General Exports And Creditors ... vs Birla Global Finance Co. Limited.
2009 Latest Caselaw 60 Del

*                IN THE HIGH COURT OF DELHI AT NEW DELHI

+                 ARBITRATION APPLICATION NO.212/2008

%                       Date of Decision: 13.01.2009

General Exports and Creditors Limited                  .... Petitioner
                    Through Mr.Ashwani       K.   Dhatwalia      and
                               Mr.Rajneesh Sharma, Advocates

                                Versus

Birla Global Finance Co. Limited.                       .... Respondent
                      Through Mr.Bharat Sangal       and Ms.Mrinalini
                                Qinam, Advocates

CORAM:
HON'BLE MR. JUSTICE ANIL KUMAR

1.    Whether reporters of Local papers may be             YES
      allowed to see the judgment?
2.    To be referred to the reporter or not?                NO
3.    Whether the judgment should be reported in            NO
      the Digest?


ANIL KUMAR, J.

*

This is a petition under Section 11(6) of the Arbitration &

Conciliation Act, 1996 for appointment of an arbitrator in terms of

clause 9 of the agreement dated 9th October, 2007 between the parties

which is the arbitration agreement between the parties.

The contention of the petitioner is that the petitioner is a

company duly incorporated under the Companies Act and respondent is

a non-banking finance company and is a subsidiary of Aditya Birla

Nuvo Limited.

The petitioner company had contended that he approached the

respondent company for grant of loan facility to the tune of Rs.6.00

crores and the loan against the shares was sanctioned by letter dated

9th October, 2007 on the following terms:

(i) Loan amount Rs.6 crore (Rupee Crore)

(ii) Nature of Facility Loan against shares

(iii) Rate of Interest 14.30% p.a. (payable monthly year ended) Interest to be rest at the end of every 91 days from the date of first disbursement based on mutual consent.

(iv) Tenure 365 days from the date of first disbursement

(v) Upfront Interest/Charges Nil.

             (vi)  Security Scrip                 Margin
                   Bajaj Auto Limited             35%
                   GHCL Limited                   50%

Maximum exposure against GHCL Limited not to exceed Rs.2.27 crore other scrip's as per approved list of securities at applicable margin.

(vii) Margin 30% to 50% i.e. Market value of share - loan and other dues Market Value of Shares

Valuation of GHCL Limited to be based on six months average market price or the current market price, whichever is lower.‖

The petitioner has also referred to clause 4(b)(vi) of the sanction

letter which is as under:

―You shall maintain the stipulated margin at all times during the continuance of security and in the event of margin falling 4% less than the stipulated due to fall in the market value of the securities, you shall make good such shortfall on your own within a period of 2 days from the date of such shortfall by pledging with BGFCL further securities of sufficient value of make up the deficiency or shall reduce the amount for the time being due to BGFCL by cash payment so as to maintain the margin. Failing which BGFCL shall be entitled to charge panel interest @ 2% p.m. on the outstanding amount for the period from the

expiry of the said days till the date of making good the deficiency in the margin or payment cash as stipulated.‖

According to the petitioner, there is an arbitration agreement in

terms of clause 9 of the agreement entered between the parties which is

as under:-

"In the event of any disputes and differences regarding this Agreement the same shall be referred to arbitration in Delhi/Mumbai under the Arbitration & Conciliation Act, 1996."

The petitioner has contended that other documents were also

executed. According to him in terms of clause 2 of the sanction letter,

he provided all the requisite documents to the respondent and also

provided 14 post-dated cheques which were regularly and timely

honored.

The petitioner has further contended that in the months of

January to March 2008 share market suddenly fell leading to fall of the

value of the securities below the stipulated margin which resulted into

respondent company proposing to levy additional interest at the

stipulated rate of 2% per month till the continuance of the deficiency in

the margin. The petitioner, therefore, provided additional security in

the form of 13,30,000 shares of GHCL which resulted into total security

in respect of GHCL being enhanced from 15,68,000 to 29,98,000.

The grievance of the petitioner is that on 28th May, 2008 without

serving any notice respondent company sold one lakh shares of the

GHCL and realized Rs.80,00,000/- and reduced the total loan amount

to that extent and the loan amount became Rs.25,70,00,000/-. The

respondent company is also alleged to have sold further one lakh shares

of GHCL @ Rs.70.74 and thus realized Rs.70,74,000/- and thereby

further reducing the loan from Rs.25,70,00,000/- to Rs.24,96,00,000/-.

