Cheque case against Director/Partner of firm can be quashed only if there is unimpeachable & incontrovertible evidence that they were not concerned with issuance of cheque: Holds Supreme Court
The Supreme Court on September 16, 2022 in the matter of S P Mani and Mohan Dairy v. Dr. Snehalatha Elangovan held that vicarious criminal liability can be inferred against the partners of a firm when it is specifically averred in the complaint about the status of the partners ‘qua’ the firm and that the High Court should not interfere under Section 482 of the Code of Criminal Procedure, 1973 (“Code”) at the instance of an accused unless it comes across some unimpeachable and incontrovertible evidence to indicate that the Director/partner of a firm could not have been concerned with the issuance of cheques.
In the instant matter an appeal was filed against an order passed by the High Court of Madras whereby the High Court quashed the criminal proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”).
The Supreme Court observed that if any Director wants the process to be quashed by filing a petition under Section 482 of the Code on the ground that only a bald averment is made in the complaint and that he is really not concerned with the issuance of the cheque, he must in order to persuade the High Court to quash the process either furnish some sterling incontrovertible material or acceptable circumstances to substantiate his/her contention. He must make out a case that making him/her stand the trial would be an abuse of process of Court. The Court, analysing the scope of Section 141 of the NI Act, observed that the object of notice before the filing of the complaint is not just to give a chance to the drawer of the cheque to rectify his omission to make his stance clear so far as his liability under Section 138 of the NI Act is concerned. It is essential for the person to whom statutory notice is issued under Section 138 of the NI Act to give an appropriate reply. The person concerned is expected to clarify his or her stance. If the person concerned has some unimpeachable and incontrovertible material to establish that he or she has no role to play in the affairs of the company/firm, then such material should be highlighted in the reply to the notice as a foundation. It was further observed that:
“The primary responsibility of the complainant is to make specific averments in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no legal requirement for the complainant to show that the accused partner of the firm was aware about each and every transaction. On the other hand, the first proviso to sub¬section (1) of Section 141 of the Act clearly lays down that if the accused is able to prove to the satisfaction of the Court that the offence was committed without his/her knowledge or he/she had exercised due diligence to prevent the commission of such offence, he/she will not be liable of punishment. On the other elements of an offence under Section 138 being satisfied, the burden is on the Board of Directors or the officers in charge of the affairs of the company/partners of a firm to show that they were not liable to be convicted.”
Thus, the Court allowed the appeal and the impugned order passed by the High Court is was set aside.
Disputes related to Tax Concessions are not Arbitrable: Holds Supreme Court
The Supreme Court on September 12, 2022 in the matter of Shree Enterprise Coal Sales Pvt Ltd. v. Union of India held that the relief related to tax concessions are not of an arbitrable nature.
In the instant matter an appeal was filed against the judgment of a Division Bench of the High Court of Allahabad in a Writ Tax petition, dismissing the petition on the ground that the terms of e-auction in a dispute are Arbitrable. In the present case Shree Enterprise Coal Sales Pvt. Ltd. (“Appellant”), a company involved in trading of coal, purchased coal from Northern Coal Fields Limited (“Respondent”) through e-auction and the Appellant took certain consignments through the railways, charged at a concessional rate of tax at two percent by the Respondent. Pursuant to this the Respondent did not grant the benefit of Form C while charging tax at the rate of four percent. Subsequently, the Appellant filed a writ petition in the High Court.
The Supreme Court overturned the High Court’s judgement and held that the High Court has erred in holding that the terms of e-auction in a dispute are arbitrable. It was held by the court that although, a contractual dispute would be amenable to being resolved by arbitration but in the present case, the relief related to tax concessions was not of an arbitrable nature as the appellant was not asserting a contractual claim in pursuance of the e-auction.Thus, the Court allowed the appeal and remanded the case back to the High Court for further consideration on the merits.
Unregistered Sale cannot be the basis for claim on Immovable Property: Holds NCLAT Delhi
The National Company Law Appellate Tribunal (“NCLAT”), Principal Bench on September 09, 2022 in the matter of Smt. Sabita A. Biswa v. Shri Vinodkumar Pukhraj Ambavat held that sale deed which is neither registered nor stamped and executed before Notary cannot be basis for any claim with regard to the purchase of immovable property.
In the instant matter, an appeal was filed against an order NCLT Cuttack Bench (“Adjudicating Authority”) rejecting the claim of Smt. Sabita A. Biswa (“Appellant”), a creditor of the Corporate Debtor in the Corporate Insolvency Resolution Process (“CIRP”) on the ground that the claim observing the alleged sale deed was neither registered nor stamped, and thus cannot be looked for any purpose.
The Bench held that the Adjudicating Authority had rightly taken the view that such kind of sale deed which is neither registered nor stamped and was executed before Notary cannot be basis for any claim with regard to the purchase of immovable property as claimed by the Appellant and thus the appeal was dismissed.
Breach of settlement agreement not a ground to trigger CIRP: Holds NCLT Delhi
The National Company Law Tribunal (“NCLT”), New Delhi Bench, on August 11, 2022 in the matter of Bajaj Rubber Company Pvt. Ltd. v. Saraswati Timber Pvt. Ltd. held that breach of terms and conditions of a Settlement Agreement does not come under the purview of Operational Debt under Insolvency and Bankruptcy Code, 2016 (“IBC”) and the same cannot be a ground to trigger Corporate Insolvency Resolution Process (“CIRP”).
In the instant matter Bajaj Rubber Company Private Limited (“Operational Creditor / Applicant”) had withdrawn an application filed under Section 9 of the IBC for initiation of CIRP against Ace Footmark Private Limited (“Corporate Debtor”) on the ground of settlement between the parties pursuant to which post-dated cheques were issued to the Applicant by the Corporate Debtor and the same failed to adhere to the terms of the Settlement Deed, as many cheques got dishonoured. The Bench held that breach of terms and conditions of payment according to a Settlement Agreement does not come under the purview of Operational Debt and the it cannot be a ground to trigger CIRP. The Bench placed reliance on the judgments of NCLT New Delhi in the matter of Alhuwalia Contracts Ltd. v. Logix Infratech Pvt. Ltd and Nitin Gupta v. International Land Developers Pvt. Ltd. wherein it was held that unpaid installment as per settlement agreement cannot be treated as an Operational debt under Section 5(21) of IBC. It was further observed that:
“Operational Debt means a claim in respect of provision of goods or services including employment. Now we consider the case of the Applicant and we observe, the claim of the applicant does not fall either under the category of the supply of the goods or service rendered by the Corporate Debtor. Rather the claim of the Applicant is based on the breach of terms and conditions of the settlement agreement, on the basis of which the Applicant has claimed that there is default in payment of the amount as referred to part IV of the application. And the second part of the Operational Debt says a debt in respect of payment dues arising under any law for the time being enforce.”
Thus, the Bench declined to revive the petition and rejected the application.
Court exercising power under Section 9 of the A&C Act not strictly bound by CPC; Should not withhold Interim Relief on mere technicality: Holds Supreme Court
The Supreme Court on September 14, 2022 in the matter of Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited held that the power under Section 9 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) should not ordinarily be exercised ignoring the basic principles of procedural law as laid down in the Code of Civil Procedure Act, 1908 (“CPC”), but the technicalities of CPC cannot prevent the Court from securing the ends of justice.
In the instant matter an appeal was filed against an order passed by Commercial Division of the High Court allowing an application filed by the Respondent under Section 9 of the A&C Act which provides that a party may apply to a court for an interim measure or protection to (i) secure the amount in dispute in the arbitration; or (ii) such other interim measure of protection as may appear to the court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of any proceedings before it. It was contented by the Appellant that to grant discretionary interim relief under Section 9 of the A&C Act, the court would have to satisfy itself that the applicant for interim relief has a bona fide and strong claim and that the court erred in not considering the requisites of Order XXXVIII, Rule 5 of the CPC for grant of interim relief.
The court observed that a court is not strictly bound by the provisions of the CPC and the powers of a court under Section 9 of the A&C Act are wider than the powers under the provisions of the CPC. It was further observed that
“In deciding a petition under Section 9 of the Arbitration Act, the Court cannot ignore the basic principles of the CPC. At the same time, the power of the Court to grant relief is not curtailed by the rigours of every procedural provision in the CPC. In exercise of its powers to grant interim relief under Section 9 of the Arbitration Act, the Court is not strictly bound by the provisions of the CPC.. While it is true that the power under Section 9 of the Arbitration Act should not ordinarily be exercised ignoring the basic principles of procedural law as laid down in the CPC, the technicalities of CPC cannot prevent the Court from securing the ends of justice. It is well settled that procedural safeguards, meant to advance the cause of justice cannot be interpreted in such manner, as would defeat justice.”
