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TMI Blog2023 (7) TMI 1497X X X X Extracts X X X X X X X X Extracts X X X X ..... s Hon'ble Court be pleased to appoint a Sole Arbitrator to adjudicate the disputes and differences that have arisen between the Applicant and the Respondents arising out of and / or relating to the Transaction Documents i.e. the Agreement dated 18th April, 2018 read with Deed of Guarantee dated 18th April, 2018;" 2 The above relief is prayed, in the wake of the dispute that arises, out of the agreement entered with respondent no.1 on 12/04/2018, through which the applicant, referred to as the "Investor", invested monies in the respondent no. 1 company, by acquisition of shares. The respondent no.2, is a Chairman and one of the promoters of respondent no.1, who is alleged to control it's affairs and business decisions. Respondent no.1 is a promoter of the company known as 'McNally Bharat Engineering company Ltd'. The agreement was executed, between the Applicant and the respondent no.1 as the respondents approached the applicant, to invest the monies into it's company, the applicant being one of the leading bank in India, and since it was expected that the said investment would be a major confidence booster for other investors and they would derive substantial benefits from such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel Mr. Ashish Kamat for respondent no.2, whereas the respondent no.1 is represented by Mr. Prathmesh Kamat. Mr. Kamat would raise three preliminary objections on the tenability of the application, seeking a relief of appointment of the nominee arbitrator and he would unfold his objections to the following effect:- (a) Since the demand of the applicant, is for the amount due and payable to it as a banking company, the money involved, in whatever form it was invested in the respondent company is a 'Debt' within meaning of Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993 (in short, 'RDBA') and as such the remedy available for recovery of debt is the Debt recovery Tribunal. To bolster his submission he would fall back on various authoritative pronouncements including the decision of the Apex Court in case of Vidya Drolia and ors vs. Durga Trading Corporation, (2021) 2 SCC page 1. (b) The respondent no.2 is a stranger to the agreement entered between the applicant and the respondent no.1 on 12/04/2018 and hence cannot be dragged in arbitration proceedings. (c) The document in question i.e. the agreement dated 12/04/2018 having not been stamped with adequate stamp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, terms and conditions and understanding reached, with a declaration that the parties are bound by the same. 7 The Agreement define certain important terms as under:. "Option Period" shall mean the period commencing upon the expiry of 15 (Fifteen) months from the Execution Date and ending on the expiry of 30 (Thirty) months from the Execution Date; "Put Event" shall mean any or all of the following (i) reference to any day during the Option Period; (ii) anytime during the term of this Agreement when the Company or the Promoter or the Promoter's majority shareholder undergoes any Insolvency Proceeding or (iii) any breach of the representations, covenants or terms of this Agreement;" 8 Clause 2 of the Agreement provide for the "Put Option" and it stipulate that upon occurrence of the "Put Event", the investor shall have the right ("Put Right"), to require the promoter, either by itself or through a third party, to purchase the option of the investor, part or all the Investor Shares ("Put Shares") in one or multiple tranche(s) subject to the terms and conditions provided under the Agreement. It permitted the Investor to exercise the Put Right by issuing an irrevocable writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term of this Agreement, including the Option Period, provided the Put Option has not been exercised." 9 The agreement executed between the parties with the aforesaid clauses was held to constitute valid and binding obligations on each party, enforceable against the other, in accordance with terms. The investor, on the date of Put Option agreed and acknowledged that there shall be no third party interest on the Investor shares nor will the Investor shares be subject to any pre-emptive rights, rights of first refusal or other similar rights pursuant to any existing agreement or commitment of the Investor. The Promoter, on the other hand, agreed that it shall honour the Put Option set out in the Agreement. The agreement also made it clear, that the Investor is acting independently in respect of its investment in the Company and is free to exercise its voting rights in respect of the Company's share, as it may deem fit in it's absolute discretion and the put option granted by the promoter is purely a financial transaction and will not create any rights of cooperation or partnership. 10 This very agreement in clause 11 provided a mechanism for 'Dispute Resolution' and the langu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a third party to buy the same as per the understanding recorded in the agreement and this gravamen the dispute. 12 Mr. Kamat has raised a jurisdictional issue by submitting the applicant is seeking recovery of the amount payable to him which necessarily is a 'Debt' and it suffers from the vice of non-arbitrability as the subject matter of the dispute is expressly non-arbitrable by a statute which has created a special forum for disposing the matters arising thereunder. In support of the preliminary objection raised about the non-arbitrability of the dispute, Mr. Kamat has emphatically relied upon the observations of the Apex Court in case of Vidya Drolia (supra) and he would submit that the term 'Debt' is assigned a wider meaning under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993 to mean any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution. He would submit that the term "Debt" is assigned a wider meaning and he would invoke Section 2(g) of the Act, which reads thus: "2(g) 'debt' means any liability (inclusive of interest) which is alleged as due from any person by a bank or a financial institution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituted, the averments are such that it is possible to hold that the jurisdiction of such a tribunal is ousted". By keeping in mind the aforesaid principle, and on examining the averments made in the plaint, a conclusion was derived that the claim in question made by the plaintiff is essentially one for recovery of debts due to it from the defendants and therefore, the Tribunal had the exclusive jurisdiction to decide the dispute and not the ordinary civil court. 