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2014 SCC OnLine Del 4181 : (2015) 216 DLT 20

In the High Court of Delhi

(BEFORE VIPIN SANGHI, J.)

Gatx India Pvt. Ld .…. Petitioner

Mr. Neeraj Kishan Kaul, Sr. Advocate with Ms. Meenakshi Arora, Sr.
Advocate, Ms. Pragya Ohri, Mr. Samar, Mr. Navin, Mr. Ranjit Prakash &
Ms. Shubhi Sharma, Advocates.
Versus
Arshiya Rail Infrastructure Limited & Anr. .….
Respondents
Mr. A.S. Chandhiok, Sr. Advocate with M/s. Kirat Nagra, Pranav Vyas,
Shankey Agrawal, Ritesh Kumar & Mayank Bamniyal, Advocates
O.M.P. 1132/2013
Decided on August 20, 2014

Arbitration — Arbitration and Conciliation Act, 1996 — S. 9 — Interim

reliefs — Petitioner entered into a Master Wagon Lease Agreement with
Respondent 1 — Dispute arising between parties on termination of
agreement — Petitioner seeking interim reliefs viz. furnishing of security —
Case of the respondents that it is the petitioner who has committed breach
of the terms of the agreements, resulting into severe losses and ultimately,
the termination of the Master Agreement — The contractual obligation to
pay rent for the first rake commenced from 21-1-2013 — However, since
February, 2013, Respondent 1 has not made any payment whatsoever
towards the said rake, even for the period when Respondent 1 had been
admittedly using it — Thus, in terms of Cl. 10.1(a) of the Master
Agreement, Respondent 1 seems to have committed an event of default
which, prima facie, entitles the petitioner to the remedies enlisted under S.
10.3 of the Master Agreement — No communication on record, whereby
respondent no. 1 had refuted/denied its liability to pay the lease rentals for
the first rake, or raised the issue of alleged delay on part of the petitioner in
delivery of rakes — No document has been filed, which would indicate that
pursuant to implementation of CDR, there has been any significant
improvement in their financial health as claimed, or it is likely to revive in
the future — Respondents' submission that since the value of their assets is
greater than the total liabilities, they would be able to meet the liabilities
qua the petitioner by utilisation of assets, if, and when, a finding is returned
in favour of the petitioner in the arbitration proceedings, cannot be accepted
— There are outstanding statutory dues, and other higher priority
obligations of the respondents — Respondents have also conceded that
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various winding up petitions have been instituted against Respondent 2

before the Bombay High Court — Thus, looking at the financial position of
the respondents, the apprehension of the petitioner that it may not be able
to effectively enforce the award, in case its claims are upheld in arbitration,
seems to be reasonable/justified. — Respondents, therefore, directed to
furnish solvent security to the satisfaction of this Court for an amount
representing the outstanding rent in respect of the first rake for the period
from 1-2-2013 till the breaking of the first rake was returned to the
petitioner.
(Paras 80 to 84)

CPI India Ltd. v. BPTP Ltd., in FAO (OS) 538/2012, pronounced on 9-11-2012;
Nimbus Communications Ltd. v. Board of Control for Cricket in India, in FAO (OS)
90/2012, decided on 27-2-2012; Intertoll ICS Cecons O&M Co. (P) Ltd. v.
National Highways Authority of India, (197) 2013 DLT 473; Steel Authority of
India Ltd. v. AMCI Pty Ltd., 2011 (3) Arb LR 502 (Delhi); National Shipping Co. v.
Sentrans Industries Ltd., 2004 (1) Arb. LR 409 (Bom.) (DB); Ratnagiri Gas and
Power (P) Ltd. v. Joint Venture of Whessoe Oil and Gas Ltd., (199) 2013 DLT
212 (DB); National Highways Authority of India v. China Coal Construction Group
Corpn., AIR 2006 Delhi 134; Mikuni Corpn. v. UCAL Fuel Systems Ltd., (2008) 1
ALR 503 (Del); Kanta Vashist v. Ashwani Khurana, MANU/DE/0380/2008;
National Agriculture Co-operative Marketing Federation of India Ltd. v. Earthtech
Enterprises Ltd., OMP No. 558/2007 decided on 23-4-2009]. On the other hand,
the court in several cases has recognised the existence of power of the court to
issue interim orders with respect to third parties under S. 9 of the Act. [see CREF
v. Puri Construction Ltd., (2000) 3 ALR 331 (Del); Arun Kapur v. Vikram Kapur,
AIR 2002 Del 420; Goyal Mg Gases (P) Ltd. v. Air Liquide Deutschland GmbH,
OMP No. 361/2004 decided on 31-1-2005, Sri Krishan v. Anand, OMP no.
597/2008 decided on 18-8-2009]; Value Advisory Services v. ZTE Corpn., OMP
no. 65/2008 decided on 15-7-2009, referred to.

The Judgment of the Court was delivered by

VIPIN SANGHI, J.
1. This petition has been preferred under Section 9 of the Arbitration
and Conciliation Act, 1996 (for short, ‘the Act’) by the petitioner to seek
the following interim reliefs : -
“(a) direct respondent No. 1 to forthwith return the first rake to the
petitioner in accordance with the terms of the Master Wagon Lease
Agreement;
(b) direct respondent No. 1 and respondent No. 2 to pay the
outstanding rents for the first rake being due and payable to the
petitioner amounting to Rs. 1,95,79,589/- (Rupees One Crore Ninety
Five Lakh Seventy Nine Thousand Five Hundred and Eighty Nine only)
along with such amounts of lease rentals that may become due and
payable till such time as the first rake is actually returned to the
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petitioner or direct the respondents to deposit the same with the

Registrar of this Court to be maintained in a fixed deposit pending
Arbitration and Award;
(c) direct the respondents to provide a Bank Guarantee in favour of
the petitioner for an amount of Rs. 14,03,60,453.00/- (Rupees
Fourteen Crore, Three Lakh, Sixty Thousand, Four Hundred and Fifty
Three) to secure the amounts that the Petitioner is entitled to under
Section 10.3.1(A) of the Master Agreement in relation to the first rake,
pending arbitration and award;
(d) direct respondent no. 1 and respondent No. 2 to provide a Bank
Guarantee in favour of the petitioner for the sum of Rs.
15,81,45,346.00 (Rupees Fifteen Crore, Eighty One Lakh, Forty Five
Thousand, Three Hundred and Fourty Six only) being the amount
already accrued under Section 2.1.3 of the Master Agreement as a
result of the failure by respondent No. 1 to take delivery of the second
rake from the petitioner;
(e) restrain respondent No. 1 from alienating or creating any third
party rights or interest in the first rake leased to it by the petitioner.
2. During the pendency of the petition, the first rake has been
returned to the petitioner - though with a different brake van than the
one supplied by the petitioner. Relief (a), therefore, does not survive.
Relief (e) also does not survive, since there is no surviving
apprehension of the respondents dealing with the first rake - which
already stands returned to the petitioner. Relief (b) cannot be granted
by way of an interim relief and, therefore, the petitioner has not
pressed the same. The petitioner has pressed the petition partially in
respect of reliefs (c) and (d) aforesaid.
3. The petitioner claims to be a company engaged in the business of
leasing equipment - particularly leasing of railway wagons and
locomotives. Respondent no. 1 is a company apparently registered with
the Indian Railways as a Container Train Operator. It is engaged in the
business of setting up rail infrastructure/network including
operations/movement of containers, goods, trains using Indian Railway
network. It acquires on lease/licence or otherwise container trains,
rakes, wagons bogies for its business. Respondent no. 2 company is the
holding company of respondent no. 1.
4. The case of the petitioner is that the petitioner entered into a
Master Wagon Lease Agreement with respondent no. 1 on 21.05.2012
(Master Agreement), the Supplement No. 1 Agreement (Supplement
No. 1) on the same day (collectively referred to as the ‘Lease
Agreement’), and the Lease Amendment dated 28.08.2012 (Lease
Amendment). Under the Lease Agreement, respondent no. 1 agreed to
take on lease ten rakes from the petitioner. To secure the discharge of
obligations by respondent no. 1, respondent no. 2 executed a Deed of
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Guarantee dated 22.05.2012 (Guarantee). The case of the petitioner is

that consequent to the aforesaid Lease Agreement, the petitioner
executed a Wagon Purchase Agreement dated 23.05.2012 (Purchase
Agreement) with Titagarh Wagons Limited (Manufacturer) for purchase
of ten rakes that were to be manufactured specially for being given on
lease to respondent no. 1. The petitioner states that the delivery
schedule of the newly manufactured rakes under the Purchase
Agreement corresponded to/was in accordance with the delivery
schedule - agreed between the petitioner and respondent no. 1, as set
out in Supplement No. 1. The petitioner states that the first rake was
due to be delivered by the petitioner to respondent no. 1 on
20.08.2012 at the terminal of respondent no. 1 at Khurja, Uttar
Pradesh. However, respondent no. 1 vide communication dated
16.07.2012 requested the petitioner to postpone the date of delivery of
the first rake by a period of one month, i.e. to September, 2012 as
respondent no. 1 had not obtained the necessary clearances and
approvals for the said terminal from the Indian Railways. The petitioner
agreed to the said postponement, and the parties amended the delivery
schedule set out in Supplement No. 1 vide the Lease Amendment.
Thereafter, the delivery schedule under the Purchase Agreement was
also amended on 14.09.2012. Unfortunately, there was a major fire at
the facility of the Manufacturer. Hence, the delivery of the first rake was
delayed, which was communicated by the petitioner to respondent no.
1 vide letter dated 18.09.2012. The petitioner further states that vide
letter dated 30.10.2012, it offered the delivery of the first rake to
respondent no. 1 between 5th and 10th November, 2012. However,
respondent no. 1 - still unable to take the delivery of the first rake,
again requested the petitioner to change the delivery period of the first
th th
rake to the period between 20 and 25 November, 2012. The
petitioner states that finally after several delays attributable to
respondent no. 1, the delivery of the first rake (RK001) was made to
respondent no. 1 on 27.11.2012. Thereafter, the petitioner called upon
the respondent no. 1 to take steps for facilitating commissioning of the
rake. However, the respondent no. 1 delayed the commissioning. In
any event, the same was finally commissioned on 21.01.2013.
5. The petitioner states that in accordance with section 2.2 of the
Master Agreement, the lease commenced from 21.01.2013, and the
obligation of respondent no. 1 to pay the monthly lease rent
commenced therefrom. The petitioner raised an invoice dated
01.01.2013 for Rs. 6,56,319.72 - being the rent for the first rake for
the period 21.01.2013 to 31.01.2013, which was paid by respondent
no. 1. The case of the petitioner is that, despite the fact that
respondent no. 1 had been operating the said rake since January, 2013
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- for which the petitioner had been raising monthly invoices for lease
rentals as and when they became due under the Lease Agreement,
respondent no. 1 has not made any payment whatsoever to the
petitioner since February, 2013, and an amount of Rs. 1,95,79,589/-
had accrued at the time of filing of the petition towards unpaid lease
rents for the first rake.
6. Further case of the petitioner is that despite repeated requests
made to respondent no. 1 to take delivery of the second rake - which
had been ready for delivery since 01.02.2013, in terms of the Lease
Agreement, respondent no. 1 kept deferring the delivery of the second
rake, and till date the said rake is lying with the petitioner who is
incurring costs thereon. In this regard, reference is drawn to the
petitioner's email communication dated 28.01.2013 - offering delivery
of the second rake (RK 002) on 01.02.2013, and respondent no. 1's
reply thereto - instructing the petitioner to hold on to the rake till
further instructions. Pursuant to petitioner's subsequent communication
dated 08.02.2013 - thereby offering delivery of the second rake on
13.02.2013, respondent no. 1, once again, asked the petitioner to wait
for further communication.
7. It is submitted that petitioner vide letter dated 22.04.2013 -
further followed by several reminders, called upon respondent no. 1 to
pay the outstanding amounts towards the first rake and to take delivery
of the second rake. The petitioner submits that respondent no. 1 vide
letter dated 21.06.2013, for the very first time refuted its liability to
pay the outstanding dues for the first rake and also terminated the
Lease Agreement qua the balance rakes, on the ground that the
petitioner had failed to adhere to the delivery schedule under the
agreements. It is submitted that the said letter of 21.06.2013 is
inconsistent with the requests sent by respondent no. 1 to defer the
delivery of the rakes in question, and a complete departure from its
earlier stand of acknowledging its obligations under the Lease
Agreement and assuring fulfilment thereof. In this regard, reference is
made to the confirmation slip signed by respondent no. 1 on
04.04.2013, whereby respondent no. 1 confirmed/admitted an amount
of Rs. 37,12,384.16/- as due and payable to the petitioner as on
31.03.2013. Attention is also drawn to email dated 10.04.2013
whereby the Managing Director of respondent no. 1 informed the
petitioner that it was undergoing corporate debt restructuring (CDR),
and committed to take delivery of five more rakes pending the CDR
decision. It is further submitted that the inanity of respondent no. 1's
latter stand in the said letter is also evident from email dated
02.07.2013, whereby respondent no. 1's management agreed to a
meeting with the petitioner to discuss the timing of payment of
overdue lease rentals, delivery date of the second rake, and delivery
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schedule for the balance rakes.

