Madras High Court
Mr.Kondala Rao Balusu vs Prodapt Solutions Private Limited on 31 January, 2025
Arb.Appeal.No.9 of 2024
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved on : 09.01.2025
Pronounced on : 31.01.2025
CORAM
THE HONOURABLE MR JUSTICE P.B. BALAJI
Arb Appeal NO. 9 OF 2024
& C.M.P.No.20458 of 2024
1.Mr.Kondala Rao Balusu
Rep. by its Power of Attorney holder
Mr.Bhaskar Rao Kurella,
Having address at 3000 Solana Avenue,
#100, Hollywood, Florida – 33024,
United States of America
Also at
19925 Stevens Creek Blvd,
#100, Cupertino, California 95014,
United States of America.
2.Mr.Bhaskar Rao Kurella
3.Mr.Manikyala Rao Papolu
Appellant(s)
Vs
Prodapt Solutions Private Limited
A Company incorporated under Companies
Act, 1956, Having its registered office at
No.25 A & B, South Phase,
5th Cross Street,
Thiru Vi Ka Industrial Estate,
1/24
https://www.mhc.tn.gov.in/judis
Arb.Appeal.No.9 of 2024
Guindy, Chennai – 600 032.
Rep. by its authorised signatory
Mr.Sandeep Somani
Respondent(s)
Prayer: Appeal under Section 37 of the Arbitration and Conciliation Act,
1996 and Section 13 of the Commercial Courts Act, 2015, praying to set
aside the interim order dated 29.07.2024 passed by the Tribunal in
M.A.No.2 of 2024 in Arbitration Case ID No.5 of 2024 and the
consequential direction to pay Rs.1,00,000/- towards costs.
For Applicant(s):
Mr.Anirudh Krishnan
& Mr.R.Abishek
For Respondent(s): Mr.Srinath Sridevan
Senior Counsel
for M/s.VIVRTI Law
JUDGMENT
This is an appeal under Section 37 of the Arbitration and Conciliation
Act, 1996, challenging the order passed by the Tribunal under Section 17 of
the Arbitration and Conciliation Act, dated 29.07.2024 in M.A.No.2 of 2024
in Arbitration Case ID.5 of 2024, directing the appellants herein to furnish
security to the aggregate of INR Rs.60 crores or US dollar equivalent, in the
form of bank guarantees with any Scheduled banks or foreign banks that
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have operation in India.
2.I have heard Mr.Anirudh Krishnan, learned counsel for the
appellants and Mr.Srinath Sridevan, learned Senior Counsel for M/s.VIVRTI
Law, counsel for the respondent.
3.Mr.Anirudh Krishnan, learned counsel for the appellants would
primarily contend that the Arbitral Tribunal had erroneously directed the
appellants to furnish security, ignoring vital evidence, after having parted
contentious issues to be decided after the parties lead evidence before the
Tribunal. He would further contend that the provisions of Order XXXVIII
Rule 5 of CPC which are applicable to arbitration proceedings have also
been ignored. He would further contend that the learned Arbitrator failed to
see that the claim itself being for unliquidated damages and when the
termination was not for any specific cause or even alleging breach on the
part of the appellants, the learned Arbitrator ought not to have directed the
appellants to offer security vide the impugned order dated 29.07.2024.
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4.The sum and substance of the argument of the learned counsel for
the appellants is that, in and by a Share Purchase Agreement, the appellants
sold the Company to the second respondent for a consideration of Rs.65.7
crores. Admittedly, the major client of the appellants was Cisco and after the
sale of the Company in September 2021, Cisco began investigations in May
2022 pertaining to the period 2017 - 2019 and it surfaced to light that gifts
have been given to certain persons in Cisco which was against the policy of
Cisco and thereby the agreement was terminated in 2023, though without
cause. In this regard, the learned counsel for the appellants would submit
that the investigation itself commenced only after the Company had been
sold in September 2021 and even after investigation in May 2022, there was
a gap of one year and three months before the termination notice was issued
in 2023. He would further refer to Cisco having continued their operations
for close to six months till as late as November 2023 and kept the
relationship alive. Therefore, he would submit that if really the violation of
the gift policy was the cause for termination, then Cisco would not have
continued the relationship for a further five to six months.
