Cheran Properties Limited vs Kasturi and Sons Limited and Ors.

KCP-third respondent, KSL-first respondent, SPIL and HRP company entered into an agreement whereby, SPIL was to allot 240 lakh equity shares to KSL against the book debts due by it to KSL. KSL offered to sell the shares to KCP. KCP agreed to take over the business, shares and liabilities of SPIL and would discharge the liabilities. However, KCP did not complete the transaction. Disputes arose between the parties resulting in arbitral proceedings. An award was passed directing KCP and SPIL to return documents of title and share certificates relating to 2.43 crore shares to KSL and KSL would pay or tender a sum of Rs. 3.58 crores with interest. The said award attained finality. KSL then initiated proceedings u/s. 111 of the Companies Act, 1956 for rectification of the register of SPIL. NCLT allowed the petition. Thereafter, NCLAT held that the appellant is a nominee of KCP and holds the shares in question, hence, NCLT was justified in entertaining the proceedings for rectification u/s. 111. Hence the present appeals.

Dismissing the appeals, the Court

HELD: 1.1 The modern business transactions are often effectuated through multiple layers and agreements. There may be transactions within a group of companies. The circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory entities within the same group. In holding a non-signatory bound by an arbitration agreement, the Court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance. The group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory. [Para 17] [1083-C-F]

International Arbitration by Redfern and Hunter, Fifth Edn 2.13, p.89-90, 99, 2.40 p 100, 2.41 p 100; Russel on Arbitration 24th Edn, 3-025 pages 110-111; Treatise on International Commercial Arbitration by Garry B Born 2nd Ed. Volume 1 p 1418 - referred to.

1.2 The instant case relates to a post award situation. The enforcement of the arbitral award has been sought against the appellant on the basis that it claims under KCP and is bound by the award. Section 35 of the Arbitration and Conciliation Act 1996 postulates that an arbitral award “shall be final and binding on the parties and persons claiming under them respectively”. The expression ‘claiming under’, in its ordinary meaning, directs attention to the source of the right. The expression includes cases of devolution and assignment of interest. The expression “persons claiming under them” in Section 35 widens the net of those whom the arbitral award binds. It does so by reaching out not only to the parties but to those who claim under them, as well. The expression “persons claiming under them” is a legislative recognition of the doctrine that besides the parties, an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings. Having derived its capacity from a party and being in the same position as a party to the proceedings binds a person who claims under it. The issue in every such a case is whether the person against whom the arbitral award is sought to be enforced is one who claims under a party to the agreement. [Para 20] [1086-D-G]

Advanced Law Lexicon by P Ramanatha Aiyar Third Edn Volume I p 818 – referred to.

1.3 The fact that the appellant was not a party to the arbitral proceedings will not conclude the question as to whether the award can be enforced against it on the ground that it claims under a party. Essentially, the Court is called upon to consider whether the test embodied in s. 35 is fulfilled, so as to bind the appellant. [Para 22] [1087-E]

1.4 Clause 14 of the agreement recognises, on the part of KSL, the right of KCP to sell or transfer his holding in SPIL “provided the proposed transferees accept the terms and conditions mentioned in this agreement” for the management of SPIL and related financial aspects covered by this agreement. KCP addressed a letter to KSL acting as the authorised signatory of the appellant. The letter contained a clear and categoric reference to the Share Purchase Agreement. The appellant intimated to KSL that it was in pursuance of the said agreement that KSL had agreed to sell and “our group of companies by this agreement and/or by themselves and/or by their nominees have agreed to purchase shares” in SPIL of a face value of Rs 2430 lakhs for a sum of Rs 2.43 crores. Accordingly, the appellant indicated that it was remitting seven share transfer deeds duly executed and requested KSL to lodge them, upon execution, with SPIL. The parties in whose favour the transfers were to be registered were described as group companies. It was indicated that a supplementary agreement would be drawn up to reflect the altered consideration. [Para 23] [1087-G-H; 1088-A-C]

