Delhi High Court

M/S Prime Telesystem Limited vs Sasken Communication ... on 18 December, 2009

Author: Shiv Narayan Dhingra

*         IN THE HIGH COURT OF DELHI AT NEW DELHI

                                                Date of Reserve: August 21, 2009
                                                 Date of Order: December 18, 2009
+OMP 35/2008
%                                                                 18.12.2009
    M/s Prime Telesystem Limited                                  ...Petitioner
    Through: Mr. Pradeep K. Bakshi with Mr. Rajat Navet, Advocates

       Versus

       Sasken Communication Technologies
       Ltd. & Ors.                                            ...Respondents
       Through: Mr. Neeraj Sharma with Ms. Archana Lakhotia and Ms. Roopali
       Sharma, Advocates

AND

+OMP 9/2008
%
    Ajit Sarin                                               ...Petitioner
    Through: Mr. Harish Malhotra, Sr. Adv with Mr. Lovkesh Sawhney and Mr.
    Durgesh Kumar Pandey, Advocates

       Versus

       Intel Capital Corporation & Ors.                       ...Respondents
       Through: Mr. Neeraj Sharma with Ms. Archana Lakhotia and Ms. Roopali
       Sharma, Advocates

       JUSTICE SHIV NARAYAN DHINGRA

1.     Whether reporters of local papers may be allowed to see the judgment?    Yes.

2.     To be referred to the reporter or not?                                   Yes.

3.     Whether judgment should be reported in Digest?                           Yes.


       JUDGMENT

1. By way of above two petitions, the petitioners have assailed an arbitration award

dated 3rd September 2007 awarding a sum of Rs.11.8 crore to the respondents.

2. Brief facts relevant for deciding maintainability of these petitions are that the

OMP Nos. 35/2008 &9/200 Page 1 Of 13 petitioner in OMP 35 of 2008 i.e. M/s Prime Telesystem Limited, a company

incorporated under the Companies Act, 1956, had entered into a Subscription-cum-

Shareholding agreement dated 28th February 2001 with Intel Capital Corporation

(respondent in OMP 9 of 2008), Citicop Finance India Limited, Sasken Communication

Technologies Ltd.(hereinafter referred to as "the Investors"). As a result of entering into

this agreement, three companies brought in an amount of Rs.11 crore into M/s Prime

Telesystem Limited. The investment made were Rs.479,99,992/- by Citi Cop,

Rs.460,00,018.40 by Intel and Rs.2,39,99,996.30 by Sasken. Mr. Ajit Sarin (petitioner in

OMP No.9 of 2008) was one of the directors of M/s Prime Telesystem Limited (PTL).

Several misleading representations were made to the investors in the Subscription-cum-

shareholding agreement about PTL, its directors and the interest of directors in other

firms and companies.

3. It was one of the conditions of the said agreement that the entire proceeds of Rs.11

crore would be transferred to a separate bank account and details of money utilized out of

the issue would be disclosed headwise under the annual report of the companies

indicating the purpose for which such money had been utilized.

4. PTL was a closely held company and its shares were previously held by its two

directors mainly viz. Mr. Anil Sarin and Mr. Satish Mehta or their family members. Mr.

Ajay Satsanghi being a director of the company at the relevant time was also a party to

the arbitration proceedings. However, he was removed from the directorship of PTL on

9th March 2001 i.e. before the amount of Rs.11 crore was invested by the investors and he

filed a civil suit and criminal proceedings against other directors. His name was struck off

from the arbitration proceedings on an application made by him.

OMP Nos. 35/2008 &9/200 Page 2 Of 13

5. The Investors soon after investing the amount discovered that they had been taken

for a ride and the information given by the petitioners herein and Mr. Satish Mehta,

before entering into the agreement were false and cooked up. The directors of the

company had also not disclosed their interest in other business entities of the firm. The

investors discovered that the two directors namely Mr. Ajit Sarin and Mr. Satish Mehta

clandestinely diverted huge funds out of Rs.11 crores into their pocket companies i.e.

either in favour of sole proprietary concern of Mr. Ajit Sarin and Mr. Satish Mehta and

their family members or to the limited companies which were completely under the

control and management of both of them. The investors collected details of these transfers

and found that the funds have been siphoned off by playing fraud and misrepresentation,

to the proprietary concerns and companies directly and closely concerned with Mr. Ajit

Sarin and Mr. Satish Mehta and their family members. The chart of siphoned off is as

under:


