1. A. No. 1984 of 1998 is filed by the 2nd defendant viz., GDR Financial Services Ltd., and A. No. 1985 of 1998 is filed by the 3rd defendant viz., M/S. Seagul Securities Ltd., against M/S. Allsec Securities Ltd., plaintiff both praying for identical relief to refer the dispute referred to in the suit to arbitration as contemplated under the Bye Laws of National Stock Exchange (NSE).

2. The case of the second defendant/applicant in A. No. 1894 of 1998 is that the plaintiff/respondent herein is a registered member of the NSE and is permitted to have constituents to trade in Stocks and Securities; that the applicant herein opened an account with the respondent and was assigned the following numbers - G0006 and G0007 and a formal client member agreement as required by NSE was executed between the 2 defendant and the plaintiff on 4.10.95 to regulate the transaction, and that all the transactions are subject to the bye laws of NSE. According to the 2 defendant, under Chapter XI of the said Bye Law, all differences and disputes between a trading member and constituent arising out of or in relation to dealings on the exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their construction, fulfillment or validity or rights, obligations and liabilities shall be referred to and decided by an arbitration. It is stated by the 2 defendant that the plaintiff has rushed to this Court by way of a frivolous suit relating to the accounts maintained by them, which are disputed by this defendant and as such the suit is not maintainable. Further the subject matter of the suit is referable only to the arbitrator and not to be decided in a suit by this Court. The other contentions are that the claims of the plaintiff against each and every defendant is independent in nature based upon different causes of action and the same cannot be mixed up and therefore the suit is bad for non-joinder of parties. In support of the said contention, this defendant has mentioned that under the grab of executing the contracts of this defendant, the respondent has fraudulently inserted a sale transaction of 48,500 shares of Reliance Industries Ltd., at Rs. 217.15 aggregating to Rs. 1,05,31,775.00 which was not ordered by them but the entries were made in his account to accommodate vested interest persons. The contract Note No. 3375 dated 16.7.96 is a testimony to the above said alleged scandalous transaction. Yet another transaction dated 22.10.96 involving the debit entries to this defendant's account to the tune of 3,75,500 with the intention to accommodate some vested interest person and he has given a complaint before the NSE on 30.12.97, which was rejected by the NSE on thee sole ground the suit is pending before this Court.

3. The third defendant/applicant in A. No. 1895 of 1998 also raises identical issues referring to the provisions of Chapter XI and further aver that the suit claim against them is not at all maintainable since his account shows a credit balance of Rs. 45, 28,608.10. It is also alleged by this defendant that the respondent has interpolated with the accounts of the applicant and vexatiously raised the suit claim and that it is an independent legal entity distinct in status and ownership and as such to attach liability on the basis of some other accounts, which are distinct from them, is unsustainable in law. This defendant has also taken the plea of mis joinder of causes of action.

4. A common counter has been filed by the plaintiff denying all the averments and stated that when serious allegations of fraud have been alleged and which required to be proved before any relief can be granted, it would not be within the scope of arbitration. The allegations made by this plaintiff in the suit are of similar which cannot be decided in arbitration proceedings, which are of a serious nature. It is further stated that the arbitrator not being trained in law, will not be able to appreciate the plaintiff's evidence and the relief sought for. It is also stated by the plaintiff that the claim against each of the defendant is based upon the fraud committed by the first defendant who has masterminded the transaction maintained by each of the defendants with them. It is mentioned in the common counter that the first defendant is the managing director of the 2 and 3 defendant companies exercising overall control of all the business affairs and the management The plaintiff also mentioned several transactions with the defendants in order to establish the fraud played by the first defendant and stated that it would be impossible for the arbitrator contemplated under the National Stock Exchange rules to go into the question of whether the first defendant committed a fraud in the summary proceedings. Further the plaintiff plead before this Court to pierce the veil of the 2 and 3 defendants in order to find that both these companies were managed by the first defendant, alone in such a manner that he would evade contractual liability and make the illegal gains at the expense of the plaintiff such relief would be beyond the scope and power of the arbitration. Hence prayed for dismissal of these applications.

