Supreme Court: Non-signatories to an arbitration agreement can be made parties to an arbitration proceeding under the group of companies doctrine

The Supreme Court, vide its judgment dated December 6, 2023, in the case of Cox and Kings Limited v. SAP India Private Limited [Arbitration Petition (Civil) No. 38 of 2020], held that non-signatories to an arbitration agreement can be bound by the arbitration agreement based on mutual intention. Consequently, the Supreme Court upheld the ‘group of companies’ doctrine

Facts

A SAP Software End User License Agreement and SAP Enterprise Support Schedule (“Software License Agreement”) was executed between Cox and Kings Limited (“Petitioner”) and SAP India Private Limited (“Respondent No. 1”). As per the terms of the Software License Agreement, certain ERP software was owned and developed by the Respondents and the licensee of the software was the Petitioner. Respondents recommended their Hybris Solution to the Petitioner, for the execution of which the arrangement was divided into three transactions: (a) Software License and Support Agreement – Software Order Form 3 dated October 30, 2015 (“License Agreement”) (for the purchase of the SAP Hybris Software License); (b) Services General Terms and Conditions Agreement (“GTC”) dated October 30, 2015 (containing the terms and conditions for the implementation of the SAP Hybris software), and (c) agreement for customisation of the SAP Hybris software dated November 16, 2015. The GTC contained an arbitration clause in accordance with the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and the seat was Mumbai. The Petitioner faced some hindrances till 2016 in the effective implementation of the Hybris Solution and accordingly, SAP-SE, the German parent company of Respondent No. 1 (“Respondent No. 2”) assisted the Petitioner.

Further, Respondent No. 2 took over the project with the aid of global experts. Respondent No. 2 rendered assistance in spite of not being a party to the GTC. Ample issues arose, such as non-fulfilment of the contracts even with the extended timelines and additional manpower, in respect of the implementation of software, which in turn led to the rescinding of the contractual obligations. The Petitioner sought refund of INR 45 crores from the Respondents that was paid towards the License Agreement as the Respondents had withdrawn their resources in respect of the implementation of the said project. Disputes arose between the parties which was followed by the commencement of the arbitration proceedings under the GTC by the Respondent No. 1 seeking a sum of INR 17 crores from the Petitioner for the wrongful termination of the GTC. The Petitioner simultaneously filed an application under Section 16 (Competence of arbitral tribunal to rule on its jurisdiction) of the Arbitration Act on the grounds that each of the agreement forms a part of a composite transaction and the same should be a part of a singular proceeding.

An application under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 was filed against the Petitioner by Yes Bank Limited, which was followed by appointment of an interim resolution professional by the National Company Law Tribunal (“NCLT”), on October 22, 2019.

Further, since corporate insolvency resolution process was initiated against the Petitioner, NCLT adjourned the arbitration proceeding between the parties on November 5, 2019. However, another notice for initiating a fresh arbitration proceeding was sent by the Petitioner on November 7, 2019 to Respondent No. 2 which made Respondent No. 2 a party to the arbitration proceedings, which was not a signatory to the agreements. However, as there was no response from the Respondents and no arbitrator was appointed by the Respondents, an application was filed by the Petitioner under Section 11 (Appointment of arbitrators) of the Arbitration Act before the Supreme Court, wherein the Petitioner sought the constitution of an arbitration tribunal and appointment of an arbitrator.

The said application was taken into consideration by a three-judge bench of the Supreme Court which considered the group of companies doctrine (“Doctrine”) under Indian arbitration law in the backdrop of the principles of privity of contract as well as the principle of autonomy of party. Further, the three-judge bench of the Supreme Court referred the matter to a Constitutional Bench of the Supreme Court to decide on the matter. In this case, there were four interveners, namely, Kirloskar Brothers Limited, Jindal Drilling Industries, ECom Express Limited, and Dost Hospitality Services Private Limited (collectively referred to as “Interveners”).

Issues

• Whether joinder of non-signatories as a ‘party’ is permissible under the Arbitration Act.
• Whether the ‘group of companies’ doctrine is valid and applicable in Indian arbitration law and, if so, under what circumstances and conditions.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that the basis for application of the Doctrine is the tacit/ implied consent by the non-signatory to be bound by an arbitration agreement. The Petitioner also submitted that the definition of ‘party’ under Section 2(1)(h) (Definitions) of the Arbitration Act should be given a wider interpretation as it cannot be restricted merely to the signatories to an arbitration agreement but should also include within its ambit non-signatories depending upon the facts and circumstances of the case.

It was contended by the Petitioner that as per Section 7 (Arbitration agreement) of the Arbitration Act, the legal relationship between the parties may be non-contractual as well. Additionally, Section 7(4)(b) of the Arbitration Act states that a non-signatory to an arbitration agreement could be bound by an arbitration agreement if the said party has demonstrated his intention to be bound by the agreement by the virtue of a written communication.

The Petitioner also contended that the Doctrine should ideally be applied by the arbitral tribunal. Further, at the referral stage, the court should only restrict itself to taking a prima facie view and let the arbitral tribunal determine the requirement of joining the non-signatories to the arbitration agreement.