Rs. 32 lac            Rs.45 lac

Remi                 H. Packers Engineering: Sole Proprietor Sole Proprietor      Ajit Sarin Ajit Sarin         Bank Statement Enclosed

- Rs.85000 (Ajit   Rs.20 Sarin)             (Satish Mehta) -    Rs.25   lac (daughter     of   Rs.25        lac Ajit Sarin)        (brother      of Satish Mehta)

OMP Nos. 35/2008 &9/200 Rs.40 lac           Rs. 48 lac

Optimum             Computex System              Services Sole Proprietor     Sole Proprietor Satish Mehta        Satish Mehta Bank Statement      Bank Statement Enclosed            Enclosed

Rs.4 lac (Ajit      Rs.3 lac (Satish Sarin)              Mehta)

Rs.35 lac Satish    Rs.3         lac Mehta               (brother      of Satish Mehta)

Rs.10         lac (father of Satish Mehta)

Rs.32        lac (mother       of Satish Mehta)

6. PRIME TELESYSTEMS LTD. Rs.9.5 lac Rs.30 lacs Rs.29 lac Rs. 22 lac Future Sam Products Royal Rampore Arrow Electronics Electronics Sole Proprietor Sole Proprietor Sole Proprietor Ajit Sarin Ajit Sarin Sole Proprietor Ajit Sarin Bank Statement Bank Statement Ajit Sarin Bank Statement Enclosed Enclosed Bank Statement Enclosed Enclosed lac Rs.8.5 lac (Ajit Rs.55000 Rs.1 lac Ajit Rs.20 lac (Ajit Sarin) (Satish Mehta) Sarin Sarin) Rs.5.50 lac (Ajit Rs.7 lac (father Sarin) of Satish Mehta) Rs.20 lac (wife of Ajit Sarin) Rs. 3 lac (brother of Satish Mehta) Rs.18 lac (wife of Ajit Sarin) Page 3 Of 13 Rs.25 lac Rs.50 lac Rs.80 lac Sole Proprietor (OEPL) SMG Corporate Satish Mehta Director Satish Service Pvt. Bank Statement Mehta Ltd. Director Enclosed Bank Statement Satish Mehta enclosed Bank Statement enclosed Rs.5 lac Ajit Rs.15 lac Rs.75 lac (Ajit Sarin (father of Satish Sarin) Mehta) Rs.21 lac (Satish Mehta) Thus, an amount of more than Rs.4 crore was siphoned off out of the designated

account by the above concerns directly and indirectly through either direct transfer or

transfer made in the name of first company and then in the name of second concern. The

details of transfers made and modus operendi of the transfers of the amount were

produced before the Arbitral Tribunal.

7. After discovery of siphoning off of the amount and after discovery of the fact that

a fraud was played with the investors, the investors invoked the arbitration clause

contained in the agreement dated 28th February 2001 and appointed arbitrator from their

side and requested PTL and its directors to appoint an arbitrator of their side and the two

arbitrators were together to appoint an umpire. Serving of legal notices in terms of

Subscription-cum-shareholding agreement on PTL and its directors, calling upon them to

purchase their equity shares in terms of the agreement is undisputed. Since these notices

were not replied to, the investors in terms of the arbitration clause, from their side

appointed Justice M.L. Padse (retired) as an arbitrator and asked PTL and its directors to

OMP Nos. 35/2008 &9/200 Page 4 Of 13 similarly nominate their arbitrator in terms of clause 36 of the agreement. This notice was

also not replied by PTL and its directors. Ultimately, investors moved Supreme Court for

nomination of arbitrator on behalf of PTL and its directors so that an arbitral tribunal was

duly constituted and claim of the claimant could be decided on merits. Notice of this

application was served upon PTL and other directors and the application was contested by

PTL and its directors. The Supreme Court vide order dated 21st May, 2003 allowed the

application and appointed Justice V.R. Dhanuka as the arbitrator for the respondent and

Justice V.R. Dhanuka and Justice Padse together appointed Justice R.S. Panta (retired) as

the third arbitrator. Thus, the arbitral tribunal was constituted in terms of the agreement

after an application made by investors was allowed by the Supreme Court.

