Contempt Proceedings Inappropriate For Resolving Complex Disputed Factual Issues: Delhi High Court

Brief Facts:

The matter pertained to contempt petitions which were filed under Section 12 of the Contempt of Courts Act, 1971, in conjunction with Article 215 of the Constitution of India, 1950 seeking appropriate action against the NEPC India Limited and Others (Respondents) for alleged deliberate and wilful disobedience of several court orders.

The underlying disputes arose from agreements in which Morgan Ventures Limited and Others (Petitioners) agreed to purchase Wind Energy Generators from Respondent No. 1. Subsequent disputes led to arbitration which resulted in Arbitral Awards later corrected by an order. The awards entitled the Petitioners to substantial amounts, including Rs. 54,55,56,639/- from Morgan Ventures Limited and Rs. 121,60,08,264/- from Goyal MG Gases Private Limited, as of 31.07.2020. Respondent No. 1 initially challenged these awards in the Madras High Court but withdrew the petitions with permission to refile them before the Delhi High Court. The Section 34 petitions challenging the awards are currently pending.

During the pendency of these petitions, the Petitioners filed Section 9 petitions under the Arbitration Act to secure the awarded amounts. Orders were passed directing Respondent No. 1 to keep aside any realized monies and assets to cover the Petitioners' dues and not to dispose of or create third-party rights in its assets. However, an inspection revealed that Respondent No. 1 realized Rs. 40.65 crores from debtors and assets but failed to set this amount aside.

Respondents No. 2 to 5, who were Directors of Respondent No. 1 at the relevant time, were also impleaded for their potential role in the alleged contempt. In their counter-affidavit, the Respondents argued that the entries in the Balance Sheets referred to by the Petitioners were book adjustments and not a breach of the court orders. They claimed that the alleged amounts were written off, not realized, and that the petitions were time-barred as they were filed beyond the one-year limitation period specified in Section 20 of the Contempt of Courts Act.

The Petitioners, on the other hand, contended that the total liability of Respondent No. 1 remains around Rs. 176 crores and that no payments have been made towards satisfying this liability. They argued that the amount written off could not have been done without court approval since it was under the court's lien as per the order. The Petitioners also challenged the Respondents' contention that the amounts were not realized and pointed to inconsistencies in the financial statements.

Observations by the High Court:

The High Court referred to its earlier order dated November 10, 2016. This order was intended to provide interim reliefs and maintain the status quo regarding the immovable property of the companies involved.

The order from November 10, 2016 mandated that certain financial conditions be observed until the petition under Section 34 of the Arbitration Act was resolved. The Respondents were directed not to create any third-party interests in their immovable property and to secure amounts realized from debtors. This directive was to remain in effect for four weeks following the disposal of the petition under Section 34 of the Arbitration Act.

The High Court then noted that the dispute centered around whether the Respondents, particularly Respondent No. 1, improperly appropriated an amount of Rs. 40.65 crores during the financial years 2016-17 and 2017-18 without court permission. The Petitioners claimed that the Respondents realized these debts without proper authorization. However, the High Court found that the Petitioners failed to provide sufficient evidence to support their claim. They have not demonstrated through direct accounting entries or other tangible evidence that Respondent No. 1 realized the debts or securities in question.

The High Court examined a detailed certificate provided by Auditor A. Nageswaran. The certificate clarified changes in the balance sheets for the relevant years, including write-offs of unrecoverable debts and non-payable creditors. The Auditor's certificate confirmed that these write-offs were standard accounting practices, permissible under accounting standards. It also clarified that no actual inflow or outflow of cash occurred due to these write-offs, and the company's financial position remained stable.

The High Court noted that the explanations provided by the Respondents' Chartered Accountant have not been countered by any other financial expert or Chartered Accountant. Thus, the High Court held that the claims that Rs. 40.65 crores were realized or that debts were improperly handled lack substantiation. The High Court acknowledged that there are standard procedures for writing off bad debts, particularly when debts are time-barred or the debtor is insolvent. The High Court found no evidence to suggest that the accounting practices used were improper or non-standard.

Therefore, the High Court decided not to delve into a detailed examination of accounting practices. It held that contempt proceedings are not suitable for resolving complex factual disputes. Given the absence of clear evidence of deliberate or wilful disobedience of the court's orders, the contempt petitions are dismissed.

Case Title: Morgan Ventures Limited Vs Nepc India Limited And Other & Ors. And Connected Matters

Citation: 2024 LiveLaw (Del) 1000

Case Number: CONT.CAS(C) 585/2020 & CM APPL. 14357/2021 and connected matters

Advocate for the Petitioner: Mr. Narender Hooda, Sr. Adv. along with Mr. Tanmay Yadav, Mr. Rahul Rathor & Mr. Shiv Bhatnagar, Advs. Mr. Tarun Singla & Mr. K.C. Joshi, Advs.

Advocate for the Respondent: Mr. Vivek Kohli, Sr. Adv. along with Mr. Kartik Malhotra, Ms. Bhavya Bhatia & Mr. Anindit Mandal, Advs.

Date of Judgment: 09 September 2024

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