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.