Delhi High Court
C.V. Rao & Ors. vs Strategic Port Investments Kpc Ltd. & ... on 1 September, 2014
Author: Rajiv Sahai Endlaw
Bench: Chief Justice, Rajiv Sahai Endlaw
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on:29.05.2014
Pronounced on: 01.09.2014
+ FAO (OS) No.203/2014
C.V. RAO & ORS. ....Appellants.
Versus
STRATEGIC PORT INVESTMENTS KPC
LTD. & ORS. .... Respondents.
+ FAO (OS) No.204/2014
KRISHANAPATNAM PORT COMPANY LIMITED ....Appellants.
Versus
STRATEGIC PORT INVESTMENTS KPC
LTD. & ANR. .... Respondents.
+ FAO (OS) No.205/2014
CHINTA INVESTMENTS PRIVATE LTD. ....Appellant
Versus
STRATEGIC PORT INVESTMENTS KPC
LTD. & ORS. .... Respondents.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW
Counsel for the Appellant: Mr. A.S. Chandhiok, Sr. Adv. along with
Mr. Ritesh Kumar, Mr. Dhruv Dewan, Mr. Sulabh Kenoria, Mr. Arjun Pall,
Ms. Mallika Ahluwalia, Mr. Mayank Bamniyal and Ms. Ishita, Advs.
Mr. Akhil Sibal,Adv. along with Mr. Guntur Pramod Kumar and Ms. Prerna
Singh, Advs. in FAO(OS)205/2014.
FAO(OS) 203, 204 & 205 of 2014 Page 1 of 45
Counsel for the respondent: Mr. Rajiv Nayyar, Sr. Adv. along with Mr.
Shankh Sengupta, Mr. Udit Mendiratta and Ms. Srishti Jain, Advocate for
R-1.
Mr. Arvind Nigam, Sr. Adv. along with Mr. S. Rewari and Mr. Arjun Pall,
Advs. in FAO(OS) 203/2014.
COMMON J U D G M E N T
: Ms.G.ROHINI, CHIEF JUSTICE
1. Aggrieved by the common order dated 31.03.2014 passed by the
learned Single Judge in I.A.Nos.4493 and 4494 of 2014 in OMP
No.218/2014, all these appeals are preferred under Section 37 of the
Arbitration and Conciliation Act, 1996 (for short „the Act‟).
2. Strategic Port Investments KPC Ltd., which is arrayed as respondent
No.1 in all the appeals, is the petitioner in OMP No.218/2014 filed under
Section 9 of the Act seeking various directions to the respondents therein
pending resolution of disputes through arbitration.
3. By the order under appeal, the learned Single Judge issued certain
directions and aggrieved by the same, the present appeals are filed.
4. The appellants in FAO (OS) 203/2014 are Mr.C.V.Rao and 8 others
who are arrayed as respondents No.2 to 5 and 7 to 11 in OMP No.218/2014.
5. The appellant in FAO (OS) 204/2014 is the respondent No.1 in OMP
No.218/2014.
6. The appellant in FAO (OS) 205/2014 is the respondent No.6 in OMP
No.218/2014.
FAO(OS) 203, 204 & 205 of 2014 Page 2 of 45
7. The facts in brief are as under:-
8. The appellant in FAO (OS) 204/2014, is a company by name
Krishnapatnam Port Company Ltd. (hereinafter referred to as „KPCL‟). It is
a Public Limited Company registered under the Companies Act, which owns
and operates Krishnapatnam Port, a port located on the East Coast and is
spread over a vast land bank of approximately 6,900 acres. The appellant
No.1 in FAO (OS) 203/2014 - Mr.C.V.Rao - is the Chairman of KPCL
whereas the other appellants in the said appeal as well as the appellant in
FAO(OS) 205/2014 are the promoters and shareholders of KPCL who are
holding 86.45% of the issued Capital Equity of the company. According to
the appellants, 4.07% of the issued capital shares of KPCL are owned by
corporate entities affiliated to Mr.C.V.Rao.
9. Coming to the respondent No.1 in all the appeals, i.e., the petitioner in
OMP No.218/2014, it is a company incorporated under the laws of the
Republic of Mauritius. It is pleaded that the said company is owned by 3i
India Infrastructure Fund, US$ 1.2 billion fund managed by the 3i group,
investing in a diversified portfolio of investments in India, focussing on the
port, airport, road and power sectors.
10. On 19.02.2009 an Investment Agreement was entered into between
KPCL, its promoters & shareholders and the respondent No.1 under which it
was agreed by the respondent No.1 to subscribe to 6,978,260 (Six Million
Nine Hundred and Seventy Eight Thousand Two hundred and sixty) equity
shares at a subscription price of Rs.148.32 per share for an aggregate
consideration of Rs.1,03,50,00,000/-. Respondent No.1 had also agreed to
subscribe to 70,00,00,000 compulsorily convertible cumulative participatory
FAO(OS) 203, 204 & 205 of 2014 Page 3 of 45
preference shares of a face value of Rs.10/- each at a time subscription price
of Rs.10/- per preference share for an aggregate consideration of
Rs.700,00,00,000/-.
11. Clause 14 of the said Investment Agreement dated 19.02.2009 provided
for a Put Option. As per Clause 14.1, respondent No.1 at any time after
31.03.2013 but before the end of business hours on 31.09.2013 will have the
right to issue Put Notice to the shareholder parties and the KPCL requiring
to purchase/buy back all the shares invested by them at a price with a
compounded internal rate of return of 18% per annum from the date of
investment until 31.03.2013 after reducing the sale proceeds received by
respondent No.1 from the sale of its shares acquired pursuant to the
Investment Agreement and calculated from the sale of investment until
31.03.2013 on the aggregate monies invested by respondent No.1 in the
KPCL. In the event of not issuing in writing such Put Notice before
31.09.2013, the investor, i.e., respondent No.1 shall be deemed to have been
issued the Put Notice exercising its Put Option on 30.09.2013. Clause 14.3
further clarified that in the event of respondent No.1 intimating KPCL and
its promoters & shareholders in writing that it does not propose to exercise
its Put Option (which is called Put Waiver Notice) then the outstanding
preference shares shall convert into equity shares and 50% of the then
outstanding preference shares shall convert into one Equity Share. As per
Clause 14.6 if KPCL fails to make payment of the Put Consideration in full
or any part thereof, then respondent No.1 would be entitled to 26% of the
Equity Share on a fully diluted basis.
FAO(OS) 203, 204 & 205 of 2014 Page 4 of 45
12. It is also relevant to note that Clause 22 of the Investment Agreement
provides for dispute resolution by way of arbitration. As per the said Clause,
if any dispute, controversy or claim between the parties arises out of or in
connection with the Investment Agreement and if the parties are unable to
resolve the disputes amicably within 15 days of service of the dispute notice
then the dispute shall be referred to arbitration and settled by way of
arbitration conducted in accordance with the Rules of the London Courts of
International Arbitration in terms of Clause 22.2.
13. In pursuance of the abovesaid Investment Agreement, Respondent No.1
invested Rs.803.50 crores in to KPCL by investing (i) Rs.103.5 crores to
acquire equity shares of the company and (ii) Rs.700 crores to acquire
compulsorily convertible preference shares. Thus, respondent No.1 holds
9.48% of the Equity Share Capital and 99.88% of the issued Preference
Share Capital of KPCL.
14. On 28.09.2013, the respondent No.1 issued a notice exercising its Put
Option in terms of Clause 14.3 of the Investment Agreement and called
upon KPCL, its promoters & shareholders to purchase its shareholding for
Rs.1588,18,15,427.60 (Rupees One thousand Five Hundred and Eighty
Eight Crores Eighteen Lakhs Fifteen Thousand Four Hundred and Twenty
Seven Rupees and Sixty Paise) on the basis of the compounded Internal Rate
of Return (IRR) of 18% per annum as per the valuation certificate annexed
to the said notice.
15. In the meanwhile, KPCL sought clarification from the Reserve Bank of
India (for short „RBI‟) with regard to the validity of Put Option Clause
incorporated in the Investment Agreement dated 19.02.2009. Pursuant
FAO(OS) 203, 204 & 205 of 2014 Page 5 of 45
thereto RBI by letter dated 20.09.2013 informed KPCL to remove the Put
Option Clause in the agreement to be in conformity with the FEMA
Regulations. Since the respondent No.1 had already issued a Put Notice by
that time, KPCL by letter dated 29.10.2013 requested the RBI to advice
about the further steps to be taken. In response to the same, RBI by letter
dated 16.12.2013 informed KPCL that Put Option under Clause 14.1
provides the non-resident investor an exit route with assured return, it
imparts debt like features to the compulsorily convertible cumulative
participatory preference shares and thus, makes it ineligible as an FDI
compliant instrument under the extant FDI policy. Thus, it was made clear
by RBI that the Put Option Clause is not in line with the FDI policy/FEMA
Regulations. Accordingly, KPCL was advised to amend the agreement
suitably by taking immediate steps for deletion of the Put Option Clause.
