TaxTMI 
TaxTMI 
2022 (11) TMI 682
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.... subsequently altered to 60% (by the petitioner) and 40% (by the respondent). 3. It is submitted by Mr. Vikas Arora, learned counsel for the petitioner that due to poor market conditions and various actions, breaches and omissions on the part of the respondent, including misbehavior with the Firm's suppliers/vendors, the Firm suffered substantial losses. In view of the losses suffered by the Firm, it became impossible for the petitioner to continue with and sustain the Firm any longer. Resultantly, the petitioner and the respondent decided to amicably dissolve the partnership. Pursuant thereto, the petitioner, the respondent and several other persons/representatives had a meeting on June 21, 2019 wherein it was discussed that there are irrecoverable losses caused to the Firm and both parties need to come up with an exit plan to close down the Firm completely. As agreed by the respondent in the said meeting, it was decided that both partners i.e. the petitioner and the respondent, individually, would evaluate the total assets and liabilities of the Firm and mutually prepare and agree upon an exit plan. Subsequently, the petitioner and the respondent met again on June 25, 2019....
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....eze debit transactions of the account of the Firm in order to stop the respondent from further misappropriating the money of the Firm. 9. Subsequently, the petitioner terminated the partnership and issued a legal notice dated July 29, 2019 to the respondent for dissolution of the Partnership Deed as per clause 13 therein, to which the respondent failed to reply, despite service. 10. He also stated that the respondent, misusing the powers of his father Ishwar Singh, who is an officer in Delhi Police, filed a false complaint against the petitioner, his father, his father-in-law and his brother-in-law. Approximately Rs.40 lakh of M/s Rugs Enterprises has been stuck in the market as the production/business has stopped due to the police action. 11. It is the case of the petitioner that no payment has been made by respondent either towards losses incurred by the Firm or towards GST and other tax liabilities of the Firm or towards the return of the unilateral withdrawals made by the respondent. The respondent is also not willing to amicably work out a solution by finalising the books of accounts, figure out the profit/loss of each partner, dispose of the assets/stocks of the Firm....
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....of the respondent No. 2 Firm at D-14, Sector 80, NOIDA. 14. It is the contention of the petitioner that the respondent No. 1, who is the majority partner holding 67% stake in the Firm, has been misappropriating funds and goods/products belonging to the Firm for his personal use and otherwise, that has caused the Firm to suffer heavy losses and eventually shut down. 15. According to Mr. Samrat Nigam, learned counsel for the petitioner, the respondent No. 2 was set up by the parties by virtue of the Partnership Deed dated March 10, 2014, with capital infused into the Firm in an equal ratio by both the petitioner and the respondent No. 1. However, the profit/loss arising out of the Firm was to be divided in the ratio 33:67 between the petitioner and the respondent No. 1 respectively. However, after the commencement of the business of the Firm, in 2016, the respondent No.1 asked the petitioner to infuse additional funds to the Firm, to be used as working capital, failing which, the purchase orders of the Firm will have to be transferred to LIT India Private Limited, the company of the father of respondent No. 1. The Firm procured a loan of Rs. 2 crore from TATA Capital Finance Se....
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....t, staying in expensive hotels and flying business class. The cost of accommodation and travel alone for this holiday is reflected in the books of the Firm to the tune of Rs.6,37,059/- . It is stated that a collation of the expenditures made by respondent No. 1 at the expense of the Firm, taken from its bank account is more than Rs. 1,33,25,724/-. A detailed list of the monies taken out of the Firm by respondent No. 1, total whereof amounts to Rs. 63,02,500/-, has been set out in a tabular form in page No. 23 of the petition. 20. On July 23, 2019, the petitioner discovered that the respondent No.3 was operating from the factory of the Firm located at D-14, Sector 80, NOIDA. Goods worth crores of rupees were siphoned off through respondent No.3, which obtained a GST Number at the factory of the Firm, through a forged rent agreement. It is stated that relatives of respondent No. 1 were the directors of respondent No. 3, which was merely a shell company, lying dormant since inception and got activated in the month of May 2019 at the behest of respondent No. 1 and his wife who was the authorised representative, who are liable for misappropriating and diverting funds from the Firm fo....
