Full Judgment Text
2019:BHC-OS:7398
sg arbp22014.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO.220 OF 2014
Edelweiss Financial Services Ltd. ....Petitioner
vs
Percept Finserve Pvt. Ltd. And Anr. ...Respondents
.....
Mr. M.S. Doctor, Senior Advocate, a/w. Mr. Dhirajkumar Totala and Ms.
Priyanka Shetty, i/b. AZB & Partners, for the Petitioner.
Mr. Sharan Jagtiani, a/w. Mr. Vaibhav Bhure, Mr. Abhishek Kale, Mr.
Deepak Deshmukh and Ms. Nisha Kaba, i/b. Naik Naik & Co., for the
Respondents.
…...
CORAM : S.C. GUPTE, J.
DATED: 27 MARCH 2019
(ORAL JUDGEMENT):
. This arbitration petition challenges an award passed by a
sole arbitrator in a reference arising out of disputes concerning a share
purchase contract.
2. The share purchase contract is contained in a share purchase
agreement dated 8 December 2007 as amended by a deed of rectification
dated 21 April 2008 and an amendment agreement dated 23 April 2008.
(The share purchase agreement, together with its two modifications
referred to above, is hereafter referred to as 'SPA'). The Petitioner is a
public company carrying on the business of financial services including
investment, consultancy, merchant banking, etc. Respondent Nos .1 and
2 are group companies forming what has been referred to by the parties
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as 'Percept Group', Respondent No.1, a private company, being one of the
promoters of Respondent No.2, a public company, holding about 85
percent of its equity capital. The Petitioner was interested in investing in
Respondent No.1 subject to a condition that the Respondents restructure
the Percept Group as agreed between the parties inter alia by an IPO.
The parties accordingly entered into the SPA providing for terms and
conditions of the share purchase contract. Under the SPA, the Petitioner
purchased 2,28,374 shares of Respondent No.2 held by Respondent No.1
for a total consideration of Rs. 20 crores. One of the conditions
subsequent under the SPA, in keeping with the original intention of the
parties, required Respondent No.1 to accomplish restructuring of the
entire Percept Group not later than by 31 December 2007 and to provide
the claimant documents in proof of such accomplishment. It was the case
of the Petitioner that the Respondents failed to complete the
restructuring of the Group within the period stipulated originally under
the SPA or, i.e. by 31 December 2007, or within the period extended by
the amendment agreement, i.e. by 30 June 2008, with obligation to
provide documentary evidence of such completion not later than by 15
July 2008. In the event of nonfulfillment of this condition subsequent,
under clause 8.5 of the SPA, the Petitioner had an option to either resell
the shares held by it to Respondent No.1, the latter being bound to
purchase the same at a price, which would give the Petitioner an
internal rate of return ('IRR') of 10% on the original purchase
consideration, or to continue as a shareholder of Respondent No.2
subject to certain undertakings from Respondent No.1. It was the case
of the Petitioner that in view of breach of this condition subsequent by
the Respondents, the Petitioner was entitled to, and did, exercise the
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option, requiring Respondent No.1 to repurchase the shareholding of the
Petitioner in Respondent No.2 for a sum of Rs.22 crores giving an IRR of
10% on the original purchase consideration of Rs.20 crores. Since
Respondent No.1 refused to comply, the Petitioner invoked the
arbitration agreement contained in the SPA. By consent of parties, the
learned arbitrator was appointed as a sole arbitrator to adjudicate the
disputes and differences between the parties. By his impugned award
dated 6 June 2013, the learned arbitrator, despite coming to the
conclusion that the Respondents had breached their obligations under
the SPA, rejected the Petitioner's claim on the ground that the
transaction of share purchase option was illegal and unenforceable, being
in breach of the Securities Contracts (Regulation) Act, 1956 ('SCRA').
3. The learned arbitrator raised various issues/points for
determination. These were of three categories. The first category
involved questions of merits as also of the arbitrator's jurisdiction to
consider the same. In particular, these issues bore on the alleged
breaches of the Respondents and nonfulfillment of the conditions
subsequent referred to above resulting therefrom. The second category
of issues concerned the legality or enforceability of the contract for
repurchase of shares contained in the SPA. The third involved actual
orders to be passed on the basis of the tribunal's findings on the other
two categories of issues. These bore on the liability of the Respondents
towards repurchase of the Petitioner's shareholding. The learned
arbitrator unequivocally held that the Respondents were in breach of the
condition subsequent contained in the SPA. The arbitrator held that it
was clear, on a conspectus of evidence laid before him, that Respondent
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No.1 was not in a position to complete restructuring of Respondent No.2
and bring out the IPO on the due date despite such date having been
extended from time to time. The excuse of Respondent No.1 that it had
almost completed restructuring, that is to say, to the extent of about
80%, and the delay in issue of IPO was on account of advice of the
merchant banking division of the Petitioner about unfavourable market
conditions, was not accepted by the arbitrator as a satisfactory
explanation. The arbitrator held that the SPA required 100%
restructuring by a given date; that date was extended by mutual consent
upto 30 June 2008; and it was no excuse to say that restructuring was
done upto 80%. Want of 100% restructuring was, thus, treated by the
arbitrator as a breach of the Respondents' obligations under the SPA. On
the issue of legality or enforceability of the transaction of repurchase
contained in the SPA, however, the learned arbitrator held against the
Petitioner. The learned arbitrator, firstly, held that clauses 8.5 and 8.5.1,
which gave an option to the Petitioner to demand repurchase of its
shareholding in Respondent No.2 by Respondent No.1, were illegal
because they constituted a forward contract prohibited under Section 16
of SCRA read with the circular dated 1 March 2000 of SEBI issued
thereunder. The learned arbitrator, secondly, held that these clauses
were also illegal because they contained an option concerning a future
purchase of shares and were, thus, a contract in derivatives and not
being traded on a recognized stock exchange, were illegal under Section
20 of SCRA (Section 18A, sic?). For both these reasons, the learned
arbitrator held clauses 8.5 and 8.5.1 of SPA to be unenforceable. Having,
thus, held against the Petitioner on the question of legality or
enforceability of the share purchase option exercised by it, the learned
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arbitrator decided the third category of issues bearing on the reliefs to be
granted in the reference either against the Petitioner or as
inconsequential in view of his findings on the legality and enforceability
of clause 8.5 or 8.5.1 as above.
