Financial Distress Alone Not Grounds To Secure Unadjudicated Claim Under S.9 Arbitration Act; O.XXXVIII R.5 CPC Principles Apply: Delhi High Court - 2025-08-28

Financial Distress Alone Not Grounds to Secure Unadjudicated Claim Under S.9 Arbitration Act: Delhi High Court

New Delhi: The Delhi High Court, in a significant ruling, has held that the precarious financial condition of a party, by itself, is not a sufficient ground to grant pre-arbitral interim relief to secure an unadjudicated claim under Section 9 of the Arbitration and Conciliation Act, 1996. Justice Jasmeet Singh emphasized that the principles underlying Order XXXVIII Rule 5 of the Code of Civil Procedure (CPC) must be met, requiring the petitioner to demonstrate a strong possibility that the respondent is dissipating assets with the intent to frustrate a future arbitral award.

The court dismissed a petition filed by UAE-based Rescom Mineral Trading FZE seeking to secure a claim of approximately INR 139 crores against Rashtriya Ispat Nigam Limited (RINL), a Public Sector Enterprise.

Background of the Dispute

The case arose from a long-term agreement where Rescom supplied 77,465 metric tonnes of Tuhup Hard Coking Coal to RINL. Rescom alleged that RINL failed to pay the full invoice amount of USD 17.1 million by the due date, leaving an outstanding balance of approximately USD 1.65 million (INR 139 crores), which included demurrage and other charges.

Rescom filed a petition under Section 9 of the Arbitration Act, seeking an order directing RINL to furnish a security deposit for the outstanding amount. The primary ground for this request was RINL's alleged "precarious and volatile financial condition," with Rescom fearing that any future arbitral award in its favour would be a mere "paper decree."

Arguments of the Parties

Petitioner's Submissions (Rescom): - Rescom's counsel argued that RINL's annual reports showed significant losses, and news reports indicated a potential disinvestment, proving its unstable financial health. - They contended that a strong prima facie case existed as RINL had admittedly received and consumed the entire coal shipment. - It was argued that RINL's quality dispute was an afterthought, raised nearly four months after the coal was delivered and consumed. - Citing the Supreme Court's decision in Essar House , they submitted that proof of actual attempts to dispose of assets is not imperative for relief under Section 9.

Respondent's Submissions (RINL): - Senior counsel for RINL countered that its financial health was improving, thanks to substantial capital infusion from the Central Government. - They argued that financial distress alone cannot justify an order of attachment before judgment. - Relying on the Supreme Court's judgment in Sanghi Industries , they asserted that the strict conditions of Order XXXVIII Rule 5 of the CPC must be satisfied. This requires the petitioner to provide cogent material showing that RINL was dissipating assets to defeat a future award. - RINL raised a bona fide dispute over the quality of the coal, claiming the ash content exceeded the contractual maximum limit, entitling it to a price rebate. This meant Rescom's claim was unadjudicated and premature.

Court's Analysis and Legal Precedents

Justice Jasmeet Singh conducted a thorough analysis of the legal framework governing interim relief in arbitration. The court noted the conflicting views in the Supreme Court's judgments of Essar House (P) Ltd. vs. Arcellor Mittal and Sanghi Industries Ltd. vs. Ravin Cables Ltd. regarding the applicability of Order XXXVIII Rule 5 CPC.

Following the principle that the later judgment of an equal coram bench prevails, and citing previous Delhi High Court decisions, the court concluded that while it is not strictly bound by the text of the CPC, the underlying principles must be satisfied.

The judgment extracted a key principle from earlier cases:

"In view of the settled principle that unadjudicated claims cannot be secured through interim relief merely because a party is in financial distress, even if the contentions of the petitioner that respondent No. 1 is facing financial distress is for sake believed, the same alone doesn’t make a strong prima facie case in favour of the petitioner."

The court found that Rescom had failed to provide any material evidence to substantiate its belief that RINL was likely to alienate its assets with malafide intent. "Mere averment that there are various news reports that comment on precarious financial status...is no proof of attempt to remove or dispose of the assets with an intent to defeat the realisation of an impending Arbitral Award," the court observed.

Final Verdict

The High Court dismissed the petition, concluding that Rescom had failed to satisfy the three-prong test for interim relief: a strong prima facie case, a balance of convenience in its favour, and the likelihood of irreparable harm.

The court held that RINL had raised a bona fide dispute regarding the quantum of dues, which required adjudication by an arbitral tribunal. Furthermore, RINL's consistent part-payments demonstrated its willingness to meet its obligations, negating any suggestion of malafide intent to defeat a potential award.

The court clarified that its observations were only for the purpose of the Section 9 petition and would not influence the future arbitral proceedings, leaving both parties at liberty to seek appropriate relief from the arbitral tribunal once constituted.