Order Passed By Court Under Section 36 Of A&C Act Is An Interim Order, Can Be Modified On Grounds Of Financial Hardship: Calcutta High Court

The Single Bench of Justice Ravi Krishan Kapur held that the security directed to be deposited by a Court under Section 36 of the A&C Act should be real and realisable, and it ought not to be illusory.

The Court added that once a Court exercises its jurisdiction under Section 36 of the A&C Act and directs furnishing of security in a particular mode and manner, it always retains jurisdiction in respect of such security. The Court ruled that an order passed by the Court under Section 36 is an interim order and is subject to alteration and modification.

The award debtor/petitioner Damodar Valley Corporation filed an application under Section 34 of the A&C Act to set aside an arbitral award. The award debtor/petitioner also filed an application under Section 36(2) of the A&C Act before the Calcutta High Court, seeking stay of the arbitral award. The High Court allowed the application for stay and directed the award debtor/petitioner to deposit 50% of the awarded amount by way of cash security and secure the remaining 50% of the awarded amount by way of bank guarantee. Against this order, the award debtor/petitioner Damodar Valley Corporation and the award holder/respondent Reliance Infrastructure Ltd filed separate Special Leave Petitions (SLP) before the Supreme Court. The SLP filed by the petitioner was dismissed by the Supreme Court with the liberty to approach the High Court for alteration of the order passed by the Calcutta High Court.

Thereafter, the petitioner/award debtor and the respondent/award holder filed applications before the Calcutta High Court seeking a modification of the order passed by the High Court.

The petitioner/award debtor Damodar Valley Corporation filed an application before the Calcutta High Court seeking modification of the order to the extent that, the award debtor be permitted to deposit only 50% of the entire awarded amount.

Whereas, the respondent/award holder Reliance Infrastructure Ltd filed an application seeking modification of the order to the extent that, the award holder be allowed to withdraw a portion of the awarded amount on the basis of an undertaking and the balance upon furnishing of bank guarantee. The award holder also sought a direction to the award debtor to deposit the entirety of the awarded amount by way of cash security.

The petitioner/award debtor Damodar Valley Corporation submitted before the High Court that it sought modification of the order passed by the High Court on ground of financial stringency. The petitioner averred that it had limited access to cash and a very high debt ratio, compelling him to borrow more money from the market. The petitioner contended that its credit rating had fallen, and since it was performing a socio-economic statutory obligation, discretion ought to be exercised in its favour.

The High Court observed that under Section 36 of the A&C Act, the award debtor is obliged to furnish security in order to obtain stay of the arbitral award. The Court added that the purpose of furnishing security was to ensure and facilitate the fulfilment and enjoyment of a right or a potential right vested in the award holder. The Court ruled that each case is to be decided on its merits and the Court is not bound to order security in each and every case. The Court added that there may be cases where an award debtor is entitled to an unconditional stay of the award, for instance where an award is so perverse, irrational and patently illegal that it ought to be stayed unconditionally.

The Court ruled that once a Court exercises its jurisdiction under Section 36 of the A&C Act and directs furnishing of security in a particular mode and manner, it always retains jurisdiction in respect of such security. The Court thus held that an order passed by the Court under Section 36 is an interim order and is subject to alteration, variation and modification. The Court added that such orders are not unalterable and cannot be cast in stone, thus the Court has the power to vary, modify and alter the order if the facts warrant.

The Court held that though the award debtor is a statutory corporation and has an element of public interest involved in its activities, it is not a charitable organisation but a profit-making enterprise, and thus it cannot be granted any special treatment on the ground of performing socio-economic obligations.

The High Court observed that the Supreme Court in the case of Pam Development Pvt. Ltd. versus State of West Bengal (2019) had held that though in certain cases a few provisions under the Code of Civil Procedure, 1908 provide for differential treatment to the Government, however, no special or exceptional treatment needs to be given to the State/Government while considering an application under Section 36 of the A&C Act.

The High Court held that to allow the award debtor to furnish security for only 50% of the awarded amount on the ground of financial stringency would defeat the very object and purpose of Section 36 of the A&C Act and also amount to granting exceptional and special treatment to the award debtor. The Court added that ordinarily, financial inability cannot be a ground to give any discretion to the award debtor to secure anything less than the entirety of the awarded amount.

"In my view, to permit the award debtor to furnish security for an amount of only 50% of the awarded amount on the ground of financial stringency would not only result in defeating the very object and purpose of the section but would amount to granting exceptional and special treatment to the award debtor. Ordinarily, impecuniosity or financial inability cannot be a factor per se in permitting an award debtor any discretion in securing anything less than the entirety of the awarded amount."

