Delhi High Court
Gtl Limited & Ors vs Ifci Ltd & Anr on 6 July, 2012
Author: Manmohan Singh
Bench: Manmohan Singh
* HIGH COURT OF DELHI: NEW DELHI
% Judgment Pronounced on: 6th July, 2012
+ I.A. No.16171/2011 in CS (OS) No.2278/2011
GTL LIMITED & ORS ..... Plaintiffs
Through Mr. Neeraj Kishan Kaul, Sr. Adv. with
Mr. Farid Karachiwala, Mr. Rishi
Agrawala, Mr. Akshay Ringe, Mr. Nikhil
Rohatgi & Mr. Bhagwan Swarup Shukla, Advs.
Versus
IFCI LTD. & ANR ..... Defendants
Through Mr. Maninder Singh, Sr. Adv. with
Mr. P.S. Bindra and Mr. Dinkar
Singh, Advs.
CORAM:
HON'BLE MR. JUSTICE MANMOHAN SINGH
MANMOHAN SINGH, J.
1. By this order, I shall dispose of I.A. No.16171/2011 filed in CS(OS) No.2278/2011 preferred by the defendant under Section 8 of the Arbitration and Conciliation Act, 1996 praying for an appointment of the arbitrator.
2. Brief factual matrix of the matter leading up to filing of the present application are enunciated as under:
3. That on 12th July, 2010, Facility Agreement was entered into between the plaintiff No.2 and defendant No.1 whereby defendant No.1 advanced a loan of Rs.250 crores against various securities to the plaintiff No.2.
4. As per the terms of the Facility Agreement, there were number of the security documents were executed. One of the securities is a pledge of shares of the plaintiff No.1 (GTL ltd) which were to be kept in non-disposal escrow account. The other securities are hypothecation of movable properties, mortgage of immovable properties, corporate guarantees etc given by the defendant No.3. The plaintiff No.1 is not a party to this Facility Agreement, even though, plaintiff No.1 is group-company of CS (OS) No.2278/2011 Page 1 of 25 plaintiff No.2 and plaintiff No.3.
5. Plaintiff No.2 was required to maintain a security cover of two times of the Facility Amount (Rs.250 crores) by escrow of such numbers of shares in the Escrow Account in accordance with Non- Disposal and Escrow Agreement in form and manner satisfactory to the defendant No.1. As per the terms of Facility Agreement the said amount was to be repaid by plaintiff No.2 at the end of 36 months from the date of disbursement of the loan i.e. from July, 2010.
6. On 12th July, 2010, a Non-Disposal and Escrow Agreement was also executed between the five parties i.e. plaintiff No.1 , i.e. GTL Limited, IFCI Financial Services Limited (defendant No.2) as the escrow agent, AXIS Bank Limited as the account bank, IFCI Limited (defendant No.1) and Chennai Network Infrastructure Ltd. (plaintiff No.2). Under the said agreement, the shares of the GTL Infrastructure Ltd./plaintiff No.2 held by the plaintiff No.1 as share holders were placed in an escrow arrangement and the payment account was established for deposit of proceed of such shares in the event of sale and for recovery of outstanding amount in case of default.
7. As per the NDE, the plaintiff No.1 escrowed approximately 27,37,29,000 equity shares of plaintiff No.3. It is specifically provided in the NDE that the escrow would stand converted into a pledge on the occurrence of event of default defined under the Facility Agreement and the NDE.
8. The plaintiff No.1 thereafter learnt that defendant No.1, without giving any notice under Section 176 of the Indian Contract Act, 1872, has sold and appropriated the pledged shares to itself. Plaintiff No.1 therefore filed a suit on 21st July, 2011, being CS (OS) No.1771/2011, along with an interim application, being I.A. No.11586/2011 before this Court, inter-alia, for the relief that the appropriation of 17,63,68,219 shares be declared null and void and defendant No.1 be declared as pledge of plaintiff No.1 for the CS (OS) No.2278/2011 Page 2 of 25 pledged shares.
9. In the said suit, the plaintiff herein had referred to the provisions of the ICA, DCA and the CDR mechanism. Reference was made to the said provisions only to show that it was only after the flash report was sent to IFCI under the CDR mechanism that it chose to derail the entire process by issuing the letter impugned in the said earlier suit. At the time when the said suit was filed, the standstill clause as contained in the ICA had not come into effect, since the basic precondition of 20% of the lenders agreeing for a CDR mechanism had not occurred. This event happened only on 12th August, 2011.
10. As per the case of the plaintiffs that on 21st July, 2011, the plaintiff No.2 (borrower) executed the Debtor Creditor Agreement (DCA) as per the standard format contained under the Inter Creditor Agreement to which none of the plaintiffs are parties after a super majority of lenders (approx. more than 90%) agreed for corporate debt restructuring of the plaintiff No.2. The said DCA is in the form of a unilateral undertaking given by the borrower in favour of the CDR cell. None of the lenders are a party to the said DCA. The DCA is only signed by the borrower. The so called arbitration clause in the DCA has no applicability to the present dispute as the defendant No.1 is not a party to the same and none of the disputes raised by the plaintiffs arise out of the DCA.