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5.The learned counsel for the appellants would refer to the Morale
Building clause in the statement of work of Cisco which permits the partner
to introduce Rewards & Recognition Programmes (Gift Vouchers &
Certificates) for their resources associated within the Cisco CMS team at
their own cost. According to the learned counsel for the appellants, the gifts
of i-phones and other vouchers were only within the permissible Moral
Building clause and therefore, there is no violation of the no gift policy of
Cisco. According to the learned counsel for the appellants, the learned
Arbitrator has side stepped the said contention regarding permissibility of
gifts under the Morale Building clause and hence, the order directing furnish
security has to necessarily go on this limited score itself.
6.That apart, the learned counsel for the appellants would also take me
through the several emails and messages exchanged between the parties,
wherein, in most of the mails, there is a reference to the gift being procured
only for the CMS team which is permissible under the rewards and
recognition programme and therefore there is nothing illegal or improper on
the part of the appellants to have acceded to the request of employee of
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Cisco, Sumit Shah. Drawing reference to the Morale Building clause, he
would also highlight that the partner was entitled to work with the team
leads to identify new ways to motivate and drive production and the team
lead being Mr.Sumit Shah, there was nothing illegal or immoral done by the
appellants by gifting vouchers and i-phones to the CMS team. He would
further contend that various denominations of the vouchers and number of i-
phones would itself go to show that it was only for the team and not for any
individual employee of Cisco, thereby not violating the no gift policy of
Cisco.
7.Further, with regard to the two employees of the first respondent
namely, Ms.Jimpy Salhotra and Mr.Vinay Kumar Singh, he would contend
that they were friends of Sumit Shah and therefore the financial transactions
between the said employees and Sumit Shah has nothing to do with the
Company and all this was not gone into by the learned Arbitrator while
holding that there has been irregularities, warranting the order to furnish
security. The learned counsel for the appellants would also state that
admittedly, after the acquisition of the Company within a period of one year,
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a profit to Rs.14 crores had been made by the first respondent Company and
thereafter, there has been no proof of the income that has accrued to the first
respondent Company. Further he would state that the first respondent also
owned immovable properties and the market value of said property had
increased and therefore, in an action for recovery of damages, the learned
Arbitrator ought not to have passed the order directing the appellants to
furnish security. The learned Arbitrator, according to the learned counsel for
the appellants has not even rendered a prima facie finding on causation of
the loss which is a fundamental requirement and therefore, the impugned
order requires interference.
8.The learned counsel for the appellants would place heavy reliance
on the decision of this Court in Dr.Pranay Kumar Singh and Another Vs.
Dr. Agarwals Healthcare Limited and Others in C.M.A.No.1772 of 2022 in
C.M.P.No.12842 & 12844 of 2022 dated 21.12.2022, which later came to be
affirmed by the Hon'ble Supreme Court in SLP.(Civil) Nos.5650 - 5652 of
2023.
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9.According to the learned counsel for the appellants, the ratio laid
down by this Court in Dr.Pranay Kumar Singh's case, were on identical set
of facts and was a binding precedent of the Arbitral Tribunal and despite
placing reliance on the same before the Arbitral Tribunal, the Arbitrator has
not considered the said decision. He would further rely on the following
decisions:
1.M/s.A-1 Biz Solutions Chennai & M/s.Cascade
Billing Center Incorporated (2011 SCC Online Mad 924).
2.Baker Hughes Singapore Pte Vs. Shiv -Vani Oil
and Gas Exploration Services Limited (2014 SCC Online
Bom 1663).
3.C.S.S Corp Private Limited Vs. Space Matrix
Design Consultants Private Limited (2011 SCC Online Mad
2413).
4.Intertoll ICS Cecons O & M Co. (P) Ltd., Vs.
National Highways Authority of India (SLP (C) No.14370-
14370 of 2013).
5.Jail Balaji Industries Limited Vs, Huyquip Systems
Private Limited (2010 SCC Online Cal 200).
6.Raman Tech & Process Engg. Co. Vs. Solanki
Traders (2008) 2 SCC 302).
