Dismissed

K.Nageshwara Rao, v. M/s. Aesseal India Private Limited

Telangana HC7 Mar 2014CMA/833/2013

Case brief

AI extract

What is this about?

This appeal assailed an order granting interim injunction restraining respondents from alienating properties pending arbitration over an Asset Purchase Agreement dispute. The Court dismissed the appeal, confirming the injunction.

What did the court decide?

Confirmed the order granting injunction restraining respondents from selling, transferring, or encumbering Schedule-A and Schedule-B properties.

K.Nageshwara Rao, Vs M/s. Aesseal India Private… — Company and Corporate | Telangana HC (2014)

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THE HON’BLE Ms.JUSTICE G.ROHINI AND

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THE HON’BLE SRI JUSTICE T.SUNIL CHOWDARY

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C.M.A.No.833 OF 2013

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JUDGMENT: (Per T. Sunil Chowdary, J.)

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1 This Civil Miscellaneous Appeal is filed under Section 37 (b) of Arbitration and Conciliation Act, 1996 (for short ‘the Act’) assailing the order and decree dated 29.07.2013, passed in O.P.No.1526 of 2011 on the file of the III Additional Chief Judge, City Civil Court, Hyderabad.

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2 By the order under appeal, the Court below allowed O.P.No.1526 of 2011 filed under Section 9 of the Act in part and granted injunction restraining the respondents from selling, transferring, encumbering or creating any third party interest in the Schedule-A property as well as schedule-B property.

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3 Succinctly, the case of the petitioner is that the petitioner is a company registered under the Companies Act, 1956 having its registered office at Gat No.85, Varve Post, Tal. Bhor District, Pune and having a branch office at Plot No.20/Part, Sy.No.50, Industrial Development Area, Phase – III, Jeedimetla, Ranga Reddy District. The petitioner company, vide its board resolution dated 23.12.2010 authorised the Chairman and Group Engineering Director Mr. Stephen Shaw to sign and verify the pleadings and institute the present proceedings on its behalf. The petitioner company is part of the AESSEAL group of companies and is a 100% owned subsidiary of AESSEAL Engineering Limited, U.K., a company registered in and under the laws in England (the parent company) AESSEAL Engineering Limited, U.K. is the holding company for all the Group Companies of the AESSEAL Group. The respondents 1 and 2 are former employees and directors of the

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petitioner and they are also former directors and promoters of the 3^rd respondent company registered under the Companies Act, 1956, having its registered office at D.No.5-55/44, Doolapally Road, IDA Phase V – Extn, Jeedimetla, Ranga Reddy District and is in the business of manufacture and distribution of mechanical seals. In the month of January 2008, when the petitioner was looking to expand its business in India, the respondents 1 and 2 in the capacity of director and promoters of 3^rd respondent, had approached the petitioner with a proposal for expansion through collaboration, association, joint venture between the petitioner and the 3^rd respondent. Alan, being the Chairman of petitioner at the relevant point of time was involved in the discussions with the 3^rd respondent for expansion. In pursuance of the negotiations between the parties, it was agreed that the operation of 3^rd respondent would be taken over by the petitioner by way of an asset purchase agreement where under, the 3^rd respondent would sell certain assets belonging to it including proprietary technical know how and intellectual property for manufacture of mechanical seals and transfer certain persons employed with it to the petitioner. An Asset Purchase Agreement dated 03.09.2008 (APA) was executed between the petitioner and the respondents. Under the said APA, it was agreed that the 3^rd respondent would sell assets, defined as ‘acquired assets’ in the APA including proprietary technical know how and intellectual property for manufacture of mechanical seals and to transfer certain persons employed with it to the petitioner as per the terms and conditions of the APA and in exchange of the purchase consideration of total Rs.17.20 crores. The acquired assets were defined as all rights, title and interest to the assets relating to the business of the 3^rd respondent. The respondents 1 and 2 had also executed their

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respective employment agreements with the petitioner on 03.09.2008, which are annexed to APA. Under the employment agreement, the 1^st respondent was appointed as Managing Director of the petitioner and the 2^nd respondent was appointed as the Manufacturing Director of the petitioner. That on 14.02.2009, the petitioner changed its registered office from Bidewadi, Pune to Bhor, Pune. During 2009, the petitioner started experiencing significant cash problem, which continued till the year 2010. despite constant infusion of funds into the petitioner company from the parent company time and again, the petitioner was unable to generate revenue. This naturally became a matter of grave concern for the petitioner as well as the parent company. Therefore, the parent company commenced an internal investigation into the financial and operational running of the petitioner whereupon it was revealed that the respondents 1 and 2 had grossly mismanaged the finance of the petitioner and had misrepresented the financial affairs to the parent company. It was also revealed that the respondents 1 and 2 and Alan in collusion with other employees have violated the other conditions of their employment agreements and have committed several illegal acts for which the petitioner is taking appropriate criminal action. The 2^nd respondent was suspended pending final outcome of the internal disciplinary investigation on 22.10.2010. The arbitration clause under the APA, which was referred by the petitioner as contained in Cl.15.13 of APA reads as under:

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“15.13. Arbitration. In the event of any dispute or difference between the parties hereto, whether arising during the currency or after the completion or abandonment of this Agreement, or after the determination thereof, whether for breach or for any other reason in regard to any matter or thing of whatsoever nature arising out of this Agreement or in connection therewith, including the interpretation of

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any provision hereof, or any question regarding the existence, validity or termination of this Agreement, then such dispute, difference or question shall be settled by arbitration in accordance with the Arbitration and Conciliation Act, 1996. the place of arbitration shall be Hyderabad, India and the language shall be English.”

