The Code of Civil Procedure 1908 provides a straight path to understand how the court is to proceed when a party claims that the defendant’s assets must be attached before the completion of the trial, lest the defendant waste the assets to defeat the enforcement of the decree.
Under Order 38 Rule 5 of the CPC, if the plaintiff is able to demonstrate that the defendant intends on frustrating a possible decree that may be passed in a suit, either by the defendant disposing off the property or removing the property from the court’s jurisdiction, the court can pass an order directing the defendant to “ …furnish security, in such sum as may be specified in the order, to produce and place at the disposal of the Court, when required, the said property or the value of the same, or such portion thereof as may be sufficient to satisfy the decree, or to appear and show cause why he should not furnish security.” [Order 38 Rule 5(1)]. A court order to this effect is termed as an order granting attachment before judgment.
In the oft-cited case of Raman Tech v. Solanki Traders, (2008) 2 SCC 302, the Supreme Court elaborated on the scope of Order 38 Rule 5 in the following words:
“4. …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.”
In a proceeding under Order 38 Rule 5, the plaintiff has to cross a very high bar. The plaintiff has to convincingly establish that but for an order granting attachment before judgment by the trial court, the defendant will engage in conduct in respect of their assets, which will ultimately frustrate any decree that may be passed in favour of the plaintiff.
Yet, how does the principle enshrined in Order 38 Rule 5 apply to cases where interim relief is sought under Section 9 of the Arbitration & Conciliation Act, 1996 (“A&C Act”)? How is a court to judge a claimant’s plea that the defendant/opponent must submit some security to ensure the arbitral award that is ultimately passed is not frustrated? Does Order 38 Rule 5 squarely apply to proceedings under Section 9 of the A&C Act or does a pro-arbitration outlook in respect of reliefs claimed under the A&C Act indicate the adoption of a contrary approach?
Two recent judgments of the Supreme Court throw light on this important issue which regularly arises in the realm of commercial law. However, the Supreme Court has spoken in opposing voices with one judgment contradicting the other within the space of a few weeks.
In Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited, 2022 SCC Online SC 1219, a Division Bench comprising Justice Indira Banerjee and Justice A.S. Bopanna expressly declared that Order 38 Rule 5 of the CPC will not apply to cases arising under Section 9 of the A&C Act, when the claimant seeks relief which are in the nature of “attachment before judgment.” As the Supreme Court saw it, reliefs claimed under Section 9 ought not be encumbered by the need to fulfil every procedural requirement that obtains under the CPC. As the SC declared, “In exercise of its powers to grant interim relief under Section 9 of the Arbitration Act, the Court is not strictly bound by the provisions of the CPC.” (Para. 39).
However, the SC held, this did not mean that in granting relief under Section 9, the CPC is to be ignored entirely (para. 40). In the opinion of the Court, to obtain interim relief seeking an order of attachment before judgment, the claimant had to establish at least a prima facie case that they may succeed in the arbitration, apart from also showing that the balance of convenience lies in their favour. These are the two important ingredients that had to be satisfied (para. 49).
Importantly, the SC declared that the claimant need not demonstrate that the opponent/defendant was actually doing away with the assets to defeat a future arbitral award. The likelihood of this occurring was sufficient for granting interim relief under Section 9:
“50. Proof of actual attempts to deal with, remove or dispose of the property with a view to defeat or delay the realisation of an impending Arbitral Award is not imperative for grant of relief under Section 9 of the Arbitration Act. A strong possibility of diminution of assets would suffice. To assess the balance of convenience, the Court is required to examine and weigh the consequences of refusal of interim relief to the applicant for interim relief in case of success in the proceedings, against the consequence of grant of the interim relief to the opponent in case the proceedings should ultimately fail.”
The judgment in Essar House was delivered on September 14, 2022. Just over a fortnight later, on September 30, 2022, a Division Bench of the Supreme Court comprising Justice M.R. Shah and Justice Krishna Murari in the case of Sanghi Industries Ltd. v. Ravin Cables Ltd., 2022 SCC OnLine SC 1329, declared that Order 38 Rule 5 of the CPC applies proprio vigore to any application filed under Section 9 of the A&C Act, which seeks interim relief against the defendant which is in the nature of an attachment before judgment. The Supreme Court declared:
“4. …[W]e are of the opinion that unless and until the pre-conditions under Order XXXVIII Rule 5 of the CPC are satisfied and unless there are specific allegations with cogent material and unless prima-facie the Court is satisfied that the appellant is likely to defeat the decree/award that may be passed by the arbitrator by disposing of the properties and/or in any other manner, the Commercial Court could not have passed such an order in exercise of powers under Section 9 of the Arbitration Act, 1996. At this stage, it is required to be noted that even otherwise there are very serious disputes on the amount claimed by the rival parties, which are to be adjudicated upon in the proceedings before the arbitral tribunal.
5. The order(s) which may be passed by the Commercial Court in an application under Section 9 of the Arbitration Act, 1996 is basically and mainly by way of interim measure. It may be true that in a given case if all the conditions of Order XXXVIII Rule 5 of the CPC are satisfied and the Commercial Court is satisfied on the conduct of opposite/opponent party that the opponent party is trying to sell its properties to defeat the award that may be passed and/or any other conduct on the part of the opposite/opponent party which may tantamount to any attempt on the part of the opponent/opposite party to defeat the award that may be passed in the arbitral proceedings, the Commercial Court may pass an appropriate order including the restrain order and/or any other appropriate order to secure the interest of the parties. However, unless and until the conditions mentioned in Order XXXVIII Rule 5 of the CPC are satisfied such an order could not have been passed by the Commercial Court which has been passed by the Commercial Court in the present case, which has been affirmed by the High Court.
