CIVIL APPEAL 6682 of 2014 on 22 December 2012

S. MANIKUMAR, J.

M/s.Shriram Equipment Finance Co. Ltd., has filed the application, seeking for a direction to furnish security to the tune of Rs.22,13,272/-, within the stipulated time, failing which, attachment of the immovable properties, morefully described in the Schedule to the Judges' Summons, belonging to the respondent, pending arbitration proceedings, between the applicant and the respondent.

2. The applicant, M/s.Shriram Equipment Finance Co. Ltd., is carrying on business of providing finance facilities for purchasing of Motor Vehicles and Machinery. The respondent has approached the Company for financial assistance for purchasing of Stone Crusher Machine and he was sanctioned loan. The respondent-borrower has executed the loan agreement (loan-cum-hypothecation), in favour of the appellant-Finance Company. As there was a default in payment of instalments, the applicant-Finance Company has filed this petition, for the relief, as stated supra. Details of the loan amount, date of loan agreement and the outstanding amount, are as follows:

3. It is the contention of the applicant that the respondent-Borrower has concealed the machinery and also attempting to alienate and dispose of the immovable property, morefully described in Schedule to Judge's summons, with an an intention to defeat all the rights of the applicant. Therefore, the applicant-Company has sought for a direction against the borrower to furnish security.

Heard the learned counsel for the applicant company and perused the materials available on record.

4. Loan agreement (Loan cum Hypothecation Agreement), has been executed between the applicant-Finance Company and the respondent-borrower, for the purchase of abovesaid machinery. Material on record discloses that collateral security offered for the loan amount, is the machinery itself and that as per the terms and conditions of the loan agreement (loan cum hypothecation agreement), the applicant-Finance Company has the first and exclusive charge to secure its debts. Agreement also provides for re-possession of the vehicle.

5. When the machinery itself has been hypothecated in favour of the applicant-Finance Company and when it stands as a collateral security for the loan amount, bald allegations have been made that the respondent-borrower has intentionally made arrangements to alienate the machinery and that he may dispose of the same to the third parties, by way of dismantling the same and under such circumstances, the applicant-Company cannot seize or re-posses the subject machinery. Stone Crusher Machine is not a small article to be concealed.

6. Section 9 of the Arbitration and Conciliation Act, 1996, deals with interim measures and the said Section reads as follows:

"A party may, before, or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court-

(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or

(ii) for an interim measure or protection in respect of any of the following matters, namely:- (a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement; (b) securing the amount in dispute in the arbitration;

(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence; (d) interim injunction or the appointment of a receiver;

(e) such other interim measure of protection as may appear to the Court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.

7. In National Shipping Co. of Soudi Arabia v. Sentrans Industries Ltd., reported in AIR 2004 Bombay 136, a Hon'ble Division Bench of the Bombay High Court, while considering the scope of Section 9 of the Arbitration and Conciliation Act, at Paragraph 10, held as follows:

"10. Section 9 in the Act of 1996 is a substantive provision which empowers the Court to pass an interim order before or during Arbitral proceedings or any time after the making of the Arbitral Award but before it is executed under Section 36. Since we are concerned with Section 9(ii)(b), it may be noticed that it provides for an interim measure of protection for securing the amount in dispute in the Arbitration. Sort of clarification it also provides that the Court shall have the same power for making orders as it has for the purpose of and in relation to any proceeding before it. Such provision as enacted in Section 9 is a provision that enables a party to apply for interim protection if action of the other party to the agreement providing for Arbitration is either in breach of the terms of the agreement or is inequitable, unfair on in breach of natural justice. The order under Section 9(ii)(b) is in the nature of interim protection order. In a special provisions of the nature like Section 9(ii)(b), we are afraid, exercise of power cannot be restricted by importing the provisions of Order 38, Rule 5 of the Code of Civil Procedure as it is. The legislature while enacting Section 9(ii)(b) does not seem to us to have intended to read into it the provisions of Order 38, Rule 5 of

