Does failure to disclose sanction of scheme by HC result in termination of the arbitration proceedings?- Delhi HC answers

The Delhi High Court has held that failure of a party to an arbitration proceeding to disclose the factum of sanction of a scheme under Section 230 of the Companies Act, 2013 would not result in termination of the proceedings.

The Judgment was passed by a Single Judge Bench of Justice Rajiv Shakdhar.

In April 2012, Moorgate via its predecessor-in-interest Stemcor India Pvt. Ltd had entered into a job works contract with Jindal Stainless Steel Ltd (JSL).

Under the contract, JSL was required to convert coal supplied by Moorgate into coke at JSL's Coke Oven Facility situate at Kalinga Nagar Industrial complex, Duburi, Jajpur, Odisha.

Thereafter, disputes arose between Stemcor and JSL and in June 2013, a sole arbitrator was appointed in terms of Section 9 of Arbitration Act, with consent of the parties.

Meanwhile, JSL, for its own reasons, moved the Punjab & Haryana High Court for sanctioning a scheme of arrangement between itself and its sister concerns which included Jindal Coke Ltd (JCL).

This scheme involved demerger and transfer of the Coke Oven Facility to JCL and was sanctioned by the Punjab & Haryana High Court in September 2015 and October 2015. The scheme also received the requisite clearance from Odisha Industrial Infrastructure Development Corporation (IIDCO).

As per the records, JCL authorized JSL to realise and pay all monies and to complete, enforce or discharge all pending contracts, arrangements and obligations in relation to the business undertaking “in trust” for JCL.

It is in this background that in January 2017, JSL lodged a claim with the arbitrator for Rs.100.42 crores from Moorgate. Moorgate, in turn, filed a counter-claim against JSL amounting to Rs.13.85 crores.

After Moorgate became aware of the scheme sanctioned by the Punjab & Haryana High Court, it moved an application before the arbitrator for the termination of arbitration proceedings under Section 32 of the Arbitration Act on the ground that JSL now had no locus with respect to the subject business undertaking.

After the application was rejected, Moorgate Industries Pvt. Ltd. moved the Delhi High Court.

Moorgate broadly argued that JSL consciously withheld information with regard to this factum of the scheme being sanctioned by the Punjab & Haryana High Court which was material for adjudication of the case by the learned arbitrator. It was also contended that the arbitrator overlooked the fact that JSL had falsely averred that it was the owner of the Coke Oven Facility whereas, both, the sanctioned scheme and its own letter dated 28.11.2016, demonstrated that the contrary was true.

On the other hand, JSL argued that when Sec 9 petition was filed, the 'effective date' under the scheme had not reached and thus the arbitration proceedings under Section 21 of the 1996 Act commenced much prior to the scheme coming into effect.

It was further submitted that even if JCL was arrayed as a party to the arbitration proceedings, neither the nature of the claims would change nor would any new evidence have to be introduced. However, if on the other hand, JCL’s right to sue was curtailed while Moorgate were to be allowed to sue JCL qua its counterclaim, it would be unfair.

After recording the facts of the case, the Court noted that in the statement of claim filed by JSL, there was no reference to the scheme being filed and it being sanctioned by the Punjab & Haryana High Court.

The Court then dealt with the law on sanctioning of schemes under Sections 391 and 394 of the Companies Act, 1956/Section 230 of the Companies Act, 2013 and observed,

“The court, while sanctioning the scheme, is required to examine, not its commercial wisdom, but whether or not it is violative of any provision of law or is unconscionable or contains provisions which are contrary to public policy. Once the court reaches to a conclusion that the scheme preferred does not violate any statutory provision and is not unfair to those who would be impacted by the scheme .. and, therefore, is neither unconscionable nor otherwise contrary to public policy, it puts its imprimatur on the scheme. The scheme operates as law and upon being sanctioned binds third parties as well.”

Given the nature of the scheme at hand, the Court opined that whether JSL disclosed the fact that the scheme had been sanctioned by the Punjab & Haryana High Court mattered "very little".

“..in the eyes of law, all rights, obligations and liabilities, as envisaged under the scheme qua business undertaking No.3 stood transferred in favour of JCL. Further steps that had to be taken to effectuate the transfer were ministerial.. Therefore, the only entity in my view which could have the carriage of proceedings would be JCL irrespective of the fact whether JSL disclosed this aspect to this court or the arbitral tribunal.”

Thus, for the foregoing reasons, the Court found no merit in the petition preferred by Moorgate and the same was dismissed.

Moorgate was represented by Senior Advocate Akhil Sibal with Advocates Puneet Singh Bindra, Simran Jeet, Smiti Tiwari, Nitya Gupta.

JSL was represented by Advocates Abhimanyu Bhandari, Nattasha Garg, Aashima Singhal.

Read the Judgement: