THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.112 of 2009 (Dated : 22-07-2011) Between: Shyam Sunder Agarwal …Applicant A n d P.Narotham Rao and others …Respondents THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.112 of 2009 ORDER: This arbitration application has been taken out under sub-sections (5) and (6) of the Arbitration and Conciliation Act, 1996 read with the Scheme for Appointment of Arbitrators, 1996 seeking appointment of a sole arbitrator to resolve the disputes between the applicant and the respondents arising out of the Memorandum of Understanding dated 08.12.2005. 2. Background facts, in a nutshell, leading to filing of this application by the applicant-Shyam Sunder Agarwal are:- (a) Mancherial Cement Company Private Limited (hereinafter referred to as “MCC”) is a company incorporated on 15.07.2004 and it is primarily engaged in manufacture and sale of cement. The applicant- Shyam Sunder Agarwal is a shareholder in MCC. The authorised share capital of MCC at the time of incorporation was Rs.1,00,00,000/- comprising of 10,00,000 equity shares of Rs.10/- each. The authorised share capital was subsequently increased to Rs.11,00,00,000/- in the Extra Ordinary General Meeting held on 14.3.2005. Shyam Sunder Agarwal, Mr.K.Vidyasagar Rao, Mr. Ashok Kumar Agrawal, Mr. S.Mahendar Rao, Mr.S.Hareender Rao and Mr. S.Anand Rao (hereinafter referred to as “Shyam Sunder Agarwal and others”) held 50.20% of the shares in MCC. Whreas, Mr.P.Narotham Rao, Mr.P.Varada Rajeswara Rao, Mr. J.Jagannadha Rao and Mr. P.Rajanarasinga Rao (hereinafter referred to as “Narotham Rao and others”) held 44.80% of the shares in MCC. Shyam Sunder Agarwal and P.Narotham Rao entered into a Memorandum of Understanding with Associated Cement Companies (hereinafter referred to as “ACC”) for the purchase of Mancherial Cement Works (hereinafter referred to as “MCW”) [including the mines, housing colony, movable and immovable assets except land admeasuring Ac.130]. The consideration agreed upon between the parties was Rs.30.33 crores. 10% of the consideration was agreed to be paid at the time of signing the MoU and the balance was agreed to be paid on or before 5-11-2004. (b) MCC applied for credit facilities with Andhra Bank, St. John’s EMHS Branch, Karimnagar (for short, “Andhra Bank”) to raise funds for purchase of MCW from ACC. Andhra Bank sanctioned term loan of Rs.25,00,00,000/- and cash credit facility up to Rs.15,00,000/- and accordingly, issued a sanctioned letter. As per the terms of the sanctioned letter, all the Directors of MCC were required to give their personal bank guarantees. In the Board meeting of the Directors of the MCC, Mr.S.Harinder Rao and Mr. P.Narotham Rao were appointed as Joint Managing Directors of the company. MCC entered into sale agreement with ACC on 25.11.2005 for purchase of MCW for a sale consideration of Rs.31,33,00,000/-. Andhra Bank addressed a letter dated 29.11.2005 expressing its readiness to disburse the loan sought for by MCC for purchase of MCW from ACC. P.Narotham Rao, who was the Joint Managing Director of the company refused to give personal guarantee, which was mandatory as per the sanctioned terms set by Andhra Bank in its letter dated 31.12.2004. Certain developments took place in ACC and consequently, ACC declared VRS to its employees and their plant was also closed in terms of the agreement dated 25.11.2005. The Board of Directors of the MCC in the meeting held on 01.12.2005 resolved to remove Mr.P.Narotham Rao as Joint Managing Director of the company and to appoint Mr. S.Harinder Rao as Managing Director of the company. Thereupon, Mr.P.Narotham Rao addressed letter to Andhra Bank not to disburse the loan amount to MCC. Consequently, Andhra Bank cancelled credit facilities to MCC. There was a re-approchment between the parties on 08.12.2005 whereunder P.Narotham Rao and others agreed to transfer their 44.80% share holding to Shyam Sunder Agarwal and others for consideration of Rs.6,50,00,000/-. The shares were valued at Rs.29/- each. Accordingly, a Memorandum of Understanding came to be executed between the parties and payment schedule has also been indicated in the MoU. As per clause (8) of the MoU, the parties nominated Mr. K.Sudhakar Rao and Mr. Gone Prakash Rao as mediators/arbitrators in order to ensure successful completion of the transaction and to avoid any unforeseen litigation. Shyam Sunder Agarwal handed over 9 post-dated cheques drawn in favour of P.Narotham Rao to the mediators. Share certificates along with duly signed transfer deeds pertaining to the 22,40,000 equity shares of Narotham Rao and others were supposed to be handed over to the above-referred two persons. Subsequently, Shyam Sunder Agarwal and others substituted the cheques with demand drafts and expressed their willingness to make the payments as per the MoU. Some correspondence went on between the parties. The applicant-Shyam