Companies Act Case Law Indowind Energy Ltd. Appellant Vs Wescare (I) Ltd. Respondents

 Companies Act Case Law

Indowind Energy Ltd. Appellant Vs Wescare (I) Ltd. Respondents

Reportable
IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3874. OF 2010
[Arising out of SLP [C] No.27330 of 2008]
Indowind Energy Ltd. … Appellant

Vs.

Wescare (I) Ltd. & Anr. … Respondents
JUDGMENT

R.V.RAVEENDRAN, J.
Leave granted.

2. The appellant and respondents 1 and 2 are companies incorporated

under the Companies Act, 1956. Wescare Care (I) Ltd., the first respondent

(for short `Wescare’), is in the business of setting up and

operating/managing windfarms and generation of power from Wind Electric

Generators. Subuthi Finance Ltd – second respondent (`Subuthi’ for short) is

a promoter of the appellant company – Indowind Energy Ltd., (referred to as

`Indowind’). On 24.2.2006 an agreement of sale was entered into between

Wescare and Subuthi. The agreement described “Wescare (India) Ltd.

including its subsidiary RCI Power Ltd” as the “seller/Wescare”. It
2
described Subuthi Finance Ltd. and its nominee as “buyer” and as the

“promoters of Indowind Energy Ltd.” Under the said agreement, the seller

agreed to transfer to the buyer certain business assets of the seller for a

consideration of Rs.98.19 crores, of which Rs.24.19 crores was payable in

cash and Rs.74 crores by issue of 74 lakhs shares (of the face value of

Rs.10/- at a premium of Rs.90/- per share). Clause 10 of the agreement

relates to arbitration. Clause 11 of the agreement relates to approval. The

said clauses are extracted below :

“10. Governing Law and Jurisdiction.

This AGREEMENT shall be governed by and interpreted in accordance
with the laws of India. The Parties submit to the exclusive jurisdiction of
the court in the city of Chennai, Tamil Nadu. Any dispute, difference,
claims or questions arising under this agreement or concerning any matter
covered by this Agreement or touching upon this Agreement, the same
shall be referred to arbitration before a sole arbitrator to be appointed by
consent of Seller, Buyer/IW. The decision/award of the Sole Arbitrator
shall be final and binding on all parties. The provisions of the Arbitration
and Conciliation Act, 1996, with such amendments thereto as may be
applicable, shall apply to the proceedings. The venue of the arbitration
shall be Chennai and the language of the Arbitration shall be English.”

“11. Approval.

Notwithstanding anything to the contrary herein contained in this
AGREEMENT this agreement is expressly subject to the approval of the
respective Boards of Directors/Shareholders by the Seller, the Buyer and
Indowind Energy Limited and if such approval is not obtained either by
the Seller, the Buyer or IW on or before 30th June 2006 this
AGREEMENT shall be null and void and of no effect whatsoever and all
transactions done under the agreement shall be reversed with all the costs
and damages to the defaulting party.”
3
3. The Board of Directors of Wescare at its meeting held on 28.2.2006

accorded approval to the agreement dated 24.2.2006. The Board of Directors

of Subuthi at its meeting held on 1.3.2006 approved the said agreement.

There was however no such approval by the Board of Directors of Indowind.
4. According to Indowind, Wescare sold 31 Wind Electric Generators

(WEGs) to Indowind on 15.3.2006 for a consideration of Rs.13,48,00,700/-,

out of which Rs.4.5 crores was paid in cash and Rs.8.84 crores by allotment

of 884,000 shares of Indowind to Wescare. Further, towards the purchase of

another 8 WEGs from Wescare, Indowind allotted 58,000 shares.
5. According to Wescare, certain disputes arose between Wescare on the

one hand and Subuthi and Indowind on the other, in respect of the said

agreement. Wescare filed three petitions under section 9 of the Arbitration

and Conciliation Act, 1996 (`the Act’, for short) against Subuthi and

Indowind seeking the following interim measures :
(i) OA No.641/2007 to restrain Subuthi and Indowind from alienating,
encumbering or otherwise disposing of the 31 WEGs and the land
appurtenant thereto.

