2022 (4) TMI 1634 - HC - Indian Laws

Non-service of notice of arbitral proceedings - time period for passing the award had expired and no ground exists for extension of time under Section 28 of the Act - obligations of all the Underwriters stood discharged as the issue was fully subscribed, and it was not even kept open for the entire period - computation of damages and award of interest. HELD THAT - The settled legal position is that a party cannot be made responsible for indirect or remote loss that may have been caused to the claimant as a result of breach on the part of the Respondent/Defendant. In the opinion of this Court, the Underwriters could not have been made responsible for the entire loss suffered by the Plaintiff. The allegations and the history of these litigations shows that there was an interference by SEBI after the public issue for whatever reason, which led to withdrawal of the subscriptions by the initial subscribers. The losses and confusion that prevailed due to the letter issued by SEBI directing the Plaintiff to give investors the option to withdraw from the public issue and the withdrawal of subscriptions thereafter cannot be the sole responsibility of the Underwriters. The Plaintiff also appears to have contributed by its own conduct in the loss suffered by it, as is evident from the facts on record, though no criminal culpability may have been found by the investigating authorities. Moreover, the Ld. Arbitrator ought to have considered if the Plaintiff made any bona fide attempt to mitigate its losses. Based on the facts and circumstances that have emerged, the question that would arise is what is the reasonable compensation or damages to be awarded against the Underwriters. This Court is of the opinion that a large number of Underwriters have already settled their disputes with the Plaintiff, even during pendency of arbitral proceedings. After passing of the Awards, several parties have settled. The Plaintiff has to clearly shoulder a substantial part of the blame for the losses which it may have suffered. The liability to pay compensation/damages qua the Underwriters ought to thus be reduced to a reasonable amount i.e., 1/4th of the losses per share as computed by the ld. Arbitrator i.e., Rs. 20/- per FCD/share. Further, the award of 18% interest p.a. by the Ld. Arbitrator is highly onerous and unsustainable, especially considering the prevalent market conditions. The said rate is also liable to be reduced to a reasonable percentage. In the facts and circumstances of the present case, while upholding the responsibility of the Underwriters to discharge their underwriting obligations, this Court holds that only reasonable damages which arose in the natural course of things or were in the direct contemplation of the parties could have been awarded by the Ld. Arbitrator for the failure of the Underwriters to discharge their obligations under the Agreement. Thus, applying the principles of computation of damages as per settled law as also taking the account the settlements that have been entered into by the Plaintiff with similarly placed underwriters in the interest of justice, the damages awarded qua the Defendant are modified. Award of Interest - HELD THAT - The Underwriters cannot be held fully responsible for the delay in appointment of arbitrator or for the period when the arbitral proceedings of the present proceedings have remained pending. Accordingly, the amount awarded above as damages, shall be paid along with interest @7% p.a. from the date of pronouncement of the award i.e., 23rd May, 2012 till today. If the entire awarded amount is paid within a period of 8 weeks, no further interest would be liable to be paid. However, in case of non-payment, simple interest on the entire awarded sum i.e., principal amount the interest @ 7% per annum from the date of award till today would be liable to be paid @ 4.5% per annum. The costs of proceedings as awarded by the ld. Arbitrator are upheld. The suit and the objections under Section 16 of the Arbitration Act, 1940 are disposed of.

Summary

Issues Involved:

1. Service of Notice in Arbitral Proceedings
2. Discharge of Underwriters' Obligations
3. Computation of Damages and Award of Interest
4. Legality of the Award and Grounds for Remand

Issue-wise Detailed Analysis:

1. Service of Notice in Arbitral Proceedings:

The Defendants contended that they were not properly served in the arbitral proceedings. The Court found that the Defendants were adequately notified through various means, including process server reports, registered posts, and publications in newspapers. The Arbitrator's repeated efforts to notify the Defendants were deemed sufficient, and the objection regarding service was rejected.

2. Discharge of Underwriters' Obligations:

The Defendants argued that their obligations were discharged when the public issue was fully subscribed and closed on the earliest closing date. The Court analyzed the Underwriting Agreement, which required the issue to remain open for a maximum of ten calendar days unless fully subscribed earlier. The Court concluded that the obligations of the Underwriters were not discharged simply upon the issue being fully subscribed initially. The Underwriters' obligations continued until the final determination of the subscription status within 30 days after the closure of the subscription list. The Arbitrator's finding that the Underwriters failed to subscribe to the devolved FCDs was upheld.

3. Computation of Damages and Award of Interest:

The Arbitrator awarded damages based on the failure of the Underwriters to subscribe to the devolved FCDs, assessing reasonable compensation at Rs. 80 per share. The Defendants argued that the damages were not substantiated by actual loss. The Court found that the Arbitrator considered various factors, including forfeiture of projects and expenses incurred for the public issue, to assess reasonable damages. However, the Court reduced the damages to Rs. 20 per FCD/share, considering the settlements entered into by the Plaintiff with other Underwriters and the principle of reasonable compensation. The interest awarded by the Arbitrator at 18% per annum was reduced to 7% per annum from the date of the award until the payment date, with further interest at 4.5% per annum in case of non-payment within eight weeks.

4. Legality of the Award and Grounds for Remand:

The Defendants sought to set aside the award under Section 16 of the Arbitration Act, 1940, arguing that the Arbitrator did not consider the discharge of their obligations and that the award was indefinite. The Court held that the Arbitrator had broadly considered the obligations of the Underwriters and the effect of SEBI's directions. The Court found no grounds for remanding the award for reconsideration, as the Arbitrator had conducted the proceedings fairly and had not acted illegally. The objections under Section 16 were dismissed, and the award was modified as per the Court's findings on damages and interest.

Conclusion:

The Court upheld the responsibility of the Underwriters to discharge their underwriting obligations, modified the damages to Rs. 1,24,440/-, and reduced the interest rate. The suit and objections were disposed of in these terms, and a decree was pronounced accordingly.