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Bkp Enterprise v. Spicejet Limited
Factual and Procedural Background
This opinion addresses an interlocutory application (IA No. 720/2017) filed by the plaintiffs under Order XXXVIII Rule 5 of the Civil Procedure Code (CPC), seeking security or continuation of an interim order against the defendant. The plaintiffs claim to be entitled to recover Rs. 7.13 crores from the defendant for breach of contract, relying on the defendant's precarious financial position as reflected in its balance sheet for the quarter ending 31st December 2016. The defendant opposes the application, asserting that its financial health has been improving. The suit itself involves a question of whether a binding enforceable contract was entered into between the parties. Earlier, an application seeking similar relief was dismissed by an order dated 16 December 2016, and the plaintiffs were granted liberty to apply again under Order XXXVIII Rule 5 CPC.
Legal Issues Presented
- Whether an order under Order XXXVIII Rule 5 CPC can be granted before the entitlement to damages is determined and prior to the issue of existence of a contract being decided in favour of the plaintiffs.
- Whether the necessary ingredients for an order under Order XXXVIII Rule 5 CPC—namely, the defendant’s intent to dispose of or remove property to obstruct or delay execution of a decree—are satisfied in the present case.
- Whether the precarious financial position of the defendant alone justifies granting security or continuation of an interim order under Order XXXVIII Rule 5 CPC.
Arguments of the Parties
Plaintiffs' Arguments
- The plaintiffs rely on the defendant’s balance sheet notes indicating material uncertainty about its ability to continue as a going concern and advances received by the defendant, suggesting financial precariousness.
- They contend that given the defendant’s financial position, the defendant should be directed to furnish security or the interim order should be continued to prevent the decree from becoming a mere paper decree.
- They place reliance on paragraph 7 of the Himachal Futuristic Communication v. Union of India judgment to support their claim for security.
- The plaintiffs emphasize the risk of non-recovery even if they succeed in the suit, due to the defendant's financial condition.
Defendant's Arguments
- The defendant’s senior counsel points out that the financial position has improved over time, with debts reduced from Rs. 2200 crores to Rs. 622 crores.
- The defendant relies on the earlier dismissal of a similar application dated 16 December 2016, arguing that there is no change in circumstances warranting a different order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Himachal Futuristic Communication v. Union of India, 2010 (2) RAJ 541 Delhi | Consideration of interim security orders in financial uncertainty contexts and limits of such orders under Order XXXVIII Rule 5 CPC | The Court distinguished the case, holding that the judgment cannot be read as allowing orders under Rule 5 merely on precarious financial position without satisfying the Rule's conditions. |
| Raman Tech. and Process Engg. Co. v. Solanki Traders, (2008) 2 SCC 302 | Clarification of the object and strict conditions for supplemental proceedings under Order XXXVIII Rule 5 CPC | The Court applied the principle that such power is extraordinary, requiring proof of intent by the defendant to dispose of or remove property to obstruct execution of a decree. |
| Premraj Mundra v. Md. Maneck Gazi, AIR 1951 Cal 156 | Guidelines on factual proof required for orders under Order XXXVIII Rules 5 & 6 CPC | The Court relied on the principles that mere insolvency or financial embarrassment is insufficient; the Court must be satisfied on facts that the defendant intends to obstruct execution. |
| Kcv Airways Ltd v. Wg.Cdr R.K Blaggana, 1997 (42) DRJ 81 | Requirement of pleading and proof of intent to dispose or remove property under Order XXXVIII Rule 5 CPC | The Court applied the principle that absence of pleading on intent to obstruct execution warranted dismissal of the application under Rule 5. |
Court's Reasoning and Analysis
The Court carefully examined the requirements of Order XXXVIII Rule 5 CPC, emphasizing that the power to grant security or attachment before judgment is drastic and to be exercised only when the defendant is shown to be attempting to dispose of or remove property to obstruct or delay execution of a decree. The Court noted that the plaintiffs' claim is for damages for breach of contract, and the entitlement to damages is yet to be determined, pending the decision on the existence of a binding contract.
The Court rejected the plaintiffs' reliance on the defendant’s precarious financial position alone as a ground for granting security. It highlighted that the financial condition of the defendant was reportedly similar at the time the contract was allegedly entered into, undermining the argument that the defendant’s current financial state justifies security.
The Court distinguished the Himachal Futuristic Communication case, clarifying that it does not support granting orders under Rule 5 merely due to financial precariousness without satisfying the Rule’s conditions. The Court reiterated the Supreme Court's guidance in Raman Tech. and Process Engg. Co. that the power under Order XXXVIII Rule 5 CPC is not to be exercised mechanically or to convert unsecured debts into secured ones.