(ii) OA NO.642/2007 to restrain Subuthi and Indowind from operating or
running the WEGs pending completion of arbitration proceedings.
4
(iii) OA NO.975/2007 to restrain Indowind from proceeding with the issue
of initial public offer, proposed under the Red Herring Prospectus issued by
it, pending final disposal of the arbitration proceedings.

 

6. The said applications were dismissed by a learned Single Judge of the

Madras High Curt on 21.8.2007, holding as follows :
(a) As Indowind has not signed nor ratified the agreement dated
24.2.2006, the maintainability of the applications under section 9 of
the Act was doubtful.

(b) As the WEGs were purchased by Indowind after paying the entire sale
consideration, Wescare was not entitled to an injunction restraining
Indowind from alienating the WEGs.

 

The order however clarified that whatever had been stated therein was in the

context of disposal of the applications seeking interim measures under

section 9 of the Act and nothing contained therein should be construed as

findings on merits and the Arbitrator should determine the issues raised

before him uninfluenced by the observations made in the said order.
7. Wescare filed a petition under section 11(6) of the Act against Subuthi

and Indowind for appointment of a sole arbitrator to arbitrate upon the
5
disputes between them in respect of agreement dated 24.2.2006. Subuthi

resisted the said petition alleging that as the agreement dated 24.2.2006 did

not contemplate any transaction between Wescare and itself (Subuthi) and as

no transaction took place between Wescare and Subuthi under the agreement

dated 24.2.2006, there was no cause of action nor any arbitrable dispute

between them. Indowind resisted the petition on the ground that it was not a

party to the agreement dated 24.2.2006 entered into between Wescare and

Subuthi; that it had not ratified the agreement dated 24.2.2006 or acted upon

it; that there was no arbitration agreement between Wescare and Indowind;

that the transactions of purchase of 31 WEGs were neither covered by nor in

pursuance of the agreement dated 24.2.2006 and therefore the petition was

liable to be dismissed.
8. The learned Chief Justice of the Madras High Court allowed the said

application under section 11 of the Act, by the impugned order dated

1.8.2008 and appointed a sole arbitrator. The learned Chief Justice held that

Indowind was prima facie a party to the arbitration agreement and was

bound by it, even though it was not a signatory to the agreement dated

24.2.2006. His conclusion was based on the following findings :
6
(a) Execution of the agreement dated 24.2.2006 between Wescare and
Subuthi containing the arbitration agreement, was not in dispute.

(b) Subuthi is one of the promoters of Indowind. Both of them had a
common registered office and common Directors. The correspondence
emanating from Indowind was signed by Raja Sukumar who was the
signatory on behalf of Subuthi in the agreement dated 24.2.2006. By
lifting the corporate veil, it could be seen that Subuthi and Indowind
was one and the same party.

(c) The agreement dated 24.2.2006 described Subuthi as the promoter of
Indowind and also described Indowind as the nominee of Subuthi.
Subuthi had entered into an agreement for purchase of the business
assets of Wescare for its nominee Indowind. The signatory to the
agreement on behalf of Subuthi was also a Director of Indowind.

(d) The agreement dated 24.2.2006 contemplated Indowind purchasing
the assets of Wescare including the WEGs. and making payment
therefor, both in cash and by allotment of shares. Indowind had in fact
purchased from Wescare 39 WEGs. in March, 2006, the consideration
for which was paid partly in cash and partly by allotment of shares,
thereby indicating that Indowind acted in terms of the agreement
dated 24.2.2006.

(e) The Red Herring Prospectus issued by Indowind in connection with
the public issue of equity shares gives a clear indication that it is
bound by the agreement dated 24.2.2006 between Wescare and
Subuthi (vide Risk Factor Nos.30 and 31).
7
(f) Signature of a party is not a formal requirement of an arbitration
agreement either under sub-section (4)(b) and (c) or under sub-section
(5) of section 7 of the Act. Therefore, Indowind could be held to be a
party to the agreement dated 24.2.2006, even if it had not executed the
said agreement.