5. The points for consideration in these applications are:

(1) Whether the dispute between the parties is one arising under the terms of the agreement or outside the terms?

(2) Whether the charge of fraud leveled by the plaintiff is a matter, which can be decided by the arbitrator?

(3) Whether the relief asked for by the plaintiff in the suit is beyond the powers of the arbitrators and can only be granted by the court?

6. The learned counsel for the defendants 2 and 3 argued that as the Bye Laws of NSE contains arbitration clause, the disputes necessarily shall be referred to arbitration, no judicial authority shall intervene and it is obligatory to the court to refer it to arbitration. Learned counsel for the defendants 2 and 3 relied upon the judgment reported in Sundaram Finance Ltd. v. Nepc India Ltd., 1999 (2) SCC 479. In this case, the Supreme Court held that the court can pass interim orders under Sec. 9. The material words occurring in Section 9. The material words occuring in Sec -9 are, ‘before or during the arbitral proceedings’. In Para-9 of the said decision it has been held as follows:

“The 1996 Act is very different from the Arbitration Act, 1940. The provisions of this act, have, therefore, to be interpreted and construed independently and in fact reference to the 1940 Act may actually lead to misconstruction. In other words, the provisions of the 1996 Act have to be interpreted being influenced by the principles underlying the 1940 Act. In order to get help in construing these provisions, it is more relevant to refer to the UNICTRAL Model Law rather than the 1940 Act”

In this case, the Apex Court held that under Sec., 9 the Court can pass interim orders. Arbitral proceedings commence only when the request to refer a dispute is received by the respondent as per Sec., 21 of the Act. The material words occurring in Sec. 9 are “before or during the arbitral proceedings”. It is clearly contemplate two stages when the Court can pass interim order i.e, during the arbitral proceedings or before arbitral proceedings. There is no reason as to why Sec. 9 of 1996 Act should not be literally construed. Meaning has to be given to the word, “before” occurring in the said section. The only interpretation that can be given is that the Court can pass interim orders before the commencement of arbitral proceedings. The court has jurisdiction to entertain the application under Sec. 9 either before arbitral proceedings or during the arbitral proceedings or after making the arbitral award but before it is enforced in accordance with Sec. 36 of the Act This decision is not helpful to the defendants since nobody disputed the power of this court to pass interim orders under Section 9. Whereas they have filed an application under Sec. 8 of the Act, to refer the dispute mentioned in the suit to arbitration. The suit is filed on the ground that there is serious allegation of fraud against the parties, which according to the plaintiff cannot be decided by the arbitrator.

The learned counsel for the defendants 2 and 3 next relied on the Judgment reported in P. Anand Gajapathi Raju v. P.V.G Raju, 2000 (4) SCC 539. In Para-8 of the said decision, it has been held thus: -

“In the matter before us, the arbitration agreement covers all the disputes between the parties in the proceedings before us and even more than that. As already noted, the arbitration agreement satisfies the requirements of Sec. 7 of the new Act. The language of Sec. 8 is peremptory. It is therefore, obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement, things remains to be decided in the original action or the appeal arising there from. There is no question of stay of the proceedings till the arbitration proceedings conclude and the award becomes final in terms of the provisions of the new Act. All the rights, obligations and remedies of the parties would now be governed by the new Act including the right to challenge the award. The Court to which the party shall have recourse to challenge the award would be the Court as defined in clause (e) of Sec. 2 of the new Act and not the Court to which an application under Sec. 8 of the new Act is made. An application before a Court under Sec. 8 merely brings to the Court's notice that the subject matter of the action before it is the subject matter of an arbitration agreement This would now be such an application as contemplated under Sec. 42 of the Act, as the court trying the action may or may not had jurisdiction to try the suit to start with or be he competent court within the meaning of section 2(e) of the New act”