14 Another decision relied upon by Mr. Kamat is of the Delhi High Court, in the case of HDFC Bank Ltd vs. Satpal Singh Bakshi, which has reiterated the principle of non-arbitrable disputes, with reference to the right in rem and right in personam, which is an interest protected solely against the specific individuals and which are traditionally considered to be amenable to arbitration, whereas those creating rights in rem are required to be adjudicated by the Courts and the tribunals, being unsuited for private arbitration. The decision of the Apex Court in case of Eureka Forbes Limited vs. Allahabad Bank and ors, (2010) 6 SCC 193, which revolve around the term 'debt' as defined under Section 2(g) of the Act, 1993, is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it would defeat the very object and purpose of the Act as a party, which had pledged or mortgaged properties in favour of the Bank and then transfer such properties in favour of a third party, and in the event, the Bank takes action under the Recovery Act, they would raise an objection that there is no privity of contract or it is not a debt. It was thus held that this would tantamount to travesty of justice and frustrate the legislative object and intent of the Recovery Act. Ultimately, the term 'debt' defined in a wider manner, would definitely cover any liability for a ascertained sum of money and include a debt payable in any kind but not include a "judgment debt". In the above case, the claim of the bank relatable to the hypothecated goods was held to be within the jurisdiction of the Tribunal exercising its power under Section 17 of the Recovery Act. 15 While dealing with the preliminary objection of Mr. Kamat, Mr. Jagtiani, on behalf of the applicant would asseverate that the applicant is not merely a lender here, but the Bank has acted as a financial Investor and when it exercised the option as per the agreement, it expected a reciprocal obligation on part of the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the terms of the agreement dated 12/04/2018. Further Mr. Jagtiani would submit that on the Put up Option being exercised, the agreement contemplated the consideration to be paid for the Put up Shares was flexible i.e. it was expected to be the higher of the fair market value or price equal to the sum of INR 62 per equity share along with IRR as agreed and therefore, it is not simply a lending transaction by the applicant in favour of the respondent no.1 Company, which has resulted in an action to recover its debts. 16 In this backdrop, Mr. Jagtiani would therefore submit that the unequivocal principle as laid down in Vidya Drolia (supra) on the aspect of non-arbitrability of disputes is not the question for consideration here, as it is settled position of law that when the subject matter of the dispute is expressly, or by necessary implication is non-arbitrable, as per the mandate of the statute, the arbitrator cannot embark upon such disputes. According to him, the law laid down in Vidya Drolia (Supra) in paragraph no.56 and 57 unequivocally has settled the position of law by providing that the DRT Act is a complete Code by itself as far as recovery of debt is concerned, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l over any of the activities specified in Section 6(1) and its various sub-clauses. The form of business in which the banking companies may engage would cover distinct activities, one of which may be borrowing, raising or taking up of money, lending or advancing of money either upon or without security, drawing, making, accepting, discounting, buying, selling, collecting and dealings in bills of exchange, promissory notes, bills of lading, debentures, scrips and other Instruments and Securities whether transferable or negotiable or not. It may cover acquiring, holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures, debenture stock bonds, obligations, securities and investments of all kinds; purchasing and selling of bonds, scrips or other form of securities, negotiating of loans and advances etc. It may also extent to contracting for public and private loans and negotiating and issuing the same. Apart from this, it may also cover the following activities as contemplated under Section 6 providing forms of business in which the banking companies may engage: "e) Carrying on and transacting every kind of guarantee and indemnity business; f) m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Eureka Forbes and United Bank of India (supra), in the wake of the primary object of the enactment in form of Act, 1993 and in establishment of Tribunal for expeditious adjudication and recovery of debts due to the Bank and Financial institution, as far as the present case is concerned since it is not merely a claim for recovery of debt but, it is a claim for specific performance and with the issue of the option to be exercised and the possibilities which will have to be ascertained after exercising the Put Option, I apprehend whether the Debt Recovery Tribunal, with it's limited power conferred under Section 19, shall be competent to deal with a claim for specific performance. Hence the first objection raised by Mr. Kamat stands rejected. 21 Dealing with the second objection of Mr. Kamat that respondent no.2 cannot be pulled into arbitration, as the first agreement dated 12/04/2018 is between applicant and the respondent no.1 and the arbitration is sought to be invoked on the basis of the said agreement, I have given anxious consideration to the same. When the 'Deed of Guarantee', another document forming part of the transaction is minutely perused, it is evident that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantor except in the manner provided therein. The various clauses of deed of guarantee therefore, leave no scope of respondent no.2 being not liable, in discharge of the obligations stipulated in the letter of guarantee. 