Between the Lines | Calcutta High Court: Award-holder’s claim will stand extinguished on approval of award-debtor’s resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016

The Calcutta High Court (“CHC”) has in its judgment dated May 7, 2021, in the matter of Sirpur Paper Mills Limited v. I.K. Merchants Private Limited (Formerly Known as I.K. Merchants) [A.P. 550 of 2008] (“Judgement”), held that the claim of the arbitral award-holder will be frustrated once the resolution plan of the award-debtor is accepted under Section 31 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

In the instant case, the petitioner is Sirpur Paper Mills Limited (“Petitioner”) and the respondent is I.K. Merchants Private Limited, formerly known as I.K. Merchants (“Respondent”). This is an application for setting aside an award, dated July 7, 2008, passed by a sole arbitrator in arbitration proceedings between the Petitioner and Respondent (“Award”), as a result of subsequent developments after the passing of the impugned Award. By a judgment dated January 10, 2020 (“2020 Order”) on the question whether application by the Petitioner under Section 34 (Application for setting aside arbitral awards) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) should be kept in abeyance following invocation of the provisions of the IBC against the Petitioner, the CHC had held that corporate insolvency resolution proceedings (“CIRP”) cannot be used to defeat a dispute which existed prior to initiation of the insolvency proceedings. Subsequently, the Petitioner applied to recall the 2020 Order, which was rejected. The present application is the second round in the recourse against the Award where the Petitioner has urged that the application for setting aside of the Award cannot be proceeded with after approval of the resolution plan (“Resolution Plan”) in relation to the Petitioner.

Issues

Whether the claim of an award-holder can be frustrated on the approval of a resolution plan under Section 31(Approval of resolution plan) of the IBC.

Arguments

Contentions raised by the Petitioner:

The Petitioner averred that the proceedings initiated under Section 34 of the 1996 Act, pursuant to the Award were infructuous in nature, and that the Respondent’s claim ceased to exist since the control of the Petitioner was vested in a new entity, following the approval of a Resolution Plan of the Petitioner by the National Company Law Tribunal (“NCLT”) under the IBC. The Petitioner relied on Section 31 of the IBC which provides that an approved resolution plan is binding on the corporate debtor and its employees, members and other stakeholders. Placing reliance on the decision of the Supreme Court (“SC”) in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [(2020) 8 SCC 531] (“Essar”), Petitioner contended that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted, and hence as per Essar, in the instant case, the debts of the Petitioner stood extinguished, save to the extent of the debts which were taken over by the resolution applicant under the approved Resolution Plan. Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016 (“CIRP Regulations”) provides that a resolution plan must mandatorily contain the amount payable under it including the amount payable to the operational and financial creditors. The Petitioner submitted that in the event a creditor fails to submit his claims before the resolution professional, it forfeits its rights to the claim. Relying on Board of Control for Cricket in India v. Kochi Cricket Private Limited & Others [ (2018) 6 SCC 287] (“Kochi Cricket”), the Petitioner urged that Section 36 (Enforcement) of the 1996 Act would apply to pending applications under Section 34 of the 1996 Act on the date of commencement of the Arbitration and Conciliation (Amendment) Act, 2016 (“2016 Amendment”).

