2025 (6) TMI 1426 - HC - Indian Laws

Bank account operation injunction vacated in Rs. 26 crore arbitration dispute while asset restrictions maintained

SREI EQUIPMENT FINANCE LIMITED Versus TRINITY ALTERNATIVE INVESTMENT MANAGERS LIMITED

Calcutta HC modified interim injunction in arbitration proceedings involving loan claim of Rs. 26 crores. Court vacated injunction restraining bank ... Admissibility of loan claim - Continuation or vacation of interim injunction restraining the respondent from operating the bank account without maintaining a minimum balance of Rs. 40 crores - scope and extent of protections available to the petitioner under Section 9 of the Arbitration and Conciliation Act, 1996, and under the SARFAESI Act, 2002 - HELD THAT:- Interim protection is granted upon consideration of prima facie case, balance of convenience and inconvenience and irreparable loss and injury to be suffered by parties in case of grant or non-grant of the interim protections. A, prima facie, case of the petitioner’s dues of Rs. 26,00,00,000 is available from the books of accounts of the respondent. This was admitted in the letter dated April 23, 2024. However, the balance of convenience and inconvenience and irreparable loss and injury tilt in not continuing with the order of injunction that was passed, restraining the operation of the bank account without keeping aside a sum of Rs.40 crores. The fact that SIFL and SEFL are both controlled, managed and administered by NARCL indicate that the NARCL has adequate control over the respondent. NARCL’s interest is protected. The injunction under the SARFAESI Act over all the secured assets as per the schedule is sufficient protection. The balance of convenience and inconvenience is in favour of vacating the order of injunction on the bank account in view of the above discussions. If the order of injunction is not vacated, it would amount to interference with the day to day business of the respondent. Thus, the interim order passed is modified to the extent that there shall be an injunction on all the investments, which have been disclosed by the respondent in the two supplementary affidavits and also on those which may be made in future. The respondent shall be restrained from disposing of, transferring or parting with or redeeming the shares or units held in the investments and funds. This injunction will apply to all future investments to be made - Financial statements for the last 6 months shall be supplied to the petitioner within two weeks from date. The order of injunction on the bank account is vacated, in view of the above discussion and on finding that NARCL which manages both the petitioner and the SIFL, has sufficient control in the respondent company. The petitioner does not require any further protection. The petitioner at this stage is entitled to the security as mentioned in the schedule of the deeds of hypothecation agreement. The respondent is continuing its business activity, and is fully functional. The pleadings do not indicate that the respondent had tried to remove its assets or alienate its properties which would give rise to an apprehension that even if an award is passed in favour of the petitioner, the same will be a paper decree. The arbitration has commenced and it is informed that the same has been fixed before the learned arbitrator in the end of June. The petitioner is always at liberty to pray for interim orders before the learned arbitrator. Conclusion - i) The law is well settled. Parallel proceedings filed under the SARFAESI Act and the Arbitration and Conciliation Act 1996 can continue. ii) The injunction on the bank account is vacated as it would interfere with the respondent's day-to-day business and block third-party investors' funds, especially given the control exercised by NARCL over the petitioner and SIFL. Application disposed off. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:Whether the interim injunction restraining the respondent from operating the bank account without maintaining a minimum balance of Rs. 40 crores should be continued or vacated;The scope and extent of protections available to the petitioner under Section 9 of the Arbitration and Conciliation Act, 1996, and under the SARFAESI Act, 2002, in the context of a rupee loan agreement secured by hypothecation of investments;The validity and enforceability of the loan claim by the petitioner, considering the corporate relationships between the petitioner, respondent, and their common parent company, including the effect of the Corporate Insolvency Resolution Process (CIRP) and the approved resolution plan on the petitioner's claim;The impact of alleged non-cooperation and disposal or depletion of hypothecated investments by the respondent on the entitlement to interim protections;Whether the petitioner's claim was included and admitted in the resolution plan under the Insolvency and Bankruptcy Code, 2016, and the consequences of such inclusion or exclusion;The applicability and effect of the automatic injunction under Section 13(4) of the SARFAESI Act on the secured assets and whether additional injunctions were