11. It is alleged by the plaintiffs that on the said date, i.e., 12th August, 2011, itself, the corporate debt restructuring proposal of plaintiff No.2 was approved by a super majority decision of more than 90% of the lenders of plaintiff No.2. This meeting was also attended by the defendant No.1‟s representative. All the lenders of plaintiff No.2, including defendant No.1, are parties to the Inter- Creditor Agreement. On this date, the standstill clause came into effect under the ICA to which IFCI is a signatory and a party. The plaintiffs are not a party to the same. There is a complete and a total absence of an arbitration clause between the borrowers on CS (OS) No.2278/2011 Page 3 of 25 the one hand and the entire body of lenders on the other.
12. The contention of the plaintiff is that with effect from the commencement date, all the lenders of plaintiff No.2 including defendant No.1 were bound by the provisions of the CDR Master Circular including the standstill clause contained in the ICA. The standstill clause basically provides that both the parties (lenders and borrower) commit themselves not to take recourse to any other legal action during the „standstill‟ period, as regards enforcement of securities as this would be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise.
13. The following directions were passed by this Court in its order dated 29th August, 2011 in the interim application in earlier CS(OS) No.1771/2011 after analyzing the terms and conditions of both the agreements:
a) That the plaintiff No.1 and 2 are the joint promisors or co-
pawners. The said finding records thus:
"The plaintiffs‟ role in the agreement cannot be obviated as it acts as co-pawner or joint promissor wherein his promise to the extent of the top up or to provide security cover is secured against the security of share along with the promise to repay the loan by the defendant No.3. Both are entitled to redemption and more so when they are group companies of each other."
The said finding is recorded in that suit considering the terms of the agreement which uses the expression Shareholder and borrower together for their obligations.
b) The notice under Section 176 of the Indian Contract Act, 1872 is mandatory so as to give ample and reasonable chance to the pledgor to make the redemption prior to the sale. Rather, the right to sale accrues only when the notice for sale is given although the remedies of pledge to file suit CS (OS) No.2278/2011 Page 4 of 25 and other remedies prescribed under Section 176 are available without notice.
c) In the present case, the notice requirement comes into play only at the time of sale and not at the time of invocation of pledge. Thus, when the defendant has sold 5,00,426 shares in the market, the defendant No.1 ought to have given the notice under Section 176 of the Act. Nevertheless, now as the sale has been effected, the only remedy lies to the plaintiff or defendant No.3 (plaintiff No.3 herein) is under the law of Torts
d) The foreclosed shares or 17,63,68,219 shares appropriated by the defendant to itself is done in contravention to the law of pledge as no such right to foreclosure is available to the pledge. His equitable title cannot exceed what has been permissible under the law. Accordingly, the defendant No.1 is still a pledgee of the said appropriated shares
e) The stipulation in agreement giving absolute right to sell after the invocation of pledge is contrary to the law and thus prima facie illegal and cannot come in the way of effecting the valid pledge.
f) Normally, the suit for redemption can be filed when there is a reciprocal act of paying at one hand and giving back the security at the other. As there is illegality in the sales and the plaintiff and defendant No.3 (plaintiff No.3) although are group companies but have separate performances to perform, such kind of arrangement is entered into and this Court has only passed this order to legitimize the relations so as to facilitate the immediate redemption legally.
g) The defendant No.1 is accordingly the pledgee of 27,37,29,000 equity shares in totality which it can treat them as per the law in view of the remedies available under Section 176 of the Act along with the remedies available CS (OS) No.2278/2011 Page 5 of 25 under the contract. The said shares are open to redemption by either by the plaintiff and defendant No.3.
h) The event of default has accrued on account of non maintenance of topping up of security cover which is stipulated in clause v under the head of event of default and the redemption of shares is open on account of the occurrence of event of default and consequent invocation of pledge by the defendant No.1.
i) In case, the defendant No.1 exercises the right to sale, it shall do so as per the law and to the extent of the debt secured and the amount due and is not entitled to make any further adjustments.
The said findings were arrived at after analyzing the nature of relations between the parties under the Facility Agreement as well as the Escrow Agreement.
14. Pursuant to the said order, when the defendant No.1 gave a legal notice dated 8th September, 2011 under Section 176 of the Act prior to exercising of his right to sale of his shares in the market. The plaintiff again replied the said notice by way of letter dated 10th September, 2011 by narrating the events which have occurred as per the plaintiffs subsequent to the hearing of the interim application and the same has been explained by the plaintiff in the suit that they have happened on 12th August, 2011 pursuant to the conclusion of the interim applications in the CS(OS) No.1771/2011.
