Bombay High Court : Misappropriation of Investor Funds Amid ‘Cynically High Sense of Hubris’; Orders Asset Freeze & USD 1 Million Deposit
Kiran Raj
The Bombay High Court Single Bench of Justice Somasekhar Sundaresan has ordered Kapani Resorts Pvt. Ltd., along with its promoters, to deposit an amount equivalent to USD 1 million along with 12% interest per annum, holding that a prima facie case exists of misappropriation of funds belonging to an elderly foreign investor. The Court directed that “protective measures have to follow that effectively binds all the three of them who are enjoying benefits at the expense of Manmohan”. The court directed the respondents, including Kapani Resorts and its promoters, to safeguard the interests of the petitioner pending arbitration proceedings. The judgement came in an arbitration petition filed under Section 9 of the Arbitration and Conciliation Act, 1996.
The petitioner, Mr. Manmohan Kapani, represented through a Special Power of Attorney holder, filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996, seeking interim measures after alleging that funds infused by him were misappropriated by Kapani Resorts Pvt. Ltd. and its promoters, Virendra Kapani and Vaibhav Kapani. Manmohan, a non-resident Indian aged over 90 years and residing in Virginia, USA, had invested USD 1 million in Kapani Resorts under a Share Subscription and Shareholders Agreement dated February 11, 2022.
Under the Agreement, this investment was to increase Manmohan’s shareholding in Kapani Resorts from 13% to 51%. The primary purpose of the investment was to enable Kapani Resorts to repay dues under a One-Time Settlement with the Small Industries Development Bank of India (SIDBI) and avert default. The petitioner alleged that although the funds were used to discharge these dues, leading to the release of personal guarantees and a mortgaged residential property in Greater Kailash, Delhi, the shares were never issued to him, contrary to the contractual commitment.
Counsel for the petitioner, Mr. Rohan Rajadhyaksha, submitted that the funds directly enabled the respondents to release the Greater Kailash property and discharge their personal guarantee obligations. He argued that “the scope of intervention under Section 9 is wide and can be creatively used for an expansive intervention bearing in mind the nature of the facts and whatever would best preserve the interests of the parties pending arbitration.”
On the other hand, counsel for the respondents, Mr. Farhan Dubash, opposed the petition, contending that the Greater Kailash property, being personally owned by Virendra and Vaibhav Kapani, was beyond the reach of Section 9 intervention. He further submitted that the funds were indeed used to pay SIDBI as per the agreed terms and that the petition was tainted by delays and technical infirmities, including proceedings previously filed under Sections 241 and 242 of the Companies Act before the National Company Law Tribunal (NCLT), which had subsequently been withdrawn.
The Court, after examining the material and submissions, observed that the respondents failed to offer any explanation for not issuing the shares due to Manmohan. It recorded, “they have offered no explanation as to why they have not given up 51% ownership stake in Kapani Resorts till date”. The Court further observed that it was “not acceptable that they rely on Kapani Resorts not being the owner of the Greater Kailash Property, to argue that no reliefs can be granted over such property.”
The judgment noted that the property could not be treated as extraneous to the dispute, as it was released using the petitioner’s investment. The Court observed, “The Greater Kailash Property and the fetter on the free and marketable title to it is indeed a thing that is subject matter of the dispute.”
The Court cited Section 9(1)(ii)(c) of the Arbitration and Conciliation Act, 1996, stating that interim protection may extend to “any property or thing which is the subject-matter of the dispute that is meant to be resolved by arbitration.” It concluded that the Greater Kailash property fell within this scope.
The Court also recorded that Virendra and Vaibhav had benefited by regaining unencumbered ownership of the Greater Kailash property and having their personal guarantees discharged, while simultaneously denying the petitioner his equity stake. The Court observed that the respondents “have reaped the benefit of being discharged from their guarantee obligations and the release of the Greater Kailash Property and yet deprived the investor of the rights owed.”
Referring to Section 42(6) of the Companies Act, the Court observed that Kapani Resorts violated statutory requirements by failing to allot shares or refund the share application money. It stated, “It is now a statutory obligation of Kapani Resorts to refund the monies invested by Manmohan.” The Court noted that “before the funds infused by Manmohan could have been used to repay SIDBI, it was incumbent on Kapani Resorts to allot shares” and that this statutory requirement was not fulfilled.
The Court also rejected the respondents’ contention that interim relief required proof of a threat of alienation. It recorded, “grave injury has already been occasioned to Manmohan’s interests by the joint and several conduct of Kapani Resorts, Virendra and Vaibhav.”
The Court directed Kapani Resorts Pvt. Ltd., Virendra Kapani, and Vaibhav Kapani to jointly or severally deposit the Indian Rupee equivalent of USD 1 million (calculated at the applicable exchange rate on the respective dates of remittance by Manmohan Kapani), along with interest at the statutory rate of 12% per annum. This interest is to be calculated on the INR equivalent of USD 350,000 from the expiry of 75 days after February 11, 2022, and on the INR equivalent of USD 650,000 from the expiry of 75 days after February 22, 2022, until the date of deposit. The Court ordered that “this deposit shall be made no later than two weeks from the date on which this Order is uploaded on the website of this Court.”
Further, the Court directed that “Kapani Resorts, Virendra and Vaibhav shall forthwith be prohibited from directly or indirectly, selling, mortgaging, alienating or creating any third-party interest or encumbrance of any nature whatsoever over any and every property of Kapani Resorts.” Similarly, “Virendra and Vaibhav shall forthwith be prohibited from directly or indirectly selling, mortgaging, alienating or creating any third-party interest or encumbrance of any nature whatsoever over the Greater Kailash Property.”
The Court granted liberty to the respondents to apply for removal of the restraint on the Greater Kailash property, contingent upon compliance with the deposit directive. It stated, “if no such deposit is made, Manmohan shall have liberty to mention the matter and seek appointment of a Court Receiver in respect of all the properties of Kapani Resorts and the Greater Kailash Property.”
Additionally, the Court awarded costs to Manmohan Kapani, recording that “Manmohan shall be entitled to costs in the sum of Rs. 2.5 lakh, payable within a period of one week from the date on which this Order is uploaded on the website of this Court.”
The Court noted that “the unreasonable conduct demonstrated so far, including the steadfast refusal to even commence arbitration without forcing a 90-year-plus individual living outside India to approach the Supreme Court only to have an arbitral tribunal constituted, is but an example of the unreasonable conduct.”
The Court further directed that “the Arbitral Tribunal shall have regard to such costs when it makes its own assessment of costs when it adjudicates the matter one way or the other.”
Advocates Representing the Parties
For Petitioner: Mr. Rohan Rajadhyaksha with Shlok Chandra, Ms. Pallavi Singh, Mr. Sankalp Sharma
For Respondents: Mr. Farhan Dubash instructed by Mithila Damle, Advocate
Case Title: Manmohan Kapani through Special Power of Attorney Chandani Sood v. Kapani Resorts Pvt. Ltd. & Ors.
Neutral Citation: 2025:BHC-OS:4305
Case Number: Arbitration Petition No. 119 of 2024 with Interim Application (L.) No. 20487 of 2023
Bench: Justice Somasekhar Sundaresan
[Read/Download order]
