Arbitral Tribunal, New Delhi: A final award was delivered by the Sole Arbitrator L. Nageswara Rao, former Judge, Supreme Court of India, in the dispute between Aditya Birla Finance Limited(‘ABFL’), Zee Entertainment Enterprises Limited (‘Zee’), and Essel Corporate LLP (‘Essel’) wherein ABFL claimed that Rs 150 Crore loan given by it to Siti Networks Limited (‘SNL’) was liable to be paid by Zee and Essel since they were a group of companies and the two companies had provided Letters of Comfort (‘LOCs’) to ABFL in this regard. The Tribunal rejected ABFL’s claims holding that the LOCs were not guarantees under Section 126 of the Contract Act, 1872 (‘Contract Act’) and thus, Zee and Essel were not liable to pay the loan defaulted upon by SNL.
Background
A Credit Arrangement Letter (‘CAL’) was issued by the Claimant- ABFL in favour of the borrower- SNL, sanctioning a term loan of Rs. 150 Crores. Thereafter, a Facility Agreement was executed between ABFL and SNL. ABFL contended that SNL defaulted in the payment of the term loan facility. SNL also failed to maintain the Total Debt-Equity Ratio, Net Debt EBIDTA Ratio and there was also a reduction in pledged shareholding in contravention of Clause 17(v) of the Facility Agreement.
Therefore, the claimant issued a letter increasing the rate of interest liable to be paid by SNL from 11 to 16 percent per annum. SNL opposed the same and began negotiating the interest reset. The Respondents also participated in this negotiation and issued LOCs assuring the repayment of the loan granted to “their group company” i.e., SNL. Thereafter, ABFL reduced the interest reset rate from 16 to 13 percent per annum.
Later, ABFL noticed that SNL had failed to maintain the required Security Cover ratio as required in contravention of Clause 19.2 and 19.3 of the Facility Agreement which constituted an event of default. Aggrieved, ABFL issued three recall notices demanding the repayment of the entire amount due under the Facility Agreement. Since, the amounts due under the Facility Agreement remained unpaid, ABFL invoked arbitration in accordance with Clause 12 of CAL read with Clause 33 of the Facility Agreement against the SNL, respondent 1- Zee and respondent 2- Essel because of their tightknit group structure and the Letters of Comfort furnished by both of them assuring the repayment of loan. However, due to no response to their notices, ABFL filed a petition under Section 11 of the Act. Accordingly, this tribunal came to be.
During the pendency of this arbitration, SNL entered the Corporate Insolvency Resolution Process, the Tribunal passed an order observing that it cannot proceed with the arbitration against SNL in view of the moratorium under Section 14 of Insolvency and Bankruptcy Code, 2016 (‘IBC’). However, ABFL chose to pursue the arbitration against Zee and SNL.
Analysis
Aspect of Jurisdiction
The principal contention of Zee and Essel that they were not signatories to the arbitration agreement and, therefore, the arbitration was not maintainable against them, was rejected by the Tribunal based on the law laid down in Cox & Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1. The Tribunal observed that Zee, Essel, and SNL are a group of companies and there was sufficient material on record to show the intention of the parties to make Zee and Essel bound by the arbitration agreement. The Tribunal stated that amongst the factors to be considered by a Court or Tribunal to decide a dispute relating to the applicability of the group of companies doctrine, the most significant factor is the active involvement of a company in the negotiations and performance of the contract. Referring to the evidence on record, the Tribunal noted that Zee and Essel played an active role in the negotiations and performance of the Facility Agreement, thereby indicating that they were veritable parties to the contract, i.e., the CAL, facility agreement, and arbitration agreement.
Regarding Zee’s contention that no relief can be granted to ABFL in the absence of SNL and without determining SNL’s liability, the Tribunal held that the absence of a signatory is immaterial once it is found that non-signatories can be made parties to the arbitration on the basis of group of companies doctrine. Further, the issue of determination of SNL’s liability was not a jurisdictional issue, rather an issue of admissibility of claims.
Claim 1 – Zee and Essel are guarantors under the letters of guarantee
The Tribunal noted that the LOCs sent by Zee and Essel acknowledged the loan given to SNL and assured and confirmed that they shall ensure that SNL repays the loan on the relevant due dates. In this regard, the Tribunal referred to Section 126 on the Contract Act, wherein a contract of guarantee is a contract to perform the promise or discharge the liability of a third person, in case of his default. The Tribunal stated that a Letter of Comfort is a document that indicates one party’s intention to try and ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default.
