IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 08/03/2011 CORAM THE HON'BLE MR. JUSTICE VINOD K.SHARMA A.No.1445 of 2011 ORDER
This application under Sec.9 of the Arbitration and Conciliation Act, 1996 has been filed by M/s.L & T Finance Ltd. through its Manager, against Mr.K.M.Surya and Mr.D.Mohan Reddy.
2. The prayer made in the application is to appoint an Advocate Commissioner to seized and deliver six numbers of Ashok Leyland tippers and to permit the Advocate Commissioner to obtain Police aid and break open the premises where the said vehicles may be found lying.
3. The case of the applicant is that on the request of the first respondent, i.e. Mr.K.M.Surya, the applicant extended loan in terms of loan cum hypothecation agreement for the purchase of six numbers Ashok Leyland Tippers. The total loan advanced was to the tune of Rs.75,60,000/- (Rupees seventy five lakhs sixty thousand only) which was to be paid with interest at the rate of 7.70% p.a. totalling Rs.98,88,528/- (Rupees ninety eight lakhs eighty eight thousand five hundred and twenty eight eight only) in 47 instalments of Rs.2,14,968/- (Rupees two lakhs fourteen thousand nine hundred and sixty eight only). The agreement also stipulated compensation @ 36% p.a. with monthly rests on unpaid amounts.
4. The first respondent paid 34 instalments in full and committed default from 35th instalment which fell due on 24.8.2010. The applicant by invoking Clause 13 of the said agreement, terminated the agreement, and called the first respondent to pay the entire amount together with interest, compensation and other moneys.
5. It is also pleaded case of the applicant that they are entitled to take charge or possession or seize and/ or remove and sell the said vehicle and to appropriate the sale proceeds towards the amount due under the contract.
6. Inspite of demand, the respondents did not take steps to settle the outstanding. The applicant claims that though the applicant was empowered to seize the vehicle in the event of default, they could not enforce the terms of the said agreement at that point of time. Therefore, notice was issued to the respondents to settle the amount.
7. It is also pleaded in the application that loan agreement contains an arbitration clause, which provides for arbitration of disputes/ differences and or claims arising out of the said agreement between the applicant and the first respondent. The applicant is also arranging for arbitration of the dispute for adjudication of the claim.
8. The vehicle stands hypothecated to the applicant. The applicant apprehends that the respondent may secrete the vehicle out of reach, if attempt is made to enforce the terms of the agreement, after notice. The application under Sec.9 of the Act has been filed to seize the vehicle before commencing the arbitration proceedings.
9. The second respondent has been impleaded as party as a guarantor, though he is not a party to the arbitration agreement. The application against the second respondent therefore is not competent, as the relief under Sec.9 of the Act, cannot be claimed against a person who is not a party to the arbitration agreement. As held by the Hon’ble Supreme Court in the case of Firm Ashok Traders and another Vs Gurukukh Das and others ( (2004)3 SCC 155), the application on the face of it, suffers from misjoinder of parties.
10. In order to appreciate the contention raised by the learned counsel for the applicant, it would be appropriate to take note of the settled law with regard to exercise of power under Sec.9 of the Arbitration and Conciliation Act 1996.
11. The Division Bench of this Court in the case of Cholamandalam DBS Finance Ltd. Vs Sudheesh Kumar (2010(1) CTC 481) was laid down, the following guidelines for exercise of powers under Sec.9 of the Arbitration & Conciliation Act 1996:
“25. (a) If the pleadings in the affidavit make out that it is just and convenient to grant interim orders, and if, prima facie, the balance of convenience is in favour of the applicant, then an ex parte order appointing an advocate commissioner may be passed, but simultaneously notice shall be ordered to go to the respondent indicating the date of hearing of the application. It is open to the learned counsel for the appellant to get permission of the Court to also serve private notice on the respondents personally at the time when the vehicle is seized. But, an affidavit must be sworn to by the Advocate Commissioner that the person who received the notice was authorised to do so and that it was not given to some third party who was not responsible or who was not authorised to acknowledge any court notice on behalf of the respondents;
(b) After the advocate commissioner reports to the Court that the vehicle has been seized, it shall be in the custody of the applicant. This custody is on behalf of the Court, i.e., the applicant will be holding it in custodia legis.