4. Mr. Doctor, learned Senior Counsel appearing for the
Petitioner, submits that the arbitrator's conclusion that the share
purchase option contained in clauses 8.5 and 8.5.1 was illegal and
unenforceable, being a forward contract prohibited by Section 16 of
SCRA, read with the circular issued by SEBI thereunder, is clearly
untenable. Learned Counsel submits that the finding is an impossible
finding, as it is directly contrary to the law stated by a Division Bench of
1
our Court in the case of MCX Stock Exchange Ltd. vs. SEBI . Learned
Counsel also submits that the contract between the parties, contained in
clauses 8.5 and 8.5.1 of SPA, cannot be said to be a contract in
derivatives prohibited by Section 18A of SCRA. Mr. Jagtiani, learned
Counsel appearing for the Respondents, does not particularly join issue
with the statement of law contained in the Division Bench judgment in
MCX Stock Exchange Ltd. Learned Counsel, however, submits that the
proposition of law stated in MCX Stock Exchange does not apply to the
option contained in clauses 8.5 and 8.5.1. Learned Counsel also submits
that the contract contained in clauses 8.5 and 8.5.1 is even otherwise
clearly prohibited under Section 18A of SCRA. Since these are
contracts in derivatives and not having been traded on a recognized stock
exchange or settled on the clearing house of any recognized stock
exchange or between parties and on terms specified by the Central
1 Judgment of Division Bench (Chandrachud and Mohta, JJ.) of Bombay High Court dated
14/03/2012.
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Government by notification in the official gazette, in accordance with
rules and byelaws of any recognized stock exchange, these are
prohibited by Section 18A of SCRA.
5. The learned arbitrator's conclusion that the purchase option
contained in clauses 8.5 and 8.5.1 was illegal and unenforceable, being a
forward contract, is clearly an impossible view. The judgment of our
Court in MCX Stock Exchange Ltd. , which was cited before the learned
arbitrator, squarely deals with a purchase option, such as the present,
where the purchaser of securities requires the vendor to repurchase them
on the occurrence of a contingency. Our Court in that case referred to
the decision of a Division Bench of our Court in Jethalal C. Thakkar vs.
2
R.N. Kapur (Per Chagla C.J. speaking for the Court), where the Division
Bench drew a clear distinction between a case where there was a present
obligation under a contract, but the performance of which was postponed
to a later date and a case, where there was no present obligation at all
but the obligation arose by reason of some condition being complied with
or some contingency occurring. The Court, relying on that decision, in
MCX Stock Exchange Ltd. held that a contract giving an option to a
purchaser to require repurchase of securities by his vendor fell in the
second category of cases, where there was no present obligation at all
and the obligation arose by reason of a contingency occurring. The Court
held that on the date when the contract was entered into, there was no
contract for sale or purchase of shares; a contract for sale or purchase of
shares would come into being only at a future point of time in the
eventuality of the party, who is granted such option, exercising it in
future on the occurrence of a stipulated contingency. As in the case of
2 AIR 1956 Bom 74
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MCX Stock Exchange Ltd. , even in our case, there is indeed no contract
of sale or purchase of shares at a future date. The contract would come
into being, if at all, at a future point of time, when two conditions are
satisfied, namely, (i) failure of condition subsequent attributable to
Respondent No.1 and (ii) exercise by the Petitioner of its option to
require repurchase of shares by Respondent No.1 upon such failure. It is
only after the Petitioner exercises such option that the contract is
complete. The arbitrator has committed a clear error in reading the
judgment of MCX Stock Exchange Ltd. The law stated in it is plain and
clear, and having regard to it, the arbitrator's view that the contract in
the present case was a forward contract, can certainly be described as an
impossible view; it is a view arrived at by practically disregarding the law
stated by our Court in MCX Stock Exchange Ltd.
6. Mr. Jagtiani seeks to distinguish the facts in MCX Stock
Exchange Ltd . from the facts of our case on the ground that in MCX
Stock Exchange Ltd. , the Court had expressly found that once an option
was exercised by the party, the contract would be completed only by
means of a spot delivery or by a mode, which was considered lawful.
Learned Counsel submits that in our case, there was a postponement of
purchase of shares even after exercise of the option by the Petitioner and
coming into being of the contract of share purchase. Learned Counsel
relies on para 6 of the Petitioner's letter of 30 December 2008, by which
the Petitioner exercised its option and required repurchase of shares by
Respondent No.1. Para 6 invokes the Petitioner's right under clauses 8.5
and 8.5.1 and calls upon Respondent No.1 to act on the clauses either
with immediate effect, or, in any case, before 12 January 2009. Relying
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on this clause, it is submitted that inasmuch as this exercise of option
demands repurchase on or before a future date, it is not a contract
excepted by the circular of SEBI dated 1 March 2000. There is no
substance in the contention. Spot delivery is a delivery of shares against
payment of price. Just because the original vendor of securities is given
an option to complete repurchase of securities by a particular date, it
cannot be said that the contract for repurchase is on any basis other than
spot delivery. There is nothing to suggest that there is any time lag
between payment of price and delivery of shares. There is nothing to
suggest that the shares would be delivered first and the price demanded
later or vice versa. There is, accordingly, no distinction to be drawn here.
The statement of law in MCX Stock Exchange Ltd. squarely and fully
applies to the facts of our case.
7. That brings us to the second leg of the arbitrator's award on
illegality or unenforceability of the share purchase option contained in
clauses 8.5 and 8.5.1, on account of breach of Section 18A of SCRA.