8. It is submitted that the petitioner invoked the dispute resolution
provisions under section 13.4(a) of the Lease Agreement vide letter
dated 17.07.2013, whereupon respondent no. 1 vide email dated
23.08.2013 agreed for a meeting to resolve the disputes. However, no
meeting was held with the senior officials of the management of the
respondents. Subsequently, respondent no. 1 issued notice dated
21.10.2013, alleging that the petitioner had delayed delivering the first
rake, and that the payment for the said rake was contingent on
petitioner sticking to the delivery schedule. Respondent no. 1 disputed
that it was liable to pay the lease rentals and other amounts towards
the first rake, as claimed by the petitioner. Learned senior counsel for
the petitioner submits that, in any event, petitioner cannot be blamed
for delay in delivery of the first rake when respondent no. 1 itself was
not in a position to take the delivery of the rakes for want of necessary
approvals from the railways with respect to the base depot.
9. Respondent no. 1, in the said letter, had also raised the issue of
alleged non-performance and defects in petitioner's rake, and also
sought to justify the termination of Lease qua balance rakes due to the
said defect and delay. Learned senior counsel for the petitioner submits
that it was for the very first time that respondent no. 1 had raised the
issue of defect in the first rake, whereas it had been using the said rake
continuously since January, 2013. He submits that the said rake had
been duly inspected before commissioning, and any deficiencies found
therein were corrected to the satisfaction of the railways. Fact of
commissioning of the rake itself is indicative of it being fit in terms of
quality and design to operate on the railways network. Attention is
drawn to the joint note of commissioning of the first rake dated
21.01.2013. Further, he points out that in terms of section 2.1.1 of the
Master Agreement, if there was any material non-compliance with the
agreed design of such rake as alleged by respondent no. 1, it ought to
have notified to the petitioner in writing about the nature and extent
thereof within two days of commissioning of the said rake. Moreover, it
is submitted that under the Lease Agreement, respondent no. 1 does
not have the right to terminate the Lease.
10. Learned senior counsel for the petitioner submits that
respondent no. 1 has committed fundamental breach of its material
contractual obligations, and is now reneging from its liabilities on
baseless and frivolous grounds of delay and defect, whereas the fact is
that it is unable to meet its obligations owing to its dismal financial
position. He submits that the lease rent payable per rake in terms of
section 2.2 of the Master Agreement read with Supplement No. 1, was
broadly Rs. 16,30,077/- per month, plus applicable indirect taxes
thereon from time to time. Under section 2.3, late payment of the lease
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rents attracted interest on the outstanding amount at the rate, per

annum, equal to the base rate of the State Bank of India plus 350 basis
point for each day from and including the first day following the due
date, to and including the date the payment is received by the
petitioner-lessor. He submits that section 10.1 enlists the events of
default and the said events, inter alia, include the lessee's failure to pay
any instalment of rent or any casualty value or any other amount due
under the applicable supplement when due, when such failure
continues for a period of 15 days. It also includes the lessee's failure to
perform or observe any covenant, condition or agreement to be
performed or observed by it under the Master Agreement or any
Supplement Agreement within 30 days after written notice thereof to
the lessee by the lessor. Section 10.3 provides the remedies available
to the lessor upon the occurrence of an event of default. The lessor is
entitled to, inter alia, demand immediate payment of the total amount
of the unpaid rent and other payments then due and, in addition, as
liquidated damages and not as penalty, the present value, discounted
at the rate per annum equal to base rate of the State Bank of India
minus 200 basis points, of the remaining rents and other amounts to
become due under the Master Wagon Lease Agreement and any
supplements throughout the remaining term thereof in case of an event
of default under Section 10.1, (other than under section 10.1(c) and
10.1(h) - with which we are not concerned). The lesser is also entitled
to demand the return of any or all of the rakes in accordance with the
Master Wagon Lease Agreement and any supplement.
11. Further case of the petitioner is that since respondent no. 1
failed to pay the amounts due and payable by it to the petitioner under
the agreements, the petitioner invoked the Guarantee, and demanded
from respondent no. 2 payment of Rs. 150,69,94,651/- vide letter
dated 01.11.2013. It is submitted that under the Guarantee,
respondent no. 2 has unconditionally, absolutely and irrevocably
guaranteed to the petitioner - as a principal obligor and not merely as
surety, the full performance and payment of all of respondent no. 1's
obligations, liabilities and monies, due and payable by respondent no. 1
under the Lease agreement, actual or contingent, when due in
accordance with the Lease Agreement. However, the said guarantee has
not been honoured by respondent no. 2 and payments have not been
made by respondent no. 2 as well.
12. Learned senior counsel for the petitioner submits that financial
position of respondent nos. 1 & 2 is extremely weak. It is submitted
that as of 31st March 2013, indebtedness of respondent no. 1 was
approximately Rs. 7,07,26,86, 847/- whereas its paid up capital was
only Rs. 32,50,67,040. He points out that the financial statement
pertaining to respondent no. 1 - subsidiary of respondent no. 2, showed
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a loss of Rs. 48,27,28,020/- being suffered by respondent no. 1 for the

st
financial year ending 31 March, 2013. Similarly, debt obligations of
respondent no. 2 as of 31st march 2013 amounted to Rs.
19,13,27,87,784 while its share capital was only Rs. 12,37,58,944. He
points out as per the directors' report 2012-2013 of respondent no. 2,
st
the loss after tax for the financial year ending 31 March, 2013 was Rs.
14,00,50,000/-. The share price of respondent no. 2, which is a public
listed company, fell drastically from Rs. 161.70 per share to Rs. 33.45
between the period from April 2012 to March 2013, and is currently
trading at approximately Rs. 16.70 per share on BSE. Owing to the
weak financial position and inability to service their debt obligations,
lenders of both the respondents are restructuring the corporate debt of
both the respondents. In this regard, the learned senior counsel draws
attention to the auditor's report on the financial statements of
respondent no. 2 for the year 2012-2013 wherein it is, inter-alia,
observed that “The company is under severe financial stress which is
due to and evident from increased trade receivables and payables and
majority of them are overdue, full and final settlement dues of resigned
employees of Rs. 23,253,374 are in arrears, statutory dues i.e. income
tax deducted at sources, service tax and value added tax of Rs.
176,189,607 are in arrears, the dues (interest and repayment of
borrowings) of banks and a financial institution and a non-banking
finance company are delayed and Rs. 2,385,428,587 are overdue, short
-term funds are used for long-term purposes and certain lenders have
filed court cases against the company and directors due to dishonour of
cheques. To mitigate financial stress, the company has taken various
steps including cost cutting exercise and opted for corporate debt
restructuring (CDR) plan which is admitted and under consideration of
the CDR cell.”. Further, as per the auditor's report on the consolidated
financial statements of respondent no. 2 and its subsidiaries - including
respondent no. 1(the Group), for the year 2012-2013, “The Group is
under severe financial stress which is due to and evident from huge
capital expenses financed by debt, increased trade receivables and
payables and majority of them are overdue, full and final settlement
dues of resigned employees of Rs. 55,054,409 are in arrears, statutory
dues i.e. income tax deducted at sources, service tax and value added
tax of Rs. 403,690,449 are in arrears, the dues (interest and repayment
of borrowings) of banks and a financial institution and a non-banking
finance company are delayed and Rs. 3,149,942,069 are overdue, short
-term funds are used for long-term purposes and certain lenders have
filed court cases against the company and directors due to dishonour of
cheques. To mitigate financial stress, the Group has taken various steps
including cost cutting exercise and opted for corporate debt
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restructuring (CDR) plan which is admitted and under consideration of

the CDR cell”. During the course of arguments, he has tendered in court
a Public Auction notice for sale of certain assets of respondent no. 2,
issued by SICOM Ltd. - mortgagor thereof, for recovery of its dues. He
submits that there is a real likelihood that the respondents might go
into liquidation before the completion of the arbitration proceedings, if
they are unable to repay their outstanding to their respective lenders.
Therefore, he submits that there is a reasonable apprehension on part
of the petitioner that in the event of the claims of the petitioner being
upheld in arbitration, it would not be able to recover the same from the
respondents, because the respondents would not be left with any
available assets to satisfy the same as all the present and future
movable and immovable assets of respondent no. 1 have been charged
in favour of its lenders, and there are other higher priority and statutory
debts.
13. Next, it is submitted that since respondent no. 1 could not take
delivery of the remaining rakes as per the stipulated delivery schedule
owing to its ongoing CDR process, the petitioner had to further amend
its Purchase Agreement with the Manufacturer vide Amendment No. 2
dated 11.07.2013. Referring to section 3 of the said Amendment No. 2,
learned senior counsel submits that since the Manufacturer had already
purchased the raw material for manufacturing 10 rakes and delivering
them to the petitioner by 31.03.2013, the petitioner had to make an
advance payment of Rs. 21 crores to the Manufacturer, and respondent
no. 1 is well aware of petitioner's position/agreement with the
Manufacturer vis-a-vis purchase of the ten rakes pursuant to the Lease
Agreement.
14. Learned senior counsel submits that the petitioner sent notice of
arbitration dated 28.01.2014 - calling upon respondent no. 1 to consent
to the name suggested therein as the sole arbitrator, but no response
has been forthcoming from respondent no. 1. He submits that
respondent no. 1 is shying away from arbitration as it has not
appointed the arbitrator till date.
15. Therefore, in view of the aforesaid submissions, he submits that
the interest of the petitioner ought to be protected during the pendency
of the arbitration proceedings, by directing both the respondents to
furnish the security as prayed for in the present petition.
16. On the other hand, respondents vehemently oppose the petition
on the ground that the petitioner has not approached the court with
clean hands - concealing material facts with respect to defects in
petitioner's rakes. The case of the respondents is that it is the
petitioner who has committed breach of the terms of the agreements,
resulting into severe losses to respondent no. 1, and ultimately, the
termination of the Master Agreement. It is argued that respondent no.
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1 is not liable to make any payments to the petitioner in view of the

