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The Court Must Be Circumspect In An Appeal Under Section 37(2)(B) Of The 1996 Act

Ifrah Murtaza ,
  01 December 2023       Share Bookmark

Court :
High Court of Calcutta
Brief :
In this appeal, the Hon’ble High Court of Calcutta (hereinafter referred to as the ‘High Court’ or ‘the Court’) dealt with an appeal filed under section 37 of The Arbitration and Conciliation Act, 1996, concerning an interim order issued by a sole arbitrator. The impugned order directed the appellant to deposit Rs. 6 crores in a separate interest-bearing account, preserving the value of the deceased partner's shares. The appellant challenged the order on various grounds, including alleged violations of statutory provisions and equitable considerations. The High Court, in its judgment, upheld the validity of the impugned order, emphasizing the broad powers of arbitral tribunals, dismissing jurisdictional objections, and finding no legal or factual infirmities in the order. The judgment underscored the need to preserve the deceased partner's interests during the ongoing arbitration proceedings.
Citation :
APO 65 of 2023

Case title: Concrete Developers LLP v. GauravChuriwal and Ors

Date of Order: 24th November 2023

Bench: Hon’ble Justice Moushumi Bhattacharya

Parties: Appellant: Concrete Developers LLP              

Respondent(s): Gaurav Churiwal and Ors.

SUBJECT

In this appeal, the Hon’ble High Court of Calcutta (hereinafter referred to as the ‘High Court’ or ‘the Court’) dealt with an appeal filed under section 37 of The Arbitration and Conciliation Act, 1996, concerning an interim order issued by a sole arbitrator. The impugned order directed the appellant to deposit Rs. 6 crores in a separate interest-bearing account, preserving the value of the deceased partner's shares. The appellant challenged the order on various grounds, including alleged violations of statutory provisions and equitable considerations. The High Court, in its judgment, upheld the validity of the impugned order, emphasizing the broad powers of arbitral tribunals, dismissing jurisdictional objections, and finding no legal or factual infirmities in the order. The judgment underscored the need to preserve the deceased partner's interests during the ongoing arbitration proceedings.

IMPORTANT PROVISIONS

The Arbitration and Conciliation Act, 1996:

  • Section 37
  • Section 17
  • Section 28
  • Section 5
  • Section 9

The Limited Liability Partnership Act,2008 (LLP):

  • Section 24(5)

The Code of Criminal Procedure,1908 (CrPC)

OVERVIEW

  • An agreement dated 24.11.2015 formed a Limited Liability Partnership (LLP) for the development of a high-end real estate project called "Raghu Estates" in Alipore, Kolkata. The project included 16 flats designated for the developer. The project received a Certificate of Completion on 19.01.2019.
  • Respondent no. 1 is the son of Pawan Kumar Churiwal, the largest shareholder and one of the three designated partners in the LLP. Pawan Kumar Churiwal passed away on 12.1.2021. The respondent no. 1, GauravChuriwal, wanted to join the LLP according to clause 22(v) of the LLP Agreement after his father's death. However, the other partners (appellants in this case) refused to admit Gaurav Churiwal as a partner.
  • Respondent filed a statement of claim requesting an award that includes a direction for his induction into the LLP. He also asked for the financial statements prepared by the appellants and requested a fresh profit and loss account for the LLP, considering the sale proceeds from the project's flats.
  • The respondent, filed an application under section 17 of the 1996 Act. In this application, he sought a direction for the appellants to provide all books of accounts and financial statements for the three financial years from 2019 to 2022, along with details of the sale proceeds received for a flat in the Raghu Estates project. Additionally, he requested the appointment of a receiver to preserve the sale proceeds received by the LLP.
  • Upon consideration of the arguments the arbitrator concluded that the claimant and/or other legal heirs of the deceased partner, Pawan Kumar Churiwal, have the right to receive accounts and a share in the profits of the LLP.
  • As a result, the appellants were instructed to set aside a sum of Rs. 6 crores in a separate interest-bearing account under the LLP's name. Additionally, the appellants were directed to provide details of the accounts to the claimant and to maintain the accounts until the arbitration was resolved.

