Supreme Court: No automatic stay on challenges to arbitral awards

The Supreme Court of India (“SC”) in the case of Hindustan Construction Company Limited and Another v. Union of India and Others (decided on November 27, 2019) struck down the insertion of Section 87 to the Arbitration and Conciliation Act, 1996 (“1996 Act”), calling it “manifestly arbitrary” and in violation of Article 14 of the Constitution of India. The newly inserted Section 87 of the 1996 Act contemplated that there would be an automatic stay on arbitral awards the moment they are challenged under Section 34 of the 1996 Act, if they pertained to arbitral proceedings commenced before October 23, 2015, that is, the date of enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”). This was irrespective of the fact that the said court proceedings under Section 34 (application for setting aside arbitral award) of the 1996 Act has commenced prior to or after October 23, 2015, Section 34 application only had to relate to an arbitral proceeding commenced prior to October 23, 2015.

The catena of issues in this case derive their genesis from an amendment to Section 36 (enforcement of arbitral awards) of the 1996 Act by Section 19 of the 2015 Amendment Act, which removed the automatic stay on operation of arbitral awards merely upon being challenged.

The SC also struck down the repeal of Section 26 (Act not to apply to pending arbitral proceedings) of the 2015 Amendment Act by the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”). In BCCI v. Kochi Cricket Private Limited [(2018) 6 SCC 287], the SC had deliberated upon the scope of Section 26, holding that automatic stay would not apply to Section 34 applications filed on or after October 23, 2015, even if the arbitral proceedings had commenced prior to the said date.

The SC held that insertion of Section 87 to the 1996 Act removed the premise of its judgement in BCCI v. Kochi Cricket Private Limited [(2018) 6 SCC 287], by imposing an automatic stay on arbitral awards if they pertained to arbitral proceedings before October 23, 2015.

FACTS
A set of writ petitions had been filed before the SC challenging the constitutionality of inserting Section 87 to the 1996 Act and repealing Section 26 of the 2015 Amendment Act. The petitioner in one of the writ petitions, Hindustan Construction Company Limited (“HCC/ Petitioner”) had submitted that as a contractor, it had undertaken projects for several government companies such as NTPC Limited, IRCON International Limited, NHPC Limited, in addition to National Highways Authority of India (“NHAI”) (collectively “Respondents”). All of the aforesaid parties were made respondents to the writ petition. In respect of these projects, cost overrun was always a matter of dispute between HCC and the Respondents. The only way for HCC to receive its dues was by instituting either a civil proceeding or an arbitration proceeding. Even in the scenario that an arbitral award was passed in the favour of HCC, it was invariably challenged by the Respondents by filing an application under Section 34 of the 1996 Act. A Section 34 application resulted in imposition of an automatic stay on the operation of arbitral awards. Consequently, on one hand, HCC’s pending dues would be stuck until the application could be adjudicated upon and on the other hand, HCC’s pending dues would become ‘disputed debt’ as per the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Therefore, any proceeding that could have been initiated by HCC under the IBC against the respondent government companies, would come to be dismissed. In any case, HCC could not initiate any proceeding against a statutory body like NHAI under the IBC.

It was also pertinent that HCC already owed large sums of money to its own operational creditors. In fact, demand notices had already been issued to HCC by these operational creditors for sums amounting to over a hundred crores. Therefore, even if HCC was financially sound, it would be unable to repay its operational creditors because of money being stuck under the automatic stay rule.

ISSUES

I. Whether Section 87 introduced to the 1996 Act by the 2019 Amendment Act was constitutionally valid.
II. Whether Section 26 of the 2015 Amendment Act should have been repealed with effect from October 23, 2015 by the 2019 Amendment Act.
III. Whether Sections 3(7) and 3(23) of the IBC are arbitrary and discriminatory to the Petitioners.

ARGUMENTS

Arguments raised by the Petitioner:
The Petitioner argued that from the plain language of Section 36 of the 1996 Act, automatic stay did not follow, and therefore, judgments of the SC which had held so, would require re-visitation.

Further, the Petitioner also brought to the SC’s notice that in its judgement in BCCI, it had considered the report chaired by Retired Justice B. N. Srikrishna (“Srikrishna Committee Report”), wherein, it was proposed that Section 87 should be introduced to the 1996 Act. The Petitioner contended that in BCCI, the SC had discouraged the introduction of Section 87 to the 1996 Act as it would have defeated the very object of introducing the automatic stay rule. Even though the judgement in BCCI was sent to Ministry of Law and Justice and to the Attorney General of India, Section 87 was finally inserted in the 1996 Act by the 2019 Amendment Act, without even a mere reference to the SC’s judgement in BCCI. Therefore, the 2019 Amendment Act sought to overturn the judgement in BCCI without disturbing its basis .The Petitioner, inter alia, raised the following contentions:

(i) It was contended that while in a full-blooded appeal, there was no automatic stay, in a summary proceeding as under Section 34 of the 1996 Act, there was an automatic stay merely upon filing of an application.