(The arbitrator refers to breach of Section 20, which had stood deleted
around the relevant time and replaced by Section 18A; learned Counsel
for the Petitioner accepts that this may be treated as a mere oversight not
bearing on the validity of the award.) Section 18A is quoted below :
18A. Contracts in derivative. Notwithstanding anything
contained in any other law for the time being in force, contracts
in derivative shall be legal and valid if such contracts are
(a) traded on a recognized stock exchange;
(b) settled on the clearing house of the recognized stock
exchange; or
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(c) between such parties and on such terms as the Central
Government may, by notification in the Official Gazette, specify,
in accordance with the rules and byelaws of such stock
exchange.
It is, firstly, to be noted that Section 18A of SCRA does not purport to
invalidate any contract. It is a nonobstante clause having overriding
effect over any other law for the time being in force and what it does is
making contracts referred to in clauses (a) to (c) thereof as legal and
valid. Notwithstanding anything contained in any law for the time being
in force, contracts in derivative which are either (a) traded on a
recognized stock exchange; or (b) settled on the clearing house of a
recognized stock exchange; or (c) are between such parties and on such
terms as the Central Government may, by notification in the official
gazette, specify, and are in accordance with the rules and byelaws of
such stock exchange, are to be treated as legal and valid. That is the
mandate of Section 18A. It does not, by its own force, make any
particular contract illegal or invalid. For such illegality or invalidity one
has to look outside Section 18A. Mr. Jagtiani submits that such illegality
is to be found under the SEBI circular of 1 March 2000, but, as we have
noted above, the circular of 1 March 2000 has nothing to do with a
contract such as the one we are concerned with in the present petition,
the reason being that such contract is no contract for sale or purchase of
securities. The circular prohibits forward contracts for sale or purchase
of securities and, as we have seen above, the option contained in clauses
8.5 and 8.5.1 does not come within that prohibition, since it does not
amount to a contract for sale or purchase of shares.
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8. Secondly, and at any rate, the option contained in clauses
8.5 and 8.5.1 cannot be termed as a contract in derivative. Mr. Jagtiani
refers to the definition of 'derivative' contained in clause (ac) of Section 2
of SCRA, which was inserted by Act No.31 of 1999, i.e. the same
amending Act, which introduced Section 18A in SCRA. The definition is
as follows :
“2(ac) “derivative” includes
(A) a security derived from a debt instrument, share, loan
whether secured or unsecured, risk instrument or contract
for differences or any other form of security;
(B) a contract which derives its value from the prices, or
index of prices, of underlying securities;
(C) commodity derivatives; and
(D) such other instruments as may be declared by the
Central Government to be derivatives.”
9. Learned Counsel refers to the definition of 'option in
securities' contained in clause (d) of Section 2. Clause (d) provides that
“option in securities” means a contract for the purchase or sale of a right
to buy or sell, or a right to buy and sell, securities in future, and includes
a teji, a mandi, a teji mandi a galli, a put, a call or a put and call in
securities. Learned Counsel relies on the Supreme Court judgment in
3
Securities And Exchange Board of India vs. Rakhi Trading Pvt. Ltd.
Relying on this judgment, it is submitted that the contract in the present
case contains a put option and is, thus, an option in securities. No
3 (2018) 13 Supreme Court Cases 753
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doubt, there is a put option in the present case, which the original
purchaser may or may not exercise. But the real question is whether such
option or its exercise is illegal. The Supreme Court in Rakhi Trading
was explaining the meaning and content of the terms 'derivatives',
'futures', and 'options'. Derivatives, as explained by the Supreme Court,
are a form of financial instruments which are traded in the securities
market and whose values are derived from the value of the underlying
variables like the share price of a particular scrip in the cash segment of
the market or the stock index of a portfolio of stocks. Derivative trading
is governed by Section 18A of SCRA. There are two types of derivative
instruments, namely, “futures” and “options”. A future or future contract
is an agreement between two parties to buy or sell an asset at a certain
time in future at a price agreed upon on the date of the agreement. An
option, on the other hand, is a contract between a buyer and his seller,
which gives a right, but not an obligation, to buy or sell the underlying
asset at a stated price on or before a specified date. What the buyer of
an option buys is his right to exercise the option, often with a premium;
his counterparty, who gives him such option, receives the option
premium and in consideration thereof, is obliged to buy or sell the
underlying asset against the option exercised by the buyer. Options are,
as the Supreme Court explained, either of “call” or “put”, call option
giving the buyer a right to buy and put option giving him a right to sell,
in both cases without an obligation, the underlying asset at a given price
on or before a given date. Clauses 8.5 and 8.5.1 give the Petitioner the
right, though not the obligation, to sell the shares purchased by it under
the SPA to Respondent No.1, its vendor, who is obliged to buy the same
in case the right is exercised by the former. Though it is very much
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doubtful if this type of option was in contemplation of the legislature
when it enacted Sections 2 (ac) and 18A to be read with Section 16 of
SCRA (the latest circular, i.e. SEBI Circular of 3 October 2013, in fact
making it clear that it was not), it may be technically possible to treat it
as an option in securities, and as such, a derivative. So far so good.
That, by itself, however, does not make it bad in law or impermissible.
What the law prohibits (Section 16 read with the SEBI Circular of 1
March 2000) is not entering into a call or a put option per se ; what it
prohibits is trading or dealing in such option treating it as a security.
Only when it is traded in or dealt with, it attracts the embargo of law as a
derivative, that is to say, a security derived from an underlying debt or
equity instrument. As such derivative, no one can trade or deal in it or
make a contract in respect thereof except on a recognized stock exchange
or as settled on the clearing house of a recognized stock exchange or as
between parties and on terms which the Central Government may
specify, in accordance with the rules or byelaws of such stock exchange,
in keeping with the three categories referred to in clauses (a) to (c) of
Section 18A. In other words, any and every trading in such put option is
illegal or unenforceable under Section 16 read with a notification issued
under that Section, and will not be saved under Section 18A unless it
falls within either of the categories mentioned in Section 18A. That is
all that is meant by Section 18A read with clauses (ac) and (d) of
Section 2 and Section 16 of SCRA read with the notification issued
thereunder. The arbitrator has completely gone wrong on these
fundamental aspects. He held the exercise of the put option to be illegal
because of the provisions of Section 18A. Merely because the contract
contains a put option in respect of securities, the contract cannot be
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termed, as explained above, as a trade or contract in derivatives. And
simply making a put option concerning a security cannot be termed as
illegal and that too under the provisions of Section 18A of SCRA.
