Between the Lines | Delhi High Court: Mere fixation of the place or the seat of arbitration outside India, will not divest the Court of its jurisdiction under Section 9 of the Arbitration and Conciliation Act, unless there is any agreement to the contrary

The Hon’ble High Court of Delhi (“DHC”) has in its judgement dated October 23, 2020, in the matter of Big Charter Private Limited v. Ezen Aviation Pty. Ltd. and Others [O.M.P. (I) (COMM.) 112/2020] (“Judgement”), held that an agreement would be required to have a specific stipulation that the parties had agreed to exclude the applicability of Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”) to the contract between them, and to disputes arising thereunder, and merely fixing a place of arbitration would not oust the Section 9 jurisdiction of the court in case of international commercial arbitration.

Facts

Big Charter Private Limited (“Petitioner”) provides scheduled air operator services under the name “Flybig”. The respondent is a private limited company registered in Australia and is engaged in the business and lease of aircrafts and other associated activities (“Respondent”). The subject matter of the dispute was an aircraft owned by the Respondent (“Aircraft”).

The Petitioner proposed to lease the Aircraft from the Respondent. Prior to issuing the Letter of Intent (“LOI”), the Respondent wrote to the Petitioner, acknowledging the desire of the Petitioner to lease the Aircraft with effect from October 1, 2019, for a period of 3 years. Lease rent was fixed at INR 37 lakhs per month plus 5% GST, for the first 18 months, and INR 40 lakhs per month plus 5% GST, for the remaining 18 months, with an additional payment of maintenance reserves to the Respondent at USD 400 (per flying cycle/ flying hour). The Petitioner covenanted to ensure that the Aircraft was registered with the Directorate General of Civil Aviation (“DGCA”). The term of lease was to commence with the delivery of the Aircraft and continue for 36 months. Additionally, the LOI set out various provisions pertaining to payment of lease rent, deposits to be made by the Petitioner and that the final lease agreement would supersede the LOI. The LOI, under its governing law clause, stated that “This Proposal and the underlying documents for the contemplated transaction shall be governed by the laws of India without regard to conflict of laws principles. Lessee and Lessor agree to submit to the exclusive jurisdiction of the courts located in Singapore with regard to any claim of matter arising under or in connection with this Proposal or the Lease Documentation…”. Subsequently, a lease deed was executed on November 12, 2019 (“First Lease Deed”) between the parties, which was superseded by a second lease deed dated December 9, 2019 (“Lease Deed”). Among other things, the LOI and subsequently the First Lease Deed and the Lease Deed set out schedules of payment of lease rent and deposits to be made by the Petitioner in tranches and format of the delivery acceptance certificate (“DAC”) to be executed for acceptance of the Aircraft (“Schedules”). On March 4, 2020, the Petitioner wrote to the Respondent, requiring for confirmation of the final date by which the Aircraft would be delivered. The Respondent alleged delay in delivery due to the delay caused by the Petitioner in painting and design, which the Petitioner argued was the Respondent’s duty. The request for handing over of the Aircraft, with all necessary documents, was reiterated, emphasising that Cockpit Door Surveillance System (“CDSS”) was required to be installed in the Aircraft, and that the Respondent was also required to provide necessary support towards acquiring of the Certificate of Registration (“COR”) and Certificate of Airworthiness (“COA”) from the DGCA. The Petitioner stated that if the DGCA were to reject the request for issuance of COA, the Respondent would be required to return to the Petitioner, all amounts paid by it, along with the cost for ferrying the Aircraft. Subsequently, on March 22, 2020, the Petitioner pointed out that during oral discussions, the Respondent had made it clear that it had no intention to deliver the Aircraft to the Petitioner. In the circumstances, the Petitioner called on the Respondent to refund to the Petitioner, an amount of USD 5,30,000, stated to be due from the Respondent. The communication by the Respondent to the Petitioner alleged delay due to the Petitioner, and default in payment of security deposit and advance lease rent, as per the terms of the Lease Deed. It was further alleged that the Petitioner had unilaterally terminated the Lease Deed, thereby obviating the necessity of any termination notice having to be issued by the Respondent. In these circumstances, it was alleged that the Petitioner was liable to pay INR 19,20,460/– to the Respondent. The Petitioner alleged that the Respondent had failed to perform its obligations under the Lease Deed, which included delivery of the Aircraft with a valid COA and reiterated the demand for a refund. Asserting the existence of a clear and undeniable breach by the Respondent of the Lease Deed, the Petitioner moved the DHC under Section 9 of the Act. The Petitioner prayed for:

• a restraint against the Respondent creating any third party interest/right/title on the Aircraft, or from selling, transferring or encumbering the Aircraft in any manner;
• a restraint against the Respondent from taking the Aircraft out of India; and
• a direction to the Respondent to deposit USD 5,30,000 (equivalent to INR 4,01,05,736/–) in an escrow account.

Issue
Whether the DHC has territorial jurisdiction to pass interim relief under Section 9 of the Act when the place of arbitration has been agreed upon as Singapore.

Arguments
Contentions raised by the Petitioner:

The Petitioner argued that the Aircraft was located at Hyderabad. It was required to be registered with the DGCA and operated in accordance with the Aircraft Act, 1934, Aircraft Rules, 1937 and the civil aviation requirements issued by the DGCA. The most efficacious remedy available to the Petitioner was, therefore, by means of recourse to the jurisdiction of the DHC under Section 9 of the Act. Meaningful provisional relief, such as attachment of the defendant’s properties, could be granted only by the court within whose territorial jurisdiction the properties were located, and not by a foreign court having jurisdiction over the situs of the arbitral proceedings. Articles 9 and 17J of the UNCITRAL Model also vested jurisdiction in courts outside the seat of arbitration to grant interim relief. Though the exclusive jurisdiction vested with courts at Singapore, it was only with respect to the application of the governing law and adjudication of disputes pertaining to substantive rights and obligations of the parties but not to grant of interim relief even before the constitution of the arbitral tribunal. The jurisdiction of the court was to be determined as per the curial law governing the conduct of the arbitral proceedings, that is, the Singapore International Arbitration Centre (“SIAC”) Rules, which permitted parties to approach any judicial authority for interim relief, before the constitution of the arbitral tribunal, and not merely judicial authorities located in Singapore. The courts in Singapore exercised the jurisdiction to secure assets located abroad only if they had in personam jurisdiction over the parties, that is, where the parties had presented themselves before the courts in Singapore. It was also argued that Section 12A of the International Arbitration Act (“IAA”) did not apply at the pre-arbitration stage.

The Petitioner argued that the Aircraft has not been delivered by the Respondent in accordance with the Lease Deed. Execution of the DAC, in the manner provided in the Schedules, was conditional on delivery of the Aircraft in accordance with the covenants of the Lease Deed. In the absence of the certificate of deregistration, certifying that the Aircraft was no longer registered with any foreign authority, there was no “delivery” of the Aircraft within the meaning of the Lease Deed. Hence, the Petitioner did not execute any DAC, certifying delivery of the Aircraft, either. By not delivering the Aircraft with all requisite documents, the Respondent breached the Lease Deed. Without delivery of the Aircraft in accordance with the covenants of the Lease Deed, no liability to pay rent could be fastened on the Petitioner. Petitioner submitted that the plea of “unilateral termination” of the Lease Deed was a smokescreen created by the Respondent to wriggle out of its obligations under the Lease Deed. The maintenance reserves need not be paid if the Aircraft was not flown, since it was not delivered. Since the Respondent is located outside India, permitting the Respondent to alienate the corpus of the arbitral proceeding, that is, the Aircraft, would render the arbitral proceedings futile. The balance of convenience would be in favour of grant of interim reliefs, as sought in the petition.

Contentions raised by the Respondent:

The primary contention of the Respondent was that the DHC did not have territorial jurisdiction to deal with this petition. The contractual position that emerges is that the Petitioner and Respondent have agreed to subject themselves to the jurisdiction of courts at Singapore, the seat of arbitration is Singapore, and the arbitration proceedings are to be in accordance with the Arbitration Rules of the SIAC. The Respondent argued that since the
parties have agreed to submit themselves to the jurisdiction of the courts at Singapore, the DHC is proscribed from entertaining the present matter. The proviso to Section 2(2) of the Act is categorical and unequivocal. It provides that, irrespective of the location of the place of arbitration, Part I of the Act, which includes Section 9 of the Act, would apply to all international commercial arbitrations, subject to an agreement to the contrary. In the instant case, Clause 23.4 of the Lease Deed fixes both the place as well as the seat of arbitration, as Singapore. The arbitration being an international commercial arbitration, the proviso to Section 2(2) of the Act would make Part I of the Act applicable, subject to an agreement to the contrary. The governing law clause of the Lease Deed, that is, Clause 22.1, falls under the category of “agreement to the contrary”. Further, the parties reside in Mumbai and Australia, and no cause of action arose in Delhi. The Petitioner is not without a remedy in Singapore as Section 12A of the IAA empowers the court to order interim measures. The Lease Deed was invalid as Clause 32 thereof terminated all prior agreements or understandings pertaining to matters covered by the said Lease Deed.

The Respondent contended that the Schedules to the Lease Deed were not signed and hence the Lease Deed was invalid, and refuted the submission of the Petitioner that there was an implicit agreement to consider the Schedules to the First Lease Deed as part of the Lease Deed. The Respondent alleged that the Petitioner unilaterally terminated the Lease Deed by an e-mail concluding with the words, “Demand full refund and close”. Delay in securing registration of the Aircraft in India was attributable to the non-completion of import formalities by the Petitioner and delay in delivery of the Aircraft after executing the DAC, was attributable to the Petitioner’s insistence that the Respondent comply with conditions, that it was not obligated to perform in terms of the Lease Deed.

Observations of the Delhi High Court

With respect to the Schedules to the Lease Deed not being duly signed, the DHC observed that lack of proper signature was not fatal to the validity of the Lease Deed, on account of the Schedules to the Lease Deed being identical to the Schedules of the First Lease Deed, which were duly signed by the parties. Addressing the primary contention of the Respondent that the DHC does not possess the jurisdiction to hear this matter and is coram non judice, the DHC observed that jurisdiction is always a matter of competence, in that want of jurisdiction renders a judicial authority incompetent to adjudicate on a claim. A plea of alternate remedy, on the other hand, involves an element of discretion. Alternate remedy is never a bar to adjudication of the claim, especially in original civil jurisdiction. If the DHC does not have jurisdiction to entertain this petition, it cannot assume such jurisdiction merely because the Petitioner has no other remedy available with it. To understand the issue related to jurisdiction in its entirety, the DHC relied on various case laws.

In Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [(2012) 9 SCC 552] (“BALCO”), the Supreme Court held that Part I of the Act is limited in its application to arbitrations taking place in India. It also held that the “seat of the arbitration” was the “centre of gravity” thereof. At the same time, it was clarified that the arbitral proceedings were not required, necessarily, to be conducted at the “seat of arbitration”, as the arbitrators were at liberty to hold meetings at different, convenient, locations. The law governing the arbitration was, however, normally the “law of the seat or place where the arbitration is held”. The Constitution Bench went on, thereafter, to underscore the importance of the distinction between the “seat” and the “venue” of arbitration, in the context of international commercial arbitration, where it would be quite crucial in the event the arbitration agreement designates a foreign country as the “seat”/“place” of the arbitration and also selects the Act as the curial law or the law governing the arbitration proceedings. It notably held that only if the agreement of the parties is construed to provide for the “seat”/ “place” of arbitration being in India – would Part I of the Act be applicable. If the agreement is held to provide for a “seat”/ “place” outside India, Part I of the Act would be inapplicable to the extent inconsistent with the arbitration law of the seat, even if the agreement purports to provide that the Act shall govern the arbitration proceedings. It was held that the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings. It would, therefore, follow that if the arbitration agreement is found or held to provide for a seat/place of arbitration outside India, then the provision that the Act would govern the arbitration proceedings, would not make Part I of the Act applicable or enable Indian courts to exercise supervisory jurisdiction over the arbitration or the award. Thus, in BALCO, the Constitution Bench of the Supreme Court held, in unmistakable terms, that Section 2(2) of the Act resulted in complete exclusion of jurisdiction of courts in India, in respect of foreign seated arbitrations, even for the purpose of obtaining interim reliefs, whether at the pre-arbitral stage or otherwise, and also went on to clarify that this position was not affected by Section 2(1)(e) of the Act.

In Swastik Gases Private Limited v. Indian Oil Corporation Ltd [(2013) 9 SCC 32], the Supreme Court held that nonuse of words like “alone”, “only”, “exclusive” or “exclusive jurisdiction” in the jurisdiction clause is not decisive and does not make any material difference. For construction of jurisdiction clause, the maxim expression uniusest exclusion alterius comes into play as there is nothing to indicate to the contrary. This legal maxim means that expression of one is the exclusion of another. By making a provision that the agreement is subject to a particular territorial jurisdiction, the parties have impliedly excluded the jurisdiction of other courts. A clause like this is not hit by Section 23 of the Indian Contract Act, 1872 at all and such clause is neither forbidden by law nor is it against the public policy.

In Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited [(2017) 7 SCC 678], the Supreme Court endorsed the view that once the seat of arbitration has been fixed, it would be in the nature of an exclusive jurisdiction clause as to the courts which exercise supervisory powers over the arbitration.

These judgements were howeverrendered prior to the insertion of the proviso to Section 2(2) of the Act. Section 2(2) of the Act states that, “This Part shall apply where the place of arbitration is in India:

“Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act.”  Thus, the said proviso inserted by the Arbitration and Conciliation (Amendment) Act, 2015 stipulates that, unless there is an agreement to the contrary, even if the place of arbitration were outside India, the provisions of Sections 9 (Interim measures, etc., by court), 27 (Court assistance in taking evidence), 37(1)(a) (Refusal to refer the parties to arbitration) and 37(3) (Second appeal from order passed in an appeal) of the Act would continue to apply to international commercial arbitration and an arbitral award made or to be made in such place would be enforceable and recognized under Part II of the Act. Thus, the beneficial reach of this proviso is conditioned by the caveat that there should be no “agreement to the contrary”. In Mankastu Impex Private Limited v. Airvisual Limited [2020 SCC OnLine SC 301], the question that arose before the Supreme Court was whether the DHC lacked jurisdiction to entertain the petition filed under Section 11 (Appointment of arbitrators) of the Act as the parties have agreed that the seat of arbitration is in Hong Kong. This judgment was made in light of the proviso to Section 2(2) of the Act. The Supreme Court held that if the arbitration agreement is found to have seat of arbitration outside India, then the Indian courts cannot exercise supervisory jurisdiction over the award or pass interim orders. However, since Section 11 of the Act did not come under the ambit of the proviso to Section 2(2) of the Act, it was finally held that the application was not maintainable.

The DHC observed that de hors the proviso to Section 2(2) of the Act, there can be little doubt that once the “seat of arbitration” has been fixed as Singapore, courts at Singapore would have exclusive jurisdiction to supervise the arbitral proceedings. However, the proviso to Section 2(2) of the Act, which came into effect on October 23, 2015, changes the goalpost. Effectuating the proviso, Section 9 of the Act would also apply to international commercial arbitration, where the place of arbitration is outside India.

The DHC noted that unlike Sections 11, 34 and 36 of the Act, Section 9 of the Act is available at the pre-arbitration stage, before any arbitral proceedings have commenced, and could be subject to supervision by any judicial forum. It observed that the rationale of the Law Commission behind including Section 9 of the Act in the ambit of the proviso to Section 2(2) of the Act is that, where the assets were located in India and there is a likelihood of dissipation thereof, the party seeking a restraint there against would lack an efficacious remedy if the seat of the arbitration is abroad. Endorsing the views of the Law Commission, the DHC agreed that alternative reliefs in such a situation are likely to be more chimerical than substantial. The DHC endorsed the view that interim injunctive relief should not be granted if it requires an unacceptable degree of supervision in a foreign land. It observed that Section 12A of the IAA would not readily enable the Petitioner to seek interim relief at the pre arbitral stage from Singapore courts. Section 12A of the IAA does not indicate, expressly or by necessary implication, that it would apply at the pre-arbitral stage.

A Section 9 petitioner is required to demonstrate that, if urgent interim reliefs were not granted, there is a chance of the arbitral proceedings being frustrated, and the award (if any) being rendered futile. A court under Section 9 of the Act is concerned with protecting the corpus of the arbitral dispute, so that the arbitration can take off and fructify.

Once a dispute, amenable to and deserving of resolution by arbitration is found to exist, and the apprehension of dissipation of the assets forming the corpus of the dispute is found to be real and subsisting, or where the circumstances indicate that enforcement of the award as and when delivered would otherwise be hindered, Section 9 of the Act can grant “interim measures of protection”.

Decision of the Delhi High Court

The proviso to Section 2(2) of the Act makes Section 9 of the Act applicable even in the case of foreign seated arbitrations, unless there is an “agreement to the contrary”. Here, any “agreement to the contrary” would, therefore, have to expressly stipulate that Section 9 of the Act would not apply in that particular case. If such a specific stipulation is absent, the beneficial dispensation contained in the said proviso cannot stand excluded. Mere submission by the parties to the jurisdiction of Singapore courts in the “Governing Law” clause in the Lease Deed, cannot suffice to operate as “agreement to the contrary”, excluding the applicability of Section 9 of the Act. The agreement would be required to have a specific stipulation that the parties had agreed to exclude the applicability of Section 9 of the Act to the contract between them, and to disputes arising thereunder. Since there is no such express provision, the argument that the parties had agreed to submit themselves to the jurisdiction of Singapore courts, would not suffice as an “agreement to the contrary”.

The Respondent did not deny that the parties had agreed to treat the Schedules to the First Lease Deed, as Schedules to the Lease Deed. Since the Lease Deed was signed by the parties at New Delhi, it could not be justifiably contended by the Respondent that no part of the cause of action arose within the jurisdiction of the DHC and hence, there is no want of jurisdiction in relation to the DHC.

Moreover, it was held that the CDSS was not provided for by the Respondent, which was a pre-requisite for the DAC to be executed and the delivery of the Aircraft, and hence the Respondent was in violation of the Lease Deed. With respect to the contention of liability on the Petitioner to pay maintenance reserves, the DHC held that, as the Aircraft had never been flown, there could be no question of the Petitioner being required to pay any maintenance reserves. Further, the Court did not agree with the contention of unilateral termination of agreement and held that the agreement had not been unilaterally terminated. The petition was disposed of with a direction that the amount of INR 4,30,00,000 shall remain deposited with the Registry of the DHC by the Respondent, in an interest bearing fixed deposit, pending further orders.

Vaish Associates Advocates View:

The DHC, through its detailed Judgement, has highlighted the law on interim relief in case of International Commercial Arbitration and has laid down an important law that mere submission to exclusive jurisdiction of a foreign court does not oust the jurisdiction of the Indian courts under Section 9 of the Act. While acknowledging the laws laid down by the Supreme Court in various judgements that if the agreement clearly lays down the seat of arbitration, it ousts the jurisdiction of other courts, the DHC highlighted the proviso to Section 2(2) of the Act.

The DHC held that fixation of a “place” or the “seat” of arbitration would not, ipso facto, divest the DHC of Section 9 jurisdiction. Such divestiture would occur only if there is any “agreement to the contrary”. The agreement would be required to have a specific stipulation that the parties had agreed to exclude the applicability of Section 9 of the Act to the contract between them, and to disputes arising thereunder.

Through this Judgement, the DHC has upheld the intent of the Law Commission behind the proviso to Section 2(2) of the Act, that is, courts in the foreign country would not efficaciously be in a position to grant pre-arbitral interim relief to secure assets which may be located in India.

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

Between the Lines | NCLAT: NCLT to decide afresh on Punjab National Bank’s insolvency plea against Mittal Corp Limited

The National Company Law Appellate Tribunal (“NCLAT”) set aside an order dated December 20, 2019 (“Impugned Order”) passed by the National Company Law Tribunal (“NCLT”), by way of its judgement dated September 7, 2020 in the case of Punjab National Bank v. Mittal Corp Limited (Company Appeal (AT) (Insolvency) No. 260 of 2020). The NCLT had rejected the application filed by Punjab National Bank (“Appellant Bank”) under Section 7 (initiation of corporate insolvency resolution process (“CIRP”) by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against Mittal Corp Limited (“Respondent Company”). Aggrieved by the Impugned Order, the Appellant Bank had preferred an appeal before the NCLAT under Section 61 (appeals and appellate authority) of the IBC. The NCLAT directed the NCLT to decide on the admission of the application under Section 7 of the IBC against the Respondent Company on merits and in an expeditious manner.

Facts
The Appellant Bank was part of a Joint Lenders Forum (“JLF”) which had a total exposure of INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores) in respect of amounts due and payable by the Respondent Company, out of which, the erstwhile Oriental Bank of Commerce (now merged with the Appellant Bank) had a total exposure of approximately INR 245 crores (Indian Rupees Two Hundred and Forty-Five crores). A circular had been issued by the Reserve Bank of India (“RBI”) on February 12, 2018 (“RBI Circular”), wherein, banks were required to refer cases above INR 2,000 crores (Indian Rupees Two Thousand crores) to NCLT, if the issue was not resolved within 180 (one hundred and eighty) days of default. In Dharani Sugars and Chemical Limited v. Union of India and Others (2019) 5 SCC 480 (“Dharani Sugars”), the Supreme Court of India (“SC”) had quashed the aforesaid circular. The SC held that the said circular was ‘ultra vires’ Section 35 AA (Power of Central Government to authorize RBI for issuing directions to banking companies to initiate insolvency resolution process) of the Banking Regulation Act, 1949. The Appellant Bank had filed a Section 7 application under IBC in order to initiate CIRP against the Respondent Company. It was the Respondent Company’s contention that the Section 7 application had been filed pursuant to the RBI Circular. However, the RBI Circular could not be made applicable to it, as the total debt payable to the JLF was INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores), which is below the set threshold of INR 2,000 crores (Indian Rupees Two Thousand crores) provided under the RBI Circular. The Respondent Company argued that basis the minutes of meetings of the JLF, it was clear that the Appellant Bank had filed the Section 7 application basis the RBI Circular. By way of the Impugned Order, the NCLT had dismissed the Section 7 application on the ground that the Appellant Bank had filed the application pursuant to the RBI Circular. The Appellant Bank, had thereafter, appealed to the NCLAT.

Contentions of the Appellant Bank

The total outstanding debt payable by the Respondent Company to the erstwhile Oriental Bank of Commerce (which had now been merged with the Appellant Bank) stood approximately at INR 245 crores (Indian Rupees Two Hundred and Forty-Five crores). Further, the total outstanding amount owed by the Respondent Company to its consortium of lenders was around INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores). As such there was existence of ‘debt’ as provided under Section 3(11) (definition of debt) of the IBC. Further, the evidence on record had also established the ‘existence of default’. The JLF had decided to classify the account as ‘Special Mention Account’ in terms of the guidelines issued by the RBI. The JLF had also sanctioned a restructuring package pursuant to which a master restructuring agreement was entered into between the Appellant Bank and the Respondent Company on March 30, 2015. As the Respondent Company had failed to adhere to the financial norms, the ‘Strategic Debt Restructuring Scheme’ (“SDR”) was invoked. As per the SDR, the management change should have been accomplished within 18 (Eighteen) months from the date of reference (June 16, 2016), and the 18 (Eighteen) months had expired on December 17, 2017. On account of failure of the SDR, the Respondent Company’s account was eventually classified as a NPA with effect from June 30, 2016. Thereafter, on March 20, 2018, the Appellant Bank had filed an application under Section 7 of the IBC before the NCLT. The NCLT, however, had incorrectly placed reliance upon the decision of the SC in Dharani Sugars, as in the instant case, the Section 7 application was not filed pursuant to the RBI Circular. There was nothing in the minutes of the JLF meeting dated February 26, 2018 (as claimed by the Respondent Company) which could indicate that the Section 7 application had been filed by the Appellant Bank pursuant to the RBI Circular. It was submitted that as far as the meeting on February 26, 2018 was concerned, the JLF had only discussed the offers of prospective investors. Further, the JLF had deliberated upon the concern regarding the Bombay High Court (“BHC”) giving time only until April 06, 2018 to take a decision regarding the Respondent Company and seeking necessary directions in the company petitions.

This was also deliberated upon in the subsequent meeting on March 13, 2018. In the meetings, the Appellant Bank was only considering the interests of unsecured creditors, when it had proposed filing of the Section 7 application. The Appellant Bank had in fact, filed the Section 7 application only in respect of debts owed by the Respondent Company to the Appellant Bank and not on behalf of the JLF. Furthermore, the Respondent Company never raised a plea before the NCLT that the Section 7 application had been filed pursuant to the RBI Circular. Therefore, the NCLT had incorrectly relied on this point. As per the RBI Circular, the timelines for large accounts to be referred under the IBC was with respect to accounts with an aggregate exposure of INR 2,000 crores (Indian Rupees Two Thousand crores) and above on or after March 1, 2018 (reference date). However, with respect to other accounts with aggregate exposure of the lenders below INR 2,000 crores (Indian Rupees Two Thousand crores) and above INR 100 crores (Indian Rupees One Hundred crores), the RBI intended to announce, over a two-year period, reference date for implementing the resolution plan to ensure calibrated, time bound resolution of all such accounts in default. It was further submitted that the last offer was received on February 22, 2018, that is, after the issuance of the RBI Circular. It was reiterated that the Section 7 application was not made pursuant to the RBI Circular.

Contentions of the Respondent Company

It was submitted that the RBI Circular had been declared as non-est in the eyes of law in Dharani Sugars. The JLF had approved the restructuring package on March 30, 2015 and a two – year moratorium had been given for payment of term loan instalments. The Respondent Company however incurred losses and had cash flow problems, which was discussed in the JLF meeting held on June 04, 2016. Meanwhile, the JLF had also acquired 51% (fifty-one per cent) stake through conversion of debt. Thereafter, three investors had approached the JLF and submitted their offers. As far as the meeting on February 26, 2018 was concerned, the JLF had considered the offers of these proposed investors and examined the same pursuant to the RBI Circular. In the JLF meeting held on March 13, 2018, the finalization of the offers of change of management was deferred. The lead bank of the JLF had also informed that the BHC had deferred the matter to April 06, 2018 as a last chance and as the finalization of the resolution plan before April 6, 2018 was difficult, the JLF had then taken a decision to file the Section 7 application under the IBC. Therefore, it was clear that the Appellant Bank had initiated the said proceedings pursuant to the RBI Circular. Despite the mandate under the revised framework as per the RBI Circular, no resolution plan had been put in place by the Appellant Bank. Even after the expiry of the period of 18 (eighteen) months from the date of reference, the JLF continued to look for potential investors to take over their 51% (fifty-one per cent) stake, when in fact, the last offer was received on February 22, 2018, subsequent to the RBI Circular. A perusal of the RBI Circular would also make it evident that the RBI Circular was not applicable in cases where a restructuring scheme had been implemented.

Issues

• Whether the application filed by the Appellant Bank under Section 7 of the IBC was maintainable.
• Whether the aforesaid application was filed pursuant to the RBI Circular.
• Whether the ratio of Dharani Sugars was applicable to this case.