Contentions raised by the Respondent

The Respondent contended that the same arguments were made by the Petitioner on two earlier occasions as well in 2020, which had been decided and that such orders had not been challenged by the Petitioner. Relying on Satyadhyan Ghosal vs. Deorajin Debi (Smt) [AIR 1960 SC 941] and Arjun Singh v. Mohindra Kumar [(1964) 5 SCR 946], it was argued that res judicata would apply to different stages of the same proceeding. It was further submitted that upon filing of the application under Section 34 of the 1996 Act in October 2008, the Award was automatically stayed, and the Respondent could not approach the NCLT for lodging its claim. Relying on Kochi Cricket and Government of India v. Vedanta Limited (Formerly Cairn India Limited)[(2020) 10 SCC 1], it was contended that amendments will only have prospective application. It was thus submitted that with the filing of an application under Section 34 of the 1996 Act, the dispute raised, amounted to a pre-existing dispute, taking the Respondent outside the purview of the IBC. The Respondent relying on Swiss Ribbons Private Limited v. Union of India [(2019) 4 SCC 17], argued that a default would occur only when a debt, arising from a claim, becomes due and payable and is not paid by the debtor. It was submitted that in the instant case, the Respondent being the operational creditor does not have any claim since nothing is due from the Petitioner, in view of the pendency of the application under Section 34 of the 1996 Act.

Observations of the Calcutta High Court:

The CHC observed that in the 2020 Order, it was held that CIRP cannot be used to defeat a dispute which existed prior to initiation of the insolvency proceedings. It was observed that subsequently, on February 3, 2020, the Petitioner’s application for recalling of the judgment, was rejected by the CHC as well. The CHC clarified that the reason for revisiting the 2020 Order, was the pronouncement of the law by the SC in Essar and in the recent Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [2021 SCC OnLine SC 313] (“Edelweiss”), wherein it was held that once a resolution plan is approved, a creditor cannot initiate proceedings for recovery of claims which are not part of the resolution plan.

The CHC observed that a decision-making process must be attuned to a dynamic legal landscape shaped by legislative intervention and judicial pronouncements. The most predictable aspect of law is its constant evolution. The CHC stated that it would hence be judicial short-sightedness, even stubbornness, to hold on to a view when the law, in the meantime, had transformed into a different avatar.

Addressing the contention of res judicata raised by the Respondent, the CHC observed that the principle of res judicata was essentially to guard the court from abuse of the process where the same matter in issue, which had been heard and finally decided by a court, is urged again between the same parties. However, it was observed that the question of maintainability of the application under Section 34 of the 1996 Act could be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter.

Analysing the SC judgements in Essar and Edelweiss, and the IBC, the CHC noted that for a claim to be considered by the resolution professional and later by the committee of creditors (“CoC”) for approval of the resolution plan, the said claim must feature in the information memorandum prepared by the resolution professional and provided to the resolution applicant which would ultimately take over the business of the corporate debtor. The CHC observed that the IBC contemplates of several stages where an operational creditor is given notice of the commencement of CIRP against a corporate debtor. The IBC also takes into account claims of parties who have not initiated proceedings against the corporate debtor as operational creditors. The CHC deemed the arrangement of the sections to be not only conducive to making all creditors aware of the CIRP but also to invite claims and include them as part of the list of claims which are collated by the resolution professional and approved in the resolution plan by the CoC and finally by the adjudicating authority.

Analysing Regulations 7 (Claims by operational creditors) and 12 (Submission of proof of claims) of the CIRP Regulations, the CHC opined that from the date of the admission of the application of initiation of CIRP against the petitioner, that is, on September 18, 2017, until approval of the Resolution Plan on May 16, 2018, the Respondent had sufficient opportunity to approach the NCLT for appropriate relief. The Respondent was obligated to take active steps under the IBC instead of waiting for the adjudication of the application under Section 34 of the 1996 Act. Addressing the issue of whether or not the Respondent could have lodged and pursued a claim before the NCLT, when the Award was challenged by the Petitioner in the CHC on October 31, 2008, the CHC noted the stance of the Respondent that in light of Section 34 of the 1996 Act, prior to 2016 Amendment, impugned Award was automatically stayed upon filing of the application under Section 34 of the 1996 Act. The CHC observed that post the 2016 Amendment, Section 36(2) of the 1996 Act requires the court to grant an order of stay of the operation of the award in accordance with Section 36(3) of the 1996 Act, on a separate application for stay taken out by the award-debtor. The CHC noted that the amended Section 36(2) of the 1996 Act marks a significant departure from the erstwhile provision in clarifying that filing of an application for setting aside of an award under Section 34 of the 1996 Act shall not by itself make the award unenforceable unless the award is stayed by an order of court in an application made in the manner provided under Section 36(3) of the 1996 Act.

