Modi Rubber Ltd. vs Morgan Securities & Credits Pvt. ...
2009 Latest Caselaw 4237 Del

 *        IN THE HIGH COURT OF DELHI AT NEW DELHI

                          Date of Reserve: August 06 2009
                          Date of Order: October 21, 2009
+ OMP No.267/2004
%                                                     21.10.2009
1.  MODI RUBBER LTD.                           .... Petitioner
              Through :      Mr. P.V. Kapoor, Sr. Adv. with
                             Mr. Ajay Kumar Jain, Adv.

     Versus

     MORGAN SECURITIES & CREDITS PVT. LTD. & ANR.
                                        ... Respondents
             Through: Mr. P.S.Bindra, Adv.

OMP No. 277/2004

2.   DR. B.K.MODI                              .... Petitioner
              Through :      Mr. L.K.Dhir with
                             Mr. Manoj Yadav, Advs.

     Versus

     MORGAN SECURITIES & CREDITS PVT. LTD. & ANR.
                                        ... Respondents
             Through: Mr. P.S.Bindra, Adv.

OMP No.278/2004

3.   V.K. MODI                                 .... Petitioner
                 Through :   Mr. P.V. Kapoor, Sr. Adv. with
                             Mr. Ajay Kumar Jain, Adv.

     Versus

     MORGAN SECURITIES & CREDITS PVT. LTD. & ANR.
                                        ... Respondents
             Through: Mr. P.S.Bindra, Adv.

     JUSTICE SHIV NARAYAN DHINGRA


1.   Whether reporters of local papers may be allowed to see the
     judgment?                                              No.

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

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

OMP Nos.267, 277 & 278/2004                           Page 1 of 10
          JUDGMENT

1. By this order I shall dispose of above three petitions

challenging common award passed by the learned Arbitrator against

the petitioner Modi Rubber Ltd. and its two directors.

2. Brief facts relevant for purpose of deciding these

petitions are that the petitioners approached respondent company

for grant of Inter Corporate Deposit. The respondent agreed to

grant Rs. 5 crore of amount as Inter Corporate Deposit with interest

@ 21% per annum. Both the parties entered into an agreement

dated 20.3.2001. On the same date the documents like demand

promissory note, letter of continuity and Inter Corporate Deposit

receipt were executed in favour of the respondent by the two

petitioners namely Mr. V.K.Modi and Mr. B.K. Modi who were

Directors of Modi Rubber Ltd. and they also executed deeds of

personal guarantee in favour of the respondent. The respondent

gave cheque of Rs.5 crores dated 20th March, 2001 drawn on

Housing Development Finance Corporation (HDFC) Bank Ltd., New

Delhi. As per agreement this amount was to be repaid within 90

days. The amount was not paid back in terms of agreement instead

letters dated 17.6.01 & 19.9.01 were written by Modi Rubber Ltd. for

extension of time for payment of amount. The respondent however

expressed its inability to give further time and asked for refund of

the Inter Corporate Deposit. The respondent thereafter wrote

letters dated 26.7.01, 19.9.07, 10.10.01, 17.10.01 and 3.12.01

requesting for refund of amount. The cheques issued by the

petitioner initially for repayment of loan were deposited by the

respondent in the account but got dishonoured. The respondent in

terms of the agreement appointed a sole Arbitrator and informed

the petitioner about the appointment of Arbitrator and filed a claim

of Rs.6,72,63,015/- before the Arbitrator inclusive of the interest

upto the date against the petitioners. The petitioners took a stand

before the Arbitrator that there was no valid arbitration agreement

between the parties and the appointment of Arbitrator was not

legally valid under the terms of agreement. However, petitioners

also staked a counter claim of Rs.50 lakhs against the respondent as

cost of time spent by management and staff on the proceedings and

one crore as damages and loss of goodwill and reputation of the

petitioners due to the proceedings initiated by the respondent.