Thus, the court held that if a strong prima facie case is made out and the balance of convenience is in favour of interim relief being granted, the court exercising power under Section 9 of the A&C Act should not withhold relief on the mere technicality of absence of averments, incorporating the grounds for attachment before judgment under Order 38 Rule 5 of the CPC. Thus, the appeal was dismissed.
Arbitration clause has to be given effect even if it does not expressly state that decision of Arbitrator is final & binding on parties: Holds Supreme Court
The Supreme Court on September 07, 2022 in the matter of Babanrao Rajaram Pund v. Samarth Builders & Developers held that an arbitration clause has to be given effect even if it does not expressly state that the decision of the arbitrator will be final and binding on the parties and that the deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.
In the instant matter an appeal was filed against an order of the High Court dismissing an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) on the ground that that the arbitration clause of an agreement lacked essential ingredients of a valid arbitration agreement as it does not mandate that the decision of the arbitrator will be final and binding on the parties. Thus, the issue raised before the Supreme Court was whether an arbitration clause not mandating the decision of the arbitrator final and binding on the parties constitutes a valid arbitration clause for the purpose of invoking powers under Section 11 of the Act?
The court observed that Section 7 of the A&C Act does not mandate any particular form for the arbitration clause. The essential elements of an arbitration agreement are as follows: (1) There must be a present or a future difference in connection with some contemplated affair. (2) There must be the intention of the parties to settle such difference by a private tribunal. (3) The parties must agree in writing to be bound by the decision of such tribunal. (4) The parties must be ad idem. It was further observed that
“It is thus imperative upon the courts to give greater emphasis to the substance of the clause, predicated upon the evident intent and objectives of the parties to choose a specific form of dispute resolution to manage conflicts between them. The intention of the parties that flows from the substance of the Agreement to resolve their dispute by arbitration are to be given due weightage. It is crystal clear to us that Clause 18, in this case, contemplates a binding reference to arbitration between the parties and it ought to have been given full effect by the High Court.”
Thus, the court held that even if the subject-clause lacks certain essential characteristics of arbitration like “final and binding” nature of the award, the parties have to abide by the decision of the tribunal if the same have evinced clear intention to refer the dispute to arbitration.
Non-Payment/ Insufficiency of Stamp Duty cannot render the Arbitration Agreement invalid: Holds Delhi High Court
The Delhi High Court on August 26, 2022 in the matter of Drooshba Fabricators v. Indue Private Limited held that the court while exercising jurisdiction under Section 11 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) should impound the unstamped/I nadequately agreement and direct the parties to cure the defect before the arbitrator could adjudicate upon such an agreement.
In the instant matter a petition was filed under Section 11 of the A&C Act seeking appointment of an arbitrator to adjudicate upon the disputes arisen with the respondent stated in the work order (agreement). It was contented by the respondent that since the work order is not stamped, the arbitration clause embedded in it is not enforceable in law and cannot be acted upon unless the requisite stamp duty is paid. It was contented by the petitioner that under Schedule 1A of the Indian Stamp (Delhi Amendment) Act, 2010, a ‘work order’ is not required to be compulsorily stamped.
The court relied on earlier judgments of the Supreme Court in the matter of N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Intercontinental Hotels Group (India) Pvt. Ltd. v. Waterline Hotels Pvt. Ltd. where it was held that non-payment of stamp duty does not invalidate the arbitration clause, therefore, the courts at the stage of appointing an arbitrator cannot refuse to exercise jurisdiction on this ground.
Thus, the court held that non-payment or insufficiency of stamp duty on the underlying agreement cannot render the arbitration clause invalid and the petition was allowed.
Arbitral Award with contradictory findings is liable to be set aside: Holds Calcutta High Court
The Calcutta High Court on August 25, 2022 in the matter of State of West Bengal v. Tapas Kumar Hazra held that an Arbitral award wherein the arbitrator has given contradictory findings and no reason for arriving at such particular finding is liable to be set aside.
In the instant matter an application was filed under Section 34 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) challenging the award passed by an Arbitrator where an agreement was terminated without execution of the entire project work contemplated by the agreement, resulting in dispute between the parties. The Arbitral award was challenged on the grounds that the Arbitrator allowed the claims of the respondent without recording any reasons for the same, gave contradictory findings regarding the issue of delay in the execution of the work and further erred in awarding an amount of compensation that is more than the claim of the respondent.
The Court observed that the Arbitrator has not ascribed any reason for allowing the claims as the arbitrator has not furnished any arithmetical basis or any documentary evidence to support the claim awarded.
Thus, it was held that a party is entitled to know the grounds on which the Arbitrator allows or disallows any claim and allowed the petition to set aside the Arbitral award.
Issue of CIRP cost to be decided in COC meeting, not by Adjudicating Authority: Holds NCLAT Delhi
The National Company Law Appellate Tribunal (“NCLAT”) on September 11, 2022 in the matter of Bharat Hotels Ltd. v. Tapan Chakraborty held that the issue of Corporate Insolvency Resolution Process (“CIRP”) cost is to be decided in the meeting of the Committee of Creditors (“CoC”) and not to be examined by the Adjudicating Authority even before the CoC takes a decision.
In the instant matter, an appeal was filed against the order of National Company Law Tribunal, Kolkata (“Adjudicating Authority”) rejecting an Interlocutory application of Bharat Hotels Ltd. (“Appellant/ Financial Creditor”) praying for order directing the Resolution Professional to disclose item wise insolvency resolution process costs and to follow the steps needed under Section 18 and Section 20(2)(a) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before proposing liquidation of the Corporate Debtor, after the CoC in its 7th meeting passed a resolution for liquidation of the Corporate Debtor. The Bench observed that:
“The resolution for liquidation was passed after more than two years from the CIRP date. The Application filed by the Appellant on the very next day of passing of the resolution was indirectly for challenging the liquidation as the Appellant being a minority shareholder in the Committee of Creditors cannot resist the passing of the resolution.”
It was held that the question of cost and its approval lays in the domain of the CoC. The CoC may ratify, modify or set aside the cost claimed. These issues may be decided in the meeting of the CoC and are not to be examined by the Adjudicating Authority even before the CoC takes a decision.
Thus, the Bench rejected the Financial Creditor’s plea seeking disclosure of item wise insolvency resolution cost and held that the Adjudicating Authority had rightly rejected the application filed under Section 18 of IBC and Regulation 34A.
Erstwhile Resolution Professional has no right to be heard before being replaced under Section 27 of IBC: Holds NCLAT Delhi
The National Company Law Appellate Tribunal (“NCLAT”) on September 02, 2022 in the matter of Sumat Kumar Gupta v. Committee of Creditors of M/S Vallabh Textiles Company Ltd. held that when the Committee of Creditors (“CoC”) decides to replace the Resolution Professional under Section 27 of Insolvency and Bankruptcy Code, 2016 (“IBC”) and an application is filed before the Adjudicating Authority for approval, the erstwhile Resolution Professional would have no right to be heard before the Adjudicating Authority.
In the instant matter, an appeal was filed under against an order of National Company Law Tribunal, Chandigarh (“Adjudicating Authority”) allowing an Interlocutory application by the Financial Creditor for replacement of the Resolution Professional. In the present case M/S Vallabh Textiles Company Ltd. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) and the Appellant was appointed as the Resolution Professional. The CoC in its meeting decided with 100% vote to replace the Appellant with another Resolution Professional.
It was contented by the Appellant he was entitled for the opportunity to be heard in the application in consonance with the principles of natural justice when an order was being passed by the Adjudicating Authority replacing the Appellant. It was submitted that Section 27 of the IBC which provides for replacement of the Resolution Professional by CoC does not exclude applicability of natural justice and the Appellant was entitled for the opportunity to be heard.
The Bench observed that Section 27 of IBC by implication excludes principles of natural justice and that the aforementioned section clearly provides that when the CoC is of the opinion that a resolution professional appointed under Section 22 of IBC is required to be replaced, it may replace him with another Resolution Professional in the manner provided under the Section 27(2) of IBC. A resolution has to be passed at the CoC meeting by 66% voting share to replace the Resolution Professional, subject to a written consent from the proposed Resolution Professional. It was further observed that:
“The decision taken by the CoC is a decision by vote of 66% and when the decision is by votes of a collective body, the decision is not easily assailable. Replacement is complete as per scheme of Section 27 when the resolution is passed with requisite 66% voting share.”