This judgment is also not helpful to the applicant. In this case during the pendency of appeal all the parties have entered into an arbitration agreement. They have agreed to refer the disputes in this appeal to arbitrator. The arbitration agreement is in the form of an application and has been signed by all the parties and meets the requirements of Section 7 of the Act Part I of the new act deals with domestic arbitrations. Section 5, which is contained in Part I of the new act, defines the extent of judicial intervention in arbitration proceedings. It says that notwithstanding anything contained in any other law for the time being in force, in matters governed by Part I, no judicial authority shall intervene except where so provided in that part Section 5 brings out clearly the object of the new Act, namely, that of encouraging settlement of dispute expeditiously and less expensively and when there is an arbitration agreement, the court's intervention should be minimal. The Apex Court ultimately came to the conclusion that if an agreement between the parties was entered into by way of an application, it is obligatory to the court to refer the parties to the arbitration in terms of the arbitration agreement. Nothing remains to be decided in the original action or the appeal arising mere from. This judgment is also not helpful to the applicant since the facts in this case are different

7. It is the case of the plaintiff that the 2 defendant is only a mere rubber stamp company and does not have any assets; that the 1st defendant has committed a clear cut fraud on the plaintiff by permitting trading in one account while showing credit in another account as such it is a fit case where this Court could pierce the veil of the 2 and 3 defendant to find that both these companies were run and managed by the Ist defendant and that on account of the clear fraud to evade contractual liability. Whether the said allegations are made with the intention to take the dispute out of the arbitrator clause is to be seen. The learned counsel has proceeded only on the basis of the allegations made in the plaint

8. As regards points 1 to 3 learned counsel for the plaintiff argued that one G.D Ramachandran, the first defendant in the suit approached the plaintiff herein in the year 1995 claiming that he was the Managing Director of the second and third defendant companies and exercising overall control of all the business affairs and management of both the companies. It is pointed out by the learned counsel that the said G.D Ramachandran alone has sworn the affidavits in both these applications on behalf of the applicant companies. The first defendant had opened multiple accounts with the plaintiff all of them were operated only on his instructions. The said first defendant also opened accounts in the name of his cousin brother who is the 4th defendant, his wife the 5 defendant and his another cousin brother the 6 defendant and all of them were allotted individual client code numbers. Two agreements dated 4.12.95 were executed by the first defendant and the plaintiff. One of which was signed by him on behalf of the second defendant and the another on behalf of the 3 defendant. During the course of the thousands of transactions carried out on the instructions of the first defendant from 28.12.95, all the accounts were treated as single account both in the eyes of the plaintiff as well as by the first defendant. Only the first defendant operated all the accounts. Except the first defendant no other person has dealt with any of the said accounts. The orders received were predominantly speculative in nature and only in a few transactions, actual delivery of shares were effected. Almost all the transactions were ordered to be done in the account of the second defendant. The net due from the first defendant as the person in-charge of all the accounts would always be taken as the relevant balance for the purpose of payments. Accordingly, whenever the plaintiff sought for payment in respect of the dues by the second defendant, even though credit was already available in the account of the third defendant, the cheques for large amounts were issued by the first defendant from the 3 defendant's bank account and the plaintiff was asked to adjust such credit and continue to operate accounts on behalf of the first defendant and other defendants. Contract Notes duly prepared were also given regularly without fail. Till the end of financial year 1995-96, the account of the 2 defendant was the only account operated by the first defendant, which had a debit balance. The figure stood at Rs. 25,77,938.02. In isolation, though this figure appeared large, when adjusted with the credits available in the other accounts on instructions from the first defendant, the figure stood drastically reduced to Rs. 6,84,205.85. The balance sheet drawn up for the period ending 31.3.1996 showed nil balance for all the accounts except 2 defendant's account which show a debit balance of Rs. 6,84,205.85. The account statements were also regularly handed over to the 1 defendant who used to visit the plaintiff's office almost every day.

