Telangana High Court
Mr. Mohd Moualana vs M/S. Brightway Communications on 12 August, 2024
Author: K. Lakshman
Bench: K. Lakshman
HONOURABLE SRI JUSTICE K. LAKSHMAN
ARBITRATION APPLICATION No.56 OF 2024
ORDER:
Heard Ms. B. Nishitha, learned counsel for the Applicant and Mr. A. Tulsi Raj Gokul, learned counsel appearing for Respondent Nos.1 and 2.
2. The Respondent No. 1 firm, named M/s. Brightway Communications, was established through a Partnership Deed dated 01-02-2012, executed between Mr. Kaveti Manohar Kumar and Mrs. Motadu Padmalatha. This partnership is registered under the provisions of the Partnership Act, 1932, with registration No. 2577/2014, allocated a 50% share in profits and losses to each partner. The original partners are no longer part of the firm. The business was founded to operate a cable network by laying cables and providing cable and internet connections to subscribers, either directly or through franchise cable operators. The firm was also set up to engage in the business of importing, exporting, trading, dealing, and acting as agents for various products, including comics, film books, calendars, greeting cards, posters, sticker toys, stationery, computer peripherals, cable TV material, television electronics, and television set-top boxes, 2 as outlined in Clause 3 of the Partnership Deed. The partnership was empowered to undertake any other business with mutual consent of the partners.
3. A Reconstitution of Partnership Deed, dated 09-05-2015, introduced Respondent Nos. 2 and 4 as new partners. The profit and loss distribution was revised as follows: (1) Kaveti Manohar Kumar - 5%; (2) MotaduPadmalatha - 50%; (3) Respondent No. 2 - 20%; and (4) Respondent No. 4 - 25%. Shortly thereafter, an "Admission-cum- Retirement Deed" dated 02-07-2015 was executed, leading to the retirement of Mrs. Motadu Padmalatha from the partnership. Simultaneously, the Applicant, along with Respondent Nos. 3, 5, 6, and 7, were inducted as partners. This Deed revised the distribution of profits and losses accordingly.
4. Respondent No. 2 presently serves as the Managing Partner of the firm. The Applicant and other partners resolved that the partnership firm's books of accounts should be audited by a certified Chartered Accountant, including all ledger documents from the firm's inception. However, despite the passage of sufficient time, Respondent No. 2 failed to present the books of accounts to the partners. The accounts have not been audited by a certified Chartered 3 Accountant, nor has any information regarding the finalization of the accounts been communicated to the partners. Consequently, the partnership firm is effectively being operated as a sole proprietary concern by Respondent No. 2. Moreover, Respondent No. 2 is engaging in activities detrimental to the interests of the other partners. There is misappropriation of funds of Respondent No.1 firm and participating in activities, causing financial and business losses, as well as mental distress to the Applicant.
5. It was submitted that Respondent No. 2 has misappropriated amounts of Rs. 2,50,00,000/- (Rupees Two Crore Fifty Lakhs) and Rs.4,00,00,000/- (Rupees Four Crores) for personal use. Consequently, the Applicant and other partners have repeatedly requested Respondent No. 2 to disclose the financial transactions of the partnership firm. However, Respondent No. 2 has consistently failed to respond. Furthermore, Respondent No. 2 is engaging in illegal activities, misusing partnership funds, and misappropriating prepaid amounts paid by members of the firm.
6. It was further contended that Respondent No. 2 is attempting to alienate the business of the Partnership Firm by presenting it as his sole proprietary concern. To counteract this, a public notice was 4 published on 18-07-2019 in the Telugu Daily Newspaper "Eenadu,"
Hyderabad Edition, warning the general public against entering into any sale transactions concerning the business of Respondent No. 1. This action underscores that Respondent No. 2 is endeavoring to sell the partnership firm without the consent of the other partners, contrary to the terms of the Partnership Deed dated 01.02.2012 and the provisions of the Partnership Act, 1932. Since the Applicant's induction into the partnership firm on 02.07.2015, the Respondents have failed to render the firm's accounts. Despite multiple requests from the Applicant, Respondent No. 2 and the other Respondents have continuously deferred providing the accounts, showing a pattern of postponement and disregard.
