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NCLT Chennai: Creditors having vested interest in corporate debtor should not be a part of the committee of creditors

All provisions cited in this case analysis, unless specified otherwise, refer to the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”).

The National Company Law Tribunal (“NCLT”), Chennai in the case of M/s. Asset Reconstruction Company (India) Limited v. Mr. Gopal Krishna Raju and Others (decided on March 5, 2019), on the basis of a business arrangement between the corporate debtor and certain unsecured creditors, laid down that such creditors would be disqualified from participating in the committee of creditors.

FACTS
M/s. Anandram Developers Private Limited (“Corporate Debtor”) had taken a loan from two financial institutions namely Indian Overseas Bank and Oriental Bank of Commerce. The loans were assigned by the said banks to M/s. Asset Reconstruction Company (India) Limited (“Applicant”).

On June 6, 2018, corporate insolvency resolution process (“CIRP”) was initiated against the Corporate Debtor and Mr. Gopal Krishna Raju was appointed as the interim resolution professional (“Respondent 1”). Respondent 1 sent out a public announcement and called for claims, following which the Applicant filed a claim as a financial creditor. On receipt of the claims, Respondent 1 constituted the committee of creditors (“CoC”) and sent out a notice for convening the first CoC meeting. From the notice, the Applicant discovered that M/s. Jayapushpam Investments and Trading Private Limited (“Respondent 2”), M/s. JDA Consultancy Private Limited (“Respondent 3”) (Respondent 2 and Respondent 3 are collectively referred to as “Claimants”), and M/s. Anand Cine Services Private Limited had also submitted their claims as financial creditors. M/s. Anand Cine Services Private Limited was categorized by Respondent 1 as related party under Section 5(24)(a) and hence, was not allowed any right of representation, participation or voting in the CoC, as stated in proviso to Section 21(2).

Following this, the Applicant sent an e-mail to the Respondent 1 asking for the details of claims submitted by Claimants, which the Respondent 1 made available to the Applicant only after the first CoC meeting was convened. The Applicant, on perusal of the claims, found that the claims of the Claimants were based on alleged assignment of debts of unsecured loans by parties who fall under the category of “related party” under Section 5 and hence, even the Claimants must have been prohibited from participating or voting in the CoC as under proviso to Section 21(2). Respondent 1, however, admitted the claims of the Claimants and included them in the CoC.

Based on this knowledge, the Applicant filed a petition in the NCLT, Chennai which passed an order directing the Respondent 1 to resolve the issue raised by the Applicant within 3 weeks. Ignoring this, the Respondent 1 conducted two CoC meetings and in the third meeting, the Respondent 1 circulated an information memorandum which showed debt due from related parties as NIL, which was contrary to the Respondent 1’s decision of categorizing M/s. Anand Cine Services Private Limited as related party. Aggrieved by the conduct of the Respondent 1, the Applicant filed the present application before the NCLT, Chennai.

ISSUE
Whether the Claimants are related parties of the Corporate Debtor as under proviso to Section 21(2) read with Section 5(24)?

Relevant provisions
For ease of reference, Section 5(24)(a) and Section 21(2) of the Code involving related party are reproduced below:

“5. Definitions. –
In this Part, unless context otherwise requires,-
(24) “related party” in relation to a corporate debtor, means-

(a) a director or a partner of the corporate debtor or a relative of a director or partner of the corporate debtor;”

“21. Committee of creditors. –

(2) The committee of creditors shall comprise all financial creditors of the corporate debtor:
Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors….”

ARGUMENTS
The Applicant submitted that the Claimants were camouflaged as financial creditors based on documents which were created for the purpose of such claims. It was argued that the Claimants were related parties to the Corporate Debtor. The basis for this was twofold. First being that the original unsecured creditors (assignors) would be hit by the related party transactions (being suspended directors and shareholders of the Corporate Debtor) and therefore the Claimants being assignees cannot have a better title. Second being that the Claimants were a part of a project under which land belonging to the Claimants was being developed by the Corporate Debtor. A joint development agreement (“JDA”) was executed between the parties whereby post the development, certain plots would be allotted to the Claimants. It was argued that the assignment agreements were entered into between the related party individuals and interested parties in order to secure the recoverability of the amounts in the hands of the interested parties, since they also owned a share of the property. Hence, the Claimants were in the position to influence the decision making in their capacity as business partners in developing the property who have a bearing on the activities of the Corporate Debtor. In view of the same, they are liable to be declared as related parties.