Thus, the Bench held that there was no error in the order of the Adjudicating Authority allowing replacement of Resolution Professional and the appeal was dismissed.
NCLAT Delhi sets aside order of liquidation; Grants additional Opportunity for inviting Resolution Plans
The National Company Law Appellate Tribunal, Delhi (“NCLAT”) on September 01, 2022 in the matter of Nikhil Tandon v. Sanjeev Bindal & Ors., set aside an order for liquidation of Corporate Debtor and gave one more opportunity to the Committee of Creditors (“CoC”) and Resolution Professional for finding out a Resolution Plan to revive the Corporate Debtor.
In the instant matter, an appeal was filed under against an order of National Company Law Tribunal, New Delhi (“Adjudicating Authority”) allowing an Interlocutory application filed by the Resolution Professional under Section 33(2) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) directing for liquidation of the Corporate Debtor. In the present case the Corporate Debtor was admitted into Corporate Insolvency Resolution Process (“CIRP”) on a petition under Section 7 of the IBC by the Creditor and a Resolution Professional was appointed.
In the 5th CoC, it was decided that since the operation of Corporate Debtor were not being carried on for more than one year, it should be liquidated. In the 6th CoC meeting, the Suspended Director of Corporate Debtor (“Appellant”) submitted a resolution plan before the CoC claiming to be an MSME and hence eligible to submit a plan. The CoC did not consider the Plan for not being in accordance with Section 30 of the IBC. In the subsequent CoC meeting, the Resolution Professional opined that the Appellant is not an MSME and decided that Appellant’s plan cannot be deliberated since no Resolution Plan was invited and the liquidation was already approved in the 5th CoC meeting. Subsequently, the Resolution Professional filed an application for liquidation of the Corporate Debtor before the Adjudicating Authority and the latter approved liquidation. Thus, the issue before the Bench was whether the decision of the CoC taken in the 5th CoC meeting to liquidate the Corporate Debtor was a sustainable decision?
It was observed by the Bench that the entire object and purpose of the IBC is to revive the Corporate Debtor and put it back on the track. The CoC had not taken any effort to issue any Form G to find out as to whether there can be resolution of the Corporate Debtor by any Resolution Applicant. Without even making one effort, CoC jumped on conclusion to liquidate. It was further observed that material irregularity has been committed in the process as the Adjudicating Authority had only relied on the resolution of the CoC in 5th meeting and had directed for liquidation, without taking into consideration the subsequent meetings of CoC and Appellant’s request for submitting Resolution Plan.
Thus, the Bench allowed the appeal, setting aside of the order of Liquidation and gave an opportunity to the CoC for finding out as to whether there can be any Resolution Plan to revive the Corporate Debtor.
Limitation to be counted from the date of preparation of Certified Copy, not delivery: Holds NCLAT Delhi
The National Company Law Appellate Tribunal (“NCLAT”) on August 24, 2022 in the matter of Wadhwa Rubber v. Bandex Packaging Pvt. Ltd. held that the limitation is to be counted from the date of preparation of the certified copy and not from the date of delivery of the certified copy.
In the instant matter an appeal was filed against an order of the Adjudicating Authority, dismissing a petition filed by Wadhwa Rubber (“Appellant”) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. The Appellant applied for the certified copy of the order, almost after a year. The Appellant contended that the reason why appeal could not be filed within 30 days from the date of Impugned Order was because a copy of the Impugned Order which is to be given free of cost was not supplied. Therefore, the certified copy was applied and when it was delivered, the appeal was filed which is within limitation.
The Bench observed that it is well settled that the limitation is to be counted not from the date of delivery of the certified copy but from the date of preparation of the certified copy. It was further observed that:
“It cannot be imagined that the dismissal of the petition was not within the knowledge of the Appellant who was represented by the Counsel. Despite that, the Appellant did not care to apply for the certified copy for over a year and has made a lame excuse that it was to be supplied free of cost. However, the certified copy appears to have been applied on 10.02.2021 and was prepared on 17.02.2021 but the Appellant spent almost two months even in taking the certified copy from the Tribunal.”
Thus, the Bench dismissed the appeal and held that it is barred by limitation in view of Section 61 of IBC, which provides a period of 30 days to file appeal and an additional period of 15 days based on the discretion of Appellate Authority to condone delay only on being satisfied that there is a sufficient cause.
Resolution plan which ignores statutory dues payable to State Government/Legal Authority liable to be rejected: Holds Supreme Court
The Supreme Court on September 06, 2022 in the matter of State Tax Officer (1) v. Rainbow Papers Limited held that Section 48 of the Gujarat Value Added Tax, 2003 (“GVAT”) is not contrary to or inconsistent with Section 53 or any other provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and that the State is a secured creditor under the GVAT Act. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.
In the instant matter, an appeal was filed under Section 62 of IBC against an order of the NCLT (“Adjudicating Authority”) holding that the Government cannot claim first charge over the property of the Corporate Debtor, as Section 48 of the GVAT provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty etc. and the aforementioned provision cannot prevail over Section 53 of the IBC. This order was further upheld by the NCLAT. Thus, the issue raised before the court was whether the provisions of the IBC and, in particular, Section 53 thereof, overrides Section 48 of the GVAT Act.
It was contented by the State that in terms of Section 48 of the GVAT Act, the claim of the Tax Department of the State, squarely falls within the definition of “Security Interest” under Section 3(31) of IBC and the State becomes a secured creditor under Section 3(30) of IBC. The Court observed that the term “Secured Creditor” as defined under the IBC is comprehensive and wide enough to cover all types of security interests namely, the right, title, interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction, which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person. The mere fact that a creditor might be an operational creditor would not result in loss of status of that operational creditor as a secured creditor. It was further observed by the court that
“A resolution plan which does not meet the requirements of Sub-Section (2) of Section 30 of the IBC, would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor”
Thus, the Court held that the Resolution plan which ignores the statutory demands payable to any State Government or a legal authority is bound to be rejected by the Adjudicating Authority and that if a company is unable to pay its debts, which include its statutory dues to the Government and/or other authorities, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.
CIRP can be initiated against Corporate Guarantor without proceeding against Principal Borrower: Holds Supreme Court
The Supreme Court on September 06, 2022 in the matter of K Paramasivam v. Karur Vysya Bank Ltd. held that Corporate Insolvency Resolution Process (“CIRP”) can be initiated against the corporate guarantor without proceeding against the principal borrower and that the liability of the Guarantor is co-extensive with that of the principal borrower.
In the instant matter an appeal was filed under Section 62 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) by the Appellant (“Promoter”) of Maharaja Theme Parks and Resorts (“Corporate Debtor”) against the order of NCLT initiating CIRP against the Corporate Debtor, which was upheld by the NCLAT as well. It was contented by the Promoter that the Corporate Debtor does not fall within the definition of ‘Corporate Guarantor’ in Section 5(5A) of the IBC, which reads ‘corporate guarantor’ means a corporate person who is the surety in a contract of guarantee to a corporate debtor” and therefore CIRP cannot be initiated against it. The Respondent (“Financial Creditor”) contented that the issue whether an action under Section 7 of the IBC can be initiated by a Financial creditor, against a corporate person, in relation to a corporate guarantee, given by that corporate person, in respect of a loan advanced to the principal borrower, who is not a corporate person, has been answered in the matter of Laxmi Pat Surana v. Union Bank of India where the Supreme Court held that the liability of the guarantor is co-extensive with that of the principal borrower. Thus, the issue raised before the court was whether CIRP can be initiated against the corporate guarantor without proceeding against the principal borrower?
It was observed by the Court that-
“The issues raised in this appeal are settled by this Court in Laxmi Pat Surana (supra). As held by this Court in Laxmi Pat Surana (supra), the liability of the guarantor is co-extensive with that of the Principal Borrower. The judgment in Laxmi Pat Surana (supra), rendered by a three-Judge Bench of this Court is binding on this Bench. It was open to the Financial Creditor to proceed against the guarantor without first suing the Principal Borrower.”
Thus, the Court held that under Section 7 of the IBC, CIRP can be initiated against a corporate entity who has given a guarantee to secure the dues of a non-corporate entity as a financial debt accrues to the corporate person, in respect of the guarantee given by it, once the borrower commits default and the guarantor is then, the Corporate Debtor and the appeal was dismissed.
Scheme for appointing Heirs of Employees on their retirement is unconstitutional: Holds Supreme Court
The Supreme Court on September 05, 2022 in the matter of Ahmednagar Mahanagar Palika v. Ahmednagar Mahanagar Palika Kamgar Union held that the appointment of the heirs of the employees on their retirement and/or superannuation is contrary to the object and purpose of appointment on compassionate grounds and is hit by Article 14 of the Constitution of India.
In the instant matter an appeal was filed against the order of High Court of Judicature at Bombay dismissing writ petitions challenging the order of an Industrial Court directing Ahmednagar Mahanagar Palika to give appointment to the heirs of the employees on their retirement and/or superannuation. The direction was based on a settlement award between the Employees Union and the Mahanagar Palika in which one of the demands by the Union was that legal heirs of the employees must be employed on retirement.
The Supreme Court held that appointment to the heirs of the employees on their retirement/superannuation is violative of Articles 14 and 15 of Constitution of India and that no one can claim to have a vested right for appointment on compassionate grounds. The appointment on compassionate grounds is not automatic and shall be subject to the strict scrutiny of various parameters including the financial position of the family, the economic dependence of the family upon the deceased employee and the avocation of the other members of the family. The court further observed that
“If such an appointment is permitted, in that case, outsiders shall never get an appointment and only the heirs of the employees on their superannuation and/or retirement shall get an appointment and those who are the outsiders shall never get an opportunity to get an appointment though they may be more meritorious and/or well educated and/or more qualified. Even otherwise, such an appointment to the heirs of the employees on their retirement and/or superannuation shall be contrary to the object and purpose of appointment on compassionate grounds and is hit by Article 14 of the Constitution of India. As observed and held by this Court in a catena of decisions, compassionate appointment shall always be treated as an exception to the normal method of recruitment.”
Thus, the Court allowed the appeal, setting aside the impugned order passed by the High Court and held that the employees of the Mahanagar Palika /Municipal Corporation shall be governed by the scheme of the State Government at par with the government employees, which does not provide for appointment on compassionate grounds to the heirs of the employees on their retirement and/or superannuation.
Non-Issuance of Completion Certificate amounts to pre-existing dispute: Holds NCLAT New Delhi
The National Company Law Appellate Tribunal (“NCLAT”) on August 22, 2022 in the matter of Navkar Urban structure Ltd v. Niyojit Infratech Pvt. Ltd. held that the non-issuance of the completion certificate amounts to a pre-existing dispute between the parties.
In the instant matter an appeal was filed by the Appellant (“Operational Creditor”) against the order of NCLT rejecting its application filed under Section 9 the Insolvency & Bankruptcy Code, 2016 (“IBC”). In the present case, the Respondent (“Corporate Debtor”) issued a notice invoking Arbitration clause under the agreement between the parties before the Operational Creditor issued a notice under Section 8 of IBC, demanding amount due and payable on account of its service provided to the Corporate Debtor. The Corporate Debtor in the reply notice denied the claim of the Operational Creditor on the ground that no money could be claimed before obtaining the Completion Certificate for the work stated in Letter of Intent (“LOI”) and referred to the notice by which Operational Creditor was informed about the Arbitration clause in LOI.
NCLAT held that the Corporate Debtor in reply to Section 8 notice as well as in reply to Section 9 application has categorically pleaded that there is Arbitration clause in the contract between the parties. It was observed by the NCLAT that:
“The Corporate Debtor in its reply has clearly stated that no amount can be claimed by the Appellant to be due on the Corporate Debtor since no Completion Certificate regarding the work of the Appellant was ever issued. When Completion Certificate regarding Work Order was never issued, the amount claimed by the Appellant is disputed and the Adjudicating Authority has rightly taken the view that in view of the pre-existing dispute between the parties the application u/s 9 cannot be admitted.”
Thus, NCLAT held that there being an Arbitration clause in the agreement between the parties, the Operational Creditor is always at liberty to pursue his claim in the Arbitration and hence, the appeal was dismissed.
Status of Debtor attained finality, can’t be altered based on a subsequent judgment: Holds NCLAT Delhi
The National Company Law Appellate Tribunal (“NCLAT”) on August 24, 2022 in the matter of Raghavendra G. Kundangar & Ors. v. Shashi Agarwal & Anr. held that when status of a debtor attains finality, the same cannot be altered on the basis of a subsequent judgment in different proceedings and further held that NCLT is exclusively invested with inherent jurisdiction to decide the petition filed either under Section 7, 9 or any of the provisions of Insolvency and Bankruptcy Code, 2016 (“IBC”).
In the instant matter, Jindal Steel & Power Limited (“Creditor” / “Respondent”) filed a petition under Section 7 of the IBC seeking initiation of CIRP against Bharat NRE Coke Ltd. (“Corporate Debtor” / “Appellant”), claiming that there was subsisting financial debt regarding supply of material to the Corporate Debtor. Consequently, the NCLT admitted the Corporate Debtor into insolvency under Section 7 of the IBC for defaulting in payments in respect of supply of material and in all subsequent appeals (including the appeal filed before the Supreme Court under Section 62 of IBC), the debt of the Creditor was declared as financial debt and had attained finality.
Subsequently, the Supreme Court in the matter of Anuj Jain v. Axis Bank Limited held that debt arising out of supply of materials is operational debt and not financial. Based on this judgment, the Corporate Debtor filed an application before NCLAT to recall the order initiating CIRP on the ground that the aforementioned is incompetent to file an application under Section 7 of IBC claiming to be financial creditor. The Corporate Debtor contented that once a judgment is overruled it will have retrospective effect, invalidating the proceedings undertaken in pursuance of the overruled judgment and further contented that the adjudicating authority lacks inherent jurisdiction.
Thus, the issue before NCLAT was to examine the impact of such overruling on the proceeding already attained finality. The tribunal observed that once the order of the adjudicating authority attains finality on account of affirmation by the Hon’ble Apex Court in appeal, the same cannot be reopened. It is hit by the doctrine of constructive res judicata, though the principle of res judicata is a part of CPC, the doctrine is applicable to the proceedings of IBC. If such issues are reopened on the basis of subsequent overruling, there will not be any end for legal proceedings. It was further observed that the doctrine of prospective overruling is a device innovated by the Apex Court to avoid reopening of settled issues and to prevent multiplicity of proceedings, avoid uncertainty and avoidable litigation. By the very object of prospective declaration of law, it is deemed that all actions taken contrary to the declaration of law prior to the date of declaration are validated. Therefore, the subordinate forums which are legally bound to apply the declaration of law made by the Hon’ble Supreme Court, are also duty-bound to apply such dictum to the cases which would arise in future only. In the matters where decisions opposed to the said principle have been taken prior to such declaration of law, cannot be interfered with on the basis of such declaration of law. Hence, the appeal was dismissed.
In cases of conflict, Insolvency and Bankruptcy Code, 2016 prevails over Custom Act, 1961: Holds Supreme Court
The Supreme Court on August 26, 2022 in the matter of Sundaresh Bhatt v. Central Board of Indirect Taxes & Customs held that the Insolvency and Bankruptcy Code, 2016 (“IBC”) will prevail over the Customs Act to the extent that once moratorium is imposed, the Customs authority have only limited jurisdiction to assess the quantum and they cannot take steps to recover the dues.
In the instant matter, an appeal was filed by the liquidator of ABG Shipyard Ltd. (“Corporate Debtor”), challenging the order of the NCLAT, directing the release of certain goods lying in the customs bonded warehouses on failure to pay customs duties. The NCLAT held that the Corporate Debtor is deemed to have relinquished its title to its goods lying in the customs bonded warehouses if he fails to clear bills of entry and claim the assets after their import by the action of Sections 48 and 72 of the Customs Act and hence the Customs Authority is empowered to sell the goods and recover the government dues. The legal issue before the Hon’ble Supreme Court was whether the Customs Authority is entitled to confiscate/ appropriate the goods of the Corporate Debtor which is currently undergoing liquidation in terms of IBC and whether the provisions of the IBC precede over the provisions of the Customs Act.
A 3 three judge Court Bench, after analysing the IBC and the Customs Act observed that the IBC, being the more recent statute, clearly overrides the Customs Act which can be made out by a reading of Section 142A of the Customs Act. According to the aforesaid provision, the Customs Authorities would have the first charge on the assets of an assessee under the Customs Act, except with respect to cases under Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993, SARFAESI Act, 2002, and the IBC, 2016. Further, it was observed that Section 238 of the IBC overrides any provision of law which is inconsistent with the IBC.
