AVITEL POST STUDIOZ LIMITED AND ORS. vs. HSBC PI HOLDING (MAURITIUS) LIMITED

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 5145 OF 2016 AVITEL POST STUDIOZ LIMITED & ORS. …APPELLANTS VERSUS HSBC PI HOLDINGS (MAURITIUS) LIMITED …RESPONDENT AND CIVIL APPEAL NO. 5158 OF 2016 HSBC PI HOLDINGS (MAURITIUS) LIMITED …APPELLANT VERSUS AVITEL POST STUDIOZ LIMITED & ORS. …RESPONDENTS WITH CIVIL APPEAL NO. 9820 OF 2016 J U D G M E N T R.F. Nariman, J. Signature Not Verified 1. These two appeals being Civil Appeal No. 5145 of 2016 by Avitel Digitally signed by INDU MARWAH Date: 2020.08.19 16:25:13 IST Reason: Post Studioz Ltd. [“ Avitel India ”] and its promoters [the “ Jain family ”], 1 and the cross appeal being Civil Appeal No. 5158 of 2016 by HSBC PL Holdings (Mauritius) Ltd. [“ HSBC ”], impugn the interlocutory judgment and order passed in the appeal under section 9 of the Arbitration and Conciliation Act, 1996 [“ 1996 Act ”] dated 31.07.2014. To dispose of the said appeals, we refer to the facts in Civil Appeal No. 5145 of 2016. The brief facts necessary to appreciate the controversy that arises in the present case are as follows: (i) On 21.04.2011, a Share Subscription Agreement [“ SSA ”] was entered into between HSBC and the Appellants. HSBC made an investment in the equity capital of Avitel India for a consideration of USD 60 million in order to acquire 7.8% of its paid-up capital. This SSA contained an arbitration clause which reads as follows:-