Observations of the NCLAT
On February 07, 2019, the Respondent Company filed a writ petition before the SC (Mittal Corp Limited v. Reserve Bank of India and Others [WP (Civil) 169 of 2019]) and the SC, on February 13, 2019, had ordered the parties to maintain their ‘status quo’. Further, on April 02, 2019, in Dharani Sugars, the SC held that the RBI Circular was ‘ultra vires’ Section 35 AA of the Banking Regulation Act, 1949. By an order dated April 19, 2019, the above mentioned writ petition filed by the Respondent Company was disposed with the observation that the NCLT was free to consider whether insolvency proceedings were initiated prior to the RBI Circular. Even though the Appellant Bank formed part of the JLF, the Appellant Bank had filed the Section 7 application only in respect of debts owed by the Respondent Company to the Appellant Bank and not on behalf of the JLF. On a reading of the provisions of the RBI Circular it was clear that the pre-requisite for invocation of the said circular was that there should be an aggregate exposure of INR 2,000 crores (Indian Rupees Two Thousand crores), and in the instant case, the debt amount totaled to INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores). Whereas the total amount claimed solely by the Appellant Bank totaled approximately to INR 245 crores (Indian Rupees Two Hundred and Forty-Five crores). For accounts with an aggregate exposure of the lender below INR 2,000 crores (Indian Rupees Two Thousand crores) and at or above INR 100 crores (Indian Rupees One Hundred crores), the RBI intended to announce, over a two-year period, reference date for implementing the resolution plan to ensure time bound resolution of all accounts in default. However, the documentary evidence did not provide for any such announcement being made by RBI in respect of the subject matter. Moreover, the RBI Circular did not have any application to the present case and as a consequence Dharani Sugars could also not be made applicable. From Dharani Sugars, it was clear that the subject matter of the RBI Circular was with respect to debts greater than INR 2,000 crores (Indian Rupees Two Thousand crores). The contention of the Respondent Company that the minutes of the meeting held on February 26, 2018 read together with the minutes of the meeting held on March 13, 2018 established that the Section 7 application was not maintainable as it was pursuant to the RBI Circular, was not tenable. The RBI Circular was not applicable in the present case since the amount claimed as debt due and payable was less than INR 2,000 crores (Indian Rupees Two Thousand crores) and furthermore, the process was initiated by the JLF prior to issuance of the RBI Circular. Merely because the JLF: (a) had discussed investor offers and the revised plan submitted by one of the investors; (b) had examined all proposals in light of the RBI issued guidelines on February 12, 2018; (c) deliberated that finalization of a resolution plan before April 06, 2018, as required by the BHC, was difficult; and (d) had decided to file a Section 7 application under the IBC, it could not be concluded that the application per se was initiated because of the RBI Circular. Furthermore, a mere discussion in the meeting cannot be considered as “substantial evidence” in establishing that the Section 7 application under the IBC was filed pursuant to the RBI Circular. The BHC order reflected that the JLF was given time until April 06, 2018 to complete the process and the same was discussed in the JLF meeting held on March 13, 2018. Appreciating the concern of the BHC and taking into consideration that a time-bound resolution could not be achieved within such a short period of time, a decision was taken by the JLF to file a Section 7 application under the IBC. It is notable that the reply filed by the Respondent Company dated June 6, 2018 did not even mention that the application was filed pursuant to the RBI Circular. It was only in their additional affidavit dated September 17, 2019 that the Respondent Company had contended that the application was filed pursuant to the RBI Circular. When in fact, in their sur-rejoinder filed on July 27, 2018, it was submitted that the application was filed in violation of the RBI Circular. As the said circular itself was not applicable to the present case, the ratio in Dharani Sugars case would also not apply.

Decision of the NCLAT
The account in question was declared as NPA in December 2017, with effect from June 2016, after the expiry of 18 (Eighteen) months period under the SDR. Further, the Section 7 application under the IBC was filed before the lapse of the time-period of 180 (One Hundred and Eighty) days (as provided under the RBI Circular), for a default in existence much before the reference date, that is, March 1, 2018. In the absence of cogent evidence that the Appellant Bank had filed the Section 7 application pursuant to the RBI Circular, which at the outset was not even applicable to the facts of the instant case, the NCLT could not have rejected the application on such grounds. The NCLAT further remitted the matter to the NCLT, directing it to consider the Section 7 application on its own merits taking into consideration the records, as expeditiously as possible.

Vaish Associates Advocates View:

It is interesting to note that on two separate instances, the Respondent Company had taken two contradictory positions in respect of the said application. Whilst, in one instance it was claimed that application was filed in violation of the RBI Circular, on a different occasion, they had come to claim that the application was filed pursuant to and in implementation of the RBI Circular.

Regardless of the same, factoring in multiple considerations in respect of the RBI Circular, such as the set threshold amount of INR 2,000 crores, the 180 day time period, including conducting a very careful consideration of the discussions that transpired in the JLF meetings, the NCLAT has rightfully concluded that there was no evidence that the Section 7 application under the IBC had been filed pursuant to the RBI Circular, and therefore, the application required a fresh consideration by the NCLT.

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

Between the Lines | Supreme Court: Suit for specific performance filed within limitation could not be dismissed on the sole ground of delay or laches

In the matter of Ferrodous Estates Private Limited v. P. Gopirathnam (Dead) and Others [Civil appeal no. 13516 of 2015], the Supreme Court of India (“SC”) vide its judgement dated October 12, 2020 held that a suit for specific performance filed within limitation could not be dismissed on the sole ground of delay or laches. The appeal had been filed against the judgement of the division bench of the Madras High Court (“MHC”). The MHC had decided against specific performance of a sale agreement entered into between the appellant and the respondents herein.

Facts
An agreement to sell dated June 12, 1980 (“Sale Agreement”) had been entered into between the appellant (“Appellant Company”) and the respondents (“Respondents”) in respect of certain property (“Suit Property”). In order to complete the sale transaction, the Respondents were to secure, inter alia, permissions from the competent authority under the Tamil Nadu Urban Land (Ceiling and Regulation) Act, 1978 (“ULCA”). The Appellant Company was to complete the transaction within six months from the date of the Sale Agreement subject to the Respondents obtaining clearance certificate from the appropriate authorities and giving vacant possession of the Suit Property. However, necessary permissions were not obtained by the Respondents, especially from the competent authority under ULCA. The Appellant Company thereafter, filed a suit for specific performance on February 24, 1981. The Appellant Company pleaded that it had been always ready and willing to perform its obligations. It was contended that the Respondents had not arranged to get, inter alia, permissions from the competent authorities in order to achieve completion of the sale. The Appellant Company believed that the Respondents were attempting to take advantage of the rise in price of landed properties and were trying to alienate the Suit Property to third parties. In the written statement filed by the Respondents, no defence was taken on any plea that ULCA would be infracted if the suit for specific performance would be decreed. The defence relating to the same was later made only in an additional written statement. The decisions taken by the courts at various stages are briefly detailed below.

