Unadjudicated Claims Cannot Be Secured Through Interim Relief U/S 9 Of A&C Act Merely Due To Financial Distress: Delhi HC

The Delhi High Court Bench of Justice Jasmeet Singh has observed that mere financial distress of the other party would not be a ground to allow interim relief and grant its unadjudicated claim under Section 11 of the Arbitration Act (ACA)."However, the calculation of any permissible rebate and the resolution of quality-based objections require factual findings and interpretation of the terms of the Agreement, which is an exercise to be carried out in the arbitration. Hence, the amounts claimed by the petitioner at this stage are unadjudicated claims, which cannot be secured through interim relief merely because respondent No. 1 is in financial distress," the court said. Facts The present petition was filed under Section 9, ACA, whereby the Petitioner inter alia sought that Respondent No.1 be restrained from selling, dealing with or alienating any of its moveable assets without furnishing security. The Petitioner and Respondent No.1 entered into a long-term agreement forthe sale and purchase of coal vide an agreement dated 29.08.2023. Since there were disputes between the parties, the Petitioner stated that they were in the course of invoking arbitration, and it was due to the precarious and weak financial condition of Respondent No. 1, that they had moved for pre-arbitral interim reliefs. Thus, the present petition was filed. Contentions The Counsel for Petitioner submitted that Respondent No.1 was in a precarious and volatile financial condition and therefore the Petitioner had concerns about the ability of Respondent No.1 to honour its financial obligations if an award is passed in its favour. The Petitioner highlighted the fact that the annual report of Respondent No. 1 recorded losses to the tune of Rs.2900 crores and its current liabilities outweighed its assets greatly. The Counsel further submitted that in view of Respondent No.1's financial , the Petitioner had a strong prima facie case and the balance of convenience was in its favour. It was stated that the interim relief sought, if granted would prevent irreparable loss/serious injury to the Petitioner. On the other hand, the Counsel for Respondent No.1 submitted that weak financial condition could not by itself justify the grant of interim relief under Section 9, ACA. It was submitted that the Government had undertaken several measures to extend substantial financial support to the Respondent No.1, so Petitioner's concerns regarding Respondent No.1's ability to satisfy the award were unfounded. The Counsel for Respondent No. 1 submitted that Order XXXVIII Rule 5, CPC applies with equal force to proceedings under Section 9, ACA. It was argued that interim relief of attachment may be granted only when the pre-conditions under Order XXXVIII Rule 5, CPC are satisfied and where the Court is satisfied that there are specific allegations with cogent material and prima-facie case that the party is likely to defeat the decree/award that may be passed by the arbitrator by disposing of the properties and/or in any other manner. It was also submitted that the Petitioner's claim was premature and unadjudicated and it is trite law that unadjudicated claims cannot be secured merely because a party is in financial distress. The Counsel further submitted that the Petitioner had placed no material on record to show that Respondent No.1 is or has been dissipating its assets with the intent to obstruct or delay the execution of any Award that may be passed against it. Observations The Court observed that the main issue for its consideration was whether Respondent No. 1 could be directed to secure the amount in dispute only on the ground that it is in financial distress and consequently, the Arbitral Award that might eventually be passed against it could become infructuous. The Court observed that though it was not strictly bound by the provisions of CPC, it could not completely disregard its underlying principles. For passing an interim order in the nature of attachment before an award, the Court needed to satisfy itself that the conditions underlying Order XXXVIII Rule 5, CPC are met. The Court has to be convinced that there exists a strong prima facie case that the other party is actively trying to dissipate its assets to defeat the outcome of the award. The Court analysed precedents in this regard and observed that unadjudicated claims could not be secured through interim relief merely because a party was in financial distress. Further, even if the contentions of the Petitioner that Respondent No. 1 was facing financial distress were for sake believed, the same alone did not make a strong prima facie case in favour of the Petitioner. The claims of the Petitioner were yet to be crystallised and would convert to a debt once the liability of the Respondent No. 1 is adjudicated upon. The Court pointed out that the Petitioner had not brought forward any...

Unadjudicated Claims Cannot Be Secured Through Interim Relief U/S 9 Of A&C Act Merely Due To Financial Distress: Delhi HC

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Unadjudicated Claims Cannot Be Secured Through Interim Relief U/S 9 Of A&C Act Merely Due To Financial Distress: Delhi HC

Arpita Pande

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