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Datamatics Software Services Ltd. & Others v/s Indepay Networks Pvt. Ltd. & Another

    Chamber Summons No. 669 of 2013 In Suit No. 294 of 2013

    Decided On, 25 November 2013

    At, High Court of Judicature at Bombay

    By, THE HONOURABLE MR. JUSTICE S.J. KATHAWALLA

    For the Plaintiffs: Virag Tulzapurkar, Senior Advocate, along with Anil Menon, instructed by M/s. Anil Menon & Associates, Advocates. For the Defendants: Ricab Chand, instructed by R.B. Sawant, Advocates.



Judgment Text

1. The above Chamber Summons is taken out by the Defendant No.1 'to refer the parties to the suit to arbitration as contemplated under the Arbitration Agreement between the Plaintiff and Defendant No.1'.

2. The Plaintiffs are Companies incorporated under the provisions of the Companies Act, 1956 and carry on the business of software development, information technology services and software services. Plaintiff No. 1 is the subsidiary of Plaintiff No.2. Defendant No. 1 is a Company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of financial payments and transaction processing services. Defendant No. 2 is the Managing Director of Defendant No. 1 and has executed a Deed of Personal Guarantee dated 20th January, 2012, guaranteeing repayment of the liability of Defendant No. 1 to the Plaintiffs.

3. According to the Plaintiffs, in or about January, 2012, Defendant No. 1 approached the Plaintiff No. 1 and requested for loan facilities to fund Defendant No.1's financial need to capitalize on certain new opportunities available to Defendant No.1 at the relevant time. Pursuant to the discussions and negotiations in that behalf, the Plaintiff No. 1 and Defendant No. 1 executed a Convertible Loan Agreement dated 20th January, 2012 ('the Loan Agreement') by which the Plaintiff agreed to lend upto Rs. 1,00,00,000/- (Rupees One Crore only) to Defendant No. 1 for the consideration and on the terms and conditions set out in the Loan Agreement.

Clause 2.1 (vi) (a) of the Loan Agreement provided that Defendant No. 1 would mortgage all present and future movable and immovable properties of the Defendant No.1 including all plant, machinery, furniture, fittings, equipment, book debts, stocks, computer hardware and software and IP rights therein (defined therein as the Mortgaged Assets) in favour of Plaintiff No.1. Clause 2.1 (vi) (b) provided that Defendant No. 2 shall execute a personal guarantee in order to secure the facility being granted by the Plaintiff No.1 to the Defendant No.1.

4. Pursuant to the said Loan agreement, Defendant No. 2 on the same day i.e. on 20th January, 2012, inter alia executed a personal guarantee agreement by which Defendant No. 2 irrevocably and unconditionally guaranteed to the Plaintiff No. 1 the full and prompt payment of the Defendant No. 1's indebtedness including, but not limited to the loan amount under the Loan Agreement. The terms of the Agreement are as set out in the said Personal Guarantee Agreement. Though Clause 15 of the Loan Agreement provided that the disputes between the parties concerning or connected with the interpretation or implementation of the Loan Agreement or arising out of the Loan Agreement would be referred to arbitration, the Personal Guarantee Agreement executed by and between the Plaintiff No.1 and Defendant No.2 did not contain any such arbitration agreement.

5. Thereafter, by an Agreement dated 30th January, 2012, called Master Agreement for Projects ('the Services Agreement'), the Plaintiff No.2 agreed to provide certain services to Defendant No. 1 for the consideration and on the terms and conditions set out in the Services Agreement. Clause 26 of the Services Agreement provides that the parties thereto shall refer their disputes arising out of the said Services Agreement to arbitration under the provisions of the Arbitration and Conciliation Act, 1996.

6. According to the Plaintiffs, the Defendant No.1 failed to make payments under the said Loan Agreement as well as the Services Agreement and Defendant No.2 having given a personal guarantee to make payments to the Plaintiffs also failed to make the payments as agreed.

7. Upon failure of Defendant No.1 to pay its debts, the Plaintiffs have filed the above Suit against Defendant Nos.1 and 2. Prayers (c) to (g) in the Suit pertain to specific performance of the mortgage and enforcement of the mortgage. The same are reproduced hereunder:

(c) That this Hon'ble Court be pleased to order and direct Defendant No. 1 specifically to perform in favour of the Plaintiff No.1 the Loan Agreement, including, specifically, Defendant No.1's obligation to create a mortgage of the said Assets in favour of the Plaintiff, and to execute such documents as may be required for performing the terms of the Loan Agreement in favour of the Plaintiff No.1;

(d) that, for the aforesaid purpose, Defendant No. 1 be ordered and decreed to do all acts, deeds, matters and things, procure all consents, agreements, permissions and sanctions and execute all documents as may be required for effectively performing the Loan Agreement in favour of the Plaintiff No. 1;