16. On 09.01.2014, a Circular was also issued by RBI bringing to the
notice of all Category-I Authorized Dealer Banks the amendment dated
12.11.2013 made to the Foreign Exchange Management (Transfer or Issue
of Security by a person resident outside India) Regulations, 2000 with
regard to optionality Clauses in FDI instruments.
17. On 28.01.2014 respondent No.1 issued a Dispute Notice in terms of
Clause 22.1 of the Investment Agreement and called upon KPCL, its
promoters & shareholders for amicable resolution of the dispute on several
issues including the alleged failure to seek consent of respondent No.1 while
deviating from the Business Plan of the company.
18. On 17.02.2014 respondent No.1 preferred OMP No.218/2014 under
Section 9 of the Act with the following prayers:
FAO(OS) 203, 204 & 205 of 2014 Page 6 of 45
"(i) Directing the respondents to ensure and procure that the
Company does not avail of any additional debt in any form, or
enter into any agreements to avail any debt, in breach of Clause
10.1 read with Schedule 4 and Schedule 5 of the Investment
Agreement, without the specific consent of the Petitioner,
(ii) Directing the Respondents to provide all of the
information requested by the petitioner till date (including
specifically the information which is set out in paragraph 22 of
this petition) and to provide the Petitioner with all information
required to be provided under Clause 9 of the Investment
Agreement on an ongoing basis;
(iii) Restraining the respondents from passing, giving effect to
or taking any action pursuant to any resolution contrary to
Clauses 10.1 (i.e. the Petitioner‟s affirmative voting rights) and
Clause 13.29 (i.e. the implementation Plan sent out in the
Investment Agreement);
(iv) Restraining the respondents from amending or taking any
action to amend the articles of association of the Company in
breach of Clause 10.1 read with Item (v) of Schedule 4 of the
Petitioner;
(v) Restraining the Company from issuing (or entering into
any agreement, arrangement or commitment to issue) any shares
or securities which are convertible into shares, to any person in
breach of Clauses 13.19-13.22 of the Investment Agreement;
(vi) Restraining the Company from passing any special
resolutions without consent of the petitioner;
(vii) Restraining the Respondents and their nominees from
exercising their voting rights as shareholders/board committee
members in breach of the petitioner‟s affirmative voting rights
specified in Clause 10.1 of the Investment Agreement;
(viii) Directing the respondents to deposit with the Hon‟ble
Court and amount of Rs.1588,18,15,427.60 (Rupees One
thousand Five Hundred and Eighty Eight Crores Eighteen Lakhs
Fifteen Thousand Four Hundred and Twenty Seven Rupees and
FAO(OS) 203, 204 & 205 of 2014 Page 7 of 45
Sixty Paise) being the amount equivalent to the Put
Consideration and due and payable by the Respondents to the
Petitioner pursuant to Clause 14.4 of the Investment Agreement;
(ix) Directing the respondents to disclose on affidavit, details
of all their respective interests (legal, beneficial and/or economic)
in movable and/or immovable properties (including but not
limited to monies lying in bank accounts, land, properties
encumbered/charged to third parties), whether such properties
may be located within India or outside and whether held by them
or by a third party (such as a trustee, nominee or fiduciary) for
their benefit, on their behalf or at their direction;
(x) Restraining the respondents from selling/transferring/
alienating/ disposing and/or encumbering their interests (legal,
beneficial and/or economic) in any and all properties of the
Respondents, wherever located within India or outside, other than
in the ordinary course of business;
(xi) Pass ex-parte orders in terms of the prayers above."
19. On 19.02.2014, an ex parte interim order was passed by the learned
Single Judge in terms of the above-mentioned prayers (i) and (vi) till the
next date, i.e., 19.03.2014.
20. On 07.03.2014, KPCL and the other respondents to OMP No.218/2014
filed applications being I.As.No.4493 and 4494 of 2014 to vacate the order
dated 19.02.2014. The said applications were heard by the learned Single
Judge on 31.03.2014 and by the order under appeal the following directions
were issued:
i. All the respondents are directed to file their
respective affidavits disclosing the information as
sought in para 22 except the information sought for
in sub-para „E‟ & „H‟ for the time being. The said
FAO(OS) 203, 204 & 205 of 2014 Page 8 of 45
respondents should also disclose the information
sought in para (ix) of the prayer Clause. The
affidavits be filed within two weeks.
ii. All the respondents are restrained in terms of
prayer (x) of the petition till the next date.
iii. The injunction granted vide order dated 19.02.2014
shall continue to operate till the next date.
List on 01.05.2014."
21. Thus, by virtue of the order under appeal, the reliefs in terms of prayers
(i), (vi), (ix) & (x) in OMP No.218/2014 have been granted.
22. Aggrieved by the above said order the present appeals are filed in
which an interim order was passed on 29.04.2014 suspending the order
under appeal subject to the condition of the appellants depositing/furnishing
appropriate security for a sum of Rs.50 crores before 01.05.2014.
23. Against the said order, respondent No.1 preferred Special Leave
Petitions before the Supreme Court and the same were disposed of by order
dated 02.05.2014 which reads as under:-
"In our opinion, since the matter has been fixed on 12th May,
2014, it is not necessary for us to examine the issue raised
herein. However, considering the questions raised, we deem it
appropriate to request the High Court to take up the matter for
final disposal on 5th May, 2014."
24. In pursuance thereof, we have taken up the hearing of the appeals and
elaborate submissions have been made on behalf of both the parties on
various issues.
FAO(OS) 203, 204 & 205 of 2014 Page 9 of 45
Preliminary Objection:-
25. Before adverting to the contentions advanced on merits, it is necessary
for us to consider the preliminary objection raised on behalf of the
respondent No.l that no relief can be granted to the appellants since they
failed to challenge the order dated 19.02.2014 passed by the learned Single
Judge. In other words, the contention is that by the order under appeal dated
31.03.2014, the learned Single Judge had merely extended the earlier order
granted on 19.12.2014 and, therefore, without challenging the order dated
19.02.2014, the appellants cannot maintain the appeals only against the
subsequent order dated 31.03.2014.
26. Per contra, it is contended by the learned Senior Counsel appearing for
the appellants that the order dated 19.02.2014 which is an ex parte order
merged with the subsequent order dated 31.03.2014 passed after hearing
both the parties and as such there is no need to challenge the order dated
19.02.2014 by preferring a separate appeal.
27. Admittedly, the order dated 19.02.2014 is an ex parte order. By that
order the respondents/appellants herein were restrained in terms of prayers
(i) and (vi) of the petition till the next date of hearing, i.e., 31.03.2014. On
31.03.2014, elaborate arguments were advanced by both the parties after
completion of pleadings and the learned Single Judge while continuing the
injunction granted earlier on 19.02.2014 further granted the reliefs in terms
of prayers (ix) and (x) of the petition. It is clear from the order under appeal
dated 31.03.2014 that the interim relief granted on 19.02.2014 in fact was
enlarged and altogether four prayers, namely, prayers (i), (vi), (ix) and (x) of
the petition were allowed. It is also relevant to note that the order dated
FAO(OS) 203, 204 & 205 of 2014 Page 10 of 45
19.02.2014 was in fact in operation only till the next date of hearing, i.e.,
31.03.2014 and on 31.03.2014 while reiterating the said order, further reliefs
were granted as mentioned above. The appellants in the instant appeals are
challenging all the directions issued by the learned Single Judge in terms of
prayers (i), (vi), (ix) and (x). Therefore, we find force in the submission of
the learned Senior Counsel for the appellants that the earlier order dated
19.02.2014 stood merged with the order under appeal dated 31.03.2014. A
perusal of the order dated 31.03.2014 wherein the learned Single Judge
extended the earlier order by assigning fresh reasons, shows that it is a
comprehensive and composite order granting the reliefs in terms of prayers
(i), (vi), (ix) and (x). Hence there is no substance in the objection raised by
the respondents as to the maintainability of the appeals on the ground that
the appellants failed to challenge the earlier order dated 19.02.2014.
28. So far as the merits of the case are concerned, the contentions advanced
on behalf of the parties may be summed up as under:
Contentions on behalf of the appellant in FAO (OS) 203/2014:
(i) Sh. Arvind Nigam, the learned Senior Counsel appearing for the
appellants at the outset has brought to the notice of this Court that after the
order under 03.04.2014 in terms of Clause 14.6 calling upon the appellants
to convert the preference shares held by it into equity shares and thereafter
on 25.04.2014 the respondent No.1 sought for reference of the disputes to
arbitration in terms of Clause 22.2 of the Investment Agreement.
