Case Study: Flywheel Logistics Solutions Pvt. Ltd. v. M/s. Hinduja Leyland Finance Ltd. & Ors. [2020]

Setting The Frame

The present case deals with the situation where a vendor seized the lent trucks of the borrower [Flywheel Logistics Solutions] due to non-payment of instalment of hire amount. However, no requisite procedures were followed and even the arbitration proceedings were a sham.

This case is an appropriate example of Darwin’s theory of survival where big fishes eat the smaller fishes in the sea. The hire-purchase market is also full of vendors (the big fishes) who wait for an opportunity to exploit the hirers (the small fishes). It is not the first time when the vendor has seized the properties of the borrower for default of money using goons and muscle power. However, with the advent of arbitration clauses in almost every contractual agreements, the scope for biasness has increased in favour of the big fishes capable to incline the arbitration proceedings in their favour.

Notwithstanding the fact that the present case reflects the regular scenario faced by hirers in case of default in payment, the Madras High Court gave a landmark judgment in this case clarifying several questions raised during the arbitral proceedings. The judgment did not only clarified the position of law but also laid down strict guidelines to be followed in case of any dispute in a hire-purchase agreement that goes for arbitration.

Factual Background of the Case

The appellant Flywheels Logistics entered into a hire-purchase agreement dated 30.09.2017 with the respondent company which is a Non-banking Financial Company (NBFC) whereby the appellant borrowed money from the respondent company and promised to return them in instalments. The amount of money was used to purchase 28 trucks to develop the business of the appellant.

The hire-purchase agreement contained the ‘arbitration clause’. According to this, if either party breaches or fails to abide by the conditions of the contract, the dispute shall be resolved through arbitration and not by moving to the court. The appellant defaulted in the payment of the instalments and the respondent invoked the arbitration clause as provided under the agreement. According to the procedure, the respondent appointed Advocate Samuel as the Sole Arbitrator of the dispute and a notice of the same was sent to the appellant.

The appellant was informed that the arbitration clause has been invoked, the amount of money that was due to the respondent company by the appellant and was also asked to settle the dispute amicably. The appointed arbitrator issued notice to the appellant on 23.11.2019 and informed him that the first hearing of the matter will take place on 09.12.2019. The notice also informed the appellant that a claim petition and an application under Section 17 of the Arbitration and Conciliation Act, 1996 for interim relief has been filed by the respondent company on the same date as the notice was issued.

Even before the hearing on 09.12.2019 took place, the arbitrator ordered the interim relief and an employee of the respondent company was permitted to seize vehicles of the appellant company towards discharge of the outstanding loan amount. In pursuance of this order, the respondent seized 26 trucks on 02.12.2019 and kept them idle since then. The present appeal has been brought before the Hon’ble Madras High Court against the order of the arbitrator permitting the respondents to seize the vehicles of the appellant.

Issues Raised before the High Court

The court had to deal with only one main issue:

What is the scope and object of the framework of Section 9 and Section 17 of the Arbitration Act, 1996 and whether there is a need for guidelines to apply them?

Relevant Legal Provisions

The two most relevant provisions of the Arbitration Act that has been discussed in this case are:

• Section 9: This provision deals with the right of a person to approach a court to claim for interim reliefs while an arbitral proceeding is going on in a matter concerning him/her. It lays down the list of reliefs that a person can claim as interim relief during the pendency or after the decision of an arbitral proceeding.
• Section 17: It is a replication of Section 9 and lays down the right of parties to an arbitration to apply for interim reliefs before an arbitral tribunal instead of a court of law.

Judgment

In a landmark judgment, the court not only allowed the appeal of the appellants but also held the arbitral proceedings conducted by the sole arbitrator Mr. Samuel was a sham and all the orders were dismissed. However, the most momentous part of the judgment which will be known for the future to come are the guidelines set by the court when applying Sections 9 and 17 by the court and the arbitrator.

The court divided the available interim reliefs in this case under Section 17 into 5 categories and laid down several principles that the arbitrator must follow while granting each of them:

1. Interim Injunction

1. Section 17(1)(ii)(d) vests power with an Arbitral Tribunal to pass an order of interim injunction during the pendency of the proceedings before it. An identical power has been vested with the Court under Section 9(1)(ii)(d), with the difference that it may be exercised by the Court before the commencement of Arbitral proceedings and after the award has been passed but before it is enforced in accordance with Section 36.
2. The court held that there can be no quarrel that the Tribunal, like a Court under Section 9(1) is, therefore, legally mandated to test the case of the applicant with reference to the well-known parameters of a) prima facie case b) balance of convenience and c) irreparable loss before granting an order of injunction.
3. There is no gainsaying that the purpose of an temporary injunction is to maintain the status quo.

