Kerala High Court
Peter John Uralil vs Babu Thomas on 2 September, 2003
Equivalent citations: 2003(3)KLT777
Author: J.B. Koshy
Bench: J.B. Koshy, K. Thankappan
JUDGMENT J.B. Koshy, J.
1. Scope of Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the 1996 Act') and power of the court to issue interim orders especially with reference to appointment of a Receiver as an interim measure of protection pending arbitration proceedings are considered in this case. We may refer to the brief facts of this case.
2. Appellant in this case is a partner of a firm called 'Dahlia Tourist Home'. The above partnership firm is carrying on business of running a bar attached hotel at Pampady near Kottayam under the name and style as, 'Dahlia Tourist Home'. After the reconstitution of the partnership on 3.11.1998, petitioner/appellant was holding 20% of the shares. First respondent is the brother-in-law of the petitioner who is holding 20% shares. He is the joint Managing Partner of the firm. Second respondent is holding 40% shares and he is also a joint Managing Partner of the firm. Third respondent, like the petitioner, is holding 20% of the shares. Investment of the petitioner as well as third respondents in the firm is Rs. 3,21,700/-. There is overdraft facility of Rs. 15 lakhs for the firm. For facilitating the same, properties of respondents 1 to 3 are hypothecated. Contention of the petitioner is that accounts are not properly maintained in the firm for the year 2000-2001 and actual income and expenses reflected in the accounts books are not correct. Funds of the firm are misappropriated by respondents 1 to 3. So, petitioner wanted to ascertain his share of profit for the period 2000-2001. It is not disputed that petitioner has requested for arbitration of the above dispute and that was accepted by the respondents. According to him, Rs. 45 lakhs is due to him as his share of profit for the year 2000-2001. He also stated that there is loss of trust reposed on the Managing Partners and, therefore, a Receiver should be appointed. He further stated that as his share of profit for the year 2000-2001, he was given only Rs. 50,000/- for the full year. If he is appointed as the Receiver, he is willing to pay Rs. 50,000/- per month to the persons who is having 40% shares and Rs. 25.000/- each to the other respondents irrespective of the profits earned by the petitioner. He also pointed out that the accounts of the year 2000-2001 forwarded to him show that the firm purchased liquor costing Rs. 16,487,667.89/- whereas income from the sale of liquor is Rs. 19,656,733/- and the purchase price from the Bewerages Corporation and the bills issued by the hotel during the relevant period would show that much more amount would have been received under this account alone and, therefore, there is a prima facie case that there is misappropriation. Therefore, in the interest of justice, a Receiver should be appointed. The prayer portion is as follows:
"Therefore, it is most respectfully prayed that this Hon'ble Court may be pleased to appoint a Receiver for the conduct and management of the business of the firm 'Dahlia Tourist Home' at Pampady in Kottayam District till the dispute is resolved by arbitral proceedings."
3. The contention of the respondents is that the allegations regarding misappropriation is not proved. Their accounts are audited accounts. Excise officials are supervising the purchase and sale of liquor. Petitioner has no dispute regarding the accounts for the year 1998-99 and 1999-2000 and more amount of profit was given during 2000-2001 and 2002-2003 to the petitioner by the firm and the profit was only increasing year by year. All these disputes were raised because of the personal enmity regarding non-removal of an employee. It is further stated that when the application for renewal of licence was made by the firm, that was objected and petitioner has requested the Excise Commissioner to cancel the bar licence. That shows that there is no bona fides in the case of the petitioner as he has no intention to protect the interest of the firm or running the business. Incidentally, it was also pointed out that Arbitrators were already appointed. Petitioner can also visit the office and inspect the accounts and there is no necessity to appoint a Receiver. After detailed consideration, the District Court found that no case has been made out for the appointment of a Receiver and application for appointment of a Receiver under Section 9 as an interim measure of protection was dismissed.
4. Section 9 of the 1996 Act is as follows:
"9. Interim measures etc. by Court.- A party may, before, or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a Court -
(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or
(ii) for an interim measure of protection in respect of any of the following matters, namely:-
(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;
(b) securing the amount in dispute in the arbitration",
(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of my party or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;
(d) interim injunction or the appointment of a Receiver;
(e) such other interim measure of protection as may appear to the Court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it."
