Between the Lines | Supreme Court: A contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void

Supreme Court: (i) A contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void (ii) The condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973, of obtaining ‘previous’ general or special permission of the Reserve Bank of India for transfer or disposal of immovable property situated in India by a person, who is not a citizen of India, is mandatory.

The Hon’ble Supreme Court (“SC”) has in its judgment dated February 26, 2021 (“Judgement”), delivered by a three judge bench, in the matter of Asha John Divianathan v. Vikram Malhotra & Others [CIVIL APPEAL NO. 9546 OF 2010], held that a contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void. It was further held that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973 (“FERA”), of obtaining ‘previous’ general or special permission of the Reserve Bank of India (“RBI”) for transfer or disposal of immovable property situated in India by a person, who is not a citizen of India, is mandatory.

Facts

Mrs. F.L. Raitt, a foreigner, was the owner (“Owner”) of an immovable property bearing No.12 (old No.10A), Magrath Road (“Property”). The Owner had executed an agreement of sale dated April 05, 1976, whereunder, the title deed of the Property was delivered in favour of Mr. R. P. David (“Mr. David”) who was the father of Asha John Divianathan (“Appellant”) and the husband of Mrs. R.P. David (“Respondent No.4”). Subsequently, the Owner gifted a portion of Property admeasuring 12,306 square feet, by a gift deed dated March 11, 1977, and a supplementary gift deed dated April 19, 1980, (“Gift Deeds”) in favour of Mr. Vikram Malhotra (“Respondent No.1”) without obtaining previous permission of the RBI under Section 31 of FERA.

Thereafter, the Owner executed a ratificatory agreement dated December 04, 1982 to transfer the Property, admeasuring 35,470 square feet in favour of Mr. David and a formal permission of RBI under Section 31 of FERA was sought. The RBI granted permission on April 02, 1983. Consequently, a registered sale deed dated April 09, 1983 (“Sale Deed”) was executed by the Owner in favour of Mr. David. However, subsequently, the Owner filed a suit, on July 30, 1983, for cancellation and setting aside of the Sale Deed. The Owner expired on January 08, 1984, and thereafter, Mrs. Ingrid Greenwood was substituted as her legal representative in the pending suit. The said suit was dismissed by the City Civil and Sessions Judge, Mayo, Bangalore (“Trial Court”).

Subsequently, Mr. David filed a suit on February 10, 1984, against Respondent No. 1 and sought relief for declaring the Gift Deeds executed as null, void and not binding and consequentially for relief of possession, permanent injunction and mesne profits. The said suit was dismissed by the Trial Court by a judgment and decree dated August 31, 2001. Thereafter, the Appellant along with Respondent No. 4, had filed first appeal before the High Court of Karnataka (“KHC”) against abovementioned judgement of the Trial Court.

The KHC examined the issue raised by the Appellant on the validity of the Gift Deeds being in violation of Section 31 of FERA. The KHC relied on Piara Singh v. Jagtar Singh and Another [AIR 1987 Punjab and Haryana 93], and held that lack of RBI’s permission under Section 31of FERA did not render the Gift Deeds as void, much less illegal and unenforceable. Accordingly, the first appeal was dismissed by impugned judgment dated October 01, 2009 of KHC.

Issues
1.  Whether Section 31 of FERA is mandatory or directory in nature.
2.  Whether the Gift Deeds executed in favour of Respondent No. 1, in contravention of Section 31 of FERA, are void or voidable. Further, whether it can be voided, if so, then at whose instance?

Arguments Contentions raised by the Appellant: The dispensation specified in Section 31 of FERA is mandatory. Therefore, the Gift Deeds being in violation of Section 31 of FERA, are null and void and unenforceable in law, consequently, not binding on the Appellant and Respondent No. 4. Further, the Appellant stated that this position of law is reinforced by Section 47 (Contracts in evasion of the Act) of FERA and that violation of Section 31 of FERA has also been made punishable under Section 50 (Penalty) of FERA, in support of this submission, reliance was placed on the ratio of a constitution bench judgment in Life Insurance Corporation of India v. Escorts Limited and Others [(1986) 1 SCC 264].

The Appellant contended that the reasons and judgement in Piara Singh (supra) are manifestly wrong since it failed to analyse the true scope and purport of Section 31 of FERA. The Appellant contended that, the entire Property stood validly transferred in favour of Mr. David based on the Sale Deed.

Contentions raised by Respondent No. 1:

The transfer through Gift Deeds in favour of Respondent No. 1 cannot be regarded as ineffective, unenforceable or invalid. Section 31 of FERA is a directory provision. Hence, not obtaining ‘previous’ permission of the RBI would not render the Gift Deeds invalid. No consequence has been provided in Section 31 or any other provision of FERA to treat the transaction in violation of Section 31 of FERA as void. It was further submitted that the stipulation under Section 31 of FERA is only a regulatory measure and not one prohibiting transfer. The consequence of such violation is provided for as penalty under Section 50 of FERA, for which the concerned parties can be proceeded against. However, no action had been taken by any party, including the RBI, in this regard.

