18 June 2025 Arbitration Law >> Business & Commercial Law  

In Mangal Credit & Fincorp Limited Through its Authorised Representative Dhirav Kishor Veera v/s GBL Chemical Limited & Others., an Application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking to refer disputes arising from a loan agreement dated March 30, 2024. The four respondents were designated as borrowers, and the agreement includes an arbitration clause (Clause 8.2).

Respondents 1 and 2 primarily objected to the arbitration, arguing that the loan was a product of fraud, and that the Applicant might even be involved. They contended that serious allegations of fraud vitiate contracts and render disputes non-arbitrable, urging the court to dismiss the application. They cited judgments such as A. Ayyaswamy v. A. Paramasivam & Ors, Rashid Raza v. Sadaf Akhtar, and Avitel Post Studioz Limited & Ors v. HSBC Holdings (Mauritious) Limited to support their argument that serious fraud allegations make disputes non-arbitrable, especially when the fraud questions the contract's validity. They also pointed out that investigations unearthed a "device of fraud" which was disclosed to stock exchanges, as Respondent 2 is a listed company.

Counsel for Respondents 3 and 4 stated they were unable to take instructions as their clients were incarcerated due to fraud charges, with a charge sheet filed by the Cuffe Parade Police Station based on an FIR lodged by Respondents 1 and 2.

The Court acknowledged the allegations of fraud and the quick recall of the loan due to documentation discrepancies. However, the Applicant maintained that the loan was disbursed, the document executed by its CEO and whole-time director, and funds remitted to Respondent 1's long-standing bank account.

The Court, after reviewing the records and the law concerning Section 11 jurisdiction, disagreed with dismissing the application at this threshold. It held that determining whether such fraud renders the dispute non-arbitrable presents a mixed question of fact and law, requiring an examination of the veracity of the allegations. The Court emphasized that a Section 11 court's role is statutorily restricted by Section 11(6A) to "examining" the existence of the arbitration agreement, not "adjudicating" on the merits or delving into complex factual disputes like fraud allegations. It referenced the Interplay Judgement and subsequent decisions (SBI General and Patel), which clarify that the Section 11 Court's purview is limited to verifying the existence of a formally executed, valid arbitration agreement, with existential substance falling under the arbitral tribunal's domain as per Section 16 of the Act. The Court also clarified that the Vidya Drolia judgment, which suggested fraud contentions could not be dealt with by an arbitral tribunal, was rendered under a different understanding of Section 11(6A)'s scope, which has since been acknowledged and articulated in the Interplay judgment.

Consequently, the application was allowed. The Court appointed Justice (Retired) Akil Kureshi as the Sole Arbitrator to adjudicate the disputes. The arbitral tribunal is requested to treat the issue of whether the dispute is non-arbitrable due to fraud as a preliminary issue to save time and cost for the parties. The order explicitly states that nothing in it expresses an opinion on the merits, leaving all such issues open for the arbitral tribunal to decide.

Section 11, Arbitration and Conciliation Act - 1996  

Arbitration and Conciliation Act, 1996