Interplay of Section 9 and 17 of the Arbitration and Conciliation Act, 1996

Background 

The case revolves around a financial transaction that took place in 2016-2017. The petitioner, Avantha Holdings Ltd., was in need of finances during this period. The Board of Directors of the petitioner approved the borrowing of ₹1400 crores, by issuance of secured/unsecured non-convertible debentures on a private placement basis. Consequently, the respondent, M/s Vistra ITCL (India) Ltd., was appointed as Debenture Trustee, as per the Debenture Trust Deeds dated 5th January, 2017.

On the same day, two Debenture Trust Deeds were executed, whereby 5650 non-convertible debentures, each with a face value of ₹ 10 lakhs, and 7000 debentures, each with a face value of ₹ 10 lakhs, were issued. These were issued in favour of a consortium of lenders comprising M/s KKR India Financial Services Pvt. Ltd. and KKR India Debt Opportunities Fund (collectively referred to as “KKR”), M/s L & T Finance Ltd., L & T Fincorp Ltd and Family Credit Ltd. (collectively referred to as “L & T”) and M/s BOI AXA Corporate Credit Spectrum Fund (“BOI”). These entities are collectively referred to as the “debenture holders”. The total value of the debentures was ₹ 1400 crores, and they were issued to the debenture holders on a private placement basis.

Controversy in Question

The controversy in question arises from the terms of the Debenture Trust Deeds and the subsequent actions of the parties involved. The petitioner alleges that the respondents engaged in market manipulation to purchase the pledged shares after artificially depressing their value. However, the court deemed this contention as presumptuous and speculative, stating that there are myriad considerations that operate to raise or lower the prices of stocks in the stock market. The fluctuation of the stock market is unpredictable, and it would be legally facile to presume that a misleading report by Vaish & Co. led to the fall in the price of the CGP shares.

Prayer of the Applicant

The petitioner, Avantha Holdings Ltd., sought the following interim measures of protection, pending initiation of arbitration proceedings, in terms of the Debenture Trust Deeds and Memoranda of Pledge, under Section 9 of the 1996 Act:

1. Call upon the Debenture Trustee, including its officers, agents, servants, and assigns to forthwith transfer the Pledged CG Shares into the Demat account of the Petitioner and to do all necessary and incidental acts in relation to the same.
2. Direct and/or restrain the Debenture Trustee, including its officers, agents, servants, and assigns from selling the shares of BILT held by the petitioner and/or acting in furtherance and/or in implementation of the notice dated 30 June, 2020.
3. Direct and/or restrain the Debenture Trustee including its officers, agents, servants, and assigns from taking any steps against the petitioner under the Debenture Trust Deeds, dated 5th January, 2017 and/or the Memoranda of Pledge dated 5th January, 2017 and 27th June, 2018.

Legal Issues Involved

The case primarily revolves around the interpretation and application of Section 9 of the Arbitration and Conciliation Act, 1996. The key legal issues involved in the case are:

1. The scope of Section 9 of the 1996 Act, which contemplates interim measures by the Court. The Court examined the ambit of of Section 9 (1) sub-clause (ii)(e), which empowers the Court to grant “such other interim measure of protection as may appear to the court to be just and convenient”. The Court emphasised that the jurisdiction under the “just and convenient” clause must be exercised with restraint and is meant to protect the rights in adjudication before the arbitral tribunal from being frustrated.
2. The validity of the petitioner’s claim for interim relief. The Court had to determine whether the petitioner had a prima facie case and whether the principles of balance of convenience and irreparable loss would justify the grant of any interim relief to the petitioner.
3. The interpretation of the terms of the Debenture Trust Deeds and the Memoranda of Pledge. The Court had to ascertain whether the petitioner had defaulted on its obligations under these agreements, thereby giving the respondent the right to invoke the pledged shares and sell them in the stock market to realise the outstanding amounts.
4. The petitioner’s allegation of market manipulation by the respondent. The Court had to determine whether the respondent had artificially depressed the value of the pledged shares to purchase them at a lower price. The Court deemed this contention as presumptuous and speculative, stating that the fluctuation of the stock market is unpredictable.