Sunder Agarwal and others made payment of Rs.1,00,00,000/- in cash to the 1st respondent-P.Narotham Rao and others on 22.2.2006. On 20.4.2006, Mr.P.Narotham Rao-1st respondent addressed letter to Mr. K.Sudhakar Rao, one of the mediators expressing his willingness to settle the issue in relation to MCC undertaking to transfer the shares of his group once he receives the total amount and upon signing of the draft supplementary agreement. The draft supplementary agreement was also enclosed to the said letter. In the draft supplementary agreement, it has been mentioned by P. Narotham Rao-1st respondent that Shyam Sunder Agarwal-applicant and others should make payment of Rs.1.80 crores and arrange to pay the balance of Rs.3.70 crores on or before 15th April, 2006. K.Sudhakar Rao, one of the mediators had addressed letter to the applicant-Shyam Sunder Agarwal informing him of the letter dated 20.4.2006 addressed to him by the 1st respondent-P.Narotham Rao. Since P.Narotham Rao- 1st respondent and others had not been honouring their obligations under the MoU dated 8.12.2005, the applicant-Shyam Sunder Agarwal and others addressed letter dated 24.5.2007 requesting K.Sudhakar Rao and Mr. Gone Prakash Rao to enter reference and mutually agree upon a third arbitrator and commence arbitration proceedings. The applicant- Shyam Sunder Agarwal reiterated his request to Sri K.Sudhakar Rao and Gone Prakash Rao under letter 01.9.2009 to commence the proceedings. The 1st respondent-P.Narotham Rao issued a reply dated 15.9.2009 questioning the very validity of the MoU. The 1st respondent-P.Narotham Rao reiterated his stand in the letters dated 15.10.2009 and 30.10.2009. The 1st respondent- Mr. P.Narotham Rao stated in the notices that the claim of the applicant-Shyam Sunder Agarwal is barred by limitation. For completion of narration of facts, I deem it appropriate to refer paragraphs 20 to 22 of the affidavit filed in support of the application and they are thus:- “20. In response to the contention of Mr.P.Narotham Rao and others in their reply dated 15-9-2009 that the claim is barred by limitation, it is submitted that the Memorandum of Understanding was entered into on 8-12-2005, cheques were issued by Shyam Sunder Agarwal and others on 8-12-2005, after the cheques were dishonoured, demand drafts were made ready by Shyam Sunder Agarwal and others and 12-4-2006, Shyam Sunder Agarwal and others paid Rs.1,00,00,000/- to Narotham Rao and others on 22-2-2006, the jurisdiction of the arbitrators was invoked on 24-5-2007. Since the arbitration clause was invoked on 24-5-2007, legal action has commenced on the said date. Subsequent thereto, there was abdication on the part of the arbitrators in commencing the arbitration proceeds. Legal proceedings have been initiated in time and, therefore, the plea of limitation does not hold. 21. The contention of Respondent No.1 in his letter dated 30-10- 2009 that there is no arbitration agreement contained in the MOU is misconceived. It is submitted that it is clearly stated in Clause 8 of the MoU that the parties to the agreement are mutually appointing Mr.K.Sudhakar Rao and Mr.Gone Prakash Rao as mediators and arbitrators in order to avoid any unforeseen litigation. The respondents cannot conveniently ignore one part of the clause and only read the part in which the same persons are appointed as escrow agents to contend that there was no arbitration agreement in the MoU. All the other objections raised by Mr. Narotham Rao in the letter dated 30-10-2009 can be agitated before the arbitrator and adjudicated upon by the arbitrator. 22. In view of the fact that the arbitrators appointed by the parties as per the MoU have been unable to agree upon a third arbitrator and commence the arbitration proceedings for the past two and half years and have, in the process, implicitly expressed their reluctance to act as arbitrators in the present matter, it becomes imperative that an arbitrator is appointed by this Hon’ble Court in terms of Section 11(6) of the Arbitration and Conciliation Act, 1996 for resolution of the disputes arising out of the MoU entered into by the applicant and the respondents on 8-12-2005”. 3. Notice to the respondents came to be ordered on 30.12.2009. Respondents 1 and 2 filed common counter and whereas respondents 3 and 4 filed counters individually. 