LEGAL UPDATE| SUPREME COURT VIEW ON MSME ACT VS ARBITRATION ACT

The Supreme Court in a recent case of Ramkrishna Electricals Limited Vs Maharashtra State Electricity Distribution Company Limited & Another (along with six other appeals) held that Section 15 to Section 23 of the Micro, Small & Medium Enterprises Development Act, 2006 (MSME Act) would override provisions of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Further, the Apex Court also held that a party would not be precluded from making a reference to the Council under the MSME Act even if an independent arbitration agreement existed between the parties. The Apex Court further held that that the Council itself could take up the dispute for arbitration and act as an arbitrator even if when the Council itself had conducted the conciliation proceedings under the MSME Act.

Brief Facts

The present appeals were preferred by each of the respective suppliers and buyers whereby though factually different, involved certain common questions of law and were therefore heard together.

Issue for Adjudication

• Whether Section 15 to Section 23 of the MSME Act would override provisions of the Arbitration Act?
  
  
• Whether a party would be precluded from making a reference to the Council under sub-section (1) of Section 18 of the MSME Act, if an independent arbitration agreement existed between the parties as contemplated in Section 7 of the Arbitration Act?
  
  
• Whether the Council itself could take up the dispute for arbitration and act as an arbitrator, when the council itself had conducted the conciliation proceedings under Section 18 of the MSME Act in view of the bar contained in Section 80 of the Arbitration Act?
  
  
• Can a party who is not the a ‘supplier’ as per the definition contained in the MSME Act on the date of entering into contract seek any benefit as the ‘supplier’ under the MSME Act, after its registration?

Held

The Supreme Court held that Chapter-V of the MSME Act would override the provisions of the Arbitration Act on account of the Arbitration Act being general law and the MSME Act being a special statute therefore the provisions of MSME Act would have precedence over or prevail over the Arbitration Act.

Further, the Apex Court also held that no party to a dispute with regard to any amount due under Section 17 of the MSME Act would be precluded from making a reference to the MSME Council even if an independent arbitration agreement as contemplated under Section 7 of the Arbitration Act exists between the parties.

In light of it being held that Section 15 to Section 23 of the MSME Act overrides the Arbitration Act, the Supreme Court further held that the restriction under Section 80 of the Arbitration Act, whereby a conciliator cannot act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings stands overridden against Section 18 of MSME Act which confers the MSME Council to itself take up the dispute for arbitration if conciliation proceedings fail.

The Supreme Court also reiterated that a party who is not the ‘supplier’ as per the definition contained in Section 2(n) of the MSME Act on the date of entering into contract cannot seek any benefit as the ‘supplier’ under the MSME Act, 2006. They however expressed that such issue being a jurisdictional issue, if raised, could also be decided by the Council acting as an arbitral tribunal under the MSME Act.

MHCO Comment:

The Supreme Court vide the judgement has conferred special law status to the MSME Act, thereby granting an overriding effect to the said MSME Act over any other law for the time being in force. The said judgment has cleared the ambiguity previously present on the applicability of the MSME Act and Arbitration Act.

It is pertinent to note at this juncture however that even though the MSME Act has statutorily stated that references made under Section 18 of the MSME Act shall be decided within a period of 90 days of making such reference, in reality, actual time to adjudicate any issue is much longer. Accordingly, it is only over a period of time one will come to know which legislation is faster and cost effective.

This update was released on 7 December 2022.

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.

REAL ESTATE UPDATE | COLLECTOR`S CONSENT NOT REQUIRED FOR TRANSFER OF CERTAIN FLATS 

The Supreme Court in case of State Of Maharashtra vs Aspi Chinoy has recently held that State Government is not entitled for any premium on sale of any flats in a society wherein (a) The plot on which the society is formed was allotted by the collector to a developer/ society on lease; and (b) The same was not allotted at the concessional value.

BACKGROUND

In the year 1971, the State Government had invited offers for the lease of a plot in Back Bay Reclamation Estate. In response to the said notice, one Aesthetic Developers Private Limited (Developer) tendered the bid which was accepted by the State Government in the year 1972. Upon acceptance of the bid, the Developer held the plot as lessee for a term of 99 years. Thereafter, the Developer constructed a building on the said plot consisting of flats. The Developer then sold those flats to individual purchasers on ownership basis and thereafter a Co-operative Society was formed by the said flat purchasers in year 1977 (Society).

On 16 December 2000, Mr Aspi Chinoy (Respondent) entered into an agreement with Mrs Reshmi Devi Agarwal for purchase of right title interest in a particular flat. When Respondent approached the Sub-Registrar`s office for registration of sale deed, the registration was declined and he was directed to obtain a NOC from Collector. Owing to the said order, Respondent moved a writ before the Bombay High Court.

