1. This application is filed under Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996 (for short ‘the Act’), seeking to appoint any person as sole arbitrator as per the arbitration agreement dated 30.09.2009, and the first and second supplementary agreements dated 13.03.2010 and 14.03.2011, entered into between the parties.
2. As per the arbitration application, the 1st applicant is M/s Shakthi Concrete Industries Limited and the 2nd applicant is Mr. Kanagiri Gyam Sagar, who is the Managing Director of the 1st applicant – company. The case of the 2nd applicant is that, he along with his family members, promoted and incorporated the 1st applicant – company. The 3rd respondent is M/s SCIL Infracon Private Limited and it is represented through its Principal Officer.
3. The 1st respondent is M/s HBL Powers Systems Limited and the 2nd respondent is the Chairman and the Director of the 1st respondent – company. The 4th respondent is the person, who purchased 500 shares of 3rd respondent – company, from the 1st respondent – company.
4. In the affidavit filed in support of the arbitration application it is stated that the 1st applicant was holding 49,50,000 equity shares in the 3rd respondent – company and there also other share holders, holdings equity shares in the said company. The 1st applicant agreed to sell 29,50,000 shares out of its 49,50,000 in the 3rd respondent – company, and the other share holders in the said company also agreed to sell their shares to the 1st respondent - company, and accordingly agreement dated 30.09.2009 was executed between the parties. Subsequently, by virtue of the first supplementary agreement dated 13.03.2010, the 1st applicant – company agreed to sell its 10,00,000 equity shares out of the balance shares held by it, and by virtue of the second supplementary agreement dated 14.03.2011, agreed to sell the remaining equity shares of 10,00,000. Thus, by virtue of the original agreement dated 30.09.2009, and the two supplementary agreements dated 13.03.2010 and 14.03.2011, the 1st applicant agreed to sell 49,50,000 equity shares held by it in the 3rd respondent – company, to the 1st respondent – company.
5. It is further stated that in pursuance of the agreement dated 30.09.2009, the 1st respondent paid Rs.1,00,00,000/- (Rupees one crore), and subsequently on 12.1.2010 and 5.2.2010 paid Rs.19,50,000/- (Rupees nineteen lakhs, fifty thousand only) and Rs.3,50,000/- (Rupees three lakhs fifty thousand only) respectively. Though the 1st applicant is following up with respondents 1 and 2 for payment of the balance of agreed sale consideration, on one pretext or the other, payment has not been made.
6. That though the balance payment has not been made, the 1st applicant executed transfer deeds relying on the assurances of respondents 1 and 2, that the said transfer deeds will not be acted upon without payment of the agreed sale consideration. The grievance of the applicants is that without payment of agreed sale consideration as assured, based on the transfer deeds executed by the 1st applicant, the 1st respondent caused transfer of these shares by manipulating the statutory records.
7. The further case of the applicants is that as the 1st respondent failed to pay the balance of sale consideration, which Rs.1,88,30,656/- (Rupees one crore, eighty eight lakhs, thirty thousand, six hundred and fifty six), and interest on the said amount, in spite of several requests, and as the agreements provide for resolving of the disputes arising out of the said agreement through arbitration, they issued notice dated 23.07.2013, invoking arbitration clause and appointing Mr. C.Ramachandram, Chartered Account as their nominee arbitrator and further informing that in case the respondents are not agreeable with the said arbitrator, to communicate the name of their nominee arbitrator. Thereafter, the applicants also filed AOP.No.727 of 2013 on 17.04.2013 under Section 9 of the Act. To the arbitration notice issued by the applicants, respondents issued reply dated 17.08.2013, with untenable allegations and failed to give consent or nominate the arbitrator on their behalf. In these circumstances, the present arbitration application came to be filed.
8. Counter affidavit is filed on behalf of respondents 1, 2 and 4 disputing the claim of the applicants. It is stated that the total sale consideration has been paid and that the applicant No.1 – company transferred its entire shares on 2.5.2010, 27.03.2011 and 25.06.2012 by executing the share transfer forms without any protest or dispute and that the obligation under the agreements was fully performed and the same was also acknowledged by the applicants and hence the contract stood discharged and nothing remains, and the arbitration clause under the discharged contracts, cannot be invoked.
