Delhi High Court: In a petition filed under Section 11(5) of the Arbitration and Conciliation Act, 1996 (‘Act’) to implead respondents 2 to 5 in the arbitration proceedings, a Single Judge Bench of Jasmeet Singh, J. held that the petitioners had made a prima facie case for their impleadment as veritable parties for the adjudication of disputes and hence, referred them to arbitration.
Background
Petitioner 1 was a company involved in the business of investment, consultancy, development, and promotion of business activities of various companies across India. Sensorise Digital Services Pvt. Ltd. (‘SDS’) (petitioner 2) was engaged in the business of M2M and IoT service provider developing solutions, and offering services in the subscription lifecycle management.
Respondent 1 was working as a Chief Solutions Officer with SDS and was aware of all the product-related information. Moreover, respondent 1 also held substantial shareholding in SDS. Respondents 2 to 5 were actively employed as key managerial personnels and were also shareholders in SDS. Respondents 1 to 6 were defined as the “ex-promoter group”.
The founder, promoter, and former Managing Director of SDS (proforma party 1) as well as the Director, Chief Technical Officer, and head of HR at SDS (proforma party 2) were the only signatories to the Memorandum of Settlement (‘MoS’) and collectively held 32.39 percent shareholding in SDS.
A Share Subscription and Shareholder’s Agreement (‘SSHA’) was executed on 27-05-2016 between petitioner 1, SDS, and proforma party 1 whereby petitioner 1 came as an investor to acquire 50 percent shareholding and 49 percent voting rights in SDS while providing funds for the operations. Due to disputes between the parties regarding the SSHA, a petition was filed under Section 9 of the Act, which was subsequently withdrawn as the parties were trying to settle amicably. However, no settlement could take place.
For the fraudulent acts committed by the proforma parties and respondent 1, 2, 4, and 5 along with some other former promoters of SDS, petitioner 1 filed a First Information Report (‘FIR’) with the police under Sections 406/409/420/467/468/471/477-A/120-B1 of the Penal Code, 1860 (‘IPC’). The respondents filed anticipatory bail applications but the same were dismissed. Thereafter, proforma party 1 along with other promoters, filed petitions for quashing the said FIR which were also dismissed.
Thereafter, an MoS dated 09-05-2002 was executed between petitioner 1, SDS, the proforma parties, and Sensorise Smart Solutions (‘SSS’) whereby petitioner 1 had agreed to take over SDS and SSS by paying Rs. 2,00,00,000/- to proforma party 1. The proforma parties had to transit their shareholding in SDS and the former promoters of SDS were obligated to support the audit process. They were also required to offer a three-month consultancy following the execution of the MoS to facilitate the transition of management and the handover of SDS’s business to petitioner 1.
In return, petitioner 1 had to provide support for quashing the above-mentioned FIR. On the same date, individual Share Purchase Agreements were also executed between petitioner 1, SDS, SSS, and respondents 1 to 6 for the sole purpose of transferring the shares in favour of the petitioners. Pursuant to the execution of the MoS, a petition was filed for quashing the said FIR but, the matter was deferred for 3 months, and the parties were referred to mediation for finding an amicable solution regarding the closing obligations in Clause 10 of the MoS.
It was contended that the respondents had failed to fulfil their obligations under the MoS and materially breached several terms and conditions. It was alleged that the respondents had failed to provide intellectual property rights, proper assistance for handover and smooth transition of SDS and that they had provided misleading information along with falsified book of accounts.
Consequently, the petitioners issued a notice and a letter after which petitioner 1 invoked arbitration against the proforma parties on 10-09-2022. Vide its letter dated 10-09-2022, the proforma parties denied the allegations.
After rounds of failed negotiations, the proforma parties initiated a petition under Section 9 of the Act and the petitioners filed a petition under Section 11 to seek the appointment of an arbitrator and another petition under Section 9. Subsequently, the proforma parties also sought appointment of an arbitrator through a Section 11 petition. Vide order dated 12-04-2023, the Court allowed the petitioner’s Section 11 application and appointed Justice (Retd.) T.S. Thakur, former Chief Justice of India, as the sole arbitrator.
