he would also rely upon Vidya Drolia and

Ors v. Durga Trading Corporation 7 which also states that the contention

of fraud cannot be dealt with by the arbitral tribunal. The law has moved

on since Vidya Drolia and, in fact, Interplay, it has been acknowledged

that Vidya Drolia did not notice the fact that deletion of Section 11(6A)

was never notified. Vidya Drolia was rendered under the belief that the

scope of jurisdiction of this Court was not restricted to examining the

existence of the arbitration agreement, a facet which has been graciously

acknowledged and articulated in depth in the Interplay judgment.

11. Consequently, it would follow that this Application deserves

to be allowed, making it clear that the arbitral tribunal may frame

whether the dispute is not arbitrable on account of fraud as a

preliminary issue. The Application is finally disposed of in the following

terms:-

A) Justice (Retired) Akil Kureshi, a former judge of this

Court, is hereby appointed as the Sole Arbitrator to

adjudicate upon the disputes and differences between

the parties arising out of and in connection with the

(2021) 2 SCC 1

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Agreement referred to above;

Office Address:-

617, Raheja Chambers,

Nariman Point, Mumbai.

Email ID: [email protected]

B) A copy of this Order will be communicated to the

Learned Sole Arbitrator by the Advocates for the

Applicant within a period of one week from the date of

upload of this order. The Applicant shall provide the

contact and communication particulars of the parties

to the Arbitral Tribunal along with a copy of this

Order;

C) The Learned Sole Arbitrator is requested to forward

the statutory Statement of Disclosure under Section

11(8) read with Section 12(1) of the Act to the parties

within a period of two weeks from receipt of a copy of

this Order;

D) The parties shall appear before the Learned Sole

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Arbitrator on such date and at such place as indicated,

to obtain appropriate directions with regard to

conduct of the arbitration including fixing a schedule

for pleadings, examination of witnesses, if any,

schedule of hearings etc. At such meeting, the parties

shall provide a valid and functional email address

along with mobile and landline numbers of the

respective Advocates of the parties to the Arbitral

Tribunal. Communications to such email addresses

shall constitute valid service of correspondence in

connection with the arbitration;

E) All arbitral costs and fees of the Arbitral Tribunal shall

be borne by the parties equally in the first instance,

and shall be subject to any final Award that may be

passed by the Tribunal in relation to costs.