(e) that, on such mortgage of the said Assets being created in favour of the Plaintiff No.1, this Hon'ble Court be pleased to declare that the amount payable by the Defendant to the Plaintiff No.1, as set out in the Particulars of Claim at Exhibit M hereto is secured by a valid and subsisting mortgage of the said Assets;

(f) That this Hon'ble Court be pleased to order and direct the Defendant to pay the amounts due and payable to the Plaintiffs as set out in the Particulars of Claim, Exhibit M hereto by such a date as may be fixed by this Hon'ble Court for redemption of the mortgage, failing which the mortgage of the said assets be enforced by and under the orders of this Hon'ble Court by sale thereof and further orders that the sale proceeds be paid over to the Plaintiffs in satisfaction of its claim against the Defendants;

(g) That, in the event that of being any deficit in the amounts recovered on sale of the said assets, a personal decree be passed against the Defendants for repayment of such deficit to the Plaintiffs;'

8. As set out hereinabove, the Defendants have taken out the above Chamber Summons under Section 8 of the Arbitration and Conciliation Act, 1996, to refer the parties to the Suit to arbitration as contemplated under the Loan Agreement between the Plaintiff and Defendant No.1.

9. The Plaintiffs have submitted that the above Suit cannot be referred to Arbitration since the subject matter of the Suit is not arbitrable, and also the subject matter of the Suit and the parties cannot be bifurcated or split. Relying on the decision of the Hon'ble Apex Court in Booz Allen and Hamilton Inc. vs. SBI Home finance Ltd. and others (2011) 5 SCC 532)the Plaintiffs have submitted that since by the present Suit the Plaintiffs are seeking specific performance and enforcement of the mortgage, and enforcement of a mortgage being an enforcement of a right in rem, the same will have to be decided by this Court and not by an Arbitral Tribunal. The Plaintiffs have pointed out that Defendant No. 2 has also executed a Personal Guarantee Agreement wherein he has guaranteed repayment of the 'Guaranteed indebtedness' of the Defendants, but not limited to the amounts due under the Loan Agreement. The Personal Guarantee Agreement does not contain an Arbitration Agreement and thus there is no Arbitration Agreement to which Defendant No.2 is a party, therefore there can be no question of referring the Suit against Defendant No. 2 to Arbitration. Relying on the decision of the Hon'ble Apex Court in SukanyaHoldings Pvt. Ltd. vs. Jayesh H. Pandya and another(AIR 2003 SC 2252), the Plaintiffs submitted that therefore in this case neither the subject matter nor the parties can be split and the Chamber Summons ought to be therefore rejected.

10. The Defendant No.1 has in support of the Chamber Summons, also relied on the decision of the Hon'ble Apex Court in Booz Allen and Hamilton Inc. (supra) more particularly paragraph 27 of the said judgment wherein it is held that, 'An Agreement to sell or an agreement to mortgage does not involve any transfer of right in rem but create only a personal obligation. Therefore, if specific performance is sought either in regard to an agreement to sell or an agreement to mortgage, the claim for specific performance will be arbitral…' Relying on the decision of the Hon'ble Madras High Court in the Chief Controller, Revenue Authority vs. Madras Fertilizers Ltd. (AIR 1975 Madras 360)it is submitted on behalf of Defendant No.1 that the essential characteristics of a mortgage are transfer of interest in present and in specific immovable property. It is submitted that in the present case admittedly there is no transfer of interest and there is no mention in the Loan Agreement as to on which assets the mortgage is specifically created. It is submitted that therefore the requirement of 'transfer of interest' in specific assets is absent in the Loan Agreement and therefore a mortgage suit is not maintainable. It is further submitted on behalf of the Defendant No. 1 that since there is a reference of a Guarantee Agreement in the Convertible Loan Agreement and also a mention of the Loan Agreement in the Guarantee Agreement and both the documents having been executed on the same day i.e. 20th January, 2012, then it has to be construed that both form one agreement or the clauses of one agreement have to be read into the other agreement by implication. It is therefore submitted on behalf of Defendant No.1 that the above Chamber Summons be allowed.

11. I have considered the submissions advanced on behalf of the parties and also the case law relied upon by them. The Plaintiffs and Defendant No.1 executed a Convertible Loan Agreement and Master Agreement for Projects (the Services Agreement) wherein there are arbitration clauses at Clause 15 and paragraph 26 respectively. It is an admitted position that there is no mortgage created as of today. The Plaintiffs have, as reproduced hereinabove, sought reliefs in terms of prayer clauses (c) to (g) of the Plaint for specific performance of the Agreement to mortgage and for enforcement of the mortgage when so created by and under a decree of this Court. This is based on clause 2.2. 1 (vi) of the Convertible Loan Agreement whereby Defendant No. 1 has expressly agreed to create a mortgage in favour of the Plaintiffs.