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.... the disputes between the partners, the business of the Firm came to a halt and all operations were ceased. Union Bank of India took over possession of the factory along with all stocks and machinery which were hypothecated to them. 24. He further averred that several complaints and FIRs have been registered against the directors of respondent No. 3 under various provisions of the Indian Penal Code (IPC) for nefarious activities. 25. Subsequently, on July 24, 2019, in order to deflect attention from the conspiracy that the petitioner had discovered, the respondent No. 1 registered an FIR being No. 534/2019 against the petitioner and his brother at Gautam Budh Nagar Police Station under Sections 323, 325, 504 of the IPC. On July 28, 2019, the petitioner addressed a complaint to the Station House Officer, Vasant Kunj Police Station against the unlawful activities of the respondent Nos. 1 and 3. An FIR bearing No.170/2019 was registered on July 31, 2019 under Sections 380, 406, 506, 120B, 467, 468 and 471 of the IPC based on the complaint. 26. On November 22, 2019, the premises of the Firm were reopened in the presence of a Chartered Accountant appointed by the Delhi Police, ....
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....aim of Rs.2,41,32,905/- from the respondent No. 1 for the stock that went missing from the godown of the Firm. The total amount for which claims have been made, thus amounts to Rs. 8,61,65,626/-. 32. Mr. Nigam has also contended that it is trite law that even parties who are not signatories to an arbitration agreement can be referred to arbitration. To buttress his argument, he has placed reliance on the judgments of the Supreme Court in the cases of Cheran Properties Ltd. v. Kasturi and Sons Ltd. and Ors., (2018) 16 SCC 413, Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641, Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. 2022 SCC OnLine SC 522, Mahanagar Telephone Nigam Ltd. v. Canara Bank and Ors., (2020) 12 SCC 767, Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr., (2018) 15 SCC 678; of this Court in the case of Vistrat Real Estates Pvt. Ltd. v. Asian Hotels North Ltd., 2022 SCC OnLine Del 1139; and of the High Court of Madras in the case of Embassy Property Developments Ltd. v. Jumbo World Holdings Ltd. and connected matter, 2013 (4) CTC 154. He seeks prayers as made in the petition. 33.....
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....o arbitration would be against the established principles of independent party autonomy. 35. He contested the reliance placed by the petitioner on Chloro Controls (supra), by stating that in Cox and Kings Limited v. SAP India Private Limited and Anr., Arbitration Petition (Civil) No. 38/2020, the Supreme Court has doubted the correctness of the decision in Chloro Controls (supra) and referred the same to a larger bench. In any case, the application of the Doctrine of Group of Companies in Chloro Controls (supra) relies upon the intent of the parties to include a non-signatory in the arbitral proceedings. It is an admitted fact that the Partnership Deed including the arbitration clause was executed on March 10, 2014. The averments regarding the role of respondent No. 3 came up only in June 2019 when the respondent No. 3 received GST Number on the address mentioned in various invoices and in July 2019 when the petitioner lodged the FIR at Vasant Kunj Police Station. He stated that the respondent No. 3 is not a subsidiary of respondent Nos. 1 or 2, and respondent No. 1 is neither a signatory nor holding any position in respondent No. 3. The Directors of respondent Nos.2 and 3 did n....
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....he learned counsel for the petitioner is not applicable to the facts of the present case, as in that case, CANFINA, which was a non-signatory to the agreement was allowed to join arbitration proceedings as the same was a wholly owned subsidiary of the respondent Canara Bank. In the present case, the respondent No.3 is a separate legal entity incorporated in the year 2013 and has no role in the affairs of respondent No.2 in any manner whatsoever. The respondent No. 3 has independently secured the purchase orders for various consignments, had purchased raw material independently to fulfill the said orders which further proves that the respondent No. 3 has nothing to do with the petitioner and respondent Nos. 1 and 2. 40. He has also contested the reliance placed by Mr. Nigam on the judgment in the case of Cheran Properties (supra) claiming that the said judgment will not be applicable to the facts of the present case, as the issue therein was execution of an arbitral award against a non-signatory. He stated that in any case, the respondent No. 3 has no nexus with the respondent No. 2 Firm and no document has been placed on record to prove that any money has been transferred from t....
