Between the Lines | Supreme Court: Once the resolution plan is approved by the Committee of Creditors and submitted to the Adjudicating Authority, a successful resolution applicant cannot withdraw or modify the resolution plan

The Hon’ble Supreme Court (“SC”) has held in its judgment dated September 13, 2021, in the matter of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another (Civil Appeal No. 3224 of 2020) that a submitted resolution plan is binding and irrevocable as between the Committee of Creditors (“CoC”) and the successful resolution applicant in terms of the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. (“CIRP Regulations”) and that once the resolution plan is approved by the CoC and submitted to the adjudicating authority; the successful resolution applicant cannot withdraw or modify the resolution plan.

Facts
The National Company Law Tribunal (“Adjudicating Authority”) by way of its order dated May 30, 2017, admitted the petition filed by Educomp Solutions Limited (“Educomp”) under Section 10 of the IBC for the initiation of voluntary Corporate Insolvency Resolution Process (“CIRP”) and thereafter, Ebix Singapore Private Limited was declared as the successful resolution applicant (“Ebix/ Appellant”). However, during the pendency of the application for approval of resolution plan, Ebix filed two applications for withdrawal of the resolution plan (“First Withdrawal Application” and “Second Withdrawal Application”) which were both dismissed by the Adjudicating Authority. In the First Withdrawal Application under Section 60(5) of the IBC, Ebix sought the direction of the Adjudicating Authority to grant sufficient time to re-evaluate its proposals contained in the resolution plan and suitably revise/modify and/or withdraw its resolution plan and the Adjudicating Authority dismissed the First Withdrawal Application. The Second Withdrawal Application was also dismissed and Ebix was given the liberty to file a fresh application on the same cause of action.

Pursuant to this, Ebix filed another withdrawal application (“Third Withdrawal Application”) and the Adjudicating Authority by order dated January 2, 2020, allowed the Third Withdrawal Application and held that a resolution plan becomes binding only after it is approved by the Adjudicating Authority and in the present circumstances on account of the pending SFIO and CBI investigations, an unwilling successful resolution applicant would be unable to effectively implement the resolution plan (“NCLT Order”). Thereafter, an appeal was preferred by the CoC of Educomp before the National Company Law Appellate Tribunal (“NCLAT”), against the NCLT Order, and the NCLAT, by way of its order dated July 29, 2020, set aside the NCLT Order allowing the Third Withdrawal Application (“NCLAT Order”). Thereafter, Ebix filed the present Appeal (“Appeal”) before the SC under Section 61 of the IBC against the NCLAT Order.

Issues
Whether a resolution applicant is entitled to withdraw or modify its resolution plan once it has been submitted by the resolution professional to the Adjudicating Authority and before it is approved by the latter under Section 31(1) of the IBC.

Arguments
Contentions raised by the Appellant:

• The Appellant is not bound by the resolution plan until it is approved by the Adjudicating Authority, in terms of the CIRP documents read with the scheme of the IBC and that Section 31(1) of the IBC provides that the resolution plan is “binding…on all stakeholders” only upon the approval of the Adjudicating Authority.
• The CIRP documents, that is, invitation of Expression of Interest (“EOI”), the Request for Resolution Plan (“RFRP”), sanction letter and resolution plan take effect of a binding contract only upon the approval of the Adjudicating Authority and the terms of the resolution plan indicate that the resolution plan is valid only for a period of six months.
• Events after the submission of the resolution plan like inordinate lapse of time and that the affairs of Educomp were also being investigated by the SFIO and the CBI, provided further evidence that the affairs of Educomp were severally mismanaged and hence susceptible to criminal investigations.
• The resolution plan was based on certain considerations that were fundamental to the Appellant’s bid for the business of Educomp. However, due to the inordinate delay in the completion of the CIRP, the tenure of the government contracts awarded to Educomp, which were crucial to its functioning, may have ended, leading to an erosion of its substratum.
• The Appellant was not provided with material information relating to the financial position of Educomp after the submission of the resolution plan, as a consequence of which, there was an impairment of a fair process in the conduct of a commercial transaction. Section 29(2) of the IBC provides that all relevant information should be provided to the resolution applicant and that the resolution applicant’s right to complete and accurate information relating to the Corporate Debtor has been recognized under the UNCITRAL Legislative Guide on Insolvency Laws (“UNCITRAL Guide”).
• The Adjudicating Authority is empowered under the IBC to permit the withdrawal of a resolution plan prior to its approval under Section 31 of the IBC.