Contentions of the Respondents:

As per the Respondents, the applicability of the Doctrine must be examined in the context that whether a non-signatory could be made a party to the arbitration agreement and the expression ‘claiming through or under’ as mentioned under Sections 8 (Power to refer parties to arbitration where there is an arbitration agreement) and 45 (Power of judicial authority to refer parties to arbitration) of the Arbitration Act cannot be the premise to apply the Doctrine. The concept of ‘person claiming through or under’ a party depicts the notion of a derivative cause of action where the non-signatory steps into the shoes of a party rather than claiming an independent right under the arbitration agreement.

It was contended by the Respondents that the Doctrine is a consensual theory which is based on the existence of a dispute which arises from a defined legal relationship and mutual intention of the parties to be bound by the arbitration agreement. Additionally, the intention of the non-signatory to an arbitration agreement has to be ascertained from the cumulative factors which have been laid down by the Supreme Court in the case of Chloro Controls India (P) Limited v. Severn Trent Water Purification Incorporated [(2013) 1 SCC 641] (“Chloro Controls Case”).

The Respondents have put forth certain factors which must be met for the application of the Doctrine to bind the non-signatory as a ‘veritable’ party to the arbitration agreement. Firstly, the mutual intention of all the parties should be to remain bound by the arbitration agreement. Secondly, the absolute and unqualified acceptance by the non-signatory party to the arbitration agreement. Thirdly, the said acceptance must either be expressed or implied. However, for a non-signatory, the said acceptance would be implied and manifested in the negotiation, performance, or termination of the contract.

It was contended by the Respondents that mutual consent of the parties to refer disputes arising out of their defined legal relationship to arbitration forms an essential ingredient of an arbitration agreement. Further, binding the non-signatory to an arbitration agreement without ascertaining their consent would go against the concept of party autonomy.

It was contended by the Respondents that the Doctrine is a purely economic concept without any basis in either contract law or company law. Hence, it cannot be applied for the determination of the intention of non-signatories to be bound by an arbitration agreement and the decision of a party to not sign the arbitration agreement may form the basis to demonstrate an intent not to be bound by it.

The determination of mutual intention of the parties by considering the consequential or subsequent agreements as laid down in the Chloro Controls Case is incorrect as it did not consider whether an implied consent derived from the conduct of a non-signatory satisfied the requirement of a clear intention to arbitrate. The Respondents also contended that there exists a requirement that the arbitration agreement should be in writing under Section 7 of the Arbitration Act. Hence, an arbitration agreement cannot be created on the basis of implied consent of the non-signatory to the arbitration agreement.

Contentions of the Interveners:

It was contended by the Interveners that the Doctrine constitutes a true and genuine effectuation of the real intent of the signatory and non-signatory to the arbitration agreement. The Interveners also submitted that the Doctrine is a reasonable and natural extension of the principle of piercing the corporate veil. Additionally, the application of the Doctrine is also justified in affixing responsibility when the requisite and sufficient degree of common ownership and control exists.

The Interveners submitted that the intention of the parties to an arbitration agreement cannot be the only basis to join a non-signatory party to an arbitration agreement and the court may also consider the non-consensual doctrines such as piercing the corporate veil, alter ego, or tight group structure.

As per the Interveners, the adoption of the Doctrine in Indian arbitration jurisprudence is not prohibited or inhibited in Indian arbitration jurisprudence under the Arbitration Act. The Interveners submitted that the expression “any person claiming through or under” was inserted vide an amendment to the Section 8 of the Arbitration Act, which recognizes and codifies the reality of non-signatories acting through or under the signatory parties. It was contended by the Interveners that the onus to prove the intention of the non-signatory to be bound by the arbitration agreement lies on the party seeking to implead the non-signatory.

The Interveners also contended that an arbitration agreement has to be in writing and there cannot be an oral agreement to arbitrate according to Section 7 of the Arbitration Act. Regardless, the intention of the non-signatory to be bound by the arbitration agreement can be gathered from its conduct. The Interveners also submitted that factors such as economic convenience, justice or equity cannot be grounds for binding non-signatories to an arbitration agreement as arbitration is in the realm of private law, and a matter of choice and intent of the parties.

Observations of the Supreme Court

The Supreme Court focused on the principle of party autonomy as well as mutual consent. It was observed by the Supreme Court that the signature of a party on the agreement is the most profound expression of the consent of a person or entity to submit to the jurisdiction of an arbitral tribunal. However, the corollary that persons or entities who have not signed the agreement are not bound by it may not always be correct.

The Supreme Court opined that the consent of the parties to be bound by the terms of the contract can be determined by the acts or conduct of the parties. As per the Indian Contract Act, 1872, consent of a party to be bound by the terms of the contract can be determined by the actions or conduct of the parties to a contract which is also applicable to an arbitration agreement, which is essentially a creature of contract.