(ii) Pointing out that there is absolutely no pleading on record with regard
to the 1st respondent‟s request for conversion of shares, the same being a
FAO(OS) 203, 204 & 205 of 2014 Page 11 of 45
subsequent event, the learned Senior Counsel submitted that the only
remedy available to the respondent No.1 in the light of the subsequent
developments is to file a fresh petition under Section 9 of the Act.
(iii) Without prejudice to the above contentions, it is further contended by
the learned Senior Counsel that by issuing the conversion notice dated
03.04.2014 the respondent No.1 elected to pursue the relief seeking 26%
shareholding and thus, waived its right to claim the alleged put consideration
of Rs.1588 crores. By such election, according to the learned Senior
Counsel, the entire substratum of the petition under Section 9 of the Act
stands changed and therefore, the order under appeal shall be set aside on
the said ground alone.
(iv) While submitting that as per the scheme of the Investment Agreement
the right of conversion under Clause 14.6 would accrue only upon the failure
of KPCL in making the payment of put consideration under Clause 14.1, it
is contended by the learned Senior Counsel that the rights available to the 1st
respondent under Clause 14.1 and Clause 14.6 are mutually exclusive of
each other and therefore it is not open to the 1st respondent to maintain the
recovery action under Clause 14.1 after seeking conversion under Clause
14.6 of the Investment Agreement.
(v) It is further contended that the learned Single Judge ought not to have
granted any relief to the respondent No.1 since there was neither a plea in
the petition under Section 9 of the Act nor any other material was produced
by the respondent No.1 to establish that the appellants intended to obstruct
or delay the execution of any decree that may be passed and that the
appellants were about to dispose of their properties to this end.
FAO(OS) 203, 204 & 205 of 2014 Page 12 of 45
(vi) Placing reliance upon Adhunik Steels Ltd. Vs. Orissa Mangnese &
Minerals (P) Ltd.; (2007) 7 SCC 125, Mala Kumar Engineers Pvt. Ltd.
(MKE) Vs. B. Seeniah and Co. (Projects) Ltd. (BSCAC); 117 (2005) DLT
183 and Nimbus Communications Ltd. Vs. Board of Control For Cricket
In India & Anr. 2012 (4) Arb. L.R. 113 and Trehan Promoters & Builders
Pvt. Ltd. Vs. Welldone Technology Parks Development Pvt. Ltd. 2010 (3)
R.A.J. 332, wherein it is held that the grant of an interim prohibitory
injunction or an interim mandatory injunction under Section 9 of the Act is
governed by the basic principles contained in Order 39 Rules 1 & 2 of Civil
Procedure Code, 1908 (C.P.C.), the learned Senior Counsel would further
contend that the learned Single Judge exceeded the jurisdiction conferred
under Section 9 of the Act.
(vii) It is further contended that the order under appeal is erroneous in the
absence of any pleadings whatsoever mainly for two reasons that; (a) the
appellants would be unable to repay any amount found due to the respondent
No.1; and (b) the appellants were taking steps to defeat or render ineffective
any relief or award that may be granted against them in the arbitration
proceedings.
(viii) It is submitted that without requiring the respondent No.1 to first
establish the above, the learned Single Judge erred in passing the orders of
restraint akin to an attachment under Order 38 Rule 5 of C.P.C. In support
of the said submission, the learned Senior Counsel relied upon Raman
Tech. & Process Engg. Co. & Anr. Vs. Solanki Traders (2008) 2 SCC 302,
Rashmi Cement Ltd. Vs. Trafigura Beheer B.V. AIR 2011 Calcutta 37,
Sterling and Wilson Electricals Pvt. Ltd. Vs. Silicon Graphics Systems
FAO(OS) 203, 204 & 205 of 2014 Page 13 of 45
(India) Pvt. Ltd.; 159 (2009) DLT 634 and Uppal Eng. Co. (P) Ltd. Vs.
Cimmco Birla Ltd.; 121 (2005) DLT 539.
(ix) It is also contended that the direction in the order under appeal to
disclose on affidavit of the details sought for in prayer (ix) is unwarranted
and unjustified since the alleged liability of the appellants against the 1st
respondent is yet to be determined. It is contended that the impugned
direction on the basis of on un-adjudicated claim would vitally impinge on
the commercial interests and privacy of the appellants.
Contentions on behalf of the appellant in FAO (OS) 204/2014:
(i) It is submitted by Sh.A.S.Chandhiok, the learned Senior Counsel that
the Put Option exercised by the respondent No.1 could not be honoured not
only on account of the decision of RBI, which is the final regulatory
authority with respect to all foreign investments in India, but also because
the Put Option Clause under the Investment Agreement is contrary to law.
(ii) It is also pointed out by the learned Senior Counsel that the
inoperability of an exit Clause with an assured return was reiterated in the
Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) (17th Amendment) Regulations, 2013, dated
12.11.2013.
(iii) Thus, it is sought to be contended by the learned Senior Counsel that
the validity or the binding effect of the decision of RBI with regard to the
Put Option Clause being incapable of resolution by arbitration in terms of
Clause 22 of Investment Agreement, the claim of the respondent No.1 under
Section 9 of the Act for interim relief ought not to have been entertained.
FAO(OS) 203, 204 & 205 of 2014 Page 14 of 45
(iv) It is further contended that the subsequent claim of the respondent
No.1 for conversion of preference shares into equity shares under Clause
14.6 on the basis of the conversion notice dated 03.04.2014 is impermissible
since such conversion can be sought only on the occurrence of a "Buyer
default" which means the failure to make payment in full or any part of the
put consideration payable to the respondent No.1 on its exercise of the Put
Option under Clause 14.1. It is pointed out by the learned Senior Counsel
that no buyer default has occurred in terms of the agreement since the non-
payment of put consideration was only on account of the decision of RBI.
(v) The further contention is that the claim for conversion made by the
respondent No.1 itself is not valid in view of the RBI‟s decision that the Put
Option provided under Clause 14.1 is in contravention of FEMA
regulations. It is submitted that the question of conversion under Clause
14.6 would arise only in the event of KPCL‟s failure to make payment of put
consideration. The learned Senior Counsel has also pointed out that by the
date of conversion notice, the respondent No.1 was admittedly aware of
RBI‟s decision.
(vi) Placing reliance upon Life Insurance Corporation of India Vs.
Escorts Ltd. & Ors. (1986) 1 SCC 264 wherein it was held by the Supreme
Court that RBI alone is competent to consider the question as to whether the
various requirements of the RBI Act, Rules, Directions and Orders have
been fulfilled, the learned Senior Counsel contended that the dispute raised
by the respondent No.1 which has a direct bearing on the decision of RBI is
incapable of resolution by arbitration and consequently no petition can be
maintained for interim relief under Section 9 of the Act.
FAO(OS) 203, 204 & 205 of 2014 Page 15 of 45
(vii) The learned Senior Counsel has also relied upon Mannalal Khetan &
Ors. Vs. Kedar Nath Khetan & Ors. (1977) 2 SCC 424 to substantiate his
contention that the contract is void, even without express declaration, if
prohibited by a statute.
(viii) It is further contended that Clause 22 of Investment Agreement
applies only in relation to any dispute, controversy or claim that arises
between the parties out of or in connection with the Investment Agreement
which means that the dispute must have a nexus with the contract and must
be limited to the confines of the contractual term. Therefore, according to
the learned Senior Counsel the dispute sought to be raised by the respondent
No.1 by way of arbitration which involves consideration of collateral and
contemporaneous documents and validity of statutory regulations cannot be
determined in the arbitral proceedings.
(ix) The learned Senior Counsel would contend that without deciding the
question whether the dispute raised is capable of determination by the
arbitral tribunal, the learned Single Judge ought not to have granted any
relief to the respondent No.1 pending the petition under Section 9 of the Act.
In support of the said submission, the learned Senior Counsel relied upon
SBP & Co. Vs. Patel Engineering Ltd. & Anr. (2005) 8 SCC 618 and a
decision of this Court in Ashok Kumar Jain & Anr. Vs. SBI Officers
Association (Delhi Circle) & Anr. 201 (2013) DLT 433.
(x) Placing reliance upon Trehan Promoters & Builders Pvt. Ltd. Vs.
Welldone Technology Parks Development Pvt. Ltd. 2010 (3) R.A.J. 332,
the learned Senior Counsel further submitted that Section 9 of the Act does
not envisage the situation where the order passed on a petition under Section
FAO(OS) 203, 204 & 205 of 2014 Page 16 of 45
9 itself settles the dispute between the parties. It is submitted that the
directions issued in the order under appeal by the learned Single Judge
virtually amount to finally disposing of the disputes between the parties and
the same is beyond the scope of Section 9 of the Act.