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....le declining an application under Section 8 of the Arbitration and Conciliation Act, 1996 of the defendant to refer the dispute to arbitration. 44. He further stated that the respondent No.3 has nothing to do with the affairs of the Firm and since the Directors of respondent No.3 are the relatives of respondent No.1, they have been falsely implicated in the FIR lodged at Vasant Kunj Police Station to arm-twist and extort money. From March 2014 till June 2019, the respondent No.3 was not in the picture, and the business of respondent No.2 Firm was being carried out exclusively by the petitioner and the respondent No.1. It is in 2019 that it was brought to the notice of the Directors of respondent No.3 that the respondent No. 2 Firm has suffered heavy business losses and needs immediate capital infusion. Further, the petitioner and his father met with the Directors of respondent No.3 for taking steps to settle the loan of Union Bank of India. Various meetings in this regard had taken place but no fruitful result arose, as the petitioner and his father did not want to share the losses as per their decided ratio in the partnership. He stated that this petition is yet another attempt....
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....ed the respondent No. 2 partnership Firm. So, in that sense, their request for appointment of an Arbitrator in these petitions, is for adjudication of their inter se disputes. Both of them have invoked the arbitration clause by issuing notices to each other. 50. The claims of the respondent No.1 primarily are the following: (i) Towards loss incurred by the Firm due to the actions of the petitioner including his unilateral withdrawals; (ii) Towards finalising the books of accounts, figuring out the profit/loss of each partners, disposing of the assets/stocks of the Firm etc.; (iii) Towards GST and other liabilities to be paid to various government agencies 51. Per contra, the claims of the petitioner are primarily the following: i. Amount of Rs.1,40,06,457/- that the respondent No. 1 have misappropriated through respondent No. 3 (M/s Rugs Enterprises Private Limited) which should have been credited to the Firm. ii. Amount of Rs.78,74,279/-, i.e. 67% out of Rs.1,17,52,656/- the Firm still owes to the creditors. iii. Amount of Rs.2,05,23,762/- being 67% of respondent No.1's share of the debt from the amount of Rs.3,06,324,....
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....ment, if the facts and circumstances of the case indicate a mutual intention of all parties to bind both the signatories and non-signatory affiliates in the group, or; 4. This Doctrine gets attracted when a non-signatory entity on the Group, was engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, or; 5. In cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality, especially when funds of one company is used to financially support or re-structure other members of the group, or; 6. Doctrine can be invoked to bind non-signatory affiliate of a parent company or inclusion of a third party to arbitration, where there is a direct relationship between the party which is a signatory to the arbitration agreement or there is direct commonality of the subject matter 7. Even if all parties to the lis were not signatory to all the agreements, but none of the Companies was a stranger to these transactions; parties intended, executed and implemented a composite tran....
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....IR or before this Court. 58. In the above background, I shall now examine the law with regard to whether the claims based on allegations of fraud / forgery can be referred to arbitration. In Ayyasamy (supra), a division Bench of their Lordships of the Supreme Court while being seized of an issue involving an application under Section 8 of the Arbitration and Conciliation Act, 1996, considered the judgment in N. Radhakrishnan (supra) (of which reliance has been sought to be made by the petitioner herein). A.K. Sikri, J., while referring to the 246th Law Commission Report held as under:- "14...............Notwithstanding the above, the Courts have held that certain kinds of disputes may not be capable of adjudication through the means of arbitration. The Courts have held that certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, cannot be referred to arbitration. Following categories of disputes are generally treated as non-arbitrable : (i) patent, trademarks and copyright; (ii) anti-trust/competition laws; (iii) insolvency/winding up; (iv....