10. Mr. Jagtiani submits that the SEBI Circular of 3 October
2013 saves a contract for purchase or sale of securities in exercise of an
option contained in a shareholders agreement; it does so for the first
time; meaning thereby that but for this saving, the law always prohibited
such contract. Learned Counsel submits that the same notification makes
it clear that it does not validate any contract entered into prior to its
date. In the first place, the subsequent notification (i.e. notification dated
3 October 2013) is not a saving notification; it is really a prohibitory
notification. It prohibits all contracts save the ones which are excepted
in it. Secondly, and more importantly, if a contract is no contract for sale
or purchase of securities, but merely an option which the promisee may
or may not exercise and entering into such option does not amount to
making of a ' contract in a derivative ', as explained above, there is no
question of saving of such a contract. It is not, and was never, prohibited
in the first place.
11. Having failed in justifying the award on either of the two
issues on legality considered by the learned arbitrator, learned Counsel
for the Respondents seeks to rely on the submissions contained in his
affidavit in reply, which are termed as crossobjections. Relying on these
objections, learned Counsel seeks to sustain the award challenging its
other findings, which are against the Respondents. I am afraid, it is not
open to a respondent in an arbitration petition under Section 34 of the
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Act to rely on any crossobjection for setting aside the award (i.e. its
reasons), or, indeed, for sustaining it (i.e. its operative part) when the
challenger is able to justify his challenge. Mr. Jagtiani relies on a
judgment of a learned Single Judge of our Court in Satpal P. Malhotra
4
vs. Puneet Malhotra and Others . In this case, the learned Judge held
that the provisions of the Code of Civil Procedure, including Order 41
Rule 22 thereof, which provide for crossobjections, would apply to
arbitration appeals filed in Court under Section 37 of the Act. The
learned Judge was of the view that Section 37 has to be read with the
provisions of Civil Procedure Code and in particular Order 41 Rule 22
thereof; it is not inconsistent with these latter provisions. While
rendering this view, the learned Judge relied on a Supreme Court
judgment in the case of ITI Ltd. vs. Siemens Public Communications
5
Network Ltd. In this judgment, what the Supreme Court held was that
merely because the Act does not make CPC applicable, by reference, it
should not be held that CPC is inapplicable. In particular, the Court held
that a revision against an order passed by a civil court in a first appeal
under Section 37 lied before the High Court under Section 115 of CPC;
merely because a second appeal is barred under subsection (3) of
Section 37 of the Act, the remedy of revision could not be said to be
unavailable. The court held that since Section 37 of the Act provides for
an appeal to the civil court and the application of CPC is not expressly
barred, the revisional jurisdiction of the High Court under CPC would get
attracted to any appeal before a civil court under Section 37 and, if that
be so, the bar under Section 5 of the Act will not be attracted. This view
of the Supreme Court in ITI Ltd. is dissented from by it in the later case
4 Judgment of R.D. Dhanuka, J. of Bombay High Court dated 6/5/2013
5 (2002) 5 Supreme Court Cases 510
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6
of Mahanagar Telephone Nigam Ltd. vs. Applied Electronics Ltd.
Since, however, the ITI Ltd. decision was of a coordinate bench, the
Supreme Court in Mahanagar Telephone Nigam referred it for
reconsideration to a larger bench. Be that as it may, we are not
concerned here with an appeal under Section 37 of the Act. What we
have here is a challenge petition under Section 34 of the Act. Section 34
of the Act cannot be described as anything but a complete code on an
application for setting aside an arbitral award. Recourse to a Court
against an arbitral award may be made, by virtue of subsection (1) of
Section 34, only by an application for setting aside the award made in
accordance with subsections (2) and (3) of Section 34. Such
application cannot be termed as an appeal from the award and, if that is
so, there is no question of importing the provisions or, indeed, the
principle, of Order 41 Rule 22 into it on an analogy of an arbitration
appeal under Section 37 of the Act. Anomalous consequences would
follow, if we were to do so and allow the opponent to a challenge
petition under Section 34 to raise crossobjections to an arbitral award,
whether towards its reasoning or its operative part, in the event the
challenger succeeds in his challenge under Section 34. First of all, that
would require us to read Section 34 in an unnatural way. We would
have to hold that a crossobjection is not a recourse to a Court against an
arbitral award. Section 34, in its very opening line (subsection (1)),
provides that recourse to a court against an arbitral award may be made
only by an application for setting aside such award in accordance with
subsections (2) and (3). On the other hand, the right to take a cross
objection under Order 41 Rule 22 is nothing but an exercise of the same
6 (2017) 2 SCC 37
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right of appeal which is given to an aggrieved party. Secondly, one
would be at a loss to find applicable grounds which can be taken in such
crossobjections, though, in the absence of any other indication, and also
logically, it would have to be supposedly the same grounds which are
provided for an application for setting aside an award. Thirdly, there is
no provision in law for making such crossobjections in any particular
form. If there is no form unlike the one provided in Order 41 Rule 22
and the objections in a challenge petition could be in the form of a reply
to the petition, there is no indication how such objections are to be
treated in case the challenge petition under Section 34 is rejected.
Should a crossobjection be nevertheless heard and determined in that
case, just as a crossobjection would under subrule (4) of Order 41 Rule
22. Then there is the unanswered question of time of such cross
objections. A strict timeline is provided for a challenge petition under
Section 34. Should there be no time for crossobjections and should
there be any consequences for nonfiling of such objections within that
time. We are driven to find out these answers outside Section 34, and
that too when the Courts are unanimous that it is a complete code!
12. In that view of the matter, this Court is not inclined to
consider the crossobjections stated by the Respondents in their reply to
the arbitration petition for sustaining the final award by impugning its
reasons.
13. In the result, the petition succeeds and is allowed by setting
aside the impugned award.
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14. In the facts of the case, there shall be no order as to costs.