7. The Applicant issued a legal notice dated 01.11.2022, demanding the Respondents to furnish the audited accounts, certified by a Chartered Accountant, along with the ledger, within seven days of receipt. The Applicant also invoked Arbitration Clause No. 13 of the Partnership Deed dated 01.02.2012. No response was received from any Respondent except Respondent No.7, who acknowledged his resignation on 13.09.2019 under a Retirement Deed, which is 5 contested through this application. However, there was no reply to the legal notice by the Respondent No.2.
8. The Arbitration clause enumerated in Partnership Deed dated 01.02.2012 is extracted below Clause 13 - Arbitration: All disputes and question in connection with the partnership or this deed between the partners or between any of them and the third party or parties may be settled by arbitration under the provisions of Indian Arbitration Act, then in force.
9. Respondent Nos.1 and 2 in their counter contended that the present application is not maintainable as it fails to establish any arbitrable dispute warranting arbitration. The allegation by the Applicant, specifically the non-rendition of accounts by the Respondent No.1 firm, is false. From the year 2018 onwards, the annual audited accounts of the Respondent No.1 firm were consistently communicated to the Applicant on his email. No genuine arbitrable dispute exists to justify the invocation of arbitration. The Applicant's claim of non-receipt of account statements, which is unfounded, does not constitute a valid basis for arbitration.
10. The contention that the Applicant, since joining the Respondent No.1 firm on 02.07.2015, has not been provided with the 6 firm's accounts is unsubstantiated. The Applicant's invocation of Clause 13, the arbitration clause in the Partnership Deed dated 01.02.2012, is inappropriate. The proper remedy for the Applicant is to seek recourse through the Civil Court. Therefore, the submissions made by the Applicant are patently false and misleading, warranting the dismissal of this application.
11. Perusal of rival submissions, the short question which arises for consideration of this Court is, the jurisdiction of the referral court at pre-referral stage when the issue with respect to the existence of any arbitrable disputes between the parties which necessitates appointment of an Arbitrator.
12. While acknowledging that Post the 2015 Amendment, judicial interference at the reference stage has been substantially curtailed as the structure of the Act was changed to bring it in tune with the pro-arbitration approach. However, reference Courts still cannot mechanically appoint arbitrator without conducting a prima facie test as to the existence of any bona fide arbitrable disputes between the parties. The prima facie review by this Court at the reference stage is to cut the deadwood and trim off the side branches 7 in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law, the litigation must stop at the first stage.
13. The limited scope of judicial scrutiny at the pre-referral stage is navigated through the test of a "prima facie review". This is explained by the Apex Court in as Vidya Drolia v. Durga Trading Corpn. 1 "133. Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the Arbitral Tribunal. It is restricted to the subject-matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide. When read with the principles of separation and competence- competence and Section 34 of the Arbitration Act, the Referral Court without getting bogged down would compel the parties to abide unless there are good and substantial reasons to the contrary. [The European Convention on International Commercial Arbitration appears to recognise the prima facie test in Article VI(3):"VI. (3) Where either party to an arbitration agreement has initiated arbitration proceedings before any resort is had to a Court, Courts of contracting States subsequently asked to deal with the same subject-matter between the same parties or with the question whether the arbitration agreement was non-existent or null and void or had lapsed, shall stay their ruling on the arbitrator's jurisdiction until the arbitral award is 1 (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549 8 made, unless they have good and substantial reasons to the contrary."]
134. Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non- existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the Court is certain that no valid arbitration agreement exists or the disputes/subject-matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the Court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial....
(emphasis supplied)
14. In NTPC Ltd. v. SPML Infra Ltd., 2 a two-Judge Bench of the Apex Court was faced with the issue of "accord and satisfaction"
in the context of a petition filed under Section 11 of the Act, for appointment of arbitrator. Placing reliance on Vidya Drolia (supra), the Apex Court gave the "Eye of the Needle" test to delineate the contours of the power of interference which the referral Court may exercise under Section 11 of the Act, 1996. The first prong of the said test requires the court to examine the validity and existence of the 2 (2023) 9 SCC 385 9 arbitration agreement which includes an examination of the parties to the agreement and the privity of the Applicant to the contract. The second prong of the test requires the Court to, as a general rule, leave all the questions of non - arbitrability to the arbitral tribunal and only as a demurrer, reject the claims which are ex-facie and manifestly non-
arbitrable. Therefore, it permits the referral Court to reject arbitration in such exceptional cases where the plea of fraud or coercion appears to be ex-facie frivolous and devoid of merit. The relevant paragraphs are extracted below;
Eye of the needle
25. 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 Court. The secondary inquiry that may arise at the reference stage itself is with respect to the non- arbitrability of the dispute.