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....hat such a case cannot be properly dealt with by the arbitrator, and ought to be settled by the Court, through detailed evidence led by both parties. 18. When the case involves serious allegations of fraud, the dicta contained in the aforesaid judgments would be understandable. However, at the same time, mere allegation of fraud in the pleadings by one party against the other cannot be a ground to hold that the matter is incapable of settlement by arbitration and should be decided by the civil court. The allegations of fraud should be such that not only these allegations are serious that in normal course these may even constitute criminal offence, they are also complex in nature and the decision on these issues demand extensive evidence for which civil court should appear to be more appropriate forum than the Arbitral Tribunal........... XXX XXX XXX 25. In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud simplicitor may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the Court, while dealing with Section 8 of the Ac....
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.... arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject matter rather than relegating the parties to arbitration, then alone such an application under Section 8 should be rejected." (emphasis supplied) D.Y. Chandrachud, J., (as his Lordship then was), concurring with the above, held as under:- "35. Ordinarily every civil or commercial dispute whether based on contract or otherwise which is capable of being decided by a civil court is in principle capable of being adjudicated upon and resolved by arbitration "subject to the dispute being governed by the arbitration agreement" unless the jurisdiction of the Arbitral Tribunal is excluded either expressly or by necessary implication. In Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. [Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 : (2011) 2 SCC (Civ) 781] , this Court held that (at SCC p. 546, para 35) adjudication of certain categories of proceedings is reserved by the legislature excl....
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.... detract from the jurisdiction of the Arbitral Tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement." (emphasis supplied) 59. In Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710, the Supreme Court reiterated that twin test laid down in paragraph 25 of Ayyasamy (supra) and held as under: "The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in paragraph 25 are : (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain. Judged by these two tests, it is clear that this is a case which falls on the side of "simple allegations" as there is no allegation of fraud which would vitiate the partnership deed as a whole or, in particular, the arbitration clause concerned in the said deed. Secondly, all the allegations ....
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....ined by fraud or cheating Section 17 would apply. In such situations, the mere fact that criminal proceedings have been initiated in respect of the subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, would cease to be so. The Court has thereby made a distinction between a contract obtained by fraud and fraud / cheating that arise thereafter. This view has been affirmed subsequently in Deccan Paper Mills v. Regency Mahavir, 2020 SCC OnLine SC 655 and Vidya Drolia & Ors. v. Durga Trading Corporation, (2021) 2 SCC 1. 62. In Ameet Lalchand Shah v. Rishabh Enterprises and Anr., (2018) 15 SCC 678, the Supreme Court in a matter dealing with allegation of fraud arising from criminal breach of trust and misrepresentation regarding equipment procured, held that only where the Court is satisfied that the allegations of fraud are serious and complicated in nature, would it be appropriate for the Court to deal with the subject matter of the dispute rather than delegate the parties to arbitration. The Apex Court was of the opinion that it is the duty of the Court to impart a sense of business efficacy to commercial transactions and mere allegations of....
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....ctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of public law." (emphasis supplied) 64. That apart, in Vidya Drolia (supra), the Supreme Court, while overruling the ratio in N. Radhakrishnan (supra), has laid down a four-fold test for determining whether the subject matter of a dispute in an arbitration agreement would not be arbitrable. The four tests to be satisfied is as below:- "(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem. (2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable; (3) when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and (4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s)." (emp....
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....ndia. These claims are with regard to the performance of the partnership deed and arise from the business of the Firm. These come directly under the purview of the arbitration agreement between the petitioner and the respondent No. 1, and as such, need to be referred to arbitration. 67. Now I shall deal with Claim Nos. (i), (iv) and (v) of the petitioner, that are relatable to allegations of misappropriation, siphoning off and fraud/forgery. (1) The claims relatable to the allegation of siphoning off of goods and monies qua respondent No. 1 In the present case, it is not the case of the petitioner that the partnership deed itself, containing the arbitration agreement has been obtained by fraud, rendering it void. In other words, there is no allegation of fraud which would vitiate the partnership deed as a whole, or even the arbitration agreement therein. The allegations of fraud raised against the respondent No. 1 have arisen subsequent to the contract, pertaining to the operations of the partnership. Claim Nos. (iv) and (v) are with regard to allegations of siphoning off of funds and goods therefrom by the respondent No. 1, which would touch upon the internal affairs o....