16.1. Arbitration

16.1.2. The seat of arbitration shall be Singapore.

2

3

16.2. Costs

16.3. Final and Binding

16.4. Application of Arbitration Act

(ii) On 06.05.2011, the aforesaid parties entered into a Shareholders’ Agreement [“ SHA ”] which defined the relationship between the parties after the SSA dated 21.04.2011 had been entered into. The SHA also contained an arbitration clause which was identical to the arbitration clause contained in the SSA. It is the case of HSBC that a representation had been made by Appellants No. 2-4 (the Jain family) 4 that the Appellants were at a very advanced stage of finalising a contract with the British Broadcasting Corporation [“ BBC ”] to convert the BBC’s film library from 2D to 3D. This contract was expected to generate a revenue of USD 300 million in the first phase, and ultimately over USD 1 billion. It is the further case of HSBC that this investment of USD 60 million was required by Avitel India to purchase equipment for Avitel Post Studioz FZ LLC [“ Avitel Dubai ”] to service the BBC contract (Avitel Dubai is a 100% subsidiary of Avitel Holdings Ltd., Mauritius [“ Avitel Mauritius ”], which, in turn, is a 100% subsidiary of Avitel India. Avitel India, Avitel Mauritius, and Avitel Dubai are collectively referred to as the “ Avitel Group ”). (iii) In early April 2012, HSBC grew suspicious about the Avitel Group’s business of digitising films and Ernst & Young and KPMG Dubai were appointed to inquire into and return findings as to the business activities of the Avitel Group. It is the further case of HSBC that they discovered, thanks to certain preliminary findings of Ernst & Young and KPMG Dubai, inter alia , that the purported BBC contract was non-existent and was set up by the Appellants to induce HSBC into investing the aforesaid money of USD 60 million in the shares of Appellant No. 1. It is also HSBC’s case that though Avitel Dubai received the entire investment proceeds of USD 60 million on or about 10.05.2011, it 5 appeared that around USD 51 million were not used to purchase any equipment to service the BBC contract, but appeared to have been siphoned off to companies in which the Jain family had a stake. (iv) As disputes arose between the parties, on 11.05.2012, notices of arbitration were issued by HSBC to the Singapore International Arbitration Centre [“ SIAC ”] to commence arbitral proceedings. On 14.05.2012, the SIAC appointed Mr. Thio Shen Yi, SC, as an Emergency Arbitrator pursuant to an application dated 11.05.2012. On 17.05.2012, the Appellants’ challenge to the appointment of the Emergency Arbitrator was considered by the SIAC and rejected. On 25.05.2012, the Appellants filed their response to the notices of arbitration. (v) The Emergency Arbitrator then passed two Interim Awards dated 28.05.2012 and 29.05.2012, in the SSA and the SHA, respectively, in favour of HSBC, directing the Appellants and Avitel Dubai to refrain from disposing of or dealing with or diminishing the value of their assets up to USD 50 million, and permitting HSBC to deliver a copy of the Interim Awards to financial institutions in India and the UAE with which any of the Appellants hold or may hold or be signatory to accounts, together with a request that the financial institutions freeze such accounts consistent with the Interim Awards. On 27.07.2012, the Emergency Arbitrator made an amendment to Interim Awards dated 28.05.2012 and 6 29.05.2012 passed in the SSA and the SHA, respectively, granting further relief to HSBC by, inter alia , directing the Appellants and Avitel Dubai to cease and desist from prohibiting or inhibiting Ernst & Young and KPMG Dubai from conducting investigations into the financial affairs of Avitel Dubai and Avitel Mauritius. (vi) On 30.07.2012, HSBC filed Arbitration Petition No. 1062 of 2012 under section 9 of the 1996 Act in the Bombay High Court, inter alia seeking directions to call upon the Appellants to deposit a security amount to the extent of HSBC’s claim in the arbitration proceedings that had begun under both the SSA and the SHA. (vii) On 03.08.2012, a learned Single Judge of the Bombay High Court passed an interim order under the section 9 petition, inter alia directing the Corporation Bank to allow the Appellants to withdraw a sum of INR 1 crore from their account on or before 09.08.2012, but not to allow any further withdrawals until further orders, till which time, the account was to remain frozen. (viii) Meanwhile, the Appellants challenged the jurisdiction of the three- member Arbitral Tribunal comprising of Mr. Christopher Lau, SC as its Chairman, and Dr. Michael C. Pryles and Justice (Retd.) Ferdino I. Rebello as co-arbitrators [“ Arbitral Tribunal ”] set up under the auspices 7 of the SIAC. On 25.09.2012, the Arbitral Tribunal decided that this would be decided as a preliminary issue. On 17.12.2012, the Arbitral Tribunal passed a unanimous “final partial award on jurisdiction”, dismissing the jurisdictional challenge, and stating that since Singapore law governs the arbitration agreement, allegations of fraud and complicated issues relating to facts are arbitrable. (ix) Meanwhile, in the section 9 petition pending before the Bombay High Court, an order was passed by a learned Single Judge dated 22.01.2014, in which the Appellants were directed to deposit any shortfall in their account with the Corporation Bank so as to maintain a balance of USD 60 million. The learned Single Judge gave prima facie findings that the seat of arbitration was at Singapore and that the arbitration agreement was governed by Singapore law; hence, arbitrability of the dispute at hand would be governed by Singapore law. It held that the unanimous “final partial award on jurisdiction” dated 17.12.2012, delivered by the Arbitral Tribunal in Singapore, upholding the jurisdiction of the Arbitral Tribunal to proceed, had not been challenged in Singapore by the Appellants, and further held that this being the case, since HSBC has a good chance of success in the final arbitral proceedings, the aforesaid order to deposit the shortfall in the account so as to maintain a balance of USD 60 million was passed. 8 (x) An appeal against the order of the learned Single Judge was disposed of by the impugned judgment and order of the Division Bench dated 31.07.2014, returning a prima facie finding that since Singapore law governs the arbitration agreement, there was no need to interfere with the findings of the learned Single Judge in this respect. Further, it was held that there is no estoppel in filing the present proceeding despite the Emergency Awards being passed in Singapore as the section 9 petition could be maintained on a plain reading of the arbitration agreement itself. It was further held that an issue of fraud in the context of sections 17 and 18 of the Indian Contract Act, 1872 [“ Contract Act ”] referred to want of free consent, and was a well- accepted ground that would vitiate the contract, rendering it voidable. After referring to various judgments of this Court, it was held that there was a distinction between the “suitability” and “arbitrability” of disputes, and on the facts of the present case, it could not be said that the dispute was not arbitrable because of an allegation of fraud made by HSBC. After then referring to the claim statement of HSBC before the Arbitral Tribunal at Singapore, it was held that the allegations of fraud and misrepresentation were primarily in the context of “fraud” and “misrepresentation” as defined in sections 17 and 18 of the Contract Act, thus establishing a civil profile of the disputes that had arisen between 9 the parties. However, after referring to certain judgments on interim mandatory injunctions, the High Court prima facie found that HSBC had carried out due diligence by engaging leading agencies like Ernst & Young and Clifford Chance. Also, it was held that the measure of damages that may ultimately be awarded may not be the amount of loss ultimately sustained by HSBC, but can at best be the difference between the price paid by HSBC in acquiring Avitel India’s shares and the price HSBC would have received had it resold the said shares in the market. This being the case, and an interim mandatory injunction being in the nature of equitable relief, the Division Bench was of the opinion that the interest of justice would be served if the Appellants are directed to deposit an additional amount equivalent to USD 20 million in its Corporation Bank account, so that the total deposit in the said account is maintained at half the said figure of USD 60 million, i.e., at USD 30 million. The appeal against the order dated 22.01.2014 was therefore partly allowed. (xi) By a Final Award in the SSA dated 27.09.2014 [“ Foreign Final Award ”], the Arbitral Tribunal held as follows: “ 21. FORMAL FINAL AWARD 21.1 The Tribunal has carefully considered the oral and documentary evidence as well as the submissions of the Parties and given due weight thereto and rejecting all submissions to the contrary hereby makes, issues and 10 publishes this Final Award and for the reasons set out above FINDS, AWARDS, ORDERS AND DECLARES as follows: 21.2 Finds that the Respondents jointly and severally represented to the Claimant the following: a. the Avitel Group's propriety stereoscopy technology was superior to that of its competitor; b. Avitel Dubai played an important role in the Avitel Group's business; c. the Avitel Group was in advanced negotiations with the BBC and that the BBC Contract was close to execution; d. the Claimant's investment was required and was to be utilized for purchasing equipment in order to enable Avitel Dubai to service the BBC Contract; e. the Avitel Group had the benefit of the Material Contracts with Kinden, SPAC and Purple Passion with a total value of approximately USD 658 million; f. the Avitel Group's key customers Kinden, SPAC and Purple Passion as well as Avitel Dubai's key supplier, Digital Fusion, and key service provider, Highend, were all independent and legitimate companies; g. the representations and warranties contained in Clauses 6.1 and 6.2 of the SSA and in Clauses 7.1, 7.3, 7.5 , 8, 10 and 11 of Schedule 3 of the SSA to be true, complete, accurate and not misleading; 21.3 Finds that the Respondents made the representations and/or warranties in order to induce the Claimant to invest in the First Respondent; 21.4 Finds that the Claimant did rely on the representations and/or warranties in making its investment in the First Respondent; 21.5 Finds that the representations and/or warranties referred to in paragraph 21.2 (a) to (g) above were false and/or misleading; 21.6 Finds that the Respondents made the representations and/or warranties referred to in paragraph 21.2 (a) to (g) 11 above knowing that these were false and/or without belief in their truth; 21.7 Finds that the Respondents are jointly and severally liable to the Claimant in tort for deceit; 21.8 Finds that the Respondents are jointly and severally liable to the Claimant for fraudulent misrepresentation under the Contract Act; 21.9 Finds that the Respondents are jointly and severally liable to the Claimant for breach of warranty; 21.10 Finds that the Second, Third and Fourth Respondents are to jointly and severally indemnify the Claimant for the loss of its investment in the amount of USD 60 million as well as for the costs of and associated with this arbitration and associated court actions; 21.11 Finds that the Claimant in respect of its claim for fraudulent misrepresentation and its claim in tort for deceit is entitled to damages in the total amount of USD 60 million; 21.12 Finds that the Claimant is entitled to interest on the sum of USD 60 million from 6 May 2011 to the date of this Final Award at the rate of 4.25 % per annum; 21.13 Finds that the Claimant is entitled to its legal and other costs as well as the costs of the arbitration in the total amount of SGD 827,615.67 comprising of the following: (a) the amount of SGD 29,235.88 in respect of the Emergency Arbitrators fees and expenses (b) the amount of SGD 756,513.19 in respect of the Tribunal's fees and expenses; (c) the amount of SGD 41,866.60 in respect of SIAC administrative fees and expenses; 21.14 Finds that upon the Respondents’ paying in full and unconditionally the sums awarded to the Claimant in paragraphs 21.15, 21.16, 21.18, 21.19 below, the Claimant's Preference Subscription Shares and Equity Subscription Shares (as defined in the SSA) in Avitel India are to be cancelled forthwith; 21.15 Awards to the Claimant and Orders the Respondents to pay damages in the amount of USD 60 million in respect of which award the First, Second, Third and Fourth Respondents are jointly and