Delhi High Court: In a petition under Section 11 (6) of the Arbitration and Conciliation Act, 1996, (‘Arbitration Act’) for appointing of an arbitrator, Neena Bansal Krishna, J., while allowing the petition, held that mere initiation of arbitration is no bar for corporate debtor to pursue remedies under Insolvency and Bankruptcy Code, 2016 (‘IBC’).
Background
Petitioner 1 is a company involved in the manufacturing and refining of edible oils, which is now owned by OAgri Farms Private Limited, petitioner 2. The respondents, former shareholders and directors of petitioner 1, approached OFB Tech Private Limited and OAgri in January 2022 to sell 100% of their shares in petitioner No.1. Following discussions, the respondents signed a term sheet projecting an average Earnings Before Interest, Taxes, Depreciation, and Amortization (‘EBITDA’) of around Rs. 17.92 crores for the financial year 2021-22, based on turnovers of Rs. 501 crores and Rs. 390 crores for the years 2021-22 and 2022-23 respectively. However, the actual average EBITDA of petitioner 1 was approximately Rs. 4.50 crores, or around 1.025%.
The respondents assured OAgri that EBITDA in the books was not reflective of the true value, claiming the actual EBITDA was about Rs. 17.92 crores. They further represented that this EBITDA was achieved using only 75% of the plant’s capacity, suggesting significant growth potential. Based on these representations, OAgri and the respondents entered into a Share Purchase Agreement (‘SPA’) on 07-10-2022. The parties also signed a Credit Facility Agreement (‘CFA’).
The petitioners later discovered that the accounting figures were false, with the actual EBITDA below the projected Rs. 17.92 crores. Additionally, the respondents failed to provide the promised transitional services, affecting the company’s operations. Despite spending Rs. 92.32 crores, the company only achieved a revenue of Rs. 154 crores and an EBITDA of Rs. 2.16 crores from 01-11-2022 to 31-03-2023.
Contentions of the Petitioner
The petitioners asserted that the SPA included an indemnity clause for losses due to misrepresentation, inaccuracy, or breach of the Warranties or any wilful misconduct or fraud. Upon discovering the fraud, they issued a Notice of Invocation on 01-12-2023, which the respondents denied in their reply dated 12-07-2023, insisting that no fraud had occurred and demanding payment of outstanding amounts. Consequently, the petitioners served a notice of arbitration on 02-12-2023, seeking the appointment of an arbitrator, to which the respondents replied on 21-12-2023. With no arbitrator having been appointed, the petitioners filed the current petition under Section 11(6) of the Arbitration Act before the Court, for appointment of arbitrator.
Contentions of the Respondents
The respondents opposed the petition, arguing misjoinder of causes of action due to the existence of two independent agreements, the SPA and the CFA, with different parties as signatories. They claimed no actual dispute exists between the parties, asserting that the amounts owed by the petitioners are admitted, and they had already filed a petition under Section 7 of the IBC before the NCLT, Jaipur. The respondents alleged that the petition under Section 11(6) of the Arbitration Act was a strategy to fake disputes and avoid the NCLT proceedings.
Decision and Analysis
With regard to the objection by the respondent that two separate agreements have been clubbed into one, the Court said that the arbitrator so appointed would be at liberty to register separate arbitrations in respect of the two agreements, if it was found that the agreements could not be consolidated in one arbitration.
The Court took further note of the fact that disputes had arisen and that the legal notice issued by the petitioner predated the petition that was filed under Section 7 of the IBC, therefore, claim of the respondent that the petition was not maintainable was not tenable. The Court held that mere initiation of arbitration proceedings would not bar a corporate debtor pursuing other remedies available under the IBC.
The Court, therefore, allowed the petition, and appointed an independent arbitrator to adjudicate disputes amongst the parties, subject to disclosure by the arbitrator under Section 12(1) of the Arbitration Act and not being ineligible under Section 12(5) of the Arbitration Act.
[Pitambar Solvex Pvt. Ltd. v. Manju Sharma, 2024 SCC OnLine Del 3995, Decided on 22-05-2024]
Advocates who appeared in this case:
Advocates for the Petitioner: B.B. Gupta, Sr. Adv., Arundhati Kajju, Sanyam Khetarpal, Achal Gupta, Lekha, Advocates
Advocates for the Respondent: Ankit Sareen, Prakul, Yash Tandon, Advocates
Buy Arbitration and Conciliation Act, 1996 HERE
