Interim Measures U/s 17 Of Arbitration Act Affecting Third-Party Rights Is Appealable: Delhi High Court
The Delhi High Court bench of Justice Jasmeet Singh has held that a third party, whose rights for a registered charge are affected by an arbitral award, can challenge such award under Section 37 of the Arbitration and Conciliation Act, 1996. The bench held that: “the appellant herein has charge duly registered in its favour and that being the position, the charge in favour of...
The Delhi High Court bench of Justice Jasmeet Singh has held that a third party, whose rights for a registered charge are affected by an arbitral award, can challenge such award under Section 37 of the Arbitration and Conciliation Act, 1996.
The bench held that:
“the appellant herein has charge duly registered in its favour and that being the position, the charge in favour of the appellant cannot be diluted/interfered as done by the impugned orders and more so in the absence of the appellant being a party in the impugned orders or the appellant being put to prior notice.”
Under the Companies Act, a "charge" refers to a form of security interest over the assets of a company, which is created to secure the payment of a debt or the performance of an obligation. It involves the company providing a lender or creditor with rights over its assets as collateral for a loan or other financial obligation.
Brief Facts:
The ATS Group, which included Respondent Nos. 1, 2, 3, 4, and 8 to 10, initiated arbitration proceedings against the Dalmia Group, comprising Respondent Nos. 5 to 7. The ATS Group secured financial facilities from Assets Care And Reconstruction Enterprise Limited (Appellant) amounting to ₹1100 Crores which created a mortgage over the projects "ATS Picturesque Reprieves" and "ATS Dolce". The High Court appointed the Sole Arbitrator to handle eleven arbitration petitions. During the arbitration, applications under Section 17 of the Arbitration Act were filed by both groups. The Arbitrator's order restrained the ATS Group from alienating or transferring flats from seven projects until further directions were complied with. Thereafter, vide order dated 05.11.2021, learned Arbitrator directed the aforesaid injunction would remain operative till the ATS Group complies with all the directions. Feeling aggrieved, the Assets Care And Reconstruction Enterprise Limited (Appellant) approached the High Court.
It contended that the ATS Group failed to comply with the directions regarding the bank guarantee and the list of properties. The Appellant, not a party to the arbitration between the ATS and Dalmia Groups, argued that the impugned orders interfere with its contractual rights and security interests.
Dalmia Group argued that the appeal should be dismissed on grounds of maintaining the contested issues of fact requiring evidence, collusion between the Appellant and ATS Group, and the Dalmia Group's prior secured creditor status. It claimed to have invested ₹113 Crores and secured an exclusive charge over a significant portion of saleable area in "ATS Dolce" under an Investment Agreement. The Dalmia Group contended that the appeal raised contested questions of fact that should be adjudicated with evidence.
Observations by the High Court:
The High Court referred to its decision in Edelweiss Asset Reconstruction Co. Ltd. v. GTL Infrastructure Ltd. This judgment addressed the same impugned orders under review. The earlier court held that the Arbitral Tribunal did not have jurisdiction to affect the rights of third-party secured creditors unless such parties were given notice.
Regarding the creation of charge, the High Court held that the Dalmia Group failed to demonstrate the existence of any registered document evidencing the creation of security or registration of charge. The Appellant executed documents for the creation of charge in relation to Facility Agreements for two projects, and these charges were properly registered with the Registrar of Companies (ROC).
In terms of the Appellant's status as a secured creditor, the High Court referred to Section 80 of the Companies Act, 2013 which states that the registration of a charge serves as notice of the charge and thus affords the Appellant a preferential position compared to unsecured creditors. Since the Dalmia Group failed to create or register a charge under Section 77, the High Court held that it could not claim to be a secured creditor.
The High Court further observed that all units allocated to the Dalmia Group were sold, thereby negating any security interests under Section 11(4)(h) of the Insolvency and Bankruptcy Code, 2016. Additionally, it that this section does not inherently create security or a charge. The High Court also found that the Dalmia Group suppressed information regarding the charge from the Arbitrator.
The High Court held that reliance on Investment Agreements and Supplementary Agreements to claim prior charge does not suffice under Section 77 of the Companies Act, 2013 which mandates registration of charges with the ROC. Section 80 also mandates that registration of charge is deemed notice to all. Therefore, the High Court held that the Appellant's registered charge remained valid and preferential as per the law.
The bench held that:
“Merely placing reliance on the clauses mentioned in Investment Agreements and Supplementary Agreements and to aver that the prior charge over the said projects have been made would not suffice as per section 77 of Act of 2013 which clearly mandates that the charge has to be registered before the ROC. Furthermore, Section 80 of Act of 2013 holds that the registration of charge is a deemed notice to the person acquiring such asset. Intention of the parties to the agreement may not be relevant here as the appellant herein has a registered charge in its favour which puts them in a preferential position.”
The High Court also found the appeal maintainable despite arguments that the impugned orders were akin to certain CPC orders requiring contested factual evidence. It held that Section 17 of the Arbitration Act provides for appeals against interim measures and such orders are enforceable as court orders under the CPC.
Consequently, the High Court allowed the appeal and set aside the directions contained in the impugned orders of the Arbitrator regarding the ATS Picturesque Reprieves and ATS Dolce projects.
Case Title: Assets Care And Reconstruction Enterprise Limited Vs Domus Greens Private Limited & Ors.
Case Number: ARB. A. (COMM.) 78/2022 & I.A. 18317/2022, I.A. 1455/2023
Advocate for the Petitioner: Mr. Jayant Mehta, Sr. Adv with Ms. Amrita Singh, Mr. Ankit Gupta, Mr. Raghav Dutt, Advs.
Advocate for the Respondent: Mr. Ajay Bhargava, Ms. Wamika Trehan, Mr. Siddhant Kumar, Ms. Radhika Khanna, Advs. for R5-7 Mr. Apoorv khator, Mr. Ankit Bashisht, Advs. for R7 Mr. Kartik Nayar, Mr. Krish Kalra, Mr. Divyansh Rai, Advs. for R 1-4 and R8- 10.
Date of Judgment: 01.07.2024