20 April, 2019
SC Clarifies that Plea of Territorial Jurisdiction cannot be Raised through Application for Revocation of the Leave Granted under the Letters Patent Act, 1865
SC, in its decision dated March 7, 2019 in Isha Distribution House Private Limited v. Aditya Birla Nuvo Limited4, has considered if the High Court was justified in allowing the defendants’ application for revoking the leave granted to the plaintiff under Clause XII of the Letters Patent Act, 1865 (‘LPA’). Setting aside the order of the High Court, SC held that a plea of territorial jurisdiction is a mixed question of fact and law, which ought to be raised in the written statement to enable the Court to try it on merits in accordance with Order XIV of the Code of Civil Procedure, 1908 and other relevant provisions. As such, a plea of such a nature cannot be tried by filing an application for revocation of the leave granted under Clause XII of the LPA. Accordingly, SC remanded the case to the High Court for deciding the plea of territorial jurisdiction afresh in accordance with the above observations.
SC Strikes Down the Requirement of 10% Pre-Deposit for Initiating Arbitration against a State Entity
SC, in its decision dated March 11, 2019 in Icomm Tele Limited v. Punjab State Water Supply & Sewerage Board5, had to judge the validity of an arbitration clause that provided for a deposit of 10% of the claim amount in a scheduled bank in the name of the arbitrator, as a condition for initiation of arbitration by a claimant, prescribed in tender documents of a State entity.
SC held that deterring a party from invoking the arbitration process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the courts, and would render the arbitral process ineffective and expensive. Accordingly, the impugned clause was held to be violative of Article 14 of the Constitution and was struck down to such extent. SC has also reiterated that terms of an invitation to tender are not open to judicial scrutiny, as they are in the realm of contract, unless they are arbitrary, discriminatory or actuated by malice.
SC Clarifies Regarding Appointment of an ‘Independent Arbitrator’
SC, in its decision dated March 29, 2019 in Union of India v. Parmar Construction Company6, has held that with respect to appointment of an independent arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (‘A&C Act’), there should be emphasis to act on the agreed terms and to first resort to the procedure in the arbitration agreement, which should be given effect to as closely as possible. Therefore, an independent arbitrator should be appointed by the Court under Section 11(6) of the A&C Act after the remedies provided for in the agreement had been exhausted. The SC also held that the Arbitration and Conciliation (Amendment Act), 2015, which came into force on October 23, 2015, would not apply to arbitral proceedings which had commenced (in accordance with Section 21 of the A&C Act) before the coming into force of such amendment, unless the parties had otherwise agreed.
Delhi HC Refuses to Grant an Anti-Bilateral Investment Treaty Arbitration Injunction
The Delhi High Court in its decision dated January 29, 2019 in Union of India v. Khaitan Holdings (Mauritius) Limited7 has refused to grant an anti-Bilateral Investment Treaty (‘BIT ’) arbitration injunction to restrain Khaitan Holdings (Mauritius) Limited from relying upon the arbitration provision in the BIT agreement entered into between India and Mauritius. It was held that: (i) the A&C Act, would not apply to BIT arbitrations as they were not commercial arbitrations and therefore, the provisions of the Code of Civil Procedure, 1908 would apply; (ii) while the Indian Courts did have jurisdiction to grant anti-BIT arbitration injunctions, such injunctions would only be granted in very rare circumstances given that it is a principle of public policy that the Government has to honour its commitments; and (iii) an arbitral tribunal constituted under a BIT is competent to decide its own jurisdiction.
Bombay High Court Decides on Enforceability of a Put Option in a Share Purchase / Shareholders’ Agreement
The Bombay High Court in its decision dated March 27, 2019 in Edelweiss Financial Services Limited v. Percept Finserve Private Limited8 has set aside an arbitral award which had held that a put option provided to Edelweiss Financial Services Limited was void and unenforceable.
The arbitral award held that such put option was a forward contract and in any event a derivative contract under the Securities Contracts (Regulation) Act, 1956 (‘SCRA ’) and therefore illegal under the notifications issued under Section 16 and also contrary to Section 18A of the SCRA . The Bombay High Court set aside the arbitral award on the ground of ‘patent illegality’ and held that such a put option is enforceable as the contract of sale comes into existence only after the exercise of such option. Therefore, such an option is neither a forward contract nor a derivative contract under Section 2(ac) of the SCRA . The Court further held that even assuming the option is a derivative, its illegality must not be borne from Section 18A of the SCRA – which only positively provides for legality and validity of contracts in derivative. The Court has also ruled that cross objections filed by a respondent in a petition under Section 34 of the A&C Act are not maintainable since the provisions of Civil Procedure Code, 1908 are not applicable
to proceedings under Section 34 as the A&C Act is a code in itself and Section 34 does not make any provision for filing of cross objections.
NCLAT holds that it is not necessary to Initiate IBC Proceedings against the Principal Borrower before Initiating CIRP against the Corporate Guarantors
The National Company Law Appellate Tribunal (‘NCLAT’), in its decision dated January 8, 2019, in Ferro Alloys Corporation Limited v. Rural Electrification Limited9, has reasoned that the Insolvency and Bankruptcy Code, 2016 (‘IBC’) does not exclusively prescribe any inter-se rights, obligations and liabilities of a guarantor qua a financial creditor. Thus, the NCLAT has held that, in the absence of any express provisions to this effect, the same will have to be noticed from the provisions of the Indian Contract Act, 1872 and therefore it is not necessary to initiate Corporate Insolvency Resolution Process (‘CIRP’) under the IBC against the ‘Principal Borrower’ before initiating it against the ‘Corporate Guarantors’. Without initiating any CIRP against the ‘Principal Borrower’, it is open to the financial creditor to initiate CIRP against the ‘Corporate Guarantors’, as such financial creditor is also the ‘Financial Creditor’ qua the ‘Corporate Guarantor’ under Section 7 of the IBC .
