Madras High Court
Ken Vander Weele vs Small Industries Development ... on 9 March, 2021
O.S.A.Nos.79 to 81 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 09.03.2021
CORAM :
THE HON'BLE MR.SANJIB BANERJEE, CHIEF JUSTICE
AND
THE HON'BLE MR.JUSTICE SENTHILKUMAR RAMAMOORTHY
O.S.A.Nos.79 to 81 of 2021
O.S.A.No.79 of 2021:
Ken Vander Weele,
Partner, Creation Investments Equitas Holdings LLC,
445, East North Water Street,
#2101, Chicago IL,
United States of America. ... Appellant
Vs.
1.Small Industries Development Bank of India,
756L, Overseas Towers,
Anna Salai,
Chennai, Tamil Nadu.
2.Creation Investments Equitas Holdings LLC,
a wholly owned subsidiary of
Creation Investments Social Ventures Fund II LP,
2711, Centerville Road, Suite 400, Wilmington,
County of New Castle, Delaware 19808,
United States of America.
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3.Creation Investments Social Ventures Fund II LP,
2711 Centerville Road, Suite 400,
Wilmington, County of New Castle,
Delaware 19808,
United States of America.
4.Patric Fisher,
Former Manager, Creation Investments Equitas Holdings LLC,
2711, Centerville Road, Suite 400, Wilmington,
County of New Castle, Delaware 19808,
United States of America.
5.Orbis Financial Corporation Private Limited,
4A, Technopolis, Sector-54, Golf Course Road,
Gurgaon-122 002. ... Respondents
O.S.A.No.80 of 2021:
Creation Investments Social Ventures Fund II LP,
2711 Centerville Road, Suite 400,
Wilmington, County of New Castle,
Delaware 19808,
United States of America. ... Appellant
Vs.
1.Small Industries Development Bank of India,
756L, Overseas Towers,
Anna Salai,
Chennai, Tamil Nadu.
2.Creation Investments Equitas Holdings LLC,
a wholly owned subsidiary of
Creation Investments Social Ventures Fund II LP,
2711, Centerville Road, Suite 400, Wilmington,
County of New Castle, Delaware 19808,
United States of America.
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3.Patric Fisher,
Former Manager, Creation Investments Equitas Holdings LLC,
2711, Centerville Road, Suite 400, Wilmington,
County of New Castle, Delaware 19808,
United States of America.
4.Ken Vander Weele,
Partner, Creation Investments Equitas Holdings LLC,
445, East North Water Street,
#2101, Chicago IL,
United States of America
5.Orbis Financial Corporation Private Limited,
4A, Technopolis, Sector-54, Golf Course Road,
Gurgaon-122 002. ... Respondents
O.S.A.No.81 of 2021:
Patric Fisher,
Former Manager, Creation Investments Equitas Holdings LLC,
2711, Centerville Road, Suite 400, Wilmington,
County of New Castle, Delaware 19808,
United States of America. ... Appellant
Vs.
1.Small Industries Development Bank of India,
756L, Overseas Towers,
Anna Salai,
Chennai, Tamil Nadu.
2.Creation Investments Equitas Holdings LLC,
a wholly owned subsidiary of
Creation Investments Social Ventures Fund II LP,
2711, Centerville Road, Suite 400, Wilmington,
County of New Castle, Delaware 19808,
United States of America.
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O.S.A.Nos.79 to 81 of 2021
3.Creation Investments Social Ventures Fund II LP,
2711 Centerville Road, Suite 400,
Wilmington, County of New Castle,
Delaware 19808,
United States of America.
4.Ken Vander Weele,
Partner, Creation Investments Equitas Holdings LLC,
445, East North Water Street,
#2101, Chicago IL,
United States of America.
5.Orbis Financial Corporation Private Limited,
4A, Technopolis, Sector-54, Golf Course Road,
Gurgaon-122 002. ... Respondents
Prayer: Appeals filed under Order XXXVI Rule 1 of the Original Side
Rules read with Clause 15 of the Letters Patent against the order
dated 6.10.2020, which was corrected vide order dated 18.11.2020,
passed in O.A.No.1137 of 2019.
For Appellants : Mr.P.S.Raman
Senior Counsel
for Mr.P.Vinod Kumar
in all three appeals
For Respondents : Mr.P.H.Arvindh Pandian
Senior Counsel
for Mr.Edward James
for respondent No.1
in all three appeals
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O.S.A.Nos.79 to 81 of 2021
COMMON JUDGMENT
(Delivered by the Hon'ble Chief Justice)
O.S.A.No.80 of 2021 is taken up as the lead matter and the
parties are referred to herein as they are arrayed in such appeal. All
three appeals arise out of a common judgment and order of October
6, 2020, as corrected on November 18, 2020.
