Supreme Court sets aside Contempt Order: Rajan Chadha & Anr. vs. Sanjay Arora (2025)

Date of the Judgment: April 23, 2025

Citation: [Not Available in Source]

Judges: B.R. Gavai, J., Augustine George Masih, J.

The Supreme Court addressed the correctness of procedure adopted by the learned Single Judge of the High Court while passing the impugned judgment and order. This case revolves around a contempt petition filed by the Appellants, which was initially decided in their favor, but later dismissed by another Single Judge of the same High Court. The Supreme Court had to determine whether the second Single Judge overstepped their authority by reviewing the merits of the initial contempt order.

The Supreme Court allowed the appeal, set aside the impugned judgment, and remitted the matter back to the High Court, emphasizing that one judge cannot sit in appeal over the order passed by a coordinate bench.

Case Background

The dispute originates from a company named “RBT Private Ltd.,” engaged in dyeing, printing, and trading fabrics. The shareholders and directors of the company included Rajan Chadha and Rajiv Chadha (Appellants), Sanjay Arora (Respondent), and Sumit Gupta. The Appellants held a combined shareholding of 51.36%, the Respondent held 25%, and Sumit Gupta held 23.64%.

On December 21, 2019, a Memorandum of Understanding (MoU) was executed among the company, the Appellants, the Respondent, Sumit Gupta, and Shilpa Gupta. The MoU aimed to transfer shareholding in the company and reorganize its management. Essentially, the Respondent was to purchase the Appellants’ entire shareholding and assume responsibility for running the company’s affairs. The MoU also stipulated that any disputes would be resolved through mutual consultation and negotiation, and if that failed, through arbitration.

The Appellants alleged that the Respondent failed to fulfill his obligations under the MoU, including operating another entity from the company’s premises, siphoning off plant and machinery owned by the company, and defaulting on term loan installments. Consequently, the Appellants issued a legal notice to resolve these issues.

After receiving no response from the Respondent, the Appellants issued a notice in terms of Section 11 of the Arbitration and Conciliation Act 1996 on March 17, 2020. Subsequently, a sole arbitrator was appointed by the company.

The Appellants then filed a petition in the High Court under Section 9 of the Arbitration Act, seeking to restrain the Respondent from disposing of, alienating, siphoning off, or creating any third-party interest or charge in the company’s assets, and from using the company’s premises for business operations of any other entity.

Timeline:

Course of Proceedings

On June 11, 2020, a Single Judge of the High Court disposed of the petition under Section 9 of the Arbitration Act by recording the submissions of the parties and appointing a new arbitrator.

On June 17, 2020, the Appellants contended before the arbitrator that the application filed before the High Court under Section 9 of the Arbitration Act should be treated as an application under Section 17 of the Arbitration Act. The Respondent objected, but the arbitrator noted that the statements made by the Respondent’s counsel before the High Court would be binding upon the Respondent.

On July 1, 2020, the arbitrator observed that the Respondent had to infuse a certain amount into the loan account of the company, which had not been done. The arbitrator also noted that the collateral security for the loan was a house jointly owned by Appellant No. 1 and his wife. The arbitrator directed that the Respondent continue to pay the EMIs into the loan account of the company to prevent the account from becoming a Non-Performing Asset (NPA) under the SARFESI Act 2002.

The Appellants, alleging non-compliance with the arbitrator’s order and illegal removal of company assets, filed an application under Section 26 of the Arbitration Act for the appointment of a Local Commissioner. This was allowed on December 16, 2020.

On December 22, 2020, the Local Commissioner’s report indicated that all machines were present and operational at the company’s premises except for one Flat Bed Printing Machine.

Aggrieved by these findings and the Respondent’s failure to deposit EMIs, the Appellants filed a Contempt Petition before the High Court on January 13, 2021, seeking prosecution and punishment of the Respondent and compliance with the orders of the High Court and the arbitrator.

During the pendency of the Contempt Petition, the National Company Law Tribunal (NCLT) Chandigarh admitted a petition against the company under Section 9 of the Insolvency and Bankruptcy Code 2016 (IBC), initiating Corporate Insolvency Resolution Process (CIRP) and declaring a moratorium under Section 14 of the IBC. As a result, the arbitrator adjourned the proceedings sine die on July 13, 2021.

On December 5, 2023, a Single Judge of the High Court observed that the Respondent had removed material from the company’s premises and had not paid EMIs of the loan account. The court noted that the Respondent and the company were distinct entities, and the undertaking was given by the Respondent. The court held that the Section 14 IBC moratorium would not apply to the Respondent and found him guilty of intentionally and malafidely violating the orders dated June 11, 2020, and July 1, 2020, and thus committed contempt of the orders of the Court. The Respondent was given four weeks to purge the contempt.