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10.Per contra, Mr.Srinath Sridevan, learned Senior Counsel appearing
for the respondent would support the findings of the learned Arbtirator and
seek for dismissal of the appeal and primarily contending the following:
i) Scope of an appeal under Section 37 against an interim order under
Section 17 in an international commercial arbitration is very narrow and
limited.
ii) The appeal is against a discretionary order and when a plausible
view has been taken and discretion has been exercises in some manner or the
other, no interference is warranted.
iii) On the facts of the case, the learned Arbitrator has prima facie
found that there has been a breach of representations and warranties given
by the appellants.
iv) The rewards and recognition policy which has been heavily relied
on by the appellants, contending that the the statement of work permits the
some was insignificant and irrelevant in the light of the specific “no gift
policy” of the Company.
v) By an interim order in the arbitration proceedings, all bank
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accounts of the appellants had been de-freezed and a very limited protection
to the tune of Rs.60 crores alone has been directed by passing the impugned
order, and not for the entire claim made by the respondent.
vi) The gifts can be permissible only for Synophic Systems Private
Limited employees and not Cisco employees and when it has been clearly
established that gifts were given to Sumit Shah, an employee of Cisco, there
was a material breach of the representations and warranties of the appellants
which had weighed with the Arbitrator in passing the impugned order.
vii) The sequence of dates tells as tale by itself since after the
investigation began, the two employees, Jimpy Salhotra and Vinay Kumar
Singh left the services of Synophic and thereafter, in July 2023, the
termination was given effect.
viii) For two years the appellant had kept the respondent in dark and
even though he knew about the investigation in May 2022 itself, the same
was not brought to the notice of the respondent and this according to the
learned Senior Counsel, is a willful omission to burk the truth.
11.Taking me through various emails, the learned Senior Counsel
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would contend that Sumit Shah had made direct demands which was clearly
in violation of the no gift policy, especially when the appellant had
sanctioned the gifts and various vouchers to be paid as and when demanded
by the said Sumit Shah. He would further contend that though there is a
specific averment in the affidavit that the appellants have suppressed the
investigation in May 2022 and email dated 05.05.2022 which was well
within his knowledge, the same was not even denied by the appellants
specifically and it was Cisco which found the breach and not the respondent
which made things more evident and easier for the respondent to make the
claim against the appellants.
12.Lastly, he would submit that once prima facie breach is established
the wrong doer is certainly rendered liable and therefore, the discretion
exercised by the learned Arbitrator cannot be found fault with.
13.The learned Senior Counsel for the respondent would place
reliance on the following decisions:
1.Wander Limited & Another Vs. Antox India Private
Limited (1990 (Supp.) SCC 727).
2.Frank Reddaway and Frank Reddaway & Co.,
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Limited Vs. George Banham & George Banham & Co.,
Limited reported in H.L(E). 1896.
3.Dinesh Gupta and Others Vs. Anand Gupta and
Others (2020 SCC Online Del 2009).
14.Before concluding, the learned Senior Counsel would also give a
fair concession with regard to the quantification of the order directing
furnish security. On instructions, learned Senior Counsel submitted that
admittedly, a said sum of Rs.14 crores has accrued to the respondent
Company by way of profit and hence, in all fairness, the respondent is
willing to adjust the said sum from and out of Rs.60 crores directed to be
secured by the Arbitrator and he would conclude his submission stating that
the order can be modified from Rs.60 crores to Rs.46 crores.
15.I have carefully considered the submissions advanced by the
learned counsel for the applicants and the learned Senior Counsel appearing
for the respondent.
16.The first appellant approached the respondent expressing his
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intention to sell 100% equity shares in Synophic Systems Private Limited.
The respondent evinced interest in acquiring Synophic India and Synophic
USA. After deliberations and due diligence exercise undertaken, in and by
Share Purchase Agreement dated September 2021, the respondent purchased
100% equity shares in Synophic India for a consideration of
Rs.65,75,00,000/-. It is an admitted fact that the decisive factor in fixing the
consideration was the contract that Synophic enjoyed with the Multinational
Company, Cisco. Cisco admittedly had entered into a contract with
Synophic Inida under separate statements of work and it is also an admitted
case that substantial business and revenue of Synophic India as well as USA
was only on account of the business with Cisco.
17.According to the respondent, they came to know that the appellants
had suppressed material facts and circumstances, especially the investigation
conducted by Cisco which revealed that Cisco employees have been given
gifts by the appellants, which was against the no gift policy of Cisco.
According to the respondent, this led to Cisco terminating the agreement
with the respondent and in order to recover losses and damages suffered, the
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respondent has initiated the arbitration proceedings against the appellants.