9. Apart from the above dispute with regard to the claim of the applicants, it is further stated in the counter affidavit that the 2nd applicant, and respondents 2 and 4 are not parties to the agreements relied on by the applicants and hence, the present application is not maintainable against the said parties.
10. It is further stated that the two supplementary agreements do not provide for arbitration clause and it is specially stated that they supersede all prior oral or written negotiations, representations or agreements reached by the parties and hence the present arbitration application is not maintainable.
11. With these averments inter alia, the present arbitration application is sought to be dismissed.
12. The 3rd respondent – company filed counter affidavit, wherein it is stated that as per the records of the 3rd respondent, the 1st applicant – company, which is holding 49,50,000 equity shares, transferred its shares to the 1st respondent – company. It is stated that the 1st applicant company transferred 29,50,000 equity shares on 11-05-2010, 10,00,000 equity shares on 27.03.2011 and 10,00,000 equity shares on 25.06.2012. As such, 49,50,000 equity shares were transferred by the 1st applicant – company by executing the share transfer deeds in favour of the 1st respondent – company, after receiving the entire sale consideration and that at no point of time, either at the time of transfer, or subsequently, the applicants have never disputed or protested such transfer. It is further stated that for the first time, the applicants by filing petition under Section 9 of the Act, raised false and baseless allegations against the respondents to create a non-existing dispute as an after though to enrich themselves unlawfully.
13. In the counter affidavit, the 3rd respondent further stated that it is not a party to the alleged agreements and hence the arbitration application is not maintainable against it.
14. With these averments in the counter affidavit, the 3rd respondent seeks to dismiss the arbitration application.
15. Learned counsel appearing for the applicants submits that the 1st applicant transferred the shares on inducement and on assuring that the same will not be used or acted upon until the entire agreed sale consideration is paid. But the respondent No.1 failed to pay the balance of sale consideration, and caused the transfer of shares by manipulating the statutory records, which are in their custody. He submits that as the transfer of shares is by inducement and without payment of consideration, it is an arbitral dispute, and as the agreement for transfer of shares provide for arbitration for resolution of disputes arising out of the said agreement, the applicants have invoked the same by issuing arbitration notice.
16. Learned counsel further submits that the agreement dated 30.09.2009, provides for arbitration under clause IX, and as per the clauses mentioned in the supplementary agreements dated 13.03.2010 14.03.2011, they have to be read with the original agreement dated 30.09.2009, and the parties have agreed that they shall constitute an integral part of the original agreement. In view of the said clause in the supplementary agreements, it cannot be said that there is no clause for arbitration in the supplementary agreements, or that they are not bound by the arbitration clause in the principal agreement.
17. Learned counsel further submits that the 2nd applicant is the promoter of the 1st applicant – company and he is the Managing Director of the said company. He executed agreements representing himself, and also as GPA of other share holders and hence, he is a proper and necessary party. Similarly, the 2nd respondent is the Chairman and Managing Director of the 1st respondent – Company. The 1st respondent – Company transferred 500 shares held by it in the 3rd respondent – company, to the 4th respondent. Therefore, they have interest and they are proper and necessary parties, and though they are not parties and signatories to the agreements, they are bound by the arbitration agreement. In support of his case, learned counsel relied on the judgment in CHERAN PROPERTIES LTD. v. KASTURI & SONS LTD (2018)16 SCC 413), wherein the Apex Court, invoking the ‘group of companies’ doctrine, held that where there is commonality of subject matter and the composite nature of transaction, then the non-signatory to such agreement, is bound by the arbitration agreement.
18. With these contentions, learned counsel seeks for appointment of an arbitrator to resolve the disputes between the parties and to pass an award in accordance with law.
