IBC UPDATE | AVOIDANCE PROCEEDINGS CANNOT SURVIVE BEYOND THE TERM OF CIRP

The Delhi High Court has recently passed an order in Venus Recruiters Private Limited vs Union of India & Others, wherein it has held that proceedings for avoidance of preferential and / or other kinds of suspect transactions cannot survive after the term of Corporate Insolvency Resolution Process (CIRP).

BACKGROUND

• CIRP was instituted against Bhushan Steel Limited (Corporate Debtor) and thus, a Resolution Professional (RP) was appointed for conducting the CIRP of the Corporate Debtor.
  
  
• Thereafter, the resolution plan submitted by Tata Steel Limited was approved by the Committee of Creditors (CoC) and the same was filed with the National Company Law Tribunal, Principal Bench, New Delhi (NCLT) seeking its approval.
  
  
• In the interim i.e. before approval of the Resolution Plan, the RP filed an avoidance application under Section 43 of the Insolvency and Bankruptcy Code, 2016 (IBC), enumerating various transactions as `suspect preferential transactions’ with related parties (Avoidance Application).
  
  
• NCLT approved the Resolution Plan. However, there was no separate order passed by the NCLT with respect to the Avoidance Application. NCLT’s order approving the Resolution Plan was upheld by the National Company Appellate Law Tribunal (NCLAT).
  
  
• After approval of the Resolution Plan, the NCLT, vide an order (Order), impleaded Venus Recruiters Private Limited (Petitioner), as a party in the Avoidance Application, and issued notice to it.
  
  
• The said Order of the NCLT, was challenged by the Petitioner, by way of a writ petition before the Delhi High Court.
  

The Delhi High Court held:

• The role of the RP is finite in nature and comes to an end after the approval of the resolution plan. Hence, the RP cannot act on behalf of the Corporate Debtor after the approval of the Resolution Plan. Thus, the “Former RP” does not possess the required locus standi to initiate avoidance proceedings.
  
  
• The Court observed that once the Resolution Plan was approved by the NCLT and the management of the Corporate Debtor was handed over to the successful resolution applicant i.e. Tata Steel Limited, the NCLT had no further jurisdiction to adjudicate, except on issues pertaining to the Resolution Plan itself.
  
  
• Therefore, the Court held that since the Resolution Plan was approved by the NCLT before the date of passing the Order, CIRP of the Corporate Debtor had come to an end, and thus, the NCLT lacked jurisdiction to adjudicate upon the Avoidance Application subsequently.
  
  
• The Court further held that from a perusal of section 44 of the IBC, the orders that can be passed by the NCLT are supposed to benefit the creditors and not the new management of the corporate debtor. Since after the approval of the Resolution Plan, the proceeds of preferential transactions cannot be included in the Resolution Plan to be distributed amongst the creditors, the Avoidance Application cannot be permitted.
  
  
• Thus, in light of the above, the High Court held that the process of determination of preferential or suspect transactions would run parallel to the other steps involved in the CIRP and avoidance applications cannot survive beyond the term of CIRP as the same would be contrary to the mandate of the IBC.

MHCO Comment :

The judgment of the Delhi High Court would ensure that third parties are not dragged into litigation, even after the conclusion of CIRP over alleged suspect transactions. However, it also implies that applications pertaining to preferential and / or other suspect transactions should be decided before the conclusion of the CIRP in order to ensure that avoidance proceedings are decided on merits.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

 IBC UPDATE | DECREEHOLDER - NOT A FINANCIAL CREDITOR?

A three-member bench of the National Company Law Appellate Tribunal (NCLAT) in a recent case of Sushil Ansal v Ashok Tripathi and Ors held that a homebuyer who had obtained a decree in his favour from a competent court or authority ceases to be the Financial Creditor within the scope of the Insolvency and Bankruptcy Code, 2016 (IBC). In this update, we will analyse this unique judgment delivered by the NCLAT.

FACTS

• Mr Ashok Tripathi (Homebuyer) entered into an agreement (Agreement) dated 12 September 2014 with Ansal Properties and Infrastructure Limited (APIL).
  
  
• APIL failed to provide possession to the Homebuyer within the time stipulated in the Agreement, the Homebuyer approached the Uttar Pradesh-Real Estate Regulatory Authority (RERA). RERA adjudicated upon the dispute, deciding in favour of the Homebuyer and issued a Recovery Certificate dated 10 August 2019 (RC), directing APIL to refund the monies. APIL failed to refund the entire amount within the time stipulated under the RC, however, part payment of the money was made.
  
  
• The Homebuyer thus moved the New Delhi bench of the National Company Law Tribunal (NCLT) under Section 7 of the IBC as a Financial Creditor, in the capacity of decree-holder against the default of the financial debt committed by Mr Sushil Ansal of APIL (Corporate Debtor) on account of the non-payment of the principal amount along with penalty as decreed by the RERA. NCLT admitted the petition and directed the appointment of IRP. The said order (Impugned Order) was challenged in the present case.
  

ISSUES

• Whether this is a fit case for invoking Rule 11 of the NCLAT Rules, 2016 to allow the parties to settle the dispute?
  
  
• Whether an application filed by Respondent Nos. 1 & 2 under Section 7 of the IBC was not maintainable?

HELD

• While holding for the first issue that allowing to settle the matter with only 2 creditors would jeopardise the interest of majority stakeholders, being about 300 allottees, the NCLAT ruled out the possibility of any settlement.
  