18.It is the case of the appellants that there is no link between the
termination and gifts given by the appellants as admittedly the termination
notice was without citing any reason. It is the further case of the appellants
that even the gifts given by appellants were permissible under the Moral
Building clause and further, Cisco continued with the respondent for about
five to six months with some of the SOWs. Therefore, according to the
appellants, the alleged losses claimed by the respondent Company were not
on account of any alleged breach of representations and warranties given to
the respondent Company and the termination of the Cisco contract with
Synophic was not on account of any action or inaction on the part of the
appellants.
19.It is the further contention of the learned counsel for the appellants
that the respondent had carried out due diligence for several months prior to
the acquisition and post transaction events having no nexus with the
termination of Cisco contract cannot be put against the appellants.
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20.It is the case of the respondent that there has been serious breach of
Cisco ethics policies and the Share Purchase Agreement was vitiated by non
disclosure of material facts, especially the investigation conducted by Cisco
in May 2022 and also because of the indulgence in activities which are
against the policy of Cisco and all these amounted to breach of the
representations and warranties given by the appellants in the Share Purchase
Agreement dated 18.09.2021.
21.I am conscious of the fact that I am deciding an appeal under
Section 37 of the Arbitration and Conciliation Act, 1996. The Courts have
consistently held that when a Court of first instance has exercised discretion
one way or other, the Appellate Court cannot interfere with the exercise of
such discretion and substitute its own discretion, unless the discretion has
been shown to have been exercised arbitrarily or capriciously or perversely,
ignoring settled principles of law, regulating grant or refusal of interim
orders. It is also settled law that an appeal against the exercise of discretion
is only an appeal on principle and the Appellate Court cannot reassess
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materials and reach a different conclusion if the conclusion reached by the
Court of first instance was reasonably possible, on the available materials.
22.In the light of the settled legal position, I am mindful of my
limitation in interfering with the decision of the Arbitrator, especially an
order which has been passed exercising discretion vested with the Arbitrator,
that too in the interlocutory stage. Keeping this in mind, I have carefully
gone through the impugned order passed by the learned Arbitrator. The
learned Arbitrator has elaborately discussed the rival submissions advanced
by the learned counsel for the parties and conscious of the fact that an
interim attachment has been sought for and the damages in respect of the
claim for damages and that damages are yet to be ascertained, proceeded to
hold that the relief of recovery of the consideration paid by the respondent to
the appellants can certainly be secured. The learned Arbitrator has also
factored the approximate value of the immovable properties which have
been offered as security and directed security to be offered only for the
remaining Rs.60 crores.
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23.The prima facie finding arrived at by the learned Arbitrator that the
appellants have indulged in unethical acts is based on the assessment of the
documents made available before the Sole Arbitrator, especially there being
a direct breach of the express warranties set out in the Share Purchase
Agreement at Annexure A. It is not as if the Arbitrator has called upon the
appellants to secure the entire claim made by way of damages. The learned
Arbitrator has discussed the facts in issue in a detailed manner. The
contentions of the appellants regarding the gifts for CMS team and not for
employees of the Cisco has also been elaborately discussed and the
Arbitrator referring to email communications and investigation by Cisco in
2022 revealing certain corrupt practices and unethical acts of employees of
the appellants with Cisco officials has prima facie found that there was a
breach of the representations and warranties given by the appellants and
thought it fit to secure at least a portion of the total claim made by the
respondent, limiting it to the consideration that passed under the Share
Purchase Agreement without directing security to be furnished in respect of
any other liquidated claims / portions. The Arbitrator has also considered the
decision relied on by the learned counsel for the appellants, especially the
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decision of this court in Dr.Pranay Kumar's case, which according to the
learned counsel for the appellants has a striking resemblance to the facts of
the present case. The learned Arbitrator has been conscious of settled legal
principles in deciding the application for interim attachment and as a first
step, has only directed the appellants to furnish security to the tune of Rs.60
crores alone as prayed for in the application by the respondent.
24.Though it is contended by the learned counsel for the appellants,
the acquisition of the Company was in 2021 and investigation by Cisco was
much later in May 2022 and therefore, the appellants cannot be accused of
suppression, it is not the question of suppression of the investigation which
is relevant but the suppression of the breaches committed by violating the
gifts and ethics policy of Cisco which has a material bearing and rightly the
Arbitrator has rendered a prima facie finding that the appellants had indeed
indulged in certain unethical acts. Such finding is based on available
documentary evidence and therefore, the findings of the Arbitrator cannot be
found fault with.
