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

The Delhi High Court has ruled that the statements made by a party in a ‘Letter of Comfort’, assuring the creditor that it shall ensure that the debtor repays the loan on the relevant due dates, are promissory in character and thus enforceable, even if they do not meet the requirement of Section 126 of the Indian Contract Act, 1872 which deals with the Contract of Guarantee. 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 1st 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 ...

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

Parina Katyal

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