  
• The more important aspect of the decision however lies in the second issue. While deciding the maintainability of the Petition under Section 7 as a Financial Creditor, the NCLAT held as follows (Paragraph 23 (ii)):
  
  “Decree-holder, though included in the definition of ‘Creditor’, does not fall within the definition of ‘Financial Creditor’ and cannot seek initiation of Corporate Insolvency Resolution Process as ‘Financial Creditor”.
  
  
• The principal reason cited for holding that the Decree Holding Homebuyer ceases to be the financial creditor was that the Agreement between the parties is terminated as soon as a decree or an RC is issued by a court/ authority having competent jurisdiction. Thus, despite being a creditor, a petition under Section 7 of the IBC was held to be not maintainable.

MHCO Comment:

We believe the judgment of NCLAT seems to raise issues in 2 ways (i) It goes squarely against its own precedents in a number of matters and (ii) It deprives the homebuyers of the remedy under IBC which was available to them under the previous decisions of NCLAT.

One of the most landmark precedents which the present NCLAT failed to consider is the case of Urgo Capital Limited vs. Bangalore Dehydration and Drying Equipment Co wherein it was held that a creditor under the IBC includes a decree-holder and is entitled to file an application under section 7 of the IBC on the basis of the decree. The said decision was also delivered by a 3-member bench of the NCLAT. Therefore, the question of law now remains to be decided by the Supreme Court now.

If the principle laid down by the NCLAT in the present case remains unchallenged, it would render a homebuyer in limbo with regards to its remedy under IBC. The homebuyers were deemed to be financial creditors and capable of filing a petition under Section 7 of the IBC for providing an efficient remedy to the homebuyers. NCLAT has held that by obtaining a decree or RC from the RERA, the homebuyers would cease to avail the remedy under the IBC. They can take refuge in the process of execution of the decree as provided under the Code of Civil Procedure, 1908. However, the said process is long-drawn and tedious. The remedy under the IBC on the other hand could prove to be more efficient. This decision of the NCLAT closes this door for the decree-holding homebuyers.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

REGULATORY PROCEEDINGS PROHIBITED DURING MORATORIUM PERIOD UNDER IBC

In an interesting Order, the Securities Appellate Tribunal (SAT), in the case of Dewan Housing, directed the Securities and Exchange Board of India (SEBI) to halt proceedings against Dewan Housing Finance Corporation Limited (DHFL) and quashed the order of the SEBI imposing penalty on DHFL.

BACKGROUND

• Corporate Insolvency Resolution Process (CIRP) was instituted against DHFL and thus, moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) was imposed on DHFL.
  
  
• During the moratorium, the Adjudicating Officer of SEBI issued a notice to DHFL to show cause as to why penalty should not be imposed on it for non-compliance of various SEBI regulations dealing with the creation of `Debenture Redemption Reserve` and submission of audited financial results.
  
  
• DHFL contended that due to the moratorium under IBC in place, no proceedings could be initiated against it. However, the Adjudicating Officer of SEBI vide an Order (SEBI Order) imposed a penalty of Rs 20 lacs on DHFL for non-compliance of various SEBI regulations.
  
  
• In light of the above circumstances, DHFL challenged the SEBI Order before SAT.
  

The Securities Appellate Tribunal held:

• SEBI argued on mainly on two grounds:- (a) the moratorium declared under IBC would be applicable only to the enforcement / recovery of the determined liability and not to proceedings for assessing or determining the liability; (b) that moratorium is only applicable to creditors and not to regulators like the SEBI.
  
  
• SAT rejected SEBI’s argument and held that the word ‘proceedings’ under Section 14 of the IBC would cover the proceedings initiated by SEBI against DHFL.
  
  
• SAT placed reliance on the judgments of the Supreme Court in Alchemist ARC case and Innoventive Industries case, and held that in cases where moratorium has been declared under the IBC, Adjudicating Officer of SEBI does not have jurisdiction to proceed under the SEBI laws / regulations against a corporate debtor (DHFL in the present case).
  
  
• It also rejected the contention of the SEBI that moratorium is only applicable to creditors and not to regulators like the SEBI. Placing reliance on previous judgments of the National Company Law Tribunal (NCLT), inter alia, in case of Ms Anju Agarwal vs Bombay Stock Exchange & Others, wherein it was held that in case of contradictions, Section 14 of the IBC would prevail over Section 28A of the SEBI Act (provision dealing with the imposition of penalties), SAT held that SEBI cannot recover any penalty from DHFL.
  
  
• Thus, SAT quashed the order of SEBI imposing penalty on DHFL. It also quashed the show cause notice and the proceedings for recovery of the penalty, as no proceedings could be instituted due to the moratorium.

MHCO Comment :

The order of the SAT is an interesting development. The order delves into and interprets Section 14 of the IBC, which might be beyond the jurisdiction of the SAT, as the NCLT would be an appropriate forum to decide the same. Further, this order effectively bars regulators like the SEBI, the Reserve Bank of India, Insurance Regulatory and Development Authority, from penalising entities for violation of its regulations. It would be interesting to see whether SEBI files an appeal against this order of the SAT.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

MAHARASHTRA APARTMENT OWNERSHIP ACT AMENDMENT| CO-OPERATIVE COURT TO NOW HAVE JURISDICTION 

The Government of Maharashtra recently amended the Maharashtra Apartment Ownership (Amendment) Act, 2020 . This update seeks to broadly set out the important changes and additions brought about to the Maharashtra Apartment Ownership Act, 1970 (Act).

