The discretionary power under section 17 of the A&C Act should be exercised sparingly and not to convert indeterminate and unsecured counter-claims into secure claims.

JUDGMENT :

Anup Jairam Bhambhani, J.

1. By way of the present appeal under section 37(2)(b) of the Arbitration & Conciliation Act 1996 (‘A&C Act’), the appellants impugn order dated 19.08.2021 made by the learned Sole Arbitrator, declining to allow an application seeking interim measures of protection under section 17 of the A&C Act. The application under section 17 was moved by the non-claimants, who are the appellants in the present appeal, who had sought to secure the amounts comprised in their counter-claims. The principal ground for seeking to secure the amount in dispute in the counter-claims was the alleged ruinous financial position of the claimant, who is the respondent in the present appeal.

2. The transaction that is the genesis of disputes between the parties is the sale by the appellants to the respondent of a business unit called Devi Metal Technologies (DMT) alongwith its assets on a ‘going concern basis’ based upon three principal documents:

i. Balance sheet dated 14.04.2016 of DMT for FY ending 31.03.2016.

ii. Deed of reconstitution dated 15.04.2016, which was to take effect from 01.04.2016; and

iii. Supplementary deed dated 15.04.2016, which carved-out certain exceptions to the sale of the running business unit.

Appellants' Arguments

3. Mr. Manish Vashisht, learned senior counsel appearing on behalf of appellants submits that at the time of sale of DMT to the respondent, the respondent was a ‘solvent company’ which had assured that the sale consideration would be paid to the appellants upon settlement and reconciliation of accounts. It is contended however, that during the pendency of arbitral proceedings, the respondent’s net-worth has eroded; by reason whereof, the amount comprised in the counter-claims deserves to be secured, since otherwise the appellants would receive a mere ‘paper award’, which would be unenforceable. It is contended that the respondent’s liabilities are much in excess of its total assets; and the respondent’s balance sheet dated 14.04.2016 reflects that position, namely that the respondent’s total assets are Rs. 195 crores whereas its total liabilities are Rs. 227 crores, thereby leading to a negative net-worth of Rs. 65 crores. Furthermore, it is contended that all the respondent’s lenders have declared their loans as non-performing assets since the respondent is not even able to pay its interest liability on such loans.

4. The principal argument advanced on behalf of the appellants is that the learned Sole Arbitrator has declined relief under section 17 of the A&C Act holding that the counter-claims of the appellants are „speculative, undetermined and disputed? and therefore the powers under section 17 cannot be exercised to secure such counter-claims. In doing so, Mr. Vashisht asserts, the learned Sole Arbitrator has grossly erred and has thereby rendered the counter-claims academic, inasmuch as even if the appellants were to succeed, they would get an unenforceable ‘paper award’ since the respondent’s net-worth is already in the negative.

Respondent’s Arguments

5. On the other hand, Dr. Anurag Kumar Agarwal, learned counsel appearing for the respondent submits that the present appeal must be decided within the scope of interference permissible under section 37(2)(b) of the A&C Act, which, in essence and substance, says that if the learned Sole Arbitrator has exercised jurisdiction in a just and reasonable manner, and such exercise is not perverse or contrary to law, the court will not interfere in the order so passed.

6. Counsel submits that the section 17 application moved before the learned Sole Arbitrator was an attempt by the appellants to ‘crystalize’ their otherwise doubtful, bloated and speculative counter-claims; that the appellants cannot be permitted to convert an unsecured claim or debt into a secured one, by seeking security from the respondent as an interim measure; and that there is no covert or overt act on the respondent’s part in disposing of and transferring its assets, that