Bombay High Court Says Proof Of Dishonest Asset Transfer Not Needed To Secure Assets Pending Arbitration

The Bombay High Court has held that a party seeking interim protection before arbitration need not prove that the opposite side has dishonestly transferred or concealed its assets.

A strong possibility that the assets may diminish before an arbitral award is enforced is sufficient to justify protection.

Justice Amit Borkar observed, "The expression 'a strong possibility of diminution of assets would suffice' does not mean that the applicant must prove that the respondent has dishonestly transferred or concealed its assets. At the same time, every apprehension expressed by the claimant cannot be accepted. What is required is that the surrounding facts should indicate that the respondent's assets are likely to become less in value or may not remain available by the time the arbitral award is to be enforced. If such circumstances are shown, the Court may exercise powers under Section 9 even before the assets are transferred. "

The ruling came while the court granted interim relief to Singapore-based Norvic Shipping Asia PTE Ltd in its demurrage dispute with Zigma International. It directed Zigma to secure Norvic's claim of about USD 2.63 lakh and GBP 9,400 by depositing the amount or furnishing a bank guarantee.

The court also restrained the company from dealing with its assets to the extent of Norvic's claim and directed it to disclose its assets on affidavit pending arbitration before the London Maritime Arbitrators Association (LMAA).

The dispute arose from a repayment schedule agreement under which Zigma acknowledged liability of about USD 2.15 lakh towards demurrage. Norvic claimed Zigma failed to pay even the first instalment despite repeated reminders. Emails placed before the court showed Zigma seeking more time because of financial difficulties without disputing its liability.

After Norvic invoked arbitration, Zigma claimed the dispute had been settled. It later relied on a pledge arrangement through brokers Bulk Commodities (Bulkcom). The court observed that no documents had been produced to prima facie support those defences.

Opposing the plea, Zigma argued that Norvic had not shown any attempt to dissipate its assets. It also pointed to its financial difficulties, multiple creditors, and an oral set-off against part of the claim.

Rejecting those submissions, the court held that its powers to grant interim protection are wider than those governing attachment before judgment under the Code of Civil Procedure. It ruled that surrounding circumstances, rather than proof of dishonest conduct, determine whether interim protection is warranted.

The court noted that Zigma had defaulted on the repayment schedule. It had continued to cite financial difficulties while advancing inconsistent and unsupported defenses after arbitration commenced. The existence of multiple creditors and competing claims over the same liability also supported the grant of interim protection, the court held.

The court further observed, "Section 9 is preventive in its object. The Court is expected to intervene before the situation becomes irreversible. If the Court waits until the respondent has disposed of all its assets, then the purpose behind granting interim protection may fail. Since dishonest intention is difficult to establish by direct evidence, the Court is entitled to examine the surrounding circumstances and arrive at a conclusion whether there exists a real likelihood that the respondent's assets may diminish before the arbitral award becomes capable of enforcement."

The court also rejected Zigma's objection that Norvic should seek interim relief only from the arbitral tribunal. It held that Zigma had failed to show that an interim order passed by the London-seated tribunal would be effectively enforceable against its assets in India.

Accordingly, the court directed Zigma to deposit about USD 2.63 lakh and GBP 9,400, or furnish a bank guarantee within four weeks. Until then, it restrained the company from transferring, alienating or encumbering its assets to the extent of Norvic's claim.

It also directed Zigma to disclose its bank accounts, movable and immovable assets, encumbrances, assets transferred during the previous two years, and details of any pending insolvency, bankruptcy or winding-up proceedings.

For Petitioner (Norvic Shipping Asia PTE Limited): Advocates Kunal Vaishnav and Vinay V. Vishwanathan instructed by Renata Partners LLP.

For Respondent (Zigma International): Advocates Ashwin Shanker, Santosh Koli and Diksha Brahma.