Judgment passed by Hon`ble Bombay High Court.

The Bombay High Court granted relief sought by the Respondent on three primary grounds:

• Ownership Transfer of Flats: It was observed that with respect to lease of land by the State Government to Developer, the members of the Society did not step into the shoes of Developer after the land and building was conveyed to Society since the members of Society had ownership right only over flats and not on the land over which the building was constructed.
  
  
• Tenant Co-Partnership Society-Members Rights only of Flat: It further observed that the Society was tenant co-partnership society wherein the members had exclusive right, title and interest in the flat and no right in the land over which the Society was constructed hence, in that case members of the Society does not require permission from Collector while selling their respective flat.
  
  
• 1983 Resolution of State Government: Thereafter, while adjudicating on issues pertaining to 1983 Resolution of State Government, it observed that the resolution is applicable only to those societies to whom the conveyance has been given by State Government at the concessional rate . Since in the present case, the land was conveyed to Society by Developer and not by Government the 1983 resolution would not be applicable.
  
  
• On the basis of the above, Hon`ble Bombay High Court allowed the writ petition of the Respondent. Aggrieved by the Judgment of the Bombay High Court, State Government (Appellant) filed a Special Leave Petition before Supreme Court.

Arguments of the Appellant:

Appellants` primary contention was that the Bombay High Court erred in considering the Government Resolution dated 1983 and 1999, wherein the Appellants were entitled to claim premium on transfer of any flats on the reclaimed land or land allotted to society on the foreshores.

Appellants further contended that the plot was leased to developer in the year 1972 and vide lease deed, the Developer was obliged to abide by all the terms and conditions of lease subsequently made by the State Government vide resolutions or addendums.

Supreme Court`s View:

After hearing the parties, the Supreme Court noted that 1983 Resolution provided grant of land to co-operative societies at concessional rates. After the resolution of 1983, due to passage of time and no change in policies, the Government revised the scheme in the year 1999 and introduced premiums on grant of transfer of flat. Therefore, 1999 Resolution was in continuation of 1983 Resolution.

The Apex Court further noted that the plot in dispute was allotted to the Developer who participated in the bid in response to public notice and as per the terms of the bids the Developer constructed the building on the said plot and sold the flats in the said building to individual flat purchasers. After the flats were sold, the Society was formed on the said plot in the year 1977 by the flat purchasers.

Therefore, the plot was not allotted to Society but to developer on lease. Hence, 1983 Resolution and 1999 Resolution was not applicable to members of such Society.

On above grounds, the Apex Court dismissed the Special Leave Petition and upheld the Judgement of Bombay High Court.

MHCO Comment : The Judgement of Supreme Court has clarified that reclamation land in Mumbai before 1983 Resolution and not granted on concessional rate are not subject to Collector`s NOC. The Collector consent will only be required if plot has been allotted to the Society post 1983 Resolution. This judgment will put quietus to many pending litigations before the Bombay High Court dealing with similar issues.

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.

LITIGATION UPDATE | PRE-LITIGATION MEDIATION MANDATORY IN COMMERCIAL CASES

The Hon`ble Supreme Court recently passed a judgement in Patil Automation Private Limited and Ors vs Rakheja Engineers Private Limited wherein Section 12A of the Commercial Courts Act 2015 (Act) has been declared to be mandatory with effect from 20 August 2022 and the plaint filed in non-adherence of the same has been held to be liable for rejection under Order VII Rule 11 of the Code of Civil Procedure 1908 (CPC).

ISSUE

The seminal question which arises for consideration is whether the statutory pre-litigation mediation contemplated under Section 12A of the Act is mandatory and whether the courts should reject the plaints filed in non-compliance of the same under Order VII Rule 11 of the CPC.

SECTION 12A IS NOT MERELY PROCEDURAL LAW

Section 12A of the Act states that a suit, which does not contemplate any urgent interim relief , shall not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation. The intention behind the said Section is to provide for a fast-track route to de-clogging the trial courts, particularly having regard to the reduction of pecuniary jurisdiction for commercial suits from Rs 1 crore to Rs 3 lakhs.

The Supreme Court after analysing the aforesaid Section 12A, held that exhausting pre-institution mediation by the plaintiff will be beneficial to all parties. It further observed that the design and scope of the Act makes it clear that Parliament intended to give it a mandatory flavour. Accordingly, it held that Section 12A is not a mere procedural provision.

CONSEQUENCE OF NON-ADHERENCE: REJECTION OF PLAINT

The Court held that a plaint filed in non-compliance of Section 12A of the Act, is liable to be rejected under Order VII Rule 11 of the CPC. The Court made this declaration effective from 20 August 2022.

