LEGAL UPDATE | SUPREME COURT`S COGNIZANCE OF EXTENSION OF LIMITATION PERIOD

 The Supreme Court of India vide its Order dated 23 September 2021 has recalled the Suo Motu Order of 27 April 2021 which had extended the period of limitation for filing cases with effect from 14 March 2021, in view of the second wave of the Covid-19. The Order dated 23 September 2021 will be applicable from 2 October 2021.

Background: On 23 March 2020, the Supreme Court had taken suo motu cognizance of the issue of limitation running vis-a-vis the strict Covid-19 restrictions. By the Order dated 23 March 2020, the period of limitation for filing of all proceedings, regardless of the limitations provided in general law or special laws, was extended with effect from 15 March 2020, until further orders of the Court. Although these provisions were temporarily relaxed due to the reduction in number of Covid-19 cases, on the advent of the second wave of the pandemic, the provisions with respect to extension of limitation were soon resorted back.

Order dated 23 September 2021:: A Bench comprising of Chief Justice of India N V Ramana, Justice L Nageswara Rao, Justice Surya Kant heard the matter and noted that the pandemic situation has now improved drastically. Thus, the Hon`ble Bench, vide its Order dated 23 September 2021, laid down further directions to be followed moving forward in respect of extension of limitation period.

By way of these directions, the Hon`ble Court has stated that the suo motu extension of limitation period will stand withdrawn with effect from 2 October 2021. It was directed that in computing the period of limitation for any suit, appeal, application or proceeding, the period from 15 March 2020 till 2 October 2021 will stand excluded, and consequently, any balance period of limitation remaining on 15 March 2021 shall be available with effect from 3 October 2021.

Further, in cases where the limitation period for any filing has expired between 15 March 2020 and 2 October 2021, notwithstanding the actual balance limitation period remaining, a buffer period of 90 days will be provided with effect from 3 October 2021. In the event if the balance period of limitation as on 3 October 2021 is greater than 90 days, that longer period shall be applicable in such cases.

The period of 15 March 2020 till 2 October 2021 will also stand excluded while computing limitation period in certain matters inter alia being under Section 23(4) and Section 29A of the Arbitration and Conciliation Act, 1996, Section 12A of the Commercial Courts Act, 2015 and the provisos to Section 138 (b) and (c) of the Negotiable Instruments Act, 1881.

MHCO COMMENT: 

The clarification of the Supreme Court vide the Order dated 23 September 2021 and providing this buffer period of 90 days comes at a time when courts have reopened and restarted physical appearances, preventing chaos in filing of suits, appeals, applications and other proceedings. Of course, this will be subject to third Covid-19 wave not hitting in this buffer period. 

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 | INTEREST FREE LOANS TO COME UNDER THE AMBIT OF ‘FINANCIAL DEBT’

The Supreme Court of India in the case of Orator Marketing Private Limited Vs Samtex Desinz Private Limited passed a material judgment which interpreted the definition of `financial debt` defined under section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Question of law for adjudication:Whether a person who gives an interest free term loan to a Corporate Person on account of its working capital requirements is not a Financial Creditor, and therefore, incompetent to initiate the Corporate Resolution Process under Section 7 of the IBC?

Background of the case: Sameer Sales Private Limited (Original Lender) advanced a term loan of INR 16 million (Loan) to Samtex Desinz Private Limited (Corporate Debtor) for meeting its working capital requirement vide a Loan Agreement dated 20 January 2018 (Loan Agreement). The Original Lender assigned the loan to Orator Marketing Private Limited (Appellant). The loan was to be repaid by the Corporate Debtor in full by 1 February 2020. The Appellant claimed that the Corporate Debtor made some payments, but around INR 15 million was still outstanding.

NCLT Order : The Appellant filed a petition under section 7 of IBC in the National Company Law Tribunal, New Delhi Bench Court- VI (NCLT). The Adjudicating Authority held that ``Mere grant of loan and admission of taking loan will ipso fact not treat the applicant as `Financial Creditor` within the meaning of Section 5(8) of the Code``. It was observed that neither the Loan Agreement has any provision regarding the payment of interest nor is there any supporting document to establish the applicable rate of interest to be paid on the said loan. The two requirements i.e., debt along with interest and disbursement made against the `consideration for the time value of money` were not satisfied by the Appellant. Thus, the NCLT dismissed the Petition on 23 October 2020.

