E. Logistics P. Ltd. And Another v. Financial Technologies India Ltd. And Others

S. Rajeshwaran, J.:— O.A No. 468 of 2006 has been filed for an order of interim injunction restraining the respondents from interfering in the day-to-day business and operations of the first applicant-company pending disposal of arbitration proceedings.

2. Application No. 3018 of 2006 has been filed to direct the respondents to repay the sum of Rs. 2,01,00,000 (rupees two crores and one lakh) taken from the first applicant-company pending disposal of arbitration proceedings. Application No. 3225 of 2006 has been filed to declare the termination of the mandate of the sixth respondent as the sole arbitrator.

3. The brief facts are as under:

The applicants approached the respondents to make financial investment in the first applicant-company in order to augment and expand its operations, 3 agreements were entered into between the applicants and respondents which are as under:

(1) Term sheet dated December 27, 2005, pursuant to which the business and commercial terms of the financial investments to be made by the respondents in the first applicant's company are recorded and agreed to.

(2) Investor rights agreement dated December 28, 2005, which provided for the respective rights and obligations of the respondents and the second respondent as shareholders and directors of the first applicant's company and other aspects relating to the management and governance of the first applicant-company.

(3) Reciprocal obligations agreement, which provides for representations and warranties made by the first applicant-company.

4. After the execution of the above said agreements the nominee directors of the respondents were appointed on the board of directors of the first applicant-company. The shareholding in the first applicant-company was agreed to be maintained at 50 per cent, for each of the group. In accordance with the terms of the agreement, the respondents invested a sum of Rs. 2.78 crores in the share capital of the first applicant-company and accordingly allotted shares representing 50 per cent of the paid up equity share capital in the first applicant company.

5. In February/March 2006, according to the applicants, the respondents started creating an unpleasant atmosphere and they were questioning each and every action taken by the second applicant as managing director of the first applicant with the sole intent of harassing and frustrating the functioning of the first applicant. The respondents did not respond to the notice for convening the board meeting. In April 2006, the respondents put enormous pressure to hand over the control of the day-to-day finance of the first applicant to the first respondent-company. The second applicant was made to transfer the funds available in the first applicant's current account and a fixed deposit aggregating Rs. 2.01 crores to the first respondent-company. Thereafter, the first applicant-company requested the first respondent-company to approve various payments to be made as a part of the operating expenses which was approved by the first respondent. When the first applicant requested the first respondent to transfer the equivalent amount to the first applicant's current account, the first respondent failed to respond to the aforesaid request. Therefore, the first applicant is not able to meet its operating expenses. All requests made by the applicants to return the sum of Rs. 2.01 crores were not considered at all by the first respondent. Instead of refunding the sum of Rs. 2.01 crores, the first respondent sent a mail dated May 25, 2006, claiming that the sum of Rs. 2.01 crores transferred to them was towards part payment of their indemnity claim for damages suffered on account of loss on investment.

6. Thus, dispute arose between the parties and the respondents referred the matter to Mr. P.G Kakodkar, as the sole arbitrator to decide the disputes. On receipt of letter of appointment of the arbitrator, the applicants sent a letter dated June 7, 2006, informing the arbitrator that the agreements provide for a different procedure for appointment of an arbitrator and his appointment is contrary to law and to the terms of the agreement. The applicants have also attributed bias to the arbitrator as they believed that he is the director of the first respondent-company. But without considering the applicants objections, the arbitrator sent a letter dated June 9, 2006, fixing the date of hearing for the arbitration.

7. Now the first applicant's company is starved of funds to meet the day-to-day expenses and is not in a position to conduct its business operations. Hence, the applicants filed O.A No. 3018 of 2006 to direct the respondents to repay a sum of Rs. 2.01 crores pending arbitration proceedings and filed O.A No. 468 of 2006 for an injunction restraining the respondents from interfering in day-to-day business of the first applicant-company.

8. The first respondent entered appearance through their counsel and filed a common counter in O.A No. 468 of 2006 and A. No. 3018 of 2006.

