Cholamandalam DBS Finance Ltd. vs Sudheesh Kumar

Prabha Sridevan, J.—This appeal has been filed against the order of the learned single Judge directing the Appellant to hand over to the

Respondent the vehicle, viz., Chevrolet Tavera BS III bearing Registration No. KL-43-2829 with Engine No. 31F42786 and Chassis No. MA6

AB6 G766 HJ42343.

The Appellant-company and the Respondent-borrower entered into a loan agreement in respect of the above vehicle. The agreement provided

for the resolution of dispute by arbitration. Article 11 of the agreement provides for re-possession by the company of the Asset of the company, as

the vehicle is called, on occurrence of any of the events of default set out in Article 10 of the agreement and if the borrower failed to deliver the

Asset, it was open to the company to enter any place where the Asset may be and to remove or take possession of the same.

The Appellant filed Application No. 1282 of 2009 for appointment of an advocate commissioner to seize and deliver the aforesaid vehicle.

According to them, the Respondent was due and payable a total sum of Rs. 5,87,796/-under the agreement. The said amount should be paid in 36

monthly instalments. It is also alleged that there was chronic and wilful default and as on 13.3.2009, a sum of Rs. 2,74,689/- was due towards

arrears of instalments. It is stated that they were in the process of initiating arbitration proceedings. But, since they had the right of re-possession

and since they feared that the vehicle would be subject to constant depreciation in value, wear and tear, the Court should appoint an advocate

commissioner to seize and deliver the vehicle. An ex parte order was passed and the vehicle was seized by the learned Advocate Commissioner

on 30.06.2009 at Ernakulam.

On 17.7.2009, the learned Counsel for the Appellant submitted to the Court that the vehicle had been seized and the application may be closed.

Only the learned Advocate Commissioner was present in Court apart from the learned Counsel for the Appellant. The learned Counsel for the

Respondent was neither present nor heard. The application was closed.

Thereafter, the Respondent filed the present application, viz., A. No. 3162 of 2009, wherein he has stated that he had been paying the

instalments for the two vehicles, which he had purchased on loan, but due to recession, he could not make payments. He has also stated that the

Appellant had filed Arbitration O.P. No. 729 of 2009 u/s 9 of the Arbitration and Conciliation Act (for brevity ''the Act'') before the District

Court, Ernakulam, against the Respondent and the guarantor and prayed for an order of attachment to attach the immovable property with a

direction to furnish security and I.A. No. 2857 of 2009 was also filed for interim attachment, which the District Court, Ernakulam had granted.

According to the learned Counsel for the Respondent, thereafter the Respondent approached the regional office of the Appellant at Cochin and

by negotiation, arrived at a sum of Rs. 3,20,000/- as one time settlement. But, even before the cheque could be furnished, the vehicle, viz.,

Chevrolet Tavera, which is the subject matter of this appeal, had been seized and only thereafter, he came to know of the order passed in the

above application. The Respondent contended that this Court had no territorial jurisdiction and that the Appellant had suppressed the filing of the

application u/s 9 of the Act and also the order of attachment obtained from the District Court, Ernakulam. In these circumstances, he prayed for

release of the vehicle.

In the application, a counter was filed by the Appellant stating that the cause of action had not entirely arisen at Kerala and that it was open to

them to file the application u/s 9 before this Court. The Respondent was not appearing even before the Arbitrator, who had by then been

appointed and who had entered upon the reference. The Respondent''s intention was only to drag on the matter. The learned Counsel, therefore,

prayed that some condition may be imposed for deposit before the vehicle is released.

The learned single Judge, after hearing the counsel, referred to the order of attachment obtained before the District Court, Ernakulam and held

that since the attachment order is in force and the Respondent''s rights are protected, it is not necessary for the Appellant to have the custody of

the vehicle and accordingly, ordered the return of the vehicle. It is against this, the present appeal has been filed.

The learned Counsel for the Appellant submitted that the Respondent is a chronic defaulter, that there were two agreements for two different

vehicles and the present application u/s 9 is only for the Tavera vehicle, whereas the other filed before the District Court, Ernakulam, was for the

Ikon vehicle and therefore, there was really no suppression and further submitted that this application was filed earlier. There are no malafides on

the part of the Appellant since the agreement provides for the right to re-possess the vehicle and even if this Court were to come to the conclusion

that the vehicle should be returned, it should have been ordered only on terms.

The learned Counsel for the Respondent submitted that when the interests of the Appellant are secured by the order of attachment before the

District Court, Ernakulam, which is for the same amount as claimed here, it was not necessary for the vehicle to be seized.

The matter came up on 02.11.2009 and we elaborately heard the learned Counsel for both sides on merits. Apart from the merits, we also

requested the learned Counsel to make their submission with regard to the correctness of the request to close the application without hearing the

Respondent. Several decisions of the Supreme Court, High Courts as well as foreign Courts have been produced before us with regard to the right

of the financier to take possession of the vehicle. Since it involves a common question, other counsel who were present in Court also made their

submissions.

12.1. In Mercantile Credit Corporation Ltd. Messrs. v. V. Amaravathi 1988 (I) L.W. 109, the learned single Judge of this Court upheld the

financier''s rights to seize the vehicle and to sell it.

12.2. In N. Paramasivam Vs. Tamil Nadu Industrial Investment Corporation Ltd. and others, the question before the Full Bench was whether

under the State Financial Corporations Act, the non-issue of notice before hypothecated assets were seized, was opposed to principles of natural

justice and the Full Bench held that there was no necessity for notice of seizure before the lorry was seized since ""the corporation was only

enforcing the terms of the contract and exercising its power under Clause 10 of the Hypothecation Deed"".

12.3. In Sri Rama Machinery Corporation Limited, etc. v. Standard Chartered Bank, etc. and Anr. 1999 (1) L.W. 267, the plea of violation of

principles of natural justice in failing to give prior notice before seizure of motor vehicle for default in paying the hire purchase instalments was

negatived.

12.4. In The Managing Director, Orix Auto Finance (India) Ltd. Vs. Shri Jagmander Singh and Another, , the Supreme Court held that if the

agreement permitted the financier to take possession of the financed vehicle, there was no legal impediment from taking such possession and that

the High Court cannot vary the agreed terms of agreement and lay down guidelines contrary to such agreement.

12.5. In Manager, I.C.I.C.I. Bank Ltd. v. Prakash Kaur and Ors. 2007 (1) L.W. 880, the Supreme Court very strongly commented about the

procedure adopted by the bank in removing the vehicle from the possession of the writ Petitioner. The Supreme Court deprecated the practice of

hiring recovery agents, who are musclemen and said that this practice should be discouraged and they declared that the bank which includes of

such institutions ""should resort to procedure recognised by law to take possession of vehicles in cases where the borrower may have committed

default in payment of the instalments instead of taking resort to strong arm tactics"".

The learned Counsel for the Appellant also referred to the creditors'' rights of replevin actions, sometimes known as claim and delivery and

referred to the judgment of the Supreme Court of United States also in Mitchell v. W.T. Grant Co. 416 U. Section. 600, where the Supreme

Court held that on an application of a creditor, seizure of movables subject to a security interest ordered without notice and duly executed,

followed by a post seizure hearing is valid and not violative of due process.

The learned Counsel for the Appellant also submitted that this Court should take note of the fact that very often, the hirers even knock down

the vehicle to put it out of reach of the creditors. The learned Counsel gave a list of cases pertaining to two such institutions, where in spite of

appointment of advocate commissioner, the application had to be closed since the Asset was not traceable. The learned Counsel submitted that if,

before the advocate commissioner went, notice had to be issued, then no goods/vehicle can ever be seized and therefore, the ex parte order was

necessary to secure the interest of the financier. The learned Counsel supporting the Appellant also referred to the cases where a Mareva

injunction was ordered and submitted that the principle underlying was where a debt is due and owing and there is a danger that the debtor may

dispose of his assets so as to defeat it before judgment, the Court had the jurisdiction to grant an interlocutory injunction so as to prevent him

disposing of the assets and this could follow the asset wherever it is situate. He also referred to (1969) 3 All England Reported 1376, where it was

held by the Chancery Division that after an ex parte injunction was granted, it was open to the Court to vary or modify the order of injunction.

Section 9 of the Arbitration and Conciliation Act reads as follows:

Interim measures, etc., by Court. - A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but

before it is enforced in accordance with Section 36, apply to a Court:

(i) for the appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings; or

(ii) for an interim measure of protection in respect of any of the following matters, namely:

(a) the preservation, interim custody or sale of any goods which are the subject-matter for the arbitration agreement;

(b) securing the amount in dispute in the arbitration;

(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any

question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any

party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for

the purpose of obtaining full information or evidence;

(d) interim injunction or the appointment of a receiver;

(e) such other interim measure of protection as may appear to the Court to be just and convenient;

and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.

The requirement of Section 9 is that the parties claiming the relief should show that the interim measure of protection is necessary for the

preservation, detention or inspection of any property, which is the subject matter of the dispute in arbitration and it also lays down what directions

the Court may give in order to make this power effective.

The principles based on which an order u/s 9 is passed are not very different from the principles based on which interim injunction under Order

39 Rule 1 of CPC is granted. The person applying should show prima facie case and should also establish the irreparable injury and also the

balance of convenience and in case, where a vehicle is to be emergently seized, there should be averments to show why it is just and convenient to

seize the vehicle. It is also well settled that the mere recitals of the words in the section is not sufficient. The application should make out a case for

the Court to grant the interim measure of protection. Without these, the applicant may not be entitled to an ex parte order and the Court shall

exercise its discretion while granting such an order. The party invoking Section 9 must also be able to satisfy the Court that the arbitral proceedings

are actually contemplated or about to be initiated.

