Full Text
HIGH COURT OF DELHI
Order reserved on: 24 February 2023
Order pronounced on: 07 March 2023
MALAVIKA SIDDHARTHA HEGDE & ORS. ..... Petitioners
Through: Mr. Trideep Pais, Sr. Adv. with Mr. Vidur Bhatia, Mr. Vidur Bhatia and Ms. Gargi Sethee, Advs.
Through: Mr. Darpan Wadhwa, Sr. Adv. with Mr. Manik Dogra, Mr. Nikhil Singh, Mr. Mohit Seth, Mr. Bilal Ikram, Mr. Parth Aggarwal Mr. Shikhar Kishore, Mr. Milin Raj Dixit, Advs. for
R-1.
Ms. Samiksha Godiyal, Mr. Govind Manoharan, Ms. Diksha Tiwari, Advs. for R-2.
Mr. Dhruv Pande, Adv. for R-3.
JUDGMENT
1. The present appeal under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996[1] impugns the order dated 17 August 2022 passed by the Arbitral Tribunal restraining the appellants from selling, the Act alienating or transferring all their assets received by them on the demise of Late Mr. V.G. Siddhartha[2]. The dispute arises out of a Memorandum of Understanding[3] entered into between VGS and the first Respondent who was the claimant before the Arbitral Tribunal. The MOU relates to a purported decision taken by the first Respondent to invest in the equity shares of one SICAL LOGISTICS Ltd.[4] to the extent of Rs. 20 crores. The Investee Company is undoubtedly listed on the Stock Exchange.
2. The MOU essentially entails the Respondent Claimant investing a sum of Rs. 20 crores in the Investee Company and VGS promising to pay interest @ 16% p.a. accrued and compounded on a quarterly basis. In terms of the provisions contained in that MOU, the Respondent Claimant was to purchase shares equivalent to the value of Rs. 20 crores from the open market and in consideration whereof VGS had promised a fixed return on investment at 16% p.a. VGS as security also calls the Pledger as identified in the MOU to hand over as security 2 lakh equity share of the Investee Company by way of transfer into the DEMAT account of the Security Holder. VGS further undertook to acquire all the shares held by the first respondent in the Investee Company either on his own or through his nominee after 12 months but not later than 18 months from the date of commencement. The MOU further stipulated that VGS would reacquire the shares at a price such that Respondent No. 1 is able to recoup the entire investment together with interest for the entire period calculated @ 16%. It was further provided that if there by any VGS MOU Investee Company shortfall upon sale of all the shares that were to be acquired by Respondent No. 1, the same shall be made good by VGS within one week thereof and if Respondent No. 1 obtains any amount in excess, the same would be paid back by Respondent No. 1 to VGS.
3. The arbitral proceedings appear to have commenced consequent to a failure on the part of VGS to repay the amounts by 06 April 2018 and which was extendable up to 06 October 2018. On the failure of VGS to adhere to the terms of the MOU, Respondent No. 1 initiated proceedings for arbitration on coming to learn that some of the pledged shares were sold and an amount of Rs. 7,38,61,589/recovered.
4. VGS is stated to have passed away suddenly on 30 July 2019. The Petitioners who are his legal heirs were then proceeded against for recovery of the amounts which were payable to Respondent No. 1 under the MOU. Seeking interim measures of protection, an application under Section 17 of the Act is stated to have been filed before the Arbitral Tribunal. Upon notices being issued, the Petitioners entered appearance and opposed the grant of the interim measures principally contending that the alleged contract, namely, the MOU was one which was clearly prohibited under the Securities Contracts Regulation Act 1956[5]. It was also asserted that the contract contravened Section 16 of the SCRA since it was in the nature of a forward contract. The Petitioners also assert that they had no knowledge of the MOU and thus they could not be held to be bound by its terms. It was also averred that Respondent No. 1 was not entitled to be granted any relief having failed to take any remedial steps to mitigate losses.
5. Insofar as violation of the SCRA is concerned, it was the case of the Petitioners, and one which was reiterated by Mr. Pais, learned senior counsel appearing in support of the petition, that it is only spot delivery contracts which are sanctioned under the SCRA. Reliance in this respect was placed upon the definition of a spot delivery contract as contained in Section 2(i) of the SCRA and Section 16(1) read with the notification dated 03 October 2013 issued by Securities and Exchange Board of India[6] to contend that the entire arrangement under the MOU was invalid, illegal and contrary to law.