fact that besides failure of the petitioner to adhere to the timelines
provided in the agreements, the first rake had also failed to conform to
contractual requirements and was not fit for the purpose it was leased.
As a result, respondent no. 1 is neither obliged to pay the future rent,
nor was it under an obligation to take the delivery of the balance rakes
because the petitioner had failed to demonstrate that the balance rakes
would not suffer from the same defects as in the first rake - caused due
to petitioner's design and technology. Without prejudice to
respondents' contention that question of invoking the Guarantee
against respondent no. 2 does not arise as nothing is due and payable
by respondent no. 1 to the petitioner, learned senior counsel for the
respondents submits that in any event, respondent no. 2 is not a party
to the arbitration agreement contained in the Master agreement, and
there is no arbitration agreement between the petitioner and
respondent no. 2. Therefore, in the present proceedings under section 9
of the Act, respondent no. 2 cannot be directed to furnish the security
as prayed for by the petitioner.
17. The respondents submit that based on the petitioner's
representations with regard to supply of superior quality rakes,
respondent no. 1 entered into MOU dated 25.10.2011 with the
petitioner - with higher lease rent of Rs. 18-19 lakhs per rake per
month as compared to the normal market lease rent of Rs. 8-10 lakhs
per month. The MOU envisaged that the rakes shall be delivered to
respondent no. 1 on or before 31.12.2012, and the lease
commencement date was to be the date of acceptance or deemed
acceptance of such block rake at the delivery location. However, the
petitioner failed to obtain the requisite license and conclude its
agreement with the Indian Railways for manufacture of the rakes as per
its design, in a timely manner. Consequently, Lease Agreement
between the petitioner and respondent no. 1 could be executed only on
21.05.2012, i.e. after lapse of a period of over 6 months. The delivery
schedule for the first rake was thereafter changed twice at the behest of
the petitioner. Respondents state that under section 2.1 of the Lease
Agreement, it was petitioner's responsibility to deliver the said rake at
the delivery location chosen by respondent no. 1 and to commission it.
Despite respondent no. 1 being ready to take delivery of the first rake
th
since 20 November, 2012, the petitioner commissioned the said rake
only on 21.01.2013, i.e. after 15 months from date of signing of MOU,
by which time respondent no. 1 had lost almost all its major customers.
Therefore, it is submitted that although respondent no. 1 may have
extended the schedule for delivery of the first rake from August, 2012
to November, 2012, but the original delay in executing the Lease
Agreement, and also the subsequent delay from November, 2012 to
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commissioning of the said rake in January, 2013, was caused by the

petitioner. Respondents submit that the petitioner also acknowledged
the delay on its part, which is further supported by the fact that the
petitioner raised an invoice for the lease rental for the month of January
commencing only from 21.01.2013.
18. Respondents submit that at the time of commissioning of the
first rake itself it was observed/noted by the Indian Railway that there
were manufacturing defects in the said rake, as a result of which, the
Indian Railways did not provide respondent no. 1 with the Closed
Circuit Certification i.e. permission for plying 6000 Kms or 30 days as is
the norm. Respondents submit that the petitioner was in constant
contact with the employees of respondent no. 1 and the Indian Railway,
and was at all times informed and aware that the first rake was found
to be defective. It is submitted that as respondent no. 1 began
operating the first rake, it continued to show manufacturing defects,
such that, contrary to petitioner's representations, it turned out to be of
an inferior quality as compared to respondent no. 1's own rakes -
purchased from the same Manufacturer.
19. Respondents further submit that given the deficiencies in the
first rake, respondent no. 1 could not accept the delivery of the second
rake until the condition of the first rake could be examined, since all
rakes scheduled to be delivered were to be manufactured on the same
specifications/design as the first rake. Respondents submit that while
respondent no. 1 was undergoing CDR, the defect in the petitioner's
rake had negatively affected business plans/caused severe economic
losses to respondent no. 1, and under such circumstances, the banks
expressed dissatisfaction towards accepting further rakes from the
petitioner. It submits that respondent no. 1's email dated 10.04.2013
did not constitute any assurance that it would take 5 rakes from the
petitioner, rather the proposal made therein by respondent no. 1 - as
per mutual understanding between the parties, was only a without
prejudice settlement discussion. Respondents submit that respondent
no. 1 had been disputing the invoices raised by the petitioner at all
times to the full knowledge of the petitioner. Respondents submit that
respondent no. 1 has not acknowledged its liability to pay the amount
stated in the petitioner's letter dated 31.03.2013. It was merely a
confirmation as to the invoices being raised by the petitioner, and was
issued at the request of the petitioner's auditors. Despite being
communicated about bleak performance of the said rake and defects
therein, the petitioner continued to make wrongful demands for
payment of rent. Respondent no. 1 was therefore constrained to
terminate the lease on 21.06.2013.
20. It is further submitted that despite the termination of the Lease
Agreement, and repeated requests by respondent no. 1 to take back
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the possession of the first rake, the petitioner failed to do so.

Nevertheless, respondent no. 1 - in good faith, continued to extend full
co-operation to the petitioner's efforts to detect the problems in the
rake, including operating the rake intermittently to identify the areas of
concern. At the continuous requests by the petitioner, a meeting was
also held for resolving the purported disputes, wherein respondent - in
consultation with its banks, proposed ‘without prejudice’ solutions for
renegotiating a contract to safeguard the interests of both the parties.
However, no amicable solution could be arrived at. It is stated that
since 01.10.2013, the first rake has been lying stationary at Arshiya
Khurja Terminal. Referring to letter dated 29.10.2013 from the
Northern Central Railway, respondents submit that respondent no. 1's
apprehension with respect to other rakes was further fortified when 80
out of 160 wheel sets of the first rake were found to be defective during
an inspection conducted by the Indian Railways in October, 2013,
which is considerable, given that the rake was new and had not been
used much. Attention is also drawn to respondent no. 1's letter dated
10.12.2013 to Northern Central Railway, whereby - notwithstanding the
termination of the Lease Agreement, respondent no. 1 - at petitioner's
behest and only in the capacity of the operator of the terminal where
the first rake was standing, allowed the railways to undertake requisite
repairs in the said rake.
21. Learned senior counsel for the respondents submits that section
1.1 stipulates execution of separate supplement in respect of each rake
pursuant to the Master agreement. Under section 2.2, lessee's
obligation to pay rent under the applicable lease for any rake
commences on the date of lessee's acceptance of such rake, and
continues until the end of the term of the lease for such rake as
provided in the applicable supplement or until the obligation to pay the
same is terminated pursuant to Section 10.1 or 10.3, and, in any case,
until such rake has been returned. He submits, in terms of section
10.3, the lease was terminated on 21.06.2013, and the first rake
stands returned to the petitioner on 20.02.2014 without the brake van,
which was being used by respondent no. 1 as common asset with
Indian Railway, and had been returned to the common pool of Indian
Railways on 21.01.2013. Consequently, respondent no. 1 is under no
obligation to pay any future rent thereon.
22. As far as the second rake is concerned, he submits that for
liquidated damages to become payable in terms of section 2.1.3 - on
account of alleged delay/failure on part of the lessee/respondent no. 1
to take the delivery of the said rake, it is imperative that
petitioner/lessor has already taken delivery thereof from the
Manufacturer. Referring to respondent no. 1's intimation to the
petitioner, to hold the delivery of the second rake till further instruction,
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he submits that the petitioner had not taken the delivery of the second
rake from the Manufacturer so as to be entitled to claim liquidated
damages thereon. He further submits that Amendment no. 2 dated
11.07.2013 to the Purchase Agreement between the Manufacturer and
the petitioner, indicating that the second rake has been delivered to the
petitioner, is after termination of the Lease Agreement by respondent
no. 1 in June, 2013.
23. Respondents claim that the arrangement between the
Manufacturer and the petitioner, and repercussions of the breach
thereof is not within the knowledge of the respondents.
24. As far as the financial condition of the respondents is concerned,
it is submitted that the respondent no. 1 is a relatively young company
- got its license to operate its rake on pan India basis for both on
Domestic and Exim route on Indian Railway Network in May, 2008, and
started operation from April, 2009. Respondent no. 1 has been utilizing
its assets only at approximately 70-80% occupancy and operating at a
positive margin at an operational level, and is not a loss making
company. The economic slowdown, coupled with the petitioner's breach
of the Lease Agreement had an adverse impact on the revenues
generated by respondent no. 1 resulting in difficulties to recover its
interest cost and depreciation from its operating margin. However, that
does not make the respondent no. 1 a financially unstable company.
The economy has now began improving and the introduction of changes
to the Railway haulage policy - ensuring level playing field in tariff
regulation for all operators including railways, will significantly improve
the revenues of respondent no. 1. Also, the correlation sought to be
made by the petitioner between respondents' liabilities and their paid-
up share capital is irrelevant to determine the financial health of the
company. According to the audited financial statement of respondent
no. 1 as of 31.03.2013, it has net assets worth INR 6,72,14,83,665.78
and net liabilities of INR 3,93,12,34,305.81 (excluding the loan of Rs.
173,51,21,618 given by the promoter company which will be converted
into equity). Similarly, according to the audited financial statements of
respondent no. 2 as of 31.03.2013, its net assets exceed its net
liabilities. Additionally, the promoters have brought in a contribution of
Rs. 199.53 crores which will be converted to equity. Thus, it is
submitted that even though there is a charge on the assets of the
respondents, since the value of the assets is greater than the total
liabilities, the respondents will be able to meet the liabilities qua the
petitioner by utilisation of assets, if, and when, a finding is returned in
favour of the petitioner in the arbitration proceedings.
25. Learned senior counsel for the respondents further submits that
the fact that CDR process has been initiated does not suggest that
respondents are in a precarious financial position. On the contrary, CDR
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mechanism is an extensively regulated process under the aegis of the

Reserve Bank of India, aimed at improving the financial position of the
commercially viable companies. He submits that in furtherance of the
said CDR, a majority of the respondents' lenders participated and
appreciated the fact that the respondents have had a sound and robust
substratum, and agreed to restructure the debts. The scheme of CDR
has been approved by the CDR Cell, and an agreement with the lenders
in this regard has already been executed and repayment of loans has
been restructured/deferred. It is submitted that the respondents have
shown an improvement in the financial condition due the
implementation of the debt restructuring. The indebtedness of
respondent no. 1 has reduced significantly, i.e. by almost Rs. 230
crores over the last financial year. Respondent No. 1 has also managed
to pay its outstanding statutory dues to a certain extent and is
committed to pay the current outstandings within the first financial
quarter of the current Financial Year 2014-15. Consequently, he
submits that the apprehension of the petitioner that the respondents
are on verge of financial collapse, or that there is a likelihood of their
liquidation, and it would not be able to recover the amount, if any,
awarded in arbitration in its favour, is completely ill-founded, and is
merely an attempt by the petitioner to impede the CDR process. It is
submitted that upon successful implementation of the debt
restructuring scheme, the respondents will be in a position to fulfil all
their obligations, under any arbitral award, if so passed in favour of the
petitioner. The petitioner will therefore not suffer any irreparable loss if
the present reliefs are not granted.
26. Without prejudice to the submission that petitioner is not
entitled to any of the amounts claimed as due and payable by
respondent no. 1, learned senior counsel for the respondents submits
that one of the prime considerations for granting an interim relief under
section 9 of the Act is balance of convenience/balancing the equities. In
view of the facts of the case, at this stage, direction for furnishing of
security - as prayed by the petitioner would severally prejudice the
ongoing CDR process - the efforts of respondent no. 1 to revive its
financial health, and the larger interests of all its creditors. In this
regard, reliance is placed on the judgment of the Division Bench of this
court in CPI India Ltd. v. BPTP Ltd., in FAO(OS) 538/2012, pronounced
on 09.11.2012.
27. Besides, learned senior counsel for the respondents submits that
facts of the case do not warrant the drastic remedy of attachment
before judgment. It is not the petitioner's case that the respondents
are attempting to dispose of the whole or any part of their property in
order to defeat the award that may be passed in its favour in
arbitration. Therefore, petitioner has not made out a case under the
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principles of Order 38 Rule 5 of the Code of Civil Procedure (C.P.C.).

