(Formerly Known As Chokhani ... vs Raj Drug Agency & Ors
2023 Latest Caselaw 1053 Cal/2

                                                             A.P. NO. 2OO OF 2022
                                                               REPORTABLE


                  IN THE HIGH COURT AT CALCUTTA
                ORDINARY ORIGINAL CIVIL JURISDICTION
                           ORIGINAL SIDE


Present:

The Hon'ble Justice Shekhar B. Saraf



                           A.P. No. 200 of 2022

                       M/S UGRO CAPITAL LIMITED
            (FORMERLY KNOWN AS CHOKHANI SECURITIES LTD.)
                                     VS

                        RAJ DRUG AGENCY & ORS.


For the Petitioner:                              Mr. Rohit Banerjee, Adv
                                                 Ms. Shrayashee Das, Adv.

For the Respondent:                              Mr. Tanish Geriwala, Adv.

Mr. Ishaan Saha, Adv.

Ms. Sananda Ganguli, Adv.

Last heard on: April 18, 2023 Judgement on: April 26, 2023

Shekhar B. Saraf J:

1. The petitioner, M/s Ugro Capital Limited., is a company having its

registered office at Equinoc Business Park, Tower- II, 4th Floor, Off

BKC, LBS Road, Kurla, Mumbai- 400070, Maharashtra, India having

its branch office at 20B, British India Street, 6th Floor, Kolkata-

700069. It is engaged in the business of providing customized loan

services to its customers. It holds a license issued by the Reserve Bank

of India to carry on business as a Non-Banking Financial Company.

A.P. NO. 2OO OF 2022 REPORTABLE

2. The respondent no. 1, Raj Drug Agency, is a proprietorship concern

having its place of business at M 42, Paharpur Road, Garden Reach,

Kolkata- 700024. It is engaged in the business of pharmaceuticals and

medical drugs. The respondent no. 2, Mr. Prakash Chandra Gupta, is

the proprietor of respondent no. 1. The respondent no. 3, Kiran Gupta

is the next of kin of respondent no. 2 and the respondent no. 4, Mr.

Saikat Pal is an associate of the rest of the respondents.

Relevant facts

3. On February 28, 2000, vide an agreement, respondent no. 4 was

trusted to manage and run the business by respondent no. 2.

Respondent no. 4 was also allowed to use the bank account and all

other license and permissions for running the pharmaceuticals

business.

4. The respondents had obtained a credit facility repayable with interest

from the petitioner under an agreement dated 28th November 2020

[hereinafter referred to as 'the Agreement']. The petitioner had

disbursed the loan amount of Rs. 25,45,000 on 28th November 2020

through electronic transfer fund to the bank account of the respondent

no. 1, maintained with Axis Bank.

5. A credit facility of Rs. 25,45,000 was advanced to the borrowers

according to the Agreement, which was repayable within 36 months

A.P. NO. 2OO OF 2022 REPORTABLE

with floating rate of interest at the rate of 19.5% per annum. The

agreed quantum of instalment payable per month was Rs. 93,934 with

effect from January 10, 2021 till December 10, 2023.

6. The respondents had started paying interest by way of ECS. On

September 10th, 2021, ECS was dishonoured as the bank account of

the respondent was frozen/blocked. The petitioners caused issuance of

notice dated October 07, 2021 under Section 25 of the Payment and

Settlement System Act, 2007, demanding payment of the said

dishonoured electric fund transfer within the statutory period. The

respondents defaulted in re-payment of the instalments and hence the

loan was recalled.

7. The petitioner had filed an application under section 9 of the

Arbitration and Conciliation Act, 1996 [hereinafter referred to as 'the

Act'] for interim orders being A.P. No. 39 of 2022. The Hon'ble Court

directed an injunction vide order dated 2nd March 2022 on the property

of the respondents and the bank account to the extent of Rs.

24,40,945.51. The respondents have filed an appeal against the order

being A.P.O. No. 62 of 2022, which is pending. Thereafter, the

petitioner preferred the instant application, being A.P. 200 of 2022,

under Section 11 of the Act for appointment of the arbitrator.