(ii) It was also contended that payment of a money decree under an arbitral award, even when under challenge, should be the rule whereas the stay should be the exception.

(iii) Further, it was contended that though introduction of Section 87 to the 1996 Act was a direct attack on the judgement in BCCI, the said section did not remove the basis of the said judgement. The said section had also arbitrarily imposed a ‘cut-off date’ qua the application of amended Section 36 of the 1996 Act.

(iv) With reference to NHAI, a statutory body constituted by the NHAI Act, 1988, the Petitioner contended that within Section 3(7) (corporate person)of the IBC, the words ‘limited liability’ should be deleted. Alternatively, Section 3(23) (g) (any other entity established under a statute) of the IBC should be read into Section 3(7) of the IBC. It was strongly contended that there was no level playing field under the IBC as far as HCC was concerned. This was because a statutory authority like NHAI could initiate resolution process against HCC but that could not happen vice-versa, which made the provisions of IBC discriminatory as IBC only provides for reorganization and insolvency resolution of corporate persons, etc. thereby excluding statutory bodies from its ambit.

(v) It was submitted that there was no bar to applying an Order VIII-A of the Civil Procedure Code, 1908 (“CPC”) type procedure to proceedings under the IBC. Such a manner of application would have manifested a situation wherein, if the Petitioner’s sub-contractor triggered the IBC, the Petitioner would be able to make its principal employer a party to such proceedings. Resultantly, the sub-contractor would be able to recover pending amounts directly from the principal employer.

Arguments raised by the Respondents

(i) It was contended that interpretation of Section 26 of the 2015 Amendment Act was only ‘declaratory’ in nature. Moreover, it was open to the Parliament to clarify its original intent by an amendment, if it found that a view expressed by the SC did not reflect its original intent. Such clarification was manifested by deleting Section 26 of the 2015 Amendment Act and introducing Section 87 to the 1996 Act.

(ii) Section 87 of the 1996 Act had also retrospectively removed the basis of the judgment of the SC in BCCI.

(iii) It was also submitted that in a plethora of cases the SC had held that fixing of a ‘cut-off date’ was within the exclusive domain of the Parliament.

(iv) The writ petition filed under Article 32 of the Constitution of India could not be converted into a recovery proceeding by the Petitioners.

(v) The definitions under Sections 3(7) and 3(23) of the IBC were separate and independent of each other. Therefore, nothing from Section 3(23) of the IBC which defined a ‘person’ could be imported into the definition of ‘corporate person’ under Section 3(7) of the IBC.

(vi) NHAI was a statutory body of the Central Government that carried out sovereign functions. Inevitably, the IBC could not be applied against a statutory body, because no resolution professional or private individual could take over the management of a body that performed sovereign functions.

OBSERVATIONS OF THE SUPREME COURT

A. Interpretation of Section 36 of the 1996 Act:
It was incorrect to read Section 36 of the 1996 Act as inferring something negative, that where the time period of ninety days for making an application under Section 34 of the 1996 Act had not expired and when such an application was made within the time frame, an automatic stay automatically ensued. The SC, pointed out that automatic stay of an arbitral award as provided in its previous judgments which are, National Aluminum Company Limited(NALCO) v. Pressteel and Fabrications Private Limited and Another [(2004) 1 SCC 540], National Buildings Construction Corporation Limited v. Lloyds Insulation India Limited [(2005) 2 SCC 367], Fiza Developers and Inter-State Private Limited v. AMCI (India) Private Limited and Another [(2009) 17 SCC 796] were incorrect. The amended Section 36 of the 1996 Act only restated the position that provisions did not stand in the way of law towards granting a stay of a money decree under the provisions of CPC.

B. Removal of the basis of the BCCI judgement by the 2019 Amendment Act:
The retrospective omission of Section 26 of the 2015 Amendment Act by the 2019 Amendment Act had indeed resulted in removal of the basis of the judgement in BCCI. The SC observed that at the time of passing of the judgment in BCCI, it was well aware of the recommendation of the Srikrishna Committee Report towards introducing Section 87 to the 1996 Act. It had noted that an immediate effect of enactment of Section 87 in the 1996 Act would put all important amendments on a back-burner.

Further, it was noted that such enactment would become contrary to the statement of objects and reasons of the 2015 Amendment Act. The statement of objects and reasons of the 2015 Amendment Act had made it very clear that the law prior to the 2015 Amendment Act had resulted in delay of arbitral proceedings and increased interference by courts in arbitration matters.