• Section 12A – As per this newly added Section 12A to the Act, the Apartment owners now can change or amend the contents of the Declaration or Deed of Apartments by passing a resolution by majority in a special meeting of the Association of Apartment Owners. Earlier, the Apartment owners in order to make any revisions or amendments required registraion of ‘Deed of Apartment – Form II’ before the Sub-Registrar of Assurances as per the Maharashtra Apartment Ownership Rules, 1972. This provision seems to be have been done away with in this amdendement.
  
  
• Section 16A – This new Section 16A now allows any aggrieved apartment owner or association of apartment owners can file a complaint with the Registrar for any violation or contravention of the provisions of the Act or the rules against any apartment owner or the sole owner or all the owners of the property. Every such complaint filed before the Registrar shall as far as possible be disposed of within a period of 30 days from the date of its filing. If the Registrar fails to dispose of the complaint within 30 days, he must record the reasons for the delay.
  
  
• Section 16B – Any apartment owner, Association of Apartment owners or any sole owner aggrieved by any direction or order of the Registrar may prefer an appeal to the Co-operative Court. Every appeal under this newly added section shall be preferred within a period of 60 days from the date on which the copy of the direction or order made by the Registrar is received. The Co-operative Court shall after giving reasonable opportunities to the parties pass such orders as it may deem fit and shall send a copy of every order passed in the appeal to the Registrar and the parties. Every appeal shall be dealt by the Co-operative Court within 90 days from the date of receipt of the appeal.
  

MHCO Comment :

Earlier the resident of the apartment owners had to file a suit before the civil court for any dispute with the apartment owners or the condominium and the same was time consuming. Even if a member did not pay the monthly maintenance fee, the other remaining members had to seek redressal from the civil court. This amendment now puts the apartment owners in same forum as the cooperative housing societies i.e. before the Deputy Registrar and Cooperative Court which being a specialised forum to adjudicate these issues. This amendment further requires the Deputy Registrar and Cooperative Court to resolve the issues in a timely manner.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

SUPREME COURT | STAY ON PROCEEDINGS TO AUTOMATICALLY CEASE TO HAVE EFFECT ON COMPLETION OF 6 MONTHS 

The Supreme Court of India recently passed an order in Asian Resurfacing of Road Agency Private Limited & Another vs Central Bureau of Investigation , directing that a stay granted by any court (including the High Courts), in any civil or criminal proceedings, shall automatically cease to have effect on expiry of 6 months, unless extended for good reasons.

BACKGROUND

• In the present case, the Complainant had approached the Court of the Additional Chief Judicial Magistrate, Pune (Trial Court) for resumption of trial that had been stayed by the Bombay High Court. However, the Trial Court refused the plea of the Complainant to resume trial and directed the Complainant to move an application for resuming trial before the Bombay High Court, as it cannot pass any order in a proceeding which has been stayed by the superior court, being the Bombay High Court.
  
  
• The Trial Court’s order deviated from what was laid down in a 2018 Judgment of the Supreme Court (2018 Judgment) , in the same matter in which the Supreme Court had directed that all stay orders against proceedings shall terminate within 6 months. In light of the above circumstances, the Complainant once again approached the Supreme Court.
  

Supreme Court observed that:

• The order of the Trial Court directing the Complainant to approach the High Court is contrary to its 2018 Judgment, wherein, the Supreme Court had held that, in all cases where a stay against proceedings of a civil or criminal trial is operating, the same shall come to an end on the expiry of 6 months from the date of the 2018 judgement. Further, any stay against proceedings, granted post the 2018 judgment shall cease to have effect on the expiry of 6 months from the date of the order granting such stay, unless extension is granted by a speaking order.
  
  
• The Supreme Court clarified that under the Constitution of India, the Supreme Court is at the apex, and the High Courts, though not subordinate administratively, are certainly subordinate judicially. Thus, the Trial Court ought to have followed the 2018 Judgment instead of abiding by the stay order granted by the Bombay High Court.
  
  
• The Supreme Court held that stay against proceedings granted by any court, including the High Courts, automatically expires within a period of 6 months from the date of passing such a stay order, and unless extension is granted for good reason, by a speaking order, the trial judge shall on the expiry of 6 months, set a date for the trial and go ahead with the same.
  
  
• The Supreme Court set aside the order of the Trial Court and directed the Trial Court to set down the case for hearing.

MHCO Comment :

This decision of the Supreme Court reiterates the position laid down in the 2018 Judgment and will go a long way in ensuring that the proceedings do not remain adjourned sine die on account of stay orders. This is a welcome step by the Supreme Court towards bringing an end to long pending trials.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

LEGAL UPDATE| SUPREME COURT CLARIFICATION ON EXTENSION OF LIMITATION PERIOD

The Supreme Court of India in a recent case of Sagufa Ahmed vs Upper Assam Plywood Products has held that the order passed by them on 23 March 2020 (March Order) extending the period of limitation on account of the Covid-19 pandemic would not be applicable to the time period up to which delay can be condoned under the discretion provided for by a statute.