19. On the other hand Sri Rupendra Mahendra, learned counsel appearing for all the respondents, reiterating the averments made in the counter affidavits, submits that the entire sale consideration has been paid to the 1st applicant, and it transferred the shares held by it in the 3rd respondent - company, and at no point of time, the 1st applicant has raised any dispute, and that only for the first time, it raised the dispute in the petition filed under Section 9 of the Act. He submits that AOP No.727 of 2013 filed by the applicants under Section 9 of the Act on the file of the Chief Judge, City Civil Court, Hyderabad was dismissed. He further submits that as the obligation under the contract stood discharged, arbitration clause in the agreements cannot be invoked and that the allegation of inducement was introduced only to indulge in speculative litigation. He submits that as the applicants have not made out even a prima facie case to show that arbitral dispute exists, the present application is not maintainable.
20. Learned counsel further submits that in the supplementary agreement, there is no arbitration clause and the said agreements supersede earlier agreement. He submits that respondents 2, 3 and 4 are not the signatories to the agreements entered into between the 1st applicant and the 1st respondent companies. He further submits that as per Section 7(4) (a) of the Act, the arbitration agreement means the document signed by the parties. In the present case, since respondents 2, 3 and 4 are not the signatories, the agreement between applicant No.1 and respondent No.1, does not constitute arbitration agreement for these respondents, and hence, they cannot be subjected to arbitration.
21. However, on instructions, he submits that the 3rd respondent – company has no objection for appointment of an arbitrator.
22. In the agreement dated 30.09.2009 entered into between the 1st applicant and the 1st respondent, clause IX provides for dispute resolution mechanism. The said clause for ready reference is extracted as under:
IX Dispute Resolution:
1. Any dispute arising out of or relating to this Agreement shall be settled by the parties hereto through friendly consultation.
2. If any dispute is not settled through friendly consultation by the parties hereto within thirty days after its occurrence, such dispute shall be submitted for arbitration according to its rules then in effect. The award of arbitration is final and binding upon both parties.
3. If any provision of this agreement shall be determined to be invalid according to the relevant laws, the remaining of this Agreement shall continue to be valid and enforceable.
23. In the supplementary agreement dated 13.03.2010, Clause VI provides as under:
VI Representations, other matters relating and Amendment to this Agreement:
The parties hereto agree this Supplementary Agreement shall constitute an integral part of the original Agreement. Any further amendments or additions shall constitute an integral part of this agreement read together with original agreement. Except to the extent of amendments in Supplementary Agreement(S), the Original and Amended Agreements shall remain valid and binding on all parties, mutatis mutandis.
25. In the second supplementary agreement dated 14.03.2011, Clause 10 provides as under:
10. This Supplementary Agreement (read with the Original Agreement executed on 30th September, 2009 and First Supplementary Agreement executed on 15th March, 2010) supersedes all prior oral or written negotiations, representations or agreements reached by the parties.
25. Reading of the arbitration clause in the original agreement dated 30.09.2009 goes to show that if the dispute arising out of this agreement is not settled through friendly consultations, within thirty days after its occurrence, such dispute shall be submitted to arbitration. In the first supplementary agreement the parties have agreed that the said supplementary agreement shall constitute an integral part of the original agreement. In the second supplementary agreement, the parties have agreed that the said supplementary agreement shall be read with the original agreement and the first supplementary agreement.
26. In view of the above, it is clear that the supplementary agreements are integral part of the original agreement and in view of the existence of the arbitration clause in the original agreement, it covers even the supplementary agreements. Hence, the contention of the learned counsel for the respondents that there is no arbitration clause in the supplementary agreements, and that they supersede earlier agreements, is found to be factually incorrect, and hence cannot be sustained.
27. The next contention of the learned counsel for the respondents is that there is no arbitral dispute and that the applicants have not even shown prima facie case.