6. Reliance was also placed on the judgment rendered by the Supreme Court in Bhagwati Developers (P) Ltd. v. Peerless General Finance & Investment Co. Ltd.,[7] to assert that the transaction was illegal. Mr. Pias had sought to draw sustenance for his submissions from the following observations as made in Bhagwati Developers:-
32. From a plain reading of the aforesaid provision it is evident that in order to prevent undesirable speculation in specified securities in any State or area the Central Government by notification is competent to declare that no person in any State or area specified in the notification shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of any security specified in the notification. The Central Government in exercise of the aforesaid power issued Notification dated 27-6-1969 and declared that in the whole of India “no person” shall “save with the permission of the Central Government enter into any contract for the sale or purchase of securities other than such spot delivery contract” as is permissible under the Act, the Rules, bye-laws and the regulations of a recognised stock exchange. The appellant, therefore, can come out of the rigours of Section 16 of the Act only when it satisfies that the transaction comes within the definition of “spot delivery contract”.
36. According to the definition, a contract providing for actual delivery of securities and the payment of price thereof either on the same day as the date of contract or on the next day means a spot delivery contract. When we consider the facts of the present case bearing in mind the definition aforesaid, we find that the contract in question is not a spot delivery contract. True it is that by the letter dated 30-10-1987 written by Tuhin to Bhagwati, he had stated that the formal agreement had been executed between them on 10-11- 1986 and as per the agreement he is transferring the entire 3530 shares of Peerless purchased from the loan amount and the transfer is in its repayment. However, the agreement dated 21-11-1994 between Bhagwati and Tuhin which formed part of the compromise decree provides that the sale of shares took place on 30-10-1987 and in consideration thereof Bhagwati paid a sum of Rs 10 lakhs on 21-11-1994 and further the dividend on the entire shares up to the accounting year 1989-1990 amounting to Rs 8,64,850 to be retained by Tuhin. In the face of it, the plea of Bhagwati that the payment of Rs 10 lakhs was made to buy peace, is not fit to be accepted and, in fact, that forms part of the consideration for the sale of shares. Once we take this view, the plea of the appellant that it is a spot delivery contract is fit to be rejected. We agree with the reasoning and conclusion of the Company Law Board and the High Court on this issue.”
7. Mr. Wadhwa, learned senior counsel appearing for the respondents, on the other hand submitted that as would be manifest from a reading of the terms of the MOU, the Claimant was essentially an investor in the Investee Company who had been promised a return of 16 % p.a. It was the case of the Respondents that the transaction was essentially in the nature of a loan or a lending facility as opposed to a transaction relating to securities. It is the aforesaid view which has found favour with the Arbitral Tribunal.
8. Prima facie the Tribunal has found that the Respondent Claimant was essentially investing money in the Investee Company on the request of VGS and was entitled to claim the money back on agreed terms. Turning then to the question of whether the transaction forming the subject matter of the MOU would be a forward contract, the Arbitral Tribunal has found against the Petitioner by holding that in the facts of the instant case, the sale of shares and receipt of consideration was envisaged to be simultaneous and therefore it would continue to fall within the ambit of a spot delivery contract.
9. The Arbitral Tribunal has based its prima facie conclusions on the decision rendered by the Bombay High Court in Edelweiss Financial Services Ltd. v. Percept Finserve Pvt. Ltd. and Another[8] where while dealing with the concept of a spot delivery contract, the learned Judge had observed as follows:-
11. The Arbitral Tribunal on the question of mitigation of losses has, however, held against the Respondent Claimant. The impact thereof, however, is an issue which has been deferred for consideration. The Tribunal has also taken note of a restraint which operates against the Petitioners in terms of the order dated 16 February 2022 passed upon OMP(I) (COMM) 55/2022 and which restrains them from transferring or alienating any of the assets that they may have acquired or received from the hands of VGS. It is in the aforesaid light that the Arbitral Tribunal has ultimately provided that in case any of the interim orders passed against the Petitioners are vacated or modified, the Petitioners shall continue to be restrained from selling, alienating or transferring all of the assets that they may have received by virtue of being the heirs of VGS.