12. Section 14 (3) (a) (i) of the Specific Relief Act states that the court may enforce specific performance where the suit is for enforcement of a contract to execute a mortgage or furnish any other security for securing repayment of loan which the borrower is not willing to repay at once, provided that where only a part of the loan has been advanced, and the lender is willing to advance the remaining part of the loan in terms of the contract. The Plaintiff is therefore correct in submitting that once the specific performance is ordered in their favour, the Court in the very same suit can grant enforcement of the mortgage as sought for in prayer clause (f). The suit is therefore a composite suit including for enforcement of the mortgage. Those composite reliefs together form the subject matter of the suit. The Plaintiffs are also correct in their submission that the relief for enforcement of the mortgage is not arbitrable as such relief affect the rights of third parties who are not parties to the Arbitration Agreement.

13. Both the parties have relied on the decision of the Hon'ble Apex Court in Booz Allen and Hamilton Inc. (supra). In the said case, the Hon'ble Supreme Court has observed that a mere Agreement to sell or an Agreement to mortgage does not involve any transfer of right in rem but creates only a personal obligation. It is therefore correct that if only specific performance is sought either in regard to an Agreement to sell or an Agreement to mortgage, the claim for specific performance will be arbitrable. However, a mortgage is a transfer of right in rem. A mortgage suit for sale of mortgaged property is an action in rem for enforcement of a right in rem. A suit on mortgage is not a mere suit for money. A suit for enforcement of a mortgage being the enforcement of a right in rem, will have to be decided by the courts of law and not by the Arbitral Tribunal. Hence the present Suit filed by the Plaintiffs seeking both specific performance and enforcement of the mortgage, being a right in rem, will have to be decided by this Court and not by an Arbitral Tribunal. Therefore, as held by the Hon'ble Supreme Court, the subject matter of the present Suit (also being enforcement of the mortgage) is not arbitrable and Reference under Section 8 of the Arbitration Act cannot be directed.

14. The Defendants have relied on the decision of the Hon'ble Madras High Court in the case of the Chief Controller, Revenue Authority (supra). In the said case it was observed that a floating charge does not involve any transfer of an interest in any specific property or creation of a right in any specified property. The Defendants have contended that the plaint or the Suit Agreements do not specify the mortgaged assets and hence it be interpreted as a floating charge. The Plaintiffs have correctly submitted that the said decision of the Madras High Court does not lend any assistance to the Defendants because the same is irrelevant to the subject matter of the present case. The judgment is under the Stamp Act wherein the question arose whether the Trust Deed created a floating charge and whether the same can be stamped as a mortgaged deed. In the instant case, no mortgage has yet been created but the suit is for creation of a mortgage and thereafter its enforcement. The Defendant No.1 has under the Loan Agreement [clause 2.1 (vi) (a)] agreed to mortgage all present and future movable and immovable properties of Defendant No. 1 including all plant, machinery, furniture, fittings, equipment, book debts, stocks, computer hardware and software and IP rights therein in favour of Plaintiff No.1. As submitted by the Plaintiffs, the identification of the mortgaged properties will be done at the trial stage by leading evidence.

15. Again, Defendant No.2 has also executed a Personal Guarantee Agreement wherein he has guaranteed repayment of the 'guaranteed indebtedness' of the Defendant but not limited to the amounts due under the Loan Agreement. The said Personal Guarantee Agreement does not contain an Arbitration Agreement and the Defendant No. 2 is not a party to the two Suit Agreements. Thus there is no Arbitration Agreement to which Defendant No.2 is a party. The Plaintiffs have filed a composite suit as per Order 1 of the Code of Civil Procedure, 1908, wherein the Plaintiffs can club or combine several causes of action against the same Defendants.

16. The Hon’ble Apex Court has in its decision in Sukanya Holdings (supra), inter alia observed as follows:

'13. 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.

17. The relevant language used in S. 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 parties to the arbitration agreement, there is no question of application of S. 8. The words 'a matter' indicates entire subject matter of the suit should be subject to Arbitration Agreement.

18. The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course if possible under Section 8 of the Act? In our view, it would be difficult to give an inter

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pretation 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 the parties who are parties to the arbitration agreement and others are possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such 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. 19. 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.' The Plaintiffs are therefore correct in their submission that in the present case neither the subject matter nor the parties can be split. There is no scope for referring the question of enforcement of the mortgage to Arbitration, in view of the Supreme Court judgment in Booz Allen (supra). The question of referring the suit to Arbitration against Defendant No. 2 cannot arise as there is no arbitration agreement with Defendant No. 2. Hence, on either count a reference to Arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 cannot be directed. 20. In view therefore, the above Chamber Summons is dismissed.
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