NCLAT Order : Being aggrieved by the NCLT Order, the Appellant preferred an Appeal before the National Company Law Appellate Tribunal (NCLAT) wherein the NCLAT affirmed the NCLT order and dismissed the Appeal. :

Supreme Court Judgment: The Appellant preferred an Appeal before the Supreme Court. The Division Bench of the Supreme Court observed that NCLAT and NCLT have misconstrued the definition of `financial debt` in Section 5(8) of the IBC, by reading the same in isolation and out of context. The Supreme Court explained that any statutory provision must be construed and / or interpreted in light of the statute`s legislative intent. The statute`s intent must be understood by the words used by the legislature. If there`s any uncertainty, it`s safe to check into the statute`s intent and purpose or the motivation and spirit that led to it. It noted that the legislature has defined the provision of financial debt with the word `include` which makes the definition broad. The sub-clauses (a) to (i) of section 5(8) are illustrative in nature and not exhaustive. The Supreme Court held that section 5(8) of IBC defines `financial debt` to mean `a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, as per Section 5(8) (a) of the IBC`. The Corporate Insolvency Resolution Process (CIRP) gets triggered when the Corporate Debtor commits a default. The NCLAT and NCLT have failed to consider and overlooked the words `if any` in the definition.

If the financial Loan does not include interest, only the outstanding principal would qualify as a financial debt. The Supreme Court set aside the orders of NCLT and NCLAT (Impugned Orders) and revived the section 7 application.

MHCO COMMENT:

The Supreme Court has rightly set aside the Impugned Orders and classified the interest free loans under the purview of Financial Debt. This judgment sets a precedent and provides remedies to the Financial Creditors who have given interest free loans and could not proceed with IBC due to the sole reason of interest clause.

This update was released on 27 September 2021.

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.

 SEBI UPDATE | SAT`S SPLIT VERDICT CAUSES CONUNDRUM

In the recent case of PNB Housing Finance Limited vs Securities and Exchange Board of India , the Securities Appellate Tribunal (SAT) rendered a split verdict on the legal question of PNB Housing Finance Limited`s preferential allotment of shares. The bench consisted of the Presiding Officer (PO) and the Judicial Member (JM) who could not reach a consensus. As a result, the status quo order of 21 June 2021 (SAT Order) presently prevails.

Question of law for adjudication:Whether a valuation report from a registered valuer, as provided for in the Articles of Association, is required for preferential issue of shares by a Listed Company, or compliance with ICDR would suffice?

Background of the case: PNB Housing Finance Limited (PNBHFL) became a listed company in November 2016 when it floated its shares on the stock exchanges. The company was desirous of raising fresh growth capital in 2021. The parent company, Punjab National Bank Limited (PNB), holding 33% shares of PNBHFL was unable to provide further growth capital to PNBHFL as it did not obtain necessary regulatory approvals from the Reserve Bank of India for such a fund infusion. While the company was scouting for growth capital, four entities jointly evinced interest to infuse funds by way of preferential allotment of shares. To that effect, PNBHFL passed a resolution dated 31 May 2021 and approved raising of capital through preferential allotment of shares to the proposed allottees at a price of Rs. 390/- per share. The resolution also resolved to convene an Extra Ordinary General Meeting (EOGM) for approval of the resolution by the shareholders and thus a notice was issued intimating that an EOGM would be convened on 22 June 2021. Item No 1 for the meeting was the issue of preferential allotment of shares.

After several communications with PNBHFL, Securities and Exchange Board of India (SEBI), issued a notice dated 18 June 2021 (Impugned Order) holding the Item No 1 of EOGM ultra vires to the Article of Association (AOA) of PNBHFL. Article 19(2) of the AOA of PNBHFL required the company to obtain a report from a registered valuer which PNBHFL had not obtained. PNBHFL had obtained a report which was merely a valuation certificate by the statutory auditor which was not in accordance with any rules or regulations.

SAT Order: PNBHFL challenged the Impugned Order contending that SEBI had no jurisdiction to pass such an order. PNBHFL claimed that the Impugned Order violated the principle of natural justice since it was issued without prior notice. To that, the PO held that the Impugned Order was arbitrary, perverse and lacked fairness, but the JM had a different opinion. JM stated that the Impugned Order was issued in order to safeguard the interest of the investors, and was thus justified. The disagreement continued with regards to the interpretation of the statutes and the question about SEBI`s authority and jurisdiction arose. As a result, the court had to examine a few legal precedents along with the AOA of PNBHFL.

