2019 (3) TMI 1936 - HC - SEBI

Arbitration petition challenges an award passed by a sole arbitrator in a reference arising out of disputes concerning a share purchase contract - HELD THAT - Having failed in justifying the award on either of the two issues on legality considered by the learned arbitrator, learned Counsel for the Respondents seeks to rely on the submissions contained in his affidavit in reply, which are termed as cross-objections. Relying on these objections, learned Counsel seeks to sustain the award challenging its other findings, which are against the Respondents. I am afraid, it is not open to a respondent in an arbitration petition under Section 34 of the Act to rely on any cross-objection for setting aside the award (i.e. its reasons), or, indeed, for sustaining it (i.e. its operative part) when the challenger is able to justify his challenge Such application cannot be termed as an appeal from the award and, if that is so, there is no question of importing the provisions or, indeed, the principle, of Order 41 Rule 22 into it on an analogy of an arbitration appeal under Section 37 of the Act. Anomalous consequences would follow, if we were to do so and allow the opponent to a challenge petition under Section 34 to raise cross-objections to an arbitral award, whether towards its reasoning or its operative part, in the event the challenger succeeds in his challenge under Section 34. First of all, that would require us to read Section 34 in an unnatural way. We would have to hold that a cross-objection is not a recourse to a Court against an arbitral award. Section 34, in its very opening line (sub-section (1)), provides that recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-sections (2) and (3). On the other hand, the right to take a cross-objection under Order 41 Rule 22 is nothing but an exercise of the same right of appeal which is given to an aggrieved party. Secondly, one would be at a loss to find applicable grounds which can be taken in such cross-objections, though, in the absence of any other indication, and also logically, it would have to be supposedly the same grounds which are provided for an application for setting aside an award. Thirdly, there is no provision in law for making such cross-objections in any particular form. If there is no form unlike the one provided in Order 41 Rule 22 and the objections in a challenge petition could be in the form of a reply to the petition, there is no indication how such objections are to be treated in case the challenge petition under Section 34 is rejected. Should a cross-objection be nevertheless heard and determined in that case, just as a cross-objection would under sub-rule (4) of Order 41 Rule 22. There is the unanswered question of time of such cross-objections. A strict time-line is provided for a challenge petition under Section 34. Should there be no time for cross-objections and should there be any consequences for non-filing of such objections within that time. We are driven to find out these answers outside Section 34, and that too when the Courts are unanimous that it is a complete code. This Court is not inclined to consider the cross-objections stated by the Respondents in their reply to the arbitration petition for sustaining the final award by impugning its reasons.

Summary

Issues Involved:
1. Breach of the Share Purchase Agreement (SPA) conditions by the Respondents.
2. Legality and enforceability of the share repurchase option under the SPA.
3. Validity of the arbitrator's findings and conclusions.

Detailed Analysis:

1. Breach of the Share Purchase Agreement (SPA) Conditions by the Respondents:
The arbitration petition challenges an award passed by a sole arbitrator concerning disputes arising from a share purchase contract. The SPA, dated 8 December 2007 and amended on 21 April 2008 and 23 April 2008, required Respondent No. 1 to restructure the Percept Group by 31 December 2007, later extended to 30 June 2008. The Petitioner claimed the Respondents failed to complete the restructuring within the stipulated time. The arbitrator concluded that the Respondents breached their obligations under the SPA, as they did not achieve 100% restructuring by the agreed date. The excuse of completing 80% restructuring due to unfavorable market conditions was not accepted.

2. Legality and Enforceability of the Share Repurchase Option under the SPA:
The arbitrator found clauses 8.5 and 8.5.1 of the SPA, which allowed the Petitioner to demand the repurchase of shares by Respondent No. 1, to be illegal and unenforceable. This was based on two grounds:
- They constituted a forward contract prohibited under Section 16 of the Securities Contracts (Regulation) Act, 1956 (SCRA) and SEBI's circular dated 1 March 2000.
- They were considered a contract in derivatives not traded on a recognized stock exchange, violating Section 18-A of SCRA.

3. Validity of the Arbitrator's Findings and Conclusions:
The Petitioner argued that the arbitrator's conclusion regarding the illegality of the share purchase option was untenable, citing the Division Bench judgment in MCX Stock Exchange Ltd. vs. SEBI. The court in MCX Stock Exchange Ltd. distinguished between a present obligation postponed to a later date and an obligation arising from a future contingency. The Petitioner contended that the SPA's clauses 8.5 and 8.5.1 did not constitute a forward contract but rather an option contingent on future events, thus not violating Section 16 of SCRA.

The court found the arbitrator's view that the contract was a forward contract to be an "impossible view," disregarding the law stated in MCX Stock Exchange Ltd. The court also rejected the argument that the repurchase option constituted a contract in derivatives under Section 18-A of SCRA. Section 18-A does not invalidate contracts but makes certain derivative contracts legal and valid if they meet specific criteria. The option in the SPA did not amount to trading in derivatives and was not prohibited by the SEBI circular of 1 March 2000.

The court also addressed the Respondents' cross-objections, concluding that under Section 34 of the Arbitration Act, cross-objections are not permissible in a challenge petition. Section 34 is a complete code for setting aside an arbitral award, and importing provisions of Order 41 Rule 22 of the CPC into it would lead to anomalous consequences.

Conclusion:
The petition succeeded, and the impugned award was set aside. The court held that the arbitrator erred in declaring the share repurchase option illegal and unenforceable. The court did not entertain the Respondents' cross-objections, emphasizing that Section 34 of the Arbitration Act is a complete code and does not allow for cross-objections. No order as to costs was made.