The Weak Financial Condition Of A Party Cannot Be The Sole Ground To Deposit Security Or Bank Guarantee: Delhi High Court

The Single Bench of Justice Anup Jairam Bhambhani has held merely because a party is in financial distress, it cannot be the sole ground to direct it to deposit the security when the other party has failed to satisfy the arbitral tribunal that it has a prima facie case in its favour and that the party against whom such relief is sought is trying to transfer or dispose of its assets from the jurisdiction of the arbitral tribunal to obstruct or delay the enforcement of the award.

The Court held that the purpose of Section 17 of the A&C Act is not to securitise an unsecured and indeterminate sum, therefore, the tribunal would not allow an application for direction to a party to furnish security unless the party claiming such a relief satisfies the arbitrator that it is likely to succeed in arbitration and the other party is transferring its assets intending to render the award unenforceable.

Facts

The appellant sold to the respondent a business unit called Devi Metal Technologies (DMT) along with its assets on a 'going concern basis'. In pursuance thereto, the parties entered into three agreements.

A dispute arose between the parties which were referred to arbitration. The appellant moved an application under Section 17 of the A&C Act to direct the respondent to furnish a bank guarantee to secure the amount of its claim on the ground that the respondent is in ruinous financial condition and the award if passed in its favour would be rendered a mere 'paper award'.

The order of the Arbitrator

The arbitrator rejected the application on the ground that the counter claims of the appellant are speculative, undetermined and disputed and that it cannot exercise power to convert an unsecured sum into a secured sum. Moreover, it held that the appellant failed to satisfy that it has a prima facie case in its favour and the respondent is likely to dispose of its assets which will make the award unenforceable.

The Contention Of The Parties

The appellant challenged the order of the arbitral tribunal on the following grounds:

• At the time when the parties entered into the agreements, the respondent was a solvent company, however, over a period of time, its net worth has eroded and it is on the verge of financial collapse.
• Keeping in view the disastrous financial condition of the respondent, it was imperative for the arbitrator to secure the amount of appellants counter claims otherwise the award of the arbitrator would be rendered unenforceable.
• The finding of the tribunal to the effect of declaring appellant's counter claims as speculative, undetermined and disputed, has rendered the counter claims academic.

The respondent countered the contention of the appellant on the following grounds:

• The Scope of interference with the order of the arbitral tribunal passed under Section 17 of the A&C Act is very limited.
• The Court would not interfere with the finding of the tribunal unless it is perverse or contrary to the law.
• The appellant vides the Section 17 application sought to crystalize its otherwise doubtful, bloated, and speculative counter claims; therefore, the arbitrator was justified in dismissing the application.
• The appellant cannot be permitted to convert an unsecured claim into a secured claim by seeking security from the respondent without satisfying the tribunal that it has a prima facie case in its favour and the respondent is disposing or is likely to dispose of its assets to render the award unenforceable.
• Financial hardship cannot be the sole criteria for directing a party to furnish security.

Analysis By The Court

The Court upheld the order of the arbitral tribunal on the ground that the weak financial condition of a party cannot be the sole ground to direct the party to deposit a security or bank guarantee to secure the amount involved in the arbitration.

The Court held that the tribunal rightly concluded that merely because a party is in financial distress, it cannot be the sole ground to direct it to deposit the security when the other party has failed to satisfy the arbitral tribunal that it has a prima facie case in its favour and that the party against whom such relief is sought is trying to transfer or dispose of its assets from the jurisdiction of the arbitral tribunal to obstruct or delay the enforcement of the award.

The Court noted that the respondent was going through a rough financial phase due to the Covid-19 pandemic and the lockdowns imposed thereof, however, it has ensured a recovery and has reduced its liabilities in the last one year, therefore, the argument that the award would be rendered unenforceable is wholly unmerited.

The Court held that the purpose of Section 17 of the A&C Act is not to securitise an unsecured and indeterminate sum, therefore, the tribunal would not allow an application for direction to a party to furnish security unless the party claiming such a relief satisfies the arbitrator that it is likely to succeed in arbitration and the other party is transferring its assets with a view to render the award unenforceable.

Case Title: Manish Aggarwal and Anr v. RCI Industries and Technologies Ltd., Arb. A. (Comm.) 46 of 2022.

Citation: 2022 LiveLaw (Del) 421

Date: 05.05.2022

Counsel for the Appellant: Mr. Manish Vashisht, Senior Advocate with Mr. Rikky Gupta, Advocate, Mr. Manashwy Jha, Advocate, and Ms. Ananya Singh, Advocate.

Counsel for the Respondent: Dr. Anurag Kumar Agarwal, Advocate with Mr. Himanshu Gupta, Advocate, Mr. Prateek Agarwal, Advocate, and Mr. Umesh Mishra, Advocate

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