12. In order to appreciate the issues that arise, it would be relevant to briefly advert to the terms of the MOU. The Respondent Claimant is defined in that instrument to be the Investor. VGS has been described in the MOU as the Beneficiary whereas one M/s Tanglin Retail Reality Developments Private Limited was identified as the Pledger. For the purposes of disposal of the present petition, the Court extracts the following relevant passages from the MOU: - “CONSIDERATION
2. Subject to the terms and conditions contained in this MOU, the Investor agrees to invest funds in the Equity Shares of the lnvestee Company through open market and in consideration thereof the Beneficiary has promised to the Investor a fixed return on investment 16% P.A. payable quarterly and the Investor has accepted the same.
TERMS AND CONDITIONS
3. That the Investor shall complete the purchase of Equity Shares in the Investee Company from Open Market within 30 days from the date of this MOU.
4. That the Beneficiary shall pay interest on the investment @ 16% P.A. Interest shall be payable on quarterly basis, however the Beneficiary shall pay the first installment of interest to the Investor at the end of 45 days from the date of commencement and thereafter on quarterly gaps of three months, till the repayment of entire amounts to the Investor.
5. That the Beneficiary has caused the Pledger to duly hand over as Security to the Investment Intermediary / Security Holder the Security Shares i.e. 2,00,000 Equity shares of the Investee Company by way of transfer into the DP account of the Pledger maintained with DP of the Investment Intermediary/Security Holder, together with such documents including Pledge documents and Shares transfer documents as required and the Investment Intermediary/Security Holder is hereby authorized to sell or deal with the Security in any manner in case of any default or breach in terms of this MOU by the Beneficiary, for the purpose of repayment of entire amounts to the Investor alongwith interest as agreed in this MOU.
7. That the Investment Intermediary/Security Holder shall hold the above-mentioned Security Shares with a right to sell all or any part of these shares upon any default or breach in terms of this MOU by the Beneficiary, authorizing him to sell these Security Shares and use the proceeds received from such sale, to pay the principal and/or interest amounts outstanding to be paid to the Investor.
9. The Beneficiary agrees, commits and undertakes to acquire all the shares held by the Investor in the Investee Company, on his own or through his nominee, after twelve months but within eighteen months from the date of commencement, the same shall be acquired at a price such that the Investor gets back his entire capital together with interest for the entire period calculated @ 16% PA. accrued and compounded on quarterly basis, after including all interests, dividends or such other payments made to the Investor during the period of the MOU.
10. That if there is any shortfall upon sale of all the shares held by the Investor, the same shall be made good by the Beneficiary within one week thereof and if there is any excess amounts received by the Investor,. the same shall be paid back by the Investor to the Beneficiary, within one week thereof.”
13. As would be evident from a reading of the various provisions contained in the MOU, the Respondent Claimant appears to have been invited by VGS to invest funds in the Investee Company by way of acquisition of equity shares of that company through the open market. Upon that investment being made, VGS had held out a promise to pay to the Respondent Claimant interest @ 16% p.a which was payable quarterly. In terms of Clause 7, the Investment Intermediary was empowered to sell all or any part of the shares which had been pledged in case there be a breach by VGS. VGS had further undertaken to acquire all the shares held by the Claimant in the Investee Company after 12 months but not later than 18 months from the date of commencement. The MOU further provided that the aforesaid purchase of securities would be at a price equivalent to the entire investment made by the claimant together with interest for the entire period calculated @ 16 % p.a accrued and compounded on a quarterly basis. VGS had further assured, the claimants that if there be any shortfall in the monies that may be ultimately obtained from the sale of shares, the same would also be made good by him.
14. Mr. Pais, learned senior counsel would contend that the MOU clearly records and envisages a purchase of shares on a future date and thus clearly answering the attributes of a forward contract. According to Mr. Pais, VGS had in terms of the MOU clearly held out that on the expiry of the term of the MOU, the shares would be acquired in accordance with the pricing formula and upon an exercise of reconciliation being undertaken as contemplated therein. It was further urged that the Petitioner had admittedly acting in terms of the said MOU invested various amounts in the Investee Company and had purchased those shares through the open market. Mr. Pais contended that those shares which were so held were to be ultimately sold and acted upon in terms of the MOU on a future date.
15. Inviting the attention of the Court to the definition of a spot delivery contract, Mr. Pais submitted that as would be evident from a reading of Section 2(i) of the SCRA, a spot delivery contract has been defined to mean a contract which provides for actual delivery of securities and the payment of a price thereof either on the same day as the date of the contract or on the next day. The submission essentially was that the delivery of securities must be simultaneous and coincide with the payment of price. According to Mr. Pais, it is the principles laid down in Bhagwati Developers which would clearly govern and since the MOU was clearly contrary and opposed to law, the order passed by the Tribunal is liable to be set aside. It was his contention that the Tribunal in failing to weigh the aforesaid issues in mind has clearly committed a manifest and patent illegality and thus warranting the impugned order being set aside.