Respondent 2 pleaded that the Claimants were not related parties under Section 5(24). It argued that the stand of the Applicant was based on the deeds of assignment between the suspended directors and the Claimants. The assignment took place in 2017, that is, prior to commencement of CIRP. The assignment was not challenged by the Applicant and what was challenged was the consequence of the assignment. In response to the argument that the Claimants fall under the purview of related parties, Respondent 2 referred to the case of Swiss Ribbons Private Limited v. Union of India (decided on January 25, 2019), wherein it was held by the Supreme Court that a person who can be directly connected as related party to the corporate debtor itself can only be termed as related party and not others. Thus, they stated that the assignees to the loan cannot be held as related party as they are not directly connected to the Corporate Debtor. They further referred to a National Company Law Appellate Tribunal judgement in the case of Edelweiss Asset Reconstruction Company Limited v. Synergies Dooray Automotive Limited (decided on December 14, 2018) and pointed out that assignee of a related party cannot be held as a related party and hence, they have the right to participate, represent and vote in the committee of creditors. The arguments of Respondent 3 too were on similar lines.

OBSERVATIONS OF THE NCLT, CHENNAI
NCLT, Chennai after review of the deeds of assignment came to the conclusion that the elements of partnership between the suspended directors of the Corporate Debtor and the Claimants were clearly established in view of the JDA. The deeds of assignment were akin to assignments cum partnership deeds, which point out towards the JDA between the Claimants and the Corporate Debtor. Therefore, the relationship between the assignors, being the suspended directors/ertswhile shareholders of the Corporate Debtor, and the assignees, being the Claimants, is of a partnership for the purpose of the joint ownership and development of the land. Thus, the Claimants were in a position to influence the decision making in their capacity as business partners as owners of the property, who have a say in the activities of the Corporate Debtor, which falls within the purview of the definition of “related party” given under Section 5(24)(a). Further, the consideration for the assignors under the deeds of assignment was allotment of equity shares in the capital of the Respondent 2 which would clearly make Respondent 2 a related party to the Corporate Debtor.

DECISION OF THE NCLT, CHENNAI
The Claimants were held to be related parties of the Corporate Debtor and were barred from participating in the CoC.

Vaish Associates Advocates View
Section 5(24) and proviso to Section 21(2) were enacted to ensure that the corporate insolvency resolution process is not influenced by any party, who stands in an interested position as regards the corporate debtor. The decision of the NCLT, Chennai in this judgment, supports the intent of the legislature to keep the CoC independent. In the instant case, the NCLT, Chennai investigated into the past relationship of the assignor (related party) and the assignee (financial creditor) to conclude that the assignees were in a position to influence the decision making in their capacity as business partners of the Corporate Debtor and hence were considered as related parties to the Corporate Debtor.

However, the application of Section 5(24)(a) seems to be erroneous. Neither were the Claimants, directors or partners of the Corporate Debtor, nor were they relatives of a director or partner of the Corporate Debtor. Sub-section (h) of Section 5(24) which states that “any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act” would have been an appropriate provision to determine the disqualification of the Claimants as related parties of the Corporate Debtor in this instance.

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

NCLAT: Resolution plans must ensure continuity of operations of the Corporate Debtor

The National Company Appellate Law Tribunal (“NCLAT”), in the case of Industrial Services v. Burn Standard Company Limited and Others (decided on May 13, 2019), held that a resolution plan which shall result in closure of the operations of the corporate debtor is against the scope and intent of the Insolvency and Bankruptcy Code, 2016 (“Code”).

FACTS
Burn Standard Company Limited (“Corporate Debtor”) is a government owned, West Bengal based wagon maker. Due to consistent losses and erosion of net worth, the Corporate Debtor was referred to Board of Industrial and Financial Reconstruction (BIFR) in the year 1994 under Sick Industrial Companies (Special Provisions) Act, 1985 and was declared as a sick company. Upon enactment of the Code, the Corporate Debtor filed an application under Section 10 of the Code to initiate corporate insolvency resolution process (“CIRP”) against itself.