Placing reliance on Kochi Cricket, the CHC clarified that with regard to Section 34 of the 1996 Act, applications which were pending at the time of the judgment in Kochi Cricket would also be governed by the new Section 36 of the 1996 Act, as amended. Thus, the Petitioner would not have the benefit of the Award being automatically stayed upon filing of the application and the Respondent would be free to enforce the Award against the Petitioner in the absence of an application for stay of the Award under the amended Section 36 of the 1996 Act.

The CHC heavily relied on the view of the SC, as crystallized in Essar and Edelweiss, that pre-existing and undecided claims which have not featured in the collation of claims and the consequent consideration by the resolution professional, shall be treated as extinguished upon approval of the resolution plan under Section 31 of the IBC.

Judgement

The CHC rendered the Award as infructuous. The CHC ruled that the Respondent could have enforced the Award against the Petitioner, in the absence of an application for stay of the Award under the amended Section 36 of the 1996 Act, and that the Award would not automatically stay on filing of the application under Section 34 of the 1996 Act. It was further held that an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an award, even where a challenge to the award is pending in a civil court. Thus, it was held that an award-holder’s claim will stand extinguished on approval of the award-debtor’s resolution plan under Section 31 of the IBC.

VA View:

The CHC has thus clarified that an award-holder’s claim will get frustrated on the approval of the resolution plan of the award debtor. Through this Judgement, the CHC has upheld the intent of the IBC, and has protected the rights of a successful resolution applicant. The Judgement recognized the necessity of featuring all the claims beforehand, in the information memorandum, to be provided to the resolution applicant, as claims which do not form a part of the resolution plan would stand extinguished.

This Judgement has reiterated the fact that a successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up, rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. This Judgement has reaffirmed that a successful resolution applicant who takes over the business of the corporate debtor must receive the opportunity to start running the business of the corporate debtor on a fresh slate.

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

Between the Lines | Supreme Court: Entries made in balance sheet amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act, 1963.

The Hon’ble Supreme Court (“SC”) has in its judgment dated April 15, 2021 (“Judgement”), in the matter of Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Another [Civil Appeal No.323/2021], held that entries in balance sheets amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act, 1963 (“1963 Act”).

Facts

Corporate Power Limited (“Corporate Debtor”) had set up a thermal power project in Jharkhand in 2009, for which it availed of loan facilities from various lenders, including the State Bank of India (“SBI”). The account of the Corporate Debtor was declared as a non-performing asset by SBI on July 31, 2013. On March 27, 2015, SBI issued a loan-recall notice to the Corporate Debtor in its capacity as the lenders’ agent. On March 31, 2015, some of the original lenders of the Corporate Debtor, namely, India Infrastructure Finance Company Limited, SBI, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala, and State Bank of Travancore, assigned the debts owed to them by the Corporate Debtor, to the Asset Reconstruction Company (India) Limited (“Appellant”). On June 20, 2015, the Appellant issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) to the Corporate Debtor. On June 01, 2016, the Appellant took actual physical possession of the project assets of the Corporate Debtor under the SARFAESI Act.

On December 26, 2018, the Appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the National Company Law Tribunal, Calcutta (“NCLT”) for a default amounting to INR 5997,80,02,973/- from the Corporate Debtor. As the relevant form indicating the date of default did not indicate date of default, this was rectified by the Appellant on November 08, 2019, by filing a supplementary affidavit before the NCLT, specifically mentioning the date of default and annexing copies of balance sheets of the Corporate Debtor, which, according to the Appellant, acknowledged periodically the debt that was due. On February 19, 2020, the Section 7 application was admitted by the NCLT. The NCLT observed that the balance sheets of the Corporate Debtor, wherein it acknowledged its liability, were signed before the expiry of three years from the date of default, and entries in such balance sheets being acknowledgements of the debt due for the purposes of Section 18 of the 1963 Act, the Section 7 application is not barred by limitation.

