IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 29TH DAY OF AUGUST, 2019 BEFORE THE HON' BLE MR. JUSTICE B. VEERAPPA C.M.P.No.377/2018 BETWEEN GARTEX INSTA APPARELS PRIVATE LIMITED A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956, HAVING ITS REGISTERED OFFICE AT NO.17, IV BLOCK, RAJAJINAGAR, BENGALURU-560 010 REPRESENTED BY ITS AUTHORIZED REPRESENTATIVE.
... PETITIONER (BY SRI ARAVIND KAMATH, SENIOR COUNSEL FOR SRI BALA NIKIT, ADVOCATE) AND M/S EROFAB EXPORTS PRIVATE LIMITED A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT 1956, HAVING ITS REGISTERED OFFICE AT R.S.F. NO.8/2G, KARUR MAIN ROAD, SOLAR PUDUR, ERODE, TAMIL NADU- 638 002. ... RESPONDENT (BY SRI NISCHAL DEV, ADVOCATE) … THIS CMP IS FILED UNDER SECTION 11(6) OF THE ARBITRATION AND CONCILIATION ACT, 1996 PRAYING TO APPOINT AN ARBITRATOR FOR REFERENCE OF THE DISPUTES ARISING OUT OF THE MEMORANDUM OF UNDERSTANDING DATED: 03.05.2015 AS PER CLAUSE 19 CONTAINED THERETO AND AS PRODUCED HEREWITH AS ANNEXURE-'A AND ETC.
THIS CMP COMING ON FOR ADMISSION THIS DAY, THE COURT MADE THE FOLLOWING:
ORDER The petitioner has filed the present memorandum of Civil Miscellaneous Petition under the provisions of Section 11(6) of the Arbitration and Conciliation Act (for short, hereinafter referred to as ‘the Act’) to appoint Sole Arbitrator in terms of Clause-19 of the Memorandum of Understanding (for short, hereinafter referred to as ‘MoU’) dated 3.5.2015 entered into between the parties.
2. It is the case of the petitioner that the petitioner is in business of manufacturing ready to wear garments and caters to a wide variety of vendors from across the glove since its inception as a Partnership firm in 1976. In the year 2015, with a view to improve the prospects of its growth, the petitioner intended to sell 100% of its share to another entity carrying on business similar to that of the petitioner. At that stage, the respondent representing and holding out to be carrying on business similar to that of the petitioner and representing to have adequate resources and capacity, expressed interest to acquire the petitioner by purchase of 100% of its shares. During the discussion, the respondent represented that it does not have necessary finances and informed that it needs to avail a bank loan and therefore, solely for the purpose of enabling the respondent to acquire the bank loan, the petitioner transferred its 50% shares in favour of the respondent. On execution of the MoU, the respondent paid a sum of Rs.3 Crores and accordingly, 5000 shares constituting 50% shareholding in the petitioner-company was transferred to the respondent. The remaining Rs.12 Crores of the first tranche was to be paid after completing the due diligence by the petitioner, which was to be done within 30 days of execution of the MoU.
3. It is the further case of the petitioner that inspite of MoU, the respondent failed to complete the transaction under the MoU on account of various breaches and deliberate lapses on its part. Therefore, the respondent failed to avail the bank loan and also failed to pay Rs.15 Crores to it as agreed. Therefore, the petitioner exercising its rights under MoU, terminated the MoU by its Letter dated 26,2,2017. The said termination has not been challenged by the respondent even as on date. As a consequence of failure by the respondent to comply with the terms of Clause 19 of the MoU read with the aforesaid letter of Undertaking, the shares allotted to the respondent initially stood reverted to the petitioner.
4. It is the further case of the petitioner that in view of the illegality committed as stated supra, the petitioner issued notice dated 26.2.2018 for termination of MoU as per Annexure-K and on receipt of the termination notice, the respondent replied by a letter dated 22.3.2018 denying the averments made by the petitioner. The petitioner, thereafter, once again issued legal notice on 1.10.2018 reiterating the breaches and illegalities committed by the respondent under the MoU and invoking the arbitration clause -19 of the MoU to the respondent. The respondent on receipt of the said legal notice, issued a reply dated 22.10.2018 refusing to accept the arbitrator nominated by the petitioner contending that the disputes cannot be referred to arbitration on the premise that the matter is pending adjudication before the NCLT. Therefore, the petitioner is before this Court for the relief sought for.
5. The respondent filed statement of objections in Company Petition No. 44/2017 filed under Sections 241 and 242 of the Companies Act, 2013 contending that the petition is filed under the garb of Oppression and mismanagement by the petitioner. In the said petition, the respondents filed an I.A. under Section 8 of the Arbitration and Concilliation Act, 1996 seeking reference of dispute which was rejected by NCLT on 23.1.2018 and the said order has reached finality. It is further contended by the respondent that it is the mistake on the part of the petitioner, since it has failed to perform its part of contract/MoU and therefore, question of appointment of Sole Arbitrator would not arise. It is further contended that the very petition filed by the petitioner for appointment of Arbitrator is barred by limitation and admittedly, the MoU was entered into between the parties on 3.5.2015, but the present petition is filed on 18th December, 2018 which is more than three years later. Therefore, the present civil miscellaneous petition is not maintainable and sought to dismiss the same.