15. The plaintiff has stated in the present case that on 12th August, 2011, the corporate debt restructuring proposal which finds mention in the plaint of earlier suit has been approved the super majority decision of the more than 90 % of the lenders of the plaintiff. Thus, the impugned notice issued by defendant No.1 is a breach of the provision of the CDR Master Circular issued by RBI which has the force in law and important feature at the CDR Mechanism is the presence of the standstill provision.
CS (OS) No.2278/2011 Page 6 of 2516. All the lenders of the plaintiff No.2 are parties to the inter creditor agreement. The implication of this has been explained by the plaintiff that the defendant No.1 is estopped from selling the shares or enforcing the security under the agreement by operation of the stand still clause envisaged under the Debtor Creditors agreement dated and Inter Creditor agreement. The said clause contained in the agreements is reproduced below:
"The Participating Financial Institutions and Banks agree and undertake that from the Commencement Date of Consideration of Reference for the first time by the CDR Empowered Group at its meeting, the Lenders shall not commence any civil action and/or make best efforts not to proceed with any civil action, if already initiated, against the Eligible Borrower for recovery of their dues in respect of the financial assistance. However, the aforesaid standstill provision will be operative for a period of 90 days but may be extended up to 180 days, with the specific approval of CDR Core Group, from the Commencement Date. This however, shall not preclude the participating financial institutions and banks from initiating or continuing any action against the eligible borrower or its promoters/directors or its officials for criminal offences. During this period, outstanding foreign exchange forward contracts, derivative products etc. can be crystallized, provided such crystallization is permitted under the agreement with the eligible borrower or the eligible borrower is agreeable to such crystallization.
Explanation: For the purpose of this clause, the term "civil action" shall mean such legal action or proceeding against the Eligible Borrower, or against individual(s) extending personal guarantee(s) in respect of the Financial Assistance provided by the Lenders to the eligible borrower and includes enforcement of securities created in favour of any Lender by the Eligible Borrower."
17. Section 21 of the Inter Creditor Agreement provides the mechanism for dispute resolution by means of arbitration. Defendant No.1 is a participating financial institution. As such only disputes that may arise as regards the ICA and its covenants and CS (OS) No.2278/2011 Page 7 of 25 that too inter se the banks and financial institution can be referred to arbitration under the said ICA. The plaintiff being a borrower is not a party to the same.
18. The relevant clause which states that only the disputes between the parties to ICA can be referred to arbitration is as follows:
"21.1 The Participating Financial Institutions and Banks agree that if any dispute, controversy disagreement or difference shall arise between the Parties thereto under this Agreement and/or the respective rights and obligations of the Parties hereto, such a dispute shall first be resolved amicably by negations under the aegis of the CDR Core Group. If a member of the CDR Core Group is a party to the dispute, its representative shall not participate in the negotiations. Such representative maybe permitted by the CDR Core Group to put forth the views of the institution he represents.
21.2 In case the dispute is not resolved by amicable settlement, the CDR Core Group shall within 30 days from the date of conclusion of negotiations, refer the dispute for arbitration. If the parties to the dispute agree, the arbitration shall be by sole arbitrator approved by the CDR Core Group. In the absence of an agreement for appointment of a sole arbitrator, the dispute shall be resolved by an arbitral tribunal consisting of three arbitrators; one each to be appointed by the parties to the dispute and the two arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator. The place for arbitration shall be at Mumbai. One-half of the expenses shall be borne by the referring party and balance by the party(ies) against whom the dispute is made out."
19. Thus, by virtue of the said clause, the plaintiff has again challenged the said notice dated 8th September, 2011 issued by defendant No.1 to sell the shares. The case of the plaintiff is that the said notice is in breach of the provisions of CDR Master circular and guidelines of RBI which mandates that pending Corporate Debt Restructuring, the standstill is to be adhered to by both the borrower and lender. The enforcement of the security as per the CS (OS) No.2278/2011 Page 8 of 25 agreement is, thus, postponed till the time such stand still clause is under operation.
20. The said suit came up for hearing on 15th September, 2011 when this Court after hearing the parties negated the ex- parte ad interim protection by observing the following:
"20. After having considered the rival submissions of the learned counsels for the parties for some time, prima facie, I feel that it is doubtful as to whether the present suit is maintainable. I am also not satisfied on merit to pass any ex-parte interim orders as prayed by the plaintiffs. In fact, no case is made out for the same. Thus, the ad-interim injunction is, therefore, declined. The maintainability of the suit would be considered as soon as the defendants would file the written statement."
21. The said order dated 15th September, 2011 was challenged in appeal by the plaintiffs before the Division Bench, being FAO(OS) No.459/2011. The Division Bench after hearing detailed submissions made by the parties was pleased to pass an order on 21st September, 2011. Relevant portion of the said order reads as under:
"Renotify for further arguments on 28.09.2011. In the meanwhile, respondents shall not sell any further shares of appellant No.3 which are pledged with them. The counsel for the appellants as well as the learned counsel for the respondents shall file short written submissions containing propositions which shall not exceed four pages each."