the Civil Procedure Code as it is. It is true and as has been held by the Supreme Court in ITI Ltd, (supra), that for want of specific exclusion of the Code of Civil Procedure in the Act of 1996, it cannot be inferred that the Code was not applicable but that would not mean that provisions of Code have to be read into as it is when the Court exercises its powers as prescribed in the Act of 1996. The procedural aspects provided in the Code about which the Act of 1996 is silent, needless to say, when the Court exercises its substantive power under the Act of 1996 shall be applicable but the guiding factor for exercise of power by the Court under Section 9(ii)(b) has to be whether such order deserves to be passed for justice to the cause. The provisions of Order 38, Rule 5, CPC cannot be read into the said provision as it is nor can power of the Court in passing an order of interim measure under Section 9(ii)(b) be made subject to the stringent provision of Order 38, Rule 5. The power of the Court in passing the protection order to secure the amount in dispute in the Arbitration before or during Arbitral proceedings or at any time of making of the Arbitral amount but before it is enforced cannot be restricted by importing the provisions set out in Order 38 of C.P.C. but has to be exercised ex debito justitiae and in the interest of justice. The Court while considering the application for interim protection under Section 9(ii)(b) is guided by equitable consideration and each case has to be considered in the light of its facts and circumstances. The interim protection order contemplated under Section 9(ii)(b) is granted by the Court to protect the interest of the party seeking such order until the rights are finally adjudicated by the Arbitral Tribunal and to ensure that the Award passed by Arbitral Tribunal is capable of enforcement. Though the power given to the Court under Section 9(ii)(b) is very wide and is not in any way controlled by the provisions of the Code but such exercise of power, obviously, has to be guided by the paramount consideration that the party having a claim adjudicated in its favour ultimately by the Arbitrator is in a position to get the fruits of such adjudication and in executing the Award. While dealing with the application for direction to the other party to deposit the security of the amount in dispute in the Arbitration, the Court also has to keep in mind the drastic nature of such order and unless a clear case not only on the merits of the claim is made out but also the aspect that denial of such order would result in grave injustice to the party seeking such protection order in as much as in the absence of such order, the applicant party succeeding before the Arbitral Tribunal may not be able to execute the Award. The obstructive conduct of the opposite party may be one of the relevant considerations for the Court to consider the application under Section 9(ii)(b). The party seeking protection order under Section 9(ii)(b) ordinarily must place some material before the Court,

Ratio decidendi

besides the merits of the claim that order under Section 9(ii)(b) is eminently needed to be passed as there is likelihood or an attempt to defeat the Award, though as indicated above, the provisions of Order 38, Rule 5, CPC are not required to be satisfied. The statutory discretion given to the Court under Section 9(ii)(b) must be exercised judicially in accordance with established legal principles and having regard only to relevant considerations. In our view, this is the proper approach for consideration of the application for interim relief under Section 9(ii)(b) and we hold that the provisions of Order 38, Rule 5 of the Civil Procedure Code cannot be read as it is and imported in Section 9 of the Act of 1996. We also hold without hesitation that the Court is competent to pass an appropriate protection order of interim measure as provided under Section 9(ii)(b) outside the provisions of Order 38, Rule 5, Code of Civil Procedure. Each case under Section 9(ii)(b) of the Act of 1996 has to be considered in its own facts and circumstances and on the principles of equity, fair play and good conscience. The power of the Court under Section 9(ii)(b) cannot be restricted to the power conferred on the Court under Civil Procedure Code though analogous principles may be kept in mind."

8. Thus, the power of the Court to issue appropriate orders, depends upon the facts and circumstances of each case. It cannot be granted by mere asking. The party seeking appropriate protective orders of interim measure, has to satisfy with specific details, that the obstructive conduct of the opposite party should be one of the relevant factors for the Court to consider the application under Section 9(ii)(b) of the Act and that there must be some positive material before the Court to issue appropriate orders.

9. As stated supra, in the present case, there is nothing but bald averments of concealing the machinery. In the above reported case, the Hon'ble Division Bench has also observed that the Court has to keep in mind, the drastic nature of order of security or attachment and that a clear case has to be made out, not only on the merits of the claim and on the facts that the applicant should establish denial of such order would result in grave injustice to the party seeking such protection. The applicant should specifically plead and prove the apprehension and the need for a protective order, by filing necessary material documents.

10. In Adhunik Steels Ltd., v. Orissa Manganese and Minerals Pvt. Ltd., reported in AIR 2007 SC 2563, the Supreme Court, at Paragraph 10, held as follows:

"10. It is true that Section 9 of the Act speaks of the court by way of an interim measure passing an order for protection, for the preservation, interim custody or sale of any goods, which are the subject matter of the arbitration agreement and such interim measure of protection as may appear to the court to be just and convenient. The grant of an interim prohibitory injunction or an interim mandatory injunction are governed by well known rules and it is difficult to imagine that the legislature while enacting Section 9 of the Act intended to make a provision which was de hors the accepted principles that governed the grant of an interim injunction. Same is the position regarding the appointment of a receiver since the Section itself brings in, the concept of 'just and convenient' while speaking of passing any interim measure of protection. The concluding words of the Section, "and the court shall have the same power for making orders as it has for the purpose and in relation to any proceedings before it" also suggest that the normal rules that govern the court in the grant of interim orders is not sought to be jettisoned by the provision. Moreover, when a party is given a right to approach an ordinary court of the country without providing a special

procedure or a special set of rules in that behalf, the ordinary rules followed by that court would govern the exercise of power conferred by the Act. On that basis also, it is not possible to keep out the concept of balance of convenience, prima facie case, irreparable injury and the concept of just and convenient while passing interim measures under Section 9 of the Act."

11. In O.A.No.6819 of 2010, dated 07.06.2011, this Court, at Paragraphs 8 and 9, held as follows:

“8. No ground whatsoever is made out for directing the respondent to furnish security, especially when not only that the amount is guaranteed by the Guarantor, but by way of security, cheques were also taken, though said to have been dishonoured.

9. The applicant, for the reason best known, has not chosen to proceed under the specific provision of law against the respondent. The jurisdiction under Section 9 of the Arbitration and Conciliation Act is to be invoked in exceptional cases. The provisions of law cannot be used as a tool to pressurise the respondents. The applicants have equally efficacious remedy under Section 17 of the Act for interim measures. The pleaded facts also do not make out any case for directing the respondents to furnish security, as no case in terms of Order 38 of Code of Civil Procedure is made out.”

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12. In A.No.613 of 2011, dated 07.06.2011, this Court held as follows:

“7. The reading of the ground taken does not make out a case for directing the respondent to furnish security. In order to succeed in application for directing the furnishing of security, it is required that case is to be brought under provisions of Order 38 of Code of Civil Procedure, with some material evidence in support of the averments.”

13. After considering the judgment of the Bombay High Court in National Shipping Co. of Soudi Arabia v. Sentrans Industries Ltd., reported in AIR 2004 Bombay 136 and A-1 Solutions Chennai, rep, by its Chief Executive Officer, Ujwal Rao v. Cascade Billing Center Incorporated, rep, by its President, Dev Anderson, reported in MANU/TN/2871/2011, a Hon'ble Division Bench of this Court in C.S.S. Corp., Private Limited v. Space Matrix Design Consultants reported in 2012 (1) CTC 225, at Paragraphs 18 & 20, held as follows:

"18. In the case on hand by reading of the averments in Section 9 application, Respondent has not averred nor produced any material to show that there is an apprehension or danger that the amount could not be recovered by them from the Appellant. Nor there is any averment that there is an attempt to defeat the award.

20. Of course the power under Section 9 of Arbitration and Conciliation Act is wide. Interim order passed under Section 9 of the Act is a drastic order. In the decision of the Bombay High Court relied upon by the Respondent [National Shipping Company of Saudi Arabia v. Sentrans Industries Limited [AIR 2004 Bombay 136], the Court has held that the Court has to keep in mind the drastic nature of such an order. Clear case has to be made out not only on the merits of the claim, but also the applicant should establish that denial of order would result in grave injustice to the party seeking protection. The statutory discretion given to the Court under Section 9(ii)(b) of the Act must be exercised judicially in accordance with the established legal principles and having regard only to the relevant considerations. In the absence of any specific averment that Appellant is having obstructive conduct or that acting in a manner to defeat the award, no interim order directing furnishing security could be passed. Appellant is stated to be a reputed concern having financial stability and in such circumstances, by denial of interim order, no irreparable injury would be caused to the Respondent. In our considered view, the learned Judge was not right in directing the Appellant to furnish security for Rs.4,56,22,368/- and the impugned order is liable to be interfered with."

14. while doing so, the Hon'ble Division Bench in C.S.S. Corp.

Private Ltd., 's case, has considered the judgment in A-1 Solutions Chennai, rep, by its Chief Executive Officer, Ujwal Rao v. Cascade Billing Center Incorporated, rep, by its President, Dev Anderson, reported in MANU/TN/2871/2011, which is extracted hereunder:

"9. ...... It is well settled law that security can be ordered only in cases where the other party is likely to abscond or there is positive evidence to show that the other party is taking steps to dispose of the property with an intention to deceive or defeat the decree or award to be passed by the Courts or Tribunal. In this case, the Respondent being a company, it is not possible for them to abscond so easily or they could dispose of their asset immediately. Therefore, the conclusion arrived at by the learned Judge that the present application has been filed by the Appellant only to pressurise the Respondent to settle the amount is well founded. It is needless to mention that filing of an application under Section 9 of the Act can be entertained by this Court only in exceptional case and this is not a case where this Court find it fit and proper to entertain the application of the Appellant."