Reliance is placed on the decision of the Bombay High Court in Nimbus
Communications Limited v. Board of Control for Cricket in India, in FAO
(OS) 90/2012, decided on 27.02.2012.
28. Further, he submits that in any event the interim reliefs sought
herein are beyond the scope of section 9 of the Act, in as much, as, the
petitioner is trying to specifically enforce the terms of the agreements
at the interim stage. He submits that bulk of the amount sought to be
secured by the petitioner pertains to damages, which are to be
determined on merits in arbitration. At this stage, the court shall not
direct provision of security in relation to a speculative claim for
damages, and any such relief granted by this court against the
respondents, would severely prejudice respondent no. 1's case in the
arbitration proceedings. In this regard, reliance is placed on the
decision of this court in Intertoll ICS Cecons O & M Co. Pvt. Ltd. v.
National Highways Authority of India, 197 (2013) DLT 473.
29. I have heard learned senior counsels for the parties and proceed
to dispose of the petition. At this stage the court has to see whether
the petitioner has made out a prima facie case for the grant of interim
relief, viz furnishing of security, as prayed for herein. Merits of the
disputes between the parties, viz. fulfilment of respective obligations
under the said agreements; alleged losses suffered due to delay/default
on part of either party; termination of lease; return of brake van to
common pool of assets of railways etc are to be examined in arbitration.
30. At the outset it is expedient to reproduce some of the relevant
clauses of the Master Agreement, which read as follows:
“2.1.1 Acceptance of New Rakes. Lessee will notify Lessor of the base
depot on the Indian Railways Network where such rake is to be
commissioned (the Base Depot) by delivering to Lessor written notice in
the form…With respect to a rake delivered to Lessee at the Delivery
Location. unless lessee informs Lessor in writing of the nature
and extent of any material non-compliance with the agreed
design of such Rake within two (2) days of commissioning
thereof, then the commission of such Rake by the MoR
(commissioning) shall be deemed to constitute acceptance of
such Rake by lessee as of the date of Commissioning…
2.1.3 Delivery. Lessor agrees to deliver the Rakes to lessee at the
point(s) designated in the applicable Supplement or as otherwise
mutually agreed in writing by Lessor and Lessee (the Delivery location)
…
In the event of any delay by lessor in the delivery of any Rake on or
before the scheduled date of delivery of such Rake under the applicable
Supplement (the Scheduled Delivery Date), the provisions set out in
the clause in the supplement regarding Delayed Delivery of Newly
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manufactured Wagons shall be applicable.

If the Lessee extends the scheduled delivery Date without prior
notice as specified in the supplement or delays or fails to accept
delivery of a Rake at the Delivery location for whatever reason,
all storage, stabling or other charges incurred in connection with
such Rakes shall be for Lessee's account, and Lessee shall be
responsible for either (a) all charges and penalties imposed on
lessor by the manufacturer for failure to take delivery of such
Rakes or (b) if Lessor takes delivery of such Rakes, liquidated
damages in an amount equal to the Rent under the applicable
lease prorated over the number of days elapsed from the last
scheduled Delivery Date mutually agreed by Lessor and Lessee
till the date the delivery is taken by the Lessee…”
2.2 Payments. Lessee's obligation to pay Rent and other
amounts, if any, required under the applicable Lease for any
Rake shall commence on the date of Lessee's acceptance
(determined pursuant to section 2.1.1 or 2.1.2, as applicable) of such
Rake (the Lease Commencement Date) and shall continue until the end
of the Term of the Lease for such rake as set forth in the applicable
Supplement or until the obligation to pay the same is terminated
pursuant to Section 10.1 or 10.3, and, in any case, until such
Rake has been returned pursuant to and in the condition required by,
the provisions of the applicable Lease, and Lessee agrees to pay Rent
and all other amounts due in accordance with the terms of the
applicable Lease…
2.3 Late Payments. If any Rent or other payment, if any, due under
any Lease (an Outstanding Amount) is not paid within seven (7)
business days after it is due, Lessee shall pay interest on the
Outstanding Amount at a rate per annum equal to the base rate of the
State Bank of India plus 350 basis points, for each day from and
including the first day following the due date to and including the date
payment is received by Lessor…”
10.1 Events of Default. The occurrence of any of the following events
shall be an ‘Event of default’:
(a) Lessee fails to pay when due any instalment of Rent…, or any
other amount due under the applicable Supplement and such failure
continues for a period of fifteen (15) days;
***
(e) Lessee fails to perform or observe any covenant, condition or
agreement to be performed or observed by it in this Master agreement
or any supplement within thirty (30) days after written notice thereof to
Lessee by Lessor of such failure, if such failure is curable (as reasonably
determined by Lessor), and provided that such cure period shall not be
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applicable to any Event of default specified in sections 10.1(a), (b), (c),

(d), (f), (g), and (i);…
10.3 Remedies. Upon the occurrence of an Event of Default and at
any time thereafter so long as such Event of Default is continuing,
Lessor may, in its sole discretion, do any one or more of the following
with respect to any or all of the Wagons subject to this Master
Agreement and any Supplements : (i) demand immediate payment
of the total amount of the unpaid Rent and other payments then
due and, in addition, as liquidated damages and not as a penalty,
the present value, discounted at a rate per annum equal to base
rate of the State Bank of India minus 200 basis points, of the
remaining Rents and other amounts to become due under this
Master Agreement and any Supplements (A) in case of an Event
of Default under section 10.1 (other than Sections 10.1(c) and
10.1(h)), throughout the remaining Term thereof…;(ii) demand
the return of any or all of the Rakes in accordance with this Master
Agreement and any Supplements; (iii) take possession of any or all of
the Rakes, without demand or notice; (iv) upon notice to Lessee,
terminate this Master Agreement and/or any applicable Supplements as
to any or all of the Wagons subject thereto;….In the event of any such
Event of Default, any storage/stabling and maintenance of any Rakes
subject to this Master agreement and any Supplements until such
Rakes are re-leased or sold shall be for the Lessee's account, and
Lessee shall, at the direction of the Lessor, promptly deliver the Rakes,
at Lessee's expense and risk, to Lessor or its designee at such locations
as Lessor shall designate, and shall pay Lessor for all costs and
expenses…No remedy referred to in this Master Agreement is intended
to be exclusive, but each shall be in addition to any other remedy
referred to or otherwise available to Lessor at law or in equity…”
31. Relevant provisions of the Supplement No. 1 read as follows:
“PAYMENT Monthly in advance on the seventh day of each
FREQUENCY: month….
RENT: INR 1,630,077 per Rake per month (the Rent) as
st
on 1 July, 2011 (the Base Date), plus any
applicable Indirect Taxes thereon from time to
time. Rent is valid only for the number and types
of Wagons specified herein, and is subject to
adjustment pursuant to the Rent Variation
Clause, as specified in Schedule B.
DELIVERY Rakes shall be delivered on or before 31st March
SCHEDULE: 2013, as per the delivery schedule detailed
hereinafter. In case of any change in the
Scheduled Delivery Date, the Lessee shall give
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Lessor at least ninety (90) days' prior notice.

Rake No. Scheduled Delivery
Date
st th
1 Rake 20 August 2012
nd th
2 Rake 30 August 2012
rd th
3 Rake 5 September 2012
th th
4 Rake 5 October 2012
th th
5 Rake 5 November 2012
th th
6 Rake 5 December 2012
th th
7 Rake 5 January 2013
th th
8 Rake 5 February 2013
th th
9 Rake 5 March 2013
th th
10 Rake 15 March 2013”

(Emphasis supplied)
32. Section 1.1 of the Master Agreement together with the provisions
of the Supplement No. 1 with respect to number of rakes and delivery
schedule reveal that the Lease Agreement pertained to lease of 10
rakes, to be delivered according to the delivery schedule provided
therein. Admittedly, the first rake out of the agreed 10 rakes was
delivered to respondent no. 1 in November, 2012, and commissioned
on 21.01.2013. Thereafter, first invoice towards the lease rental for the
said rake for the period of 21.01.2013-31.01.2013 was also paid by
respondent no. 1. Therefore, according to section 2.2 of the Master
Agreement read with relevant provisions of Supplement No. 1, with
respect to the said rake the contractual obligation of respondent no. 1
to pay rent of Rs. 16,30,077/- per month plus applicable indirect taxes
thereon - payable in advance on the seventh day of each month,
commenced from the date of commissioning, i.e. 21.01.2013. Further,
in terms of section 2.2 of the Master Agreement obligation to pay rent
for a particular rake continues till expiry of the term of the lease for the
said rake or termination thereof, as case may be, but, in any case until
return of the said rake. Notwithstanding the purported termination of
the Lease on 21.06.2013 - which, in any event, was qua the balance
rakes respondent no. 1, admittedly, had been using the rake till
October, 2013. As already observed in the Order 20.02.2014 under
section 7.1, it was respondent no. 1's obligation to return the rake at
the location of the petitioner. It is a matter of record that the said rake
was returned to the petitioner only pursuant to the said Order, and that
too without the brake van. Consequently, prima facie, respondent no. 1
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appears to be obligated to pay lease rental towards the first rake till the
return of the said rake in its original formation. Copy of the invoices
raised by the petitioner towards the monthly rent of the said rake as
and when it became due have been placed on record. It is not disputed
that no rent for the said rake has been paid by respondent no. 1 since
February, 2013. In terms of section 2.3, late payment of the rent - due
and payable by the respondent no. 1 towards the first rake, also
entitles the petitioner to interest on such outstanding amounts of rent,
at the rate stipulated therein.
33. The petitioner has placed on record several letters calling upon
respondent no. 1 to pay the amounts due and payable by it towards the
first rake. It seems that the respondents, on several occasions, have
acknowledged respondent no. 1's obligation to pay lease rentals for the
first rake and also assured compliance thereof. Apparently, respondent
no. 1 vide confirmation dated 04.04.2013 affirmed the sum of Rs.
37,12,384.16/- to be the total amount outstanding including TDS, on
the relevant date. It is trite to point out that at this stage, the court is
not appreciating the evidentiary value of the documents before it and,
thus, it need not concern itself with respondent's contention that the
said confirmation was merely an acknowledgment of relevant invoices
being raised by the petitioner, and not of respondent's liability to pay
the same. Subsequently, Arshiya Group Chairman/MD, Mr. Mittal vide
mail dated 10.04.2013 expressed respondent no. 1's inability to lease
further rakes on account of it being in CDR, but stated that it agreed to
take 5 more rakes subject to the CDR decision. Thereafter, petitioner
vide letter dated 22.04.2013 not only asked the respondent no. 1 to
pay the overdue amount towards the first rake; to immediately accept
the second rake; and to provide the modified delivery schedule for
remaining rakes, but also to share information on the CDR process.
Again, Chairman of the Arshiya Group Mr. Mittal vide email dated
14.05.2013 assured the petitioner that all issues - including that of
payment of outstanding rentals would be resolved by 23rd May, 2013.
The relevant extract of the said email read:
“As discussed we have to wait till we get to the stage of signing of
LOA with the banks through the CDR process. The next date of the CDR
EG is 23rd May and we hope that all matters will be sorted out including
rd
payments on 23 .”
34. When past due lease rentals for the first rake were not paid by
respondent no. 1 by 23rd May, 2013 despite its assurances, the
petitioner vide letter dated 27.05.2013 called upon respondent no. 1 to
rectify the defaults vis-a-vis payments in respect of first rake and
delivery of the second rake, lest the petitioner should, inter-alia,
terminate the lease and repossess the first rake. Letter of even date
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was also sent to respondent no. 2 to ensure compliance by respondent