(xi) Placing reliance upon the judgment of this Court dated 09.11.2012 in
FAO(OS) No. 538/2012 titled CPI India Limited Vs. B.P.T.P. Limited &
Ors., it is further contended that the impugned directions by way of an
interim order pending the petition under Section 9 of the Act which would
have a grave and significant impact on the interests and business of the
appellants are impermissible under law.
Contentions on behalf of the appellant in FAO (OS) 205/2014:
(i) It is submitted by Sh.Akhil Sibal, the learned counsel appearing for
the appellant that the Business Plan has become obsolete and irrelevant for
the parties on account of substantially altered business circumstances. It is
also pointed out that the respondent No.1 never raised any objection since
June, 2013 despite being aware of the deviation in the long term borrowing
figure but for the first time, by letter dated 31.10.2013 it was alleged that the
debt being availed by KPCL is a significant deviation from the Business
Plan and therefore requires its consent. It is contended by the learned
counsel that this objection which has been raised only on account of disputes
that arose between the parties is not bonafide and ought not to have been
accepted by the learned Single Judge.
(ii) While submitting that the consent of the respondent No.1 is required
under the Investment Agreement only when there is a significant deviation
FAO(OS) 203, 204 & 205 of 2014 Page 17 of 45
from the figure of senior debt under the Business Plan, the learned counsel,
further contended that the learned Single Judge has erroneously held that
any and all debts availed by the company shall require the consent of the 1 st
respondent.
(iii) It is also contended that the learned Single Judge ought not to have
ignored the submissions made on behalf of the appellants that the Business
Plan had been abandoned by the parties on account of altered business
circumstances which the respondent No.1 was very well aware and had
never chosen to object; that the figures of long term borrowing and the
senior debt are uncomparable; that the senior debt holds a specific and
particular connotation in law and that there has been no significant deviation
from the Business Plan.
(iv) The further contention is that the finding of the learned Single Judge
that the consent of the 1st respondent would be required for unsecured debts
as well is patently erroneous.
(v) It is also contended that grant of immediate relief pending the petition
under Section 9 of the Act is not at all warranted in the present case in view
of the admitted fact that there was a long delay on the part of the respondent
No.1 in raising an objection with regard to deviation in the Business Plan.
(vi) It is also contended that the allegation of siphoning of funds to sister
concern (NECL) is not substantiated by the respondent No.1. Pointing out
that in fact the respondent No.1 itself is a shareholder of NECL holding
11.76% of the share capital of NECL, it is contended by the learned counsel
FAO(OS) 203, 204 & 205 of 2014 Page 18 of 45
that the suppression of the said fact by the respondent No.1 disentitles him
to claim any relief.
Contentions on behalf of the respondent No.1:
(i) On the other hand, it is contended by Sh.Rajiv Nayyar, learned Senior
Counsel appearing for the respondent No.1 that having regard to the
admitted fact that the appellants failed to pay the Put Consideration, the
respondent No.1 is entitled to conversion of its preference shares to equity
shares representing 26% equity share capital of KPCL in which event KPCL
cannot pass any special resolution without the consent of respondent No.1.
KPCL has also failed to disclose certain information to the respondent No.1
as required under Clause 9.1 of the Investment Agreement and therefore the
impugned directions were rightly issued by the learned Single Judge.
(ii) Pointing out that as per Clause 10.1 read with Item-(xiii) of Schedule-
IV of the Investment Agreement prior written consent of respondent No.1 is
essential for any significant deviation from the Business Plan (Schedule-V
to the Investment Agreement) on the basis of which the respondent No.1
made its investment, the learned Senior Counsel contended that KPCL failed
to seek consent of the respondent No.1 for obtaining the proposed additional
debt of Rs.1,000 crores.
(iii) It is explained by the learned Senior Counsel that until the financial
year 2012-13, KPCL adhered to the Business Plan and did not exceed its
debts beyond the ceilings stipulated in the Business Plan. However, on
10.6.2013 it was proposed by KPCL to have aggregate long term
borrowings of Rs.5196 crores for FY 2013-14 whereas the senior debt of
FAO(OS) 203, 204 & 205 of 2014 Page 19 of 45
KPCL is capped at Rs.4268.6 crores in the Business Plan for FY 2013-14.
Though this amounts to significant deviation, KPCL not only failed to seek
consent of the respondent No.1 nor was there any response to the respondent
No.1‟s letters requesting for clarifications on the rationale for such debts.
(iv) The further contention is that the allegation of siphoning of funds has
been amply established in the light of the admitted facts that Navayuga
Engineering Company Limited (NECL) which is a company owned and
controlled by the same promoter group i.e., Mr. C.V. Rao & family, would
be the direct beneficiary of additional capital expenditure since construction
activities for Krishnapatnam Port have been outsourced to NECL and as per
the own version of the KPCL Rs.960 crores of debt has been drawn down in
FY 2013-14 for the purpose of EPC contract payments to NECL.
(v) With regard to the contention of the appellants that respondent No.1‟s
claim for conversion of shareholding is impermissible, the learned Senior
Counsel contended that Clause 14.6 entitles the respondent No.1 to convert
the preference shares into equity shares without prejudice to any other right
of the respondent No.1. It is also submitted that since the put consideration
was admittedly not received by the respondent No.1 as provided under
Clause 14.4, without prejudice to its other rights, conversion notice dated
3.4.2014 was rightly issued.
(vi) It is also submitted that Clause 22.1 confers wide jurisdiction on the
arbitral tribunal to decide any dispute in connection with the Agreement
including the breach, termination or invalidity thereof and therefore, the
contention that the dispute raised by the respondent No.1 is incapable of
determination by arbitral tribunal is untenable.
FAO(OS) 203, 204 & 205 of 2014 Page 20 of 45
(vii) Placing reliance upon a decision of this Court in CPI India Limited
Vs. BPTP Ltd., it is further contended that the legality of the Put Option
Clause can be determined by the arbitral tribunal since Clause 22.1 of the
Investment Agreement gives the arbitral tribunal the power to decide all
issues "in connection with the agreement including the breach, termination
and invalidity thereof". In that regard, the learned Senior Counsel has also
relied upon Clearwater Capital Partners (Cyprus) Ltd. Vs. Satyajit Singh
Majithia & Ors. 189 (2012) DLT 362, Lalea Trading Ltd. Vs. Anant Raj
Projects Pvt. Ltd. & Anr. (198) 2013 DLT 339 and Modi Rubber Ltd. Vs.
Guardian International Corp. 141 (2007) DLT 822.
(viii) It is also contended that Put Option continues to remain valid even
after the new RBI circular dated 09.01.2014 since the Circular has not held
the existing contracts to be void but it merely requires compliance with the
conditions specified therein to qualify as FDI compliant.
(ix) The further contention is that Clause 19.12 provides for severance of
invalid part of the agreement to give effect to the rest of the agreement and
therefore, that part of Clause 14.1 which caps the return at 18% can be
severed and the remaining Clause remains valid and enforceable. To
substantiate the said contention, the learned counsel relied upon Shin
Satellite Public Co. Ltd. Vs. Jain Studios Ltd. (2006) 2 SCC 628 wherein
the Supreme Court explained the applicability of the doctrine of severability
and held on facts that the objectionable part is really severable as it is
independent of the dispute being referred to and resolved by an arbitrator
and Court does not need to rewrite contract or do something that is not
contemplated by parties.
FAO(OS) 203, 204 & 205 of 2014 Page 21 of 45
(x) It is also contended that Put Option is a deemed right and therefore
even if the respondent No.1 had not issued the put notice on 28.9.2013, the
respondent No.1 would have been deemed to have been issued put notice on
30.09.2013. Hence, according to the learned Senior Counsel the question of
election does not arise.
(xi) It is further contended that bar on mining of Iron ore and deferred
commissioning of coal-based power plants around the ports does not amount
to a force majeure event which was separately dealt with in Clause 14.5 and
even otherwise the occurrence of a force majeure event cannot be
considered as an exemption from the obligations of KPCL under Clause
10.1 of the Investment Agreement.
(xii) In support of his submission that the discretion exercised by the
learned Single Judge warrants no interference on appeal, the learned Senior
Counsel relied upon Wander Ltd. & Anr. Vs. Antox India P. Ltd. (1990)
Supp. SCC 727 wherein it was held that the appellate court will not
interfere with the exercise of discretion of the Court of first instance and
substitute its own discretion except where the discretion has been shown to
have been exercised arbitrarily or capriciously or perversely or where the
Court had ignored the settled principles of law regulating grant or refusal of
interlocutory injunctions.
Consideration of the Contentions:
29. The execution of the Investment Agreement between the parties is not
in dispute. Admittedly Clause 14.1 provides for a Put Option Clause and
FAO(OS) 203, 204 & 205 of 2014 Page 22 of 45
Clause 14.6 provides for conversion of preference shares into equity shares
in the event of non-payment of put consideration in full or any part thereof.