 

9 The said judgment is challenged in this appeal by special leave. On

the contentions urged the following two questions arise for consideration:
(i) Whether an arbitration clause found in a document (agreement)
between two parties, could be considered as a binding arbitration
agreement on a person who is not a signatory to the agreement?

(ii) Whether a company could be said to be a party to a contract
containing an arbitration agreement, even though it did not sign the
agreement containing an arbitration clause, with reference to its
subsequent conduct?
10. Section 7 defines an arbitration agreement and it is extracted below :

“7. Arbitration agreement.–(1) In this Part, “arbitration agreement”
means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of
a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration
clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in–

(a) a document signed by the parties’
8

(b) an exchange of letters, telex, telegrams or other means of
telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which
the existence of the agreement is alleged by one party and not
denied by the other,

(5) The reference in a contract to a document containing an arbitration
clause constitutes an arbitration agreement if the contract is in writing and
the reference is such as to make that arbitration clause part of the
contract.”

The term `party’ is defined in section 2(h) as referring to a party to an

arbitration agreement. The term arbitration agreement is defined under

section 2(b) as an agreement referred to in section 7. An analysis of

sub-sections (2), (3) and (4) of section 7 shows that an arbitration agreement

will be considered to be in writing if it is contained in : (a) a document

signed by the parties; or (b) an exchange of letters, telex, telegrams or other

means of telecommunication which provide a record of the agreement; or (c)

an exchange of statements of claim and defence in which the existence of the

agreement is alleged by one party and not denied by the other, or (d) a

contract between the parties making a reference to another document

containing an arbitration clause indicating a mutual intention to incorporate

the arbitration clause from such other document into the contract.
11. It is fundamental that a provision for arbitration to constitute an

arbitration agreement for the purpose of section 7 should satisfy two
9
conditions : (i) it should be between the parties to the dispute; and (ii) it

should relate to or be applicable to the dispute. [See: Yogi Agrawal v.

Inspiration Clothes & U & Ors. – 2009 (1) SCC 372].
12. Wescare has not entered into any agreement with Indowind, referring

to the agreement dated 24.2.2006 containing the arbitration agreement, with

the intention of making such arbitration agreement, a part of the their

agreement. Nor is it the case of Wescare that there has been any exchange of

statements of claim and defence in which it had alleged the existence of an

arbitration agreement and the same had been accepted and not denied by

Indowind in the defence statement. It is also not the case of Wescare that

any exchange of letters, telex, telegrams or other means of

telecommunication referred to and provided a record of any arbitration

agreement between the parties. It therefore follows that neither sub-section

(5) nor clauses (b) and (c) of sub-section (4) of section 7 applies. Therefore,

what remains to be seen is whether there is any `document signed by

parties’, as provided in clause (a) of sub-section (4) of section 7.
13. Wescare puts forth the agreement dated 24.2.2006 as an agreement

signed by the parties containing an arbitration agreement but the said

agreement is signed by Wescare and Subuthi and not by Indowind. It is not
10
in dispute that there can be appointment of an arbitrator if there was any

dispute between Wescare and Subuthi. The question is when Indowind is not

a signatory to the agreement dated 24.2.2006, whether it can be considered

to be a `party’ to the arbitration agreement. In the absence of any document

signed by the parties as contemplated under clause (a) of sub-section (4) of

section 7, and in the absence of existence of an arbitration agreement as

contemplated in clauses (b) or (c) of sub-section (4) of section 7 and in the

absence of a contract which incorporates the arbitration agreement by

reference as contemplated under sub-section (5) of section 7, the inescapable

conclusion is that Indowind is not a party to the arbitration agreement. In

the absence of an arbitration agreement between Wescare and Indowind, no

claim against Indowind or no dispute with Indowind can be the subject-

matter of reference to an arbitrator. This is evident from a plain, simple and

normal reading of section 7 of the Act.
14. Learned counsel for Wescare referred to various clauses in the