Therefore, the Supreme Court, in respect of the issue pertaining to the non-signatories being bound by an agreement, made certain conclusions: (i) an arbitration agreement arises out of a legal relationship existing between or among persons/entities which may be contractual or otherwise; (ii) it is not necessary for the persons or entities to be signatories to the arbitration agreement to be bound by it and in case of non-signatory parties, the important determination for the courts is whether the persons or entities intended or consented to be bound by the arbitration agreement or the underlying contract containing the arbitration agreement through their acts or conduct; (iii) the requirement of a written arbitration agreement does not exclude the possibility of binding effect on the non-signatory parties in those situations where there is a defined legal relationship between the signatory and non-signatory parties; and (iv) once the validity of an arbitration agreement is established, the court or tribunal can determine the issue of which parties are bound by such agreement.

It was held by the Supreme Court that a non-signatory party could be considered as a party to the arbitration agreement on the basis of their role in the negotiation, performance, or termination of the underlying contract containing the arbitration agreement.

In respect of the second issue pertaining to the validity and applicability of the Doctrine, the Supreme Court analysed the Doctrine vis-à-vis its applicability under the context of Indian arbitration law. The Companies Act, 2013 has statutorily recognized a subsidiary company as a separate legal entity. However, the courts consider it appropriate to pierce the corporate veil when maintaining the separateness of corporate personality is found opposed to justice, convenience and public interests.

The Supreme Court held that the arbitration law has witnessed several evolutions and development and has also adopted the Doctrine according to which it can allow or compel a non-signatory party to be bound by an arbitration agreement. The Doctrine is used in the context of companies which are related to each other by being a part of the same corporate group and for the identification of the common intention of the parties in binding a non-signatory to the arbitration agreement by emphasizing the corporate affiliation of the distinct legal entities.

The Supreme Court noted that the underlying basis of the Doctrine rests on maintaining the separate legal personality of the group companies while determining the common intention of the parties for the purpose of binding the non-signatory party to the arbitration agreement.

In order to analyse the Doctrine, the Supreme Court emphasised on the Chloro Controls Case and observed that a non-signatory could be subjected to arbitration when the underlying transactions were with a group of companies and a clear intention existed between the parties to bind the signatory as well as non-signatory parties to the arbitration agreement. It was also held in the case of Cheran Properties Ltd v. Kasturi and Sons Limited [3 (2018) 16 SCC 413] that the Doctrine is an aid to decoding the layered structure involved in commercial arrangements for the purpose of unravelling the true intention of the parties to bind someone who is not formally a signatory to the contract, but has ‘assumed’ the obligation to be bound by the actions of a signatory.

The Supreme Court, for the purpose of determining the mutual intention, held that in case of multi-party agreements, the courts/tribunals will have to examine the corporate structure for determining whether both the signatory and non-signatory parties belong to the same group which is followed by the court/tribunal to consider the commercial circumstances as well as the conduct of the parties in order to determine the common intention of the parties to arbitrate and the party which seeks joinder of a non-signatory has to proof the satisfaction of the said factors to the satisfaction of the court/tribunal.

It was noted by the Supreme Court that if a non-signatory party is involved actively in the performance of a contract and its conduct is in harmony with the other members of the group, it creates an appearance that such a non-signatory party is a ‘veritable party’ to the contract containing the arbitration agreement. Based on such an appearance created by the non-signatory, the other party can legitimately rely on the said appearance and believe that non-signatory was a veritable party to the contract and therefore the other party can bind the non-signatory to the arbitration agreement.

It was held that the approach of the Supreme Court in the Chloro Controls Case, which was pronounced earlier in point of time, to the extent that the phrase ‘claiming through or under’ under Section 8 of the Arbitration Act is inclusive of the Doctrine is erroneous as it has given a wider perspective to the Doctrine which is against the principles of commercial as well as contract law. The Supreme Court also held that the principle of single economic unit cannot form the sole basis for applying the Doctrine and the courts/tribunals must take into consideration every cumulative factor as laid down in the case of Oil and Natural Gas Corporation Limited v. Discovery Enterprises Private Limited [5 (2022) 8 SCC 42]which factors have been reproduced herein: “…. (i) The mutual intent of the parties; (ii) The relationship of a non-signatory to a party which is a signatory to the agreement; (iii) The commonality of the subject-matter; (iv) The composite nature of the transactions; and (v) The performance of the contract.”

It was also held by the Supreme Court that any authoritative determination given in relation to the Doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

Decision of the Supreme Court

The Supreme Court held that the definition of “parties” is inclusive of both the signatory as well as non-signatory parties according to the Section 2(1)(h) read with Section 7 of the Arbitration Act and the consent of the parties can be the basis for determination of their consent to be bound by the arbitration agreement. Additionally, the requirement of a written arbitration agreement under Section 7 of the Arbitration Act does not exclude the possibility of binding non-signatory parties.

The Supreme Court held that the underlying basis for the application of the Doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement and the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the Doctrine as the said Doctrine has an independent existence as a principle of law which originated from the harmonious construction of the Section 2(1)(h) read along with the Section 7 of the Arbitration Act.