Enumeration of provisions:

Article 19(2) of the AOA of PNBHFL state as under
``Notwithstanding anything contained in sub-clause (1) hereof, the further shares aforesaid may be offered to any persons (whether or not those persons include the persons referred to in clause (a) of sub-clause (1) hereof) if authorized by special resolution either for cash or for consideration other than cash, if the price of such shares is determined by the valuation of a registered valuer.``

The AOA mandated that the price of the shares be valued by a registered valuer, whereas the other statutes had dispensed with such a requirement. The mandated compliance is specified in Section 62(1)(c) of the Companies Act, 2013 (Companies Act) . However, this section does not apply to listed companies, since the Companies (Share Capital and Debentures) Rules, 2014 (SCD Rules) do not require a listed company to determine the price of shares by valuation report of a registered valuer.

Second Proviso of the SCD Rules state as under
``Provided further that the price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by valuation report of a registered valuer.``
Hence, PNBHFL was in compliance with the SCD rules.

Regulation 164 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) prescribes a regulatory method and stipulates a minimum price at which preference shares may be issued. The floor price as per ICDR in this case was Rs. 384.60/-. Hence, the preference issue price determined by PNBHFL was in compliance with Regulation 164 of ICDR.

The differing perspective of the members of the Tribunal: The view taken by PO was that the submissions of PNBHFL are valid as the ICDR is a complete code. The price of preferential allotment of shares by listed companies under ICDR follows a specific methodology and cannot be valuation based pricing. Thus, the contradictions between the provisions can be easily determined as ICDR overturns the Companies Act and SCD Rules in case of listed companies.

To that, the JM had a differing opinion. The JM was of the view that the AOA is a contract between the shareholders and the company and should be strictly complied with unless void. Article 19(2) of AOA which mandates price to be valued by registered valuer is not repugnant to Regulation 164 of ICDR or Regulation 13 of SCD Rules. The Regulation 13 of the SCD Rules does not prohibit determination of the price by registered valuer. Further, Regulation 164 of ICDR just sets a minimum price. To him, there is no repugnancy between any provisions and the provisions can stand together. If AOA imposes a requirement over and above what the ICDR or SCD rules / provisions require, they cannot be called repugnant. He also relied on a decision of Punjab and Haryana High Court wherein the quorum required for the board meeting in AOA was 4 directors i.e., greater than Companies Act which requires a quorum of 3 directors. He also stated that Section 6 of the Companies Act overrides the provisions of AOA but the AOA cannot erode/dilute the mandates of the Companies Act.

Way Forward: Given that the previous SAT Order shall prevail, owing to the split verdict, the only recourse the parties have is to approach the Supreme Court to resolve this conundrum.

MHCO COMMENT:

Due to differing opinions, the stalemate continues. When looked at severally, both the opinions seem justified. Although JM`s view appears more purposive and in the interest of shareholders/investors, the PO`s view is strictly technical and cannot be argued against. The issue of interpretation of various statutory provisions, some of which may not always be in complete consonance with each other, continues to remain a vexing legal issue. While dealing with such issues, the intent of the legislature must be looked at and the provision which advances the cause of justice and defeats the mischief must be adopted. Another unresolved legal aspect is whether SEBI can intrude in the affairs of the listed company in the manner that they have sought to do in this case. We sincerely hope that the Supreme Court will resolve this conundrum and settle these vexing questions of law and interpretation in the coming days.

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 | SIGNIFICANCE OF THE INTENTION OF PARTIES

The Supreme Court in a recent judgement of South Eastern Coalfields Ltd. & Ors. vs M/s S. Kumar’s Associates AKM (JV) held that for a document to be of a binding nature, the intention of the parties has to be looked upon. The court observed that for a Letter of Intent (LOI) to be a legally binding contract, the intent of the same must be clear and unambiguous, as evidenced by its terms. It stated that an LOI simply expresses a party's intention to engage into a contract with the other party in the future. Likewise, in another recent case of Bhimrao Ramchandra Khalate (Deceased) Through L.Rs. vs Nana Dinkar Yadav (Tanpura) & Anr , the Supreme Court ruled that the parties' intentions must be considered while determining whether a transaction is an absolute sale or a mortgage by conditional sale.

Questions of law for adjudication:

  1.Whether an LOI executed between the parties can be construed as a binding contract?
  2.Whether a Deed is of Absolute Transfer or Mortgage by Conditional Sale?