Respondent 2 to 9 filed applications seeking termination of the arbitral proceedings on the grounds that the respondents were non signatories to the MoS and could not be made parties before the Arbitrator. Thereafter, the petitioners served legal notice dated 31-10-2023 to respondents 1 to 9.
Analysis and Decision
The Court said that the issues for consideration were:
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Whether, on a prima facie view, the arbitration clause in the MoS could be extended to respondents 2 to 9, who were no signatories to the MoS.
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Whether the Court had the power to consolidate arbitration proceedings.
The Court said that where impleadment of non-signatories to arbitration proceedings is necessary, it could be achieved through either consent-based theory which emphasizes identifying the mutual intent of the parties or non-consensual theories which are rooted in equity and encompass doctrines such as alter ego/piercing the corporate veil, etc.
Issue I
The Court said that it was well settled in law that the definition of parties under the Act is inclusive of both signatories and non-signatories. Reference was made to Cox & Kings Ltd. v. SAP India (P) Ltd. (2024) 4 SCC 1 to say that the term ‘veritable parties’ applied to both persons and entities.
The Court noted that respondents 2 to 5 were not only employees of the petitioner but also shareholders in SDS and had to perform certain obligations mentioned in the MoS. It was said that their dual role tied them to the contractual framework established by the MoS. It was noted that the SPAs had been executed between the parties that contained mirror obligations and indicated the interconnected nature of the SPAs with MoS.
The Court said that it was difficult to dissociate respondents 2 to 5 from the obligations of the MoS because the signatories assured that in order to give complete control, the said respondents would also sign their shareholding in favor of the petitioner.
The Court said that the petitioners had made out a prima facie case of respondents 2 to 5 being veritable parties because even though they were not signatories to the arbitration agreement, their positive, direct, and substantial involvement in fulfilling the terms of the MoS established their role as necessary parties to the dispute.
The Court found the argument of the respondents that the petitioners were estopped from invoking arbitration at this stage was untenable and referred to various cases to say that the grounds raised by the respondents would be available to them at the appropriate stage and would not come in the way of a referral court to refer the parties to an arbitration.
The Court said that a strict and technical interpretation of the contents of the notice dated 31-10-2023 issued to implead the respondents would be against the ethos of the Act and that the notice clearly showed the petitioners’ intent to refer the disputes to arbitration. Further, it was said that the petitioners had made out a prima facie case for impleadment of respondents 2 to 5 as veritable parties.
Since Justice (Retd.) T.S. Thakur had already been appointed as the arbitrator. The Court appointed him as the arbitrator in the present matter and requested him to furnish a declaration as per Section 12 of the Act before entering into the reference.
Regarding the SPA executed between respondent 6, the Court noticed that Clause 16 showcased its intention to not be bound by any of the clauses in the MoS and said that invoking arbitration against them on the basis of the MoS would be legally unsustainable. Therefore, the Court held that no case was made out against respondent 6 to be referred to arbitration.
Further, the Court said that respondents 7 to 9 could not be referred to arbitration as there were no SPAs executed between them and the petitioner, and they were also not mentioned in the MoS.
Issue II
The Court said that since the issue was premature, consolidation of the present reference with the ongoing arbitration proceedings was not required and any such direction would be prejudicing the issue of whether the respondents are in fact proper and necessary parties.
Thus, the Court disposed of the present petition.
[KKH Finvest Pvt. Ltd. v. Jonas Haggard, 2024 SCC OnLine Del 7254, Decided on 21-10-2024]
Advocates who appeared in this case:
For Petitioners — Sr. Advocate Akhil Subal, Advocate Ranjana Roi, Advocate Vasudha Sen, Advocate K Hema, Advocate Debosree Mukherjee
For Respondents — Advocate Shivek Trehan, Advocate Ishaan Kumar, Advocate Pranay Mohan Govil, Advocate Riya Nair, Advocate Rajeshwari H, Advocate Tahir A.J., Advocate Sugandh Shahi, Advocate Tarang Gupta, Advocate Kartikeya Sharma
1. Sections 316(2)/316(5)/318(4)/338/336(3)/340(2)/344/61(2) of the Bharatiya Nyaya Sanhita, 2023
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