The Supreme Court held that the utility of Doctrine in determination of the intention of the parties in case of complex transactions which involves multiple parties and multiple agreements should be considered and thus the Doctrine should be retained in the Indian arbitration jurisprudence. It was also held by the Supreme Court that at the referral stage, the referral court should leave it for the arbitral tribunal to decide on the issue whether the non-signatory is bound by the arbitration agreement.

VA View:

The act of binding non-signatories to an arbitration agreement has been heavily debated and subjected to scrutiny by various courts/tribunals, from time to time, both nationally as well as internationally. The Supreme Court has rightly emphasised on the judgments which are contrary to each other in respect of binding the non-signatories to an arbitration agreement.

The present case is a milestone announcement in the Indian arbitration jurisprudence as it has settled the long lasting issue pertaining to validity of the Doctrine in the context of Indian legal framework. The Doctrine means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement. The Supreme Court has rightly taken into its consideration the various international aspects of the said doctrine such as its applicability and validity under various global jurisdictions and thus clarified the right approach and stand of the Doctrine in the context of India.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: Arbitration clauses in unstamped agreements enforceable, seven-judge bench overrules ‘NN Global’ decision

The Supreme Court, vide its judgment dated December 13, 2023, in the matter of Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 [Curative Petition (C) No. 44 of 2023 in Review Petition (C) No. 704 of 2021 in Civil Appeal No. 1599 of 2020 and with Arbitration Petition No. 25 of 2023], has held that agreements which are not stamped, or are inadequately stamped, are inadmissible in evidence under Section 35 (Instruments not duly stamped inadmissible in evidence, etc.) of the Indian Stamp Act, 1899 (“Stamp Act”). However, such agreements are not rendered void or void ab initio or unenforceable as non-stamping or inadequate stamping is a curable defect.

Background of the case

The genesis of the present judgment flows from some of the previous judgments with contradictory ratio. In the case of SMS Tea Estates (P) Limited v. Chandmari Tea Company (P) Limited [(2011) 14 SCC 66] (“SMS Tea Estates Case”), a two-judge bench of the Supreme Court had held that an arbitration agreement in an unstamped contract cannot be acted upon.

Thereafter, on December 31, 2015, after the recommendation of the Law Commission of India Report, 2015, in order to reduce judicial interference during the appointment of the arbitrator, Section 11(6A) was inserted in the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) by way of amendment stating that the court, while considering application for appointment of arbitrators, shall, confine to examination of existence of arbitration agreement.

Thereafter, on April 10, 2019, in the matter of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited [(2019) 9 SCC 209] (“Garware Case”), the Supreme Court reaffirmed the legal position that an arbitration agreement in an unstamped contract would not exist in law and therefore cannot be acted upon until the contract is sufficiently stamped.

Thereafter, in the matter of NN Global Mercantile (P) Limited v. Unique Flame Limited [(2021) 4 SCC 379] (“NN Global 1 Case”) decided on January 11, 2021 by a three-judge bench, the Supreme Court held that the non-payment of stamp duty would not invalidate the underlying contract because it is a curable defect.

Thereafter, on April 25, 2023, five-judge constitution bench of the Supreme Court decided the issue referred to by the three-judge bench in NN Global 1 Case (“NN Global 2 Case”). By a majority of 3:2, it was held that NN Global 1 Case does not represent the correct position of the law. Furthermore, it was held that an unstamped instrument, not being a contract and not enforceable in law, cannot legally exist. The arbitration agreement in such an instrument can be acted upon only after it is duly stamped.

Previously, on February 14, 2020, the Supreme Court relied upon SMS Tea Estates Case in the matter of Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers [2020 4 SCC 612] (“Bhaskar Raju Case”). Notably, Bhaskar Raju Case was pronounced prior to NN Global 1 Case. However, during the pendency of reference made by three-judge bench in NN Global 1 Case, review petitions were filed in Bhaskar Raju Case, which were dismissed on the grounds of delay as well as on merits.

Thereafter, on December 7, 2022, a curative petition seeking reconsideration of Bhaskar Raju Case was filed. Thereafter, NN Global 2 Case was pronounced on April 25, 2023. Thereafter, due to broader implications of NN Global 2 Case, the Supreme Court referred the proceedings to a seven-judge Bench.

Issue

Whether an Arbitration Agreement would be considered non-existent, invalid or unenforceable in the event the underlying contract is unstamped or insufficiently stamped.

Arguments

Contentions of the Petitioners:

The petitioners submitted that Section 11(6A) of the Arbitration Act expressly restricts the power of the referral court to the examination of the existence of an arbitration agreement and such power does not extend to examine adequacy of the stamping under Section 33 (Examination and impounding of instruments) of the Stamp Act.

It was further contended that the majority view in NN Global 2 Case has nullified the effect of Section 11(6A) of the Arbitration Act which had restricted the jurisdiction of the court to the examination of the existence of an arbitration agreement. It was further contended that the Arbitration Act restricts the authority of referral court to examine the arbitration agreement only and not the instrument in question.