The Court also considered the potential adverse impact of granting the order on the defendant’s efforts to improve its financial health and on the rights of other creditors not before the Court, concluding that it would not be in the overall interest to grant such relief.
Accordingly, the Court found no case made out for relief under Order XXXVIII Rule 5 CPC.
Holding and Implications
IA No. 720/2017 is dismissed.
The direct effect of this decision is that the plaintiffs are not granted security or continuation of the interim order under Order XXXVIII Rule 5 CPC at this stage. The ruling confirms that such orders require strict compliance with the conditions laid down by law, particularly proof of intent to obstruct execution of a decree, and cannot be granted solely based on a defendant’s financial condition. No new precedent is established; the decision adheres to established legal principles regarding attachment before judgment and the protection of defendants' property rights pending adjudication of claims.
Rajiv Sahai Endlaw, J.
IA No. 720/2017 (of plaintiffs u/O XXXVIII R-5 CPC)
1. The senior counsels for the parties have been heard.
2. The senior counsel for the plaintiffs has drawn attention to the notes appended to the balance sheet of the defendant for the quarter ending 31st December, 2016 and particularly to note 7 where it has been stated that the factors mentioned therein resulted in a material uncertainty that may cause significant doubt about the Company's ability to continue as a going concern and to note 3 about the advances received by the defendant from others. The senior counsel for the plaintiffs has next contended that even as per the accounts now filed by the defendant itself and as per the Agreement pleaded by the plaintiffs, the plaintiffs are entitled to recover a sum of Rs. 7.13 crores from the defendant and in view of the precarious financial position of the defendant as evident from the balance sheet of the defendant, the defendant ought to be directed to furnish security and/or the interim order earlier made needs to be continued, else the plaintiffs, even if succeed in getting a decree, would have only a paper decree and unable to recover anything thereunder. Reliance is placed on para 7 of Himachal Futuristic Communication v. Union of India 2010 (2) RAJ 541 Delhi.
3. I have enquired from the senior counsel for the plaintiffs, whether not the claim of the plaintiffs in the suit is for damages for breach of contract and if that be so, how can an order under Order XXXVIII Rule 5 of the CPC be made unless the entitlement of the plaintiffs to damages is determined and which determination in turn is dependent upon the issue already framed, of the existence of the contract, being decided in favour of the plaintiffs.
4. It has further been enquired, whether not the necessary ingredients of Order XXXVIII Rule 5 of the CPC are the intent of the defendant to dispose of the whole or any part of his property or to remove the whole or any part of his property from the local limits of the jurisdiction of the Court and as to how the same are satisfied.
5. It has yet further been put to the senior counsel for the plaintiffs, whether not the financial status of the defendant was the same at the time when the plaintiffs claim to have entered into a contract with the defendant and if that be the situation, whether it is possible for the plaintiffs to contend that the decree should not be allowed to be rendered into a mere paper decree.
6. The senior counsel for the plaintiffs has fairly stated that the position of the defendant may not have been any better at the time when according to the plaintiffs the contract, for breach whereof damages are claimed, was entered into. It is also not disputed that the claim in the suit is for recovery of damages for breach of contract and the issue no.(i) framed on 18th October, 2016 is, whether any binding enforceable contract came into existence between the parties. The senior counsel however emphasises that the decree should not be reduced to a paper decree.
7. As far as reliance by the senior counsel for the plaintiffs on Himachal Futuristic Communication supra is concerned, in that case the petition under section 9 of the arbitration & conciliation act, 1996 for a direction to the respondent therein to deposit the awarded amount, application under Section 34 of the said Act whereagainst was pending in the Court, was dismissed. All that para 7 of the judgment observes is that vis-a-vis Union of India it cannot be suggested that unless the order of deposit was made, the petitioner therein would suffer a fait accompli or would not be in a position to execute the award in the event of dismissal of the petition under Section 34 of the Arbitration Act. The said judgment cannot be read as laying down a proposition of law that notwithstanding the express language of Rule 5 of Order XXXVIII prescribing the conditions on satisfying which only the order thereunder can be made, the order can also be made when otherwise the position of the defendant is shown to be precarious financially. This is more so in a case where there is no change in the financial health of the defendant from the time the plaintiffs chose to enter into the contract with the defendant.
8. The senior counsel for the defendant has drawn attention to the order dated 16 December, 2016 dismissing the earlier application filed by the plaintiff inter alia seeking the same relief as claimed in IA No. 720/2017 and has contended that there is no change.
9. The senior counsel for the plaintiffs in rejoinder draws attention to the liberty granted in the order dated 16 December, 2016 to the plaintiffs to apply under Order XXXVIII Rule 5 of the CPC.