C. Constitutional challenge to the 2019 Amendment Act:
The SC agreed with the contentions of the Petitioner that mischief of the old Section 36 of the 1996 Act as regards automatic stay had been remedied after a period of more than 19 years by way of the 2015 Amendment Act, and now enactment of Section 87 to the 1996 Act would mean working in a reverse direction. Moreover, payments already made under the amended Section 36 of the 1996 Act to award-holders in a situation of ‘no stay’ or ‘conditional stay’ would be sought to be refunded. It was observed that the Srikrishna Committee Report did not refer to the provisions of the IBC. As a result of an automatic stay, the award holder may become insolvent by defaulting on payments to its creditors, when such payments would have been ordinarily forthcoming from the arbitral awards. Therefore, deletion of Section 26 of the 2015 Amendment Act and insertion of Section 87 to the 1996 Act were struck down as being manifestly arbitrary under Article 14 of the Constitution of India.

As far as the fixing of ‘cut-off date’ was concerned, it was the non-bifurcation of court proceedings and arbitration proceedings with reference to October 23, 2015 that was found to be manifestly arbitrary. The challenge was not in respect of fixing of a cut-off date. The SC also held that the ratio decidendi in BCCI would have continued application, so as to enable application of salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after October 23, 2015.

D. Constitutional challenge to the IBC:
The SC held that as far as the statutory body, that is, NHAI was concerned, the Petitioner’s argument as to deletion of words in Section 3(7) of the IBC or addition of words from Section 3(23) (g) of the IBC into Section 3(7) of the IBC was not acceptable. NHAI was a statutory body that functioned as an extended limb of the Central Government, and these governmental functions could not be taken over by a resolution professional under the IBC, or any other corporate body. It was also impossible that such a statutory body could be ultimately wound-up under the provisions of IBC. Relying upon its judgment in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [(2019) 8 SCC 416], the SC held that the IBC is not meant to be a recovery mechanism, what it did in fact intend, was the resolution of stressed assets. Further, the argument that an Order VIII-A type mechanism as under the CPC was not barred under IBC, was totally rejected by the SC. It was observed that a dispute must be between the parties as provided under the IBC. The IBC was not a debt recovery legislation, wherein by some theory of indemnity or contribution debt owed to the Petitioners could be fastened on to public sector units.

Vaish Associates Advocates View
The myriad of legal conflicts started right from the enactment of 2015 Amendment Act. A body of conflicting decisions across High Courts as to the applicability of the automatic stay rule, had resulted in constant uncertainty until the SC finally rendered its judgement in BCCI. The primary principle of this judgement is to prevent an automatic stay on an arbitral award when challenged, merely because it pertained to an arbitral proceeding commenced before October 23, 2015, that is, the date of enactment of the 2015 Amendment Act. The SC, in a welcome decision, clearly has recognized the need for India to become an arbitration friendly destination, which had been suddenly nullified by introduction of Section 87 to the 1996 Act. Excessive interference of courts and undue delay would have been the ultimate result of the retrospective resurrection of the automatic stay rule.

More particularly, an award holder would have been rendered insolvent because of obstruction of dues pending under an arbitral award on the one hand, and the escalating debt, now being owed to the award holder’s creditors on the other hand. The perpetuation of this vicious cycle would have taken a toll on the financial health of the award holder, and simply defeat the purpose and object of deleting the automatic stay rule. The judgement has done well in green signaling India as a business and arbitration friendly regime.

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

Supreme Court: Court can permit the filing of a counter claim even after the written statement has been filed but not after the issues have been framed unless there are exceptional circumstances

The Supreme Court (“SC”) in the matter of Ashok Kumar Kalra v. Wing Commander Surendra Agnihotri and Others (decided on November 19, 2019) held that a counter claim against the original claim may at the court’s discretion be filed after the written statement has been filed but not after the issues have been framed. However, exceptional circumstances exception has been carved out to permit the filing of the counter claim after the issues have been framed in order to prevent the multiplicity of proceedings and avoid the situation of an effective retrial but any counter claim filed after the recording of evidence has begun would be improper.

FACTS
Dispute arose between Ashok Kumar Kalra (“Petitioner”) (Original Defendant No. 2) and Wing Commander Surendra Agnihotri (“Respondent No. 1”) (Original Plaintiff) concerning a contract for sale pursuant to which Respondent No. 1 filed a suit on May 02, 2008 seeking the relief of specific performance.

Thereafter, the Petitioner in this case filed his written statement on December 02, 2008 and subsequently a counter-claim in the same suit on March 15, 2009. This was objected to by the Respondent No. 1 and the trial court rejected objections against the filing of the counter-claim after filing of the written statement and framing of issues. This order was quashed by the High Court. Hence, reference was made to the SC on this question of law.

ISSUES

i) Whether Order VIII Rule 6A of the Civil Procedure Code (“Rule 6A”) mandates an embargo on filing the counterclaim after filing the written statement.
ii) If not, then what are the restrictions on filing the counterclaim after filing of the written statement?

