Between the Lines | DHC: Multiple arbitrations can exist if the cause of action continues or arises after the constitution of a tribunal

The High Court of Delhi (“DHC”) has in its judgment dated January 17, 2022 (“Judgement”), in the matter of Panipat Jalandhar NH 1 Tollway Private Limited v. National Highways Authority Of India [ARB.P. 820/2021], held that multiple arbitrations can exist if the cause of action continues or arises after the constitution of a tribunal.

Facts

The petition had been filed by Panipat Jalandhar NH-1 Tollway Private Limited (formerly known as M S Soma Isolux NH 1 Tollway Private Limited) (“Petitioner”) under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”) to seek (i) appointment of a nominee arbitrator of the National Highways Authority Of India (“Respondent”/ “NHAI”) for adjudication of disputes with regard to concession agreement dated May 09, 2008 entered into for a duration of 15 years commencing from May 11, 2009 till May 11, 2024 (“Concession Agreement”) and (ii) to declare that the purported appointment of Justice (Retd.) G.P. Mathur, former Judge, Supreme Court, was non est and bad in the eyes of law.

The Petitioner had entered into the Concession Agreement with NHAI for development of the six-lanes of Panipat-Jalandhar Section of NH-1 having a total length of 291.10 km in the State of Haryana and Punjab. Subsequently, certain disputes arose between the parties in the year 2013 and these were pending adjudication before an independent arbitral tribunal. Therein, the Petitioner had claimed that out of the total 291.10 km, work on 269 km had been completed when the Respondent took a decision to delink 22.1 km out of the total length, on the ground of delay and failure on the part of the Respondent to hand over the stretch. Consequently, due to this delinking, the Petitioner suffered severe loss to the tune of more than INR 2,000 crores. Accordingly, the Petitioner had sent a notice of dispute dated October 25, 2019 (“Notice of Dispute”) to the Respondent. Since the parties failed to resolve the disputes, the Petitioner invoked arbitration under Clause 44.3 of the Concession Agreement and issued a notice dated February 7, 2020 calling upon the Respondent to confer a set of arbitrators. However, on December 4, 2020 the Respondent suspended the Concession Agreement against which the Petitioner preferred a petition under Section 9 of the Act. During pendency of the aforesaid petition, the Respondent terminated the Concession Agreement on March 5, 2021, which was also challenged by the Petitioner.

According to the Petitioner, the disputes with regard to aforesaid suspension and termination of Concession Agreement were pending adjudication before the second arbitral tribunal comprising of (i) Justice (Retd.) M.K. Sharma, Presiding Arbitrator; (ii) Justice (Retd.) A.K. Sikri (the “Petitioner’s Nominee Arbitrator”); and (iii) Justice (Retd.) G.P. Mathur as proposed by the Respondent and appointed by order dated May 4, 2021 (“Appointment Order”) of the DHC (the “Respondent’s Nominee Arbitrator”), hereinafter referred to as the “Arbitral Tribunal”. A declaration was given on May 25, 2021 by Respondent’s Nominee Arbitrator that he had been appointed arbitrator in three other matters by the Respondent in last three years and his fourth appointment was by virtue of the Appointment Order on the second Arbitral Tribunal (“Declaration 1”). Therefore, if nomination of Respondent’s Nominee Arbitrator in response to the Petitioner’s Invocation Notice (defined below) was accepted, this would be his fifth appointment on behalf of the Respondent.

Further, since the parties failed to resolve their disputes mentioned in the dispute notice, the Petitioner issued a notice dated June 4, 2021 to the Respondent invoking arbitration, appointed Mr. V.K. Tyagi as its nominee arbitrator and called upon the Respondent to appoint its nominee arbitrator within 30 days (“Invocation Notice”). However, to avoid multiplicity of the proceedings, instead of appointing an alternate arbitrator, the Respondent had requested to consolidate the second and third arbitrations. Further, the Respondent appointed Justice (Retd.) G.P. Mathur as its nominee arbitrator and intimated the Petitioner as well as the Petitioner’s Nominee Arbitrator. The aforesaid requests were objected by the Petitioner by its letter dated July 6, 2021, explaining that the disputes raised in proposed third and the second arbitration were completely different and independent even though they arose out of the same Concession Agreement. Further that, if these disputes were consolidated then it would result in delaying the outcome of second arbitration, as pleadings therein were complete. Further, the Petitioner objected to the appointment of Respondent’s Nominee Arbitrator since he had already been appointed by the Respondent in four matters, including the second arbitration between the same parties.

Issue

• Whether multiple arbitrations can exist if the cause of action continues or arises after the constitution of an arbitral tribunal.

Arguments

Contentions raised by the Petitioner:

It was submitted that the Respondent had failed to appoint its nominee arbitrator within 30 days of receiving the Invocation Notice. The Petitioner drew attention of the DHC to the twin pre-conditions to the appointment of Respondent’s Nominee Arbitrator, (i) that by filing petition under Section 11 of the Act, the Respondent had in fact forfeited its right to appoint an arbitrator in view of Supreme Court’s (“SC”) decision in Datar Switch gears Limited v. Tata Finance Limited [(2000) 8 SCC 151]; and (ii) All arbitrators had to comply with the requirements of the relevant Schedules of the Act. The Petitioner raised doubts on the independence and impartiality of the Respondent’s Nominee Arbitrator. The Petitioner elaborated that the appointment and the Declaration 1 of Respondent’s Nominee Arbitrator was in contravention of Entry No. 22 of the Fifth Schedule of the Act. The Petitioner submitted, the interpretation that, the Respondent’s Nominee Arbitrator considered his appointment in the present matter as an appointment by the DHC and not by the Respondent, is in contravention of Entry No. 22 of the Fifth Schedule of the Act.

Further, even the subsequent declaration dated August 5, 2021 by Respondent’s Nominee Arbitrator (“Declaration 2”) was not in accordance with Sixth Schedule of the Act. The Declaration 1 and Declaration 2 (“Declarations”) were bereft of all material particulars as required under the Act. It was submitted that, the Declarations did not provide information of the total ongoing arbitrations and whether other three arbitrations wherein Respondent’s Nominee Arbitrator was appointed as arbitrator were pending or not. The Petitioner submitted that Section 11(8)(b) of the Act required the DHC to have due regard to the ‘contents of the disclosure and other considerations to secure impartial and independent arbitrator’.