3. The learned Arbitrator after considering the evidence

and documents, passed an award holding that the respondent was

entitled to receive jointly and severally Rs.6,72,63,015/- upto the

date of reference and thereafter the respondent would be entitled to

interest at the contractual rate of 21% per annum from the date of

reference till the date of award and thereafter from the date of

award till payment, simple interest at the rate of 18% per annum

would be payable. However, a concession was given that if the

entire payment was made within 3 months from the date of award,

the rate of interest from the date of award till the date of payment

shall stand reduced to 12% per annum.

4. The petitioner company namely Modi Rubber Ltd. in the

meantime filed an application before BIFR for declaring it as a sick

company and the proceedings before BIFR were continuing even

after passing of arbitration award.

5. The petitioners assailed the arbitration award on the

ground that the arbitration clause was invalid as the arbitration

agreement was one sided and misleading. The arbitration clause

vested a right in respondent of appointing an Arbitrator and the

clause does not give mutual rights to both the parties for appointing

an Arbitrator each of their choice. The award was therefore liable to

be set aside.

6, The petitioners had entered into contract with open

eyes. The petitioners were at liberty not to enter into the contract if

the arbitration clause was not agreeable to them. Moreover, such a

clause as is contained in the arbitration agreement is not an unusual

or illegal clause. The respondent had provided in the clause that

the Arbitrator shall be appointed by it. Such reservation regarding

appointment of Arbitrator is normally found in arbitration clauses.

Where a person enters into such an arbitration clause, he cannot

later on say that the clause was illegal or void. It is settled law that

parties are bound by agreement entered into between them

including the arbitration clause. If the arbitration clause provided

that the arbitration proceedings shall be conducted only by a

particular Arbitrator appointed by the respondent such a clause is

not an illegal clause and the petitioner is bound by the arbitration

clause. I therefore find no force in this objection.

7. The other objection taken by Modi Rubber Ltd. is that

the award was liable to be set aside since a proper notice was not

given by the respondent of invoking the arbitration clause and the

letter dated 24th January, 2002 issued by the respondent was a

combined notice calling upon the petitioner to pay the amount of

Rs.4 crores with interest and in case of refusal it was provided that

the matter would be referred to Mr. S.C. Goyal, a Director of the

Lender Company for appointment of a sole Arbitrator. I find no force

in this argument. The respondent had been writing to the petitioner

for refund of the amount along with the interest from July, 2001

onwards. Several letters were written by the respondent to the

petitioner. In the last letter dated 24th January, 2002, the

respondent while invoking arbitration clause had simultaneously

told the petitioner to pay back the amount. Such a notice is not an

illegal notice and it cannot be said that the award was bad or

arbitration clause was invoked without giving proper advance notice

to the petitioner of appointment of Arbitrator.

8. The other ground taken by the petitioner is that the

agreement entered into between the parties regarding Inter

Corporate Deposit provided for exorbitant rate of interest. i.e., 21%

per annum plus penal rate of 3% at monthly basis in case of non-

payment after the due date, plus commission at 4.5% of the loan

amount. Such a high rate was unconscionable and unreasonable,

the agreement therefore was void.

9. The petitioners entered into this agreement with open

eyes and they had requested respondent for giving Inter Corporate

Deposit of a huge amount for a period of 3 months. The rate of

interest agreed was 21% per annum for the period of these 3

months. The penal interest provisions were only in case of their

failure of giving back the loan amount. The petitioners cannot take

a ground that the agreement was unreasonable and void. An

agreement signed between the parties with open eyes, without an

allegation of fraud is a valid agreement. If the petitioners felt that

the rate of interest was exorbitant and the rate of interest was

unconscionable, the petitioners were at liberty to pay back the

amount and take loan from other banks and financial company. The

petitioners cannot take the stand that once they had taken

advantage and received the amount of Rs.5 crore as Inter Corporate

Deposit, the agreement became void because of the provisions of

interest and they were not liable to pay back the amount. Under

Section 65 of the contract Act, in those cases where an agreement

is discovered to be void or becomes void subsequently, any person

who has received advantage of such an agreement or contract is

bound to restore the benefits to the other party. The petitioners

were therefore bound to return the amount of Rs.5 crore

immediately to the respondent. The petitioners cannot assail the

validity of the award on this ground.

