March 30, 2024 In Uncategorized


In a recent case of DLF Limited vs PNB Housing Finance Limited and Others, ARB.P. 1190/2023, a single Judge Bench of the Hon’ble Delhi High Court comprising of Justice Sachin Datta passed a Judgment dated 22-03-2024 and observed that the scope of inquiry by a referral court in an Application under Section 11 of the Arbitration and Conciliation Act 1996 is confined to examination of the existence of an arbitration agreement and thereby, left the disputes pertaining to misjoinder of non-signatories and assignee of debt, unlawful sale of pledged shares by such assignee, etc, to be determined by the arbitrator.


1) In the present case, the Petitioner- DLF Limited (DLF) along with the Respondent No. 4- Hubtown Limited (Hubtown) and the Respondent No. 5- Chinsha Property Private Limited (Chinsha) had been the shareholders in the Respondent No. 3- Joyous Housing Limited (JHL) in the ratio of 37.5% (DHL), 37.5% (Chinsha) and 25% (Hubtown).

2) That JHL had availed a loan of Rs. 800 Crores from the Respondent No. 1- PNB Housing Finance Limited (PNBHFL) under a Loan Agreement-cum-Mortgage Deed dated 20-12-2017 read with a Supplementary Loan Agreement dated 27-08-2020, for cluster development project / slum rehabilitation project at Mahalaxmi Racecourse, Tulsiwadi, Mumbai (Loan Agreement).

3) The Respondent No. 3- JHL had secured the loan primarily by way of creating a mortgage in favour of PNBHFL and as an additional security, pledged the entire shareholding of JHL in favour of PNBHFL, for which purpose a Share Pledge Agreement dated 26-12-2017 (SPA) was executed in favour of PNBHFL by the shareholders of JHL i.e. DLF, Chinsha and Hubtown. The said SPA contained an Arbitration Clause.

4) That when JHL failed to fulfil its loan repayment obligations, PNBHFL declared JHL as a non-performing asset (NPA) on 04-01-2022.

5) Thereafter, PNBHFL had sought to auction the secured assets to recover the loan amount under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act); but the amount could not be recovered.

6) Thus, a Memorandum of Understanding dated 27-10-2022 (MOU) was executed between DLF Home Developers Ltd., a subsidiary of DLF, and PNBHFL, whereby, it was agreed that PNBHFL would purchase the entire shareholding of JHL against complete discharge of DLF’s dues towards PNBHFL.

7) Further, PNBHFL had also issued a Default Notice dated 02-11-2022 read with Letter dated 08-11-2022, in terms of the SPA, whereby PNBHFL sought to act as follows:

i) To reconstitute the JHL Board

ii) To invoke the pledge and sell the pledged shares at enterprise value.

iii) PNBHFL further invited offers from existing shareholders of JHL to purchase 100% pledged shares of JHL, with a reserve price of Rs. 1075 Crores.

8) DLF, replied, vide Letter dated 10-11-2022 and offered an amount of Rs. 1450 Crores for 100% legal ownership of the pledged shares and 100% control of JHL.

9) Thereafter, an Extra-ordinary General Meeting (EGM) was held on 09-03-2023 for removal of the nominee directors of JHL and replacing them with the nominee directors of PNBHFL and a resolution was passed to that effect.

10) Aggrieved by the appointment of nominee directors of PNBHFL to the Board of JHL and other decisions passed at the aforesaid EGM, Respondent No. 4- Hubtown filed a Company Petition bearing CP/85(MB)2023 before Ld. National Company Law Tribunal (NCLT), Mumbai, under Sections 241 of the Companies Act, 2013 (Application to Tribunal for relief in cases of oppression, etc) and 242 of the Companies Act (Powers of Tribunal), thereby, alleging oppression and mismanagement in JHL. But in the said Petition, PNBHFL was not made a party.

11) The NCLT, vide Order dated 14-03-2023, passed a status quo order to the extent of resolutions passed in the aforesaid EGM.

12) Thus, aggrieved by NCLT Order dated 14-03-2023, PNBHFL filed an Appeal before Ld. National Company Law Appellate Tribunal (NCLAT), which was not allowed by NCLAT. However, NCLAT granted liberty to PNBHFL to approach the NCLT.