There is no doubt that there is a conflict of judicial opinion on the issue of whether a court seized of an application under Section 9 of the A&C Act has to follow the rigours of Order 38 Rule 5 of the CPC. This conflict of opinion will now have to be resolved by a 3-judge bench of the Supreme Court. Yet from a study of the two judgments, there are 6 important issues which merit deeper scrutiny:
1. In Essar House, the Supreme Court declared that Order 38 Rule 5 does not apply to Section 9 proceedings because as a general matter, the CPC cannot control the operation of the A&C Act. This is perhaps on account of the general understanding that the A&C Act is a special legislation and thus general laws cannot affect the operation of a special law (see Union of India v. Popular Construction Co., (2001) 8 SCC 470).
Yet, the A&C Act itself offers clues when and when not the CPC is to apply. Certain sections clearly stipulate that the CPC will not apply (see Section 45: Power of judicial authority to refer parties to arbitration). On the other hand, other provisions expressly stipulate that the provisions of the CPC will apply to the implementation of the said provisions (see Section 36: Enforcement).
More pertinently, the A&C Act does not contain a provision which entirely excludes the applicability of the CPC to the A&C Act especially in the context of Section 9 of the A&C Act. Thus, it is difficult to conclude that the general rule in arbitration law is that the CPC is of no avail when interpreting provisions of the A&C Act.
2. It is well recognised that an order granting attachment before judgment against a defendant is a much more stringent interim order than for instance, a court ordering that the parties shall maintain status quo. The more stringent and far-reaching the interim relief, the threshold for obtaining that relief itself must be heightened.
3. Assuming, arguendo, that the CPC does not apply to the A&C Act, the sequitur cannot be that the important principle of law enshrined in Order 38 Rule 5 itself is to be given a go-by and a relaxed standard of review is to be adopted.
Consider the Telecom Regulatory Authority of India Act, 1997 (“TRAI Act”). In this Act, Section 16 expressly stipulates that when adjudicating any dispute, the Telecom Disputes Settlement and Appellate Tribunal, “…shall not be bound by the procedure laid down by the Code of Civil Procedure but shall be guided by the principles of natural justice and subject to the other provisions of this Act, the Appellate Tribunal shall have powers to regulate its own procedure.” (See Section 16(1) of the TRAI Act).
Despite the clear language of Section 16, the Supreme Court in Union of India v. Tata Teleservices (Maharashtra) Ltd., (2007) 7 SCC 517, held that
“…It is significant to note that it is not a case of exclusion of the powers under the Code of Civil Procedure and conferment of specific powers in terms of sub-section (2) of that section. It is really a right given to tdsat even to go outside the procedural shackles imposed by the Code of Civil Procedure while dealing with a dispute before it.” (Para. 25)
Seen thus, any court acting under Section 9 of the A&C Act need not follow every procedural rule set out in Order 38 Rule 5. However, the rigorous standard that the claimant needs to fulfil before being granted an order of attachment before judgment can certainly apply to a proceeding seeking interim relief under Section 9 of the A&C Act. In other words, the rigorous standard which demands fulfilment for an order granting attachment before judgment under Order 38 Rule 5 ought not to be ignored.
4. A choice need not be made between two extremes. The extremes being on the one hand, the idea that Order 38 Rule 5 is to be ignored in a proceeding under Section 9 of the A&C Act and the other being that ever procedural requirement set out in Order 38 Rule 5 specifically and in the CPC generally must be fulfilled.
The middle path solution may be that in a Section 9 proceeding, the claimant has to actually demonstrate, and not simply aver, that the defendant is engaging in conduct with the ultimate aim of defeating a future arbitral award, and that but for the relief, the arbitral award will only be a paper decree.
5. At any rate, it is well settled that when adjudicating an application under Order 38, Rule 5 of the CPC, the court has to adopt a three-part test to determine whether an order for attachment before judgment is to be passed.
First, the plaintiff has to demonstrate that they have a good prima facie case and that on balance, the plaintiff is entitled to a decree in their favour.
Second, that the claim of the plaintiff is bona fide.
Third, it has to be established that the sole intent with which the defendant is dealing with their property/assets is to defeat a possible decree being passed against them. (Raman Tech, paras. 4-6).
Thus, it is evident that establishing a prima facie case is only one of the ingredients that has to be satisfied in any prayer seeking an order of attachment before judgment against a defendant. To put it another way, merely establishing a prima facie case is not sufficient to seek an order on attachment before judgment.
6. Since attaching a defendant’s assets during a trial can have severely onerous consequences when contrasted with other forms of interim reliefs that are usually granted (see Raman Tech, para. 6), a court in a proceeding arising under Section 9 of the A&C Act ought to judge whether any other relief can secure the ends of justice. In other words, it would be appropriate if a court does inquire if there are less restrictive means by which the claimant’s grievances regarding the conduct of the defendant can be addressed.
Parties seeking attachment before judgment in arbitration proceedings is a recurring phenomenon and it is hoped that the Supreme Court will resolve this important issue concerning arbitration law in the near future.
Rohan J. Alva is an arguing counsel in the Supreme Court and High Court of Delhi. He is the author of Liberty After Freedom: A History of Article 21, Due Process and the Constitution of India (HarperCollins 2022) and of A Constitution to Keep: Sedition and Free Speech in Modern India (HarperCollins 2023).