BACKGROUND OF THE CASE

• The Appellants together claimed to hold 24.89% of the shares of the Upper Assam Plywood Products Private Limited (Respondent Company). The Appellants had moved an application before the National Company Law Tribunal, Guwahati (NCLT) for the winding up of the company. The petition was dismissed by an order dated 25 October 2019 (NCLT Order).
  
  
• The Appellants stated that they had applied for the certified copy of the NCLT Order on the 21 November 2019. The Appellants further stated that they received the certified copy of NCLT Order on 19 December 2019.
  
  
• Pursuant to receiving the certified copy of the NCLT Order on 19 December 2019, the Appellants chose to file the statutory appeal before the National Company Law Appellate Tribunal (NCLAT) on 20 July 2020. The Appeal was filed along with an application for condonation of delay.
  
  
• By an order dated 4 August 2020, the NCLAT dismissed the application of condonation of delay and the appeal on the ground that it was barred by limitation and the NCLAT had no power to condone the delay beyond the prescribed period of 45 days as provided under Section 421(3) of the Companies Act, 2013. This application filed by the Appellants in the NCLAT had been moved in July 2020 but the period of limitation stood lapsed on 18 March 2020. The Appellants herein approached the Supreme Court in an appeal from the decision of the NCLAT dated 4 August 2020.
  

THE SUPREME COURT HELD

• The main contentions before the Supreme Court were that: (a) NCLAT failed to note of the March Order passed by the Supreme Court wherein the period of limitation for filling any proceeding was extended from 15 March 2020 and thereafter until further orders and; (b) that the NCLAT had wrongly calculated the period of limitation from the date of the NCLT order which was contrary to the provisions of Section 421(3) of the Companies Act,2013.
  
  
• Section 421(1) provides for a remedy of an appeal to the NCLAT against the order of the NCLT. Section 421(3) prescribes the period of limitation of 45 days for filing an appeal and the proviso thereunder confers a limited discretion upon the NCLAT to condone the delay.
  
  
• The certified copy of the order of the NCLT was received by the Appellants on 19 December 2019. The Appellants had 45 days to file an appeal which expired on 2 February 2020. By the virtue of the proviso, the NCLAT was empowered to condone the delay up to a period of 45 days. This period started from the 2 February and expired on 18 March 2020. The Appeal was file before the NCLAT on the 20 July 2020. The Appellants relied upon the March Order of the Supreme Court wherein the period of limitation for filling any proceeding was extended until further orders.
  
  
• The Supreme Court clarified that vide its March Order, what was extended was only the prescribed period of limitation and not the period up to which delay can be condoned in exercise conferred by the statute. The order passed by the Supreme Court was intended to benefit vigilant litigants who were prevented due to the pandemic and the lockdown, from initiating proceedings within the period of limitation prescribed by general or special law.
  
  
• Further referring to Section 10 of the General Clauses Act, 1897 and the provisions of the Limitation Act the Supreme Court stated that the expression ‘prescribed period’ appearing in Section 4 could not be construed to mean anything other than the period of limitation. Any period beyond the ‘prescribed period’, during which the Court or Tribunal has the discretion to allow a person to institute the proceedings, cannot be construed to be ‘prescribed period’. Therefore, the Appellants could not have claimed the benefit of the March Order for enlarging, even the period up to which delay can be condoned. Hence the Supreme Court upheld the order of passed by the NCLAT while dismissing the appeal and application for condonation of delay.

MHCO Comment :

This judgment provides further clarification to the interpretation of the term `prescribed period` under the Limitation Act, 1963 and a welcome precedent for all the lower courts who shall be dealing with the issues pertaining to the period of limitation. This judgement shall further provide a much-required clarity to all those cases wherein the blanket benefit of extension of limitation period has been taken on account of orders passed by the Supreme Court extending the period of limitation since lockdown was imposed in the country.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

 CONSUMER PROTECTION ACT | DRAFT GUIDELINE FOR MISLEADING ADVERTISEMENT

The Government of India issued draft Central Consumer Protection Authority (Prevention of Misleading Advertisements and Necessary Due Diligence for Endorsement of Advertisements) Guidelines, 2020 (Guidelines) under the Consumer Protection Act, 2019 (Act).This update summarizes and analyses the Guidelines for prevention of misleading advertisements with an aim to protect the consumers.

Scope and Applicability of the Guidelines

• The Guidelines cover all advertising/marketing communications regardless of form, format, or medium.
  
  
• The Guidelines apply to the manufacturer/service providers whose products/services are subject of the advertising/marketing communications, as well as to advertisement agencies and endorsers (wherever applicable) of the product/service.
  

Conditions for a valid Advertisement

• The advertisement must contain truthful and honest representations; and not mislead consumers by exaggerating. The advertisement should not suggest that the claims made in it are universally accepted and must not mislead about the nature or extent of the risk to consumers’ personal security.
  
  
• Advertisements should not be offensive to generally accepted standards of the public.
  
  
• An advertisement should not be similar in terms of layout, slogans, music, visual presentation, etc. and should also be not similar to the previous advertisements that may have been published by another advertiser.

Types of Advertising

• Comparative advertising: It shall be permissible only if it is factual, accurate, and capable of substantiation.
  
  
• Bait advertising: The manufacturers have to ensure that there is an adequate supply of the goods or services to meet the demand that such advertisements generate. If supply is short, the advertisements have to say that the stock is limited. The Guidelines add that advertisements cannot entice customers to buy something without a ``reasonable prospect`` of selling it at the price offered.
  