The RBI is exclusively entrusted with the task of determining the permissibility of the transaction, being the repository of management of foreign exchange of the country. The Respondent No. 1 further relied on the provisions of the Indian Contract Act, 1872 (“1872 Act”) to state that there is a distinction between void and voidable transactions. Therefore, the transfer in favour of Respondent No. 1 would at best be voidable, that too, at the instance of the RBI only and no one else.

Respondent No. 1 relied on Waman Rao and Others v. Union of India and Others [(1981) 2 SCC 362] and contended that different high courts have consistently opined that transaction in contravention of Section 31 of FERA cannot be regarded as void and that view needs no interference. Therefore, following the principle of stare decisis and the fact that FERA had been repealed, the SC ought not to countermand the consistent view taken by the high courts prevailing since 1987.

Observations of the Supreme Court

The SC noted that, Mr. David had acquired clear title of the Property transferred to him by virtue of the Sale Deed as it was executed only after receipt of ‘previous’ permission from the RBI. However, Gift Deeds in favour of Respondent No. 1 were not backed by such previous permission of the RBI. Admittedly, no permission had been sought from the RBI in that regard.

Object and purpose of FERA:

The SC noted the object of FERA was to consolidate and amend the law relating to dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development.

The SC observed that while introducing the bill in the Lok Sabha, Mr. Y.B. Chavan, the then Minister of Finance, explained the object of Section 31 of FERA as follows, “As a matter of general policy it has been felt that we should not allow foreign investment in landed property/buildings constructed by foreigners and foreign controlled companies as such investments offer scope for considerable amount of capital liability by way of capital repatriation. …, there is no reason why we should allow foreigners and foreign companies to enter real estate business.”

Therefore, the SC noted that the avowed object of Section 31 of FERA was thus to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of disposal of property by a person, who is not a citizen of India.

Understanding the distinction between a void and a voidable transaction:

The SC analysed the purport of expression “void” and “voidable” and hence adverted to the exposition in the case of Dhurandhar Prasad Singh v. Jai Prakash University and Others [(2001) 6 SCC 534] wherein it was noted that, it is necessary to distinguish between two kinds of invalidity, the one kind is where the invalidity is so grave that the list is a nullity altogether, such that, there is no need for an order to quash it. It is automatically null and void. The other kind is when the invalidity does not make the list void altogether, but only voidable, such that, it stands valid unless and until it is set aside.

The SC noted that in the case of Union of India & Others. v. A.K. Pandey [(2009) 10 SCC 552], it was observed that where a contract, express or implied, is expressly or by implication forbidden by statute, no court will lend its assistance to give it effect. The SC observed that it is settled that prohibition and negative words can rarely be directory. The SC noted that it is well established that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition. In the case of Union of India v. Colonel L.S.N. Murthy and Another [(2012) 1 SCC 718] it was opined that the contract would be lawful, unless the consideration and object thereof is of such a nature that, if permitted, it would defeat the provisions of law and in such a case the consideration or object is unlawful and would become void and that unless the effect of an agreement results in performance of an unlawful act, an agreement which is otherwise legal cannot be held to be void and if the effect of an agreement did not result in performance of an unlawful act, as a matter of public policy, the court should refuse to declare the contract void with a view to save the bargain entered into by the parties and the solemn promises made thereunder.

Understanding Section 31 of FERA:

The SC observed that the title of Section 31 of FERA restricts acquisition, holding and disposal of immovable property in India by foreigners/non citizens. It is crystal clear that a person, who is not an Indian citizen, is not competent to dispose of by sale or gift, as in this case, any immovable property situated in India without ‘previous’ general or special permission of the RBI, except as provided in the proviso, that is, by way of lease for a period not exceeding 5 years. Section 31(2) of FERA mandated a person, who is not an Indian citizen, to make an application to the RBI with necessary disclosures. The second proviso to Section 31(3) of FERA provided for a deemed permission, if no response was received within a period of 90 days from receipt of the application by the RBI. The SC noted that, as per Section 31(4) of FERA, every person, who was not an Indian citizen, holding immovable property situated in India at the time of commencement of FERA, was obliged to make disclosure and declaration within 90 days from the commencement of FERA or such further period as was allowed by the RBI. The SC observed that it is true that the consequences of failure to seek such ‘previous’ permission had not been explicitly specified in Section 31 of FERA or any other provision in FERA. The SC noted that, the purport of Section 31 of FERA must be understood in the context of legislative intent with which it was enacted, that is, basis the general policy to not allow foreign investment in landed property/buildings constructed by foreigners or enter into real estate business to eschew capital repatriation.

The SC, for harmonious interpretation of provisions, observed the purport of the other provisions of FERA. Section 47(1) of FERA clearly envisaged that no person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of FERA or of any rule, direction or order made thereunder and Section 47(2) of FERA declared that an agreement shall not be invalid if it provides, that thing shall not be done without the permission of the Central Government or the RBI.