9. In the common counter, the first respondent stated that the internal auditors of applicant No. 1, for the period April 1, 2005, to December 31, 2005, qualified a report with respect to infusion of funds and their applications, purchases, related party transactions, collection of tax, shortage of cash, inventory verification, lapses and delay in payment, dismal performance of sales, status of books of account and compliance to shareholders and investors. This report points out so many omissions and commissions on the part of the applicants necessitating the first respondent to file a company petition bearing No. 32 of 2006 for oppression and mismanagement of the company. The Company Law Board, Chennai, by order dated June 16, 2006, appointed an advocate-commissioner to authenticate the statutory records and to submit his report and further directed that the shareholding pattern in the company shall not be disturbed till the disposal of the company petition. In the very same order dated June 16, 2006, the Company Law Board directed that any resolution which may be passed at the board meeting proposed to be held on June 17, 2006, in relation to refund of Rs. 2.01 crores will not be implemented until further orders. It is denied by the first respondent that their investment is only Rs. 2.78 crores as alleged by the applicants. According to them, the respondents made investment to the tune of Rs. 8.30 crores. The findings of the internal auditors show that the affairs of the applicant-company were not handled properly and hence the applicants were questioned for the action taken which are prejudicial to the interest of the first applicant-company. The first applicant has specifically stated that a sum of Rs. 2.01 crores was paid as part payment of the first respondent's claim for indemnity for the loss suffered by the first respondent. It is further stated that they invoked arbitration clause as per clause 28 of the investors rights agreement according to which Mr. Kakodkar alone can be appointed as sole arbitrator. Therefore, they prayed for the dismissal of the above two applications.

10. A rejoinder has been filed by the applicants reiterating their early stand. When these two applications are pending the applicants filed A. No. 3225 of 2006 under section 14 read with section 12 of the Act, 1996, to declare the termination of the mandate of the sixth respondent as the sole arbitrator.

11. In this application it was stated that the sixth respondent was appointed contrary to the provisions of the agreement and he was not only the director in the first respondent-company but is also a part of the audit committee and receiving remuneration towards sitting fees as director of the first respondent-company. Even though all their objections were sent to the sixth respondent, the sixth respondent has not responded to the charge of bias and therefore they approached this court to declare that the mandate of the arbitrator stands terminated.

12. A counter-affidavit was filed by the first respondent stating that the sixth respondent was validly appointed as per clauses 28 and 44 of the investors rights agreement. The sixth respondent was the ex-chairman of State Bank of India and he is the independent director of the first respondent. It is further stated that section 14 of the Act, 1996, will not apply to the facts of this case and even otherwise the applicants should agitate this matter only before the arbitrator under section 16 of the Act. Therefore, they prayed for dismissal of this application also.

13. Heard learned counsel for the applicants, Mr. Arvind P. Datar, learned senior counsel for the first respondent and learned counsel for respondents Nos. 2 to 5. I have also perused the documents filed and the judgments referred to by them.

14. I have considered the rival submissions carefully.

15. The prayer asked for in A. No. 468 of 2006 is for an injunction restraining the respondents from interfering in the day-to-day business and operation of the first applicant-company. It is an admitted fact that three agreements, namely. Term sheet dated December 27, 2005, Investors Rights Agreement dated December 28, 2005, and Reciprocal Obligations Agreement dated December 27, 2005, were entered into between the parties to reflect their mutual rights and obligations. In such circumstances the applicants cannot ask for a blanket injunction against the respondents. The parties are bound by their agreements and subject to their agreements the respondents could question the administration and management of the first applicant-company. It is also admitted by the applicants that the nominee directors of the respondents were appointed on the board of directors on the first applicant and the respondents invested an aggregate sum of Rs. 2.78 crores in the share capital and respondents were allotted shares representing 50 per cent, of the paid up equity share capital.

16. Even though it was claimed by the applicants that the affairs of the first applicant-company were being conducted in the true spirit of the agreements the report of the internal auditors points out certain irregularities resulting in C.P No. 32 of 2006 filed before the Company Law Board and the Company Law Board on June 16, 2006, passed an interim order appointing an advocate to authenticate the statutory records. In such circumstances, the applicants have not made out a prima facie case for granting an order of injunction as prayed for. Therefore, O.A No. 468 of 2006 is dismissed. No costs.

17. In so far as Application No. 3018 of 2006 is concerned the applicants prayed for a direction to direct the respondents to repay a sum of Rs. 2.01 crores taken from the first applicant-company. It is the case of the applicants that a sum of Rs. 2.01 crores was transferred to the first respondent-company as per their request and the first respondent assured them that as and when required to meet the operating expenses, they would release the same to the first applicant-company. But in spite of such assurance, the first respondent is not releasing the fund to meet the operating expenses and therefore the first respondent should be directed to repay the sum of Rs. 2.01 crores.

18. The first respondent denied that a sum of Rs. 2.01 crores is in the nature of temporary loan as alleged by the applicants. It is categorically stated by the first respondent that the amount was paid as part payment of first respondent's claim for indemnity for the loss suffered by the first respondent.

