25 June 2025 Arbitration Law >> Business & Commercial Law  

The Delhi High Court has dismissed a petition challenging a lower court's order in a loan recovery suit, which had rejected the petitioner's application for rejection of plaint and closed their right to file a written statement. The ruling clarifies key aspects regarding the validity of board resolutions in corporate litigation and the interpretation of arbitration clauses, especially when an application under Section 8 of the Arbitration and Conciliation Act, 1996, is not formally filed.

The case originated from a loan of Rs. 35,00,000 availed by Mr. Din Dayal Agrawal-HUF (the petitioner) from the respondent company, secured by equity shares. The respondent filed a recovery suit, but the petitioner sought rejection of the plaint on two primary grounds:

1. Invalid Board Resolution: The initial board resolution filed by the respondent authorized legal action against a different entity (M/s Trishul Dream Homes Ltd.) and not against the petitioner-HUF.
2. Mandatory Arbitration Clause: Clause 10 of the Loan Agreement mandated dispute resolution through arbitration, which the respondent allegedly bypassed by initiating a civil suit without prior negotiation.

Court's Analysis of Board Resolution Defect:

The High Court upheld the lower court's decision to allow the respondent to file a fresh board resolution, dated September 27, 2023, which ratified the previous one and authorized legal action against the petitioner. The court, referring to Order XXIX Rule 1 and Order VI Rule 14 of the Code of Civil Procedure (CPC), affirmed that procedural irregularities, such as a defective board resolution, are generally curable defects and do not inherently invalidate a suit.

Citing the Supreme Court's stance in United Bank of India v. Naresh Kumar & Ors., the High Court reiterated that a company can ratify the actions of its officers, including the signing of pleadings, at a later stage. Since the suit was signed by a Director, the initial irregularity did not adversely affect the respondent's substantive rights.

Interpretation of Arbitration Clause and Section 8:

The petitioner argued that the arbitration clause in the loan agreement made the civil suit non-maintainable. However, the High Court noted a crucial procedural omission: the petitioner had filed an application under Order VII Rule 11 CPC (Rejection of Plaint), merely highlighting the arbitration clause, instead of a formal application under Section 8 of the Arbitration and Conciliation Act, 1996.

The court clarified that Section 8 empowers a judicial authority to refer parties to arbitration if a valid arbitration agreement exists and an application is made before submitting the first statement on the substance of the dispute, accompanied by the original or certified copy of the agreement. Importantly, Section 8 does not bar a civil court from entertaining a suit; it merely provides an alternative for the defendant to seek arbitration.

Referencing the Andhra Pradesh High Court's decision in Chundru Visalakshi v. Chunduru Rajendra Prasad, the Court held that:

• If an application is filed under Section 8, and preconditions are met, the court shall refer parties to arbitration and may reject the plaint under Order VII Rule 11(d) CPC if barred by law.
• However, if no application under Section 8 is filed, the mere existence of an arbitration clause is not a ground to reject the plaint under Order VII Rule 11 CPC.

Since the petitioner failed to file a proper Section 8 application, the trial court was deemed justified in not rejecting the plaint on the ground of the arbitration clause. The court also considered the respondent's argument that the arbitration clause, using terms like "may," indicated an optional rather than mandatory intent, although its primary decision rested on the procedural lapse by the petitioner.

Closing Right to File Written Statement:

Finally, the High Court addressed the closing of the petitioner's right to file a written statement. While the suit was initially filed as a commercial suit (where timelines for written statements are stricter), it was later treated as an ordinary suit. In ordinary suits, the 90-day period for filing a written statement is directory, not mandatory (Kailash vs Nanhku & Ors.).

However, the court found that the petitioner failed to show any "sufficient cause" for not filing the written statement within the prescribed period. The pendency of the Order VII Rule 11 CPC application was not a valid excuse, especially since the petitioner did not even file an application to condone the delay.

Conclusion:

The High Court found no "manifest illegality or perversity" in the trial court's order. The petition was accordingly dismissed, affirming that procedural defects can be cured, a mere arbitration clause without a formal Section 8 application does not automatically lead to plaint rejection, and parties must diligently pursue their legal obligations, including filing timely responses.

Arbitration and Conciliation Act, 1996