INDIAN ARBITRATION UPDATE | THRESHOLD FOR INTERIM ORDERS IN AN INTERNATIONAL ARBITRATION MATTER

Delhi High Court (DHC) in a recent Case Goodwill Non-Wovens Private Limited v XCoal Energy & Resources LLC,clarifies the threshold required for obtaining interim reliefs under Section 9 of the Arbitration and Conciliation Act 1996 (Act) with respect to Arbitrations seated outside India. The Court held that along with a strong prima-facie case, the petitioner must also satisfy the Court that the Respondent is acting in a manner so as to defeat the realization of the future award which may be passed in favour of the petitioners.

FACTS OF THE CASE:

• Goodwill Non-Wovens Private Limited (Petitioner) being an Indian company and XCoal Energy & Resources LLC (Respondent) – being coal marketing and logistics company based out of United States of America (USA) entered into a contract for sale and delivery of 13,500MT of Consol BEFH US High CV Thermal Coal at the designated port.
• On alleged default of the Respondent, the Petitioner terminated the contract and intended to initiate arbitral proceedings at the International Chamber of Commerce (ICC) against the Respondent for the refund of monies remitted under the contract and for damages. The Petitioner, in the interim, sought to secure the dispute amount through Section 9 petition on the following grounds:
  
  
  • Section 9 of the Act is applicable to Part II arbitrations, and Indian Courts have time and again upheld this position;
  • In the wake of COVID-19 pandemic, it was difficult to obtain a speedy remedy under the ICC Rules, given the procedural timelines;
  • The provisions in ICC Rules do not oust the jurisdiction of any competent judicial authority, and thus the Petitioner had the liberty to approach this court even after considering the ICC Rules;
  • There was an apprehension that the Respondent may obstruct the realization of the final award which may be passed in favour of the Petitioner.


• Respondent offered a 3-fold objection to the Petitioners contentions:
  
  
  • The Petition was not maintainable, because the Act allows application of Section 9 to only such Part II arbitrations, the final award whereof would be enforceable in India. Contending that the court, under this provision, have asset-based jurisdiction, the Respondent challenged the maintainability of the petition itself, as the Respondent does not have any assets situated in India.
• Secondly, it was contended that the powers of the Court to grant interim relief has to be exercised scarcely and in accordance with the conditions laid down in Order 38 Rule 5 of the Code of Civil Procedure, 1908 (CPC).
• Thirdly, it was stated that the ICC Rules contained provisions for emergency arbitration whereby quick and speedy remedy can be availed by the Petitioner. The special conditions arisen due to the COVID-19 pandemic are not enough for the Petitioner to bypass that remedy and approach the Court under Section 9 of the Act.

ISSUES

• Whether the Petition was maintainable?
• Whether the Petitioners had a good prima facie case?
• Whether the interim relief could be granted in view of the spread of COVID-19?
• Whether Section 9 of the Act had to be read with Order 38 Rule 5 of the CPC?

HELD:

The Delhi High Court dismissed the petition on the following grounds:

• While upholding the maintainability of the Petition, the Court held that the exercise of powers of the Court under Section 9 of the Act did not explicitly require any assets of the Respondent to be situated within the jurisdiction of the Court.
• While examining the question of whether any interim relief could be granted in a Part II Arbitration, the Court set out 2-point threshold that must be satisfied by the Petitioner, viz:
  
  
  • The Petitioner must satisfy the Court that it has a good prima facie case.
• There must be a reasonable apprehension that the Respondent is acting in a manner so as to obstruct the satisfaction of the final award.

• As regards the prima facie case, the Court observed that there were disputed facts between the parties and required a consideration on merits, which cannot be done in the present petition and has to be decided by the Arbitral Tribunal during the Arbitration Proceedings.
• The Court cited a number of judgments of various High Courts and placing heavy reliance on Ajay Singh Case stating that the underlying principles of Order 38 Rule 5 of the CPC (i.e. attachment before judgement) must be borne in mind while exercising the power under Section 9 of the Act. The conditions imposed by Order 38 Rule 5 of the CPC are as follows:
  
  
  • That the Respondent is about to dispose of the whole or any part of his property, or
• That the Respondent is about to remove the whole or any part of his property from the local limits of the jurisdiction of the Court.
Since there was no material on record to substantiate such an apprehension, the court rejected this plea of the Petitioner.

