Nafed vs Earthtech Enterprises Ltd. & Anr.
2009 Latest Caselaw 1604 Del

               * IN THE HIGH COURT OF DELHI AT NEW DELHI

                                                                Date of Reserve: 6.4.2009
                                                              Date of Order: April 23, 2009

OMP No.558/2007
%                                                                           23.4.2009

        National Agricultural Co-operative Marketing
        Federation of India Ltd. (NAFED)           ... Petitioner
                         Through: Mr. A.K.Thakur, Mr. R.K.Mishra,
                         Mr. Rajiv Arora, Advocates
             Versus

        Earthtech Enterprises Ltd. & Anr.               ... Respondents
                        Through: Mr. Parvinder Khatra, Advocate &
                        Mr. Pramod Kumar, Advocate


JUSTICE SHIV NARAYAN DHINGRA

1. Whether reporters of local papers may be allowed to see the judgment?

2. To be referred to the reporter or not?

3. Whether judgment should be reported in Digest?

JUDGMENT

IA No. 9245/2008

This application under Order 1 Rule 10 read with Section 151 CPC has

been made by respondent no.2 stating that respondent no. 2 was not a party to the

arbitration agreement and it has been unnecessarily made as a party to the application

under Section 9 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as 'the

Act'). There is no dispute to the fact that respondent no. 2 M/s Firstcorp Petrochem Ltd.

was not a party to the MoU/Agreement entered into between petitioner and respondent

no.1. The applicant/petitioner has made respondent no.2 as a party to the application

on the ground that respondent no.2 was affiliated to respondent no.1 in the manner that

respondent no. 2 was a group company of respondent no.1 and it was through

respondent no.2 that the respondent no.1 fraudulently diverted the money advanced by

the petitioner in respect of the transactions. Respondent no.2 actively connived with

respondent no.1 in sale of the goods and diverting the money to its own account for

further purchase of other goods on High Seas.

2. It may be that a fraud has been played with the petitioner by respondent

no. 1 in connivance with respondent no.2, which is the sister concern of respondent no.1

however, an application under Section 9 of the Act can be made only against the parties

to the arbitration agreement. A petition under Section 9 cannot be entertained against

third party. The petitioner would have liberty to proceed against respondent no.2 for

fraud, connivance etc. either before the Criminal Court or Civil Court, but the petitioner

cannot make respondent no.2 as a party to an application under Section 9, since

respondent no.2 is not a party to the agreement or before the arbitrator, where

arbitration proceedings are going on between petitioner and respondent no.1.

I, therefore allow this application and name of respondent no.2 is struck

off from the array of parties.

OMP No. 558/2007

3. The petitioner has made this application under Section 9 of the Arbitration

& Conciliation Act, 1996 after the prayer of the petitioner made in an application under

Section 17 of the Act before the Arbitrator asking respondent to provide adequate

security to protect the interests of claimant to the dispute in the form of bank guarantee

and other property security was dismissed observing that only the High Court has wider

power to pass such an order under Section 9 of the Act and the power of the Arbitrator

under Section 17 was limited.

4. Brief facts relevant for the purpose of deciding this application are that the

petitioner filed a claim petition before the Arbitrator seeking passing of an award of

Rs.304,14,69,002/- plus interest thereon. The dispute arose between the parties since a

MoU was entered into between the parties on 16.10.2003 which was subsequently

amended on 12.2.2004. The petitioner imported various material at the instance of the

respondent the material so imported was to be sold on high sea sale basis against 100%

payment i.e. the full value of the material plus other expenses viz. bank rates interest

and services charges etc. All material so imported was to stand hypothecated/.pledged

in favour of the petitioner till the dues were paid. Upto July, 2005 respondent lifted the

material only after making payment of dues but thereafter it lifted the material and sold

the same without making payment. The petitioner then sent notices and reminders to the

respondent asking it to pay the due amount. In response, respondent (respondent no.1)

gave 50 Post Dated Cheques (PDCs) of Rs.2 crore each on 5.9.2005 promising that it

would fulfill all its commitments in terms of the agreement. On 11.1.2006 respondent

promised to pay a sum of Rs. 250 crore in partial discharge of its liabilities and towards

that issued 30 PDCs for Rs. 5 crore each. On 1.2.2006, respondent handed over 20

more PDCs of Rs.5 crore each. On receipt of these cheques, the claimant/petitioner

returned the previously obtained 50 PDCs of Rs.2 crore each. Thus, the respondent no.

1 gave PDCs worth Rs. 250 core to the petitioner assuring the petitioner that it will

discharge its liability. However, the respondent failed to discharge its liability and when

some of these PDCs were presented for payment they got dis-honoured. The

respondent even did not furnish the details of the stock available with it. The petitioner

then raised a dispute and the matter was referred to the Arbitrator under the orders of

this Court. The petitioner had also made an application under Section 9 of the Act and

sought an order of attachment and sale of stock, location of which petitioner learnt. This

Court appointed Local Commissioner and directed sale by public auction of certain stock

and directed that the amount realized be kept in an FD in a nationalized bank. The

amount received from sale of the stock being a miniscule as compared to the liability, the

petitioner made present application for security.

5. The learned Arbitrator while disposing of application under Section 17 of

the Act, though declining the relief because of jurisdiction, observed that the amount

realized on sale of stock fell extremely short of the claim made by the petitioner. He also

observed that the respondent had issued PDCs of Rs.250 crore and some of the

cheques which were presented got dishonoured. All this, tilted a balance towards the

petitioner. However, the learned Arbitrator felt helpless in passing an order for providing

adequate security to protect the interests of the petitioner.

6. The respondent in its reply had not denied the factual situation of issuing

PDCs worth Rs.250 crores but stated that the nature of claims set up by the petitioner

before the Arbitrator was hollow and flimsy. The petitioner in its earlier petition under

Section 9 of the Act before this Court had claimed that the outstanding due and payable

by the respondent was 199.19 crore inclusive of interest and service charges as per

MoU. This clearly reflects that as per petition itself, the figure of Rs.250 crore was not a

correct figure and the position was highly inconsistent with the position taken by the

petitioner.

7. During pendency of this petition, the respondent was asked to file a list of

its immovable properties and the respondent in the affidavit filed that it had no

immovable property. This Court cannot enter into the merits of the matter and decide

as to what amount was likely to be awarded in favour of the petitioner. Suffice it to say

that there is no denial of the fact that respondent had issued PDC worth Rs.250 crore.

These cheques were issued by the respondent after considering its liability towards the

petitioner. Had there been no liability of the respondent towards the petitioner the

respondent would not have issued these cheques. There is no denial of the fact that the

petitioner had been acting as financer to the respondent and the petitioner had opened a

Letter of Credit on behalf of the respondent for importing the material. This

material/stock was to be sold on high seas sale basis and the money was to be

transferred to the petitioner. Prima facie there is a gross breach of the contract by the

respondent and the petitioner seems to have a good case before the Arbitrator.

8. Looking into the financial condition portrayed by the respondent and the

fact that the petitioner has discovered that the respondent had diverted large sums of

money to respondent no.2 I consider that it is necessary that respondent no. 1 should be

asked to give adequate security to ensure that if an award is passed, it does not become

a paper award. I, therefore direct the respondent to provide security to the tune of

Rs.200 crore for the claim of petitioner either in the form of bank guarantee or property

security within a period of 30 days to the satisfaction of Registrar General of this Court.

April 23, 2009                                        SHIV NARAYAN DHINGRA, J.
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