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Arbitral Tribunal cannot affect the rights and liabilities of third party secured creditors in the course of determining the disputes pending – Delhi High Court

In view of the position of law laid in SBI v. Ericsson, it would not be permissible for the learned Arbitral Tribunal to issue any such direction as would prejudice the rights of such third party secured creditors, over the assets of GIL was held in the case of Edelweiss Asset Reconstruction Company Ltd, acting in its capacity as trustee of the Earc trusts vs GTL Infrastructure Ltd. and Anr. , ARB. A. (COMM) 13/2020 by the bench comprising of Justice C. Hari Shankar.

The facts of the case are Edelweiss Asset Reconstruction Company Ltd. invoked Section 37 of the Arbitration and Conciliation Act, 1996 to challenge an order, dated December 17, 2019, passed by the learned Arbitral Tribunal, which directed M/s. GTL Infrastructure Ltd. to pay Rs.240 crores to M/s. GTL Ltd. and to deposit Rs 200 crores in an Escrow account, to be maintained by GIL.

Though Edelweiss was not a party before the learned Arbitral Tribunal but claims to be affected by the impugned directions and it is also claimed, by Edelweiss, that GIL and GTL are in collusion, and that they misled the learned Arbitral Tribunal into passing the impugned Order, suppressing the fact that Edelweiss had a first charge over the monies which GIL has been directed to pay to GTL or to deposit in the Escrow account.

The position, in law, that an Arbitral Tribunal cannot pass an order, which affects the rights and remedies of the third party secured creditors, while determining the disputes pending before it, was held in the case of SBI vs. Ericsson, thus:
“5. There can be no dispute that the Arbitral Tribunal has no jurisdiction to affect the rights and remedies of the third party-secured creditors in the course of determining disputes pending before it…”

The Delhi High Court relied on SBI vs. Ericsson and held that Edelweiss, in fact, is a secured creditor of GIL, and the direction contained in the impugned order, affect the assets of GIL, secured with Edelweiss and other secured creditors, the direction, ex facie, cannot sustain.

The Court also held that, once a case for interference is found to exist, the appellate jurisdiction of the Court, under Section 37 would, in my view, also extend to modifying the order of the learned Arbitral Tribunal, in view of the inalienable indicia of appellate jurisdiction, as identified in Tirupati Balaji Developers (P) Ltd.

Thus, it was held that it is not permissible for Arbitral Tribunal to issue any such direction as would prejudice the rights of such secured creditors, over the assets of GIL and also in the present case interference, in order to protect the legitimate interests of the appellant, is justified the order of the tribunal has been modified invoking Section 37(2) of the 1996 Act.

Written By: Prime Legal Law Firm
Off Address: 39/2, 2nd floor, K G Road, Bengaluru, Karnataka-560001
Phone no: +9986386002, Email: [email protected]

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