Section 9 Arbitration Act | Foreign Award Enforcement Requires Asset Disclosure as Security : Bombay HC Grants Interim Protection

The Bombay High Court has delivered a significant judgment under Section 9 of the Arbitration and Conciliation Act, 1996, reinforcing the necessity of asset security for enforcing foreign arbitral awards. The Court directed the respondent to furnish security for USD 610,818.68, highlighting the importance of executable assets and the consequences of failing to dispute liability through proper pleadings. This judgment underscores the discretionary power of courts to protect award holders from potential enforcement challenges.

Background & Facts

The Dispute

The petitioner, Alby Happy S.A., a Panamanian company, sought interim protection under Section 9 of the Arbitration and Conciliation Act, 1996 pending enforcement of a foreign arbitral award dated 2 January 2024. The award, passed by an Arbitral Tribunal seated in London, directed the respondent, Sakuma Exports Limited, to pay USD 479,843.16 along with interest and costs. As of the petition's filing date, the total amount payable had escalated to approximately USD 610,818.68, equivalent to Rs. 5.19 crores.

Key Facts

• 08.05.2020: The parties entered into a Voyage Charter Party, which included an arbitration agreement providing for arbitration in London.
• Disputes arose regarding freight, demurrage, and other claims, leading to arbitration.
• 02.01.2024: The Arbitral Tribunal passed a Final Award in favor of the petitioner.
• 04.04.2024: The Tribunal disposed of the respondent's request for clarification of the award.
• The petitioner sent multiple communications demanding payment, but the respondent failed to satisfy the award.
• The petitioner contended that the respondent's financial position, as disclosed in annual reports, raised concerns about the enforceability of the award.

Procedural History

• Notice Issuance: The Court issued notice to the respondent, granting sufficient opportunity to file a defense.
• Affidavit of Disclosure: Instead of filing an Affidavit in Reply, the respondent filed an Affidavit of Disclosure pursuant to the Court's directions.
• Hearing: During the hearing, the respondent orally denied liability but failed to support this denial with any pleadings or evidence.

Relief Sought

The petitioner sought interim protection to secure the awarded amount of USD 610,818.68, arguing that the respondent's financial disclosures and conduct raised apprehensions about the enforceability of the award.

The Legal Issue

The central question before the Court was whether Section 9 of the Arbitration and Conciliation Act, 1996 permits the grant of interim protection to secure a foreign arbitral award, particularly when the respondent's asset disclosure raises concerns about the enforceability of the award.

Arguments Presented

For the Petitioner

• The petitioner relied on the existence of the foreign arbitral award and the respondent's failure to satisfy it despite repeated demands.
• It was argued that the respondent's financial disclosures, particularly the reduction in non-current assets and increase in current liabilities, justified the grant of interim protection.
• The petitioner contended that the respondent's conduct, including the failure to file an Affidavit in Reply, warranted protective measures.

For the Respondent

• The respondent argued that the mere existence of a foreign award does not entitle the petitioner to an order directing security.
• It was submitted that the jurisdiction under Section 9 is discretionary and requires a showing of necessity based on the facts of the case.
• The respondent relied on its Affidavit of Disclosure, which listed assets such as motor vehicles, office equipment, and furniture, to argue that the petitioner's apprehensions were unfounded.

The Court's Analysis

The Court conducted a detailed examination of the circumstances surrounding the petition, emphasizing the limited scope of Section 9 proceedings. The analysis focused on the following key aspects:

1. Existence of the Foreign Award: The Court noted that the respondent had not disputed the existence of the Charter Party, the arbitration agreement, or the passing of the Foreign Award. The award had attained finality as no challenge had been filed against it.

2. Respondent's Conduct: The Court observed that the respondent had failed to file an Affidavit in Reply, leaving the petitioner's averments unchallenged. The respondent's oral denial of liability was not supported by any pleadings or evidence, which weakened its position.

   "The Respondent's submission that no liability exists therefore has to be examined in this limited context. In the absence of pleading explaining why the Foreign Award is not binding or why the liability determined by the Tribunal should be ignored, the Court finds it difficult to attach weight to a bare oral denial."

3. Asset Disclosure: The Court scrutinized the respondent's Affidavit of Disclosure, which revealed that a substantial portion of the disclosed assets consisted of motor vehicles, office equipment, and furniture. These assets, while movable, depreciate over time and do not provide the same security as immovable properties or capital assets.

   "The schedule does not disclose ownership of immovable properties which constitute executable assets. In my opinion, this distinction cannot be ignored while considering an application under Section 9."

4. Apprehension of Non-Enforcement: The Court acknowledged the petitioner's apprehension that the award might become difficult to enforce, given the respondent's financial disclosures and the absence of executable assets. The respondent's failure to offer any security or satisfy the award despite repeated demands further justified the petitioner's concerns.

5. Discretionary Power Under Section 9: The Court reiterated that the jurisdiction under Section 9 is discretionary and not automatic. However, the cumulative effect of the circumstances - including the existence of the award, the respondent's conduct, and the nature of the disclosed assets - tilted the balance in favor of granting interim protection.

The Verdict

The Bombay High Court allowed the petition and directed the respondent to secure the petitioner's claim as follows:

• The respondent must furnish security for USD 610,818.68 (or its equivalent in Indian Rupees) within four weeks from the date of the judgment.
• The security may be furnished either by depositing the amount before the Court or by providing an unconditional and irrevocable Bank Guarantee from a nationalized or scheduled commercial bank.
• The Bank Guarantee must remain valid until the disposal of the enforcement proceedings or further orders of the competent court.
• Until the security is furnished, the respondent is prohibited from creating third-party rights, transferring, alienating, encumbering, or parting with possession of its fixed assets, except in the ordinary course of business.
• The respondent must file a further affidavit within four weeks, disclosing complete particulars of all asset transactions undertaken between 2 January 2024 and the date of filing the affidavit.
• The Court clarified that its observations were prima facie and confined to the Section 9 proceedings.
• In case of non-compliance, the petitioner is at liberty to seek further protective directions, including attachment before judgment.
• No order as to costs was passed.

What This Means For Similar Cases

Asset Disclosure Must Be Comprehensive and Executable

• Practitioners must ensure that asset disclosures under Section 9 proceedings include executable assets such as immovable properties or capital assets. Movable assets like motor vehicles, office equipment, and furniture, while relevant, may not suffice to dispel apprehensions about enforceability.
• Courts are likely to scrutinize the composition of disclosed assets rather than merely their total value. Disclosures that fail to include executable assets may weaken a party's position.

Failure to File Affidavit in Reply Can Be Fatal

• The judgment underscores the importance of filing a proper Affidavit in Reply to dispute averments in a petition. Mere oral denials or affidavits of disclosure, without addressing the merits of the claims, may not be sufficient to counter the petitioner's case.
• Parties must explicitly dispute liability and provide evidence to support their contentions. Failure to do so may lead courts to draw adverse inferences.

Courts Will Consider Cumulative Circumstances

• While the mere existence of a foreign award does not automatically entitle a party to interim protection, courts will consider cumulative circumstances such as:
  • The existence of the award and its finality.
  • The respondent's conduct, including non-payment despite demands.
  • The nature and executability of disclosed assets.
  • The absence of pleadings disputing liability.
• Practitioners should build a strong factual record to justify the need for interim protection, as courts are increasingly inclined to grant such relief when enforcement risks are evident.