TMI Blog2022 (11) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... r that even respondent No. 3, i.e., Rugs Enterprises Private Limited needs to be referred to arbitration - HELD THAT:- The Doctrine of Group of Companies shall not be applicable to the facts of this case. The doctrine can be invoked in certain circumstances, to bind non-signatory affiliates to an arbitration agreement. However, here the petitioner was a partner in a partnership firm and is trying to bind a company, i.e., respondent No.3 to the arbitration agreement between him and respondent No.1, which is clearly impermissible as a partnership in its very nature cannot be equated with a company to invoke the Doctrine. As the name suggests, the Doctrine of Group of Companies is applicable in cases where the arbitration agreement is entered into by one of the companies in a group and the non-signatory affiliate, or sister/parent company is held to be bound by the arbitration agreement when the facts indicate the mutual intension of all the parties to bind the non-signatory affiliate to the agreement - the respondent No.3 cannot be referred to arbitration along with the petitioner and the respondent No.1. Which claims of the parties are required to be referred to arbitration? - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, where the petitioner had hoped that the respondent would discuss the exit plan with a positive frame of mind in order to dissolve the Firm. The losses as reflected in the balance sheet of the partnership Firm as on that day was ₹4,90,52,569.91/-. 4. However, no action was taken by the respondent on the exit plan offered by the petitioner, i.e. offering to liquidate the stocks, plants and machinery of the Firm immediately and close down the factory to stop any fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹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, negotiate with the bank to reduce liability, vacate the factory premises etc. Therefore it is clear that a dispute has arisen between the parties. Clause 16 of the Partnership Deed provides for arbitration, which reads as under:- 16. That in case of any dispute or differences which may arise in the ordinary course of business between the parties or their authorized representative as regard the constitution, meaning and effect of this deed or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 ₹ 2 crore from TATA Capital Finance Services Limited, through its partners. The primary guarantor of the loan was the respondent No.2 Firm and the petitioner s father Ishwar Singh mortgaged a property bearing No. 6517, C-6, Vasant Kunj, New Delhi, as collateral for the said loan. 16. On March 17, 2017, Andhra Bank (now Union Bank of India, hereinafter referred to as such) took over the loan from TATA Capital Finance Services and extended a loan of ₹ 3 crore to the Firm with an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereof amounts to ₹ 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 for their own personal wrongful gain. The modus operandi employed by the respondent No. l was that the at the time of dispatch, goods belonging to the Firm, which were supposed to be sold on invoices of SS Manufacturing were instead shipped on invoices of Rugs Enterprises'. Goods which were produced using raw material, machinery, employees and factory of the Firm were illegally sold as goods belonging to respondent N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the petitioner, respondent No. 1, the Manager of Union Bank of India and certain officials of GST Department. The Chartered Accountant prepared a report dated November 29, 2019, wherein it was observed that (a) there was a variation in stocks worth ₹2.41 crore of the Firm; (b) the arbitration clause contained in the Partnership Deed is per se biased in favour of respondent No. 1 and in violation of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. A reply has been filed by the respondent No. 3 /Rugs Enterprise Private Limited in Arb. P. 199/2021, wherein it has been stated that the reference of respondent No. 3 to the proposed arbitration is beyond the scope of arbitration clause contained in clause 16 of the Partnership Deed between the petitioner and respondent No. 1, as it has no role in the inter-se dispute between the petitioner and the respondent N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not even know each other at the time of execution of the contract. Respondent No.3 is not a third party beneficiary in any manner in the Partnership Deed entered into between the petitioner and the respondent No.1. As such, the contention of the petitioner to implead the respondent No.3 as a party in the proposed arbitration to seek the relief in the form of an award and to enforce it jointly and severally, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fairs 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 the accounts of the Firm to the accounts of respondent No. 3. 41. He has also submitted that the petitioner, with intent to cause harassment and to put pressure upon the respondent No.3 to settle all the outstanding liabilities of the Firm, has initiated vexatious litigations against the respondent No.3, including the FIR lodged at Vasant Kunj Police Station. 42. As regards the allegation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sant 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 to pressurise respondent No.3 and its Directors into paying the outstanding loan amount. 