The SC noted that, though ostensibly the agreement would be conditional subject to permission of the Central Government or the RBI, as the case may be, and if such term is not expressly mentioned in the agreement, it shall be an implied term of every contract governed by the law of obtaining permission of the Central Government or the RBI before doing the thing provided for in the agreement. In that sense, such a term partakes the colour of a statutory contract. Notably, Section 47 of FERA applied to all the contracts or agreements covered under FERA, which required previous permission of the RBI.

Section 50 (Penalty) of FERA reinforced the position that transfer of land situated in India by a person, who is not an Indian citizen, would be penalized. The SC noted that indeed, inserting such a provision did not mean that FERA was a penal statute, but is to provide for penal consequence for contravention of provisions, such as Section 31 of FERA. Further, Section 63 (Confiscation of currency, security, etc.) empowers the court trying a contravention, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place.

The SC noted that in the case of Mannalal Khetan and Others. v. Kedar Khetan and Others [(1977) 2 SCC 424] it was observed that, in the present dispensation provided under Section 31 of FERA read with Sections 47, 50 and 63 of FERA, although it may be a case of seeking ‘previous’ permission, it is in the nature of prohibition. In every case where a statute imposes a penalty for doing an act, though, the act not prohibited, yet the thing is unlawful because it is not intended that a statute would impose a penalty for a lawful act. When penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void.

The SC concluded that from the analysis of Section 31 of FERA and upon conjoint reading with Sections 47, 50 and 63 of FERA, the requirement of taking ‘previous’ permission of the RBI before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law. The dispensation under Section 31 of FERA mandates ‘previous’ or ‘prior’ permission of the RBI before the transfer takes effect and, therefore, contract or agreement including the gift pertaining to transfer of immovable property of a foreign national without previous general or special permission of the RBI, would be unenforceable in law.

Validity of the Gift Deeds:

The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under Section 31 of FERA to such transaction. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of FERA, as noted in the case of Life Insurance Corporation of India (supra).

In light of the general policy prevalent at that time, the SC observed that foreigners should not be permitted/allowed to deal with real estate in India, the peremptory condition of seeking ‘previous’ permission of the RBI before engaging in transactions specified in Section 31 of FERA and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. Therefore, until permission is accorded by the RBI, it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the 1872 Act.

The SC commended the decision of the Bombay High Court (“BHC”) in Joaquim Mascarenhas Fiuza v. Jaime Rebello and Another [1986 SCC OnLine Bom 234], that dealt with the case of transfer of property, which according to the respondent therein, could not be held by the plaintiff/petitioner, who was a not a citizen of India, in absence of permission given by the RBI in that regard. The BHC took the view that the requirement of seeking ‘previous’ permission of the RBI in Section 31 of FERA is mandatory.

The SC observed that, the judgment of Piara Singh (supra) relied upon by KHC, erroneously assumed that there was no provision regarding confiscation of the immovable property referred to in Section 31 of FERA. The expression ‘property’ in Section 63 of FERA is an inclusive term and, therefore, there is no reason to assume that consequence of confiscation may not apply to immovable property in respect of which contravention of the provisions of Section 31(1) of FERA had taken place. The SC further noted that, the basis of that judgment is tenuous and is palpably wrong. Merely because no provision in the FERA made the transaction void or says that no title in the property passes to the purchaser in case there is contravention of the provisions of Section 31 of FERA, will be of no avail.

A priori, the SC concluded that the various decisions of concerned high courts taking the view that Section 31 of FERA is not mandatory and the transaction in contravention thereof is not void or unenforceable, is not a good law. Accordingly, the SC deemed it appropriate to overrule the decisions of the high courts, taking contrary view, albeit, prospectively. The SC however cautioned that transactions which have already become final including by virtue of the decision of the court of competent jurisdiction, need not be re-opened or disturbed in any manner because of this Judgement. This declaration/direction was issued in exercise of the SC’s plenary power under Article 142 of the Constitution of India.

Decision of the Supreme Court

The SC set aside the judgment and decree of the Trial Court as confirmed by the KHC and held that, the condition of seeking ‘previous’ general or special permission of the RBI for transfer or disposal of immovable property situated in India, by a person, who is not a citizen of India, under Section 31 of FERA is mandatory. Resultantly, the SC declared the Gift Deeds invalid, unenforceable and not binding on the Appellant. The SC observed that a fortiori, the Appellant was entitled for possession of the Property from Respondent No. 1 and also mesne profits for the relevant period for which a separate inquiry needs to be initiated under Order 20 (Judgment and Decree) Rule 12 (Decree for possession and mesne profits) of the Code of Civil Procedure, 1908.

With respect to the second part of issue 2, the SC stated that, the transaction can be voided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. A person affected by such a transaction could set up challenge thereto, by direct action or even by way of collateral or indirect challenge.

The SC correctly observed that this would nevertheless be a case of transaction opposed to public policy and, thus, the fact that a transaction can be taken forward after grant of permission by the RBI did not make the transaction any less forbidden at the time it was entered into.