Arguments by the Applicant

The advocate for the petitioner, Mr. Mukul Rohtagi, made the following arguments: 

1. The petitioner contended that the respondent’s actions were in violation of the Debenture Trust Deeds and Memoranda of Pledge. The petitioner emphasised that the Strategic Committee was entrusted with the responsibility of providing guidance in order to achieve the Identified Events, which were specifically delineated in Schedule 15 to the Debenture Trust Deeds.
2. The petitioner argued that the respondent’s actions were not in line with the purpose of achieving the Identified Events as outlined in the Debenture Trust Deeds. The petitioner asserted that the respondent’s actions were aimed at gaining control over CGP and BILT by purchasing the pledged shares from the open market after their price had fallen.
3. The petitioner alleged that the respondent had engaged in market manipulation to purchase the pledged shares after artificially depressing their value. The petitioner contended that the price of the CGP shares had fallen due to a misleading report by Vaish & Co.
4. The petitioner further argued that the Debenture Trust Deeds and Memoranda of Pledge stand vitiated due to the alleged machinations of the respondents. The petitioner asserted that it had no liability under the Debenture Trust Deeds.
5. The petitioner sought interim relief under Section 9 of the 1996 Act, pending initiation of arbitration proceedings, in terms of the Debenture Trust Deeds and Memoranda of Pledge. The petitioner sought directions to the respondent to transfer the pledged CG shares into the petitioner’s demat account and to restrain the respondent from selling the shares of BILT held by the petitioner.

Submission by the Opposition 

The respondent, represented by Mr. Rajiv Nayar, made the following submissions:

1. The respondent argued that the petitioner had defaulted on its obligations under the Debenture Trust Deeds and Memoranda of Pledge. The respondent pointed out that all Outstanding Amounts were required to be paid on or before 6th July, 2019, and the petitioner had failed to do so.
2. The respondent contended that the invocation of the pledged CGP shares was preceded by notices under Section 176 of the Contract Act, following which the pledge was invoked on 16th September, 2019.
3. The respondent also pointed out that the petitioner’s account had been categorised as a Non-Performing Account on 10th October, 2019, as per applicable guidelines of the Reserve Bank of India (RBI).
4. The respondent further noted that a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) had been filed by the ICICI Bank against the petitioner.
5. The respondent submitted that the petitioner cannot maintain its claim for interim relief, as it has no prima facie case. The principles of balance of convenience and irreparable loss, too, would militate against the grant of any interim relief to the petitioner.

Important Observations of the Court

1. The Court, while exercising its power under Section 9 of the 1996 Act, has to be acutely conscious of the power, vested in the arbitrator/arbitral tribunal, by Section 17 of the same Act. A reading of Section 9, and Section 17, of the 1996 Act, reveals that they are identically worded. The Court, while exercising jurisdiction under Section 9, even at a pre-arbitration stage, cannot, therefore, usurp the jurisdiction which would, otherwise, be vested in the arbitrator, or the arbitral tribunal, yet to be constituted. (Page 42, Para 25)
2. Professor Lew in his Commentary on Interim and Conservatory Measures in ICC Arbitration Cases, has indicated: “The demonstration of irreparable or perhaps substantial harm is also necessary for the grant of a measure. This is because it is not appropriate to grant a measure where no irreparable or substantial harm comes to the movant in the event the measure is not granted. The final award offers the means of remedying any harm, reparable or otherwise, once determined.” (Page 45, Para 27 (14))
3. Tested on the touchstone of the above principles, it becomes apparent that none of the prayers, in this petition, can be granted. The jurisdiction under the “just and convenient” clause is quite while in amplitude, but must be exercised with restraint. Interim measures are to be granted by the Court so as to protect the rights in adjudication before the arbitral tribunal from being frustrated. (Page 50, Para 31)
4. The prayers of the petitioner, in the present petition cannot, therefore, be granted, in exercise of the power conferred on this Court by Section 9 of the 1996 Act. The petition, therefore, fails and is dismissed. Observations on this judgement are limited to deciding the prayers, in this petition, in the context of Section 9 of the 1996 Act. (Page 65, Para 47)