In an order dated March 6, 2018, the National Company Law Tribunal (“NCLT”), Kolkata approved Corporate Debtor’s insolvency resolution plan, which included INR 417 Crores financial package to pay back creditors and suppliers, and a voluntary retirement scheme of all the employees. The resolution plan submitted by the Corporate Debtor showed that the Ministry of Railways proposed to use the entirety of the abovementioned financial package to repay the dues and shut down the company.

The NCLT, Kolkata while approving the resolution plan stated in its order that “The Resolution Plan in the case in hand is a unique plan which provides no revival of the corporate debtor but to close it by discharging its debts to all stakeholders inclusive of its staff and workmen.”

Aggrieved by the contents of the resolution plan approved by the NCLT, Kolkata, Industrial Services (“Appellant 1”), an operational creditor of the Corporate Debtor, whose claim was not accepted by the resolution professional of the Corporate Debtor (“RP”), filed an appeal against the NCLT, Kolkata’s decision. Further, the Burn Standard Ex-Employee Welfare Association (“Appellant 2”) also filed an appeal against the NCLT, Kolkata’s order, and stated that a resolution plan cannot be used to close the operations of the Corporate Debtor.

ISSUES
1. Whether the resolution plan is against the statement of objects and reasons of the Code?

2. Whether the application under Section 10 of the Code was filed by the Corporate Debtor with malicious intent for any purpose other than for the resolution of insolvency, or liquidation of the Corporate Debtor?

ARGUMENTS
The Appellant 1 contended that the resolution plan is bad in law, as the provisions of Section 29A of the Code are not fulfilled. It was also stated that the procedure prescribed under the Code was not complied with. For example, no evidence was provided to show that the information memorandum was published, as required under Section 25 of the Code or operational creditors or their representatives were called in the meeting of the committee of creditors, as required under Section 24 of the Code. Another contention was that the resolution plan provides for no revival of the Corporate Debtor but closure and retrenchment of all the workmen.

On the other hand, the Corporate Debtor submitted that, being an undertaking of the Indian Railways, it cannot be held to be ineligible in terms of Section 29A of the Code. It was submitted that it is not an undischarged insolvent nor a willful defaulter. Further, its account has not been declared as a non-performing asset.

OBSERVATIONS OF THE NCLAT
The NCLAT observed that during the resolution process, and thereafter, the resolution applicant is required to ensure that the company remains as a going concern, but contrary to the provisions of the Code, closure of the Corporate Debtor has been proposed and approved by the NCLT, Kolkata.

The NCLAT referred to the decision of the Supreme Court in the case of Swiss Ribbons Private Limited v. Union of India and Others (decided on January 25, 2019), where it was stated that the primary intention of the legislature in enacting the Code was to ensure revival of the corporate debtor by protecting the corporate debtor from its own management and from a corporate’s death by liquidation. It was also held that the preamble of the Code shows that the Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. The Supreme Court opined that the fact that the preamble of the Code does not even mention ‘liquidation’, it can be stated that liquidation is only available as a last resort, in the event no suitable resolution plans are received.

Therefore, the Supreme Court stated that the Code is a beneficial legislation which puts the corporate debtor back on its feet, and is not a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests.

The NCLAT also referred to its decision in Y. Shivram Prasad v. S. Dhanapal and Others (decided on February 27, 2019) where it held that steps should be taken for resolution at different stages including the liquidation stage to keep the company as a going concern in the interest of the employees, and that liquidation should only happen as a last resort.

In view of the abovementioned precedents, the NCLAT observed that, the resolution plan goes against the object of the Code and the application under Section 10 of the Code was filed with intent of closure of the Corporate Debtor for a purpose other than for the resolution of insolvency. Therefore, the part of the resolution plan which relates to closure of the Corporate Debtor is against the scope and intent of the Code and is in violation of Section 30(2)(e) of the Code, which states that the resolution plan should not contravene any law in force.