( S.C. GUPTE, J. )
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO.220 OF 2014
Edelweiss Financial Services Ltd. ....Petitioner
vs
Percept Finserve Pvt. Ltd. And Anr. ...Respondents
.....
Mr. M.S. Doctor, Senior Advocate, a/w. Mr. Dhirajkumar Totala and Ms.
Priyanka Shetty, i/b. AZB & Partners, for the Petitioner.
Mr. Sharan Jagtiani, a/w. Mr. Vaibhav Bhure, Mr. Abhishek Kale, Mr.
Deepak Deshmukh and Ms. Nisha Kaba, i/b. Naik Naik & Co., for the
Respondents.
…...
CORAM : S.C. GUPTE, J.
DATED: 27 MARCH 2019
(ORAL JUDGEMENT):
. This arbitration petition challenges an award passed by a
sole arbitrator in a reference arising out of disputes concerning a share
purchase contract.
2. The share purchase contract is contained in a share purchase
agreement dated 8 December 2007 as amended by a deed of rectification
dated 21 April 2008 and an amendment agreement dated 23 April 2008.
(The share purchase agreement, together with its two modifications
referred to above, is hereafter referred to as 'SPA'). The Petitioner is a
public company carrying on the business of financial services including
investment, consultancy, merchant banking, etc. Respondent Nos .1 and
2 are group companies forming what has been referred to by the parties
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as 'Percept Group', Respondent No.1, a private company, being one of the
promoters of Respondent No.2, a public company, holding about 85
percent of its equity capital. The Petitioner was interested in investing in
Respondent No.1 subject to a condition that the Respondents restructure
the Percept Group as agreed between the parties inter alia by an IPO.
The parties accordingly entered into the SPA providing for terms and
conditions of the share purchase contract. Under the SPA, the Petitioner
purchased 2,28,374 shares of Respondent No.2 held by Respondent No.1
for a total consideration of Rs. 20 crores. One of the conditions
subsequent under the SPA, in keeping with the original intention of the
parties, required Respondent No.1 to accomplish restructuring of the
entire Percept Group not later than by 31 December 2007 and to provide
the claimant documents in proof of such accomplishment. It was the case
of the Petitioner that the Respondents failed to complete the
restructuring of the Group within the period stipulated originally under
the SPA or, i.e. by 31 December 2007, or within the period extended by
the amendment agreement, i.e. by 30 June 2008, with obligation to
provide documentary evidence of such completion not later than by 15
July 2008. In the event of nonfulfillment of this condition subsequent,
under clause 8.5 of the SPA, the Petitioner had an option to either resell
the shares held by it to Respondent No.1, the latter being bound to
purchase the same at a price, which would give the Petitioner an
internal rate of return ('IRR') of 10% on the original purchase
consideration, or to continue as a shareholder of Respondent No.2
subject to certain undertakings from Respondent No.1. It was the case
of the Petitioner that in view of breach of this condition subsequent by
the Respondents, the Petitioner was entitled to, and did, exercise the
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option, requiring Respondent No.1 to repurchase the shareholding of the
Petitioner in Respondent No.2 for a sum of Rs.22 crores giving an IRR of
10% on the original purchase consideration of Rs.20 crores. Since
Respondent No.1 refused to comply, the Petitioner invoked the
arbitration agreement contained in the SPA. By consent of parties, the
learned arbitrator was appointed as a sole arbitrator to adjudicate the
disputes and differences between the parties. By his impugned award
dated 6 June 2013, the learned arbitrator, despite coming to the
conclusion that the Respondents had breached their obligations under
the SPA, rejected the Petitioner's claim on the ground that the
transaction of share purchase option was illegal and unenforceable, being
in breach of the Securities Contracts (Regulation) Act, 1956 ('SCRA').
3. The learned arbitrator raised various issues/points for
determination. These were of three categories. The first category
involved questions of merits as also of the arbitrator's jurisdiction to
consider the same. In particular, these issues bore on the alleged
breaches of the Respondents and nonfulfillment of the conditions
subsequent referred to above resulting therefrom. The second category
of issues concerned the legality or enforceability of the contract for
repurchase of shares contained in the SPA. The third involved actual
orders to be passed on the basis of the tribunal's findings on the other
two categories of issues. These bore on the liability of the Respondents
towards repurchase of the Petitioner's shareholding. The learned
arbitrator unequivocally held that the Respondents were in breach of the
condition subsequent contained in the SPA. The arbitrator held that it
was clear, on a conspectus of evidence laid before him, that Respondent
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No.1 was not in a position to complete restructuring of Respondent No.2
and bring out the IPO on the due date despite such date having been
extended from time to time. The excuse of Respondent No.1 that it had
almost completed restructuring, that is to say, to the extent of about
80%, and the delay in issue of IPO was on account of advice of the
merchant banking division of the Petitioner about unfavourable market
conditions, was not accepted by the arbitrator as a satisfactory
explanation. The arbitrator held that the SPA required 100%
restructuring by a given date; that date was extended by mutual consent
upto 30 June 2008; and it was no excuse to say that restructuring was
done upto 80%. Want of 100% restructuring was, thus, treated by the
arbitrator as a breach of the Respondents' obligations under the SPA. On
the issue of legality or enforceability of the transaction of repurchase
contained in the SPA, however, the learned arbitrator held against the
Petitioner. The learned arbitrator, firstly, held that clauses 8.5 and 8.5.1,
which gave an option to the Petitioner to demand repurchase of its
shareholding in Respondent No.2 by Respondent No.1, were illegal
because they constituted a forward contract prohibited under Section 16
of SCRA read with the circular dated 1 March 2000 of SEBI issued
thereunder. The learned arbitrator, secondly, held that these clauses
were also illegal because they contained an option concerning a future
purchase of shares and were, thus, a contract in derivatives and not
being traded on a recognized stock exchange, were illegal under Section
20 of SCRA (Section 18A, sic?). For both these reasons, the learned
arbitrator held clauses 8.5 and 8.5.1 of SPA to be unenforceable. Having,
thus, held against the Petitioner on the question of legality or
enforceability of the share purchase option exercised by it, the learned
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arbitrator decided the third category of issues bearing on the reliefs to be
granted in the reference either against the Petitioner or as
inconsequential in view of his findings on the legality and enforceability
of clause 8.5 or 8.5.1 as above.