In an appeal filed to the National Company Law Appellate Tribunal (“NCLAT”), the Corporate Debtor relied upon a precedent of a full bench judgment of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund [Company Appeal (AT) (Insolvency) No. 57/2020], wherein a majority of four members held that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the 1963 Act. After a preliminary hearing, a three-member bench passed an order on September 25, 2020, doubting the correctness of the majority judgment of V. Padmakumar (supra) and referred the matter to the ‘Acting Chairman’ of the NCLAT to constitute a bench of coordinate strength to reconsider V. Padmakumar (supra).

A five-member bench of the NCLAT, by the impugned judgment dated December 22, 2020, (“Impugned Judgment”), refused to adjudicate the question referred, stating that the reference to the bench was incompetent. The NCLAT, in the Impugned Judgment had, without reconsidering the majority decision in V. Padmakumar (supra), rubber-stamped the same.

Issue

Whether entries made in a balance sheet of the Corporate Debtor amount to an acknowledgement of liability under Section 18 of the 1963 Act.

Arguments

Contentions raised by the Appellant:

The majority judgment of the NCLAT in V. Padmakumar (supra) was per incuriam as it had not considered various binding judgments of the SC and that the said judgment was wholly incorrect in rejecting the reference out of hand at a preliminary stage. A number of judgments of the SC were referred in which it had been made clear that by Section 238A of the IBC, Section 18 of the 1963 Act is applicable to a proceeding under Section 7 of the IBC. Catena of judgments of the high courts and of the SC have expressly held that entries made in signed balance sheets of a corporate debtor would amount to acknowledgements of liability and have, therefore, correctly been relied upon by the NCLT on the facts of this case.

It was further argued that the reference made to the five-member bench by the three-member bench was perfectly in order and ought to have been answered on merits. The constitution of the five-member bench which passed the Impugned Judgment was not in order and contrary to the principles of natural justice, since three out of the five members of the bench were members who had assented with the majority opinion in V. Padmakumar (supra), and the dissentient member was not made part of the bench so formed. Further, the fact that a balance sheet has to be filed under compulsion of law does not mean that an acknowledgement of debt has also to be made under compulsion of law.

Contentions raised by the Respondents:

Bishal Jaiswal and another (the “Respondents”) argued that, by Section 18 of the 1963 Act, entries made in balance sheets do not amount to acknowledgement of debt. Further, the explanation to Section 7, read with the definition of “default” under Section 3(12) of the IBC, would preclude the application of Section 18 of the 1963 Act inasmuch as a default in respect of a financial debt would include a financial debt owed not only to the applicant-financial creditor, but to all other financial creditors of a corporate debtor. Further, reference was made to Insolvency Committee Report which introduced Section 238A of the IBC to gauge the rationale for enacting the said section. The Respondents strongly relied upon the fact that in all matters where recovery proceedings were ongoing before the Debt Recovery Tribunal and/or the appellate authority under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and that, by not applying Section 18 of the 1963 Act to the IBC, recoveries will not be thwarted.

The Respondents referred the main submission of the Appellant that, INR 12,000 crores would go down the drain if acknowledgements in balance sheets were not looked at, to contend that, this would be relevant only in recovery proceedings and not in proceedings before the IBC, which are not meant to be recovery proceedings at all.

Further that, no date of default had been mentioned in the original form that was submitted with the application under Section 7 of the IBC, and that this would be a non-curable defect, on account of which the application under Section 7 of the IBC should have been dismissed at the threshold itself.

