India: Threshold For Grant Of Security Of Amount In Dispute Under Section 9 Of The Arbitration And Conciliation Act, 1996: An Analysis Of Essar House Private Limited V. Arcelor Mittal Nippon Steel India Limited

1. INTRODUCTION

The grant of security of the amount in dispute under Section 9 of the Arbitration & Conciliation Act ("Act") is a drastic interim measure that affects the adjudication of the dispute. Naturally, over a period of time, the Courts have developed guidelines for circumstances where the security of the amount in dispute may be granted to a party under Section 9 of the Act. A common approach is to liken Section 9 of the Act with Order XXXVIII and Order XXXIX Rule 5 of the Code of Civil Procedure, 1908 ("CPC") and thereby incorporate the principles underlying the exercise of power under CPC to govern the grant of an interim measure under Section 9 of the Act¹. However, the extent to which provisions of the CPC can govern the grant of the interim measure under Section 9 of the Act has always been contested. In 'Essar House Private Limited v. Arcelor Mittal Nippon Steel India Limited², ("Essar House") the Hon'ble Supreme Court ("Court") ruled that the power of the Court to grant relief under Section 9 of the Act is not strictly bound by the provisions of the CPC. The Court has ruled that a strong possibility of diminution of assets would suffice for granting interim relief under Section 9 of the Act and an actual attempt to remove or dispose of the property with a view to defeat the realization of the arbitral award is not required for granting security of amount in dispute.

This Article analyzes the legal developments regarding the power of the Court to grant the security of the amount in dispute under Section 9 of the Act and the thresholds developed for such grant of interim relief in light of the Judgment of the Court in Essar House.

2. FACTS OF THE CASE

In Essar House, the Commercial Division of the Bombay High Court ("High Court") vide order dated 10.12.2020 allowed the application filed by Arcelor Mittal Nippon Steel India Limited ("Arcelor") under Section 9 of the Act and directed the deposit of Rs. 47.41 Crores with the High Court³. The appeal against the same was dismissed by the Division Bench of the High Court vide judgment dated 01.02.2021.⁴

2.1. AGREEMENTS BETWEEN ESSAR STEEL AND ESSAR HOUSE PRIVATE LIMITED

Essar Services, a part of the Essar Group of Companies, along with Essar Steel India Limited ("Essar Steel")entered into a Support Services Agreement dated 24.01.2012 which was subsequently amended to require Essar Steel to deposit a sum of Rs 73 Crore as security deposit with Essar Services. It is undisputed that Essar Steel deposited a security deposit amounting to Rs. 47.41 Crores.

Essar Steel had also entered into a "Rent Agreement" dated 01.04.2016 with Essar House Private Ltd ("EHPL") under which the ground floor, podium, and 20 upper floors in Essar House were let out to Essar Steel on a lease and license basis. Under Clause 3 of the "Rent Agreement", Essar Steel was to pay an amount of Rs 25.80 Crore to Essar House Private as an interest-free refundable security deposit. It is important to note that there was no dispute about the receipt or the making of the interest-free refundable security deposit of Rs 25.80 Crore by Essar Steel.

Essar Steel also entered into a "Business Centre Agreement" dated 17.09.2018 in terms of which Essar Steel was allowed the use of six floors of the Essar House at a monthly rent of Rs 1,78,80,000/-. The Business Centre Agreement had subsumed the rental agreement previously entered between Essar Steel and EHPL. Under the "Business Centre Agreement", Essar Steel was required to make a security deposit of Rs. 35.51 Crores. In this regard, the security deposit of Rs 25.80 crore paid by Essar Steel under the Rental Agreement was adjusted towards the security deposit payable to Essar House under the "Business Centre Agreement".

2.2. INITIATION OF CIRP PROCEEDINGS AGAINST ESSAR STEEL

Standard Chartered Bank and State Bank of India filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") for initiation of the Corporate Insolvency Resolution Process ("CIRP") against Essar Steel before the Ahmedabad Bench of the National Company Law Tribunal ("NCLT"). The said application was admitted on 02.08.2017.