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25.The learned Arbitrator has also adverted the fact that though there
has been no reason for termination, a reason could be inferred by attendant
circumstances and the quantum of damages would be decided based on
appropriate proof led by the parties during the stage of evidence in the main
arbitration proceedings. While directing the appellants to furnish security for
Rs.60 crores or 30 million US Dollar equivalent, the learned Arbitrator has
also modified the earlier interim orders and enable the appellants to operate
their bank accounts. The learned Arbitrator has also referred the undertaking
of the appellants that they would not alienate the properties set out in
Schedule B in the Judges Summons in O.A.No.217 of 2024 and undertaking
to other immovable properties belonging to the appellants. Though decisions
have been cited by the learned counsel on either side and on going through
the same, I find that the ratio laid down in the said judgments relating to
principles of Order XXXVIII Rule 5 of CPC, Section 17 of the Arbitration
and Conciliation Act and the scope of Section 37 appeal under the
Arbitration and Conciliation Act are all fairly well settled by now and there
is no need to reiterate the said principles one again.
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26.However, since specific reference has been made to the decision of
this Court in Dr.Pranay Kumar's case, contending that it is on almost
identical facts, I am proceeding to discuss the said case in some detail. That
was a case where there were Business Transfer Agreements and Service
Agreements executed on a particular date. The appellants were
Ophthalmologists practicing at Indore. The first respondent and the
appellants negotiated for sale of the respondents 2 and 3 partnership firms
for a total consideration of Rs.16.43 crores. Under the Service Contract
Agreements, the appellants were to be paid consultancy fee of
Rs.3,50,00,000/- per month. The agreement also provided for a lock-in
period of five years. However, within a year and half of the agreement being
entered into, disputes arose and proceedings were initiated under the
Arbitration and Conciliation Act. An application under Section 17 was filed
seeking the appellants to furnish security to the tune of Rs.16.43 crores
alleging that the appellants were working against the interest of the first
respondent and the appellants were also attempting to set up practice in a
new hospital and the appellants would have no means to pay damages in the
event of the first respondent succeeding.
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27.This Court noting that the claim petition was yet to be filed, merely
on pleadings in a Section 17 application, the Arbitrator could not have
presumed that the termination of the contract had resulted in a loss for the
first respondent and under such circumstances, proceeded to set aside the
order directing the appellants to furnish security. What mainly weighed with
this Court is that when the obligations under the Business Transfer
Agreements had been completed and the first respondent had taken over the
management and assets of the respondents 2 and 3 and even in resepct of
Services Contract, the appellants had cooperated for over two years and they
had given reasons for terminating the contract, all these could be tested only
through evidence. This Court set aside the order directing the appellants to
furnish security to the tune of Rs.16.43 crores. Though on first reading, it
appears that the facts in the said case are quite similar to the facts of the
present case, on careful reading of the said decision, I find that no doubt, in
the present case also claim statement has not yet been filed as in Dr.Pranay
Kumar's case. However, the discretion exercised by the Arbitrator in the
present case is based on materials available before him which has led the
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Arbitrator to prima facie arrived at a finding that there has been a material
breach committed by the appellants and therefore, a portion of the claim can
be secured. Such exercise of discretion, in my opinion is not perverse.
28.Conscious of the fact that the powers available under Section 37 of
the Act to interfere with the discretionary order passed by the learned
Arbitrator and having found that the prima facie findings arrived at by the
Arbitrator are neither perverse nor illegal and have been arrived at based on
documentary evidence available on record and after giving due consideration
to all contentions raised by the parties, I do not deem it fit to interfere with
the said order of the Arbitral Tribunal. However, in view of the concession
shown by the respondent coming forward to adjust the profit of Rs.14 crores,
it would be appropriate to modify the order of the learned Arbitrator by
restricting the security to be furnished to Rs.46 crores alone instead of Rs.60
crores.
29.In fine, the appeal is partly allowed and the appellants are directed
to furnish security for Rs.46 crores or US dollar equivalent, instead of Rs.60
crores, as directed by the learned Arbitrator, in the form of bank guarantees
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with any Scheduled banks or foreign banks that have operation in India.
Connected Civil Miscellaneous Petition is closed.
31-01-2025
ata
P.B.BALAJI,J.
ata
https://www.mhc.tn.gov.in/judis
31.01.2025
https://www.mhc.tn.gov.in/judis