  
• Surrogate advertising: Advertisements for goods or services whose advertising is otherwise prohibited or restricted by law shall not circumvent such restrictions by purporting to be advertisements for other goods or services, the advertising of which is not prohibited or restricted by law.
  
  
• Puffery: Advertisement can make a claim in the nature of obvious exaggeration, in the nature of a claim that a reasonable consumer is unlikely to take literally.
  
  
• Free claims: An advertisement shall not describe a good or service as `free`, `without charge` or other similar terms if a consumerhas to pay anything other than the unavoidable cost of responding to the advertisement and collecting or paying for the delivery of the item.
  
  
• Advertisement targeted at children: The Guidelines prescribe a long list of rules and guidelines for advertisements that target children. Advertisements targeted at children cannot in any way condone, encourage or emulate behaviour dangerous to children; take advantage of children's inexperience, condone or encourage bullying; feature children for tobacco or alcohol-based products.
  
  
• Prohibited advertisement: Advertisement that is likely to incite persons to commit crime and promotes disorder, violence or intolerance; encourages or propagates the use of products which are banned under any law for the time being in force; or shows, glorifies, or refers to a dangerous practice, or manifests a disregard for safety or encourages negligent behavior are prohibited.

Disclaimers

• Any disclaimer that has a small font size in advertisements and comparative advertising and is not factual, will be considered to be misleading and may carry a penalty with it.

Endorser

• It is stated that the honesty of statements and due diligence is to be made by an endorser in support of the advertisements.
  
  
• This provision is more of a mandatory provision rather than a directive. The draft Guidelines have divided endorsements into three major provisions namely, honest statements by endorsers, personal use of products and consumer endorsement that also includes celebrity endorsement and expert endorsements.

MHCO Comment:

The Guidelines area welcome move by the government. They propose to regulate advertisements and hold manufacturers, service providers, advertising agencies as well as brand endorsers accountable for any misleading claims for misleading advertisements. Further, as these Guidelines cover all formats, including print, television and social media, advertisers and endorsers have to be more careful with what they associate themselves with. These Guidelines shall majorly hold accountable those celebrities who endorse products without much accountability.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

SUPREME COURT JUDGMENT | A WOMAN`S RIGHT TO INHERITANCE IN HUF PROPERTY

The Supreme Court of India in its recent landmark judgment in Vineeta Sharma v. Rakesh Sharma & Ors, lays down the law qua a woman’s right to the ancestral property of a Hindu Undivided Family (HUF).The customary laws created rights only in favour of male descendants, which was codified by the Hindu Succession Act, 1956 (Act). However, pursuant to the 2005 Amendment of the Act, female descendant’s equal rights to ancestral property were also recognized. This landmark judgment further lays down that these rights can be claimed by the daughter even if her father had died before 9 September 2005, which is the date on which the amendment granting equal rights to the daughter under Act came into effect.

This update analyses the Hon`ble Supreme Court Judgment.

BACKGROUND OF CASE

• Earlier, the Mitakshara School of Hindu law codified as the Act governed the succession and inheritance of the ancestral property. The Act only recognized male descendants as legal heirs and female descendants were not considered as coparceners or an heir to the ancestral property.
  
  
• The Section 6 of the Act provided for the devolution of interest in a coparcenary property of a person who died intestate. The law provided that when a person dies intestate, the coparcenary property will devolve only to his male heirs including his sons, grandsons and great-grandsons.
  
  
• To correct this historical gender discrimination, the Act was amended in September2005 (2005 Amendment) and the female descendants were duly recognized as coparceners for the purpose of the partition of property post the amendment. Further, Section 6 of the Act was amended in 2005 to recognize a female descendant of a coparcener as a coparcener herself by birth, in her own right, in the same manner as the male descendant.
  
  
• It also gave the female descendant the same rights and liabilities in the coparcener`s property as she would have had if she had been a male descendant.
  
  
• Vineeta Sharma, the Appellant, had filed a suit demanding her share as a coparcener before the Delhi High Court. Although the 2005 Amendment granted equal rights to female descendants, the issue raised in several cases was whether, this law is to be applied retrospectively, and if the rights of the female descendants depended on whether their father through whom they would inherit, was alive on the date of the amendment or not. Different benches of the Supreme Court and the High Courts had taken conflicting views on the issue.
  
  
• This raised a very important issue before the court whether the 2005 Amendment, which gave equals rights to the female descendants in the ancestral property, was applicable retrospectively or only prospectively.
  

SUPREME COURT HELD:

• The Supreme Court expounded on the 2005 Amendment which removed the gender discrimination as contained in Section 6 of the Hindu Succession Act, 1956, by giving equal rights to female descendants.
  
  
• Under Section 6 a right to an “unobstructed heritage” is created by virtue of the birth of the daughter of the coparcener, the right cannot be limited by whether the coparcener is alive or deceased when the right is operational. An obstructed heritage depends upon the owner`s death, but an unobstructed heritage does not depend upon the death of the owner. Thus, the coparcener father need not be alive on 9 September 2005, the date of amendment of provisions of Section 6 of the Act.
  