15. In Sundaram Finance Ltd., v. K.Stalin [A.Nos.111, 268 and 360 of 2013, dated 09.04.2013], this Court, at Paragraph 8, 9 and 10, held as follows:

“8 The reading of the pleadings shows, that the jurisdiction of this Court is mechanically invoked by making identical averments in all cases without verifying facts in each case.

9 This Court cannot direct the respondent to furnish security on the vague allegations in the absence of any substantial materials to support the allegations.

10 The submission that the respondent is taking steps

to dispose of the property with an intention to defeat the rights of the applicant cannot be accepted, as there is no material on record to show any overact on the part of the respondent showing steps being taken to dispose of the property.”

16. In Sundaram Finance Ltd., v. M.K.Khunabdulla reported in 2014 (3) CTC 159, Sundaram Finance Corporation Ltd., filed an application for a direction to furnish security. Loan agreement was for the purchase of a Marti Ritz Car. The borrower committed default. Arbitration proceedings ended in an Award. A learned single Judge dismissed the application. On appeal, at Paragraphs 25 and 26, the Hon'ble Division Bench held as follows:

“25.As far as the present case is concerned, the plea of the Appellant/Applicant is that the Respondent be directed to furnish security for a sum of Rs.4,80,019.32 and in default to attach the properties mentioned in the schedule of judge's summons. Further, it is represented on behalf of the Appellant/Applicant that under Article 3.9 of the Loan Agreement, the Respondent had agreed to provide additional security to secure the amount due and payable under the Loan Agreement which he failed to honour. In the present case on hand, the loan of the Respondent is undoubtedly a secured one by means of the Loan Agreement dated 03.03.2012 entered into between the parties. Further, one Khalid stood as a Guarantor for the amount borrowed by the Respondent. One cannot ignore an important fact that seeking the relief from the opposite party in regard to furnishing of security to the tune of Rs.4,80,019.32 by the Appellant/Applicant within such time to be stipulated by this Court and in default of the Respondent doing so, to order attachment of the properties, is not a process to be adopted either as a matter of routine or a matter of course. Ordinarily, the said process cannot be employed as a lever or premium for the Appellant/Applicant to coerce the Respondent to come to terms. As such, a Court of Law is to act with utmost caution and circumspection before passing

an order of interim measure like this under Section 9 of the Act, 1996. At a nebulous stage, the relief of requiring the opposite party to furnish security for the amount in question, being an extraordinary one, cannot be granted merely on the basis of vague or general allegations that the Respondent is about to dispose of the properties or to remove it beyond the jurisdiction of the Court, when they are totally unsupported by particulars and this would not be a fulfilment of requisites of Section 9 of the Arbitration and Conciliation Act, 1996. Furthermore, the Appellant/Applicant in an affidavit to support his contentions, must state as to which portion they are true to knowledge and the source of information should be disclosed and the grounds for belief should be stated. Also, an interim relief of requiring a party to furnish security and failure to do so, to result in attachment of properties are not to be passed/ordered because of the fact that no prejudice or hardship would be caused to the other side. Suffice it to point out that an order under Section 9 of the Arbitration and Conciliation Act, 1996 in regard to the prayer for requiring the opposite party to furnish security or in the arbitration the schedule mentioned properties can be passed only if circumstances exist of course to the subjective satisfaction of this Court, when the Appellant/ Applicant has made out a case ex facie for obtaining such an order.

26. It transpires that in the matter of Arbitration of dispute between the Appellant/Applicant and the Respondent (in respect of Agreement No.GZ-158693 dated 03.03.2012), an award was passed during February, 2014 and therefore, it is reasonable and prudent for the Appellant/Applicant to take further course of action, as deems fit and proper, in the manner known to law and in accordance with law. Looking at from any point of view, the order passed by the Learned Single Judge dated 09.04.2013 in Application No.268 of 2013, in dismissing the Application, by observing that 'the averments made by the Applicant (Appellant) in mechanical manner does not make out any case for furnishing of security, when the loan is already secured etc.', cannot be found fault with, as opined by this Court. Viewed in that perspective the Original Side Appeal fails.