DECISION OF THE NCLAT
The NCLAT, set aside the part of the resolution plan that stated that the Corporate Debtor would be closed, but upheld the rest of the resolution plan. Further, it stated that consequential orders, including the order of closure of the Corporate Debtor and the order of retrenchment issued to the employees of the Corporate Debtor are also to be set aside. The NCLT, Kolkata was directed to make necessary correction in the resolution plan by asking the Corporate Debtor to delete the portion of the resolution plan requiring the closure of the Corporate Debtor. If the Corporate Debtor refuses to do so, the plan approved will be treated to be set aside by the NCLAT and the NCLT, Kolkata will proceed asking the RP to call for fresh expressions of interest and resolution plans and proceed in accordance with law.

Vaish Associates Advocates View
In the instant case, in order to reaffirm the central theme of the Code, which is to ensure revival of the corporate debtor, the NCLAT held that the resolution plan shall ensure that the Corporate Debtor shall remain a going concern. In an earlier case of K. Sashidhar v. Indian Overseas Bank and Others (decided on February 5, 2019), the Supreme Court had held that the NCLT and NCLAT should not question the commercial wisdom of the committee of creditors, but should only examine the resolution plan through the lens of Section 30(2) of the Code, which provides for requirements of a resolution plan. In the present case, the ‘commercial wisdom’ of the banks favored the resolution plan submitted, however the NCLAT overrode the same, as the proposed resolution plan did not fulfil the requirements under the Code.

The ratio decidendi of this case, that the resolution plans must ensure that the company continues to operate as a going concern is important and it can be said that with this judgement, the NCLAT is nailing its colours to the mast. Therefore, resolution plans must provide for the continuation of the corporate debtor as a going concern and the aspiration of the Code, is to ensure revival, not repayment.

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

Supreme Court: Arbitration proceedings once terminated under Section 32 of Arbitration Act cannot be subsequently recalled

The Supreme Court in the case of Sai Babu v. M/S Clariya Steels Private Limited (decided on May 1, 2019), held that once the sole arbitrator terminates the arbitration proceedings under Section 32(2)(c) of Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the same cannot be subsequently recalled.

FACTS
In an arbitration between Sai Babu (“Appellant”) and M/S Clariya Steels Private Limited (“Respondent”), the learned arbitrator, by its order dated May 4, 2017, terminated the arbitration proceedings under Section 32(2)(c) of the Arbitration Act. However, an application dated May 5, 2017 was made by the Respondent before the arbitrator to recall the order of termination of arbitration proceedings. Having found merit in the reasons, the arbitrator on May 18, 2017, recalled its earlier order of termination of arbitration proceedings. Further, the said order of recalling the arbitration proceedings was challenged before Karnataka High Court by the Appellant. However, the challenge was dismissed by the Karnataka High Court on June 14, 2017. Aggrieved by the order of Karnataka High Court, the Appellant filed an appeal in the Supreme Court and the following issue came up for determination:

ISSUE
Whether an arbitrator can recall the arbitration proceedings which were earlier terminated under Section 32(2)(c) of the Arbitration Act?

RELEVANT PROVISIONS
Section 25 of the Arbitration Act provides that:
“25. Default of a party. —
Unless, otherwise agreed by the parties, where, without showing sufficient cause, —
(a) the claimant fails to communicate his statement of claim in accordance with sub-section (1) of Section 23, the arbitral tribunal shall terminate the proceedings;

(b) the respondent fails to communicate his statement of defence in accordance with sub-section (1) of Section 23, the arbitral tribunal shall continue the proceedings without treating that failure in itself as an admission of the allegations by the claimant and shall have the discretion to treat the right of the respondent to file such statement of defence as having been forfeited;

(c) a party fails to appear at an oral hearing or to produce documentary evidence, the arbitral tribunal may continue the proceedings and make the arbitral award on the evidence before it.”

Sections 32(2)(c) and 32(3) of the Arbitration Act provides that:
“32. Termination of proceedings. —
(2) The arbitral tribunal shall issue an order for the termination of the arbitral proceedings where—

(c) the arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible.

(3) Subject to Section 33 and sub-section (4) of Section 34, the mandate of the arbitral tribunal shall terminate with the termination of the arbitral proceedings.”