  
• It also stated that the conferral of a right is by birth, and the rights are given in the same manner with incidents of coparcenary as that of a son and she is treated as a coparcener in the same manner with the same rights as if she had been a son at the time of birth. Though the rights can be claimed, with effect from 9 September 2005, the provisions are of retroactive application, they confer benefits based on the antecedent event and the Mitakshara coparcenary shall be deemed to include a reference to a daughter as a coparcener.
  
  
• The Supreme Court, further clarified that the above rule may not be applicable to the partition that may have taken place earlier, either by way of a registered deed or by court decree. It observed that the intention of the legislature behind creating the above exception was to not re-open matters which were already closed or to take away rights which had already vested by way of actual partition.
  
  
• The Supreme Court explained that if a partition deed has been executed and registered but no effect has been given to the same nor has it been acted upon, the joint family property in question cannot be said to have been partitioned. Therefore if the statutory provision of partition created by proviso to Section 6 of the Act, as originally enacted, did not bring about the actual partition or disruption of legal right. Then daughters are also to be given equal share as that of a son.
  
  
• Oral partition cannot be accepted as a statutorily recognised mode of partition.
  
  
• It also provided for the distinction between the terms prospective, retrospective and retroactive application of various laws.
  
  
• It also directed the High Courts to dispose of cases involving this issue within six months since they would have been pending for years.

MHCO Comment:

This landmark judgment is an excellent specimen of the progressive and gender sensitive outlook of the Indian Judiciary. This landmark judgment recognizes that women who have been deprived of an equal share of their deceased father`s ancestral property will now have the right to claim their due. Further, it also upheld the fundamental right to equality under the Indian Constitution in its truest sense.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

INDIAN ARBITRATION UPDATE | WHAT MAKES A VALID ARBITRATION    AGREEMENT?

Bombay High Court (BHC) in the recent case of Quick Heal Technologies Ltd. v. NCS Computech Pvt. Ltd. construed the use of the word ``may`` in an arbitration agreement as an option for dispute resolution and not a mandatory provision, thereby dismissing the application for appointment of an arbitrator. In this update, we will analyses this interesting judgment.

FACTS:

• Quick Heal Technologies Limited (Petitioner) entered into a software distribution agreement with one NCS Computech Private Llimited (Respondent No 1) and one Innovative Edge, a partnership firm (Respondent No 2) on 2 April 2011 (Agreement).
  
  
• The Agreement contained an arbitration clause which reads as follows:
  
  ``17. Dispute Resolution:
  
  a. All disputes under this Agreement shall be amicably discussed for resolution by the designated personnel of each party, and if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration as stated below.
  
  b. Disputes under this Agreement be referred to arbitration as per the Arbitration and Conciliation Act, 1996 as amended from time to time. The place of arbitration shall be at Pune and language shall be English. The arbitral tribunal shall comprise one arbitrator mutually appointed, failing which, three (3) arbitrators, one appointed by each of the Parties and the third appointed by the 2 so appointed arbitrators and designated as the presiding arbitrator and shall have a decisive vote.
  
  c. Subject to the provisions of this Clause, the Courts in Pune, India, shall have exclusive jurisdiction and the parties may pursue any remedy available to them at law or equity.``
  
  
• Later in 2017, disputes arose between the parties, and as a result of failure to settle the disputes amicably, the Petitioner sent the notice of invocation of arbitration to the Respondents. As the Respondents disputed the said notice, the Petitioner was constrained to file a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Arbitration Act).
  
  
• The Petitioner argued that there was a valid and mandatory arbitration agreement, which was binding on the parties, while the Respondents disputed the existence of a valid arbitration agreement, on the account of use of the word ‘may’ in the relevant clause.
  

ISSUE:

• Whether the use of the word `may` in the arbitration clause can amount to a valid arbitration agreement?
  

HELD:

The BHC answered the above question in the negative and dismissed the petition for the following reasons:

• The Court observed that the use of both the words `shall` and `may` clearly indicates that the parties intended to resolve the dispute through amicable settlement. In case of failure of such settlement, the disputes `may` be settled by way of an arbitration. Use of both the words in the same clause indicates that the parties were well aware of the implications of both these words, and thus the construction of the provision of reference to arbitration cannot be made as mandatory, but has to be made as optional. Thus, the agreement is not a mandatory arbitration agreement and thus the petition was dismissed.
  
  
• The Court further relied upon the cases of Wellington Associates Ltd. v. Kirit Mehta and Powertech Worldwide Ltd. v. Delvin International General Trading LLC and held that there was no consensus ad idem between the parties with regard to arbitration and they only agreed to provide fresh consent (by use of the word `may`) in order to proceed with the arbitration. Since there was no fresh consent in the present case, the petition was dismissed.
  
  
• As regards the interpretation of the mandatory or optional nature of the words contained in the clause, the Court relied upon the Supreme Court judgments in the cases of The Labour Commissioner, Madhya Pradesh v. Burhanpur Tapti Mills Ltd. and others and Jamatraj Kewalji Govani v State of Maharashtra, and held that in the clauses where the words `may` and `shall` both appear, they must be construed to have a distinct meaning.
  
  
• The court however, distinguished the facts of the present case from the landmark judgments of the Supreme Court, in cases of Zhejiang Bonly Elevator v. Jade Elevator Components and Indtel Technical Services v. Atkins Rail Ltd. where the words `should` and `will` were used respectively, and the apex court had construed the same as being mandatory in nature, thus holding the arbitration agreement as valid. The BHC in the present case, however, observed that the word `may` has a non-binding implication, and thus can be differentiated from the use of words such as `should` and `will`.