Background:

South Eastern Coalfield Case - In this case, South Eastern Coalfields Limited (Appellant) floated a tender for the work and S Kumar’s Associates AKM (Respondent) was the successful bidder. An LOI was issued dated 5 October 2009 by awarding the contract for work. LOI had a clause which stated that- ``The Respondent was called upon to deposit Performance Security Deposit for a sum total to 5% of annualized contract amount within 28 days from the date of receipt of the LOI as per the provisions of the tender document``. The Respondent mobilized the resources, but the effort was halted due to circumstances beyond the Respondent's control. The Appellant addressed a letter stating that they would award the work to another contractor at the risk and cost of the Respondent. Due to non-performance, the Appellant elected to terminate the contract on 23 December 2009 and again on 15 April 2010 (Termination Letters). The work was given to a different contractor at a higher price than agreed upon with the Respondent and thus the Appellants sent a letter requesting Rs. 78,07,573/- (Recovery Order) from the Respondent. The sum in question was the difference between the Respondent's and the new contractor's work values. The Respondent filed a writ petition at the Chhattisgarh High Court seeking to quash the Termination Letters and Recovery Order sent by the Appellants. The High Court held that there was no existing contract between the parties to bind them to the contract's general terms and conditions. The Appellants preferred a special leave petition before the Supreme Court.

Supreme Court View: The Supreme Court stated that the terms and circumstances of the LOI, and the actions of the parties are all factors in determining whether a contract is consummated. It concluded that mobilization at site by the Respondent would not amount to a concluding a contract inter se the parties. LOI merely indicates the intention of the parties to enter into a contract in future. At this point, there is no binding link between the parties, and the totality of the facts must be assessed in each situation.

Bhimrao Ramchandra Khalate case - Bhimrao Khalate (Plaintiff) being the owner of agricultural land (Land) in Village Khunte borrowed Rs 3000/- from Defendant No 1 on 22 February 1969 by executing ‘conditional sale deed’ as a security for the loan amount. The Defendant No 1 refused to re convey the Land and transferred the same in favour of his brother (Defendant No 2). Thus, the Plaintiff filed a suit for redemption of property and possession on 5 April 1989. The Plaintiff claimed that the ‘conditional sale deed’ was in the nature of mortgage even though it was titled as the conditional sale. The clauses of the conditional sale deed stated that the defendant was bound to give back the possession to the plaintiff within one year from the date of conditional sale deed.

The Judgment: It was observed by the Supreme Court that the intention of the parties has to be seen when the document is executed. The plaintiff had borrowed a sum of Rs. 3,000/- for his family costs, and the defendant is obligated to retransfer the land if the amount is paid within one year, according to the entire interpretation of the conditional sale deed. The loan advance and repayment are both part of the same instrument that establishes a debtor-creditor relationship. This is covered by the proviso in Section 58(c) of the Transfer of Property Act, 1882. Accordingly, the Supreme Court set aside the order passed by the lower courts which dismissed the suit for redemption against the defendants and further directed the Appellant to pay or deposit the mortgage amount within three months of the receipt of copy of the order.

MHCO COMMENT:

The Supreme Court of India has clarified and reiterated that the intention of the parties is paramount and should be looked at while understanding the nature of any contract. We believe that these judgments are a welcome step from the Apex court, to clear the ambiguity with respect to the intention of parties.

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.

INFRINGEMENT OF TRADEMARKS ON E-COMMERCE PLATFORMS | FORUM FOR TERRITORIAL JURISDICTION

A Single Judge Bench of Delhi High Court (Court) in a recent case of V Guard Industries Ltd. v. Sukan Raj Jain & Anr. , pertaining to a trademark infringement dispute has affirmed that the territorial court can exercise the jurisdiction in cases wherein the infringing goods are accessible on e-commerce platforms within the forum state, thereby giving rise to cause of action, despite the Defendants not having place of business in the said state.

Question of law for adjudication : Whether sale of infringing goods on third party e-commerce platforms accessible within the forum state satisfies the territorial jurisdiction of that forum/Court?

Background: V Guard Industries Ltd. (Plaintiff) is a company, head quartered at Kerala in the business of marketing / selling electrical goods under the trademark ‘V Guard’. Defendant No.1 is a sole proprietor of the firm M/s N-Guard Electronic Industries (Defendant). The Plaintiff filed a suit seeking a permanent injunction against the sale of offending products on third-party marketplace websites such as Indiamart, Flipkart, Shopclues and Snapdeal (E-commerce Platforms) wherein the Defendant was shown as a verified supplier of the product. For evidencing the same, the Plaintiff had produced sale invoices of the offending products purchased online by it. The Court had passed an ex-parte ad-interim order restraining the Defendants from infringing and passing-off of the Plaintiff’s trademark “V-Guard”.