22. The said appeal is pending and the aforesaid interim order has been continued. It is pertinent to mention that it was at the stage of sur-rejoinder arguments by the defendants in appeal that the defendants took time for the same.
23. After taking time to address sur-rejoinder arguments in FAO (OS) No.459/2011, the defendants filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 stating that the parties be referred to arbitration on the ground that an arbitration clause is contained in the DCA.
CS (OS) No.2278/2011 Page 9 of 2524. It is submitted by the plaintiffs in nutshell that the DCA is not signed between the plaintiff No.2 and the defendants. The defendants as a matter of facts are not even a party to the said DCA and further none of the issues which are raised in the instant suit are arbitrable.
25. The defendants also filed an appeal, being FAO (OS) No.519/2011, against the order dated 29th August, 2011 passed by this Court in CS(OS) No.1771/2011. Parties have informed to the Court that arguments have been concluded in the said appeal and judgment is reserved in the said appeal.
26. The defendant No.1 then preferred the present application in the form of I.A. No.16171/2011 under Section 8 of the Arbitration and Conciliation Act, 1996 seeking reference of the matter to the arbitration on the following counts:
a) The said application avers that as the plaintiffs set up the CDR mechanism in the form of Debtors and Creditors Agreement and Inter Creditors agreement. The said agreements contain the arbitration clause. Thus, the subject matter of the present suit has to be referred to the arbitration. The said clause contained the agreement reads as under:
b) The suit is liable to be dismissed in view of the arbitration clause as the plaintiff‟s own showing that CDR mechanism is an out of Court mechanism and there is a complete agreed procedure including arbitration. In such cases, as per the defendants, the jurisdiction of the Court is barred as per Section 5 of the Act.
27. On the other hand, the plaintiff has opposed the said application by filing the reply which contains the following grounds of the opposition:
a) That the ingredients of Section 8 of the Arbitration and Conciliation Act are not satisfied in as much as the defendants have not filed certified copy of the agreement CS (OS) No.2278/2011 Page 10 of 25 containing the arbitration clause which is requirement of the law.
b) The dispute in the plaint is not arbitrable and thus the same cannot be referred to the arbitration.
c) There is no agreement containing the arbitration clause between the parties to the suit. All the parties to the suit are not parties to DCA. In these circumstances, the dispute cannot be referred to the arbitration.
d) The disputes between plaintiff No.2 on the one hand and defendant No.1 on the other hand cannot only be referred to the arbitration in relation to enforceability of standstill clause of CDR Master Circular.
28. It is submitted by the defendants that all the pleas taken by the plaintiffs are false and frivolous. It is stated that under ICA, DCA has been defined to mean an undertaking executed by the Eligible Borrower in the form provided in Schedule-III. In terms thereof, DCA has been executed by plaintiff No.2, copy of the DCA is placed on record. In fact, the plaintiffs also understand the same in the manner interpreted by the defendants which is clear from the written submissions filed by them in appeal filed by them bearing FAO (OS) No.459/2011 impugning the order dated 15 th September, 2011 passed in the present suit.
29. In the written submissions on behalf of the plaintiffs, reliance has been placed on recital of clause (D) of the ICA to show that execution of DCA by the eligible borrower is a condition precedent to applicability of LCA and further in sub-para-A (vi) and sub-para-A(vii) clearly accepts that ICA obligations and DCA obligations, though exist separately and distinctly in respective documents, they are reciprocal promises and thus consideration for each other and therefore enforceable by each other against each other. It is further alleged that there is binding contract between the appellants on the one hand and the respondent No.1 on the CS (OS) No.2278/2011 Page 11 of 25 other side since (a) IFCI has executed the ICA and (b) appellants have executed the DCA.
30. Relevant paragraph of written submissions are reproduced hereunder for convenience of this Court:
"(vi). The DCA being the acceptance by the debtor of the proposal by the creditors, a binding contract between the debtor and the creditor crystallizes. The ICA‟s obligation and the DCA obligations though exist separately and distinctly in respective documents, they are reciprocal promises and thus consideration for each other and therefore enforceable by each other against each other. They are reciprocal promise and obligations which crystallize the moment the DCA is executed by the debtor. The evidence of such enforcement of the contract is the fact that the moment the DCA is signed all unilateral undertaking of the debtor become enforceable against the debtor by any and all the creditors who have signed and executed the ICA.
(vii). Therefore, there is binding contract between the Appellants on the one hand and the Respondent No.1 on the other side since (a) IFCI has executed the ICA and (b) Appellants have executed the DCA."
31. The net result in the submission of the defendant No.1 is that DCA is only a pre-condition for the purposes of ICA and they are both integral in nature. DCA is a condition precedent to be fulfilled for ICA and clause 4 of DCA makes it abundantly clear that for the dispute under ICA and DCA, both the plaintiffs and the defendants are parties.
