TaxTMI 
TaxTMI 
2021 (4) TMI 319
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..... 2. The facts, briefly stated, are as follows: 2.1. A private company was incorporated on 09.12.1971 under the name and style of Asian Films Laboratories Private Limited ["the company"] by Prem Prakash, the entire amount of the paid-up capital being paid for by him from his personal funds. He then distributed shares to his family members without receiving any consideration for the same. On 06.03.1997, the name of the company was altered to its present name - ANI Media Private Limited. 2.2. Owing to the extensive efforts of Sanjiv Prakash at a global level, Reuters Television Mauritius Limited (now Thomson Reuters Corporation), a company incorporated in Mauritius ["Reuters"], approached him for a longterm equity investment and collaboration with the company on the condition that he would play an active role in the management of the company. 2.3. Pursuant to this understanding, a Memorandum of Understanding ["MoU"] was entered into sometime in 1996 between the four members of the Prakash Family. The MoU recorded that Sanjiv Prakash, supported by the guidance and vision of Prem Prakash, had been responsible for the tremendous growth of the company. The paid-up share capit....
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....l of the company to vest with S.P. 6. In view of the fact that S.P. has been able to get Reuters to participate in Asian Films Laboratories Pvt. Ltd. The other shareholders of the Prakash family namely P.P., D.P. and S.K. agree to vote on all resolutions both in the directors and shareholders meeting in the manner instructed by S.P. To this effect, they are agreeable to cooperate and vote for amendment in the Articles to reflect the following: (a) Any resolution in Board to have either affirmative vote of S.P. or his consent in writing to approve the same. (b) Disproportionate voting rights irrespective of the number of the shares held by them as under: Prem Prakash 1 vote Daya Prakash 1 vote Seema Kukreja 1 vote Sanjiv Prakash 5097 votes Reuters Television Mauritius Limited 4900 votes. 7. This MoU shall be binding on all the heirs, successors and assigns of P.P., D.P., S.P. and S.K. and they would act in the manner stated in this MoU. 8. That in the event P.P. or D.P. desire to sell and or bequeath his/her equity shares, the same shall be offered/bequeathed only to S.P. or his heirs and successors. Similarl....
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....proved Business Plan and Budget;" xxx xxx xxx "Management Deadlock means a material management dispute (not being an Artificial Deadlock) between any or all of the Prakash Family Directors on the one hand and the Reuters directors on the other hand relating to the affairs of the Company which is not resolved within sixty (60) days of such dispute being referred for settlement to the Reuters Managing Director (as defined in clause 16.1) and the Chairman;" The expression "Prakash Family Directors" was defined as follows: "Prakash Family Directors means the directors of the Company from time to time appointed by the Prakash Family Shareholders in accordance with the Articles;" The expression "Prakash Family Members or Interests" was defined as follows: "Prakash Family Members or Interests means each of the Prakash Family Shareholders and each of their respective fathers, mothers, sons, daughters, brothers and sisters (the Prakash Family Relatives) and any company in which any such relation or any Prakash Family Shareholder has a controlling interest;" "Reuters Directors" was defined as follows: "Reuters Directors means the director....
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....ty" then provided as follows: "12.1 Where the introduction, imposition or variation of any law or any change in the interpretation or application of any law makes it unlawful or impractical without breaching such law for Reuters to continue to hold upto at least forty nine per cent. (49%) of the issued ordinary share capital of the Company or to carry out all or any of its obligations under this Agreement, upon Reuters notifying the other Shareholders: (a) Reuters shall be entitled to require the other Shareholders to purchase its holding of Shares at a price determined in accordance with clause 11.4, which shall apply mutatis mutandis, and any such purchase shall be made by the other Shareholders in the proportions agreed between them or otherwise in the proportion each such other Shareholders holding of Shares bears to the aggregate number of Shares held by all of such Shareholders; (b) Any amounts loaned or made available to the Company shall forthwith be repaid to Reuters; and (c) Reuters shall upon the service of such notice cease to be bound by the provisions hereof save for the preceding provisions of this clause 12." The termination cl....
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....ration shall be London and the terms of this clause 16.2 shall be governed by and construed in accordance with English law. The language of the arbitration proceedings shall be English." Clause 28, upon which a large part of the argument of both sides hinges, is set out as follows: "ENTIRE AGREEMENT 28.1 This Agreement, the Ancillary Agreements, and the Share Purchase Agreement constitute the entire agreement and understanding of the parties with respect to the subject matter thereof and none of the parties has entered into this agreement in reliance upon any representation, warranty or undertaking by or on behalf of the other parties which is not expressly set out herein or therein. 28.2 Without prejudice to the generality of clause 28.1, the parties hereby agree that this Agreement supersedes any or all prior agreements, understanding, arrangements, promises, representations, warranties and/or contracts of any form or nature whatsoever, whether oral or in writing and whether explicit or implicit, which may have been entered into prior to the date hereof between the parties, other than the Ancillary Agreements and the Share Purchase Agreement." Cla....