It is also not in dispute that the 1st respondent invested Rs.803.50 crores and
acquired compulsorily convertible preference shares worth Rs.700 crores
and equity shares worth Rs.103.50 crores. The 1st respondent exercised the
Put Option on 28.09.2013 and called upon the appellants to purchase/buy
back its shareholdings for Rs.1588,18,15,237.60 computed as per the terms
of the Investment Agreement. Since the put consideration was not paid to
the respondent No.1, it issued a dispute notice to the appellants on
28.01.2014. Alleging that the disputes remained unresolved, the respondent
No.1 on 17.02.2014 filed OMP No.218/2014 under Section 9 of the Act for
the interim reliefs to protect and safeguard its interest pending resolution of
the disputes through arbitration.
30. In OMP No.218/2014 the 1st respondent prayed for altogether eleven
(xi) reliefs which have been extracted in para-18 supra.
31. The learned Single Judge passed an ex parte order on 19.2.2014
restraining the appellants herein in terms of prayers (i) & (vi) of the petition
holding that a prima facie case of breach of agreement dated 19.2.2009 has
been made out by the petitioner/respondent No.1 herein.
32. By order dated 31.03.2014 i.e. the order under challenge before us, the
learned Single Judge continued the reliefs in terms of prayers (i) & (vi) and
in addition to that granted the reliefs in terms of prayers (ix) & (x) thereby
directing all the respondents/appellants herein to file their respective
affidavits disclosing the information as sought in para-22 of the petition
except the information sought for in sub-paras (e) & (h) and further to
FAO(OS) 203, 204 & 205 of 2014 Page 23 of 45
disclose the information sought in para (ix) of the prayer Clause within two
weeks. That apart, the respondents / appellants herein are restrained from
selling / transferring any of their properties in terms of prayer (x).
33. For ready reference, the prayers (i), (vi), (ix) & (x) that have been
granted by the learned Single Judge are reproduced hereunder:
(i) Directing the respondents to ensure and procure that the
company does not avail of any additional debt in any form, or
enter into any agreements to avail any debt, in breach of
Clause 10.1 read with Schedule 4 and Schedule 5 of the
Investment Agreement, without the specific consent of the
petitioner;
(vi) Restraining the respondents from amending or taking any
action to amend the articles of association of the Company in
breach of Clause 10.1 read with Item (v) of Schedule 4 of the
petitioner;
(ix) Directing the respondents to disclose on affidavit, details
of all their respective interests (legal, beneficial and/or
economic) in movable and/or immovable properties (including
but not limited to monies lying in bank accounts, land,
properties encumbered/charged to third parties), whether such
properties may be located within India or outside and whether
held by them or by a third party (such as a trustee, nominee or
fiduciary) for their benefit, on their behalf or at their direction;
(x) Restraining the respondents from selling/transferring/
alienating/ disposing and/or encumbering their interests (legal,
beneficial and/or economic) in any and all properties of the
Respondents, wherever located within India or outside, other than
in the ordinary course of business;
FAO(OS) 203, 204 & 205 of 2014 Page 24 of 45
34. As we could see, the above said Prayers (i), (iv), (ix) and (x) have been
issued recording prima facie satisfaction as under:
"(18) .....Prima facie it appears that on account of the
investments made by the petitioner, the respondents agreed to
take the consent of the petitioner before undertaking further
liabilities over and above the figures projected in the Business
Plan. From the communication of respondent No.1 dated
28.12.2013 it appears that the petitioner was not informed of the
further liabilities already undertaken by the respondent No.1
before the issuance of the said letter.....
(19) The incurring of additional liabilities - be they secured
debts/senior debts or unsecured debts - as owed to NECL;
towards foreign exchange variation; Aditya Birla and, Phase-2
subordinate debts, prima facie would impact the petitioner‟s
ability to realize the put amount. Therefore, prima facie, it
appears that the petitioner‟s consent could not be limited only in
respect of "senior debts". The petitioner‟s consent, prima facie,
would be required for taking unsecured debts as well, since the
petitioner also would stand in the queue with unsecured
creditors of respondent No.1, and would not enjoy any priority
in respect of the put amount, if, eventually, the petitioner is
required to legally recover the said amount from respondent
No.1. If the submission of the respondents were to be accepted,
it would mean that the respondents can incur unsecured debts to
any extent without the consent of the petitioner, even though the
same directly and adversely impinges on the petitioner‟s
chances of recovering the put amount. Pertinently, the stand
now taken by the respondents was not even taken by them in
their response dated 28.12.2013. Therefore, prima facie, the
respondents have acted in breach of the agreement between the
parties and the petitioner‟s rights need greater protection than
already granted. The submission that the petitioner has valued
the shares of respondent No.1 at Rs.1618/- per share is neither
here nor there. The said valuation is not accepted by the
respondents. The same was made, apparently without having
the correct figures as the full liabilities incurred by the
FAO(OS) 203, 204 & 205 of 2014 Page 25 of 45
respondents were not made known to the petitioner. The
respondent itself states that the amount due as Put Option is to
the tune of Rs.1500 Crores. The said amount is likely to rise in
time to come, unless paid. Reliance placed on the
communication of the RBI, prima-facie, is of no avail since the
RBI itself had stated that in case the Put Option is not removed,
respondent No.1 should unwind the transaction which could
only mean that the amount invested by the petitioner would
need to be refunded with a reasonable return.
(20) The submission that the other shareholders, i.e.
respondents No.2 to 11 should not be injuncted in terms of
prayer (x) even till the next date has no merit. Respondents
No.2 to 11 have also jointly undertaken to pay the put amount
to the petitioner. The petitioner would be left high & dry in
case the said respondents are permitted to dissipate their assets
in the meantime. The said respondents cannot be permitted to
present a fait accompli to the petitioner in the event of the
petitioner‟s succeeding in enforcing the Put Option which,
prima facie, the petitioner is entitled to enforce."
35. It is no doubt true that the order under appeal is an interim order and
the petition filed under Section 9 of the Act is still pending before the
learned Single Judge. However, the contention on behalf of the appellants is
that the order under appeal which has the characteristics and trappings of
finality, affects the vital and valuable rights of the appellants and works
serious injustice to them. Therefore, it is submitted by the learned counsel
for the appellants that it is essential to examine whether the order under
appeal stands the tests laid down by the Courts for grant of interim relief
under Section 9 of the Act.
36. Having carefully gone through the order under appeal and the other
material available on record, we find force in the aforesaid submission made
FAO(OS) 203, 204 & 205 of 2014 Page 26 of 45
by the learned counsel for the appellants. However, it is made clear that we
are not going into the correctness of the findings recorded by the learned
Single Judge, but our endeavour is only to examine whether the order under
appeal is in conformity with the standards laid down by the Supreme Court
so as to ensure that the impugned directions do not result in irreparable loss
to any of the parties.
Legal Position:
37. Section 9 of the Arbitration & Conciliation Act, 1996 vests power on a
Court to pass necessary orders and/or interim injunction for preservation,
interim custody or sale of any goods which are the subject-matter of a
reference and/or for securing the amount in dispute in the arbitration.
38. The law is well-settled that the discretion of the Court to grant interim
relief under Section 9 of the Act has to be exercised sparingly and only in
appropriate cases and the Courts should be extremely cautious in granting
the interim relief. As held in Olex Focas Pvt. Ltd. & Anr. Vs. Skoda
Export Company Ltd. & Anr.; AIR 2000 Delhi 161 the power to pass
orders with regard to interim measures should always be exercised by Court
for the purpose of safeguarding the interest of the parties to the arbitration
proceeding so that the award is not frustrated. The Court‟s discretion ought
to be exercised in those exceptional cases when there is adequate material on
record leading to a definite conclusion that the respondent is likely to render
the entire arbitration proceedings infructuous, by frittering away the
properties or funds either before or during the pendency of arbitration
FAO(OS) 203, 204 & 205 of 2014 Page 27 of 45
proceedings or even during the interregnum period from the date of award
and its execution. It is also a well settled principle of law that unless and
until the petitioner succeeds in bringing the nature of dispute and differences
within the ambit of agreement no relief can be granted under the provisions
of Section 9 of the Act (See Smt. Baby Arya vs. Delhi Vidyut Board:AIR
2002 Delhi 50).
39. In Adhunik Steels Limited's case (supra), the Supreme Court
explained:
"10. It is true that Section 9 of the Act speaks of the court by
way of an interim measure passing an order for protection, for
the preservation, interim custody or sale of any goods, which
are the subject matter of the arbitration agreement and such
interim measure of protection as may appear to the court to be
just and convenient. The grant of an interim prohibitory
injunction or an interim mandatory injunction are governed
by well known rules and it is difficult to imagine that the
legislature while enacting Section 9 of the Act intended to
make a provision which was de hors the accepted principles
that governed the grant of an interim injunction. Same is the
position regarding the appointment of a receiver since the
Section itself brings in, the concept of 'just and convenient'
while speaking of passing any interim measure of protection.
