Case Summary: KAYNET FINANCE LIMITED VS. VERONA CAPITAL LIMITED, AIR 2019 BOM 298

• Title: KAYNET FINANCE LIMITED VS. VERONA CAPITAL LIMITED
• Citation: AIR 2019 BOM 298
• Court: High Court of Bombay
• Bench: Pradeep Nandrajog, C.J. and N.M. Jamdar, J
• Date of Judgment: 9th July 2019
• Relevant Section: CODE OF CIVIL PROCEDURE, 1908 (CPC) – Order VII Rule 6
• Acts/Rules/Orders: Code of Civil Procedure, 1908 (CPC) – Order VII Rule 6; Companies Act, 2013 – Section 248 (5); Limitation Act, 1963 – Section 18

FACTS OF THE CASE

The Appellant of the case is Kaynet Finance Limited, a member-broker at the National Stock Exchange of India and the Respondent is Verona Capital Limited, a constituent of Kaynet Finance Limited. 

The disputes arose between the parties over share transactions. The Respondent moved an arbitration application before the National Stock Exchange. An Arbitral Tribunal was constituted by the National Stock Exchange. The Tribunal awarded one claim out of four made by the Respondent and directed the Appellant to pay an amount of Rs. 17,52,47,517/- with interest. The Appellant challenged the Award before a learned Single Judge.

The Respondent appointed the Appellant as a stockbroker to effect transaction on the National Stock Exchange of India and Bombay Stock Exchange. The Respondent opened account with Kaynet Finance limited in January 2009 and commenced transactions around February 2009. The Respondent acquired share of Pipapvav Defence and Offshore Engineering and desired to offer the shares in an Open offer. However, Kaynet Finance Limited allegedly showed indifference and declined to transfer the shares in Demat Account.

Respondent discovered disputes with many clients of Appellant over share transactions. They demanded payment from the Appellant which was not paid. Respondent filed complaints with Economic Offences Wing and the Investor Services Cell of the National Stock Exchange. Respondent filed and Arbitration Application with the National Stock Exchange in August 2018.

The Respondent raised four claims:

1. Return of the credit balance in the ledger account as of 31st March 2015 (Rs. 17,52,47,517/-)
2. Value of shares of Pipapvav Defence and Offshore Engineering.
3. Amounts of losses incorrectly debited in the account of Respondent.
4. Delayed payment charges debited by the Appellant.

Arbitration was conducted before a panel of arbitrators under the By-laws, Rules and Regulations of National Stock Exchange of India Ltd.

The tribunal rejected three claims and partly granted the first claim of Rs. 17,52,47,517/-, directing Appellant to pay the amount with interest.

The Appellant challenged the Award before a learned Single Judge, primarily on two grounds: limitation and maintainability of the arbitration application.

The learned Single judge rejected the petition and Appellant then filed an appeal.

QUESTION RAISED BEFORE THE COURT 

1. Whether the claim awarded to the Respondent, Verona Capital Limited, in the arbitration proceeding was barred by limitation.
2. Whether the arbitration application filed by Verona Capital Limited was maintainable, considering the disqualification of its directors under the Companies Act of 2013

PETITIONER’S ARGUMENT

1. The Appellant contended that the Arbitral Tribunal’s ruling on the claim was made after the time limit expired. They highlighted that according to the Respondent’s pleading, the amount due as of 31 March 2015, was claimed by the Respondent and the claim was lodged on 30 August 2018, which was obviously after the three-year period of limitation. The Appellant pointed out that the statement of claim neither mentioned how the limitation was calculated nor which Article of the Limitation was invoked. They asserted that even if Section 18 of the Limitation Act, which extends the time limit in specific instances, applied, it was for the Respondent to plead it specifically. They also maintained that the Arbitral Tribunal should not have allowed the document attached to the Appellant’s plaint to be made use of, because there was no pleading in the arbitration application and the learned Single Judge did not view the case in the light of Order VII Rule 6 of the CPC.
2. The second point raised by the Appellant was regarding the maintenance of the arbitration application that was filed in the Stock Exchange. They highlighted that at the time of the reference the Respondent was a struck-off entity which means the company was no longer in existence due to dissolution. The Appellant claimed that the arbitration required filing was done by a disqualified director of the company thus making it not bringable. They admitted that even if the company’s name was later restored on the Register of Companies, the director would still be disqualified, and hence the claim made in the name of the company would not be maintainable.