28. To consider the above contention, the law laid down by Apex Court in similar facts and circumstances, is required to be noticed. In UNION OF INDIA v. PRADEEP VINOD CONSTRUCTION CO. (2020)2 SCC 464)the Apex Court was considering the request of the claimant therein, which was made prior to Amendment Act of 2016, and the facts of which are akin to the facts of the present case, i.e., the appellant – Railways therein was pleading total discharge, and the claim of the respondent / claimant is that it issued discharge voucher under undue influence. In the present case, the claim of the applicant No.1 is that it was induced to transfer the equity shares though it was not paid the balance of agreed sale consideration; and the 1st respondent – transferee company herein, is pleading total discharge. Considering these facts and circumstances, the Apex Court held that it is not inclined to go into the merits of the contentions of the parties and it is for the arbitrator to consider the claim of the parties, and the contentions raised by the parties, were left open to be raised before the arbitrator. The relevant portion is as under:
“18. Insofar as the plea of the appellant that there was settlement of final bill/insurance of “no claim” letter is concerned, the learned counsel for the appellant has drawn our attention on Clause 43(2) – Signing of the “No claim” certificate and submitted that as per Clause 43(2), the contractor signs a “no claim” certificate in favour of the Railways in the prescribed format after the work is finally measured up and the contractor shall be debarred from disputing the correctness of the items covered under the “no claim” certificate or demanding a clearance to arbitration in respect thereof. On behalf of the respondent, it has been seriously disputed that issuance of “no claim” certificate as to the supplementary agreement recording accord and satisfaction as on 6-5-2-14 (CA No.6400 of 2016) and issuance of “no claim” certificate on 28-8-2014 (CA No.6420 of 2016) that they were issued under compulsion and due to undue influence by the Railway Authorities. We are not inclined to go into the merits of the contentions of the parties. It is for the arbitrator to consider the claim of the respondent(s) and the stand of the appellant Railways. This contention raised by the parties is left open to be raised before the arbitrator.”
29. In an other judgment, in ORIENTAL INSURANCE CO. LTD. vs. DICITEX FURNISHING LTD., (2019 SCC On Line SC 1458)the Apex Court considering the request of the claimant therein for reference of the dispute to arbitrator, and which request was made prior to Amendment Act of 2016, held as under:
“23. . . . . This court is conscious of the fact that an application under Section 11(6) is in the form of a pleading which merely seeks an order of the court, for appointment of an arbitrator. It cannot be conclusive of the pleas or contentions that the claimant or the concerned party can take, in the arbitral proceedings. At this stage, therefore, the court-which is required to ensure that an arbitrable dispute exists, has to be prima facie convinced about the genuineness or credibility of the plea of coercion; it cannot be too particular about the nature of the plea, which necessarily has to be made and established in the substantive (read; arbitration) proceedings. If the court were to take a contrary approach and minutely examine the plea and judge its credibility or reasonableness, there would be a danger of its denying a forum to the applicant altogether, because rejection of the application would render the finding (about the finality of the discharge and its effect as satisfaction) final, thus precluding the applicant of its right event to approach a civil court.”
30. Thus in the above judgment, the Apex Court, held that in an application filed under Section 11(6) of the Act, the court has to ensure that an arbitrable dispute exists and that it has to be prima facie be convinced about the genuineness or credibility of the plea raised by the applicant and that it cannot be too particular about the nature of the plea, which is required to be established before the arbitrator. The Apex Court further held that if the court minutely examines the plea and judge its credibility or reasonableness, there would be danger of its denying a forum to the applicant together, because such rejection of the application, would render the finding about the finality of the discharge and its effect as satisfaction, final, thus precluding the applicant of its right even to approach a civil court.
31. In the present case, there is no dispute that the 1st applicant is holding shares in the 3rd respondent – company and it entered into agreements for transfer of shares and it executed transfer deeds and its case is that it was paid only part of agreed sale consideration and the balance was not paid. On the other hand, the claim of the respondent No.1 is that there is total discharge. These circumstances suggest that there is prima facie case, and that an arbitral dispute exists between the parties, which is required to be decided based on evidence to be lead by both the parties. As held by the Apex Court (3 supra), this court cannot minutely examine the credibility or reasonableness of the claim of the 1st 12 applicant, and the same has to be left for the decision of the arbitrator. In view of the above facts and circumstances, the contention of the learned counsel for the respondents in this regard, merits for rejection.
