Court May Permit Award-Holder To Withdraw Security Deposited By Award-Debtor Pending Challenge To Arbitral Award U/S 34: Calcutta High Court

The Calcutta High Court has recently allowed an application filed by the State of West Bengal, as an award-holder in AP 808 of 2022, under the Arbitration and Conciliation Act, 1996 (“1996 Act”) to withdraw a security of Rs 9 crore furnished by BBM Enterprises (“award debtor”) in lieu of the arbitral award, during the pendency of setting aside proceedings on the impugned award, initiated by the award-debtor.

In holding that an award-holder required no statutory sanction or a separate application in the stay proceedings for withdrawing the secured amount, a single-bench of Justice Moushumi Bhattacharya directed the State to furnish a bank guarantee of an equivalent amount to the Registrar, Original Side, Calcutta High Court, before withdrawing the amount, and opined that withdrawal of the amount would not prejudice the rights of the award-debtor, during the pendency of the setting-aside proceedings. It was held:

“This Court is of the view that the award-holder is not under any obligation statutorily or otherwise to file an application for release of the money in the application filed by the award-debtor for stay of the award. GA 1 of 2023 is accordingly allowed for these reasons. The award-holder is permitted to withdraw the amount of Rs. 9 crores upon furnishing a bank guarantee of an equivalent amount with the Registrar, Original Side. The award-holder shall furnish the bank guarantee before withdrawing the money which shall be from a Bank which is a constituent of the RBI. The award holder shall be at liberty of taking steps within such time as is found to be reasonable. The award-debtor shall be at liberty to take steps for listing of the application for setting aside of the award. GA 1 of 2023 is disposed of in terms of the above. The Bank guarantee shall be kept renewed till disposal.”

On an earlier occasion, in the setting-aside proceedings (AP 746 of 2022), the Court had been pleased to order the award-holder to deposit a secured amount of Rs 9 crore in lieu of the impugned award, and had noted that the award would be stayed consequent to such a deposit being made.

The present application for withdrawal of the security amount was initiated by the award-holder, in lieu of changed circumstances since the order of stay had been passed on 17.01.2023.

The claim of withdrawal was resisted by the award-debtor on the lines that i) there existed no provision under 1996 Act for allowing such a prayer and ii) Court would have to come to a prima facie view on the award before passing such orders. It was also submitted that the present application could not be entertained as the stay application had already been disposed of by the court at an earlier date.

Statutory sanction not needed for withdrawal of security amount; falls under discretion of Court

In deciding upon whether the award-holder would require a separate sanction to be able to withdraw a secured amount in the presence of an order of stay and during the pendency of setting-aside proceedings, the Court looked at Section 36 of the 1996 Act, and opined that the status of an award-holder in the Act is the same as that of a decree-holder, with the only exception being under Section 36(2), which gave a Court the discretion to grant an order of stay, subject to Section 36(3) and a separate application made by the award-debtor for stay of the award.

The Court looked at the pre and post-amendment changes in Section 36 of the 1996 Act, and opined that no specific sanction would be required in the present case, since under Section 36 post-amendment, the enforcement and setting aside of award had been ‘de-coupled’, and that under the current regime, the Court possessed discretionary power in interpreting Section 36(2) insofar as merely filing an application for stay of an arbitral award, would not be seen to tantamount to an order for setting aside or for stay. It was opined:

The amendment brought in two significant changes. First, it decoupled enforcement and setting aside of an award by the opening words of section 36(2). Second, it gave a temporary leg-room to the award-debtor to apply for stay of the award subject to the discretion exercised by the Court. The discretionary space of the Court would be apparent from section 36 (2) which sets the tone of the departure from the pre-amendment position in the clarification that mere filing of an application for stay shall not by itself render the award unenforceable unless the Court grants an order of stay of the Arbitral award. Therefore, the effect of the amendment is not far to seek; the march of the award towards enforcement continues un-deterred unless brakes are put in that movement by the award-debtor who applies for stay and the Court grants that stay upon on suitable conditions.

The sub-text is that the award-holder must be given the fruits of the victory unless the Court finds that the enjoyment may be deferred subject to the award-debtor securing the award pending a shot at having the award set aside. The construction of section 36(2) as it stands today is in step with the power of the Court to permit an award holder to withdraw the money secured by the award-debtor. It is a step in aid of and in keeping with the statutory intention of giving primacy to the finality of an arbitral award.