Subsequently, another Single Judge of the High Court was seized of the contempt petition.

On July 3, 2024, the High Court concluded that there was no willful and deliberate disobedience by the Respondent and discharged the show cause notice.

Legal Framework

• Section 9 of the Arbitration and Conciliation Act 1996: This section allows a party to apply to a court for interim measures during the arbitration proceedings.
• Section 11 of the Arbitration and Conciliation Act 1996: This section provides the procedure for the appointment of arbitrators.
• Section 17 of the Arbitration and Conciliation Act 1996: This section empowers the arbitral tribunal to order interim measures.
• Section 26 of the Arbitration and Conciliation Act 1996: This section allows the arbitral tribunal to appoint experts.
• Section 9 of the Insolvency and Bankruptcy Code 2016 (IBC): This section allows for the initiation of the Corporate Insolvency Resolution Process (CIRP) by an operational creditor.
• Section 14 of the Insolvency and Bankruptcy Code 2016 (IBC): This section provides for a moratorium upon the commencement of CIRP.
• SARFESI Act 2002: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, deals with Non-Performing Assets (NPA).
• Contempt of Courts Act, 1971: This act defines and sets out the procedures for dealing with contempt of court.

Arguments

• Appellants’ Arguments:
  • The learned Single Judge’s approach in the impugned judgment breached settled legal positions.
  • Once the High Court, on December 5, 2023, held the Respondent guilty of intentionally violating the orders, another Single Judge could not review the matter.
  • The learned Single Judge virtually sat in appeal over the order passed by another Single Judge.
• Respondent’s Arguments:
  • The learned Single Judge, after considering the affidavit and subsequent developments, reasonably concluded that there was no deliberate and willful disobedience.
  • The learned Single Judge correctly considered Sections 12 and 13 of the Contempt of Courts Act, 1971.

Issues Framed by the Supreme Court

1. The core issue before the Supreme Court was whether the procedure adopted by the learned Single Judge of the High Court in passing the impugned judgment and order was correct.

Treatment of the Issue by the Court

Authorities

The judgment refers to the following authorities:

• Arbitration and Conciliation Act 1996: Used to address the appointment of arbitrator and proceedings related to it.
• Insolvency and Bankruptcy Code 2016: Used to address the moratorium.
• Contempt of Courts Act, 1971: Used to address the contempt of court.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Contempt of Courts Act, 1971: The Court referred to the provisions of this Act to emphasize that once contempt has been established, the subsequent judge can only consider whether the contemnor has purged the contempt or should be punished.

What weighed in the mind of the Court?

The primary concern for the Supreme Court was the procedural impropriety of a coordinate bench reviewing and overturning the decision of another coordinate bench. The Court emphasized the importance of judicial discipline and adherence to established legal principles.

Fact:Law

Key Takeaways

• A Single Judge of a High Court cannot sit in appeal over the order passed by another Single Judge of the same Court.
• Once a court has determined that contempt has been committed, a subsequent judge can only consider whether the contemnor has purged the contempt or should be punished.
• Adherence to judicial propriety and established legal principles is essential for maintaining the integrity of the judicial system.

Development of Law

The ratio decidendi of the case is that a coordinate bench cannot review and overturn the decision of another coordinate bench. This reaffirms the principles of judicial discipline and the hierarchy of courts.

Conclusion

The Supreme Court allowed the appeal, set aside the impugned judgment, and remitted the matter back to the High Court. The Court’s decision underscores the importance of judicial discipline and adherence to established legal principles, ensuring that the integrity of the judicial system is maintained.

Category

• Arbitration and Conciliation Act, 1996
  • Section 9, Arbitration and Conciliation Act, 1996
  • Section 11, Arbitration and Conciliation Act, 1996
  • Section 17, Arbitration and Conciliation Act, 1996
  • Section 26, Arbitration and Conciliation Act, 1996
• Insolvency and Bankruptcy Code, 2016
  • Section 9, Insolvency and Bankruptcy Code, 2016
  • Section 14, Insolvency and Bankruptcy Code, 2016
• Contempt of Courts Act, 1971
• Judicial Review
• Civil Law

FAQ

1. What is judicial discipline?

   Judicial discipline refers to the adherence to established legal principles and the hierarchy of courts, ensuring that lower courts follow the decisions of higher courts and coordinate benches respect each other’s judgments.

2. What happens when a court finds someone in contempt?

   Once a court determines that contempt has been committed, the contemnor is given an opportunity to purge the contempt. If they fail to do so, the court may impose punishment, such as a fine or imprisonment.

3. What is the significance of this Supreme Court judgment?

   This judgment reinforces the principle that a coordinate bench cannot review and overturn the decision of another coordinate bench, maintaining the integrity of the judicial system.