Contentions raised by the Respondent:

The Respondent submitted that the present petition was not only ill-conceived and motivated but also filed with mala fide intention to create confusion. The Respondent submitted that it had been in regular touch with the Petitioner over appointment of its nominee arbitrator and thereby, the Petitioner could not claim that the Respondent had failed to take steps to nominate its arbitrator within 30 days of the Invocation Notice. The Respondent submitted that appointment of the Respondent’s Nominee Arbitrator was in compliance with the Act and disputes should be referred to the second Arbitral Tribunal. Therefore, when an arbitrator had been appointed by a party and intimation thereof has been conveyed to the other, an application for appointment of an arbitrator under Section 11 of the Act was not maintainable. The present petition under the provisions of Section 11(6) of the Act deserved to be rejected as it had been filed on the false pretext that the Respondent had failed to appoint its nominee arbitrator within 30 days.

With regard to the plea of the Petitioner that the Respondent’s Nominee Arbitrator had made insufficient Declarations, the Respondent submitted that the learned arbitrator had specifically stated that he had been nominated by the Respondent in three other matters out of which one nomination was made way back on June 1, 2018, that is, more than three years ago. It was also submitted that the fourth nomination was by the DHC by virtue of the Appointment Order.

The Respondent further submitted that by filing this petition, the Petitioner was seeking appointment of third arbitral tribunal for adjudication of disputes relating to a project for which second Arbitral Tribunal had already been constituted. This would lead to multiplicity of proceedings which is wholly unwarranted and unsustainable. It was also submitted that appointment of the Respondent’s Nominee Arbitrator in the second Arbitral Tribunal was with the consent of the Petitioner and, therefore, the Petitioner could not raise objection with regard to his impartiality. It was submitted that, it would be a wholesome approach while deciding all the disputes which might be interlinked, if all the disputes between the parties for the same project arising out of common Concession Agreement were referred to the same Arbitral Tribunal. Since the disputes sought to be resolved in the present petition pertain to the same project between the parties, the Petitioner’s objection to refer it to the second Arbitral Tribunal could not sustain.

Observations of the Delhi High Court

The DHC observed that the jurisdiction of the court under Section 11 of the Act is primarily to find out whether there exists a written agreement between the parties for resolution of disputes through arbitration and whether the aggrieved party has made out a prima facie arbitrable case. In Vidya Drolia and Others v. Durga Trading Corporation [Special Leave Petition (Civil) Nos. 5605-5606 of 2019], the SC had clarified that, with a view to prevent wastage of public and private resources, court may conduct ‘prima facie review‘ beyond the bare existence of an arbitration clause, at the stage of reference to weed out any frivolous or vexatious claims. Such a review, is not intended to usurp the jurisdiction of the arbitral tribunal but is aimed at streamlining the process of arbitration. The DHC noted that, the Invocation Notice was replied to by the Respondent on June 17, 2021 stating that with respect to the Concession Agreement, the Arbitral Tribunal was constituted in May, 2021 and, therefore, these disputes should have been referred to the same Arbitral Tribunal. Further, the Respondent appointed the Respondent’s Nominee Arbitrator, hence, it could not be said that the Respondent had failed to respond to the Invocation Notice. The Invocation Notice records that “all claims raised by the Concessionaire in its Notice of Dispute is being referred to Arbitral Tribunal to be formed in accordance with Clause 44.3 of the Concession Agreement …”. The DHC further observed that, during the course of the hearing, the Petitioner time and again reiterated that no question had been raised to the integrity and fairness of Respondent’s Nominee Arbitrator but the only objection raised is that he had been appointed as an arbitrator on more than three previous occasions.

The DHC noted that, in Gammon India Limited and another v. National Highways Authority of India [AIR 2020 Delhi 132] while dealing on the aspect of multiplicity-multiple invocations, multiple references, multiple arbitral tribunals, multiple awards and multiple challenges, between the same parties, in respect of the same contract or the same series of contracts, the court therein had observed that, filing of different claims at different stages of a contract or a project is permissible in law, inasmuch as the contract can be of a long duration and the parties may wish to seek adjudication of certain disputes, as and when they arise. Further, the endeavour of courts in the domain of civil litigation is always to ensure that claims of parties are adjudicated together, or if they involve overlapping issues, the subsequent suit is stayed until the decision in the first suit. The DHC observed that it is with the intention of avoiding multiplicity that the principle of res judicata is a part of the Code of Civil Procedure, 1908. It was also observed by the DHC that, multiple arbitrations before different arbitral tribunals in respect of the same contract is bound to lead to enormous confusion and refute the purpose of arbitration being speedy resolution of disputes. It was also observed by the DHC that a previously appointed tribunal was already seized of the disputes between the parties under the same contract and the constitution of three different tribunals was unwarranted and inexplicable. The DHC further noted that, there was no justification for the Petitioner having invoked third arbitration by virtue of the Invocation Notice within less than a month of constitution of second Arbitral Tribunal in respect of the Concession Agreement and Notice of Dispute.

The Fifth Schedule of the Act provided that, the following grounds give rise to justifiable doubts as to the independence or impartiality of arbitrators: (Arbitrator’s relationship with the parties or counsel) – “…The arbitrator has within the past three years been appointed as arbitrator on two or more occasions by one of the parties or an affiliate of one of the parties.” Further, on the aspect of applicability of Entry No. 22 of the Fifth Schedule of the Act, the SC in HRD Corporation v. GAIL (India) Limited [(2018) 12 SCC 471], had observed as follows, “The disqualification contained in Items 22 and 24 is not absolute, as an arbitrator who has, within the past three years, been appointed as arbitrator on two or more occasions by one of the parties or an affiliate, may yet not be disqualified on his showing that he was independent and impartial on the earlier two occasions…” . The DHC noted that, the fact that an arbitrator had already rendered an award in a previous arbitration between the parties would not, by itself, on the ground of reasonable likelihood of bias, render him ineligible to be an arbitrator in a subsequent arbitration.

The DHC noted that a perusal of the Declarations made it manifestly clear that all necessary disclosures under the relevant provisions of the Act had been made. The Declarations clarified that the Respondent’s Nominee Arbitrator or any of his family members had no relationship with the Respondent. The DHC observed that, the stand of the Respondent while nominating name of Mr. Justice (Retd.) G.P. Mathur was clearly with the intent to refer the disputes to the second Arbitral Tribunal, of which he was a member. Further, the decision in HRD Corporation (supra) made it clear that there was no bar in appointment of an arbitrator in multiple cases, if so warranted. In the light of afore-noted discussions, the DHC found that objections raised by the Petitioner with regard to nomination and appointment of Respondent’s Nominee Arbitrator were baseless and liable to be rejected.

The DHC was informed that the disputes pertaining to the year 2013 were pending before the first arbitral tribunal. The suspension and termination of the Concession Agreement in question are subject matter of consideration before the second Arbitral Tribunal. In the considered opinion of the DHC, forming another tribunal would lead to multiple observations and findings by two different tribunals, which could not be permitted.

Decision of the Delhi High Court

The DHC was informed that the proceedings before the second Arbitral Tribunal were in progress, however, not yet complete. The DHC noted that , since the members of the second Arbitral Tribunal were well conversant with the facts and disputes raised between the parties, having dealt the same Concession Agreement and Notice of Dispute, it would enable it to expedite the resolution of disputes rather than delaying it. Moreover, there shall be no confusion or complexity in the outcome of the arbitration, having avoided multiple proceedings.

The DHC held that, multiple arbitrations could exist if the cause of action continues or arises after the constitution of a tribunal. Consequently, it was directed that the subject matter of disputes raised in Invocation Notice with regard to the Concession Agreement and the Notice of Dispute shall be dealt by the second Arbitral Tribunal. Therefore, the present petition was accordingly disposed of.

VA View:
The DHC in this Judgement observed that constitution of multiple tribunals is inherently counter-productive. Further, in any agreement or contract, an arbitration clause is inserted with an object of speedy resolution of disputes. Therefore, a situation where multiple arbitral tribunals parallelly adjudicate different claims arising between the same parties under the same contract, especially raising overlapping issues, should be avoided. In cases where the disputes are of larger magnitude and multiple in number, to avoid any confusion or infirmity, the disputes should be referred to the same arbitral tribunal prior to the constitution of a tribunal.

The DHC rightly observed that, there was no doubt that the Act had been brought in force to ensure independence and impartiality of an arbitrator. Further, at the same time, provisions of the Act do not incapacitate the courts in arriving at just decision given the facts of a particular case. However, multiple arbitrations could exist if the cause of action continues or arises after the constitution of a tribunal.

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

Between the Lines | NCLAT: No possibility negotiating the resolution plan in the intervening period between approval by the CoC, and pending the approval of the NCLT

The Hon’ble National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated January 27, 2022, in the matter of Union Bank of India v. Kapil Wadhawan and Others [Company Appeal (AT) (Insolvency) No. 370, 376-377 & 393 of 2021] (“Judgement”) held that once the resolution plan is approved by the Committee of Creditors (“CoC”), the jurisdiction of the adjudicating authority is confined by the provisions of Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC.

Facts

In the instant case, the Union Bank of India (“Appellant”) filed the appeal on behalf of the CoC of Dewan Housing Finance Limited (“DHFL”/”Corporate Debtor”) against the order of the NCLT, Mumbai (“NCLT”) dated May 19, 2021 (“Impugned Order”) whereby the NCLT directed the administrator of DHFL to place the letter dated December 29, 2021 (“Second Settlement Proposal”) sent by Kapil Wadhwan (“Respondent No. 1”), erstwhile promoter and director of DHFL, before the CoC for its consideration, and to inform the NCLT the outcome of the same within 10 days from the date of Impugned Order. The NCLT noted that the Respondent No. 1 had addressed various letters to the administrator, the CoC and also submitted a settlement proposal dated December 13, 2020 (“First Settlement Proposal”) but did not receive any reply and, therefore, submitted the Second Settlement Proposal. The Fist Settlement Proposal and the Second Settlement Proposal are hereinafter collectively referred to as “Settlement Proposals”. Respondent No. 1, DHFL and the Reserve Bank of India (“RBI”) are hereinafter collectively referred to as “Respondents”.

Subsequently, the Appellant had orally requested the NCLT for a stay of the Impugned Order, which was set aside (“Second Impugned Order”). The Impugned Order and the Second Impugned Order are hereinafter collectively referred to as “Impugned Orders”.

Aggrieved, the Appellant raised the appeal in the instant case against the Impugned Orders, before the NCLAT.

Issues

Whether after the CoC’s approval of the resolution plan as submitted by the Piramal Group (“Resolution Plan”), and pending approval of the NCLT, the NCLT can direct the CoC to convene a meeting and place the Second Settlement Proposal as offered for consideration, decision and voting.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the CoC by the Impugned Orders was being compelled to consider the Second Settlement Proposal without any provision of law requiring the CoC to consider such offer, which is in direct contravention of the IBC and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). The NCLT had acknowledged that there is no provision in the IBC or the CIRP Regulations by which it is empowered to pass the Impugned Orders. Hence, the adjudicating authority has passed the Impugned Orders by exercising its inherent power under Rule 11 (Inherent Powers) of the National Company Law Tribunal Rules, 2017 and Section 60(5) of the IBC.

Further, Respondent No. 1, throughout the corporate insolvency resolution process (“CIRP”), sent various letters and proposals, all of which had been placed before the CoC, who felt that such proposals cannot be considered. The Second Settlement Proposal was nothing but the First Settlement Proposal in a different form. An order compelling the CoC to consider every offer by the promoter, who was once in control of the corporate debtor, would gravely hamper the CIRP causing inordinate delays, and materially impacting the sanctity of the process in which the CIRP has been conducted.

The Appellant contended that the NCLT by the Impugned Orders has asked the CoC to consider the Second Settlement Proposal, which has neither been submitted in compliance with the Request for Resolution Plan (“RFRP”) nor in compliance with Section 12A (Withdrawal of application admitted under section 7, 9 or 10) of the IBC (and related regulations), and that such a direction of the NCLT was passed after the CoC had, by an overwhelming majority, approved the Resolution Plan, and the administrator had already filed the plan approval application, which had been heard and reserved for orders by the NCLT. Moreover, the RBI had granted its no-objection certificate regarding the Resolution Plan contemplated in Rule 5(d)(iii) of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. Therefore, it was submitted that these directions of the NCLT were without jurisdiction, and prejudicial to the stakeholders’ interests and are very likely to adversely impact the timely conclusion of the CIRP.

The Appellant contended that only a Resolution Plan compliant with the provisions of the IBC or an application under Section 12A of the IBC could be placed before the CoC. The Second Settlement Proposal was neither a compliant Resolution Plan nor an application under Section 12A of the IBC. The Appellant further contended that inherent powers could not override express provisions of the law. The provisions in relation to settlement proposals are codified under Section 12A of the IBC and Regulation 30A (Withdrawal of application) of the CIRP Regulations. The Appellant argued that there was no provision of law that permits the NCLT to compel the CoC to consider an offer that is not a settlement under Section 12A of the IBC nor even a proposal as per the provisions of the IBC.

Contentions raised by Respondents:

The Respondents submitted that the Second Settlement Proposal is different from the First Settlement Proposal and that on a perusal of the minutes of the meeting of the CoC, wherein the First Settlement Proposal was purportedly discussed, would show that the said proposal was never considered on merits and was rejected on hyper technicalities.