MHCO Comment:

The Court takes a conservative view in terms of construction of an arbitration clause. In terms of business efficacy as well as encouragement of Alternative Dispute Resolution mechanism, Indian courts have time and again construed badly worded arbitration clauses as valid arbitration agreements, giving due consideration to the intention of the parties. The present judgment contrasts with the liberal approach which is generally taken by the Courts.

Cases such as these emphasise the importance of well-drafted, water-tight and unambiguous arbitration clauses, leaving no room for any party to escape the procedure of arbitration by convenient interpretation in case of any dispute. Even though the judiciary has generally been construing rather weak or ambiguous arbitration clauses as valid arbitration agreements, it should not be taken for granted by the parties and the parties should take enough care at the time of drafting the clause.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

     THE CONSUMER PROTECTION (E-COMMERCE) RULES, 2020 

The Government of India recently notified the provisions of the Consumer Protection (E-Commerce) Rules, 2020 (E-Commerce Rules) under the Consumer Protection Act, 2019 (Act) from 24 July 2020. This update summarizes and analyses the E-Commerce Rules which lists down the scope, duties and liabilities of the e-commerce entities.

SCOPE AND APPLICABILITY OF THE E-COMMERCE RULES

• The E-commerce Rules shall apply to all goods and services bought or sold over digital or electronic network including digital products, all models of e-commerce, including marketplace and inventory models of e-commerce; all e-commerce retail, including multi-channel single-brand retailers and single-brand retailers in single or multiple formats; and all forms of unfair trade practices across all models of e-commerce.
  
  
• These E- Commerce Rules shall apply to an e-commerce entity which is not established in India, but systematically offers goods or services to consumers in India.
  
  
• The E-Commerce Rules now provide for several key definitions to understand the applicability of the E-commerce Rules. Key definitions are as follows:
  
  ``e-commerce entity`` defined as any person who owns, operates, or manages digital or electronic facility or platform for e-commerce;
  
  ``inventory e-commerce entity`` which is an e-commerce entity which owns the inventory of goods or services and sells such goods or services directly to the consumers; and
  
  ``marketplace e-commerce entity`` which is defined to mean an e-commerce entity which provides an information technology platform on a digital or electronic network to facilitate transactions between buyers and sellers.
  

DUTIES OF E-COMMERCE ENTITIES

• An e-commerce entity shall be incorporated as a company under the Companies Act, 1956 or the Companies Act, 2013, or an office, branch, or agency outside India which is owned or controlled by persons resident in India.
  
  
• This entity shall appoint a nodal person of contact or an alternate senior designated functionary who is resident in India, to ensure compliance with the provisions of the Act or the rules there-under.
  
  
• Every e-commerce entity shall disclose on its platform all the information about themselves, including their legal name, location of offices, details of website, and contact details of customer care and a grievance officer; and location from where goods are imported, the details of the importer or the seller.
  
  
• No e-commerce entity shall adopt any unfair trade practice.
  
  
• Every e-commerce entity shall establish an adequate grievance redressal mechanism and shall ensure that the grievance officer acknowledges the receipt of any consumer complaint within forty-eight hours and redresses the complaint within one month from the date of receipt of the complaint.
  
  
• No e-commerce entity shall impose cancellation charges on consumers cancelling after confirming purchase unless similar charges are also borne by the e-commerce entityif they cancel the purchase order unilaterally for any reason.
  
  
• Every e-commerce entity shall only record the consent of a consumer for the purchase of any good or service offered on its platform where such consent is expressed through an explicit and affirmative action, and no such entity shall record such consent automatically, including in the form of pre-ticked checkboxes.
  
  
• No e-commerce entity shall manipulate the price of the goods or services offered on its platform or discriminate between consumers of the same class or make any arbitrary classification of consumers affecting their rights under the Consumer Protection Act.
  

LIABILITIES OF MARKETPLACE E-COMMERECE ENTITIES

• E-Commerce Rules recognizes that marketplace e-commerce entities may seek benefit of being regarded as an intermediary by complying with the Information Technology (Intermediary Guidelines) Rules, 2011. Accordingly, the marketplace e-commerce entities are now required to disclose on their platforms i.e. (a) details of sellers; (b) information relating to return;(c) refund, exchange, warranty and guarantee; (d delivery and shipment, payment methods, and grievance redressal mechanism; terms and conditions; details of the grievance officer; ensure that descriptions, images, and other content pertaining to goods or services on their platform is accurate and corresponds directly with the appearance, nature, quality, purpose and other general features of such good or service.
  
  
• Every marketplace e-commerce entity shall include in its terms and conditions generally governing its relationship with sellers on its platform, a description of any differentiated treatment which it gives or might give between goods or services or sellers of the same category.
  
  
• Every marketplace e-commerce entity shall take reasonable efforts to maintain a record of relevant information allowing for the identification of all sellers who have repeatedly offered goods or services that have previously been removed or access to which has previously been disabled under the Copyright Act, 1957 , the Trade Marks Act, 1999 or the Information Technology Act, 2000:
  

DUTIES OF SELLERS ON MARKETPLACE

• Sellers offering goods and services through a marketplace e-commerce entity are required to, not to adopt unfair trade practices.
  