It was further submitted that the arbitral tribunal has the competence to rule on its own jurisdiction on issues pertaining to stamping. It was further contended that the non-obstante clause provided under Section 5 (Extent of judicial intervention) of the Arbitration Act confines the scope of judicial intervention of courts in the arbitral process and must be read harmoniously with the provisions of the Stamp Act.

It was further submitted that the requirement of stamping does not render an instrument void, but only makes the instrument inadmissible in evidence until the defect is cured in accordance with the provisions of the Stamp Act.

Contention of the Respondents:

Respondents contended that the requirements set out for a curative petition to be maintainable as laid down by the Supreme Court in the landmark judgment of Rupa Ashok Hurra v. Ashok Hurra [(2002) 4 SCC 388] was not adhered to.

It was further contended that the examination by the court under Section 11(6A) of the Arbitration Act is not confined to mere facial existence of an arbitration agreement and that the referral court has to prima facie examine the existence as well as validity of the arbitration agreement.

It was further argued that Section 33 of the Stamp Act casts a mandatory obligation on courts under Section 11 of the Arbitration Act to impound an unstamped or insufficiently stamped instrument and that the same cannot be admitted in evidence or acted upon until payment of the stamp duty and requisite penalty is paid.

Observations of the Supreme Court

With regards to the maintainability of the curative petition, Supreme Court did not deal with the same and considered it appropriate that this issue be left open for parties to raise to the appropriate bench.

It was further observed that Section 35 of the Stamp Act is significant for adjudication of the issue at hand. In a nutshell, Section 35 of the Stamp Act provides that no instrument chargeable with stamp duty shall be admitted in evidence or shall be acted upon, unless such instrument is duly stamped.

However, the aforesaid section also provides that upon payment of the balance insufficient amount of stamp duty, the instrument will be admitted in evidence. Hence, Section 35 of the Stamp Act renders a document inadmissible for evidence but not void and therefore, the ratio laid down by the five-judge bench in NN Global 2 Case is not correct as it does not appreciate the distinction between enforceability and admissibility of a document.

Further, Supreme Court examined the distinction between inadmissibility and voidness of an agreement. It was observed that the issue of admissibility means as to whether a court may rely upon a document while adjudicating a case, whereas when an agreement is void, it hits on the issue of enforceability of such agreement in a court of law.

Further, Supreme Court also analysed the concept of separability or severability of an arbitration agreement from the underlying contract and observed that an arbitration agreement is juridically independent from the underlying contract in which it is contained.

Thereafter, Supreme Court dealt with the common law concept of ‘Competence-Competence’ which is adopted in Section 16 (Competence of arbitral tribunal to rule on its jurisdiction) of the Arbitration Act.

Upon consideration, Supreme Court arrived at the conclusion that the analysis of five-judge bench in NN Global 2 Case was not correct as the aforesaid analysis is contrary to the separability presumption which treats an arbitration agreement as separate from the underlying contract.

Further, Supreme Court examined the scope of judicial interference under the Arbitration Act. It was observed that upon analysis of relevant judicial pronouncements prior to insertion of Section 11(6A) of the Arbitration Act, there was high level of judicial intervention in appointment of an arbitrator.

Consequently, the Law Commission of India deemed it fit to curtail the extent of judicial interference and hence, recommended the insertion of Section 11(6A) by way of amendment in the Arbitration Act.

Further, Supreme Court laid stress on harmonious construction of the Arbitration Act, the Stamp Act and the Indian Contract Act, 1872. Furthermore, Supreme Court observed that the object of the Arbitration Act is to ensure an efficacious process of arbitration and minimize the supervisory role of courts in the arbitral process. Whereas, the object of the Stamp Act is to secure revenue for the State. Hence, there is a need that provision of both the aforesaid legislations must be interpreted in a harmonious manner.

Decision of the Supreme Court

Supreme Court held that arbitration clauses in unstamped agreements are enforceable. Even though unstamped or inadequately stamped agreements are inadmissible in evidence under Section 35 of the Stamp Act, such agreements are not rendered void or void ab initio or unenforceable since non-stamping or inadequate stamping is a curable defect.

Further, Supreme Court held that objection on the issue of stamping does not fall within the scope of determination under Sections 8 or 11 of the Arbitration Act. However, the concerned court must examine whether arbitration agreement prima facie exists.

Further, it was held that any objection in relation to stamping of the agreement falls within the ambit of arbitral tribunal. Further, it was made clear that the decision in NN Global 2 Case, SMS Tea Estates Case and Garware Case (to the extent of paragraphs 22 and 29 of the judgment) stand overruled by virtue of the present judgment.

VA View:

The present judgment laid down by the Supreme Court is a landmark judicial pronouncement in the regime of Arbitration Act vis-à-vis Stamp Act. Further, this judgment gives clarity on the legal position as well as distinction between admissibility of an agreement/instrument in evidence and its legal enforceability in a court of law on account of non-stamping or insufficient stamping.