They argued that objections by the Appellant alleging lack of jurisdiction on the part of the NCLT are misconceived. It was further argued that the objection by the Appellant that the Impugned Order will interfere with the commercial wisdom of the CoC was incorrect as the adjudicating authority had merely directed consideration of the Second Settlement Proposal and not interfere with the commercial wisdom of the CoC. The Respondents further argued that the Resolution Plan is not in the interest of creditors and, therefore, the Second Settlement Proposal must be considered.

Observations of the NCLAT

The NCLT by the Impugned Order had directed the COC to consider the Second Settlement Proposal of Respondent No. 1 when the Resolution Plan after approval from the CoC was pending adjudication under Section 31 (Approval of Resolution Plan) of the IBC. The CoC contends that the Second Settlement Proposal was neither submitted in compliance with the RFRP nor with Section 12A of the IBC and related regulations. Such a direction of the NCLT was passed despite the fact that the CoC of the corporate debtor had by an overwhelming majority approved the Resolution Plan. The administrator had already filed the plan approval application, and that application was heard and reserved for orders by the learned NCLT.

It is pertinent to mention that the Supreme Court (“SC”) in the case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited, [2021 SCC online SC 707] (“Ebix Judgement”), has very recently dealt with the same issue which has arisen in this appeal. In the Ebix Judgement, the SC had observed that “CoC-approved Resolution Plans, before the Approval of the Adjudicating Authority under Section 31, are a function and product of the IBC’s mechanisms. Their validity, nature, legal force and content is regulated by the procedure laid down under the IBC, and not the Contract Act. The voting by the CoC also occurs only after the R.P. has verified the contents of the Resolution Plan and confirmed that it meets the conditions of the IBC and the regulations therein.

[…]

The Court held that there was no scope for negotiations between the parties once the Resolution Plan has been approved by the CoC. Thus, contractual principles and common law remedies, which do not find a tether in the wording or the intent of the IBC, cannot be imported in the intervening period between the acceptance of the CoC and the Approval by the Adjudicating Authority.
[…]

We cannot afford to be swayed by abstract conceptions of equity and ‘contractual freedom’ of the parties to freely negotiate terms of the Resolution Plan with unfettered discretion, that are not grounded in the intent of the IBC.”

Further, in the case of Pratap Technocrats Private Limited v. Monitoring Committee of Reliance Infratel Limited [2021 SCC Online SC 569], the SC held that “neither the adjudicating Authority (NCLT) nor the appellate Authority (NCLAT) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors.”

Based on the law laid down in the cases mentioned above, the NCLAT, in the instant case observed that once the Resolution Plan was approved by a 100% voting share of the CoC, the jurisdiction of the NCLT was confined by the provisions of Section 31(1) of the IBC to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC. Once the requirements of the IBC have been fulfilled, the NCLT and the NCLAT are duty-bound to abide by the discipline of the statutory provisions. Neither the NCLT nor the NCLAT has an unchartered jurisdiction in equity. The jurisdiction arises within and as a product of a statutory framework. The jurisdiction of the adjudicating authority is confined by the provisions of Section 31(1) of the IBC to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC. There was no scope for negotiations between the parties once the CoC had approved the Resolution Plan.

It was further observed that the principles of contractual construction and interpretation may serve as interpretive aids, in the event of ambiguity over the terms of a Resolution Plan, however, remedies that are specific to the Indian Contract Act, 1872 (“Contract Act”) cannot be applied, de hors the over-riding principles of the IBC. It was also observed that if resolution applicants are permitted to seek modifications after subsequent negotiations or a withdrawal after a submission of a resolution plan to the NCLT 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. The broader legitimacy of this course of action can be decided by the legislature alone, since any other course of action would result in a flurry of litigation which would cause the delay that the IBC seeks to disavow.

Decision of the NCLAT

In the instant case, the NCLAT noted that after approval of the Resolution Plan by the CoC, the application was pending before the NCLT under Section 31 of the IBC, for approval of the Resolution Plan, during which the NCLT directed the CoC to consider the Second Settlement Proposal within 10 days and take an appropriate decision. The NCLAT concluded that the Impugned Order was liable to be set aside. Relying on the ratio of the Ebix Judgement, which expressly laid down that there was no scope for negotiations between the parties once the CoC has approved the resolution plan, the NCLAT set aside the Impugned Order deeming it to be unsustainable.

VA View:
The NCLAT through this Judgement re-emphasised on the postulate that commercial or business decisions of the financial creditors are not open to any judicial review by the NCLT or NCLAT. The NCLAT upheld the law laid down by the SC in the Ebix Judgement that once the resolution plan is approved by the CoC, the plan cannot be revisited and modified. The NCLAT rightly upheld the principle that a resolution plan cannot be construed purely as a contract governed by the Contract Act, in the period intervening its acceptance. Even during such intervening period, the resolution plan is binding owing to the IBC framework. Through this Judgement, the NCLAT has reiterated that CIRP proceedings should not be taken lightly by those intending to submit resolution plans for approval.

Thus, when the plan has been approved by the CoC and pending the NCLT’s approval, the jurisdiction of the NCLT is limited to the extent of verifying the compliance of the plan with regard to the provisions laid down under the IBC and the NCLT should not interfere with the CoC’s decision, thereby second guessing its commercial wisdom.

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

Between the Lines | Supreme Court: An arbitral tribunal constituted in violation of the neutrality clause under Section 12(5) of the Arbitration and Conciliation Act, 1996 will lose its mandate and cannot be given effect

The Hon’ble Supreme Court (“SC”) has in its judgment dated January 4, 2022 (“Judgment”), in the matter of Ellora Paper Mills Limited v. The State of Madhya Pradesh [Civil Appeal No. 7697 of 2021] held that an arbitral tribunal constituted in violation of the neutrality clause under Section 12(5) of the Arbitration and Conciliation Act, 1996 (“Act”) will lose its mandate and cannot be given effect.

Facts

The State of Madhya Pradesh (“Respondent”) had issued a tender for supply of cream wove paper and duplicating paper for the year 1993 to 1994. Ellora Paper Mills Limited (“Appellant“) participated in the tender process and was awarded the contract by way of a supply order dated September 22, 1993. Thereafter, a dispute arose when the Respondent did not make 90% of the payments as per the terms of the contract for the paper supplied by the Appellant and rejected some consignments without providing any justifications and subsequently by a letter dated November 15, 1993, the Respondent informed the Appellant that the paper supplied did not conform to their specifications.