The power under Order VII Rule 11 is available to the court to be exercised suo motu and the plaint may even be rejected without issuing summons. However, the Court has to hear the plaintiff before it invokes its power besides giving reasons under Order VII Rule 12 of the CPC. Undoubtedly, on issuing summons it will be always open to the defendant to make an application as well under Order VII Rule 11 of the CPC.

MHCO Comment : In our experience, it has rarely been observed that the commercial suits are filed without an accompanying application for interim-relief. Therefore, considering that most commercial suits will have an urgency, the requirement of pre-litigation mediation will be rendered irrelevant, for all practical purposes.

This update was released on 22 August 2022.

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 | FINANCIAL CREDITORS CAN JOINTLY FILE AN IBC APPLICATION TO REACH THE THRESHOLD LIMIT

The Rajasthan High Court in a recent judgement in the case of Vishnu Oil Mill Pvt. Ltd. Vs. Union of India upheld Section 7 of the Insolvency and Bankruptcy Code 2016 (IBC), that a group of financial creditors can converge and join hands to touch the financial limit of INR 10 Million as stipulated under Section 7 so as to initiate a Corporate Insolvency Resolution Process (CIRP) under the IBC.

Brief Facts

The petitioner in the present case, Vishnu Oil Mill Private Limited (Petitioner) had filed a writ petition to assail the validity of Section 7 of the IBC and also to challenge the Order dated 22 December 2021 passed by the National Company Law Tribunal, Jaipur Bench (NCLT Jaipur) against the petitioner. The counsel representing the petitioner had contended that due to the serious financial distress brought around by the Covid-19 pandemic, the Government of India increased the minimum amount of default to INR 10 million from the existing threshold of INR 100,000. He contended that, while raising the threshold limit for initiating CIRP, the legislature's objective was that a joint application by financial creditors could be heard, but a minimum default of INR 10 million should be qua every individual creditor. The Petitioner stated that the provision needs to be read in a purposive manner so as to lay down such principle. The petitioner further argued that some of the defendants had started insolvency proceedings despite of not having a default of INR 10 million.

The Petitioner further stated that the Supreme Court while determining the validity of Section 7 in the case of Swiss Ribbons Private Ltd. & Anr. Vs. Union of India & Ors , has till date not accounted for the possibility of complying with the threshold limit provided under section 7 of IBC by group of financial creditors for filing application collectively.

On the other hand, the respondents argued that the language of Section 7 of the IBC is unambiguous. They submitted that the remedy to trigger CIRP has been provided to financial creditors in their individual capacity and also through a joint application with the total minimum threshold for initiation of CIRP being fixed at INR 10 million. They argued that the letter and spirit of Section 7 would be weakened if it is determined that the threshold of INR 10 million is qua every individual financial creditor, and that such an interpretation cannot be envisaged by any stretch of imagination.

Issues to be adjudicated:

• Whether Section 7 of the IBC is constitutionally valid?

• Whether a group of financial creditors can jointly trigger CIRP without meeting the individual default threshold of Rs. 1 crore?

Held:

The Rajasthan High Court was of the opinion that a plain reading of Section 7 reveals that there is no ambiguity in the clause that demands any interpretation other than what is expressed in its literary sense. The section clearly stipulates that the application for triggering CIRP may be initiated by a financial creditor either individually or jointly with other financial creditors. It was observed that in the case of MSMEs, financial creditors with individual debts of INR 10 million or more may not exist. The statute and the amendments thereto make it clear that they were drafted in such a way as to provide a means of effective redressal to the smaller financial creditors and to give them the opportunity of availing of the speedy remedy under the IBC rather than being forced to engage in other time-consuming proceedings to recover their money. The High Court held that the Section 7 of the IBC as amended vide Gazette Notification dated 5 June 2020, admits no other interpretation except that a group of financial creditors can converge and join hands to touch the financial limit of INR 10 million stipulated under Section 7 so as to initiate a CIRP under the IBC.

In the view of the above, the Rajasthan Court dismissed the writ petition however, the petitioner was given the liberty to avail appropriate lawful remedy against the order dated 22 December 2021 passed by the NCLT Jaipur.

MHCO Comment : In our view, the Rajasthan High Court has made it crystal clear that a group of financial creditors can join hands to touch the threshold of INR 10 million to initiate CIRP and that there is no other way to interpret the section 7 of IBC.

This update was released on 12 August 2022.

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 JUDGMENT | MSME ARBITRATION UPDATE

The Supreme Court in a recent judgment, regarding the Micro, Small and Medium Enterprise Development Act, 2006 ("MSME Act") held that the requirement of making a pre-deposit of 75% of the award, in order to challenge any order / decree, as per Section 19 of the MSME Act is mandatory.