4. The counter of respondents 1 and 2, in brief, is:- (a) There is no clause in the MoU dated 8.12.2005 entered into between the parties with regard to reference of disputes to the arbitrators. Therefore, the application filed by the applicant seeking appointment of arbitrator is barred by limitation under Article 54 of the Limitation Act. The validity of the MoU dated 8.12.2005 has been ceased by the Company Law Board in Company Petition No.112 of 2007. The applicant herein is one of the respondents in the said company petition. Pending proceedings before the Company Law Board, the instant application before this Court seeking appointment of arbitrator is not maintainable. It is for the Company Law Board to decide whether this respondent and others have agreed to relinquish their rights in the company under the MoU dated 8.12.2005. Respondent No.7-S.Ananda Rao and respondent No.9-S.Mahender Rao and respondent No.10-S.Harinder Rao filed O.S.No.241 of 2007 on the file of the Chief Judge, City Civil Court, Hyderabad against the applicant and 2nd respondent herein and others for specific performance of MoU dated 8.12.2005 for a direction to the defendants 6 and 7 therein to handover the signed transfer deeds to the plaintiffs. Since the civil Court ceased of the issue as to the validity of the MoU, the applicant ought to have got himself impleaded as party defendant in the said suit to put quietus to the disputes centred around the MoU. Some of the shareholders filed Company Petition No.73 of 2007 and Company Petition No.76 of 2007 before the Company Law Board questioning the validity of the MoU dated 8.12.2005 and sought for a declaration that the MoU dated 8.12.2005 is void and contrary to the Articles 21 and 22 of the Articles of Association of the company. One of the parties to the MoU, namely, Ashok Kumar Agarwal issued a notice disputing the very execution of MoU. The applicant in the reply notice dated 01.8.2006 expressed his dismay as to how K.Sudhakar Rao and Gone Prakash Rao parted with the cheques deposited by him before completion of the transaction and even denied the existence of liability under MoU dated 8.12.2005. Unless the petitioners who filed company petition Nos.73 of 2007 and 76 of 2007 are made as parties in this arbitration application, no effective adjudication can be taken up with regard to the issue involved in this application. A joint memo was filed in C.P.Nos.73, 76 and 112 of 2007 on the file of Company Law Board by both the parties indicating the constitution of the committee of management. The committee comprises P.Narotham Rao, S.Suman Rao and one to be elected at the extra-ordinary General meeting to be held on 30.9.2007. The Company Law Board appointed Sri N.R.Sridharan, CA and CS to chair the EGM. The voting of the EGM shall be as per the share holding of the company as on 10.11.2005 and the election was held and Management committee is constituted and the same is managing the affairs of the company. The 1st respondent as the Managing Director of the company filed O.S.375 of 2007 on the file of III Additional Chief Judge, City Civil Court, Hyderabad seeking injunction against the appellant, respondents 5, 6, 7, 8, 9 and one A.Sandeep Reddy restraining them from interfering with the day-to-day affairs of the company and the said suit is pending disposal. The applicant issued certain cheques in pursuance of the MoU dated 8.12.2005 and the said cheques came to be dishonoured and thereupon, this respondent initiated proceedings under Section 138 of the N.I.Act and subsequently, the proceedings under the cheque bouncing case came to be withdrawn. Since the limitation prescribed for specific performance of the MoU dated 8.12.2005 has been expired, the applicant is not entitled to seek reference of the same. This respondent filed C.C.No.142 of 2007 on the file of Special Judge for Economic Offences, Hyderabad against the applicant and respondent No.8 herein for filing false declaration in Form No.32 before the Registrar of Companies, Hyderabad. He also filed C.C.No.147 of 2007 on the file of the same Court against respondents 5, 8 and 9 herein for misappropriation of the company’s amount. Another complaint being C.C.No.23 of 2009 filed against the applicant, respondent No.6 is pending disposal before the Special Court for Economic Offences, Hyderabad. (b) The persons of the first part to the MoU dated 8.12.2005 hold 5,60,000 shares and whereas the persons of the 2nd part to the MoU dated 8.12.2005 hold 4,80,000 out of 50 lakh shares. Neither the first part nor second part is entitled to enter into MoU on behalf of the persons who are not parties to the MoU without any authorisation from them. The averment in the application that S.Hareender Rao, K.Vidyasagar Rao, Shyam Sunder Agarwal, Mr. Ashok Kumar Agarwal, S.Mahender Rao and Mr. S.Anand Rao held 50.20% of the shares in MCC as on the date of the entering into MoU, i.e., 08.12.2005 is factually incorrect. The sale agreement with ACC was entered into without any authority by Mr. S.Hareender Rao misrepresenting himself as Managing Director of the company on 25.11.2005. He was only Joint Managing Director of the company at the relevant point of time. K.Sudhakar Rao and Gone Prakash Rao are only mediators and not arbitrators. There is no arbitration clause in the MoU dated 8.12.2005. The so called Demand Drafts said to have been issued by the applicant were never handed over to this respondent or any one on his behalf at any point of time. The criminal cases initiated under Section 138 of the N.I.Act were withdrawn by this respondent even before notices/summons were served on the accused in the said criminal cases, as he was not interested in prosecuting the same. Ashok Kumar Agarwal by his reply notice 22.8.2006 denied the existence of MoU dated 8.12.2005. Hence, sought for dismissal of the application. 