Contentions raised by the respondents:

• The IBC is a complete code as held by the SC in M/s Embassy Property Developments Private Limited v. State of Karnataka & Others [(2020) 13 SCC 308] and M/s Innoventive Industries Limited v. ICICI Bank & Another [(2018) 1 SCC 407]. It does not envisage withdrawal of resolution plans after mutual negotiations between the resolution applicant and the CoC, which culminates into a binding agreement.
• Non-implementation of resolution plans after approval from the Adjudicatory Authority under Section 31 attracts prosecution under Section 74(3) of the IBC.
• Permitting the withdrawal would push Educomp towards liquidation, which would in turn risk thousands of crores of public monies owed to the public sector banks during the economic crisis caused by the Covid-19 pandemic.
• The Appellant had conducted its own due diligence in accordance with the RFRP and hence its arguments that the substratum or commercial viability has eroded due to the subsequent circumstances is facetious.
• The scope of judicial review with the Adjudicatory Authority under Section 31 of the IBC is confined to parameters delineated in Section 30(2) of the IBC, which does not envisage the withdrawal or unwillingness of the resolution applicant to continue with a CoC approved resolution plan.

Observations of the Supreme Court
Statutory period of 330 days prescribed under the IBC:

The SC noted its decision in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [2020) 8 SCC 531] which, while reiterating the rationale of the IBC for ensuring timely resolution of stressed assets as a key factor, had to defer to the principles of actus curiae neminem gravabit, that is, no person should suffer because of the fault of the court or the delay in the procedure. The SC observed that the previous statutory experiments for insolvency had failed because of delay as a result of extended legal proceedings and hence it chose to only strike down the word ‘mandatorily’, keeping the rest of Section 12(3) of the IBC intact. Therefore, the SC held that the law as it stands, mandates the conclusion of the CIRP – including time taken in legal proceedings, within 330 days with a short extension to be granted only in exceptional cases.

Adverting to the issue of withdrawal or modification of resolution plan by a successful resolution applicant under the IBC, the SC observed:

Absence of clear legislative provision:

The SC observed that in absence of a clear legislative provision, the SC will not, by a process of interpretation, confer on the Adjudicating Authority a power to direct an unwilling CoC to re-negotiate a submitted resolution plan or agree to its withdrawal, at the behest of the resolution applicant. The Adjudicating Authority can only direct the CoC to re-consider certain elements of the resolution plan to ensure compliance under Section 30(2) of the IBC, before exercising its powers of approval or rejection under Section 31 of the IBC. The absence of any exit routes being stipulated under the statute for a successful resolution applicant is indicative of the IBC’s proscription of any attempts at withdrawal at its behest. The rule of casus omissus is an established rule of interpretation, which provides that an omission in a statute cannot be supplied by judicial construction.

Commercial Wisdom of the CoC and judicial restraint:

The SC observed that in Essar Steel India Limited (supra), a three judge Bench of the SC, affirmed a two judge Bench decision in K Sashidhar v. India Overseas Bank [2019) 12 SCC 150], prohibiting the Adjudicating Authority from second-guessing the commercial wisdom of the parties or directing unilateral modification to the resolution plans. Thus, judicial restraint must be exercised while intervening in a law governing substantive outcomes through procedure, such as the IBC. If resolution applicants are permitted to seek modifications after subsequent negotiations or a withdrawal after a submission of a resolution plan to the Adjudicating Authority as a matter of law, it would dictate the commercial wisdom and bargaining strategies of all prospective resolution applicants who are seeking to participate in the process and the successful resolution applicants who may wish to negotiate a better deal, owing to myriad factors that are peculiar to their own case.

