2022 Supreme(Del) 1611

IN THE HIGH COURT OF DELHI AT NEW DELHI
Prathiba M. Singh, J.
Ommorrowland Limited (earlier Known As Tomorrowland Technologies Exports Limited) - Appellant
Versus
Ensource Finance Limited (formerly Hmg Financial Service Co. Pvt. Ltd.) - Respondent
CS (Os) 2170/2012 & I.A. 13013/2012
Decided On : 27-04-2022

Headnote:

The present suit has been filed by the Plaintiff under Sections 14 & 17 of the Arbitration Act, 1940 seeking judgment and decree in terms of the award dated 30th May, 2012 passed in the arbitration case being M/s M.S. Shoes East Ltd. v. HMG Financial Service Co. Pvt. Ltd. The Defendant upon being served has filed its Reply to the Award and raised several objections, which have been captured in paragraph 18 above.

Fact of the Case:

The Plaintiff launched a public issue for 1,75,84,800 zero interest unsecured Fully Convertible Debentures (hereinafter 'FCDs') of Rs. 199 each for cash and at par aggregating to Rs. 349,93,75,200/- to the public and issue of 31,28,500 FCDs of Rs. 250/- each for cash at par aggregating to Rs. 78,21,25,000/- to non-resident Indians / persons of Indian origin resident abroad / OCBs on firm allotment basis together aggregating to Rs. 428,15,00,200/- (hereinafter 'public issue'). The disputes in these cases relate only to FCDs issued to the public in India. The issue was publicized along with a prospectus, which was duly vetted by the Securities and Exchange Board of India (hereinafter 'SEBI').

Finding of the Court:

The Court held that the Underwriters could not have been made responsible for the entire loss suffered by the Plaintiff. The allegations and the history of these litigations shows that there was an interference by SEBI after the public issue for whatever reason, which led to withdrawal of the subscriptions by the initial subscribers. The losses and confusion that prevailed due to the letter issued by SEBI directing the Plaintiff to give investors the option to withdraw from the public issue and the withdrawal of subscriptions thereafter cannot be the sole responsibility of the Underwriters. The Plaintiff also appears to have contributed by its own conduct in the loss suffered by it, as is evident from the facts on record, though no criminal culpability may have been found by the investigating authorities. Moreover, the Ld. Arbitrator ought to have considered if the Plaintiff made any bonafide attempt to mitigate its losses.

Issues: a) That the Defendant was not served with the notice of the appointment of the Ld. Arbitrator nor the notice of the hearing of the arbitration proceedings nor was served with any papers and proceedings for service of the arbitration proceedings viz. the Statement of Claim etc. Thus, the entire proceedings were held behind the back of the Defendant. b) That there was a loss of public confidence in the subscription of the issue due to defaults committed by the Company, which resulted in a CBI inquiry against the Plaintiff. It is submitted that clear acts of fraud were committed by Mr. Sachdeva as the director of the Plaintiff since the ex-rights price of the issue was not mentioned in the prospectus. c) That once the issue was over-subscribed and declared to be closed on the basis of the certificate issued by the Registrar of Issues and if the under subscription is caused as a result of fraud perpetuated by the Company, then the Underwriters cannot be held to be responsible. d) That fraud vitiates of contracts and hence the Underwriters are absolved from any liability. e) That the award was an ex-parte award and the right of hearing has been refused to the Defendant.

Ratio Decidendi: The Court held that a large number of Underwriters have already settled their disputes with the Plaintiff, even during pendency of arbitral proceedings. After passing of the Awards, several parties have settled. The Plaintiff has to clearly shoulder a substantial part of the blame for the losses which it may have suffered. The liability to pay compensation/damages qua the Underwriters ought to thus be reduced to a reasonable amount i.e., 1/4th of the losses per share as computed by the ld. Arbitrator i.e., Rs. 20/- per FCD/share. Further, the award of 18% interest p. a. by the Ld. Arbitrator is highly onerous and unsustainable, especially considering the prevalent market conditions. The said rate is also liable to be reduced to a reasonable percentage.