4. Mr. Doctor, learned Senior Counsel appearing for the
Petitioner, submits that the arbitrator's conclusion that the share
purchase option contained in clauses 8.5 and 8.5.1 was illegal and
unenforceable, being a forward contract prohibited by Section 16 of
SCRA, read with the circular issued by SEBI thereunder, is clearly
untenable. Learned Counsel submits that the finding is an impossible
finding, as it is directly contrary to the law stated by a Division Bench of
1
our Court in the case of MCX Stock Exchange Ltd. vs. SEBI . Learned
Counsel also submits that the contract between the parties, contained in
clauses 8.5 and 8.5.1 of SPA, cannot be said to be a contract in
derivatives prohibited by Section 18A of SCRA. Mr. Jagtiani, learned
Counsel appearing for the Respondents, does not particularly join issue
with the statement of law contained in the Division Bench judgment in
MCX Stock Exchange Ltd. Learned Counsel, however, submits that the
proposition of law stated in MCX Stock Exchange does not apply to the
option contained in clauses 8.5 and 8.5.1. Learned Counsel also submits
that the contract contained in clauses 8.5 and 8.5.1 is even otherwise
clearly prohibited under Section 18A of SCRA. Since these are
contracts in derivatives and not having been traded on a recognized stock
exchange or settled on the clearing house of any recognized stock
exchange or between parties and on terms specified by the Central
1 Judgment of Division Bench (Chandrachud and Mohta, JJ.) of Bombay High Court dated
14/03/2012.
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Government by notification in the official gazette, in accordance with
rules and byelaws of any recognized stock exchange, these are
prohibited by Section 18A of SCRA.
5. The learned arbitrator's conclusion that the purchase option
contained in clauses 8.5 and 8.5.1 was illegal and unenforceable, being a
forward contract, is clearly an impossible view. The judgment of our
Court in MCX Stock Exchange Ltd. , which was cited before the learned
arbitrator, squarely deals with a purchase option, such as the present,
where the purchaser of securities requires the vendor to repurchase them
on the occurrence of a contingency. Our Court in that case referred to
the decision of a Division Bench of our Court in Jethalal C. Thakkar vs.
2
R.N. Kapur (Per Chagla C.J. speaking for the Court), where the Division
Bench drew a clear distinction between a case where there was a present
obligation under a contract, but the performance of which was postponed
to a later date and a case, where there was no present obligation at all
but the obligation arose by reason of some condition being complied with
or some contingency occurring. The Court, relying on that decision, in
MCX Stock Exchange Ltd. held that a contract giving an option to a
purchaser to require repurchase of securities by his vendor fell in the
second category of cases, where there was no present obligation at all
and the obligation arose by reason of a contingency occurring. The Court
held that on the date when the contract was entered into, there was no
contract for sale or purchase of shares; a contract for sale or purchase of
shares would come into being only at a future point of time in the
eventuality of the party, who is granted such option, exercising it in
future on the occurrence of a stipulated contingency. As in the case of
2 AIR 1956 Bom 74
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MCX Stock Exchange Ltd. , even in our case, there is indeed no contract
of sale or purchase of shares at a future date. The contract would come
into being, if at all, at a future point of time, when two conditions are
satisfied, namely, (i) failure of condition subsequent attributable to
Respondent No.1 and (ii) exercise by the Petitioner of its option to
require repurchase of shares by Respondent No.1 upon such failure. It is
only after the Petitioner exercises such option that the contract is
complete. The arbitrator has committed a clear error in reading the
judgment of MCX Stock Exchange Ltd. The law stated in it is plain and
clear, and having regard to it, the arbitrator's view that the contract in
the present case was a forward contract, can certainly be described as an
impossible view; it is a view arrived at by practically disregarding the law
stated by our Court in MCX Stock Exchange Ltd.
6. Mr. Jagtiani seeks to distinguish the facts in MCX Stock
Exchange Ltd . from the facts of our case on the ground that in MCX
Stock Exchange Ltd. , the Court had expressly found that once an option
was exercised by the party, the contract would be completed only by
means of a spot delivery or by a mode, which was considered lawful.
Learned Counsel submits that in our case, there was a postponement of
purchase of shares even after exercise of the option by the Petitioner and
coming into being of the contract of share purchase. Learned Counsel
relies on para 6 of the Petitioner's letter of 30 December 2008, by which
the Petitioner exercised its option and required repurchase of shares by
Respondent No.1. Para 6 invokes the Petitioner's right under clauses 8.5
and 8.5.1 and calls upon Respondent No.1 to act on the clauses either
with immediate effect, or, in any case, before 12 January 2009. Relying
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on this clause, it is submitted that inasmuch as this exercise of option
demands repurchase on or before a future date, it is not a contract
excepted by the circular of SEBI dated 1 March 2000. There is no
substance in the contention. Spot delivery is a delivery of shares against
payment of price. Just because the original vendor of securities is given
an option to complete repurchase of securities by a particular date, it
cannot be said that the contract for repurchase is on any basis other than
spot delivery. There is nothing to suggest that there is any time lag
between payment of price and delivery of shares. There is nothing to
suggest that the shares would be delivered first and the price demanded
later or vice versa. There is, accordingly, no distinction to be drawn here.
The statement of law in MCX Stock Exchange Ltd. squarely and fully
applies to the facts of our case.
7. That brings us to the second leg of the arbitrator's award on
illegality or unenforceability of the share purchase option contained in
clauses 8.5 and 8.5.1, on account of breach of Section 18A of SCRA.