5. The 3rd respondent filed counter resisting the application on the similar grounds urged by respondents 1 and 2. It is stated in para (12) of the counter that clause (8) of the MoU which is referred as arbitration clause by the applicant deals only with nomination of escrow agents, and though the words `mediators/arbitrators’ have been used in respect of Sri K.Sudhakar Rao and Sri Gone Prakash Rao in the said MoU, that itself does not make them arbitrators nor the applicant can import an arbitration clause in the said MoU for resolution of the disputes, which otherwise has not been agreed by the parties. 6. The 4th respondent sought for dismissal of the application on almost on the similar grounds urged by respondents 1 and 2. It is suffice to refer paragraph 9 of the counter, which reads as hereunder:- “ This respondent further states that there is no pre existing arbitrable dispute between the applicant and this respondent in as much as no notice seeking specific performance of the terms of the MoU was ever issued to this respondent and therefore, in the absence of any pre existing arbitrable dispute, Annexure-U notice in so far as the same pertains to this respondent is bad in law and consequently this application is not maintainable against this respondent. Furthermore, I state that since the obligation which is sought to be enforced is a composite one, even if the applicant has issued any notice of dispute to Respondent No.1, still the entire application must fail since it seeks to enforce a composite obligation against all the respondents to whom no notice of demand was ever issued prior to the purported invocation”. 7. The applicant filed reply affidavit to the counter filed on behalf of the respondents 1 and 2 and respondents 3 and 4. It is stated in the reply affidavit that C.P.No.112 of 2007 has not been filed in relation to MoU dated 8.12.2005 and the relief sought for in the said company petition is to cancel the allotment of 50,00,000 shares allotted on 17.12.2005 to certain shareholders of MCC. The applicant herein along with certain other respondents therein had filed a counter. The applicant is not a party to O.S.No.241 of 2007 said to have been filed by some of the parties to the MoU. The applicant has not chosen to file a civil suit for specific performance of the MoU dated 8.12.2005 in view of the existence of an arbitration clause (clause 8 of the MoU). The fact that certain parties to the MoU have not chosen to invoke the arbitration clause cannot be held against the applicant who acted in accordance with the terms of the MoU by invoking the arbitration clause. Company Petitions 73 of 2007 and 76 of 2007 have been filed at the behest of and in collusion with the 1st respondent herein. The applicant is not bound by the statements made by respondent No.6-Mr. Ashok Kumar Agarwal, who stated to have denied the execution of the MoU. Proceedings initiated by the 1st respondent and others under Section 138 of the Negotiable Instruments Act came to be settled before the Lok Adalat by Award dated 12.3.2007 consequent upon payment of Rs.78,12,500/-. 8. The applicant placed on record additional affidavit dated 14.2.2011. It is stated in the affidavit that respondents 8 and 9, who are parties to the MoU dated 8.12.2005 and who filed the suit being O.S.No.241 of 2007 on the file of the Chief Judge, City Civil Court, Hyderabad, for specific performance of MoU have entered into MoU dated 2.2.2011 and placed the said MoU before the Company Law Board in C.P.No.73 of 2007 in which one of the terms is that respondent No.8 would withdraw all the pending litigations including O.S.No.241 of 2007. Accordingly, respondent No.8 filed memo before the Company Law Board. A copy of the memo filed before the Company Law Board by respondent No.8 along with the Memorandum of undertaking has been placed on record. 9. The 7th respondent though entered appearance through a counsel reported no counter. 10. Heard Sri S.Ravi, learned senior counsel appearing for the applicant, Sri N.Subba Rao, learned counsel appearing for the respondents 1 and 2, Sri P.Vikram, learned counsel appearing for respondent No.3, Sri S.Rajan, learned counsel appearing for respondent No.4 and Sri Vedula Srinivas, learned counsel appearing for respondent No.9. 