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Rival Submissions

8. Mr. Rohit Banerjee, appearing on behalf of the petitioner made the

following submissions :-

a) Despite receiving the notice, the respondent has deliberately and

wilfully chosen not to make payments and departed from the

principal obligation to pay monthly instalment.

b) The respondent no. 2 and 3 have relied upon an F.I.R. dated

September 18, 2021 against respondent no. 4 who is being

accused of forgery. Such documents are irrelevant, internal and do

not discharge the obligation of the respondents. The petitioner no.

1 has received the payment from the petitioner vide the Agreement

wherein respondents no. 2 to 4 are mentioned as borrowers along-

with their signatures. The Agreement clearly has an arbitration

clause and therefore the matter should be referred to arbitration.

c) The respondents cannot treat the contract piecemeal for their

convenience and rescind from the obligation to repay all the credit

facilities availed by it.

d) The allegations of fraud are not such that the power of this Court

to appoint an arbitrator would wither away. Reliance was placed

on Rashid Raza v. Sadaf Akhtar [2019] 8 SCC 710 and Avitel

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Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited

[2021] 4 SCC 713.

9. Mr. Tanish Geriwala, advocate appearing on behalf of the respondent

has made the following submissions :-

a) The sanction letter issued by the petitioner has not been signed by

the respondent no. 2 and 3 [hereinafter referred to as 'the

answering respondents] and signatures appearing on the

documents are blatant forgeries. The answering respondents had

no knowledge of the Agreement and they have not in any way

consented to be bound by the terms of it.

b) Respondent no. 4 has confessed that he had taken undue

advantage of respondent no. 2's condition and had taken diverse

loans in the name of respondent no. 1 without the knowledge or

consent of the answering respondents.

c) Inspector of Metiabruz Police Station has brought to the notice of

Ld. ACJM Alipore that Ugro Capital has failed to furnish the

original loan agreement for signature verification.

d) The answering respondents have not received any money from the

petitioner and that the money has been appropriated by

respondent no. 4. The answering respondents are not bound by

A.P. NO. 2OO OF 2022 REPORTABLE

the Agreement and accordingly cannot be held liable for the

fraudulent and unlawful acts of the respondent no. 4.

e) The very existence of the arbitration agreement is vitiated by fraud

as the action of respondent no. 4 entering into the agreement

having the arbitration clause is an act of fraud coupled with

forgery, rendering the Agreement void. Hence, the application is

not maintainable and no reference to arbitration can proceed on

the basis of an arbitration agreement vitiated by fraud.

f) A suit has been instituted being CS No 1544 of 2021 before the Ld.

City Civil Court seeking a declaration that the Agreement is

invalid.

g) This Hon'ble Court cannot exercise its powers under section 11 of

the Act to appoint an arbitrator or pass any ad-interim order(s) as

sought for in the said application as any arbitration cannot

proceed out of an agreement ex-facie invalidated by fraud and in

circumstances wherein the subject matter is non-arbitrable.

Reliance was placed on Vidya Drolia and Others v. Durga

Trading Corporation [2021] 2 SCC 1 for the said proposition.

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Analysis

10. The Supreme Court in Rashid Raza (supra) had laid down a two-fold test to decide upon allegations of fraud vis-à-vis appointment of arbitrators. The relevant paragraphs are extracted below :-

'4.The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

The Apex Court pronounced that in case the answer to any of the above two tests was in the positive, reference to arbitration must be denied.

11. The tests outlined above were further explained by the Supreme Court in Avitel Post Studioz Limited (supra). The germane portion of the judgement is reproduced herein below :-

'35. After these judgments, it is clear that "serious allegations of fraud" arise only if either of the two tests laid down are satisfied, and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.'

Emphasis Added

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The Court also elaborated on the consequences of there being a possibility or existence of criminal proceedings, on arbitrability of the dispute. The relevant paragraph is extracted below :-

'43. In the light of the aforesaid judgments, para 27(vi) of Afcons [Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24 : (2010) 3 SCC (Civ) 235] and para 36(i) of Booz Allen [Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 : (2011) 2 SCC (Civ) 781] , must now be read subject to the rider that the same set of facts may lead to civil and criminal proceedings and if it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject-matter of such proceeding under Section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so.'