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That the 3^rd respondent consented to the appointment of Sri Justice T.Ch.Surya Rao as sole arbitrator. The petitioner has suffered huge loss to a tune of Rs.15.50 crores due to gross misconduct of the respondents. As the assets belonging to the respondent are hardly any worth so as to satisfy the petitioner’s claim pending adjudication before the arbitrator, the petitioner submits that its interest needs to be protected by way of security deposit. Prima facie case and balance of convenience are in favour of the petitioner. Hence the petition.

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4 The first respondent fled counter inter alia denying the averments in the petition. It is stated that there is no arbitral dispute as raised by the petitioner company against the respondents 1 and 2. The respondents have filed counter claims. The claim of the petitioner is not only bereft of pleas for an actionable cause, but the claim of the petitioner is outside the ambit of arbitration dispute resolution itself, therefore, the interim measures petition as well as claim petition filed by the petitioner against the respondents 1 and 2 is liable to be rejected. The relief claimed by the petitioner cannot be granted and otherwise also this petition is liable to be dismissed with costs. The interim measure application has not stated any facts much less material facts disclosing the actionable cause and further there are no material particulars which are required as per order VI Rule 4 CPC. The elementary aspect of ‘pleadings’ is to plead facts and not to plead the consequences of those facts. The material facts, which

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constitute the cause of action, are lacking in this petition. Hence this application is liable to be rejected at the threshold. The further aspects alleged to be accruing out of serious criminal allegations are not arbitral, therefore, looking from any angle, the interim measure application is liable to be rejected in toto against the respondents 1 and 2 and there is no cause pleaded against the third respondent. The petitioner suppressed the material facts and filed the petition. The respondents 1 and 2 have separately filed counter claims along with their counters claiming Rs.5.00 lakhs each as damages from the petitioner herein before the Arbitrator. Hence the petition is liable to be dismissed.

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5 Basing on the material available on record, the trial Court allowed the application in part. The operative portion of the order reads as under:

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“(A) An injunction is granted restraining the respondents from selling, transferring, encumbering or creating any third party interest in the premises admeasuring 1295 sq. yards with built up areas on 4300 sq. feet bearing plot No.20/part, Sy.No.50, Industrial Development Area, Jeedimetla, Ranga Reddy District (more fully described in the schedule ‘A’) owned by the respondents till the final award is passed and becomes final,

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(B) An injunction is granted restraining the respondents from selling, transferring, encumbering or creating any third party interest in respect of petition – B schedule property i.e. the premises admeasuring 1295.55 sq. yards, with built up area of 4250 sq. feet bearing plot No.20/Part, Sy.No.50, Industrial Development Area, Jeedimetla, Ranga Reddy District owned by the respondents before and during the arbitration proceedings and till the final award is passed and becomes final including the property situated at plot No.48-51 in Sy.No.169, Part, IDA, Phase-V, Extension, Dhollapally, Jeedimetla, Hyderabad adm. 4516 sq. ft.”

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6 Feeling aggrieved by the order of the trial court, the present

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CMA is filed under Section 37 of the Arbitration and Conciliation Act, 1996.

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7 Heard Sri S.Sudeep Reddy, leaned counsel for the appellants/respondents and Sri S.Niranjan Reddy, learned counsel for the first respondent.

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8 The points for consideration in this appeal are: i. Whether the petitioner is entitled to interim injunction?

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ii. Whether the order under appeal is legally sustainable?

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9 The predominant contention of the learned counsel for the appellants / respondents 1 and 2 before the Court below was that the petition under Section 9 of the Act is not legally sustainable.

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10 Per contra, the learned counsel for the respondent No.1/petitioner before the Court below submitted that the trial court passed the order keeping in mind the scope of Section 9 of the Act and hence the said order needs no interference.

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11 The learned counsel for the appellants in support of his submissions placed reliance upon the ratio laid down in Premraj Mundra Vs. Md. Maneek Gazi and Others^[1] and Raman Tech. & Process Engg. Co. and Another Vs. Solanki Traders^[2] .

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12 Both the said decisions pertain to the scope of Order 38 Rule 5 CPC, and therefore, the ratio laid down therein has no relevance to the facts of the case on hand.

