M/S Varun Industries Ltd & Ors. vs M/S S.E Investments Ltd.
2015 Latest Caselaw 1342 Del

*        IN THE HIGH COURT OF DELHI AT NEW DELHI
                                Judgment reserved on February 05, 2015
                               Judgment delivered on February 13, 2015
+        ARB.A. 5/2015 & IA 2340/2015 (for stay)

         M/S VARUN INDUSTRIES LTD & ORS            ..... Appellants
                 Through: Mr.Sai Krishna, Adv. with Mr.Santosh
                           Chaurihaa &Mr.Ashutosh Dubey,
                           Advocates

                          versus

         M/S S.E INVESTMENTS LTD                  .... Respondent
                        Through: Mr.P.Nagesh, Adv.

CORAM:
HON'BLE MR. JUSTICE V.KAMESWAR RAO
V.KAMESWAR RAO, J.

1. This appeal under Section 37 (2)(b) of the Arbitration and

Conciliation Act, 1996 („Act‟ in short) read with Section 151 of the Code

of Civil Procedure, 1908 („CPC‟ in short) has been filed by the

appellants against the order dated January 10, 2015 passed by the learned

Arbitrator on two applications filed by the parties herein under Sections

17 and 31 of the Act.

2. Some of the facts are, an amount of Rs.36,90,00,000/- was

advanced as loan in terms of 12 loan agreements executed on four dates;

(1) an aggregate sum of Rs.11,25,00,000/- to the appellants under four

separate loan agreements, all dated October 04, 2011; (2) an aggregate

sum of Rs. 5,65,00,000/- to the appellants under two separate loan

agreements dated December 02, 2011; (3) an aggregate sum of Rs. 10

lakhs to the appellants under three separate loan agreements dated

January 19, 2012, & (4) an aggregate sum of Rs. 10 lakhs to the

appellants under three separate loan agreement dated February 23, 2012.

The appellants defaulted in the repayment of loan. As on May 17, 2013,

as per the statement of claim, the appellants were liable to pay an

aggregate sum of Rs. 33,86,95,046/- and as on August 26, 2014, the

amount swelled to Rs.53,81,94,194/-. It was the case of the appellants

that they had entered into a settlement dated August 20, 2012. As per the

said settlement, as on August 07, 2012, an amount of

Rs.24,88,56,373.98/- was due and payable by the appellants to the

respondent and the matter was finally and fully settled for

Rs.27,13,56,373.98/-. It was the case of the appellants, as per the

settlement, the appellants were to pay a sum of Rs. 2,25,00,000/- on or

before August 10, 2012 and balance in four equal instalments together

with interest @ 12% p.a. from January 31, 2013 and accordingly, post

dated cheques were issued. It was also agreed that in case of default, the

respondent would be entitled to claim interest @ 15% p.a. with all other

legal action in terms of the documents executed earlier. It was the case of

the appellants that they had honoured the settlement and paid Rs.2.25

Crores and has also issued four cheques as per the settlement dated

August 20, 2012 which has been acted upon by the claimants by

presenting some of the cheques to its banker and on being dishonoured,

the respondent had filed criminal complaint against the appellants.

3. Suffice to state, the respondent has disputed the settlement dated

August 20, 2012. It was their case that without prejudice to their rights

and contentions, the appellants have admitted their liability of Rs.

24,88,56,373.98/- as on August 07, 2012. Since the disputes had arisen,

the respondent, vide its Advocate‟s letter dated July 18, 2012 invoked

the arbitration clause and appointed a learned Arbitrator. An application

dated May 17, 2013 was also filed by the appellants herein wherein the

appellants sought dismissal of the claim petition on the following

grounds:

(1) The appointment of the Sole Arbitrator under Clause 19 of the

loan agreement in question was never consented to by the

appellants.

(2) The dispute between the claimant and the respondent No. 1

(Principal Borrower) had been fully and finally settled and the

same was recorded at Mumbai on the terms and conditions stated

in the appellants‟ letter dated August 20, 2012. It is further

averred that the said settlement had been acted upon and the

parties are bound by the same. The reason suggested is that

original agreement having been substituted by the alleged

settlement agreement, the arbitration clause cease to apply.

4. In other words, it was the contention of the appellants that the

learned Arbitrator had no jurisdiction to proceed in the matter. Suffice to

state, that the learned Arbitrator, vide its order dated July 20, 2013 had,

in detail, dealt with the aforesaid two issues. The learned Arbitrator had

recorded the stand of the respondent herein, that the terms of the letter

dated August 20, 2012, which according to the appellants, was the

settlement as entered into between the parties, was never agreed upon.

