Between the Lines | Supreme Court: Proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 not maintainable against foreign award

The Supreme Court (“SC”) has in its judgment dated November 26, 2020 in the matter of M/s Noy Vallesina Engineering SpAv. M/s Jindal Drugs Limited and Others [Civil Appeal No. 8607 of 2010], held that proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 (“ACA”) are not maintainable against a foreign award.

Facts
M/s. Noy Vallesina Engineering SpA (“Appellant”), is a company incorporated under Italian laws involved in the setting-up and construction of plants for production of synthetic fibres, polymers and ascorbic acid. M/s Jindal Drugs Limited (“Respondent”), is a public limited company incorporated under Indian laws. The Respondent had entered into four agreements with one Engineering Chur AG of Switzerland (“Enco”) to set up an ascorbic acid plant (“Plant”) in India, being; (i) an engineering contract for construction of the plant (“Plant Contract”); (ii) a supply contract; (iii) a service agreement; and (iv) a license agreement (collectively the “other Agreements”). The aforesaid Plant Contract and other Agreements were executed on January 30, 1995. Under the Plant Contract, Enco agreed to provide the Respondent with technical information and basic engineering documentation for the construction, commission, operation and maintenance of the Plant. In consideration of Enco’s obligations, the Respondent was to pay a total fee of Swiss Francs 86,00,000 in the manner provided in the Plant Contract. The Plant Contract and the other Agreements contained an arbitration clause which expressly stated that arbitration would be “under the Rules of Conciliation and arbitration of the International Chamber of Commerce, Paris and Arbitration proceedings shall be in the English language and shall take place in London.” In March 1995, Enco assigned the Plant Contract to the Appellant with the consent of the Respondent, pursuant to which all obligations of Enco towards the Respondent were taken over by the Appellant.

However, due to certain disputes arising between the Respondent and the Appellant, the Appellant terminated the Plant Contract claiming damages from the Respondent. Subsequently, on October 31, 1996, the Respondent filed a request for arbitration under the Plant Contract before the International Court of Arbitration, Paris (“ICC”) which was followed by the Appellant filing its reply to the Respondent’s claim and also making a counter claim. After considering the claims and counter claims, the ICC arbitral tribunal passed a partial award on February 1, 2000, under which the Respondent’s claims were rejected and the Appellant was awarded Swiss Francs 44,33,416 (“Partial Award”) towards its counterclaims under the Plant Contract. The ICC arbitral tribunal then called upon the parties to present written representations on interest and costs to enable it to frame the final award.

On February 20, 2000, the Respondent filed a petition before the Bombay High Court (“BHC”) under Section 34 of the ACA challenging the Partial Award. The petition was admitted for final hearing on March 1, 2000 and notice was issued to the Appellant, the ICC and the ICC arbitral tribunal, whereupon an interim injunction was issued restraining them “from receiving any further submissions, and/or passing any further direction and/or Ruling and/or Award in the arbitration proceedings….”. However, the ICC arbitral tribunal held the view that the interim order passed by the BHC was not binding on it and consequently, proceeded with granting its final award on October 22, 2001 (“Final Award”). When the Final Award was made, the Respondent’s challenge to the Partial Award, and the interim application were both pending before the BHC.

The petition under Section 34 of the ACA challenging the Partial Award was decided by an order dated February 6, 2002 passed by a single judge bench of the BHC (“Single Bench Order”), which held that the partial award was a foreign award, and therefore a challenge through a petition under Section 34 of the ACA was not maintainable. Thereafter, the Respondent preferred an appeal against the Single Bench Order before a division bench of the BHC (“Division Bench”). During the pendency of the appeal, the Appellant had applied before the BHC for enforcement of the Partial Award and Final Award under Sections 47 and 48 of the ACA. The said petition for enforcement of the Partial Award and Final Award was allowed and the Respondent’s objections against enforceability of the two awards were overruled. The single judge who decided the petition held, in a judgment, (“Enforcement Order”) that the two awards were enforceable, save and except thatpart of the award which directs payment of Swiss Francs 14,53,316 by the Respondent to the Appellant.

The Respondent subsequently preferred an appeal before the BHC and the Appellant filed a cross appeal thereafter. While these appeals were still pending, the Division Bench, relying on the judgments of the SC in Bhatia International v. Bulk Trading S. A. and Another [(2002) 4 SCC 105] (“Bhatia Judgement”) and Venture Global Engineering v. Satyam Computer Services Limited and Another [2008 (4) SCC 190] (“Venture Global Judgement“) held that the proceedings under Section 34 of the ACA could be validly maintained to challenge a foreign award and set aside the Single Bench Order. The Appellant subsequently preferred the present appeal before the SC, challenging the order of the Division Bench.

Issue
Whether proceedings under Section 34 of the ACA can be maintained to challenge a foreign award.

Arguments

Contentions raised by the Appellant:

The Appellant, inter alia, contended that the order passed by the Division Bench of the BHC was not supported by law because a foreign award cannot be challenged under Section 34 of the ACA. It argued that the three-judge decision in the Bhatia Judgment (supra) and the subsequent holding in the Venture Global Judgment (supra) were both held to be incorrect in the larger, five judges ruling in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc [2012 (9) SCC 552] (“BALCO Judgement”). Relying on the BALCO Judgement, it was contended that foreign awards, having been rendered outside India under the aegis of the ICC could not be challenged merely because a condition in the underlying contract provided that the law governing the agreement, would be Indian law. It was also argued that the BALCO Judgement clearly enunciated the principle that the seat of arbitration also indicated the choice of the law governing the arbitration basis the ‘Shashoua’ principle that states that the designation of a “seat” of the arbitration would carry with it “something akin to an exclusive jurisdiction clause”.

Referring to identical terms in the Plant Contract and other Agreements, in the present case, which expressly stated that arbitration would be “under the Rules of Conciliation and arbitration of the International Chamber of Commerce, Paris and Arbitration proceedings shall be in the English language and shall take place in London.” the Appellant argued that the intention of the parties, expressed unambiguously in the contract, was that the arbitration was governed by the law of the seat, which was UK law. Therefore, the findings in the impugned judgment were clearly untenable. The Appellant also contended that the judgements passed in Union of India v. Reliance Industries [2015 (10) SCC 213], Harmony Innovation Shipping Limited v. Gupta Goal India Ltd [2015 (9) SCC 172] and Roger Shashoua v. Mukesh Sharma [2017 (14) SCC 722] (“Shashoua Judgement”) have now established that disputes arising prior to the BALCO Judgement involving agreements which stipulated that the juridical seat was in India, and which stipulate or could be read as stipulating that the law governing arbitration would be Indian law, should not be decided basis the BALCO Judgement. However, cases where the juridical seat was not in India, or the law governing arbitration was not Indian law, would be bound by the BALCO Judgement. Therefore, the impugned judgment, which held to the contrary, could not be sustained. Lastly, relying on the judgment passed by the Supreme Court in Fuerst Day Lawson Limited v. Jindal Exports Limited [(2011) 8 SCC 333] (“Fuerst Day Lawson Judgement”) it was contended by the Appellant that basis Section 50 of the ACA (Provides for a restrictive category of appealable subject matters, and prohibits appeals in other matters), the order holding that the petition under Section 34 was not maintainable, was not appealable.

Contentions raised by the Respondent:

The Respondent on the other hand contended that the impugned judgment was unexceptionable and not liable to be interfered with, and that Section 34 of the ACA operated in a field different from Section 48 of the ACA. It argued that the latter enabled the enforcement of a foreign award, and the court could only refuse enforcement, whereas under Section 34 of the ACA, the legality of an award could be gone into and the court had the jurisdiction to set it aside and that this crucial difference was recognized by Indian courts, as was evident from the decisions in the Bhatia Judgment and Venture Global Judgment. Relying on the observations in the BALCO Judgement that arbitration agreements entered into before the decision, and disputes which arose under them, would continue to be bound by the rules set prior to the BALCO Judgement, it was argued that, since, in this case, the agreements were entered into, and awards too were rendered during the prevalence of the principles set out under the Bhatia Judgment, the later decision in the BALCO Judgement or any subsequent judgment could not apply. It was further argued that, though the Plant Contract stated that the arbitration was to be held in London, under the ICC, Clause 12.4.1 of the Plant Contract clearly stated that the contract would be governed by Indian law, which unambiguously pointed to the fact that the parties intended that the law governing arbitration too was Indian law. Therefore, there was no question of the applicability of the ratio under the BALCO Judgement in the instant matter.

Observations of the Supreme Court

The SC observed that the Bhatia Judgment, and later, the Venture Global Judgment, had held that resorting to remedies under Part I of the ACA can be made in respect of foreign awards, despite the clear dichotomy in the enactment between domestic awards covered by Part I and foreign awards covered by Part II of the ACA. This understanding was re-visited in the BALCO Judgement where the SC held that “the Arbitration Act, 1996 has accepted the territoriality principle which has been adopted in the UNCITRAL Model Law. Section 2(2) makes a declaration that Part I of the Arbitration Act, 1996 shall apply to all arbitrations which take place within India. We are of the considered opinion that Part I of the Arbitration Act, 1996 would have no application to international commercial arbitration held outside India. Therefore, such awards would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996. In our opinion, the provisions contained in the Arbitration Act, 1996 make it crystal clear that there can be no overlapping or intermingling of the provisions contained in Part I with the provisions contained in Part II of the Arbitration Act, 1996.” Further, it was observed that the principle in the Shashoua Judgement had been followed repeatedly in a series of decisions by the SC, with respect to the law governing the seat as the law of the “seat” where the arbitration had been held. This view was reinforced in IMAX Corporation v. E-City Entertainment (India) (P.) Limited [2017 (5) SCC 331]. Taking into consideration the fact that the parties had expressly chosen to resolve the dispute through the ICC, in the form of a London based arbitration, the SC stated that “ICC having chosen London, leaves no doubt that the place of arbitration will attract the law of UK in all matters concerning arbitration.”

The SC further observed that even as per the latest decision on this issue in Government of India v. Vedanta Limited [2020 SCC Online (SC) 749], the dispute arose out of a pre-BALCO Judgement contract on January 18, 2011 where the seat of arbitration was Kuala Lumpur, however, the governing law of the contract, was English law.

The SC, in its three-judge bench decision, held that the law governing the challenge to the award was Malaysian law as the curial law of the arbitration was to be determined by the seat of arbitration.

The SC also noted that the decision in the Feurest Day Lawson Judgement unambiguously ruled out the maintainability of any appeal against an order granting enforcement of a foreign arbitration award. It accordingly observed that in the present case, both the Partial and Final Awards being foreign awards, the provisions of Sections 47 and 48 of the ACA were correctly invoked by the Appellant.

Decision of the Supreme Court

In allowing the instant appeal, the SC did not consider the merits of the substantive challenge to the Enforcement Order, because the parties had not been heard and therefore, it would not have been fair to comment on it. Further, the Respondent had proceeded on the assumption that its appeal to the Division Bench on this aspect was pending. In view of the finding of the court that such an appeal against an order of enforcement was untenable due to Section 50 of the ACA, the merits of the Respondent’s objections to the Single Bench Order, were open for it to be canvassed in appropriate proceedings. The SC also held that such proceedings could not also be a resort to any remedy under the Code of Civil Procedure, 1908. In the event the Respondent chose to avail of such remedy, the question of limitation was left open, as the court was conscious of the fact that although the Fuerst Day Lawson Judgment was a decision rendered over 10 years ago, it settled the law decisively and has been followed in later judgments.

Vaish Associates Advocates View:

The SC’s judgement in the present matter, highlights the importance of choosing the rules and seat of arbitration and governing law in contracts as per the intended agreement/understanding between parties. In allowing this appeal the SC has yet again clarified its stand on the application of Part I and Part II of the ACA with respect to domestic and foreign arbitration awards.

Parties to contracts having foreign seat of arbitration and Indian law as governing law should therefore be well advised and aware that they can no longer take recourse to the argument that since their contracts were entered into prior to the BALCO Judgement, the pre-BALCO rules would automatically apply to them. Accordingly, the seat of arbitration should be chosen in alignment/consonance with the governing law of the contract if the parties wish to ensure due enforcement of arbitral awards in India.

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

Between the Lines | Supreme Court: Trivial procedural lapses not a ground to nullify SARFAESI proceedings initiated by secured creditor if no substantial prejudice was caused to borrower

The Supreme Court (“SC”) has in its judgment dated October 27, 2020 in the matter of M/s L&T Housing Finance Limited v. M/s Trishul Developers and Another [Civil Appeal No.3413 OF 2020], observed that proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”), initiated by secured creditors, could not be nullified simply on the grounds of technical defects and procedural lapses, unless significant damage was caused to the defaulter.

Facts

M/s L&T Housing Finance Limited (“Appellant”), a housing finance company established under the National Housing Bank Act, 1987, is also a notified Financial Institution by the Department of Finance (Central Government). M/s Trishul Developers (“Respondent”), is a partnership firm registered under the Partnership Act, 1932, engaged in the real estate construction business. The Respondent had approached the Appellant towards seeking financial assistance and submitted a request by an application dated May 15, 2015, for a term loan of INR 20 Crores (“Term Loan”) for the purposes of completion of its housing project, namely, Mittal Palms, Phase-I (“Project”).

Pursuant to the above, by a sanction letter dated August 7, 2015 (“Sanction Letter”), the Appellant sanctioned a Term Loan facility of INR 20 crores in favour of the Respondent for completion of the said Project. Towards availing the said credit facility, the Respondent executed a Facility Agreement dated August 11, 2015 (“Facility Agreement”) along with certain other security documents, thereby mortgaging various immovable properties and creating security interest in favour of the Appellant against the Term Loan. The Sanction Letter had the name of the Appellant, ‘L&T Finance (Home Loans)’ set out on the top right hand corner of the letterhead, and ‘L&T Housing Finance Ltd.’ with its address mentioned on the bottom left hand corner.

The Respondent subsequently defaulted on repayment of the Term Loan, following which, the Appellant served a demand notice dated December 16, 2016, on the Respondent to pay the outstanding dues within the stipulated period mentioned in the said demand notice. Since the Respondent failed to make the outstanding payment within the stipulated period, the Appellant classified the account of the Respondent as a Non Performing Asset (“NPA”) on April 15, 2017, and issued a notice of demand dated June 14, 2017, under Section 13(2) of the SARFAESI Act (“Demand Notice”), calling upon the Respondent to pay the outstanding dues of INR 16,97,54,851/- as on May 31, 2017, with future interest till actual payment, in terms of the Demand Notice, within sixty days from the date of receipt of the Demand Notice.

Upon receipt of the Demand Notice, the Respondent failed to discharge its liability and instead issued a reply dated August 8, 2017, to the Demand Notice. Consequently, the Appellant filed an application under Section 13(4) read with Section 14 of the SARFAESI Act, before the competent authority towards taking possession of the mortgaged properties and the collateral security of the Respondent. In response, the Respondent filed a securitisation application (No.76/2018) before the Debt Recovery Tribunal (“DRT”) under Section 17 of the SARFAESI Act assailing the issuance of the Demand Notice. After hearing both sides, the DRT by its order dated March 23, 2018 (“DRT Order”), set aside the Demand Notice on the ground that it had not been validly issued in the name of the Appellant, and instead the name “L&T Finance Ltd.” had been mentioned on the Demand Notice. The DRT held that since the Demand Notice was issued by another group entity of the Appellant and not the Appellant itself, who in fact was the secured creditor, and the defect not being curable after issuance of the Demand Notice, the proceedings under Section 13(4) read with Section 14 of the SARFAESI Act were not sustainable. The DRT Order was challenged by the Appellant under an appeal before the Debt Recovery Appellate Tribunal (“DRAT”) which, by its order dated April 16, 2019 (“DRAT Order”), set aside the order of the DRT. The DRAT Order was subsequently challenged by the Respondent by way of a writ petition filed before the High Court of Karnataka (“HC”). The HC, by its order dated June 27, 2019 (“HC Order”), set aside the DRAT Order and confirmed the observations of the DRT, following which, the Appellant had preferred the present appeal before the SC, against the said impugned HC Order.

Issue

Whether the Appellant could maintain proceedings under the SARFAESI Act in light of a technical defect in the application.

Arguments

Contentions raised by the Appellant:
The Appellant, inter alia, contended that the same letterhead of the Appellant was used right from the beginning of its dealings with the Respondent, including issuance of the Sanction Letter and the Demand Notice, and even in its subsequent correspondences. The Appellant argued that, only at one stage, had it due to oversight, inadvertently applied the seal of “L&T Finance Ltd.” and that it was not the case of the Respondent that the same had caused any substantial prejudice to it. In the given circumstances, the mere technical defect noticed in the Demand Notice by the DRT and relied upon in the DRT Order and subsequently confirmed by the HC in the HC Order, should not negate the proceedings which had been initiated by the Appellant in carrying out its obligations and protecting its security interest as contemplated under the provisions of the SARFAESI Act.

Contentions raised by the Respondent:
The Respondent on the other hand contended that when the salient defect had been noticed by the DRT and confirmed by the HC at the very inception of the proceedings being initiated under the SARFAESI Act, all the consequential proceedings initiated in furtherance thereof in the instant case could not be said to be in due compliance of the SARFAESI Act, and once a procedure had been prescribed by law as mandated under the SARFAESI Act, the secured creditor was under an obligation to comply with it, which in the instant case had undisputedly not been followed. The Respondent further contended that in the given circumstances, no error had been committed by the HC under its impugned HC Order, which needed to be rectified by the SC.

Observations of the Supreme Court
The SC observed that from the very inception, when the proposal of taking the Term Loan from the Appellant was furnished by the Respondent by its application dated May 15, 2015 and accepted by the Appellant by the Sanction Letter, the letterhead which was used for the purpose clearly reflected “L&T Finance (Home Loans)” on the top right hand corner of the letterhead, and “L&T Housing Finance Ltd.” with its registered office address on the bottom left hand corner, and this had been duly signed by the authorised signatory of the Respondent. Therefore, it manifested from the record that the Respondent, from the initial stage, was aware of the procedure which was being followed by the Appellant in its correspondence while dealing with its customers and that was the same practice being followed by the Appellant when another notice dated December 16, 2016 was served by it at a later stage. The Demand Notice, which in explicit terms indicated the execution of the Facility Agreement between the Appellant and the Respondent and of the default being committed by the Respondent in furtherance thereof, was served on the same pattern of the letterhead which was being ordinarily used by the Appellant in its correspondence with its customers leaving no iota of doubt that it was in reference to the non-fulfilment of the terms and conditions of the Facility Agreement executed between the parties. Even in the reply to the Demand Notice, which was served by the Respondent on August 8, 2017 under Section 13(3A) of the SARFAESI Act, no specific contention was raised with reference to the manner of correspondence between the Appellant and the Respondent and no objection was raised by the Respondent with regard to any defect in the Demand Notice.

It was further observed by the SC that when action had been taken by the competent authority as per the procedure prescribed by law and the person affected has knowledge of it, such action could not be held to be bad in law merely on account of a trivial objection, unless any substantial prejudice is caused on account of the procedural lapse as prescribed under the SARFAESI Act or the rules framed thereunder. The SC further stated that it always depended upon the facts of each case to decipher the nature of the procedural lapse being complained of and the resultant damage, if any, being caused, and there could not be a straitjacket formula which could be uniformly followed in all the transactions.

The SC observed that the objection raised by the Respondent was trivial and technical in nature and the Appellant had complied with the procedure prescribed under the SARFAESI Act. At the same time, the objection raised by the Respondent in the first instance, at the stage of filing of a securitisation application before the DRT under the SARFAESI Act, was a feeble attempt which had persuaded the DRT and the HC to negate the proceedings initiated by the Appellant under the SARFAESI Act. This was unsustainable, more so, since the Respondent was unable to justify the error in the procedure being followed by the Appellant in initiating proceedings under the SARFAESI Act.

Decision of the Supreme Court
In allowing the instant appeal, the SC held the view that the submission made by the Respondent that the Demand Notice under Section 13(2) of the SARFAESI Act was served by the authorised signatory of “L&T Finance Ltd.” which was not the actual secured creditor, was wholly without substance, for the reason that “L&T Finance Ltd.” and “L&T Housing Finance Ltd.” were the companies who in their correspondence with all their customers used a common letterhead, having the same authorised signatory, and at one stage due to human error by the authorised signatory, the seal of “L&T Finance Ltd.” was affixed in place of “L&T Housing Finance Ltd.” Moreover, when that there was not any confusion in the case of the Respondent in its knowledge regarding the action being initiated in the instant case, or any substantial prejudice being caused apart from the technical objection in the Demand Notice under Section 13(2) of the SARFAESI Act or in the proceedings in furtherance thereof, no interference by the HC in its limited scope of judicial review was called for. Consequently, the SC was of the view that, the judgement of the HC was unsustainable and deserved to be set aside. Accordingly, HC Order was quashed and set aside.

Vaish Associates Advocates View:

The decision of the SC in the present case should deter loan defaulters from seeking to frustrate and delay recovery proceedings against them by secured creditors on trivial and technical grounds. This decision is supported by the logic that unless serious damage or prejudice has been caused to the defaulter under the proceedings as a result of such procedural lapse, the judiciary should not entertain such applications under Section 17 of the SARFAESI Act.

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

Between the Lines | NCLT, Mumbai: The jurisdiction to grant reliefs for recovery of rent from the tenant and the eviction of tenant from the property of the corporate debtor is in the exclusive domain of the civil court

The National Company Law Tribunal, Mumbai (“NCLT”) has in its judgement dated October 27, 2020 (“Judgement”) in the matter of Asset Reconstruction Company (India) Limited v. Precision Fasteners Limited [C.P. (IB) No. 1339/NCLT/MB/2017], held that jurisdiction to grant reliefs of recovery of rent from tenant and the eviction of tenant from the property of the corporate debtor lies in the exclusive domain of the civil court, hence, such issues cannot be dealt with by the adjudicating authority (“Adjudicating Authority”) as defined under Section 5(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) by invoking Section 60(5) of the IBC.

Facts

The NCLT, in this Judgement, has considered the following two applications:

• M.A. No. 1512/2018 (“Application No.1”) filed by the Liquidator (“Applicant”or “Liquidator”) of Precision Fasteners Limited (“Corporate Debtor”) against Siddhi Edibles Private Limited (“Respondent”); and
• M.A. No. 47/2019 (“Application No. 2”) filed by the Respondent against the Liquidator.

Application No.1 was filed by the Liquidator under Section 60(5)(c) of the IBC, wherein the Applicant stated that he had been appointed as the liquidator of the Corporate Debtor by an order dated March 12, 2018. The Corporate Debtor rented out a premise owned by it, that is, the ‘office Space No. 19, Ground floor at premise No. 8, Camac Street, Kolkata’ (“Property”) to the Respondent. By agreement dated October 07, 1983, (“Agreement”), one Mrs. Pushpadevi Jain had assigned all the right, title and interest in respect of the Property in favour of the Corporate Debtor and the Agreement also recorded that the Corporate Debtor had obtained the consent of Shantiniketan Estates Private Limited (“Developer”). The Developer had also recognised the ownership, title and interest of the Corporate Debtor for the Property by letter dated October 24, 1986. The promoter of the Corporate Debtor had entered into a leave and license agreement with the Respondent in respect of the Property and copy of it was not traceable. The Applicant by letter dated June 08, 2018 had communicated to the Respondent that the promoters of the Corporate Debtor had confirmed that the leave and license agreement had expired prior to the commencement of the corporate insolvency resolution process of the Corporate Debtor and was not renewed thereafter. The Respondent unilaterally reduced the rent of the Property from INR 26,000/- per month to INR 21,000/- per month from December, 2017. Further, the Respondent paid only INR 18,900/- in the month of June, 2018 and subsequently had stopped paying the rent.

Respondent stated that it was a lawful tenant and bona-fide occupant of the Property and paid rent regularly to the Corporate Debtor. The Respondent submitted that during October, 2016, on the instruction of the Corporate Debtor, the Respondent paid a part of the rent to the Kolkata Municipal Corporation (“KMC”), and the Applicant had also stated that the said amount paid to KMC was adjusted towards rent paid by the Respondent. The Respondent had also enclosed the property tax receipt that had the name of Corporate Debtor as the owner of the Property.

The Applicant stated that he served notice dated April 17, 2018 (“Eviction Notice-1”) and notice dated September 12, 2018 (“Eviction Notice-2”) to the Respondent but in reply to both eviction notices, the Respondent refused to vacate and handover the possession of the Property.

Therefore, this Application No.1 was filed by the Applicant wherein he sought relief for eviction of, and recovery of outstanding rent from, the Respondent. Further, the Applicant also sought relief to sell, dispose-off and transfer the Property. Application No.2 was filed by the Respondent against the Applicant seeking the relief to set aside and/or quash the Eviction Notice-1 and Eviction Notice-2.\

Issues

• Whether the Adjudicating Authority has the jurisdiction to grant reliefs for recovery of rent from tenant and eviction of tenant from the Property of the Corporate Debtor under Section 60(5) of the IBC.
• Whether the Liquidator was right in including the Property under liquidation estate of the Corporate Debtor.

Arguments
Contentions raised by the Applicant:

Applicant contended that unilateral reduction of the rent of the Property by the Respondent was unjustified. The Applicant brought forth the irony by the Respondent in the correspondences. On one hand, by the letter dated May 14, 2018, the Respondent, in reply to Eviction Notice -1, stated therein that the Respondent paid rent to the Corporate Debtor, paid property tax on behalf of the Corporate Debtor to KMC and name of the Corporate Debtor appeared on the property tax receipt enclosed therewith; the contents of which corroborated that the Corporate Debtor is the owner of the Property, while, on the other hand, by letter dated September 17, 2018 in reply to Eviction Notice– 2, the Respondent challenged the inclusion of the Property in the liquidation estate of the Corporate Debtor and further the Respondent had challenged the title and ownership of the Corporate Debtor to the Property.

As per Section 35 (Powers and duties of liquidator) of the IBC, the Applicant was empowered to take into his custody or control of all assets, property, effects, actionable claims of the Corporate Debtor and to take such measures to protect and preserve the assets of the Corporate Debtor as necessary. Applicant relied on Section 36 (Liquidation estate) of the IBC and sought a relief that the Respondent be directed to vacate the Property owned by the Corporate Debtor. As per Regulation 44 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, the Applicant is required to liquidate the Corporate Debtor within a time-bound manner and therefore, the Applicant submitted that it is just and necessary that the reliefs sought be granted.

Contentions raised by the Respondent:
Respondent objected to the Eviction Notice–1. Respondent had replied to the letter dated June 08, 2018 of the Liquidator by letter dated June 27, 2018 stating that the Respondent was ready to pay rent to the Liquidator subject to production of document to establish that the Property belonged to the Corporate Debtor. Even though the Corporate Debtor entered into an agreement for sale with the Developer, ultimately, there was no registered deed of conveyance in favour of the Corporate Debtor from the Developer. The Liquidator had admitted that the ownership of the Property had not been lying with the Corporate Debtor even though Mrs. Pushpadevi Jain had executed the Agreement in favour of the Corporate Debtor, because the Agreement has not been duly registered. The Developer had acknowledged the right of the Corporate Debtor as owner of the Property, though there was no valid registered deed of transfer in favour of the Corporate Debtor. In view of the above, the Property would not come under the liquidation estate as per Section 36(4)(a) of the IBC, as it is an asset owned by a third party which is in possession of the Corporate Debtor.

The Liquidator issued Eviction Notice – 2 even after having the knowledge that the Property did not come under the liquidation estate. The Respondent, by letter dated September 17, 2018, refused to hand-over the possession of the Property. The Respondent had no information relating to creation of security relating to the Property in favour of any secured creditor of the Corporate Debtor. The Respondent submitted that it is a settled position of law that without legal recourse, a tenant cannot be evicted.

Observations of the NCLT

The NCLT relied on the judgment of the Hon’ble Supreme Court in the case of Embassy Property Developments Private Limited v. State of Karnataka and Others [2019 SCC OnLine SC 1542] wherein it was held that “If NCLT has been conferred with jurisdiction to decide all types of claims to property, of the corporate debtor, Section 18(f)(vi) would not have made the task of the interim resolution professional in taking control and custody of an asset over which the corporate debtor has ownership rights, subject to the determination of ownership by a court or other authority. … Section 25(1) and 25(2)(b) reads as follows: 25. Duties of resolution professional – (1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor (2) For the purposes of Sub-section (1), the resolution professional shall undertake the following actions: (a)…. (b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial and arbitration proceedings. This shows that wherever the corporate debtor has to exercise rights in judicial, quasi-judicial proceedings, the resolution professional cannot short-circuit the same and bring a claim before NCLT taking advantage of Section 60(5)”.

The NCLT analysed the applicability of the precedents to the instant matter at hand, that is, whether the above judgments dealing with the powers and duties of resolution professional could be applicable to liquidator.

The NCLT noted that Section 35(1)(k) of the IBC provides that, subject to the directions of the Adjudicating Authority, the liquidator shall have the power to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name of or on behalf of the corporate debtor. Further, the NCLT noted that Section 63 of the IBC provides for ‘Civil court not to have jurisdiction’ and Section 231 of the IBC provides for ‘Bar of jurisdiction’. Therefore, the NCLT observed that when the Adjudicating Authority is provided with a specific jurisdiction under the IBC, the civil court has no jurisdiction in respect of those specific matters such as preferential transactions, undervalued transactions, etc. The NCLT further observed that when the provisions of the IBC are read comprehensively, such as Section 18(f)(vi), Section 25(2)(b) and Section 35(1)(k), it can be inferred that the jurisdiction of the Adjudicating Authority does not extend to subjects such as recovery of money, specific performance, eviction proceedings, etc. which were to be dealt with by civil court only.

Further, reference was also made to the judgment of the National Company Law Appellate Tribunal upholding the rejection of resolution plan in the matter of K.L Jute Products Private Limited v. Tirupti Jute Industries Limited and Others [Company Appeal (AT)(INS) No. 277 of 2019]. The relevant portion is as follows: “Insofar as, the eviction of 2nd Respondent is concerned, the Adjudicating Authority is not empowered to pass an order of eviction and it is for an ‘Aggrieved party’ to move the appropriate forum for redressal of its grievances in accordance with Law….”

The NCLT observed that in the guise that the IBC is a complete code in itself, the Adjudicating Authority can neither enlarge nor amplify its jurisdiction.

Decision of the NCLT

The NCLT held that recovery of rent from the tenant and the eviction of tenant from the Property of the Corporate Debtor is in the exclusive domain of the civil court and cannot be dealt with by the Adjudicating Authority under Section 60(5) of the IBC. It was held that the jurisdiction to deal with such matters lies exclusively with the civil court/rent control court only. Hence, the NCLT advised the parties to approach the appropriate jurisdictional civil court for the remedies sought except for sale of the Property.

It was held that, since the Respondent paid rent for the Property, which is an admitted fact, the Liquidator was right in including this Property in the liquidation estate of the Corporate Debtor. Further, it was held that the Liquidator may take steps to register the sale deed for the Property so that there will be a clear title for the Property. Insofar as the sale of the Property by the Liquidator was concerned, the NCLT held that he could do so after taking possession of the Property by due process of law.

Vaish Associates Advocates View:

The NCLT has rightly analyzed the powers of the liquidator and thereby in corollary interpreted the limited scope of the Adjudicating Authority under the IBC. By reading the various provisions of the IBC comprehensively and in view of the legislative intent, this Judgement observed that the power to grant the relief of recovery of rent from tenant and the eviction of tenant from the property of the corporate debtor lies with the appropriate jurisdictional civil court.

It is important to note that a civil court has jurisdiction by virtue of Section 9 of the Code of Civil Procedure, 1908 to try all suits of civil nature excepting suits of which cognizance is either expressly or impliedly barred. However, the Adjudicating Authority under the IBC does not have jurisdiction to all suits since the various professionals working towards the resolution/liquidation of the corporate debtor have the power to approach other appropriate authorities for seeking reliefs. Therefore, the NCLT, through this Judgement, has rightly clarified that the Adjudicating Authority can exercise only such powers within the contours of its jurisdiction, as prescribed by the statute, the law in respect of which, it is called upon to administer.

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

Between the Lines | Delhi High Court: Once the CIRP process itself comes to an end, an application for avoidance of transactions cannot be adjudicated

The Delhi High Court (“DHC”) has in its judgement dated November 26, 2020 (“Judgement”), in the matter of M/S. Venus Recruiters Private Limited v. Union of India [W.P.(C) 8705/2019 & CM APPL. 36026/2019], held that the role of the Resolution Professional (“RP”) cannot continue once the resolution plan (“Plan”) is approved and the
successful resolution applicant takes charge of the corporate debtor (“Corporate Debtor”). It was further held that the National Company Law Tribunal (“NCLT”) has no jurisdiction to entertain and decide avoidance applications in respect of a Corporate Debtor, which is now under a new management, unless provision is made in the final Plan.

Facts
M/s Bhushan Steel Limited, the Corporate Debtor in the instant case, was the subject of Corporate Insolvency Resolution Process (“CIRP”) before the NCLT, New Delhi, initiated by the State Bank of India in 2017. When the CIRP was initiated, Mr. Vijay Kumar Iyer was appointed as an interim resolution professional, who was subsequently confirmed as the RP by the Committee of Creditors (“CoC”) at its first meeting held on August 24, 2017. The CoC
approved the Plan proposed by Tata Steel Limited and the same was filed to seek approval before the NCLT on March 28, 2018. Thereafter, on April 9, 2018, the RP herein also filed an avoidance application, being CA No.284(PB) of 2018, under Section 25(2)(j), Sections 43 to 51 and Section 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In the said avoidance application, various transactions were enumerated as suspect transactions with related parties. The following were the suspect transactions allegedly entered into by the Corporate Debtor in the instant case:

• Potential excess payment of lease rent to Vistrat Real Estate Private Limited;
• Preferential credit to various international customers and long outstanding receivables to entities such as Shree Steel Djibouti FZCO and Shree Global Steel FZE;
• Excess payments to manpower companies/ contractors; and
• Uncontracted payment of interest on advance to Peak Minerals and Mining Private Ltd. for cancelled sale-and-lease back transactions.

M/s Venus Recruiters Private Limited (“Petitioner”) is one of the manpower contractors, as listed in suspect transactions in (iii) above. The Corporate Debtor and the RP herein, the successful resolution applicant (Tata Steel Limited) and the Union of India are hereinafter  collectively referred to as the “Respondents”. Within five weeks of filing the avoidance application, the NCLT approved the Plan, and the avoidance application in relation to the suspect transactions was neither heard nor decided on merits. On May 18, 2018, the Plan was finally closed and the new management took over. On July 24, 2018, the NCLT passed an order in the avoidance application (C.A. No. 284/2018), which was filed prior to the approval of the Plan.

The NCLT’s order dated May 15, 2018, approving the Plan, was subsequently upheld by the National Company Law Appellate Tribunal (“NCLAT”) by its judgment dated August 10, 2018. However, on October 25, 2018, the NCLT impleaded the Petitioner as a party in CA No. 284(PB)/2018 and issued notice to it. It is the said order impleading and issuing notice to the Petitioner, which was challenged by the Petitioner in the present petition, seeking issuance of a writ declaring the proceedings pending before the NCLT as void and non-est.

Issues

• Whether an application for avoidance of a preferential transaction, though filed prior to the Plan being approved, can be heard and adjudicated by the NCLT, at the instance of the RP, after the approval of the Plan.
• Whether a RP can continue to act beyond the approval of the Plan.
• Who would get the benefit of an adjudication of the avoidance application after the approval of the Plan.

Arguments
Contentions raised by the Petitioner:

The Petitioner questioned the jurisdiction of the NCLT and submitted that once the CIRP has reached finality, the RP becomes functus officio, after which it was no longer entitled to file or pursue any application on behalf of the company. Various provisions of the IBC were referred to, to submit that the RP merely conducts and manages the operations of the Corporate Debtor during the CIRP and not beyond that. As per Section 60 of the IBC, jurisdiction of the NCLT cannot extend beyond the approval of the Plan, and as the NCLT had disposed of all the pending applications by its order on May 15, 2018 making way for the new management to acquire control of the erstwhile Corporate Debtor, at a later stage, the order issuing notice in an application filed prior to the acceptance of the Plan is completely void. It was further submitted that there are strict timelines provided under the IBC. Reliance was placed on the preamble of the IBC which emphasizes its purpose of concluding the insolvency proceedings in a time bound manner. As per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations“), there are specific timelines prescribed for the RP to determine whether any transaction was preferential, undervalued, fraudulent or extortionate and also to file an application before the NCLT, both within the prescribed 180-day period. Accordingly, it was advanced that avoidance of any such transactions ought to be undertaken before conclusion of the CIRP. It was further emphasized that avoidance applications could not be filed by the Corporate Debtor or by the resolution applicant, but only by the CoC or the RP, prior to the Plan being approved. The difference between a statutory remedy under Sections 43 and 44 of the IBC and a civil remedy was highlighted and it was argued that once the new management comes into control of the Corporate Debtor, post the approval of the Plan, the Corporate Debtor was free to avail of its civil law remedies in respect of any new transaction that the new management is overviewing. The Petitioner explained that once the Plan is approved, the CoC itself is wound up, as all the dues of CoC are paid and a “No Dues Certificate” is submitted, after which no further proceedings can be undertaken by the CoC. Since the CoC
assumes the role of the final arbiter of the Plan, if it chooses not to pursue any particular transaction, the RP ought not to be allowed to pursue the same and reopening the resolution process in this manner would have adverse implications.

Contentions raised by the Respondents:
The Respondents protested that despite receiving the notice in the avoidance proceedings in April 2018, the Petitioner approached the DHC only in 2019 and thus it would not be entitled for discretionary jurisdiction to be exercised in its favour. The Respondents highlighted that the intention of the IBC is to delink the CIRP proceedings from avoidance transactions inasmuch as the adjudication of such transactions could take much longer than timelines fixed in the adjudicatory process. It was submitted that after the introduction of Section 26 of the IBC, it is clear that the power of the RP is independent of the CIRP proceedings. The Respondents, with the support of the Discussion Paper on Corporate Liquidation Process along with Draft Regulations published by Insolvency and Bankruptcy Board of India (“IBBI”) on April 27, 2019, contended that applications in respect of vulnerable transactions are long drawn due to continuous litigation and it is for this reason that Section 26 of the IBC clarifies that filing of an avoidance application shall not affect the proceedings of the CIRP. Reliance was placed on the decision in Committee of Creditors of Essar Steel India Ltd. through Authorised Signatory v. Satish Kumar Gupta [Civil Appeal No. 8766-67 of 2019, dated 15th November, 2019 (SC)], wherein the Supreme Court held that, although timelines were important in the CIRP proceedings, the word ‘mandatorily’ was struck down from
Section 12 of the IBC as being violative of Article 19(1)(g) of the Constitution. It was also argued that any order passed by the NCLT under Sections 60 and 61 of the IBC is appealable to the NCLAT, thereby questioning the jurisdiction of the DHC to entertain the instant writ petition on accord of an alternate remedy.

The point raised was that the NCLT could not have disposed of the entire petition, without dealing with the avoidance application and the timelines to adjudicate on the avoidance transactions can in fact be extended. It was contended that a perusal of Regulation 39(4) of the CIRP Regulations along with Form H of the CIRP Regulations clearly shows that the avoidance application could be filed or be pending at the time of submitting the Plan by the RP. It was pointed out that Clause 4.2 of the Report of the Insolvency Law Committee, constituted by the Ministry of Corporate Affairs dated 20th February, 2020 (“ILC Report”), opined that an avoidance application may continue even beyond the closure of the resolution proceedings. The Respondents argued that the RP, after arriving at a conclusion that a particular transaction is a preferential transaction, has to approach the NCLT, which can reverse the effect of the transaction and under Section 26 of the IBC there is no fixed time limit for deciding an avoidance application.

Observations of the Delhi High Court

Role of the RP:
While making note of the structure of the CIRP prescribed under the IBC, the DHC held that under Section 31 of the IBC, if the NCLT is satisfied with a Plan, it shall approve the same, making it binding on the Corporate Debtor and its stakeholders and guarantors. After ensuring that the Plan has sufficient provisions for its implementation, the NCLT approves the Plan, pursuant to which the moratorium order under Section 14 of the IBC ceases. The RP forwards all the records relating to the CIRP and the Plan to the IBBI to be recorded on its database, after which the role of the RP comes to an end.

Application for avoidance transactions:
The IBC contemplates various transactions which could be considered as objectionable or unacceptable and may require to be either reversed or compensated for, in order to maintain the fairness of insolvency or liquidation process to the creditors. As per Section 43 of the IBC, if the RP is of the opinion that any preferential transaction has taken place, by which the Corporate Debtor has given any benefit to a related party two years prior to the insolvency commencement date, or a preference to an unrelated party one year prior to the said date, he can move an application with the NCLT for avoidance of the same. If the NCLT is of the view that the transaction was a preferential transaction, it can pass various types of orders as set out in Section 44 of the IBC, in effect neutralizing the transaction including the reversal of the transaction, sale of any property given under the transaction, and amounts being paid in respect of benefits received. The DHC noted that a related party transaction would be preferential if it has taken place two years before the insolvency commencement date and puts such party in a beneficial position as against other creditors, sureties or guarantors. In case of an unrelated party, the period is one year.

The avoidance application in the instant case was filed after the CoC had approved the Plan and almost at the very end of the submissions on the Plan being heard by the NCLT, which it did not deal with at the time of approving the Plan. The DHC opined that after the approval of the Plan and the new management taking over the Corporate Debtor, no proceedings remain pending before the NCLT, except issues relating to the Plan itself, as permitted
under Section 60 of the IBC. Emphasizing that certainty and timeliness is the hallmark of the IBC, the DHC reiterated the views upheld in Innoventive Industries Ltd. v. ICICI Bank & Anr. [(2018) 1 SCC 407], that one of the important objectives of the IBC is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process. Continuation of the jurisdiction of the NCLT beyond what is
permitted under the IBC would be contrary to its very ethos. The DHC observed that after the approval of the Plan, the NCLT cannot exercise jurisdiction in respect of the avoidance application. It reasoned that an avoidance application for any preferential transaction is meant to give some benefit to the creditors of the Corporate Debtor and not to the Corporate Debtor in its new avatar, after the approval of the Plan, as is clear from Section 44 of the IBC.

The DHC noted that while the IBC is bereft of any provision prescribing a time limit to dispose of avoidance applications, the CIRP Regulations clearly stipulate the structure and methodology for dealing with objectionable transactions. Analyzing Sections 43 and 44 of the IBC, it observed that the assessment by the RP of the objectionable transactions including preferential transactions cannot be an unending process. As prescribed by the CIRP Regulations, if the RP concludes that the Corporate Debtor has been subject to preferential transactions, the determination has to be made by the 115th day and application to the NCLT for appropriate relief on or before the 135th day. The DHC observed that the said timelines are prescribed so that the RP includes these details in the resolution plan submitted under Section 30 of the IBC. These details ought to be available before the NCLT at the time of approval of the resolution plan under Section 31 of the IBC. The DHC observed that there is a start line and finish line for the CIRP. Section 23 of the IBC clearly stipulates that the role of the RP is to `manage’ the affairs of the Corporate Debtor `during’ the resolution process and not thereafter. Prior to the proviso to Section 23 of IBC, the RP’s mandate ended with the CIRP, but the proviso merely extended the functions of the RP till the approval of the Plan under Section 31 of the IBC, or appointment of liquidator, and not beyond that. Thus, the continuation of the RP or filing of an application for the purpose of prosecuting an avoidance application as a `Former RP’ is beyond the contemplation of the IBC. The RP ceases to be one after an order under Section 31 of the IBC is passed. The RP does not have any connection whatsoever with the new management which takes over the erstwhile Corporate Debtor, after the approval of the Plan. Any other interpretation could lead to a situation where an RP could be a ‘Former RP’ for years together without any definite end date.

The DHC pointed out that the mandate for the RP, under Section 23 of the IBC, cannot be extended beyond the contemplation in the statute. After the approval of the Plan, the new management takes over, and the manner in which the affairs of the company are to be run is the sole prerogative of the new management. In the statutory scheme, the RP cannot continue to act on behalf of the erstwhile Corporate Debtor under the title of `Former RP’, in violation of the legislative intention and the statutory prescription. A perusal of Section 30(4) of the IBC also makes it adequately clear that the CIRP period has to be completed within the time period specified under Section 12(3) of the IBC. Thus, the IBC does not contemplate the continuation of the RP beyond the CIRP period. The DHC clarified that the Judgement passed was strictly applicable to resolution processes and not liquidation. It was also observed that once the CIRP comes to an end, Form H of the CIRP Regulations cannot come to the aid of avoidance applications to remain pending beyond the CIRP process. The DHC, upon closely looking at the ILC Report, observed that the successful resolution applicant cannot be permitted to file such avoidance applications, as the same was not factored into the bid. If an avoidance application for preferential transactions is permitted to be adjudicated beyond the period after the Plan is approved, the NCLT would effectively be stepping into the shoes of
the new management to decide what is good or bad for the erstwhile Corporate Debtor. Once the Plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus, if the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the Plan.

Decision of the Delhi High Court
Allowing the petition, the DHC held that once the CIRP process itself comes to an end, an application for avoidance of transactions cannot be adjudicated. It was held that after the approval of the Plan and the new management taking over the Corporate Debtor, no proceedings remain pending before the NCLT, except issues relating to the Plan itself, as permitted under Section 60 of the IBC. Emphasizing on the lack of jurisdiction of the NCLT, the DHC upheld the maintainability of the instant writ petition and held the argument that avoidance applications relating to preferential and other transactions can survive beyond the conclusion of the CIRP, to be contrary to the scheme of the IBC. It was also held that the RP cannot continue beyond an order under Section 31 of the IBC, as the CIRP comes to an end with a successful Plan having been approved, subject to the Plan stating otherwise. The DHC further held that the RP’s role cannot continue once the Plan is approved and the successful resolution applicant takes charge of the Corporate Debtor.

It was decided that Section 26 of the IBC cannot be read in a manner so as to allow an application for avoidance of transactions under Section 25(2)(j) of the IBC to survive after the CIRP process. It was categorically held that the NCLT has no jurisdiction to entertain and decide avoidance applications, in respect of a Corporate Debtor, now under a new management unless provision is made in the final Plan and the parties would have to resort to civil and other remedies in terms of the contract between them. The DHC stated that the RP cannot wear the hat of the ‘Former RP’ and pursue an avoidance application in respect of preferential transactions after the hat of the Corporate Debtor has changed and it no longer remains a Corporate Debtor as this would be wholly impermissible in law as the mandate of the RP has come to an end.

Vaish Associates Advocates View:

Avoidance transactions under the IBC include transactions such as preferential transactions, undervalued transactions, extortionate credit transactions and transactions involving fraudulent and wrongful trading. When the RP or the Liquidator comes across any transaction that can be classified as avoidance transaction, the IBC mandates them to file an avoidance application with the NCLT, seeking appropriate reliefs and directions permissible under the IBC. In the instant case, the question that arose before the DHC pertains to the timeline for disposal of an avoidance application. The DHC has through this Judgement furnished much needed clarity on the fate of pending avoidance applications under Section 43 of the IBC, pursuant to the conclusion of the CIRP.

This Judgement has successfully prescribed a deadline, which has not been expressly stipulated in the IBC or its corresponding regulations, for the speedy disposal of avoidance applications. This case now acts as a precedent for NCLTs throughout the country, highlighting the need to deal with avoidance applications on a priority basis prior to the approval of the Plan. Through the Judgement, the DHC has upheld the integrity of one of the basic tenets of the IBC, that is, insolvency resolution in a time-bound manner.

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