• Thirdly, it was also held that the special circumstances arisen due to the COVID-19 pandemic did not have a bearing on the facts of the present case and thus the Petitioner was not entitled to any relief as prayed for.

MHCO Comment: In this Judgment the court has clearly spelt out the scope of its powers under Section 9 of the Act and has reaffirmed that the underlying principles of attachment before judgement must be kept in mind while exercising these powers. It has clearly pointed out the conditions which must be satisfied for obtaining relief under the said provision.

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

CREEPING ACQUISITION | RELAXATION OF TAKEOVER CODE

The lockdown on account of the COVID-19 pandemic has led substantial erosion of Indian businesses. To boost the confidence, Securities and Exchange Board of India (SEBI) vide a notification dated 16 June 2020 (Amendment) has amended the SEBI (Substantial Acquisition and Takeovers) Regulation, 2011 (Takeover Code) and relaxed the provisions with respect to creeping acquisition by the promoters under the Takeover Code for the Financial Year 2020-2021.

This update seeks to broadly set out the important changes brought about by the Amendment to the Takeover Code as follows:

CREEPING ACQUISITION

• The creeping acquisition mechanism under Regulation 3 of the Takeover Code provides that any person holding between 25% and 75% off shares in the company is entitled to acquire further shares not exceeding up to 5% voting rights during each financial year without triggering the compulsion to make a mandatory open offer. If such an acquirer breaches this annual limit, they will have to make an offer to the other shareholders to acquire at least another 26% shares on a pro rata basis. However by this Amendment, SEBI has permitted acquisition from 5% up to 10% of voting rights in the listed entity, only pursuant to preferential issue of equity shares.


• It is important to note that the promoters who own more than 25% shares of the listed company can avail the benefit of this Amendment. If the promoter who has less than 25% shares of the listed company will not be able to avail this benefit. Further, it seems to be observed that the exemption is applicable to only equity shares. It seems to be unclear if convertible securities (i.e. securities which have the option to be converted into equity shares at a future date) will be covered under this Amendment.

VOLUNTARY OPEN OFFER

• In terms of Regulation 6 of the Takeover Code, a shareholder can make a voluntary open offer for acquiring shares subject to his aggregate shareholding after completion of offer does not exceeds the maximum permissible non-public shareholding in such listed entity (up to 75%). However the prelude before making an offer is that the intended shareholder should not have acquired shares of such listed entity in the preceding 52 weeks.
• This Amendment has however temporarily relaxed Regulation 6 of the Takeover Code and has allowed such eligible shareholder to make a voluntary open offer even though he may have acquired shares of such listed entity in the preceding 52 weeks.

MHCO Comment: This Amendment will provide some kind of boost to the companies by allowing them to raise funds to address their liquidity concerns in these crucial times. The companies always find raising of funds through these methods easier as this process is efficient and relatively quicker than competing models of garnering funds. However, it would be interesting to see whether by raising the cap by just 10%, would be sufficient for companies to meet their commercial requirements.

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

IBC ORDINANCE 2020 | SUSPENSION IN OPERATIONS OF SECTION 7, 9 & 10 OF IBC

The COVID-19 pandemic has severely impacted businesses, financial markets and the economies all over the globe creating severely stressful and trying times for businesses. In order to prevent spread of the virus, India had enforced a nationwide lockdown which further added major disruptions to operations of businesses, which may have led to a possibility of a default in discharging their liabilities or debt obligations to various corporate persons.