Brief Facts

Tirupati Steels (Appellant) filed a claim petition before the Micro and Small Enterprises Facilitation Council (Council) , for the recovery of around INR 27.2 million against Shubh Industrial Component (Respondent) . After the conciliation process failed, the matter was referred to arbitration. The arbitral award was in favour of the Appellant. Post the order, the Appellant filed an execution petition before the district and sessions judge in Faridabad. The Respondent, then made a request to set aside the arbitration award in accordance with Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") before the Special Commercial Court in Gurugram.

Issue for Consideration

Whether, the pre-deposit of 75% of the awarded amount as per section 19 of the MSMED Act, 2006, under section 34 of the Arbitration Act should be made mandatory?

High Court View

Before considering an application made under Section 34 of the Arbitration Act, the Special Commercial Court in Gurugram gave the respondent six weeks to deposit 75% of the amount due under the arbitral judgement. The respondent filed the commercial appeal before the High Court after feeling wronged by the Special Commercial Court's ruling. While upholding the validity of Section 19 of the MSME Act, the division bench of the Punjab and Haryana High Court (High Court) held that the pre-deposit of 75% of the arbitral award is, in fact, directory and not mandatory. The High Court did not insist on a pre-deposit of 75% of the awarded amount and instead allowed the arbitration proceedings pursuant to Section 34 of the Arbitration Act to commence.

Supreme Court View

The Appellant filed an appeal with the Supreme Court. The Supreme Court set aside the ruling made by the Division Bench of the High Court, which allowed the arbitration proceedings under Section 34 of the Arbitration Act to continue without requiring a pre-deposit of 75% of the awarded amount.

The Supreme Court while interpreting Section 19 of the MSME Act, observed that the requirement of depositing 75% of the amount in terms of the award as a pre-deposit is mandatory. However, the Supreme Court also noted that the court may let the pre-deposit be made in instalments if the court is convinced that the appellant will suffer an undue hardship if required to deposit 75% of the awarded amount as a lumpsum amount.

MHCO Comment : With regard to contesting an arbitral award under Section 34 of the Arbitration Act, the Supreme Court's decision provides much-needed clarification on the scope of the pre-deposit obligation outlined in Section 19 of the MSME Act. The Apex Court has struck a delicate balance in the current case, by underlining the required nature of the pre-deposit requirement under the MSME Act of 75% of the awarded sum and upholding the right of the aggrieved party to be heard in an appeal.

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 UPDATE | GUIDELINES ON SERVICE CHARGES

Central Consumer Protection Authority (CCPA) recently issued guidelines dated 4 July 2022 (Guidelines) which now prohibits hotels and restaurants to levy any service charges to the customers.

BACKGROUND

Following amendments made in the Consumer Protection Act 2019, the Central Government vide notification dated 30 July 2020 established the Central Consumer Protection Authority to regulate the matters that are related to the violation of consumer rights, unfair trade practices and false and misleading advertisements which are prejudicial to the interest of the consumers and to promote, protect and enforce the rights of consumers with effect from 29 July 2020. The Department of Consumer Affairs vide notification 21 April 2017 had previously established guidelines on an almost equivalent effect barring it being limited. Thus, the new Guidelines are a more comprehensive set of guidelines that shall be in addition to the previous guidelines.

GUIDELINES

The Service Charge Guidelines are ascribed to the CCPA to curb unfair trade practices and protect the rights of the consumer, they are as given below:

• No hotel or restaurant shall add service charge automatically or by default in the bill;

• Service charge shall not be collected from consumers by any other name;

• No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional and at consumer's discretion;

• No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers;

• Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

  The recourse available to the consumers on non-compliance of the Guidelines by the restaurants or hotels are:

• Make a request to the concerned hotel or restaurant to remove service charge from the bill amount;

• Lodge a complaint on the National Consumer Helpline (NCH), which works as an alternate dispute redressal mechanism at the pre-litigation level by calling 1915 or through the NCH mobile app;

• File a complaint against unfair trade practice with the Consumer Commission. The Complaint can also be filed electronically through e- daakhil portal www.edaakhil.nic.in for its speedy and effective redressal;

• Submit a complaint to the District Collector of the concerned district for investigation and subsequent proceeding by the CCPA. The complaint may also be sent to the CCPA by e-mail at com-ccpa@nic.in;

  On satisfaction of the CCPA that there was a violation, the CCPA may pass an order after giving the other person an opportunity to be heard under Section 20 of the Consumer Protection Act, 2019 as follows:

• To recall the goods or withdraw the services which are dangerous, hazardous or unsafe;

• To reimburse the prices of goods or services that are so recalled to the purchasers of such goods or services; and

• To discontinue the practices which are unfair and prejudicial to consumers' interest.

MHCO Comment : The Guidelines by the CCPA are a great addition to the previous set of guidelines released by the Department of Consumer Affairs. The Guidelines even provides for a mechanism to deal with the non-compliance and facilitate a wider redressal system for the consumer which was a limitation in the previous set of guidelines. While a great addition for the consumer, the pushback by the hospitality industry would make the implementation of the Guidelines noteworthy.