Section 9 is essentially based on Article 9 of the UNCITRAL Model. Analogous provision under the Arbitration Act, 1940 Act is Section 41(b) read with Second Schedule to the said Act. But, the powers of the court under the 1996 Act are wider. Under the 1940 Act, pendency of the court proceedings was a condition precedent for exercise of power (See: Sant Ram and Company v. State of Rajasthan and Ors. (AIR 1997 SC 2557). Section 9 is an independent power and pendency of a court proceeding was not necessary to attract jurisdiction under Section 9 of the 1996 Act. Being an independent statutory power, by agreement between the parties, power of the court cannot be restricted; but, under Section 17, power of the arbitrator to take interim measure of protection can be restricted by agreement between the parties as Section 17 begins with the words "Unless otherwise agreed by the parties". Courts have no power to adjudicate on merits of the case in the guise of passing orders under Section 9. The list of interim measures or protection given in Clauses (a) to (d) of Section 9(ii) is not exhaustive. Clause (e) indicates that other interim measures for protection also can be granted by the court at its discretion, if it appears to the court just and convenient. Therefore, power under Section 9 is wider than Section 44(3) of the old Act and power of the arbitrator under Section 17 of the 1996 Act. Power of the court under Section 9 is a statutory power and not emanating from the arbitration agreement.
5. The first question to be considered is whether Section 9 can be invoked as arbitration proceedings were not started in this case. It was held by the Apex Court in Sundaram Finance Ltd. v. NEPC Ltd. (AIR 1999 SC 565) that an interim order under Section 9 can be passed even before the commencement of arbitration proceedings. If it is after receipt of notice under Section 21 of the Act provided there is an agreement for arbitration. Apex Court held as follows:
"14. Under the 1996 Act the Court can pass interim orders under Section 9 Arbitral proceedings, as we have seen, commence only when the request to refer the dispute is received by the respondent as per Section 21 of the Act. The material words occurring in Section 9 are "before or during the arbitral proceedings." This clearly contemplates two stages when the Court can pass interim orders, i.e., during the arbitral proceedings or before the arbitral proceedings. Thee is no reason as to why Section 9 of the 1996 Act should not be literally construed. Meaning has to be given to the word "before" occurring in the said section. The only interpretation that can be given is that the Court can pass interim orders before the commencement of arbitral proceedings. Any other interpretation, like the one given by the High Court, will have the effect of rendering the word "before" in Section 9 as redundant. This is clearly not permissible. Not only does the language warrants such an interpretation but it was necessary to have such a provision in the interest of justice. But for such a provision no party would have a right to apply for interim measure before notice under Section 21 is received by the respondent. It is not unknown when it becomes difficult to serve the respondents. It was, therefore, necessary that provision was made in the Act which could enable a party to get interim relief urgently in order to protect it's interest. Reading the section as a whole it appears to us that the court has jurisdiction to entertain an application under Section 9 either before arbitral proceedings or during arbitral proceedings or after the making of the arbitral award but before it is enforced in accordance with Section 36 of the Act."
In this case, arbitrators were appointed and both parties have agreed for arbitration. Therefore, Section 9 is applicable.
6. The power of the court to make interim orders under Section 9 during arbitral proceedings is similar to the power for the purpose and in relation to any proceedings before it. This shows that the provisions are equivalent to the powers of the court in granting interim orders under the Code of Civil Procedure. It is a discretionary remedy. The power of the court to issue interim orders like appointment of Receiver under Section 9 is discretionary and equitable in nature. The court should be satisfied that there is a prima facie case for the claimant and bona fides of the petitioner who seeks interim order also should be considered. Section 9 of the Act does not confer the powers on the court to appoint Receiver as an interim measure in every case as a matter of course in every case; but, only enables the court to grant relief in a 'fit' case. Power under Section 9 shall be exercised judiciously and cautiously. Prima facie case, balance of convenience, injury that is caused, likelihood of a destruction or wasting of property or assets of the firm or business etc. have to be considered before interim orders are issued under Section 9. Courts will be very slow in appointing a Receiver in a going concern unless a very strong prima facie case is made out.