The concluding words of the Section, "and the court shall
have the same power for making orders as it has for the
purpose and in relation to any proceedings before it" also
suggest that the normal rules that govern the court in the grant
of interim orders is not sought to be jettisoned by the
provision. Moreover, when a party is given a right to
approach an ordinary court of the country without providing a
special procedure or a special set of rules in that behalf, the
FAO(OS) 203, 204 & 205 of 2014 Page 28 of 45
ordinary rules followed by that court would govern the
exercise of power conferred by the Act. On that basis also, it
is not possible to keep out the concept of balance of
convenience, prima facie case, irreparable injury and the
concept of just and convenient while passing interim
measures under Section 9 of the Act.
xxx xxx xxx
17. In Nepa Limited Vs. Manoj Kumar Agrawal [AIR 1999
MP 57], a learned Judge of the Madhya Pradesh High Court
has suggested that when moved under Section 9 of the Act for
interim protection, the provisions of the Specific Relief Act
cannot be made applicable since in taking interim measures
under Section 9 of the Act, the court does not decide on the
merits of the case or the rights of parties and considers only
the question of existence of an arbitration Clause and the
necessity of taking interim measures for issuing necessary
directions or orders. When the grant of relief by way of
injunction is, in general, governed by the Specific Relief Act,
and Section 9 of the Act provides for an approach to the court
for an interim injunction, we wonder how the relevant
provisions of the Specific Relief Act can be kept out of
consideration. For, the grant of that interim injunction has
necessarily to be based on the principles governing its grant
emanating out of the relevant provisions of the Specific Relief
Act and the law bearing on the subject. Under Section 28 of
the Act of 1996, even the arbitral tribunal is enjoined to
decide the dispute submitted to it, in accordance with the
substantive law for the time being in force in India, if it is not
an international commercial arbitration. So, it cannot certainly
be inferred that Section 9 keeps out the substantive law
relating to interim reliefs.
xxx xxx xxx
FAO(OS) 203, 204 & 205 of 2014 Page 29 of 45
21 ... ... .... Whether an interim mandatory
injunction could be granted directing the continuance of the
working of the contract, had to be considered in the light of
the well-settled principles in that behalf. Similarly, whether
the attempted termination could be restrained leaving the
consequences thereof vague would also be a question that
might have to be considered in the context of well settled
principles for the grant of an injunction. Therefore, on the
whole, we feel that it would not be correct to say that the
power under Section 9 of the Act is totally independent of the
well known principles governing the grant of an interim
injunction that generally govern the courts in this connection.
So viewed, we have necessarily to see whether the High Court
was justified in refusing the interim injunction on the facts
and in the circumstances of the case."
40. In Mala Kumar Engineers Pvt. Ltd. (MKE) Vs. B. Seenaiah and Co.
(Projects) Ltd. (BSCPL) 117 (2005) DLT 183 it is held as under:-
"20. Though language of Section 9 of the Arbitration and
Conciliation Act, 1996 does not expressly state that as a
condition precedent for passing an order under Section 9, it
has to be established that there is a danger of the
respondent defeating, delaying or obstructing the execution
of the award, the issue is no longer rest integra.
21. In the decision AIR 1998 Delhi 397, M/s Global
Company v. M/s National Fertilizers Ltd., learned Single
Judge of this Court held that the intention of the defendant
is sine qua non for invoking Section 9 where claim is to
secure the amount in dispute in the arbitration. It was held
that guidance could be taken from Order 38 Rule 5 of CPC
and Sections 18 and 41 of the Arbitration Act, 1940. In para
11, it was observed as under :-
FAO(OS) 203, 204 & 205 of 2014 Page 30 of 45
„11. It is true that the said Arbitration Act, 1940 stands
repealed by the Act of 1996 and the provisions
contained in the Code of Civil Procedure are not
applicable to the proceedings under the Act, still, in my
opinion, in the absence of guidelines how the power for
grant of relief under Section 9(ii)(b) is to be exercised
by the Court, the principles underlying the aforesaid
sections are to be applied. It is only on adequate
material being supplied by the petitioner that the Court
can form opinion that unless the jurisdiction is exercised
under the said Section 9(ii) there is real danger of the
respondent defeating, delaying or obstructing the
execution of the award made against it. On the basis of
the only ground of protection of financial interest of the
petitioner taken in para 6 of the petition, the respondent
a Govt. of India Undertaking cannot be legally directed
to furnish security for the amount of US$ 88,250
together with interest @ 9% p.a. Petition thus deserved
to be dismissed."
22. Petitioner has not averred that the respondent is a
bankrupt or a near bankrupt company. Petitioner has
nowhere alleged that if the amount is not secured, it would
not be possible for the petitioner to recover the amount, if
awarded during arbitration. There is no averment that
respondent No. 1 has taken resort to an action which could
be indicative of an intention to deprive the petitioner the
benefit of the award, if in favor of the petitioner."
41. In Nimbus Communications Limited vs . Board of Control for Cricket
in India and Anr 2012 (4) Arb. L.R. 113 the Bombay High Court held as
under:-
"22. The judgment of the Supreme Court in Adhunik Steels
has noted the earlier decision in Arvind Constructions
which holds that since Section 9 is a power which is
conferred under a special statute, but which is exercisable
FAO(OS) 203, 204 & 205 of 2014 Page 31 of 45
by an ordinary court without laying down a special
condition for the exercise of the power or a special
procedure, the general rules of procedure of the court
would apply. Consequently, where an injunction is sought
under Section 9 the power of the Court to grant that
injunction cannot be exercised independent of the
principles which have been laid down to govern the grant
of interim injunctions particularly in the context of the
Special Relief Act 1963. The Court, consequently would be
obligated to consider as to whether there exists a prima
facie case, the balance of convenience and irreparable
injury in deciding whether it would be just and convenient
to grant an order of injunction. Section 9 specifically
provides in sub-Clause (d) of Clause (ii) for the grant of an
interim injunction or the appointment of a receiver. As
regards sub-Clause (b) of Clause (ii) the interim measure of
protection is to secure the amount in dispute in the
arbitration. The underlying object of Order 38 Rule 5 is to
confer upon the Court an enabling power to require a
defendant to provide security of an extent and value as may
be sufficient to satisfy the decree that may be passed in
favour of the plaintiff. The exercise of the power to order
that security should be furnished is, however, pre-
conditioned by the requirement of the satisfaction of the
Court that the defendant is about to alienate the property or
remove it beyond the limits of the Court with an intent to
obstruct or delay execution of the decree that may be
passed against him. In view of the decisions of the Supreme
Court both in Arvind Constructions and Adhunik Steels, it
would not be possible to subscribe to the position that the
power to grant an interim measure of protection under
Section 9(ii)(b) is completely independent of the provisions
of the Code of Civil Procedure 1908 or that the exercise of
that power is untrammelled by the Code. The basic
principle which emerges from both the judgments of the
Supreme Court is that though the Arbitration and
Conciliation Act 1996 is a special statute, Section 9 does
not either attach a special condition for the exercise of the
FAO(OS) 203, 204 & 205 of 2014 Page 32 of 45
power nor does it embody a special form of procedure for
the exercise of the power by the Court. The second aspect
of the provision which has been noted by the Supreme
Court is the concluding part of Section 9 under which it has
been specified that 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. This has been interpreted in both
the judgments to mean that the normal rules that govern the
Court in the grant of an interlocutory order are not
jettisoned by the provision. The judgment of the Division
Bench of this Court in National Shipping Company (supra)
notes that though the power by Section 9(ii)(b) is wide, it
has to be governed by the paramount consideration that a
party which has a claim adjudicated in its favour ultimately
by the arbitrator should be in a position to obtain the fruits
of the arbitration while executing the award. The Division
Bench noted that the power being of a drastic nature, a
direction to secure the amount claimed in the arbitration
petition should not be issued merely on the merits of the
claim, unless a denial of the order would result in grave
injustice to the party seeking a protective order. The
obstructive conduct of the party against whom such a
direction is sought was regarded as being a material
consideration. However, the view of the Division Bench of
this Court that the exercise of power under Section
9(ii)(b) is not controlled by the provisions of the Code of
Civil Procedure 1908 cannot stand in view of the decision
of the Supreme Court in Adhunik Steels.
23. In a recent judgment of a learned Single Judge of the
Delhi High Court in Steel Authority of India Ltd. v.