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. 

CYBER SECURITY UPDATE | INDIAN COMPUTER EMERGENCY RESPONSE TEAM (CERT-In)

The Ministry of Electronics and Information Technology (MEITy) recently issued directions to augment and strengthen cyber security in the country (Directions) . These Directions apply to service providers, intermediaries, data centres, companies and government organisations and any non-compliance in this regard may invite grave consequences. These Directions will come into effect from 27 June 2022.

BACKGROUND

The Central Government had appointed ``Indian Computer Emergency Response Team (CERT)`` vide notification dated 27 October 2009. As per provisions of Section 70B (4) of the Information Technology Act 2000 (IT Act), CERT is the national agency for performing certain functions in the area of cyber security, such as (a) Collection, analysis and dissemination of information on cyber incidents; (b) Forecast and alerts of cyber security incidents; (c) Emergency measures for handling cyber security incidents; (d) Coordination of cyber incidents response activities; etc.

CERT is empowered and competent to call for information and give directions to the service providers, intermediaries, data centres, body corporate and any other person for carrying out the activities enshrined in sub-section (4) of Section 70B of the IT Act.

DIRECTIONS:

These Directions are issued under Section 70B (6) of the IT Act. They are as follows:

• The service providers, intermediaries, data centres, body corporate and Government organisations shall designate a ``Point of Contact`` to interface with CERT in respect of cyber incident response, protective and preventive. All communications from CERT seeking information and providing directions for compliance shall be sent to the said Point of Contact. The details of a Point of Contact shall be submitted in the format specified in Annexure II of the Directions.

• Any service provider, intermediary, data centre, body corporate and Government Organisation shall mandatorily report cyber incidents to CERT within 6 hours of noticing such incidents or being brought to notice about such incidents. The incidents can be reported to CERT-In via email (incident@cert-in.org.in), Phone (1800- 11-4949) and Fax (1800-11-6969). The details regarding methods and formats of reporting cyber security incidents is also published on the website of CERT-In www.cert-in.org.in and will be updated from time to time.

• All service providers, intermediaries, data centres, body corporate and Government Organisations are mandatorily required to enable logs of all their ICT systems and maintain them securely for a period of 180 days and the same shall be maintained within the Indian jurisdiction. These should be provided to CERT along with reporting of any incident or when ordered / directed by CERT.

• Data Centres, Virtual Private Server providers, Cloud Service providers and Virtual Private Network Service providers shall be required to register the following accurate information which must be maintained by them for a period of 5 years or longer as mandated by law after any cancellation or withdrawal as the case may be: (a) Validated names of subscribers/customers hiring the services; (b) Period of hire including dates; (c) IPs allotted to / being used by the members; (d) Email address and IP address and time stamp used at the time of registration / on-boarding (c) Purpose for hiring services; (d) Validated address and contact numbers (e) Ownership pattern of the subscribers / customers hiring services.

• The virtual asset service providers, virtual asset exchange providers and custodian wallet providers shall mandatorily maintain all information obtained as part of Know Your Customer (KYC) and records of financial transactions for a period of 5 years. This is in view of the growth of virtual assets and to ensure cyber security in the area of payments and financial markets for citizens while protecting their data, fundamental rights and economic freedom.

• With respect to transaction records, accurate information shall be maintained in such a way that individual transaction can be reconstructed along with the relevant elements comprising of information relating to the identification of the relevant parties including IP addresses along with timestamps and time zones, transaction ID, the public keys (or equivalent identifiers), addresses or accounts involved (or equivalent identifiers), the nature and date of the transaction, and the amount transferred.

PENALTY FOR NON-COMPLIANCE

It must be noted that a failure to comply with the Directions can invite punitive action under Section 70B (7) of the IT Act which may go up to INR 100,000 or imprisonment for a term up to 1 year or both.

TYPES OF CYBER SECURITY INCIDENTS

Following are the types of cyber security incidents that are mandatory to be reported by service providers, intermediaries, data centres, body corporate and Government organisations to CERT:

• Compromise of critical systems/information

• Unauthorised access of IT systems/data

• Defacement of website or intrusion into a website and unauthorised changes such as inserting malicious code, links to external websites etc.

• Data breaches and data leaks

• Unauthorised access to social media accounts

• Attacks or malicious/ suspicious activities affecting Cloud computing systems/servers/software/applications

MHCO Comment :The aforesaid Directions issued by MEITy are a great step towards safer and secure digital-India, though we still have a long way to go. With growing usage and storage of data and exchange of information online, there has always been a need for a mechanism to ensure that the data/information is safe and not exposed to unauthorised access or breaches. It is pertinent to note that the Directions will apply to most, if not all, organisations in India regardless of the quantum of data collected/stored by them. However, it will be interesting to see the implementation and enforcement of these Directions over the next few months.