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court referred its earlier judgment in case of SREI Infrastructure Finance Limited v. Tuff Drilling Private Limited [(2018) 11 SCC 470], where the issue involved was whether the arbitral tribunal which had terminated arbitral proceedings under Section 25(a) of the Arbitration Act due to non-filing of claim by the claimant, had any jurisdiction to consider an application for recall of its order terminating the arbitration proceedings upon sufficient cause being shown by the claimant. In the said judgement, the Supreme Court held that the arbitral tribunal had jurisdiction to recall its order of terminating the arbitration proceedings under Section 25 of the Arbitration Act.

The Supreme Court in the aforesaid case further observed that Section 32 of the Arbitration Act deals with the termination of the arbitral proceedings wherein the arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible. Moreover, the Supreme Court observed that the eventuality as contemplated under Section 32 of the Arbitration Act will only arise when the claim is not terminated under Section 25(a) of the Arbitration Act and proceeds further. The usage of words “unnecessary” or “impossible” stipulated in Section 32(2)(c) of the Arbitration Act does not cover a situation where proceedings were terminated due to default of the claimant. Section 32(3) of the Arbitration Act also provides that subject to Sections 33 (Correction and interpretation of award; additional award) and 34(4) (resume the arbitral proceedings in order to eliminate the grounds for setting aside the arbitral award) of the Arbitration Act, the mandate of an arbitral tribunal shall be terminated, once the order of termination under Section 32 of the Arbitration Act has been passed. However, the aforesaid phrase “mandate of the arbitral tribunal shall terminate” in Section 32 of the Arbitration Act have not been used in Section 25 of the Arbitration Act and hence it has to be treated with a purpose and object. The Supreme Court noted that the purpose and object of Section 25 of the Arbitration Act could only be achieved when the claimant shows sufficient cause, and accordingly, the proceedings could then be recommenced.

DECISION OF THE SUPREME COURT
Relying on the distinction made in its earlier judgement between the mandate terminating under Section 32 and proceedings coming to an end under Section 25 of the Arbitration Act, the Supreme Court concluded that no recall application would be covered in cases covered by Section 32(3) of the Arbitration Act. Consequently, the Supreme Court allowed the appeal by setting aside the order of the Karnataka High Court. Further, pursuant to Section 15(2) of the Arbitration Act, upon termination of mandate of the arbitrator, the Supreme Court appointed the sole arbitrator to decide all disputes between the parties.

Vaish Associates Advocated View
The Supreme Court relied upon its earlier judgement in case of SREI Infrastructure Finance Limited v. Tuff Drilling Private Limited (supra) and laid down its importance while basing its decision in the instant case. The Supreme Court made a clear distinction as regards the purpose of order of termination of proceedings under Section 25 of the Arbitration Act vis-à-vis Section 32 of the Arbitration Act.

The primary concern here was whether the arbitrator had the jurisdiction to recall the arbitration proceedings terminated under Section 32(2)(c) of the Arbitration Act. The Supreme Court was of the opinion that the eventuality as envisaged under Section 32 of the Arbitration Act would arise only when the claim is not terminated under Section 25(a) of the Arbitration Act. Therefore, once the mandate of the arbitral tribunal is terminated with termination of arbitral proceedings, the arbitrator does not have the authority to recall the proceedings terminated under Section 32 of the Arbitration Act.

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

Competition News Bulletin – June 2019

We are pleased to share the June 2019 edition of our newsletter- Competition News Bulletin. Some highlights of this issue are as under:

CCI imposes penalty on chemists and druggist associations in Madhya Pradesh and two pharmaceutical companies
CCI approves amalgamation of GlaxoSmithKline into Hindustan Unilever Limited
EC rejects merger between Tata Steel and ThyssenKrupp
Supreme Court allows CCI appeal against JCB – permits material seized during dawn raid to be used as evidence
Delhi High Court settles constitutional challenges to the Competition Act, 2002

The Bulletin is amongst India’s first comprehensive Newsletters on the subject published by Vaish Associates Advocates with an aim to supplement CCI’s efforts towards competition advocacy

For more information please write to Mr. M. M. Sharma at [email protected]

NCLAT holds that shareholders can file application to approve settlement with creditors even after appointment of official liquidator

In a recent judgement in the case of Rasiklal S. Mardiya v. Amar Dye Chem Limited (decided on April 8, 2019), the National Company Law Appellate Tribunal (“NCLAT”) has stated that shareholders can file application to approve settlement with creditors even after appointment of official liquidator.