7. With regard to appointment of a Receiver, a Division Bench of this Court in the decision reported in Das v. Parijathamma and Ors. (198S KLT 109) (Judgment by Justice T. Kochuthommen as he then was) observed as follows:
"22. The court has the discretion to appoint a receiver where it is just and convenient to do so. The court must exercise its discretion reasonably and objectively by taking into account all the circumstances of the case and the need to meet the ends of justice by preserving the property and protecting the rights of all the parties. A receiver will not be appointed at the instance of a person until the court is satisfied that prima facie he has a strong case and an excellent chance of succeeding in the suit. The court will be slow to deprive a person of his de facto possession unless it is satisfied that the property is exposed to danger and loss and the person in possession has obtained it through fraud or force. The high prerogative act of taking property out of the hands of one and putting it in pound under the order of the Judge ought not to be taken except to prevent manifest wrong imminently impending": Crawford v. Rose (39Ga44) (quoted in Krishnaswamy v. Thangavelu (AIR 1955 Mad. 430, 435)). The conduct of the party seeking the appointment of the Receiver is a relevant consideration in the exercise of this discretion. He who comes to equity must come with clean hands. As stated by Atkinson, J. in Dozier v. Logon (101 Ga 173):
"The appointment of a Receiver is recognised as one of the harshest remedies which the law provides for the enforcement of rights and is allowable only in extreme cases and in circumstances where the interest of the creditors is exposed to manifest peril." (quoted in AIR 1955 Mad. 430, 435)."
Appointment of a Receiver is the hard step to taken in compelling circumstances. As far as passing orders under Section 9(2) is concerned, interim orders can be issued only as an 'interim measure of protection'. Under Order XL Rule 1 of the Code of Civil Procedure, if it appears to the court 'to be just and convenient' a Receiver can be appointed. Even under Order XL, Rule 1 CPC Receiver cannot be appointed unless the property in question is exposed to damage and loss and bona fides and a prima facie case is established. In Section 9 it is not only enough that it is 'just and convenient' but, interim order under Section 9(ii) can be issued only as an 'interim measure of protection'. Therefore, the party who seeks appointment of the Receiver should be able to point out that it is necessary for the protection of the property involved in the arbitration. This application is not filed for an interim order under Section 9(C) for the purpose of obtaining full information or evidence; but, under Section 9(d) for appointment of a Receiver. The subject-matter of the arbitration is the accounts for 2001-2002. During the course of hearing a letter written by the petitioner to the respondents agreeing the proposals and accepting that the arbitrators are Mr. James Kurian, Advocate and Mr. Thomas Mani, Chartered Accountant and the dispute is regarding the accounts of 2000-2001 was produced. The letter dated 22.7.2003 is as follows:
"Please refer to your letter dated 5.5.2003. I am accepting your proposal for appointing Mr. Thomas Mani, F.C.A., Koshy & Mani, Chartered Accountants, Baker Junction, Kottayam-686001 as Arbitrator from the persons suggested by you. The dispute that are to be referred to the Arbitrators M/s. James Kurian and Thomas Mani are as fellows:
(1) Whether the books of accounts of the firm Dahlia Tourist Home, Pampady maintained: from 2000-2001 are correct and discloses the actual income and expenses and whether the same can be treated as correct on the basis of the purchase and sale bills of the firm in comparison with that of other similar licencees and their purchases and bills?
(2) Ascertain the actual profit of the firm from 2000-2001 and the share of partner Mr. Peter John Uralil in the same?
Appointment of a Receiver in 2003 cannot be stated to be for the protection of the subject-matter of arbitration. Even though there are allegations of misappropriation and non-accounting, there is no contention that there is a wastage of the property of the bar and restaurant and the business will be destroyed if the present management is being continued. It is the case of the respondents that the petitioner did not join to renew the licence and, in fact, be had written to the Excise officials questioning the renewal of licence. Therefore, Ms intention is not to conduct the business or the protection of the business; but, just the opposite.