Issue
Among other issues which were framed in the suit, the primary issue was: Whether the Appellant Company was not entitled to purchase more than 500 square meters under ULCA and whether the Sale Agreement was void on that account.

Decision of Madras High Court (Single Judge)
By judgement dated March 15, 1991, the MHC held that since the Respondents had not sought permissions under ULCA, they had breached the Sale Agreement. The Appellant Company was, therefore, entitled to get a decree of specific performance. It was noted that there was no term in the Sale Agreement that provided that it was subject to the grant of permissions under ULCA and that in the event of refusal of the same, the Sale Agreement would fail. Even if the said permissions had not been obtained, the Respondents could not refuse sale on such grounds. It was open to the Appellant Company to get a sale of the Suit Property with the risk. The Sale Agreement was true, valid and enforceable and it did not suffer from material alteration. Thereafter, the Respondents were directed to execute the sale deed within a two month period.

Decision of Madras High Court (Full Bench)
First appeal was made to the division bench in respect of the above judgement. The division bench then referred the matter to a full bench in respect of various questions. By judgement dated March 3, 1999, the MHC held that even if a contract by itself may not be illegal, if its enforcement violated any law, the agreement could not be enforced. The ULCA had been enacted to prevent concentration of urban land in the hands of few persons. The prohibition under Section 6 (transfer of vacant land) of the ULCA was for transferring of land by a person holding land in excess of the ceiling limits and any such transfer was deemed to be null and void. It was held that the provision contemplated both proposed transfer and completed transfer. Consequently, an agreement of sale was also affected by Section 6 of the ULCA. As far as exemption under ULCA was concerned, such exemption could be applied for only by the vendor. Further, while considering a suit for specific performance, the MHC was concerned with whether the purchaser had come to the court for enforcing the agreement in terms thereof. Asking a vendor to get exemption and then execute the agreement would amount to deviating from the terms of contract and the court could not enforce such a contract. This would mean that the purchaser was not willing to purchase the land as per the agreement, but only with a deviation, that is, vendor would have to get an exemption and then execute the sale deed. When a transaction could be completed only after obtaining exemption or permission from another authority over which the court had no control, the relief of specific performance was usually not granted.

Decision of Madras High Court (Single Judge)
The matter was referred to the division bench. The division bench then directed the single judge to record a finding on the question as to whether the Suit Property was held by the Respondents in excess of the ceiling limit applicable to them, and as to whether it could have been sold if at all, only with the permission of the authorities under the ULCA. By judgement dated September 30, 2003, the single judge recorded two aspects: (a) Material questions such as whether the Appellant Company was entitled to claim relief of specific performance or not, inter alia, could only be decided by the division bench;(b) The Suit Property factually stands as excess lands within the meaning of the ULCA before it came to be repealed by the Tamil Nadu Urban Land (Ceiling & Regulation) Repeal Act, 1999 (“Repeal Act”).

Decision of Madras High Court (Division Bench)
By judgement dated January 29, 2007, the division bench reversed the judgment of the single judge. The MHC held that the land transferred would have exceeded the ceiling limit in respect of the Appellant Company. Section 5(3) (ceiling limit) of ULCA enabled the person holding land in excess to continue to hold such land because the sanctioned layout was available. However, as far as the proviso to the above section was concerned, it was clear that the person intending to purchase such property should not, in the process, acquire land in excess of his own ceiling limit. In respect of the argument regarding the repeal of the ULCA by the Repeal Act, the division bench held that, it would mean that during the duration of ULCA, the Sale Agreement was not enforceable and could be specifically performed after the repeal. The court would be called upon to enforce the Sale Agreement on the basis of a consideration which was also fixed almost two decades back. Even if it was considered that there were many instances where such cases were pending before courts for a long period, and the court passed a decree for enforcement of contract, such position could not be compared to the present case. As per the decision of the full bench itself, the agreement was held to be contrary to the public policy under Section 23 (Lawful/unlawful considerations and objects) of the Indian Contract Act, 1872 and was not enforceable, if not void. To enforce such an agreement after long lapse of time because of the subsequent event, that is, repeal of the ULCA, would not be equitable. The court also considered the submissions, namely, the Appellant Company was prepared to submit INR 1.25 crores towards completing the sale and whereas the Respondent Company submitted that instead of the court enforcing the Sale Agreement, it was prepared to pay the Appellant Company INR 2 crores as damages, since the Sale Agreement itself contemplated damages in case of breach. The court held that in the interest of justice, instead of a decree for specific performance of the Sale Agreement, the Respondents were to pay a sum of INR 2 crores, in discharge of their entire liability. Thereafter, it did not consider the question if the Appellant Company was ready and willing to perform its obligations under the Sale Agreement.

An appeal was then preferred against the judgement before the SC.

Contentions of the Appellant Company before the SC

On an incorrect application of the judgement of the full bench of the MHC, it would follow that the Sale Agreement was void ab initio. This was incorrect, because it was a fact that the Respondents were the ones required to obtain permission under the ULCA, which could have been obtained. Given the fact that a first appeal was in the nature of a rehearing of a suit, on the date that the division bench passed its decree, the ULCA stood repealed, as a result of which none of its provisions could be used in order to hit the Sale Agreement. Further, the division bench’s interpretation of Section 5(3) of the ULCA and proviso would only render the main part of the said section redundant. Moreover, the Appellant Company had always been ready and willing to perform its obligations whereas the Respondents were actually in breach. It was open to the four Respondents to have applied for exemption of the Suit Property out of the larger property owned by them, and if that had been done, the Suit Property would have been within the original ceiling limit of the four Respondents, therefore, the suit for specific performance was correctly decreed in the Appellant Company’s favour. The fact that the Appellant Company could only purchase within the ceiling limit would not render the Sale Agreement null and void ab initio, it would have been instead the risk of the Appellant Company. In any case, the ULCA having been repealed by way of the Repeal Act, by the time the division bench passed its judgment, there was no impediment in decreeing specific performance.

