The court held that misappropriation of investor funds occurs when benefits are enjoyed without fulfilling corresponding obligations, allowing for protective measures pending arbitration.

JUDGMENT :

Context and Factual Background:

1. This is a Petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“the Act”). The Petitioner Mr. Manmohan Kapani (“Manmohan”) is a resident of Virginia, United States of America aged over 90 years. Manmohan infused a sum of USD 1 million into Respondent No. 1, Kapani Resorts Pvt. Ltd. (“Kapani Resorts”) pursuant to the Share Subscription Agreement and Shareholders Agreement dated February 11, 2022 (“Agreement”). The Agreement has an arbitration clause, and its existence is not disputed.

2. Under the Agreement, the investment of USD 1 million would increase Manmohan’s equity shareholding in Kapani Resorts from 13% to 51%. The end-use of the funds invested by Manmohan was to enable Kapani Resorts to service its debt obligations under a One-Time Settlement (“OTS”) with Small Industries Development Bank of India (“SIDBI”) and stave off a default. Respondent No.2, Mr. Virendra Kapani (“Virendra”) and Respondent No. 3, Vaibhav Kapani (“Vaibhav”) were guarantors of the amounts owed by Kapani Resorts to SIDBI. Using the funds invested by Manmohan, Kapani Resorts discharged the dues owed to SIDBI, resulting in Virendra and Vaibhav getting relieved of their guarantee obligations. Likewise, the assets of Kapani Resorts and the property located at 124, Block-E, Greater Kailash, Part II, New Delhi (“Greater Kailash Property”), the residential property of Virendra and Vaibhav, that had been mortgaged to SIDBI were released.

3. Therefore, Virendra and Vaibhav got Kapani Resorts to use the funds infused by Manmohan to get the Greater Kailash Property released, as indeed their guarantee obligations discharged, but simply refused to issue the shares that were required to be allotted to Manmohan. By issuing such shares, they would have lost control over Kapani Resorts, in terms of the commitments made under the Agreement, but evidently, this has not been done. Hence, this Petition under Section 9 of the Act.

4. These proceedings have a chequered history. The parties have engaged in detailed technical objections to one another. The matter was first called out on June 19, 2023. Thereafter, pleadings were completed. On August 11, 2023, Virendra and Vaibhav drew the attention of a Learned Single Judge of this Court to proceedings under Section 241 and 242 of the Companies Act, 2013 (“the Companies Act”) alleging oppression and mismanagement. The Learned Single Judge took a view that parallel proceedings ought not to be pursued and Manmohan’s advocates sought time to take instructions.

5. On August 30, 2024, another Learned Single Judge heard arguments and reserved judgement, permitting written submissions to be filed on September 2, 2024. On that date, Virendra and Vaibhav were not represented and the matter was stood over once again. On that day, it was found that arguments not made in Court had been set out in the Respondents’ Written Submissions, and this led to another round of objections by each side about the conduct of the other side, and more submissions were made, with the matter effectively being reopened.

6. Thereafter, the matter came up before me on January 15, 2025, when Manmohan alone was represented. It was stated on behalf of Manmohan that being a foreign national, the Section 11 Court would be the Supreme Court and not this Court. The matter was then heard partly on two dates. It was then heard on February 5, 2025. Eventually, written notes on arguments of both sides were taken on record and arguments concluded on February 17, 2025.

Contentions of the Parties:

7. I have heard Mr. Rohan Rajadhyaksha, Learned Counsel on behalf of Manmohan and Mr. Farhan Dubash, Learned Counsel on behalf of Virendra and Vaibhav. The facts are quite clear, and controversy between the parties is primarily on the law and on how far this Court, in exercise of powers under Section 9 of the Act, can intervene in respect of a property owned by Virendra (and not by Kapani Resorts), which was released by use