Impact of Covid-19 Pandemic:

In the wake of the Covid-19 Pandemic, since several resolution plans remained pending before adjudicating authorities, the legislature had provided relief by way of imposing temporary suspension on the initiation of CIRP under Sections 7, 9 and 10 of the IBC for defaults arising for six months from March 25, 2020 (extendable by one year). This was followed by an amendment through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 which provided for a carve-out for the purpose of defaults arising during the suspended period. The delays on account of the lockdown were also mitigated by the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020, which inserted Regulation 40C on April 20, 2020, with effect from March 29, 2020, and excluded such delays for the purposes of adherence to the otherwise strict timeline. In view of the above, the SC noted that there has been a clamour on behalf of successful resolution applicants who no longer wish to abide by the terms of their submitted resolution plans that are pending approval under Section 31 of the IBC, on account of the economic slowdown that impacted every business in the country. However, no legislative relief for enabling withdrawals or re-negotiations has been provided, in the last eighteen months. Thus, in the absence of any provision under the IBC allowing for withdrawal of the resolution plan by a successful resolution applicant, vesting the Appellant with such a relief through a process of judicial interpretation would be impermissible.

Further, regarding the contention of the Appellant that the clauses under RFRP accepted by the CoC were binding on the CoC and the CoC approved resolution plan was voidable at the instance of the Appellant on account of inordinate delay in the approval of the submitted plan with the Adjudicating Authority; the SC rejected the argument of the Appellant and observed that the 6 months’ time period under the RFRP relates to the validity of the resolution plan for the period of negotiation with the CoC and not for a period after the resolution plan is submitted for the approval of the Adjudicating Authority. The court held that parties cannot indirectly impose a condition on a judicial authority to accept or reject its plan within a specified time period, failing which the CIRP process will inevitably come to an end. The time which may be taken before the Adjudicating Authority is an imponderable which none of the parties can predict.

The SC also rejected the argument of the Appellant that its position changed manifestly because of new allegations which came up in relation to the financial conduct of Educomp and observed that the Appellant was responsible for conducting its own due diligence of Educomp and could not use that as a reason to revise/modify the approved resolution plan. In any event, Section 32A of the IBC grants immunity to the corporate debtor for offences committed prior to the commencement of the CIRP and it cannot be prosecuted for such offences from the date the resolution plan has been approved by the Adjudicating Authority under Section 31 of the IBC, if the resolution plan results in a change of management or control of the corporate debtor, subject to certain conditions.

Decision of the Supreme Court

The SC while dismissing the present Appeal held that the residuary powers conferred on the Adjudicating Authority under the IBC cannot be exercised to create procedural remedies which have substantive outcomes on the process of insolvency. Enabling withdrawals or modifications of the resolution plan at the behest of the successful resolution applicant, once it has been submitted to the Adjudicating Authority, would create another tier of negotiations and trigger litigations not akin to the object of the IBC, and thereby would risk delaying the insolvency process under the IBC.

VA View:

The existing insolvency framework in India provides no scope for effecting further modifications or withdrawals of CoC-approved resolution plans, at the behest of the successful resolution applicant, once the plan has been submitted to the Adjudicating Authority. The existing framework only enables Adjudicating Authority to permit withdrawals from the CIRP under Section 12A of the IBC and Regulation 30A of the CIRP Regulations.

Even the UNCITRAL Guide does not contain any provisions for withdrawal of a submitted plan, and it only discusses the possibilities of amending a resolution plan. The UNCITRAL Guide indicates that the legislature should choose if it wants to allow any amendments to a submitted resolution plan. In the event, it does, it should lay down the detailed steps of proposing amendments to a submitted resolution plan. If the legislature intended to permit parties to amend the resolution plan after submission to the Adjudicating Authority, based on its specific terms of the resolution plan, it would have adopted the critical safeguards highlighted by the UNCITRAL. Since the IBC does not provide for the withdrawal of a resolution plan by the successful resolution applicant; providing a resolution applicant with such a relief through a process of judicial interpretation would bring in the evils which the IBC sought to obviate.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | Supreme Court: Neither the NCLT nor the NCLAT have an unchartered jurisdiction in equity in dealing with resolution plans approved by the CoC.

The Hon’ble Supreme Court (“SC”) has in its judgement dated August 10, 2021, in the matter of Pratap Technocrats (P) Limited and Others v. Monitoring Committee of Reliance Infratel Limited and Another [Civil Appeal No 676 of 2021] held that the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) are duty bound to abide by the discipline of statutory provisions envisaged under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and once the requirements of the IBC have been duly fulfilled, the decisions of NCLT and the NCLAT are in conformity with law and there is no residual equity based jurisdiction with them.

Facts
The Corporate Insolvency Resolution Process (“CIRP”) of Reliance Infratel Limited (“Corporate Debtor”) was initiated by an order dated May 15, 2018 of the NCLT. The resolution plan submitted by Reliance Digital Platform and Project Services Limited (“Resolution Applicant”) was approved by the Committee of Creditors (“CoC”) with a 100% voting share and, the NCLT by an order dated December 03, 2020, had approved the resolution plan (“NCLT Order”).

Thereafter, Pratap Technocrats Private Limited and others (“Appellants”), who were the operational creditors of the Corporate Debtor challenged the NCLT Order before the NCLAT, inter alia, on the ground that the claims of the Appellants had not received fair and equitable treatment. The NCLAT by an order dated January 04, 2021, rejected the appeal and held that equitable treatment can be claimed only by similarly situated creditors (“NCLAT Order”). Aggrieved by the NCLAT Order, the Appellants filed the present appeal before the SC under Section 62 of the IBC (“Appeal”).

Issue
Whether the NCLT and the NCLAT have a jurisdiction in equity in the approval of a resolution plan within the ambit of the IBC.

Arguments
Contentions raised by the Appellants:
The object and purpose of the IBC is to balance the interest of all stakeholders and to maximize the value of assets. Further, it is essential that the CIRP must be just, fair and equitable to all stakeholders and the interest of the financial creditors cannot be placed at a higher pedestal at the cost of other stakeholders. The CIRP was conducted in a secretive manner, in violation of the principles of natural justice. Further that, it was only after the NCLT Order, that the Appellants became aware of the specifics of the resolution plan.

It was claimed that, the operational debts owed to the Appellants constituted over 90 % of the total operational debts of the Corporate Debtor and the Appellants’ interests had not been given due regard by the CoC and had placed certain assets of the Corporate Debtor outside the resolution plan. It was contended that, the approved resolution plan reserved a portion of the Corporate Debtor’s assets amounting to INR 800 crores realizable from preference shares held by Reliance Bhutan Limited, a wholly owned subsidiary of the Corporate Debtor, for distribution to financial creditors alone, thereby vitiating the object of the IBC. Since the IBC mandates that the CoC must consist only of financial creditors while the operational creditors are only allowed to attend the meeting without voting rights, the operational creditors are left unaware of the process and the entire decision making is left to the commercial wisdom of the CoC.

It was further contended that, on an application filed by Doha Bank, a financial creditor of the Corporate Debtor, the NCLT by an order dated March 02, 2021, had set aside the inclusion of certain financial creditors from the CoC without considering the implication on the distribution of funds under the resolution plan. Such an exclusion resulted in increasing the rate of recovery for the financial creditors from 10.32 % to 91.98 % whereas operational creditors had a mere recovery of 19.62 %.

Contentions raised by the Respondent:
The Respondent while submitting that the provisions of the IBC provide for specific stipulations in respect of operational creditors stated that if the aggregate dues of the operational creditors are not less than 10 % of the debt of the Corporate Debtor, the representation of their views in the CoC is envisaged under Section 24(3)(c) of the IBC through the operational creditors themselves or their representatives. It was further submitted that under Section 30(2)(b) of the IBC, the payment of debts to the operational creditors in the resolution plan shall not be less than the amount to be paid in the event of a liquidation under Section 53 of the IBC as per the priority in terms of the water fall mechanism.

In view of the above, it was contended that if the proceedings were to take place in strict accordance with the provisions of the IBC, the liquidation value would be zero, however, it was pertinent to note that the resolution plan provided a 19.62 % rate of recovery for the operational creditors as opposed to the financial creditors who were to receive only 10.32 % of their dues.