An Application was filed by the Defendants under Order 7 Rule 10 of the Civil Procedure Code, 1908 (CPC) for Return of Plaint on the grounds that the Court lacked territorial jurisdiction. The Plaintiff’s registered office was in Kerala and the Defendant’s registered office was in Karnataka. Defendants’ contention was that none of the parties had its registered office in Delhi and they do not directly sell their products in Delhi and the sale relied upon by the Plaintiff is a “trap sale” and, hence, is not admissible evidence. The Plaintiff argued that since the Defendant’s offending products were accessible on E-commerce Platforms within Delhi, the cause of action had arisen in Delhi, and that the Plaintiff had its supply offices also in Delhi.

Judgment: The Court held that self-generated sale relied upon by the Plaintiff cannot per se be termed as “trap sale”, if the Defendant is otherwise found to have targeted products at a place where the said sale was made.

Points of law discussed:

• Trademark Act, 1999: Section 134 of the Trade Marks Act, 1999 (TM Act) provides that a plaintiff can initiate a cause of an infringement action, where the plaintiff resides or has a place of business.

• Section 20 of CPC provides that the plaintiff can institute a suit where the defendant resides or carries on business, or where the cause of action wholly or in part arises.

• The Court observed that additional jurisdictions have been made available to the Plaintiff by virtue of Section 134 of the TM Act, over the jurisdictions available under Section 20 of CPC.

The occurrence of cause of action is held to be a determining factor under both the sections to attract the territorial jurisdiction of the Court. Therefore, if any part of cause of action has arisen at a place where the Plaintiff has its branch/subordinate office, Courts at that place will have jurisdiction to entertain a suit against infringement and passing off. Hence, since the Defendant’s offending products were accessible at a place where the Plaintiff had its subordinate (supply) office, the Plaintiff was held to be qualified both under Section 134 of the TM Act as well as under Section 20(c) of CPC.

MHCO COMMENT:

Delhi High Court in this judgment, has clarified the position of law regarding territorial jurisdiction of courts by acknowledging and equating the existence of virtual stores on the internet with the conventional physical stores. This is an important precedent, as due to the pandemic there has been a paradigm shift in the way the vendors and consumers interact through online platforms. This judgment also elucidates the importance of limiting the territories which a manufacturer would supply to through a distributor, in order to restrict the litigations in territories where they would not like to do any business.

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.

AMAZON VS FUTURE ARBITRATION UPDATE | INTERNATIONAL EMERGENCY AWARDS ENFORCEABLE IN INDIA

Introduction:

The Supreme Court of India (SC) in a very recent case of Amazon.Com NV Investment Holdings LLC v Future Retail Limited & Ors has upheld the enforcement of an order by the Singapore International Arbitration Centre (SIAC)`s Emergency Arbitrator in favour of Amazon that puts on hold the Future Group`s deal with Mukesh Ambani Group of Companies (Reliance Group).

This update briefly analyses the said judgement of the Supreme Court.

FACTS:

• Amazon.Com NV Investment Holdings LLC (Amazon), the appellant in the present case, invested INR 14310 million in the Future Coupons Private Limited (FCPL), on 26 December 2019 by way of a Shareholders Agreement (SHA). The said investment amount had `flown down`` transferred, on the same day, to Future Retail Limited (FRL), basis an internal agreement between the two companies (together, along with other promoters, Future Group)

• On 29 August 2020, FRL entered into an agreement with the Reliance Group, by way of a slump sale of the retail and wholesale businesses (Future-Reliance Deal)

• Amazon objected to the said deal on the ground that the Reliance Group was listed in the category of “Restricted Persons” in the SHA between Amazon and FCPL, as well as in the other agreements entered into between Future Group companies and promoters. Amazon challenged the said deal before the Emergency Arbitral Tribunal constituted under the SIAC Rules, pursuant to the SHA which provided for/ had prescribed arbitration in accordance with the SIAC Rules..

• The Emergency Arbitrator passed an award on 25 October 2020, granting interim relief to Amazon, putting on hold the Future-Reliance Deal (Emergency Award). Future Group, instead of challenging this award, went ahead with the deal..

• FRL in the meantime filed a Suit before the Hon’ble Delhi High Court and sought to interdict the arbitration proceedings before the SIAC and restrain Amazon from taking any action in accordance with the Emergency Award. Delhi High Court refused to grant any interim relief to FRL on the ground that the balance of convenience went in favour of Amazon. No appeal was filed by FRL against this order. However, Amazon filed an appeal before the Division Bench of the Delhi High Court, challenging some portions of the order, which is pending.

• In the meantime, Amazon filed an Application against FRL under Section 17(2) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) before the single bench of Delhi High Court. By Order dated 2 February 2021 and Order dated 18 March 2021, the single bench of Delhi Court granted a stay in favour of Amazon and restrained Future Group from going ahead with the Future-Reliance Deal.