The Supreme Court held that after the imposition of moratorium in terms of Sections 14 or 33(5) of the IBC, the Customs Authority has a limited jurisdiction to assess/determine the quantum of customs duty and other levies and does not have the power to initiate recovery of dues by means of sale/confiscation/appropriation, as that would tantamount to violation of the lBC and put the applicant/liquidator of the Corporate Debtor company (under liquidation) in disadvantageous position. One of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under IBC to protect the Corporate Debtor against pecuniary attacks.
The Supreme Court further ruled that following the imposition of the moratorium, the Customs Authority was only required to assess the duties that were payable and submit its claims (concerning customs dues/operational debt) before the adjudicating authority which would be handled in accordance with the provisions of IBC. The Court held that the IRP/Resolution Professional/Liquidator has the right to take control of the assets belonging to the Corporate Debtor and immediately secure goods from the Customs Authority to be dealt with appropriately, in terms of the IBC.
Arbitrator has discretion to award Post – Award interest on a part of the ‘Sum’: Holds Supreme Court
The Supreme Court on September 01, 2022 in the matter of Morgan Securities and Credits Pvt. Ltd. V. Videocon Industries Ltd. held that the arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made i.e. whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award.
In the instant matter, an appeal was filed challenging the award of an arbitrator on the ground that the arbitrator does not have the discretion to determine the ‘sum’ on which the post-award interest is to be granted.
Relying on the earlier judgment of the Hon’ble Apex Court in the matter of Hyder Consulting (UK) Ltd. v. State of Orissa, it was contented that if pre-award interest is awarded on the principal sum, the aggregate of the principal and the pre-award interest is the ‘sum’ on which post-award interest must be granted. However, Section 31(7)(b) of The Arbitration and Conciliation Act, 1996 (“the Act”) is qualified by the phrase “unless the award otherwise directs“, implying that Section 31(7)(b) of the Act would only be applicable where an arbitral award is silent on the component of post-award interest. Thus, the issue before the court was whether the phrase “unless the award otherwise directs” in Section 31(7)(b) of the Act only provides the arbitrator discretion to determine the rate of interest or both the rate of interest and the ‘sum’ it must be paid against?
The Court held that the phrase “unless the award otherwise directs” in Section 31(7)(b) of the Act only qualifies the rate of interest. It does not fetter the discretion of the arbitrator to grant post-award interest. It only contemplates a situation in which the discretion is not exercised by the arbitrator. The Court observed that when a discretion has been conferred on the arbitrator in regard to the grant of pre-award interest, the statute cannot be interpreted to presuppose that the legislative intent was to reduce the discretionary power of the arbitrator for the grant of post-award interest under clause (b) of Section 31(7) of the Act. The discretion of the arbitrator can only be restricted by an express provision to that effect and there is no provision in the Act which restricts the discretion of the arbitrator for the grant of post-award interest which the arbitrator otherwise holds inherent to their authority.
The Court further held that the purpose of granting post-award interest is to ensure that the award debtor does not delay the payment of the award. The arbitrator while granting arbitral award must exercise the discretion in good faith, take into account relevant and not irrelevant considerations, and must act reasonably and rationally taking cognizance of the surrounding circumstances.
Section 7(5)(b) of IBC to notify Financial Creditor before rejecting claim extends to appeals before NCLAT: Observes Supreme Court
The Supreme Court on August 13, 2022 in the case of Kotak Mahindra Bank Limited v. Kew Precision Parts Private Limited and Ors., observed that Section 7(5)(b) of the Insolvency and Bankruptcy Code, 2016(“IBC”) which requires the Adjudicating Authority to notify the Financial Creditor before rejection of a claim, would be applicable to appeals as well, since appeal is the continuation of original proceedings.
Kotak Mahindra Bank (“the Bank”) is servicing loans to the Corporate Debtor since 2012. In 2014, it sanctioned a loan to the Corporate Debtor who defaulted in making the repayment and the Bank declared its account as non-performing asset. Thereafter, the Bank issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (“SARFAESI Act”). The Corporate Debtor admitted its liability and offered a one-time settlement. After modifying the settlement amount a couple of times it made the final offer, which was accepted by the Bank. As the Corporate Debtor defaulted, the Bank filed a petition under Section 7 of the IBC. NCLT admitted the petition; initiated the Corporate Insolvency Resolution Process (“CIRP”); imposed a moratorium; and appointed an Interim Resolution Professional. Holding the petition to be time barred, NCLAT did not allow the appeal.
Referring to Section 25 of the Contract Act, 1872, the Apex Court was of the view that a written promise to pay the barred debt is a valid contract and such a promise may form the basis of a suit independent of the original debt. It also noted that under Section 18 of the Limitation Act, 1963 if an acknowledgment of liability is made in writing and signed by the party against whom such right is claimed and the same is made within the initial limitation period, it has the effect of creating a fresh start of limitation. The Apex Court opined that the NCLAT did not notice the terms of settlement and did not consider whether Section 25(3) of the Contract Act, 1872, is applicable. It merely noted that since there was no acknowledgement of the debt within the period of limitation, appeal could not be allowed.
The Apex Court assailing the order of the NCLAT allowed the appeal and held that NCLAT erred in closing the CIRP proceedings without giving the Bank an opportunity to rectify the defects in the application under Section 7 by filing additional pleadings and/or documents. Placing reliance on Dena Bank v. C. Shivakumar Reddy and Another, it emphasized that such additional documents can be filed at any time until the application for CIRP is finally dismissed. Finally, the Bench remanded the matter back to NCLAT for fresh consideration.
Continuity of service with back wages can be directed in cases where the retrenchment was not bona fide: Observes Supreme Court
The Supreme Court on August 12, 2022 in the case of Armed Forces Ex Officers Multi Services Cooperative Society Ltd v. Rashtriya Mazdoor Sangh (INTUC) observes that continuity of service can be directed in cases where, the retrenchment was not bona fide.
In the instant matter, Armed Forces Ex Officers Multi Services Cooperative Society Ltd retrenched the services of fifty-five employees, on the grounds that it had closed its business. Retrenchment compensation as per Section 25F of the Industrial Disputes Act, 1947, was also offered. Before the Industrial Tribunal, Pune, the Government referred the dispute regarding a demand of the workmen for reinstatement of fifty-five drivers with continuity of service and full back wages. The orders of termination were set aside by the Tribunal and the workmen were directed to be reinstated with continuity of service and 75% back wages, save eight employees who admitted to gainful employment post retrenchment. The Bombay High Court also upheld this order of the Tribunal.
Regarding the submission that the management has a right to organize its business based on economic considerations, the Apex Court observed that:
“There is also no quarrel with the principle of Parry & Co. Ltd. v. P.C. Pal , which laid down the proposition that a bona fide policy decision for reorganizing the business based on economic considerations is within an enterprise’s proprietary decision and retrenchment in this context must be accepted as an inevitable consequence. The answer is here itself, and pertains to the material requirement of bona fide of the decision. In the present case, the Tribunal has come to the conclusion that the entirety of business is not lost due to the strike and the retrenchment seems to have been imposed as retribution against the workmen for going on a strike. It is for this reason that the decision of this Court in the case of Parry Company (supra) will not apply to the facts of the present case.”
While dismissing the appeal, the Apex Court refused to interfere with the direction of the Tribunal to award 75% back wages.
CIRP against solvent, MSME Company providing employment is not justified: NCLAT Delhi
The National Company Law Appellate Tribunal (“NCLAT“), Principal Bench, on August 07, 2022 while adjudicating an appeal filed in M/s Agarwal Veneers v Fundtonic Service Pvt. Ltd., upheld the dismissal of a Section 9 petition on the grounds of the Corporate Debtor being a solvent company, operating as a ‘going concern’ and is also a MSME enterprise providing employment and generating revenue. It was held that in such cases, especially when due amount is small, the question of ‘Reorganising’ or ‘Resolution of the Company’ does not arise.
In the instant matter, M/s Agarwal Veneers (“Appellant“) had filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC“) before the NCLT Ahmedabad Bench (“Adjudicating Authority“), seeking initiation of Corporate Insolvency Resolution Process (“CIRP“) against Fundtonic Service Pvt. Ltd. (“Respondent“).
The Adjudicating Authority rejected the petition while observing the following grounds:
- That the Demand Notice issued under Section 8 of the IBC was issued by an advocate to whom no authority was given to issue such notice and there was nothing on record to show that the advocate was associated with the Appellant.
- That the Respondent is a going concern and at present giving employment to 20 employees. Hence, it would defeat the very purpose of the IBC, if a going concern generating revenue, the employees and stakeholders are subject to the rigors of the CIRP.
- That the Appellant had filed the petition as a tool of recovery mechanism which is not the objective of the IBC.