The Appellant filed a civil suit in the Civil Court, Bhopal, seeking the relief of permanent injunction against the Respondent, restraining it from awarding the contract to a third party. However, the suit had become infructuous since the Respondent had already awarded the contract to a third party. Thereafter, the Appellant filed another suit before the Civil Court to recover Rs. 95,32,103, and in the said suit the Respondent preferred an application under Section 8 of the Act and sought a stay of proceedings on the ground that there existed an arbitration clause in the contract between the Appellant and the Respondent. However, the said application was rejected by the Civil Court. The Respondent filed a revision petition before the Madhya Pradesh High Court (“HC”) and the parties were referred to arbitration by the Stationery Purchase Committee (“Arbitral Tribunal”) comprising officers of the Respondent.

The Appellant filed its objections to the constitution of the Arbitral Tribunal and also challenged its jurisdiction by filing an application under Section 13 of the Act, which was rejected. Thereafter, the Appellant filed another application under Section 14 read with Sections 11 and 15 of the Act before the HC seeking termination of the mandate of originally constituted Arbitral Tribunal and for appointment of a new arbitrator. The Appellant, relying on Section 12 (5) of the Act, submitted that since all the members of the Arbitral Tribunal were employees of the Respondent, a new Arbitral Tribunal had to be constituted.

However, the HC dismissed the application filed by the Appellant and held that since Section 12(5) of the Act was made effective from October 23, 2015 and was introduced through the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act, 2015”), it cannot have retrospective operation in the arbitration proceedings already commenced prior to the Amendment Act, 2015, unless the parties otherwise agree (“Impugned Judgment”). Being aggrieved by the Impugned Judgment, the Appellant filed the present appeal before the SC (“Appeal”).

Issue

• Whether the Arbitral Tribunal consisting of the officers of the Respondent had lost its mandate as per Section 12 (5) read with the Seventh Schedule of the Act.
• Whether a fresh arbitrator had to be appointed as per the Act.

Arguments

Contentions raised by the Appellant:

It was contended that the Impugned Judgment was contrary to the decision of the SC in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers [AIR 2021 SC 4869] and that the continuation of the Arbitral Tribunal consisting of the officers of the Respondent would frustrate the object and purpose of the Amendment Act, 2015, by which Section 12(5) read with the Seventh Schedule was inserted to keep in check the impartiality and neutrality of the arbitrators. It was further contended that the HC erred in observing that the arbitration proceedings had commenced since there was a stay granted by the HC and the earlier members of the Arbitral Tribunal had already retired. Hence, it could not be claimed that the arbitration proceedings had commenced and that further steps were taken by the Arbitral Tribunal.

In view of the above, it was submitted that the members of the Arbitral Tribunal had lost their mandate as per Section 12(5) of the Act and were ineligible to continue as members of the Arbitral Tribunal and therefore a fresh arbitral tribunal was to be constituted.

Contentions raised by the Respondent:

It was submitted that the Arbitral Tribunal was constituted in the year 2000, and Section 12(5) read with the Seventh Schedule of the Act was inserted into the statute with effect from October 23, 2015. Therefore, it would not be retrospectively applicable in the present factual background, as had been held in the Impugned Judgment.

It was further submitted that the decision of the SC in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra) was not applicable since in the aforementioned case, the arbitrator was appointed after the Amendment Act, 2015. However, in the present case, the arbitrator was appointed approximately 20 years prior thereto and thereafter the arbitration proceedings commenced and the Appellant had also participated.

Observations of the Supreme Court

The SC observed that the Arbitral Tribunal was constituted in the year 2001 as per the agreement entered into between the parties, however, the arbitration proceedings could not commence due to the proceedings initiated by the Appellant. In the meanwhile, the officers of the originally constituted Arbitral Tribunal had also retired. Hence, the SC was of the view that given the circumstances, technically the arbitration proceedings had not commenced.

The SC by placing reliance on Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra) and Bharat Broadband Network Limited v. United Telecoms Limited [(2019) 5 SCC 755], further observed that Section 12 of the Act was amended by Amendment Act, 2015 based on the recommendations of the Law Commission, which specifically dealt with the issue of neutrality of arbitrators. To achieve the main purpose for amending the provision, Section 12(5) of the Act specifically provides that when an arbitration clause is found to be foul with the amended provision, the appointment of the arbitrator would be outside the scope of the arbitration agreement, empowering the court to appoint such an arbitrator as may be permissible and the other party cannot insist upon the appointment of the arbitrator in terms of the arbitration agreement. When the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous and the right to natural justice cannot be said to have been waived only on the basis of a “prior” agreement between the parties at the time of the contract and before arising of the disputes.

Decision of the Supreme Court

In view of the above, the SC held that the Arbitral Tribunal comprising of officers of the Respondent had lost its mandate in view of Section 12(5) read with Seventh Schedule of the Act. Considering that the dispute between the parties was pending since the year 2000, instead of remanding the matter back to the HC, the SC decided to appoint a former Judge of the SC as the new arbitrator.

VA View:
In this Judgment, the SC considered and relied upon its earlier decisions and emphasised that independence and impartiality of an arbitrator are the hallmarks of any arbitration proceedings and the rule against bias is a fundamental principle of natural justice. When an arbitrator is appointed in terms of a contract and by parties to the contract, he is required to be independent of the parties. Thus, where the balance between the principles of natural justice and binding nature of the contract between the parties is considered, party autonomy cannot be stretched beyond the requirement of impartial and independent adjudicators for resolution of disputes.

Hence, the principles of impartiality and independence cannot be abandoned at any stage of the proceedings, more importantly at the stage of constitution of the arbitral tribunal, and it would be implausible to consider that the autonomy of the party can be exercised in disregard of these principles even if the same was agreed prior to the disputes arising between the parties.

Between the Lines | Supreme Court: An arbitrator has the power to grant post-award interest on the interest amount awarded under the Arbitration and Conciliation Act, 1996

The Hon’ble Supreme Court of India (“SC”) has in its judgement dated January 7, 2022 (“Judgement”), in the matter of UHL Power Company Limited v. State of Himachal Pradesh [Civil Appeal Nos. 10341 and 10342 of 2011], held that an arbitrator has the power to grant post-award interest on the interest amount awarded under the Arbitration and Conciliation Act, 1996 (“Act”).

Facts

UHL Power Company Limited (“UHL”) and the State of Himachal Pradesh (“State of H.P.”) executed a memorandum of understanding dated February 10, 1992 (“MoU”) and implementation agreement dated August 22, 1997 (“Implementation Agreement”) with respect to construction of a project. However, after execution of the MoU and the Implementation Agreement, differences arose between the parties and arbitration proceedings were initiated between UHL and the State of H.P., wherein the learned sole arbitrator, by award dated June 05, 2005, awarded a sum of INR 26,08,89,107.35/- in favour of UHL towards expenses claimed along with pre-claim interest capitalized annually, on the expenses so incurred. In addition, the arbitrator also awarded compound interest in favour of UHL at the rate of 9% per annum till the date of claim and in the event the awarded amount is not realized within a period of six months from the date of making the award, future interest at the rate of 18% per annum was also awarded on the principal claim with interest (“Award”).