VA View:

In the present case, the transaction was executed close to the coming into force of FERA, in the year 1977, when considerations were different and governed by different policy manifested in FERA. The SC relied on the objectives of FERA as stated at the time of introduction of the bill in the Lok Sabha, forbidding foreigners from dealing with real estate in India. This Judgment has on perusal of multiple precedents and resources, clearly interpreted the purpose of Section 31 of FERA in light of the legislative intent with which it had been enacted, that is, keeping in mind the then general policy to not allow foreigners to transact in or hold real estate in India. The SC observed that Section 31 of FERA was mandatory in nature.

The SC rightly observed that behind the simple dichotomy of void and voidable acts (invalid and valid until declared to be invalid), lurked terminological and complex conceptual conundrum, that if an act, order or decision is ultra vires, in the sense being beyond/outside the jurisdiction, it would be invalid, or null and void. However, if it is intra vires, it was, of course, valid. The SC further observed that, if it is flawed by an error perpetrated within the area of authority or jurisdiction, it was usually said to be voidable; that is, valid till set aside on appeal or in the past quashed by certiorari for error of law on the face of the record. The SC eventually concluded that the position of law is clear, that when the enforcement of the contract is against any provision of law, it will amount to enforcement of an illegal contract even though the contract per se may not be illegal. Such contracts, where enforcement requires compliance of statutory conditions, failure of such compliance of conditions will amount to statutory violation.

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

Between the Lines | Delhi High Court: Order terminating arbitration proceedings under Section 32(2)(c) of Arbitration and Conciliation Act, 1996 is not an award

The Delhi High Court (“DHC”) has in its judgment dated January 12, 2021 in the matter of M/s PCL Sunconv. M/s National Highway Authority of India [O.M.P. (T) (COMM.) 80/2020], held that an order terminating arbitration proceedings under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996 (“ACA”) is not an award, and can be disputed under Section 14(2) of the ACA.

Facts

The National Highway Authority of India (“Respondent”) had invited bids for “Four laning and strengthening of the existing two lanes between Km. 317 and Km. 65 on NH-2, in the State of U.P. and Bihar for construction package IV-A: Contract Agreement No. GTRIP/5.”. Pursuant to the same, M/s.PCL Suncon (“Petitioner”), a joint venture constituted by Progressive Construction Limited and SUNCON Construction Berhard, Malaysia, submitted its bid on December 15, 2001. The Petitioner’s bid was accepted and by a letter dated February 23, 2002, the Petitioner was awarded the contract for an amount of INR 3,96,47,78,901/-. Pursuant thereto, a formal agreement between the parties was executed on March 28, 2002 (“Contract”). Due to a dispute arising between the parties, the Petitioner invoked the arbitration clause under the Contract, inter alia, claiming INR 57,84,00,000/- towards overstay/ overhead charges; INR 2,50,00,000/- as refund of the liquidated damages deducted by the Respondent; and INR 40,04,000/- for rehabilitation of Bridge 58/1. For the purpose of constituting the arbitral tribunal, the Petitioner nominated Justice E. Padmanabhan as its nominee and the Respondent appointed Mr. S. R. Pandey as its nominee, and both the nominated arbitrators nominated Mr. B. Majumdar as the presiding arbitrator (“Presiding Arbitrator”). With the appointment of the Presiding Arbitrator on August 3, 2015, the arbitral tribunal was constituted (“Arbitral Tribunal”) where upon the Petitioner filed its statement of claims to which the Respondent filed its counter claims before the said Arbitral Tribunal. The Arbitral Tribunal last sat on October 11, 2017, when the arguments on behalf of the Petitioner were heard and dates for further hearings were allotted on January 16, 2018, January 17, 2018 and January 18, 2018. However, the said hearings were cancelled due to non- availability of Justice E. Padmanabhan who subsequently resigned as an arbitrator and requested the Petitioner to nominate another arbitrator in his place. Copies of Justice E. Padmanabhan’s resignation letter were forwarded to the other co-arbitrators as well.

The Petitioner attempted to appoint a substitute arbitrator but the process was delayed as the persons who were approached by the Petitioner, did not consent to be appointed as an arbitrator, and in addition, the authorized officer of the Petitioner, who was pursuing the matter on its behalf, abandoned his assignment due to personal reasons. Consequently, on April 20, 2020, the Arbitral Tribunal passed the impugned order terminating the arbitral proceedings under Section 32(2)(c) of the ACA (“Order”). The Petitioner, however, did not receive any communication from the remaining two arbitrators informing it of their intention to terminate the arbitral proceedings nor was the said Order communicated to the Petitioner. On May 22, 2020, the Petitioner sent a letter to the Respondent and the arbitrators, nominating Mr. Subhash I. Patel as its nominee arbitrator and requested

the Presiding Arbitrator to schedule a hearing. In response to the same, the Petitioner was informed about the Order by a letter dated May 27, 2020.