This update was released on 10 June 2022.

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 | INVESCO vs ZEE: THE SAGA CONTINUES

In our previous update regarding Zee vs Invesco case (which can be seen here ), we had examined the order (Impugned Order) passed by the single bench of Bombay High Court (Court) which granted an injunction restraining Invesco Developing Markets Fund (Invesco) from calling for and holding an Extraordinary General Meeting (EGM) of Zee Entertainment Enterprises Limited (Zee) and had discussed the lacunae therein.

This Impugned Order was challenged by Invesco before the Division Bench of the Court. Recently, the Division Bench of the Court allowed the appeal filed by Invesco against the Impugned Order rightfully stating that said jurisdiction is before the National Company Law Tribunal (NCLT) and not with civil court.

This post now analyses the Division Bench Order which re-affirms the principles of corporate democracy and shareholder supremacy.

Section 100 of the Companies Act 2013 (Act)

Vide the Impugned Order, the Single Judge concluded that the resolutions proposed by Invesco, if allowed, would result in a situation where Zee would be in violation of various statutory compliances. Further, a distinction was required to be drawn in regard to resolutions proposed at a requisitioned EGM that are irregular, undesirable or unpalatable to the Board and those that are illegal. In this regard, it was held that the question was not about the interpretation of the expression ``valid resolution`` in Section 100(4) of the Act, but rather about ``whether what is sought to be done is plainly an illegality``.

The Division Bench of the Court set aside the findings contained in the Impugned Order, relying upon the various judgements passed by the Supreme Court of India which has held that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Act.

Further, the Court held that no discretion had been conferred upon the board of a company to sit in judgment over ``any matter`` for consideration of which the meeting is requisitioned. As such, the board of a company is mandatorily obliged to requisition a meeting if the requirements specified in sub-sections (2) and (3) of Section 100 are satisfied. The Court explicitly held that the language used in the Section 100 aids corporate democracy and protects the rights of shareholders, since the same provides shareholders with an additional right to proceed to call for and hold an EGM despite an unwilling board.

In view thereof, the Court held that the expression ``valid requisition`` in Section 100(4) of the Act is restricted to numerical and procedural compliances with the requirements of Section 100 and nothing more. Even if the requisition was illegal or invalid, the Court held that the Board was still obliged to call for the meeting.

The division bench thereafter proceeded to analyse the resultant consequences of allowing civil courts, in certain cases, to grant an injunction restraining the shareholders of a company from exercising their statutory right to call for and hold an EGM. In this regard, the Court held the resultant consequences would be that any unwilling board of a company, which intends to obstruct its shareholders from exercising their statutory right and calling for and holding an EGM, will resolve that the company file a suit in a civil court. In such civil suit, the company will move an interim application, praying for an injunction from acting upon the proposed resolutions alleging ``resultant illegalities``. Till such time as adjudication of the ``illegalities`` is completed, to balance equities, the civil court will injunct the holding of the meeting. Such decision of the civil court would then be subject to multiple rounds of appeal.

The Court held that if the aforesaid approach were to be adopted, the same would, in turn, open flood gates of litigation where corporate democracy would be ``rendered nugatory``. The Court thus held that it could not lay down a precedent resulting in such drastic consequences, derailing the democratic functioning of companies across India, owing to the non-cooperative and obstructive conduct of the board of directors.

Section 430 of the Act

The Court held that Section 430 of the Act provides for two contingencies: first, that no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the NCLT or the NCLAT is empowered to determine by or under the Act or any other law for the time being in force, and second, that no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act, or any other law for the time being in force, by the NCLT or the NCLAT.

In view of the absolute bar on the jurisdiction of civil court as contained in Section 430 of the Act, the Single Judge could not have granted an injunction against Invesco. Further, given the scheme of Sections 96 to 100 of the Act, the Court held that the issue between Zee and Invesco would squarely fall within the jurisdiction of the NCLT. As such, the Court held that a civil court could not interfere with the jurisdiction of the NCLT by granting an injunction, which would effectively prevent the NCLT from considering Invesco`s prayer.

MHCO Comments: The Division Bench rightfully set-aside the findings of the Impugned Order on all counts, thereby reaffirming and upholding the settled legal position on corporate democracy and shareholder supremacy in India.

This update was released on 28 April 2022.

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 | PROCEEDINGS AGAINST PERSONAL GUARANTOR - NCLT VS DRT

National Company Law Appellate Tribunal (NCLAT) in a very recent case of State Bank of India v. Mahendra Kumar Jajodia held that initiation of Corporate Insolvency Resolution Process (CIRP) against a corporate debtor is not a pre-requisite to initiate Insolvency Resolution Process (IRP) against a personal guarantor of a debt. This update briefly analyses this case.