32. It is stated that argument of counsel for plaintiffs is fallacious for the reason that Section 13(2) of General Act provides that plural would include singular, i.e., lenders would also include lender and the present suit is not maintainable in view of the above mentioned admitted position on record, the application of defendant No.1 under Section 8 of the Arbitration and Conciliation Act deserves to be allowed inasmuch as the plaintiffs are alleging breach of ICA and DCA and further DCA is only a pre-condition towards the operation of ICA and both are integral to each other, CS (OS) No.2278/2011 Page 12 of 25 the arbitration clause would apply and the dispute between the parties squarely fall within the arbitration agreement.
33. Mr. Maninder Singh has argued that the plaintiff stand that there is no agreement containing the arbitration clause is fallacious as the plaintiffs own argument before the learned division bench of this Court in the appeal no FAO(OS) No.459/2011 in the written submissions would show that the plaintiffs contention is that the Debtors Creditors agreement and Inter Creditors Agreement comprises the integral whole containing the reciprocal promises and thus, the plaintiffs are estopped from contending to the contrary. He has also argued that this Court does not have jurisdiction over the subject matter in view of the arbitration clause contained in DCA which as per the plaintiffs own showing is one agreement alongside ICA. Thus, this Court should not entertain the suit in the present form and relegate the parties to the agreed mechanism of the settlement of the dispute as per the CDA.
34. Per Contra, Mr. Neeraj Kishan Kaul, learned Senior counsel strongly refuted the submissions of the defendants by urging the following:
a) Mr. Kaul argued that the plea of the defendants/applicant that because the plaintiffs is placing reliance upon the agreement and thus the matter may be referred to arbitration must not be accepted as it is for the defendant to elect either to accede to arbitration or not.
b) The defendant on the one hand does not intend to bind himself with CDR mechanism by leaving it open ended so that the defendant can misappropriate the shares and avoid the agreement and on the other hand asking for the arbitration without agreeing for the valid DCA and ICA. In view of the fact that the defendant himself is denying the agreement, the matter could not be referred to the arbitration.CS (OS) No.2278/2011 Page 13 of 25
c) Mr. Kaul argued that the CDR mechanism is binding on both the plaintiff No.2 as a borrower and the defendant No.1 as a lender. It is to enforce such obligation, the present suit is filed. The arbitration clause has been inserted in the two agreements when there are disputes between the parties relating to Debt Restructuring scheme which falls within the purview of the agreements and not the disputes which are outside the agreement. Thus, the present dispute cannot be referred to the arbitration.
Mr. Kaul has relied upon the following authorities in order to support the contentions:
a) Atul Singh and Others vs. Sunil Kumar Singh and Others, reported in (2008) 2 Supreme Court Cases 602.
b) Sardar Associates and Others vs. Punjab & Sind Bank and Others, reported in (2009) 8 Supreme Court Cases 257.
c) Atlas Interactive (India) Pvt. Ltd. vs. Bharat Sanchar Nigam Limited, reported in (2006) 126 DLT
504.
d) Mahabir Auto Stores and Others vs. Indian Oil Corporation and Others, reported in (1990) 3 Supreme Court Cases 752.
e) Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya and Another, reported in (2003) 5 Supreme Court Cases 531.
f) Booz Allen and Hamilton Inc. vs. SBI Home Finance Limited and Others, reported in (2011) 5 Supreme Court Cases 532.
Mr. Kaul thus concluded his submissions that the present dispute ought not to be referred to the arbitration.
35. I have gone through the records of the proceedings, application and the reply filed by the parties and also examined the agreements entered into by the parties under CDR scheme. I shall proceed to discuss the legal aspects arising in the present case.
36. It is for me to first discuss law on the scope of the inquiry by the civil Court seized of the dispute under Section 8 of the CS (OS) No.2278/2011 Page 14 of 25 Arbitration and Conciliation Act before making the reference to the Arbitration.
37. Section 8 is the provision governing reference of disputes to the arbitration. The said Section 8 reads as under:-
"8.Power to refer parties to arbitration where there is an arbitration agreement.-
(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
(2) The application referred to in sub-Section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been made under sub-Section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made."
38. From the bare reading of the aforesaid provision, it is clear that the judicial authority shall refer the dispute to the arbitration if the same forms "subject of arbitration agreement" as per Section 8(1) of the Arbitration and Conciliation Act, 1996. This means that the Court seized of the dispute while examining the application u/s 8 of the Arbitration and Conciliation Act, 1996, praying for reference of dispute to the arbitration is within its powers to measure and evaluate as to whether there exists a valid arbitration agreement between the parties prior to referring the parties to the arbitration so as to ascertain that the dispute which is brought before the Court is actually forming subject of arbitration agreement or not.
39. The judicial opinion in the field is well settled that in order to ascertain whether there exists a valid arbitration agreement and the dispute which is forming subject matter of such CS (OS) No.2278/2011 Page 15 of 25 agreement, the Court is empowered to look into the following aspects relating to the agreement:-
a) whether there exists a valid arbitration agreement;
b) whether the parties to the dispute before the civil Court are also the parties to the agreement;
c) whether the entire dispute raised before the Court is subject matter of arbitration or only the part of the dispute is subject matter to the arbitration; and
d) whether the said dispute raised before the Courts is actually arbitrable in nature or not?