1.5 The record established that the transfer of shares by KCP to his nominees was to be on the express condition that the nominee would abide by the terms of the agreement in relation to the take over of the management of SPIL and related financial aspects. The appellant, while purchasing the shares, was not merely aware of the agreement but expressly sought the allotment of shares in pursuance to it, to its group companies. In this background, it would not be open to the appellant to contend that while it was bound by all other terms of the agreement, it would not be bound by the arbitration agreement contained in the very same agreement. The arbitral award attained finality after all attempts to raise objections to it failed before the High Court and, later, before this Court. The appellant, in purchasing the shares, was conscious of and accepted the terms of the agreement. Its letter leaves no manner of doubt of the acceptance of this position. [Para 24] [1088-C-E]

1.6 The parent agreement envisaged the allotment of equity shares of KSL to KCP with the intent that KCP would take over the business, assets and liabilities of SPIL. While KCP was entitled to transfer his shareholding, this was expressly subject to the condition of the acceptance by the transferee of the terms and conditions of the agreement. KCP’s letter to KSL contains a specific reference to the share purchase agreement. It was in pursuance of that agreement that KCP indicated, as authorised signatory of the appellant, that his group of companies had agreed to purchase the shares in SPIL. The shares were to be purchased by several entities in the same group. A supplementary agreement was to be entered into, to reflect the altered consideration. Eventually, no supplementary agreement was executed and the transaction was structured on the basis of the parent agreement which the appellant recognised in its letter. Having regard to this factual context, the defence of the appellant against the enforcement of the award cannot be accepted. [Para 26] [1089-B-E]

1.7 The arbitral award envisaged that KSL was entitled to the return of documents of title and the certificates pertaining to the shares of SPIL contemporaneously with the payment or tendering of a sum of Rs 3.58 crores together with interest. KSL is in terms of the arbitral award entitled to the share certificates. That necessarily means the transfer of the share certificates. To effectuate the transfer, recourse to the remedy of the rectification of the register under Section 111 was but appropriate and necessary. The arbitral award has the character of a decree of a civil court under Section 36 and is capable of being enforced as if it were a decree. Armed with that decree, KSL was entitled to seek rectification before the NCLT by invoking the provisions of Section 111 of the Companies Act, 1956. There can be, therefore, no question about the jurisdiction of NCLT to pass an appropriate order directing rectification of the register. [Para 27] [1089-F-H; 1090-A]

1.8 The submission that the application by KSL to the NCLT was not maintainable since the tribunal has no power to execute an arbitral award, cannot be accepted. The submission proceeds on finding of the tribunal that the purpose of the petition before it was to implement the award and that its ultimate direction is to the same effect. The submission relies on the provisions of Section

42 of the 1996 Act. It is necessary to note that the award of the arbitral tribunal mandates that the appellant must return the share certificates relating to 2.43 crore shares of SPIL which were handed over in terms of the agreement against the payment of the consideration stipulated in the award. The transfer of the share certificates by the appellant will be effectual only by the rectification of the register of the company. The mere handing over of a share certificates will not constitute due implementation of the award. The award contemplates the transmission of the shares which stood in the name of the appellant in pursuance of the agreement, to the claimant in the arbitral proceedings. This necessitated an application under Section 111 for the purpose of securing a rectification of the register. [Para 28] [1090-B, D-G]

1.9 Under the provisions of Section 35, the award can be enforced in the same manner as if it were a decree of the Court. The award has attained finality. The transmission of shares as mandated by the award could be fully effectuated by obtaining a rectification of the register under Section 111 of the Companies Act. The remedy which was resorted to was competent. The view of the NCLT, which has been affirmed by the NCLAT does not warrant interference. There is, therefore, no merit in the challenge addressed by the appellant. [Paras 34-35] [1096-G-H; 1097-A-B]

Indowind Energy Limited v. Wescare (India) Limited (2010) 5 SCC 306 : [2010] 5 SCR 284 - distinguished. S.N.Prasad, Hitek Industries (Bihar) Limited v. Monnet Finance Limited (2011) 1 SCC 320 : [2010] 13 SCR 207; Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. (2013) 1 SCC 641 : [2012]

13 SCR 402; Duro Felguera, S.A. v Gangavaram Port Limited (2017) 9 SCC 729; State of West Bengal v. Associated Contractors (2015) 1 SCC 32 : [2014] 10 SCR 426; Sundaram Finance Limited v. Abdul Samad (2018) 2 SCALE 467; Satish Kumar v Surinder Kumar [1969] 2 SCR 244; Uttam Singh Duggal & Co v. Union of India Civil Appeal No 162 of 1962 decided on 11.10.1962 – referred to.