8. It is further contended that while pointing out the value of the liquor purchased and sold, petitioner has not adverted to the stock in trade as per the accounts for 2001-2002. For previous years, only lesser profit was given and petitioner had no objection for the same. For the year under attack, more profit was received by the petitioner and sale bills produced by the petitioner were not genuine. We are not concerned with the merits of the case here; but, only with the prima facie and bona fides. We have already stated, Receiver can be appointed for interim protection of the property and it is an equitable remedy. The court below has given very valid reasons in rejecting the application for appointing a Receiver. When judicial discretion is exercised by a court properly, it will not be interfered by the appellate court lightly. In this case, valid reasons are given by the court below in not appointing the Receiver. Apart from the vague allegations that funds of the firm are being diverted, there is no prima facie material to prove that the business of the partnership firm is in peril and the partners having 80% shares will act against the interest of the firm and protection of the property can be achieved only if petitioner himself or any other third party is appointed as the Receiver. It is pointed out by the counsel for the respondents that even though petitioner promises that he will give more amount as share of profit to the respondents, since petitioner himself objected in renewing licence to the bar he has no interest in continuing the business and if the business is entrusted to him as a Receiver, there is possibility that he may do something harmful and there is likelihood of complete destroyal of the business. Respondents also submitted that the petitioner can verify the accounts at ay time and take part in the management of the firm and there is nothing to indicate that the petitioner is excluded from the management or is precluded in taking part in the business of the firm. Being an equitable remedy, the court on being approached under Section 9, apart from other considerations, also can look into the conduct of party invoking the jurisdiction of the court and can refuse to interfere unless his conduct is free from blemish. When an equitable order is passed exercising judicial discretion by the court having jurisdiction, the appellate court will not interfere unless it is satisfied that the court did not exercise the jurisdiction judiciously in an equitable manner. Here, the court has considered the entire aspects and was not inclined to appoint the Receiver and we see no ground to interfere with the same;
9. From the foregoing discussions, we hold that:
(i) Court has jurisdiction to pass orders as an interim measure under Section 9 even before commencement of arbitral proceedings; but after notice is received by the contesting party under Section 21 of the Act. Orders under Section 9 can also be passed during arbitral proceedings and after arbitration award; but, before it is enforced under Section 36 of the Act. But, only if there is an arbitration clause in the agreement and notice under Section 21 is received by the other party, Section 9 can be invoked. Existence of a valid arbitration agreement between the parties is a sine qua non for attracting jurisdiction under Section 9.
(ii) An order passed under Section 9 is appealable whether petitions are allowed or dismissed. Therefore, even though application for appointment of Receiver filed by the petitioner is dismissed, the appeal is maintainable.
(iii) The interim order under Section 9 is discretionary in nature and equitable in character and the court has to be satisfied that there is a prima facie case and there is bona fides in the application and balance of convenience is in favour of issuance of interim direction as prayed for. But, such discretion, has to be exercised judiciously.
(iv) The list of interim measures for protection given in Sub-clause (a) to (d) of Section 9(ii) is not exhaustive as Sub-clause (e) indicates other interim measures for protection also can be ordered, if court is satisfied that they are 'just and convenient' reasons. Power of court under Section 9(ii) is wider than the powers under the old Act and power of the Arbitrator and Section 17 of the 1996 Act.
(v) Section 9 is a statutory power. For exercising the power, no provision is needed in the arbitration agreement allowing the court to pass such interim measures. Pendency of court proceedings is also not necessary to pass such order. It is an independent power. Order under Section 9 can be passed only by a court having jurisdiction over the subject-matter of the arbitration agreement.
(vi) Unlike Order XL, Rule 1 CPC, appointment of Receiver under Section 9(ii)(d) can be made only as an 'interim measure of protection'. Appointment of a Receiver in a going concern is a hard step and such measure can be ordered only with caution to prevent manifest wrong imminently pending and to preserve the property.
(vii) As appointment of a Receiver as an interim measure of protection is discretionary, appellate court will not interfere in such orders lightly, whether application is allowed or not, if the discretion is exercised judiciously after considering the circumstances of the case in a fair manner by the court of first instance.
10. Jurisdictional court was not prima facie satisfied about the bona fides of the petition in seeking the appointment of a Receiver. Since we agree with the court below that no prima facie case has been made out to appoint a Receiver in the going concern and since it is not proved that continuance of the business by the major partners will affect the business or assets of the firm adversely and considering the offer of the respondents that petitioner also can inspect the accounts and take part in the management, we are of the opinion that no grounds are made out in the appeal for interference in the impugned order. Arbitrators can go on with the dispute according to law on merit untrammelled by the observations in the impugned order of the District Court or in this judgment.
Appeal is dismissed. Parties to bear their costs.