Mirza & Associates, Advocates & Attorneys

_{An article by Mr. Shubhit Gaur, 3rd Year Law Student of Symbiosis Law School, Pune}

In the recent order of New Morning Star Travels v Volkswagen Finance Ltd.’ (decided on 9^th November 2020), the Hon’ble High Court of Delhi held that coercive ex-parte orders under Section 9 of the Arbitration and Conciliation Act (‘The Act’) are not allowed as they lack equitable soundness in terms of established legal provisions and surrounding Jurisprudence. This marks as a significant development in terms of furthering the rights of Individual Business Owners and small enterprises.

In the aforementioned case, New Morning Star Travels entered into a contract with Volkswagen’s finance company for a grant of loan to buy vehicles to further their travel-agency business. However, due to the situation surrounding Covid-19 Pandemic, their business came to a halt owing to which they were not able to pay certain instalments of the loan.

 This led to an application being filed before the civil court under section 9, which in the very first hearing itself gave an ‘Ex-Parte’ order for the seizure of the respondent’s vehicles.  

The Delhi High Court while hearing the appeal referred to the findings in Kotak Mahindra Prime Ltd vs. Kamal Chauhan & Anr and opined that the power of the court to adjudge matters under section 9 along with passing ex-parte orders is not questioned and remains intact however such power has to be exercised in consonance with the provisions of the Code of Civil Procedure (‘the Code or CPC’) and the established principles of Natural Justice.

It implies that a symbolic custody of the property of the respondent can be taken on the basis of an application under section 9 by the court in form of custodia legis, however simultaneously a notice is also to be sent to the respondent intimating him about the first hearing.

Reasoning

For the grant of an ex-parte decree, the court must adhere to the procedure laid down under Order XXXVIII and Order XXXIX of CPC i.e.  The following to be fulfilled [1]:

• Balance of Convenience for the Applicant.
• Presence of a Prima Facie case.
• Occurrence of an Irreparable Injury or Loss in case the interim protection is not provided.[2]

Additionally, it is necessary to prove in cases where a vehicle is the subject matter of the application, then there is a conspicuous attempt by the other party to dispose it off or has a malafied intention of not paying the amount of debt with respect to it.

The court also referred the specific guidelines laid down in Cholamandalam DBS Finance Ltd. v. Sudhees Kumar”[3] as the standing procedure and upheld that the application under the impugned section cannot be disposed off without giving a fair chance of hearing to the other party. Furthermore, a receiver must be appointed as per Order XL of the code along with the appointment of the Advocate commissioner who will make sure that the Arbitration proceedings will be initiated within 90 days of the grant of interim relief.

Previous Approach to Section 9 of the Arbitration & Conciliation Act

The previous approach dictated that the provisions of the code shall not be applicable for governing procedures under the Arbitration and Conciliation Act on the premise of jurisprudence surrounding section 5 and section 19 which restrict judicial interference.[1] The rationale behind this rested on the argument that the rigors of the provisions of CPC will defeat the purpose of granting ‘party autonomy’ under the act and hence must not be made applicable.[2]

Since, as per this approach, the courts were not bound by the provisions of the code, they assumed the authority to grant ‘Ex-parte’ orders under section 9 without giving an opportunity to the other party to even present their case in the first hearing. The only thing mandatory was to show in the application that the case had merits for seeking interim relief[1] and it was deemed that the act of not granting the relief immediately will lead to denial of justice.[2] The provisions of CPC were only categorized as ‘guiding principles’ as against binding rules[3], giving the court the discretion for non-observance of the code, if they deemed fit.[4]

This often leads to situations whereby pursuant to the court’s order under section 9, the applicants entered into the respondent’s space and seized the property forming the subject matter of the contract, much to their surprise which leads to the sudden halt in the day to day working of their business disabling them even more to fulfil their part of the contract.

Impact

The order of the Delhi High Court will act as a ‘binding precedent’ to the effect that the court can only give ad interim ex parte orders under the section without first giving notice and a fair hearing to the respondent i.e. the custody of the property subject of the contract can be taken by the court only in a symbolic manner by giving direction to the respondent to not sell the property or do anything to prejudice it’s value and worth.

 It is only after giving the opportunity of hearing to the respondent; the application can be disposed of.  If the respondent fails to appear, even after the service of the notice, the court can grant reliefs as prayed by the applicant including the sale of the property under an ex-parte order.  In the present matter itself, the court set aside the impugned orders of the civil court on the same lines of reasoning.

It is an advancement to various inclusive observations done in various judgments but these orders marks as a first to give a conclusive answer. In “Arvind Construction v. Kalinga Mining Corporation”, the supreme court has held that there is no reason to believe that the legislative intent for granting interim injunctions under section 9 was to exclude the application of the code, therefore it shall be governed by the same.[1]In “Indian Telephone Industries v. Siemens Public Communication”[2], the courts had taken a similar view point to suggest that section 9 must be governed by the principles laid down in CPC, even though not expressively contained in the act.

The judgment will go a long way in securing the rights of individuals and organizations party to a contract as a coercive action cannot be taken against them unless it proved that they have a malafied intention of not fulfilling the contract, or there is a promising possibility that they will be unable to fulfill the contract or prejudice will be caused to the property of an irreparable nature if interim relief is not granted.  

Also, this acts as a precedent to say that, without notice to the respondent and further hearing ex-parte order of taking custody and sale of a property cannot be granted implying that the seizure of properties in a sudden manner of the uninformed respondents will not be considered sound in law, not affecting their business abruptly and simultaneously also giving them a chance to be prepared.