In the Order, the arbitrators had noted that hearings could not be fixed as no response had been received from Justice E. Padmanabhan to the communication letters sent by the Presiding Arbitrator. It was further noted that there was also lack of initiative on the part of the Petitioner as no proposal had been made for fixing any new dates to proceed with the adjudication process. The Petitioner was accordingly advised to check the convenience of Justice E. Padmanabhan for further hearings, but while the Arbitral Tribunal was awaiting the Petitioner’s response, Justice E. Padmanabhan had by a letter dated February 19, 2019, resigned as an arbitrator and requested the Petitioner to nominate another arbitrator. The arbitrators noted that more than a year had elapsed and the Petitioner had not appointed an arbitrator in his place. The arbitrators noted that because of the deadlock, the continuation of proceedings had become impossible and accordingly, terminated the arbitral proceedings under Section 32(2)(c) of the ACA. The Petitioner, thereafter, filed the present petition under Section 14(1)(a) read with Section 15 of the ACA before the DHC, against the said impugned Order.

Issue

Whether the Order terminating arbitration proceedings under Section 32(2)(c) of ACA is an award.

Arguments

Contentions raised by the Respondent:

The Respondent, inter alia, contended that the present petition was not maintainable as the entire arbitral proceedings had been terminated in terms of Section 32(2)(c) of the ACA and this was not a case where arbitrators had withdrawn from the proceedings or the mandate of any arbitrator had been terminated as contemplated under Section 14(1)(a) of the ACA. It was further argued that the Petitioner could approach the court under Section 15 of the ACA only in a case where the arbitrator had withdrawn from the arbitral proceedings or had become de jure or de facto unable to perform its functions. In such circumstances, a substitute arbitrator could be appointed. However, in a case where the entire arbitral proceedings had been terminated, there was no case for appointing any arbitrator under Section 15(2) of the ACA. The Respondent referred to the decision of the Division Bench of the Calcutta High Court in The India Trading Company v. Hindustan Petroleum Corporation Limited [2016 SCC OnLine Cal 479] and basis the same, contended that the decision of the Arbitral Tribunal to put an end to the proceedings was a final award, which could be challenged only by way of an application for setting aside the same under Section 34(2) of the ACA. The Respondent contended that in view of the said decision, the recourse to an application under Section 14 of the ACA was not available to the Petitioner. In addition, reference was also made by the Respondent to the decision of a Coordinate Bench of DHC in Angelique International Limited v. SSJV Projects Private Limited and Another [2018 SCC OnLine Del 8287], wherein the court had accepted the contention that the termination of proceedings in respect of the claim filed by the petitioner would amount to an arbitral award, which could be challenged only by a petition under Section 34 of the ACA. It was also contended

that the Petitioner was responsible for the delay in appointment of an arbitrator in place of Justice E. Padmanabhan and therefore, the decision of the Arbitral Tribunal to terminate the arbitral proceedings could not be faulted.

Contentions raised by the Petitioner:

The Petitioner on the other hand contended that it was well settled that an order terminating the proceedings under Section 32(2) of the ACA could not be considered as an award. The Petitioner submitted that termination of the arbitral proceedings on account of non-prosecution of claims also could not be construed as an award and which could be challenged under Section 34 of the ACA. It was further argued that the abovementioned decision in Angelique International Limited v. SSJV Projects Private Limited and Another [2018 SCC OnLine Del 8287] (supra) struck a discordant note inasmuch as it held that only a petition under Section 34 of the ACA would be maintainable against an order terminating the arbitral proceedings under Section 32(2)(c) of the ACA. It was argued that the said decision was per in curiam as it ignored the binding decisions of the DHC in Bridge and Roof Co. (India) Limited v. Guru Gobind Singh Indraprastha University and Another [2017 SCC OnLine Del 10412], Puneet Kumar Jain v. MSTC Limited and Others [MANU/DE/7910/2017], Shushila Kumari and Another v. Bhayana Builders Private Limited [2019 SCC OnLine Del 7243], Gangotri Enterprises Limited v. NTPC Tamil Nadu Energy Company Limited [(2017) 237 DLT 690] and Pandit Munshi and Associates Limited v. Union of India and Others [2015 (2) ARB LR 40 (Delhi)]. Lastly, the Petitioner argued that the Order was liable to be set aside as no pre-emptory notice was issued by the arbitrators before proceeding to terminate the arbitral proceedings.

Observations of the Delhi High Court

The DHC observed that, as per Section 34 of the ACA, “(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).” The use of the word ‘only‘in Section 34(1) of the ACA was significant and it clearly implied that except under Section 34 of the ACA, no other recourse was available against an arbitral award, to which Part-I of the ACA applied. The contention that the present petition was not maintainable and the only recourse available to the Petitioner was to file an application under Section 34 of the ACA was founded on the assumption that the impugned Order was an award. Clause (c) of Sub-section (1) of Section 2 of the ACA, defines an ‘arbitral award‘ to include an interim award. Section 31 of the ACA provides for the form and the content of an arbitral award. The question as to the distinction between an award and an order of an arbitral tribunal had been a subject matter of a number of rulings. It was now well settled that an award constituted a final determination of a particular issue or a claim in arbitration.