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13 The learned counsel for the appellants has further drawn our attention to the ratio laid down in 1) Dalpat Kumar v Prahlad Sing h^[3] , 2) Adhunik Steels Ltd v Orissa Manganese and

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Minerals (P) Ltd.^[4] and 3) Martin Burn Ltd., vs. R.N. Banerje e^[5] .

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14 The principles that can be deduced from the above judgments are 1) While granting interim injunction, the Court has to satisfy itself that the petitioner has established the three cardinal principles of prima facie case, balance of convenience and irreparable loss are in his favour, 2) Section 9 of the Arbitration and Conciliation Act, 1996 is akin to Order 39 Rules 1 & 2 CPC. So, we will consider the facts of the case on hand in the light of the above principles.

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15 It is a settled principle of law that pre-existing dispute is a sine qua non to invoke the Section 9 of the Act. A perusal of the record clearly reveals that the appellants / respondent Nos.1 and 2 before the Court below entered into an agreement with the petitioner company on 03.09.2008. A perusal of the record also reveals that the 2^nd respondent was removed as director of the petitioner company. The specific allegation of the petitioner was that the respondent Nos.1 and 2 had mismanaged the financial affairs of the company to a tune of Rs.15.00 crores.

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16 A perusal of the record prima facie reveals that there is an arbitration clause in the APA. A glimpse of Clause 15.13 clearly demonstrates that the disputes likely to arise out of APA shall be settled by way of arbitration. In pursuance of the arbitration clause, the petitioner company appointed a sole arbitrator to resolve the disputes between them. As seen from the counter, the respondents have also made a counter claim claiming damages.

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17 Admittedly, the arbitration proceedings are still pending. It is also not in dispute that the schedule properties are in possession

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of the petitioner company. The underlying object of Section 9 of the Act is to preserve the property intact thereby to secure the amount in dispute likely to be settled in arbitration proceedings. A perusal of the record prima facie reveals that there is an arbitral dispute between the petitioner and the respondents which was referred to a sole arbitrator. While deciding the interlocutory applications, the Court should not express any opinion with regard to the merits of the case. The material placed before the Court clinchingly establishes that there is a prima facie case to go for a trial. The Court has to see whether the balance of convenience is in favour of the petitioner or respondents. Balance of convenience means inconvenience or mischief to be caused to one of the parties to the proceedings. The Court has to take into consideration which party will be put in great inconvenience if injunction is granted or not granted. In the instant case, if no interim order is granted, it may not be possible for the petitioner to realize the fruits of the arbitration award if ultimately it succeeds before the sole arbitrator. Even if an interim injunction is granted in favour of the petitioner, the same may not cause any inconvenience to the respondents. The material placed before the Court prima facie reveals that the balance of convenience is in favour of the petitioner. As observed earlier, the property is in possession of the petitioner. The fact remains that the petitioner availed the services of the respondents for expansion of their business. During pendency of the agreement, disputes arose between the parties and it ultimately culminated into arbitration proceedings. In such circumstances, if respondents create any encumbrance or alienate the schedule properties to third parties, it may cause untold hardship to the petitioner.

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18 A perusal of the record reveals that the trial Court has

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granted status quo order on 26.07.2011 with regard to the petition schedule properties until disposal of the AOP No.1526 of 2011. The 2^nd respondent filed CMA No.156 of 2012 and the same was disposed of with a direction to the Court below to dispose of the said application expeditiously, preferably, within a period of two months from the date of receipt of copy of the order. However, this Court inclined to direct the maintenance of status quo with regard to the schedule properties until the Court below disposes of the application under Section 9 of the Act on merits. Thus the fact remains that there is an order of status quo in favour of the petitioner with effect from 26.7.2011.

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19 From the material placed on record, we are of the considered view that the petitioner has established prima facie case, balance of convenience and irreparable injury. The Court below passed the order under appeal keeping in mind the scope of Section 9 of the Act which is akin to Order 39 Rules 1 and 2 CPC. At any rate and viewed from any angle, factual and legal aspects, we are unable to accede to the contention of the learned counsel for the respondents 1 and 2 that the order under appeal is not legally sustainable.

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20 For the foregoing discussion, the Civil Miscellaneous Appeal is dismissed, confirming the order and decree dated 29.07.2013, passed in O.P.No.1526 of 2011 on the file of the III Additional Chief Judge, City Civil Court, Hyderabad. No order as to costs. As a sequel, miscellaneous applications if any pending shall stand closed.

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G. ROHINI, J

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_________________________ T. SUNIL CHOWDARY, J

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Date: 07.03.2014. Kvsn*

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[1] AIR 1951 Calcutta 156 [2] (2008) 2 SCC 302 [3] (1992) 1 SCC 719 [4] (2007) 7 SCC 125 [5] AIR 1958 SC 79

K.Nageshwara Rao, v. M/s. Aesseal India Private Limited

Case brief

What is this about?

What did the court decide?

K.Nageshwara Rao, v. M/s. Aesseal India Private Limited

Case brief

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What did the court decide?

What the court decided

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