This judicial pronouncement is remarkable because it has settled the confusion prevailing over this issue of law, provided clarity on the scope of judicial intervention by an appropriate court at the time of appointment of arbitrator as well as harmonizes the conjoint interpretation of relevant provisions of the law pertaining to arbitration and stamping.

This judgment will give impetus to development of arbitration regime in India and will go a long way in ensuring that India becomes a preferred destination for arbitration.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Kerala High Court: An insolvency application filed by satisfying the statutory procedural requirements and without any defects, gives effect to moratorium, and mere uploading of an application cannot be taken as filing of an application under Section 96 of IBC

The Kerala High Court (“Kerala HC”), by its judgment pronounced on November 17, 2023, in the matter of Jeny Thankachan v. Union of India and Others [WP(C) No. 31502 of 2023], has held that the mere uploading of an application cannot be taken as filing of an application under Section 96 (Interim Moratorium) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The filing of an application is legal and acceptable only when it is filed without any defects, satisfying the statutory procedural requirements of filing and when the adjudicating authority numbers the application. The Kerala HC further held that unless there is any repugnancy between the provisions of IBC and the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), there is no question of IBC overriding the provisions of the SARFAESI Act in totality.

Facts

Jeny Thankachan (“Petitioner”) is a sleeping partner of Hawking Technologies India LLP (“Respondent No. 3”/ “Corporate Debtor”). The Corporate Debtor obtained a bank loan of an amount of INR 65,10,000/- from IndusInd Bank Limited (“Respondent No. 4”) for which the Petitioner was a guarantor. The Corporate Debtor defaulted in repayment of the loan and the account of the partnership was rendered non-performing asset on October 31, 2022. Thereafter, Respondent No. 4 initiated proceedings under Section 13 (Enforcement of security interest) of the SARFAESI Act and issued a notice to the Corporate Debtor and the Petitioner (being a guarantor).

Respondent No. 4 approached the Chief Judicial Magistrate under Section 14(1) (Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset) of the SARFAESI Act. The Chief Judicial Magistrate passed an order dated May 5, 2023 appointing an Advocate Commissioner to assist Respondent No. 4 to take possession of the schedule property. The Petitioner, at this stage, filed an application dated August 21, 2023 for initiating insolvency resolution process under Section 94 (Application by debtor to initiate insolvency resolution process) of IBC before the National Company Law Tribunal, Kochi (“Respondent No. 2”/ “NCLT”). On August 23, 2023, NCLT assigned diary number 1386/2023 to the application submitted by the Petitioner.

The present petition by the Petitioner is to obtain a stay on the proceedings initiated by Respondent No. 4 and the Chief Judicial Magistrate under the SARFAESI Act and to seek a declaration, as to the effect, that provisions of IBC shall have an overriding effect over the provisions of SARFAESI Act.

Issue

Whether the filing of an application under Section 94 of IBC would by itself trigger a stay on the proceedings initiated by Respondent No. 4 and the Chief Judicial Magistrate under the SARFAESI Act as contemplated under Section 96(1)(b)(i) of IBC.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that action to foreclose, recover or enforce any security interest under the SARFAESI Act shall be deemed to have been stayed by virtue of Section 96(b) of IBC upon the Petitioner filing an application under Section 94 of IBC. Placing reliance on Section 238 (Provisions of this Code to override other laws) of IBC and Government order dated November 15, 2019, by which the provisions in relation to personal guarantors to corporate debtors have come into force, the Petitioner contended that the provisions of IBC shall have overriding effect over the SARFAESI Act and as such the proceedings under SARFAESI Act should be stayed.

The Petitioner further submitted that the loan agreement has not been executed between the Petitioner, and Respondent No. 4, but between the Corporate Debtor and Respondent No. 4, and since the property proceeded against by Respondent No. 4 is a joint family property of the Petitioner, of which half the share is not liable to be proceeded against pursuant to order dated May 5, 2023.

Contentions of the Respondent:

Respondent No. 4 while applying the ratio laid in the case of State Bank of India v. B. Ramakrishnan [2018 17 SCC 394] (“Ramakrishnan Case”), wherein it was held that moratorium under Section 14 (Moratorium) of IBC, on admission of insolvency petition would not be extended to personal guarantor of the corporate debtor, contended that interim moratorium under Section 96 of IBC would not be applicable to the Petitioner in the present case, who is the personal guarantor of the Corporate Debtor. Respondent No. 4 further asserted that since the application filed by the Petitioner under Section 94 of IBC was not assigned a regular case number by the NCLT, the provisions under Section 96 of IBC did not even apply to the Corporate Debtor.

Observations of the Kerala HC

The Kerala HC observed the difference in the provisions of moratorium in case of corporate insolvency resolution process and in cases relating to individuals and partnership firms. An order of declaration of moratorium by the adjudicating authority is necessary in the former, while the latter operates automatically by operation of law. The Kerala HC observed that Sections 96 and 101 (Moratorium) of IBC need to be construed strictly, since legal actions and proceedings initiated by the creditor against the debtor are stayed, and consequently, creditors are left disabled and disentitled.