no. 1 of its obligations under the lease, lest the petitioner should invoke
the Guarantee against respondent no. 2. Thereafter, respondent no. 1
vide letter dated 21.06.2013 - alleging that the petitioner had failed to
fulfil its obligation of delivering the rakes as per their respective
scheduled dates of delivery, inter-alia, stated that:
“… it is well within GATX's knowledge that during several high level
meetings that the Company had with GATX representatives/executives,
it was clearly discussed and agreed that the Company would pay for the
first rake only if GATX stuck to the scheduled delivery date. To the
Company's dismay, GATX repeatedly failed to respect the delivery
dates….
In light of the above, the Company is constrained to exercise their
rights to terminate the said Agreements qua the balance rakes and
shall shortly notify GATX of the damages as would be payable by GATX
to the Company for its egregious failure to adhere to the scheduled
dates of delivery of the rakes ordered….”.
35. Pertinently, there is no communication on record prior to this
letter dated 21.06.2013, whereby respondent no. 1 had refuted/denied
its liability to pay the lease rentals for the first rake, or raised the issue
of alleged delay on part of the petitioner in delivery of rakes.
Nevertheless, it is a matter of record that respondent no. 1 continued
using the first rake, and petitioner continued raising invoices towards
the rent thereof.
36. It appears from the subsequent correspondence exchanged
between the parties that even post the alleged termination of the Lease
vide letter dated 21.06.2013, respondents did not out rightly deny their
obligation to pay rent for the first rake, but were rather keen on revision
of the lease rentals, whereas the petitioner kept demanding the
payments thereof and maintained that any negotiation was contingent
on respondent duly fulfilling its liabilities already accrued under the
Lease Agreement. While no amicable solution was forthcoming from the
negotiation talks respondent no. 1 vide letter dated 21.10.2013 -
reiterating the stand taken in its letter dated 21.06.2013, additionally
raised the issue of alleged manufacturing defects in the first rake and
disputed its obligations under the Lease Agreement. At this stage, I
need not delve further into respondents' contention that the
communication from their end - subsequent to the 21st June letter,
were only ‘without prejudice settlement negotiations’.
37. Coming to respondents' contention with respect to petitioner's
failure to adhere to the timelines provided under the said agreements,
it is discernible that although induction of the 10 rakes was to start
from August, 2012 as per the delivery schedule provided in
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Supplement No. 1, respondent no. 1 vide letter dated 16.07.2012

requested the petitioner to defer the induction plan of all the 10 rakes
by a month, since the C& W facility at Khurja - where admittedly all the
10 rakes were to be based, was being delayed due to specific
clearances and approval of the facilities by the Indian railways.
Consequently, the delivery schedule provided in the Supplement No. 1
was amended and replaced by new delivery schedule vide the Lease
Amendment. Recitals of the said amendment, inter-alia, record that
“Lessee has requested that Lessor consent to a delay in the delivery
dates of the ten Rakes to be leased by lessee pursuant to the Lease,
and Lessor is willing to grant such consent on the terms and conditions
set forth in this Amendment.” Accordingly, the new delivery schedule,
as agreed by the parties read as follows:
“DELIVERY Rakes shall be delivered on or before 31st March
SCHEDULE: 2013, as per the delivery schedule detailed
hereinafter. In case of any change in the
Scheduled Delivery Date, the Lessee shall give
Lessor at least ninety (90) days' prior notice.
Rake No. Scheduled Delivery
Date
st th
1 Rake 15 September 2012
nd th
2 Rake 10 October 2012
rd st
3 Rake 1 November 2012
th nd
4 Rake 22 November 2012
th th
5 Rake 13 December 2012
th rd
6 Rake 3 January 2013
th th
7 Rake 24 January 2013
th th
8 Rake 14 February 2013
th th
9 Rake 7 March 2013
th th
10 Rake 28 March 2013”

38. Prima facie, it appears that the production operations at the

manufacturing plant of Titagarh Wagon's limited were disrupted, as a
result of which, apparently, the first rake could not be ready for delivery
by the petitioner on the amended scheduled date for delivery and the
fact of delay thereof was brought to the knowledge of respondent no. 1.
But at the same time, when subsequently the petitioner vide letter
dated 30.10.2012 requested respondent no. 1 to take delivery of the
first rake between 5-10th November, 2012, the respondent no. 1 vide
th
even dated email asked the petitioner to push the delivery to 20-25
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November, stating that it was yet to get formal approval for basing the
rakes at Khurja - stipulated Base Depo. It seems that even if the first
rake had been ready for delivery as per schedule, i.e. on or before 15th
September, 2012, respondent no. 1 would not have been able to take
delivery thereof for the said reason. Therefore, prima facie the delay in
delivery of the first rake cannot be said to be attributable to the
petitioner.
39. Moreover, the Lease Agreement specifically provides that “In the
event that lessor is unable to provide for delivery of any newly
manufactured Rake under this Supplement on or before the Scheduled
Delivery Date, Lessor shall endeavour to deliver the Rake to the
lessee within 150 days of the applicable Scheduled Delivery
Date; provided however, that the Rent in respect of such delayed
Rake shall be determined as if such Rake had been delivered on
the last agreed Scheduled Delivery Date prior to the delay. Lessor
shall have no liability or obligation to lessee (including, without
limitation, any liability for loss of profits, cost or expenses in connection
with such delay) for any delay in delivery; provided, however, that if
such delay extends beyond the 150th day following the
Scheduled Delivery Date, either Lessor or Lessee, by written
notice to the other, may terminate the Supplement to the extent
applicable to such delayed Rake, without cost or penalty, and,
following such termination, Lessee shall have the right to refuse
such rake when tendered for delivery by Lessor; provided,
however, that the applicable supplement shall remain in full force and
effect with respect to all Rakes covered thereby other than the delayed
Rake.” (emphasis supplied) Thus, in view of the facts of the case and
the said provision of the Lease, obligation of respondent no. 1 to pay
rent for the first rake does not seem to be affected by alleged delay in
delivery thereof.
40. Further, it appears from the email communications on record
that after handing over of the rake to respondent no. 1, the petitioner
was promptly following up with respondent no. 1 with regard to
completion of formalities on part of respondent no. 1 with respect to
requisite permissions for allotment of the base depot at Khurja. I may
take note of one such communication dated 08.01.2013 from
petitioner's representative to respondent no. 1, which read as follows:
“The work of commissioning of our rake is still held up on account of
the pending approval from North Central Railways. It is more than three
weeks that the rake arrived here….
We request you to take up the matter with North Central Railway in
right earnest and get it resolved. The delay in commissioning is leading
to unnecessary idling of the rake.”
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41. Also, with regard to the second rake, it appears from the
material placed on record that when the petitioner vide email dated
28.01.2013 offered delivery of the second rake on 01.02.2013,
respondent no. 1 in reply thereof asked the petitioner to hold on till
further instructions, without giving any reason whatsoever for deferring
the delivery. Again, replying to petitioner's subsequent request to take
delivery of the second rake by 13.02.2013, respondent no. 1 simply
stated “please wait for further communication from our side, we will
intimate the delivery location and date.” It appears from the emails
th
exchanged between the representatives of the parties on the 8/9
April, 2013, that respondent no. 1 had agreed to take over the delivery
of the said rake on 11.04.2013, and a team of the petitioner was
dispatched to Kolkata to facilitate the handing over of delivery to the
respondent, but what transpired thereafter - such that it could not take
effect, cannot be said at this stage.
42. Here, I may reproduce an extract from respondent's email dated
10.04.2013, which read as follows:
“Firstly, we are in CDR and are not allowed to proceed with any
more leasing of rakes. We have however agreed to take delivery
of (pending CDR decision) up to 5 rakes provided that they come to
Khurja (as Khurja is that base depot) and that they will be stabled at
CIMCO till such time we have clarity on way forward from the CDR
decision. You will appreciate that we in this position that if we
don't abide by the CDR our entire company will get into a
permanent financial difficulty, which we will not allow at any
cost.”
(Emphasis supplied)
43. Thus, it appears from the contemporaneous communication
between the parties herein that respondent no. 1 was not in a position
to take the timely delivery of the first two rakes due to problems at
respondent no. 1's end. Besides, perusal of the records, prima facie,
shows that the issue of non compliance of delivery schedule on part of
the petitioner was raised by respondent no. 1 only as a ruse for the
very first time vide letter dated 21.06.2013.
44. Also, on the aspect of the alleged manufacturing defects in the
first rake, perusal of the relevant agreements indicates that the rakes in
question were to be designed in accordance with RDSO (Research
Designs and Standard Organisation, Ministry of Railways) specifications,
and were to be subjected to dual inspection/approval for operation by
railways, i.e. before dispatch from the Manufacturer's factory and also
at the time of the commissioning. Petitioner has placed on record
despatch memo for 45 wagons and the brake van of the first rake,
whereby the said wagons were duly inspected and passed by RDSO
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designated railways official. Further, it is borne out from the joint note
of commissioning dated 21.01.2013 that before commissioning the first
rake was duly inspected; wagon-wise defects found, if any, were
notified; and almost all the notified defects/deficiencies were provided
for/attended to. The Brake van attached to the rake was also examined
and found fit to run. Consequently, the first rake was duly
commissioned on 21.01.2013 with the remark ‘allowed for one trip
(Round)’. Since no objection with respect to any material non-
conformity with the contractual requirement (agreed design) seem to
have been notified in writing by respondent no. 1 within two days of
commissioning thereof, as provided for under section 2.1.1, prima facie,
it appears that the rake was accepted by respondent no. 1 on
21.01.2013. Also, section 3.1, inter-alia, provides that acceptance of
the rake by respondent no. 1 in terms of section 2.1.1 shall amount to
acknowledgement that “the details of the size, design, capacity and
manufacture of the Rakes being leased by the Lessee under each Lease
are satisfactory..”. This is further supported by the fact that respondent
no. 1 thereafter also paid the prorate lease rent for the month of
January for an amount of Rs. 6,56,319.72.
45. Pertinently, there is nothing on record to show that after its
commissioning in January, 2013, any adverse observations/issues were
noticed by the railways in respect of the said rake until October, 2013.
Also, there is not a whisper of alleged manufacturing defects in the first
rake in any of the communications prior to respondent no. 1's letter
dated 21.10.13, not even in the letter dated 21.06.13 - whereby it
sought to terminate the lease only on the ground of alleged delay.
46. Based on these aforestated considerations, I am, prima facie, not
impressed with respondents' contention that respondent no. 1 is under
no obligation to pay the lease rental, and other amounts due and
payable towards the first rake, on account of delayed supply or
defective rake.
47. Therefore, prima facie, it seems that the contractual obligation to
pay rent for the first rake commenced from 21.01.2013. However, since
February, 2013, respondent no. 1 has not made any payment
whatsoever towards the said rake - even for the period when
respondent no. 1 had been, admittedly, using it. Thus, in terms of
clause 10.1(a) of the Master Agreement, respondent no. 1 seems to
have committed an event of default which, prima facie, entitles the
petitioner to the remedies enlisted under section 10.3 of the Master
Agreement - which, inter-alia, provides for the demand of immediate
payment of all unpaid rent and other payments then due, plus
liquidated damages equivalent to the remaining rents (discounted to
present value) for the remaining term for the said rake.
48. In Steel Authority of India Ltd. v. AMCI Pty Ltd., 2011 (3) ARBLR
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502 (Delhi), this court had the occasion to deal with a petition for
securing the amounts awarded in arbitration in favour of the petitioner
therein pending the objections thereto. Although it was at the post-
Award stage, but one of the main issues involved therein was the
guiding principles that the Court would follow while considering a
petition preferred under Section 9(ii)(b). After considering various
decisions on the subject, this court, inter-alia, concluded that:
“45. In proceedings under Section 9 of the Act, at the highest what
could be said is that the provisions of Order 38 Rule 5 Code of Civil
Procedure would serve as the guiding principle for the Court to exercise
its discretion while dealing with a petition requiring the Respondent to
furnish security for the amount in dispute. Since the letter of the law
per se is not applicable, the requirements set out in Order 38 Rule 5
Code of Civil Procedure need not strictly be satisfied, and so long as the
ingredients of the said provision are generally present, the Court would
not be unjustified in exercising its jurisdiction to require the
Respondent to furnish security. The bottom line, in my view, is that the
Court should be satisfied that the furnishing of security by the
Respondent is essential to safeguard the interests of the Petitioner.”
49. Pertinently, the Division Bench in Nimbus Communications
(supra) has also taken note of the aforesaid observation. The Division
Bench in Nimbus Communications (supra), expressing disagreement
with the observation of the co-ordinate bench of that Court in National
Shipping Company v. Sentrans Industries Limited, 2004 (1) Arb. LR
409 (Bom.) (DB) that the exercise of power under Section 9(ii)(b) was
not controlled by the provisions of the C.P.C., concluded that:
“24. A close reading of the judgment of the Supreme Court in
Adhunik Steels would indicate that while the Court held that the basic
principles governing the grant of interim injunction would stand
attracted to a petition under Section 9, the Court was of the view that
the power under Section 9 is not totally independent of those
principles. In other words, the power which is exercised by the Court
under Section 9 is guided by the underlying principles which govern the
exercise of an analogous power in the Code of Civil Procedure 1908.
The exercise of the power under Section 9 cannot be totally
independent of those principles. At the same time, the Court
when it decides a petition under Section 9 must have due regard
to the underlying purpose of the conferment of the power upon
the Court which is to promote the efficacy of arbitration as a
form of dispute resolution. Just as on the one hand the exercise
of the power under Section 9 cannot be carried out in an
uncharted territory ignoring the basic principles of procedural
law contained in the Code of Civil Procedure 1908, the rigors of
every procedural provision in the Code of Civil Procedure 1908
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cannot be put into place to defeat the grant of relief which