13) Thereafter, Omkara Asset Reconstruction Company Limited (Omkara) submitted its offer to PNBHFL on 01-08-2023 for assignment of the JHL’s NPA loan to Omkara.

14) A few days later, PNBHFL, vide Letter dated 05-08-2023, informed JHL and its shareholders that PNBHFL has invited bids for assignment of debt through ‘Swiss Challenge Process’. Further, PNBHFL invoked the pledge under SPA that was earlier executed in favour of PNBHFL by the shareholders of JHL i.e. DLF, Chinsha and Hubtown.

15) Despite objections made by DLF and Chinsha against invocation of pledge, PNBHFL conducted the auction pursuant to its Public Notice dated 05.08.2023 and assigned its debt owed by DLF, along with all underlying security interests, pledges and guarantees in favor of Omkara, vide Assignment Deed dated 18-08-2023. As a result, the SPA came to be assigned in favour of Omkara.

16) Thereafter, Omkara sent a Letter dated 22-08-2023 and informed the shareholders of JHL about the aforesaid Assignment Deed.

17) DLF and Chinsha submitted their objections regarding the following acts and omissions on the part of PNBHFL and Omkara:

i) The manner in which assignment process was concluded and further purported to highlight anomalies in the transaction between PNBHFL and Omkara.

ii) DLF also reiterated its willingness to complete the purchase of the entire shareholding of JHL for an amount of Rs 1450 Crore, in terms of DLF’s earlier Letter dated 10-11-2022.

iii) It was also stated by the DLF and Chinsha that any transfer of pledged shares to a third party would be illegal, and that a joint and several liability would devolve upon both PNBHFL and Omkara.

18) That Omkara informed DLF and Chinsha on 06-09-2023 that 75% of the pledged shares belonging to DLF and Chinsha have been sold towards realizing the outstanding dues of JHL, without disclosing the party to whom the shares have been sold. It further informed that no further amount remained due to be recovered and payable from JHL.

19) However, the 25% of the pledged shares belonging to Hubtown were not sold purportedly because the said shares were in physical form and blank transfer deeds for the same were not furnished by Hubtown.

20) Thus, aggrieved by the aforesaid acts and omissions on the part of PNBHFL and Omkara, the DLF and Chinsha filed Petitions under Section 9 of the Arbitration and Conciliation Act 1996 (Act) (Interim measures, etc., by Court) before the Hon’ble Delhi High Court seeking certain interim orders.

21) The High Court, vide Common Interim Order dated 18-09-2023, directed as under:

“Prayer (b) is inchoate in view of Prayer (a) since the identity of the transferee is not known yet, in view of which, no order can be passed against the unknown transferees. However, it would be appropriate if pledged shares sold to a third party by Omkara are kept in a suspended animation by directing JHL not to recognise further sale, if any, undertaken by Omkara transferees. If any request is received by JHL by further transferees the same shall not be acted upon by JHL and further transferees shall not be recorded as members (shareholders) in the record of JHL.

43. Omkara is further directed to disclose the identity of the transferees to the petitioners, to whom it has sold the pledged shares, within a period of 7 days for the petitioners to take remedies that are available to them in law, against such transferees….”

22) Aggrieved by the aforesaid Common Interim Order dated 18-09-2023 passed by the single Judge Bench of the High Court, PNBHFL, Omkara and Twenty-Five South i.e. the transferee in whose favor 75% of the pledged shares belonging to DLF and Chinsha had been sold, filed Appeals before the Division Bench of the High Court in FAO(OS)(COMM) 218/2023 & Ors.

23) The Division Bench of the High Court, vide Order dated 11-01-2024, set aside the Common Interim Order dated 18-09-2023 passed by the single Judge Bench of the High Court and further held that Twenty-Five South will continue to retain 75% equity stake in JHL till the disposal of the Section 9 Petitions by the single Judge Bench of the High Court.

24) Meanwhile, the NCLT Petition filed by Hubtown was later withdrawn.

