The Delhi High Court on November 09, 2020 in the case of New Morning Star Travels vs. Volkswagen Finance Private Limited[1], held that a petition under section 9 of the Arbitration Act cannot be disposed of ex-parte, especially when coercive orders are to be passed as it violates principles of natural justice.
Background and Facts
The Petitioner entered into loan-cim-hypothecation agreements (‘said agreement’) with the Respondent on November 28, 2018. In compliance with the same, it purchased 16 vehicles. The said agreement contained an arbitration clause. The dispute began as the Petitioners defaulted in the payment of certain instalments of the loan. The Petitioner then was made aware of the fact that the Respondent had filed 16 petitions (‘said petitions’) under Section 9 of the Arbitration and Conciliation Act, 1996 (‘the Act’) in which the impugned orders had been passed.
The Petitioner, a company providing bus services, has thus filed the present petition. The said petitions were disposed of on the first day without issuing notice to the Petitioner. Additionally, coercive orders have also been passed, permitting the Respondent to take possession of the vehicles of the Petitioner.
The Petitioner argued that the total dues are not large enough for the court to be taking possession of all vehicles as that would bring the business of the Petitioner to a complete stand still. The Petitioner is aggrieved by the fact that the abovementioned petitions have been disposed of without notice and coercive orders of possession have been passed, without giving the Petitioner a chance to be heard.
The said petition were accompanied with an application for interim ex-parte relief. According to the orders, the said agreement was executed, and loan recall notices were issued by the Respondent and the Petitioner was called to pay the outstanding sum. Furthermore, in the circumstance that the Petitioner did not pay the said amount, the Trial Court appointed a Receiver to take possession of the vehicles referring to the holding in an earlier decision of the court.[2] The Trial Court then directed the Respondent to initiate arbitration proceedings within 90 days, failing which the interim order would be automatically vacated.
Thus, it is contented that while dealing with the application for ad-interim ex-parte relief, the main petition under Section 9 of the Act was disposed off without calling upon the Petitioner to even file a reply.
Court’s observations
The Court observed that Section 9 petitions cannot be disposed of ex-parte, without providing notice to the Respondent, especially in cases where coercive orders are being passed. It is remarked that disposal of the petitions, without issuing notice and hearing the Respondent as well as directing coercive orders of possession would be violative of the principles of natural justice. The disposal of Section 9 petitions without even hearing the Respondent is contrary to all settled tenets.
It added that:
· The grant of ex-parte injunctions, ex-parte interim measures or appointment of Receivers at the ex-parte stage would be governed by principles akin to Order XL CPC wherein there has to be a grave and imminent apprehension that the property would not be able to be retrieved if notice is issued.
· The appointment of Receivers at the ex-parte stage in matters such as vehicle loans ought to satisfy the test of imminent threat.
· The Court also ought to come to a conclusion that there was a deliberate intention not to repay the loan. Thus, out of the total instalments due and payable, the Court has to see the conduct of the borrower including the irregularity of payment, the total payments paid till date, any other extenuating or other factors such as the present pandemic which could justify non-payment etc.
· The appointment of a Receiver to take possession at the ad-interim stage could lead to the buses which are being used for the everyday business of the Petitioner being seized by the finance company, thereby causing the Petitioner’s business activities to come to a sudden halt.
The standard that would be required to be satisfied for such an extreme measure should be high. Moreover, disposal of a Section 9 petition on the first date itself would be contrary to the basic principles that govern the adjudication of such petitions.
The Madras High Court has expressly laid down guidelines that ought to be followed while dealing with applications under Section 9 in respect of seizure of vehicles.[3] Detailed guidelines have been issued for seizure of vehicles. Thus, notice to the Respondent is mandatory and disposal of the petition without notice is not permissible.
It went on to distinguish the cited Kotak Mahindra case from the present case by stating that in the cited case, it was only after the respondents did not appear despite service, that the Court proceeded ex-parte and directed appointment of Receiver. Thus, the facts differ from the present case and the cited judgement was not the correct basis for the Trial Court to pass coercive orders on the first date of hearing and also dispose of the petitions ex-parte.
The Court opined that the Trial Court did not pass beyond jurisdiction, however the principles for grant of interlocutory injunctions as also for appointment of receivers, that too at the ex-parte stage had to be observed. Further, directing 16 buses to be taken possession of by the Receiver is a direction that ought to be passed under extraordinary circumstances when the default by the company availing loan is not capable of being made good. In such cases, since no notice was issued, the Trial Court could not have presumed that the Petitioner would not be willing to make the payments. Moreover, the Trial Court ought to have issued notice to the Petitioner, afforded a hearing, and then passed appropriate orders in accordance with law.
Finally, the Court set aside the impugned orders and remanded the matter back to the Commercial Court. Additionally, the Petitioner provided an undertaking to pay to the Respondent a sum of INR 25 lakhs (USD 33,592) within one week.
Conclusion
The Delhi High Court made a particularly important observation in this case. The fact that notice was also not provided to the Respondent in the previous petitions and a decision to take possession of the vehicles was made, clearly distinguished the present case from those decided upon earlier. Petitions with coercive orders when passed ex-parte are unfair to the Respondent party who was not given a chance to present a case and the court’s observation in this regard will help in future litigation on the same lines.
[1] CM (M) 553/2020 & CM APPL.28266/2020. Access here. [2] Kotak Mahindra Prime Ltd. vs. Kamal Chauhan & Anr., OMP (I No. 540/2015 & IA No. 25026/2015. [3] Cholamandalam DBS Finance Ltd. v. Sudhees Kumar, 2010 (1) CTC 481.
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