would subserve the paramount interests of justice. A balance has
to be drawn between the two considerations in the facts of each
case. The principles laid down in the Code of Civil Procedure 1908 for
the grant of interlocutory remedies must furnish a guide to the Court
when it determines an application under Section 9 of the Arbitration
and Conciliation Act, 1996. The underlying basis of Order 38 Rule 5
therefore has to be borne in mind while deciding an application under
Section 9(ii)(b).”
(Emphasis supplied)
50. Therefore, the strict provision of Order 38 Rule 5 does not get
bodily lifted and imported into Section 9(ii)(b) of the Act, but the
underlying principle has be borne in mind while issuing direction for
furnishing security pending arbitration. In view of the fact that
respondents are apparently running into heavy losses; undergoing CDR,
which prima facie indicates that it would be difficult for them to honour
their debts and financial obligations; their assets are charged in favour
of lenders - some of whom seem to have already initiated proceedings
to recover their dues against the security given therefor; there are
statutory dues and other higher priority obligations; and winding up
proceedings are pending against respondent no. 2, the obstruction to
the execution of the award that may be passed in favour of the
petitioner is imminent. It does not matter whether the respondents
have the ‘intent’ to obstruct or delay the execution of the award - in
case it is passed in petitioner's favour. It is no solace to the petitioner,
who may not be able to eventually enforce the award (in case passed in
its favour) - because of the respondents becoming financially defunct,
that the financial incapacity is not on account of any mal-intentions of
the respondents, but on account of the respondents being highly
indebted and going into losses, without intending to do so, so as to
obstruct the execution of the award. The award, if eventually passed in
favour of the petitioner, would be reduced to a paper award, in case the
respondents go under.
51. Reliance placed on the decision in CPI Ltd. (supra) does not aide
the respondents' case. Observation of the Court in any decision has to
be seen in the context of the facts and circumstances of that particular
case. In the said case, the appellant had invested certain sums in the
respondent company, in return whereof it was entitled to a share in
profits generated from certain projects, but respondent company was
allegedly siphoning off funds. Learned single judge therein, inter-alia,
stayed the development and booking of flats in two of such ongoing
projects, and also restrained the respondent company from giving
effect to a particular board resolution meant for raising certain loan. The
Division Bench, observing that the interim order was “likely to stop vital
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oxygen supply to BPTP Ltd. and if the company dies it would be

prejudicial to the interest of CPI India Ltd.”, balancing the equities and
sufficiently protecting interests of the appellant, modified the said
interim order. Pertinently, the interim order passed in the said case
restrained the respondent therein from carrying out certain business
activities, which directly obstructed the inflow of funds and jeopardized
the business of the respondent company, which would have been, in
turn, detrimental to appellant's interest. A direction to furnish security
cannot be equated to a direction which put a complete embargo on the
fund raising activities of a company, in terms of the hardship likely to
be suffered as a consequence thereof. Moreover, the consideration that
weighed with the Division Bench was that the appellant therein could
be well protected by directing the respondent company to deposit the
balance amount realizable from the said two projects in an escrow
account, whereas, in the present case, there is no such circumstance
which affords adequate protection to the petitioner - whose dues are
unsecured, and also, do not appear to figure in respondents' CDR
scheme. Thus, equities are clearly in favour of the petitioner herein.
52. Reliance on the decision in Intertoll ICS (supra) is misplaced.
The issue before the court therein was the ambit of power of the
arbitrator under section 17 - to grant interim measures, viz. securing
the amount in dispute in arbitration. Besides, the observations made
therein were in context of a direction to provide security in form of a
bank guarantee for a claim for damages - which had no reasonable
basis, nor was there any prima facie determination of the amount of the
damages for which the claim was likely to succeed.
53. During the course of arguments, learned senior counsel for the
respondents also sought to place reliance on the decision in Ratnagiri
Gas and Power Pvt. Ltd. v. Joint Venture of Whessoe Oil and Gas Ltd.,
199 (2013) DLT 212 (DB), with regard to the scope of power of court to
grant interim relief under section 9. Reference to the said case is
completely out of context here. The court therein had held that no
interim relief under section 9 could be granted, unless there existed an
arbitrable dispute between the parties, and interim relief in respect
thereof was prayed for. It is not the respondents' case here that there
is no arbitrable dispute in existence.
54. Looking to the circumstances of the case in their entirety, I am
of the opinion that the balance of convenience is in favour of grant of
the interim measure of protection, and the petitioner would suffer
irreparable injury if the interests of the petitioner are not adequately
protected.
55. Therefore, in view of the aforesaid discussion, the petitioner has
made out a strong prima facie case for the grant of interim relief, viz
furnishing of security for the lease rent for the first rake for the period
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from February, 2013 till the return of the complete rake. As far as
securing the amounts claimed under section 10.3.1(A) towards
liquidated damages is concerned, I am not inclined to issue direction in
respect thereof for the reason that although the petitioner might be
entitled to some damages for the alleged defaults on part of respondent
no. 1, that liability and the amount is yet to be determined. The court
cannot direct provision of security for the entire possible sum of
damages claimed, i.e. equivalent to the remaining rents (discounted to
present value) for the remaining lease term for the said rake, when
there is no reasonable basis for determination of what that amount
could be. There has to be a reasonable nexus between the damages
claimed and the loss suffered by a party as a result of the alleged
breach of contractual obligation by the other party. It is a settled legal
position that damages are granted for the actual losses - proved to
have been suffered by a party as a consequence of the alleged breach,
with the exception that in some contracts, where it is impossible to
assess the compensation arising from a breach, the sum named by the
parties in the contract - if it be regarded as a genuine pre-estimate and
is not in nature of a penalty, may be awarded as the measure of
reasonable compensation. In view of the fact that respondents have
disputed their liability to pay the amounts claimed by the petitioner -
alleging breach of contractual obligations on part of the petitioner, and
that the rake stands returned to the petitioner, which might be re-
leased for rent equivalent to, or even higher than the rate stipulated
under the Lease Agreement, the damages cannot be determined, even
prima facie, by this court at this stage. What amount the petitioner is
entitled to in respect of the future rents/damages, in the facts and
circumstances herein, is a substantive issue requiring adjudication on
merits, which should be left to be decided by the arbitral tribunal.
Therefore, any direction in this regard is beyond the scope of the
present proceedings, and uncalled for.
56. For the same reasons as discussed in the foregoing paragraph,
prayer (d) - for securing the amount claimed to have accrued under
section 2.1.3 of the Master Agreement in respect of the second rake, is
declined.
57. Section 2.1.3 provides that if the lessee fails to accept the
delivery of a rake at the delivery location for whatever reason, all
storage, stabling or other charges incurred in connection therewith shall
be on lessee's account, and additionally, if lessor has taken delivery of
the rake from the Manufacturer, lessee shall also be liable to pay
liquidated damages equal to the rent under the applicable lease
prorated over the number of days elapsed from the last scheduled
delivery date (mutually agreed by the lessor and lessee) till the date
the delivery is taken by the lessee. But, if the lessor has not taken the
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delivery from the Manufacturer, then lessee's liability is commensurate

with the charges and penalties imposed on the lessor therefor by the
Manufacturer.
58. As mentioned above, the petitioner vide letter dated 28.01.2013,
had offered to deliver the second rake on 01.02.2013. However,
respondent no. 1 kept deferring the delivery thereof, and ultimately,
failed to take the delivery of the said rake, which would prima facie
entail consequences under section 2.1.3. But, in view of the dispute
whether the petitioner had not taken the delivery of the second rake
from the Manufacturer, several aspects would have to be examined
before it could be said that the petitioner is entitled to the amounts
sought to be secured herein in relation to the second rake, e.g. whether
or not the petitioner had taken the delivery of the said rake from the
Manufacturer; if the answer is in affirmative, then, what would be the
quantum of damages in light of the purported termination of the Lease;
and if not, then, what was the penalty imposed, if any, by the
Manufacturer on the petitioner for its failure to take delivery thereof.
These aspects need adjudication on merits in arbitration, to determine
the liability, if any, of respondent no. 1 under section 2.1.3 vis-à-vis
the second rake.
59. It would be beyond the purview of proceedings before this court
under section 9(ii)(b) to sift and appreciate the documents placed on
record in this context, and having regard to the facts of the case, I feel
it would also be inappropriate for this court to record any specific
finding, even prima facie, on petitioner's claim under section 2.1.3 with
respect to the second rake. Thus, at this stage, the question of granting
interim relief as prayed herein in relation to the second rake does not
arise.
60. I now proceed to consider the submission of the respondents
that respondent No. 2 is not a party to the Lease Agreement and,
therefore, not a party to the Arbitration Agreement. The submission of
the respondents is that respondent No. 2 has consciously not signed
the lease agreement and is a party only to the guarantee. According to
the respondents, this shows the intention of the parties not to embroil
respondent No. 2 in an arbitration with the petitioner in respect of the
disputes arising under the lease agreement and to relegate the
petitioner and respondent No. 2 to the ordinary Civil Courts in respect
of disputes arising under the guarantee. The submission is that the
guarantee cannot be enforced and, no interim relief in respect thereof
can be sought, in arbitration proceedings which may be initiated by the
petitioner only against respondent No. 1 - i.e. the second party to the
lease agreement.
61. Under the Deed of Guarantee, respondent no. 2 guaranteed to
the petitioner the full performance and payment-when due under the
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Lease, by respondent no. 1 of the Guaranteed Obligations, which is