In this regard, the Tribunal relied upon Yes Bank Ltd. v. Zee Entertainment Enterprises Ltd., 2020 SCC OnLine Bom 11763, wherein it was held that not every Letter of Comfort is ipso facto a guarantee and the ordinary rules of construction and interpretation of contracts apply to them. The Tribunal also placed reliance on Phoenix ARC (P) Ltd. v. Ketulbhai Ramubhai Patel, (2021) 2 SCC 799, and BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd., (2025) 1 SCC 456. Thus, the Tribunal held that the LOCs in the present case could not be treated as a guarantee under Section 126 of the Contract Act for the following reasons:
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The basic requirement of Section 126 of the Contract Act is that a party undertakes the obligation of a third party in the event of default. Zee and Essel undertook to ensure that SNL would fulfil its obligations and assured that the outstanding amount would be paid. To treat the said LOCs as guarantees would amount to adding words which were not written.
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There was no ambiguity in the LOCs and it was not permissible to alter them by altering the liability beyond what the party had undertaken.
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Even ABFL understood the LOCs were an assurance given by Zee and Essel to ensure that payments were made by SNL. The Letters of Comfort were treated to be guarantee for the first time in the legal notice sent by ABFL. There was no material placed on record by ABFL to show that the LOCs were intended to be a guarantee. The Letters of Comfort were also not stamped under the Maharashtra Stamp Act, 1958. It was only during the course of the hearing that ABFL undertook to pay the stamp duty as the issue of admissibility of the said documents was raised by Zee and Essel.
Claim 2 — Zee and Essel have undertaken promissory obligations to pay the outstanding amounts due to ABFL
The Tribunal stated that in the unamended Statement of Claim that was filed initially, there was no pleading to the effect that Zee and Essel were jointly and severely liable for promissory obligations and representations towards repayment of the facility. After deletion of SNL, ABFL was permitted to amend the Statement of Claim therein it attempted to include this alternate relief. The Tribunal opined that ABFL cannot be permitted to alter its case as it was permitted only to amend the Statement of Claim for deletion of SNL from the array of parties and make consequential amendments. Thus, this claim was rejected.
Claim 3 — Declaration that Zee and Essel are Security Providers under the Facility Agreement
The Tribunal noted that according to the facility agreement, apart from the borrower, any other person who provides security in favour of the lenders to secure the secured obligations is a security provider. Therein any amounts payable by the borrower or any other obligor, pursuant to the terms of the financing document are secured obligations. Apart from the agreement, any security document or any other document designated by the lenders is a financing document. Any person can be a security provider, in case of creation of a security interest, pursuant to the financing documents. The Tribunal stated that the crucial question was whether the LOCs were financing documents.
The Tribunal noted that there was no material placed on record by ABFL showing the LOCs being designated as a financing document. The Tribunal held that designation of a document as a financing document was crucial to ABFL’s claim and in its absence, the claim could not be granted. Accordingly, this claim was rejected.
Claim 4 – Zee and Essel are liable to pay an amount of Rs. 75 crores
The Tribunal noted that the basis for this claim were the emails sent by a person named Mr. Dinesh Kanodia with email address dinesh.kanodia@zee.esselgroup.com wherein it was stated that a pre-payment of Rs.75 Crores would be made in two tranches. ABFL contended that such offer made by Mr. Dinesh Kanodia, acting on behalf of Zee, was accepted and the interest rate was reset. Thus, there was a contract between the parties which was enforceable, and both Zee and Essel were jointly and severely liable to make the pre-payment of Rs. 75 Crores as promised by Mr. Dinesh Kanodia. The Tribunal further noted that in a letter sent by ABFL to SNL, there was a reference to Mr. Kanodia’s email with the understanding that SNL, Zee and Essel belonged to one group and accordingly, the reset interest rate was reduced.
Upon scrutiny of Mr. Kanodia’s email, the Tribunal stated that the letters stated “we are arranging for making pre-payment” and “also in line with our understanding arranging to reduce the Joan amount”. Thus, it cannot be said that the promise for making the pre-payment of Rs.75 Crore was made on the behalf of Zee, even assuming that Mr. Kanodia was representing Zee. Further, the Tribunal stated that in the letter sent by ABFL mentioned these emails and stated that the assurance of pre-payment was made by the borrow, i.e., SNL.