The learned Arbitrator had also observed that the appellants themselves

had appointed Justice Deshpande by letter dated March 25, 2013, which

is a date, after August 20, 2012. Meaningfully read, the appointment of

Justice Deshpande as the Arbitrator, is the acceptance of the arbitration

clause in the loan agreement by the appellants herein. Suffice to state,

that the said order has attained finality.

5. One of the two applications which were decided by the learned

Arbitrator vide the impugned order was filed by the respondent, wherein

the following prayers were made:

"1. The application filed by the Claimant dated 16.09.2014 seeks following reliefs:

(i) Pass an interim award directing the Respondents to pay the claimed amount of Rs.33,86,95,046/- to the Claimant; In the alternative

(ii) Pass an interim order directing the Respondents to deposit a sum of Rs.33,86,95,046/- before this Arbitral Tribunal; and upon such deposit of Rs.33,86,95,046/- by the Respondents, Claimant be allowed to withdraw the said amount after furnishing suitable Bank Guarantee to the satisfaction of this Hon'ble Arbitral Tribunal.

(iii) Decline any further postponements/adjournments, if any sought by the Respondents and continue the Arbitral Proceedings without any further adjournments and make the Arbitral Award on the basis of the terms of the written contract and documents produced before this Hon'ble Arbitral Tribunal as per Section 28(3) of the Arbitral and Conciliation Act, 1996.

(iv) Pass any further order or orders as the Hon'ble Arbitral Tribunal may deem fit and proper in the facts and circumstances of the present case."

6. In the application filed by the appellants, the following stand was

taken:-

"a. The respondents have furnished Collateral Security of 22,61,000 Equity Shares by mortgaging them to the Claimant.

b. The Claimant had sold without information or seeking permission from the Respondents in this regard.

c. That at the time when the Equity Shares were mortgaged with the Claimant the value of shares was manifold to cover the loan amount. Even on the date of alleged default, that is, 16.03.2012, the rate of share of the counter- claimant was Rs.219.75 per share which works out to be Rs.49,68,54,750/-.

d. That the Claimant fraudulently sold the pledged shares of the Respondent. They have sold 16,35,000 shares of Rs.3,82,25,173/- from 13.07.2012 to 04.09.2012. No information was sent to the Respondents. No notice was served upon the Respondents before sale of the Shares. That 6,26,000 equity shares are still lying with the Claimant.

e. That as per the Claimant, on the date of default that is 16.03.2012 they became the owners of the shares. On such date, the price of the shares was Rs.219.75 per share and total value of 22,61,000 shares works out Rs.49,68,54,750/-. The Claimant is liable to pay such amount along with interest @ 24% p.a. to the Respondents.

f. On the aforesaid grounds, the Respondents have prayed

that the Claimant should be directed to deposit Rs.49,68,54,750/- with the Tribunal or furnish Bank security till the final disposal of the counter-claim. It is also prayed that the Claimant may be directed to deposit Rs.49,68,54,750/- with the Tribunal and the Respondents may be allowed to withdraw the same against appropriate security."

7. The learned Arbitrator, has, while disposing of the applications,

directed the appellants as under:-

"1. The Respondents are directed to furnish bank Guarantee, before this Tribunal for Rs.21,06,31,200/- to the effect that the Respondents shall immediately make payment of the aforesaid amount, if an Award is passed against them in this case.

2. The Respondents shall further furnish Solvent Surety for remaining claimed amount i.e. Rs.12,80,63,846/- before this Tribunal that in case an Award is passed against them the Respondent shall duty satisfy the Award.

3. The aforesaid both, Bank Guarantee and Solvent Surety, be furnished within a period of two weeks from today."

8. It was the submission of Mr.Sai Krishna, learned counsel for the

appellants that the arbitration proceedings before the learned Arbitrator

are not maintainable as the original loan agreement stands superseded by

the settlement dated August 20, 2012, which does not contemplate

settlement of disputes through arbitration. That apart, he would state that

the directions given by the learned Arbitrator are contrary to the well

settled position of law and beyond the scope of Section 17 of the Act as

no order can be passed for securing money claim. He would also submit

that when the appellants had also made a prayer against the respondent

for deposit of Rs.49,68,54,750/-, the learned Arbitrator could not have,

without deciding the rival claims of the parties, grant or direct the

furnishing of bank guarantee/solvent surety against the appellants herein.