22 The argument of Mr. Kamat that there is no arbitration clause in the deed of guarantee and therefore respondent no.2 cannot be bound by arbitration is an argument equally without any merit. Merely because clause no. 13 in the deed of guarantee, which prescribe the governing law and jurisdiction, do not refer to arbitration, by its conspicuous exclusion, it cannot be the basis of the argument that respondent no.2 cannot be a party to the arbitration proceedings. In any case this is an argument, too late in the day to be advanced, as my attention is invited to an analogous stand being taken by respondent no.2 in Section 9 petition filed by the applicant before this Court, seeking interim measures against the promoter company, as well as the guarantor, and a statement was made jointly on behalf of the respondent no.1 and 2, that they shall submit to an injunction as prayed in the petition and even, respondent no.1 also agreed to make disclosure. Apart from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween Williamson Magor's obligation and the and the exactly corresponding assumption by Khaitan of the very obligation. Khaitan's obligation is simply a fail-safe or a fall-back position, to do exactly what Williasmson Magor had agreed to do; not a jot more, and not a whit less. The submission of Mr Kamat must be repelled. Khaitan is bound by the arbitration agreement." 23 Mr. Kamat make a feeble attempt to invite my attention to para 38 of the order, which record, that the view expressed is prima facie, for the purposes of the order under Section 9 and he would urge that, the observations would not bind this Court. I do not think that I can subscribe to such a view. For the purpose of conferring the interim measures as prayed under Section 9 petition, Justice Patel has considered the purport of the "Transactions" entered between the parties, so as to ultimately decide upon whether the applicant Bank is entitled for the interim measures as sought. This necessarily required the learned Single Judge to consider both the transactions entered on the same date and while deciding upon the prayer for the claim of little more than 23 crores, a specific argument advanced on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to him, on the deed of guarantee, similar stamp duty should be paid i.e. in the sum of Rs. 2,97,600/- separately. Apart from this, it is liable for levy of penalty on late payment of stamp duty, is his argument. 26 Dealing with this contention, Mr. Jagtiani would dispute that the document in question deserve to be stamped with a duty in terms of Section 5(h)(A)(iv) as he would submit that clause (iv) clearly stipulate that the creation of any obligation, right or interest having monetary value, but not covered under the other article and according to him, Article 5(b)(ii) of the Indian Stamp Act, 1899, applicable in West Bengal would incur Stamp Duty @ 0.50 for every Rupees 5000/-, whereas in the State of Maharashtra, under the Maharashtra Stamp Act, 1958, the stamp duty would computed under Article 5(c)(ii) as under: (c) "If relating to purchase or sale of shares, scrips, stocks, bonds, debentures, debenture stock or any other marketable security of the like nature in or of any incorporated company or other body corporate- (ii) in any other case @ of Rs.1.00 for every 10,000/-." 27 According to Mr. Jagatiani, the document on being brought in Maharashtra would be liable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties- 'nothing more nothing less'. Once again in Vidya Drolia (Supra) the principle of prima facie test on existence of an arbitration agreement came to be reiterated, by leaving the question of arbitrability to be decided by the arbitrator. Following the principle, the arbitral tribunal would be the first authority to decide the questions of non-arbitrability, the law is crystalized by the Apex Court in case of NTPS Ltd (supra) where it is held that court may not refer parties to arbitration when it is clear that the case is manifestly an ex-facie non-arbitrable. The eye of the needle test is laid down by the bench headed by the Hon'ble Chief Justice of India Dr. Justice D.Y. Chandrachud: "25. Eye of the Needle: The above-referred precedents crystallise the position of law that the pre-referral jurisdiction of the courts under Section 11(6) of the Act is very narrow and inheres two inquiries. The primary Inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant's privity to the said agreement. These are matters which require a thorough examination by the referral cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement dated 18/04/2018 and since arbitration has been invoked by the applicant by appointing his nominee and the respondents having been called upon to appoint theirs, the applicant seek appointment of the nominee arbitrator on behalf of the respondent so that the two arbitrators so appointed shall nominate the third arbitrator. On exercising the power available in me under Sub- section (6) of Section 11, I nominate the arbitrator for the respondent by the following order: TERMS OF APPOINTMENT (a) Appointment of Arbitrator : Mr. Swanand Ganoo, is hereby appointed as a nominee Arbitrator of the respondents to adjudicate the disputes and differences that have arisen between the parties out of the 'Transaction Documents' dated 18/04/2018. (b) Communication to Arbitrator of this order :- (i) A copy of this order will be communicated to the Arbitrator by the Advocates for the applicant within one week from the date this order is uploaded. (c) Disclosure :- The Arbitrator, within a period of 15 days before entering the arbitration reference, shall forward a Statement of disclosure as per the requirement of Section 11(8) read with Section 12(1) of the Arbitration and Conc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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