TaxTMI 
TaxTMI 
2018 (4) TMI 1412
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....L and a company by the name of Hindcorp Resorts Pvt. Ltd. (Hindcorp). Under the agreement SPIL was to allot 240 lakh equity shares of Rs. 10 each, fully paid up at par to KSL against the book debts due by SPIL to KSL. KSL offered to sell to KCP or his nominees 243 lakh equity shares representing 90 per cent of the total paid up share capital for a lumpsum consideration of Rs. 2,31,50,000. The intention of the parties, as reflected in the agreement, was that KCP would take over the business, shares and liabilities of SPIL and would discharge the liabilities set out in Schedules 2 and 3 of the agreement which were outstanding on the date of the agreement. KCP agreed to discharge the Schedule 2 liabilities within 180 days from the date on which he took over management of SPIL. Clause 14 of the agreement was to the following effect: "KSL hereby recognise the right of KCP and/or his nominees to sell or transfer their holding in SPIL to any other person of their choice, provided the proposed transferees accept the terms and conditions mentioned in this agreement for the management of SPIL and related financial aspects covered by this agreement." The agreement contained the following p....
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.... to sign all the Annexures to the Agreement. There are certain outstanding guarantees issued by you, to the parties listed in Schedule 2 to the above Agreement. You are requested to keep your guarantees in good standing in accordance with the terms of the Agreement. We shall relieve your guarantees in accordance with the Agreement". 3 Since the transaction was not completed by KCP, disputes arose between the parties resulting in the commencement of arbitral proceedings. On 16 December 2009 the arbitral tribunal made its award in the following terms: "28.0 Award 28.01 In the result this Arbitral Tribunal passes the final Award in the arbitration matter between M/s Kasturi & Sons Limited M/s Hindcorp Resorts Private Limited, the claimants and Mr K C Palaniswami and M/s Sporting Pastime India Limited, the respondents:- (i) Directing the respondents to return to the claimants the documents of title and share certificates relating to 2,43,00,000 shares of the second respondent namely Sporting Pastime India Limited, which were handed over earlier to the first respondent pursuant to the agreement dated 19/07/2004 in the manner following : (a) The documents of title relating to ....
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....ntertaining the proceedings for rectification under Section 111. For coming to the conclusion that the appellant is a nominee of KCP and held the shares on his behalf, reliance has been placed on a judgment dated 29 April 2011 of the Madras High Court inter partes in an application under Section 9 of the Arbitration and Conciliation Act, 1996. The Madras High Court formulated the following questions for consideration: "(1) Whether an order of interim injunction can be passed against the respondents who are not party to the arbitration agreement or arbitration proceedings; (2) Whether the respondents 3 to 6 can be said to be nominees of Sri K.C. Palanisamy so as to be bound by the Arbitration Award, for passing interim direction against them." The High Court came to the conclusion that clause 14 of the agreement dated 19 July 2004 recognise the right of KCP to transfer his holding in SPIL to a person of his choice, provided that the proposed transferee accepts the terms and conditions mentioned in the agreement for the management of SPIL together with related financial aspects covered by the agreement. The High Court held that the shares had not been purchased by the appellant ....
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....whereas this was a case of a domestic arbitration. The provisions of Section 45 must be distinguished from unamended Section 8 of the Arbitration and Conciliation Act 1996. The appellant is not a party to the arbitration agreement and having paid consideration for its purchase of shares, is not bound by the arbitral award; Thirdly, the decision in Chloro Controls has been clarified by this Court in Duro Felguera, S.A. v Gangavaram Port Limited (2017) 9 SCC 729. 10 Dr Abhishek Manu Singhvi has in his submissions addressed the Court on the following propositions. Firstly, the arbitral award dated 16 December 2009 cannot be executed against the appellant which is admittedly not a signatory to the agreement dated 19 July 2004 which contains a provision for arbitration; Secondly, the arbitral award cannot be executed by a Tribunal such as the NCLT/NCLAT in a "camouflaged petition" (under Sections 111, 397, 398, 402 and 403 of the Companies Act 1956) which would be barred by Section 42 of the Arbitration and Conciliation Act, 1996; Thirdly, the prayer seeking a rectification of the register of members fails to meet the strict requirements of Sections 111 and 111 A of the erstwhi....
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....ansfer of shares can be decided except by the NCLT after 2013. KSL requires physical custody of the share certificates and rectification of the share register. Mere transfer of the physical custody of the share certificates wold not be sufficient, since a rectification of the share register is required to perfect the title of KSL. Consequently, it was necessary for KSL to move the NCLT for rectification of the share register under Section 111; and Fifthly, the principle that an arbitral award may bind a group company, which is an affiliate of a signatory to the arbitration agreement has been settled in a judgment of a three judge bench of this Court in Chloro Controls. While there can be no dispute about the applicability of the Indowind principle in the generality of cases, attribution of an arbitral award to a group company is governed by the decision in Chloro Controls (supra). 12 Mr Mukul Rohtagi and Mr Arvind Datar have countered the submissions which were urged on behalf of the appellant. They have urged that: Firstly, each of the submissions which are sought to be advanced before this Court in the present appeals were urged before the Madras High Court in the proceeding....