ISSUES RAISED

  • Whether circumspection is called for in the instant case?
  • Whether the learned arbitrator could have passed the order on equitable considerations without a specific sum being admitted by the parties?

ARGUMENTS ADVANCED BY THE APPELLANT

  • The appellant's counsel raises several objections, starting with the argument that the order goes against various sections of The Arbitration and Conciliation Act, 1996, including 28(3), 28(1)(a), and section 17(1)(ii)(b).
  • The appellant contended that an order to secure a specific amount of money should only be made concerning an "amount in dispute." However, the contested order appears to be based on fairness and justice, which, according to the counsel, is not permissible under the 1996 Act.
  • The respondent's section 17 application did not request the securing of any specific amount, and the contested order also violates section 24(5) of the LLP Act, 2008. This section limits a person's entitlement to a deceased partner's share to the former partner's capital contribution and share in the LLP's accumulated profits.
  • The order lacked reasons for directing the appellant to set aside Rs. 6 crores and contradicts the arbitrator's findings in the 10th sitting.
  • Additionally, the appellant alleged that the claimant's behavior during the arbitration was unfair, and the contested order was inherently unlawful and distorted.

ARGUMENTS ADVANCED BY THE RESPONDENT

  • The respondent (claimant) sought interim relief through the application under section 17(1), asserting that the respondent's request in the arbitration was for entry into the LLP as a partner in place of his father, Pawan Kumar Churiwal. The section 17 application, therefore, aimed at safeguarding the value of the claimant's share at the time of his father's death, who was also a deceased partner of the LLP.
  • The purpose of section 17 is to protect the value of the deceased partner's share at the time of their death, preventing other partners who control the appellant LLP from dissipating the claimant's share.
  • The appellant and other partners were diverting profits from the sale of flats during the arbitration.
  • The appeal under section 37 has limited scope when the contested order is issued under an application under section 17.
  • The appellant and other partners of the Sureka Group were responsible for reducing the assets of the LLP, and the contested order is intended to preserve the value of the deceased partner's share.

JUDGEMENT ANALYSIS:

  • The interim measure sought is primarily aimed at safeguarding the value of the deceased partner's shares until the arbitration process concludes with an award. This interim order does not appear to harm the appellant or the other surviving partners since the money would remain in the LLP's account. Conversely, the claimant/respondent No. 1 could suffer irreparable harm, and the claim might become futile if the funds are not placed in a separate account.
  • Considering the circumstances in which the impugned order was issued, the grounds raised by the appellant and surviving partners to challenge it are undermined.
  • In this case, molding reliefs were deemed necessary due to the gradual and forced disclosure of the alienation of assets and funds of the LLP by the appellant and surviving partners.
  • This Court was also unwilling to accept the argument that the impugned order lacks reasons. The directive to the appellant and other partners to set aside Rs. 6 crores was well-supported by evidence of the arbitrator having considered the facts before him.
  • This serves as guidance, endorsed by statutory authority, acknowledging that the impact of the interim order is evidently of a temporary nature. The Court must evaluate whether the interim order would inflict irreversible harm on the appellant to the extent of thwarting the appellant's claim/defense entirely and rendering the arbitration inconsequential (Dinesh Gupta vs. Anand Gupta and L & T Finance Limited vs. DM South India Hospitality Private Limited).
  • The impugned order from the learned arbitrator is justified by the provided reasons.
  • The appellants have only been instructed to set aside a sum of Rs. 6 crores in an interest-bearing account rather than transferring this amount to the respondent. Disregarding other aspects, the appellants cannot claim any harm resulting from this directive.

CONCLUSION

In conclusion, the High Court found that the impugned interim order well-founded, given the facts, disclosures, and legal provisions governing arbitral tribunals. There is no valid jurisdictional objection, as the 1996 Act empowers the arbitral tribunal with plenary authority to issue such preservation orders. Devoid of factual or legal flaws, the order is neither arbitrary nor perverse, as supported by the reasons outlined above. Considering the legal framework, pertinent case law, and the specifics of the case, the Court determines that there is no need for any intervention. As a result, the appeal was dismissed, and no costs were imposed.

 
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Published in Taxation
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