Dissatisfied with the Award, the State of H.P. challenged the Award under Section 34 of the Act before the High Court of Himachal Pradesh (“High Court”). The High Court, by judgment dated December 16, 2008, disallowed the Award. The said judgment was challenged by UHL under Section 37 of the Act before the division bench of the High Court. The division bench of the High Court, on the conclusion that the Implementation Agreement was prematurely terminated by the State of H.P., awarded the payment of actual principal amount of INR 9,10,26,558.74/- in favour of UHL along with simple interest at the rate of 6% per annum from the date of filing of the claim till the date of realization of the awarded amount. However, relying on the judgement of State of Haryana v. S.L. Arora and Co [(2010) 3 SCC 690] (“S.L. Arora case”) wherein it was held that compound interest can be awarded only if there is a specific contract or authority under a Statute for compounding of interest, and that there is no general discretion vested in courts or tribunals to award compound interest, the High Court denied the Award of compound interest and stated that in the absence of any provision for interest upon interest in the contract, an arbitrator does not have the power to award interest upon interest, or compound interest, either for the pre-award period or for the post-award period (“Impugned Judgement”). Aggrieved by the Impugned Judgement, both UHL and the State of H.P. challenged the Impugned Judgement before the SC by filing different appeals which was clubbed by the SC.

Issue

Whether an arbitrator has the power to grant post-award interest on the interest amount awarded under the Act.

Arguments

Contentions raised by UHL:

The UHL, inter alia, contended that the ratio of S. L. Arora, case on which reliance has been placed in the Impugned Judgement, was set aside by a three-judge bench of the SC in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa through Chief Engineer [(2015) 2 SCC 189] (“Hyder Consulting Case”) wherein it was held that post-award interest can be granted by an arbitrator on the interest amount awarded. As the judgment of S.L. Arora case has been overruled by the SC, UHL contended that the findings of the Impugned Judgment insofar as it relates to grant of the compound interest should be reversed while restoring the Award on the above aspect in favour of UHL.

Contentions raised by the State of H.P.:

The State of H.P. contended that, the Impugned Judgement is gravely erred and failed to appreciate that the MoU did not merge into the Implementation Agreement as both were distinct documents, and that the MoU and the Implementation Agreement contained separate arbitration clauses. Secondly, the State of H.P. argued that the arbitral tribunal in the Award has committed a grave error in arriving at the conclusion that the Implementation Agreement was prematurely terminated by the State of H.P. much before the expiry of the prescribed period.

Observations of the Supreme Court:

The SC, first, noted that, since the judgment of S.L. Arora case has been overruled by the Hyder Consulting Case, the findings returned by the High Court in the Impugned Judgment to the effect that an arbitrator is not empowered to grant compound interest or interest upon interest is quashed and set aside.

Secondly, the SC, analysing the facts of the case, stated that the fact that the State of H.P. admits to having executed the MoU with UHL and the MoU being annexed as “Appendix A” to the Implementation Agreement itself demolishes the plea taken by the State of H.P. that the MoU did not merge into the Implementation Agreement. This was also reinforced on a reading of the definition of the word “agreement” in the Implementation Agreement which clearly stated that the word “agreement”, wherever used in the Implementation Agreement, included all its appendices and annexures. Therefore, the MoU having been described as Appendix A to the Implementation Agreement would have to be treated as having merged with the Implementation Agreement for all effects and purposes. Thus, the disputes that were referable to arbitration under the Implementation Agreement included disputes arising under the MoU, even though the latter did contain a separate arbitration clause. On this basis, the SC held that the contention that the MoU forms a part of the Implementation Agreement, does not deserve any interference.

Thirdly, the SC noted that a plain reading of clauses 4.1(a) and (b) of the Implementation Agreement leaves no doubt that UHL was required to commence construction of a project within a period of one year from the effective date of Implementation Agreement only after obtaining the necessary clearances. However, it was agreed by the parties that since obtaining of the relevant clearances was not entirely in the hands of UHL, in the event of any delay beyond a period of three months reckoned from the effective date, the stipulated period of one year contemplated in the Implementation Agreement could be extended. In the light of the aforesaid clauses of the Implementation Agreement, the SC noted that the submission made by the State of H.P. is unmerited.

Lastly, the SC, by citing various judicial pronouncements, concluded by stating that the jurisdiction conferred on courts under Section 34 of the Act is fairly narrow and when it comes to the scope of an appeal under Section 37 the Act, the jurisdiction of an appellate court in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed. Therefore, the interpretation of the relevant clauses of the Implementation Agreement, as arrived at by the learned arbitrator in the Award, are both, possible and plausible.

Decision of the Supreme Court:

In view of the above, the SC partly allowed the appeal by UHL by stating that the arbitrator has the power to grant post-award interest and rejected the appeal of the State of H. P. in toto.

VA View:
In the Judgement, the SC throws additional clarity on two important aspects of arbitration law in India. The SC, in line with the recent judgement with respect to the power of arbitrators to grant interest and pendente-lite interest in the cases of Punjab State Civil Supplies Corporation Limited v. Ganpati Rice Mills [LL 2021 SC 591] and M/s Garg Builders v. M/s Bharat Heavy Electronics Limited (Civil Appeal No. 6216 of 2021), held that an arbitrator has the power to grant post-award interest on the interest amount awarded. In light of these judgements, the parties, while drafting the agreement, may consider explicitly mentioning about the power of arbitrator to grant post award or any other form of interest to avoid any uncertainty and confusion at a later stage.

Secondly, with respect to the judicial review of arbitral awards, the SC rightly stated that the jurisdiction conferred on courts under Section 34 of the Act is fairly narrow and when it comes to the scope of an appeal under Section 37 of the Act, the jurisdiction of an appellate court is more circumscribed and when there are two plausible interpretations of the terms and conditions of the contract, then no fault can be found if the arbitrator proceeds to accept one interpretation as against the other.

Between the Lines | NCLAT: A ‘Successful Bidder’ cannot make ‘conditional bids’ or withdraw bid after paying earnest money deposit

The National Company Law Appellate Tribunal (“NCLAT”) has in its judgment dated January 11, 2022 (“Judgement”), in the matter of Visisth Services Limited v. Mr. S. V. Ramani and Others [Company Appeal (AT) (Insolvency) No.896 of 2020], held that a ‘Successful Bidder’ cannot wriggle out of the contractual obligations and withdraw the bid after payment of earnest money deposit on the ground that the offer made was a ‘conditional offer’.

Facts

The present appeal had been filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), by M/s. Visisth Services Limited (“Appellant”) against an order dated August 07, 2020 (“Impugned Order”) passed by the National Company Law Tribunal, Kolkata Bench (“NCLT”). By the Impugned Order, the NCLT had dismissed the application of the Appellant and also disposed of the company application filed by Mr. S. V. Ramani, the liquidator (“Respondent 1” / “Liquidator”) of United Chloro Paraffins Private Limited (the “Corporate Debtor”) with directions to issue fresh invitation to bidder to provide balance sale consideration within such time as per Schedule I of Regulation 33 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“LPR 2016”). Further, the NCLT directed that, in case of payment of the full sale consideration, the Liquidator shall execute certificate of sale or sale deed to transfer the assets in the manner specified in the terms of sale as per bidding document and in case of failure to pay the balance sale consideration, the Liquidator was at liberty to cancel the sale in favour of the bidder by forfeiting the earnest money deposit (“EMD”) and the amount paid towards the price of bidding document and to proceed with sale as per Regulation 32-A of the LPR 2016.

Previously, on October 12, 2018, an application filed under Section 10 of the IBC by the Corporate Debtor was admitted by the NCLT. Subsequently, due to failure of corporate insolvency resolution process (“CIRP”), on July 19, 2019, an order of liquidation was passed and Mr. S. V. Ramani was appointed as the Liquidator. Consequently, on September 01, 2019, the Liquidator issued advertisements inviting ‘Bids’ from prospective buyers through e-auction process for sale of the Corporate Debtor under liquidation as a ‘Going Concern’. Pursuant to this, the Appellant purchased the e-Auction Process Information Document (“Bid Document”) from the Liquidator upon payment of Rs. 5 Lakhs. On September 04, 2019, the Appellant issued an e-mail to the Liquidator – (i) seeking clarifications on several issues with respect to ‘E-Auction process’ (the queries pertained to the claims and liabilities of the Corporate Debtor such as charges over the assets, outstanding statutory dues to the ‘Tax Authorities, Electricity Authorities’, etc.); (ii) proposed different payment terms; and (iii) specified in the e-mail that their offer of acceptance was conditional to extinguishment of claims of ‘Financial Creditors, Tax Department, Operational Creditors, Provident Fund Employees and other contingent liabilities’ (“Conditional Offer E-mail”).

On September 05, 2019, the Liquidator sent two e-mails to the Appellant informing that the terms and conditions of the Bid Document could not be changed or revised after publication. M/s. State Bank of India (“SBI” / “Respondent 2”) had also replied to the e-mail and clarified the conditions. The Appellant addressed a letter on September 06, 2019 reconfirming its understanding of acceptance of the terms and conditions for the bid (“Reconfirming E-mail”). The Appellant submitted an EMD of Rs. 37,10,000/- to the Liquidator. On September 08, 2019, the Appellant sent an e-mail to the Liquidator stating that if any litigation arises from any source, the EMD amount and the Bid Document purchase amount was to be refunded within three days.

The Liquidator issued a provisional sale letter dated September 25, 2019 in favor of the Appellant (“Provisional Letter of Sale”) upon receipt of communication from SBI confirming that it was the highest successful bidder in the e-auction process. On October 29, 2019, the Appellant addressed a letter to the Liquidator stating that the Provisional Letter of Sale was inconsistent with the terms of payment specified by the Appellant and sought for refund of the money paid with the interest. Subsequently, on January 9, 2020, an affidavit was filed by the Appellant in the application preferred by the Liquidator before the NCLT seeking direction for ‘Approval of the Sale’ as a ‘Going Concern’; wherein the Appellant sought for approval without transfer of any liabilities; and if there exists any impediment, it sought for withdrawing from the bid and the refund of the amount paid.

Issue

• Whether sale of Corporate Debtor as a ‘Going Concern’ in liquidation proceedings includes its liabilities.
• Whether the Appellant could withdraw from the bid after payment of the EMD and seek for refund of the EMD on the ground that the offer made was a ‘conditional offer’.

Arguments

Contentions raised by the Appellant:

There was no valid contract between the parties. The Conditional Offer E-mail was sent wherein it was amply clarified that the Appellant would be willing to participate in the e-auction process only if the liabilities attached to the units of the Corporate Debtor, both statutory and non-statutory in nature, were extinguished. Further, different payment terms were proposed. These conditional terms formed part of the multiple subsequent correspondence issued by the Appellant to the Liquidator, including the Reconfirming E-mail.

The terms of the bid laid down in the Bid Document were not absolute, and only an intimation to offer. The intending purchaser was at liberty to negotiate and agree upon the terms subject to which the offer will be made, as formed part of the Conditional Offer E-mail and the Reconfirming E-mail. The Liquidator selectively chose to remain silent on the issues despite repeated clarifications sought by the Appellant and the clear intention that the offer of the Appellant would be conditional. The Liquidator informed the Appellant that SBI had accepted most of the conditions made by the Appellant and, therefore, the Appellant deposited the EMD of Rs. 37,10,000/- assuming that the conditions set out in the Conditional Offer E-mail had been accepted. The Liquidator proceeded to issue the Provisional Sale Letter despite the clear contents of the Appellant’s Conditional Offer E-mail.

Since the Liquidator did not assist the Appellant in clarifying the liabilities of the Corporate Debtor, the Appellant informed the Liquidator that if its bid is not accepted with its terms they would seek to withdraw from the bid. An affidavit to this extent was filed by the Appellant before the NCLT on January 09, 2020 seeking to withdraw its bid and sought for refund of the EMD and the amount paid towards purchasing the Bid Document. Subsequently, the sale remained unconfirmed till July, 2020, by which date the pandemic hit the country and on account of this unprecedented force majeure event, the Appellant addressed an e-mail dated July 10, 2020, informing the Liquidator about the poor financial health and seeking to withdraw from the bid.

The Appellant had participated in the bid with the bona fide intention to complete the sale conditional to the terms proposed by it. However, the Liquidator failed to clarify the terms of the sale and the Appellant cannot be subjected to the terms that it did not agree to abide by. Further, even in the case where a ‘Going Concern’ is on an ‘as is where is basis’, the pre-existing pecuniary liabilities cannot be transferred. The LPR 2016 provides that the Liquidator shall identify and group the assets and liabilities to be sold as a ‘Going Concern’ in consultation with the ‘Consultation Committee of Creditors’. In the present case, the Liquidator had failed to exercise his duty of assisting the Appellant with information and documents pertaining to the liabilities of the Corporate Debtor. If the EMD is forfeited, the Corporate Debtor will be permitted to make unlawful gains and unjustly enrich at the expense of the Appellant.