ARGUMENTS
The Petitioner argued that the intent behind Rule 6A is to provide an enabling provision for the filing of counterclaim so as to avoid multiplicity of proceedings, thereby, saving the time of the courts and avoiding inconvenience to the parties. Therefore, no specific statutory bar or embargo has been imposed upon the court’s jurisdiction to entertain a counterclaim except the limitation under the said provision which provides that the cause of action in the counterclaim must arise either before or after the filing of the suit but before the defendant has delivered his defense. Additionally, the Petitioner submitted that the rules of procedure should not be interpreted in a manner that ultimately results in failure of justice.

Respondent No. 1 argued that the language of the statute, and the scheme of the order, indicates that the counterclaim has to be a part of the written statement also relying on the statutory requirement that the cause of action relating to a counterclaim must arise before the filing of the written statement, and submitted that the counterclaim must therefore form a part of the written statement. Reliance was also placed on the placement of the provision relating to counter claim in Rule 6A.

OBSERVATIONS OF THE SUPREME COURT
The SC began emphasizing on the importance of both procedural and substantive justice, and the need to recognize and harmoniously stitch the two types of justice together to have an effective, accurate and participatory judicial system. It then considered the provisions of Order VIII, Civil Procedure Code, 1908, especially the claim of set-off in a money suit and right to claim under Rule 6A in addition to a set off (which is to have the effect of a cross suit) in respect of a cause of action accruing to the defendant before the delivery of his defense. It then went on to add that the counter-claim shall be treated as a plaint and governed by the rules applicable to plaints. The whole scheme of Order VIII in the opinion of the SC unequivocally points out the legislative intent to advance the cause of justice by placing an embargo on the belated filing of written statement, set-off and counterclaim.

The SC then pointed out the fact that Rule 6A was inserted vide an amendment (Act No. 104 of 1976) to avoid multiplicity of proceedings and that following Salem Advocate Bar Association Tamil Nadu v. Union Of India, [(2005) 6 SCC 344], procedural law should not be construed in a way to leave the court helpless, giving in fact a wide discretion to the civil court regarding procedural elements of a suit. Then following the Mahendra Kumar and Another v. State of Madhya Pradesh and Others, [(1987) 3 SCC 265] case, the SC, while considering the scope of Rule 6A(1) held that it does not bar the filing of a counter-claim by the defendant after he has filed the written statement as the cause of action for the counter-claim has arisen before the filing of the written statement.

The SC briefly discussed cases pertaining to the limitation applicable to filing such counter-claims and other judgments dealing with Rule 6A before concluding that a time limitation is not explicitly provided by the legislature, rather only limitation as to the accrual of the cause of action is provided. However, this does not mean that the counter-claim can be filed at any time after filing of the written statement as it is to be treated as a plaint which needs to be compliant with limitation provided under the Limitation Act, 1963. Time-barred suits cannot be entertained under the guise of counter-claim just because the cause of action arose as per the parameters of Rule 6A. The SC preferred a discretionary approach as opposed to the rigid technical view where the courts taking into the consideration, the reasons stated in support of the counter-claim, adopt a balanced approach keeping in mind the object behind the amendment and to sub-serve the ends of justice while deciding whether the counter-claim can be filed.

Hence, the SC stated that Rule 6A does not put an embargo on filing counter-claim after filing written statement but the restriction is only with respect to accrual of the cause of action. This does not give the right to file the counter-claim after substantial delay even if the limitation period has not passed and pegged the outer time limit till the framing of issues. The factors to be taken into consideration while permitting the filing are, inter alia, period and reason of delay, prescribed limitation period of cause of action, similarity in cause of action between main suit and counter-claim, injustice and abuse of process, and other facts and circumstances.

The dicta of Justice Shantanagoudar further added that in exceptional circumstances, the subsequent filing of the counter-claim may be permitted after the framing of issues until the stage of recording of evidence as there is no significant development in the proceedings during the intervening period of framing of issues and recording of evidence. A new issue can be framed by the court after the counter-claim if needed, without prejudicing the rights of either party. He however, went on to add that the filing of counter-claims after the commencement of recording of evidence is not illegal per se, rather improper and that the discretion has to be exercised wisely and pragmatically.

Vaish Associates Advocates View
One of the foremost activities of the third pillar is to ensure balance is maintained. This task of striking a balance is often a mammoth one, as one wrong precedent may lead to a floodgate of proceedings in the lower judiciary all over the country. The SC in the present judgment has attempted this balance, while trying to carve out principles of allowing a counter-claim to be filed after the written statement, in consonance with Rule 6A of the Civil Procedure Code, 1908. While doing so, the court has enshrined the foundational principle of “procedural law is not to be a tyrant but a servant, not an obstruction but an aid to justice”.

The SC has gone on to expound that although a rigid formula cannot be laid down, a counterclaim can be filed after filing of written statement in certain exceptional cases. The SC has delegated the balancing act to the civil judge to decide upon whether or not to allow such belated filing, while at the same time capping the upper limit at the stage of framing of issues. This delegation comes with a checklist of parameters to allow such filings that may successfully limit the number of counter claims filed at a later stage.