8. Before the arbitral tribunal, investors filed their claim but despite opportunities,

the petitioner and two directors did not respond to the claim filed by the investors neither

filed their version of facts. The arbitral tribunal proceeded to record evidence. Witnesses

were produced before the arbitral tribunal and were cross examined on behalf of PTL and

its directors. The arbitral tribunal after considering entire evidence and documents passed

an award in favour of investors which has been challenged by the two petitioners herein.

The grounds of challenge as stated by the petitioner Mr. Ajit Sarin in his petition under

Section 34 are:

(a) That the agreement dated 28th February 2001 as produced before the

arbitral tribunal was a forged document since some of its pages have been

changed and there were no signatures of the representatives of Intel

Technologies.

(b) The plea of fraud as taken by the investors could not have been gone into

by the arbitral tribunal and only a Civil Court was competent to go into the

OMP Nos. 35/2008 &9/200 Page 5 Of 13 plea of fraud. Thus, the subject matter before the arbitral tribunal was

beyond its jurisdiction in terms of Section 34(2)(6) of the Arbitration &

Conciliation Act, 1996.

proceedings before the arbitral tribunal were conducted ex parte. The

petitioner came to know of the proceedings at the final stage only. He

appointed his advocate to represent him but the advocate was not permitted

to participate in the proceedings nor was allowed to address the arbitral

tribunal or to file reply.

(d) That the award was against public policy since the restitution as ordered

would render the jurisdiction of the Company Law Board nugatory and the

provisions of the Companies Act would be rendered superfluous. The

arbitral tribunal could not have forced PTL or its directors to buy back the

shares. The investors who were shareholders by virtue of the agreement

should have approached Company Law Board for the redressal of their

grievances.

(e) That since the investors had pleaded that the agreement dated 28th

February, 2001 was hit by fraud and misrepresentation, the arbitral tribunal

could not have ordered for refund of money as it would amount giving

relief which was not even asked for by claimants.

(f) The petitioner had not made any misrepresentation to claimants/ investors

since the investors acted on a report of Ernst and Young which was to

perform due diligence in respect of PTL and one Ms. Sita Khosla, advocate

had done legal due diligence.

9. In its petition PTL had assailed the award on following grounds:

OMP Nos. 35/2008 &9/200                                                   Page 6 Of 13
        (a)     The award was not as per public policy of India as the award has ordered

petitioner to buy back its shares which was barred in terms of Section

77(B)(c) of the Companies Act.

(b) The petitioner company was under severe financial constraints and unable

to present its case as it was not allowed to withdraw funds for payments to

litigations and arbitrator's fee.

contrary to statutory provisions viz. Sections 64 and 65 of Contract Act.

(d) The appointment of the arbitral tribunal by Supreme Court was contrary to

law as PTL had no contract with any foreign entity and the arbitral tribunal

had no jurisdiction.

(e) The award was contrary to Section 18 and 20-B of the Arbitration &

Conciliation Act, 1996 since the arbitral tribunal has drawn adverse

inference against PTL for not filing statement of defence. The arbitral

tribunal also wrongly relied upon affidavit filed by a person on behalf of

respondent no.3, who was not authorized by defendant no.3 and who was

not even authorized to act on behalf of corporation.

(f) The decision in the award was beyond the scope of the agreement between

the parties and submissions to the arbitral tribunal.

10. One of the common grounds of challenging to award taken by the petitioners in

the two petitions is their incapacity to contest. I think this ground is not available to the

petitioners. PTL had allowed its funds worth more than Rs.4 crore to be siphoned off by

its two directors into the accounts of various proprietary firms or pocket companies. PTL

had liberty to call back this amount from its two directors even if there was an injunction

OMP Nos. 35/2008 &9/200 Page 7 Of 13 issued by the Court against use of other funds of PTL. Thus, there was no dearth of funds

with PTL. If PTL had called back this amount it would have got Rs.4 crore from those

persons to whom funds were transferred. There is no contention of PTL that it had made

efforts to call back the amount. The siphoning off of the funds is proved by documents

and bank statement. This contention of not having financial capacity, therefore, must fail.

Even otherwise, while PTL had not been appearing before the arbitral tribunal on the

ground that it had no funds. It had been filing one petition after another before the High

Court and had been filing appeals and SLPs. Various petitions FAOs, LPAs and SLPs

filed by PTL reveal that there was no dearth of funds with PTL when it wanted to move

High Court or Supreme Court. The plea of dearth of funds or its inability to pay the legal

charges to the counsel or fees of the arbitral proceedings is a baseless plea. Similarly, Mr.