(The arbitrator refers to breach of Section 20, which had stood deleted
around the relevant time and replaced by Section 18A; learned Counsel
for the Petitioner accepts that this may be treated as a mere oversight not
bearing on the validity of the award.) Section 18A is quoted below :
18A. Contracts in derivative. Notwithstanding anything
contained in any other law for the time being in force, contracts
in derivative shall be legal and valid if such contracts are
(a) traded on a recognized stock exchange;
(b) settled on the clearing house of the recognized stock
exchange; or
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(c) between such parties and on such terms as the Central
Government may, by notification in the Official Gazette, specify,
in accordance with the rules and byelaws of such stock
exchange.
It is, firstly, to be noted that Section 18A of SCRA does not purport to
invalidate any contract. It is a nonobstante clause having overriding
effect over any other law for the time being in force and what it does is
making contracts referred to in clauses (a) to (c) thereof as legal and
valid. Notwithstanding anything contained in any law for the time being
in force, contracts in derivative which are either (a) traded on a
recognized stock exchange; or (b) settled on the clearing house of a
recognized stock exchange; or (c) are between such parties and on such
terms as the Central Government may, by notification in the official
gazette, specify, and are in accordance with the rules and byelaws of
such stock exchange, are to be treated as legal and valid. That is the
mandate of Section 18A. It does not, by its own force, make any
particular contract illegal or invalid. For such illegality or invalidity one
has to look outside Section 18A. Mr. Jagtiani submits that such illegality
is to be found under the SEBI circular of 1 March 2000, but, as we have
noted above, the circular of 1 March 2000 has nothing to do with a
contract such as the one we are concerned with in the present petition,
the reason being that such contract is no contract for sale or purchase of
securities. The circular prohibits forward contracts for sale or purchase
of securities and, as we have seen above, the option contained in clauses
8.5 and 8.5.1 does not come within that prohibition, since it does not
amount to a contract for sale or purchase of shares.
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8. Secondly, and at any rate, the option contained in clauses
8.5 and 8.5.1 cannot be termed as a contract in derivative. Mr. Jagtiani
refers to the definition of 'derivative' contained in clause (ac) of Section 2
of SCRA, which was inserted by Act No.31 of 1999, i.e. the same
amending Act, which introduced Section 18A in SCRA. The definition is
as follows :
“2(ac) “derivative” includes
(A) a security derived from a debt instrument, share, loan
whether secured or unsecured, risk instrument or contract
for differences or any other form of security;
(B) a contract which derives its value from the prices, or
index of prices, of underlying securities;
(C) commodity derivatives; and
(D) such other instruments as may be declared by the
Central Government to be derivatives.”
9. Learned Counsel refers to the definition of 'option in
securities' contained in clause (d) of Section 2. Clause (d) provides that
“option in securities” means a contract for the purchase or sale of a right
to buy or sell, or a right to buy and sell, securities in future, and includes
a teji, a mandi, a teji mandi a galli, a put, a call or a put and call in
securities. Learned Counsel relies on the Supreme Court judgment in
3
Securities And Exchange Board of India vs. Rakhi Trading Pvt. Ltd.
Relying on this judgment, it is submitted that the contract in the present
case contains a put option and is, thus, an option in securities. No
3 (2018) 13 Supreme Court Cases 753
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doubt, there is a put option in the present case, which the original
purchaser may or may not exercise. But the real question is whether such
option or its exercise is illegal. The Supreme Court in Rakhi Trading
was explaining the meaning and content of the terms 'derivatives',
'futures', and 'options'. Derivatives, as explained by the Supreme Court,
are a form of financial instruments which are traded in the securities
market and whose values are derived from the value of the underlying
variables like the share price of a particular scrip in the cash segment of
the market or the stock index of a portfolio of stocks. Derivative trading
is governed by Section 18A of SCRA. There are two types of derivative
instruments, namely, “futures” and “options”. A future or future contract
is an agreement between two parties to buy or sell an asset at a certain
time in future at a price agreed upon on the date of the agreement. An
option, on the other hand, is a contract between a buyer and his seller,
which gives a right, but not an obligation, to buy or sell the underlying
asset at a stated price on or before a specified date. What the buyer of
an option buys is his right to exercise the option, often with a premium;
his counterparty, who gives him such option, receives the option
premium and in consideration thereof, is obliged to buy or sell the
underlying asset against the option exercised by the buyer. Options are,
as the Supreme Court explained, either of “call” or “put”, call option
giving the buyer a right to buy and put option giving him a right to sell,
in both cases without an obligation, the underlying asset at a given price
on or before a given date. Clauses 8.5 and 8.5.1 give the Petitioner the
right, though not the obligation, to sell the shares purchased by it under
the SPA to Respondent No.1, its vendor, who is obliged to buy the same
in case the right is exercised by the former. Though it is very much
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doubtful if this type of option was in contemplation of the legislature
when it enacted Sections 2 (ac) and 18A to be read with Section 16 of
SCRA (the latest circular, i.e. SEBI Circular of 3 October 2013, in fact
making it clear that it was not), it may be technically possible to treat it
as an option in securities, and as such, a derivative. So far so good.
That, by itself, however, does not make it bad in law or impermissible.
What the law prohibits (Section 16 read with the SEBI Circular of 1
March 2000) is not entering into a call or a put option per se ; what it
prohibits is trading or dealing in such option treating it as a security.
Only when it is traded in or dealt with, it attracts the embargo of law as a
derivative, that is to say, a security derived from an underlying debt or
equity instrument. As such derivative, no one can trade or deal in it or
make a contract in respect thereof except on a recognized stock exchange
or as settled on the clearing house of a recognized stock exchange or as
between parties and on terms which the Central Government may
specify, in accordance with the rules or byelaws of such stock exchange,
in keeping with the three categories referred to in clauses (a) to (c) of
Section 18A. In other words, any and every trading in such put option is
illegal or unenforceable under Section 16 read with a notification issued
under that Section, and will not be saved under Section 18A unless it
falls within either of the categories mentioned in Section 18A. That is
all that is meant by Section 18A read with clauses (ac) and (d) of
Section 2 and Section 16 of SCRA read with the notification issued
thereunder. The arbitrator has completely gone wrong on these
fundamental aspects. He held the exercise of the put option to be illegal
because of the provisions of Section 18A. Merely because the contract
contains a put option in respect of securities, the contract cannot be
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termed, as explained above, as a trade or contract in derivatives. And
simply making a put option concerning a security cannot be termed as
illegal and that too under the provisions of Section 18A of SCRA.