The only concern that may arise from this ruling is that such a belated filing may become a matter of routine and customary procedure. In a number of civil courts, the upper limit for filing a written statement has been increased to ninety days as a matter of practice, even though the statutory time limit is thirty days, and the extended time of up to ninety days is to be allowed only in exceptional cases. This ruling if not applied correctly, may lead to delayed counterclaims becoming a matter of practice, and the SC’s upper limit till the stage of framing of issues may only be able to do so much to prevent this practice.

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

Registrar of Companies cannot strike off the name of a company when there is litigation or insolvency proceedings pending by or against it – NCLT Ahmedabad

The National Company Law Tribunal, Ahmedabad (“NCLT Ahmedabad”) has by an order dated November 6, 2019 (“NCLT Order”), held that the Registrar of Companies cannot, during the pendency of Corporate Insolvency Resolution Process (“CIRP”), strike off the name of a company involved in pending litigation.

FACTS
M/s. J. R. Diamonds Private Limited (“Company”) was incorporated in 1977 as a private limited company under the Companies Act, 1956. An Insolvency and Bankruptcy Petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was admitted against the Company by the NCLT pursuant to an order dated February 13, 2018, under which one Mr. Vinod Tarachand Agrawal (“Appellant”) was appointed as the resolution professional. The Appellant was subsequently appointed as the liquidator of the Company by NCLT Ahmedabad by its order dated October 1, 2018. Following this, by a letter dated December 20, 2018, the Appellant informed the Registrar of Companies, Gujarat (“Respondent”) of the order passed by the NCLT Ahmedabad for liquidation of the Company, to which no response was received from the Respondent. While the status of the Company at the time of initiation of CIRP was shown as being ‘Active’, the Appellant subsequently discovered from the web portal of the Ministry of Corporate Affairs that the name of the Company had been struck off from the register of companies maintained by the Respondent during the pendency of the liquidation process pursuant to an order dated August 6, 2018 passed by the Respondent. The present appeal was filed by the Appellant towards seeking restoration of the name of the Company in the register of companies maintained by the Respondent.

ARGUMENTS
The Appellant, inter alia, contended that at the time of Company’s name being struck off by the Respondent, the Company had assets valuing INR 81,26,35,384, which included an investment of INR 4,50,00,000 in the preference shares of M/s. Peacock Jewellery Limited (“PJL”). The Appellant further contended that the said preference shares had matured and the payment recovery was due from PJL, for which the Appellant, being the liquidator, had filed a petition with the National Company Law Tribunal, Bengaluru. The Appellant informed NCLT Ahmedabad that the said petition was pending as on the date of filing of the present appeal and hence the name of the Company ought to have not been struck off. The Appellant also contended that the Respondent had struck off the name of the Company from the register maintained by the Respondent primarily because the Company had failed to file its financial statements and statutory annual returns from the financial year 2013-14 onwards. It was further contended by the Appellant that the Respondent had not followed the correct procedure under Section 248(1) of the Companies Act, 2013 as it had proceeded to publish the notification for striking off the name of the Company in the official gazette without sending a notice to the Appellant seeking his representation in relation to the proposed strike-off, as is statutorily required.

The Respondent, on the other hand, argued that the present appeal was not maintainable because the Company had failed to file its statutory returns for a continuous period of more than two years which mandated the Respondent to strike-off the name of the Company from the register of companies maintained by it as prescribed under Section 248(1) of the Companies Act, 2013. Notwithstanding the above, the Respondent submitted that NCLT Ahmedabad may pass appropriate orders for restoration of the name of the Company subject to fulfilment of the following conditions: (i) the Company filing all its financial statements and annual returns for the years on which the same were not filed, as well as all other event based filings, as prescribed under the Companies Act, 2013, (ii) publication of notices in two leading newspapers circulating in the district and the official gazette of the Government of India with regard to restoration of the name of the Company, at the cost of the Appellant, (iii) assurance that the Appellant will ensure that the Company will not make any default in filing statutory returns in the future, and (iv) payment of such costs by the Appellant as may be deemed fit by the Respondent for restoring the name of the Company in the register of companies maintained by it.

OBSERVATIONS OF NCLT AHMEDABAD
NCLT Ahmedabad noted that the Appellant, being the liquidator of the deregistered Company, is competent to file the present appeal to seek restoration of the Company’s name in the register of companies maintained by the Respondent. NCLT Ahmedabad also observed that when the name of the Company was struck off by the impugned order dated August 6, 2018, the Insolvency and Bankruptcy Petition had already been admitted and the CIRP had commenced with effect from February 13, 2018. Further, moratorium was declared in relation to the Company under Section 14 of the IBC, and accordingly no proceeding against it could have been legally initiated nor the provisions of Section 248 of the Companies Act, 2013 could have been invoked during such moratorium period.