The Kerala HC further discussed the overriding nature of IBC over the SARFAESI Act. It opined that Section 238 of IBC cannot be applied in the case of SARFAESI Act, since IBC and SARFAESI Act operate in different areas of law. Further, on this point, the Kerala HC discerned that unless there is any repugnancy between the provisions of IBC and the SARFAESI Act, there is no question of IBC overriding the provisions of the SARFAESI Act in totality. The Kerala HC relied upon judgment pronounced in the matter of Ramakrishnan Case and reiterated that since protective provisions of IBC do not extend to personal guarantor of corporate debtor, the securitization proceedings against personal guarantors of corporate debtors can continue under the SARFAESI Act.

Decision of the Kerala HC

The Kerala HC held that since the Petitioner’s application is not duly numbered by the NCLT, the Petitioner’s contention that the Respondents cannot proceed with the securitisation proceedings under the SARFAESI Act and interim moratorium under Section 96 of IBC is in force, is rejected.

VA View:

The present judgment of the Kerala HC is a significant judicial pronouncement in the realm of insolvency law.

The Kerala HC has held that the personal guarantors of corporate debtors cannot use the provisions of IBC as a shield to escape from the claims of creditors. Section 96 of IBC must be construed strictly, since the operation of interim and final moratorium under Sections 96 and 101 of IBC have serious repercussions, that is to say legal actions and proceedings pending against the debtor are stayed and the creditors of the debtor are not able to initiate any legal proceeding in respect of any debt. The Kerala HC further clarified that an application will be deemed proper only when it is filed without any defects and by satisfying the statutory procedural requirements of filing and when the adjudicating authority numbers the application.

The Kerala HC has further clarified that even though Section 238 of IBC provides for an overriding effect over other laws, it cannot oust the operation of the SARFAESI Act in totality in absence of any repugnancy between the provisions of IBC and the SARFAESI Act.

For any query, please write to Mr. Bomi Daruwala at [email protected]

NCLAT: An operational creditor who is a participant in meetings of the CoC has no right to seek a copy of the information memorandum

The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”), in its order dated October 10, 2023, in the matter of Vinay Kumar Singhal, Resolution Professional for M/s. PG Advertising Private Limited v. Mahesh Bajaj [Comp. App. (AT) (Ins) No. 645 of 2023], has held that an operational creditor, who was merely a participant in the meetings of the committee of creditors (“CoC”), would have no right to seek a copy of the information memorandum.

Facts

Mr. Tulsi Nandan Kant Bansal, the financial creditor of M/s. PG Advertising Private Limited (“Corporate Debtor”), filed an application under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) seeking resolution of an amount of INR 1,05,00,000/-, which was due from the Corporate Debtor to such financial creditor. The said application was admitted by the National Company Law Tribunal, New Delhi (“NCLT”) on October 18, 2022, and corporate insolvency resolution process (“CIRP”) was initiated against the Corporate Debtor. Following this, a moratorium was imposed, and Mr. Vinay Kumar Singhal (“Petitioner”) was appointed as the interim resolution professional.

During the pendency of the CIRP, Mr. Mahesh Bajaj (“Respondent”), one of the operational creditors of the Corporate Debtor, representing 10% of the total debt owed by the Corporate Debtor, filed an application before the NCLT for issuance of directions to the Petitioner for providing the information memorandum and other relevant documents to him, since he was a participant of the CoC. The NCLT, vide its order dated May 3, 2023 (“Impugned Order”), instructed the Petitioner to deliver a copy of the information memorandum along with the other relevant documents to the Respondent, despite the fact that the Respondent was merely a participant and not a member of the CoC.

Aggrieved by the Impugned Order, the Petitioner filed the present appeal before the NCLAT, urging the NCLAT to set aside the Impugned Order.

Issue

Whether a copy of the information memorandum can be ordered to be given to an operational creditor, who is merely a participant in the meeting of the CoC and not a member.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that the term ‘member’ has neither been defined in IBC nor in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). Whilst referring to Section 21(2) (Committee of creditors) of IBC, the Petitioner submitted that the CoC must essentially comprise of all the financial creditors of a corporate debtor and that an operational creditor was not a member.

The Petitioner further referred to Section 24 (Meeting of committee of creditors) of IBC, and submitted that Section 24(3) of IBC provides for the issuance of notice of each meeting of the CoC and Section 24(3)(c) of IBC deals with the issuance of notice to the operational creditors of the corporate debtor or their representatives. The Petitioner submitted that while Section 24(4) of IBC provides the operational creditors or their representatives with a right to attend the CoC meeting, it does not provide them with a right to vote at such meeting. Further, Section 24(8) of IBC stipulates that the meeting of the CoC must be conducted in a specific manner, as enumerated in the CIRP Regulations.

The Petitioner referred to Regulation 2(1)(d) (Definition) of CIRP Regulations which defines ‘committee’ as a CoC established under Section 21 of IBC and to Regulation 2(1)(l) of CIRP Regulations which defines ‘participant’ as a person entitled to attend a meeting of the CoC under Section 24 of IBC, or any other person authorized by the CoC to attend the meeting.

