Delhi High Court Refers Claims Against Essel Group Companies under ‘Letters Of Comfort’ To Arbitration

The bench of Justice V. Kameswar Rao thus referred the claim raised by the petitioner/ claimant, Aditya Birla Finance Ltd, seeking compliance with the ‘Letters of Comfort’ issued by Zee Entertainment Enterprises Ltd and Essel Corporate LLP, in relation to a loan availed by their group company, Siti Networks Ltd, to arbitration.

The Court invoked the doctrine of ‘Group of Companies’ to refer the parties to arbitration, noting that Siti Networks, Zee Entertainment and Essel Corporate are part of the Essel Group of companies and are related parties.

The respondent no. 1, Siti Networks, availed a Term Loan from the petitioner, Aditya Birla Finance, under a ‘Credit Arrangement Letter’ read with a ‘Facility Agreement’ (Loan Agreement) executed between them.

Contending that Siti had defaulted in payment of the term loan, Aditya Birla Finance invoked the arbitration clause contained in the Loan Agreement and filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Delhi High Court, seeking appointment of a Sole Arbitrator.

The petitioner, Aditya Birla Finance, submitted before the High Court that the respondent no. 2, Zee Entertainment, and respondent no. 3, Essel Corporate LLP, had issued ‘Letters of Guarantee’ with respect to the term loan availed by Siti.

It contended that Siti and Zee have a direct relationship, as they form a part of the same group of companies i.e., the Essel Group of Companies, adding that the beneficial owner of Zee is the son of the Promoter of Siti. It claimed that Siti had admitted in its annual reports for FY 2016-17 and 2018-19 that Zee is a related party.

It further submitted that in the ‘Letter of Guarantee’ issued by them, Zee and Essel Corporate had admitted that Siti is their group company.

While averring that all the respondents belong to the same group of companies and have a single economic identity, the petitioner, Aditya Birla Finance, pleaded that all the respondents should be referred to arbitration on the basis of the ‘Group of Companies’ doctrine.

Zee and Essel Corporate submitted before the Court that they are non-signatories to the arbitration Clauses enumerated in the Loan Agreement and therefore, they cannot be compelled to arbitrate.

They further argued that the letter alleged to be a ‘Letter of Guarantee’, was merely a ‘Letter of Comfort’ (LoC), and that the same never formed a part of the composite transaction since the same was given much later in time than the execution of the loan transaction.

Zee and Essel Corporate averred that in terms of the LoC, they had merely asserted that they shall ensure that the 1^st respondent, Siti, repays the Credit Facility on the due dates. However, they never took upon themselves the obligation to service or repay the debt in the event Siti failed to do so, which is a key ingredient under Section 126 of the Indian Contract Act, that deals with the Contract of Guarantee, they argued.

Contending that the respondents are not related parties, they pleaded that there is no direct relationship / nexus between the entities and thus, the Group of Companies doctrine cannot be invoked to refer them to arbitration.

The High Court observed that it was clear from the letters issued by respondents 2 (Zee) and 3 (Essel Corporate), that they have described the respondent no.1 (Siti) as part of their group i.e., Essel Group of Company.

Referring to the facts of the case, the bench concluded that it cannot be denied that Siti and Zee are part of the Essel Group of companies and as such they are a single economic entity and related parties.

The Court added that by applying ordinary rules of constructions and interpretation relating to contracts, a letter of comfort can be treated as a letter of guarantee, but to be so it must conform to the provisions of Section 126 of the Indian Contract Act.

“In the case in hand, on perusal of the letters dated June 26, 2018, it can be seen that there is no assurance in the letters that respondent Nos.2 and 3 shall pay the credit facility to the petitioner on the failure of respondent No. 1 to repay the petitioner. In the absence of such stipulation the letters do not meet the requirement of Section 126 of the Indian Contract Act, 1872. This I say so because the letter only states that the respondent Nos.2 and 3 shall assure and confirm that the petitioner is repaid the facilities on the relevant due dates,” the Court ruled.

However, the bench reckoned that in the arbitration notice issued by the petitioner/ claimant, Aditya Birla Finance, the claim raised against Zee and Essel Corporate is that they failed to ensure that the debtor, Siti, makes payments as per the loan agreement.

“It is seen that the case of the petitioner is also that the respondent Nos.2 and 3 shall ensure the enforcement of the letters of comfort issued by them. In other words, the claim of the petitioner in that sense is seeking compliance / performance of the letters of comfort issued by respondent Nos.2 and 3. Such a claim can be maintainable before the arbitrator only when the respondent Nos. 2 and 3 are parties before the Arbitrator,” the Court added.

Thus, the bench concluded that Zee and Essel Corporate can be referred to arbitration.

Rejecting the contentions raised by Zee that the letters of comfort issued by it do not create any legal obligations and are thus not actionable and therefore, no relief can be claimed in terms of them, the Court held that the assurances made in the letter of comfort were statements made in the midst of a commercial transaction, and the same were promissory in character and thus enforceable.

“...the contents of letters being that the respondent Nos.2 and 3 assures and confirms to respondent No.1 (petitioner) that they shall ensure respondent No.1 repays the facility on the relevant due dates, are the statements made in the midst of a commercial transaction; which are also promissory in character and thus enforceable. So, in that sense there was an intention to create a legal relation by the parties as the conduct of the parties is always a guide to the construction of a contract as held by the Supreme Court in the case of The Godhra Electricity Co. Ltd. v. The State of Gujarat & Ors,” the Court said.

The Court thus appointed a Sole Arbitrator and referred the parties- the petitioner and the respondents 1-3, to arbitration.

Case Title: Aditya Birla Finance Limited vs. Siti Networks Limited & Ors.

Citation: 2023 LiveLaw (Del) 204

Dated: 03.03.2023

Counsel for the Petitioner: Mr. Raj Shekhar Rao, Sr. Adv. with Mr. Aseem Chaturvedi, Mr. Ravitej Chilumuri, Ms. Mihika Jalan, Ms. Raddhika Khanna, Ms. Pragya Dahiya and Ms. Aanchal Tikmani, Advs.

Counsel for the Respondent: Mr. Joy Basu, Sr. Adv. with Ms. Ritwika Nanda, Ms. Akshita Salampuria and Mr. Kanak Bose, Advs. for R-1 Mr. P. Chidambaram, Sr. Adv. and Mr. Sandeep Sethi, Sr. Adv. with Mr. Aman Raj Gandhi, Mr. Vardaan Bajaj, Ms. Bindi Dave and Mr. Pranay Tuteja, Advs. for R-2 Mr. Samar Singh Kachwaha, Ms. Shivangi Nanda and Ms. Kavita Vinayak, Advs. for R-3

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