• Aggrieved by the said order of the Single Judge, FRL filed an appeal before the Division Bench of Delhi High Court, which stayed both the Orders of 2 February 2021 and 18 March 2021. Aggrieved by this stay order, Amazon challenged the order before the Hon’ble Supreme Court in appeal..

ISSUE 1:

Whether an “award” delivered by an Emergency Arbitrator under the SIAC Rules can be said to be an order under section 17(1) of the Arbitration Act?

HELD

The Supreme Court answered the first question in the Affirmative based on the following reasons:

• In the interpretation of the Arbitration Act, party autonomy is considered paramount. Thus, when the parties had agreed to abide by the SIAC Rules, the question of then contesting the legality and correctness of those rules does not arise.

• Secondly, the SIAC Rules on Emergency Arbitration reflect similar provisions as provided in Section 9 and 17 of the Arbitration Act. It can thus be said that the award passed by an “Emergency Arbitrator” can be construed as an “Interim Order” passed by an arbitrator under Section 17(1) of the Arbitration Act.

• SIAC Rules and the Arbitration Act go hand in hand in achieving the common objective of decongestion of the arbitration proceedings in the civil courts for the grant of interim relief.

ISSUE 2:

Whether an Order passed by High Court under Section 17(2) of the Arbitration Act for enforcement of an award passed by Emergency Arbitrator is appealable?

HELD

The Court answered this question in the negative on the basis of following reasons:

• Section 37 of the Arbitration Act provides for appealable orders, wherein the orders of the arbitral tribunal “granting or refusing to grant an interim measure under section 17” have been included.

• However, the intention of the legislature becomes clear from the wording that only the orders under section 17(1) which are passed by the tribunal are covered by this section and not the orders passed by the court under Section 17(2), thereby enforcing the orders passed under Section 17(1).

MHCO COMMENT:

The Supreme Court has taken one significant step in developing the Indian Arbitration Jurisprudence, reducing the judicial interference in the Arbitration process to the minimum. The Court has once again unequivocally demonstrated the judicial intent of promoting arbitration as a preferred method of dispute resolution. Supreme Court has also reaffirmed that in order to augment faith and trust in the arbitral proceedings, enough powers and teeth need to be given to the arbitrators, both domestic as well as international. The present judgment is with respect to the SIAC Rules. In view of the 2019 amendments to the Arbitration Act, seeking to foster institutional arbitration within India, this judgment will serve as an important precedent for similar disputes that may arise in future.

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 | LIABILITY OF CORPORATE GUARANTORS 

The Supreme Court of India in the recent case of Laxmi Pat Surana v. Union Bank of India has observed that proceedings under the Insolvency and Bankruptcy Code 2016 (IBC) can be initiated against a corporate guarantor who has given a guarantee on behalf of a sole proprietorship. This update briefly summaries this said judgment.

Background: In the present case, the financial creditor being Union Bank of India (Bank) extended a loan facility to the principal borrower, Mahaveer Construction (Principal Borrower), a proprietary firm. Surana Metals Limited stood as the guarantor (Corporate Guarantor) for the loan availed by the Principal Borrower. The loan was eventually declared as a non-performing asset in 2010 and the Bank issued recall notices against the Principal Borrower and the Corporate Guarantor. The Bank initiated proceedings before the Debt Recovery Tribunal, Kolkata against the Principal Borrower and during the pendency of the proceedings, the Bank also addressed a demand notice to the Corporate Guarantor under the IBC.

NCLT : The Bank initiated proceedings against the Corporate Guarantor for a default of a sole proprietorship firm, in its capacity as the corporate guarantor of the loan. NCLT admitted the application and held that the action had been initiated against the corporate guarantor, who was co-extensively liable to repay the debt of the Principal Borrower. As the Corporate Guarantor failed to do so despite the recall notice, the Corporate Guarantor in this scenario, became the corporate debtor liable to be proceeded against under the provisions of the IBC. An appeal was preferred from this decision before the National Company Law Appellate Tribunal (NCLAT).

NCLAT Before the NCLAT, the main contention raised on behalf of the Corporate Guarantor was that since no insolvency proceedings at present can be initiated against a sole proprietorship firm under IBC, as such, no insolvency proceedings can also be initiated against the Corporate Guarantor.