27. In the upshot of detailed qualitative and quantitative discussions and on taking note of the attendant facts and circumstances of the case in an encircling fashion, this Court comes to a resultant conclusion that the present Original Side Appeal sans merits and the same is dismissed, to prevent an aberration of Justice, without costs. Resultantly, the order, passed by the Learned Single Judge, dated 09.04.2013, in Application No.268 of 2013, is affirmed by this Court for the reasons assigned in this Appeal. Consequently, connected Miscellaneous Petition is closed."17.In M/s.Cholamandalam Investment & Finance Co. Ltd., v.

Philomina George [O.S.A.No.195 of 2011, dated 17.03.2014], application filed under Order XIV Rule 8 of the O.S. Rules read with Section 9(ii) of the Arbitration and Conciliation Act, 1996, was filed by M/s.Cholamandalam Investment & Finance Co. Ltd., for a direction to furnish security and in the event of default, to attach the schedule mentioned properties. Loan agreement has been entered into between the Finance company and the borrower. There was a default in payment of instalments. Arbitrator was appointed. By observing that, “Mere filing of the claim petition before the Arbitrator does not lead to a conclusion, that interim measures under Sec. 9 of the Act are to be positively passed. The application is misuse of provisions of law, to achieve the object of recovery, which is not the intention of the section.”, the application was dismissed, by a learned Single Judge. When the said order was challenged on appeal, a Hon'ble Division Bench, at Paragraphs 17 and 18, opined thus,

Conclusion

“17.It is true that a power of a Court of Law is wide enough and the same is to be exercised by way of discretion with utmost care and circumspection. A party requiring a protection order under Section 9(ii) (b) of the Arbitration and Conciliation Act, 1996 generally must place some positive material before a Court of Law, besides the merits of the claim that is eminently required to be passed as there is likelihood or an endeavour to defeat the Award, although the provisions of Order XXXVIII Rule 5 of the Civil Procedure Code are not required to be satisfied.

18. It cannot be lost sight of that an Application for interim relief should not be granted by the Courts when a similar Application is pending before the Arbitral Tribunal, as per decision in Arun Kumar v. Vikram Kapur, AIR 2002 NOC 103 (Del). Equally, a Court of Law cannot prescribe any general principle in regard to the maintainability of an Application filed by a party. No wonder, the same will have to be determined by a Court of Law based on the facts and circumstances of each case whether for the purpose of interim measure of protection, preservation, sale of any goods, securing the amount in dispute etc. Also that, on the basis of general/bald or vague allegations viz., that the Respondent is about to dispose of the properties or to remove it beyond the jurisdiction of the Court and that too, unsupported by requisite particulars, an extraordinary remedy of requiring the other side to furnish security of the amount in question cannot be granted as a matter of routine. In fact, just because an amount is due from the Respondent, the relief of 'Attachment Before Judgment' cannot be asked for. There must be definite evidence that the Respondent by his definite mala fide conduct is to dispose of or about to dispose of his property with a view to defeat the rights of a Creditor.”

Accordingly, the appeal has been dismissed.

18. Reverting to the case on hand, for the loan amount, the machinery purchased has been hypothecated and steps can be taken to seize the machinery, pending arbitration proceedings. Necessary clauses have also been included in the loan agreement that after adjustment of the sale proceeds, towards the amount payable by the borrower, the Finance Company can still continue arbitration proceedings.

19. Furnishing of security or for the matter, attachment, is a drastic order and exercise of the power cannot be made mechanically for mere asking. The said legal position has been reiterated by a Hon'ble Division Bench of this Court in M.Padmini v. M.Anandan reported in 2014 (3) CTC 792, wherein, after considering a catena of decisions, at Paragraph 13, the Court held that, “it is an extraordinary power and such power cannot be exercised mechanically. Courts have held that thepower to order security or attachment, must be, used strictly inaccordance with the Rules. Purpose of Order 38, Rule 5, is not toconvert an unsecured debt into secured debt.”

20. When the loan agreement provides for seizure and re-possess the machinery, for violation of the terms and conditions of the loan agreement, furnishing of security cannot be granted by mere asking. Schedule mentioned properties, owned by the borrower, are sought to be furnished as security to the loan obtained by the borrower and that the same cannot be granted. For the abovesaid reasons, this Court is of the view that the applicant-Finance Company has not made out any prima facie case, for issuance of a direction, sought for.

21. Hence, this application is dismissed. It is made clear that dismissal of the application, would not foreclose the right of the Finance Companies to any other appropriate relief, permissible under Section 9 of the Arbitration and Conciliation Act.

27.11.2014

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S. MANIKUMAR, J.

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Application No.6682 of 2014

27.11.2014