In justifying the use of its discretionary powers to allow the withdrawal of the secured amount, due to financial hardships and SARFAESI proceedings being faced by the award-holder, the Court held that there would not be any specific statutory provision required for the same, as Sections 35 and 36 of the 1996 Act themselves provide for such orders to be passed in appropriate cases, where there had been a change of circumstances after the prayer for stay had been disposed of. It was further held:

“The attending circumstances would become relevant if the Court exercises its discretion for passing such an order. Events subsequent to the stay of the award would be material in this respect. In the present case, the subsequent events pleaded in the application constituting a change in circumstances after the order of stay of the award are as follows. Proceedings were initiated against the award-holder under section 13(2) of the SARFAESI Act, 2002. There are debts which are due and payable by the award-holder to the Bank. The award-holder is also facing a severe shortage of working capital which is preventing the award-holder to participate in any new tenders. These circumstances are sufficient to justify release of the amount secured by the award-debtor.”

Award-debtor not prejudiced by withdrawal of security; prima facie finding of Court not needed

It was held that the prayer for withdrawal of security made by the award-holders, was in consonance with the 1996 Act, as amended in 2016. The Court noted that the only time that such a prayer would be refused, would be if the award-debtor was left without a remedy, which was not the case in the present circumstances due to the award-holder furnishing a bank guarantee of equivalent amount, which could be encashed in case the award-debtor succeeded in setting aside the award.

As such, it was held that, even under an order of stay, the award-holder could not be made to wait indefinitely to enjoy the fruits of the award, if there existed a change in circumstances after the order for stay had been passed. It opined:

“The object of the amendment in the Act in granting stay of an award cannot be to make the award-holder wait for an uncertain and indefinite period of time to enjoy the fruits of the award. This is particularly so where the award holder proves its bona fides not only by way of bringing significant subsequent events to the Court but also undertakes to secure the award-debtor in the event the award is set aside. In the present case, the award-holder undertakes to replace the amount to be withdrawn by way of a bank guarantee of an equivalent amount. The award-debtor will hence be completely secured in the event it succeeds in the application for setting aside of the award. No inconceivable prejudice, whether immediate or in the future, will hence be caused to the award-debtor if it succeeds in setting aside the Award.”

It was further held that since Section 36(2) of the 1996 Act does not require the Court to go into the merits of an award or its legality in granting an order of stay, the same would only be adjudicated upon in proceedings for setting aside under Section 34 of the Act. As such, the Court held that in the present case, a prima facie finding would not be needed for the purpose of withdrawal of the security amount. It opined:

“The legality of the award can only be gone into in an application for setting aside of an award under section 34 of the Act. The Court is not required to go into the merits of the award for granting stay of the award under section 36(2)…A prima facie finding, by its very definition means a first-blush-look at the factual context of the matter for consideration whether an award may be stayed under section 36(2). The Court simply looks at the bona fides of the award-debtor in having a way to secure the award. Hence, the inescapable conclusion is that the award-holder is not required to make out a prima facie case for withdrawal of the security given by the award-debtor.”

Separate application for withdrawal of security by award-holder not required.

Finally, on the contention of the award-debtors that an application for withdrawal of security could have only been made during the application for stay, which had already been disposed of on 17.01.23, the Court held that such an argument was ‘fallacious’ and that an application for release of secured amount would be unconnected to the stay application, since the award-holder had shown a change of circumstances, post the order of stay being passed. The Court concluded:

“Application for release of the secured amount to the award-holder is unconnected to a prayer for stay and is entirely different in cause and purpose. The award-holder must also show that intervention of events subsequent to the stay of the award calls for a decision as to whether the award-holder could be given some sort of interim relief in the form of withdrawing the secured amount. Thus, there must be a time gap between the two applications to allow the intervening facts to come in. The lis between the award-holder and the award-debtor continues until the award is given finality or is set aside by the Court. The continuation of the lis is substantially different, for instance, from a suit or a writ petition being disposed of by a Court and one of the parties thereafter coming to the Court with a fresh cause of action. In the case of section 36 of the 1996 Act, the Court retains jurisdiction to pass further orders while in the second instance the Court becomes functus officio. The present application is hence found to be maintainable for the above reasons.”

Case: The State of West Bengal & Ors. Vs. M/s. BBM Enterprise

Coram: Justice Moushumi Bhattacharya

Citation: 2023 LiveLaw (Cal) 193

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