It was further submitted that the exclusion of certain financial creditors from the CoC was stayed by the NCLAT, however, the issue was a non sequitur as the exclusion of any financial creditor had no significance to the requisite majority required for passing a resolution plan.

The principle of equitable treatment only applies between creditors belonging to the same class and that there is a fundamental difference between the position of operational creditors and financial creditors which is emphasised by Explanation 1 to Section 30(2)(b) of the IBC and in the decision of the SC in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [2020) 8 SCC 531]. It was further contended that there was a fundamental error on the part of the Appellants in overlooking that INR 800 crores, which was the realisable value of preference shares had already been duly considered and was a part of the liquidation value.

The CoC had approved the resolution plan based on its commercial wisdom and the NCLT did not have the jurisdiction to scrutinize the commercial wisdom of the CoC and, thus, the NCLT acted in accordance with the provisions of the IBC.

Observations of the Supreme Court
The SC while dealing with the issue of the jurisdiction of the NCLT and the NCLAT while approving a resolution plan, also clarified three factual aspects which had a bearing on the outcome of the Appeal:

1. Valuation of preference shares
It was the contention of the Appellants that INR 800 crores which was the realisable value of preference shares held by Reliance Bhutan Limited had not been included in the liquidation value. The SC observed that the contention was factually incorrect since the realisable value for the Corporate Debtor on account of any proceeds from the preference shares was included in the determination of its liquidation value and it was supported by relevant excerpts from valuation reports by appointed valuers.

2. Liquidation value
With reference to the contention of the Appellants that the resolution plan reserved a sum of INR 800 crores exclusively for distribution to the financial creditors, the SC clarified that even if the liquidation value of the realisable value of the preference shares were to be considered in isolation for distribution amongst all operational creditors, in terms of the priority contained in Section 53(1) of the IBC, the liquidation value due to the Appellants would remain at nil.

3. The impact of exclusion of certain financial creditors
The exclusion of certain financial creditors has no implication on the operational creditors for two reasons, firstly, the resolution plan continued to be approved with a 100% majority even after their exclusion and, secondly, the only consequence would be the inter se distribution between financial creditors which had no consequence for the operational creditors.

4. The exercise of jurisdiction to approve a resolution plan
The SC revisited various provisions of the IBC in relation to the submission and approval of a resolution plan and observed that Section 30(1) of the IBC provides for the submission of resolution plan by a resolution applicant and the resolution professional is required to ensure that the plan is in accordance with the statutory requirements in clauses (a) to (f) of Section 30(2) of the IBC. Thereafter, the resolution professional presents the resolution plan to the CoC for its approval and the CoC may approve a resolution plan with a voting percentage of not less than 66 % of the voting shares of the financial creditors as enshrined under Section 30 (4) of the IBC.

The SC observed that, in view of the above, the jurisdiction of the NCLT under Section 31 of the IBC is limited to determining whether the resolution plan as approved by the CoC under Section 30(4) of the IBC meets the requirements under Section 30(2) of the IBC. This jurisdiction is statutorily defined, recognised and conferred and cannot be equated with a jurisdiction in equity that operates independently of the provisions of the statute. Similarly, the jurisdiction of the NCLAT under Section 61(3) of the IBC, while considering an appeal against an order approving a resolution plan is limited to the grounds specified therein.

The SC observed that the perusal of the definitions of ‘financial creditor’, ‘financial debt’, ‘operational creditor’ and ‘operational debt’ along with Section 30(2)(b) of the IBC, indicates that the ambit of the NCLT is to determine whether the amount payable to operational creditors under the resolution plan is consistent with the requirements of Section 30(2)(b) of the IBC. The SC further clarified that Explanation 1 to clause (b) of Section 30(2) of the IBC provides that a distribution “shall be fair and equitable” to such creditors. Fair and equitable treatment, in other words, is what is fair and equitable between operational creditors as a class and not different classes of creditors.