In fact, this is why in Sundaram Finance Ltd. v. NEPC India Ltd. AIR 1999 SC 564 : 1999 (3) L.W. 335 the Supreme Court held that it was

open to the Court to put the applicant on terms, which will ensure that arbitral proceedings will be commenced. In that case, the Supreme Court

dealt with the scope of the orders u/s 9 under the 1996 Act. In the present case, the learned Counsel for the Respondent submitted that if notice is

issued before the advocate commissioner is appointed, then the purpose for filing the application will be defeated and that is why they referred to

decisions where it has been held that pre-seizure notice is not required. In the Sundaram Finance''s case, the Supreme Court observed that

It is not unknown when it becomes difficult to serve the Respondents. It was, therefore, necessary that provision was made in the Act which could

enable a party to get interim relief urgently in order to protect its interest."" and therefore, the Supreme Court held that it is not possible to interpret

the word ''before'' in Section 9 to mean that unless notice u/s 21 is received by the Respondent, no party would have a right to apply for interim

measure. Therefore, it is clear that an ex parte order can be passed. In the same judgment, the Supreme Court has also referred to the power to

grant Mareva injunction and held that ""the power to grant an interim injunction u/s 44 of the Act extends to the granting of a Mareva injunction in

appropriate cases. It may also include granting an interim mandatory injunction, although the Court will be slow to grant an injunction which

provides a remedy of essentially the same kind as is ultimately being sought from the arbitral tribunal"". The Supreme Court held that if an

application u/s 9 is made ""the Court will first have to be satisfied that there exists a valid arbitration agreement and the applicant intends to take the

dispute to arbitration. Once it is so satisfied the Court will have the jurisdiction to pass orders u/s 9 giving such interim protection as the facts and

circumstances warrant. While passing such an order and in order to ensure that effective steps are taken to commence the arbitral proceedings, the

Court while exercising jurisdiction u/s 9 can pass conditional order to put the applicant to such terms as it may deem fit with a view to see that

effective steps are taken by the applicant for commencing the arbitral proceedings.

In Firm Ashok Traders and Another etc. Vs. Gurumukh Das Saluja and Others etc., , the Supreme Court held that the order passed by the

Court shall fall within the expression ""an interim measure of protection"" as distinguished from an all-time and permanent protection.

In Adhunik Steels Ltd. Vs. Orissa Manganese and Minerals Pvt. Ltd., , the Supreme Court had clearly held that

it is difficult to imagine that the legislature while enacting Section 9 of the Act intended to make a provision which was dehors the accepted

principles that governed the grant of an interim injunction"". The Supreme Court again repeats and reinterates that ""Section 9 itself brings in the

concept of ''just and convenient'' while speaking of passing any interim measure of protection. The concluding words of Section 9, ""and the court

shall have the same power for making orders as it has for the purpose and in relation to any proceedings before it"" also suggest that the normal

rules that govern the court in me grant of interim orders is not sought to be jettisoned by the provision. Moreover, when a party is given a right to

approach an ordinary court of the country without providing a special procedure or a special set of rules in that behalf, the ordinary rules followed

by that court would govern the exercise of power conferred by the Act.

While the reality that the Respondent may refuse to receive notice cannot be ignored, at the same time, we must also remember the

observations of the Supreme Court in Firm Ashok Traders''s case (cited supra), that the creditors should not make the interim measure an

permanent measure. The danger in closing the application without hearing the other side is that there is the possibility of an unscrupulous creditor

obtaining an order for seizure, reporting to Court that the Commissioner has seized it. If the application is closed on such information and the

creditor does not initiate the arbitral proceedings at all, then the Court would be doing a great injustice to the Respondent. It is true, even

thereafter, the borrower may be able to move the appropriate forum for remedy, but we would have caused injustice by closing the application

without hearing him and no man shall suffer on account of an act of Court.

In fact, the learned Judges of the Supreme Court of United States in Mitchell v. W.T. Grant Co. 416 U. Section. 600, referred to above, have

held that when seizure of movables is ordered before notice and is duly executed and if it is followed by a post-seizure hearing, then such order is

valid and not violative of due process. Therefore, what follows is that the post-seizure hearing ensures the adherence of the principles of fairness

and non-arbitrariness.