The Ministry of Corporate Affairs (Ministry) had earlier by a way of Notification dated 24 March 2020 (Notification) increased the threshold for invoking Corporate Insolvency Resolution Plan (CIRP) against a corporate debtor to Rs 1 Crore from the existing Rs 1 Lac. Now the government has announced the decision to suspend the invocation of the Insolvency and Bankruptcy Code, 2016 (IBC). As the Parliament is not in session, the invocation is being promulgated through IBC (Amendment) Ordinance, 2020 (Ordinance) dated 5 June 2020 to further amend IBC and provide the much awaited clarity with regards to the suspension in operations of Section 7,9 and 10 of IBC.

This update seeks to broadly set out the important changes brought about by the Ordinance to the IBC:

• Suspension: The Ordinance mainly inserts Section 10A in the IBC which deals with selectively suspending the applicability Section 7, 9 and 10 of the IBC to protect defaulters on account of a situations beyond their control, from being pushed into insolvency proceedings under the IBC. The newly added Section 10A of IBC mainly deals with two aspects which are as follows:


• No application shall be filled for invoking any default arising on or after 25 March 2020 for a period of 6 months or such further period not exceeding 1 year;
• No application shall ever be filed for initiation of CIRP for defaults occurring during the said period.



• This insertion has not only been added just to protect the defaulters from invocation of CIRP due to defaults arising on/after 25 March 2020 but also taking into account the difficulty in finding a resolution applicant willing to invest money to rescue the defaulter by discharging their liabilities.
• Further, this insertion of Section 10A of the IBC gives rise to certain questions as to the execution of the provisions because it specifically prohibits the filing of any application to initiate CIRP. Now onwards it would fall upon National Company Law Tribunal (NCLT) to determine if the occurrence of the default happened on or after of the 25 March 2020. It would completely be the responsibility of the corporate debtor to prove the same as and when an application is filed. The Ministry would have to provide clarity on the aspect whether any application at all, can be filed post 6 or 12 months as specified in the newly inserted section or it completely bars the same, as provided under the provision which states that no such application can ever be filed. Till the time such ambiguity remains, it would be interesting to see as to how the NCLT or the Apex Court interpret the same, as such ambiguity per se would lead to various interpretations from each side which would have to be dealt with in the course of time.
• Increase in the Threshold Limit: The Ordinance further fails to provide any, much needed clarity from the earlier Notification, wherein the threshold of the default was increased from Rs 1 Lac to Rs 1 Crore under Section 4 of the IBC. It will once again lie on to NCLT to interpret whether if a majority amount of the default occurred before 25 March 2020 and remainder portion of Rs 1 Crore occurs after 25 March 2020. Then would such a default be protected under provisions of this Ordinance or would it be considered beyond the purview of Section 10A allowing the creditor to file an application invoking the initiation of CIRP.
• Voluntary Resolution: The Ordinance further limits the scope of voluntary reference to insolvency especially in the view that all other means of debt resolution outside the IBC would be with the concurrence of the existing management and therefore if the same management is of the view that the resolution under IBC is best and feasible option then any further wastage of time by opting to resort to other modes of insolvency would only lead to deterioration of value of the assets. It would have been appropriate if the option of voluntary insolvency would have been provided in the Ordinance as it would have paved way for stressed businesses to avoid further diving in an already stressed out financial environment.
• The Ordinance also inserts sub-section (3) to section 66 of the IBC prohibiting the resolution professional from filing an application under Section 66(2) of the IBC. Section 66 of the IBC deals with fraudulent trading or wrongful trading i.e. transactions which done to defraud the creditors. With the insertion of sub-section (3) to section 66 it provides protection to directors / promoters of a corporate debtor for any fraudulent transactions committed during the period of 6 months as prescribed under Section 10A.

MHCO Comment: The Ordinance appears to have been passed with the intention of protecting companies from liabilities arising in these difficult and trying times. It is however necessary for the NCLT to ensure that Section 10A does not become a defense mechanism for defaulters. However these new provisions inserted through Ordinance requires clarity in regards to issues explained above, hopefully which shall be clarified by way of a notification in the future. As it stands as of today, businesses can take the breathing time as provided by the Ministry, without being dragged to a court of law for defaults that may have taken place in obliging the payment terms in an otherwise normal day.

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