Summary
Essar Steel had paid refundable security deposits of about Rs. 35.5 crore to Essar House, its licensor of office space, and Rs. 47.41 crore to Essar Services, its support-services provider. After ArcelorMittal Nippon Steel took over Essar Steel under an approved resolution plan and vacated the premises, it sought refunds. The Essar companies said the deposits had been adjusted under internal group arrangements against Essar Steel's dues to third parties. The Bombay High Court ordered them under Section 9 of the Arbitration Act to deposit the amounts or furnish bank guarantees. The Supreme Court dismissed their appeals. Novation needs the counterparty's consent, and set-off or adjustment of a corporate debtor's dues during its CIRP was impermissible. Section 9 relief is guided by, but not bound by, Order 38 Rule 5 CPC, and a strong possibility of diminution of assets suffices.
Issues
- Whether the High Court could direct deposit of security amounts under Section 9 of the Arbitration Act without the strict requirements of Order 38 Rule 5 CPC being pleaded and proved
- Whether the appellants could resist refund on the basis of unilateral adjustments, novations and set-offs against the corporate debtor's dues to third parties
Provisions considered
- Section 9(1)(ii)(b) and (e), Arbitration and Conciliation Act, 1996The court may secure the amount in dispute or grant any just and convenient interim protection. A good prima facie case, balance of convenience and promptness suffice, without the technical averments needed for attachment before judgment. (¶¶ 41, 42, 48, 49, 50)
- Order 38 Rule 5, Code of Civil Procedure, 1908Its underlying principles guide Section 9 relief, but its rigours cannot defeat justice. Proof of actual attempts to remove assets is not required, and Raman Tech, decided under the CPC in a suit, was distinguished. (¶¶ 30, 39, 40, 44, 45, 46, 50)
- Section 62, Indian Contract Act, 1872Novation, rescission or alteration of a contract requires the agreement of both parties, and obligations cannot be assigned without the promisee's consent. (¶¶ 31, 32, 33)
- Section 14, Insolvency and Bankruptcy Code, 2016During Essar Steel's CIRP, novation or set-off affecting its dues without the Resolution Professional's consent was not permissible. (¶¶ 34, 35, 36)
Held
- While deciding a Section 9 petition, the court cannot ignore the basic principles of the CPC, but it is not strictly bound by its procedural provisions, and procedural safeguards cannot be read to defeat justice. Where a strong prima facie case and balance of convenience exist, relief should not be withheld merely because grounds for attachment before judgment were not pleaded. (¶¶ 39, 40, 43, 44, 45, 47, 49)
- Proof of actual attempts to dispose of property is not imperative, and a strong possibility of diminution of assets suffices. Balance of convenience weighs the consequences of refusing relief to a successful applicant against those of granting it to an ultimately successful opponent. (¶ 50)
- The security deposits were admittedly refundable. Prima facie, refusal to release them rested on a convoluted series of internal group arrangements diverting them to Essar Steel's alleged third-party dues. Those arrangements could not bind ArcelorMittal without consent and were impermissible during the CIRP. (¶¶ 31, 33, 34, 36, 51)
- A disclosure that the opponent is heavily indebted or that its only asset is encumbered does not preclude a Section 9 deposit order where the applicant has good prospects in arbitration. Otherwise the fruits of the award would be lost. (¶ 52)
Result
Appeals dismissed. The orders directing Essar House to deposit about Rs. 35.5 crore and Essar Services Rs. 47.41 crore, or to furnish bank guarantees, were upheld.