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....he parties; (b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract." While interpreting Section 7 in Indowind, a two Judge Bench of this Court held that: "It is fundamental that a provision for arbitration to constitute an arbitration agreement for the purpose of Section 7 should satisfy two conditions: (i) it should be between the parties to the dispute; and (ii) it should relate to or be applicable to the dispute." That was a case where an agreement of sale was entered into between W and S. The agreement described S and its nominee as a buyer and as the promoter of Indowind. Under the agreement, the seller agreed to transfer to the buyer certain assets for a consideration which was payable partly in cash and partly by the issue of equit....
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....he acts of the other. In the view of this Court: "..A contract can be entered into even orally. A contract can be spelt out from correspondence or conduct. But an arbitration agreement is different from a contract. An arbitration agreement can come into existence only in the manner contemplated under Section 7. If Section 7 says that an arbitration agreement should be in writing, it will not be sufficient for the petitioner in an application under Section 11 to show that there existed an oral contract between the parties, or that Indowind had transacted with Wescare, or Wescare had performed certain acts with reference to Indowind, as proof of arbitration agreement." 15 The decision in Indowind was followed by a two Judge Bench in Prasad (supra). The issue in that case was whether a guarantor to a loan who is not a party to a loan agreement between the lender and borrower could be made a party to a reference to an arbitration in regard to a dispute governing the repayment of the loan and be subjected to the arbitral award. The loan agreement contained an arbitration clause. In the view of this Court: "An arbitration agreement between the lender on the one hand and the borrower....
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....y has been applied in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement. [Russell on Arbitration (23rd Edn.)] This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, "intention of the parties" is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties." The Court held that it would examine the facts of the case on the touch-stone of the existence of a direct relationship with a party which is a signatory to the arbitration agreement, a 'direct commonality' of the subject matter and on whether the agreement between the parties is a part of a composite transaction: "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 tou....
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....ween the lender and borrower contained an arbitration agreement. The guarantor was not a party to that agreement. 17 As the law has evolved, it has recognised that modern business transactions are often effectuated through multiple layers and agreements. There may be transactions within a group of companies. The circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory entities within the same group. In holding a non-signatory bound by an arbitration agreement, the Court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance. The group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to u....
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....of companies doctrine has been applied to pierce the corporate veil to locate the "true" party in interest, and more significantly, to target the creditworthy member of a group of companies (Redfern and Hunter (supra) 2.40, page 100). Though the extension of this doctrine is met with resistance on the basis of the legal imputation of corporate personality, the application of the doctrine turns on a construction of the arbitration agreement and the circumstances relating to the entry into and performance of the underlying contract. (Id.2.41 page 100) Russel on Arbitration (24th Ed.), 3-025 pages 110-111 formulates 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, often 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 bound by the agreement to arbitrate. For example, ..., assignees and representatives may b....
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....Section 11 of the Arbitration and Conciliation Act 1996. Indowind was not a signatory to the contract and was held not to be a party to the agreement to refer disputes to arbitration. Indowind held that an application under Section 11 was not maintainable. The present case does not envisage a situation of the kind which prevailed before this Court in Indowind. The present case relates to a post award situation. The enforcement of the arbitral award has been sought against the appellant on the basis that it claims under KCP and is bound by the award. Section 35 of the Arbitration and Conciliation Act 1996 postulates that an arbitral award "shall be final and binding on the parties and persons claiming under them respectively". The expression 'claiming under', in its ordinary meaning, directs attention to the source of the right. The expression includes cases of devolution and assignment of interest (Advanced Law Lexicon by P Ramanatha Aiyar Third Edition, Volume I Page 818). The expression "persons claiming under them" in Section 35 widens the net of those whom the arbitral award binds. It does so by reaching out not only to the parties but to those who claim under them, as well. T....
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....d 243 lakh equity shares of KSL for a consideration of Rs. 2.31 crores. The intent of the parties, as evinced in clause 6 of the agreement, was that KCP would take over the business, assets and liabilities of SPIL. KCP was to discharge those liabilities of SPIL which were specified in Schedules 2 and 3 of the agreement. Clause 14 of the agreement recognises, on the part of KSL, the right of KCP to sell or transfer his holding in SPIL "provided the proposed transferees accept the terms and conditions mentioned in this agreement" for the management of SPIL and related financial aspects covered by this agreement. Significantly, on 17 August 2004, KCP addressed a letter to KSL acting as the authorised signatory of the appellant. The letter contains a clear and categoric reference to the Share Purchase Agreement dated 19 July 2004. The appellant intimated to KSL that it was in pursuance of the said agreement that KSL had agreed to sell and "our group of companies by this agreement and/or by themselves and/or by their nominees have agreed to purchase shares" in SPIL of a face value of Rs. 2430 lakhs for a sum of Rs. 2.43 crores. Accordingly, the appellant indicated that it was remitting ....