warranted;The legitimacy of the respondent's contention that the loan was in fact an investment by the petitioner's sister concern and whether any undertaking was given by the petitioner not to take coercive measures;The appropriateness of the Court's intervention in granting interim measures in aid of arbitration, including the balance of convenience and irreparable injury considerations;The obligations of the respondent to disclose assets, investments, and bank accounts in opposition to the interim relief sought;The effect of the respondent's conduct, including alleged malafide disposal of investments and failure to disclose material facts, on the Court's decision on interim relief;The extent of the petitioner's entitlement to security and protection pending arbitration proceedings.2. ISSUE-WISE DETAILED ANALYSISa) Continuance or Vacation of Interim Injunction on Bank AccountLegal Framework and Precedents: The Court considered the powers under Section 9 of the Arbitration and Conciliation Act, 1996, to grant interim protections, and the automatic injunction under Section 13(4) of the SARFAESI Act, which restrains a borrower from transferring secured assets after notice issuance. Additionally, principles of balance of convenience, irreparable injury, and prima facie case were applied.Court's Reasoning: The Court noted that the petitioner's claim of Rs. 26 crores loan was admitted by the respondent, as per the letter dated April 23, 2024. However, the petitioner's claim of Rs. 53 crores including interest was not supported by an admission. The value of hypothecated investments was estimated at Rs. 12.41 crores initially, with subsequent disclosures valuing them at Rs. 41.04 crores, though reliability was questioned.The Court found no evidence of malafide conduct by the respondent causing depletion of assets, nor attempts to alienate assets to frustrate recovery. The automatic injunction under SARFAESI Act was deemed sufficient protection. The Court emphasized that continuation of the injunction on the bank account would interfere with the respondent's day-to-day business and block third-party investors' funds.Application of Law to Facts: Considering the consolidated control of the petitioner and SIFL by NARCL and the CIRP proceedings, the Court held that adequate control existed to protect the petitioner's interests without the bank account injunction. The Court thus vacated the injunction on the bank account while maintaining injunctions on hypothecated investments.Competing Arguments: The petitioner argued for continuation to secure dues and prevent dissipation of assets. The respondent contended that the loan was an internal investment, that SARFAESI Act protections sufficed, and that the injunction hindered legitimate business operations.Conclusion: The Court modified the interim order, vacating the injunction on the bank account but restraining the respondent from disposing of hypothecated investments, pending arbitration.b) Validity and Nature of the Loan and Corporate RelationshipLegal Framework: The Court examined the deeds of hypothecation, the loan agreements, and the Insolvency and Bankruptcy Code, 2016, including the CIRP and resolution plan approved by the NCLT. The Court also considered principles regarding related party transactions and the effect of insolvency proceedings on claims.Court's Interpretation: The loan was extended by the petitioner (a subsidiary of SIFL) to the respondent (Trinity), which was also a subsidiary of SIFL. The petitioner's claim to recover the loan was independent of the corporate structure and insolvency proceedings. However, the resolution plan approved by the NCLT potentially extinguished claims not admitted therein.Key Findings: The petitioner's claim of Rs. 26 crores was admitted in the respondent's books and acknowledged by the respondent. The CIRP consolidated SEFL and SIFL, with NARCL as the resolution applicant managing both. The petitioner was included in the Committee of Creditors but barred from voting due to related party status. Whether the petitioner's claim was admitted in the resolution plan is a matter for the arbitrator.Application of Law to Facts: The Court held that the question of whether the loan was an investment or a debt, and the admissibility of the claim in the resolution plan, were issues for arbitration. The Court found no conclusive evidence that the loan was converted into an investment or that any undertaking not to enforce recovery was given.Competing Arguments: The respondent argued the loan was an investment by the parent company and that the petitioner had no right to coercive measures. The petitioner asserted the loan was a crystallized debt with security and entitlement to interim protections.Conclusion: The Court held that these issues required detailed adjudication by the arbitrator and did not affect the petitioner's right to interim protection of the hypothecated assets.c) Effect of SARFAESI Act and Automatic InjunctionLegal Framework: Section 13(4) of the SARFAESI Act automatically restrains the borrower from transferring secured assets after notice under Section 13(2). The Court relied