Thereafter, the SC proceeded to examine the nature of jurisdiction exercised by the NCLT and the NCLAT by relying on the consistent principle of law laid down in K Sashidhar v. India Overseas Bank [(2019) 12 SCC 150] and Essar Steel India Limited (supra) that, neither the NCLT nor the NCLAT can enter into the commercial wisdom underlying the approval granted by the CoC to the resolution plan. The SC further observed that, the decision in Essar Steel India Limited (supra) emphasised that, equitable treatment of creditors is “equitable treatment” only within the same class and that the decision in Swiss Ribbons Private Limited. v. Union of India [(2019) 4 SCC 17] highlights the principle that financial creditors belong to a class distinct from operational creditors.

The SC observed that, the IBC is a complete code in itself and it defines what is fair and equitable by constituting a comprehensive framework. Further, to argue that a residuary jurisdiction must be exercised to alter the delicate economic coordination that is envisaged by the statute would do violence on its purpose and would be an impermissible exercise of the NCLT’s power of judicial review.

Decision of the Supreme Court
The SC while dismissing the Appeal held that, since the resolution plan was approved by the requisite majority of the CoC in conformity with Section 30(4) of the IBC, the exclusion of certain financial creditors was of no consequence and that the jurisdiction of the NCLT and the NCLAT was confined by the provisions of Section 31(1) of the IBC, that is to determine whether the requirements of Section 30(2) of the IBC have been fulfilled in the resolution plan as approved by the CoC.

VA View:
Financial creditors, from the very beginning of the CIRP, are involved with assessing the viability of the corporate debtor, preserving the corporate debtor as a going concern while maximising the value of its assets and hence there exists an intelligible differentia between financial creditors and operational creditors which is directly related to the objects sought to be achieved by the IBC. Even though certain foreign jurisdictions allow resolution plans to be challenged on the grounds of fairness and equity, a conscious choice has been made by the legislature not to confer any independent equity-based jurisdiction on the NCLT.

Further, the precedents laid down by the SC are consistent with the recommendations given in the UNCITRAL’s Legislative Guide on Insolvency Law which states that it is desirable that a court does not review the economic and commercial basis of the decision of creditors. The SC has time and again reiterated that the commercial or business decisions of financial creditors are not open to judicial review by the NCLT or the NCLAT.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | Supreme Court: A foreign award is enforceable against non-signatories under Part II of the Arbitration and Conciliation Act, 1996

The Hon’ble Supreme Court (“SC”) has in the matter of M/s Gemini Bay Transcription Private Limited v. M/s Integrated Sales Services Limited and Others (Civil Appeal No. 8343-8344 OF 2018), held that the foreign arbitral awards are binding on non-signatories under Part II of the Arbitration and Conciliation Act, 1996 (“Act”).

Facts
M/s Integrated Sales Services Limited (“ISS”), a company based in Hong Kong, entered into a representation agreement dated September 18, 2000 (“Agreement”) with M/s DMC Management Consultants Limited (“DMC”), a company registered in India. As per the Agreement, ISS was required to assist DMC to sell its goods and services to prospective customers, and in consideration thereof, receive commission. In 2009, a dispute arose between ISS and DMC and a statement of claim dated June 22, 2009, was filed before the arbitrator by ISS against DMC, Mr. Arun Dev Upadhaya (chairman of DMC and DMC Global) (“ADU”), DMC Global (company registered in Mauritius), Gemini Bay Consulting Limited (company registered in British Virgin Islands) and Gemini Bay Transcription Private Limited (company registered in India) (“GBT”). It was alleged by ISS that DMC is trying to evade its contractual obligations in the Agreement by shifting the client brought by ISS to other entities mentioned hereinabove. ISS further alleged that ADU, who owns the other companies, is using other companies as alter egos of himself to evade DMC’s contractual obligations under the Agreement.

The substantive law of the arbitration proceedings was the law of Delaware, the United States. The arbitral tribunal, as per the Delaware law and on the basis of oral and documentary evidence, held that the doctrine of alter ego is an appropriate justification for lifting the corporate veil and ADU, DMC and GBT are jointly and severally liable for breaching the Agreement (“Award”).