FACTS
The case arises from a winding up petition filed before the Bombay High Court in 1998, upon the recommendation of the Board for Industrial and Financial Reconstruction (“BIFR”). In 2008, Rasiklal S. Mardiya, the promoter of Amar Dye Chem Limited (“Appellant”), attempted to resolve differences with the creditors. The Bombay High Court granted him liberty to do so. He subsequently filed application for convening the meeting of shareholders and creditors which was allowed by the Bombay High Court in 2010. The official liquidator did not object to these proceedings. During the pendency of the same, the Ministry of Corporate Affairs on December 7, 2016, issued the Companies (Transfer of Pending Proceedings) Rules, 2016 (“Transfer Rules”) transferring pending proceedings to the respective National Company Law Tribunals (“NCLT”). Consequently, the petition was transferred to the NCLT, Mumbai in 2017.

The matter was continued in NCLT, Mumbai which held that under Section 391(1) of the Companies Act, 1956 (“Old Act”), of which the corresponding provision in the Companies Act, 2013 (“New Act”) is Section 230(1), once a company is in liquidation, only the liquidator was authorized to file a petition for compromise or arrangement. Aggrieved by the NCLT Mumbai’s judgement, the Appellant approached the NCLAT.

ISSUES
The following issues were examined by the NCLAT:

Whether the NCLT, Mumbai was correct in holding that the liquidator alone can file for compromise or settlement?
Whether the transfer of proceedings from the Bombay High Court to NCLT, Mumbai was good in law?

ARGUMENTS
Relying on the observations of the Bombay High Court, the Appellant claimed that he had locus to submit the scheme which was permitted by the Bombay High Court and his locus was wrongly held against him by the NCLT, Mumbai. Reference was made to the Order of the Bombay High Court dated July 21, 2011, whereby extension of time was granted for convening meetings of the shareholders and creditors. It was argued that official liquidator of the Amar Dye Chem Limited (“Respondent”), had never objected to the right of Appellant to file such scheme of compromise/ arrangement under Section 391–394 of the Old Act and therefore the NCLT, Mumbai could not have reopened the issue whether or not the Appellant was competent to file the scheme when the company was already in liquidation.

The Respondent filed reply and opposed the appeal trying to justify the view taken by NCLT, Mumbai stating that when the company is in liquidation, only the official liquidator could apply for scheme of arrangement / compromise. The Respondent, cited the judgement of the Jharkhand High Court in the case of Rajiv Sachdeva v. Rajhans Steel Limited (In Liquidation) (decided on August 12, 2010) (“Rajiv Sachdeva Judgement”) to support the NCLT, Mumbai’s conclusion on who can file for settlement, where it was stated that when the proceedings had been initiated initially before BIFR, it becomes matter of record that rehabilitation was not possible and consequently, the company was required to be wound up. The Respondent drew the NCLAT’s attention to the Delhi High Court judgement in case of Sunil Gandhi and Others v. A.N. Buildwell Private Limited and Others (decided on March 15, 2017) (“Sunil Gandhi Judgement”). The NCLT, Mumbai had only relied on the Sunil Gandhi Judgement to ascertain the issue regarding filing of application by official liquidator for compromise or settlement. The Respondent’s contention was that Sunil Gandhi Judgement also comprehensively covers the second question insofar as it holds that NCLT should not exercise jurisdiction when winding up proceedings is in advanced stage in the High Court. It was also averred that transferring the proceedings was not envisaged in the Transfer Rules and should be avoided as it only leads to protracted litigation.

OBSERVATIONS OF THE NCLAT
The NCLAT took note that the NCLT, Mumbai had not addressed the first question on merits at all. Rather, it had only read Section 391(1) of the Old Act/ Section 230(1) of the New Act restrictively to hold that the liquidator “alone” could file for settlement. The NCLAT has noted that the NCLT, Mumbai had read the word “alone” into the provision which did not appear to be the legislature’s intention.