26. As a general rule and a principle, the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. As an exception to the rule, and rarely as a demurrer, the Referral Court may reject claims which 10 are manifestly and ex facie non-arbitrable [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, para 154.4 :
(2021) 1 SCC (Civ) 549] . Explaining this position, flowing from the principles laid down in Vidya Drolia [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549] , this Court in a subsequent decision in Nortel Networks [BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC 738 : (2021) 3 SCC (Civ) 352] held [BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC 738, para 45.1 : (2021) 3 SCC (Civ) 352] : (Nortel Networks case [BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC 738 : (2021) 3 SCC (Civ) 352] , SCC p. 764, para 45) "45. ... 45.1. ... While exercising jurisdiction under Section 11 as the judicial forum, the Court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation.
Limited jurisdiction of the Courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere "only" when it is "manifest" that the claims are ex facie time- barred and dead, or there is no subsisting dispute."
27. The standard of scrutiny to examine the non-arbitrability of a claim is only prima facie. Referral Courts must not undertake a full review of the contested facts; they must only be confined to a primary first review [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, para 134 : (2021) 1 SCC (Civ) 549] and let facts speak for themselves. This also requires the Courts to examine whether the assertion on arbitrability is bona 11 fide or not. [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549] The prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. [BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC 738, para 47 : (2021) 3 SCC (Civ) 352] On the other hand, even if there is the slightest doubt, the rule is to refer the dispute to arbitration [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, para 154.4 :
(2021) 1 SCC (Civ) 549] .
28. The limited scrutiny, through the eye of the needle, is necessary and compelling. It is intertwined with the duty of the Referral Court to protect the parties from being forced to arbitrate when the matter is demonstrably non-arbitrable [Ibid.] . It has been termed as a legitimate interference by Courts to refuse reference in order to prevent wastage of public and private resources [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, para 139 : (2021) 1 SCC (Civ) 549] . Further, as noted in Vidya Drolia [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549] , if this duty within the limited compass is not exercised, and the Court becomes too reluctant to intervene, it may undermine the effectiveness of both, arbitration and the Court [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, para 139 : (2021) 1 SCC (Civ) 549] . Therefore, this Court or a High Court, as the case may be, while exercising jurisdiction under Section 11(6) of the Act, is not expected to act mechanically merely to deliver a purported dispute raised by an Applicant at the doors of the chosen arbitrator, as explained in DLF Home Developers 12 Ltd. v. Rajapura Homes (P) Ltd. [DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd., (2021) 16 SCC 743, paras 22, 26 : 2021 SCC OnLine SC 781, paras 18, 20]
15. In the light of the aforesaid legal position, as discussed supra, in the present case, there are disputes between the Applicant, respondent No.1 and Respondent No.2 with regard to the affairs of Respondent No.1. According to the Applicant, there is misappropriation of funds to the tune of Rs.2,50,00,000/- (Rupees two crores fifty lakhs only) and Respondent No.2 used an amount of Rs.4,00,00,000/- (Rupees four crores only) of Respondent No.1 firm to his personal use. Therefore, he requested Respondent No.2 to disclose the financial transaction of Respondent No.1. According to the Applicant, Respondent No.2 is engaging in illegal activities, misusing the funds of Respondent No.1 partnership firm, misappropriating pre-paid amounts paid by the partners of Respondent No.1 firm. Respondent No.2 tried to alienate the property of Respondent No.1 and therefore, a caution notice was published in 'Eanadu' Telugu daily newspaper. Thus, this Court is of the considered opinion that there are disputes between the Applicant, Respondent No.1 and Respondent No.2 which are arbitrable in nature. The same would be adjudicated by an Arbitrator.
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16. Accordingly, This Arbitration Application is allowed. Sri Justice M. Seetharama Murti, Former Judge of High Court of Andhra Pradesh at Amaravati. is appointed as sole Arbitrator to adjudicate the disputes between the parties. The parties are at liberty to take all the defences before the learned sole Arbitrator.
As a sequel thereto, miscellaneous petitions, if any, shall stand pending.
__________________________ JUSTICE K. LAKSHMAN, J Date: 06.08.2024.
b/o. vvr.