10. Though there is some controversy, whether the order dated 16 December, 2016 is continuing till now or not, but in my view the same is immaterial now when this application is being considered and adjudicated upon.
11. I am of the view that if it were to be accepted that in every claim of recovery of money or damages for breach of contract, the defendant, notwithstanding the conditions under Rule 5 of Order XXXVIII being not even pleaded, can be directed to furnish security, then the same would be contrary to the sanction of the Legislature. Ordinarily, till a money decree is passed, the plaintiff would not be entitled to seek such order. The Legislature has made provision therefor only for situations where the defendant, to deprive the benefit to the plaintiff of the decree likely to be passed, is found to be indulging in acts detrimental to the interest of the plaintiff. That is not so here. Rather it is the contention of the senior counsel for the defendant that the financial health of the defendant has been improving over a period of time and from the debts, earlier of Rs. 2200/- crores, stand reduced to Rs. 622 crores.
12. Supreme Court in Raman Tech. and Process Engg. Co. v. Solanki Traders (2008) 2 SCC 302 has held that the object of supplemental proceedings (applications for arrest or attachment before judgment, grant of temporary injunctions and appointment of receivers) is to prevent the ends of justice being defeated. It was further held that the scheme of Order XXXVIII and the use of the words “to obstruct or delay the execution of any decree that may be passed against him” in Rule 5 make it clear that before exercising the power under the said Rule, the court should be satisfied that there is a reasonable chance of a decree being passed in the suit against the defendant. It was yet further held that “it is well-settled that merely having a just or valid claim or a prima facie case, will not entitle the plaintiff to an order of attachment before judgment, unless he also establishes that the defendant is attempting to remove or dispose of his assets with the intention of defeating the decree that may be passed”. The power under Order XXXVIII Rule 5 CPC was held to be a drastic and extraordinary power, not be exercised mechanically or merely for the asking; it should be used sparingly and strictly in accordance with the Rule. The Supreme Court cautioned that the purpose of Order XXXVIII Rule 5 is not to convert an unsecured debt into a secured debt and any attempt by a plaintiff to utilize the provisions of Order XXXVIII Rule 5 as a leverage for coercing the defendant to settle the suit claim should be discouraged. The Supreme Court reminded that a defendant is not debarred from dealing with his properties merely because a suit is filed and only if the plaintiff prima facie shows that the defendant is about to remove or dispose of the whole or part of his property, with the intention of obstructing or delaying the execution of any decree that may be passed against him is the power under Order XXXVIII Rule 5 of the CPC to be exercised.
13. The judgment of the High Court of Calcutta in Premraj Mundra v. Md. Maneck Gazi AIR 1951 Cal 156 laying down the guiding principles in this regard was relied upon by the Supreme Court. The Calcutta High Court in the said judgment inter alia held (i) that whether the circumstances as stated in the order xxxviii rules 5 & 6 exist or not is a question of fact that must be proved to the satisfaction of the Court; (ii) that the Court would not be justified in issuing an order for attachment before judgment or for security merely because it thinks that no harm would be done thereby or that the defendants would not be prejudiced; (iii) that a mere allegation that the defendant was selling off his properties is not sufficient; (iv) the fact that the defendant is in insolvent circumstances or in acute financial embarrassment, is a relevant circumstance, but not by itself sufficient; (v) that in the case of running businesses, the strictest caution is necessary and the mere fact that a business has been closed, or that its turnover has diminished, is not enough; (vi) and, that the defendant in a suit is under no liability to take any special care in administering his affairs, simply because there is a claim pending against him.
14. Mention may also be made of the dicta of the Division Bench of this court in Kcv Airways Ltd v. Wg.Cdr R.K Blaggana. 1997 (42) DRJ 81 where in the absence of any pleading that the defendant with the intent to obstruct or delay the execution of the decree that may be passed against him was about to dispose of the whole or any part of his property or about to remove the whole or any part of his property from the local limits of the jurisdiction of the Court, the application under Order XXXVIII Rule 5 was dismissed.
15. I am further of the view that granting any order as sought by the plaintiffs against the defendant may materially affect the steps being undertaken by the defendant to come out of the red and may also affect the rights of other creditors of the defendant who are not before this Court. For this reason also, it would not be in overall interest to grant any such order.
16. No case for granting relief under Order XXXVIII Rule 5 of the CPC is made out.
17. IA No. 720/2017 is dismissed.
CS(COMM) No. 1118/2016.
18. The senior counsels for the parties state that the defendant, in terms of the order dated 20 March, 2017 has filed further documents and the plaintiffs will be filing the affidavit by way of examination-in-chief as scheduled before the Court Commissioner appointed for recording evidence.
19. List the suit after the recording of evidence is complete.
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