It was also observed that Section 32 of the ACA drew a clear distinction between a final arbitral award and interim orders passed by an arbitral tribunal. In terms of Section 32(1) of the ACA, arbitral proceedings stood terminated by a final award or by such orders as were specified under Section 32(2) of the ACA. In Rhiti Sports Management Private Limited v. Power Play Sports and Events Limited [2018 SCC OnLine Del 8678], the DHC had noted that “A plain reading of Section 32 of the Act indicates the fact that the final award would embody the terms of the final settlement of disputes (either by adjudication process or otherwise) and would be a final culmination of the disputes referred to arbitration.….To put it in the negative, any procedural order or an order that does not finally settle a matter at which the parties are at issue, would not qualify to be termed as ‘arbitral award’.”

As opposed to the reasoning held in Angelique International Limited v. SSJV Projects Private Limited and Another [2018 SCC OnLine Del 8287] by the DHC, the Supreme Court (“SC”) had, in the case of Indian Farmers Fertilizer Cooperative Limited v. Bhadra Products [(2018) 2 SCC 534] considered the question of whether an award on the issue of limitation could be considered to be an interim award and whether the decision on the point of limitation was a matter of jurisdiction and therefore, be covered under Section 16 of the ACA and held that since the award had finally determined one of the issues between the parties, the same could be considered as an interim award inasmuch as it finally determined a claim that could not be re-adjudicated all over again. Thus, in order for a decision of the arbitral tribunal to qualify as an award, the same must finally decide a point at which the parties are at issue. In cases where the same is dispositive of the entire dispute referred to the arbitral tribunal, the said award would be a final award, which would result in termination of the arbitral proceedings. In light of the above, the DHC observed that, it was clear that an order which terminated the arbitral proceedings as the arbitral tribunal found it impossible or unnecessary to continue the arbitral proceedings, would not be an award. This was because it did not answer any issue in dispute in arbitration between the parties but was an expression of the decision of the arbitral tribunal not to proceed with the proceedings. Section 32 of the ACA made a clear distinction between an award and an order under Sub-section (2) of Section 32 of the ACA. Indisputably, an order under Sub-Section (2) of Section 32 of the ACA was not an award.

Further, the DHC observed that the Order passed by the arbitrators expressly stated that the arbitral proceedings were terminated under Section 32(2)(c) of the ACA as in their view, it had become impossible to continue with the said proceedings. Indisputably, an order terminating the proceedings under Section 32(2)(c) of the ACA could be impugned under Section 14(2) of the ACA. The Respondent’s contention that even though an application under Section 14(2) of the ACA may be filed, the present application which is under Section 14(1)(a) and Section 15 of the ACA is not maintainable, appeared to be unpersuasive. A plain reading of Sub-section (2) of Section 14 of the ACA indicated that unless otherwise agreed by parties, a party could apply to a court to decide on the question of termination of the mandate, if a controversy remained concerning any of the grounds referred to in Sub-section 14(1)(a) of the ACA.

Decision of the Delhi High Court

Allowing the petition, the DHC noted that, although the arbitrators had passed the Order, it was not disputed that a notice intimating that they were contemplating terminating the proceedings was not issued to the Petitioner, prior to passing of the Order. However, it could not be denied that the Petitioner was responsible for the stalling of the proceedings as it had inordinately delayed the appointment of an arbitrator. Whilst the DHC was of the view that the Petitioner ought not be rendered remediless to urge its claims, the Respondent’s contention that the Petitioner must be visited with costs was merited. Hence, the DHC set aside the impugned Order, albeit, subject to payment of costs of INR 25,000/- by the Petitioner.

Since the Petitioner had already nominated an arbitrator, Mr. Subhash I. Patel, the Arbitral Tribunal was directed to resume the arbitration proceedings. The Arbitral Tribunal was further directed to conclude the arbitral proceedings as expeditiously as possible and preferably within one year from date of the DHC’s judgement.

Vaish Associates Advocates View:

In light of the previous judgments on same question of law and interpretation, dealt with and decided by the SC, the DHC has fittingly interpreted Section 32 and Section 34 of the ACA, to distinguish between an ‘award’ and an ‘order’.

Aside from the clear intent of the legislation, which is evident in the text of Section 32, it would appear logically inconsistent to treat a procedural order as an award, while provision has been given for both in the law and in the way they are to be dealt with in case parties to a contract want to challenge the same before a court of law. Also, considering that the impugned Order itself stated that the same was passed under Section 32 (2)(c) of the ACA, to treat it as an award under Section 32 (1) would have been inappropriate.

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

Between the Lines | Calcutta High Court: If a challenge is regarding lack of jurisdiction of NCLT under the IBC, writ jurisdiction of High Court can be invoked despite availability of alternative remedy under the IBC

In the case of Kolkata Municipal Corporation and Another v. Union of India and Others (W.P No. 977 of 2020), Calcutta High Court (“CHC”) by its judgement dated January 29, 2021, held that if a challenge is made regarding lack of jurisdiction of National Company Law Tribunal (“NCLT”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”), writ jurisdiction of the High Court could be invoked despite availability of alternative statutory remedy.