NCLT Ahmedabad also took cognisance of Circular No. 16 dated December 26, 2016, issued by the Ministry of Corporate Affairs, that sets out that the provisions of Section 248 of the Companies Act, 2013 would not be applicable in respect of companies against which any prosecution for any offence, an application for compounding of offence, or any litigation is pending, pursuant to the order of a competent court.

In arriving at its decision, NCLT Ahmedabad relied on the decision of the Delhi High Court in M.A. Panjwani v. Registrar of Companies and Another [(2015) 192 Comp. Case 380 Dec.], where it was held that when there is litigation pending by or against a company before any competent court of law, striking off the name of such company by the Registrar of Companies was not justified.

NCLT Ahmedabad also relied on the decision of the Honourable High Court of Andhra Pradesh and Telangana (“AP HC”) in Velamati Chandrasekhara Janardan Rao v. M/s. Sree Raja Rajeswari Paper Mills Limited and Another [(2016) 198 Comp. Case 335 (AP)], where it was held that under Section 560(6) of the Companies Act 1956, the company court has the power to order restoration of a company’s name to the register of companies either on an application made by such company or its members or creditors or when it appears to the company court that it is ‘otherwise just’ that the name of such company be restored in the register. In this matter, the AP HC observed that the company court has the discretion to order restoration, even if the company was not carrying on any business or was not in operation at the time of striking off, if it appears to the court to be ‘otherwise just’. In arriving at its decision, the AP HC had relied on the judgement of the Madhya Pradesh High Court in Bhogilal Chimanlal v. Registrar of Joint Stock Companies [(1954) 24 Comp. Case 279 (MB)], where it held that the effect of the order of the Registrar of Companies striking off the name of a company from the register of companies would be that the company will be deemed to be dissolved and it may be difficult for the petitioner to obtain any relief in a suit pending before the trial court.

In addition to the above, NCLT Ahmedabad noted that the impugned action by the Respondent was inoperative and void in law due of the provisions of Section 238 of IBC, which has an overriding effect over other legislations.

DECISION OF THE NCLT AHMEDABAD
Considering the above, NCLT Ahmedabad conditionally allowed the present appeal and directed the Respondent to restore the name of the Company in the register of companies maintained by it, subject to compliance of the following conditions by the Appellant on behalf of the Company: (a) the Appellant would file all overdue statutory returns on behalf of the Company with fees and imposed penalties, if any, within ninety days from the receipt of the NCLT Order, (ii) the Appellant would publish a notice in leading newspapers circulating in the district as well as in the official gazette of the Government of India with regard to the restoration of the name of the Company in the register of companies, and (iii) before compliance of the statutory requirements of the Respondent, the Appellant would verify and settle the statutory requirements of the IBC.

Vaish Associates Advocates View
The ratio decidendi adopted by NCLT Ahmedabad in this case, that courts can order restoration of the name of a deregistered company that appears to be ‘otherwise just’ gives definitive discretionary powers to courts/tribunals to settle such matters. In effect, the decision passed by NCLT Ahmedabad invalidates any action not in conformity with the provisions of the IBC during the pendency of CIRP, and reaffirms the overriding effect of the IBC.

This is in consonance with the intent of the said legislation requiring that the moratorium period provided thereunder should act as a bar against any additional statutory process being undertaken against a company, which would otherwise frustrate the very purpose of the CIRP.

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

Supreme Court: Definition of commercial disputes under the Commercial Courts Act, 2015 to include immovable property ‘actually used’ and not ‘likely to be used’, ‘ready to be used’ or ‘to be used’

The Honourable Supreme Court of India (“Supreme Court”) in its judgement, in Ambalal Sarabhai Enterprises Ltd. v. K.S. Infraspace LLP &Anr. {Civil Appeal No. 7843 of 2019} (decided on October 04, 2019) held that as far as disputes arising out of agreements relating to immovable property are concerned, only those disputes which arise of immovable property being actually and exclusively used in trade or commerce, shall be categorised as ‘commercial disputes.’

FACTS
On February 14, 2012, Ambalal Sarabhai Enterprises Limited (“Appellant Company”) executed an agreement (“Agreement”) to sell a piece of land (“Said Land”) to one Ketan Bhailalbhai Shah (“Respondent No. 2”). Thereafter, Respondent No. 2 assigned and transferred all his rights under the Agreement to K.S. Infraspace LLP (“Respondent No. 1”), by executing a Deed of Assignment (“Assignment Deed”) dated October 12, 2017. Consequently, Respondent No. 1 purchased the Said Land from the Appellant Company by way of a Deed of Conveyance (“Conveyance Deed”) dated November 03, 2017. Since there were some aspects of the Said Land that were to be changed, particularly with reference to its nature of use, the right of the Appellant Company was required to be protected. In pursuance of the same, a Memorandum of Understanding dated November 03, 2017 (“MOU”) was executed amongst the Appellant Company, Respondent No. 1 and Respondent No. 2. As per the terms of the MOU, a mortgage deed was to be executed in favour of the Appellant Company. Accordingly, a Mortgaged Deed (“Mortgage Deed”) was executed on November 03, 2017, albeit it was not registered. The Appellant Company, thereafter, sought to enforce execution of the Mortgage Deed, by filing a Commercial Civil Suit (“Suit”) before the Commercial Court at Vadodara (“Commercial Court”). Furthermore, the Appellant Company also sought permanent injunction and other reliefs before the Commercial Court.