AMCIPTY Ltd. O.M.P. 417/2011 decided on 1 September
2011, the judgment of the Division Bench of this Court in
National Shipping Company was relied upon. The Delhi
High Court observed that the provisions of Order 38, Rule
5 would serve as a guiding principle for the exercise of the
jurisdiction while dealing with a petition under
Section 9 requiring the respondent to furnish security and
the basic consideration is that the Court should be satisfied
FAO(OS) 203, 204 & 205 of 2014 Page 33 of 45
that the furnishing of security is essential to safeguard the
interest of the petitioner.
24. A close reading of the judgment of the Supreme Court
in Adhunik Steels would indicate that while the Court held
that the basic principles governing the grant of interim
injunction would stand attracted to a petition under
Section 9, the Court was of the view that the power under
Section 9 is not totally independent of those principles. In
other words, the power which is exercised by the Court
under Section 9 is guided by the underlying principles
which govern the exercise of an analogous power in the
Code of Civil Procedure 1908. The exercise of the power
under Section 9 cannot be totally independent of those
principles. At the same time, the Court when it decides a
petition under Section 9 must have due regard to the
underlying purpose of the conferment of the power upon
the Court which is to promote the efficacy of arbitration as
a form of dispute resolution. Just as on the one hand the
exercise of the power under Section 9 cannot be carried out
in an uncharted territory ignoring the basic principles of
procedural law contained in the Code of Civil Procedure
1908, the rigors of every procedural provision in the Code
of Civil Procedure 1908 cannot be put into place to defeat
the grant of relief which would subserve the paramount
interests of justice. A balance has to be drawn between the
two considerations in the facts of each case. The principles
laid down in the Code of Civil Procedure 1908 for the grant
of interlocutory remedies must furnish a guide to the Court
when it determines an application under Section 9 of the
Arbitration and Conciliation Act, 1996. The underlying
basis of Order 38 Rule 5 therefore has to be borne in mind
while deciding an application under Section 9(ii)(b)."
42. In the light of the legal position noticed above, it is clear that while
exercising its jurisdiction under Section 9 of the Act the Court cannot ignore
the underlying principles which govern the analogous power conferred
FAO(OS) 203, 204 & 205 of 2014 Page 34 of 45
under Order 39 Rules 1 and 2 and Order 38 Rule 5 of CPC. It is also
necessary for the Court to satisfy itself that there exists a valid arbitration
agreement between the parties and that a dispute which is referable to the
arbitral tribunal has arisen. Further, as is evident from the language of
Section 9 itself, an order can be made under the said provision for an interim
measure of protection only in respect of the matters specified in Section
9(ii)(a) to (e). The underlying object of all the Clauses (a) to (e) of Section
9(ii) is to preserve the property which is the subject matter of dispute till the
arbitral tribunal decides the dispute. The scope of relief under Section 9
therefore, cannot be extended to directing specific performance of the
contract itself, though the Court must have due regard to the underlying
purpose of the conferment of the power upon the Court i.e. to promote the
efficacy of arbitration as a form of dispute resolution.
43. Coming to the facts of the case on hand, the disputes raised by the
respondent No.1 primarily relate to (i) breach of terms and conditions of the
Investment Agreement on account of the alleged action of KPCL in
proposing to incur excess debt of Rs.1000 Crores for further capital
expenditure without the consent of respondent No.1, (ii) alleged non-
disclosure of information sought by the respondent No.1 and (iii) alleged
failure to make the payment of put consideration.
44. To be more precise, para 5 of the notice dated 28.01.2014 issued by the
respondent No.1 wherein the disputes are summed up is reproduced
hereunder:
"(i) the disregard for the Investor‟s contractual rights and
basic corporate governance norms;
FAO(OS) 203, 204 & 205 of 2014 Page 35 of 45
(ii) the illegal, mala fide and unfair actions of the Company
and the Shareholder Parties, all calculated to unilaterally
undermine the Investor‟s rights with respect to its
investment in the Company;
(iii) numerous and repeated breaches of the Investment
Agreement and the Articles of Association;
(iv) violation of the Investor‟s statutory rights; and
(v) the stated intent of not performing the obligations in
respect of the Put Option , in the manner required under the
Investment Agreement."
45. A perusal of the reliefs claimed by the respondent No.1 in notice dated
25.04.2014 seeking reference for arbitration further clarifies the nature of
the disputes sought to be resolved through arbitration and the same is
extracted hereunder for ready reference:-
"VII. RELIEFS
The Claimant seeks:
(i) to enforce its information rights under Clause 9 of the
Investment Agreement on a continuing basis;
(ii) to enforce its governance rights under Clause 10 of the
Investment Agreement;
(iii) to enforce its exit rights under Clause 14 of the
Investment Agreement;
(iv) to enforce its right to convert the Preference Shares into
equity shares of the Company, which, together with equity
shares already held by the Claimant, would represent 26% of
the fully diluted equity share capital of the Company in
accordance with Clause 14.6 of the Investment Agreement;
FAO(OS) 203, 204 & 205 of 2014 Page 36 of 45
(v) to seek appropriate damages for various breaches of the
Investment Agreement, including, without limitation,
damages pursuant to Clauses 5.5(a) and 5.5(c) in connection
with the additional indebtedness incurred by the Company in
breach of the Investment Agreement;
(vi) an award directing the Respondents to pay the
Claimant‟s legal and other costs in relation to these
arbitration proceedings (including, the sums covered by the
advance costs, including the administrative charges of the
LCIA and the Arbitral Tribunal‟s fee);
(vii) appropriate interim reliefs to protect the Claimant‟s
interests pending the conclusion of the arbitral proceedings;
and
(viii) such further or other relief as may be necessary."
46. Even before making the request for reference of disputes for
arbitration, the respondent No.1 filed OMP No.208/2014 under Section 9 of
the Act and in paras 33 & 34 of the said petition, the need for grant for
immediate relief has been mentioned as under:
"33. It is submitted that the Respondents have been
engaged in a concerted plan to cause prejudice to the
Petitioner through illegal and mala fide actions. The
proposal to avail large amounts of excess debt without the
Petitioner‟s consent and without any clear rationale or
explanation, the adoption of the audited financial statements
at a purported annual general meeting where the Petitioner
was deliberately excluded, the evasive tactics employed by
the Respondents to not provide information and
clarifications requested by the Petitioner, and the refusal to
honor the Petitioners rights under the Investment
Agreement, all consistently lead to a legitimate and
reasonable apprehension that the affairs of the Company are
being conducted to the detriment of the Petitioner. The
FAO(OS) 203, 204 & 205 of 2014 Page 37 of 45
Petitioner is aware of instances where the promoter group
has deliberately and wilfully defaulted on its contractual
obligations and assurances to investors, and the Petitioner
craves leave to refer to specific facts and documents to
evidence this before the Hon‟ble Court.
34. In view of the consistent breach of its contractual rights
and in view of the imminent risk of injury to its interest, the
Petitioner is constrained to approach this Hon‟ble Court
under section 9 of the Arbitration and Conciliation Act,
1996, and seek urgent orders to protect its interests under the
Investment Agreement. The Petitioner has approached this
Hon‟ble court as a last resort. The Petitioner has not been
provided with information which has been requested by the
Petitioner since June 2013 until date. In these
circumstances, the Petitioner has been constrained to issue
the Dispute Notice on 28 January 2014. The Petitioner
apprehends that the Respondents may take actions which
will diminish the value of the Company and prejudice the
valuable rights of the Petitioners as envisaged in the
Investment Agreement and has accordingly approached this
Hon‟ble court for urgent interim orders."
47. As noticed above, the order under appeal came to be passed by way of
an interim order pending OMP No.218/2014 restraining the appellants
herein from availing any additional debt without the specific consent of the
respondent No.1 and also restraining them from
selling/transferring/alienating their interest in any of their properties.
48. Apparently, the reliefs so granted by the learned Single Judge are based
on the prima facie satisfaction that the respondent No.1 is entitled to realise
the put consideration.
FAO(OS) 203, 204 & 205 of 2014 Page 38 of 45
49. Since, we do not propose to go into the correctness of the prima facie
satisfaction recorded by the learned Single Judge, the only question that
requires consideration by us is whether on the basis of the averments in
OMP No.218/2014 and the other material available on record the injunction
as granted by the learned Single Judge is warranted by way of an interim
order pending the petition under Section 9 of the Act.
50. We may at the outset point out that the reliefs granted by the order
under appeal are in the nature of both prohibitory injunction and attachment
before judgment. It is no doubt true that the power of the Court under
Section 9 of the Act is wide enough to grant such reliefs, however as held by
the Courts in the decisions noticed above, the Court is obligated to consider
not only the existence of prima facie case but it is also necessary to keep in
mind the balance of convenience and irreparable injury in deciding whether
it would be just and convenient to grant the reliefs.
