PNP 1 ARBAP37-10=1.10 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. ARBITRATION APPLICATION NO.37 OF 2010 Ares Investments ..Applicant. Vs. Wilson Sandhu Logistics (India) Ltd. and others ..Respondents. .... Mr.Zal Andhyarujina i/b ARA Law for the Applicant. Mr.Rahul Chitnis with Mr. Devesh Juvekar i/b Khaitan & Co. for the Respondents. ..... CORAM : DR.D.Y.CHANDRACHUD, J. 1 October 2010. P.C. : 1. This is an application under Section 11(6) of the Arbitration and Conciliation Act, 1996. The First Respondent is a company incorporated under the Companies Act 1956. The Second to Fifth Respondents are promoter directors while the Sixth and Seventh Respondents are promoters of the First Respondent. An investment agreement was entered into on 13 September 2007 between the Petitioner, First Respondent and what is described as, the Sponsor PNP 2 ARBAP37-10=1.10 Group (as defined in Section 1.1). The Sponsor Group consists of Respondent Nos.2 to 7. The investment agreement contains a clause providing for a reference of disputes to arbitration. Clause 25.17 of the agreement, which is entitled as “Dispute Resolution”, insofar as is material reads as follows : “25.17 Dispute Resolution (i) The Parties agree to negotiate in good faith to resolve any dispute between them regarding this Agreement. If the negotiations do not resolve the dispute to the reasonable satisfaction of the Parties, then each of the Investor, Sponsor Group and the Company shall nominate a person with respectable professional standing and unimpeachable conduct as its representative. These representatives shall, within thirty (30) days of a written request by any Party to call such a meeting, meet in person and alone (except for one assistant for each Party) and shall attempt in good faith to resolve the dispute. (ii)Upon the Parties being unable to appoint the representatives as aforesaid, or if the disputes cannot be resolved by such persons in such meeting as aforesaid, in such event, the disputes or differences shall be submitted to final and binding arbitration at the request of either of Sponsor Group or the Investor upon written notice to that effect to the others. In the event of such arbitration: (a) Such arbitration shall be in accordance with PNP 3 ARBAP37-10=1.10 the Indian Arbitration and Conciliation Act, 1996 (which is deemed to be incorporated in this Agreement by reference). All proceedings of such arbitration shall be in the English language. The venue of arbitration shall be New Delhi (India). (b) The arbitration panel shall consist of three arbitrators, one arbitrator to be appointed jointly by the Company and Sponsor Group, one arbitrator to be appointed by the Investor and the third arbitrator to be appointed in accordance with the Indian Arbitration and Conciliation Act, 1996.” 2. By a notice dated 9 September 2009 the Applicant invoked the arbitration clause. The invocation was founded on the claim of the Applicant that it is entitled to the conversion of 3600 Series A preferred shares (pursuant to Clause 16.2 (a)(ii)) into 114,499 equity shares of the company. There is no response to the notice invoking arbitration. 3. An affidavit in reply has been filed on behalf of the Second to Seventh Respondents, by the Second Respondent. During the course of the hearing three defences have been raised to the Arbitration Application. Firstly, it has been submitted that prior to PNP 4 ARBAP37-10=1.10 the appointment of an arbitrator, parties were duty bound to negotiate as stipulated in sub clause (i) of Clause 25.17. In the absence of negotiations, the invocation of arbitration is premature. Secondly, it has been urged that there is no dispute between the parties. According to the Respondents, the entitlement of the Applicant to seek conversion of its preference shares into equity shares was to be based on a formula defined by the effective post- money valuation. According to the Respondents, since the audited figures for the financial year 2009 are not available, the Applicant is not entitled at this stage to seek conversion of its preference shares into equity and until audited figures are available, no dispute could arise. Thirdly, it has been submitted that Respondents 2 to 7 have moved a petition under Sections 397 and 398 of the Companies Act 1956. Such a petition is in the nature of a petition for winding up and a claim for winding up is not arbitrable. 4. Now the existence of the arbitration clause has not been disputed. All the parties to the arbitration agreement are parties to PNP 5 ARBAP37-10=1.10 the proceedings before this Court. The arbitration clause postulates that parties must initially negotiate in good faith and have to nominate a person to act as their representative for negotiations. The Applicant by its letter dated 11 August 2009 had nominated its representative and had called upon the Respondents to designate their representatives specifically with reference to Clause 25.17(i). The Respondents having failed to do so, they cannot be now heard to submit that the condition for negotiation has not been complied with. The Applicant had duly invoked the requirement of negotiation by calling upon the Respondents to negotiate in good faith. 5. The main line of defence is that no arbitrable dispute exists. The defence is that the number of equity shares which are to be issued upon conversion to the Applicant have to be determined in accordance with a formula set out in the definition of the expression “effective post money equity valuation”. Under Schedule II of the investment agreement the entitlement of the Applicant would vary between 17.93% and 46.88%. The effective post money equity PNP 6 ARBAP37-10=1.10 valuation is defined as a certain mark up over the audited profits after tax (PAT) for financial years 2008 and 2009 respectively. The defence is that since the audited figures for financial year 2009 are not available, the number of equity shares to be allotted to the Applicant cannot be determined and hence, there is no dispute. The Applicant has, as a matter of fact, disputed the contention of the Respondents that audited figures for financial year 2009 are not available. But that apart, the question as to whether the Applicant is entitled to the allotment of equity shares in conversion of the preference shares held in the company and if so, the quantum of equity shares that is liable to be allotted is a matter which goes to the merits of the dispute and which must be determined by the Arbitrator. Evidently, there is a dispute between the parties. What resolution the dispute must lead to is a matter for adjudication in arbitration. There is therefore no merit in the second submission. A faint attempt was made on behalf of the Applicant to urge that a petition under Sections 397 and 398 is in the nature of winding up and that a claim for winding up cannot be arbitrable. Now there is no dispute about the PNP 7 ARBAP37-10=1.10 principle of law that a claim for winding up cannot be the subject matter of an arbitration agreement (Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. 1). The claim of the Applicant is not for the winding up of the First Respondent. The Applicant seeks to assert its contractual right under the investment agreement dated 13 September 2007 by the allotment of equity shares in conversion of the preference shares held by the Applicant. This contractual agreement is governed by the terms agreed upon by the parties therein. The dispute is purely of a contractual nature and is hence, arbitrable. 6. In the circumstances, for the reasons indicated above, it will be necessary to exercise the jurisdiction under Section 11(6) of the Arbitration and Conciliation Act 1996 by the appointment of an Arbitrator for and on behalf of the Respondents. By the Applicant’s notice dated 9 September 2009 Shri Kumar Desai, Advocate has already been nominated as an arbitrator. Hence, in exercise of the powers conferred by Section 11(6), it would be necessary for this Court to nominate the second arbitrator. The Hon’ble Mr. 1 (1999) 5 SCC 688. PNP 8 ARBAP37-10=1.10 Justice S.P. Bharucha, Former Chief Justice of India is accordingly nominated as the second arbitrator. The Arbitration Application is accordingly disposed of. There shall be no order as to costs. (Dr. D.Y.Chandrachud, J.)