Delhi HC Rules Transferring Liabilities from Previous Loan Agreement Renders Subsequent Arbitration Clauses Binding

LI Network

Published on: 19 September 2023 at 11:12 IST

The Delhi High Court has affirmed that transferring liabilities from a previous loan agreement imposes the binding nature of arbitration clauses in subsequent agreements upon the involved parties.

This ruling comes as the Court dismissed an appeal challenging the order issued by the Trial Court, which had previously dismissed a petition challenging an Arbitration Award.

The bench, presided over by Justice Manmohan and Justice Mini Pushkarna, asserted that the arbitration proceedings were rightfully initiated, as the 2010 Loan Agreements, in question, contained arbitration clauses.

The case, titled DD Global Capital Pvt Ltd & Ors v M/S S E Investments Ltd, revolved around a loan transaction. Appellant no. 1 had requested a loan of Rs. 4 Crores from the Respondent, which was subsequently approved, resulting in the disbursal of Rs. 3.20 Crores under the 2008 Loan Agreement.

The loan came with a one-year repayment period and an annual interest rate of 25%. Appellants no. 2 and 3 had provided personal guarantees, and Renaissance Buildcon Co. Pvt. Ltd. (RBCL) had offered 5.92 acres of land as collateral. RBCL had also issued a corporate guarantee.

However, Appellant no. 1 failed to meet the repayment terms, leading to discussions for loan restructuring. As of July 31, 2010, the loan, along with outstanding interest, amounted to Rs. 6.37 Crores. To address this, the Respondent refinanced the loan by providing five new loans for a one-year term, charging upfront interest at 30% per annum, under the 2010 Loan Agreements. These loans were also secured by personal guarantees from Appellants no. 2 and 3, a corporate guarantee from RBCL, and the mortgaged land as collateral. Additional undertakings, debit vouchers, and post-dated cheques for Rs. 9.10 crores were provided.

Unfortunately, default occurred, leading to the initiation of arbitration proceedings under Clause 20 of the 2010 Loan Agreements. The Arbitrator issued a single Arbitral Award, which affirmed the Respondent’s right to recover Rs. 9.10 crores jointly and severally from the Appellants. The award also included interest for the pre-award period and future interest at a rate of 18% per annum.

Subsequently, the Appellants filed a petition under Section 34 of the Arbitration Act to challenge the award. However, the Single Judge dismissed this petition. An appeal was then filed challenging the dismissal order.

The Delhi High Court, in its ruling, noted that the Appellants had not contested the validity of the 2010 Loan Agreements and had not requested the disbursement of the specified loan amounts.

The Arbitrator correctly interpreted the debit vouchers, which demonstrated that the Appellant company had received consideration for the 2010 Loan Agreement through an adjustment of outstanding dues from the 2008 Loan Agreement. Since the 2010 Loan Agreements contained an arbitration clause, the initiation of arbitration proceedings was deemed appropriate.

Furthermore, the Court emphasized that the interpretation of an agreement falls within the Arbitrator’s purview. The Single Judge found the Arbitrator’s conclusions plausible, leaving no grounds for questioning the findings. Consequently, the Court determined that no interference was warranted.

The Court ruled that the Appellants could not object to the continuation of the arbitration proceedings at this stage, as they had not raised objections before the Arbitrator and had continued to participate in the proceedings, even after the 2015 amendment.

Thus, the Delhi High Court dismissed the Appeal, affirming the binding nature of arbitration clauses in subsequent agreements when liabilities from previous loan agreements are transferred.

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