Madras High Court
Northern Arc Capital Limited vs Feed Back Infra Private Limited on 2 February, 2022
Arb.O.P.No.129 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE D : 02.02.2022
CORAM:
The Hon'ble Mr. Justice SENTHILKUMAR RAMAMOORTHY
Arb.O.P.(Comm. Div)No.129 of 2021
Northern ARC Capital Limited,
Rep. by its authorized signatory
Mr.Veda Raguraj J
Having office at
10th Floor, Phase I, IIT Madras Research Park,
Kanagam Village, Taramani,
Chennai – 600 113. ... Petitioner
Vs
1.Feed Back Infra Private Limited,
Rep. by its authorized signatory
15th Floor, Building 9B,
DLF Cyber City Phase – III,
Gurgaon – 122 002, Haryana.
2.Mission Holdings Private Limited,
Rep. by its authorized signatory,
No.311, 3rd Floor, Vardhaman, Plaza Pocket 7,
Plot No.6, Sector 12, Dwarka,
New Delhi – 110 078. ... Respondents
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PRAYER : This Petition has been filed under Sections 11(5) and 11(6) of
the Arbitration and Conciliation Act 1996 praying to appoint an Arbitrator
to adjudicate the disputes between the petitioner and the respondents in
terms of Clause 15 of the Facility Agreement dated 29.03.2019.
For Petitioner : Mr.Anirudh Krishnan
For Respondents : Mr.M.Nirmalkumar for R-1
Ms.Aditi Sharma for R-2
ORDER
A lender, Northern ARC Capital Limited, has filed this petition
against the borrower, Feedback Infra Private Limited, and the guarantor,
Mission Holdings Private Limited, for the appointment of a sole arbitrator.
2. The borrower, who is the first Respondent herein, approached
the Petitioner seeking loan facilities. Thereafter, the Petitioner and the first
Respondent entered into a Facility Agreement dated 29.03.2019(the FA) by
which the Petitioner agreed to extend a loan of Rs.2,50,00,000/- to the first
Respondent. Such loan was repayable with interest thereon at 13% per
annum in 24 equated monthly installments. The FA admittedly contains an
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arbitration clause in Clause 15 thereof. In connection with the grant of loan
facilities, several other documents and agreements were executed
contemporaneously. These documents or agreements included a deed of
hypothecation, demand promissory note, special power of attorney, deed of
guarantee, facility letter, etc. Of particular relevance to this case is the Deed
of Guarantee dated 29.03.2019 (the Guarantee Deed), which was executed
by the second Respondent in favour of the Petitioner. The Guarantee Deed,
which is both unconditional and irrevocable, does not contain an arbitration
clause.
3. On 08.12.2020, the Petitioner issued a loan recall notice on the
ground that the first Respondent had failed to discharge its obligations
under the FA. Upon issuance of the loan recall notice, the entire amount
due and payable under the FA became repayable immediately. On the same
date, the Petitioner also issued a notice to the second Respondent under the
Guarantee Deed calling upon the second Respondent to pay a sum of
Rs.1,74,53,291/- by 14.12.2020. Since payments were not made either by
the borrower or the guarantor, a dispute arose. The Petitioner issued a
notice under Section 21 of the Arbitration and Conciliation Act, 1996 (the
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Arbitration Act) on 11.05.2021 and proposed the name of a sole arbitrator.
In spite of receipt of such notice, the Respondents did not accept the person
proposed by the Petitioner. The present petition is filed in the above facts
and circumstances.