The Petitioner argued that as per Regulation 36(4) (Information memorandum) of the CIRP Regulations, the resolution professional of the corporate debtor must share the information memorandum with the members of the CoC, upon receiving an undertaking from the member of the CoC to the effect that such member shall maintain confidentiality of the information and shall not use such information to cause an undue gain or loss to itself or any other person. The Petitioner contended that there was no provision, either in IBC or the CIRP Regulations for giving information memorandum to the participants in the meeting of the CoC, and that the NCLT had committed an error in passing the Impugned Order on the ground that there was no such prohibition under the legislature. The Petitioner concluded its arguments by submitting that reliance by the NCLT on the case of Vijay Kumar Jain v. Standard Chartered Bank and Others [Civil Appeal No. 8430 of 2018] (“Vijay Kumar Jain Case”), at the time of passing the Impugned Order, was not sustainable since the said case had altogether different facts and dealt with the supply of resolution plan to the erstwhile member of the board of directors as a participant of the CoC.

Contentions of the Respondent:

Respondent submitted that there was no error in the Impugned Order, and hence did not call for any interference by the NCLAT. Respondent submitted that while the definition of ‘member’ is conspicuous by its absence in both IBC and the CIRP Regulations and the definition of ‘participant’ has been given only in the CIRP Regulations, it did not mean that the information memorandum and other documents cannot be supplied to the Respondent.

Respondent referred to Regulations 21(2) (Contents of the notice for meeting) and 21(3)(iii) of the CIRP Regulations and submitted that it was essential to supply to each member of the meeting of the CoC, copies of all documents, which are relevant for the matter to be discussed and issues to be voted upon at the meetings of the CoC. Respondent further referred to Regulation 24(2)(e) (Conduct of meeting) of the CIRP Regulations to contend that the meeting of the CoC cannot be convened without supplying an agenda with all the relevant material for the said meeting.

Respondent, in order to support its submissions, relied on the Vijay Kumar Jain Case, wherein the Hon’ble Supreme Court had held that although the erstwhile board of directors of the corporate debtor were not members of the CoC, they had a right to participate in each and every meeting held by the CoC, and also had a right to discuss along with members of the CoC all resolution plans that were presented at such meetings of the CoC. The Hon’ble Supreme Court also opined that even though persons such as operational creditors have no right to vote and were merely participants in meetings of the CoC, they would still have a right to be given a copy of the resolution plans before such meetings are held so as to effectively comment on the same to safeguard their interest, as operational creditors of the corporate debtor.

Observations of the NCLAT

The NCLAT observed that the Respondent had admitted that he was merely a participant to the CoC meeting. Further, it was an admitted fact that there is no definition of ‘member’ provided in IBC or in the CIRP Regulations, albeit repeatedly used in IBC as well as the CIRP Regulations. The NCLAT observed that while both IBC and the CIRP Regulations are silent about the supply of the information memorandum to a participant of a CoC meeting, the legislature has made a provision for providing a copy of the information memorandum to the member of the CoC and the resolution applicant of the corporate debtor. In this regard, the NCLAT further observed that since IBC and the CIRP Regulations are totally silent about the supply of the information memorandum to the participant of the CoC meeting, it has to be inferred that the legislature has made a provision for providing a copy of the information memorandum to the member of the CoC and the resolution applicant but not to the participant of the CoC meeting, as the Respondent. Therefore, the finding of the NCLT that since there is no express prohibition in IBC or the CIRP Regulations for providing the information memorandum to an operational creditor (as a participant of the CoC meeting) was totally erroneous and unsustainable.

The NCLAT observed that the NCLT wrongly relied on the Vijay Kumar Jain Case, at the time of passing the Impugned Order, as there was no reasonable nexus attached with the supply of information memorandum to the participant as the Respondent. Further, although the Hon’ble Supreme Court, in the Vijay Kumar Jain Case, had opined that the expression ‘documents’ was a wide expression which would include resolution plans, the information memorandum which was one of its own kind could not be referred to as a document which had to be given to the participant of the meeting of the CoC, especially when there was no such provision under the legislature.

Decision of the NCLAT

In view of the above, the NCLAT set aside the Impugned Order and held that the Respondent being a participant in the meeting of the CoC had no right to seek a copy of the information memorandum.

VA View:

Through this judgement, the NCLAT has clarified the position under IBC on an operational creditor’s right to seek a copy of information memorandum, and has rightly observed that while the legislature has made a provision to provide a copy of the information memorandum to the ‘members’ of the CoC, there is no provision for providing a copy of such information memorandum to the ‘participants’ in meetings of the CoC.

The NCLAT has rightly held that since IBC and the CIRP Regulations are totally silent on the supply of the information memorandum to the participant of the CoC meeting, it has to be inferred that the legislature has made a provision for providing a copy of the information memorandum to only the members of the CoC and the resolution applicant (and not to the participant of the CoC meeting, as the Respondent in the instant case).

For any query, please write to Mr. Bomi Daruwala at [email protected]