51. Further, where Section 9 of the Act is invoked to secure the amount in
dispute in arbitration, like the case on hand, it is also necessary for the Court
to satisfy itself that the assets which are the subject matter of arbitration, are
about to be alienated or removed beyond the limits of the court with an
intent to obstruct or delay execution of the award. An order restraining the
opposite party from dealing with his properties being drastic in nature, grant
of such relief has necessarily to be based on the principles governing Order
38 Rule 5 CPC and before passing such an order the Court has to ensure that
a specific case is made out that the party against whom such an order is
proposed to be made is attempting to remove or dispose off the assets with
the intention of defeating the decree/award that may be passed.
FAO(OS) 203, 204 & 205 of 2014 Page 39 of 45
52. In this context, it would be appropriate to notice the following
principles laid down by the Supreme Court in Raman Tech. and Process
Engg. Co. and Anr. vs. Solanki Traders (2008) 2 SCC 302 with regard to
exercise of power under Order 38 Rule 5 of CPC:
"4. The object of supplemental proceedings (applications
for arrest or attachment before judgment, grant of
temporary injunctions and appointment of receivers) is to
prevent the ends of justice being defeated. The object of
Order 38 Rule 5 CPC in particular, is to prevent any
defendant from defeating the realization of the decree that
may ultimately be passed in favour of the plaintiff, either
by attempting to dispose of, or remove from the jurisdiction
of the court, his movables. The Scheme of Order 38 and the
use of the words 'to obstruct or delay the execution of any
decree that may be passed against him' in Rule 5 make it
clear that before exercising the power under the said Rule,
the court should be satisfied that there is a reasonable
chance of a decree being passed in the suit against the
defendant. This would mean that the court should be
satisfied that the plaintiff has a prima facie case. If the
averments in the plaint and the documents produced in
support of it, do not satisfy the court about the existence of
a prima facie case, the court will not go to the next stage of
examining whether the interest of the plaintiff should be
protected by exercising power under Order 38 Rule 5 CPC.
It is well-settled that merely having a just or valid claim or
a prima facie case, will not entitle the plaintiff to an order
of attachment before judgment, unless he also establishes
that the defendant is attempting to remove or dispose of his
assets with the intention of defeating the decree that may be
passed. Equally well settled is the position that even where
the defendant is removing or disposing his assets, an
attachment before judgment will not be issued, if the
plaintiff is not able to satisfy that he has a prima facie case.
FAO(OS) 203, 204 & 205 of 2014 Page 40 of 45
5. The power under Order 38 Rule 5 CPC is a drastic and
extraordinary power. Such power should not be exercised
mechanically or merely for the asking. It should be used
sparingly and strictly in accordance with the Rule. The
purpose of Order 38 Rule 5 is not to convert an unsecured
debt into a secured debt. Any attempt by a plaintiff to
utilize the provisions of Order 38 Rule 5 as a leverage for
coercing the defendant to settle the suit claim should be
discouraged. Instances are not wanting where bloated and
doubtful claims are realised by unscrupulous plaintiffs, by
obtaining orders of attachment before judgment and forcing
the defendants for out of court settlements, under threat of
attachment.
6. A defendant is not debarred from dealing with his
property merely because a suit is filed or about to be filed
against him. Shifting of business from one premises to
another premises or removal of machinery to another
premises by itself is not a ground for granting attachment
before judgment. A plaintiff should show, prima facie, that
his claim is bonafide and valid and also satisfy the court
that the defendant is about to remove or dispose of the
whole or part of his property, with the intention of
obstructing or delaying the execution of any decree that
may be passed against him, before power is exercised
under Order 38 Rule 3 CPC. Courts should also keep in
view the principles relating to grant of attachment before
judgment (See - Prem Raj Mundra v. Md. Maneck Gazi
AIR 1951 Cal 156, for a clear summary of the principles.)"
Conclusion:
53. Apparently, the order under appeal proceeds on an assumption that the
put amount is due and payable to the respondent No.1. It may be pointed
out that the claim of Rs.1588 Crores made by the respondent No.1 towards
FAO(OS) 203, 204 & 205 of 2014 Page 41 of 45
put consideration comprises the initial investment amount of Rs.803.5
Crores and an amount of Rs.785 Crores towards the assured return on the
initial investment amount of Rs.803.5 Crores. The said claim has been
contested by the appellants on various grounds including the decision of RBI
on the basis of the amended Regulations under FEMA. The specific case of
the appellants is that the claim of the first respondent being a matter to be
considered by the arbitral Tribunal, no protection by way of interim measure
can be granted under Section 9 of the Act unless it is established that the
appellants are attempting to remove or dispose off the assets with the
intention of defeating the award that may be passed by the arbitral Tribunal.
54. On a careful perusal of the order under appeal, we found that the
learned Single Judge has not gone into the question whether there is a
danger of defeating, delaying or obstructing the execution of the arbitral
award by the appellants and whether the facts and circumstances of the case
warrant preservation of the property which is the subject matter of the
Arbitration Clause under the Investment Agreement. We have also noticed
that the conclusion of the learned Single Judge that the appellants cannot be
permitted to present a fait accompli in the event of the respondent No.1
succeeding in enforcing the Put Option is not based upon either pleadings or
any other material to establish the probability of alienation of the assets of
the appellants. In the absence of any material to indicate even remotely the
intention of the appellants to frustrate the rights of the respondent No.1 to
enforce the arbitral award, if any, in their favour we are of the opinion that
no prohibitory order is warranted as an interim measure restraining the
appellants from dealing with their moveable/immoveable properties. The
FAO(OS) 203, 204 & 205 of 2014 Page 42 of 45
mere allegations that KPCL is attempting to avail additional debt without
real need and that it is possible that the appellants herein are siphoning funds
through unrecognized capital expenditure to benefit their sister concern -
NECL apart from being vague and lacking in material particulars, are not
sufficient to establish that the appellants are intending to render the entire
arbitration proceedings infructuous by frittering away properties or funds of
KPCL either before or during the pendency of arbitration proceedings.
55. It may be added that even if a prima facie case is made out by the
respondent No.1 as to their claim for put amount, the same will not entitle
them to seek an interim measure or protection by restraining the appellants
from dealing with their assets unless it is also established that the appellants
are intending to defeat the right of the respondent No.1 to enforce the
arbitral award.
56. We may also add that the learned Single Judge while issuing the
impugned orders of prohibitory injunction missed the important aspect of
balance of convenience.
57. Having given our careful consideration to the submissions made by the
learned counsel for both parties, we find substance in the submission on
behalf of the appellants that the impugned orders of prohibitory injunction
would not only harm the reputation and goodwill of the appellants, i.e.
KPCL and its shareholders, but the same would also cripple KPCL possibly
leading to its eventual shutdown. In comparison, the averments made by
respondent No.1 indicate that any damage likely to be caused to respondent
No.1 by incurring of additional debt by the appellant a company would be
only in quantifiable monetary terms. Thus, it appears to us that the balance
FAO(OS) 203, 204 & 205 of 2014 Page 43 of 45
of convenience in the present case would be in favour of the appellants as it
is the KPCL which faces the threat of imminent shutdown and irreversible
harm to its reputation, as opposed to respondent No.1 who only faces a
threat of monetary loss, which can be compensated at any stage. Therefore,
the loss/damage the respondent No.1 apprehends to suffer cannot be said to
be irreversible. On the other hand, the impugned orders of injunction would
result in causing huge financial harm and prejudice to the interests of KPCL
as well as its shareholders and if ultimately the Arbitral Tribunal disallows
the claim of respondent No.1, it would be impossible to undo the same.
58. Yet another aspect which requires to be taken note of is that the
respondent No.1 was admittedly aware of KPCL‟s proposal to raise
additional debt on 10.06.2013 itself. However, it was only after seven
months i.e. on 17.02.2014 the respondent No.1 invoked the jurisdiction of
the Court under Section 9 of the Act. It is pertinent to note that the petition
under Section 9 of the Act is absolutely silent about the prejudice if any
caused to the respondent No.1 in the interregnum. We are also of the opinion
that in the absence of any plea in the petition under Section 9 of the Act as to
the probability of alienation of assets of KPCL or its shareholders, the
impugned directions are unwarranted and unjustified, particularly by way of
an interim order pending disposal of the petition. In fact, the impugned
directions in a way amount to allowing the main OMP itself.
59. For the aforesaid reasons, the order under appeal cannot be sustained
and the same is accordingly set aside leaving it open to the learned Single
Judge to proceed with the main O.M.P. No.218/2014 and to dispose of the
same following due process of law.
FAO(OS) 203, 204 & 205 of 2014 Page 44 of 45
60. All the appeals are accordingly allowed. There shall be no order as to
costs.
CHIEF JUSTICE
RAJIV SAHAI ENDLAW, J.
SEPTEMBER 1, 2014 kks FAO(OS) 203, 204 & 205 of 2014 Page 45 of 45