Contempt Court Can Reverse Benefits Obtained From Disobeying Orders U/S 9 & 17 Of Arbitration Act: Delhi HC

In the present case, the Respondent was restrained from parting with the properties under Section 9 of the Arbitration Act, and this order was subsequently continued by the Arbitrator under Section 17.

Brief Facts:

Respondent No.1 owed M/S Rhine Power Pvt. Ltd. (Petitioner) Rs. 7,33,30,548 as of 27th September 2018. To settle the dues, both parties entered into five Agreements to Sell, dated 27th September 2018, for the sale of 21 flats in the “PRIMERA” project in Gurugram, with a buy-back clause.

Respondent No.1 exercised the buy-back option for two agreements, which were cancelled through a Cancellation Agreement dated 3rd June 2019.

However, the petitioner alleged that the buy-back option for the remaining 15 flats lapsed, making it obligatory for respondent No.1 to convey them as per the agreements. Due to non-responsiveness and apprehension of third-party transfers, the petitioner filed a Section 9 petition under the Arbitration Act on 31st May 2023.

On 2nd June 2023, this Court restrained respondent No.1 from creating third-party interests in the 15 flats.

Subsequently, petitioner invoked arbitration sending a Notice under Section 21 of the Arbitration Act. By orders dated 19th October 2023 and 7th November 2023, this Court disposed of the petition under Section 9 of the Arbitration Act extending the protection afforded to petitioner vide order dated 2nd June 2023, till such time as the Arbitrator took up petitioner's application under Section 17 of the Arbitration Act, and relegated the parties to arbitration.

Considering there was apprehension that the flats had been sold, the Arbitral Tribunal directed respondent no.1 to file an affidavit disclosing the status of fifteen flats. Respondent no.1 did not comply with the said directions and did not disclose the status of the fifteen flats.

On 12th July 2024, respondent no.1 filed an application for recall of order dated 13th May 2024, passed by the Arbitral Tribunal since it closed the right to file a Statement of Defence. The Tribunal declined to issue Notice on the application until it complied with its earlier orders of disclosure.

The Tribunal then observed that respondent no.1 was in breach of the injunction granted by this Court and also made reference to taking consequential steps before the appropriate Court.

Contentions:

The Petitioner submitted that respondents were clearly in contempt, considering the admitted facts, as well as the orders passed by the Sole Arbitrator and, therefore, cannot be seen to enjoy the fruits of their contempt.

Per contra, the Respondent's counsel relied on several proceedings to support their case. Firstly, reference was made to the Sole Arbitrator's order dated 13th July 2024, which noted that respondent No.1 had furnished a bank guarantee of Rs.3 crores, but the petitioner was entitled to further security, considering the valuation report estimating the fifteen flats at Rs.23 crores. The Arbitrator granted time to respondent No.1 to file a reply and continued the injunction restraining alienation of the flats.

Secondly, reliance was placed on the Sole Arbitrator's proceedings dated 20th July 2024, where it was recorded that the petitioner was at liberty to approach the appropriate court for breach of the injunction. It was also noted that, except for Flat No. D-2103, no conveyance deed had been registered in favour of any third party.

Thirdly, the petitioner relied on the order dated 4th December 2024, wherein respondent No.1 was directed to file its Statement of Defence and supporting documents within one week. Lastly, the petitioner referred to a table annexed with the preliminary reply-cum-objection to the contempt petition to show that respondent No.1 had made consistent payments over time.

Observations:

The court noted that though respondent no.1 sought to rely on the proceedings before the Arbitral Tribunal, those do not really support his case. The order by the Arbitral Tribunal on 20th July 2024, in fact, restrains respondent no.1 from executing any conveyance deed in respect of the flats in question and directions to the concerned Sub-Registrar, Kadipur, Gurugram not to register any conveyance deed with respect to certain flats.

It further observed that respondent no.1 has no case to resist the said application considering that it is a matter of record that it had transferred the possession of the said flats after order of 2nd June 2023.

The Supreme Court in Balwantbhai Somabhai Bhandari v Hiralal Somabhai Contractor (2023) held that the contempt court does have the power to declare a contemptuous transaction as void, even if such transfer pendente lite is not void ab initio under Section 52 of the Transfer of Property Act, 1882.

The Apex Court further held that in contempt proceedings, the court can declare such transactions void or direct their reversal to ensure that the contemnor does not benefit from disobedience of court orders. This includes issuing appropriate directions to authorities to nullify any advantage gained through such contumacious conduct, thereby upholding the majesty of law.

Similarly, the Supreme Court in Amit Kumar Das v Shrimati Hutheesingh Tagore Charitable Trust 2024 held that significantly, the two-judge Bench reiterated the settled principle from DDA v. Skipper Construction Co. (P) Ltd., that a contemnor should not be allowed to retain the benefits of contempt.

Citing Mohammad Idris v. Rustam Jehangir Babuji, the Apex Court held that serving punishment for contempt does not preclude the Court from issuing further directions to undo violations of its orders. The crystallized principle is that courts may not only punish the contemnor but also take steps to ensure that the fruits of disobedience are not enjoyed.

Based on the above, the court held that there shall be an interim order restraining further transfer, alienation or creation of any third-party rights or interests and the parting of possession in respect of the flats as noted. Therefore, respondent no.1 will ensure that there is no further transfer, alienation or creation of any third-party rights or interest and parting of possession in respect of the “Said Flats”.

The court concluded that the Supreme Court in Balwantbhai Somabhai held that third parties, even bona fide purchasers without notice, have no locus in contempt proceedings. Directions to preserve the property's status are essential to prevent respondents from benefiting from their prima facie contempt. The Court supports a broader approach to deter contemnors and uphold the majesty of law, as otherwise, deceptive tactics could defeat court orders.

Accordingly, the present application was disposed of.

Case Title:M/S Rhine Power Pvt. Ltd. Versus M/S Ramprastha Promoters And Developers Pvt. Ltd. & Ors.

Citation: 2025 LiveLaw (Del) 568

Case Number: CONT.CAS(C) 1744/2024

Judgment Date: 28/04/2025

For Petitioner: Mr. Viksit Arora, Advocate

For Respondent: Mr. Virender Ganda, Senior Advocate along with Mr. Sougat Sinha, Ms. R. Gayathri Manasa, Mr. Vishal Majumdar, and Ms. Charmi Khurana Advocates.

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