If a period of three years had elapsed from the date of declaration of the account of a corporate debtor as a non-performing asset, the claim filed by a creditor is a dead claim which cannot be resurrected having recourse to Section 18 of the 1963 Act. Lastly, the balance sheets in the present case did not amount to acknowledgement of liability inasmuch as the auditor’s report, which must be read along with the balance sheets, would make it clear that there was no unequivocal acknowledgement of debt, but that caveats had been entered by way of notes in the auditor’s report.

Observations of the Supreme Court

The SC in the instant appeal, deemed it important to first advert to the rationale for the enactment of Section 238A (Limitation) of the IBC, which was inserted by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. The SC noted that in the case of Jignesh Shah v. Union of India [(2019) 10 SCC 750], the SC had referred to the Report of the Insolvency Law Committee of March, 2018, (“Committee”) which led to the introduction of Section 238A of the IBC and noted that, considering that the 1963 Act applies only to courts, unless made statutorily applicable to tribunals, the Committee was of the view that the 1963 Act should be made to applicable to the IBC as well. The Committee observed that, though the IBC is not a debt recovery law, the trigger being “default in payment of debt” would render the exclusion of the law of limitation “counter-intuitive”. Thus, it was made clear that an application to the IBC should not amount to resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of limitation.

The SC noted that in the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited [(2020) 15 SCC 1] (“Babulal”) it was observed that, Section 18 of the 1963 Act would be triggered every time when the principal borrower and/or the corporate guarantor, as the case may be, acknowledge their liability to pay the debt. Such acknowledgement, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to acknowledgement of the debt, from time to time, for institution of the proceedings under Section 7 of the IBC. Further, the acknowledgement must be of a liability in respect of which the financial creditor can initiate action under Section 7 of the IBC.

The SC noted that several judgments including Mahabir Cold Storage v. CIT [1991 Supp (1) SCC 402], S. Natarajan v. Sama Dharman [Crl. A. No. 1524 of 2014] and Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, [AIR 1962 Cal 115] (“Bengal Silk Mills”) have indicated that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the 1963 Act. It was further noted that if the amount borrowed by the accused is shown in the balance sheet, it may amount to acknowledgement and the creditor might have a fresh period of limitation from the date on which the acknowledgement was made.

The SC observed that the natural inference to be drawn from the balance-sheet is that the closing balance due to the creditor at the end of the previous year will be carried forward as the opening balance due to him at the beginning of the next year. In each balance-sheet, there is thus an admission of a subsisting liability to continue the relation of debtor and creditor and a definite representation of a present intention to keep the liability alive until it is lawfully determined by payment or otherwise. The SC observed that the judgment of Bengal Silk Mills (supra) had held that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet. The SC observed that in the judgment of Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad, [(1962) 1 SCR 140] it had been clarified that all that was necessary, was that, the acknowledgement establishes a jural relationship of debtor and creditor.

The SC also examined the position under the Companies Act, 2013 (“Companies Act”) qua any compulsion of law for filing of balance sheets and acknowledgements made. The provisions mentioned below were specifically noted by the SC:

• Section 2(40) of the Companies Act defines financial statement and Section 129, refers directly to financial statements and the required compliance with the accounting standards mentioned under Section 133 of the Companies Act.
• Section 92 of the Companies Act, mandates every company to prepare an annual return containing certain particulars as prescribed.
• Section 128 of the Companies Act, mandates every company to prepare and keep at its registered office, books of accounts and financial statements for every financial year as prescribed.
• Section 134 of the Companies Act, provides that financial statements are to be approved by the board of directors before they are signed, and the auditor’s report, as well as a report by the board of directors, is to be attached to each financial statement.
• Section 137 of the Companies Act, provides that copies of financial statements are to be filed with the Registrar of Companies.