(c) Of course, if even after notice, the borrower does not appear or if it appears to the Court that the borrower is deliberately evading notice, then it is open to the applicant to pray for such reliefs as are necessary, which may even include the sale of vehicle and the matter may be heard ex parte and orders passed in exercise of discretion of Court.
(d) The application shall not be closed without hearing the other side after notice is served. Before closing the application, the Court shall also ascertain whether the applicant has taken steps to initiate the arbitral proceedings. If the applicant has not done so, then orders shall be passed putting the applicant on terms as laid down in Sundaram Finance’s case (cited supra), because section 9 depends on a close nexus with the initiation of arbitral proceedings;
(e) As regards the expenditure incurred for keeping the vehicle in custody, the applicant shall bear it until the respondent is served and appears. After that, the Court shall hear the parties and pass orders.
(f) The remuneration for advocate commissioners appointed by this Court shall be commensurate with the work done, since the financiers will shift this burden only on the already beleaguered borrower.
One other advantage in hearing the respondent before the closing of application is the clue that we get from Firm Ashok Traders’ case [(2004) 3 SCC 155], cited supra, where the Supreme Court encouraged the parties to suggest a solution. If that is really possible, then even at the initial stage, the entire matter will come to a happy resolution. Therefore, it is not only in the interest of natural justice and fairness, but also as a pragmatic measure that we have laid down these guidelines. ”
12. The Division Bench in para 26 of the judgment also held as under:
“26.In the case on hand, in the affidavit, no averments are made to justify interim order except to state that the vehicle will be subject to constant depreciation in value, wear and tear. There must be necessary pleadings to show that it is just and convenient to pass the interim measure of protection. This is clear from Adhunik Steels’s case [(2007) 7 SCC 125], referred supra. Since the respondent himself says that there was an one-time settlement of payment of Rs.3,20,000/-, if that amount is paid to the appellant, then they shall release the vehicle. However, the learned counsel for the appellant denies there was such an one-time settlement. Therefore, the same shall be decided by the learned Arbitrator in the arbitral proceedings initiated by the appellant.
13. The Hon’ble Supreme Court in the case of Firm Ashok Traders and another Vs Gurukukh Das and others (supra), was pleased to lay down as under:
“17. There are two other factors which are weighing heavily with us and which we proceed to record.As per the law laid down by this Court in M/s Sundaram Finance Ltd an application under Section 9 seeking interim relief is maintainable even before commencement of arbitral proceedings. What does that mean? In M/s. Sundaram Finance Ltd., itself the Court has said-
“It is true that when an application under Section 9 is filed before the commencement of the arbitral proceedings there has to be manifest intention on the part of the applicant to take recourse to the arbitral proceedings”.
Section 9 permits application being filed in the Court before the commencement of the arbitral proceedings but the provision does not give any indication of how much before. The word ‘before’ means inter alia, ‘ahead of; in presence or sight of; under the consideration or cognizance of. The two events sought to be interconnected by use of the term ‘before’ must have proximity of relationship by reference to occurrence; the later event proximately following the preceding event as a foreseeable or ‘within sight’ certainty. The party invoking Section 9 may not have actually commenced the arbitral proceedings but must be able to satisfy the Court that the arbitral proceedings are actually contemplated or manifestly
intended (as M/s Sundaram Finance Ltd. puts it) and are positively going to commence within a reasonable time. What is a reasonable time will depend on the facts and circumstances of each case and the nature of interim relief sought for would itself give an indication thereof. The distance of time must not be such as would destroy the proximity of relationship of the two events between which it exists and elapses. The purposes of enacting Section 9, read in the light of the Model Law and UNCITRAL Rules is to provide ‘interim measures of protection’. The order passed by the Court should fall within the meaning of the expression ‘an interim measure of protection’ as distinguished from an all-time or permanent protection.
18. Under the A & C Act 1996, unlike the predecessor Act of 1940, the arbitral tribunal is empowered by Section 17 of the Act to make orders amounting to interim measures. The need for Section 9, in spite of Section 17 having been enacted, is that Section 17 would operate only during the existence of the arbitral tribunal and its being functional. During that period, the power conferred on the arbitral tribunal under Section 17 and the power conferred by the Court under Section 9 may overlap to some extent but so far as the period pre and post the arbitral proceedings is concerned the party requiring an interim measure of protection shall have to approach only the Court. The party having succeeded in securing an interim measure of protection before arbitral proceedings cannot afford to sit and sleep over the relief, conveniently forgetting the ‘proximately contemplated’ or ‘manifesty intended’ arbitral proceedings itself. If arbitral proceedings are not commenced within a reasonable time of an order under Section 9, the relationship between the order under Section 9 and the arbitral proceedings would stand snapped and the relief allowed to the party shall cease to be an order made ‘before’ i.e. in contemplation of arbitral proceedings. The Court, approached by a party with an application under Section 9, is justified in asking the party and being told how and when the party approaching the Court proposes to commence the arbitral proceedings. Rather, the scheme in which Section 9 is placed obligates the Court to do so. The Court may also while passing an order under Section 9 put the party
on terms and may recall the order if the party commits breach of the terms.”