agreement dated 24.2.2006 to contend that it should be deemed to be an

agreement executed/signed by Indowind. Firstly it was submitted that the

agreement was entered into by Subuthi as promoter of Indowind and also

described Indowind as its nominee and the agreement was signed on behalf

of Subuthi by a person who was also a Director of Indowind. It is submitted
11
that the agreement also specifically stated that Subuthi was desirous of

purchasing certain assets of Wescare for its nominee Indowind, and in fact,

Indowind purchased the said assets of Wescare. This according to the

learned counsel for Wescare, led to an irresistible conclusion that Indowind

was acting in terms of the agreement dated 24.2.2006 and therefore, it would

be bound by the arbitration clause therein.
15. It is not in dispute that Subuthi and Indowind are two independent

companies incorporated under the Companies Act, 1956. Each company is a

separate and distinct legal entity and the mere fact that two companies have

common shareholders or common Board of Directors, will not make the two

companies a single entity. Nor will existence of common shareholders or

Directors lead to an inference that one company will be bound by the acts of

the other. If the Director who signed on behalf of Subuthi was also a

Director of Indowind and if the intention of the parties was that Indowind

should be bound by the agreement, nothing prevented Wescare insisting that

Indowind should be made a party to the agreement and requesting the

Director who signed for Subuthi also to sign on behalf of Indowind. The

very fact that parties carefully avoided making Indowind a party and the fact

that the Director of Subuthi though a Director of Indowind, was careful not

to sign the agreement as on behalf of Indowind, shows that the parties did
12
not intend that Indowind should be a party to the agreement. Therefore the

mere fact that Subuthi described Indowind as its nominee or as a company

promoted by it or that the agreement was purportedly entered by Subuthi on

behalf of Indowind, will not make Indowind a party in the absence of a

ratification, approval, adoption or confirmation of the agreement dated

24.2.2006 by Indowind.
16. Clause 11 of the agreement dated 24.2.2006 categorically states that

the agreement shall be null and void and of no effect whatsoever unless it is

expressly approved by the respective Board of Directors/shareholders of

Wescare, Subuthi and Indowind. It is admitted that the Board of Directors of

Wescare and Subuthi approved the agreement. But the Board of Directors or

the shareholders of Indowind did not approve the agreement. In the absence

of such approval by Indowind, and in the absence of Indowind being a party

or signatory to the agreement dated 24.2.2006, it is ununderstandable as to

how Indowind can be deemed to be a party to the agreement dated 24.2.2006

and consequently a party to the arbitration agreement contained therein.
17. Wescare referred to several acts and transactions as also the conduct

of Indowind to contend that an inference should be drawn that Indowind was

a party to the agreement or that it had affirmed and approved the agreement
13
or acted in terms of the agreement. An examination of the transactions

between the parties to decide whether there is a valid contract or whether a

particular party owed any obligation towards another party or whether any

person had committed a breach of contract, will be possible in a suit or

arbitration proceeding claiming damages or performance. But the issue in a

proceeding under section 11 is not whether there was any contract between

the parties or any breach thereof. A contract can be entered into even orally.

A contract can be spelt out from correspondence or conduct. But an

arbitration agreement is different from a contract. An arbitration agreement

can come into existence only in the manner contemplated under section 7. If

section 7 says that an arbitration agreement should be in writing, it will not

be sufficient for the petitioner in an application under section 11 to show that

there existed an oral contract between the parties, or that Indowind had

transacted with Wescare, or Wescare had performed certain acts with

reference to Indowind, as proof of arbitration agreement.
18. A Constitution Bench of this Court in Economic Transport