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.... of the Seller's Shares within the time period set out in Article 11(e) the Shares subject to such Purchases shall be acquired by each Prakash Family Shareholder in the proportion such Shareholder's holding of Shares bears to the aggregate number of Shares held by all of the Prakash Family Shareholders who have become bound to make such purchases." Likewise, clause 11(i)(i) was inserted, in which it was stated: "11. Transfer of Shares xxx xxx xxx (i) xxx xxx xxx (i) SP shall have the right (but not the obligation) upon serving notice in writing to each remaining Prakash Family Shareholder to purchase all (but not some only) of such Shares in preference to any other Prakash Family shareholder;" Clause 16(b) of the Articles of Association also incorporated clause 6(b) of the MoU as follows: "16. xxx xxx xxx (b) If a poll is demanded in accordance with the provisions of section 179 of the Companies Act 1956: (i) SP shall so long as he holds Shares be able to vote such number of Shares as is equal to the number of Shares held by all the Prakash Family Shareholders less the numbers of Prakash Family Shareholders other ....
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....ment dated 22.10.2020, the Delhi High Court set out what according to it was the issue that had to be decided in paragraph 79 follows: "79. In this petition, I am of the view, the initial issue which arises for consideration is, whether at the stage of considering the request of the petitioner for the appointment of an Arbitrator, it is only the existence of an Arbitration Agreement that needs to be seen, leaving it to the Arbitrator to decide the issue of validity of the Agreement, including the plea of novation of MoU." After referring to both the MoU and the SHA, the learned Single Judge of the Delhi High Court held: "88. In so far as Clause 1.1 is concerned, the same defines 'artificial deadlock' as a management deadlock caused by virtue of the Prakash Family Shareholders or Reuters voting against an issue or proposal in circumstances where the approval of the same is required for the functioning of the Company as per approved plans. No doubt, Mr. Kathpalia, Mr. Nayar and Mr. Sethi may be right in contending that there exist a contemplation of groups viz. Prakash Family Members and Reuters under the SHA, but the same is in a particular fact situation of dea....
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....ect of novation of contract containing an arbitration agreement/clause is well-settled. An arbitration agreement being a creation of an agreement may be destroyed by agreement. That is to say, if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it or if the original contract in entirety is put to an end, the arbitration clause, which is a part of it, also perishes along with it. Hence, the arbitration clause of the MoU, being Clause 12, having perished with the MoU, owing to novation, the invocation of arbitration under the MoU is belied/not justified. 99. In view of my conclusion above, the plea of doctrine of 'kompetenz-kompetenz' and the reliance placed on Section 11(6A) of the Act are untenable. I have also considered the judgments relied upon by the counsels for the petitioners viz. Duro Felguera S.A. [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729], Mayavati Trading Pvt. Ltd. [Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714], Zostel Hospitality [Zostel Hospitality Pvt. Ltd. v. Oravel Stays Pvt. Ltd., Arb. Pet. 28/2018], Oriental Insurance Company Ltd. [Oriental ....
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....orking only in India to have to be referred to arbitration in accordance with the rules of the London Court of International Arbitration, which would be the result if the SHA were to supersede the MoU. He was also at pains to point out that clause 28 of the SHA has to be read as a whole, and clause 28.1 made it clear that the entire agreement and understanding between the parties which was contained in the SHA, the SPA, and the ancillary agreements was only "with respect to the subject matter thereof", the subject matter of these Agreements being the relationship between the Prakash Family and Reuters, which was completely different from the subject matter of the MoU, which was only between the members of the Prakash Family, Reuters not being a party thereto. For this purpose, he relied strongly upon the judgments contained in Barclays Bank Plc v. Unicredit Bank Ag and Anor, [2014] EWCA Civ 302 (at paragraphs 27 and 28), The Federal Republic of Nigeria v. JP Morgan Chase Bank, NA, [2019] EWHC 347 (Comm) (at paragraph 37), and Kinsella and Anor v. Emasan AG and Anor, [2019] EWHC 3196 (Ch) (at paragraphs 64 to 71). A reading of these judgments would, according to the learned Senior A....
