S.37 Court Must Be Circumspect When Interfering With Arbitrator’s Interim Orders: Calcutta HC Preserves Deceased LLP Partner’s Share

The Calcutta High Court has recently held that a Court exercising powers under Section 37 of the Arbitration & Conciliation Act, 1996 (“1996 Act”) must be circumspect in its interference with interim orders of an arbitrator.

In refusing to interfere with the order passed under Section 17 of the 1996 Act, for preserving the share of a deceased LLP partner, amounting to approx. Rs 6 crores in a separate interest bearing account in name of the LLP, a single-bench of Justice Moushumi Bhattacharya held:

There can be no jurisdictional objection to the impugned order as the Act of 1996 grants the arbitral tribunal plenary powers to pass such orders for preserving the dispute in the arbitration. The order also does not suffer from any factual or legal infirmity and is certainly not arbitrary or perverse. Taking into account the legal position, the case law on the subject and the particular facts in the present matter, the Court is accordingly of the view that the impugned order does not call for any interference.

Brief facts

These observations were made in an appeal filed under Section 37 of the 1996 Act, seeking to set aside the directions of the sole arbitrator, who had passed an interim order directing the appellant, an LLP, to deposit a sum of Rs 6 crores in a separate interest bearing account.

Such directions were passed pursuant to the death of the largest shareholder of the LLP, holding 33.4%, whereby his son (respondent no 1) had requested to be included in the LLP Agreement, pursuant to clause 22(v) of the aforesaid agreement.

Upon being refused inclusion in the LLP by the other members, the respondent no 1 filed a statement of claim for an award, and made several applications under Section 17 of the 1996 Act, to secure the share of his father by praying for financial statements and books of accounts of the LLP to be produced before the arbitrator.

Upon considering his case, the sole arbitrator directed the appellants to set aside approx. Rs 6 crores in a separate account, being the total balance pertaining to the respondent’s father’s share in the LLP.

The sole arbitrator was of the view that the respondent no 1 and other legal heirs of the deceased partner would be entitled to the accounts and share in profits of the LLP.

Appellants, members of the LLP, argued that the impugned order could not be sustained for being contrary to provisions of the 1996 Act, including Sections 28(3), 28(1)(a) and 17(1)(ii)(b).

It was argued that an order for securing a particular amount of money could only be made in respect of an amount in dispute, whereas the impugned order was based on equitable considerations which was not permissible under the Act.

It was also submitted that the order was contrary to Section 24(5) of the LLP Act, which restricted the entitlement of a person to the share of a deceased partner to the capital contribution of the former partner and the former partner’s share in the accumulated profits of the LLP.

Respondents, on the other hand, argued that they had applied for interim relief in their Section 17 application and for the induction of the respondent no 1 in the LLP, in place of his father, and that the Section 17 application had been made to preserve value of the respondent’s shares at the time of his father’s demise.

It was submitted that the object of Section 17 was to preserve the value of a share of a deceased partner such that it isn’t “frittered away” by other partners, as the respondent alleged the other partners of the LLP were siphoning off profits made from their operations.

It was finally argued that the scope of interference by a Court under Section 37 of the Act was limited when the impugned order had been passed under Section 17, and that the appellant and other partners were guilty of dilution of assets of the LLP due to which preserving value of the deceased partner’s shares was paramount.

Court’s observations

In dealing with the submissions, the Court observed that the avenue sought for by the respondents was not an exit from the LLP, but instead for the induction of the respondent no 1 as a partner in the LLP.

It was accordingly held that the appellant’s argument under Section 24(5) of the LLP Act on the ground of alleged negative balance in the share of the deceased partner, was misplaced and irrelevant.

Section 24(5) does not have any manner of application to the present facts since respondent no. 1 was not seeking to exit the LLP under any circumstances but to continue in place of his deceased father under clause 22(v) of the LLP Agreement, it held.

It was further observed that the impugned order contained a detailed breakdown of the monetary share of all partners of the LLP, and a calculation that the deceased partners share in the same would amount to almost 7.7 crore.

Court noted that such an amount, adjusted against accumulated losses of Rs 1.28 crore, would still leave almost Rs 6.4 crores in the share of the deceased partner.

It was held that the interim measure employed by the arbitrator to retain the aforesaid amount in an interest bearing account would protect the interest of the respondent no 1, who would suffer irreparable loss and injury if the amount was not preserved. Court held:

The interim order cannot be seen as prejudicial to the appellant or the other surviving partners as the money would continue to lie in the account of the LLP. On the other hand, the claimant / respondent no. 1 [may suffer] irreparable injury and the claim [may be] rendered infructuous if the money is not deposited in a separate account

The Court rejected further arguments from the appellants and held that the order passed by the arbitrator was well justified as well as reasoned, and that in any case it was completely interim in nature, in view of ongoing proceedings between the parties, causing no prejudice to be appellants.

It was further held that Courts must be circumspect in an appeal under Section 37(2)(b) of the 1996 Act. The Bench added:

The Act contemplates giving unfettered power to the arbitral tribunal not only to pass interim orders but also to see the end of the lis before it. The section 37 court in appeal must therefore see an interim order passed by the arbitral tribunal within the prismatic efficacy of the statutory purpose in that the court would only intervene where the exercise of discretion is palpably perverse and the order is patently unconscionable.

In reiterating that an appeal Court should take a hands-off approach to any jurisdictional objection to an interim order passed by an arbitral tribunal, it was concluded that such circumspection would be called for in the present case, where the sole arbitrator had passed a well-reasoned interim order, which was not perverse or unconscionable.

Accordingly, the appeal was dismissed.

Citation: 2023 LiveLaw (Cal) 335

Case: Concrete Developers LLP v Gaurav Churiwal and Ors.

Case No: APO 65 of 2023

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