6. I have heard the learned Counsel for the parties to the lis.
7. Sri Aravind Kamath, learned Senior Counsel appearing for the petitioner reiterating the averments made in the petition contended that it is not in dispute that the respondent approached the petitioner and by a mutual understanding, the petitioner transferred 50% of its shares in favour of the respondent and the remaining Rs.12 crores of the first trance was to be paid after completing the due diligence by the petitioner, which shall be within 30 days from the execution of the MoU. He further contended that inspite of bringing notice, the various breaches and deliberate lapses on the part of the respondent, the respondent has failed to fulfill its obligation under the MoU. Therefore, the MoU came to be terminated by the letter dated 26.2.2018 and the petitioner issued a legal notice to the respondent as contemplated under the provisions of Section 7(5) of the Act invoking the arbitration clause-19 of the MoU nominating the arbitrator. He also contended that the respondent has sent a reply refusing to accept the arbitrator nominated by the petitioner which is baseless and untenable. He would further contend that there is no dispute with respect to existence of memorandum of Understanding dated 3.5.2018 between the parties and clause-19 of the MoU stipulating Arbitration Clause as well as the petitioner complying with the provisions of Section 7(5) of the Act and therefore, sought to allow the civil miscellaneous petition.
8. Per contra, Sri Nischal Dev., learned Counsel for the respondent reiterating the grounds raised in the objections contended that in the company petition filed by the petitioner, the application filed under Section 8 of the Act came to be rejected and therefore, the petitioner cannot seek parallel proceedings before this Court as well as NCLT. Therefore, the very civil miscellaneous petition filed before this Court is barred by law and sought to dismiss the same.
9. Having heard the learned Counsel for the parties, it is an undisputed fact that the parties have entered into MoU on 3.5.2015 and in pursuance of the said MoU, the petitioner has transferred 50% shares in favour of the respondent and the respondent has paid a sum of Rs. 3 Crores and remaining sum of Rs.12 Crores of the first trance was to be paid by the respondent within 30 days from the date of execution of MoU. It is the specific case of petitioner that despite specific understanding between the parties, the respondent has failed to complete the transaction in terms of the MoU and has not paid the balance amount to the petitioner. Therefore, the termination notice issued on 26.2.2017 has reached finality. It is also not in dispute that in the memorandum of understanding, Clause-19 stipulates arbitration clause which reads as under:
“Arbitration: All or any dispute arising under this agreement shall be referred for arbitration by an arbitrator who shall be appointed by mutual consent and his/her decision shall be binding on both the parties. Further all disputes shall be subject to the jurisdiction of the courts in Bangalore”
10. Though the learned Counsel for the respondent sought to contend that the MoU is barred by limitation and the petitioner cannot file the present petition on the ground that the application filed by the petitioner under Section 8 of the Act in the company petition came to be rejected on 21.1.2018, which cannot be accepted for the simple reason that admittedly the memorandum of understanding came to be executed on 3.5.2015. According to the petitioner, cause of action accrues on 26.2.2018 and therefore, he issued legal notice for termination of MoU on 1.10.2018 and the civil miscellaneous petition under Section 11 of the Act is filed before this Court on 18.12.2018 which is within the stipulated time and admittedly, the respondent filed Company Petition No.44/2017 against the petitioner for certain Oppression and mismanagement. In the said petition, an interim application filed under Section 8 of the Act came to be rejected is not a ground to dismiss the present civil miscellaneous petition.
11. In view of the above, it is not in dispute with regard to the existence of the MoU dated 3.5.2015 as per Annexure-A between the parties and the existence of arbitration clause i.e., Clause-19 in the MoU and also the MoU is in writing and duly signed by both the parties. It is also not in dispute that the petitioner has complied the provisions of Section 7(5) of the Act by issuing legal notice. Therefore, there is no impediment for appointment of the sole arbitrator to adjudicate the dispute between the parties.
12. In view of the aforesaid reasons, Civil Miscellaneous Petition is allowed. Hon’ble Mr. Justice Chandrashekariah, Former Judge of this Court, is appointed as the sole Arbitrator to adjudicate the dispute between the parties in terms of Clause-19 of the Memorandum of Undertaking dated 3.5.2015 entered into between the parties and in accordance with law.
13. All the contentions raised by both the parties are left open to be urged before the learned Arbitrator and any observation made by this Court shall not affect both parties in any of the proceedings pending before any other forum including NCLT.
14. Registry is directed to send a copy of this order to – Hon’ble Mr. Justice Chandrashekariah , Former Judge of this Court as well as to the Arbitration Centre forthwith for reference.
Sd/- Judge Nsu/-