defined as “all obligations, liabilities and monies which are now or at
any time hereafter may be due, owing or payable by Lessee, actually or
contingently, on any account whatsoever pursuant to the Lease…, or as
a consequence of any breach, non-performance, disclaimer or
repudiation by Lessee…of any of Lessee's obligations under the
Lease…”, and in the event of failure of respondent no. 1 to make
payment of any amount of the Guaranteed Obligations - due and
payable in accordance with the Lease, it undertook to pay the same to
the petitioner on demand. Pertinently, the undertaking under the Deed
of Guarantee was given by respondent no. 2 as ‘a principle obligor, and
not merely as a surety’. Respondent no. 2 guaranteed to the petitioner
the fulfilment of all the obligations of respondent no. 1 under the Lease,
as respondent no. 2's primary obligation under the Guarantee, and for
enforcing the Guarantee in event of failure on part of respondent no. 1,
petitioner is not obliged to first make a demand, or take any
proceedings or satisfy any other requirement, against respondent no. 1.
It is obvious that for ascertaining the obligation of respondent no. 2
under the Guarantee, terms of the Lease would have to be looked into,
because the obligations of the respondent no. 2/guarantor are co-
extensive with the obligations of respondent no. 1/lessee under the
Lease. Against this backdrop, I may draw attention to clause 7.4 of the
Deed of Guarantee, which read as follows:
“Entire Agreement-this Guarantee and the Lease constitute the
entire agreement between the parties hereto with respect to the
subject matter hereof and thereof and supersede all other discussions
or agreements, written or oral, concerning such subject matter…”
wherein, “Lease” is defined under clause 1.2 to mean, collectively,
the Master Agreement and Supplement no. 1.
62. Clause 7.4 of the guarantee in plain and simple terms states as
to what constitutes “entire agreement between the parties”. It states
that the guarantee and the lease agreement constitute “the entire
agreement between the parties hereto with respect to the subject
matter hereto and thereto”. Therefore, clearly the parties intended that
the guarantee and the lease agreement be read as one agreement with
respect to the subject matter of both the guarantee and the lease
agreement. It is well-settled that an arbitration agreement may either
be contained in the body of the agreement itself, or it may be contained
in a separate agreement/instrument. When the arbitration agreement is
contained in the body of the agreement to which it relates, the subject
matter of that agreement would not only mean the subject matter in
respect of which the agreement has been entered into, as for instance,
in the present case the subject matter of the lease agreement is the
lease of the ten rakes, but the subject matter would also include
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arbitration agreement. In the present case, the parties namely the

petitioner and respondent No. 2 have agreed that their entire
agreement is contained in the guarantee and the lease agreement in
respect of the subject matter of both the instruments. Therefore, in my
view, respondent No. 2 cannot escape from its obligation to go to
arbitration in respect of disputes arising under the lease agreement and
the guarantee.
63. If the submission of the respondents that respondent no. 2 is not
a party to the arbitration agreement is accepted, and respondent No. 2
is not represented in arbitration between the petitioner and respondent
No. 1, it is possible that an award is rendered against respondent No. 1.
In that eventuality, respondent No. 2 would also become liable to
honour the said award - though not in enforcement of the arbitration
award, but on account of the obligation undertaken by respondent No.
2 under the deed of guarantee. Consequently, clause 7.4 of the deed of
guarantee can only be interpreted to mean that the arbitration
agreement in the lease agreement binds respondent no. 2 as well.
64. Even if it were to be accepted that respondent No. 2 is not bound
by the Arbitration Agreement contained in the Lease Agreement, an
analysis of the law, as interpreted and applied in several decisions leads
to the conclusion that in the facts of this case there is sufficient
justification to issue interim directions in respect of respondent no. 2. I
may examine the legal position as regards the power of court under
section 9 of the Act to issue interim orders against third parties to
arbitration.
65. Section 9 of the Act provides that:
“9. 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 of 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
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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.”
66. While the section explicitly provides that only a party to the
arbitration agreement can apply to the court for interim measures, it
does not say against whom any such relief can be claimed. Unlike
section 17 - which specifically allows for measures to be directed only
against parties to arbitration, there is nothing in section 9 which
expressly restricts a court from passing orders against non-signatories
to arbitration agreement. Pertinently, there has been a divergence of
opinion in this Court on the aspect of maintainability of a petition under
section 9 of the Act against a third party. On one hand, there are cases
where the learned single judges of this court have endorsed the view
that section 9 of the Act is applicable only inter se/between the parties
to the arbitration agreement. [see : National highways Authority of
India v. China Coal Construction Group Corp, AIR 2006 Delhi 134;
Mikuni Corporation v. UCAL Fuel Systems Ltd, (2008) 1 ALR 503 (Del);
Smt. Kanta Vashist v. Shri Ashwani Khurana, National agriculture Co-
operative Marketing federation of India Ltd. v. Earthtech enterprises
ltd., OMP no. 558/2007 decided on 23.04.2009]. On the other hand,
the court in several cases has recognised the existence of power of the
court to issue interim orders with respect to third parties under section
9 of the Act. [see : CREF v. Puri Construction Ltd., (2000) 3 ALR 331
(Del); Arun Kapur v. Vikram Kapur, AIR 2002 Del 420; Goyal Mg Gases
(p) Ltd. v. Air Liquide Deutschland GmbH, OMP no. 361/2004 decided
on 31.01.2005, Sri Krishan v. Anand, OMP no. 597/2008 decided on
18.08.2009].
67. In Value Advisory Services v. ZTE Corporation, OMP no. 65/2008
decided on 15.07.2009, learned single judge after considering
numerous conflicting judgments of single-judge benches of the High
Court, inter-alia, concluded that:
“13. A conspectus of the judgments aforesaid on Section 9 would
show that the court in each case has made the observation with regard
to maintainability/applicability of Section 9 qua third parties depending
upon facts of each case and depending upon feasibility of the order
sought/required therein. In my view, no general principle of
maintainability/applicability or non-maintainability/non-
applicability can be laid down. It will have to be determined by
the court in the facts of each case whether for the purpose of
interim measure of protection, preservation, sale of any goods,
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securing the amount in dispute, an order affecting a third party

can be made or not.
14. In my view, if as a general rule it is laid down that in
exercise of power under Section 9, no direction can be issued to
parties not parties to agreement containing an arbitration clause
or not parties to arbitration proceedings, the same will hamper
the efficacy of the said provision. Under Clause (i) thereof, the
guardian to be appointed may not be such a party; similarly the goods
under Clause (ii)(a) may be or may be required to be in custody of or
delivered to or sold to such third parties - further orders against such
third parties may also be required in connection with such sale; under
Clause (ii)(b) the amount to be secured may be in the form of money
payable or property in hands of such third party - the scope
cannot/ought not to be restricted to securing possible with orders
against parties to arbitration only. Similar examples can be given with
respect to other clauses also.”
(Emphasis supplied)
68. In the aforesaid case, the court was dealing with a petition under
section 9 of the Act for direction to respondent no. 3 - owing certain
money to respondent no. 1&2, to deposit the same in the court in order
to secure the monetary claim that the petitioner had against
respondent nos. 1&2 therein. The learned single judge held that,
notwithstanding the fact that respondent no. 3 was not a party to the
arbitration agreement between the petitioner & the other two
respondents, and was not concerned with the dispute between them, it
was within the ambit of Court's power under section 9 to issue such a
direction to respondent no. 3. Observing that section 9 provides that
“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”, and referring
to provisions under CPC, such as sections 47, 60 and Order 21 Rules 46
and 46A-F, Order 38 Rules 6-11A of CPC, learned single judge reasoned
that the practice of issuing interim orders including pre-decretal ones
against third parties was well-accepted under the C.P.C., and therefore,
it would be illogical not to extend the same powers to the Court under
section 9 of the Act. On the question of - possibility of the third party
contesting such an application, or setting up a defense thereto, calling
for an adjudication on trial, the Court, inter-alia, observed that “The
court, in such cases in its discretion can on a prima facie view of the
matter, either refuse to exercise powers under Section 9 or pass other
appropriate order to protect the interest of all parties concerned.”
However, in the facts of that case, the court refused to order
respondent no. 3 to deposit the monies in Court.
69. The observations made in Value Advisory Services (supra) with
respect to power of the court under section 9 being analogous to power
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of a civil court to pass an order qua a third party - for attachment of

property/deposit of money in court, at a pre-decretal stage, were made
in the context of an interim relief in nature of a garnishee order. The
observations were made with respect to power of the court to order
attachment of property/monies of a defendant, which may be in
possession of third party-in trust, for or on behalf of the defendant.
70. I find myself in respectful agreement with the learned single
judge that no hard and fast rule can be laid down as to issuance of
interim orders qua third parties, and the same depends on the facts of
each case. I may point out that subsequently, the court - taking note of
the said observation made in Value Advisory Services (supra), in the
specific facts of the respective cases, refused to exercise its power
under section 9 against a non-signatory to arbitration agreement in
Ajay Makhija v. Dollarmine Exports Pvt. Lt., whereas, it passed interim
orders with respect to a third party in Dorling Kindersley (India) Pvt.
Ltd. v. Sanguine Technical Publishers, 2013 (3) ARB LR 52 (Del).
71. Undoubtedly, section 9 provides that the court shall have the
same powers for making interim orders under section 9 as a civil court
has for the purpose of, and in relation to, any proceedings before it, and
the powers of a civil court in this regard are very wide. The civil courts -
as and when required, and deemed appropriate in the facts and
circumstances of a particular case have been making interim orders in
respect of third parties, such as : interim injunction restraining third
party-banks from honouring bank guarantees; attaching defendant's
monies/property in hands of third party-trustee, debtor, agent etc;
restraining third party-subsequent transferee/person claiming rights in
suit property from disposing of the same, and the like. As a corollary,
the power of the court to issue interim orders under section 9 cannot be
confined only to the parties to arbitration agreement. However, a
significant parameter - inherent in section 9, for exercise of this power
against a non-signatory to arbitration agreement, is that the purpose of
section 9 is to aid arbitration between the parties thereto, and the
interim orders thereunder have to be with regard to subject matter of
arbitration/in connection with the arbitral proceedings. In this context,
it is relevant to draw a distinction between orders granting interim
relief against a party to the arbitration agreement - which incidentally
affects a third party, on one hand, and orders granting relief directed
against a third party, on the other. While the former is ordinarily
acceptable as being within the scope of section 9, the power with
respect to the latter should be exercised sparingly. For instance, an
order appointing a third party as a receiver or guardian of a
minor/person of unsound mind is not an order against the third party,
or detrimental to its rights as such. Rather, it is a relief granted to the
petitioner in support of the arbitral proceedings, and affects the party
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to the arbitration agreement. Similarly, when a subsequent transferee,