40. The Supreme Court in the case of P. Anand Gajapati Rajuvs PVG Raju, reported in (2000) 4 SCC 539 has observed that while the language of Section 8 of the Arbitration Act is peremptory, that is, a reference is mandatory; it is, however, subject to the fulfillment of the conditions contained therein before parties can be relegated to a arbitral forum. The conditions paraphrased in the said judgment are briefly as follows:
(i) there is in place an arbitration agreement;
(ii) the party which has brought the action' to Court is a party to the arbitration agreement;
(iii) that the subject matter of the action' is the same as the subject matter of the arbitration agreement; and,
(iv) lastly, the applicant/party, which seeks a direction from the Court that parties should be relegated to arbitration, should move the Court before submitting his first statement on the substance of the dispute.
41. Recently, the Supreme Court in the case of Booz Allen and Hamilton Inc. Vs. SBI Home Finance Ltd. &Ors. (supra), speaking through Hon‟ble Raveendran, J. (as his lordship then was) has laid down that the scope of enquiry of arbitrability in the context of Section 8 in a pending suit is wider than in the cases relating to appointment of Arbitrator by the Court u/s 11of the Act. The said difference has been noted by Supreme Court by observing CS (OS) No.2278/2011 Page 16 of 25 as under:-
"The nature and scope of issues arising for consideration in an application under Section 11 of the Act for appointment of arbitrators, are far narrower than those arising in an application under Section 8 of the Act, seeking reference of the parties to a suit to arbitration. While considering an application under Section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of „arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal."
"If the arbitrator wrongly holds that the dispute is arbitrable, the aggrieved party will have to challenge the award by filing an application under Section 34 of the Act, relying upon sub-Section 2(b)(i) of that Section. But where the issue of 'arbitrability' arises in the context of an application under Section 8 of the Act in a pending suit, all aspects of arbitrability have to be decided by the Court seized of the suit, and cannot be left to the decision of the Arbitrator. Even if there is an arbitration agreement between the parties, and even if the dispute is covered by the arbitration agreement, the Court where the civil suit is pending, will refuse an application under Section 8 of the Act, to refer the parties to arbitration, if the subject matter of the suit is capable of adjudication only by a public forum or the relief claimed can only be granted by a special Court or Tribunal." (Emphasis Supplied).
42. The Hon‟ble Court has further elaborated the meaning of the word "arbitrability" in the following manner:-
"The term „arbitrability' has different meanings in different contexts. The three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as under:
i. whether the disputes are capable of adjudication and settlement by arbitration? That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the arbitral tribunal) or whether they would exclusively fall within the domain of public fora (Courts).CS (OS) No.2278/2011 Page 17 of 25
ii. Whether the disputes are covered by the arbitration agreement? That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the `excepted matters' excluded from the purview of the arbitration agreement.
iii. Whether the parties have referred the disputes to arbitration? That is, whether the disputes fall under the scope of the submission to the arbitral tribunal, or whether they do not arise out of the statement of claim and the counter claim filed before the arbitral tribunal. A dispute, even if it is capable of being decided by arbitration and falling within the scope of arbitration agreement, will not be „arbitrable' if it is not enumerated in the joint list of disputes referred to arbitration, or in the absence of such joint list of disputes, does not form part of the disputes raised in the pleadings before the arbitral tribunal."
43. From the reading of foregoing illuminating observations of Supreme Court of India in the case of Booz Allen (supra), it is amply clear that the Court seized of the dispute in a civil suit is within its powers to see and ascertain fully about the arbitrability of the case and all other facets of arbitrability as stated by the Court prior to making such reference of disputes in arbitration and the said enquiry u/s 8 of the Act is wider in scope than that of Section 11 of the Act.
44. One of such facets of arbitrability is that whether the subject matter of suit as raised by the parties to the suit is clearly covered within the agreement containing arbitration clause. Second is the question which is whether the parties which are raising cause of action in the suit are the same which have agreed to refer their disputes as per the agreement to the arbitration. This is essential due to the reason that if the cause of action still remains to be decided by the civil Court dehors some part of cause of action or the dispute which has been agreed to by some of the parties to refer to the arbitration, then the judicial trend leans towards non referral of the dispute as the basic intent of arbitration CS (OS) No.2278/2011 Page 18 of 25 is to expedite the resolution of disputes rather than complicating it by bifurcating the cause of actions from the same dispute.
45. This aspect has been minutely explained in detail in the case of Sukanya Holdings Pvt. Ltd vsJayesh H. Pandya & Anr, (supra) wherein the Supreme Court while interpreting Section 8 of the Arbitration and Conciliation Act, 1996, has observed on the similar lines as under:-
"Secondly, there is no provision in the Act that when the subject matter of the suit includes subject matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators.