The SC observed that on a perusal of the aforesaid provisions, there is no doubt that, the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, and any transgression of the same is punishable by law. The SC importantly noted that the notes that are annexed to or form part of such financial statements are expressly recognised under Section 134(7) of the Companies Act. Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet. Therefore, the SC observed that, the statement of law contained in Bengal Silk Mills (supra), that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the 1963 Act. The SC observed the precedent cited in Bengal Silk Mills (supra) of, Good v. Jane Job, 120 E.R. 810 at 812, wherein the court held that, “The balance-sheet contains admissions of liability; the agent of the company who makes and signs it intends to make those admissions. The admissions do not cease to be acknowledgements of liability merely on the ground that they were made in discharge of a statutory duty.” The SC noted that this judgment of Bengal Silk Mills (supra) has been referred to with approval in various subsequent judgments.

The SC further observed that, in Shahi Exports Private Limited. v. CMD Buildtech Private Limited [(2013) 202 DLT 735], the Delhi High Court held that it is hardly necessary to cite authorities in support of the well-established position that an entry made in the company’s balance sheet amounts to an acknowledgement of the debt and has the effect of extending the period of limitation under Section 18 of the 1963 Act.

Decision of the Supreme Court

The SC held that the entries in balance sheets amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the 1963 Act. Therefore, the SC concluded that the majority decision in V. Padmakumar (supra) was contrary to a catena of judgments referred and hence set it aside. The SC further observed that, the NCLAT, in the Impugned Judgment had, without reconsidering the majority decision of V. Padmakumar (supra), rubber-stamped the same, therefore, the SC set aside the Impugned Judgment.

The SC allowed the appeal, and the matter was remanded to the NCLAT to be decided in accordance with the law laid down in this Judgment.

VA View:
The SC has importantly noted that, it is an undisputed fact that, a balance sheet is the statement of assets and liabilities of a company, which at the end of a financial year is approved by the ‘Board of Directors’ and is authenticated in the manner provided by law. The SC also noted the observation made by Justice Krishna Iyer in Ambika Prasad Mishra v. State of Uttar Pradesh [(1980) 3 SCC 719], that, every new discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent.

The SC in this Judgement reiterated the well-established position of law that, an entry made in the company’s balance sheet amounts to an acknowledgement of the debt and that it has the effect of extending the period of limitation under Section 18 of the 1963 Act. It was rightly observed that, the inclusion of a debt in a balance sheet duly prepared and authenticated by a company would amount to admission of a liability and therefore would satisfy the requirements of law for a valid acknowledgement under Section 18 of the 1963 Act for extension of the limitation period.

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

Between the Lines | Supreme Court: Refusal to condone delay under Section 34(3) of the Arbitration and Conciliation Act, 1996, is appealable under Section 37 of the said Act

The Hon’ble Supreme Court (“SC”) by its judgment in Chintels India Limited v. Bhayana Builders Private Limited [Civil Appeal No. 4028 of 2020], on February 11, 2021, held that refusal to condone delay under Section 34(3) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) was appealable under Section 37 of the 1996 Act.

Facts

Chintels India Limited (“Appellant”) had filed an application for condonation of delay before the Delhi High Court (“DHC”) under Section 34 (application for setting aside arbitral award) of the 1996 Act. The said application was filed after the limitation period prescribed under the 1996 Act. The application related to an award passed on May 3, 2019, and the DHC had dismissed the application by its judgment dated June 4, 2020 (Single Judge). The DHC thereafter issued a certificate under Article 133 (Appellate jurisdiction of Supreme Court in appeals from High Courts in regard to civil matters) read with Article 134A (certificate for appeal to the Supreme Court) of the Constitution of India by its judgment dated December 04, 2020 (Division Bench). The present appeal has been filed in respect thereof.

Issue

• Whether order passed by single judge refusing to condone Appellant’s delay in filing an application under Section 34 of the 1996 Act is appealable under Section 37(1)(c) of the 1996 Act.

