Disobedience Of Interim Measures Due To Insolvency Proceedings Is Not Contempt: Delhi High Court

The bench held that if the disobedience results from circumstances beyond the contemnor's control, such as financial constraints or ongoing disputes that impact compliance, contempt charges are not justified.

Brief Facts:

The matter pertained to a Memorandum of Understanding (MOU) executed among all shareholders and directors of RBT Private Limited, where Sanjay Arora was to purchase the entire shareholding from the directors of the company (Petitioners) and take responsibility for running the company's affairs. Disputes arose when the Petitioners claimed that Respondent failed to fulfil his obligations under the MOU and used the company's premises for his other entities' commercial gains. Consequently, the Petitioners filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 and sought to restrain Respondent from disposing of or creating third-party interests in the company's assets.

During the hearing, the High Court appointed an arbitrator and directed that the Respondent should not take away any raw material or machinery from the company's premises. This was followed by an order from the arbitral tribunal reiterating the court's directions and binding the Respondent to comply. Later, the tribunal allowed an application for interim relief and directed the Respondent to continue paying the company's EMIs until the arbitration proceedings were resolved.

Despite these orders, the Petitioners alleged that the Respondents did not comply which forced the Petitioners to pay EMIs amounting to ₹4.10 Crores. Additionally, the Petitioners discovered that machinery hypothecated with South Indian Bank was sold by the Respondent. The inspection revealed a missing machine and another dismantled one. The Petitioners further claimed that the Respondent removed various items from the premises. Therefore, the Petitioner approached the High Court d alleging willful disobedience of the interim directions.

Observations by the High Court:

The High Court noted that contempt can only be established when disobedience to court orders is willful. It held that the quasi-criminal nature of contempt proceedings which requires proof beyond a reasonable doubt. It held that mere probabilities are insufficient grounds for invoking contempt jurisdiction; the disobedient act must be deliberate, intentional, and done with full awareness of its consequences.

The bench held that the disobedience was willful, indicating a deliberate state of mind and a conscious choice to disregard court directives. It held that if disobedience arises from circumstances beyond the contemnor's control, such as financial constraints or ongoing disputes impacting compliance, contempt charges are not warranted.

The High Court referred to the affidavit submitted by the Respondent, which explained the inability to meet financial obligations due to investment disputes and ongoing insolvency proceedings against the Respondent's company. The affidavit detailed the Respondent's efforts to manage financial difficulties and legal challenges which included attempts to resolve outstanding debts and comply with court directives.

Therefore, the contempt petition was dismissed.

Case Title: Mr.Rajan Chadha & Anr Vs Mr.Sanjay Arora & Anr.

Citation: 2024 LiveLaw (Del) 790

Case Number: CONT.CAS(C) 75/2021 & CM APPL. 62249/2023

Advocate for the Petitioner: Mr Rohan Jaitley, Mr Akshay Sharma, Mr Bhuvnesh Sehgal & Mr Dev Pratap Shahi

Advocate for the Respondent: Mr Abhimanyu Mahajan with Mr Rakesh Kumar, Mr A Mishra, Mr Sahil and Mr Nidhish Gupta

Date of Judgment: 03.07.2024

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