Thirdly, there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the Court may refer the same to arbitration provided that the same can be separated from the rest of the subject matter of the suit. Section also provided that the suit would continue so far as it related to parties who have not joined in such application."
Thereafter, the Court has proceeded to hold that only those disputes which are entirely covered by the arbitration for which the suit is concerned shall be referred to the arbitration and not the part of the disputes in the suit. This has been explained by the Supreme Court in the following words:-
"The relevant language used in Section 8 is "in a matter which is the subject matter of an arbitration agreement", Court is required to refer the parties to arbitration. Therefore, the suit should be in respect of 'a matter' which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced - "as to a matter"
which lies outside the arbitration agreement and is also between some of the parties who are not CS (OS) No.2278/2011 Page 19 of 25 parties to the arbitration agreement, there is no question of application of Section 8. The words 'a matter' indicate entire subject matter of the suit should be subject to arbitration agreement."
(Emphasis Supplied) "The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act? In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. (Emphasis Supplied) If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.(Emphasis Supplied) Secondly, such bifurcation of suit in two parts, one to be decided by the arbitral tribunal and other to be decided by the civil Court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums.
46. These observations in Sukanya Holdings (supra) were made by the Supreme Court in the context of Section 8 of the Arbitration and Conciliation Act, 1996. Thus, it is further clear that the Court u/s 8 of the Act can see whether the dispute which is before the Court is completely covered by the arbitration agreement as the language of Section 8 relates to "a matter"
which shall be the subject of arbitration and further is entitled to see whether the parties to the suit raising their grievances correspond with the parties to the arbitration agreement.CS (OS) No.2278/2011 Page 20 of 25
This dictum of Sukanya Holdings has been followed time and again by many Courts as well as by this Court whereby it was held that, where there are genuine claims raised by the parties to the suit which can be conveniently adjudicated by the civil Court irrespective of the fact that there exists an arbitration agreement. In those cases, the Courts have refused to refer the dispute to the arbitration. However, there is a line of authority which is also emerging wherein parties to the agreement intentionally add other parties in the suit in order to wriggle out of arbitration agreement and in those cases, the Courts have also not remained hesitant in lifting the veil and examining the correct position between the parties and proceed to refer the dispute when the dictum of Sukanya Holdings (Supra) becomes distinguishable. (kindly see the judgments of this Court rendered in Virender Yadav vs. Aerosvit Airlines &Ors. 153 (2008) DLT 250 and in W.P.I.L. vs. NTPC Ltd. 2009 (1) Arb.L.R. 378 where this Court distinguished Sukanya (supra) in appropriate case).
47. Applying the said test relating to Section 8 of the Arbitration and Conciliation Act, 1996 as laid down by the Apex Court to the present case, it can be seen that the parties to the present suit are as under:-
a) GTL Limited as plaintiff No.1
b) Chennai Network Infrastructure Ltd as the plaintiff No.2
c) GTL Infrastructure Limited as plaintiff No.3
d) IFCI Limited as Defendant No.1
48. It is further noteworthy that in the previous suit CS(OS) No.1771 of 2011, in the order dated 29th August, 2011 the finding has arrived at that Plaintiff No.1 and Defendant No.3 ( which is the plaintiff No.2 in the present suit) in that suit are joint promisors considering the role of Plaintiff No.1 in the said Facility Agreement and the non disposal of escrow agreement.
49. Thus, the Plaintiff No.1 being a joint promisor as held by CS (OS) No.2278/2011 Page 21 of 25 this Court in the its order dated 29th August, 2011 is one of the parties to the subject dispute which has been surfaced by the Court now at present. The said plaintiff No.1 has a role and obligation to perform to the extent of providing the top up requirement of the security cover as per the reading of the agreement. Rather, the said finding in the order dated 29th August, 2011 further clarifies that the plaintiff No.1 and the defendant No.3 or the plaintiff No.2 have equal right of redemption of the pledge of the share of whose pledgee is the defendant No.1 is at present by virtue of the same very order of this Court. Thus, the role of plaintiff No.1 being a joint promissor or co-pawnor cannot be omitted and his claims also require adjudication if they are not included in the arbitration agreement.
50. Clearly and plainly even if it is accepted that the arbitration agreements if at all have been between the Plaintiff No.2 and plaintiff No.3 and the Defendant, it is unclear as to how the claims of Plaintiff No.1 as a declared co-pawnor being a party to the Non Disposal Escrow Agreement and having role in Facility Agreement can be decided by the arbitration when the said plaintiff No.1 is not signatory to such CDR, DCA and ICA. The said plaintiff No.1 though is a group company is a separate legal entity having distinct role in the Escrow agreement being a shareholder and the plaintiff No.2 is a borrower.