Brief Facts: The Appellant in the present case, State Bank of India (SBI), in its capacity as financial creditor, filed an appeal against the Order of the National Company Law Tribunal, Kolkata Bench (NCLT) which refused to entertain an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) against a personal guarantor on the ground that the same is pre-mature, as CIRP against the corporate debtor had not yet been initiated.

Issue to be adjudicated: Does Section 60(2) of IBC in any way preclude filing of insolvency proceedings under Section 95 of IBC against a personal guarantor even if no CIRP proceedings are pending against the corporate debtor?

Held: NCLAT was of the opinion that the NCLT erred in holding that since no CIRP of the corporate debtor is pending, the application under Section 95(1) of IBC filed by the Appellant is not maintainable, and therefore set aside the Order of the NCLT. It was held that the application filed under Section 95(1) read with Section 60(1) of the IBC could not have been rejected only on the ground that no CIRP was pending against the corporate debtor.

NCLAT relied on an interpretation of the provisions of Section 60 of the IBC stating that the language used therein only signifies that where a CIRP against a corporate debtor proceeding is pending before a NCLT, IRP proceedings against the guarantor of such corporate debtor must lie before the NCLT, with the idea that both the proceedings would be entertained by the same NCLT. It was held that Section 60(2) of the IBC does not in any way prohibit filing of proceedings under Section 95 of IBC even if no such proceedings are pending before the NCLT.

Accordingly, the application filed by SBI under Section 95(1) of IBC was revived before the NCLT.

MHCO COMMENT:

NCLAT has provided a wide interpretation of the law set out in IBC and has deviated from the settled position of previous judgments. Further, it seems that NCLAT has missed reading Sections 79(1) and 179 of IBC, which deal with the jurisdiction of Debt Recovery Tribunals (DRT) with respect to personal guarantors. However, by this judgment, NCLAT has cleared the conundrum where without initiating CIRP against the principal borrower, a financial creditor can initiate IRP against the personal guarantors. This judgment is likely to have long lasting ramifications pertaining to the jurisdiction of DRT vis-a-vis jurisdiction of NCLT. It will be interesting to see how the Supreme Court reacts to similar cases as this will have a direct impact on the jurisdiction of DRT and the same did not seem to be the intent of the legislator while drafting IBC.

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.

 

 

ARBITRATION UPDATE | INSUFFICIENTLY STAMPED ARBITRATION AGREEMENT CAN BE ACTED UPON

The Supreme Court of India (Supreme Court) in the case of Intercontinental Hotels Group (India) Private Limited and Another v Waterline Hotels Private Limited has held that an arbitration agreement is insufficiently or inadequately stamped can still be acted upon, for the purpose of appointment of arbitrator.

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

FACTS:

• On 17 September 2015, Intercontinental Hotels Group (India) Private Limited (IHG) and Anr. and Waterline Hotels Private Limited (Waterline) entered into a Hotel Management Agreement (HMA) , for a period of 10 years, to operate and run a hotel named Holiday Inn and Suites, Bengaluru, Whitefield (Hotel).

• It was contended by IHG that it had made significant investments and further, had carried out renovations for setting up the Hotel, in accordance with the HMA. However, despite IHG complying with its obligations, Waterline failed to pay the requisite fees which it was contractually bound to under the HMA.

• Thereafter, on 12 October 2018, Waterline addressed an email to IHG terminating the HMA. In response, IHG addressed an email to Waterline contending that the unilateral termination of the HMA was not valid as there was no legal basis for the same.

• Subsequently, IHG invoked the arbitration clause under the HMA vide their notice dated 21 January 2019. In response, Waterline stated that the notice sent by IHG was not a notice of arbitration and hence, did not merit a reply.

• Accordingly, IHG communicated its intention to invoke arbitration to the Singapore International Arbitration Centre (SIAC) and requested SIAC to either suggest names of sole arbitrators or to invoke the mechanism of appointing a three-member tribunal if Waterline did not agree on a single name. Although SIAC issued a notice to Waterline for the appointment of a suitable arbitrator, Waterline replied to the SIAC`s notice stating that notice of arbitration dated 21 January 2019 was defective and not curable.

• Accordingly, IHG filed the aforementioned arbitration petition (Petition) before the Court for appointment of Arbitrator under Section 11(6) of the Act.

CONTENTIONS OF THE PARTIES:

• Waterline opposed the Petition contending that the HMA, which contained the arbitration agreement, was an unstamped document. In this regard, Waterline contended that an agreement which is not duly stamped cannot be relied on or acted upon unless the unstamped document is impounded, and the applicable stamp duty and penalty is assessed and paid.

