Suit for recovery filed by the plaintiff before a Civil Court and claim for money filed by a claimant under the given arbitration clause are 2 remedies under law which are regularly invoked by lawyers on behalf of their clients. It is common knowledge that a suit for recovery will take as long as 3 to 4 years and an arbitration claim for recovery of the amount will take as long as 1 to 2 years before getting finally decided. One of the requests which is frequently made by the client from their respective lawyer is that pending this suit or arbitration claim the amount which is claimed under the litigation may be secured by way of a fixed deposit, bank guarantee or any other mode in a way that the said amount is protected from being alienated by the respondent or defendant pending the litigation/recovery process.

Above mentioned provisions of law become even more important and relevant in cases where the defendant or the respondent company is facing financial turmoil and maybe on the brink of insolvency. A litigation or an arbitration where there is very less chance of being able to receive the fruits of the decree or the award is a legal process which likely is going to end up in wastage of time, resources and money for all the stakeholders involved. Hence, in such circumstances the importance and purport of Order XXXVIII Rule 5 of the Code of Civil Procedure 1908 and section 9(1)(ii)(b) of the Arbitration Act 1996 becomes important.

It is settled position of law that principles governing the Code of Civil Procedure 1908 and the provisions under the same is not mandatorily applicable to proceedings under the Arbitration Act 1996. However, it is also common knowledge that a vast amount of jurisprudence and detailed procedure has evolved under the Code of Civil Procedure 1908 in the last more than 100 years. Arbitration Act 1996 is relatively new and hence has time and again been inspired by the principles and procedure laid down under the Code of Civil Procedure 1908.

The question therefore is that whether the legal process of securing the amount involved in an arbitration under Section 9(1)(ii)(b) will be bound by the principles as enshrined under Order XXXVIII Rule 5 of the Code of Civil Procedure 1908. This article intends to comment on the above-mentioned question in a structured manner wherein the first part of this article shall deal with the ingredients which a litigant has to satisfy before the appropriate court in order to secure an interim order thereby protecting the claim amount in dispute pending the arbitration. The second part of this article shall deal with the relationship between Order XXXVIII Rule 5 of the Code of Civil Procedure 1908 and section 9(1)(ii)(b) of the Arbitration Act 1996 from the perspective of the claimant whose endeavour is to secure the claim amount pending the arbitration.

INGREDIENTS WHICH THE CLAIMANT NEEDS TO SATISFY IN ORDER TO SUCCESSFULLY SECURE AN INTERIM ORDER UNDER SECTION 9(1)(ii)(b) OF THE ARBITRATION ACT 1996

There are 2 mandatory prerequisites which need to be established and satisfied by the claimant in order to successfully secure an interim order under Section 9(1)(ii)(b) of the Arbitration Act 1996. The first prerequisite is to show a prima facie case which is extremely strong and credible on the face of it. There are numerous judgments of the Honourable Supreme Court and the High Courts which state that when the nature of the claim is prima facie not tenable or the debt in the litigation is not crystallised and is in some sort of dispute, then in such cases the underlying amount of the arbitration shall not be ordered to be secured by way of any interim order. There can be no cavil to the proposition that any defence setup by the respondent against an alleged claim cannot be frivolous and totally baseless. Such a defence will not create any plausible doubt in the tenability of the claim as claimed by the Claimant and hence, the debt of the Claimant in such cases would continue to remain crystallized.

A strong prima facie case usually means that the claimant was able to adduce his or her claim along with documents which are of high evidentiary value. For eg. the claimant is able to produce an admission of liability which may have been made by the respondent at any time prior or post the commencement of the arbitral proceedings. Such admissions strengthen the case of the claimant and show that prima facie the respondent is indeed liable to make the payment of the alleged amount to the claimant. In such cases once a prima facie determination has been made that the amount is payable from the respondent to the claimant, the balance of convenience is in favour of the claimant and hence the respondent is required to secure the amount in question so that later whenever the award or decree is passed the same may not be defeated due to any circumstances which are beyond the control of the claimant.

It will be apposite to mention the following precedents with the relevant portions from the same to corroborate the above said:

1.) Sepco Electric Power Construction Corporation v. Power Mech Projects Ltd., (2021) 10 SCC 792:

“34.  Section 9 of the Arbitration Act confers wide power on the Court to pass orders securing the amount in dispute in arbitration, whether before the   commencement   of   the   Arbitral   proceedings, during   the   Arbitral proceedings or at any time after making of the arbitral award, but before its enforcement in accordance with Section 36 of the Arbitration Act. All that the Court is required to see is, whether the applicant for interim measure has a good prima facie case, whether the balance of convenience is in favour of interim relief as prayed for being granted and whether the applicant has approached the court with reasonable expedition.”