25) Thereafter, DLF invoked the Arbitration Clause contained in SPA, vide Letter dated 22-09-2023 and approached the Hon’ble the Delhi High Court seeking appointment of a sole arbitrator to adjudicate the disputes between DLF and PNBHFL, Omkara, JHL, Hubtown, Chinsha, Twenty-Five South, etc under Section 11 of the Act.

High Court Observations

The Single Judge Bench of the Delhi High Court, vide Order dated 22-03-2024, made the following observations:

i) That the scope of inquiry by a referral court in a Petition under Section 11 of the Act is confined to the examination of existence of an arbitration agreement. The proceedings under Section 11 of the Act are preliminary and summary and not in the nature of a mini-trial. Further, the referral court may decline reference when there is a doubt that the claim is non-arbitrable and in the event there is a slightest doubt that the claim is arbitrable, the rule is to refer the dispute to arbitration.

ii) Further, in context of a situation where non-signatories are sought to be impleaded in an arbitration, it has been observed by the Supreme Court in Cox & Kings Ltd. v. SAP India (P) Ltd. 2023 SCC OnLine SC 1634 as follows:

a) “when deciding the referral issue, the scope of reference under both Sections 8 and 11 is limited. Where Section 8 requires the referral court to look into the prima facie existence of a valid arbitration agreement, Section 11 confines the court’s jurisdiction to the existence of the examination of an arbitration agreement”.

b) “when a non-signatory person or entity is arrayed as a party at Section 8 or Section 11 stage, the referral court should prima facie determine the validity or existence of the arbitration agreement, as the case may be, and leave it for the arbitral tribunal to decide whether the non signatory is bound by the arbitration agreement.”

iii) Thus, at the referral stage, the referral court ought to leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement or not.

iv) That the High Court observed as follows in respect of the disputes sought to be raised by DLF regarding illegal invocation of the pledge, unlawful sale of pledged shares, unlawful assignment of SPA by PNBHFL in favor of Omkara, PNBHFL’s non-acceptance of the offer of DLF, etc:

a) DLF along with PNBHFL, JHL Hubtown and Chinsha are the signatories to the Arbitration Agreement. Hence, there is no impediment against impleading the said Parties to the arbitration proceedings.

b) Even otherwise, PNBHFL would be a necessary party regarding pre-assignment disputes. Thus, the contention of PNBHFL that upon assignment, it can no longer be a party to any proposed arbitration was rejected.

c) Further, in respect of impleading Omkara i.e. the Assignee in whose favor SPA was assigned by PNBHFL, in the arbitration proceedings, the Bench observed that “the law is also well settled that where there is an assignment of a contract containing an arbitration agreement, the assignee will be bound by the arbitration agreement. The assignee would take both the benefit and burden of the arbitration agreement i.e., the assignee can invoke the arbitration agreement to pursue a claim and can be compelled to arbitrate a dispute raised by another party.

d) Thus, the Bench held that the aforementioned disputes and those in respect of assignment of debt together with the underlying security, in relation to the Loan Agreement entered into between JHL and PNBHFL or its Assignee, as sought to be raised by DLF, required an in-depth inquiry. Hence, the Bench observed that the High Court ought to leave it for the arbitrator to decide such disputes.

e) Further, the Petitioner-DLF contended that although Omkara was not a direct signatory of the SPA, but by virtue of the Assignment Deed, Omkara can be impleaded in the arbitration proceedings, which is based on the consent-based theory. The Bench observed that “the legal bases for making a non-signatory a party can be classified as consensual and non-consensual. The consensual theories that are focused on determining the mutual intent of the parties include agency, implied consent, and assignment and transfer of contractual rights, and the non-consensual theories that are based on equity considerations include alter ego/piercing the corporate veil, estoppel, succession, and apparent authority.” The said contentions also needed in-depth inquiry by the arbitrator.


Thus, based on the aforesaid observations, the High Court allowed the Section 11 Application filed by the Petitioner-DLF and thereby, appointed a Sole Arbitrator to decide the disputes arising from the Loan Agreement and the SPA between the Parties.


Harini Daliparthy

Senior Associate

The Indian Lawyer

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