11. Sri S.Ravi, learned senior counsel appearing for the applicant submits that the MoU dated 8.12.2005 entered between the parties contains an arbitration clause, in case of disputes in the process of satisfactory completion of the entire transaction, and as the respondents 1 to 4 who are the 2nd party to the MoU frustrated the process of transaction, the applicant invoked the arbitration clause. The applicant and respondent No.5 issued notice dated 24.5.2007 to the named arbitrators to enter into reference and mutually agree upon a third arbitrator and commence arbitration proceedings. Thereafter, the applicant issued another notice dated 01.9.2009 requesting the named arbitrators to take immediate steps to commence arbitration proceedings and there being no action on the part of the named arbitrators to proceed with the arbitral proceedings, it is to be construed that the named arbitrators abdicated their functions and therefore, the applicant has been compelled to approach this Court seeking appointment of sole arbitrator for resolution of the disputes between the parties relatable to MoU dated 8.12.2005. Learned senior counsel submits that the named arbitrators failed to perform the function entrusted to them under the MoU and therefore, the applicant is entitled to approach this Court under sub-section (6) of Section 11 seeking appointment of a sole arbitrator for resolution of the disputes between the parties relatable to agreement dated 8.12.2005. Learned senior counsel refers clauses (8) and (12) of the MoU and notices dated 24.5.2007, 01.9.2009 and 15.10.2009 in support of his submissions. It is suffice to refer the contents of notice dated 15.10.2009 which read as hereunder:- “ Sub: Your letter dated 15.9.2009 This is in response to your letter dated 15.9.2009 which has been sent in reply to a letter dated 1.9.2009 sent by me to Mr. K.Sudhakar Rao and Gone Prakash Rao, arbitrators requesting them to take steps to commence arbitration proceedings at the earliest. It is clarified that the notice dated 1-9-2009 has been issued in my individual capacity and not as a representative of any other person or persons. It is denied that there are any contradictions between the notice dated 1-9-2009 and the notice dated 24-5-2007. It is denied that the agreement is void. Even assuming but not admitting that it is void, it is a settled proposition of law that the arbitration clause of the agreement survives and issue whether the agreement is void or not can be agitated before the arbitral tribunal. No proceedings have been initiated by me before any other forum as the memorandum of understanding contains an arbitration clause and the proper forum for deciding disputes that arise out of the memorandum of understanding dated 8- 12-2005 is the arbitral tribunal. It is denied that the claim is barred by limitation. Even assuming but not admitting that it is, this issue can be agitated before the arbitral tribunal. In view of the fact that a substantial amount of time has elapsed since the arbitration clause was invoked and the arbitrators having failed to initiate the arbitration proceedings, I am now constrained to approach Hon’ble High Court seeking the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.” 12. Learned senior counsel would further contend that a reading of clauses (8) and (11) of the MoU indicates that the named mediators/arbitrators have been conferred with power of adjudication of disputes during the process of satisfactory completion of the transaction envisaged therein and any decision taken by them during the period of the entire transaction shall be final. A reading of all the clauses are suggestive of the parties consenting of the adjudication of the disputes by arbitration. Inartistic drafting of arbitration clause in the agreement cannot be a ground to reject the application. In support of his submissions, reliance has been placed on the decision of Supreme Court in VISA International Ltd. v. Continental Resources (USA) Ltd. [1]. Much emphasis has been laid on paras (25) and (26) of the cited judgment, which read as hereunder:- “( 25. ) THE submission is unsustainable for more than one reason. No party can be allowed to take advantage of inartistic drafting of arbitration clause in any agreement as long as clear intention of parties to go for arbitration in case of any future disputes is evident from the agreement and material on record including surrounding circumstances. ( 26. ) WHAT is required to be gathered is the intention of the parties from the surrounding circumstances including the conduct of the parties and the evidence such as exchange of correspondence between the parties. The respondent in none of its letters addressed to the applicant suggested that the dispute between the parties is required to be settled through conciliation and not by arbitration. In response to the applicant's letter invoking the arbitration clause the respondent merely objected to the names inter-alia contending the suggested arbitration would not be cost effective and the demand for arbitration itself was a premature one.” 13. Learned senior counsel submits that arbitration clause is not required