The 1 defendant continued to operate the accounts for the subsequent period and the last transaction operated by the Ist defendant was on 11.11.1996 The position of the individual accounts on that day stood as mentioned below: -

2 Defendant Rs. 88,23,849.72 Debit 3 Defendant Rs. 47,11,612.69 Credit 4 Defendant Rs. 6,240.26 Debit 5 Defendant Rs. 1,46,996.03 Debit 6 Defendant Rs. 17.043.56 Debit NET Rs. 42,82,516.88

On instructions from the 1 defendant and as per the past practice, the plaintiff had adjusted the credits/debits of all the other accounts to the 2 defendant's account. Even then, a sum of Rs. 42, 82,516.88 was due in the 2 defendant's account, the duly audited balance sheet of the plaintiff for the period ending 31.3.1997 showed nil balance in all other five accounts except the 2 defendant's account which showed a debit balance of Rs. 42,82,516.88 since the amount due was not forth coming despite several promises, the plaintiff called upon the Ist defendant for immediate clearance, the Ist defendant assured the plaintiff that despite his severe losses, he was capable of discharge the dues since he was an affluent person and at worst would be able to generate sufficient funds from the sale of his 1/3 share of immovable property at No. 4, Appa Garden Street, Kilpauk, Chennai-10 and also promised to clear the entire dues in one stroke by the end of September, 1997 but failed to fulfill his assurances. On 27.8.1997, the plaintiff's Directors went to the 1 defendant's office and requested for the confirmation of balance as per the letter handed over earlier and the first defendant appended his signature as Director of the 2 defendant; that a sum of Rs. 42,82,516.88 was due and payable as on 31.3.1997 The 1 defendant in order to escape from his liability issued a letter dated 27.8.1997 which was received by the plaintiff the next day as though the confirmation of balance was obtained under threat and coercion by the plaintiffs and that the 2 defendant did not agree with the transfer entries relating to the other accounts. After several correspondences, lawyer notices were exchanged by the parties. However, the 1 defendant has never denied the operation of all the accounts and was authorized to operate the accounts of the 2 and third defendants in the capacity as managing director. He has also operated his personal account, that of his wife's and cousins. Hence, he had complete control over all the transactions and all the account holders were merely his puppets and he used them to make false claim against the plaintiff.

9. Learned counsel for the plaintiff has argued that the reason for filing the suit was that there are serious allegations of fraud and dishonesty against the applicants herein. hence arbitration cannot be an appropriate remedy. learned counsel relied upon the decision reported in Budhu Lal v. Jagan Nath, AIR 1949 All. 70. In Para.4 of the said decision it it has been held as follows:

“Another reason given by the learned Civil Judge for refusing to stay the proceedings is that the plaint contains serious allegations of fraud and dishonesty against the appellant and following the Calcutta case of Maharajah sir Manindra Chandra Nandy v. N.V Low & Co., AIR (11)1924 Cs.796: (Sc Lc.934) and the case of Russell v. Russell, 1880 (14) Ch.D 471: 49 L.J.Ch.268 the learned Civil Judge is of the opinion that this is a case in which the Court should refuse its discretion to stay the proceedings. A perusal of the judgment in Maharajah Sir Manindra Chandra Nandy's case, AIR (11) 1924 Ca.796: 88 IC 934, however, shows that unless aprima facie case of fraud is made out, the proceedings should when an arbitration agreement exists, be stayed. If the plaintiff objects to the case being referred to a domestic tribunal in accordance with an arbitration agreement between the parties he must make out a substantial and bonafide case of fraud. In the present case, respondent-1 has no doubt, made serious allegations of fraud against the appellant But he did not come into the witness box and the statement on oath of the appellant and the affidavit filed on his behalf stand unrebutted. On the other hand, the applicant has filed two affidavits sworn by respondent-1 in which he has denied the allegation of fraud. No doubt, it is said on behalf of respondent-1 that these affidavits had been obtained from him by undue influence and mis representation. But, as I have said before, respondent-1 has not appeared in the witness-box to state these facts on oath and there is also no affidavit on his behalf in support of these allegations.”