Thereafter, the Resolution plan submitted by Arcelor Mittal India Pvt Ltd. in respect of Essar Steel was approved by the Hon'ble Supreme Court in "Committee of Creditors of Essar Steel India through Authorised Signatory v. Satish Kumar Gupta & Ors"⁵. Therefore, 100% of the shareholding of Essar Steel India Limited was acquired by Arcelor Mittal India Pvt Ltd.

2.3. SET-OFF OF SECURITY DEPOSIT BY EHPL

Subsequently, Arcelor Mittal Nippon Steel India Limited ("Arcelor") had called upon Essar House Private Limited to refund the interest-free security deposit amounting to Rs 35.51 Crore. However, EHPL stated that it had taken over a loan of Rs 26 Crore due from Essar Steel to Marvel Mines and had adjusted the same against the security deposit kept by Essar Steel with EHPL.

The EHPL averred that was an inter-se agreement between Essar Steel and Marvel Mines to the effect that a portion of the alleged financial assistance availed by Marvel Mines would be used to service Essar Steel's debt to the HDFC Bank. Marvel Mines had assigned this receivable to EHPL and thus, EHPL had adjusted the same against the security deposit kept by Essar Steel with EHPL. The balance amount of Rs 9.71 Crore was paid by the EHPL to Edwell in the discharge of a debt owed by Essar Steel to Edwell. Thus, EHPL informed that there was no security deposit left to be refunded to the AMIPL.

3. ANALYSIS OF THE JUDGMENT

Based on the above, two important factual points need to be kept in consideration while analyzing this judgment: firstly, (1) no submissions were made by the EHPL/Appellant as to why the admitted refundable amount of deposit was not made by it, and how such amount could be adjusted by EHPL with a third party. Secondly, (2) EHPL had submitted that it was heavily indebted and did not have an asset other than the asset disclosed in the affidavit of Disclosure that it could offer as security for the claim of Rs. 34.81 Crore/-. Pertinently, it was averred before the Division Bench of the High Court that EHPL had created a charge on its immoveable properties and moveable properties for an amount of Rs. 138.38 Crore and that Arcelor apprehended that the EHPL was arranging its affairs to defeat its legitimate rights and escape its obligations under the business center agreement.

Based on Point (1) mentioned above, Hon'ble Supreme Court noted that the novation of the contract or set off was not allowed in respect of a corporate entity undergoing CIRP without the consent of the Resolution Professional. Therefore, even if any prior inter se arrangement existed between the Parties, EHPL could not have adjusted the security deposit payable to Essar Steel against the alleged dues of Essar Steel to a third party during the CIRP.

On Point (2) mentioned above, Hon'ble Court ruled that the power of the Court to grant relief is not curtailed by the rigors of every procedural provision in the CPC and that the court is not strictly bound by the provisions of the CPC in the exercise of its powers to grant interim relief under Section 9 of the Act. Thus, all that the Court is required to see under Section 9 of the Act is whether the applicant for an interim measure has a good prima facie case, whether the balance of convenience is in favor of interim relief as prayed for being granted and whether the applicant has approached the court with reasonable expedition. The Hon'ble Court relied on residuary power under Section 9 of the Act to observe that the technicalities of CPC cannot prevent the Court from securing the ends of justice.

3.1. INTERIM RELIEF UNDER SECTION 9 OF THE ACT AND UNDERLYING PRINCIPLES OF CPC

It is trite law that the Courts are competent to pass appropriate protective orders of interim measure as provided under Section 9 of the Act outside the provisions of Order XXXVIII Rule 5 of the CPC⁶. However, this cannot be taken to mean that Court may bypass the principles underlying the provisions of CPC. In 'Adhunik Steels Ltd v. Orissa Manganese and Minerals Pvt Ltd'⁷, the Supreme Court had observed that "well-known rules" of the CPC would have to be kept in mind while granting interim relief under Section 9 of the Act and the considerations adjudicated before granting of an interim injunction such as prima facie case, the balance of convenience and irreparable injury.