The same was reiterated by the Hon’ble Supreme Court in Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited, 2022 SCC OnLine SC 1219.

2.) Adhunik Steels Limited v. Orissa Manganese and Minerals (P) Ltd., (2007) 7 SCC 125:

“10. It is true that Section 9 of the Act speaks of the court by way of an interim measure passing an order for protection, for the preservation, interim custody or sale of any goods, which are the subject matter of the arbitration agreement and such interim measure of protection as may appear to the court to be just and convenient. The grant of an interim prohibitory injunction or an interim mandatory injunction are governed by well-known rules and it is difficult to imagine that the legislature while enacting Section 9 of the Act intended to make a provision which was de hors the accepted principles that governed the grant of an interim injunction. Same is the position regarding the appointment of a receiver since the Section itself brings in, the concept of ‘just and convenient’ while speaking of passing any interim measure of protection. The concluding words of the Section, “and the court shall have the same power for making orders as it has for the purpose and in relation to any proceedings before it” also suggest that the normal rules that govern the court in the grant of interim orders is not sought to be jettisoned by the provision. Moreover, when a party is given a right to approach an ordinary court of the country without providing a special procedure or a special set of rules in that behalf, the ordinary rules followed by that court would govern the exercise of power conferred by the Act. On that basis also, it is not possible to keep out the concept of balance of convenience, prima facie case, irreparable injury and the concept of just and convenient while passing interim measures under Section 9 of the Act.”

The second prerequisite for the claimant in order to successfully secure an interim order under Section 9(1)(ii)(b) is to show that there is a strong possibility that the assets of the respondent will be dissipated or are being dissipated during the course of the proceedings and hence, there won’t be anything left on the basis of which the Claimant would be able to enjoy the fruits under the arbitral award. This second pre-requisite, in most cases, is even more of an important ingredient than the first pre-requisite mentioned in the preceding paragraphs. The burden on the claimant is to show that the respondent, in all likelihood, is in the process of selling / alienating his or her assets so that the respondent does not have to bear the burden of the eventual liability. The claimant can also show that the respondent is undergoing major financial turmoil and may be at the brink of insolvency proceedings. The larger point which needs to be advanced by the Claimant along with some prima facie evidence is that if the amount in the claim is not secured by way of an interim order (fixed deposit, bank guarantee etc) then the fruits of the award will not be enjoyed by the Claimant.

It will be apposite to mention the following precedents with the relevant portions from the same to corroborate the above said:

1.) Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited, 2022 SCC OnLine SC 1219 observed:

“48. Section 9 of the Arbitration Act confers wide power on the Court to pass orders securing the amount in dispute in arbitration, whether before the commencement of the arbitral proceedings, during the arbitral proceedings or at any time after making of the arbitral award, but before its enforcement in accordance with Section 36 of the Arbitration Act. All that the Court is required to see is, whether the applicant for interim measure has a good prima facie case, whether the balance of convenience is in favour of interim relief as prayed for being granted and whether the applicant has approached the court with reasonable expedition.

49.If a strong prima facie case is made out and the balance of convenience is in favour of interim relief being granted, the Court exercising power under Section 9 of the Arbitration Act should not withhold relief on the mere technicality of absence of averments, incorporating the grounds for attachment before judgment under Order 38 Rule 5 of the CPC.

50.Proof of actual attempts to deal with, remove or dispose of the property with a view to defeat or delay the realisation of an impending Arbitral Award is not imperative for grant of relief under Section 9 of the Arbitration Act. A strong possibility of diminution of assets would suffice. To assess the balance of convenience, the Court is required to examine and weigh the consequences of refusal of interim relief to the applicant for interim relief in case of success in the proceedings, against 17 the consequence of grant of the interim relief to the opponent in case the proceedings should ultimately fail.”

