Delhi High Court appoints Justice L Nageswara Rao as arbitrator in ₹150 crore loan dispute involving Essel, Zee, Siti, Aditya Birla Finance

The Delhi High Court recently referred to arbitration a dispute involving Essel Corporate, Zee Enterprises, Siti Networks and Aditya Birla Finance in relation to the dispute regarding Siti’s failure to repay the term loan of ₹150 crores extended by Aditya Birla Finance..Former Supreme Court judge, Justice L Nageswara Rao was appointed the sole arbitrator in the case."This Court appoints Justice L Nageswara Rao, a former judge of Supreme Court of India, as the sole Arbitrator, who shall adjudicate the disputes between the parties, through claims and counter claims, if any. He shall give his disclosure under Section 12 of the [Arbitration and Conciliation] Act of 1996. The learned arbitrator can fix the fee to conduct arbitration proceedings in consultation with the counsel for the parties,” the Court ordered..Justice V Kameswar Rao ordered the companies to be referred to arbitration after Aditya Birla Finance approached the Court stating that Siti – part of Subhash Chandra owned Essel Group – defaulted on the payment of the loan and admitted the same to the National Stock Exchange and the Bombay Stock Exchange.The Court was told that Siti has gone into insolvency.It was argued that two letters of guarantee were issued by the respondents to the petitioner for the loan. While the first letter was issued by Zee and signed by its promoter and Managing Director, Punit Goenka (son of Subhash Chandra), the second was signed by Himanshu Mody, Head – Group Finance and Strategy of the Essel Group.Aditya Birla Finance demanded that since Siti, Zee and Essel belong to the same group of companies and have a single economic identity and, therefore, all of them should be referred to the adjudicatory process of arbitration.However, Zee and Essel argued that they are non-signatory to the arbitration clause enumerated in the facility agreement and the credit arrangement letter (CAL) and, therefore, cannot be compelled to arbitrate in the absence of the mutual intent of the parties..After considering the case, Justice Kameswar Rao said that as per the judgement of the Supreme Court in Chloro Controls India (P) Ltd, non-signatory or third party could be subjected to arbitration without their prior consent in exceptional cases.The Court noted that there cannot be any denial that the respondent, Siti and Zee are part of Essel Group of companies and as such they are a single economic entity and related party.Justice Rao said that even though the two letters, which Aditya Birla Finance claimed to be letters of guarantee cannot be called so in terms of the Indian Contract Act and can only be considered as letters of comfort, given the fact that the petitioner is seeking compliance/performance of these letters, such a claim can be maintainable before the arbitrator only when the respondent Nos. 2 and 3 are parties before the arbitrator."The contents of letters being that the respondent Nos.2 (Zee) and 3 (Essel) assures and confirms to respondent No.1 (Siti) that they shall ensure respondent No.1 repays the facility on the relevant due dates, are the statements made in the midst of a commercial transaction; which are also promissory in character and thus enforceable. So, in that sense there was an intention to create a legal relation by the parties as the conduct of the parties is always a guide to the construction of a contract as held by the Supreme Court in the case of The Godhra Electricity Co. Ltd. v. The State of Gujarat & Ors,” the Court said..Aditya Birla Finance had filed another plea seeking direction to Siti to deposit the outstanding amount of ₹134 crore and to restrain them from making any further payments and/or transferring any assets to respondent Zee prior to making payments to the petitioner.On this issue, the bench said that since an arbitrator has been appointed in the matter, the petition shall be treated as an application under Section 17 of the Arbitration and Conciliation Act and will be decided by the arbitrator along with two other applications filed by the petitioner seeking withdrawal of the amount deposited by the respondent.The Court further said that the arbitrator will also decide Zee’s application seeking modification/clarification of the order wherein the court had directed it to refrain from making any payments to its related parties.“Till such time the applications are decided by the learned Arbitrator, the orders passed by this Court in this petition from time to time, as noted above, shall continue. It is made clear, the amount deposited by the respondent No.1 in this Court shall continue to be deposited, till the decision of the learned Arbitrator.”.Senior Advocate Raj Shekhar Rao along with advocates Aseem Chaturvedi, Ravitej Chilumuri, Mihika Jalan, Raddhika Khanna, Pragya Dahiya and Aanchal Tikmani appeared for Aditya Birla Finance.Siti was represented through Senior Advocate Joy Basu along with advocates Ritwika Nanda, Akshita Salampuria and Kanak Bose.Senior Advocates P Chidambaram and Sandeep Sethi along with advocates Aman Raj Gandhi, Vardaan Bajaj, Bindi Dave and Pranay Tuteja appeared for Zee.Essel was represented through advocates Samar Singh Kachwaha, Shivangi Nanda and Kavita Vinayak..[Read Judgment]