Facts

Kolkata Municipal Corporation (“KMC”) is a statutory body under the Kolkata Municipal Corporation Act, 1980 (“1980 Act”). Pursuant to exercise of its statutory powers under the 1980 Act, KMC seized certain office premises of the assessee-corporate debtor (“Assessee”) for non-payment of tax dues. When the debt of the Assessee came within the purview of corporate insolvency resolution process (“CIRP”), the resolution professional in question approached the NCLT for handover of the Assessee’s premises. The NCLT passed an order on January 17, 2019 lifting the attachment on the premises and directed KMC to hand over the premises to liquidation by an order dated January 31, 2020. KMC then had filed the writ petition with the CHC challenging handover of physical possession of the office premises.

Issues

1. Whether writ jurisdiction of the High Court under Article 226 (power of high courts to issue certain writs) of the Constitution of India, 1949 (“Article 226”) could be invoked despite availability of alternative remedy under the
2. Whether the property having been seized by KMC for non-payment of statutory dues by the Assessee could be subject matter of

Contentions of KMC

KMC being a statutory body, had taken possession of the Assessee’s premises in exercise of its statutory powers. This was an independent statutory exercise and could not be interdicted by the NCLT as per the IBC. As per Embassy Property Developments Private Limited v. State of Karnataka and Others [2019 SCC OnLine SC 1542] (“Embassy”), the powers of NCLT under Section 60 (adjudicating authority for corporate persons) of the IBC were circumscribed by the authority of the interim resolution professional, as provided under Section 18 (duties of interim resolution professional) of the IBC. As per Section 18(1)(f)(vi) of the IBC, control and custody of any asset to be taken by an interim resolution professional has to be subject to the determination of ownership by a court or authority. Since KMC is a statutory body, determination of ownership by taking possession and subsequent attachment and sale falls within its domain. Exercise of power, therefore, by the interim resolution professional, would be subject to KMC’s authority. Further, as per Embassy, writ jurisdiction of CHC could be invoked despite

availability of an alternative remedy. This is because the challenge herein pertains to the nature of jurisdiction of the NCLT, and not wrongful exercise of available jurisdiction.

Contentions of respondent no. 3

As such, all issues pertaining to properties of a corporate debtor and rights or obligations could be decided by the NCLT. Reference was made to the definition of “property” under Section 3(27) of the IBC, and it was contended that Section 18(1)(f) of the IBC provided that an interim resolution professional could take control and custody of assets subject to determination of ownership by a court or authority. Basis Embassy, if NCLT had been conferred the jurisdiction to decide all types of claims with the property of a corporate debtor, Section 18(1)(f)(vi) of the IBC would not make the task of the interim resolution professional, in taking control and custody of an asset on which the corporate debtor has ownership right, subject tothe determination of ownership of a court or other authority. The right of the interim resolution professional to take control and custody, as such, is not completely subject to determination of ownership by courts or authorities. Moreover, it could not be said that the NCLT must yield to the determination by courts or other authorities in all cases, in so far as the right to determination of ownership of properties of a corporate debtor was concerned. As per Embassy, a decision taken by a statutory/government body in relation to a matter within the realm of public law, could not be brought within the fold of expression “arising out of or in relation to the insolvency resolution” as provided in Section 60(5) of the IBC. The legal position with respect to the aforesaid is clear as the Supreme Court (“SC”) had created a distinction between proceedings which had attained finality, fastening liability upon the corporate debtor, and all other matters. Therefore, a distinction must be drawn in respect of matters which are relevant for CIRP on the issue of debt or property of the company; and other matters. All such other issues would be beyond NCLT’s jurisdiction. Even if a matter is within the jurisdiction of the NCLT, a distinction must be drawn between matters which have a direct bearing on CIRP, that is, directly pertaining to a debt or property of the corporate debtor and other matters. The jurisdiction of other courts or other tribunals could not be transgressed upon. In the present case, the question involved directly related to the property of the corporate debtor and, therefore, was within the purview of the NCLT. KMC herein, was also merely an operational creditor and it did not matter under the IBC if a creditor was a statutory creditor or not. KMC had also submitted itself to the jurisdiction of the NCLT by lodging its claim. It could not contend now that its attachment for recovery of claim was outside the NCLT’s jurisdiction. Moreover, there was a remedy of appeal available under Section 61 (Appeals and Appellate Authority) of the IBC and, therefore, the writ petition should not be entertained. It had been previously held by the SC in Whirlpool Corporation v. Registrar of Trade Marks, Mumbai and others [(1998) 8 SCC 1] (“Whirlpool Corporation”) that where there was an appellate remedy, the court does not entertain writ petitions unless the order was either passed without jurisdiction or in violation of natural justice. In Commissioner of Income Tax and others v. Chhabil Dass Agarwal [(2014) 1 SCC 603] (“Chhabil Dass”), the SC held that interference is not warranted under Article 226 unless extraordinary circumstances were made out. The SC had previously followed the principal of entertaining writ petitions only under strict exceptions.