NCLAT upheld the observation of the NCLT that the definition of ‘Corporate Guarantor’ under IBC is merely explanatory and such definition could not be the basis of applicability or non-applicability of the provisions of IBC to those liable under the provisions thereof. NCLAT observed that a ‘Financial Debt' includes a debt owed to a creditor by a principal borrower and a guarantor. Thus, proceedings under Section 7 of the IBC may be initiated against a guarantor in the same manner as it would for a principal borrower, as their liability is coterminous and coextensive.

Supreme Court: The order of the NCLAT was then challenged in appeal before the Supreme Court. The Supreme Court held that a guarantor cannot escape from the lawful liability of the principal debtor under the contours of the IBC, in case of default in repayment by the principal debtor, despite being a sole proprietorship firm. Accordingly, the Supreme Court upheld the order and reasoning mentioned by the NCLT.

MHCO COMMENTS:

Supreme Court and NCLAT in this landmark decision have expanded the scope of the definition of ‘Corporate Guarantor' and have brought under its ambit firms acting as guarantors to loans of sole proprietorship firms. Thus, even though insolvency proceedings cannot be initiated against a firm in its capacity of a principal borrower in default, such action can be initiated against firms acting as guarantors. This provides an efficacious remedy to creditors who had to suffer at the hands of vagrant borrowers and guarantors trying to circumvent their liability.

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.

INDIAN ARBITRATION UPDATE | SUPREME COURT`S LATEST TAKE ON VENUE/PLACE/SEAT 

The Supreme Court of India (SC) in a recent case of Inox Renewables Ltd v Jayesh Electricals Limited has held that when parties to an arbitration agreement mutually agree to change the venue/place of arbitration, the new venue/place will become the 'seat’ of arbitration and the courts of the changed venue will be vested with the exclusive jurisdiction qua disputes and the courts at the earlier venue will cease to be vested with the jurisdiction.

This update briefly analyses the said judgement of the Supreme Court.

Facts:

• One Gujarat Fluorochemicals Limited (GFL) entered into a purchase order dated 28 January 2012 with the Respondent i.e. Jayesh Electricals Limited (Jayesh) for the manufacture and supply of power transformers at wind farms PO).

• PO contained an arbitration clause which prescribed Jaipur as the venue of arbitration and vested the jurisdiction over the disputes arising out of the arbitration in the courts of Rajasthan.

• GFL entered into a business transfer agreement dated 30 March 2012 (BTA) with the Appellant i.e. Inox Renewables Limited (Inox). Through this BTA, a slump sale of the entire business of GFL took place in favour of Inox, wherein the PO was also assigned to Inox. However, Jayesh was not a party to the said BTA. The BTA designated Vadodara as the seat of the arbitration between the parties, vesting the courts at Vadodara with exclusive jurisdiction qua disputes arising out of the BTA.

• As disputes arose between the parties, Jayesh filed an application against Inox under Section 11 of the Arbitration and Conciliation Act, 1996(Act) before the Gujarat High Court to appoint an arbitrator under the PO. The Application was allowed and a Sole Arbitrator was appointed. The Sole Arbitrator passed an award dated 28 July 2018 in favour of Jayesh. In the award, the Sole Arbitrator also recorded that the parties had mutually agreed, irrespective of a specific clause as to the venue, that the place of the arbitration would be at Ahmedabad and not at Jaipur.

• Inox challenged this award vide an application under section 34 of the Act, before the civil commercial court at Ahmedabad. The Application was resisted by Jayesh stating that under the BTA, exclusive jurisdiction was vested in the court of Vadodara. The civil commercial Court at Ahmedabad accepted this contention and dismissed the application.

• Aggrieved, Inox filed a Civil Application against this order before the Gujarat High Court. The High Court made a reference to the PO and brought to the notice of the Court that the exclusive jurisdiction under the PO was vested in the courts of Jaipur. However, the High Court found no error in the order of the commercial court of Ahmedabad and dismissed the civil application. An appeal was then preferred to the SC.

Issue:

• Whether the mutual agreement as to the change of venue of arbitration can imply the change of seat and result in exclusive jurisdiction of the courts of the newly agreed seat?.

HELD:

Placing heavy reliance on judgment in the case of BSG SGS SOMA JV v NHPC Limited , the SC allowed the appeal for the following reasons:

• The parties, by mutual consent, entered into an agreement to substitute the venue at Jaipur with Ahmedabad as the place/seat of arbitration under Section 20(1) [and not Section 20(3)] of the Act. The same is also recorded in the award, thus obviating the need for a separate agreement in writing. Thus, Jaipur does not continue to be the seat of arbitration and Ahmedabad is now the seat designated by the parties, and not merely a venue to hold meetings.