It was his case that the appellants had furnished collateral security of

22,61,000 Equity Shares valued at Rs.58 Crores with the respondent, the

directions for further security is uncalled for. He would state that the

respondent, without seeking permission of the appellants, had sold

16,35,000/- shares at a much lower rate. Even at the time when the

shares were mortgaged with the respondent, the value of shares was

manifold to cover the loan amount. According to him, even on the date

of alleged default i.e. March 16, 2012, the rate of share was Rs.219.75

which worked out to Rs. 49,68,54,750/-, and as such, the respondent is

liable to pay the said amount which should have been directed to be

deposited. In support of his contention that the direction would not fall

within the scheme of Section 17 of the Act, he would rely upon the

judgment of the learned Single Judge of this Court reported as 297

(2013) Delhi Law Times 473, Intertoll ICS Cecons. O & M Co. Pvt.

Ltd. Vs. National Highways Authority of India more specifically paras

12, 13, 14, 15, 19 & 20 in support of his submissions.

9. On the other hand, Mr.P.Nagesh, learned counsel, who appeared

for the respondent, would submit that the issue of maintainability of

arbitral proceedings, stands settled by the learned Arbitrator vide order

dated July 20, 2013. According to him, the said order has attained

finality and cannot be re-agitated by the appellants in this petition. That

apart, he would state that the respondent has disputed the settlement

dated August 20, 2012. Without prejudice, it was his submission that the

respondent has accepted the liability of 24,88,56,373.98/-. He would

state that the conduct of the appellants show that they are not interested

in discharging their liability under the loan agreement and are more

interested in delaying the proceedings. He would highlight various

litigations which have been initiated against the appellants and so noted

in para 16 of the impugned order, including appellants have to pay the

Indian Banks huge amount which matter is pending before the Debt

Recovery Tribunal, Mumbai. He would support the order of the learned

Arbitrator inasmuch as the respondent had expressed apprehension if the

interim order is not passed, the respondent may suffer irreparably. He

would state, the stand of the appellants that they were not aware of the

selling of the shares which were pledged by it is incorrect. In this regard,

he has drawn my attention to page 24 of the documents, wherein, the

appellants in their e-mail dated December 13, 2012, had stated "please

issue us a credit note that you have received Rs.3,82,25,173/- against

loan". This fact itself would testify that the appellants had accepted and

in knowledge of selling of the shares by the respondent. He would seek

the dismissal of the petition.

10. Mr.Sai Krishna, learned counsel for the appellants, in his

rejoinder, would submit that on August 20, 2012, the appellants were not

actually aware of the fact that the shares have been sold by the

respondent. According to him, the letter referred to by Mr.Nagesh is one

written subsequent to August 20, 2012. If in the interregnum, this fact

has come to the knowledge of the appellants, the respondent cannot

impute knowledge on the appellants of the said fact on August 20, 2012.

11. Having considered the rival submissions of the learned counsel for

the parties, insofar as the issue of maintainability of proceedings before

the learned Arbitrator is concerned, the same stands decided by the

Arbitral Tribunal, vide its order dated July 20, 2013. The case of the

appellants as noted in the order dated July 20, 2013, was primarily that it

did not consent to the appointment of the Arbitrator. The said aspect has

been dealt with in para 7 of order dated July 20, 2013.

12. Even if the contention of Mr.Sai Krishna was, that the arbitration

clause did not survive, as Loan Agreement stands superseded by the

settlement dated August 20, 2012, the said submission is also liable to be

rejected for more than one reason. Firstly, the very same ground was

taken in the earlier application filed on May 17, 2013. Secondly, the

learned Arbitrator has in para 11 of the order dated July 20, 2013

referred to the fact that the appellants had appointed Justice Deshpande

as an Arbitrator vide letter dated March 25, 2013, which proves the

acceptance by the appellants of the arbitration clause in the main

agreement as a process of dispute resolution and the appellants had acted

in furtherance of such an agreement. That apart, filing of the application

by the appellants under Section 17 and 31 for interim measure/interim

award for deposit of Rs.49,68,54,750/- with the "Tribunal" or furnishing

bank securities, itself prove submission to the jurisdiction of the Arbitral

Tribunal, otherwise why an application for interim relief.