on settled law that parallel proceedings under SARFAESI and Arbitration Act can continue.Court's Reasoning: The Court accepted that the automatic injunction under SARFAESI Act was operative and sufficient to protect the petitioner's interest in the hypothecated assets. The Court noted non-cooperation by the respondent in handing over possession but found no evidence of deliberate malafide depletion of assets.Application of Law to Facts: The Court found that additional injunctions beyond SARFAESI protections, such as on the bank account, were not justified given the circumstances and the control exercised by NARCL.Conclusion: The automatic injunction under SARFAESI was adequate, and the Court modified the interim relief accordingly.d) Disclosure Obligations and Conduct of the RespondentLegal Framework: Under Section 9 of the Arbitration Act and principles of interim relief, the respondent was required to disclose all assets, investments, and bank accounts to enable the Court to assess the security available to the petitioner.Court's Findings: The respondent failed to fully comply with disclosure directions initially, filing supplementary affidavits with discrepancies and valuations questioned by the petitioner. The Court noted the respondent's conduct in resisting possession by the authorized officer and non-disclosure raised prima facie concerns.Competing Arguments: The petitioner alleged suppression and malafide conduct. The respondent denied these allegations and contended the disclosures were adequate and the valuations were fair.Conclusion: The Court drew adverse inferences against the respondent for incomplete disclosures but did not find sufficient evidence to justify continuation of the bank account injunction.e) Effect of Insolvency Proceedings and Resolution PlanLegal Framework: The Court examined the effect of the Insolvency and Bankruptcy Code, 2016, including the principle that claims not admitted in the approved resolution plan stand extinguished, citing relevant judgments and the NCLT order approving the plan.Court's Reasoning: The petitioner's claim's inclusion in the resolution plan was uncertain and to be decided by the arbitrator. The Court noted that the resolution plan was binding and that the petitioner's rights as a financial creditor were subject to the plan's terms.Application of Law to Facts: The Court held that the petitioner's entitlement to recover the loan depended on the arbitrator's decision and the resolution plan's treatment of the claim. The Court recognized the control exercised by NARCL post-resolution plan approval.Conclusion: The insolvency proceedings and resolution plan did not preclude interim protection of hypothecated assets but limited the scope of protections to what was secured under the hypothecation deeds.f) Interim Reliefs Pending ArbitrationLegal Framework: Interim relief under Section 9 of the Arbitration Act requires a prima facie case, balance of convenience, and irreparable injury. The Court also considered the commercial sophistication of parties and the absence of malafide conduct.Court's Reasoning: The Court found a prima facie case for protection of hypothecated investments but held that the injunction on the bank account was disproportionate and interfered with business operations. The Court emphasized that the petitioner could seek further interim reliefs before the arbitrator.Conclusion: The Court granted interim injunction restraining the respondent from disposing of hypothecated investments (present and future) but vacated the injunction on the bank account, subject to further orders by the arbitrator.3. SIGNIFICANT HOLDINGS'The law is well settled. Parallel proceedings filed under the SARFAESI Act and the Arbitration and Conciliation Act 1996 can continue.''The automatic injunction under Section 13(4) of the SARFAESI Act remains operative and is sufficient protection for the hypothecated assets.''The petitioner's claim of Rs. 26 crores was admitted by the respondent as per the books of accounts and letter dated April 23, 2024, but the claim of Rs. 53 crores including interest is not supported by any admission.''The injunction on the bank account is vacated as it would interfere with the respondent's day-to-day business and block third-party investors' funds, especially given the control exercised by NARCL over the petitioner and SIFL.''The respondent is restrained from disposing of, transferring, or redeeming the shares or units held in the investments and funds hypothecated to the petitioner, including future investments.''The question of admissibility and quantum of the petitioner's claim, and the effect of the resolution plan on such claim, are issues to be decided by the learned arbitrator.''The petitioner is entitled to the security as per the deeds of hypothecation; no further security or protection is warranted at this stage.''The respondent's failure to fully disclose assets and investments raises adverse inferences but does not justify continuation of the bank account injunction.''The petitioner may seek further interim reliefs before the arbitrator as the arbitration proceedings have commenced.'