Final Decision: The Court held that only reasonable damages which arose in the natural course of things or were in the direct contemplation of the parties could have been awarded by the Ld. Arbitrator for the failure of the Underwriters to discharge their obligations under the Agreement. Thus, applying the principles of computation of damages as per settled law as also taking the account the settlements that have been entered into by the Plaintiff with similarly placed underwriters in the interest of justice, the damages awarded qua the Defendant are modified as under: Total number of FCDs devolved upon the Defendant (1,17,907) x Rs. 20=Rs. 23,58,140/-

JUDGMENT

Prathiba M. Singh, J. - The present suit is one of 27 connected suits, all of which relate to disputes between the Plaintiff - M/s. MS Shoes East Ltd. (now known as Tommorrowland Limited) and various Defendants/Respondents who were Underwriters of a public issue brought out by the Plaintiff-Company in 1995. The background of the cases is the same but the underlying facts vary from case to case. Hence, separate judgements are being delivered.

Background and Summary of the Proceedings

2. The background of the disputes is that the Plaintiff had launched a public issue sometime in 1995 for issuance of Fully Convertible Debentures (hereinafter 'FCDs') to public in India as well as Non-Resident Indians. The public issue was underwritten by various Underwriters, including the Defendant herein. The public issue was closed on the earliest closing date on the basis that it was over-subscribed. However, subsequently SEBI found some irregularities and directed the Plaintiff to give an option to all the subscribers to either continue their offers or withdraw the same. Pursuant thereto, several subscribers withdrew the offers and the issue was under-subscribed. The Plaintiff then sought to raise a demand against the Underwriters to subscribe to their respective portions of the underwritten FCDs. The Underwriters only partially subscribed, which led to disputes between the Plaintiff and the Underwriters. There was an arbitration clause in the Underwriting Agreements which was invoked by the Plaintiff. A Id. Single Judge of the Delhi High Court had appointed a Sole Arbitrator -Justice (Retd.) Ms. Manju Goel to adjudicate the disputes between the Plaintiff and all the Underwriters who were 267 in number. Several of the Underwriters settled their disputes during arbitral proceedings. However, the Defendants in the present 27 disputes herein, for various reasons, did not appear or remained ex parte in the arbitral proceedings, resulting in ex parte awards being passed against them. The said awards are the subject matter of the batch of cases being currently dealt with by the Court. The Plaintiff has filed suits seeking judgment in terms of the awards and the Defendants have resisted the same. Some of the Defendants have raised objections under Sections 30 and 33 of the Arbitration Act, 1940 (hereinafter, "Act") and some Defendants have sought remand under Section 16 of the Act.

Brief facts of the Present Case:

3. The Plaintiff launched a public issue for 1,75,84,800 zero interest unsecured Fully Convertible Debentures {hereinafter, 'FCDs') of Rs. 199 each for cash and at par aggregating to Rs. 349,93,75,200/- to the public and issue of 31,28,500 FCDs of Rs. 250/- each for cash at par aggregating to Rs. 78,21,25,000/- to non-resident Indians / persons of Indian origin resident abroad / OCBs on firm allotment basis together aggregating to Rs. 428,15,00,200/- (hereinafter 'public issue'). The disputes in these cases relate only to FCDs issued to the public in India. The issue was publicized along with a prospectus, which was duly vetted by the Securities and Exchange Board of India (hereinafter 'SEBI').

4. The issue was opened on 14th February, 1995 and the closing date for the issue was to be not later than 24th February 1995. The earliest closing date was 18th February, 1995. The Lead Managers to the issue were SBI Capital Markets Ltd., Tourism Finance Corporation of India Limited, Lloyds Finance Limited, Indian Merchant Banking Services Ltd. and Bank of Baroda. The Registrar to the issue was MAS Services Pvt. Ltd. The FCDs, which were to be allotted to the subscribers, were to be compulsorily and automatically converted into one equity share of Rs. 10/- each fully paid up, at a premium of Rs. 189/- in the case of Indian public, on the date of conversion i.e. on the expiry of seventeen and a half months from the date of allotment of the

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