Contentions of the Appellant

The Appellant cited the SC’s judgment in Essar Constructions v. N.P. Rama Krishna Reddy (2000) 6 SCC 94) (“Essar Constructions”). Essar Constructions was passed in respect of Section 39 (appealable orders) of the Arbitration Act, 1940 (“1940 Act”). It was argued that Section 39 of the 1940 Act is in pari materia with Section 37 (appealable orders) of the 1996 Act, in that an appeal lies when a single judge refuses to condone delay, resulting in an order refusing to set aside an arbitral award. Therefore, the ratio of Essar Constructions would apply to Section 37 of the 1996 Act. It was contended that refusal to condone delay would result in a refusal to set aside an award. Therefore, an appeal against such order was maintainable under Section 37 of the 1996 Act. Judgments of various high courts were relied upon to argue that an order refusing to condone delay stands on a completely different footing from an order which condones delay, as the latter order cannot be said to impart any finality to the proceeding. This is because when an order condones delay, the merits of the award are yet to be adjudicated.

When a right of appeal is provided under a statute, dismissing the appeal on a preliminary ground is a dismissal of the appeal itself, as no opportunity of hearing on the merits is afforded post dismissal. Further, right of appeal once provided should not be limited by statutory interpretation when the words used in the provision are capable of a wider construction. In terms of the language of Section 37(1)(c) of the 1996 Act, there must be refusal to set aside an arbitral award “under Section 34”, which includes Section 34(3) of the 1996 Act, under which a court may refuse to condone delay in filing an application. The Appellant argued upon the relevancy of the DHC, in passing its judgement whilst relying on BGS SGS Soma JV. v. NHPC Limited (2020) 4 SCC 234 (“Soma JV”) and State of Maharashtra and Another v. M/s Ramdas Construction Co. and Another [C.A. Nos. 5247- 5248 of 2007] (“Ramdas Construction”). It was argued that in Soma JV, the SC had considered a very different question. The question was whether an application to set aside an award under Section 34 of the 1996 Act should be returned to the proper court dependent upon where the seat of arbitration was located. It was only in the course of discussion relatable to this question that the DHC had approved certain observations made in its decision in Harmanprit Singh Sidhu v. Arcadia Shares and Stock Brokers Private Limited 2016 SCC OnLine Del 5383, in which the single judge had allowed an application for condonation of delay, and the division bench thereafter held that an appeal against such an order was not maintainable under Section 37 of the 1996 Act. It cannot be said that the court has refused to set aside the award under Section 34 of the 1996 Act, as it may yet do so on the merits of the challenge to the award.

Contentions of Bhayana Builders Private Limited (“Respondent”)

The counsels for the Respondent argued that it could not be said that Section 37 of the 1996 Act was pari materia with Section 39 of the 1940 Act. Section 39 of the 1940 Act was materially different and concerns itself with grounds made under Section 30 of the 1940 Act. The grounds thereunder are different from the grounds under Section 34(2) and (2A) of the 1996 Act. Section 37 of the 1996 Act therefore must be interpreted in its own terms and Essar Constructions could not be made applicable in this instance. As per Section 5 of the 1996 Act and the ‘Statement of Objects and Reasons’, it was clear that judicial intervention is to be minimal in the arbitration process. As far as Section 37 of the 1996 Act was concerned, the above object of minimal intervention was reinforced, firstly, by way of the non-obstante clause contained in Section 37(1) of the 1996 Act, secondly, the grounds of appeal provided herein are exhaustive and clarify that appeal shall lie from no other grounds. Upon reading of Section 37 (1)(c) of the 1996 Act it was clear that the refusal to set aside the award could only be on merits and not on some preliminary ground which would then lead to a refusal to set aside the award. Relying on judgement passed by the SC in Union of India v. Simplex Infrastructures Limited (2017) 14 SCC 225 (“Simplex Infrastructures”) it could not be said that by condoning or refusing to condone delay, an arbitral award either gets or does not get set aside. Moreover, the judgement in Ramdas Construction was the correct enunciation of the law, and judgments of the other High Courts should be overruled.