Sarin also had no dearth of funds, either in his personal capacity or as a director. As

director of PTL he could have called back Rs.4 crore of amount which was transferred

from PTL to his proprietary concerns or concerns of his family members.

11. I find no force in the plea taken by petitioner that they were under financial

incapacity to contest the proceedings before the arbitral tribunal.

12. The other common ground raised in these two petitions is regarding jurisdiction of

the arbitral tribunal. Both the petitioners have urged that the arbitral tribunal had no

jurisdiction since it was not an international commercial arbitration. To my view, this plea

must fail. One because the arbitral tribunal has devolved upon this plea at great length and

rejected this plea on merits. Secondly because this plea should have been raised before

the Supreme Court when an application under Section 11 of the Arbitration &

Conciliation Act made by the investors was contested tooth and nail by the petitioners.

OMP Nos. 35/2008 &9/200 Page 8 Of 13 Once the Supreme Court had considered that it was a case of international commercial

arbitration and appointed the arbitrator in terms of the agreement entered into between the

parties, it is not open to the petitioners to raise or re-agitate this issue again.

13. The other common ground taken by two petitioners is that the award was contrary

to public policy since the award was contrary to the provisions of the Companies Act, as

by the award the learned arbitral tribunal had ordered petitioners to buy back all the

shares. This plea also must fail. The arbitral tribunal by its order has restored status quo

ante as if there was no agreement. It is well settled law that fraud vitiates all actions. The

action of allotment of shares done by PTL in favour of investors was vitiated by fraud and

therefore it cannot be said that there was valid allotment of shares. The arbitral tribunal

has only asked for refund of the amount obtained from investors by PTL by playing fraud

and payment of interest thereon. The arbitral tribunal has specifically observed that it was

not asking for buying back of the shares in terms of the agreement between the parties.

14. The petitioners submitted that since the contract has been held to be vitiated by

fraud the arbitration clause itself also would go with the contract. It is settled law that the

arbitration clause is a separate contract in itself from the main contract and it is severable

from the main contract. The arbitration clause is a contract of settlement of disputes.

Although it normally forms part of the main contract but it forms a separate contract

regarding settlement of disputes. Even if the main contract is vitiated by fraud, the

contract regarding settlement of disputes and the arbitration clause shall survive.

15. The plea taken by petitioners about the subject matter of dispute being beyond the

scope of arbitration and it could only be adjudicated by the Civil Court is not tenable.

OMP Nos. 35/2008 &9/200 Page 9 Of 13 Here the subject matter before the arbitral tribunal was the claim of claimants/ investors

who had invested about Rs.11.8 crore in PTL. The petitioners had not only played fraud

while entering the contract by misrepresentation, but committed breach of contract as

well. The fraud played by its two directors and PTL to lure the investors by concealing

vital information is one aspect, the breach of contract by siphoning of funds is other

aspect. The siphoning of the huge funds by the petitioners made them liable for civil as

well as criminal acts. The civil action for restoring status quo ante can be entertained not

only by the Civil Courts but also by the arbitral tribunal. There is no legal impediment on

the arbitral tribunal considering the claim of a party who had pleaded that a fraud was

played upon it. The petitioners have relied upon Abdul Kadir Shamsuddin Bubere vs.

Madhav Prabhakar Oak and another AIR 1962 SC 406 (V 49 C 63) to plead that where

there were serious allegations of fraud that would be sufficient cause for the Court not to

order the arbitration agreement to apply and not to make reference. This judgment would

not come to the rescue of the petitioners. The petitioners ought to have raised this plea

before the Supreme Court when the Supreme Court was deciding an application under

Section 11 of the Arbitration & Conciliation Act, 1996 made by the investors. It is not the

case of the petitioners that they had raised this plea. If this plea was not raised by the

petitioners before the Supreme Court, the petitioners are now barred from raising this plea

by constructive res judicata and if petitioners had raised this plea and the plea had been

rejected by the Supreme Court, the petitioners cannot raise this plea now because of res

judicata itself. Even otherwise, the relevant part of the judgment of Abdul Kadir (supra)

relied upon by the petitioner reads as under:

"17. There is no doubt that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and

OMP Nos. 35/2008 &9/200 Page 10 Of 13 not to make the reference. But it is not every allegation imputing some kind of dishonesty, particularly in matters of accounts, which would be enough to dispose a court to take the matter out of the forum which the parties themselves have chosen......."