14. In this case, there is a positive assertion showing intention of the applicant to initiate arbitration proceedings for adjudication of the dispute.
15 In the case of Cholamandalam DBS Finance Ltd. Vs Sudheesh Kumar (supra) the Division Bench of this Court laid down, that the principle on which an order under Sec.9 of the Act can be passed are the same on which interim injunction under Order 39 Rule 1 of CPC can be granted.
16 Therefore, the applicant in order to succeed on an application under Sec.9 of the Act has to prove the prima facie case and establish irreparable injury and balance of convenience.
17 The facts of this case show that the applicant does not fulfill any of the conditions for grant of interim relief.
17. The learned counsel for the applicant contended that a prima facie case is proved, as out of total amount of Rs.98,88,528/- (Rupees ninety eight lakhs eighty eight thousand five hundred and twenty eight only) which is payable by the applicant, a sum of Rs.30,00,000/- (Rupees thirty lakhs only) is still outstanding, only 34 instalments out of 44 instalments have been paid. This contention cannot be accepted as the very basis of arbitration is a dispute which is to be adjudicated by the arbitrator, this court in exercise of jurisdiction under section 9 of the Act cannot usurp the jurisdiction to adjudicate the dispute to determine the amount due.
18 The case of the applicant is that in case vehicles are not seized, the applicant would suffer irreparable loss, as it will be difficult to recover the awarded amount, as the possibility of disposing of the vehicle or taking it out of reach of the applicant cannot be ruled out and that balance of convenience is in favour of the applicant, cannot be accepted as admittedly vehicles are hypothecated to the applicant.
19. The learned counsel for the applicant placed reliance on the judgment of the Hon’ble Supreme Court in the case of The Managing Director, Orix Auto Finance (India) Ltd. Vs Jagmander Singh and another (2006(1) CTC 670) to contend that it is not open to High Court vary agreed terms of agreement and lay down guidelines contrary to such agreement. Therefore, the right vests with the applicant to seize the vehicle which deserves to be protected by interim measures under Sec.9 of the Arbitration & Conciliation Act.
20 On consideration, I find no force in the contention of the learned counsel for the applicant. It would be seen that out of Rs.98,88,528/- (Rupees ninety eight lakhs eighty eight thousand five hundred and twenty eight only) i.e. amount due inclusive of interest, a sum of Rs.68,88,528/- (Rupees sixty eight lakhs eighty eight thousand five hundred and twenty eight only) stands paid by the first respondent. In addition, admittedly, the vehicles are hypothecated in favour of the applicant to secure the loan. The entries with regard to hypothecation are recorded in the registration book. The loan advanced also stands guaranteed by the second respondent, being a guarantor to the loan.
21. In view of the admitted position referred to above, it cannot be said that the applicant has prima facie case, to seize the vehicles for disposal. The application is contrary to the settled law as the prayer made is not to seek interim custody of the vehicle, but to take custody for the recovery of the amount due, which is not the intention of Sec.9 of the Arbitration & Conciliation Act.
22. At the sake of repetition, it may be noticed that the applicant is totally secured by way of hypothecation and the guarantee of the second respondent to recover the loan amount. The substantial amount of loan is also paid. The applicant does not have a prima facie case to seize the vehicles. The balance of convenience is not in favour of the applicant, but in favour of the first respondent, as by the seizure of vehicle, the very source of income of the first respondent would come to an end, with no advantage to the applicant as the vehicles will be retained in custodia legis . The guarantee and hypothecation further shows that on account of non seizure, the applicant is not likely to suffer irreparable loss or injury.
23 No case therefore is made out to invoke jurisdiction under Sec.9 of the Arbitration & Conciliation Act, for appointing an Advocate Commissioner.
24. Consequently, the application is dismissed. No costs.
vaan