To enforce the Award, ISS went to the High Court of Judicature at Bombay, Nagpur Bench (“BHC”) however, the hon’ble single judge of BHC held that as per Sections 48(1)(c) to (e) of the Act, the Award cannot be enforced against persons who are non-signatories, even though such non-signatories may have participated in the arbitration proceedings. The said decision of the single judge of BHC was appealed under Section 50 of the Act and the hon’ble division bench of BHC held that the Award could only be challenged under Section 48 of the Act if the Delaware law has not been followed on the alter ego principle. The division bench, being satisfied that the Delaware law has been properly applied, held that none of the grounds contained in Section 48 of the Act would apply so as to resist enforcement of the Award. Consequently, the BHC allowed the appeal and set aside the judgment of the single judge by the judgment dated January 4, 2017. A review petition was subsequently dismissed on February 24, 2017. On account of this decision by the division bench of BHC, GBT and ADU filed an appeal before the SC seeking an order that the foreign Award is not enforceable against GBT and ADU as they are non-signatories to the arbitration agreement.

Issue
Whether a foreign award is enforceable against non-signatories (GBT and ADU) under Part II of the Act.

Arguments
Contentions raised by GBT:
GBT, inter alia, contended that as per Section 47(1)(c) of the Act, the burden of proving that a foreign award may be enforced under Part II of the Act is on the person in whose favour that award is made, and that such burden in the case of a non- signatory to an arbitration agreement can only be discharged by adducing evidence which would independently establish that such non- signatory can be covered by the foreign award in question.

It was further contented that as per Section 48(1) of the Act, a foreign award against a non-signatory to an arbitration agreement would be directly barred by sub-clause (a) as well as sub-clause (c) of Section 48 of the Act. Further, it was also contented that no proper reasoning was given in the Award and it should also be set aside on the basis of Section 48(1)(b) of the Act.

GBT also relied on the Supreme Court of Victoria, Australia case of IMC Aviation Solutions Private Limited v. Altain Khuder LLC [(2011) VSCA 248] to submit that, where a party resists enforcement of a foreign award on the ground that it is not a signatory to the arbitration agreement, the enforcing court is duty bound to examine the question of jurisdiction by itself. Lastly, it was argued that the Award is perverse as two clients of DMC that were shifted to GBT were vital evidence in the case, and the non-examination of these two clients would vitiate the Award.

Contentions raised by ADU:
ADU, first, contented that the dispute is in relation to a tort which is outside contractual disputes that arise under the Agreement and that since the cause of action really arose in tort, the Award was vitiated on this ground. Secondly, relying on the judgement of Dallah Real Estate and Tourism Co v. Ministry of Religious Affairs of the Government of Pakistan [(2010) 3 WLR 1472], it was contented that a full review based on oral and/or documentary evidence ought to have been undertaken which was not done by the BHC and BHC merely echoed the Award’s findings. Lastly, ADU, comparing Section 46 and Section 35 of the Act, argued that under Section 46, a foreign award is to be treated as binding only on “parties” of the Agreement and not on any other non-signatory.

Contentions raised by ISS:
In reply to the contentions of ADU and GBT, ISS, by taking the SC through the Award, argued that the Award is well reasoned and there is no requirement to state elaborate/detailed reasons in an arbitral award so long as the award happens to be reasoned. Further, with respect to Section 48 of the Act, ISS contented that neither Section 48(1)(a) nor Section 48(1)(c) of the Act deal with non-signatories to an arbitration agreement and since there is no objection to the enforcement of the Award with respect to Section 48(2)(b) that is, being contrary to public policy of India, the appeal should be dismissed.

Observations of the Supreme Court:
Burden of proof under Section 47(1)(c) of the Act: The SC stated that the requirement under Section 47(1)(c) of the Act being procedural in nature does not go to the extent of requiring substantive evidence to “prove” that a non-signatory to an arbitration agreement can be bound by a foreign award. The said section only refers to the six ingredients for enforcement of a foreign award which are contained in Section 44 of the Act and, were met in this case.