16. It becomes pertinent to note that in Bhagwati Developers the Supreme Court had found that the agreement of 21 November 1994 had clearly recorded that while the sale of shares took place on 30 October 1987, consideration thereof was paid only on 21 November
1994. It had further found that the agreement itself contemplated all dividends accruing upon those shares up to the Accounting Year 1989 -1990 being retained by the person who held those shares originally. It was in the aforesaid backdrop that the Supreme Court came to conclude that the transaction was not a spot delivery contract.
17. It must at the outset be noted that upon a construction of the terms of the MOU, the Arbitral Tribunal has firstly come to the prima facie conclusion that the transaction was essentially a lending facility. The aforesaid view as formed by the Tribunal cannot be viewed as being perverse bearing in mind the fact that the MOU does refer to the request of VGS to invest in SICAL and the acceptance of that offer by the respondent. In the considered opinion of this Court, merely because the investment was made through the share purchase mode, it would not fundamentally alter the nature of the contract and it would continue to constitute an investment that was made by the Respondent. In any case, the Tribunal appears to be justified in forming that opinion and one which could be said to be plausible.
18. Insofar as the question of whether the same would amount to a future contract, the Court notes that while the investment was made in securities, the promise made by VGS was essentially connected with the return of money invested by the Respondent Claimant together with interest. Though the MOU also contemplated a repurchase of the securities coupled with a return on the investment made by the respondent claimant, it did not either mandate or provide for a sale of shares on a deferred date on the basis of consideration already obtained. The Court also notes that the Investee Company had purchased the shares on the bourse. A similar exercise was liable to be undertaken by VGS at the end of twelve to eighteen months. In both instances, the acquisition and repurchase of shares would have had to be carried out on the Stock Exchange. The shares would have changed hands parallelly with the passing of consideration. This was, therefore, not a case where the payment of consideration of shares stood deferred to a future date and would have not taken place at the time of acquisition. A lucid enunciation of the principles underlying a spot delivery contract is found in Jethalal C. Thakkar v. R.N. Kapur10 to the following effect: - “The Bombay Securities Contracts Control Act, 1925 defines a ready delivery contract as a contract for the purchase or sale of securities for the performance of which no time is specified and which is to be performed immediately or within a reasonable time. The contention of the plaintiff was that this was a ready delivery contract. The contention of the defendant on the other hand was that this was a contract which did not satisfy the definition of a ready delivery contract, and it is common ground that if the contract is not a ready delivery contract it comes within the mischief of s. 6 of the Act and is void. Therefore the question that we have to consider and determine is whether the contract in suit is a ready delivery contract bearing in mind the definition given in the Act. The definition is very simple and very clear. If there is a contract for the purchase or sale of securities then in that contract no time must be specified for its performance and the contract must be performed immediately or within a reasonable time. The test therefore we have to apply is first whether this is a contract for the purchase or sale of securities and whether it is to be performed within a specified time or whether no time is specified in the contract and the contract is to be performed immediately or within a reasonable time. It will be noticed that the obligation undertaken by the defendant under the contract was to sell for the plaintiff his thousand shares at a price of Rs. 50 per share within 12 months from the date when the Bank was converted into a finance corporation. He then promised in the case of the first event not taking place to take delivery of the thousand shares himself and pay the plaintiff the sum of Rs. 50,000. The plaintiff is not suing the defendant on the first part of the contract. He is suing the defendant on the second part which has come into operation by reason of the fact that the defendant has failed to get the shares sold. It is clear on a plain reading of this contract that no obligation attached with regard to the purchase of these shares on the part of the defendant until the contingency contemplated occurred after the lapse of 12 months. A clear distinction must be borne in mind between a case where there is a present obligation under a contract and the performance is postponed to a later date, and a case where there is no present obligation at all and the obligation arises by reason of some condition being complied with or some contingency occuring. The contract before us falls into the second category. At the date when the contract was entered into there was no present obligation with regard to the purchase or sale of these shares. It was definitely not a case where a present obligation having been created the parties agreed to postpone the performance. The parties intended and made their intention clear by the language of the contract itself that there was no obligation upon the defendant to purchase these shares until the contingency contemplated took place. The question therefore is