45. As regards the allegation of the petitioner regarding the alleged misappropriation of moulds of the Firm and misuse of the funds, he stated that the same is the subject matter of investigation in the FIR bearing No.170/2019 dated July 31, 2019 lodged at Vasant Kunj Police Station. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹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 ₹78,74,279/-, i.e. 67% out of ₹1,17,52,656/- the Firm still owes to the creditors. iii. Amount of ₹2,05,23,762/- being 67% of respondent No.1 s share of the debt from the amount of ₹3,06,324,84/- that is owed to Union Bank of India. iv. Amount of ₹1,96,28,223/-, i.e. the sum total of ₹ 63,02,500/- and ₹1,33,25,723/- which were wrongfully siphoned off by respondent No.1. v. Amount of ₹2,41,32,905/- for the stock which went missing from the godown of the Firm, which was siphoned off by respondent No. 1. 52. During the course of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract, 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 transaction. 54. Having noted the position of law, I must state that the Doctrine of Group of Companies shall not be applicable to the facts of this case. The doctrine can be invoked in certain circumstances, to bind non-signatory affiliates to an arbitration agreement. However, here the petitioner was a partner in a partnership firm and is trying to bind a company, i.e., respondent No.3 to the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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) bribery/corruption; (v) fraud; (vi) criminal matters. Fraud is one such category spelled out by the decisions of this Court where disputes would be considered as non-arbitrable. 15. 'Fraud' is a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his detriment. Fraud can be of different forms and hues. Its ingredients are an intention to deceive, u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced, the Court can sidetrack the agreement by dismissing application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exclusively for public fora as a matter of public policy. Certain other categories of cases, though not exclusively reserved for adjudication by courts and tribunals may by necessary implication stand excluded from the purview of private fora. This Court set down certain examples of non-arbitrable disputes such as: (SCC pp. 546-47, para 36) (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made which have been relied upon by the learned counsel appearing on behalf of the respondent, pertain to the affairs of the partnership and siphoning of funds therefrom and not to any matter in the public domain. (emphasis supplied) 60. In Avital Post Studioz Limited and Ors. v. HSBC Pi (Mauritius) Limited, Civil Appeal No.5145/2016 the Supreme Court after considering the decision in Rashid Raza (supra) wherein the Supreme Court had referred to A.K. Sikri J. s, Judgment in A. Ayyasamy (supra), has in paragraph 14 held as under:- After these judgments, it is clear that serious allegations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises 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 fraud would not be sufficient to deny reference of disputes to arbitration. 63. In N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited Ors., Civil Appeal No.3802/2020 , the Supreme Court after discussing various judgments including those cited above, held that all civil or commercial disputes, contractual or non contractual, which can be adjudicated by a Civil Court, in principle can be adjudicated and resolved through arbitration, unless it is excluded by a statute or by necessary implication. Certain categories of disputes that are reserved by the legislature, as a matter o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 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). (emphasis supplied) 65. From a perusal of the above judgments, the following would emerge: i. All civil or commercial disputes which are capable of being decided by a Civil Court are, ordinarily, capable of being adjudicated through arbitration unless the same is excluded by statute or by necessary implication. ii. Disputes relating to rights in personam, i.e., an interest protected against specified individuals, are amenable to arbitration. iii. Disputes relating to rights in rem, i.e., rights exercisable against the world at large, are required to be adjudicated by Courts and statutory tribunals. iv. When the subject matter of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 of the parties inter se, and shall have no implications on public domain. These allegations do find mention in the FIR 170/2019 lodged at Vasant Kunj Police Station, and may even give rise to criminal proceedings. However, these are essentially arising out of the civil or contractual relationship between the petitioner and the respondent No. 1 inter se, and being a lis in personam, cannot be said to detract from the jurisdiction of an arbitral tribunal to resolve the dispute. An arbitral tribunal could very well adjudicate the issue through appreciating facts, evidence and the law. (2) The claims relatable to the allegations of fraud/forgery qua respondent Nos. 1 and 3. Now, coming to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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