The SC, citing various authorities, further observed that Part II of the Act is based on the Convention on Recognition and Enforcement of Foreign Awards, 1958 (New York Convention), which follows a pro-enforcement bias, and unless a party is able to show that it’s case comes clearly within Sections 48(1) or 48(2) of the Act, the Award must be enforced.

Objections under Section 48(1)(a) of the Act: The SC stated that in the guise of applying Section 48(1)(a), the SC is being asked to undertake a review on the merits which is not possible under Section 48 of the Act. It stated that the grounds mentioned in Section 48(1)(a) of the Act are in themselves specific, and only speak of incapacity of parties and the agreement being invalid under the law to which the parties have subjected it and the attempt to bring non-parties within this ground is “to try and fit a square peg in a round hole”. The SC further stated that the Dallah Real Estate (Supra) and the IMC Aviations (Supra) are different in terms of facts as well as on law and are inapplicable when construing Section 48(1)(a) of the Act.

Objection under Section 48(1)(b) of the Act: The SC stated that Section 48(1)(b) of the Act has to be narrowly construed and the only grounds on which a foreign award cannot be enforced under Section 48(1)(b) of the Act are natural justice grounds relatable to notice of appointment of the arbitrator or of the arbitral proceedings, or that a party was otherwise unable to present its case before the arbitral tribunal and both the grounds were not met in this case.

Objections under Section 48(1)(c) of the Act: The SC stated that Section 48(1)(c) of the Act only deals with disputes that could be said to be outside the scope of the arbitration agreement between the parties – and not to whether a person who is not a party to the agreement can be bound by the same. This was further established by the SC by referring to the proviso to Section 48(1)(c) of the Act which stated that an award may be partially enforced, provided that matters which are outside the submission to arbitration can be segregated.

Perversity of the Award: The SC stated that perversity as a ground to set aside an award in an international commercial arbitration is no longer valid after the 2015 amendment to the Act as the “public policy of India” does not take within its scope the “perversity of an award”.

Dispute in relation to a tort: The SC stated that the dispute was a tort claim in relation to the Agreement and as per Renusagar Power Company Limited. v. General Electric Company, [(1984) 4 SCC 679], Section 44 of the Act recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the agreement.

Contention under Section 46 of the Act: The SC stated that Section 46 of the Act does not speak of “parties”, but of “persons” who may, therefore, be non-signatories to the arbitration agreement. It further stated that Section 35 of the Act speaks of “persons” in the context of an arbitral award being final and binding on the “parties” and “persons claiming under them”, respectively. Section 35 of the Act, therefore, refers to persons claiming under parties and is, therefore, more restrictive in its application than Section 46 of the Act which speaks of “persons” without any restriction.

With respect to the damages awarded, the SC stated that the facts of this case cannot even remotely be said to shock the conscience of the court so as to clutch at “the basic notion of justice” ground contained in Section 48(2) Explanation (1)(iii) of the Act. Lastly, the SC also pointed out that the approach of the division bench of the BHC to satisfy the proper application of Delaware Law on the Award is completely erroneous as Section 48 of the Act does not contain any ground for resisting enforcement of a foreign award based upon the foreign award being contrary to the substantive law agreed by the parties.

Decision of the Supreme Court:
In light of the abovementioned, the SC arrived at the conclusion that the foreign award is binding on non-signatories as there is no valid ground under Part II of the Act to restrict the application of a foreign award on non-signatories to the arbitration agreement.

VA View:
The SC’s decision, following a pro-arbitration approach, rightly restricts the grounds for non-enforcement of a foreign arbitral award to what is clearly specified in Section 48, Part II of the Act. The SC, by examiniting Section 44 and 47 of the Act, brings a lot of clarity with respect to substantive ingredients for enforcement of foreign arbitral awards.

The decision follows the spirit of New York Covention, on which Part II of the Act is based, by following a pro-enforcement bias towards enforcing a foreign arbitration award unless a party is able to show that its case comes clearly within the ambit of Section 48 of Act. This decision provides a great insight and guidance to foreign and Indian parties looking to enforce a foreign arbitral award on non-signatories to arbitration agreement in India and is a right step forward towards making India a global arbitration hub.

For more information please write to Mr. Bomi Daruwala at [email protected]