51. Therefore, it is highly doubtful as to how the entire dispute between all the parties to the suit can be said to be arbitrable and can be referred to the arbitration and not only the bifurcated claim which is sought to be referred by the applicant/ defendants seeking the said referral of the arbitration. The contention of defendant No.1 is still available to them to the effect, as to whether the second suit filed by the plaintiffs is maintainable or not, or whether CDR mechanisms and agreements referred to above is binding on the defendants or not. All these objections raised by the defendants are serious questions which have to be CS (OS) No.2278/2011 Page 22 of 25 determined by the Court at the appropriate stage when raise. At present, in the suit, merely an ex parte ad-interim injunction was not issued when the matter was listed first time before the Court. I am of the considered view that merely on the basis of averment made in the written submissions of the plaintiffs in the appeal, prayer made in the application cannot be allowed.
52. The present case is squarely covered within the parameters of law laid down by Sukanya Holdings (supra). Therefore, it is incomprehensible to how the present dispute can be covered with DCA and ICA signed by the some parties to the suit which are the plaintiff No.2, 3 and defendant No.1 without having plaintiff No.1 as a party to such agreement. thus, only bifurcated dispute relating to borrower and lender can be said to be said to be subject matter of DCA and ICA and not the dispute relating to shareholder whose shares are pledged vis-a-vis borrower or lender who has equal right to redemption. Under these circumstances, the powers u/s 8 of the Act cannot be exercised to refer the dispute to the arbitration
53. It is also clear from the version of the Defendant/ Applicant itself that there exists no arbitration agreement between the parties. This is due to the reason that the Defendant is stating in the written submission in para 2 and oral submission that without prejudice to the plea of Defendant that there exists no agreement between the parties because the plaintiff is setting up the said agreement, the Court must refer the dispute to the arbitration. Such kind of plea cannot be accepted wherein on the one hand the Defendant disputes the existence of agreement and on the other hand applies for referral of dispute to the arbitration. This itself means that the applicant seeking referral for arbitration is unclear as to whether there exists an arbitration agreement between the parties or not and intends to challenge the existence of such arbitration agreement. Further, as per the legal position only the party to the arbitration agreement can seek reference of CS (OS) No.2278/2011 Page 23 of 25 the dispute to the arbitration and not the outsider. Thus, the defendant No.1 by taking such plea himself is raising the doubts as to existence of the arbitration agreement. It is one thing to say that the agreement is not binding on particular party or for that matter the said agreement is vitiated by fraud or otherwise there is a ground which affects the liability of the party to the agreement. However, it is altogether different thing to say that such agreement does not exist at all between the parties. In the former case, the referral to the arbitration can be made at the behest of such party where in it does not deny the existence of the agreement but only sets up the challenge as to the validity or intends to escape the liability, but in the later case, where the party challenges the very existence of the arbitration agreement, it is inconceivable as to how the referral can be made the arbitration at the behest of such party.
54. The Court u/s 8 is within its powers to ascertain the existence of valid arbitration agreement as a prerequisite to the said referral of dispute cannot allow this uncertainty to prevail wherein the party which is the applicant is intending to seek the referral of dispute to the arbitration leaving it open the challenge as to existence of agreement, binding nature of the agreement upon the party and proceed to ask for referral solely on the count as the plaintiffs are setting up the said agreements. This is against the fundamental and basic tenets of arbitration which is that it is consensual dispute resolution mechanism.
55. Secondly, the argument could be taken that what is an arbitrable dispute in the present case is only the subject matter of the present suit and not the subject matter of the previous suit and hence the above line of reasoning may not be appropriate.
56. As already held in earlier suit that plaintiff No.1 as a co-pawnor who has a equal right of redemption as per the order dated 29th August, 2011 who is also seeking to prevent the defendants together with the plaintiff No.2 till the time CDR CS (OS) No.2278/2011 Page 24 of 25 mechanism and standstill clause is under operation. Thus, the said role of the plaintiff No.1 and his role and right to seek such relief is independent in some way to that of the plaintiff No.2 being a separate legal entity and co-pawnor. Thus, the reference to the arbitration is not possible due to bifurcation of the claims.
57. At this stage, it is only to be seen that whether the dispute is covered by the arbitration agreement or not. It is altogether different matter as to what merit the plaintiff No.1 claim has in law. But the strength or the weakness of the claim cannot deny the remedy to the plaintiff No.1 as a party.
58. Finally, the argument of the defendants that the plaintiffs have raised some arguments in the FAO (OS) No.459/2011 relating to DCA and ICA agreement by submitting before the Court that the promises contained in the two agreement are reciprocal in nature and comprises a one covenant and thus the matter could be referred to an arbitration is rejected. I have already arrived at the finding above that even if the two agreements DCA and ICA are assumed to be a single agreement, still the claims of the plaintiff No.1 as a co-pawnor remains unadjudicated in the event the matter is referred to an arbitration and the subject matter of the suit is not covered by the arbitration agreement due to the non-satisfaction of the ingredients of Section
8. Thus, the argument does not aid the case of the defendant/ applicant.
59. Consequently, IA No.16171/2011 is dismissed.
CS (OS) No.2278/2011List on 12th September, 2012.
MANMOHAN SINGH, J.
JULY 06, 2012 CS (OS) No.2278/2011 Page 25 of 25