  
• Ensure that advertisements are consistent with the goods or service.
  
  
• There is no misrepresentation of facts or falsely post false reviews on the platform.
  
  
• No seller shall refuse to take back goods, or withdraw or discontinue services purchased or agreed to be purchased, or refuse to refund consideration, if paid, if such goods or services are defective, deficient or spurious, or if the goods or services are not of the characteristics or features as advertised or as agreed to, or if such goods or services are delivered late from the stated delivery schedule.
  
  
• Execute a written contract with the marketplace e-commerce entity; and
  
  
• Appoint a grievance officer and ensure that the grievance officer acknowledges the receipt of any consumer complaint and redresses within 1 month of the receipt of the complaint;
  

DUTIES AND LIABILITES OF INVENTORY E-COMMOERCE ENTITIES

• Shall disclose all the information related to return, refund, warranty and guarantee, all information about payment methods, all mandatory notices and information as required by applicable laws, grievance redressal and total price.
  
  
• Shall not falsely represent itself and post reviews about its goods and services.
  
  
• Ensure that all the advertisement are consistent with the goods and services
  

The provisions of Consumer Protection Act, 2019 shall apply for violation of the provisions of the E-commerce Rules.

MHCO Comment: The new norms empower the central government to act against unfair trade practices on e-commerce platforms. They require e-commerce entities to facilitate easy returns, address customer grievances and prevent discriminating against merchants on their platforms. These E-commerce Rules do, at instances, seem to address consumer issues and lay out wider guidelines which can be adopted for change in market practice and technology. Further it also imposes duties on the e-commerce entities and seller to set up a grievance redressal mechanism which will help the consumer to address their complaints.

SUPREME COURT JUDGMENT | RIGHT TO SUE UNDER THE LIMITATION ACT

The Supreme Court of India recently passed a judgment in Shakti Bhog Food Industries Limited vs The Central Bank of India & Anr, and held that accrual of right to sue under Article 113 of the Schedule of the Limitation Act, 1963 (Limitation Act) did not necessarily arise when the right to sue first accrued but rather, when there was a clear and unequivocal threat of infringement of rights.

This update analyses this Supreme Court Judgment.

BACKGROUND OF CASE

• In July 2000, Shakti Bhog Food Industries Limited (Appellant) informed and raised a grievance that they were being overcharged interest and commission in respect of certain facilities availed by it from the Central Bank of India (Bank). The Appellant brought to the knowledge of the Bank and sought for a refund of the excess amount charged.
  
  
• The Bank, in May 2020 after due deliberation informed the Appellant that the interest and commission had been charged by it as per applicable policy and the Appellant was not entitled to any refund.
  
  
• After exchange of several communications between the parties, both parties were adamant on their stand. In these circumstances, in February 2005, the Appellant filed a suit against the Bank seeking rendition of true and correct accounts of the commission and interest charged by it and refund of the excess amount charged.
  
  
• The Bank, being the defendants in the suit, filed an application for rejection of plaint on the ground that the suit was time barred.
  
  
• The trial court applied Article 113 of the Schedule of the Limitation Act, which is the residuary entry governing a suit in respect of which there is no specific entry in the Schedule. Article 113 provides a limitation period of 3 years from ``when the right to sue accrues``. The trial court held that at best, the right to sue could be taken to accrue in favour of the Appellant in October 2000, which was till the time the Appellant availed the credit facilities from the Bank. This would mean that the suit had to be filed by October 2003, rendering the instant suit barred by limitation. The plaint was therefore rejected and the suit dismissed.
  
  
• This view was affirmed by the first appellate court and the second appellate court, which was the Delhi High Court. Aggrieved, the Appellant filed a Special Leave Petition before the Supreme Court.
  
  

SUPREME COURT HELD

• The issue for consideration before the Supreme Court was whether the present suit was liable to be rejected as barred under the Limitation Act.
  
  
• The Supreme Court thereafter examined Article 113 in light of other entries in the schedule of the Limitation Act and observed that unlike other articles, Article 113 does not specify any event as the starting point of computation of limitation. Further, as opposed to entries like Article 58 which require limitation to be calculated from when the right to sue “first” accrues, Article 113 merely requires limitation to be computed from when the right to sue accrues.
  
  
• In the scheme of the Limitation Act, wherever it was intended that the period of limitation be calculated from the occurrence of an event earliest in point of time, it had been specified. The legislature had consciously worded Article 113 liberally. For the purposes of Article 113, the right to sue would only arise when there was a clear and unequivocal threat of infringement of rights.
  
  
• The Supreme Court further held that the trial court had failed to read the plaint as a whole and did not consider specific averments in the plaint. Since limitation is a mixed question of fact and law, courts were required to be circumspect while considering applications for rejection of plaint on the ground of the suit being time barred on the basis of the whole plaint and not one stray averment that the Appellant.
  
  
• In these circumstances, the Supreme Court allowed the appeal and restored the plaint to the file.

MHCO Comment: This judgment of the Supreme Court clarifies that limitation for the purposes of Articles 113 would start running when there is a clear and unequivocal threat to one’s rights and not merely when the breach happened. The Supreme Court by this judgment has judicially established the starting point of limitation under Article 113 of the Limitation Act. Further, it laid emphasis on the importance of considering the entire plaint and circumstances, whilst dealing with an application for rejection of a plaint under the Civil Procedure Code.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance