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Shaji B. John, Kings International Ltd., Quilon & Others v/s The Marine Products Exports Development Authority, Cochin, Represented by Its Secretary, Dr. G. Santhanakrishnan

    Arb. A. No. 7 of 2009
    Decided On, 13 November 2019
    At, High Court of Kerala
    By, THE HONOURABLE MR. JUSTICE C.T. RAVIKUMAR & THE HONOURABLE MR. JUSTICE N. NAGARESH
    For the Appellants: V. Philip Mathew, Advocate. For the Respondent: Joseph Kodianthara, Mathews K. Uthuppachan, Terry V. James, Advocates.


Judgment Text
Nagaresh, J.

1. Aggrieved by order dated 11.04.2008 in O.P.(Arb) No.140/2004 of the District Court, Ernakulam, the appellants have preferred this Arbitration Appeal invoking the provisions of the Arbitration and Conciliation Act, 1996.

2. Appellants 1 to 6 are Promoters/Directors of the 7th appellant-Company. The 7th appellant-Company undertook setting up of a project of integrated shrimp farming with a total capacity of 150 Million shrimp seed per annum and processing facilities at Tutucorin and Nellore. The processing capacity was to be 6700 Tonnes per annum. The work was to be completed by March, 1994 at an expected cost of RS. 2750 lakhs. The respondent is a statutory body constituted under the Marine Products Exports Development Authority Act. The respondent entered into a Financial Collaboration Agreement with the appellants with respect to the said project on 08.07.1993 under which the respondent was allotted 5 lakhs equity shares with a total value of Rs.50 lakhs. Under Clause 6.2 of the agreement, appellants 1 to 6 were bound to buy back the said equity shares from the respondent. Though the appellants were required to repurchase the shares held by the respondent on 07.07.1995, the appellants could not repurchase in view of the restrictive guidelines issued by the Securities and Exchange Board of India which prohibited transfer of shares under preferential allotment, for a period of three years.

3. Thereupon, the respondent filed Arbitration Request No.17/1998 before this Court and a Sole Arbitrator was appointed. The said Arbitrator dismissed the claim of the respondent as per Award dated 11.11.2000. Subsequently, the respondent filed Arbitration Request No.11/2001 and this Court appointed Sri.Somachudan Nair as the Sole Arbitrator. Before the Arbitrator, the respondent claimed a sum of Rs.1,15,26,027.40. After considering the evidence available on record, the Sole Arbitrator passed an Award dated 14.01.2004 allowing the claim made by the respondent.

4. Aggrieved by the said Award dated 14.01.2004, the appellants preferred O.P. (Arb) No.140/2004 before the District Court, Ernakulam invoking Section 34 of the Arbitration and Conciliation Act, 1996. After hearing both sides, the District Court concluded that the claim made by the respondent is not barred by the principles of res judicata or constructive res judicata since at the time of the earlier arbitration proceedings, the cause of action under Clause 6.2 of the agreement had not arisen. The appellants had raised a contention that since liquidation proceedings have been initiated against the 7th appellant-Company, the Arbitrator ought to have stopped his proceedings. On this point, the District Court found that the agreement in question was between appellants 1 to 6 - Promoters and the respondent and there is no agreement between the 7th appellant-Company and the respondent. The agreement from which the arbitration proceedings arise was signed by the Promoters in their personal capacity. Hence, even if liquidation proceedings were initiated against the 7th appellant-Company, the arbitration proceedings cannot be said to be illegal, held the District Court.

5. The District Court did neither find favour with the argument of the appellants that the agreement in question was not entered into by the Promoters of the 7th appellant-Company as appellants 1 to 6 were Directors of the Company. The District Court further held that any proceeding pending under Section 22 of the Sick Industrial Companies (Special Provisions) Act will not be a bar to the arbitral proceedings.

6. On merits, the District Court found that the Arbitrator has elaborately considered the materials before him as well as the legal contentions urged by the appellants and hence, there is no ground under Section 34 of the Arbitration and Conciliation Act to interfere with and set aside the impugned Award. The District Court, therefore, dismissed O.P. (Arb) No.140/2004 as per order dated 11.04.2008, which is now under challenge.

7. The learned counsel for the appellants argued that the Sole Arbitrator had no jurisdiction to entertain or decide the disputes involved in the matter since as per Clause 10 of the agreement, disputes arising therefrom are to the resolved by two Arbitrators along with an Umpire. Therefore, the Award impugned before the District Court was liable to be interfered with. The counsel for the appellants further urged that as the claims of the respondent were considered and rejected by an earlier Award, a second arbitration was not maintainable and the same is hit by the principles of res judicata. Alternatively, the counsel argued that the court below ought to have found that the respondent has abandoned and waived its claim based on their rights arising out of Ext.A1 agreement, by permitting O.P. No.34/2001 to be dismissed as not pressed. The findings of the District Court regarding res judicata and constructive res judicata are, therefore, liable to be interfered with.