Contentions raised by the Respondent 1:

The Appellant after payment of the EMD, wrote a letter to the Liquidator on September 06, 2019, that the sale of the Corporate Debtor should be transferred without any liabilities. The Appellant was aware of the fact that the sale of the assets of the Corporate Debtor included its liabilities as the sale was on an ‘as is where is basis’. It was also submitted that the Appellant was involved in the CIRP where it was the unsuccessful resolution applicant and, thus, was aware of the liabilities attached to the assets of the Corporate Debtor.

The Liquidator in its response dated January 05, 2020 to the e-mail sent by the Appellant in September, 2019, had clarified that no changes could be made to the Bid Document, once it is published in the public domain. The Appellant was bound by its declaration submitted to the Liquidator on September 05, 2019, that upon failure to act on the terms of the sale, the EMD and all other amounts would be forfeited.

Contentions raised by the Respondent 2:

Subsequent to making its bid on September 06, 2019 and having been declared ‘Successful Bidder’, the Appellant cannot seek to impose conditions as it has attempted to do so by the Reconfirming E-mail and e-mails dated September 08, 2019 and October 29, 2019. The Appellant was bound by the terms and conditions of the Bid Document, wherein the payment of all statutory dues, taxes, fees, charges, was specified to be the sole responsibility of the Appellant. The Liquidator never either expressly or impliedly accepted the terms and conditions addressed to by the Appellant. The Appellant should have refrained from participating in the bid if it was desirous of sticking to the conditions put forth by it.

It was denied that SBI had ever accepted the conditions proposed by the Appellant. The sale of the Corporate Debtor was as a ‘Going Concern’ on ‘as is where is basis’, therefore the assets and liabilities could not be bifurcated. The Bid Document duly clarified that the assets in liquidation were being sold as a ‘Going Concern’. The Appellant had accepted condition of forfeiture of the EMD as mentioned in the Bid Document. The amount deposited by the successful bidder accounts for 10% for the ‘Reserve Price’ and if there is forfeiture, the loss is indeed enormous. The Appellant has no right to make any claim in as much as it has failed to pay the subsequent due towards the sale consideration within the time frame of 90 days as per Clause 12 of Schedule 1 of the LPR 2016.

Observations of the NCLAT

The NCLAT observed that, it could be seen from the paragraphs 3.2.1, 3.2.2 and 4.2.1 of the IBBI Discussion Paper on Corporate Liquidation Process (“Discussion Paper”) along with Draft Regulations dated April 27, 2019 as well as Regulation 32-A of the LPR 2016, that sale as a ‘Going Concern’ means sale of assets as well as liabilities and not assets sans liabilities. The NCLAT observed that, paragraphs 3.2.1 and 4.2.1 of the discussion paper amply specified that all assets and liabilities, which constitute an integral business of the Corporate Debtor would be transferred together, and the consideration paid must be for the business of the Corporate Debtor.

Thereafter, the NCLAT addressed the second issue, and noted that, it is the main case of the Appellant having communicated to the Liquidator prior to the ‘E-Auction process’ date; they had participated in the bid process with the bona fide intention to comply the sale process as the Respondent 2/SBI had accepted the payment terms. The NCLAT observed that perusal of the terms and conditions of the Bid Document for the proposed sale showed that clauses 12,13,14 and 15 showed that the Appellant had accepted all the terms and conditions and could not revise the same. The Bid Document also specified under the heading ‘Costs, Expenses and Tax Implications’ that payment of all statutory and non-statutory dues, taxes, rates, assessments, charges, fees, owed by the Corporate Debtor to anybody in respect of the subject property shall be the sole responsibility of the Appellant being the ‘Successful Bidder’. The NCLAT also noted that by an e-mail dated September 06, 2019, the Liquidator had clearly mentioned that ‘legal issues pertaining to e-Auction cannot be changed after public notification’. The NCLAT noted that the fact that the Appellant was supposed to comply the auction purchase in 2019 itself and the pandemic erupted in the year 2020.

The NCLAT observed that, the Supreme Court in Pawan Kumar Agarwal v. Association of Management Studies and Another [2009 (6) SCC 171] had observed in paragraph 26 as follows, “26. A tender is an offer. It is something which invites and is communicated to notify acceptance. Broadly stated it must be unconditional; must be in the proper form, the person by whom tender is made must be able to and willing to perform his obligations. The terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract. However, a limited judicial review may be available in cases where it is established that the terms of the invitation to tender were so tailor made to suit the convenience of any particular person with a view to eliminate all others from participating in the bidding process.”

The NCLAT observed that, the Liquidator will carry on the business of the Corporate Debtor for its beneficial Liquidation as prescribed under Section 35 of the IBC. The Liquidator will only act and cannot modify/revise the terms of the contract.

The Liquidator shall endeavor to sell the Corporate Debtor as a ‘Going Concern’ only in accordance with the law. In the declaration signed, the Appellant unconditionally agreed to abide by the terms of the ‘E-Auction process’ and the Bid Document, which is inclusive of forfeiture of the EMD, in the event the Appellant did not perform their part of obligation after the acceptance of the bid in their favor. The acceptance was conveyed to the Appellant on September 25, 2019. Clearly noting the terms and conditions that the Corporate Debtor was being sold as a ‘Going Concern’ in an ‘as is where is basis’, the Appellant cannot now be permitted to turn around and plead that their offer was conditional.

Decision of the NCLAT

The NCLAT concluded that the sale of a company as a ‘Going Concern’ means sale of both assets and liabilities, if it is stated on ‘as is where is basis’. Further, the Appellant being the ‘Successful Bidder’ cannot wriggle out of the contractual obligations and having regard to Regulation 32-A of the LPR 2016 and the scope and objective of the IBC, the NCLAT was of the opinion that the Appellant cannot be entitled to the EMD amount and the amount paid towards the Bid Document, if he does not comply with the terms of the contract on the ground that the offer made was a ‘conditional offer’. As a result, the NCLAT did not find any illegality or infirmity in the order of the NCLT. Hence, the appeal was accordingly dismissed.

VA View:

The NCLAT in this Judgement has correctly observed that, the Appellant was bound by the terms and conditions of the Bid Document and no communication to the Liquidator stating that it was a conditional offer, was sustainable. If the Appellant had any apprehensions and conditions about the liabilities, the Appellant could have exercised its choice of not participating in the bid.

The NCLAT observed that, having participated, the Appellant cannot propose certain conditions subsequent to its participation and bid. It was analysed that, if the Appellant is allowed to withdraw from the bid at this stage and seek refund on the ground that its conditional offer has not been accepted, then the liquidation process would be a never ending one, defeating the scope and objective of the IBC.