severally liable; 12 21.16 Awards to the Claimant and Orders the Respondents to pay interest on the sum of USD 60 million from 6 May 2011 to the date of this Final Award at the rate of 4.25% per annum in respect of which award the First, Second, Third and Fourth Respondents are jointly and severally liable; 21.17 Orders in terms identical to the orders in the Interim Award (as amended by the Addendum and Amendment to Interim Award dated 15 June 2012 and by the Amendment to Interim Award dated 27 July 2012), which orders are to remain in force up to and including the date on which the Respondents comply with all other orders in this Final Award; 21.18 Awards to the Claimant and Orders the Respondents to pay the Claimant's legal and other costs amounting to USD 1,652,890.14 in respect of which award the First, Second, Third and Fourth Respondents are jointly and severally liable; 21.19 Awards to the Claimant and Orders the Respondents to pay all the costs of this arbitration in the total amount of SGD 827,615.67 as follows: (a) the amount of SGD 29,235.88 in respect of the Emergency Arbitrator’s fees and expenses; (b) the amount of SGD 756,513.19 in respect of the Tribunal’s fees and expenses; (c) the amount of SGD 41,868.60 in respect of SIAC administrative fees and expenses; 21.20 Declares the Second, Third and Fourth Respondents jointly and severally liable to indemnify the Claimant for the loss of its investment in the amount of USD 60 million together with interest thereon for the period and at the rate specified in paragraph 21.16 hereinabove and the Claimant's legal costs, related expenses as well as the costs of this arbitration as specified in paragraph 21.19 hereinabove; 21.21 Declares and Orders that upon the Respondents’ paying in full and unconditionally the sums awarded to the Claimant in paragraphs 21.15, 21.16, 21.18, 21.19 hereinabove and all costs arising out of and incidental to the cancellation of the Claimant's Preference Subscription Shares and Equity Subscription Shares (as defined in the SSA) in Avitel India, that the said shares be cancelled and that in this regard, the Parties take the requisite steps to 13 effect the said cancellation within 30 days of receipt of such payment.” Initially, this Foreign Final Award was challenged by the Appellants in a section 34 proceeding in the Bombay High Court. By a judgment dated 28.09.2015, the section 34 petition was dismissed as being not maintainable. An appeal under section 37 of the 1996 Act was dismissed on 05.05.2017. Meanwhile, HSBC moved the Bombay High Court on 15.04.2015 to enforce the Foreign Final Award in the SSA dated 27.09.2014, which enforcement proceedings are still pending. 2. Mr. Mukul Rohatgi, learned Senior Advocate and Mr. Saurabh Kirpal, learned counsel, appearing on behalf of the Appellants, took us through the Single Judge order and the Division Bench judgment, and then referred to the Indian law on the allegations of fraud made in arbitral proceedings, which, according to them, show that if the transaction entered into between the parties involve serious criminal offences such as forgery and impersonation, then it is clear that under Indian law, such dispute would not be arbitrable. In fact, they stated that a criminal complaint was filed by HSBC against the Appellants dated 16.01.2013, alleging offences under sections 420, 467, 468, read with section 120B of the Indian Penal Code, 1860, with the Economic Offences Wing, Mumbai [“ EOW ”], resulting in an FIR being registered. However, the EOW informed HSBC that a closure report was filed before the 14 concerned Magistrate in Mumbai. This closure report was then accepted. HSBC then filed a protest petition seeking rejection of the closure report, which was dismissed by the learned Magistrate on 05.05.2018. This order passed by the Magistrate was in turn challenged by HSBC in Writ Petition (Criminal) No. 5659 of 2018, which petition is still pending. They then argued that, ultimately, in enforcement proceedings in India, the gateways of section 48 of the 1996 Act have to be met. “The public policy of India” is contained in the judgments of this Court regarding serious allegations of fraud made in arbitral proceedings, and if HSBC cannot pass this gateway, then enforcing a foreign award in India would not be possible. It was from this prism that a prima facie case had to be made out under section 9 of the 1996 Act. They, therefore, attacked both the Single Judge order and the Division Bench judgment, stating that a prima facie case for enforcement of such foreign awards cannot possibly refer to the Singapore law on fraud being alleged in arbitral proceedings, but can only refer to Indian law. They further argued that the Division Bench of the Bombay High Court had relied upon a Single Judge judgment of this Court reported as Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee, (2014) 6 SCC 677 [“ Swiss Timing ”] which had held the judgment in N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 [“ N. Radhakrishnan ”] per incuriam , vitiating the entire Division Bench 15 judgment. This is clear because a Single Judge judgment of this Court under section 11 of the 1996 Act has no precedential value as has correctly been held in State of West Bengal v. Associated Contractors, (2015) 1 SCC 32 [“ Associated Contractors ”]. Mr. Rohatgi also indicated that Mr. Christopher Lau, SC, the Chairman of the Arbitral Tribunal in the Singapore proceedings was biased, in that HSBC was a client of the firm to which he belonged, and this is one of the important grounds taken up in the section 48 proceeding which is pending in the Bombay High Court. He also sought to raise an argument (for the first time before us) that the award being insufficiently stamped could not be looked at and that this would also go to show that there is no prima facie case in order to sustain the interim mandatory orders passed by the Division Bench of the High Court. It was further added that Report No. 246 of the Law Commission of India on ‘Amendment to the Arbitration th and Conciliation Act, 1996’ of August 2014 [“ 246 Law Commission Report ”] had recommended that a section 16(7) be added so as to do away with the ratio of N. Radhakrishnan (supra). However, Parliament thought it fit, when it passed the Arbitration and Conciliation (Amendment) Act, 2015 [“ 2015 Amendment Act ”], not to incorporate such a section, showing that N. Radhakrishnan (supra) holds the field and that, therefore, serious questions of fraud raised, like in the present arbitral proceedings, would render such dispute inarbitrable. For this 16 proposition, they relied heavily on the House of Lords judgment in President of India and La Pintada Compania Navigacion S.A., [1985] A.C. 104 [“ La Pintada ”]. 3. Mr. Harish Salve, learned Senior Advocate appearing on behalf of the Respondent, HSBC, countered all these submissions by relying upon several judgments of this Court, including the recent judgment in Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 [“ Rashid Raza ”]. According to the learned Senior Advocate, this judgment has, with great clarity, explained the judgment in A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386 [“ Ayyasamy ”], which in turn had explained N. Radhakrishnan (supra), as referring only to such serious allegations of fraud as would vitiate the arbitration clause along with the agreement, and allegations of fraud which are not merely inter parties, but affect the public at large. He argued that a reading of the pleadings in the present case would show that neither of these two tests has been met. He also copiously read from the Foreign Final Award dated 27.09.2014, which found not merely on impersonation, which was one small leg on which it stood, but also on siphoning off or diversion of a substantial portion of the USD 60 million paid by HSBC into companies owned or controlled by the Jain family. He said that these issues are predominantly civil law issues to be decided inter parties. He further argued that insofar as Mr. Christopher Lau SC’s 17 alleged bias is concerned, this was not the time or place to go into such allegations, which would only be fully met in the section 48 proceedings which are pending. He indicated that in any case, this Foreign Final Award was unanimous and consisted of two other arbitrators, Dr. Michael C. Pryles and Justice (Retd.) Ferdino I. Rebello, retired Chief Justice of the Allahabad High Court. He also asked us not to go into the stamping aspect of the Foreign Final Award inasmuch as it was raised here for the first time without any proper pleading; if properly pleaded, then his client would have had an opportunity to rebut the same to show that there was no insufficiency of stamp duty paid. Mr. Salve therefore supported the ultimate order of the learned Single Judge of the Bombay High Court, and said that the Division Bench ought not to have reduced the amount of USD 60 million to half, i.e., USD 30 million without any reasoning worth the name, particularly because the Foreign Final Award had held that the USD 60 million was to be paid by way of damages with interest and costs, the shares in HSBC’s name standing cancelled. Once it is clear that the aforesaid shares stood cancelled, it is clear that the 7.8% of the paid-up share capital of Avitel India that was held by HSBC reverts to Avitel India. This being the case, there would be no awarding of the difference between market value of the shares as on the date of breach and USD 60 million, as the shares are back in the hands of Avitel India. 18 4. Having heard learned counsel appearing on behalf of both the parties, the only real question that needs to be addressed in the section 9 proceedings is the extent to which HSBC could be said to have a strong prima facie case in the enforcement proceedings under section 48 which are pending before the Bombay High Court. If so, whether irreparable prejudice would be caused to HSBC if protective orders were not issued in its favour, and generally, whether the balance of convenience tilts in its favour and to what extent. 5. First and foremost, it is correct to state that this prima facie case would necessarily depend upon what is the substantive law in India qua arbitrability when allegations of fraud are raised by one of the parties to the arbitration agreement. The law on this point has its origins in a judgment under the Arbitration Act, 1940 [“ 1940 Act ”], the predecessor to the 1996 Act, which repealed the 1940 Act. Thus, in Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, [1962] 3 SCR 702 [“ Abdul Kadir ”], disputes arose out of an agreement between the parties, which contained an arbitration clause. Consequently, respondents no.1 and 2 filed an application under section 20 of the 1940 Act, as it then stood. This application was opposed by the appellant on four grounds before the Hon’ble Supreme Court. The fourth ground is important from our point of view and reads thus: 19 “xxx xxx xxx ( 4 ) The respondents had made allegations of fraud against the appellant in their application and that was also a ground for not referring the dispute to arbitration.” (at p. 707) In dealing with this ground, the Court first referred to section 20(4) of the 1940 Act, which laid down that “ where no sufficient cause is shown, the Court shall order the agreement to be filed, and shall make an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise or, where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the Court .” This Court referred to the fact that the words of this sub-section leave a wide discretion with the Court to consider whether an order for filing an agreement should be made and reference thereon should also be made. Various English judgments were referred to. Russel v. Russel, [1880] 14 Ch D 471 was referred to for the proposition that the Court will, in general, refuse to send a dispute to arbitration if the party charged with fraud desires a public inquiry, but where the objection to arbitration is by the party charging the fraud, the Court will not necessarily accede to it, and will never do so unless a prima facie case of fraud is proved [ see Abdul Kadir (supra) at p. 713]. The next English judgment is Charles Osenton & Co. v. Johnston, 1942 A.C. 130 . This case held that as the professional reputation of a particular firm was involved, the matter 20 should not be referred to arbitration for the reason that the normal tribunal of a High Court with a jury, from which there is recourse to a right to appeal, could not be substituted by proceedings before an official referee under section 89 of the Judicature Act, 1925. After referring to these cases, this Court cautioned:

21 that certain items are exaggerated and so on that is not enough to induce the court to refuse to make a reference to arbitration. It is only in cases of allegations of fraud of a serious nature that the court will refuse as decided in Russel’s case [1880 14 Ch D 471] to order an arbitration agreement to be filed and will not make a reference. We may in this connection refer to Minifie v. Railway Passengers Assurance Company [(1881) 44 LT 552]. There the question was whether certain proceedings should be stayed; and it was held that notwithstanding the fact that the issue and the evidence in support of it might bear upon the conduct of a certain person and of those who attended him and so might involve a question similar to that of fraud or no fraud, that was no ground for refusing stay. It is only when serious allegations of fraud are made which it is desirable should be tried in open court that a court would be justified in refusing to order the arbitration agreement to be filed and in refusing to make a reference.” (at pp. 714-716) The Court then turned to the facts of the case before it and held that allegations as to the correctness or otherwise of entries in accounts are not serious allegations of fraud, stating that such allegations are often made in suits for accounts, which are purely civil proceedings. It was added:

22

(at pp. 717-718) 6. In N. Radhakrishnan (supra), differences between the partners of a firm were sought to be adjudicated in a civil suit filed by the respondents. The appellant filed an application under section 8 of the 1996 Act stating that as there was an arbitration clause between the partners, the matter should now be referred to arbitration. This Court, after considering the judgment in Abdul Kadir (supra), extracted one sentence from the said judgment at p. 714 as follows: “There is no doubt that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference.” This sentence, according to the learned Division Bench, being the ratio in Abdul Kadir (supra), would necessarily mean that wherever serious allegations of fraud are raised in a case in which there is an arbitration agreement, they should be tried in a court of law. In the fact situation before the Court, the Court found that the appellant had made serious 23 allegations against the respondents alleging that they were committing malpractices in the account books and had manipulated the finances of the partnership firm. This, according to the learned Division Bench of this Court, was enough to dismiss the section 8 application. We may also refer to the fact that the appellant’s counsel had relied upon the judgment in Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503 [“ Hindustan Petroleum ”], in which it was stated that it is mandatory for a civil court to refer to arbitration a dispute that arises between parties with an arbitration agreement, under section 8 of the 1996 Act. We may only note at this stage that this judgment was not dealt with at all by the Court. On the contrary, a judgment delivered under section 20(4) of the 1940 Act was referred to, in order to arrive at the conclusion arrived at by the Court. 7. In Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24 [“ Afcons ”], this Court held as follows:

24

It will be seen that items (iv) and (vi) are relevant from our point of view and require to be explained in the light of subsequent decisions of this Court. 8. In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 [“ Booz Allen ”], this Court decided that proceedings in rem , such as a mortgage suit filed under Order XXXIV of the Civil Procedure Code, 1908 (which was a proceeding in rem ), would not be arbitrable. In a significant passage, this Court held: “ 36. The well-recognised examples of non-arbitrable disputes are: ( i ) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; ( ii ) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; ( iii ) guardianship matters; ( iv ) insolvency and winding-up matters; ( v ) testamentary matters (grant of probate, letters of administration and succession certificate); and ( vi ) eviction 25

Industries (India) Ltd., (1999) 5 SCC 688 , that similarly, winding up proceedings under the Companies Act, 1956 cannot be referred to arbitration ( see paragraph 42). As against this, suits for specific 26 performance are arbitrable despite the fact that the court is vested with discretion to be exercised based upon principles laid down as to when not to decree specific performance ( see paragraphs 43 and 44). The Court then concluded:

9. We now come to a learned Single Judge’s judgment in Swiss Timing (supra). There is no doubt that this judgment delivered by a learned Single Judge under a section 11 jurisdiction cannot be said to be a binding precedent [ see Associated Contractors (supra) at paragraph 17]. However, the learned Judge’s reasoning has strong persuasive value which we are inclined to adopt. The learned Single Judge first held 27 that the judgment in P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539 , was not brought to the notice of this Court in N. Radhakrishnan (supra). The judgment of Hindustan Petroleum (supra) which was brought to the notice of the Court was not dealt with at all. Further, the provisions of sections 5 and 16 of the 1996 Act were also not referred to. Section 5 of the 1996 Act states as follows: “ 5. Extent of judicial intervention.— Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.” Section 16(1) of the 1996 Act states: “ 16. Competence of arbitral tribunal to rule on its jurisdiction.— (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,— (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.” These provisions, together with section 8 of the 1996 Act, which now makes it mandatory to refer an action which is brought before a judicial authority, which is the subject matter of an arbitration agreement, to arbitration, if the conditions of the section are met, all point to a sea change from the 1940 Act which was repealed by this 1996 Act. By way 28 of contrast with section 8 of the 1996 Act, section 20 of the 1940 Act is set out hereinbelow: “ 20. Application to file in Court arbitration agreement.— (1) Where any persons have entered into an arbitration agreement before the institution of any suit with respect to the subject-matter of the agreement or any part of it, and where a difference has arisen to which the agreement applies, they or any of them, instead of proceeding under Chapter II, may apply to a Court having jurisdiction in the matter to which the agreement relates, that the agreement be filed in Court. (2) The application shall be in writing and shall be numbered and registered as a suit between one or more of the parties interested or claiming to be interested as plaintiff or plaintiffs and the remainder as defendant or defendants, if the application has been presented by all the parties, or, if otherwise, between the applicant as plaintiff and the other parties as defendants. (3) On such application being made, the Court shall direct notice thereof to be given to all parties to the agreement other than the applicants, requiring them to show cause within the time specified in the notice why the agreement should not be filed. (4) Where no sufficient cause is shown, the Court shall order the agreement to be filed, and shall make an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise or, where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the Court. (5) Thereafter the arbitration shall proceed in accordance with, and shall be governed by, the other provisions of this Act so far as they can be made applicable.” It will be seen from section 20 of the 1940 Act, as was held in Abdul Kadir (supra), that a wide discretion is vested in the Court if sufficient cause is made out not to refer parties to arbitration. It was in that context 29 that the observations in Abdul Kadir (supra) as to serious allegations of fraud triable in a civil court, being “sufficient cause” shown under section 20(4) of the 1940 Act were made. Also, the approach of the 1940 Act is made clear by section 35(1), which is set out hereinbelow: “ 35. Effect of legal proceedings on arbitration.— (1) No reference nor award shall be rendered invalid by reason only of the commencement of legal proceedings upon the subject-matter of the reference, but when legal proceedings upon the whole of the subject-matter of the reference have been commenced between all the parties to the reference and a notice thereof has been given to the arbitrators or umpire, all further proceedings in a pending reference shall, unless a stay of proceedings is granted under Section 34, be invalid. xxx xxx xxx” Thus, even where arbitral proceedings are ongoing, such proceedings become invalid the moment legal proceedings upon the whole of the subject matter of the reference have been commenced between all the parties to the reference and a notice thereof has been given to the arbitrators or umpire. As against this, sections 5, 8 and 16 of the 1996 Act reflect a completely new approach to arbitration, which is that when a judicial authority is shown an arbitration clause in an agreement, it is mandatory for the authority to refer parties to arbitration bearing in mind the fact that the arbitration clause is an agreement independent of the other terms of the contract and that, therefore, a decision by the arbitral tribunal that the contract is null and void does not entail ipso jure the 30 invalidity of the arbitration clause. Even otherwise, N. Radhakrishnan (supra) did not refer to the ratio of Abdul Kadir (supra) correctly. As has been seen by us hereinabove, Abdul Kadir (supra) held that serious allegations of fraud are not made out when allegations of moral or other wrongdoing inter parties are made. In particular, it was held that discrepancies in account books are the usual subject matter in account suits, which are purely of a civil nature. For all these reasons, we are broadly in agreement with the observations of Nijjar, J. rendering N. Radhakrishnan (supra) lacking in precedential value. 10. The next judgment to be dealt with, chronologically speaking, is the judgment in Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788 [“ Vimal Kishor Shah ”]. To the six categories of exceptions to arbitrability of civil disputes, a seventh category has been added, namely, disputes arising under trust deeds governed by the Trusts Act, 1882. Here, it was held that a consideration of the Trusts Act would show that the intention of the legislature was to confer jurisdiction only on civil courts for deciding disputes arising under the Trusts Act, which would amount to an implied bar on other proceedings including arbitral proceedings. The Court therefore found: “ 53. We, accordingly, hold that the disputes relating to trust, trustees and beneficiaries arising out of the trust deed and the Trusts Act, 1882 are not capable of being decided by the arbitrator despite existence of arbitration agreement to that 31 effect between the parties. A fortiori, we hold that the application filed by the respondents under Section 11 of the Act is not maintainable on the ground that firstly, it is not based on an “arbitration agreement” within the meaning of Sections 2(1)( b ) and 2(1)( h ) read with Section 7 of the Act and secondly, assuming that there exists an arbitration agreement (Clause 20 of the trust deed) yet the disputes specified therein are not capable of being referred to private arbitration for their adjudication on merits. 54. We thus add one more category of cases i.e. Category ( vii ), namely, cases arising out of trust deed and the Trusts Act, 1882, in the list of six categories of cases specified by this Court in para 36 at pp. 546-47 of the decision rendered in Booz Allen & Hamilton Inc. [ Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. , (2011) 5 SCC 532 : (2011) 2 SCC (Civ) 781] which as held above cannot be decided by the arbitrator(s).” [This judgment was referred to with approval in Vidya Drolia and Ors. v. Durga Trading Corporation, 2019 SCC OnLine SC 358 at paragraph 30]. 11. Now comes the important judgment in Ayyasamy (supra). Two separate judgments were delivered by a Division Bench of this Court. Sikri, J., after referring to the judgments in Abdul Kadir (supra), N. Radhakrishnan (supra), Swiss Timing (supra), and Booz Allen th (supra), then referred to the 246 Law Commission Report, in particular to paragraphs 50 and 51 thereof. He then held: “ 23. A perusal of the aforesaid two paragraphs brings into fore that the Law Commission has recognised that in cases of serious fraud, courts have entertained civil suits. Secondly, it has tried to make a distinction in cases where there are allegations of serious fraud and fraud simpliciter. It, 32 thus, follows that those cases where there are serious allegations of fraud, they are to be treated as non-arbitrable and it is only the civil court which should decide such matters. However, where there are allegations of fraud simpliciter and such allegations are merely alleged, we are of the opinion that it may not be necessary to nullify the effect of the arbitration agreement between the parties as such issues can be determined by the Arbitral Tribunal. 24. Before we apply the aforesaid test to the facts of the present case, a word on the observations in Swiss Timing Ltd. case [ Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee , (2014) 6 SCC 677 : (2014) 3 SCC (Civ) 642] to the effect that the judgment of N. Radhakrishnan [ N. Radhakrishnan v. Maestro Engineers , (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] was per incuriam, is warranted. In fact, we do not have to labour on this aspect as this task is already undertaken by this Court in State of W.B. v. Associated Contractors [ State of W.B. v. Associated Contractors , (2015) 1 SCC 32 : (2015) 1 SCC (Civ) 1]. It has been clarified in the aforesaid case that Swiss Timing Ltd. [ Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee , (2014) 6 SCC 677 : (2014) 3 SCC (Civ) 642] was a judgment rendered while dealing with Section 11(6) of the Act and Section 11 essentially confers power on the Chief Judge of India or the Chief Justice of the High Court as a designate to appoint an arbitrator, which power has been exercised by another Hon’ble Judge as a delegate of the Chief Justice. This power of appointment of an arbitrator under Section 11, by the Court, notwithstanding the fact that it has been held in SBP & Co. v. Patel Engg. Ltd. [ SBP & Co. v. Patel Engg. Ltd. , (2005) 8 SCC 618] as a judicial power, cannot be deemed to have precedential value and, therefore, it cannot be deemed to have overruled the proposition of law laid down in N. Radhakrishnan [ N. Radhakrishnan v. Maestro Engineers , (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12]. 25. In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud simpliciter may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of 33 criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can side-track the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself. Reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application under Section 8 of the Act, the focus of the court has to be on the question as to whether jurisdiction of the court has been ousted instead of focusing on the issue as to whether the court has jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the Act is concerned, it does not specifically exclude any category of cases as non-arbitrable. Such categories of non-arbitrable subjects are carved out by the courts, keeping in mind the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, courts i.e. public fora, are better suited than a private forum of arbitration. Therefore, the inquiry of the Court, while dealing with an application under Section 8 of the Act, should be on the aforesaid aspect viz. whether the nature of dispute is such that it cannot be referred to arbitration, even if there is an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal 34