SC Strikes Down RBI Circular dated February 12, 2018
In Dharani Sugars and Chemicals Limited v. Union Of India10, the SC dealt with various petitions challenging the constitutional validity of RBI circular dated February 12, 2018 (‘RBI Circular’). The SC struck down the RBI Circular and declared it as ultra-vires.
With respect to the scope of RBI’s power to issue the RBI Circular under Section 35AA of the Banking Regulation Act, 1949 (‘BR Act’), the SC held that RBI can direct banking institutions to initiate insolvency proceedings if two conditions are fulfilled, namely if: (i) there is a Central Government authorization to do so, and (ii) the direction is in respect of specific defaults. Section 35AA, by necessary implication, prohibits RBI to exercise the power in any manner other than as set out in Section 35AA. Whilst prior to the enactment of Section 35AA of the BR Act, RBI could have issued directions under Section 21 and Section 35A of the BR Act to initiate an insolvency resolution process under the IBC; after the enactment of Section 35AA, this can be done only within the four corners of Section 35AA.
With respect to the scope of Section 35AB of the BR Act, the SC interpreted the words “without prejudice” appearing in Section 35AB to be only illustrative of a general power which does not restrict such general power. Therefore, the power to issue directions under Section 35AB is in addition to the power under Section 35A. Additionally, Section 35AB is not without prejudice to the provisions contained in Section 35AA and, therefore, the power under Section 35AB (read with Section 35A) is to be exercised separately from the power conferred by Section 35AA. The SC held that the scheme of Sections 35A, 35AA, and 35AB of the BR Act is as follows:
i. Section 35AA is the only source of power to issue directions to initiate the insolvency resolution process under IBC;
ii. When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving the problem of stressed assets under IBC, such power falls within Section 35AB (read with Section 35A).
The SC was of the view that all actions taken under the RBI Circular, including actions by which IBC has been triggered, falls along with this RBI Circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of IBC, only because of the operation of the RBI Circular, have been declared to be non-est.
NCLAT Dismisses Tata Steel’s Appeal Against Liberty in the Matter of Bhushan Power & Steel
The NCLAT, in its judgment dated February 4, 2019, has dismissed the appeal filed by Tata Steel Limited (‘TSL’) against Liberty House Pte. Ltd. (‘Liberty’). TSL had challenged the order of the National Company Law Tribunal, Principal Bench (‘NCLT’) dated April 23, 2018 whereby the Committee of Creditors (‘CoC’) of Bhushan Power & Steel Limited (‘BPSL’) was directed to consider the resolution plan submitted by Liberty after expiry of the last date for submission of the same. During the CIRP of BPSL, TSL and JSW Steel Limited (‘JSW’) had submitted their respective bids within the timelines provided by the resolution professional. Whilst TSL’s appeal against the NCLT’s order dated April 23, 2018 was pending before the NCLAT, JSW revised its earlier bid and, thereafter, continued to revise its bid, which was also challenged by TSL before the NCLAT (along with actions of the CoC in connection with the same).
The issues for consideration before the NCLAT were whether the NCLT/CoC could provide multiple opportunities to resolution applicants to revise their respective resolution plans and if the CoC was authorized to entertain fresh or revised resolution plans without exhausting available bids. The NCLAT relied upon the judgment in the Binani Industries case and confirmed that prior to the voting on resolution plans placed before the CoC, the CoC can call for and consider the ‘improved financial offer(s)’ in order to ensure value maximization and within the IBC timelines it was open for the CoC to grant multiple opportunities to the resolution applications to revise their respective financial offers.
The NCLAT also held that the appeal filed by TSL was premature in absence of any final decision taken by the NCLT as to the approval of the resolution plan. The NCLAT took note of the approval of the resolution plan of JSW by the CoC during the pendency of the appeal and directed that proceedings could be initiated before the NCLT for approval of the same.
Subsequently, the resolution professional has filed an application before the NCLT for approval of the resolution plan of JSW, which is currently pending.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
4 Isha Distribution House Private Limited v. Aditya Birla Nuvo Limited, Civil Appeal Nos. 25542555 of 2019 (arising out of S.L.P.(C) Nos. 1977719778 of 2017).
5 Icomm Tele Limited v. Punjab State Water Supply & Sewerage Board, Civil Appeal No. 2713 of 2019 (arising out of
SLP (Civil) No. 3307 of 2018).
6 Union of India v. Parmar Construction Company, Civil Appeal No(s). 3303 of 2019 (arising out of SLP(C) No(s). 6312
of 2018).
7 Union of India v. Khaitan Holdings (Mauritius) Limited, CS (OS) 46 of 2019.
8 Edelweiss Financial Services Limited v. Percept Finserve Private Limited, Arbitration Petition No. 220 of 2014.
9 Ferro Alloys Corporation Limited v. Rural Electrification Limited, Company Appeal (AT) (Insolvency) No. 92 of 2017.
10 Dharani Sugars and Chemicals Limited v. Union Of India, Transferred Case (Civil) No. 66 of 2018 in Transfer
Petition (Civil) No. 1399 of 2018.