- That the Respondent falls within the category of Micro, Small and Medium Enterprise (MSME) and CIRP proceedings against a going concern jeopardizing livelihood of several families is against the objectives of IBC.
- That the Appellant had not produced on record documents like copy of the purchase order, delivery challan and a copy of bank statement showing that no payment is received from the corporate debtor towards the invoices raised to substantiate its claim.
The Bench observed that a Demand Notice under Section 8 could be issued by an advocate. However, the Adjudicating Authority is empowered to reject an incomplete petition under Section 9 if a copy of the invoices, the bank statements and the financial accounts are not furnished alongwith it. The Preamble of IBC describes its spirit and objective to be ‘Reorganisation’ and ‘Insolvency Resolution’, specifically omitting the word ‘Recovery’. If IBC is purely used for the purpose of Debt Recovery, particularly when the amounts due are small, and the Company is a solvent entity and is a going concern, the question of ‘Reorganising’ or ‘Resolution of the Company’ does not arise.
Reliance was placed on the Supreme Court judgment in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd., 2022 SCC Online SC 841, wherein was held that if there is a ‘debt’ and ‘default’, the Adjudicating Authority should use its discretion in admitting/ rejecting an Application.
Finally, the Bench upheld the order of the Adjudicating Authority and dismissed the appeal.
Mere use of words “Arbitration” or “Arbitrator” in a clause won’t make it arbitration agreement: Supreme Court
The Supreme Court on August 03, 2022 in the case of Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture observed that an arbitration agreement should disclose a determination and obligation on behalf of parties to refer disputes to arbitration and noted that mere use of the word “arbitration” or “arbitrator” in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration.
In the instant matter, the contract agreement between Mahanadi Coalfields Ltd. and IVRCL AMR Joint Venture, Clause 15 titled as ‘Settlement of Disputes/Arbitration’ read as follows:
It is incumbent upon the contractor to avoid litigation and disputes during the course of execution. However, if such disputes take place between the contractor and the department, effort shall be made first to settle the disputes at the company level. The contractor should make request in writing to the Engineer-in-Charge for settlement of such disputes/claims within 30 (thirty) days of arising of the case of dispute/claim failing which no disputes/claims of the contractor shall be entertained by the company. If differences still persist, the settlement of the dispute with Govt. Agencies shall be dealt with as per the Guidelines issued by the Ministry of Finance, Govt. of India in this regard. In case of parties other than Govt. Agencies, the redressal of the disputes may be sought in the Court of Law.
Allowing an application filed by the Contractor under Section 11(6) of the Arbitration and Conciliation Act, 1996, the High Court of Orissa appointed a sole arbitrator.
The bench referred to the judgment in Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719, and observed that, in the present case, the substantive part of the Clause 15 makes it clear that there is no arbitration agreement between the parties agreeing to refer either present or future disputes to arbitration.
Finally, the court while allowing the appeal held that:
“A plain reading of the above clause leaves no manner of doubt about its import. There is no written agreement to refer either present or future disputes to arbitration. Neither does the substantive part of the clause refer to arbitration as the mode of settlement, nor does it provide for a reference of disputes between the parties to arbitration. It does not disclose any intention of either party to make the Engineer-in-Charge, or any other person for that matter, an arbitrator in respect of disputes that may arise between the parties. Further, the said clause does not make the decision of the Engineer-in-Charge, or any other arbitrator, final or binding on the parties. Therefore, it was wrong on the part of the High Court to construe clause 15 of the Contract Agreement as an arbitration agreement.”
Trust property cannot be alienated unless it is for benefit of trust and/or its beneficiaries: Observes Supreme Court
The Supreme Court on July 22, 2022 in the case of Khasgi (Devi Ahilyabai Holkar Charities) Trust Indore v. Vipin Dhanaitkar observed that a trust property cannot be alienated unless it is for the benefit of the Trust and/or its beneficiaries. The Trustees are not expected to deal with the Trust property, as if it is their private property. It is the legal obligation of the Trustees to administer the Trust and to give effect to the objects of the Trust.
In the instant matter, one of the issues raised in the appeal was whether the provisions of the Public Trusts Act apply to the Khasgi Trust. The court noted that the trust was created with the object of preservation and maintenance of the Trust properties which are charities and endowments. Thus, the court observed that the Khasgi Trust, is an express Trust for public, religious and charitable purposes. Under Section 4(1) of the Public Trusts Act, every such Trust requires compulsory registration. The court noted that all the alienations made by the Trustees of Khasgi Trust except one have been made without complying with the mandatory requirement of obtaining the previous sanction as required by sub Section (1) of Section 14. The Supreme Court, therefore, directed the Registrar under the Public Trusts Act, to conduct necessary investigations into such alienation of properties of Khasgi Trust.
There cannot be two arbitration proceedings with respect to same contract/ transaction: Holds Supreme Court
The Supreme Court on July 22, 2022 in the case of M/s Tantia Constructions Limited v. Union of India made a firm opinion that there cannot be two arbitration proceedings with respect to the same contract/ transaction and stated that when a dispute has earlier been referred to arbitration and an award was passed on the claims made, then it is “rightful” to refuse to refer to arbitration, in exercise of Section 11(6) of the 1996 Arbitration Act, a fresh arbitration proceeding sought to be initiated with respect to some further claims.
Court while deciding ‘Section 11’ application seeking appointment of arbitrator can consider the question as to whether dispute falls within ‘Excepted Clause’: Supreme Court Opines
The Supreme Court on July 20, 2022 in the case of Indian Oil Corporation Limited v. NCC Limited held that at the stage of deciding application for appointment of arbitrator, a court can consider whether the dispute falls within the excepted clause and also held that Section 11(6A) of Arbitration Act does not prevent courts from considering issue of arbitrability.
In the instant matter, perusing the contract between the parties, the bench noted that there are clauses which provides that ‘Whether or not a claim sought for arbitration by the contractor is a Notified Claim or any such matter / dispute is specifically excluded from the scope, purview and ambit of arbitration agreement, such matter / dispute shall have to be first decided by the General Manager prior to the arbitral proceeding with or proceeding further with the reference.’ Thus, unless there is a decision by the General Manager on whether or not a claim sought to be referred to arbitration by the contractor is a Notified Claim or not, the Arbitrator or Arbitral Tribunal shall have no jurisdiction to entertain such a dispute, the court noted.
The court observed that the question of jurisdiction and non – arbitrability can be considered by a Court at the stage of deciding an application under Section 11 of Arbitration and Conciliation Act, if the facts are very clear and glaring.
The court further observed:
“Parties to the contract are free to agree on applicability of (1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration. Parties to the contract also may agree for matters excluded from the purview of arbitration. As observed by this Court in a catena of decisions, unless the effect of agreement results in performance of an unlawful act, an agreement, which is otherwise legal, cannot be held to be void and is binding between the parties.”
The court, therefore, held that the High Court erred in referring the dispute to arbitration and appointing a sole Arbitrator to adjudicate on the dispute with respect to the claims which as such are held to be not Notified Claims by the General Manager.
Discretionary power for the admission of application by a Financial Creditor for initiation of CIRP vested with the adjudicatory authority: Holds Supreme Court
The Supreme Court on July 12, 2022 in the matter of Vidarbha Industries Power Limited v. Axis Bank Limited, observed that discretionary power has been vested with the adjudicatory authority as per section 7(5) of the Insolvency and Bankruptcy Code (“IBC”) for the admission of application by a Financial Creditor for initiation of CIRP.
In the instant case, the Appellant was awarded a contract by bidding process which was conducted by Maharashtra Industrial Development Corporation (“MIDC”) for implementation of a Group Power Project (“GPP”), which was later converted into an Independent Power Project (“IPP”). However, Maharashtra Electricity Regulatory Commission (“MERC”) disallowed a substantial portion of actual fuel cost which was claimed by the Appellant for the Financial Years 2014-2015 and 2015-2016 and also capped the tariff for the Financial Years 2016-2017 to 2019-2020.The Appellant filed an appeal before the Appellate Tribunal for Electricity (“APTEL”), challenging the disallowance of the actual fuel cost for the abovementioned Financial Years, which was allowed and a sum of Rs.1,730 Crores is due to the Appellant pursuant to which the Appellant filed an application before the MERC for implementation of this order of APTEL. MERC filed a civil appeal challenging the order of APTEL which was pending. Amid these series of pending cases the Appellant was short of funds. Axis Bank Limited, as Financial Creditor of the Appellant, filed an application under Section 7 (2) of the IBC for the initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Appellant. The Appellant filed an application, seeking stay of proceedings under Section 7 of the IBC before the NCLT, placing reliance to the case of Swiss Ribbons Private Limited and Anr. v. Union of India and Ors (2019) 4 SCC 17, the NCLT held that-
“The imperativeness of timely resolution of a Corporate Debtor, who was in the red, indicated that no other extraneous matter should come in the way of expeditiously deciding a petition under Section 7 or under Section 9 of the IBC”
The National Companies Law Appellate Tribunal (“NCLAT”) upheld the decision of the Adjudicating Authority (“NCLT”).