RESPONDENT’S ARGUMENT

1. The Respondent argued that the Arbitral Tribunal correctly applied Section 18 of the Limitation Act. They stated that the application filed on 31 August 2018 was within limitation as it was based on the admitted ledger accounts maintained by the Appellant, which showed an acknowledgement of liability of the claimed amount until 31 March 2018.
2. The Respondent contended that the arbitration application was maintainable even though the company’s name had been struck off and later restored to the Register of Companies. The disqualified directors were said to be the embodiment of certain provisions of the Companies Act of 2013. The party that made this claim stressed that the disqualification had not resulted in the automatic cessation of the office of the directors, and consequently, they were still able to act on behalf of the company in court.

JUDGEMENT 

1. The appeal against the second impugned order allowing restoration of the company’s name is not maintainable since the Tribunal had already rejected the Appellant’s intervention application.
2. The Appellant, being debtors, lacked locus standi to challenge the restoration of the company’s name. the term ‘person concerned’ in Section 252(1) refers to ‘aggrieved persons’, which does not include debtors.
3. The principle ‘ubi jus ibi remedium’ dictates that only those whose legal rights have been infringed can seek legal remedy. The Appellant failed to demonstrate any infringement of their legal rights.
4. The court rejected the Appellant’s intervention to be a tactic to evade their liabilities and stall legal proceedings. They were directed to pay costs to the Respondent, with 50% of the amount to be released immediately upon realization.
5. The appeal was thus dismissed, and the Appellants were ordered to pay costs to the Respondent.

RATIO DECIDENDI

• Maintainability and Limitation of Arbitration Claim

Legal Principle:

If a party acknowledges liability through action or documents on file, the limitation period may be lengthened under Section 18 of the Limitation Act where the pleading or confessed accounts reveal a continuous acknowledgment of liability even if the claim seems to be barred by time.

Application in Case:

1. The arbitration application in connection with the sum of ₹17,52,47,517/- was considered to be within the limitation period since the Appellant’s recognized ledger accounts as of 31 March 2018 included debt’s continuous acknowledgment.
2. So, the Tribunal rightly applied Section 18 of the Limitation Act.

• The Issue of Arbitration Application’s Maintainability When Company Struck Off

Legal Principle:

The restoration of a company’s name under Section 252 is considered a legal fiction that the company had never been struck off. Therefore, the proceedings which were initiated while the company was non-existent will now be regarded as valid if the company gets restored.

Application in Court:

1. Although the Respondent’s name was removed from the register on 18 Aug 2017, it was restored on 30 Oct 2018.
2. So, the Company was considered to be in existence all the time during the filing of the arbitration application (31 Aug 2018), thus making the application maintainable.

• Disqualification of Directors under Sections 164(2) & 167

Legal Principle:

A director objected to under section 164(2) does not, in this case, vacate office for all purposes; the sanction keeps the director from being re-appointed but does not at once take away the right of the director to act for the company after being restored.

Application in Case:

The directors who were disqualified under Section 164(2)(a) still had the power to take part in arbitration on behalf of the Respondent because their positions had not been vacated automatically before the case came for restoration, and the interpretation of Sections 164 and 167 does not lead to the situation of no authority as was contended.

• Patent Illegality Standard in Setting Aside Arbitral Awards

Legal Principle:

It is not enough that an arbitral award contains a legal error, but it must show patent illegality that affects the basic policy of Indian law and not only the wrong application of law.

Application in Case:

The Court decided that any technical or disputable legal error in accepting the arbitration reference did not constitute patent illegality which would justify the court’s intervention under Section 34 of the Arbitration & Conciliation Act, 1996.

OBITER DICTA

Judges’ remarks, though persuasive, not obligatory, are these:

• Judicial remark on arbitration CPC principles:

Although CPC is not applicable to arbitration in strict sense, basic principles (e.g., Order VII, Rule 6) can guide arbitrators’ decisions in cases where documents are not formally pleaded and are still considered.

It speaks of judicial reasoning rather than a mandatory ruling.

• Interpretative Harmony of Statutes (164 & 167):

The court’s reasoning regarding the objectives of Sections 164 and 167 as well as the legislative intent was very broad and included the consideration of statutory interpretation rules that support reasoning but do not on their own determine the issue of maintainability.

FINAL OUTCOME OF KAYNET FINANCE LTD. & ANR. VS VERONA CAPITAL LTD. & ANR.

The appeal was dismissed.

The National Company Law Appellate Tribunal (NCLAT) confirmed both the arbitral award favouring Verona Capital Ltd. and the rejection of Kaynet Finance Ltd.’s challenge to that award. The Tribunal did not consider the appellant’s arguments — that the claim was barred by limitation and that the arbitration application was not maintainable because of the directors’ status — to be meritorious. Thus, the arbitral award which directed Kaynet Finance Ltd. to pay ₹17,52,47,517/- with interest was confirmed, and the appeal was dismissed.