Delhi High Court Lays Down Twin Test For Exercising Power Of Attachment Before Passing Arbitral Award

The Delhi High Court has ruled that though the power to pass an attachment order before an award is rendered by the Arbitral Tribunal may not have been specifically set out in Sections 9 and 17 of the Arbitration and Conciliation Act, 1996 (A&C Act), however, such an order could be made if the circumstances so warrant.

However, the bench of Justice Yashwant Varma remarked that the said power cannot be invoked merely because the claimant is found to have a just or valid claim upon a prima facie evaluation. It would also be obligatory upon the claimant to establish that the defendant before the Tribunal is indulging in activities aimed at dissipation of assets or is seeking to remove the assets with an intent to defeat the arbitral award that may be ultimately passed. The said twin test must be satisfied before such an attachment order is justifiably made, the Court said.

The Court further observed that utilisation of assets in the ordinary course of business or operating losses suffered by a party would not be sufficient to invoke the said power.

The High Court was hearing an appeal filed under Section 37(2)(b) of the A&C Act against the order of the Arbitral Tribunal where the Tribunal had rejected the party’s application for interim measures under Section 17 seeking securitising of its claim amount.

The parties, Tahal Consulting Engineers India Pvt Ltd and Promax Power Ltd, invoked arbitration proceedings with respect to the dispute arising between them under a sub-contract.

Thereafter, Promax moved an application under Section 17 of the A&C Act before the Arbitral Tribunal seeking securitising of its claim amount, which was dismissed by the Arbitral Tribunal.

Placing reliance on the principles governing the invocation of Order 38 Rule 5 of the Code of Civil Procedure (CPC), 1908, which deals with the power of the court to pass an attachment order before judgment, the Tribunal concluded that there existed no justification to call upon Tahal to secure the entire claim amount.

Promax challenged the order of the Arbitral Tribunal before the Delhi High Court.

The petitioner, Promax contended that Tahal’s revenue and profit had decreased as per its Financial Reports. The said circumstance would warrant a direction for attachment before the award is made, it pleaded.

Promax added that it was not necessary for it to establish or prove that an actual attempt was made by Tahal to dispose of its properties, and that even a strong possibility of diminution of assets would be sufficient and would justify an order of attachment.

The High Court reiterated that the power under Section 37(2)(b) is to be exercised and wielded with due circumspection and restraint. Further, the order of the Arbitral Tribunal is to be tested on the limited grounds of perversity, arbitrariness and a manifest illegality only.

The bench reckoned that though the Arbitral Tribunal may not be strictly bound by the principles underlying Order 38 Rule 5 of the CPC, it could adopt principles analogous to those comprised in the said provision.

While observing that the power of attachment before a judgment is passed, has always been understood and described as harsh and severe in character, the court said that the power cannot be invoked merely because the claimant before the Arbitral Tribunal is found to have a just or valid claim upon a prima facie evaluation. “It would also be obligatory upon the claimant to establish that the defendant before the Tribunal is indulging in activities aimed at dissipation of assets or seeking to remove assets with an intent to defeat the Award that may ultimately be rendered”, the court ruled.

“The power of attachment before judgment would thus be liable to be exercised where the Tribunal is convinced that the claimant has made out a strong prima facie case, is likely to ultimately succeed and that in case emergent steps were not to be taken, the respondent would be able to remove its assets from the control of the Tribunal and thus deny the claimant the fruits of the award that may ultimately be pronounced. It is the aforenoted twin tests which must be satisfied before such an order being justifiably made,” the court said.

The bench further emphasised that utilisation of assets in the ordinary course of business or operating losses would not be sufficient to invoke the said power.

While recognising that a business may face a cyclical downtrend or a fall in its profit margins for a variety of reasons, the court remarked that unless the same is established to constitute a “drastic or alarming reduction” impacting the very viability or existence of an entity, it would not constitute a sufficient ground to attach the assets before the judgment. “In any case, Promax had failed to establish before the Tribunal that Tahal did face such a spectre,” the bench said.

“The Tribunal has upon due consideration of the material placed before it come to conclude that there existed no justification for an order of attachment being framed. Promax has failed to establish the aforesaid finding to be either perverse or manifestly erroneous,” the court observed.

The bench added, “The Tribunal has returned categorical findings that Promax had woefully failed to establish that Tahal was attempting to remove its assets from the reach of the Arbitral Tribunal or as part of a design to avoid any award that may be pronounced after due contest. Promax has also failed to establish before this Court that the aforesaid conclusions as ultimately returned and recorded by the Arbitral Tribunal could be said to suffer from a manifest illegality or be one which no reasonable person could have arrived at on the basis of the material which stood placed on the record.”

The Court thus dismissed the appeal.

Case Title: M/s Promax Power Ltd vs. M/s Tahal Consulting Engineers India Pvt Ltd

Citation: 2023 LiveLaw (Del) 311

Counsel for the Petitioner: Mr. Moazzam Khan, Mr. Vidit Gupta, Ms. Anvita Goel, Mr. Anany Gupta, Mr. Prince Kumar, Mr. Chetan Singh, Advs.

Counsel for the Respondent: Mr. Arvind Nayar, Sr. Adv. with Ms. Ritwika Nanda, Ms. Akshita, Mr. Akshay Joshi, Mr. Shubham Pandey, Advs.

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