2. Appointment of Receiver

1. the appointment of a Receiver in the exercise of powers under Section 9 of the Act can be done only if the case is brought within the accepted principles under the CPC.
2. The appointment of a receiver is a discretionary power of the court and the tribunal and it must be exercised with sound judgment without any biases.
3. A receiver should only be appointed if the court is completely satisfied the plaintiff in a suit has excellent odds of succeeding in the suit.
4. The plaintiff must show a reasonable cause such as an immediate danger or threat to the property that requires urgent interference by the court. Also, the plaintiff must be clear about its right and should not have anything against him.
5. A court is barred from appointing a receiver if the appointment will effect affect the de facto right to possess the property of the defendant or respondent.

3. Seizure of Vehicles

1. The Tribunal or the Court is very often approached by finance companies and banks for interim measures to seize and secure the vehicles lent to hirers under a hire purchase/hypothecation agreement. The power to re-possess the vehicle for defaults in payment of instalments by the borrowers is a creature of the contract. Though it is well settled that finance companies/banks can exercise this contractual power to re-possess the asset the exercise of this power can be only in a manner known to law. The Supreme Court has, in no uncertain terms, condemned the use of hirelings to recover possession of the vehicle without recourse to the remedies available in law.
2. The court observed that the power to seize the vehicles from the possessions of hirers can be traced to O. 39 R. 7 of the CPC which allows the civil courts to appoint commissioners to seize any such vehicle or other hypothecated properties.
3. While the finance company or Bank may have a contractual right to repossess the asset upon Commission of default by the borrower, it cannot be again said that in many cases mechanical seizure of vehicles, en masse, may lead to substantial injustice.

4. Order Sale

1. Section 9(1)(ii)(a) empowers the Court to order the sale of the goods which are the subject matter of the agreement. An identical power is available to the Arbitral Tribunal under Section 17(1)(ii)(a). In L & T Finance Ltd. v. G.G. Granites, (2013) 5 LW 714 this Hon’ble Court held that these powers are akin to those granted under O. 39 R. 6 of the Code, and that the principles laid down therein must guide the exercise of power under Sections 9 and 17 as well.
2. Under O. 39 R. 6 the Court may order the interim sale of any movable property forming the subject matter of the proceeding or which is attached before judgment. Sale may be ordered where the property is subject to speedy or natural decay [as in the case of perishable goods] or for any other “just and sufficient cause” which may make it desirable to have it sold at once.
3. Before ordering sale, O. 39 R. 8 mandates that the Tribunal must order notice to the other side. This is the norm. Notice cannot be dispensed with save in exceptional cases where the object of the sale would be defeated by the delay involved in ordering notice.

5. Furnishing of Security

1. 1. The Madras High Court observed that the power under Section 9(1)(ii)(b) and Section 17(1)(ii)(b) of the Arbitration Act is analogous to the provisions of O. 38 R. 5 of the CPC. Further, it was observed that the applicability of the provisions of the Code to an application to furnish security under Section 9(1)(ii)(b) is not an untouched or a de novo matter. It was recently discussed by the Bombay High Court in Nimbus Communications Ltd. v. Board of Control for Cricket in India.
   2. The condition that is essential for the court to order furnishing of security is that the court must be satisfied that the defendant will part from its property such that it goes beyond the limits of the court. Moreover, the intention of the party must be to destruct or delay the execution of the decree passed by the court or the award of the tribunal.

Conclusion

Remember the days when zamindars used to lend money to the farmers in the hope that the farmer will not be able to repay them and the zamindar will take the possession of farmer’s land in return of a meagre amount of money. The irony of the situation is that the names have changed but the situation still exists in the 21^st century in the form of hire-purchase agreements.

The lenders use their muscle power, their influence and goons to threaten the hirers and do not provide them with any opportunity to repay the amount of money. They can even corrupt the arbitrators who are now a pillar of the judiciary and convert the entire judicial process into a shameful act. This judgment is a much-needed take on such actions by banking and non-banking financial companies. The judgment mentions all the previous cases of High Courts and Supreme Court which has ruled on this matter, it clarifies them and sets a precedent that can be followed in such cases.

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