On being notified of the Suit, Respondent No. 1 and Respondent No. 2 (collectively referred to as “Respondents”) contended that since the dispute was not a ‘commercial dispute’ as per Section 2(1)(c)(vii) of the Commercial Courts Act, 2015 (“CC Act”), the Suit would not be maintainable. In addition, the Respondents filed an application under Order VII Rule 10 of the Civil Procedure Code, 1908 (“Application”) seeking that the plaint be presented in the Court in which such a Suit should have been actually instituted. However, the Commercial Court rejected the Application by way of its order dated October 17, 2018. The Commercial Court had relied upon the Memorandum of Association and Articles of Association of the Appellant Company to take note of the business that the Appellant Company could undertake.

Thereafter, the Commercial Court concluded that the Appellant Company seemed to be carrying on a business as an estate agent and thus the dispute that had transpired between the Appellant Company and the Respondents was a ‘commercial dispute.’ Aggrieved by the aforementioned order of the Commercial Court, the Respondents filed an appeal in the High Court of Gujarat (“High Court”). The High Court passed an order dated March 01, 2019, that allowed the petition of the Respondents and set aside the order dated October 17, 2018, passed by the Commercial Court. By the aforementioned order, the High Court also allowed the Application, directing that the plaint was to be returned to the Appellant Company, in order to be presented to an appropriate Court. The High Court had taken a conclusive view that the immovable property, was in fact, not being used for either trade or commerce. The Appellant being aggrieved by the order of the High Court, thereby approached the Supreme Court.

ISSUE
Whether a dispute arising out of an agreement involving an immovable property could be considered as a ‘commercial dispute’ so as to enable the Commercial Court to entertain such a suit?

ARGUMENTS
The Appellant Company contended that it was running an industry on the Said Land and had indeed acquired the same for the very purpose. Furthermore, it contended that the Respondent No. 1 had purchased the Said Land for developing it and thus, the Said Land is being used for trade and commerce purposes.

On the other hand, the Respondent No. 1 contended that the Appellant Company had ceased to function for the past several years. Owing to the factum that the Appellant Company was defunct, the Said Land was not being used for either trade or commerce. Respondent No. 1, further elaborated that though it had sought for change in the use of Said Land for developing it, the same would be subject to such change of land use that would be granted and the use for which would it would be put to, in the future. Therefore, the Said Land, at present was not being used for either trade or commerce and thus, the dispute would not be maintainable before the Commercial Court.

Moreover, Section 2(1)(c)(vii) of the CC Act states, “a commercial dispute means a dispute arising out of agreements relating to immovable property used exclusively in trade or commerce.” With regard to the same, the Appellant Company relied on the decision of the Division Bench of the High Court of Delhi in Jagmohan Behl v.State Bank of Indore [2017 SCC On Line Del 10706] (“Appellant Company’s Case Law”). Herein, it was held that the expression “arising out of” and “in relation to immovable property” should not be given the narrow and restricted meaning and the expression would include all matters relating to agreements in connection with immovable property.

The Respondents relied on the decision of the Division Bench of the High Court in Vasu Healthcare Private Limited v. Gujarat Akruti TCG Biotech Limited [AIR 2017 Gujarat 153] (“Respondent’s Case Law No. 1”). Herein, the High Court concluded that on a plain reading of Section 2(1)(c) of the CC Act, the expression “used” must mean “actually used” or “being used”. It was elaborated in the aforesaid decision that if the legislature had intended to expand the scope of the definition, it would have employed phrases such as “likely to be used” or “to be used”. The Respondents also relied on Federation of A.P. Chambers of Commerce and Industry and Others v. State of A.P. and Others [(2000) 6 SCC 550] (“Respondent’s Case Law No. 2”) wherein, the Supreme Court had observed that the terminology “land is used for any industrial purpose” and “land is used for any other non-agricultural purpose” meant that there has to be a finding of the fact that the land at present, is being used for an industrial purpose, or a commercial purpose, or any other non-agricultural purpose. The Supreme Court has also observed that such juxtaposition was important to ascertain whether a piece of land should be assessed at the rate specified for a land used for an industrial purpose.

The Appellant Company argued that the strict interpretation applied in the facts of Respondent’s Case Law No. 2 emanated from the point that in the particular instance, it was the case of a taxing statute. It was argued that unlike the strict interpretation applied in taxing statutes, it would not be appropriate to adopt an identical approach in issues relating to jurisdiction. The Appellant Company contended that the statements of objects and reasons of the CC Act provided that the reason for enacting the CC Act was the speedy disposal of high value commercial disputes so as to create a positive image to the investors world about the independent and responsive Indian legal systems. It was also argued that a wider purport must be assigned while considering the dispute to be a ‘commercial dispute’.

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court was of the view that since the dispute is a civil suit, the nature of the dispute and the jurisdiction to try the dispute should be reflected in the plaint. However, the Supreme Court observed that the plaint filed in the Commercial Court had neither mentioned the nature of the land nor the type of use to which it was being put to, as on the date of Agreement or MOU or as on the date of the Suit.

Para 22 of the plaint which provided for the jurisdiction of the Commercial Court is reproduced herein below:

“22. Jurisdiction: The Plaintiff states that the Defendants having their office at Vadodara land which is the subject matter of the instant suit is situated within the territorial jurisdiction of this Hon’ble Court and hence this Hon’ble Court has the jurisdiction to hear and decide the matter.”

The Supreme Court was of the view that the Appellant Company had not mentioned any reason as to why the Commercial Court had exclusive jurisdiction to try the said dispute. It would not suffice to point that simply because the office of the Respondents and the Said Land is situated at Vadodara, it would automatically confer jurisdiction upon the Commercial Court. It was also noted that the plaint sought for specific performance of the terms of the MOU, particularly, wherein it was agreed that the Mortgage Deed will be executed. The Supreme Court stated that even if the immovable property under the Mortgage Deed was the subject matter of dispute, it was necessary to plead and indicate that such immovable property was being used for trade or commerce purposes as only in such cases, can the jurisdiction of a Commercial Court be invoked.

The Supreme Court observed that the Appellant Company’s Case Law pertained to those immovable properties which were undoubtedly being used for either trade or commerce, and where the suit was instituted for recovery of rent or mesne profit, security deposit, etc. for the use of such immovable property. The Supreme Court, therefore, concurred with the views expressed by the High Court in Respondent’s Case Law No. 1.

Referring to the purpose of the CC Act, the Supreme Court is of the firm belief that the purpose of the CC Act would be defeated if a wider interpretation is given to the term ‘commercial disputes’. The reason being that every suit which is filed because of its high value and with the intention of seeking an early disposal, would lead to clogging of the systems and blocking the way for genuine commercial disputes. Moreover, even if the CC Act is strictly interpreted, it would not mean that litigants will be excluded from any other remedy. It is notable that such litigants can always approach an ordinary Civil Court.

Justice Bhanumati has written a concurring opinion offering strong reasoning as to the true intention of the CC Act. With immense transparency, it was brought to fore that the CC Act is to be interpreted to enable quick disposal of commercial litigations, at a fair and reasonable cost. It was noted that merely because an immovable property is likely to be used in relation to trade or commerce, it cannot attract the jurisdiction of the Commercial Court. It was brought to fore that the expression “used exclusively in trade or commerce” is to be interpreted purposefully. It was reiterated that the expression “used” should only mean “actually used”, and not “ready for use”, “likely to be used” or “to be used”. A wide interpretation would essentially defeat the objects of the CC Act and implementation of its fast track procedure.

DECISION OF THE SUPREME COURT
The Supreme Court dismissed the appeal stating that neither the Agreement mentioned that the immovable property was exclusively used for the purpose of trade or commerce, nor was there any pleading to that effect in the plaint filed before the Commercial Court. Furthermore, the relief sought by the Appellant Company is for execution of the Mortgage Deed in the manner of specific performance of the terms of the MOU. Herein also, there is no reference to the immovable property being used in trade or commerce as on the date of the Suit.

Vaish Associates Advocates View
It is quite discernible from the judgement of the Supreme Court that a plaint filed in a Commercial Court is required to have a certain degree of specification. It was pointed out that the plaint did not provide substantial reasoning as to why a Commercial Court was to be conferred with jurisdiction. It is one thing to claim that an immovable property happens to be within the territorial jurisdiction because of a mere address and an entirely different thing to establish with staunch reasoning as to how dispute relating to an immovable property at hand fits the bill for a ‘commercial dispute’ within the meaning of the CC Act. There can be innumerable disputes of different forms that have remedies at ordinary Civil Courts. However, it is the nature of current usage of the property that gives the dispute relating to it, a certain level of credibility to qualify into a ‘commercial dispute’.

The judgement has also affirmatively cleared the coast as to the true interpretation of the expression “used”, that the expression indicates actual and current usage and not a hypothetical likelihood or a distant historical association with trade or commercial usage. It is also pertinent for the parties that the commercial documents relating to immovable property be appropriately registered and clauses be drafted with skill to reflect on record as to how an immovable property is indeed exclusively, being used for trade or commercial purposes. The disputes that may possibly spiral out with reference to an immoveable property would not automatically be a commercial dispute merely because of its high value or some underlying assumption. This development definitely provides a judicious insight to parties that plan on approaching Commercial Courts.

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