• In this regard, IHG filed an application along with an e-challan evidencing that it had taken steps to pay the requisite stamp duty, along with the maximum penalty thereon, in accordance with the Karnataka Stamp Act 1957 (Stamp Act . In view of the same, IHG requested the Supreme Court to appoint the Arbitrator.

• 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.

ISSUE:

• Whether an insufficiently stamped arbitration agreement can be acted upon, for the purpose of appointment of arbitrator under Section 11(6) of the Act?

HELD:

• Keeping in mind the divergent view taken by the Supreme Court in NN Global Mercantile Case and Garware Wall Ropes Case regarding the arbitrability of unstamped documents (containing arbitration agreements) and the reference of the aforesaid question of law to a constitutional bench, the Supreme Court held that arbitration issues were time-sensitive in nature and hence could not be left hanging until the constitutional bench settles the issue. In view of the same, the Supreme Court held that the Court, until the larger Bench decides on the interplay between Sections 11(6) and 16 - should ensure that arbitrations are carried on, unless the issue before the Court patently indicates existence of deadwood``.

• In light of the above, the Supreme Court proceeded to deal with the question as to whether the issue of insufficient stamping raised by Waterline is deadwood or there are deeper issues which can be resolved at a later stage. Placing extensive reliance on the settled position of law which expounds that courts have very limitedjurisdiction while dealing with issues under Section 11(6) of the Act, the Supreme Court held that the issue of `existence` and/or `validity` of the arbitration clause would not be needed to be looked into as the stamp duty had been paid in the present case. The Supreme Court held that the insufficiency or appropriateness of stamp duty is a question that could answered at a later stage as the Supreme Court could not review or go into this aspect under Section 11(6).
• The Supreme Court further held that if the present Petition involved a question of complete non-stamping, then it might have had an occasion to examine the judgement passed in N. N. Global (supra) (which states that any concerns of non-stamping would not affect the validity of the arbitration agreement). However, since the present Petition did not deal with a similar scenario, the Supreme Court referred the disputes between IHG and Waterline to arbitration in terms of the HMA.

MHCO COMMENT:

The Judgment is one of the many pro-arbitration rulings passed by the Indian judiciary in the recent past. While the question regarding the validity of unstamped documents containing arbitration agreements still remains grey and requires consideration by a larger bench, the Supreme Court, in this judgment, clarifies the position as regards insufficiently or inadequately stamped agreements, and holds that such deficiency does not act as a bar to the reference of disputes to an arbitral tribunal.

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 | EXTENSION OF LIMITATION PERIOD IN LIGHT OF THIRD WAVE OF PANDEMIC

 

The Supreme Court of India vide its Order dated 10 January 2022 has restored its earlier order for the exclusion of period starting from 15 March 2020 till 28 February 2022 for the purposes of computing limitation prescribed under any general or special laws in respect of all judicial or quasi-judicial proceedings, in light of the spread of the third wave of the Covid-19 pandemic.

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 an Order, 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. Subsequently, a 3-Judge Bench of the Supreme Court heard the matter and noted that the pandemic situation had improved drastically. Thus, the Supreme Court, 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 Supreme Court had stated that the suo motu extension of limitation period will stand withdrawn with effect from 2 October 2021.

In light of the ongoing third wave of the Covid-19 pandemic, the drastic surge in the number of Covid cases across the country and increasing restrictions, the Supreme Court has heard the matter regarding a further extension of limitation period. The Supreme Court has directed that the previous orders in respect of extension of limitation are restored and accordingly, the period between 15 March 2020 till 28 February 2022 shall stand excluded for the purposes of limitation. Accordingly, any balance period of limitation remaining as on 3 October 2021 shall become available with effect from 1 March 2022.

Further, in cases where the limitation period is expiring between 15 March 2020 to 28 February 2022, such actual balance period of limitation remaining, the concerned parties shall be entitled to 90 days of extended limitation period from 1 March 2022. If the actual balance period of limitation remaining as on 1 March 2022 is greater than 90 days, that longer period shall apply in such cases.

Such period of exclusion from 15 March 2020 till 28 February 2022 shall also be applicable while computing periods prescribed under Sections 23(4) and 29A of the Arbitration and Conciliation Act, 1996, Section 12A of the Commercial Courts Act, 2015 and provisos (b) and (c) of Section 138 of the Negotiable Instruments Act, 1881 and any other laws, which prescribe any period(s) of limitation for instituting proceedings and outer limits (within which the court or tribunal can condone delay).

MHCO COMMENT:

The directions of the Supreme Court vide Order dated 10 January 2022 and providing an additional buffer period of 90 days comes at a time when various states are imposing restrictions and courts are functioning in a limited manner. This will provide much needed relief to litigants in these excruciating circumstances

This update was released on 13 January 2022.

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.