Organisation v. M/s. Charan Spinning Mills (P) Ltd. – 2010 (2) SCALE 427

pointed out that court examines a document from different perspectives in

different types of cases. This Court observed:
14

“20. In this context, it is necessary to remember that the nature of
examination of a document may differ with reference to the context in
which it is examined. If a document is examined to find out whether
adequate stamp duty has been paid under the Stamp Act, it will not be
necessary to examine whether it is validly executed or whether it is
fraudulent or forged. On the other hand, if a document is being examined
in a criminal case in the context of whether an offence of forgery has been
committed, the question for examination will be whether it is forged or
fraudulent, and the issue of stamp duty or registration will be irrelevant.
But if the document is sought to be produced and relied upon in a civil
suit, in addition to the question whether it is genuine, or forged, the
question whether it is compulsorily registrable or not, and the question
whether it bears the proper stamp duty, will become relevant. If the
document is examined in the context of a dispute between the parties to
the document, the nature of examination will be to find out that rights and
obligation of one party vis-`-vis the other party. If in a summary
proceedings by a consumer against a service provider, the insurer is added
as a co-complainant or if the insurer represents the consumer as a power of
attorney, there is no need to examine the nature of rights inter-se between
the consumer and his insurer.”
19. The scope of examination of the agreement dated 24.2.2006, by the

learned Chief Justice or his Designate under section 11(6) is necessarily to

be restricted to the question whether there is an arbitration agreement

between the parties. The examination cannot extend to examining the

agreement to ascertain the rights and obligations regarding performance of

such contract between the parties. This Court in SBP & Co. v. Patel

Engineering Limited [2005 (8) SCC 618] and in National Insurance Co. Ltd.

v. Boghara Polyfab Pvt. Ltd. [2009 (1) SCC 267] has held that when an

application is filed under section 11, the Chief Justice or his Designate is

required to decide only two issues, that is whether the party making the

application has approached the appropriate court and whether there is an
15
arbitration agreement and whether the party who has applied under section

11 of the Act, is a party to such agreement. Therefore, the Chief Justice

exercising jurisdiction under section 11 of the Act has to only consider

whether there is an arbitration agreement between the petitioner and the

respondent/s in the application under section 11 of the Act. Any wider

examination in such a summary proceeding will not be warranted.
20. In so far as the issue of existence of arbitration agreement between the

parties, the learned Chief Justice or his Designate is required to decide the

issue finally and it is not permissible in a proceeding under section 11 to

merely hold that a party is prima facie a party to the arbitration agreement

and that a party is prima facie bound by it. It is not as if the Chief Justice or

his Designate will subsequently be passing any other final decision as to

who are the parties to the arbitration agreement. Once a decision is rendered

by the Chief Justice or his Designate under section 11 of the Act, holding

that there is an arbitration agreement between the parties, it will not be

permissible for the arbitrator to consider or examine the same issue and

record a finding contrary to the finding recorded by the court. This is

categorically laid down by the Constitution Bench in SBP. Therefore the

prima facie finding by the learned Chief Justice that Indowind is a party to

the arbitration agreement is not what is contemplated by the Act.
16

 

21 It is no doubt true that if Indowind had acknowledged or confirmed in

any correspondence or other agreement or document, that it is a party to the

arbitration agreement dated 24.2.2006 or that it is bound by the arbitration

agreement contained therein, it could have been possible to say that

Indowind is a party to the arbitration agreement. But that would not be under

section 7(4)(a) but under section 7(4)(b) or section 7(5). Be that as it may.

That is not the case of Wescare. In fact, the delivery notes/invoices issued by

Wescare do not refer to the agreement dated 24.2.2006. Nor does any letter

or correspondence sent by Indowind refers to the agreement dated

24.2.2006, either as an agreement executed by it or as an agreement binding

on it. We may now refer to the several documents referred to and relied on

by Wescare.
22. The first is in regard to the sale of WEGs by Wescare to Indowind.