Observations in reference to the identical wording of Section 9 and 17 

• The Court, while exercising its power under Section 9 of the 1996 Act, has to be acutely conscious of the power, vested in the arbitrator/arbitral tribunal, by Section 17 of the same Act. A reading of Section 9, and Section 17, of the 1996 Act, reveals that they are identically worded. The Court, while exercising jurisdiction under Section 9, even at a pre-arbitration stage, cannot, therefore, usurp the jurisdiction which would, otherwise, be vested in the arbitrator, or the arbitral tribunal, yet to be constituted. (Page 42, Para 25)
• That said, the mere satisfaction of these criteria does not, ipso facto, make out a case for ordering interim measures under Section 9. Additionally, the Court is also required to satisfy itself that the relief, being sought under Section 9, cannot await the constitution of the arbitral tribunal, or the appointment of the arbitrator, and the invocation, before such arbitrator or arbitral tribunal, of Section 17. Emergent necessity, of ordering interim measures is, therefore, an additional sine qua non, to be satisfied before the Court proceeds to grant relief under Section 9 of the 1996 Act. (Page 43, Para 26)
• Tested on the touchstone of the above principles, it becomes apparent that none of the prayers, in this petition, can be granted. The jurisdiction under the “just and convenient” clause is quite while in amplitude, but must be exercised with restraint. Interim measures are to be granted by the Court so as to protect the rights in adjudication before the arbitral tribunal from being frustrated. (Page 51, Para 32)

Important Provisions of Law

• Section 9 of the Arbitration and Conciliation Act, 1996: This section contemplates interim measures by the Court. The Court, while exercising its power under Section 9, has to be acutely conscious of the power vested in the arbitrator/arbitral tribunal by Section 17 of the same Act. A reading of Section 9, and Section 17 of 1996 Act, reveals that they are identically worded. The Court, while exercising jurisdiction under Section 9, even at a pre-arbitration stage, cannot usurp the jurisdiction which would, otherwise, be vested in the arbitrator, or the arbitral tribunal, yet to be constituted. (Page 42, Para 25) 
• Section 17 of the Arbitration and Conciliation Act, 1996: This section empowers the arbitrator/arbitral tribunal to order interim measures. The Court, while exercising its power under Section 9, has to be acutely conscious of the power vested in the arbitrator/arbitral tribunal by Section 17. The Court, while exercising jurisdiction under Section 9, even at a pre-arbitration stage, cannot usurp the jurisdiction which would, otherwise, be vested in the arbitrator, or the arbitral tribunal, yet to be constituted. (Page 42, Para 25) 
• Section 176 of Indian Contract Act: This section deals with the rights of the pledgee when the pawnor makes default. The invocation of the pledged CGP shares was preceded by notices under Section 176 of the Contract Act, following which the pledge was invoked. (Page 29, Para 6.18)
• Section 7 of the Insolvency and Bankruptcy Code, 2016: This section provides for the initiation of corporate insolvency resolution process by a financial creditor. The respondent noted that a petition under Section 7 of the IBC had been filed by the ICICI Bank against the petitioner. (Page 39, Para 18) 

Conclusion

The court concluded that the prayers of the petitioner, in the present petition, could not be granted, in exercise of the power conferred on this Court by Section 9 of the 1996 Act. The court did not deem it necessary to advert to the decisions cited by the respondents. The petition, therefore, failed and was dismissed. The court’s observations on this judgement were limited to deciding the prayers, in this petition, in the context of Section 9 of the 1996 Act. There were no orders as to costs. Pending applications, if any, stood disposed of accordingly. 

 

Author: Parthvi Patel, United World School of Law