16. The above observation of the Supreme Court makes it clear that it is not that every

allegation imputing dishonesty, particularly in matters of accounts, would be enough to

dispose Courts to take the matter out of arbitration. The Supreme Court relied upon

Russell's case (1880) 14 Ch D 471 wherein it was observed that merely because there are

allegations of accounts not being correct or certain items have been exaggerated it was

not enough to induce the Court refusing to make a reference to arbitration and the Courts

may refuse to make a reference to arbitration only in case of allegations of fraud of a

serious nature. As already observed in this case the arbitral tribunal was concerned with

the rights of the investors to claim back their monies because of inducement done to the

investors by mis-representation and subsequently playing fraud by the petitioners and

other directors of PTL.

17. PTL had raised a ground that the award was bad because the arbitral tribunal

recorded that it was drawing adverse inference against the petitioners for not filing their

response to the claim and for not producing or adducing any evidence. The petitioners

have relied upon Section 25(b) of the Arbitration & Conciliation Act, 1996 to press this

point.

18. Section 25 of the Arbitration & Conciliation Act, 1996 reads as under:

"25. Default of a party. Unless otherwise agreed by the parties, where, without showing sufficient cause,-

OMP Nos. 35/2008 &9/200 Page 11 Of 13

(a) the claimant fails to communicate his statement of claim in accordance with sub-section (1) of section 23, the arbitral tribunal shall terminate the proceedings;

(b) the respondent fails to communicate his statement of defence in accordance with sub-section (1) of section 23, the arbitral tribunal shall continue the proceedings without treating that failure in itself as an admission of the allegation of the allegation by the claimant;

(c) a party fails to appear at an oral hearing or to produce documentary evidence. the arbitral tribunal may continue the proceedings and make the arbitral award on the evidence before it."

19. A perusal of the above provisions of the Arbitration & Conciliation Act, 1996

only shows the anxiety of the Legislature that where the respondent does not file any

response to the claim of the claimant, the claim should not be straightway allowed by the

arbitrators and the arbitrator must go into the merits of the claim irrespective of the fact

whether a response has been filed or not and the arbitral tribunal shall not consider the

failure to file response as an admission to the allegations of claimant. In the case in hand,

the arbitral tribunal did not close the proceedings after petitioners failed to file the

response to the claim. The arbitral tribunal not only proceeded with the matter in fair

manner but framed issues and thereafter asked the claimant to lead evidence on the issues

and gave opportunities to the petitioners at every stage and witnesses of the claimant were

cross examined. Therefore, it is not a case where there was violation of Section 25 ((b)

and (c) of the Arbitration & Conciliation Act, 1996. Nor it can be said that it was a case

where equal treatment was not given to the parties as envisaged under Section 18 of the

Arbitration & Conciliation Act, 1996. You can take a horse to the pond but you cannot

make a horse to drink water unless horse wants to drink the water. The petitioners in this

OMP Nos. 35/2008 &9/200 Page 12 Of 13 case were provided ample opportunities by the arbitral tribunal but the petitioners had

deliberately chosen not to answer the claims. There were serious allegations made against

the petitioners of siphoning off the funds. The petitioners could have at least explained in

their written response about transfer of these huge funds of more than Rs.4 crore from the

account of PTL to different concerns by its two directors or family members. It is in this

context that the arbitral tribunal had observed that an adverse inference was to be drawn

against the petitioners who deliberately did not file their response. Even then, the arbitral

tribunal did not decide the claim on the basis of just adverse inference and the claim has

been adjudicated and decided on the basis of documents and oral evidence after satisfying

itself about the genuineness and justification of the claim of the claimants. I, therefore,

find that the petitions have no force and are liable to be dismissed.

20. It is settled law that while deciding a petition under Section 34 of the Arbitration

& Conciliation Act, 1996, the Court does not sit in appeal and cannot act as a Court of

appeal. This Court has jurisdiction to set aside the award only and it only the case of

petitioner falls within the scope and ambit of Section 34. In my view the petitioners have

miserably failed in showing that there was an infirmity in the award passed by the arbitral

tribunal in terms of Section 34 of the Arbitration & Conciliation Act, 1996.

21. In view of my foregoing discussion, both the petitions are hereby dismissed being

without merits.

December 18, 2009                                    SHIV NARAYAN DHINGRA J.
rd




OMP Nos. 35/2008 &9/200                                                     Page 13 Of 13