or a person claiming title under a party to arbitration is ordered to
maintain status quo, or not to dispose of property - which is subject
matter of arbitration, it is again ancillary to arbitral proceedings in as
much, as, it is for protection of the subject matter of arbitration that
the order is passed. An injunction, or order of attachment with respect
to the properties belonging to/monies owed to a party to arbitration,
but in hands of a third party for/on behalf of the said party, is
effectively a relief against the said party, which incidentally affects the
third party. Pertinently, it is expressly provided in the C.P.C. that
attachment before judgment shall not affect the prior existing rights of
third parties in the property of the defendant sought to be attached.
Injunction against a third party - bank from honouring a bank
guarantee is consequential to interim relief of restraining a party from
encashing the same against the petitioner. To sum up, the court may
issue interim orders against the third parties to arbitration only in
exceptional circumstances - which are such that denial thereof might
frustrate the petitioner's rights in arbitration; defeat the very object of
arbitration between the parties thereto; render the arbitration
proceedings infructuous; lead to gross injustice; and/or, leave the
petitioner remediless, depending on facts of each case.
72. Even assuming that respondent no. 2 is not a party to arbitration
agreement, it is not a total stranger to the covenants of the Lease
Agreement. Apparently, respondent no. 2 has been in the picture
throughout : at the stage of execution of the Lease Agreement between
the lessor and the lessee, and also during the subsistence of the Lease
- when respondent no. 1 allegedly defaulted in performance of its
obligations thereunder. Pertinently, Supplement no. 1 expressly
provides for furnishing of a guarantee by respondent no. 2 for
performance of all of respondent no. 1's stipulated obligations. Also, the
recital (B) in the Deed of Guarantee, inter-alia, records that “…
execution and delivery of this Guarantee is a condition precedent to
Lessor leasing the Rake(s) to Lessee pursuant to the Lease…”. Further,
when the disputes arose under the Lease Agreement - which are
subject matter of arbitration between the lessor and the lessee,
respondent no. 2 seems to have been actively involved in the
efforts/negotiations to resolve the disputes, and to arrive at an
amicable solution. Reference may also be made to communications
dated 27.05.2013 and 17.07.2013, wherein the petitioner has
specifically mentioned about the discussions between the petitioner and
respondent no. 2, and assurances given by respondent no. 2, on behalf
of respondent no. 1. Relevant extracts are reproduced hereunder.
73. Petitioner's letter dated 27.05.2013, inter-alia, stating that:
“…During discussions between GIPL and Arshiya and based on
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assurances made by the Chairman, Arshiya International Limited,

on behalf of Arshiya, GIPL expected the past due Rent payments
for the first rake to be paid by Arshiya by May 23, 2013; however,
this was not done….”
(Emphasis supplied)
74. Petitioner's notice dated 17.07.2013 for dispute resolution, inter-
alia, stating that:
“… GIPL has had frequent discussions with Arshiya to attempt to
resolve the foregoing issues. Despite assurances from the Chairman
of Arshiya International, on behalf of Arshiya, that all past due
amounts on Rake No. 1 would be paid after the CDR process was
completed. The Empowered Group of CDR forum approved
Arshiya group's corporate debt restructuring on June 24, but still
no payment has been received and Arshiya has not indicated when the
payment will be made…”
(Emphasis supplied)
75. Respondent no. 1 is a wholly owned subsidiary of respondent no.
2. It is not uncommon that in cases where group companies
substantially constitute one economic entity, the courts - instead of
going by the separate legal entities of the companies, have lifted the
corporate veil, and looked at the common economic entity of the group
to which they belong. In view of the facts of the case, and the conduct
of the parties as reflected from the material on record, it does, prima
facie, appear that the respondents conducted their affairs as
constituents of the Arshiya Group. Also, in as much, as, respondent no.
2 has undertaken to honour respondent no. 1's obligations towards the
petitioner as its own primary obligations, and the petitioner has a right
to claim from respondent no. 2 the amounts allegedly due and payable
by respondent no. 1 under the lease, there is a commonality of interest
between respondent No. 1 and respondent no. 2. Moreover, looking at
the dismal financial condition of respondent no. 1 - as discussed
hereinafter, a direction only to respondent no. 1 to furnish the required
security might not afford adequate protection to the petitioner.
Therefore, I am of the opinion that the facts of the instant case are
such that orders under section 9 ought to be passed against respondent
no. 2.
76. As far as petitioner's averments in respect of the financial
position of the respondents are concerned, it is noticeable from the
financial reports placed on record and admissions of the respondents
that they are indeed in a tight spot. Financial statement of respondent
no. 1 for the year ending 31st March, 2013 shows losses to the tune of
Rs. 48,27,28,020/-. It is submitted by the petitioner that as per the
Standalone balance sheet of respondent no. 1 for the period
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01.04.2012 to 31.03.2013, net worth of respondent no. 1 has eroded

by almost 40% and its secured liabilities are five times its net worth. It
is also submitted that 25% to 30% of the revenues of respondent no. 1
go towards servicing the interest costs on its borrowings, and it has
also defaulted in payment of its statutory liabilities amounting to
approximately Rs. 6 Crores.
77. In this regard, I may draw attention to an observation recorded
in the auditor's report on the financial statements of respondent no. 1
as on 31.03.2013, which read as follows:
“The company is under severe financial stress which is reflected by
increased trade receivables and payables and majority of them are
overdue, the workforces downsized and full and final settlement of
resigned employees is in arrears of Rs. 68,92,900/- delayed and non-
payment of dues (interest and repayment of borrowings) of Banks and
Financial Institution of Rs. 22,74,14,578/-, and statutory dues i.e.
income tax deducted at source and Works contract tax for Rs.
4,42,55,171/-. The company has filed Corporate Debt Restructuring
plan with the lending bankers which is under consideration.”
78. Under the Deed of Guarantee respondent no. 2 guaranteed to the
petitioner payment in full of any amount due and payable to it by
respondent no. 1 - a wholly owned subsidiary of respondent no. 2 in
respect of the obligations of respondent no. 1 under the Lease
Agreement. However, financial reports of respondent no. 2 also do not
inspire much confidence about the soundness of its financial health. It
is borne out from the records that it incurred losses (after tax) to the
st
tune of Rs. 14,00,50,000/- for the financial year ending 31 March,
2013. Respondent no. 2 in it notes to Standalone financial Results for
the quarter and half year ending 30th September, 2013 has, inter-alia,
stated as follows:
“The company is under severe financial stress which is reflected by
increased trade receivables and payables and majority of them are
overdue, the workforce downsized and full & final settlement of
resigned employees is provided for and is in arrears to the extent of Rs.
394.04 lacs, its delayed and non-payment of dues (interest and
repayment of borrowings) of banks and a financial institution and a non
-banking finance company of Rs. 21,264.74 lacs (including interest),
short-term funds are used for long-term purpose, statutory dues i.e.
income tax deducted at source and value added tax are in arrears to
the extent of Rs. 2,238.58 lacs and certain lenders have filed court
cases against the company and directors due to dishonour of cheques.
The corporate debt restructuring (CDR) scheme of the company has
been approved by the CDR cell and Master Restructuring Agreement
(MRA) with all banks except one bank. The company is confident that it
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will comply with all the conditions of the CDR scheme and shall
continue as a viable unit.”
79. Further, I may refer to the auditor's report on the consolidated
financial statements of respondent no. 2 and its subsidiaries-including
respondent no. 1 (the Group), for the year 2012-2013, wherein it is,
inter-alia, observed that:
“The Group is under severe financial stress which is due to and
evident from huge capital expenses financed by debt, increased trade
receivables and payables and majority of them are overdue, full and
final settlement dues of resigned employees of Rs. 55,054,409 are in
arrears, statutory dues i.e. income tax deducted at sources, service tax
and value added tax of Rs. 403,690,449 are in arrears, the dues
(interest and repayment of borrowings) of banks and a financial
institution and a non-banking finance company are delayed and Rs.
3,149,942,069 are overdue, short-term funds are used for long-term
purposes and certain lenders have filed court cases against the
company and directors due to dishonour of cheques. To mitigate
financial stress, the Group has taken various steps including cost
cutting exercise and opted for corporate debt restructuring (CDR) plan
which is admitted and under consideration of the CDR cell.”
80. Thus, it can be seen that there are various risk factors disclosed
in the aforementioned reports, viz increased and overdue trade
receivables, arrears due to employees, outstanding statutory dues,
legal proceedings by lenders etc. Admittedly, the respondents are
undergoing CDR. As per respondents' submission the scheme of CDR
has been approved by the CDR Cell, and an agreement with the lenders
in this regard has already been executed and repayment of loans has
been deferred. It is submitted that upon successful implementation of
the debt restructuring scheme, the respondents will be in a position to
fulfil all their obligations, under any arbitral award, if so passed in
favour of the petitioner. It is claimed that the respondents have shown
an improvement in the financial condition due to implementation of
CDR, and indebtedness of respondent no. 1 has reduced significantly.
Further it is stated that respondent no. 1 has also managed to pay its
outstanding statutory dues to a certain extent, and is committed to pay
the current outstandings within the first financial quarter of the current
Financial Year 2014-15.
81. Pertinently, respondents have not filed any document which
would indicate that pursuant to implementation of CDR, there has been
any significant improvement in their financial health as claimed, or it is
likely to revive in the future. I may point out that from perusal of some
of the correspondence on record (emails dated 22.04.2013,
14.05.2013, 27.05.2013, 17.07.2013, 23.08.2013, 30.08.2013,
31.08.2013, 05.09.2013, 12.09.2013), it seems that the petitioner had
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been constantly asking the respondents to share information on the

CDR process - its projected financial implication on respondents'
business and credit profile and also how the obligations under the Lease
were expected to be fulfilled, but the concern of the petitioner does not
seem to have been addressed cogently. It appears from the said
correspondences that while on one hand, respondents had been
projecting that respondent no. 1 was committed to fulfilling its
obligations under the Lease - once the CDR was implemented, on the
other hand, taking a completely different stand, respondent no. 1
denied its liabilities altogether and terminated the Lease on seemingly
feeble grounds. Besides, when it was put to the counsel for the
respondents as to whether the amounts due towards the rent of the
first rake were reflected in the financial statements of respondent no. 1
as outstandings for the relevant period, and the liability under the
Lease forms part of the CDR process/taken into consideration while
formulating the scheme for restructuring of debts, no satisfactory
answer was forthcoming.
82. Also, I am not impressed with respondents' submission that
since the value of their assets is greater than the total liabilities, they
would be able to meet the liabilities qua the petitioner by utilisation of
assets, if, and when, a finding is returned in favour of the petitioner in
the arbitration proceedings. As per respondents' own admission, their
assets are charged in favour of their lenders. My attention was drawn to
the Public Auction notice - issued by SICOM Ltd, with respect to one
such mortgaged property of respondent no. 2. It is discernible from the
material before me that there are outstanding statutory dues, and other
higher priority obligations of the respondents. In the sur-rejoinder, the
respondents have also conceded that various winding up petitions have
been instituted against respondent no. 2 before the Bombay High
Court. Thus, looking at the financial position of the respondents, the
apprehension of the petitioner that it may not be able to effectively
enforce the award, in case its claims are upheld in arbitration, seems to
be reasonable/justified.
83. I may clarify that expression of opinion herein is a prima facie
view, without prejudice to the rights and contentions of parties - to be
adjudicated on merits by the arbitral tribunal.
84. Therefore, for the aforementioned reasons, the present petition is
allowed partially, and the respondents are, accordingly, directed to
furnish solvent security to the satisfaction of this Court for an amount
representing the outstanding rent in respect of the first rake for the
period from 01.02.2013 till the breakvan of the first rake was returned
to the petitioner. The security be furnished jointly and severally by
respondents No. 1 & 2 within four weeks to the satisfaction of the
Registrar General of this Court.
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85. List the matter before the Registrar General on 23.09.2014 for
verification and scrutiny of the security.
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