2. The appellant, a limited liability partnership firm, is
indignant at being hounded by a party that once did business with
an erstwhile company in which the appellant originally owned the
full complement of its shares. The appellant steadfastly urges a
point of principle: that if a party has not entered into an arbitration
agreement with another, such first party cannot be proceeded
against in an arbitral reference and, consequently, no application
may be moved against it under Section 9 of the Arbitration and
Conciliation Act, 1966.
3. Across the court from the American appellant is an Indian
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public sector undertaking. Such Indian entity, having mostly been
led up the garden path by the second respondent, invokes the group
of companies doctrine, wants the corporate veil to be pierced and
even takes recourse to the string theory – not as a discipline in
science, but as applicable to a puppet – to chase the former holding
entity of a vanishing party with which the first respondent had
business transactions. The essence of the first respondent's case in
the Section 9 proceedings is that the party with which the first
respondent herein entered into an agreement was merely a puppet
whose strings were in the control of the appellant herein and the
same was writ large in how the second respondent herein always
described itself as a wholly-owned subsidiary of the appellant herein
in the several documents and Court proceedings that it filed. The
first respondent also claims that as a consequence of an
undertaking furnished by the second respondent herein in this
Court, by which the appellant herein bound itself, the first
respondent has every right to proceed against the appellant herein
and treat the appellant as a party to the arbitration agreement in
the document where the only eo nomine parties were the first and
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second respondents herein.
4. The matter pertains to a share purchase agreement of
December 11, 2013. The second respondent herein entered into an
agreement with the first respondent for the purchase of shares in a
company by the name of Equitas Holdings Private Limited. Disputes
arose between the two parties which culminated in the second
respondent invoking the arbitration clause contained in agreement
and making a reference for a claim in the nature of specific
performance of the share purchase agreement and seeking an award
commanding the first respondent to sell the relevant shares to the
second respondent.
5. The arbitration clause contained in the relevant agreement
of December 11, 2013 provided as follows:
“11. DISPUTE RESOLUTION
11.1 If any dispute or claim between the Parties
hereto arises out of or in connection with this
Agreement, including its breach, termination or
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invalidity thereof (“Dispute”), the Parties hereto shall
use all reasonable endeavours to negotiate with a
view to resolving the Dispute amicably. If a Party
gives the other Party notice that a Dispute has arisen
(“Dispute Notice”) and the Parties hereto are unable
to resolve the Dispute amicably within 30 days of
service of the Dispute Notice (or such longer period
as the Parties may mutually agree), then the Dispute
shall be referred to arbitration in accordance with the
terms of Clause 11.2 below.
11.2 Subject to Clause 11.1 above, any Dispute shall
be referred to and finally resolved by arbitration, in
accordance with the Arbitration and Conciliation Act,
1996. Unless the Parties are able to agree on a sole
arbitrator within a period of 30 days of such
reference to arbitration being made, the Dispute shall
be referred to a panel of 3 arbitrators, of whom the
Seller shall appoint 1 arbitrator and the Purchaser
shall appoint 1 arbitrator and the 2 arbitrators so
appointed shall appoint the third arbitrator. Any
arbitral award shall be final and binding on the
Parties hereto. The venue of the arbitration shall be
Chennai, India. The language of the arbitration shall
be English.”
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6. The arbitral reference was disposed of by a split award with
two of the three arbitrators rejecting the claim. The arbitral award
of September 19, 2016 was challenged before this Court in
proceedings under Section 34 of the Act.
7. During the pendency of the arbitral reference and prior to
the commencement of the reference, the second respondent
obtained an injunction restraining the first respondent herein from
selling the subject shares in company Equitas Holdings Private
Limited, pending the outcome of the arbitration proceedings. Upon
the claim being rejected, the prayer was carried to the Court in the
proceedings under Section 34 of the Act. The Court renewed the
order of injunction, but put the second respondent herein on terms
by requiring an affidavit of undertaking to be furnished by it to the
effect that if the injunction was ultimately vacated and a loss was
occasioned to the first respondent herein as a consequence of the
injunction, the second respondent would make good the loss. It was
the usual underlying undertaking which is given by a suitor seeking
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an injunction, except that in this case it was an express
undertaking. The original order was modified by a further order of
January 31, 2017 requiring a clearer undertaking to be furnished,
duly stamped.
8. The document that was filed pursuant to the order of
January 31, 2017 was executed by one Ken Vander Weele (the
appellant in O.S.A.No.79 of 2021), claiming to be a partner and
authorised signatory of the second respondent herein. In addition
to such affidavit indicating the assets that the second respondent
held in India, it also detailed the assets of the holding entity of the
second respondent in India and overseas. The appellant herein was
the relevant holding entity, having at one point of time held the
entirety of the paid-up capital in the second respondent herein.
9. Among the assets of the appellant indicated in the relevant
affidavit was the appellant's holding of shares of value then in
excess of Rs.91.99 crore in a company by the name of Sonata
Finance Private Limited.
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10. On or about July 11, 2019, the second respondent's
challenge to the arbitral award stood dismissed. As a consequence,
the injunction restraining the first respondent from dealing with the
shares in company Equitas Holdings Private Limited was dissolved.
On or about October 1, 2019, the first respondent herein wrote to
the second respondent, lodging a claim in excess of Rs.76.77 crore
on account of the damages suffered by it as a consequence of its
shares in company Equitas Holdings Private Limited being injuncted
from being sold and the interest thereon. The first respondent
asserted in the relevant notice that it had suffered an actual loss of
Rs.36,73,55,489/-. It also claimed interest to the extent of
Rs.40,04,14,088/-.
11. It does not appear that either the appellant or the second
respondent issued any immediate reply to the notice of October 1,
2019. It was only by a communication dated December 3, 2019
that Patrick Fisher, who had earlier signed documents on behalf of
the second respondent as its manager, informed the first respondent
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herein that the second respondent had gone into voluntary
liquidation within about 20 days of its challenge to the arbitral
award failing. Incidentally, Patrick Fisher is admittedly the founder
and managing partner of the appellant herein and the appellant has
asserted at several places that the second respondent was floated by
the appellant as an investment arm.
12. Thus, the first respondent was faced with a piquant
situation where the first respondent had suffered damages on
account of the needless injunction that it suffered and perceived
that it had no recourse to the second respondent since it had gone
into liquidation. Within a fortnight or so of the first respondent
receiving the news of the second respondent's virtual legal demise
from Patrick Fisher, the first respondent instituted a petition under
Section 9 of the Act against the appellant, seeking security to cover
its claim. The relevant petition asserted that by its conduct or
association, the appellant herein was an equal party to the share
purchase agreement of December 11, 2013 and the arbitration
clause contained therein as the second respondent. An initial
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injunction was issued in favour of the second respondent which has
now been confirmed by the judgment and order impugned dated
October 6, 2020, as corrected on November 18, 2020. The order
passed is in the nature of attachment before judgment and the
appellant has been restrained from selling its shares in company
Sonata Finance Private Limited till the disposal of the arbitral
reference.
13. In the interregnum, in January, 2020, the first respondent
herein commenced arbitral proceedings against the appellant herein
within the meaning of Section 21 of the said Act. An initial request
was made before the Chief Justice of this Court for the constitution
of an arbitral tribunal; but, on an objection by the appellant herein,
the request has been carried to the Chief Justice of India on the
appreciation that the resultant arbitration may be an international
reference.
14. The appellant asserts that merely because the appellant
was at one point of time the holding entity of the second respondent
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would not imply that the appellant was a party to the share
purchase agreement entered into by the second respondent with the
first respondent herein or that the appellant would be covered by
the arbitration clause contained in the matrix contract involving the
first and second respondents herein. According to the appellant, it
had nothing to do with the share purchase agreement between the
first and second respondents and the association of Patrick Fisher in
connection with such agreement was only in Patrick Fisher's
capacity as a manager of the second respondent company.
15. The first respondent, on the other hand, says that not only
did the second respondent represent in its very description in the
share purchase agreement and elsewhere that it was inextricably
connected with and an integral part of the appellant herein, implicit
in the furnishing of the details of the appellant's assets in the
affidavit pursuant to the order January 31, 2017 was that the
appellant herein remained bound for the obligations of the second
respondent herein. The first respondent contends that once the
second respondent, with direct knowledge of the key officers of the
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appellant, indicated the assets of the appellant to impress this Court
that the second respondent had the requisite funds to discharge its
monetary obligations if the injunction were to be ultimately vacated,
the appellant herein stood roped in, if not as a party to the original
share purchase agreement, but in the nature of a guarantor taking
responsibility to fulfill the obligation of the second respondent
herein, should the second respondent independently fail in such
regard.
16. The first respondent submits that Patrick Fisher may be
seen to have been the controlling mind of both the appellant herein
and the second respondent. The first respondent adds that since the
transactions between the first respondent and the second
respondent were conducted on the second respondent's behalf by
Patrick Fisher and the majority of the documents signed or executed
by the second respondent bear the signature of Patrick Fisher, it
may be seen that it was always the appellant which was a party to
the transaction, though operating in the name and style of the
second respondent.
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17. In support of first respondent's assertion that the appellant
and the second respondent were inexorably connected, such that the
second respondent had only to be recognised as an extension of the
appellant herein, several cases have been brought to bear, including
the judgments reported at (2013) 1 SCC 641 (Chloro Controls India
Private Limited v. Severn Trent Water Purification Inc.), AIR 2019
SC 4449 (Mahanagar Telephone Nigam Ltd v. Canara Bank) and
(2015) 15 SCC 622 (Purple Medical Solutions Private Limited v. MIV
Therapeutics Inc.).
18. In the first of the cases, the Supreme Court referred to the
principle pertaining to commonality of interest and another
pertaining to the interlinking of assets being the guiding factors to
perceive when a non-party to an arbitration agreement could be
regarded to have been so intricately connected to the transaction
covered by the matrix contract so as to be treated as a eo nomine
party thereto and governed by the arbitration agreement. In the
second of the cases, the group of companies doctrine was pressed
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into service to find that a related company could be roped in as a
party to an arbitration agreement. In the third of the cases, the old
principle of lifting the corporate veil was resorted to, to discern
whether the apparent non-party was lurking behind the veil and
such non-party may be treated as an alter ego of the relevant eo
nomine party and be regarded as a party to the arbitration
agreement.
19. The appellant, however, seeks to detract from the line
pursued by the first respondent by referring to the same Mahanagar
Telephone Nigam Ltd case and relying on paragraph 10.2 therefrom.
The passages that the appellant rely on speak of a holding company
and a subsidiary being distinct corporate entities, as would also be a
company and an associate company, and unless the transactions
linked the holding and the subsidiary or one associate with another,
the non-party to the arbitration agreement may not be brought
within the fold of arbitration.
20. After the sea-change in the philosophy of corporate
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jurisprudence in this country over the last decade, the purist may
wonder if the old adage still holds good: that the affairs of a
company include the affairs of its subsidiary. But whether or not the
affairs of a company may include the affairs of its subsidiary, in the
present case, there was an element of the appellant not only lurking
behind but also hovering over the second respondent through the
person of Patrick Fisher, who executed the primary documents on
behalf of the second respondent and appears to have been in control
of such company. Since Patrick Fisher is also the founder and the
managing partner of the appellant herein and the appellant admits
that the second respondent was incorporated as an investment arm,
the overwhelming connection between the appellant and the second
respondent cannot be missed, particularly in the context of the
apparently dishonest conduct on the part of the second respondent
to sneak into oblivion by applying for voluntary liquidation shortly
after the dismissal of the challenge to the arbitral award. There is
every likelihood that Patrick Fisher may be found to have executed
the liquidation papers on behalf of the second respondent.
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21. Indeed, the communication of December 3, 2019
addressed by Patrick Fisher to the first respondent and the
circumstances pertaining to the second respondent as mentioned
therein, would demonstrate that it may have been Patrick Fisher
who was the controlling mind of both the appellant and its
investment arm, the second respondent herein. At any rate, the
issue need not be answered conclusively. Prima facie, it appears
that such a perception would be plausible in how the parties
conducted themselves and how Patrick Fisher projected himself and
the entities under his control.
22. At its inception and even at the time of the execution of
the share purchase agreement on December 11, 2013, the second
respondent was wholly-owned by the appellant herein. This made
the second respondent a veritable proprietorship concern of the
appellant. Just as a proprietorship concern of a human proprietor
does not have any identity independent of the human agency in
control of it, the business and transactions of the second
respondent must be seen to have been merely a part of the business
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and transactions of the appellant herein at the relevant point of
time. If the second respondent can be seen to have functioned as a
mere instrumentality of the appellant herein or the appellant seen to
have operated through the agency of the second respondent herein,
there is sufficient identity between the appellant and the second
respondent for the appellant to be perceived as the other contracting
party with the first respondent herein in the share purchase
agreement of December 11, 2013.
23. The second respondent appears to have been a company.
Curiously, Ken Vander Weele described himself as “a Partner and
Authorized Signatory of the Applicant” in the affidavit of undertaking
executed by him on April 12, 2017. It may have been the proverbial
Freudian slip in the deponent indicating his position in the parent
entity rather than the relevant “Applicant” that found its way in the
affidavit. It is only one of the pointers indicative of how the second
respondent may only have functioned as a unit of the appellant
herein, particularly since the human agencies involved in the
transactions on behalf of the second respondent were in de facto
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control of the appellant herein.
24. One of the grounds urged in passing by the appellant here
is that an order for furnishing security or in the nature of
attachment before judgment would not lie in a claim for damages.
Ordinarily, the principle is beyond question, except that it comes
with certain caveats as when liquidated damages for an ascertained
sum have been indicated or the methodology for assessing damages
has been agreed upon and the breach resulting in damages is
apparent. In the present case, the undertaking furnished was in the
nature of an indemnity to cover any loss that could be caused to the
first respondent herein as a result of the embargo on the sale of its
shares by an order of injunction that could ultimately be found to be
without basis. Generally, the principle that no security may be
furnished in a claim for damages is founded on the twin grounds
that the factum of damages having been suffered has first to be
established and, thereupon, the quantum of damages would require
to be ascertained. However, where the factum of damages is
evident and the quantum payable on account thereof is also
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ascertainable, the principle may not hold good, particularly in the
context of a foreign entity holding ephemeral assets as shares of a
company in the country where the lis originates. If an injunction in
the nature of a Mareva order may be seen to be permissible if the
claim were to be fashioned as a suit, an order in the nature of
security may also be made in the circumstances.
25. Given that the second respondent was born as an
investment arm of the appellant and that the second respondent
operated through the human agencies that controlled the appellant
itself, the righteous indignation displayed by the appellant does not
behove it. There is no doubt that a de jure argument is still
possible, but the facts as they present themselves and the
surreptitious manner in which the second respondent went into
voluntary liquidation smack of a foul odour brought about by the
orchestration of the appellant and the persons in control thereof.
The first respondent's action must be seen, as of now, to hold the
persons responsible for its loss accountable. Viewed from such
perspective, the injunction issued appears to be justified in principle.
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26. At the end of the day, it is the arbitral tribunal which may
have to decide whether the arbitration clause contained in the share
purchase agreement of December 11, 2013 would govern the
appellant and the claim of the first respondent made against the
appellant in the present case. Since a prima facie view has now
been taken, upon noticing that a substantial loss had been caused
to the first respondent herein by the injunction obtained by the
second respondent, in principle, the order impugned does not call
for any great interference.
27. However, the quantum of the security may require some
adjustment. If the claim of the first respondent made on October 1,
2019 is anything to go by, the principal component thereof can be
seen to be to the tune of Rs.36.73 crore. There is no doubt that
such quantum is dated and is the figure as at November 8, 2019.
There is also no doubt that the first respondent herein may have a
claim on account of interest, depending on what date is finally fixed
for ascertaining the damages suffered by the first respondent. For
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the present purpose, if a composite amount of about Rs.60-65 crore
were to be deposited in any nationalised bank, that should be
sufficient cover for the first respondent's claim against the appellant.
28. Accordingly, the order impugned dated October 6, 2020,
as corrected on November 18, 2020, is modified by requiring the
appellant to deposit a sum of Rs.65 crore in any nationalised bank
having a branch in this city within a period of eight weeks. Till such
time that the deposit is made, the injunction in terms of the order
impugned will continue. In the event the deposit is made within the
time permitted, the injunction pertaining to the shares in company
Sonata Finance Private Limited will stand vacated.
29. It is made clear that the observations here are tentative
and will not bind the arbitral tribunal in course of the reference, if
any.
30. In the light of the above order, no further disclosure of
assets need be made by the appellant.
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31. Accordingly, OSA Nos.79 to 81 of 2021 stand disposed of
with the impugned order being modified as aforesaid. There will be
no order as to costs. Consequently, C.M.P.Nos.3071, 3084 and 3104
of 2021 are closed.
(S.B., CJ.) (S.K.R., J.)
09.03.2021
Index : Yes
sasi/suk
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THE HON'BLE CHIEF JUSTICE
AND
SENTHILKUMAR RAMAMOORTHY, J.
(sasi)
O.S.A.Nos.79 to 81 of 2021
09.03.2021
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