In Essar House, the Hon'ble Court relied upon the ruling of 'Ajay Singh & Ors. v. Kal Airways Private Limited and Ors'⁸, 'Jagdish Ahuja & Anr v. Cupino Limited'⁹, 'Valentine Maritime Ltd v. Kruez Subsea Pte Ltd'¹⁰ and 'Srei Infrastructure Finance Limited v. M/s Ravi Udyog Pvt Ltd & Anr' by Delhi High Court, Bombay High Court and Calcutta High Court respectively to hold that the powers of a Court under Section 9 of the Act are wider than the powers under the provisions of the CPC. Accordingly, while the Court in Essar House reaffirmed the need for underlying principles of CPC to be kept in mind, the Court has provided that if a strong prima facie case is made out and the balance of convenience is in favor of interim relief is granted, the Court exercising power under Section 9 of the Arbitration Act should not withhold relief on the mere technicality of the absence of averments, incorporating the grounds for attachments before judgments under Order XXXVIII Rule 5 of the CPC.

3.2. THRESHOLD FOR GRANT OF RELIEF AND THE PROCEDURAL PROVISIONS OF THE CPC

On the question of thresholds for the grant of relief under Section 9 of the Act, the Court has held that it was not imperative for the grant of relief under Section 9 of the Act that there was an actual attempt to deal with, remove or dispose of the property to defeat or delay the realization of an impending arbitral award.

The Court held that a strong possibility of diminution of the asset would suffice. The Division Bench of the High Court had also ruled in its judgment that the obstructive conduct of the party against whom such a direction is sought is also regarded as a material consideration. The Hon'ble Court also held that the Court is required to examine and weigh the consequences of the refusal of interim relief to the applicant for interim relief in case of success in the proceedings, against the consequence of the grant of the interim relief to the opponent in case the proceedings should ultimately fail.

CONCLUSION

The judgment of the Hon'ble Court in Essar House provides clarity and guidance on the determination of cases involving the grant of interim relief under Section 9 of the Act wherein objections to the grant of relief are couched in non-fulfillment of procedural stipulations and technicalities provided in CPC. Through this judgment, the Court provided some clarity on what the underlying principles of CPC mean in the context of governing the grant of relief under Section 9 of the Act. To that end, Essar House has interpreted the underlying principles of CPC to exclude technicalities in the context of Section 9 of the Act.

Footnotes

1. Ajay Singh v. Kal Airways Private Limited, 2017 SCC OnLine Del 8934.

2. Essar House Private Limited v. Arcelor Mittal Nippon Steel India Limited, 2022 SCC OnLine SC 1219.

3. Arcelor Mittal Nippon Steel India Limited v. Essar House Private Limited, Comm. Arbitration Petition (L) No. 6602 of 2020.

4. Essar House Private Limited v. Arcelor Mittal Nippon Steel India Limited, Comm. Arbitration Appeal (L) No 1022 of 2021.

5. Committee of Creditors of Essar Steel India through Authorised Signatory v. Satish Kumar Gupta & Ors, (2020) 8 SCC 531.

6. Motor & General Finance v. Bravo Hotels Pvt Ltd, 2018 (2) Arb LR 50 (Delhi).

7. Adhunik Steels Ltd v. Orissa Manganese and Minerals Pvt Ltd, AIR 2007 SC 2563. Also see Steel Authority

8. Ajay Singh & Ors. v. Kal Airways Private Limited and Ors (2017) SCC OnLine Del 8934.

9. Jagdish Ahuja & Anr v. Cupino Limited, 2020 SCC OnLine Bom 849.

10. Valentine Maritime Ltd v. Kruez Subsea Pte Ltd, 2021 SCC OnLine Bom 75.

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