The letter dated 15.3.2006 enclosing the invoice, the delivery notes dated

15.3.2006 given by Wescare to Indowind, the confirmation dated 15.3.2006

by Wescare to Indowind relating to the sale of WEGs, relied on by Wescare,

very significantly do not refer to the agreement dated 24.2.2006. They are

straight and simple delivery notes and an invoice in regard to the sale of

goods. They can be independent transactions which do not depend on or
17
relate to the agreement dated 24.2.2006. If they were with reference to the

agreement dated 24.2.2006, it is strange that Wescare did not choose to refer

to the said agreement in any of these documents.
23. Strong reliance is placed on the Red Herring Prospectus issued by the

Indowind in connection with the public issue of its shares. We extract below

the relied upon portions of the prospectus :
“30. We have agreed to takeover the assets of Wescare (India) Limited,
subject to approval of owners of assets and statutory formalities, but only
a portion of acquisition has been completed.

Our Company agreed to takeover wind mills along with land,
infrastructure and spares from Wescare India Limited. But due to non
receipt of approvals from the lenders/lessors, only a part of the total being
6.49 MW has been acquired by us. The Company is not certain of
completing the remaining acquisition. We had paid the total amount for 39
windmills, however only 28 windmills were delivered to us representing
nearly 72% of the total money paid by us.

31. One of our Promoters, Subuthi Finance Limited, has entered into an
agreement dated February 24, 2006 with Wescare (India) Limited for the
acquiring wind mills and other assets in the name of its nominee viz.
Indowind Energy Limited for a consideration aggregating approximately
Rs.9819 lacs.

The consideration for the above was to be partly settled in partly in cash
(Rs.2419 lacs) and partly by way of shares (74 lacs) of Indowind Energy
Limited.

Wescare (India) Limited has filed the following applications before the
Hon’ble High Court of Madras under Section 9 of the Arbitration and
Conciliation Act, 1996 :
18
SNo. Application No. Applicant Respondents
1 O.A.No.641 of 2007 Wescare India (i) Subuthi Finance
Limited Limited
(ii) Indowind Energy
Limited
2 O.A.No.642 of 2007 -same as above- -same as above-
3 Appl. No.3808 of 2007 -same as above- -same as above-
4 Appl. No.3808 of 2007 -same as above- -same as above-

All above applications are pending before the Hon’ble High Court of
Madras. For further details of the same, please refer section titled
“Outstanding Litigations and Material Developments” on page 190 of this
Red Herring Prospectus.”
Para 30 of the Prospectus merely refers to Indowind agreeing to take over

the wind mills along with land, infrastructure and spares from Wescare. It

does not refer to the agreement dated 24.2.2006 nor does it state that the

takeover of the wind mills etc., was in pursuance of the agreement dated

24.2.2006. Para 31 of the Prospectus specifically states that Subuthi had

entered into an agreement dated 24.2.2006 with Wescare to acquire WEGs

and other assets in the name of its nominee Indowind. This has never been

disputed by anyone. But what is significant is that there is no

acknowledgement or statement that the said agreement was authorized to be

entered on its behalf by Indowind or Indowind had ratified or approved the

said agreement. Para 31 also refers to the applications under section 9 filed

by Wescare and the interlocutory applications filed in such applications. But

then that also does not help as in fact in the said application under section 9
19
the High Court has held that Indowind is not a party to the agreement

dated 24.2.2006 and therefore not a party to an arbitration agreement.
24. Wescare relied upon two decisions of the US Court of Appeals to

contend that a person to be bound by an arbitration agreement need not

personally sign the written arbitration agreement. [FISSER v. International

Bank – 282 F.2d 231 (1960) and J.J.Ryan & Sons, Inc. v. Rhone Poulene

Textile, S.A. – 863 F.2d 315]. These decisions are of no assistance as they do

not relate to a provision similar to section 7 of the Indian Act.
25. In view of the above, we allow this appeal, set aside the order of the

High Court appointing an Arbitrator in regard to the claims of Wescare

against Indowind and dismiss the application under section 11(6) of the Act

filed by Wescare in so far as Indowind is concerned. The appointment of

Arbitrator in so far as Subuthi is concerned, is not disturbed. It is however

open to Subuthi to raise all contentions including the contention relating to

absence of arbitral dispute, before the Arbitrator.

 

………………………….J.
(R V Raveendran)
New Delhi; ………………………….J.
April 27, 2010. (K S Radhakrishnan)

Leave a Comment