The plea of the petitioner is that the loan amount as on 30th May, 2008

was Rs.24,96,00,000/- and the value of the securities with the

respondent were Rs.41,93,00,000/-. Grievance of the petitioner is that

the respondent has been selling his securities without any notice and

justification and appropriating the amount towards loan, though the

petitioner had been paying interest on the loan amount regularly.

The petitioner consequently filed a petition under Section 9 of the

Arbitration & Conciliation Act, 1996 being OMP No.310/2008 where

the respondent has been restrained from selling further securities of the

petitioner. The said petition is still pending.

The petitioner has contended that the disputes have arisen, the

petition invoked clause 9 of the agreement which is the arbitration

agreement between the parties by an undated notice which was sent on

2nd June, 2008 by registered post which was received by the respondent

which has been admitted in the reply filed by the respondent. The plea

of the petitioner is that since within 30 days from the receipt of the

notice seeking appointment of the arbitrator, no arbitrator has been

appointed and even till the filing of the petition dated 5th June, 2008

seeking appointment of Arbitrator, the arbitrator in terms of clause 9 of

the agreement has not been appointed, therefore the respondent has

lost his right to appoint the arbitrator and consequently any person be

appointed as an arbitrator.

The petition is opposed by the respondent contending inter alia

that no occasion has risen for filing of present petition under Section

11(6) of the Arbitration & Conciliation Act, 1996. It is also contended

that there are no arbitrable disputes between the parties so as to give

rise to any arbitration proceedings. The respondent has also contended

that the sanction letter dated 9th October, 2007 clearly provided the

terms and conditions under which the securities were to be provided by

the petitioner/borrower in relation to the loan amount. It is further

contended that only two scrip's of Bajaj Auto Limited and of GHCL are

mentioned along with margin amount and the maximum security which

was acceptable in terms of shares of GHCL Ltd. was not to exceed the

sum of Rs.2.10 crores and, therefore, it is apparent that the loan of

Rs.3.90 crores was to be secured by the shares of Bajaj Auto Limited. It

is also asserted by the respondent that if any other script was to be

provided as additional security, it had to form part of the approved list

of securities at applicable margin which are stipulated in clause 1 (vi) of

the sanction letter dated 9th October, 2007.

The respondent has further pleaded that against the pledge of

shares as securities of the shares of Bajaj Auto Limited it had to be

evaluated by 30% margin while being accepted for security and shares

of M/s.GHCL Limited were to be evaluated at 50% margin. It is also

contended that in terms of clause 1(vi), if any other company's shares

were to be considered for security, they had to be on the approved list of

securities and only such securities which were on the approved list of

securities could be considered as applicable margin as securities for the

loan.

Learned counsel for the respondent has categorically contended

that the maximum loan against the share of GHCL Limited could not be

allowed to exceed Rs.2.10 crores and the security margin was to be

provided by the petitioner in terms of the shares of Bajaj Auto limited to

secure 3.90 crores of the total loan amount with a margin of 35% and

the value of the securities of shares of Bajaj Auto Limited on the basis

of this works out at Rs.6.00 crores.

The reliance is also placed on the sanction letter and loan-cum-

pledge agreement to contend that in case the value of the securities of

share falling resulting into value of the shares pledged as security

reduced, the deficiency in the security amount had to be made up

either by pledging further shares of Bajaj Auto Limited or the shares of

GHCL Limited or by pledge of scrip's of other companies which were

mentioned in the list of approved scrip's or by pledge of deficient

amount by way of cash with the respondent. In case of failure of

petitioner to take any of step, the respondent had a right to sell off part

of the shares held by it as security and consequent thereto the

securities were sold. The respondent has contended that in the

circumstances, the respondent was entitled to sell the securities and

consequently no occasion has arisen for invoking the arbitration clause

and there are no arbitrable disputes between the parties.

I have heard the learned counsel for the parties. This is not

disputed that there is an arbitration agreement between the parties in

terms of clause 9 of the agreement which contemplates that disputes

and differences regarding agreement shall be referred to the arbitration

in Delhi/Mumbai under the Arbitration & Conciliation Act, 1996.

The petitioner is disputing the sale of scrip's by the respondent

and the plea of the respondent is that under the sanction letter and

loan-cum-pledge agreement the respondent was entitled to sell the

scrip's. The petitioner contend that the shares could not be sold.

