Case: Kaynet Finance Limited Vs. Verona Capital Limited

The factual backdrop and reasons for this conclusion are as follows2. The Respondent appointed the Appellant as a stockbroker to effect transactions on the National Stock Exchange of India and Bombay Stock Exchange. The Respondent opened a trading account with the Appellant in January 2009. The Respondent commenced transactions through the Appellant around February 2009. The Respondent had acquired shares of Pipapvav Defence and Offshore Engineering reflected in the client muster on 31 March 2015 and those shares were lying in the Appellants Demat Account. It is the case of the Respondent that Reliance Infrastructure had declared intention of acquiring shares of Pipapvav Defence and Offshore Engineering and the Respondent desired to offer the shares in an Open offer. According to Respondent, the Appellant showed indifference and declined to transfer the shares in Demat Account. Concerned by the attitude of the Appellant, the Directors of Respondent made enquiries and discovered that many clients of the Appellant were having disputes with the Appellant over share transactions. Alarmed, the Respondent called for details of transactions carried out by the Appellant from the National Stock Exchange. The Respondent also acquired Trade Loss documents from the National Stock Exchange on 8 May 2017. According to the Respondent on verification of the accounts, the Respondent found that various false entries of debits were made. Besides this position, a credit balance of 17,52,47,517/- was reflected  in the ledger account regarding transaction carried out on the National Stock Exchange. The Respondent issued a letter on 23 November 2017 demanding this amount and other losses, but the amount was not paid. The Respondent filed a complaint against the Appellant with the Economic Offences Wing on 12 March 2018. An F.I.R. was registered by the Economic Offences Wing on 22 June 2018. The Respondent also lodged a complaint with the Investor Services Cell of the National Stock Exchange on 26 July 2018. On 31 August 2018, the Respondent filed an Arbitration Application with the National Stock Exchange in From-I as per the National Stock Exchange Bye-laws3. The Respondent raised four claims. First was for the return of the credit balance in the ledger account of the Respondent in the Appellants book as on 31 March 2015 as  17,52,47,517/-. The second claim was for the value of 29,58,095 shares of Pipapvav Defence and Offshore Engineering, market value of the shares being at 75.31 at the average rate as  on 17 December 2015 was 22,27,74,135/-. The third was for  the amounts of losses incorrectly debited in the account of the Respondent with no transaction on the National Stock Exchange, being 47,81,53,245/-. The fourth was for delayed payment  charges debited by the Appellant in the Respondents account of   8,40,02,219/-. The total of four claims was 96,01,77,116/-4. The arbitration was conducted before the panel of arbitrators, consisting of Presiding Arbitrator and two Arbitrators, under the Bye-laws, Rules & Regulations of National Stock Exchange of India Ltd. Claim No. 2 for 22,27,74,135/- was  rejected on merits by the Arbitral Tribunal. The Tribunal rejected claim No. 3 for 47,81,53,245/- since the transaction pertaining  for the period from 9 October 2009 to 28 February 2013 and the claim was time-barred. The fourth claim of 8,40,02,219/-  was also rejected because the claim was beyond the period of six years5. As regards the Claim No.1 of 17,52,47,517/-,  (which was granted), the Appellant had raised two main defenses. First, this claim was barred by limitation and second, that the claim was not maintainable, having moved by the Company, i.e. Respondent whose name was struck off from the Register of Companies and whose directors stood disqualified. The Arbitral Tribunal found that the application was maintainable. On limitation, the Tribunal held that the Appellant did not dispute the amount of 17,52,47,517/- in their documents and the  balance shown in the accounts of the Appellant for the year 31 March 2018 brought the claim within the extended period of limitation. The Arbitral Tribunal partly granted the claim of the Respondent and directed the Appellant to pay the amount of  17,52,47,517/- with simple interest at 12% till the payment and realization6. The Appellant filed an Arbitration Petition No. 716 of 2019 under Section 34 of the Act of 1996. Before the learned Single Judge, the Appellant raised the issue of limitation and the maintainability of the claim. The learned Single Judge found no perversity in the award of the Arbitral Tribunal and that no ground was made out to set aside the award as enumerated in Section 34 of the Act of 1996. The learned Single Judge rejected the petition by order dated 24 June 2019.