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.... 1 and 2, relied heavily on the fact that the MoU was superseded immediately, inasmuch as it no longer existed after some of its material clauses were put into the Articles of Association of the company on 14.05.1996. They also argued that the MoU was never given effect to as Daya Prakash, who was the Managing Director of the company, did not continue as such but handed over the management to Sanjiv Prakash, who then became the Managing Director of the company soon after the SHA was entered into. They then pointed out that, in any case, after 2012, even this did not remain as the Articles of Association were then amended with the consent of Sanjiv Prakash to no longer incorporate what had earlier been contained in the Articles post the amendment of 1996. They also pointed out that on the same day, i.e. on 05.10.2019, just as Prem Prakash sought to divest his shareholding in the company to be jointly held by Sanjiv Prakash and himself, Daya Prakash did likewise, and sought to divest her shareholding in the company to be jointly held by Seema Kukreja and herself. The first reaction of Sanjiv Prakash then was not to rely upon a novated MoU, but to take up the plea that the document be....
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....orporation (supra), both of which have been heavily relied upon by the learned Single Judge in the impugned judgment, as follows: "127. An interesting and relevant exposition, when assertions claiming repudiation, rescission or "accord and satisfaction" are made by a party opposing reference, is to be found in Damodar Valley Corpn. v. K.K. Kar [Damodar Valley Corpn. v. K.K. Kar, (1974) 1 SCC 141], which had referred to an earlier judgment of this Court in Union of India v. Kishorilal Gupta & Bros. [Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362] to observe: (Damodar Valley Corpn. case [Damodar Valley Corpn. v. K.K. Kar, (1974) 1 SCC 141] , SCC pp. 147-48, para 11) "11. After a review of the relevant case law, Subba Rao, J., as he then was, speaking for the majority enunciated the following principles: (Kishorilal Gupta & Bros. case [Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362], AIR p. 1370, para 10) '(1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it; (2) however comprehensive the terms of an arbitration clause may be....
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....40. The Arbitration Act specifically incorporates principles of separation and competence-competence and empowers the Arbitral Tribunal to rule on its own jurisdiction. 129. Principles of competence-competence have positive and negative connotations. As a positive implication, the Arbitral Tribunals are declared competent and authorised by law to rule as to their jurisdiction and decide non-arbitrability questions. In case of expressed negative effect, the statute would govern and should be followed. Implied negative effect curtails and constrains interference by the court at the referral stage by necessary implication in order to allow the Arbitral Tribunal to rule as to their jurisdiction and decide non-arbitrability questions. As per the negative effect, courts at the referral stage are not to decide on merits, except when permitted by the legislation either expressly or by necessary implication, such questions of non-arbitrability. Such prioritisation of the Arbitral Tribunal over the courts can be partial and limited when the legislation provides for some or restricted scrutiny at the "first look" referral stage. We would, therefore, examine the principles of competen....
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....ection 43(1) of the Arbitration Act states that the Limitation Act, 1963 shall apply to arbitrations as it applies to court proceedings. Sub-section (2) states that for the purposes of the Arbitration Act and Limitation Act, arbitration shall be deemed to have commenced on the date referred to in Section 21. Limitation law is procedural and normally disputes, being factual, would be for the arbitrator to decide guided by the facts found and the law applicable. The court at the referral stage can interfere only when it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute. All other cases should be referred to the Arbitral Tribunal for decision on merits. Similar would be the position in case of disputed "no claim certificate" or defence on the plea of novation and "accord and satisfaction". As observed in Premium Nafta Products Ltd. [Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd., 2007 UKHL 40 : 2007 Bus LR 1719 (HL)], it is not to be expected that commercial men while entering transactions inter se would knowingly create a system which would require that the court should first decide whether the contract should be rectified or avoi....
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....s applied for reference is party to such agreement would be subject to more thorough examination in comparison to the second and third categories/issues which are presumptively, save in exceptional cases, for the arbitrator to decide. In the first category, we would add and include the question or issue relating to whether the cause of action relates to action in personam or rem; whether the subject-matter of the dispute affects third-party rights, have erga omnes effect, requires centralised adjudication; whether the subject-matter relates to inalienable sovereign and public interest functions of the State; and whether the subject-matter of dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s). Such questions arise rarely and, when they arise, are on most occasions questions of law. On the other hand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlying the merits of the respective disputes/claims. They would be factual and disputed and for the Arbitral Tribunal to decide. 139. We would not like to be too prescriptive, albeit observe that the cou....
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....ide the jurisdiction of the court at the referral stage. On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement. Such interpretation can draw support from the plain meaning of the word "existence". However, it is equally possible, jurisprudentially and on contextualism, to hold that an agreement has no existence if it is not enforceable and not binding. Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. A reasonable and just interpretation of "existence" requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hol....