Whether the shares could be sold or not is a dispute under the

agreement and it is to be decided by arbitration. The respondent cannot

contend that no arbitrable dispute has arisen. The respondent is also

alleging that the petitioner has failed to repay the loan amount and has

referred to various orders passed between the parties, where it is alleged

by the petitioner that some of the amounts shall be paid by various

dates. Learned counsel for the respondent has also contended that even

after the expiry of the agreement, despite the representations made to

the Court in the pending proceedings, the loan amount has not been

paid by the petitioner to the respondent. Even no amount on account

of interest has been paid by the petitioner to the respondent. Learned

counsel for the petitioner refutes it and states that an amount of

Rs.2.00 crores has been paid. Whether the amount has been paid or

not and whether the amount has been paid as interest or not are also

disputes which are arbitrable. Consequently, it cannot be held that

there are no disputes which are not arbitrable. Whether the disputes

which have been raised by the petitioner are not arbitrable is also a

dispute which is to be adjudicated by the arbitrator and not by this

Court in the facts and circumstances.

The arbitration agreement between the parties is not denied and

it is also not denied that despite invoking the arbitration agreement, the

respondent has not appointed any arbitrator before filing of the present

petition under Section 11(6) of the Arbitration & Conciliation Act, 1996

on 5th June, 2008. Since the respondent failed to appoint the arbitrator

in terms of clause 9 of the agreement which is an arbitration clause, the

respondent lost his right to appoint an arbitrator.

In Union of India v. M/s. R.R. Industries, 120 (2005) DLT 572

(DB) it was held that once a party does not supply the vacancy or fails

to supply the vacancy before filing of a petition under Section 11(6) of

the Arbitration and Conciliation Act, such a party forfeits the right to

supply the vacancy in terms of the arbitration clause and what remains

is only the arbitration clause, i.e. the dispute has to be resolved under

the mechanism of alternative dispute redressal scheme but no right

survives to the respondent to supply the named Arbitrator in the

arbitration clause. In the present facts and circumstances there is no

named arbitrator.

A three-Judge Bench of this Court in Punj Lloyd Ltd. v. Petronet

MHB Ltd., III (2006) SLT 287=II (2006) CLT 251 (SC)=(2006) 2 SCC 638,

considered the applicability of Section 11(6) and held that once notice

period of 30 days had lapsed, and the party had moved the Chief

Justice under Section 11(6), the other party having right to appoint

Arbitrator under arbitral agreement loses the right to do so. While

taking this view, the Court had referred to the judgment rendered in

Datar Switchgears Ltd. v. Tata Finance Ltd. and Another, VII (2000) SLT

543=IV (2000) CLT 191 (SC)=(2000) 8 SCC 151, wherein at page 158

(para 19) SCC, it was held as under :

―19. So far as cases falling under Section 11(6) are concerned--such as the one before us -- no time limit has been prescribed under the Act, whereas a period of 30 days has been prescribed under Section 11(4) and Section 11(5) of the Act. In our view, therefore, so far as Section 11(6) is concerned, if one party demands the opposite party to appoint an Arbitrator and the opposite party does not make an appointment within 30 days of the demand, the right to appointment does not get automatically forfeited after expiry of 30 days. If the opposite party makes an appointment even after 30 days of the demand, but before the first party has moved the Court under Section 11, that would be sufficient. In other words, in cases arising under Section 11(6), if the opposite party has not made an

appointment within 30 days of demand, the right to make appointment is not forfeited but continues, but an appointment has to be made before the former files application under Section 11 seeking appointment of an Arbitrator. Only then the right of the opposite party ceases.

We do not, therefore, agree with the observation in the above judgments that if the appointment is not made within 30 days of demand, the right to appoint an Arbitrator under Section 11(6) is forfeited.‖

In the circumstances, it will be just and appropriate to appoint

an arbitrator to adjudicate the disputes which are raised and which

may be raised by the parties.

Therefore, I appoint Mr. Justice Vijender Jain (Retd.), House no.

136, Sector 15,NOIDA UP ( Phone nos. 0120-2511535 ; 9711009541)

as the sole arbitrator to adjudicate all the disputes between the parties.

The arbitrator shall decide his procedure for adjudicating the disputes

and shall also decide his fee. A copy of this order be sent to the

Learned Arbitrator forthwith, Copies of this order be also given dasti to

the parties. Parties are directed to appear before the Learned Arbitrator

on 23rd January, 2009 at 5.00 PM. With these directions the petition is

disposed of.

January 13th, 2009                                        ANIL KUMAR, J.
'Dev'