The Supreme Court disagreeing with the decision of lower courts held:
“There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters. The Adjudicating Authority (NCLT) found the dispute of the Corporate Debtor with the Electricity Regulator or the recipient of electricity would be extraneous to the matters involved in the petition. Disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance. The question is whether an award of the APTEL in favour of the Corporate Debtor, can completely be disregarded by the Adjudicating Authority (NCLT), when it is claimed that, in terms of the Award, a sum of Rs.1,730 crores, that is an amount far exceeding the claim of the Financial Creditor, is realisable by the Corporate Debtor. The answer, in our view, is necessarily in the negative.”
The Supreme Court by distinguishing the section 7(5) of IBC’s admission of application by Financial Creditors and section 9(5) of IBC’s admission of application by Operational Creditors held that:
“The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor.”
“On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.”
The Supreme Court held that the power under Section 7(5) of the IBC should not be applied arbitrarily and capriciously. It also held that only the existence of financial debt and default would not be sufficient for the admission of application of CIRP under section 7(5) of the IBC but also additional grounds would also be needed to be taken into consideration. The Apex Court also highlighted:
“The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example, when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation. The example is only illustrative.”
Appointment on the basis of false cast certificate cannot be permitted to retain benefit of wrongful appointment: Observes SC
The Supreme Court on July 11, 2022 in the matter of The Chief Executive Officer, Bhilai Steel Plant, Bhilai v. Mahesh Kumar Gonnade & ors, observed that when a person secures appointment on the basis of a false caste certificate, he cannot be permitted to retain the benefit of wrongful appointment.
In the instant matter, the employee obtained wrongful Caste Certificate showing him to be “Halba” Scheduled Tribe from the Deputy Collector, Durg and on the basis of the said certificate, joined service as a Management Trainee (Technical) against a Schedule Tribe quota vacancy at the Bhillai Steel Plant of the Steel Authority of India Limited (SAIL). Later, High-Level Caste Scrutiny Committee, Raipur cancelled his Caste Certificate with the observation that he failed to produce documents prior to the year 1950 showing him as Halba. Following this, he was terminated from service. He challenged the Termination order before the Central Administrative Tribunal (CAT). The Chhattisgarh High Court allowed his writ petition relying on a judgment of the Supreme Court in State of Maharashtra v. Milind and Ors. (2001) 1 SCC 4.
The Supreme Court in this case, placing reliance on Union of India v. Dattatray & Ors (2008) 4 SCC 612 observed that the Chhattisgarh High Court misapplied the State of Maharashtra v. Milind and Ors. (2001) 1 SCC 4, since the appointment as Management Trainee (Technical), cannot be compared to the education and appointment of a medical doctor. It observed:
“As we notice, the High Court disregarded the Government’s circular dated 11.01.2016 whereby the previous circular (01.10.2011) was cancelled with the specific observation that Milind’s judgment was clarified subsequently in Dattatray, by declaring that when a person secures appointment on the basis of a false certificate, he cannot be permitted to retain the benefit of wrongful appointment. In fact, necessary actions were expected to be taken against those who secured unmerited appointment on the basis of false caste certificate.”
The Supreme Court held that instead of granting equitable relief, the High Court should have ruled that he could not continue to usurp the benefits meant for a ST category person because he was an OBC. Respondent being an OBC cannot be retained in a ST category post. The emoluments paid to him, however, should not be recovered. It is also determined that the respondent is ineligible for any pensionary benefits as a result of his wrongful appointment.
Lease Rental is an operational debt under the IBC: Holds NCLAT
NCLAT on July 05, 2022 while adjudicating an appeal in the case of Jaipur Trade Expocentre Pvt. Ltd. v. Metro Jet Airways Training Pvt. Ltd. held that the lease rental qualifies as an operational debt within the meaning of Section 5(21) of the Insolvency Bankruptcy Code, 2016 (“IBC”).
In the instant case, Jaipur Trade Expocentre Private Limited (“Jaipur Trade”) entered into a license agreement with Metro Jet Airways Training Private Limited (“Metro Jet Airways”) for a license of a building admeasuring 31,000 Sq. Ft. The term of the license was for a period of five years and the license was INR 4,00,000/- per month plus govt. taxes. Initially, Metro Jet Airways made payment to the Jaipur Trade but the cheque dated 07.05.2018 & 08.10.2018 for INR 20,00,000/- each were dishonoured. Accordingly, Jaipur Trade sent a demand notice under Section 8 of the IBC and thereafter filed petition under Section 9 of the IBC against Metro Jet Airways before NCLT, Jaipur. NCLT, Jaipur dismissed the Section 9 petition on the ground that the claim arising out of the license to use the immovable property does not fall in the category of goods & services and therefore, the Section 9 application is not maintainable.
NCLAT noted that the definition of operational debt as mentioned under Section 5(21) of the IBC provides that the operational debt means a claim arising out of provision of goods and services but the term “services” is not defined anywhere under the IBC.
The Bench referred to Clause 4(b) of the license agreement which provides that the licensee shall pay all govt. taxed including GST and observed that the payment of GST is only provided for goods and service and the license agreement itself provided for payment of GST which clearly indicates that the license is taxed for services. It was also observed that if the agreement was not for services then there was no requirement of payment of GST.
NCLAT also held that the term operation is derived from “operate”. An Operating Cost is an expense incurred in the conduct of the principal activities of the enterprise and similarly operational debt is also a debt which is incurred in the conduct of the principal activities of the enterprise.
“In the present case, the Corporate Debtor has taken a licensed premises for running an Educational Institution. All cost incurred by the Corporate Debtor and cost which remained unpaid shall become a debt on the part of Operational Creditor.”
In light of the above, NCLAT observed that – The claim of licensor for payment of license fee for use of Demised Premises for business purposes is an ‘operational debt’ within the meaning of Section 5(21) of the IBC.
Sale of Corporate Debtor as a ‘Going Concern’ includes both assets and liabilities: NCLT Mumbai
The NCLT, Mumbai on July 02, 2022 in the matter of Harsh Vinimay Pvt. Ltd. v Gajanan Industries Ltd., held that when a Corporate Debtor is sold as a ‘going concern’, then such sale shall include both assets and liabilities and not merely assets sans liabilities.
In the instant matter, NCLT Mumbai Bench (“Adjudicating Authority”) passed the liquidation order against the Gajanan Industries Ltd. (“Corporate Debtor”) and C.A. Devang P Sampat was appointed as the Liquidator. The E-auction of the assets of the Corporate Debtor was scheduled and Mr. Gaurav Agarwal (“Applicant”) had submitted an Earnest Money Deposit of Rs. 50,00,000/- for participating in the e-auction. The Applicant was declared as the Successful Bidder of the Corporate Debtor as a going concern with a bid amount of Rs. 4,65,00,000/- and was accordingly issued a letter of intent by the Liquidator. The Applicant paid the entire remaining consideration of Rs. 4,15,00,000/- along with an interest of Rs. 10,09,000/- towards the auction purchase and the same was acknowledged by the Liquidator.
Thereafter, the Applicant filed an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the Liquidator before the Adjudicating Authority, seeking:
“ii. The Applicant shall not be responsible for any other claims/ liabilities/ obligations etc. payable by the Corporate Debtor as on this date to the Creditors or any other stakeholders including Government dues. All the liabilities of the Corporate Debtor as on the date stand extinguished, as far as the Applicant is concerned.”
The Adjudicating Authority placed reliance on the NCLAT judgment in M/s Visisth Services Limited v. S.V. Ramani, Company Appeal (At) (Ins) No. 896 of 2020, wherein it was held that- “It can be seen from the afore-noted discussion as well as Regulation 32 A of the IBBI (Liquidation Process) Regulations, 2016 that Sale as a ‘Going Concern’ means sale of assets as well as liabilities and not assets sans liabilities…….sale of a Company as a ‘Going Concern’ means sale of both assets and liabilities, if it is stated on ‘as is where is’ basis…”
Under ‘Right of Subrogation’ guarantor is entitled to initiate CIRP against principal borrower: NCLT Kolkata
The NCLT, Kolkata on June 27, 2022 in the matter of Orbit Towers Pvt. Ltd. v. Sampurna Suppliers Pvt. Ltd. while deciding a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, held that if a guarantor pays the debt on behalf of the Principal Borrower, it steps into the shoes of the creditor and can initiate Corporate Insolvency Resolution Process (“CIRP”) against the Principal Borrower.
