TaxTMI 
TaxTMI 
2021 (4) TMI 319
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....lows: 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 capital of the company was held as follows: Rup....
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.... 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. Similarly, in the event of S.K. or her heirs/successors desire to sell their shares, the same shall be sold only to S.P. or his successors. The consideration paid shall be....
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....d 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 directors of the Company from time to time appointed by Reuters in accordance with the Articles;" "Reuters Group" was defined as follows: "Reuters Group means Reuters, its Holding Company and such Holding Company's Subsidiaries for the time being;" Tr....
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....r 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 clause was set out as follows: "14.1 This Agreement shall continue in full force and effect for so long as both (i) any of the Prakash Family Shareholders and (ii) any member of the Reuters Group hold any Shares. If, as a result of any sale or disposal made in accordance with this Agreement, either (i) ....
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....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." Clause 31 deals with governing law and jurisdiction and states as follows: "31. This Agreement (save for clause 16.2, which shall be governed by and construed in accordance with the laws of England) is governed by and shall be construed in accordance with the laws of India." 2.5. On the same day, a Share Purchase Agreement dated 12.04.1996 ["SPA"] was entered into between ....
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....s 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 than SP (the other Prakash Family Shareholders). The remaining votes attributable to Shares hold by Prakash Family Shareholders shall be divided equally between the other Prakash Family shareholders; and (ii) The provisions of Article 16(b)(i) shall cease to be valid and effective upon the occurrence of any of the events in relation to SP." We are informed that this position continued up to the year 2012 after which, by mutual agreement, the Articles of Association were again a....
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....ea 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 deadlock then the Prakash Family Members and Reuters act as 'blocks', which does not mean that SHA does not recognise Prakash Family Shareholders in their individual capacity. More so, as per the opening paragraph, the term 'parties' envisages Prakash Family Shareholders both individually as well as collectively." xxx xxx xxx "90. A conjoint reading of the Clause 28.2 with the opening paragraph of SHA therefore necessarily means that any kind of agreement as detailed in Clause 28.2, 'between the parties' shall st....
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....U, 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 Insurance Company Ltd. v. Narbheram Power and Steel Pvt. Ltd., (2018) 6 SCC 534], Vodafone [Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613], Uttarakhand Purv Sainik [Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Ltd., (2020) 2 SCC 455], Russell [Russell v. Northern Bank Development Corpn. Ltd., (1992) B.C.C. 578] and Anderson [Catherine Anderson v. Ashwani Bhatia, (2019) 11 SCC 299], and the same are not applicable to the case in hand." 3. Shri K.V. Viswanathan, learned Senior Advocate appearin....
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....eing 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 Advocate, show that "entire agreement" clauses are to be construed strictly, the idea being to obviate having to refer to negotiations that had taken place between the parties pertaining to the subject matter of the agreement before the agreement was formally entered into. He then assailed the learned Single Judge's judgment dated 22.10.2020, arguing that the impugned judgment, instead of following Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 ["Duro Felguera"] and Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC ....
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....2, 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 being unstamped, ought not to be taken in evidence. It is only as an afterthought that clause 8 of the MoU was then relied upon. Both the learned counsel strongly relied upon clause 11.2 of the SHA which made it clear beyond doubt that the MoU stood superseded. They then relied upon the judgments in Kishorilal Gupta (supra) (at paragraph 9), Damodar Valley Corporation (supra) (at paragraphs 7 and 8), Young Achievers (supra) (at paragraphs 5 and 8), Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813 (at paragraph 23),....
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....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, the existence of the contract is a necessary condition for its operation; it perishes with the contract; (3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio; (4) though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder; (5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it ....
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....eferral 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 competence-competence with reference to the legislation, that is, the Arbitration Act. 130. Section 16(1) of the Arbitration Act accepts and empowers the Arbitral Tribunal to rule on its own jurisdiction including a ruling on the objections, with respect to all aspects of nonarbitrability including validity of the arbitration agreement. A party opposing arbitration, as per sub-section (2), should raise the objection to jurisdiction of the tribunal before the Arbitral Tribunal, not later than the submission of statement of defence. However, participation in the appointment procedure or appointing....
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....g 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 avoided or rescinded, as the case may be, and then if the contract is held to be valid, it would require the arbitrator to resolve the issues that have arisen." (emphasis supplied) 7. A recent judgment, Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd., 2021 SCC OnLine SC 190, referred in detail to Vidya Drolia (supra) in paragraphs 15 to 18 as follows: "15. Dealing with "prima facie" examination under Section 8, as amended, the Court then held [Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1]: "134. Prima facie examination is not full review but a primary first review....
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....t-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 court may for legitimate reasons, to prevent wastage of public and private resources, can exercise judicial discretion to conduct an intense yet summary prima facie review while remaining conscious that it is to assist the arbitration procedure and not usurp jurisdiction of the Arbitral Tribunal. Undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the integrity and efficacy of arbitration as a dispute resolution mechanism. Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain ....
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....trary 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 hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law. 147. We would proceed to elaborate and give further reasons: 147.1. In Garware Wall Ropes Ltd. [Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 : (2019) 4 SCC (Civ) 324], this Court had examined the question of stamp duty in an underlying contract with an arbitration clause ....
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....ourt 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 the court to examine. 147.4. Most jurisdictions accept and require prima facie review by the court on non-arbitrability aspects at the referral stage. 147.5. Sections 8 and 11 of the Arbitration Act are complementary provisions as was held in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618]. The object and purpose behind the two provisions is identical to compel and force parties to abide by their contractual understanding. This being so, the two provisions should be read as laying down similar standard and not as laying down different and separate parameters. Section 11 does not prescribe any standard of judicial review by the court for determining whether an arbitration a....
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....igant 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 Felguera [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764], Kurian Joseph, J., in para 52, had referred to Section 7(5) and thereafter in para 53 referred to a judgment of this Court in M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd. [M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696 : (2009) 3 SCC (Civ) 271] to observe that the analysis in the said case supports the final conclusion that the memorandum of understanding in the said case did not incorporate an arbitration clause. Thereafter, reference was specifically made to Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] and Boghara Polyfab (P) Ltd. [National Insurance Co. Ltd. v. Bogha....
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....ai 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 the decision-making authority between the court at the referral stage and the arbitrators' primary jurisdiction to decide disputes on merits. The court as the judicial forum of the first instance can exercise prima facie test jurisdiction to screen and knock down ex facie meritless, frivolous and dishonest litigation. Limited jurisdiction of the courts ensures expeditious, alacritous and efficient disposal when required at the referral stage." 18. The Bench finally concluded: "153. Accordingly, we hold that the expression "existence of an arbitration agreement" in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the ....
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....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 other that an arbitration agreement exists between the parties on a prima facie review of facts of that case, and that a deeper consideration must be left to an arbitrator, who is to examine the documentary and oral evidence and then arrive at a conclusion. 8. Likewise, in Bharat Sanchar Nigam Ltd. v. Nortel Networks India Pvt. Ltd., 2021 SCC OnLine SC 207, another Division Bench of this Court referred to Vidya Drolia (supra) and concluded: "39. The upshot of the judgment in Vidya Drolia [Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1] is affirmation of the position of law expounded in Duro Felguera [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729] and Mayavati Trading [Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714], which continue to hold the field.....