10. Mr. Jagtiani submits that the SEBI Circular of 3 October
2013 saves a contract for purchase or sale of securities in exercise of an
option contained in a shareholders agreement; it does so for the first
time; meaning thereby that but for this saving, the law always prohibited
such contract. Learned Counsel submits that the same notification makes
it clear that it does not validate any contract entered into prior to its
date. In the first place, the subsequent notification (i.e. notification dated
3 October 2013) is not a saving notification; it is really a prohibitory
notification. It prohibits all contracts save the ones which are excepted
in it. Secondly, and more importantly, if a contract is no contract for sale
or purchase of securities, but merely an option which the promisee may
or may not exercise and entering into such option does not amount to
making of a ' contract in a derivative ', as explained above, there is no
question of saving of such a contract. It is not, and was never, prohibited
in the first place.
11. Having failed in justifying the award on either of the two
issues on legality considered by the learned arbitrator, learned Counsel
for the Respondents seeks to rely on the submissions contained in his
affidavit in reply, which are termed as crossobjections. Relying on these
objections, learned Counsel seeks to sustain the award challenging its
other findings, which are against the Respondents. I am afraid, it is not
open to a respondent in an arbitration petition under Section 34 of the
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Act to rely on any crossobjection for setting aside the award (i.e. its
reasons), or, indeed, for sustaining it (i.e. its operative part) when the
challenger is able to justify his challenge. Mr. Jagtiani relies on a
judgment of a learned Single Judge of our Court in Satpal P. Malhotra
4
vs. Puneet Malhotra and Others . In this case, the learned Judge held
that the provisions of the Code of Civil Procedure, including Order 41
Rule 22 thereof, which provide for crossobjections, would apply to
arbitration appeals filed in Court under Section 37 of the Act. The
learned Judge was of the view that Section 37 has to be read with the
provisions of Civil Procedure Code and in particular Order 41 Rule 22
thereof; it is not inconsistent with these latter provisions. While
rendering this view, the learned Judge relied on a Supreme Court
judgment in the case of ITI Ltd. vs. Siemens Public Communications
5
Network Ltd. In this judgment, what the Supreme Court held was that
merely because the Act does not make CPC applicable, by reference, it
should not be held that CPC is inapplicable. In particular, the Court held
that a revision against an order passed by a civil court in a first appeal
under Section 37 lied before the High Court under Section 115 of CPC;
merely because a second appeal is barred under subsection (3) of
Section 37 of the Act, the remedy of revision could not be said to be
unavailable. The court held that since Section 37 of the Act provides for
an appeal to the civil court and the application of CPC is not expressly
barred, the revisional jurisdiction of the High Court under CPC would get
attracted to any appeal before a civil court under Section 37 and, if that
be so, the bar under Section 5 of the Act will not be attracted. This view
of the Supreme Court in ITI Ltd. is dissented from by it in the later case
4 Judgment of R.D. Dhanuka, J. of Bombay High Court dated 6/5/2013
5 (2002) 5 Supreme Court Cases 510
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6
of Mahanagar Telephone Nigam Ltd. vs. Applied Electronics Ltd.
Since, however, the ITI Ltd. decision was of a coordinate bench, the
Supreme Court in Mahanagar Telephone Nigam referred it for
reconsideration to a larger bench. Be that as it may, we are not
concerned here with an appeal under Section 37 of the Act. What we
have here is a challenge petition under Section 34 of the Act. Section 34
of the Act cannot be described as anything but a complete code on an
application for setting aside an arbitral award. Recourse to a Court
against an arbitral award may be made, by virtue of subsection (1) of
Section 34, only by an application for setting aside the award made in
accordance with subsections (2) and (3) of Section 34. Such
application cannot be termed as an appeal from the award and, if that is
so, there is no question of importing the provisions or, indeed, the
principle, of Order 41 Rule 22 into it on an analogy of an arbitration
appeal under Section 37 of the Act. Anomalous consequences would
follow, if we were to do so and allow the opponent to a challenge
petition under Section 34 to raise crossobjections to an arbitral award,
whether towards its reasoning or its operative part, in the event the
challenger succeeds in his challenge under Section 34. First of all, that
would require us to read Section 34 in an unnatural way. We would
have to hold that a crossobjection is not a recourse to a Court against an
arbitral award. Section 34, in its very opening line (subsection (1)),
provides that recourse to a court against an arbitral award may be made
only by an application for setting aside such award in accordance with
subsections (2) and (3). On the other hand, the right to take a cross
objection under Order 41 Rule 22 is nothing but an exercise of the same
6 (2017) 2 SCC 37
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right of appeal which is given to an aggrieved party. Secondly, one
would be at a loss to find applicable grounds which can be taken in such
crossobjections, though, in the absence of any other indication, and also
logically, it would have to be supposedly the same grounds which are
provided for an application for setting aside an award. Thirdly, there is
no provision in law for making such crossobjections in any particular
form. If there is no form unlike the one provided in Order 41 Rule 22
and the objections in a challenge petition could be in the form of a reply
to the petition, there is no indication how such objections are to be
treated in case the challenge petition under Section 34 is rejected.
Should a crossobjection be nevertheless heard and determined in that
case, just as a crossobjection would under subrule (4) of Order 41 Rule
22. Then there is the unanswered question of time of such cross
objections. A strict timeline is provided for a challenge petition under
Section 34. Should there be no time for crossobjections and should
there be any consequences for nonfiling of such objections within that
time. We are driven to find out these answers outside Section 34, and
that too when the Courts are unanimous that it is a complete code!
12. In that view of the matter, this Court is not inclined to
consider the crossobjections stated by the Respondents in their reply to
the arbitration petition for sustaining the final award by impugning its
reasons.
13. In the result, the petition succeeds and is allowed by setting
aside the impugned award.
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14. In the facts of the case, there shall be no order as to costs.
( S.C. GUPTE, J. )
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