19. No materials were filed by the applicants to prove that the said sum of Rs. 2.01 crores is in the nature of a temporary loan given to the respondents. In fact the very dispute seems to arise from the non-release of funds by the first respondent to the applicants from the said sum of Rs. 2.01 crores transferred from the account of the first applicant-company. When one party claims that it is like a loan and the same has to be repaid, the other party claims that it is a part payment for its claim for indemnity for the loss suffered by them. Therefore, the nature of the transaction is to be gone into in detail by going through the relevant records and documents by the arbitrator in the arbitration proceedings and until a finding is arrived at it is not possible at this juncture to direct the respondents to repay the sum of Rs. 2.01 crores to the applicants. Therefore, the applicants have not made out a prima facie case to grant this prayer and Application No. 3018 of 2006 is also dismissed. No costs.

20. In Application No. 3225 of 2006, the applicants prayed to declare the termination of the mandate of the sixth respondent as the sole arbitrator. The contention of the applicants is that No. 1 his appointment is not in accordance with the agreement and No. 2 he is a director of the first respondent-company and therefore biased.

21. Section 14 of the Act, 1996, reads as under:

“14. Failure or impossibility to act.—(1) The mandate of an arbitrator shall terminate if—

(a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and

(b) he withdraws from his office or the parties agree to the termination of his mandate.

(2) If a controversy remains concerning any of the grounds referred to in clause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the court to decide on the termination of the mandate.

(3) If, under this section or sub-section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub-section (3) of section 12.”

22. A close reading of section 14 of the Act would make it clear that the mandate of an arbitrator shall terminate if sub-clauses (a) and (b) of subsection (1) is attracted. An arbitrator should be unable to perform his function de jure or de facto or for other reason, he should fail to act without undue delay and the arbitrator should withdraw from his office or the parties should agree to the termination of his mandate. Only these happenings are contemplated under section 14 of the Act and the applicants herein have not made out a case for the termination of the contract by bringing in any one of the grounds enumerated under section 14 of the Act.

23. The only objection raised by the applicants is that his appointment is not in accordance with the agreement and he is a paid director of the first respondent.

24. In so far as the allegation of the appointment of arbitrator contrary to agreement is concerned, it is open to the applicants to file an application under section 16 of the Act questioning the jurisdiction and thereafter the procedure contemplated under section 16 of the Act is to be followed.

25. In so far as the allegation of bias is concerned, the applicants have to send a written statement of the reasons for the challenge to the arbitral tribunal under section 13 of the Act 1996 and has to follow the further procedure contemplated under section 13 of the Act.

26. But the applicants without following the procedure contemplated under sections 13 and 16 of the Act, have straightaway filed the above application under section 14 read with section 12 of the Act, 1996, which is not maintainable.

27. The scope of judicial intervention is very minimal under the Act, 1996, and as per section 5 of the Act courts shall not intervene where adequate procedures are contemplated in the Act. Therefore, I am not inclined to terminate the mandate of the sixth respondent as prayed for.

28. Learned counsel for the applicants relied on the decision of this court reported in K.V. Krishna Iyer v. State Of Madras, AIR 1977 Mad 30. In that decision, the Division Bench of this court held as follows (page 32):

“3. We are unable to agree with the conclusion of the learned subordinate judge. There was no argument before us as was attempted in the written statement that the suit has not been properly framed. It is by now clear that if the parties to a contract voluntarily incorporated as one of its terms a clause which obliges one or the other of them to refer such disputes, arising under it or to seek for an interpretation of the terms of such a contract to or from an arbitrator specified or named by them, then the mandate imposed upon themselves by the parties is inescapable and has to be given effect to. To this general principle there is an exception. If it is satisfactorily proved and established that the person named or specified as the arbitrator under the contract is biased towards one of the parties or the arbitrator overtly or covertly involved himself in the subject-matter of the contract from the time of its inception and during the course of its working so as to give an impression to a reasonable person that a reference to him of the disputes that have arisen between the parties in relation to the contract would be futile and in the ultimate analysis would not be a means to secure justice to the complaining party, then the courts have carved out an exception to the general application of the mandate as above and has allowed parties to come to court to seek for the appointment of an arbitrator other than the named arbitrator before whom the differences between the parties could be laid for final adjudication…”

29. A reading of the above decision will make it clear that this is not helpful to the case of the applicants as in the present case it is not satisfactorily proved and established that the sixth respondent/arbitrator is biased or overtly or covertly involved himself in the subject matter of the contract.

30. Even in the other decision relied on by learned counsel for the applicants reported in Ashalata S. Lahoti v. Hiralal Liladhar, [2001] 103 Comp Cas 1097, the Bombay High Court held that if the Tribunal is constituted contrary to section 10 of the Act, 1996, the arbitrators de jure will not be able to perform those functions.

31. In the present case, it is not established that the sixth respondent is constituted contrary to section 10 of the Act, 1996. Therefore, A. No. 3225 of 2006 is also dismissed. No costs.

32. In view of the above, all the three applications are dismissed as devoid of merits. No costs.