The High Court ruled that though there was an element of public interest in the activities of the award debtor, however, there was also a corresponding element of public interest in statutory corporations like the award debtor of paying and securing their dues within time.

The High Court thus dismissed the application of the award debtor/petitioner.

Dealing with the application filed by the award holder/respondent Reliance Infrastructure Ltd, the High Court observed that the award holder sought modification of the order and withdrawal of the awarded amount on the ground that it was suffering adverse financial hardship and that it was in dire need of funds.

The award holder Reliance Infrastructure Ltd provided an undertaking to the Court that the portion of the awarded amount, if permitted to be withdrawn by the award holder, would remain charged to several lenders of the award holder, and no part of the same amount would be retained by the award holder.

The award holder/respondent submitted before the High Court that it had succeeded in the arbitration proceedings and thus had obtained a potential right to the fruits of the award.

The High Court ruled that to permit the award holder to withdraw a portion of the awarded amount unconditionally or even on the basis of the said undertaking would tantamount to unconditional enforcement of the award notwithstanding the pendency of the application under Section 34 of the A&C Act to set aside the arbitral award. The Court thus, rejected the application of the award holder for withdrawal of a portion of the awarded amount on the basis of the said undertaking. The Court, however, allowed the award holder to withdrawal a particular fraction of the awarded amount upon furnishing of bank guarantees.

The Court held that in appropriate cases it can permit the decree holder to withdraw the whole or a portion of the awarded amount upon furnishing a bank guarantee without prejudice to the rights of the parties. The Court added that it was an equitable measure in balancing the competing rights of the parties.

"In balancing the equities, a Court can always at this stage and in an appropriate case permit the decree holder to withdraw the whole or a portion of the awarded amount upon furnishing a bank guarantee without prejudice to the rights and contentions of the parties and subject to the result of the application. This is an equitable measure in balancing the competing rights of the parties and ensuring that there is no undue hardship on the award holder."

The High Court observed that ordinarily, money decrees are best secured by cash which is naturally the best form of solvent security. The Court added a party may be directed to furnish a bank guarantee or furnish cash security, and that there is no statutory fetter on this being the only from of security permissible under Section 36 of the A&C Act. However, the Court ruled, the security directed by a Court should be real and realisable, and it ought not to be illusory or the enforcement of which may lead to protracted litigation. The Court ruled that the mode of security would always have an impact on the finances of the award debtor.

The Court noticed that it had directed 50% of the awarded amount to be secured by way of cash security and 50% to be secured by way of bank guarantee.

The Court observed that the credit ratings of the award debtor Damodar Valley Corporation had fallen in a short span, from AAA to A (-). Thus, the Court reflected upon what that the financial position of the award debtor would be by the time the application to set aside the arbitral award under Section 34 of the A&C Act attained finality. The Court ruled that Section 36 of the A&C Act seeks to ameliorate such kinds of contingencies.

The Court thus modified its order by directing the award debtor to furnish an enhanced portion of the awarded amount by way of cash security.

The Court held that grounds of suffering adverse financial hardship, financial indebtedness and having a potential right to the fruits of the arbitral award were sufficient grounds for modifying the order in favour of the award holder Reliance Infrastructure Ltd.

The Court ruled that the award holder shall be entitled to withdraw the whole or a portion of such amount covered by cash security upon furnishing a similar unconditional bank guarantee.

Case Title: Damodar Valley Corporation versus Reliance Infrastructure Ltd

Case Citation: 2022 LiveLaw (Cal) 164

Dated: 25.03.2022 (Calcutta High Court)

Counsel for the Petitioner: Mr. Ratnanko Banerji, Senior Advocate, Ms. Vineeta Meharia, Mr. Amit Meharia, Mr. Santanu Chatterjee, Ms. Urmila Chakraborty, Ms. Tannishtha Singh, Ms. Paramita Banerjee, Ms. Subika Paul

Counsel for the Respondent: Mr. Harish Salve, Senior Advocate, Mr. Prateek Sakseria, Mr. Paritosh Sinha, Mr. Atanu Raychaudhuri, Mr. Saubik Chowdhury, Ms. Shrayashee Das, Mr. Pushan Majumdar, Mr. Rohit Banerjee, Ms. Ayushmita Sinha Sahni, Mr. Jishnujit Roy

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