Contentions of the resolution professional (respondent no. 4)

There is no distinction between statutory and operational debts. As such, even statutory dues or crown debts are considered as operational debt as under Section 18(1)(f) of the IBC. The provisions of the IBC indicate that the interim resolution professional has to take control and custody of assets over which the corporate debtor has ownership rights, which may or may not be in possession of the corporate debtor, or any asset subject to determination of ownership by a court or authority. In the instant case, KMC has only attached the asset of the corporate debtor and is in possession of it. The asset has not been sold and, therefore, the ownership is still with the corporate debtor. As per Section 36(3)(a) and (b) (provisions relating to liquidation estate) of the IBC, it was argued that asset attached by KMC would become part of the liquidation estate. Herein, KMC had filed a claim during CIRP and it would have to await the outcome of the process and distribution of assets as per Section 53 (Distribution of assets) of the IBC in the liquidation proceeding. It was contended that as per Commissioner of Income Tax v. Monnet Ispat and Energy Limited [Special Leave to Appeal (C) No. (S) 6483 of 2018] even crown debts do not take precedence over secured creditors. Moreover, basis a reading of the provisions of the IBC, the NCLT had jurisdiction to pass such orders. As per Section 238 (Provisions of this code to override other laws) of the IBC, the IBC also has an overriding effect over other laws. It was contended that as per Sulochna Gupta and Another v. RBG Enterprises Private Limited [2020 SCC OnLine Ker 4153], a writ petition is not maintainable against an NCLT order.

Observations of the Calcutta High Court

With regard to exercise of power conferred upon High Courts under Article 226, the CHC referred to the judgement in Embassy. The CHC noted SC’s view that despite availability of a statutory remedy under a special statute, distinction between lack of jurisdiction and wrongful exercise of jurisdiction must be factored and taken into account if Article 226 is sought to be invoked. In this instance, KMC had invoked Sections 217 to 220 (Chapter XVI – payment and recovery of taxes) of the 1980 Act to attach the Assessee’s office premises, so that it could be potentially sold. KMC had argued that exercise of such powers is beyond the IBC’s purview and could not fall within the ambit of powers conferred upon either the resolution professional or the NCLT under the IBC. It was also noted by the CHC that the issue under consideration herein was regarding absence of jurisdiction, and not wrongful exercise of available jurisdiction. Therefore, this clearly fell within the contours of Article 226. As per Whirlpool Corporation, alternative remedy would not be a bar where order or proceedings are without jurisdiction. This in line with the judgement in Chhabil Dass, would allow court’s interference under Article 226. The powers of the High Court under Article 226 are wide and there is no such express limitation on the same. While the rules of self-imposed restraint could not be ignored, this was a rule of discretion and not of compulsion. A coherent reading of the decisions of the SC would make it clear that while a wrongful exercise of available jurisdiction would not be sufficient to invoke Article 226, absence of the same could allow such invocation. Therefore, in this instance the writ petition is maintainable. For addressing the second issue, the decision in Embassy was once again referred to. As per Embassy a decision taken by a government or statutory authority in relation to a matter which was in the realm of public law, could not, by any stretch of imagination, be brought

within the fold of the phrase “arising out of or in relation to the insolvency resolution”. It was noted in Embassy that if the NCLT had jurisdiction to decide all types of claims to the property of a corporate debtor, the provisions of the IBC would not have tasked the interim resolution professional to take control and custody of assets subject to the determination of ownership by a court or other authority. The next aspect to be considered was whether an asset for which control and custody is sought to be taken by the interim resolution professional, is sub-judice before a court or authority for the purpose of “determination of ownership”. In the instant case, KMC followed procedure as laid down under the 1980 Act and took possession of the office property upon non-payment of taxes. There was no scope for any further determination of ownership of the property. In the absence of any successful challenge, KMC’s claims also attained finality and fastened a liability on the corporate debtor. KMC’s claim would therefore become an operational debt under the IBC. The powers conferred upon the NCLT under Section 60 of the IBC are circumscribed by Section 18(f)(vi) of the IBC. Under Section 60(5) of the IBC, this exercise of power would fall within the ambit of “arising out of or in relation to the insolvency resolution”. Therefore, the finalized claim of KMC would become the subject matter of CIRP under the IBC. The concerned resolution professional had jurisdiction to take control and custody of the Asseessee’s property. It is also notable that even though KMC is a statutory body, per the provisions of the IBC, its claims could not gain precedence over other secured creditors.

Decision of CHC

KMC’s writ petition under Article 226 against the order passed by the NCLT was maintainable. However, its claims would still be the subject matter of CIRP.

Vaish Associates Advocates View:

KMC’s primary intention to prove that Assessee’s premises would fall outside the purview of the NCLT did not attain fruition, however, its petition was ruled to be maintainable by the court, whilst elaborating on the ambit of Article 226.

Powers of the court under Article 226 are expansive. Nevertheless, these powers must be exercised with caution and restraint. The factor of restraint becomes relevant when there is already an alternative statutory remedy available. In this case, the CHC extensively dwelt upon the ‘self-imposed restriction’ principle. It affirmed that availability of statutory remedy did not act as a bar towards invocation of Article 226. In essence, if the primary challenge rooted from either a lack of jurisdiction or violation of natural justice, court’s powers under Article 226 could be exercised. This strengthens the point that the principle of self-imposed restriction is not a fixed and definitive rule. Its application would ultimately depend upon the context, as evidenced by the facts of this case.

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