Contentions of the Respondent Company before the SC

The full bench judgment being res judicata between the parties, it was not now possible to reopen what was held therein. Further, the division bench was correct in its conclusion that the Sale Agreement being void ab initio could not be resuscitated at any point in the future, given the repeal of the ULCA. A suit must be decided on the date the plaint was filed and not on the date of the state of the law when the appellate decree was passed. The SC should not interfere under Article 136 (special leave to apply by the Supreme Court) of the Indian Constitution, as the judgment passed by the division bench was equitable – the Appellant Company had been awarded INR 2 crores with interest, which would come to a sum of over INR 3 crores in the present day, despite the fact that specific performance could not be granted of a void agreement.

Observations of the SC

As far as the Sale Agreement was concerned, it was clearly provided therein that the Respondents had to obtain permissions under the ULCA. The full bench judgement itself had recognized that there could be agreements with such clauses, in which case it would become the court’s duty to enforce clauses. Therefore, the Sale Agreement could not be said to be hit by the full bench judgement. The single judge had in fact correctly held that it was for the Respondents to apply for exemption under the ULCA, which they had failed to do. Therefore, they had breached the Sale Agreement. The Sale Agreement, therefore, could not be void ab initio. The argument of the Respondents in respect of the proposition that the repeal of a statute, which made an agreement void, could not revive such void agreement, therefore, had no application. Further, it is settled in many judgements of the SC including in Chandnee WidyaVati Madden v. Dr. C.L.Katial [AIR 1964 SC 978], that if after the grant of the decree of specific performance of the contract, the land and development officer refused to grant permission for sale, the decreeholder may not be in a position to enforce the decree but it could not be held that such a permission is a condition precedent for passing a decree for specific performance of the contract. Furthermore, it is settled law that an appeal is a continuation of a suit, as a result of which a change in law will become applicable on the date of the appellate decree, provided that no vested right is taken away thereby. Further, the respondent’s reliance on Keshava Madhava Menon v. State of Bombay [1951 SCR 228] to buttress the argument that a repealing act could not be retrospectively applied so as to destroy a fundamental right, would not be applicable herein. The judgement in context was distinguishable given the fact that there was no fundamental right involved and that no vested right of the Respondents was affected by the Repeal Act.

Decision of the SC

On the date when the appellate decree was passed, the ULCA having been repealed, would not hinder passing of a decree for specific performance. There was no vested right under the ULCA in respect of the Respondents. Rights, if any, existed in favour of the state government, which has washed its hands off this matter by way of submission of a report to the SC on August 17, 2015. The division bench judgment was also incorrect in stating that: (a) it had taken 27 (twenty seven) years for the court process to decide the specific performance suit; and (b) specific performance being a discretionary relief ought not to be granted. Section 20 of the Specific Relief Act, 1963, (“SRA”) prior to its substitution by the Specific Relief (Amendment) Act, 2018 provided that while jurisdiction to decree specific performance was discretionary, it was not arbitrary. Section 20(2) of the SRA listed cases in which the court may properly exercise discretion not to decree specific performance. Significantly, Section 20(2) of the SRA provided for aspects to be adjudged at the time of entering into contract. No pleas relating to such Section 20(2) of the SRA had in fact been made by the Respondents. It was highlighted that in Saradamani Kandappan v. S. Rajalakshmi [(2011) 12 SCC 18] it was held that given the steep rise in urban land prices it may be incorrect to say that time was not the essence in the performance of contract of sale of immoveable property. There was an urgent need to revisit this position. As far as facts of the present case were concerned, time was definitely the essence of contract. Therefore, a suit for specific performance filed within limitation could not be dismissed on the sole ground of delay or laches (this was however subject to certain exceptions such as default on part of the plaintiff). It had also been previously held by courts that mere escalation of land prices after the date of filing of suit could not be a ground to deny specific performance. Once a suit for specific performance had been filed, any delay as a result of the court process could not be put against a plaintiff in decreeing specific performance. However, it is within the discretion of the court, regard being had to the facts of each case, as to whether some additional amount ought or ought not to be paid by the plaintiff once a decree of specific performance is passed in its favour, even at the appellate stage. The appeal of the Respondents that discretionary jurisdiction under Article 136 of the Indian Constitution should not be exercised given the fact that INR 2 crores plus interest was to be paid almost by way of solatium to the Appellant Company, was also rejected. The Respondents had taken up dishonest pleas and were also held to have been in breach of the Sale Agreement in which they were to obtain permissions under ULCA, which, if not obtained, under the Sale Agreement itself, would not stand in the way of the specific performance of the Sale Agreement. Given the conduct of the Respondents in this case, as contrasted with the conduct of the Appellant Company, which was ready and willing throughout to perform its part of the bargain, the judgement passed by division bench was set aside and the decree passed by the single judge was restored. Further, since the Appellant Company itself had offered to pay a sum of INR 1.25 crores to Respondents, it was directed that such amount be paid within a period of eight weeks from the date of the judgment.

Vaish Associates Advocates View:

It was noted that delay in court process, (in this instance the delay prolonged for a period of 27 years) could not be pitted against a plaintiff. This is equitable in the sense, as the SC rightfully pointed out that there were many instances where such cases were pending before courts.

Furthermore, while the MHC expressed its hesitation in enforcing specific performance of an agreement for which consideration was fixed almost two decades ago, the SC pointed out that mere escalation of land prices after the date of filing of the suit, could not be the sole ground for denial of specific performance. This may be read with an important observation of the SC that there was an urgent necessity to revisit the principle that time is not of the essence in case of contracts involving immoveable property. Such reconsideration by the SC is a shift from the normal principle that time is not considered to be an essence of the contract unless an intention can be gathered otherwise by the terms of the contract.

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