13. Insofar as the submission of Mr.Sai Krishna, the amount being

undeterminable and till such time, the rival claims are

decided/crystallized, the learned Arbitrator could not have passed the

impugned order for giving bank guarantee/solvent surety is concerned,

the said submission also need to be rejected in view of the alleged

settlement dated August 20, 2012, wherein the appellants agreed to pay

the respondent an amount of Rs.27,13,56,373.98/-, by initially giving an

amount of Rs.2,25,00,000/- (which they did) and balance of

Rs.24,88,56,373.98/- in quarterly equal instalments together with interest

@ 12% p.a. starting from January 31, 2013. There cannot be more

unequivocal acknowledgement of debt than the one made by the

appellants in the said letter. It is a different aspect that the respondent

herein has disputed the settlement. In any case, such a letter can be read

against the appellants herein. The learned Arbitrator in para 16 had

observed that the appellants herein had specifically admitted their

liability to the tune of Rs.24,88,56,373.98. From the said amount, the

learned Arbitrator had deducted the amount of Rs. 3,82,25,173/- to

arrive at a figure of Rs.21,06,31,200/-, which according to the learned

Arbitrator, is an amount prima facie payable to the respondent.

14. The claim of the respondent is for Rs. 33,86,95,046/-. That apart,

the fact that the appellants had given cheques to the respondent, which

got dishonoured, cannot be overlooked for securing the amount claimed

by the respondent.

15. Insofar as the submission of Mr.Sai Krishna that the appellants are

entitled to a claim of Rs. 49,68,54,750/- against the respondent for

2261000 shares pledged with the respondent is concerned, suffice to

state that such a claim appears to be have been dealt with by the learned

Arbitrator in para 17 of the impugned order, which I reproduce

hereunder:-

"Now the application filed by the Respondents may be looked into. The aforesaid application has been filed by the Respondents claiming Rs.49,68,54,750.00 from the Claimants. The contention of the Respondent is that the value of pledged shares on the relevant date was Rs.219.75 per share and the entire shares, i.e. 22,61000 works out to be Rs.49,68,54,750.00 and this month has been claimed by the Respondents from the Claimants. In so far as the sold shares are concerned, as stated hereinabove, the email which is referred hereinabove has been prima facie proved by the Claimant. The Respondents had not objected sale or price of the Shares and for the first time they have denied the email and claimed aforesaid amount in the counter- claim. This aspect is yet to be adjudicated by this Tribunal. Remaining shares are with the Claimant and no apprehension has been shown by the Respondents that the Claimant is still intending to sell the shares, in absence of which no prima facie case is made out by the Respondents. The application is found without any substance and is accordingly dismissed."

16. I agree with the conclusion of the learned Arbitrator in this regard.

17. Insofar as the judgment of the learned Single Judge of this Court

in Intertoll ICS Cecons. O & M. Co. (supra) is concerned, the learned

Single Judge of this Court was considering a situation where claim of

both the parties were in the nature of damages. The counter-claim of the

respondent was for the amount higher than the claim made by the

claimant. The respondent on that premise applied for furnishing a

security under Section 17 of the Act before the Tribunal, which the

Tribunal allowed by directing the claimant to furnish security by

subtracting the amount of claim from the amount of the counter-claim

and directed the claimant to furnish security for the differential amount.

The learned Single Judge has also held that the powers of the Tribunal

under Section 17 of the Act are not wide as the Court under Section 9

and the words "subject matter of the dispute" in Section 17 should be

understood as referring to tangible "subject matter of the dispute" which

is different from amount in dispute. Learned Single Judge also held that

the grant of interim relief under Section 17 was required to be preceded

by determination that the party seeking interim relief has the prima facie

case. Learned Single Judge also held that even if the power of the

Tribunal under Section 17 is held to be as wide as under Section 9, it

cannot extend to a direction to provide security in the form of a bank

guarantee in relation to a speculative claim for damages. In other words,

the judgment itself recognize power of the Tribunal to pass an order for

providing security in the nature of bank guarantee, however, not in

relation to a speculative claim for damages. In the case in hand, as

concluded above, the appellants have admitted their liability to the extent

of Rs.21,06,31,200/-. On a higher counter-claim for Rs.49,68,54,750/-

the relevant observation of the learned Arbitrator has been already

reproduced above. In view of the observation of the learned Arbitrator as

reproduced above, this Court refrain from saying anything on the same

except that the same is in the nature of seeking damages. Hence, the

judgment has no application to the facts of this case.

18. Keeping in view the totality of the facts, if the learned Arbitrator

has secured the claim of the respondent before it, and with a finding that

the counter-claim of the appellants is yet to be decided, I do not see any

infirmity in such an order. There is no merit in the present appeal.

The appeal is accordingly dismissed.

IA 2340/2015 (for stay) In view of the dismissal of the appeal, the application is also

dismissed.

(V.KAMESWAR RAO) JUDGE FEBRUARY 13, 2015/akb