12. Mr. Tanish Geriwala, advocate appearing on behalf of the answering respondents relied upon VidyaDrolia (supra) to contend that the issue at hand is non-arbitrable owing to there being serious allegations of fraud relating to the validity of the Agreement itself, which also carries the arbitration clause. Therefore, reference to certain paragraphs of Vidya Drolia (supra) is apposite, which are extracted below :-

'76. In view of the above discussion, we would like to propound a fourfold test for determining when the subject-matter of a dispute in an arbitration agreement is not arbitrable:

(1) When cause of action and subject-matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem. (2) When cause of action and subject-matter of the dispute affects third-party rights; have ergaomnes effect; require centralised adjudication, and mutual adjudication would not be appropriate and enforceable.

(3) When cause of action and subject-matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable.

(4) When the subject-matter of the dispute is expressly or by necessary implication non- arbitrable as per mandatory statute(s).

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(5) These tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject-matter is non-arbitrable. Only when the answer is affirmative that the subject- matter of the dispute would be non-arbitrable.

* * *

78. In view of the aforesaid discussions, we overrule the ratio in N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] inter alia observing that allegations of fraud can (sic cannot) be made a subject-matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability. We have also set aside the Full Bench decision of the Delhi High Court in HDFC Bank Ltd. [HDFC Bank Ltd. v. Satpal Singh Bakshi, 2012 SCC OnLine Del 4815 : (2013) 134 DRJ 566] which holds that the disputes which are to be adjudicated by the DRT under the DRT Act are arbitrable. They are non-arbitrable.'

Emphasis Added

13. The Supreme Court, in Vidya Drolia (supra), concurred with the view

taken in Rashid Raza (supra) and Avitel Post Studioz Limited

(supra). Furthermore, the Court in Vidya Drolia (supra) also

interpreted, as it appears from a reading of the portion extracted above,

the law with respect to arbitrability and holds that the existence of

certain kinds of fraud would make the subject matter non-arbitrable.

However, such non-arbitrability has to be considered alongside the

other two decisions in Rashid Raza (supra) and Avitel Post Studioz

Limited (supra). A holistic reading of all these judgements would

illuminate the law in the realm of non-arbitrability jurisprudence,

which is rather clouded with uncertainty. It is only in clear

circumstances where the Court unerringly finds that the agreement or

the arbitration clause does not exist, as in, the party against whom

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breach is alleged has not entered into the agreement, will the Court

hold the matter to be non-arbitrable and refuse to refer the matter to

arbitration.

Conclusion

14. It appears that the money was credited to the account of the

respondent no.1. It is also evident that respondent no. 4 was granted

the power to run the business of respondent no. 1 and make use of its

bank accounts, by respondent no. 2 vide agreement dated February 28,

2000. Furthermore, such agreement was renewed on July 15, 2015 for

a period of ten years.

15. In my opinion, after considering the facts above, a clear inference

cannot be drawn that the Agreement was not entered into by the

answering respondents. Correspondingly, the allegations that the

amount was siphoned off by the respondent raise disputes inter-se

parties and the mere possibility or existence of criminal proceedings in

respect of the same would not make the dispute non-arbitrable.

Therefore, the matter should be referred to arbitration.

16. Accordingly, I appoint Ms. Radhika Singh, Advocate (Mobile No.

9831090675) as the sole arbitrator to resolve the dispute between the

parties. The appointment is subject to submission of declaration by the

Arbitrator in terms of Section 12(1) in the form prescribed in the Sixth

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Schedule of the Act before the Registrar, Original Side of this Court

within four weeks from today.

17. A.P. 200 of 2022 is therefore allowed and disposed of.

18. Urgent Photostat certified copy of this order, if applied for, should be

made available to the parties upon compliance with the requisite

formalities.

(Shekhar B. Saraf, J.)