Reasoning: 11. The first limb of the argument on limitation is that the Arbitral Tribunal could not have looked into the documents annexed to the plaint by the Appellant because of Order VII Rule 6 of the CPC in absence of pleading in the arbitration application. It is pertinent to note how these documents came on record. The Respondent had filed simpliciter claim to recover the amounts from the Appellant. The Appellant had filed a statement of defense, in which the Appellant had annexed a copy of plaint in Suit No. 2466 of 2018 filed on 18 July 2018 by the Appellant in the City Civil Court. In the suit, the Appellant had sought the amount of  31,52,370/- from the Respondent along with 18% interest. The reason the Appellant had annexed the plaint was because of its defense. The defense being that no sum is due to the Respondent and in fact Respondent owes certain sum to the appellant which is claimed in the Suit. Also, since the Appellant had filed a suit against the Respondent and its directors, the matter is subjudice in the competent civil court. These documents, thus, formed part of the proceeding before the Arbitral Tribunal12. It is trite, that the Code of Civil procedure is not strictly applicable to the arbitral proceedings, but its fundamental principles can be invokedThe proviso to the Rule 6 does not contain any express embargo on the court not to look into the admitted documents brought on record by the parties to determine the exemption. The proviso is enacted to do justice between the parties. It being the power of the court conferred for effective adjudication, it is not prudent whittle it down, more particularly in absence any specific embargo. Further in the preset case, we are concerned with arbitral proceedings. The arbitrators were called upon to decide whether the claim filed by the Respondent was within limitation. The Respondent, who had raised the ground of bar of limitation, had in its admitted documents provided the ingredient of Section 18 of the Limitation Act. In this context, if the arbitrators have chosen to rely on the pleading of the Respondent, and we find no perversity in the same14. We have perused the plaint filed by the Appellant, which is part of the record. Annexures to the plaint are Client Financial Accounts. Annexure Exh. B-4 onwards to the plaint is the Client Financial Accounts of Verona Capital Limited – Respondent herein with Code No. 6737. These accounts are from 1 April 2008, and they continue onwards to 31 March 2008. The annexures run into almost 90 pages. In paragraphs 10 and 11 of the plaint, the Appellant has pleaded that the ledger accounts annexed at B-1 to B-4 of defendant nos.1 to 4 till the inception would show there has been extensive trade carried out in the consolidated ledger account of the defendant nos.1 to 4 over the years and none has been disputed. The claim of the Appellant against the Respondent is based on the consolidated ledger accounts of defendant nos.1 to 4, who included Priti Vora, Mansi Vora, Mridula Vora and Respondent – Verona Capital Ltd. In the ledger account regarding the defendant no.4, for the April 2015, the amount of 17,52,47,517/- was reflected. This position was  continued throughout the accounts till 31 March 2018. Therefore, it cannot be any dispute that as on 31 March 2018, the Appellant had admitted liability of 17,52,47,517/- in favour of the  Respondent. Since there was a clear acknowledgement throughout in the admitted ledger accounts maintained by the Appellant, even as of 31 March 2018, the application filed on 31 August 2018 was within limitation. In conclusion, the ground of limitation raised by the Appellant is rejected18. In the case at hand, the disqualification of the Directors is under Section 164(2)(a) of the Act 2013. So the discussion is in the context of this provision. A casual glance at Section 167 does create an impression that the office of the director, who is disqualified under all categories of Section 164 will fall vacant. There is a reference in Section 167(1)(a) to Section 164However, Section 164 (1) does not deal only with disqualification for initial appointment, it also contemplates a sitting director. Because it cannot be the position that a disqualification applicable for appointment as a director, such as unsound mind and conviction, cannot disqualify a director who has incurred such a disqualification after he has become a director. Therefore, harmoniously read, the interplay between Section 164 and 167 is that the office of a director of a company will not automatically fall vacant if a director of a company incurs any of the disqualifications enumerated in Section 164(2) of the Act of 201322. Next debate on this aspect was on the implication of the proviso is inserted in Section 167 of the Act 2013 by Act 1 of 2018 with effect from 7 May 2018. It states that that where a person incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company in defaultThis argument is incorrect. The legislative intent prior to the incorporation of the proviso, was not to declare that the office of the director covered in contingencies under Section 164(2)(a) to become vacant forthwith and the only embargo was on the eligibility for re-appointment. The proviso introduces a mandate from 7 May 2018, that a director of a company which has failed to file its financial statements or annual returns for a continuous period of three financial years, cannot continue as a director of the other companies. The contention of the Appellant that the proviso relaxed the position in favour those directors who were disqualified under Section 164(2)(a) and now vacation of office is restricted only to companies other than in default, is incorrect. The position is other way round. Prior to proviso there was no automatic vacation of office of director falling under Section 164(2)(a). By the proviso, a sanction is now imposed that such directors will not only be ineligible for reappointment, but if they are holding office as director in other companies, that office will fall vacant. Again the legislative intent reiterated, that as far the company in default, the office of its directors will not automatically fall vacant23. We, therefore, reject the contention of the Appellant that the Arbitration Application filed on behalf of the Respondent by its Directors who were disqualified was not maintainable. The office of these Directors had not fallen vacant on their disqualification, and they could represent the Respondent24. We also have to be mindful that we are deciding this question in the proceedings taken out to set aside an arbitral award. We note the conduct of the Appellant, which has been considered by the single judge, that the Appellant has filed a civil suit against the Respondent seeking relief is sought against the Respondent-company and the directors in its private capacity. The Respondent (defendant no. 4 in the Suit) as on July 2018 is described as a company registered under the Companies Act. It is mentioned in the plaint that the name of Respondent is struck off from the Register of Companies and, however, because of Section 250 of the Act of 2013, the suit is maintainable25. Further, even if the Arbitral Tribunal committed a legal error in entertaining the application, that error cannot straightway lead to setting aside the award. The law declared by the Supreme Court is that the phrase Patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within the fundamental policy of Indian law, namely, the contravention of a statute not linked to public policy or the public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.1 We do not find that in the present case, assuming there is a legal error, it falls within the test laid by the Supreme Court.