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....e different packages as well as the corporate guarantee did not depend on the terms and conditions of the original package nor on the memorandum of understanding executed between the parties. The judgment in Duro does not detract from the principle which was enunciated in Chloro Controls. 26 In the present case, as we have seen, the parent agreement dated 19 July 2004 envisaged the allotment of equity shares of KSL to KCP with the intent that KCP would take over the business, assets and liabilities of SPIL. While KCP was entitled to transfer his shareholding, this was expressly subject to the condition of the acceptance by the transferee of the terms and conditions of the agreement. KCP's letter dated 17 August 2004 to KSL contains a specific reference to the share purchase agreement dated 19 July 2004. It was in pursuance of that agreement that KCP indicated, as authorised signatory of the appellant, that his group of companies had agreed to purchase the shares in SPIL. The shares were to be purchased by several entities in the same group. A supplementary agreement was to be entered into, to reflect the altered consideration. Eventually, no supplementary agreement was executed an....
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....appellant must return the share certificates relating to 2.43 crore shares of SPIL which were handed over in terms of the agreement dated 19 July 2004 against the payment of the consideration stipulated in the award. The transfer of the share certificates by the appellant will be effectual only by the rectification of the register of the company. The mere handing over of a share certificates will not constitute due implementation of the award. The award contemplates the transmission of the shares which stood in the name of the appellant in pursuance of the agreement dated 19 July 2004, to the claimant in the arbitral proceedings. This necessitated an application under Section 111 for the purpose of securing a rectification of the register. Sub-section 4 of Section 111 deals with a situation where a default is made in entering in the register, the fact of any person having become a member of the company. Under sub-section 5 while hearing the appeal, the Tribunal is entitled to direct that the transfer or transmission shall be registered by the company and to order rectification of the register. 29 In the present case, the arbitral award required the shares to be transmitted to the ....
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....ined, such applications would be outside Section 42. (d) Section 9 applications being applications made to a court and Section 34 applications to set aside arbitral awards are applications which are within Section 42. (e) In no circumstances can the Supreme Court be "court" for the purposes of Section 2(1)(e), and whether the Supreme Court does or does not retain seisin after appointing an arbitrator, applications will follow the first application made before either a High Court having original jurisdiction in the State or a Principal Civil Court having original jurisdiction in the district, as the case may be. (f) Section 42 will apply to applications made after the arbitral proceedings have come to an end provided they are made under Part I. (g) If a first application is made to a court which is neither a Principal Court of Original Jurisdiction in a district or a High Court exercising original jurisdiction in a State, such application not being to a court as defined would be outside Section 42. Also, an application made to a court without subject-matter jurisdiction would be outside Section 42." 31 More recently in Sundaram Finance Limited v Abdul Samad (2018) 2 SCALE 4....
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...." 19.The aforesaid provision provides for arbitral proceedings to be terminated by the final arbitral award. Thus, when an award is already made, of which execution is sought, the arbitral proceedings already stand terminated on the making of the final award. Thus, it is not appreciated how Section 42 of the said Act, which deals with the jurisdiction issue in respect of arbitral proceedings, would have any relevance.." Consequently, in the view of the Court, the enforcement of an award through its execution can be initiated anywhere in the country where the decree can be executed and there is no requirement of obtaining a transfer of the decree from the Court which would have jurisdiction over the arbitral proceedings. 32 In the present case, the arbitral award, in essence, postulates the transmission of shares from the appellant to the claimant. The only remedy available for effectuating the transmission is that which was provided in Section 111 for seeking a rectification of the register. There is, therefore, no merit in the challenge addressed by the appellant. 33 We may also note the fact that in the proceedings before the Madras High Court under Section 9, it was held th....
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....ed before this Court have been negatived. 34 Finally, having covered the entire gamut of submissions which were urged on behalf of the appellant, it would be worthwhile to revisit the fundamental principles which were formulated nearly fifty years ago in a judgment of a three judge Bench of this Court in Satish Kumar v Surinder Kumar (1969) 2 SCR 244. That case arose under the provisions of the Indian Arbitration Act 1940. The question which arose before this Court was whether an award under the Act requires registration under Section 17(1)(b) of the Registration Act, if it effects partition of immovable property above the value of Rs. 100. A Full Bench of the Patna High Court held that unless a decree is passed in terms of the award (in terms of the position as it stood under the 1940 Act) it had no legal effect. In holding thus, the Patna High Court had relied upon a Punjab Full Bench decision holding that under the Arbitration Act 1940, an award was effective only when a decree follows a judgment on the award. The Punjab Full Bench held that even if the award is registered, it is still a 'waste paper' unless it is made a rule of the court. In appeal, this Court held that the tw....