• Rejecting the argument of Jayesh, that even if it is admitted that the seat was shifted from Jaipur to Ahmedabad by mutual agreement, the same is independent of the clause vesting exclusive jurisdiction in the courts of Rajasthan; the SC held that “[T]he moment the seat is chosen as Ahmedabad, it is akin to an exclusive jurisdiction clause, thereby vesting the courts at Ahmedabad with exclusive jurisdiction to deal with the arbitration.” It further held that said argument cannot stand as the arbitration clause in the PO ought to be read as a whole.

MHCO Comments :

• Section 20 of the Act provides for the “Place” of arbitration. While the words “venue”, “seat” and “place” continue to be common confusables, this judgment thickens the line between Section 20(1) and 20(3).
  
  a)  Section 20(1) refers to the place of arbitration in the notion of “seat”, i.e. the courts whereof would have exclusive jurisdiction over the arbitration. The section empowers the parties to agree upon any seat of arbitration. If the parties fail to reach such agreement, the tribunal can determine the seat [Section 20(2)].
  
  b)  Section 20(3), independent of Sections 20(1) and 20(2), refers to the place of arbitration in the notion of “venue” for mere logistical convenience.

• The Judgment sets an important precedent in terms of the interpretation of Section 20 of the Act in determining the seat of arbitration and the impact of mutual agreement of parties on it, in a post-dispute scenario.

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 | RECORDING OF ENTRIES IN BALANCE SHEET  ACKNOWLEDGEMENT OF DEBT

The Supreme Court of India, in the case of Asset Reconstruction Company (India) Limited v Bishal Jaiswal has analysed the impact of an acknowledgment of a liability towards a loan in the balance sheet of a corporate debtor vis-à-vis Section 18 of the Limitation Act, 1963 (Limitation Act), which provides that a fresh period of limitation begins to run as and when a written acknowledgment of a liability is made.

Question of law for adjudication: The pertinent question adjudicated upon and answered in the aforementioned decision was whether an entry made in a balance sheet of a corporate debtor would amount to an acknowledgement of liability under Section 18 of the Limitation Act?.

Background of Case: In the present case, Corporate Power Limited (Corporate Debtor) had obtained loans from various lenders, including State Bank of India (SBI), to set up a thermal project. Subsequently, Corporate Debtor failed to repay the lenders and their account was declared as a non-performing asset. Some of the lenders, including SBI, Infrastructure Finance Company Limited, etc assigned the loans to an asset reconstruction company (ARC). ARC filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) acting as a financial creditor, before National Company Law Tribunal, Calcutta (NCLT) for an outstanding amounting to around Rs 6000 crores.

NCLT Order: NCLT admitted the petition under Section 7 of the IBC on the ground that the balance sheet of the Corporate Debtor had an acknowledgment which was signed on behalf of the company before the expiry of a period of 3 years from date of default and such entries would amount to an acknowledgment of debt for the purpose of Section 18 of the Limitation Act. Accordingly, NCLT held that the petition was not barred by limitation as entries of the balance sheet amounted to an acknowledgment of debt.

NCLAT Order: An appeal was referred to NCLAT against the order of the NCLT. NCLAT overturned the order passed by the NCLT and held that the acknowledgment in the balance sheets does not amount to acknowledgment of debt for the computation of limitation. This judgment was challenged before the Supreme Court in this appeal.

Supreme Court Order: The argument raised before the NCLAT, which was reconsidered by the Supreme Court, was that it was mandatory under the Companies Act, 2013 to file a balance sheet and disclose all facts necessary therein on an annual basis. In these circumstances, as it is a statutory obligation of the Corporate Debtor, the same cannot be the basis of extension of limitation period. The Supreme Court observed that while there is a statutory requirement to prepare a balance sheet, there is no such compulsion to make any acknowledgment of debt therein and that an entry in a balance sheet qua any particular creditor can also be made with caveats in the auditor’s statement filed by the company. Accordingly, the Apex Court, relying on its earlier rulings in Mahabir Cold Storage , along with the judgment passed by the Calcutta High Court in Bengal Silk Mills , set aside the NCLAT decision.

The Supreme Court also held that whether an acknowledgement of debt has been made is to be determined on a case by case basis and would depend on the facts of each case as to whether an entry made in a balance sheet with respect to any particular creditor is unequivocal or has been entered into with caveats.

MHCO Comment : The Supreme Court, in this judgment, has provided much-need clarity on a common question of law which was causing confusion and misinterpretation of the law. However, the Supreme Court’s observation that the aforesaid position cannot be applied in a straight-jacket formula and instead differs from case to case, may cause some more confusion in future cases.

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.