4. The Petitioner contended that the FA is the mother agreement
and that the other documents executed contemporaneously therewith are
ancillary thereto. Therefore, it is contended that these documents are closely
inter-connected and constitute an integrated whole. The second contention
of the Petitioner is that the arbitration clause in the FA is wide and,
therefore, any dispute arising out of the Guarantee Deed is also within the
scope of the said arbitration clause. The third contention of the Petitioner is
that the signatory to the FA on behalf of the first Respondent was also the
signatory to the Guarantee Deed on behalf of the second Respondent. This
underscores the inter-connected nature of the parties. The last contention of
the Petitioner was that the second Respondent is the the largest shareholder
of the first Respondent as evidenced by the list of shareholders of the first
Respondent as on 31.03.2020. In specific, the Petitioner pointed out that the
second Respondent holds 67,34,500 shares in the first Respondent
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aggregating to 41.16% of the total paid-up share capital. Thus, according
to the Petitioner, the first and second Respondents are definitely companies
constituting a group of companies. Keeping in mind the inter-connected
nature of the FA and the Guarantee Deed and the fact that both the
Respondents are part of a group of companies with the second Respondent
being effectively in control of the first Respondent, the dispute between the
Petitioner, on the one hand, and the two Respondents, on the other, may be
referred to arbitration notwithstanding the fact that the second Respondent
did not sign the FA.
5. The Petitioner referred to the following judgments either in
support of the above contentions or to place and distinguish the same:
(i) Chloro Controls India Private Limited v. Severn Trent Water
Purification Inc. and others, (2013) 1 SCC 641(Chloro Controls), wherein,
at paragraph 71 to 73, the Hon'ble Supreme Court formulated the group of
companies doctrine and held that when there are several inter-connected
agreements executed by a group of companies, the ends of justice may
require that the dispute arising under all the agreements be referred for
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arbitration although some parties may not be signatories to the agreement
containing the arbitration clause.
(ii) Ameet Lalchand Shah and others v. Rishabh Enterprises and
Another 2018 SCC Online 7865(Ameet Lalchand Shah), wherein the Delhi
High Court extended the principles laid down in Chloro Controls to
domestic arbitration.
(iii) Cheran Properties Limited v. Kasturi and Sons Limited and
others (2018) 16 SCC 413 (Cheran Properties Limited), wherein, at
paragraph 23, the Hon'ble Supreme Court referred to and relied upon the
group of companies doctrine and concluded that a non-signatory may be
bound by the arbitration clause if such intention is evident from the
agreements between a group of companies.
(iv) Fiona Trust & Holding Corporation and Others v. Yuri
Privalov and others (2007) 1 AII ER (Comm) 891.
(v) S.N.Prasad, Hitek Industries (Bihar) Limited v. Monnet
Finance Limited and others (2011) 1 SCC 320(S.N.Prasad), wherein the
Hon'ble Supreme Court held that the convenience and expediency of the
Petitioner is not the primary consideration and that a non-signatory
guarantor cannot be joined as a party to arbitral proceedings if such
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guarantor had not executed the loan agreement containing the arbitration
clause.
(vi) STCI Finance Limited v. Sukhmani Technologies Pvt. Ltd. and
others 2016 SCC Online Del 6650 (STCI Finance Limited), wherein the
Hon'ble Delhi High Court followed S.N.Prasad and concluded that the
relevant deed of guarantee is a separate contract. Moreover, the Court held
that a non-signatory claiming through or under a signatory could seek
reference of a dispute to arbitration, but a signatory could not take recourse
to the group of companies doctrine to extend an arbitration agreement to a
non- signatory.
6. The first Respondent cited force majeure (COVID 19) as the
reason for non payment and denies the existence of a dispute. However,
without prejudice, the first Respondent agreed that the arbitration clause in
the FA is binding on it and that the dispute between the Petitioner and the
first Respondent is clearly referable to arbitration.
7. The second Respondent, however, contested the applicability
of the arbitration clause to disputes arising out of the Guarantee Deed. The
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first contention of the second Respondent was that the arbitration clause is
not referred to in the Guarantee Deed. Therefore, the second Respondent
contended that the arbitration clause is certainly not incorporated by
reference into the Guarantee Deed. The second contention of the second
Respondent was that the Guarantee Deed is distinct and separate, and that
cause of action would arise under the Guarantee Deed only if notice is
issued in terms of the Guarantee Deed. The third contention of the second
Respondent was that the Guarantee Deed contains a distinct and separate
dispute resolution clause, which does not even refer to the FA or the
arbitration clause contained therein.
8. The second Respondent further submitted that the judgment in
Chloro Controls is distinguishable because all the agreements therein were
intended for one purpose and were in furtherance of the shareholders
agreement. The said contention was made by drawing reference to
paragraphs 63,73,74 and 105 of the judgment. For the same reason, the
second Respondent contended that Ameet Lalchand Shah is also
distinguishable by drawing reference to paragraph 12.5 thereof. The second
Respondent relied extensively on the judgment in STCI Finance Limited
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and, in particular, paragraphs 29 to 31 thereof to contend that disputes
under the Guarantee Deed cannot be referred for arbitration. The second
Respondent, however, brought to the notice of this Court the judgment in
Fernas Construction Co. Inc. v. ONGC Petro Additions Ltd., 2019 SCC
Online Del 8580 (Fernas Construction), wherein, at paragraphs 21 to 23,
the Delhi High Court held that the guarantor could be bound by the
arbitration clause in the facility agreement. However, learned counsel for
the second Respondent pointed out that the Court recorded an express
finding that the guarantor was more than a guarantor and had provided full
financial and technical support to the borrower for the performance of the
contract. For that reason, the second Respondent contended that the
judgment is distinguishable. The second Respondent also referred to and
relied upon the judgment in STCI Finance Limited v. Shreyas Kirti Lal
Doshi and Others, 2020 SCC Online Del 100, wherein, at paragraphs 20
and 26, the Delhi High Court held that the non-signatory was not bound by
the arbitration clause in the facility agreement because there was nothing in
the deed of guarantee which disclosed the intention to incorporate the
arbitration clause in the facility agreement into the deed of guarantee.
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9. By way of rejoinder, the Petitioner pointed out that it was not
relying on incorporation by reference. The judgment in Chloro Controls
does not deal with incorporation by reference; instead, it provides for the
reference of a dispute for arbitration if the agreements are composite and
inter-connected, the parties are part of a group of companies, even though
some parties may not be signatories to the principal agreement. A specific
reference was made to paragraphs 13.7 and 34 of Cheran Properties to
emphasize the change in judicial approach to the question of referring a
dispute even as regards non-signatories. The Petitioner also contended that
the law laid down in S.N.Prasad is therefore no longer applicable. The last
contention of the Petitioner was that the first Respondent had expressly
agreed to waive any objection to jurisdiction. Therefore, the Petitioner is on
a stronger wicket than the requesting party in the cited precedents and the
request for reference cannot be refused by the second Respondent.
10. In view of the above contentions, the arbitration clause in the
FA should be subjected to close scrutiny. The said clause is set out below:
''Jurisdiction and Governing Law:
15.1 This Agreement shall be governed and
construed in accordance with the laws of India and
subject to the provisions of Clause 15.2, the parties
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hereby submit to the exclusive jurisdiction of courts and
tribunals at Chennai. The submission to the jurisdiction
of the courts and tribunals of Chennai is for the benefit
of the Lender only and shall not (and shall not be
construed so as to limit the right of the Lender to take
proceedings in any other court of competent jurisdiction,
nor shall the taking of proceedings by the Lender in any
one or more jurisdictions preclude the taking of
proceedings by the Lender in any other jurisdiction
(whether concurrently or not) if and to the extent
permitted by law.
15.2 If any dispute arises between the parties
hereto during the subsistence of this Agreement or
thereafter, in connection with the validity, interpretation,
implementation or alleged breach of any provision of
this Agreement, the dispute shall be referred to a sole
arbitrator who shall be a neutral and suitably qualified
third party appointed by the Lender.
15.3 The place of arbitration shall be at
Chennai. The arbitration proceedings shall be governed
by the Indian Arbitration and Conciliation Act, 1996.
The arbitration proceedings shall be conducted in
English and the arbitral award shall be recorded in
writing.''
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11. The above arbitration clause applies to disputes arising
between the parties. The expression “parties” is a defined term, which refers
to the Lender and Borrower, as defined in the FA. The definition of
borrower in the FA does not extend to the second Respondent. Thus, on a
textual reading, the arbitration clause in the FA is restricted to disputes
between the Petitioner and the first Respondent. However, Sub-clause (2) of
Clause 15 indicates that the arbitration clause would apply to a dispute
between the parties in connection with the validity, interpretation,
implementation or alleged breach of any provision of the FA. The FA
contains a definition of the expression “Facility Documents”. The said
expression is defined to include the FA, the facility letter, the security
documents and any other agreement, document or deed executed pursuant
thereto or in connection therewith and designated as such by the lender from
time to time. The expression “Security Document” is also defined and
“means the Agreement of Hypothecation and any other instrument or
document as may be executed by the Borrower to secure the Facility or as
may be designated as such by the Lender from time to time.” Given the
expansive language of the definitions of Facility Agreement and Security
Documents, the Guarantee Deed would qualify as both a Facility Document
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and Security Document. Clause 9 of the FA, which deals with events of
default, makes the failure to perform a covenant or undertaking under any of
the Facility Documents an event of default. Thus, there is basis to conclude
prima facie that the FA and the Guarantee Deed are inter-connected and
may be construed as composite agreements. Even otherwise, the second
Respondent does not deny that the Guarantee Deed was executed in order to
guarantee fulfilment of obligations under the FA.
12. In order to ascertain whether the parties intended to extend the
arbitration clause to the guarantor, the Guarantee Deed should also be
examined. Clause 2.3 of the Guarantee Deed provides that the obligations
of the guarantor are separate and distinct and are imposed as a primary
obligor and not merely as a surety, on a full indemnity basis. After stating
that the obligations are as a primary obligor, Clause 2.3 proceeds to record
that the obligations of the guarantor as an indemnifier are triggered if the
obligations of the borrower become void, voidable, unenforceable or
ineffective for any reason. Thus, when read as a whole, the obligations of
the guarantor are contingent on the default of the borrower or principal
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debtor. The Guarantee Deed contains a dispute resolution clause in Clause
19 thereof. Clause 19 is as under:
''19. JURISDICTION
19.1 The Guarantor agrees that the courts
and tribunals in Chennai shall have jurisdiction to
settle any disputes which may arise out of or in
connection with this Guarantee and that accordingly
any suit, action or proceedings (together referred to as
Proceedings) arising out of or in connection with this
Guarantee may be brought in such courts or the
tribunals and the Guarantor irrevocably submits to and
accepts for itself and in respect of its property,
generally and unconditionally, the jurisdiction of those
courts or tribunals.
19.2 Nothing contained in this Clause shall
limit any right of the Lender to take Proceedings in any
other court or tribunals of competent jurisdiction, nor
shall the taking of Proceedings in one or more
jurisdictions preclude the taking of Proceedings in any
other jurisdiction whether concurrently or not and the
Guarantor irrevocably submits to and accepts for itself
and in respect of its property, generally and
unconditionally, the jurisdiction of such court or
tribunals and the Guarantor irrevocably waives any
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objection it may have now or in the future to the laying
of or the venue of any Proceedings and any claim that
any such Proceedings have been brought in an
inconvenient forum.
19.3 To the extent that Guarantor may in any
jurisdiction claim for itself or its assets immunity from
suit, execution, attachment (whether in aid of
execution, before judgment or otherwise) or other legal
process and to the extent that in any such jurisdiction
there may be attributed to itself or its assets such
immunity (whether or not claimed), the Guarantor
hereby irrevocably agrees not to claim and hereby
irrevocably waives such immunity.''
Upon perusal of the above clause, it is indisputably wide in scope and
covers all disputes arising out of or in connection with the guarantee.
Besides, by Sub-clauses 2 and 3 of Clause 19, the guarantor has waived its
right to raise objections to jurisdiction even if proceedings are instituted by
the lender in any courts or tribunals other than the courts or tribunals
specified in sub-clause 1 thereof.
13. Before examining whether the non-signatory guarantor is
bound by the arbitration clause in the FA, a preliminary issue should be
addressed. The said issue relates to the scope of Section 11 proceedings.
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In Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC
1(Vidya Drolia), the Hon'ble Supreme Court dealt with the scope of
inquiry under Section 11 extensively. While exercising jurisdiction under
Section 11, the Hon'ble Supreme Court concluded that a prima facie review
of the existence, including validity, of the arbitration agreement is justified.
Indeed, in paragraph 147.6, the Hon'ble Supreme Court concluded that an
absolute ''hands off'' approach would be counter productive qua
arbitration. The merits of this dispute should be viewed in light of the
principles laid down in Vidya Drolia.
14. In Chloro Controls, the Hon'ble Supreme Court formulated
tests to decide whether a non-signatory is bound by the arbitration
agreement in the primary contract. The first criterion specified by the
Hon'ble Supreme Court is that the relevant contracts should be closely inter
connected and constitute a composite contract. In this case, the two
contracts in question are the FA between the lender and borrower and the
Guarantee Deed between the lender and guarantor. Although a deed of
guarantee may constitute a separate contract for certain purposes, the
liability of the guarantor is triggered only if the borrower or principal debtor
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defaults. Therefore, it is a secondary obligation which cannot be looked at
in isolation from the primary obligation of the borrower or principal debtor.
Thus, the first test formulated in Chloro Controls is certainly satisfied in
this case. The second test formulated in Chloro Controls is that the non
signatory should be a part of a group of companies to which the signatory
belongs. A perusal of the FA and the Guarantee Deed evidence that the
signatory to the two agreements on behalf of the first and second
Respondents, respectively, is the same individual. Moreover, the Petitioner
has placed the share holding pattern of the first Respondent as on
31.03.2020. The said share holding pattern discloses that the second
Respondent is the single largest shareholder of the first Respondent holding
67,34,500 shares, which constitutes about 41.16% of the paid-up share
capital of the first Respondent. Hence, there is little doubt that the two
companies are part of a group of companies. The last aspect to be
considered is whether the agreements disclose the intention to bind the non-
signatory/ second Respondent to the arbitration clause in the FA. As set out
earlier, the arbitration clause in the FA, on a textual reading, applies only to
parties as defined therein. However, as dilated upon in paragraph 11 above,
sub-clause 15.2 expands the scope of the arbitration clause and extends the
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same to disputes arising out of defaults under the Facility Documents,
including the Guarantee Deed. Besides, the jurisdiction clause in the
Guarantee Deed is wide and applies to any dispute arising out of or in
connection with the guarantee. Significantly, the jurisdiction clause in the
Guarantee Deed contains an express waiver by the guarantor of any
objections to jurisdiction if the lender approaches any court or tribunal,
thereby indicating its intention to submit itself to the jurisdiction of any
court or tribunal, including arbitral tribunal, which is approached by the
lender. When viewed collectively, there is sufficient basis to conclude that
the mother agreement is the FA and the Guarantee Deed is ancillary thereto;
the guarantor under the Guarantee Deed is more than a guarantor inasmuch
as it is the single largest and controlling shareholder of the first Respondent.
Besides, the guarantor agreed to accept the jurisdiction of any court or
tribunal if the lender raises a dispute with the guarantor. Thus, the principle
underlying the Fernas Construction decision applies to this case, and the
Petitioner has fulfilled, in substance, the parameters set out in Chloro
Controls to deviate from the general rule as regards non-signatories to an
arbitration clause. As a corollary, there is sufficient basis to refer the dispute
between the lender, on the one hand, and the borrower and guarantor, on the
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other, to arbitration. Given the composite nature of the agreements and the
inter-connected nature of liabilities, it would also subserve the interest of
justice.
15. Accordingly, Arbitration O.P.(Comm. Div)No.129 of 2021 is
allowed by appointing Mr. Justice K.Ravichandrabaabu, a retired Judge of
this Court, Flat ID, Crescent Castle Apartment, 13, Second Crescent Park
Road, Gandhi Nagar, Adyar, Chennai – 600 020(Mobile No. 94980 33336)
as the Sole Arbitrator. The Sole Arbitrator is directed to enter upon
reference and adjudicate the dispute between the parties in accordance with
law. The Sole Arbitrator may fix his fees and expenses in relation to such
arbitral proceedings.
02.02.2022
Index :Yes
Internet :Yes
rrg
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SENTHILKUMAR RAMAMOORTHY J.,
rrg
Arb.O.P.No.129 of 2021
02.02.2022
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