whether when there is no present obligation at the date of the contract to purchase or sell shares, can it be said that this is a contract for the purchase or sale of shares which comes within the mischief of the Act? A very simple test that can be applied to this contract is this. Can it be said that on March 19, 1948, there was a contract of purchase or sale of shares? If one were to put that question the answer is obvious. There was no such contract. In fact it could not even be said on March 4, 1948, that there ever would be such a contract. Whether there would be such a contract or not would depend entirely on what happened at the end of the year. If the defendant succeeded in getting the plaintiff's shares sold there would be no such contract. The learned Judge, with respect, is right when he says that in order to determine whether a contract is void or not we must look at the date when the contract was entered into, and that is exactly the test we are applying. If at the date when the contract was entered into there was no contract of sale or purchase of shares, it is impossible to suggest that at that date the contract was void because it came within the mischief of the Act. The obligation contingently undertaken by the defendant to purchase the shares only ripened into a perfect obligation at the end of the year when the contingency took place. Therefore it is only at the end of the year that there was a contract of purchase or sale, and when we look at the terms of that contract at the end of the year it is clear that the contract was to be performed immediately or within a reasonable time. The contract would definitely have come within the mischief of the Act if the parties had provided that after the contingency occurred the performance was to be postponed for a particular time. But that the parties have not provided. Therefore the intention of the parties was that there was to be a contract for the purchase or sale of shares on the occurring of a contingency and as soon as the obligation ripened and a contract subsisted between the parties that contract was to be performed immediately or within a reasonable time. Contingent contracts are an interesting species of contracts over which learned authors have devoted lot of time and thought and there is a very striking passage in Salmond and Williams on Contracts, second edition, at p. 53: “What, then, does the expression conditional obligation really mean? The true answer would seem to be that a conditional obligation is not in truth a real obligation at all; it is merely the chance or possibility or potentiality of an obligation. The only real obligations are those which are absolute. But the chance or possibility or potentiality of an obligation is itself called an obligation by way of anticipation or prolepsis, and is distinguished from a genuine or absolute obligation by the qualifying epithet „conditional‟. A conditional obligation, in other words, is a quasiobligation consisting in the chance or possibility that a real obligation may already exist or may come into existence in the future. The fulfilment of the condition is the transformation of this potentiality into actuality. Conversely, the failure of the condition is the failure of this chance to become a fact.” Therefore, the obligation undertaken by the parties was only in the realm of potentiality. There was no certainty that the potentiality would become an actuality. It depended upon the lapse of one year and the defendant not being in a position to sell the shares of the plaintiff. It was only when that happened that the potentiality contemplated by the parties became an actuality. Therefore it would not be true to say at all that at the date when this contract was entered into there was any complete obligation undertaken by the defendant to purchase the shares and the contract of purchase or sale contemplated by the Bombay Act is a contract where there is a complete obligation to purchase or sell shares....."
19. In the facts of the present case and on a due consideration of the MOU terms the Court finds that the sale of shares though stipulated to take place at a future point in time was to be a seamless transaction. The sale as well as the repurchase would undisputedly have to be made upon the Stock Exchange since the Investee Company was a listed company and remittances were to follow. The Court also bears in mind the stipulations in the MOU and which had provided that in case upon repurchase the amount garnered be less than the investment made by the Respondent Claimant, VGS was to make good the shortfall. It also provided for a converse situation and in which case the Respondent Claimant was obliged to refund the amounts in excess of the investment originally made along with the interest that was payable. The Court thus finds itself unable to either doubt the correctness of the prima facie view which has been taken by the Tribunal in this respect nor can it be said to suffer from a manifest or patent illegality warranting interference by this Court in exercise of its powers conferred by Section 37.
20. The Court deems it apposite to bear in mind the following pertinent observations as rendered by a learned Judge in Shabnam Dhillon v. Zee Entertainment Enterprises Ltd. and Others11 and which succinctly describes the Section 37 power in the following words: -
21. In a more detailed decision which was rendered on the subject, the Court in Dinesh Gupta and Others v. Anand Gupta and Others12 had observed as follows: -
22. On an overall conspectus of the aforesaid, the Court finds no merit in the present appeal. It shall, consequently, stand dismissed.
YASHWANT VARMA, J. MARCH 07, 2023