2.) Indiabulls Housing Finance Limited v. Ambience Projects & Infrastructure Private Limited & Ors, MANU/DE/0557/2021:

“44. To my mind, on the face of it, these assertions are woefully insufficient to maintain a prayer for interim protection, under Section 9 of the 1996 Act. No particulars, of the manner in which the making of payments, to Vistra, by APIPL, would “grossly undermine the ability” of APIPL to make payments to IHFL, are forthcoming. No basis for the “apprehension” that the assets of Respondents 12 to 26 are at the risk of being sold off/ transferred/alienated is, either, provided in the petition. (This aspect is, strictly speaking, not relevant for the present order, as Mr. Nayar restricted his prayer for ad interim relief to a restraint, against APIPL, from making payments to APL or to any other creditors or group companies.) How, even if payments were to be made by APIPL to APL, or to Vistra, towards satisfaction of the MoU dated 14th January, 2021, the arbitral proceedings relating to the present dispute would be rendered infructuous, is also not apparent either from the pleadings or from the material placed on record. There is no averment, in the petition, that, if APIPL were to make further payments to APL, or to Vistra, it would be rendered financially incapable of liquidating its debts towards IHFL-assuming, that is, that these dues are found to be payable in the arbitral proceedings, which are yet to commence…

…

45. This Court has, in its judgment in Avantha Holdings MANU/DE/1548/2020, observed thus, in this context:

26. 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. While passing orders under Section 9, therefore, the Court is required to satisfy itself that (i) the applicant, before it, manifestly intends to initiate arbitral proceedings, (ii) the criteria for grant of interim injunction, which apply to Order 39 of the CPC, stands satisfied, and (iii) circumstances also exist, which renders the requirement of ordering interim measures an emergent necessity, which cannot await a Section 17 proceeding, before the arbitrator, or arbitral tribunal. In assessing whether such an emergent necessity exists, or not, the Court would, essentially, have to satisfy itself that failure to order interim measures, under Section 9, would frustrate, or would render the recourse, to arbitration-which is yet to take place-futility.”

The chances of the Claimant receiving an interim order in his or her favor becomes really high if the Claimant is able to satisfy the appropriate court on the above mentioned 2 factors. Being able to receive an interim order under Section 9(1)(ii)(b) of the Arbitration Act 1996 comes with benefits for the Claimant. The primary benefit which such an order provides is that in cases where the Claimant ends up being successful and secures the arbitral award in his / her favor then in all such cases, the execution proceedings are not required to be filed or even if filed then the same remains mostly a formality. Since, the claim amount under the dispute has already been secured, the execution proceedings are mostly left for the purposes of securing the interest and costs on the claim amount. Usually, in cases where the courts have ordered interim relief under Section 9(1)(ii)(b) of the Arbitration Act, 1996, in all such cases the courts at the time of pronouncement of the final award also orders the release of the amount to the Claimant which was secured vide the interim order.

RELATIONSHIP BETWEEN ORDER 38 RULE 5 OF THE CODE OF CIVIL PROCEDURE, 1908 AND SECTION 9(1)(b)(ii) OF THE ARBITRATION ACT 1996

To what extent should the principles under Order 38 Rule 5 of the Code of Civil Procedure, 1908 should govern the exercise of jurisdiction under Section 9(1)(b)(ii) by appropriate courts in cases of recovery of money is a subject of some debate. Some courts have taken the view that Order 38, Rule 5 has a much higher threshold and burden for the Plaintiff to prove in order to be able to secure an interim order as compared to the threshold and burden of the Claimant under Section 9(1)(b)(ii). In Delta Constructions v. Narmada Cement, (2002) 2 BOMLR 225, the Bombay High Court pronounced:

“10. …All this makes it clear that Act of 1996 itself has provided for interim measures that can be granted by the court and by the Arbitral Tribunal. Insofar as the Court is concerned, there is further power conferred that the court meaning thereby the court having jurisdiction can exercise all the powers available to it as the court under the provisions of the Code of Civil Procedure. The substantive power conferred on the court by Section 9 is to be effected by the procedural provisions as contained in the Code of Civil Procedure. The Code of Civil Procedure for example under Order 38 has provided for the security by way of arrest before Judgment and attachment before judgment. The Court before issuing the warrant of arrest or attaching the property and/or in the event, defendant does not furnish security has to satisfy itself that the various predicates as set out in Order 38 of Code of Civil Procedure have been satisfied. The corresponding power in the court under Section 9 would be of securing the amount in dispute in the arbitration. The power of the court to secure the amount in dispute under arbitration is not hedged by the predicates as set out in Order 38. All that the court must be satisfied is that an interim measure is required. In other words, the party coming to the court must show that if it is not ‘secured, the Award which it may obtain would result in a paper decree or a decree which cannot be enforced on account of acts of a party pending arbitral process. Therefore, the court would not to be bound by the requirement of Order 38 Rule 5. Since the power is discretionary, the court must be satisfied that it is in the interest of justice, based on the material before it to pass order to secure the petitioner before it. The discretion to be exercised would be based as set out earlier on the material before it and the petitioner making out a case that there is need for an interim measure of protection. However, once the court passes the order, then the order to secure would be as per the procedure as laid down in the Code of Civil Procedure. Insofar as preservation, interim, custody etc. is concerned, the power as conferred under Order 39, Rule 7 is also provided by Section 9(ii)(c). Appointment of Receiver is covered by 9(ii)(d). Power to sell goods at interim stage is specifically provided for in Section 9(ii)(a). Apart from that there is general power reserved in the courts for such interim measure as it may thought proper under Section 9(ii)(a). The substantive provisions of granting interim relief as provided for in the Code of Civil Procedure therefore, cannot be read into Section 9. There are independent provisions in the Act itself. The exercise of the power must be construed, bearing in mind the object of the Act and the need to dispose of the matter as expeditiously and not hedged in, by the provisions of the Code of Civil Procedure. To my mind, therefore, it is not necessary for the court when called upon to secure the amount in dispute to find out whether the respondent before it is seeking to dispose of the property or taking the property outside the jurisdiction of the court. The court is not hedged by such restriction. If it were to be so, the legislature considering that the petition lies to the Civil Court could have provided that court can exercise all the powers it has under the Civil Procedure Code for granting interim relief. On the contrary only procedural provisions to give effect to the power under Section 9 have been conferred. Considering that, to my mind, the observation of the learned Judge of the Delhi High Court in M/s Global (supra) when it noted that the principles of the Code of Civil Procedure will have to be borne in mind would only restrict the exercise of powers under Section 9. The power under Section 9 cannot be fettered by reading into it the requirements for granting interim reliefs which are not provided. To that extent, I am unable to agree with the view expressed by the Delhi High Court.”

However, some other courts have indeed pronounced that the principles governing the grant of interim order under Order 38, Rule 5 will indeed be considered by the appropriate courts while granting an order under Section 9(1)(b)(ii) of the Arbitration Act, 1996. In Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited, 2022 SCC OnLine SC 1219, the Supreme Court relied upon the observations made by the Bombay High Court in Valentine Maritime Ltd. v. Kreuz Subsea Pte. Ltd. & Anr, 2021 SCC Online Bom 75 the following terms:

“46. In Valentine Maritime Ltd. v. Kreuz Subsea Pte. Ltd. & Anr., the High Court held :-

95. Insofar as judgment of this Court delivered by the Division Bench of this court in case of Nimbus Communications Limited v. Board of Control for Cricket in India (supra) relied upon by the learned senior counsel for the VML is concerned, this Court adverted to the judgment of Hon’ble Supreme Court in case of Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd., (2007) 7 SCC 125 and held that in view of the decision of the Supreme Court in case of Adhunik Steels Ltd., (supra) the view of the Division Bench in case of National Shipping Company of Saudi Arabia (supra) that the exercise of power under section 9(ii)(b) is not controlled by the provisions of the Code of Civil Procedure, 1908 cannot stand. This court in the said judgment of Nimbus Communications Limited (supra) held that the exercise of the power under section 9 of the Arbitration Act cannot be totally independent of the basic principles governing grant of interim injunction by the civil Court, at the same time, the Court when it decides the petition under section 9, must have due regard to the underlying purpose of the conferment of the power upon the Court which is to promote the efficacy of arbitration as a form of dispute resolution.

96. This court held that just as on the one hand the exercise of the power under Section 9 cannot be carried out in an uncharted territory ignoring the basic principles of procedural law contained in the Code of Civil Procedure, 1908, the rigors of every procedural provision in the Code of Civil Procedure, 1908 cannot be put into place to defeat the grant of relief which would sub-serve the paramount interests of justice. A balance 15 has to be drawn between the two considerations in the facts of each case. The principles laid down in the Code of Civil Procedure, 1908 for the grant of interlocutory remedies must furnish a guide to the Court when it determines an application under Section 9 of the Arbitration and Conciliation Act, 1996. The underlying basis of Order 38 Rule 5 therefore has to be borne in mind while deciding an application under Section 9(ii) (b) of the Arbitration Act.”

Therefore, it seems like both the Claimant and the Respondent have something on which they can possibly rely to bring their burden under law to a threshold which is much lower than that as required under Order 38, Rule 5 of the Code of Civil Procedure, 1908. Needless to mention that this is important at the time of arguing and contesting the interim application under Section 9(1)(b)(ii) as any interim order granted or declined in money claims can possibly have a game changing impact on the entire arbitration proceedings itself.