10. The other ground taken by the petitioner, Modi Rubber

Ltd. is that it was a case of signing on dotted line of the documents

sent to the petitioners. The documents of guarantee of directors

were only "make believe" cover documents and not meant to act

upon. I consider that such an arguments cannot be entertained and

has to be outrightly rejected being a malicious and perverse

argument made by a person who has received advantage under the

agreement but now does not want to pay back the amount of loan.

11. The next ground taken by the petitioner is that the

Arbitrator lacked inherent jurisdiction and the proceedings before

the Arbitrator were therefore without jurisdiction. This argument is

based on the ground that the petitioner company was a sick

industrial company within the meaning of Clause (o) of Section 3(1)

of Sick Industrial Companies (Special Provision) Act, 1985 requiring

a reference to BIFR within prescribed period. The Board of Directors

of the petitioners company decided to make a reference to the BIFR

on 6th December, 2003 and the reference was made on 4 th February,

2004.

12. The arbitration in this case was invoked in 2002 itself.

At that time, the petitioners company was not a sick company and

the petitioners should have returned the amount. It was not

necessary for the petitioners either to make the company a sick

company or to wait for the company to become a sick company so

that they can take the plea of the company having become a sick

company so as not to pay to creditors after enjoying their hard

earned money. The award itself was passed by the learned

Arbitrator on 6th May, 2004 when there was no order of BIFR

declaring the company as a sick company. This ground is therefore

not available.

13. During pendency of the petition, counsel for the

petitioners again raised issue of petitioner no. 1 being a sick

company before the Court and sought a stay of the proceedings of

this petition under Section 34. This Court vide judgment dated 9th

April, 2009 observed that the contention of the petitioner regarding

stay of proceedings under Section 34 of the Act have no force and

the objections were to be decided on merits. It was also observed

by this Court that Section 22 of SICA cannot be used to breed

dishonesty.

14. The petitioner raised an argument about the post award

interest of 18% granted by learned Arbitrator to be on higher side

and exorbitant. Supreme Court in State of Rajasthan vs. Ferro

Concrete Construction Pvt. Ltd 2009 (8) Scale had made the

position in respect of interest clear after coming into force of

Interest Act, 1978 and laid down as under:

"34. The position regarding award of interest after the Interest Act, 1978 came into force, can be stated thus:

(a) where a provision has been made in any contract, for interest on any debt or damages, interest shall be paid in accordance with the such contract.

(b) where payment of interest on any debt or damages is expressly barred by the contract, no interest shall be awarded.

(c) where there is no express bar in the contract and where there is also no provision for payment of interest then the principles of section 3 of Interest Act will apply in regard to the pre-suit or pre-reference period and consequently interest will be payable:

(i) where the proceedings relate to a debt (ascertained sum) payable by virtue of a written instrument at a certain time, then from the date when the debt is payable to the date of institution of the proceedings;

(ii) where the proceedings is for recovery of damages or for recovery of a debt which is not payable at a certain time, then from the date mentioned in a written notice given by the person making a claim to the person liable for the claim that interest will be claimed, to date of institution of proceedings.

(d) payment of interest pendent lite (date of institution of proceedings to date of decree) and future interest (from the date of decree to date of payment) shall not be governed by the provisions of Interest Act, 1978 but by the provisions of section 34 of Code of Civil Procedure 1908 or the provisions of the law governing Arbitration as the case may be."

15 Thus it is clear from the provisions of Interest Act that

where a provision has been made in contract for interest, the

interest has to be paid in accordance to such contract. The

Arbitrator has ordered payment of interest on the award amount

only in accordance with the contract and for subsequent period, the

Arbitrator has awarded interest at the rate of 18%. I consider that

looking at the conduct of the petitioners who have been trying to

delay the proceedings at every stage and even in respect of Inter

Corporate Deposit had shown their dishonest intention from the day

one of not paying back the amount and raising frivolous pleas, the

award of interest was not on higher side and was in accordance with

law. I find no force in these petitions. The petitions are hereby

dismissed.

October 21, 2009                    SHIV NARAYAN DHINGRA J.
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