8. The counsel for the appellants further urged that arbitration proceedings should not have been continued in view of the winding up proceedings initiated under Section 22 of the Sick Industrial Companies (Special Provisions) Act against the 7th appellant and the District Court ought to have held so. The appellants did not purchase the shares only in view of the prohibition imposed by the SEBI. The appellants could not have overcome the statutory prohibition. Therefore, the District Court ought to have held that the doctrine of frustration and Section 56 of the Indian Contract Act, 1972 would come into play. On these grounds, the order dated 11.04.2008 of the District Court, Ernakulam is liable to be set aside, contended the counsel for the appellants.

9. The respondent entered appearance and objected to the contentions of the appellants. We have heard the arguments raised by the counsel on either side and perused the records.

10. As regards appointment of Sole Arbitrator, against the conditions contained in the arbitral agreement, it is seen that the respondent by letter dated 23.02.2001 intimated the appellants of nomination of Mr. N. Sukumaran, Retired District Judge and called upon the appellants to nominate their Arbitrator within 30 days. On the failure of the appellants to do so, the respondent filed A.R. No.11/2001 before this Court and this Court appointed the present Arbitrator as the Sole Arbitrator. Therefore, the appellants cannot now be heard to contend that appointment of Sole Arbitrator is illegal, as being violative of the agreement.

11. The appellants urged the grounds of res judicata and constructive res judicata, in order to set aside the Arbitral Award. The contention is that the respondent had earlier filed Arbitration Request No.17/1998 before this Court and the Arbitrator appointed pursuant thereto found that appellants are not liable to repurchase the shares. The claim, therefore, was dismissed on 11.11.2000. The respondent, therefore, filed O.P. (Arb) No.34/2001 before the District Court which was later dismissed as not pressed. The respondent, therefore, was barred by the principles of res judicata. But, the facts revealed from the records would show that the claim made in A.R. No.17/1998 was rejected by the Arbitrator for the reason that appellants were not liable to repurchase the shares because the guidelines of the SEBI prohibited such purchase within three years of its issuance. The rejection, therefore, will not preclude the respondent from making the claim after the three year period and such claim will not be hit by the principles of res judicata or constructive res judicata. The respondent also could not have treated as having abandoned the claim by not pressing the O.P. (Arb) No.34/2001.

12. The argument of the appellants that the arbitration proceedings should not have been continued in view of the winding up proceedings initiated under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 against the 7th appellant-Company, cannot also stand the scrutiny of law. Section 22 provides that where in respect of an Industrial Company, an enquiry is pending or any scheme is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal is pending under the provisions of the Act, then no proceedings for winding up or for execution, distress or the like against any of the properties of the Industrial Company and no suit for the recovery of money or for the enforcement of any security against the Industrial Company or of any guarantee in respect of any loans or advance granted to the Company shall lie or be proceeded with further, except with the consent of the Board or the Appellate Authority.

13. A reading of Section 22 would make it clear that what is prohibited thereunder, are proceedings of winding up, or for execution, distress or the like against the properties of the Company, suits for recovery of money and enforcement of any security or guarantee in respect of any loans advanced to the Company. In the case on hand, the appellants have no case that they were only guarantors to the amount advanced by the respondent to the 7th appellant-Company. On the other hand, it is evident that the agreement dated 08.07.1993 was executed between the respondent and appellants 1 to 6 as Promoters, along with the 7th appellant-Company. In view of the said agreement, Section 22 of the Act, 1985 cannot bar any arbitral proceedings initiated by the respondent, against appellants 1 to 6.

14. The further contention of the appellants is that their failure to purchase shares was solely due to the prohibition imposed by SEBI, that they could not have legally abide by the said condition and hence, the District Court ought to have held that the doctrine of frustration and Section 56 of the Indian Contract Act, 1972 would come into play. In fact, the respondent had required the appellants to repurchase the shares during the period of restriction and has initiated arbitral proceedings, on the failure of the appellants. The said proceedings went against the respondent in view of the prohibitive guidelines of SEBI. After the said prohibitive period, the demand of the respondent remained unheeded and thereupon, the respondent resorted to fresh arbitral proceedings. In the said circumstances, the appellants cannot legally take a defence that the contract was frustrated or that it is hit by Section 56 of the Indian Contract Act.

15. Lastly, the appellants pointed out that the amount awarded by the Arbitrator towards interest was based on a finding that the 7th appellant had paid 20%

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interest to ICICI Limited and IDBI. The documents produced by the appellants as Annexures-I to VI before this Court would show that the Company had settled their liabilities with its Banks on lesser rates of interests and on better terms. Learned counsel for the appellants relied on the judgments of the Apex Court in Rajasthan State Road Transport Corporation v. Indag Rubber Ltd. [(2006) 7 SCC 700] and McDermott International Inc. v. Burn Standard Co. Ltd. and Others [(2006) 11 SCC 181]. The judgments of the Apex Court would not be of any help to the appellants because they had not produced any document before the Arbitrator to establish their liability to pay interest at lesser rates. We are of the firm view that such claims made on the basis of documents which Arb. Appeal No.7 OF 2009 14 were not produced before the Arbitrator and which were only produced before this Court, cannot be relied upon to give any relief to the appellants as the same would be beyond the powers of this Court under Section 37 of the Arbitration and Conciliation Act, 1996. In view of our finding as stated above, the Arbitration Appeal is liable to be dismissed and we dismiss the same accordingly.
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