32. The other objection of the learned counsel for the respondents is that the 2nd applicant and respondent Nos.2, 3 and 4 are not parties to the agreements entered into between the 1st applicant and the 1st respondent and hence, they cannot be subjected to arbitration.
33. As per the facts noted above, and the submissions of the learned counsel for the parties, the 2nd applicant is the promoter of the 1st applicant – company and he is the Managing Director of that company and he executed the agreements on his behalf and also on behalf of the other share holders in the 3rd respondent – company. The 2nd respondent is the Managing Director of the 1st respondent – company. The issue is relating to the transfer of shares held by shares holders of the 3rd respondent company. The 1st respondent – company is having 45% shares in the 3rd respondent – company and by virtue of the agreements, it agreed to purchase the shares of 1st applicant - company and other share holders in the 3rd respondent – company, which constitute 55% of the shares. Thus, the 1st respondent – company is the major share holder in the 3rd respondent – company and the 4th respondent herein acquired 500 shares of the 3rd respondent – company, from the 1st respondent – company. The 1st applicant is alleging that the 1st respondent has not paid the entire sale consideration for transfer of its share and all the respondents are pleading total discharge. Thus, the other respondents though are not the signatories to the agreement, as there is commonality of the subject matter, and the result of the arbitration proceedings will have effect on the transfer of shares; the said respondents, who are having interest, are required to be impleaded in the arbitration proceedings for the ends of justice.
34. The Apex Court in CHLORO CONTROLS INDIA (P) LTD. v. SEVERN TRENT WATERPURIFICATION INC. (2013)1 SCC 641)held as under:
“73. A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the court would have to examine whether a composite reference of such parties would serve the needs of justice. Once this exercise is completed and the court answers the same in the affirmative, the reference of even non-signatory parties would fall within the exception afore-discussed.”
35. Following the above judgment, the Apex Court in another judgment in Cheran Properties case (1 supra), held that relationship of the non-signatory to the party which is a signatory, commonality of the subject-matter and the composite nature of the transaction, are the relevant considerations to adjudicate the bindi
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ngness of the agreement on a non-signatory. The Apex Court relied on the material of different authors on arbitration, and the relevant excerpt is as under: “26. Russell on Arbitration (24th Edn., 3-025, pp. 110-11), formulated the principle thus: Arbitration is usually limited to parties who have consented to the process, either by agreeing in their contract to refer any disputes arising in the future between them to arbitration or by submitting to arbitration when a dispute arises. A party who has not so consented, other referred to as a third party or a non-signatory to the arbitration agreement, is usually excluded from the arbitration. There are however some occasions when such a third party may be bond by the agreement to arbitrate. For example, . . . assignees and representatives may become a party to the arbitration agreement in place of the original signatory on the basis that they are successors to that party’s interest and claim “through or under” the original party. The third party can then be compelled to arbitrate any dispute that arises.” 36. In view of the above facts and circumstances of the case and the law laid down by the Apex Court in the decisions cited supra, though respondents 2 to 4 are not the parties to the agreement, they can be subjected to arbitration, since they have commonality of interest of subject-matter and the 4th respondent acquired shares from the 1st respondent, and that subjecting them to arbitration, would be in their interest, and also in the interest of justice. Hence, the objection of the leaned counsel for the respondents in this regard, cannot be sustained. 37. For the foregoing reasons, the arbitration application is allowed. 38. Sri Justice G.Krishna Mohan Reddy, Former Judge of the erstwhile High Court of Andhra Pradesh, is appointed as sole arbitrator to resolve the disputes between the parties and to pass award in accordance with law. 39. The learned Arbitrator is entitled to fees as per the rates specified in the Fourth Schedule to the Act of 1996, inserted by Act 3 of 2016 with effect from 23-10-2015, which shall be borne by both parties in equal shares. 40. Interlocutory applications pending, if any, shall stand closed. No order as to costs. 41. Before parting with the case it is made clear that all the issues are left open to both the parties to agitate before the learned Arbitrator, and the said Arbitrator shall pass award on merits and in accordance with law, uninfluenced by any finding or observation made in this order.