Chandrachud, J., in a separate judgment, referred to the judgment in N. Radhakrishnan (supra) and then held: “ 40. The above extract from the judgment in N. Radhakrishnan [ N. Radhakrishnan v. Maestro Engineers , (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] relies extensively on the view propounded in Abdul Kadir [ Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak , AIR 1962 SC 406]. The decision in Abdul Kadir [ Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak , AIR 1962 SC 406] arose under the Arbitration Act, 1940 and was in the context of the provisions of Section 20. In Abdul Kadir [ Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak , AIR 1962 SC 406] , this Court emphasised that sub-section (4) of Section 20 of the Arbitration Act, 1940 left a wide discretion in the court. In contrast, the scheme of the 1996 Act has made a radical departure from the position under the erstwhile enactment. A marked distinction is made in Section 8 where no option has been left to the judicial authority but to refer parties to arbitration. Abdul Kadir [ Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak , AIR 1962 SC 406] explains the position under the Arbitration Act, 1940. The present legislation on the subject embodies a conscious departure which is intended to strengthen the efficacy of arbitration. xxx xxx xxx 43. Hence, the allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the Arbitral Tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement.” He then cautioned against the use of N. Radhakrishnan (supra) as a precedent, and distinguished it as follows: 35 “ 45. The position that emerges both before and after the decision in N. Radhakrishnan [ N. Radhakrishnan v. Maestro Engineers , (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] is that successive decisions of this Court have given effect to the binding precept incorporated in Section 8. Once there is an arbitration agreement between the parties, a judicial authority before whom an action is brought covering the subject-matter of the arbitration agreement is under a positive obligation to refer parties to arbitration by enforcing the terms of the contract. There is no element of discretion left in the court or judicial authority to obviate the legislative mandate of compelling parties to seek recourse to arbitration. The judgment in N. Radhakrishnan [ N. Radhakrishnan v. Maestro Engineers , (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] has, however, been utilised by parties seeking a convenient ruse to avoid arbitration to raise a defence of fraud: 45.1. First and foremost, it is necessary to emphasise that the judgment in N. Radhakrishnan [ N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon. To allow such a plea would be a plain misreading of the judgment in N. Radhakrishnan [ N. Radhakrishnan v. Maestro Engineers , (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] . As I have noted earlier, that was a case where the appellant who had filed an application under Section 8 faced with a suit on a dispute in partnership had raised serious issues of criminal wrongdoing, misappropriation of funds and malpractice on the part of the respondent. It was in this background that this Court accepted the submission of the respondent that the arbitrator would not be competent to deal with matters “which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation ”. Hence, it is necessary to emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability. The burden must lie heavily on a party which avoids compliance with the obligation assumed by it to submit disputes to arbitration to establish the dispute is not arbitrable under the law for the 36

37

Mr. Saurabh Kirpal took exception to Sikri, J.’s judgment in that Sikri, J. th did not refer to paragraph 52 of the 246 Law Commission Report and th its aftermath. Paragraph 52 of the 246 Law Commission Report reads as follows: “ 52. The Commission believes that it is important to set this entire controversy to a rest and make issues of fraud expressly arbitrable and to this end has proposed amendments to section 16.” (at p. 28) The Law Commission then added, by way of amendment, a proposed section 16(7) as follows: “Amendment of Section 16 10. In section 16, After sub-section (6), insert sub-section “(7) The arbitral tribunal shall have the power to make an award or give a ruling notwithstanding that the dispute before it involves a serious question of law, complicated questions of fact or allegations of fraud, corruption etc.” 38 [ NOTE: This amendment is proposed in the light of the Supreme Court decisions (e.g. N. Radhakrishnan v. Maestro Engineers , (2010) 1 SCC 72) which appear to denude an arbitral tribunal of the power to decide on issues of fraud etc.]” (at p. 50) He then referred to the fact that the aforesaid sub-section was not inserted by Parliament by the 2015 Amendment Act, which largely incorporated other amendments proposed by the Law Commission. His argument therefore was that N. Radhakrishnan (supra) not having been legislatively overruled, cannot now be said to be in any way deprived of its precedential value, as Parliament has taken note of the proposed th section 16(7) in the 246 Law Commission Report, and has expressly chosen not to enact it. For this proposition, he referred to La Pintada (supra). This judgment related to a challenge to an award granting compound interest, inter alia , in a case where a debt is paid late, but before any proceedings for its recovery had begun. Lord Brandon of Oakbrook, who wrote the main judgment in this case, stated:

39

(at p. 122) After referring to various precedents, the learned Judge referred to a Law Commission Report of 07.04.1978, which contained recommendations for alterations in the law and a draft bill which would remedy injustice to unpaid creditors in all the three cases set out hereinabove. However, when Parliament passed the Administration of Justice Act, 1982, it covered cases 2 and 3 but not case 1. In this context, Lord Brandon held:

(at pp. 129-130) One can see from the speeches of the other Law Lords, with what great reluctance they allowed the appeal and set aside the Court of Appeal’s 40 judgment. Each of the Law Lords did so with regret and reluctance. The real reason why London, Chatham and Dover Railway Company v. South Eastern Railway Company, [1893] A.C. 429 [“ London Railway Case ”] could not be overruled via a common law (as opposed to a statutory) route was because the statutory route regarded the award of interest on debts as a remedy to which a creditor should not be entitled to as of right, but only as a matter of discretion; whereas the common law route granted them such interest as a matter of right. If, in overruling the London Railway Case (supra), two parallel remedies would be created, this would lead to an inconsistent position in law, as a result of which, no departure was made from the 1893 decision. Also, in the words of Lord Brandon, it was held:

(at pp. 130-131) 12. It is a little difficult to apply this case to resurrect the ratio of N. Radhakrishnan (supra) as a binding precedent given the advance made in the law by this Court since N. Radhakrishnan (supra) was decided. Quite apart from what has been stated by us in paragraph 9 above, as to how N. Radhakrishnan (supra) cannot be considered to be a binding precedent for the reasons given in the said paragraph, we are of the view that the development of the law by this Court cannot be thwarted 41 merely because a certain provision recommended in a Law Commission Report is not enacted by Parliament. Parliament may have felt, as was mentioned by Lord Reid in British Railways Board and Herrington, 1972 A.C. 877 [House of Lords] , that it was unable to make up its mind and instead, leave it to the courts to continue, case by case, deciding 1 upon what should constitute the fraud exception. Parliament may also have thought that section 16(7), proposed by the Law Commission, is clumsily worded as it speaks of “a serious question of law, complicated questions of fact, or allegations of fraud, corruption, etc.” N. Radhakrishnan (supra) did not lay down that serious questions of law or complicated questions of fact are non-arbitrable. Further, “allegations of fraud, corruption, etc.” is vague. For this reason also, Parliament may have left it to the courts to work out the fraud exception. In any case, we have pointed out that dehors any such provision, the ratio in N. Radhakrishnan (supra), being based upon a judgment under the 1940 Act, and without considering sections 5, 8 and 16 of the 1996 Act in their proper perspective, would all show that the law laid down in this case cannot now be applied as a precedent for application of the fraud mantra to negate arbitral proceedings. For the reasons given in this judgment, the House of Lords’ decision would have no application inasmuch as N. 1 This case is referred to in Lord Brandon’s judgment in La Pintada (supra) and distinguished at p. 130 of his judgment. 42 Radhakrishnan (supra) has been tackled on the judicial side and has been found to be wanting.

extracting paragraph 25 from Sikri, J.’s judgment and paragraph 48 of

14. In a recent judgment reported as Rashid Raza (supra), this Court referred to Sikri, J.’s judgment in Ayyasamy (supra) and then held: “ 4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”. Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether 43 the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.” After these judgments, it is clear that “serious allegations of fraud” arise only if either of the two tests laid down are satisfied, and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or malafide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain. 15. At this stage, it is necessary to deal with the broad statement of the law in Afcons (supra) and Booz Allen (supra). When Afcons (supra) refers in paragraph 27(iv) to “cases involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion, etc.”, this must now be understood in the sense laid down in Ayyasamy (supra) and Rashid Raza (supra). When it comes to paragraph 27(vi) in Afcons (supra), and paragraph 36(i) in Booz Allen 44 (supra), namely, cases involving prosecution for criminal offences, it is also important to remember that the same set of facts may have civil as well as criminal consequences. Thus, in K.G. Premshanker v. Inspector of Police, (2002) 8 SCC 87 [“ Premshanker ”], this Court had to answer a reference made to it as follows:

The observations in V.M. Shah v. State of Maharashtra, 1995 (5) SCC 767 , which led to the reference, are set out in paragraph 11 as follows:

45

After referring to sections 40 to 43 of the Indian Evidence Act, 1872, and the judgment in M.S. Sheriff v. The State of Madras, 1954 SCR 1144 , this Court held: “ 32. In the present case, the decision rendered by the Constitution Bench in M.S. Sheriff case [AIR 1954 SC 397 : 1954 Cri LJ 1019] would be binding, wherein it has been specifically held that no hard-and-fast rule can be laid down and that possibility of conflicting decision in civil and criminal courts is not a relevant consideration. The law envisages “such an eventuality when it expressly refrains from making the decision of one court binding on the other, or even relevant, except for limited purpose such as sentence or damages”. 33. Hence, the observation made by this Court in V.M. Shah case [(1995) 5 SCC 767 : 1995 SCC (Cri) 1077] that the finding recorded by the criminal court stands superseded by the finding recorded by the civil court is not correct enunciation of law. Further, the general observations made in Karam Chand case [(1970) 3 SCC 694] are in context of the facts of the case stated above. The Court was not required to consider the earlier decision of the Constitution Bench in M.S. Sheriff case [AIR 1954 SC 397 : 1954 Cri LJ 1019] as well as Sections 40 to 43 of the Evidence Act.” Likewise, in P. Swaroopa Rani v. M. Hari Narayana, (2008) 5 SCC 765 , this Court laid down the proposition:- “ 11. It is, however, well settled that in a given case, civil proceedings and criminal proceedings can proceed simultaneously. Whether civil proceedings or criminal proceedings shall be stayed depends upon the facts and 46 circumstances of each case. (See M.S. Sheriff v. State of Madras [AIR 1954 SC 397], Iqbal Singh Marwah v. Meenakshi Marwah [(2005) 4 SCC 370 : 2005 SCC (Cri) 1101] and Institute of Chartered Accountants of India v. Assn. of Chartered Certified Accountants [(2005) 12 SCC 226 : (2006) 1 SCC (Cri) 544].)” In Syed Askari Hadi Ali Augustine Imam v. State (Delhi Admn.), (2009) 5 SCC 528 , it was held:

47

48

49

To complete the review of case law on the subject, we may finally refer to Guru Granth Saheb Sthan Meerghat Vanaras v. Ved Prakash, (2013) 7 SCC 622 , wherein this Court, after referring to the previous case law on the subject held as follows:

50 Section 41 provides which judgment would be conclusive proof of what is stated therein.” Moreover, the judgment, order or decree passed in previous civil proceedings, if relevant, as provided under Sections 40 and 42 or other provisions of the Evidence Act then in each case the court has to decide to what extent it is binding or conclusive with regard to the matters decided therein. In each and every case the first question which would require consideration is, whether the judgment, order or decree is relevant; if relevant, its effect. This would depend upon the facts of each case. 18. In light of the above legal position, it may be immediately observed that the High Court was not at all justified in staying the proceedings in the civil suit till the decision of criminal case. Firstly, because even if there is a possibility of conflicting decisions in the civil and criminal courts, such an eventuality cannot be taken as a relevant consideration. Secondly, in the facts of the present case there is no likelihood of any embarrassment to the defendants (Respondents 1 to 4 herein) as they had already filed the written statement in the civil suit and based on the pleadings of the parties the issues have been framed. In this view of the matter, the outcome and/or findings that may be arrived at by the civil court will not at all prejudice the defence(s) of Respondents 1 to 4 in the criminal proceedings.” 16. In the light of the aforesaid judgments, paragraph 27(vi) of Afcons (supra) and paragraph 36(i) of Booz Allen (supra), must now be read subject to the rider that the same set of facts may lead to civil and criminal proceedings and if it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject matter of such proceeding under section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to 51 the conclusion that a dispute which is otherwise arbitrable, ceases to be so. 17. Section 17 of the Contract Act defines “fraud” as follows: “ 17. “Fraud” defined.— “Fraud” means and includes any of the following acts committed by a party to a contract, or with 2 his connivance, or by his agent , with intent to deceive another party thereto or his agent, or to induce him to enter into the contract— (1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one having knowledge or belief of the fact; (3) a promise made without any intention of performing it; (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be fraudulent. Explanation .—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping 3 silence to speak , or unless his silence is, in itself, equivalent to speech.” Section 10 of the Contract Act states that all agreements are contracts if they are made with the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Section 14 states that consent is said to be free when it is not caused inter alia by fraud as defined in section 17. Importantly, the section goes on to say that consent is said to be so caused when it would not have been given but for the existence, inter 2 Cf . S. 238, infra . 3 See S. 143, infra . 52 alia , of such fraud. Where such fraud is proved, and consent to an agreement is caused by fraud, the contract is voidable at the option of the party whose consent was so caused. This is provided by section 19 of the Contract Act which reads as follows: “ 19. Voidability of agreements without free consent.— When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representation made had been true. Exception .—If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of Section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the 4 means of discovering the truth with ordinary diligence. Explanation .—A fraud or misrepresentation which did not cause the consent to a contract of the party of whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable. It has been held by the Bombay High Court in Fazal D. Allana v. Mangaldas M. Pakvasa, AIR 1922 Bom 303 , that section 17 of the Contract Act only applies if the contract itself is obtained by fraud or 4 It is important to note that the exception in section 19 does not apply to fraudulent misrepresentation as the words “by silence” alone go with the word “fraudulent”, thus not applying to cases of fraudulent misrepresentation. In John Minas Apcar v. Louis Caird Malchus, AIR 1939 Cal 473 , the concurrent judgments of Derbyshire, C.J. and Lort Williams, J. referred to a passage from Sir Frederick Pollock and Sir th Dinshah Mulla, in their work on the Contract Act, 6 Edition, which said: “It will be observed that the exception does not apply to cases of active fraud as distinguished from misrepresentation which is not fraudulent”. ( see pp. 476-477) 53 cheating. However, a distinction is made between a contract being obtained by fraud and performance of a contract (which is perfectly valid) being vitiated by fraud or cheating. The latter would fall outside section 17 of the Contract Act, in which the remedy for damages would be available, but not the remedy for treating the contract itself as being void ( see pp. 311-312). This is for the reason that the words “with intent to deceive another party thereto or his agent” must be read with the words “or to induce him to enter into the contract”, both sets of expressions speaking in relation to the formation of the contract itself. This is further made clear by sections 10, 14 and 19, which have already been referred to hereinabove, all of which deal with “fraud” at the stage of entering into the contract. Even section 17(5) which speaks of “any such act or omission as the law specially deals to be fraudulent” must mean such act or omission under such law at the stage of entering into the contract. Thus, fraud that is practiced outside of section 17 of the Contract Act, i.e., in the performance of the contract, may be governed by the tort of deceit, which would lead to damages, but not rescission of the contract 5 itself.

“Thus tort is a civil injury other than a breach of contract which is capable of sustaining an action for unliquidated damages in a court of law. If the appropriate remedy is not a claim for unliquidated damages but for injunction or some other relief, it would not rank as a tort though all the same it would be an actionable wrong.” (at p. 48) 54 18. Both kinds of fraud are subsumed within the expression “fraud” when it comes to arbitrability of an agreement which contains an arbitration clause. 19. Now, as to the measure of damages for fraudulent misrepresentation by which a party to the contract is induced to enter into the contract. In Smith New Court Securities Ltd. v. Scrimgeour Vickers (Asset Management) Ltd., [1996] 4 All ER 769 , the appellant, Smith New Court [“ SMC ”] purchased shares in a company, Ferranti International Signal Inc. [“ F. Inc. ”], which had been pledged to a bank as security for a loan made by the bank to a client. SMC was given the impression that it was in competition with two other bidders for the

55 shares and, therefore, bid a very high price for the shares. When the share price collapsed as a result of a major fraud, SMC investigated the circumstances of its purchase and discovered that the two other bidders were not there at the time of the sale. SMC then brought proceedings against the first defendant, Scrimgeour Vickers (Asset Management) Ltd., and the bank, claiming damages for fraudulent misrepresentation. The House of Lords referred to the leading judgment in Doyle v. Olby (Ironmongers) Ltd., [1969] 2 All ER 119 (Queen’s Bench) [“ Doyle ”], and held:

In this judgment of Lord Browne-Wilkinson, a useful summary of the principles that apply in assessing the damages payable where the plaintiff has been induced to enter into a contract by a fraudulent misrepresentation, are stated as follows: 56

Likewise, in the same judgment Lord Steyn, after referring to the seminal judgment in Doyle [supra] stated the law thus:- “The logic of the decision in Doyle v. Olby (Ironmongers) Ltd. justifies the following propositions. (1) The plaintiff in an action for deceit is not entitled to be compensated in accordance with the contractual measure of damage, i.e. the benefit of the bargain measure. He is not entitled to be protected in respect of his positive interest in the bargain. 57

58 In an important passage titled “the date of transaction rule”, Lord Steyn emphasised that in cases of fraudulent misrepresentation, there is only one and not two alternative measures of damages, namely, the loss truly suffered by the party affected who must be put back in the same place as if he had never entered into the transaction. In an action for deceit, the price paid less the valuation at the transaction date is simply a method of measuring such a loss, but is not a substitute for the basic rule. This was felicitously stated as follows: “ The date of transaction rule That brings me to the perceived difficulty caused by the date of transaction rule. The Court of Appeal [1994] 1 W.L.R. 1271, 1283G, referred to the rigidity of “the rule in Waddell v. Blockey (1879) 4 Q.B.D. 678, which requires the damages to be calculated as at the date of sale.” No doubt this view was influenced by the shape of arguments before the Court of Appeal which treated the central issue as being in reality a valuation exercise. It is right that the normal method of calculating the loss caused by the deceit is the price paid less the real value of the subject matter of the sale. To the extent that this method is adopted, the selection of a date of valuation is necessary. And generally the date of the transaction would be a practical and just date to adopt. But it is not always so. It is only prima facie the right date. It may be appropriate to select a later date. That follows from the fact that the valuation method is only a means of trying to give effect to the overriding compensatory rule: Potts v. Miller , 64 C.L.R. 282, 299, per Dixon J. and County Personnel (Employment Agency) Ltd. v. Alan R. Pulver & Co. [1987] 1 W.L.R. 916, 925–926, per Bingham L.J. Moreover, and more importantly, the date of transaction rule is simply a second order rule applicable only where the valuation method is employed. If that method is inapposite, the court is entitled simply to assess the loss flowing directly 59 from the transaction without any reference to the date of transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it. An example of such a case is to be found in Cemp Properties (U.K.) Ltd. v. Dentsply Research & Development Corporation [1991] 2 E.G.L.R. 197, 201, per Bingham L.J. There is in truth only one legal measure of assessing damages in an action for deceit: the plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendants. The analogy of the assessment of damages in a contractual claim on the basis of cost of cure or difference in value springs to mind. In Ruxley Electronics and Construction Ltd. v. Forsyth [1996] A.C. 344, 360G, Lord Mustill said: “There are not two alternative measures of damages, as opposite poles, but only one; namely, the loss truly suffered by the promisee.” In an action for deceit the price paid less the valuation at the transaction date is simply a method of measuring loss which will satisfactorily solve many cases. It is not a substitute for the single legal measure: it is an application of it.” (at pp. 793-794) 20. At this stage, in order to discover whether there is a strong prima facie case made out in favour of HSBC in the present section 9 proceedings, it is necessary to refer to the Foreign Final Award dated 27.09.2014. The Foreign Final Award in this case, after setting out the case of HSBC (the Claimant before the Arbitral Tribunal) and the case of Avitel India and the Jain family (the Respondents before the Arbitral Tribunal), set out the issues for determination thus: “ ISSUES Issues for Determination 60

61 In answering these issues, the Arbitral Tribunal found:

It further found that the siphoning off of a large part of the amount of USD 60 million into companies owned or controlled by the Jain family was made out as follows:

62

63

It then found that the following admitted facts would show that most of the representations made by the Avitel Group and the Jain family to HSBC were false in that:

64

65

As a result thereof, issue (iv) was answered stating:

66

67

68

As a result, in paragraph 20, a summary of findings was given as follows:

69

70

As a result thereof, it was found that HSBC, in respect of its claim for fraudulent misrepresentation, and its claim in tort for deceit, is entitled to damages in the total amount of USD 60 million plus interest and costs as awarded. The final declaration made in the Award then reads:

71

21. There can be no doubt whatsoever after reading the issues and some of the material findings in the Foreign Final Award that the issues raised and answered are the subject matter of civil as opposed to criminal proceedings. The fact that a separate criminal proceeding was sought to be started and may have failed is of no consequence whatsoever. We, therefore, hold on a conspectus of these facts, and following our judgments, that the issues raised and answered in the Foreign Final Award would indicate: (i) That there is no such fraud as would vitiate the arbitration clause in the SSA entered into between the parties as it is clear that this clause has to be read as an independent clause. Further, any finding that the contract itself is either null and void or voidable as a result of fraud or misrepresentation does not entail the invalidity of the arbitration clause which is extremely wide, reading as follows:

(emphasis supplied) 72 (ii) That the impersonation, false representations made, and diversion of funds are all inter parties, having no “public flavour” as explained in paragraph 14 so as to attract the “fraud exception”. 22. Thus, a reading of the Foreign Final Award in this case would show that a strong prima facie case has indeed been made out as the Award holds the BBC transaction as a basis on which the contract was entered into and the USD 60 million paid by HSBC, which would clearly fall within fraudulent inducement to enter into a contract under section 17 of the Contract Act. Such a contract would be voidable at the instance of HSBC. Also, the findings on the siphoning off of monies that were meant to be allocated for the performance of the BBC contract would attract the tort of deceit. The measure of damages for such fraudulent misrepresentation is not the difference between the value of the shares on the date of making the contract and the value HSBC would have received, if it had resold those shares in the market, after the purchase. As has been held in the judgments stated hereinabove, the measure of such damages would be to put HSBC in the same position as if the contract had never been entered into, which is, the entitlement to recover the price paid for the shares and all consequential losses. This being the case, it is difficult to accede to the Division Bench’s finding as to the measure of damages in such cases. 73 23. So far as the other points raised by M/s. Mukul Rohatgi and Saurabh Kirpal are concerned, we wish to say nothing, as any finding on these points even prima facie would prejudice the section 48 proceedings pending in the Bombay High Court. So far as the appeal of HSBC is concerned, we are of the view that it has substance in that the USD 60 million that was to be kept aside vide the Single Judge’s order, was fair and just in the facts of the case in that it is only the principal amount without any interest or costs that is ordered to be kept aside. Further, the reduction of USD 60 million to USD 30 million by the Division Bench is not justified given our finding on the measure of damages in the facts of this case. 24. It is clarified that any finding made on facts in this judgment is only prima facie for the purpose of deciding the section 9 petition. We have held that HSBC has made out a strong prima facie case necessitating that USD 60 million, being the principal amount awarded to them, is kept apart in the manner indicated by the learned Single Judge of the Bombay High Court. The balance of convenience is also in its favour. It is clear that in case HSBC was to enforce the Foreign Final Award in India in accordance with section 48 of the 1996 Act, irreparable loss would be caused to it unless at least the principal sum were kept aside for purposes of enforcement of the award in India. Accordingly, we 74 dismiss Civil Appeal No.5145 of 2016 filed by Avitel India and the Jain family, and allow Civil Appeal No.5158 of 2016 filed by HSBC. Civil Appeal No. 9820 of 2016 25. In this case, the Appellant is an angel investor in the shares of Avitel India. By a letter dated 04.07.2016, the Appellant herein expressed his concern on the observations and the freezing of the company’s bank account by the Bombay High Court vide orders dated 22.01.2014 and 31.07.2014. The Appellant attended a meeting of the Board of Directors of Avitel India on 11.07.2016, in which the Chairman of the company, i.e., Mr. Pradeep Jain, explained to the Appellant in some detail as to the proceedings filed by HSBC against the company and the orders passed by the Arbitrators and Courts therein. The Chairman expressed a view that, ultimately, they were likely to succeed in this litigation. The Appellant stated that he was not satisfied with this point of view and asked for the return of the money invested along with interest at the rate of 12% per annum. The Chairman stated that the amounts invested by the Appellant were in equity shares, which were the fixed capital of the company, and any return of such investment is not permissible in law. The Appellant then stated the following, which is recorded in the Minutes of the Board Meeting dated 11.07.2016: 75 “Mr. Savla stated that he would like to peruse the documents in detail and would not rest content till full justification is made available, if need so arises for redressal of issues involved. He requested that the disputes be decided by an Arbitrator. The Board unanimously consented that any disputes raised by Mr. Ravindra Savla, so long as they are arbitrable under law, shall be referred to arbitration in accordance with Indian law. Mr. Ravindra Savla stated that he would examine the papers provided to him and determine his further course of action. Mr. Ravindra Savla further requested that a copy of the Minutes of this Meeting of the Board of Directors be made available to him. The Chairman accepted the said request.” 26. Almost immediately, the Appellant filed a section 9 petition under the 1996 Act before the learned ADJ, Mohali, which was decided by a judgment dated 03.08.2016, in which the learned ADJ held that the Board Resolution dated 11.07.2016 only showed that any disputes raised by the Appellant shall be referred to arbitration in accordance with Indian law, provided they are arbitrable disputes. It was then held that as serious allegations of fraud were raised by HSBC in the dispute between HSBC and the Avitel Group/Jain family, such dispute would not be arbitrable as per Indian law. Even otherwise, according to the learned ADJ, this dispute (i.e., the dispute between HSBC and the Avitel Group/Jain family) is pending adjudication before the Supreme Court of India, and any decision made by that Court shall have a direct bearing on the dispute between the parties in this case also. It was, therefore, held: 76 “ 11. In view of the detailed discussion made above, this court can safely conclude that the petitioner is a shareholder and has no specific separate arbitration agreement, so no arbitrable dispute arises, as per Indian law, which may be referred to arbitration or for which, provisions of section 9 of Arbitration and Conciliation Act can be involved for protection of his interest qua the shares purchased by him. Therefore, I do not find that any prima-facie case is made out in favour of applicant. Even balance of convenience is not in favour of the applicant and no irreparable loss will be caused to the applicant, if this application is not allowed. Thus no ground is made out for grant of relief under section 9 of the Act and section 151 of CPC and the application stands dismissed accordingly. File be consigned to the record room.” 27. An appeal was filed against this judgment to the Punjab and Haryana High Court. A learned Single Judge of the High Court, by the impugned judgment dated 02.09.2016, held that the final relief sought for is the return of an invested amount with interest together with cancellation of the shares. Such disputes would be governed by the Companies Act, 2013. Therefore, following some of the judgments of the Supreme Court, the remedy for arbitration sought by the Appellant would be barred by implication in view of the provisions of the Companies Act, 2013. After discussing the “fraud exception” in some detail and stating that serious allegations of fraud and impersonation are not arbitrable, the High Court concluded: “For the foregoing reasons, I am of the view that primarily, the appellant is trying to make out a case of parity with the case of HSBC, which is already a matter sub-judice before the Competent Court, but as per the facts narrated above, I am of the view that the prima facie allegation of fraud, as 77 already noticed above, would not fall in the realm of arbitrable dispute and therefore, rightly so, the court below has declined to grant the interim relief as sought. I do not intend to differ with the order under challenge. No ground for interference is made out. The appeal is dismissed.” 28. In view of the judgment in Civil Appeal No.5145 of 2016 and Civil Appeal No.5158 of 2016, we set aside the judgments of the learned ADJ and the learned Single Judge that are impugned in this appeal, and remand the matter for adjudication afresh by the ADJ, Mohali. This civil appeal is, accordingly, allowed, the judgments dated 03.08.2016 and 02.09.2016 are set aside, and the matter is remanded to the ADJ, Mohali for fresh disposal in accordance with law. …………..………………J. (R. F. Nariman) ……..……………………J. (Navin Sinha) New Delhi August 19, 2020. 78