SHYAM SUNDER AGARWAL Vs. P NAROTHAM RAO

JUDGEMENT

(1.) THIS arbitration application has been taken out under sub-sections (5) and (6) of Section 11 of the Arbitration and Conciliation Act, 1996 read with the Scheme for Appointment of Arbitrators, 1996 seeking appointment of a sole arbitrator to resolve the disputes between the applicant and the respondents arising out of the Memorandum of Understanding dated 08.12.2005.

(2.) BACKGROUND facts, in a nutshell, leading to filing of this application by the applicant-Shyam Sunder Agarwal are:- (a) Mancherial Cement Company Private Limited (hereinafter referred to as "MCC") is a company incorporated on 15.07.2004 and it is primarily engaged in manufacture and sale of cement. The applicant- Shyam Sunder Agarwal is a shareholder in MCC. The authorised share capital of MCC at the time of incorporation was Rs.1,00,00,000/- comprising of 10,00,000 equity shares of Rs.10/- each. The authorised share capital was subsequently increased to Rs.11,00,00,000/- in the Extra Ordinary General Meeting held on 14.3.2005. Shyam Sunder Agarwal, Mr.K.Vidyasagar Rao, Mr. Ashok Kumar Agrawal, Mr. S.Mahendar Rao, Mr.S.Hareender Rao and Mr. S.Anand Rao (hereinafter referred to as "Shyam Sunder Agarwal and others") held 50.20% of the shares in MCC. Whreas, Mr.P.Narotham Rao, Mr.P.Varada Rajeswara Rao, Mr. J.Jagannadha Rao and Mr. P.Rajanarasinga Rao (hereinafter referred to as "Narotham Rao and others") held 44.80% of the shares in MCC. Shyam Sunder Agarwal and P.Narotham Rao entered into a Memorandum of Understanding with Associated Cement Companies (hereinafter referred to as "ACC") for the purchase of Mancherial Cement Works (hereinafter referred to as "MCW") [including the mines, housing colony, movable and immovable assets except land admeasuring Ac.[130]. The consideration agreed upon between the parties was Rs.30.33 crores. 10% of the consideration was agreed to be paid at the time of signing the MoU and the balance was agreed to be paid on or before 5-11-2004. (b) MCC applied for credit facilities with Andhra Bank, St. John's EMHS Branch, Karimnagar (for short, "Andhra Bank") to raise funds for purchase of MCW from ACC. Andhra Bank sanctioned term loan of Rs.25,00,00,000/- and cash credit facility up to Rs.15,00,000/- and accordingly, issued a sanctioned letter. As per the terms of the sanctioned letter, all the Directors of MCC were required to give their personal bank guarantees. In the Board meeting of the Directors of the MCC, Mr.S.Harinder Rao and Mr. P.Narotham Rao were appointed as Joint Managing Directors of the company. MCC entered into sale agreement with ACC on 25.11.2005 for purchase of MCW for a sale consideration of Rs.31,33,00,000/-Andhra Bank addressed a letter dated 29.11.2005 expressing its readiness to disburse the loan sought for by MCC for purchase of MCW from ACC. P.Narotham Rao, who was the Joint Managing Director of the company refused to give personal guarantee, which was mandatory as per the sanctioned terms set by Andhra Bank in its letter dated 31.12.2004. Certain developments took place in ACC and consequently, ACC declared VRS to its employees and their plant was also closed in terms of the agreement dated 25.11.2005. The Board of Directors of the MCC in the meeting held on 01.12.2005 resolved to remove Mr.P.Narotham Rao as Joint Managing Director of the company and to appoint Mr. S.Harinder Rao as Managing Director of the company. Thereupon, Mr.P.Narotham Rao addressed letter to Andhra Bank not to disburse the loan amount to MCC. Consequently, Andhra Bank cancelled credit facilities to MCC. There was a re-approchment between the parties on 08.12.2005 whereunder P.Narotham Rao and others agreed to transfer their 44.80% share holding to Shyam Sunder Agarwal and others for consideration of Rs.6,50,00,000/-. The shares were valued at Rs.29/- each. Accordingly, a Memorandum of Understanding came to be executed between the parties and payment schedule has also been indicated in the MoU. As per clause (8) of the MoU, the parties nominated Mr. K.Sudhakar Rao and Mr. Gone Prakash Rao as mediators/ arbitrators in order to ensure successful completion of the transaction and to avoid any unforeseen litigation. Shyam Sunder Agarwal handed over 9 post-dated cheques drawn in favour of P.Narotham Rao to the mediators. Share certificates along with duly signed transfer deeds pertaining to the 22,40,000 equity shares of Narotham Rao and others were supposed to be handed over to the above-referred two persons. Subsequently, Shyam Sunder Agarwal and others substituted the cheques with demand drafts and expressed their willingness to make the payments as per the MoU. Some correspondence went on between the parties. The applicant-Shyam Sunder Agarwal and others made payment of Rs.1,00,00,000/- in cash to the 1st respondent-P.Narotham Rao and others on 22.2.2006. On 20.4.2006, Mr.P.Narotham Rao-1st respondent addressed letter to Mr. K.Sudhakar Rao, one of the mediators expressing his willingness to settle the issue in relation to MCC undertaking to transfer the shares of his group once he receives the total amount and upon signing of the draft supplementary agreement. The draft supplementary agreement was also enclosed to the said letter. In the draft supplementary agreement, it has been mentioned by P. Narotham Rao-1st respondent that Shyam Sunder Agarwal-applicant and others should make payment of Rs.1.80 crores and arrange to pay the balance of Rs.3.70 crores on or before 15th April, 2006. K.Sudhakar Rao, one of the mediators had addressed letter to the applicant-Shyam Sunder Agarwal informing him of the letter dated 20.4.2006 addressed to him by the 1st respondent-P.Narotham Rao. Since P.Narotham Rao-1st respondent and others had not been honouring their obligations under the MoU dated 8.12.2005, the applicant-Shyam Sunder Agarwal and others addressed letter dated 24.5.2007 requesting K.Sudhakar Rao and Mr. Gone Prakash Rao to enter reference and mutually agree upon a third arbitrator and commence arbitration proceedings. The applicant-Shyam Sunder Agarwal reiterated his request to Sri K.Sudhakar Rao and Gone Prakash Rao under letter 01.9.2009 to commence the proceedings. The 1st respondent-P.Narotham Rao issued a reply dated 15.9.2009 questioning the very validity of the MoU. The 1st respondent-P.Narotham Rao reiterated his stand in the letters dated 15.10.2009 and 30.10.2009. The 1st respondent-Mr. P.Narotham Rao stated in the notices that the claim of the applicant-Shyam Sunder Agarwal is barred by limitation. For completion of narration of facts, I deem it appropriate to refer paragraphs 20 to 22 of the affidavit filed in support of the application and they are thus:-

(3.) THE 3rd respondent filed counter resisting the application on the similar grounds urged by respondents 1 and 2. It is stated in para (12) of the counter that clause (8) of the MoU which is referred as arbitration clause by the applicant deals only with nomination of escrow agents, and though the words 'mediators/ arbitrators' have been used in respect of Sri K.Sudhakar Rao and Sri Gone Prakash Rao in the said MoU, that itself does not make them arbitrators nor the applicant can import an arbitration clause in the said MoU for resolution of the disputes, which otherwise has not been agreed by the parties.