In view of the aforesaid, the Tribunal held that it was not necessary to determine whether Mr. Dinesh Kanodia was representing Zee or not since ABFL itself understood that the pre-payment was to be made by SNL. Thus, this claim was rejected.
Claim 5 — Zee and Essel are liable to pay a refund of Rs. 108 Crores and/or any other additional amounts payable by SNL to Zee and Essel
The Tribunal noted that this claim was made based on Clause 16.20, 16.21 and the Hypothecation Agreement between SNL and Zee. Clause 16.20 provides that all existing related party transactions shall be subordinated to the secured obligations. According to Clause 16.21, the Borrower, i.e., SNL agreed and undertook on its behalf, the Obligors and other members of the group to ensure that all subordinated claims shall be fully subordinated to the secured obligations. SNL further agreed that any payments with respect to subordinated claims shall not be paid till final settlement date. As per Clause 16.21 (iii), any amount received by the group entity towards payment of Subordinated Claims shall be held in trust on behalf of the Finance Parties and the said amount shall be handed over to the Claimant.
The Tribunal stated that there was force in the submissions made by ABFL that a group of companies can bound by the arbitration agreement even if it is not a signatory. However, it cannot be bound by the underlying contract, which in this case, was the Facility Agreement. Tin this regard, the Tribunal placed reliance on Cox and Kings (supra) wherein it was held that the group of companies doctrine concerns only the parties to the arbitration agreement and not the underlying commercial contract. Therefore, the Tribunal held that ABFL was not entitled for any relief to be granted against Zee and Essel, especially in the absence of SNL which was a signatory to the Facility Agreement.
Moreover, ABFL participated in the lenders meeting wherein it was reiterated that the restructuring plan would be best way forward for resolution of SNL’s account. Thus, the Tribunal held that Zee and Essel cannot be held bound by the aforesaid provisions and the same logic applied to the Hypothecation Agreement.
Accordingly, this claim was rejected.
Claim 6 — Payment of Rs. 20 Crores towards loans accruing to ABFL due to the breach of the letters of guarantee by Zee and Essel
The Tribunal noted that the amount of Rs. 20 Crores was claimed towards loss suffered by the Claimant due to reduction of interest rate from 16 to 13 percent pursuant to the promise made on behalf of Zee to pre-pay an amount of Rs.75 Crores and the Letters of Comfort. The Tribunal stated that a perusal of the averments in paragraph 149 of the Statement of Claims would show that no details were given for arriving at an amount of Rs. 20 Crores. Any claim for damages towards loss suffered can be granted only when there is a specific pleading and proof of the loss suffered. Further, law requires a party claiming loss to also prove the measures of mitigation taken to reduce the loss. Since, the liability of Zee and Essel to make a payment of Rs. 20 Crores towards loss was based on the understanding that the Letters of Comfort were guarantees and that claim was already rejected, the Tribunal rejected this claim as well.
Counter Claim 1 – Payment of Rs.15 Crores misappropriated by ABFL from the FDR
The Tribunal stated that a perusal of the facts from the pleadings made it clear that ABFL withdrew Rs.15 Crores from the fixed deposit of Rs. 39 Crores that was being supervised by the Agency for Specialised Monitoring. The said withdrawal is subject matter of an appeal pending before the NCLAT. Thus, the Tribunal refused to adjudicate upon this issue
Decision
Thus, all the claims of ABFL were rejected and the Tribunal directed the parties to bear their own costs for the present arbitral proceedings and bear the fee of the Tribunal equally.
In light of the holding that the LOCs were not guarantees, the Tribunal held that ABFL was entitled to refund of the Stamp Duty paid for the said LOCs along with penalties under the relevant provisions of the Maharashtra Stamp Act.
[Aditya Birla Finance Limited v. Zee Entertainment Enterprises Limited, Final Award, decided on 12-05-2025]
Advocates who appeared in this case:
For the claimant: Senior Advocate Rajshekhar Rao, Advocate Ravitej Chilumuri, Advocate Aseem Chaturvedi, Advocate Mihika Jalan, Advocate Pragya Dahiya, and Advocate Hanisha Daboo
For the respondents: Senior Advocate Joy Basu, Advocate Ritwika Nanda, Senior Advocate Ritin Rai, Advocate Aman Raj Gandhi, Advocate Vardaan Bajaj, Advocate Ritika Sinha, Advocate Ojasvi Sinha, Advocate Samar Singh Kachwaha, Advocate Shivangi Nanda, Advocate Kavita Vinayak, and Advocate Prayuj Sharma