The NCLAT went on to analyse the judgement of the Division Bench of Delhi High Court in National Steel & General Mills v. Official Liquidator (decided on March 9, 1989) (“National Steel Judgement”) wherein it was held that liquidator is not the exclusive person who can move an application under Section 391 of the Old Act but is only an additional person. Categorizing the liquidator’s power as a general power, the Delhi High Court had underlined that it does not take away the special power of the member, creditor and the company to file a petition for settlement, after the commencement of liquidation proceedings. The NCLAT also found resonance of this opinion in the Supreme Court’s judgement in Meghal Homes (P) Limited v. Shree Niwas Girni K.K. Samiti (decided on August 24, 2007) (“Meghal Homes Judgement”).

The National Steel Judgement and the Meghal Homes Judgement were weighed against the Jharkhand High Court’s observations in the Rajiv Sachdeva Judgement. The NCLAT distinguished the Rajiv Sachdeva Judgement insofar as the observations therein could aid in deciding the merits of the instant matter, but it does not express judicial opinion on Section 391 of the Old Act, per se. Hence, on the first issue, the NCLAT stated that the Appellant could have filed a petition for settlement with creditors before NCLT/Company Court under Section 391 of the Old Act.

The NCLAT answered the second issue, which was the issue of which of the two fora is appropriate for filing of a settlement application in the instant matter. It relied on the extensive observation made by the Delhi High Court in Sunil Gandhi Judgement. Finding itself in agreement with the Delhi High Court, the NCLAT stayed the NCLT, Mumbai proceedings and allowed the Appellant to move to the Bombay High Court. This was done as the NCLAT found the transfer to be bad in law as the Transfer Rules explicitly stated that all cases where winding up was ongoing following BIFR recommendation were to stay with the respective High Courts.

DECISION OF THE NCLAT
The NCLAT reversed the NCLT, Mumbai’s stance and stated that the Appellant could have filed a petition for settlement with creditors before NCLT/Company Court under Section 391 of the Old Act. On the second issue, the NCLAT stated that the transfer of proceedings to the NCLT, Mumbai was bad in law.

Vaish Associates Advocates View
The legislature has been resolute in its intention to keep promoters out of the corporate insolvency resolution process. Section 29A was inserted into the Insolvency and Bankruptcy Code, 2016 vide the Insolvency and Bankruptcy Code (Amendment) Act, 2018 to prohibit promoters from bidding for their companies during the corporate insolvency resolution process as well as in case of liquidation as a going concern. This was done to take care of the moral hazard that is apparent in allowing promoters who were primarily responsible for the company’s mismanagement and loss of value to buy it back later at a discount. This judgement’s practical application may strike a dent into the legislature’s intention. It may create a backdoor entry for promoters to cling on to their companies.

Hence, in all the fresh liquidation proceedings before the NCLTs, it may have to entertain the application of the promoters for settlement/compromise.

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

Supreme Court holds that courts cannot appoint an arbitrator basis an inadequately stamped agreement containing the arbitration clause

A two judge bench of the Supreme Court, in the case of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (decided on April 10, 2019) held that the arbitration clause contained in an agreement or conveyance is not separable from the said agreement or conveyance and hence, if such agreement or conveyance is insufficiently stamped, the court cannot appoint an arbitrator in the dispute in response to an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

FACTS
Garware Wall Ropes Limited (“Appellant”) entered into an agreement with Coastal Marine Constructions and Engineering Limited (“Respondent”) on which adequate stamp duty was not paid by the parties. Annexure to the agreement contained an arbitration clause, which provided for appointment of a sole arbitrator by the Appellant and Respondent jointly, in agreement. A dispute arose and the Appellant terminated the agreement. The Respondent sent a notice nominating a sole arbitrator, which was unacceptable to the Appellant. Hence, the Respondent approached the Bombay High Court, which appointed the same person as sole arbitrator. Aggrieved by the decision of the Bombay High Court, the Appellant approached to the Supreme Court and the following issue came up for determination:

ISSUE
What is the effect of an arbitration clause contained in an agreement which is insufficiently stamped?

