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2023 Supreme(Del) 1167
IN THE HIGH COURT OF DELHI AT NEW DELHI
Yashwant Varma, J.
Malavika Siddhartha Hegde & Ors. – Appellants
Versus
Naresh Nagpal & Ors. – Respondents
Arb. A. (COMM.) 81 of 2022, I.A. 18804 of 2022 (Interim Relief)
Decided On : 07-03-2023
Mr. Trideep Pais, Senior Advocate with Mr. Vidur Bhatia, Mr. Vidur Bhatia and Ms. Gargi Sethee, Advocates, for the Petitioners.
Mr. Darpan Wadhwa, Senior Advocate with Mr. Manik Dogra, Mr. Nikhil Singh, Mr. Mohit Seth, Mr. Bilal Ikram, Mr. Parth Aggarwal Mr. Shikhar Kishore, Mr. Milin Raj Dixit, Advocates, for the Respondent-1.
Ms. Samiksha Godiyal, Mr. Govind Manoharan, Ms. Diksha Tiwari, Advocates, for the Respondent-2.
Mr. Dhruv Pande, Advocate, for the Respondent-3.
The main legal point established in the judgment is the interpretation of the transaction under the MOU in relation to the Securities Contracts Regulation Act, specifically Section 16, and the distinction between a lending facility and a forward contract.
Headnote:
Arbitration - Securities Contracts Regulation Act - Section 16 - MOU - [ARBITRATION] - [Securities Contracts Regulation Act] - [Section 16] - [Summary of Acts and Sections] The court discussed the provisions of the Securities Contracts Regulation Act and the interpretation of Section 16 in relation to the MOU. The court found that the transaction was essentially a lending facility and not a forward contract. The court also referred to the judgment in Bhagwati Developers and the decision of the Bombay High Court in Edelweiss Financial Services Ltd. v. Percept Finserve Pvt. Ltd. to support its conclusion.
Fact of the Case:
The dispute arose from a Memorandum of Understanding (MOU) between the late Mr. V.G. Siddhartha and the first Respondent, relating to an investment in SICAL LOGISTICS Ltd. The Respondent initiated arbitration proceedings after VGS failed to repay the amounts as per the MOU. The Petitioners, VGS's legal heirs, opposed the grant of interim measures, contending that the MOU was prohibited under the Securities Contracts Regulation Act 1956 (SCRA) and was in the nature of a forward contract.
Finding of the Court:
The Arbitral Tribunal found that the transaction was essentially a lending facility and not a forward contract. It also held that the sale of shares and receipt of consideration was envisaged to be simultaneous, falling within the ambit of a spot delivery contract. The Tribunal also held against the Respondent Claimant on the question of mitigation of losses.
Issues: The issues included the nature of the transaction under the MOU, whether it constituted a forward contract, and the question of mitigation of losses.
Ratio Decidendi: The court found that the transaction was essentially a lending facility and not a forward contract. It also held that the sale of shares and receipt of consideration was envisaged to be simultaneous, falling within the ambit of a spot delivery contract.
Final Decision: The court found no merit in the appeal and dismissed it.
ORDER
1. The present appeal under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 [the Act] impugns the order dated 17 August 2022 passed by the Arbitral Tribunal restraining the appellants from selling, alienating or transferring all their assets received by them on the demise of Late Mr. V.G. Siddhartha [VGS]. The dispute arises out of a Memorandum of Understanding [MOU] entered into between VGS and the first Respondent who was the claimant before the Arbitral Tribunal. The MOU relates to a purported decision taken by the first Respondent to invest in the equity shares of one SICAL LOGISTICS Ltd. [Investee Company] to the extent of Rs.20 crores. The Investee Company is undoubtedly listed on the Stock Exchange.
2. The MOU essentially entails the Respondent Claimant investing a sum of Rs.20 crores in the Investee Company and VGS promising to pay interest @ 16% p.a. accrued and compounded on a quarterly basis. In terms of the provisions contained in that MOU, the Respondent Claimant was to purchase shares equivalent to the value of Rs.20 crores from the open market and in consideration whereof VGS had promised a fixed return on investment at 16% p.a. VGS as security also calls the Pledger as identified in the MOU to hand over as security 2 lakh equity share of the Investee Company by way of transfer into the DEMAT account of the Security Holder. VGS further undertook to acquire all the shares held by the first respondent in the Investee Company either on his own or through his nominee after 12 months but not later than 18 months from the date of commencement. The MOU further stipulated that VGS would reacquire the shares at a price such that Respondent No. 1 is able to recoup the entire investment together with interest for the entire period calculated @ 16%. It was further provided that if there by any shortfall upon sale of all the shares that were to be acquired by Respondent No. 1, the same shall be made good by VGS within one week thereof and if Respondent No. 1 obtains any amount in excess, the same would be paid back by Respondent No. 1 to VGS.
3. The arbitral proceedings appear to have commenced consequent to a failure on the part of VGS to repay the amounts by 06 April 2018 and which was extendable up to 06 October 2018. On the failure of VGS to adhere to the terms of the MOU, Respondent No. 1 initiated proceedings for arbitration on coming to learn that some of the pledged shares were sold and an amount of Rs.7,38,61,589/- recovered.
4. VGS is stated to have passed away suddenly on 30 July 2019. The Petitioners who are his legal heirs were then proceeded against for recovery of the amounts which were payable to Respondent No. 1 under the MOU. Seeking interim measures of protection, an application under Section 17 of the Act is stated to have been filed before the Arbitral Tribunal. Upon notices being issued, the Petitioners entered appearance and opposed the grant of the interim measures principally contending that the alleged contract, namely, the MOU was one which was clearly prohibited under the Securities Contracts Regulation Act 1956 [SCRA]. It was also asserted that the contract contravened Section 16 of the SCRA since it was in the nature of a forward contract. The Petitioners also assert that they had no knowledge of the MOU and thus they could not be held to be bound by its terms. It was also averred that Respondent No. 1 was not entitled to be granted any relief having failed to take any remedial steps to mitigate losses.
5. Insofar as violation of the SCRA is concerned, it was the case of the Petitioners, and one which was reiterated by Mr. Pais, learned senior counsel appearing in support of the petition, that it is only spot delivery contracts which are sanctioned under the SCRA. Reliance in this respect was placed upon the definition of a spot delivery contract as contained in Section 2(i) of the SCRA and Section 16(1) read with the notification dated 03 October 2013 issued by Securit