Observations of the Supreme Court

Reading of Section 34 of the 1996 Act made it clear that an application for setting aside the award must be as per the grounds set out under Section 34(2) or Section 34(2A) of the 1996 Act and also would have to be filed within the limitation period provided under Section 34(3) of the 1996 Act. As such it is settled that Section 5 (extension of prescribed period in certain cases) of the Limitation Act, 1963, would not apply herein and any delay beyond 120 days could not be condoned.

Reading of Section 37(1)(c) of the 1996 Act which provides appeal from original decrees of a court passing the order for “setting aside or refusing to set aside an arbitral award under section 34” would go to show that refusal to set aside an award as delay not been condoned under Section 34(3) of the 1996 Act would certainly fall within Section 37(1)(c) of the 1996 Act. The expression, “under section 34” would refer to the entire section and not simply restricted to Section 34(2) of the 1996 Act. The fact that an award can be refused to be set aside for refusal to condone delay under Section 34(3) of the 1996 Act reinforces the contention.

The judgement in Simplex Infrastructures was referred, to hold that the said judgement was not contradicting the SC’s observations. In the said case, in answer to the question as to whether a single judge’s judgment condoning delay in filing an application under Section 34 of the 1996 Act was without jurisdiction, the SC had correctly held that such an order is in exercise of jurisdiction conferred by the statute. This judgment therefore cannot be said to be an authority for the proposition that, as the converse position to the facts contained in the present appeal had been held to be not appealable, it must follow that even where delay is not condoned, the position remains the same.

As far as Soma JV was concerned, the question herein was entirely different as argued by the Appellant. The judgements are not to be construed like Euclid’s theorems, but the observations made therein must relate to the context. In Soma JV, the context was where an application under Section 34 of the 1996 Act would have to be returned to the court which had jurisdiction to decide a Section 34 application, dependent upon where the seat of the arbitral tribunal was located. In this context, it was held that a preliminary step, which did not lead to the application being rejected, could not be characterized as an order which would result in the application’s fate being sealed. The focus therein was neither on the language of Section 37(1)(c) of the 1996 Act, nor were any arguments made as to its correct interpretation. As far as Ramdas Construction was concerned, it could not be said that it had stated the law correctly as it is not in compliance with Essar Constructions and was contrary to the interpretation drawn for Section 37(1)(c) of the 1996 Act so far. As far as the Respondent’s argument was concerned regarding the extent of judicial intervention under Section 5 of the 1996 Act, and the proposition that Section 37 of the 1996 Act was enacted to give limited right of appeal, the SC held that Section 5 of the 1996 Act did not take Respondent’s argument any further. This is because after the non-obstante clause, the section states that no judicial authority shall intervene “except where so provided in this Part”. What is “provided in this part” is Section 37 of the 1996 Act, which therefore brings the argument back to square one. A limited right of appeal is given under Section 37 of the 1996 Act, but it is not the province or duty of the SC to further limit such right by excluding appeals which are in fact provided for, given the language of the provision as interpreted in this judgement.

Decision of the Supreme Court

An appeal under Section 37(1)(c) of the 1996 Act would be maintainable against an order refusing to condone delay in filing an application under Section 34 of the 1996 Act to set aside an award. The matter was thereafter remitted to a division bench of the DHC to decide whether the single judge’s refusal to condone delay was correct.

VA View:

By drawing a literal interpretation of Section 37 of the 1996 Act, the SC has put forth its position on broadening the scope of the said section. As per the SC, the language of Section 37 of the 1996 Act would make clear that it was the legislature’s intention to include the entirety of Section 34 of the 1996 Act within the framework of Section 37 of the 1996 Act.

The implication is that now a Section 34 application dismissed due to delay has a remedy under Section 37 of the 1996 Act. This adds a further strain on the system and recourse for an individual avoiding an arbitral award and possibly result in lengthy proceedings.

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