1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORIGINAL SIDE ARBITRATION APPLICATION NO.17 OF 2007 BLA Industries Private Limited .... Applicants Vs. Foundry Fuel Products Limited .... Respondents S/Shri P.K. Samdani, Senior Advocate with Lalan Gupta and Darshan Mehta i/b M/s. Dhruve Liladhar & Co. for the Applicants. Shri Vaibhav Sugdare i/b M/s. Khaitan & Jaykar for the Respondents. CORAM: J.N. PATEL, ACTING C.J. DATED: FEBRUARY 5, 2010 P.C: 1. Heard. The applicants have approached this Court seeking appointment of an Arbitrator to resolve the dispute arising out the Loan Agreement dated 6-4-2004. 2. It is the case of the applicants that the respondent-company had sought a loan from the applicants in order to settle their matter before the BIFR and accordingly the applicants 2 agreed to lend a sum of Rs.1.65 crores to the respondents by way of a secured loan, subject to the terms and conditions executed in the Agreement dated 6-4-2004. In the said Agreement, the parties had agreed that all the disputes and differences arising out of the Agreement shall be resolved by a three-member Arbitral Tribunal. Clause 23 of the Agreement provides for the constitution of such Arbitral Tribunal. 3. It is the case of the applicants that as per the said Agreement, the applicants had handed over to the respondents at Mumbai a Demand Draft bearing No.167762, dated 23-4-2004, for the sum of Rs.45 lakhs, issued by the State Bank of India, Commercial Branch, Mumbai and subsequently paid an additional amount through cheque and the aggregate amount of loan advanced to the respondents was Rs. 185.63 lakhs. It is the case of the applicants that the respondents utilised the said amount of Rs.185.63 lakhs, lent and advanced by the applicants, for discharging their liability of IDBI and the State Bank of India but the respondents failed and neglected to make any payment of interest or any amount lent under the said Agreement towards the repayment of the 3 loan and, therefore, committed defaults of their obligations under the loan Agreement which led the applicants to give notice to the respondents through their Advocate on 13-10-2006, calling upon the respondents to pay the sum of Rs.185.63 lakhs together with interest thereon at 1% below prime lending rate of State Bank of India with quarterly rests on Rs.45 lakhs from 23-4-2004 and on Rs. 1,40,63,000/- from 29-6-2004 till payment. 4. The respondents, by their Advocate's letter dated 3-11-2006, replied that they were under no obligation to repay the amount. Therefore, the applicants again called upon the respondents to pay the outstanding amounts at Mumbai and also to create a charge on the moveable and immoveable properties of the respondents. As disputes arose between the parties, the applicants invoked the arbitration clause and suggested names of five persons out of which the respondents were requested to suggest the name of one of them for appointment as sole Arbitrator but the respondents failed to accede to the request of the applicants. 5. It is the case of the applicants that the respondents having failed and neglected to 4 honour their obligation under the Agreement, they have filed the present application under Section 11 of the Arbitration and Conciliation Act, 1996 and by the order dated 18-12-2006 this Court had granted interim relief till 22-12-2006 and the said application is still pending in the Court. 6. On the other hand, the respondents contend in their affidavit in reply that as the respondent-company is declared sick, under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, the applicants cannot pursue this matter and further tried to explain the facts and circumstances which led to separation of the family and the family business as the companies were closely held by the family as a joint business of four brothers, namely, Parmeshwar Kumar Agarwalla (PKA), Devendra Kumar Agarwalla (DKA), Mahendra Kumar Agarwalla (MKA) and Yogendra Kumar Agarwalla. It is alleged that though DKA was entrusted with the responsibility of managing the day-to-day affairs of respondent-company, the controlling power all along remained in the hands of PKA. It is also contended that the loan transaction referred to in the applicants' notice is an ostensible loan transaction 5 whereby and whereunder PKA has simply discharged his liability that accrued owing to various setbacks and adversities suffered by the respondent-company and it was never meant to create any liability on the respondents. In relation to the family partition entered into in or about 1999, it is submitted by the respondents that it was pursuant to that arrangement and in order to liquidate the liabilities of the respondent-company towards IDBI and SBI, a one time settlement or OTS of Rs.185.63 lakhs was reached at the intervention of PKA himself and the said amount of Rs.185.63 lakhs came from BLA Industries Limited in the shape of a loan transaction. It is contended by the respondents that this was merely to benefit the parties but was never contemplated to create nor has actually created any liability on the respondents by giving instances of other related transactions of similar nature. They have also claimed that they have unimpeachable documentary evidence to establish the fact that the loan transaction referred to in the applicants' letter dated 13-10-2006 is just a sham transaction or a cover to camouflage the internal financial arrangements of intra family business. 6 7. The learned counsel appearing for the applicants submitted that as the respondents have failed to constitute an Arbitral Tribunal in terms of Clause 23 of the Agreement, this Court may appoint a sole Arbitrator. The learned counsel appearing for the respondents firstly submitted that the present application cannot be prosecuted in view of the proceedings initiated against the respondent-company before the BIFR and unless leave is taken under Section 22 of the SICA, this application is not tenable. Secondly, it is submitted that the High Court at Calcutta will have jurisdiction to entertain such an application, if at all it is tenable in law and, thirdly, it is submitted that the Loan Agreement dated 6-4-2004, on which the applicants have placed reliance, is not executed by the respondents. 8. Shri P.K. Samdani, the learned Senior Advocate appearing for the applicants, has relied on a decision of the Delhi High Court in the case of Lloyd Insulations (India) Ltd. v. Cement Corporation of India Ltd., reported in (2001) Vol.105 Company Cases (Delhi), Page 729 wherein it has been held that the word "suit" under Section 22(5) of the 1985 Act relates only to civil suits in the Court of law which 7 are governed by Section 9 of the Civil Procedure Code whereas proceedings under Sections 14 and 17 of the Arbitration Act will not be covered. 9. In so far as the other contentions raised by the learned counsel for the respondents about the jurisdiction and non- execution of the Agreement in question are concerned, the same cannot be accepted as part of the cause of action under the Agreement arose at Mumbai where the monies were paid to the respondents and in so far as the execution of the Agreement is concerned, it is the respondents own case that it was an ostensible arrangement. Therefore, this Court proceeds to appoint Smt. Justice Sujata Manohar, former Judge, Hon'ble Supreme Court of India, as the sole Arbitrator. 10. Needless to say, all issues and contentions between the parties relating to the Loan Agreement are kept open for being adjudicated by the Arbitrator so appointed. 11. The application stands disposed of. ACTING CHIEF JUSTICE