In this matter, Sampurna Suppliers Pvt. Ltd. (“Corporate Debtor”) availed a loan of Rs.10,00,00,000/- from the Indian Bank. Upon the request of Corporate Debtor, Orbit Towers Pvt. Ltd. (“Financial Creditor”) had given corporate guarantee for the said loan and had also created an equitable mortgage of its property situated in Kolkata in favour of Indian Bank.
The Corporate Debtor was obligated to repay the loan amount of Rs.10,00,00,000/- along interest and to obtain release of the Financial Creditor’s property at Kolkata. However, the Corporate Debtor failed to do so and the Financial Creditor paid Rs.8,45,19,907/- to the Indian Bank in capacity of a Corporate Guarantor. Thereafter, the Corporate Debtor paid Rs.2,60,00,000/- to the Financial Creditor towards part discharge of its liability and a sum of Rs.5,85,19,907/- remained due and payable. The liability of Principal Borrower (Corporate Debtor) was discharged by the Guarantor (Financial Creditor).The Financial Creditor filed a petition under Section 7 of the IBC before NCLT Kolkata Bench, seeking initiation of CIRP against the Corporate Debtor.
The NCLT Bench observed that Sections 140 and 141 of the Indian Contracts Act, 1872 talks of “right of subrogation”, which entails the substitution of another person in place of the Creditor, so that the person substituted will succeed to all the rights of the creditor with reference to the debt.
“The guarantor’s right to be placed in the creditor’s position on the discharge of the principal debtor’s obligation, to the extent that the Guarantor’s property or funds have been used to satisfy the Creditor’s claim and to effect such discharge is called the Guarantor’s right of subrogation”
It was further observed that Section 140 of the Indian Contracts Act, 1872 provides that rights of surety of payment or performance, where a debt has become due on default of the Principal Debtor to perform, the surety upon making payment or performance of all that, is eligible for and is invested with all the rights which the Creditor had against the Principal Debtor. The Creditor had the rights to sue the Principal Debtor. The Guarantor may therefore, sue the Principal Debtor, having got invested with all rights of the Creditor. Therefore, under the provisions of the Indian Contract Act, 1872, all the rights of the then Creditor i.e., the Indian Bank, would automatically become the rights of the Surety (Financial Creditor).
On the issue of absence of any agreement between Corporate Debtor and Financial Creditor, it was held that:
“Any agreement of guarantee between the Indian Bank and the Guarantor is sufficient for the purpose of bestowing all the rights of the Bank/creditor upon the Financial Creditor herein once the Financial Creditor has discharged all the liability of the Corporate Debtor towards Indian Bank. There may or may not be any agreement between the Financial Creditor and the Corporate Debtor. It does not make any difference at all. The Law is very clear that once the Guarantor/surety discharges the liability of the Principal borrower towards the creditor, all the rights of the Creditor to recover that money would automatically be transferred in favour of the surety/ Guarantor. This is exactly the right of subrogation.”
Thus, the Bench held that the Financial Creditor was eligible and entitled to proceed against the Corporate Debtor for recovery of the dues and file the petition under Section 7 of the IBC before Adjudicating Authority or before any other Forum of competent jurisdiction. The petition was admitted and CIRP was initiated against the Corporate Debtor.
The interest or claim of a partner against another partner or firm is not protected under IBC: NCLT Mumbai
The NCLT, Mumbai Bench on June 27, 2022 in the matter of Parul A Vora v. Kavya Buildcon Private Limited, while deciding a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) held that the IBC does not protect the interest or claim of a partner against another partner or the partnership firm.
In the instant matter, Parul A Vora (“Petitioner”) had disbursed via RTGS an amount of Rs.5,25,000/- in favour of M/s Kavya Construction Co. (“Borrower Firm”), of which Kavya Buildcon Pvt. Ltd. (“Respondent”) was a partner. The Petitioner contended that the Respondent being a Partner, was personally and jointly liable for repayment of the amount borrowed by the Borrower Firm and was obligated to pay the Petitioner a total amount of Rs.9,72,876/- (inclusive of interest @12%p.a.) as on 31.03.2019. The Petitioner had filed a petition under Section 7 of the IBC before NCLT Mumbai Bench, seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Respondent, when the latter declined to repay the amount borrowed by the Borrower Firm.
The Bench observed that the Borrower Firm owed money to the Petitioner and had committed default in its repayment. However, the default was committed by the Borrower Firm and not the Respondent. Reliance was placed on the NCLAT judgment in Gammon India Ltd. v Neelkanth Mansions and Infrastructure Pvt. Ltd., Company Appeal (AT) (Ins) No. 698 of 2018, wherein it was held that:
“It is not in dispute that the amount due to Appellant is from ‘Gammon Neelkanth Realty Corporation.’ The bill was raised against the said partnership firm namely– ‘Gammon Neelkanth Realty Corporation’. ‘Neelkanth Realtors Pvt. Ltd.’, ‘Gammon Housing and Estates Developers Ltd.’ and ‘Neelkanth Mansions and Infrastructure Pvt. Ltd.’ are the partners, therefore, even if one of the partners or more than one partner is the ‘Corporate Debtor’ as the amount is due from the partnership firm, the application under Section 9 of the IBC against one of the partners of such partnership firm will not be maintainable.”
The Bench observed that even though the above judgment was under Section 9 of the IBC, but the ratio laid therein would also apply to petitions under Section 7 of the IBC.
The Bench finally dismissed the petition and held that –
“IBC does not protect the interest or claim of a Partner against another Partner or the Firm as such though, the Petitioner may be entitled to the claims against the Respondent under any other law in force which may provide the legal recourse to the Financial Creditor.”
Market value does not become decisive of valuation merely because litigation involves immovable property: Supreme Court
The Supreme Court on June 16, 2022 in the matter of Bharat Bhushan Gupta v. Pratap Narain Verma And Anr., held that the nature of relief claimed in a plaint is decisive of the valuation of the suit. Market value does not become decisive of suit valuation merely because immovable property is the subject-matter of litigation. The Apex Court further stated that it is trite law that a suit for mandatory and prohibitory injunction is not required to be valued at the market value of the property.
In the instant matter, the appellant instituted a suit before the court of Senior Civil Judge, South West District, Dwarka, New Delhi for injunction and recovery of damages against his elder brother and his Munshi. His elder brother was a licensee, utilising the concerned property which was owned by the appellant for storage purposes. Later, he sought permission from the appellant to allow his Munshi to stay in the concerned property until the time the appellant requires it. Thereafter, when the appellant had asked them to vacate the property, his brother and his Munshi refused. The appellant served legal notices in August, 2016 asking them to vacate the concerned property and warned that he would claim damages for unauthorised use in case they stayed beyond the expiry of the notice period. Gauging that they have no intention to vacate the premises, the appellant had filed the said suit. As the matter came up for hearing, the Munshi alleged that the concerned property did not belong to the appellant and the suit was instituted on the basis of forged documents and solely with the purpose to grab the property. He further alleged that the plan was hatched by the appellant in connivance with his elder brother. The Munshi also filed an application under Order XIV Rule 5 of Code of Civil Procedure, 1908 seeking orders for framing additional issues, which was dismissed by the Trial Court. He had again filed an Order VII Rule 11 application stating that the value of the property at the time of filing of the suit (Rs. 1.8 crores) as admitted by the appellant reflected that the Trial Court did not have the jurisdiction to adjudicate the suit. The application was rejected with costs and was subsequently assailed before the Delhi High Court.
The Supreme Court noted that the valuation of the suit depends on the nature of the relief claimed. Merely because the subject matter of the litigation involves an immovable property, market value would not become decisive of the suit valuation. The Court observed that in the present case, a mandatory injunction had been sought by the appellant seeking the licensees to remove themselves and their belongings from the concerned property. It noted that the appellant had valued the suit for the purpose of Court fees and jurisdiction at Rs. 250 for each of the reliefs for injunction and Rs. 1lakh for damages and accordingly paid the court fees. It was of the view that the High Court had erred in not considering the unquestionable principle of law that a suit for mandatory and prohibitory injunction is not required to be valued at the market value of the property.