What disturbed us in this case is that the application was closed even without hearing the Respondent. If before the application was closed the

Respondent had been heard, he would have brought to the notice of the Court that an order of attachment had been obtained in the District Court

of Ernakulam, in which case, the learned Judge might have modified or varied the order of injunction. We are not, for one minute, saying that an ex

parte order of appointment of advocate commissioner shall not be granted. If the averments in the affidavit make out for such an order, then an ex

parte order of appointment of advocate commissioner to go and seize the vehicle may be granted. But, on the same day, notice shall be ordered to

go to the Respondent so that after the vehicle is seized by the advocate commissioner, the Respondent, on receipt of notice, will appear before

Court. Then, after hearing both the parties, the Court can pass such orders as are necessary. We cannot rule out the possibility of a creditor

moving an application u/s 9 alleging chronic default when it is not so. So, when both parties are heard, the Court can assess whether the default is a

chronic one or is a temporary one for reasons beyond the control of the borrower, and the Court may pass appropriate orders balancing the

equities between the parties. It is not possible to do that if the application is closed without hearing the Respondent.

Repeatedly the learned Counsel for the Appellant/creditor said that their rights under the agreement provided for re-possession. We are not

negating their rights under the law. All that we say is, when they come to Court and pray for an order from us, we are bound to issue notice to the

other side to hear the other side before the matter is disposed of finally. If in spite of receipt of notice, the Respondent does not appear we will

hear it ex parte and pass orders. But, if we close the application without affording an opportunity to the other side, the order will cause grave

injustice to one of the parties. It is for this reason that we decided to hear not only the learned Counsel for the Appellant but other counsel too, so

that some guidelines can be laid down with regard to such applications.

The basic principle of natural justice is to hear the other side. Our system of jurisprudence stands on that. We cannot ignore that while

rendering justice. Therefore, some guidelines shall be followed while dealing with application u/s 9. This applies to seizure of vehicles alone, since

we have not heard the submissions with regard to any other cases falling u/s 9. This is strictly with regard to cases where the advocate

commissioners are appointed to seize the vehicles and report to Court.

The guidelines are:

a) If the pleadings in the affidavit make out that it is just and convenient to grant interim orders, and if, prima facie, the balance of convenience is in

favour of the applicant, then an ex parte order appointing an advocate commissioner may be passed, but simultaneously notice shall be ordered to

go to the Respondent indicating the date of hearing of the application. It is open to the learned Counsel for the Appellant to get permission of the

Court to also serve private notice on the Respondents personally at the time when the vehicle is seized. But, an affidavit must be sworn to by the

Advocate Commissioner that the person who received the notice was authorised to do so and that it was not given to some third party who was

not responsible or who was not authorised to acknowledge any court notice on behalf of the Respondents;

b) After the advocate commissioner reports to the Court that the vehicle has been seized, it shall be in the custody of the applicant. This custody is

on behalf of the Court, i.e., the applicant will be holding it in custodia legis.

c) Of course, if even after notice, the borrower does not appear or if it appears to the Court that the borrower is deliberately evading notice, then it

is open to the applicant to pray for such reliefs as are necessary, which may even include the sale of vehicle and the matter may be heard ex parte

and orders passed in exercise of discretion of Court.

d) The application shall not be closed without hearing the other side after notice is served. Before closing the application, the Court shall also

ascertain whether the applicant has taken steps to initiate the arbitral proceedings. If the applicant has not done so, then orders shall be passed

putting the applicant on terms as laid down in Sundaram Finance''s case (cited supra), because Section 9 depends on a close nexus with the

initiation of arbitral proceedings;

e) As regards the expenditure incurred for keeping the vehicle in custody, the applicant shall bear it until the Respondent is served and appears

After that, the Court shall hear the parties and pass orders.

f) The remuneration for advocate commissioners appointed by this Court shall be commensurate with the work done, since the financiers will shift

this burden only on the already beleaguered borrower.

One other advantage in hearing the Respondent before the closing of application is the clue that we get from Firm Ashok Traders and Another etc.

Vs. Gurumukh Das Saluja and Others etc., , where the Supreme Court encouraged the parties to suggest a solution. If that is really possible, then

even at the initial stage, the entire matter will come to a happy resolution. Therefore, it is not only in the interest of natural justice and fairness, but

also as a pragmatic measure that we have laid down these guidelines.

In the case on hand, in the affidavit, no averments are made to justify interim order except to state that the vehicle will be subject to constant

depreciation in value, wear and tear. There must be necessary pleadings to show that it is just and convenient to pass the interim measure of

protection. This is clear from Adhunik Steels Ltd. Vs. Orissa Manganese and Minerals Pvt. Ltd., , referred supra. Since the Respondent himself

says that there was an one-time settlement of payment of Rs. 3,20,000/-, if that amount is paid to the Appellant, then they shall release the vehicle.

However, the learned Counsel for the Appellant denies there was such an one-time settlement. Therefore, the same shall be decided by the learned

Arbitrator in the arbitral proceedings initiated by the Appellant.

With the above observations, the Original Side Appeal is disposed of. No costs. Consequently, connected M.P. is closed.