ARGUMENTS
The Appellant argued that regardless of Section 11(6A) of the Arbitration Act, which requires courts to only decide on prima-facie existence of an arbitration clause in an agreement, the Supreme Court’s decision in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited [(2011) 14 SCC 66] (“SMS Tea Judgement”) would be applicable here. In SMS Tea Judgement, it was held that where there is an arbitration clause in an unstamped agreement, it cannot be acted upon, and the court should impound the documents and proceed with the Section 11 application under the Arbitration Act only after the necessary stamp duty is paid. The Appellant said that the Maharashtra Stamp Act, contained provisions similar to the Indian Stamps Act, 1899 (“Indian Stamp Act”) and hence the SMS Tea Judgment shall be applicable in this case as well since Section 11(6A) of the Arbitration Act does not interfere with the Indian Stamp Act.

The Respondent argued that an arbitration clause is independent from the agreement of which it is a part and hence it can be acted upon even if the agreement containing it is unstamped. Further, the Respondent contended that the Indian Stamp Act is a fiscal statute and Section 11(6A) of the Arbitration Act only envisaged courts to rule on the existence or non-existence of an arbitration clause, and not inquire into its substance or validity, leaving those questions to the arbitrator(s), in order to avoid a mini trial. In the present case, it was argued, the insufficiently stamped agreement would only cast a shadow on the validity of the arbitration agreement but its existence is beyond doubt, hence, the Bombay High Court was correct in appointing the sole arbitrator despite the agreement being insufficiently stamped. Further, an application under Section 11 of the Arbitration Act is to be disposed of within 60 days and if the court impounds the documents pending decision of revenue authorities, the 60 days period will lapse.

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court analyzed its earlier decision in SMS Tea Judgement, and the introduction of Section 11(6A) of the Arbitration Act, which were the two pillars of basing the current decision. It was observed that under the Maharashtra Stamp Act, an agreement becomes enforceable in law only when it is duly stamped. It was further observed that an arbitration clause cannot be bifurcated entirely from the agreement it is contained in, as the stamp legislation applies to the entire agreement. Consequently, an arbitration clause would not ‘exist’ when the underlying agreement is not enforceable under law. Accordingly, the Supreme Court held that under Section 11 of the Arbitration Act, a court can impound an agreement if it is not stamped in accordance with the mandatory provisions of the applicable stamp legislation.

Parallel to these proceedings, a full bench of the Bombay High Court was seized of a matter with a similar question of law. Just a few days before this judgment, the Bombay High Court in the case of Gautam Landscapes Private Limited v. Shailesh Shah (decided on April 4, 2019), held that for appointment of arbitrators under Section 11 of the Arbitration Act, it was not necessary for courts to await the adjudication of stamp duty by stamp authorities in cases where a document was not adequately stamped. The Supreme Court held that this judgment is not good in law, and thereby set it aside.
Applying the doctrine of harmonious construction, the Supreme Court interpreted the scope and application of section 11(13) of the Arbitration Act read with Sections 33 and 34 of the Indian Stamp Act, and laid down a procedure to be followed by courts and stamp authorities when the agreement in question is unstamped. It was held that the Bombay High Court must impound the agreement which does not bear the requisite stamp duty.

Thereafter, the unstamped or insufficiently stamped agreement should be handed over to the relevant authority under the relevant stamp legislation, which will decide the issues relating to stamp duty and penalty as expeditiously as possible, and preferably within a period of 45 days from the date on which the authority receives the agreement. Once the requisite stamp duty and penalty is paid by the parties, the parties can bring the instrument to the notice of the High Court. The High Court will then proceed to expeditiously hear and dispose of the Section 11 application under the Arbitration Act.

DECISION OF THE SUPREME COURT
The Supreme Court allowed the appeal and held that a court cannot appoint an arbitrator when the contract containing arbitration clause is insufficiently stamped. In light of the same, the matter was remitted to the Bombay High Court for adjudication.

Vaish Associates Advocates View
The Supreme Court has settled the position on a long-drawn issue of law, which was creating confusion due to contrary positions in different High Courts. The Supreme Court has balanced the fiscal interests of the country, while at the same time ensuring that the efficacy of alternate dispute resolution is not disrupted in the process.

However, the primary concern here is the efficacy of the procedure prescribed for impounding the instrument and appointment of arbitrator(s) thereafter. The revenue authorities may not be able to adhere to the 45 days timeline, which may ultimately lead to a major delay in the arbitration proceedings.

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