Learned counsel also relied on the decision of Division Bench reported in C.D Gopinath v. Gordon Woodroffe & Co., 1979 (92) LW 531. In Para-8 and 20 of the said decision, it has been observed as follows:

‘“Though there are no inflexible rules governing the exercise of the said discretion, the principles on which the discretion is to be exercised can be culled out from various judicial precedents. They are: (1) where parties have agreed to refer a dispute to arbitration and one of them, notwithstanding, that agreement, files a suit to have the dispute determined by the Court, the prima facie leaning of the court is to stay the action and leave the plaintiff to the tribunal to which he has agreed. (2) The fact that a party who has agreed to refer the dispute to arbitration desires to obtain, in connection with those disputes, relief which is beyond the powers of the arbitrator to afford is not a conclusive reason or the court to refuse stay of the action in which such relief is claimed. (3)Where the parties had agreed to submit a dispute to arbitration, the fact that a reference would entail more expense than would be necessary, if the matters came before the court, is not sufficient reason for not granting stay. (4) The fact that the arbitration agreement includes but a small part of the matters covered by the suit may be a sufficient reason for refusing the stay. (5) The fact that the dispute involves a charge of fraud or a charge against the character of one of the parties may in some cases be sufficient to induce the court to refuse to stay the proceeding, unless there is an express stipulation that questions involving fraud also should be referred to arbitration. The party against whom the charge is made will have the option to go either before the arbitrator or before the court. However, if the objection to arbitration is by the party alleging the fraud the court will not necessarily accede to it, unless a prima facie case of fraud is established by him. (6) If the dispute involves serious and complicated questions of law, which call for a decision of the court, then the court will be justified in refusing the stay.

20. Even assuming that a prima facie case of fraud had not been Established by the plaintiff, in this case, the position comes to this. Out of the three substantial reliefs, damages for breach of contract, permanent injunction and accounting, the first will be covered by the arbitration clause and the other two will be outside that clause. In such a case it is not just and proper to split up the action by referring the matter relating to breach of contract alone for arbitration and leaving the other matters for a decision by the court.”

10. The learned counsel for the applicants/defendants 2 and 3 argued that the entire transaction is based on the agreement and as such the dispute shall be referred to the arbitrator as contemplated under the Bye Laws of NSE.

11. It is very difficult to accept the contention of the learned counsel for the defendants 1 and 3 that the dispute raised by the plaintiff in the suit is one, which could be brought within the purview of the arbitrator. It is the case of the plaintiff that the first defendant with the knowledge of the other defendants has deceived the plaintiff and it is pointed out that several transactions were made at his instance, which are mentioned supra. To substantiate their contention, it is brought to the notice of this Court that the affidavit of the defendants 2 and 3 were sworn only by the 1 defendant in his capacity as the Managing Director of Defendants 2 and 3. The submission of the plaintiff that the dispute raised by them is outside the terms and condition of the Bye-laws of NSE is justifiable. The said charges are very serious, complicated, cannot be considered and determined by the arbitrator. This court has proceeded on the basis of allegations made in the plaint and the said allegations are not made recklessly. The defendants 2 & 3 also in Para No. 9 of their affidavit alleged fraud against Plaintiff as such it is necessary for them also to resolve their issues in the suit Having regard to the above facts, this Court find out a prima facie case in relation to the allegation of fraud is made out Defendants 2 & 3 can put forth all their defences and what are all mentioned in the affidavits, which were filed in support of the applications, in the suit. This order will not be a bar to the parties herein to put forth all their respective defences in the suit Hence, I have no hesitation to accept the case of the plaintiff that the disputes cannot be resolved by the arbitrator since it is outside the terms and conditions of the bye-laws of NSE and I answer all the points 1, 2 & 3 in favour of the plaintiff. Hence, the relief sought for by the applicants/defendants cannot be granted and both the applications are liable to be dismissed.

12. In the result, both the applications 1894 of 1998 and 1895 of 1998 dismissed. No costs.