Calcutta High Court Advises Courts To Be Wary Of Meddling With Arbitrator’s Interim Orders

Calcutta High Court Advises Courts To Be Wary Of Meddling With Arbitrator’s Interim Orders

The bench preserves the deceased LLP partner’s share of Rs.5 crores

The Calcutta High Court has held that while exercising powers under Section 37 of the Arbitration & Conciliation (A&C) Act, 1996, a court must be circumspect in its interference with interim orders of an arbitrator.

A single-judge bench of Justice Moushumi Bhattacharya refused to intervene in the order passed under Section 17 of the A&C Act for preserving the deceased LLP partner’s share amounting to approximately Rs.6 crores in a separate interest-bearing account in the name of the LLP.

The judge held that there could be no jurisdictional objection to the impugned order as the Act granted the arbitral tribunal plenary powers to pass such orders for preserving the dispute in the arbitration. Also, the order did not suffer from any factual or legal infirmity and was not arbitrary or perverse. Therefore, the impugned order did not call for any interference.

The observations were made in an appeal filed under Section 37 of the A&C Act, seeking to set aside the directions of the sole arbitrator, who passed an interim order directing the appellant, an LLP, to deposit Rs.6 crores in a separate interest-bearing account.

The directions were passed pursuant to the death of the largest shareholder of the LLP, holding 33.4 percent, whereby his son (respondent No.1) requested to be included in the LLP Agreement, pursuant to clause 22(v) of the agreement.

However, on being refused inclusion in the LLP by the other members, the respondent filed a statement of claim for an award. He sent several applications under Section 17 to secure the share of his father by praying for financial statements and books of accounts of the LLP to be produced before the arbitrator.

Thereafter, the arbitrator directed the appellants to set aside Rs.6 crores in a separate account, being the total balance pertaining to the respondent’s father’s share in the company. The arbitrator viewed that the respondent and other legal heirs of the deceased partner were entitled to the accounts and share in the company’s profits.

The appellants, members of the LLP, argued that the impugned order could not be sustained for being contrary to the provisions of the A&C Act, including Sections 28(3), 28(1)(a), and 17(1)(ii)(b). They stated that an order for securing a particular amount of money could only be made in respect of an amount in dispute, whereas the impugned order was based on equitable considerations, which, under the Act, was not permissible.

The appellants added that the order was contrary to Section 24(5) of the Limited Liability Partnership (LLP) Act, 2008. It restricted the entitlement of a person to the share of a deceased partner to the capital contribution of the former partner and his share in the accumulated profits of the LLP.

On the other hand, the respondent argued that he had applied for interim relief in the Section 17 application and for induction in the LLP, in place of his father. The Section 17 application was meant to preserve the value of the respondent’s shares at the time of his father’s demise.

He further submitted that the object of Section 17 was to preserve the value of a share of a deceased partner so that it was not ‘frittered away’ by other partners. He alleged that while profits were made from the operations, other partners of the LLP were siphoning off the funds.

It was argued that the scope of interference by a court under Section 37 was limited when the impugned order was passed under Section 17. The appellant and other partners were guilty of dilution of assets of the LLP, due to which the preserving value of the deceased partner’s shares was paramount.

Justice Bhattacharya observed that the avenue sought by the respondent was not an exit from the LLP, but instead for the induction as a partner. She held that the appellant’s argument under Section 24(5) of the LLP Act on the ground of alleged negative balance in the share of the deceased partner, was misplaced and inappropriate.

The bench stated that Section 24(5) did not have any manner of application to the facts since the respondent was not seeking to exit the LLP under any circumstances but to continue in place of his deceased father under clause 22(v) of the LLP Agreement.

The court noted that the impugned order contained a detailed breakdown of the monetary share of all partners of the LLP. The calculation was that the deceased partner’s share in the same would amount to almost 7.7 crores. This meant that such an amount, adjusted against the accumulated losses of Rs.1.28 crore, would still leave almost Rs.6.4 crore in the deceased partner’s share.

The interim measure employed by the arbitrator to retain the amount in an interest-bearing account would protect the interest of respondent No.1, who would suffer irreparable loss and injury if the amount was not preserved, the bench stated.

Thus, the court ruled that the interim order could not be seen as prejudicial to the appellant or the other surviving partners, as the money would continue to lie in the account of the LLP. On the other hand, the claimant/respondent No.1 might suffer irreparable injury, and the claim might be rendered infructuous if the money was not deposited in a separate account.

While rejecting further arguments from the appellants, the bench held that the order passed by the arbitrator was well-justified and reasonable. It was completely interim in nature in view of the ongoing proceedings between the parties, causing no prejudice to the appellants.

While advising that the courts must be circumspect in an appeal under Section 37(2)(b), the bench added that the A&C Act contemplated giving unfettered power to the arbitral tribunal. It was not only to pass interim orders but also to see the end of the lawsuit.

Therefore, in an appeal, Section 37 must see an interim order passed by the arbitral tribunal within the prismatic efficacy of the statutory purpose. The court could only intervene if the exercise of discretion was palpably perverse, and the order was patently unconscionable.

Thus, while dismissing the appeal, the bench reiterated that an appeal court should take a hands-off approach to any jurisdictional objection to an interim order passed by an arbitral tribunal. The circumspection was called for in the case, as the sole arbitrator had passed a well-reasoned interim order, which was neither perverse nor reprehensible.