2001 (10) TMI 1136 - SC - Companies Law

Whether the balance of convenience is in favour of appointment of a Receiver for preserving as well as managing the property to save it from any anticipated loss till the decision of the suit? - Held that - Need for or desirability of appointing the Receiver and granting of injunction, as prayed for, is concerned, the High Court does not seem to have taken into account the overall necessity to balance the interests of both parties. Since only the land has been said to have been brought into the partnership assets by the Plaintiffs husband with no other contribution of any further funds, that the land was got legally converted into one fit for commercial purposes of the Firm and the constructions were stated to have been put up only with the funds of the other partners or the builders, as the case may be, and the serious difficulties and loss to which the Firm and partners may be put into by freezing the day-to-day business activities of the Firm and the adverse impact on the credibility and reputation of the Firm, as a whole, do not seem to have engaged the attention of the High Court in passing the orders under challenge. The feasibility or otherwise of appointing Party Receiver and allowing them to carry on the day-to-day activities of the business subject to strict and effective control and accountability to the Court of the realizing of the business does not seem to have been considered at all before going out for the appointment of a third party Receiver and prohibiting any sales, completely. As long as the Arbitration clause exists, having recourse to Civil Court for adjudication of disputes envisaged to be resolved through arbitral process or getting any orders of the nature from Civil Court for appointment of Receiver or prohibitory orders without evincing any intention to have recourse to arbitration in terms of the agreement, may not arise. For all the reasons stated supra, the orders of the High Court as also that of the Trial Court set aised and remit the proceedings to the Trial Court which shall consider the matter afresh.

Issues Involved:
1. Appointment of Receiver
2. Application under Section 34 of the Arbitration Act, 1940
3. Application under Section 8 of the Arbitration and Conciliation Act, 1996
4. Estoppel due to withdrawal of earlier application
5. Balance of convenience and necessity to balance interests of parties

Issue-wise Detailed Analysis:

1. Appointment of Receiver:
The High Court ruled that the balance of convenience favored the appointment of a Receiver to preserve and manage the property to prevent any anticipated loss until the decision of the suit. The Supreme Court, however, found that the High Court did not adequately consider the need to balance the interests of both parties. The land was brought into the partnership assets by the plaintiff's husband, but the construction was funded by other partners or builders. The Supreme Court noted that freezing the day-to-day business activities could cause serious difficulties and loss to the Firm and adversely impact its credibility and reputation. The feasibility of appointing a Party Receiver, who could carry on the business activities subject to strict control and accountability to the Court, was not considered by the High Court.

2. Application under Section 34 of the Arbitration Act, 1940:
Initially, the defendants filed applications under Section 34 of the Arbitration Act, 1940, to stay the legal proceedings in favor of arbitration. The Trial Court allowed these applications, staying further proceedings in the suit. However, at the appellate stage, the defendants withdrew their applications under Section 34, citing the repeal of the 1940 Act and the enactment of the 1996 Act.

3. Application under Section 8 of the Arbitration and Conciliation Act, 1996:
Subsequently, the defendants filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, requesting a stay of proceedings before the Trial Court. The High Court rejected this application, stating that once the application under the 1940 Act was dismissed as not pressed, the defendants could not invoke Section 8 of the 1996 Act. The Supreme Court disagreed, emphasizing that Section 8 of the 1996 Act mandates that the Judicial Authority must refer the parties to arbitration if a party applies before submitting its first statement. The Supreme Court clarified that the 1996 Act does not require a specific stay of proceedings, as arbitration proceedings can continue and an arbitral award can be made despite the pendency of legal proceedings.

4. Estoppel due to withdrawal of earlier application:
The High Court held that the defendants were estopped from filing a fresh application under Section 8 of the 1996 Act because they had earlier withdrawn their application under Section 34 of the 1940 Act. The Supreme Court rejected this reasoning, stating that the withdrawal of the application under the 1940 Act due to its repeal does not constitute a legal impediment to invoking Section 8 of the 1996 Act. The distinct purposes, scope, and objectives of the provisions in the two Acts mean that estoppel does not apply to deprive the defendants of their right to arbitration.

5. Balance of convenience and necessity to balance interests of parties:
The Supreme Court highlighted that the High Court failed to consider the overall necessity to balance the interests of both parties. The land was brought into the partnership assets by the plaintiff's husband, and the construction was funded by other partners or builders. The Supreme Court noted that freezing the Firm's business activities could cause serious difficulties and loss to the Firm and adversely impact its credibility and reputation. The feasibility of appointing a Party Receiver, who could carry on the business activities subject to strict control and accountability to the Court, was not considered by the High Court.

Conclusion:
The Supreme Court set aside the orders of the High Court and the Trial Court, remitting the proceedings to the Trial Court for fresh consideration in light of the Arbitration and Conciliation Act, 1996. The Trial Court was directed to pass orders in accordance with law, considering the claims and rights of the respective parties. The status quo established by the High Court's orders was to continue until the Trial Court issued its own orders. The appeals were allowed with no order as to costs.

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