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....oes not satisfy mandatory legal requirements. Invalid agreement is no agreement. 147.2. The court at the reference stage exercises judicial powers. "Examination", as an ordinary expression in common parlance, refers to an act of looking or considering something carefully in order to discover something (as per Cambridge Dictionary). It requires the person to inspect closely, to test the condition of, or to inquire into carefully (as per Merriam- Webster Dictionary). It would be rather odd for the court to hold and say that the arbitration agreement exists, though ex facie and manifestly the arbitration agreement is invalid in law and the dispute in question is non-arbitrable. The court is not powerless and would not act beyond jurisdiction, if it rejects an application for reference, when the arbitration clause is admittedly or without doubt is with a minor, lunatic or the only claim seeks a probate of a will. 147.3. Most scholars and jurists accept and agree that the existence and validity of an arbitration agreement are the same. Even Stavros Brekoulakis accepts that validity, in terms of substantive and formal validity, are questions of contract and hence for th....
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....ns need to be evolved to deter litigants from their compulsive obsession towards senseless and ill-considered claims. One needs to keep in mind that in the process of litigation, there is an innocent sufferer on the other side of every irresponsible and senseless claim. He suffers long-drawn anxious periods of nervousness and restlessness, whilst the litigation is pending without any fault on his part. He pays for the litigation from out of his savings (or out of his borrowings) worrying that the other side may trick him into defeat for no fault of his. He spends invaluable time briefing counsel and preparing them for his claim. Time which he should have spent at work, or with his family, is lost, for no fault of his. Should a litigant not be compensated for what he has lost for no fault? The suggestion to the legislature is that a litigant who has succeeded must be compensated by the one who has lost. The suggestion to the legislature is to formulate a mechanism that anyone who initiates and continues a litigation senselessly pays for the same. It is suggested that the legislature should consider the introduction of a "Code of Compulsory Costs"." 147.9. Even in Duro Felgu....
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....Power & Steel (P) Ltd. [Oriental Insurance Co. Ltd. v. Narbheram Power & Steel (P) Ltd., (2018) 6 SCC 534 : (2018) 3 SCC (Civ) 484] and Hyundai Engg. & Construction Co. Ltd. [United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd., (2018) 17 SCC 607 : (2019) 2 SCC (Civ) 530] , both decisions of three Judges, has rejected the application for reference in the insurance contracts holding that the claim was beyond and not covered by the arbitration agreement. The Court felt that the legal position was beyond doubt as the scope of the arbitration clause was fully covered by the dictum in Vulcan Insurance Co. Ltd. [Vulcan Insurance Co. Ltd. v. Maharaj Singh, (1976) 1 SCC 943] Similarly, in PSA Mumbai Investments Pte. Ltd. [PSA Mumbai Investments Pte. Ltd. v. Jawaharlal Nehru Port Trust, (2018) 10 SCC 525 : (2019) 1 SCC (Civ) 1] , this Court at the referral stage came to the conclusion that the arbitration clause would not be applicable and govern the disputes. Accordingly, the reference to the Arbitral Tribunal was set aside leaving the respondent to pursue its claim before an appropriate forum. 147.11. The interpretation appropriately balances the allocation of....
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....e at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is nonexistent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably "non-arbitrable" and to cut off the deadwood. The court by default would refer the matter when contentions relating to nonarbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the Arbitral Tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism. 155. Reference is, accordingly, answered." The Court then concluded, on the facts of that case, that it would be unsafe to conclude one way or the ot....
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....h, without doubt, concern minors, lunatics or other persons incompetent to contract. There is nothing vexatious or frivolous in the plea taken by the Appellant. On the contrary, a Section 11 court would refer the matter when contentions relating to non-arbitrability are plainly arguable, or when facts are contested. The court cannot, at this stage, enter into a mini trial or elaborate review of the facts and law which would usurp the jurisdiction of the arbitral tribunal. 10. The impugned judgment was wholly incorrect in deciding that the plea of doctrine of kompetenz-kompetenz and reliance on Section 11(6A) of the 1996 Act, as expounded in Duro Felguera (supra) and Mayavati Trading (supra) were not applicable to the case in hand. Apart from going into a detailed consideration of the MoU and the SHA, which is exclusively within the jurisdiction of the arbitral tribunal, the learned Single Judge, while considering clause 28 of the SHA to arrive at the finding that any kind of agreement as detailed in clause 28.2 between the parties shall stand superseded, does not even refer to clause 28.1. No consideration has been given to the separate and distinct subject matter of the MoU and....