Section 9 petitions cannot be disposed of ex-parte, without giving notice to the respondent therein, especially when coercive orders are being passed.

The Delhi High Court on 09.11.2020 in the matter of New Morning Star Travels Vs. Volkswagen Finance Private Limited held that, “Section 9 petitions cannot be disposed of ex-parte, without giving notice to the respondent therein, especially when coercive orders are being passed. The power to pass ad-interim orders under Section 9 of the Act are not in doubt. However, disposal of the petitions, without issuing notice and hearing the respondent as well as directing coercive orders of possession would be violative of the principles of natural justice.”

Facts of the matter-

The Petitioners in the present petition runs a bus service and had purchased 16 vehicles under loan-cum-hypothecation agreements entered into on 28.11.2018 with the Respondents. The said agreement contained an arbitration clause. There was a default by the Petitioners in payment of certain installments which led to Respondents filing 16 petition u/s 9 of the Arbitration and Conciliation Act, wherein the Ld. District Judge vide the impugned order of various dates, disposed off all 16 petitions.
The said petitions have been disposed of on the very first day of hearing, without issuing notice in the petitions to the Petitioner herein. Further, coercive orders have also been passed, permitting the Respondent to take possession of the vehicles of the Petitioner. A perusal of the impugned orders shows that the said orders have been passed in almost identical terms. On the ground that the Petitioner did not pay the said amount and expressing an apprehension that the vehicles may be disposed of, the Trial Court appointed a Receiver to take possession of the vehicles in terms of an order of Hon’ble Delhi High Court in Kotak Mahindra Prime Ltd vs. Kamal Chauhan & Anr., [O.M.P (I No 540/2015 & I.A. No. 25026/2015].
Thus, while dealing with the application for ad-interim ex-parte relief, the main petition under Section 9 of the Act was disposed off, without calling upon the Petitioner to even file a reply. No hearing was afforded to the Petitioner.
The Petitioner herein contended that the total dues are only to the tune of Rs. 87 lakhs and the taking of possession of all the vehicles in the manner as has been done in this case, would bring the business of the Petitioner to a complete stand still. His grievance is that the Section 9 petitions have been disposed of without notice and coercive orders of possession have been passed, without even hearing the Petitioner.

Observations of the Hon’ble Court-

The Hon’ble Court observed and held that, “Section 9 petitions cannot be disposed of ex-parte, without giving notice to the respondent therein, especially when coercive orders are being passed. The power to pass ad-interim orders under Section 9 of the Act are not in doubt. However, disposal of the petitions, without issuing notice and hearing the respondent as well as directing coercive orders of possession would be violative of the principles of natural justice.
The standards to be adopted for grant of interim measures under Section 9 of the Act are akin to the standards that are applied for grant of interim injunction under Order XXXIX Rules 1 and 2 CPC and for appointment of a Receiver under Order XL CPC. The disposal of Section 9 petitions without even hearing the Respondent is contrary to all settled tenets. Moreover, the grant of ex-parte injunctions, ex-parte interim measures or appointment of Receivers at the ex-parte stage would be governed by principles akin to Order XL CPC wherein there has to be a grave and imminent apprehension that the property would not be able to be retrieved if notice is issued. The appointment of Receivers at the ex-parte stage in matters such as vehicle loans ought to satisfy the test of imminent threat. The Court also ought to come to a conclusion that there was a deliberate intention not to repay the loan. Thus, out of the total installments due and payable, the Court has to see the conduct of the borrower including the irregularity of payment, the total amounts paid till date, any other extenuating or other factors such as the present pandemic which could justify non-payment etc. The appointment of a Receiver to take possession at the ad-interim stage could lead to the buses which are being used for the everyday business of the Petitioner being seized by the finance company, thereby causing the Petitioner’s business activities to come to a grinding halt. The standard that would be required to be satisfied for such an extreme measure should be high. Moreover, disposal of a Section 9 petition on the first date itself would be contrary to the basic principles that govern the adjudication of such petitions.
The Court referred to a Full Bench of the Telangana and Andhra Pradesh High Court in East India Udyog Limited v. Maytas Infra Ltd. & Ors. [AIR 2015 AP 118], has answered the question as to whether a Court can dispose of a Section 9 petition even before initiation of arbitral proceedings under Section 21 of the Act in view of the judgments of the Supreme Court in Sundaram Finance Ltd., V. NEPC India Ltd. [(1999) 2 SCC 479] and Firm Ashok Traders and another V. Gurumukh Das Saluja and Ors., [(2004) 3 SCC 155], as following:
“The Court as defined under Section 2(e) of the Act, is undoubtedly entitled to dispose of the application filed under Section 9 of the Act even before initiation of the arbitral proceedings under Section 21 of the Act. The Court, however, cannot dispose of such application ex parte without giving notice to the respondents, but Court can pass ex parte ad interim order pending the application filed under Section 9 of the Act.

The court also explained that in Kotak Mahindra (supra) as well, the respondents therein were issued notice on 21st September, 2015 and thereafter on 17th December, 2015. It was only after the respondents did not appear despite service, that the Court proceeded ex-parte and directed appointment of receiver. Thus, the said judgment could not have formed the basis for the Trial Court to pass coercive orders on the first date of hearing and also dispose of the petitions ex-parte.

The Court further observed that, “There cannot be any doubt that the Trial Court has the power to pass orders under Section 9. However, one has to bear in mind the principles for grant of interlocutory injunctions as also for appointment of receivers, that too at the ex-parte stage. The vehicles involved herein are luxury buses. Directing 16 buses to be taken possession of by the Receiver is a direction that ought to be passed under extraordinary circumstances, when the default by the company availing loan is not capable of being made good. In these cases, since no notice was issued, the Trial Court could not have presumed that the Petitioner would not be willing to make the payments. Defaults in few instalments cannot lead to such extreme directions especially during the pandemic situation. The Trial Court ought to have issued notice to the Petitioner, afforded a hearing and then passed appropriate orders in accordance with law. Under these facts and circumstances, this Court is inclined to set aside the impugned orders and remand the matter back to the Commercial Court. The Petitioner undertakes to pay to the Respondent a sum of Rs.25 lakhs within one week.”

The impugned orders are accordingly set aside.