Page 29 – Vaish Associates Advocates

Bombay High Court: Arbitration clause can be invoked by assignee of rights under contract

The High Court of Bombay (“High Court”), by a judgment pronounced on March 1, 2023, in the matter of Siemens Factoring Private Limited v. Future Enterprises Private Limited [Commercial Arbitration Application No. 174 of 2022] has held that assignee, having stepped into the shoes of the assignor, can invoke arbitration clause in terms of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Facts

Future Enterprises Private Limited (“Respondent”) is engaged in a variety of household, consumer and fashion products and operates retail stores throughout India. The Respondent had entered into a Master Rental Agreement dated January 27, 2020 (“MRA”) with LIQ Residuals Private Limited (“LIQ”) for renting equipment, whereby the Respondent, in the capacity of renter, would forward a request to LIQ for renting an equipment and LIQ would get the equipment delivered to the Respondent.

Further, the Respondent executed rental schedule for distinct periods on February 14, 2020, February 28, 2020 and March 4, 2020, comprising of details of the equipment to be rented out and rental payable by the Respondent to LIQ. Pertinently, the signed rental schedule provided that it must be signed by the authorized signatory of the Respondent. Further, by virtue of entering into the MRA, the Respondent acknowledged that by forwarding a rental schedule for acceptance by LIQ, it shall pay the supplier towards the equipment supplied by it.

Subsequently, by virtue of distinct notification of assignments contained in letters dated February 17, 2020, February 20, 2020 and March 4, 2020, LIQ informed the Respondent, about the aforementioned assignment of rental payments in favour of Siemens Factoring Private Limited (“Applicant”), a non-banking financial company, and the assignment was acknowledged by the Respondent.

As per the Applicant, pursuant to the aforementioned assignment, a sale of receivable agreements was executed between the Applicant and LIQ on February 12, 2020, February 27, 2020 and February 29, 2020. In terms of the afore-mentioned receivable agreements, LIQ could sell the receivables under the MRA and provide collateral securities to the Applicant. Consequently, the Applicant was assigned the receivables by LIQ, payable to them under the MRA executed with the Respondent.

Further, LIQ also executed irrevocable power of attorney in favour of the Applicant. Hence, according to the Applicant, it was authorized to exercise all its rights and remedies under the MRA, including the recovery of dues from the Respondent and for enforcement of underlying securities and exercise their rights as the owner of the equipment including sale of the equipment.

Thereafter, when dispute arose between the Applicant and the Respondent, the Applicant issued a legal notice dated June 21, 2022 upon the Respondent, for payment of a sum of INR 4,88,06,155/- (Rupees Four Crores Eighty-Eight Lakhs Six Thousand One Hundred and Fifty-Five Only) as on June 20, 2022 along with applicable interest thereon. However, according to the Applicant, the Respondent willfully neglected and failed to comply with the demands raised by the Applicant in the aforementioned legal notice. In view thereof, the Applicant approached the High Court under Section 11 (Appointment of arbitrators) of the Arbitration Act, seeking appointment of a sole arbitrator to adjudicate the dispute between the Applicant and the Respondent.

Issue

Whether the assignee of rights under contract is legally entitled to invoke arbitration under the Arbitration Act, considering that the assignee was not a party to the original agreement between the assignor and the alleged defaulter.

Arguments

Contentions raised by the Applicant:
On the issue as to whether arbitration clause can be invoked by assignee of rights under contract, the Applicant referred to and relied upon the MRA executed between the Respondent and LIQ, wherein LIQ was defined to mean and include its successors in business, assigns and so on. Further, the MRA specifically covered reference in agreement or document as novated, supplemented or replaced from time to time. The Applicant further submitted that in terms of the MRA, the equipment financed under the MRA were to remain the property of LIQ and/or its assigns. Further, the Applicant also drew the attention of the High Court to Clause 8 of the MRA titled ‘Assignment and Sub Letting’ and Clause 27 of the MRA titled ‘Assignment and Agency’.

Further, it was submitted by the Applicant that, basis perusal of the notification of assignment letter, even though not signed by the Applicant, it is clear that the Applicant has stepped into the shoes of LIQ, thereby leading to assignment of all liabilities and entitlements in terms of the MRA and also covers the right to invoke arbitration.

Contentions raised by the Respondent:
The Respondent opposed the relief sought by the Applicant on the ground that there is no valid arbitration agreement between the Applicant and the Respondent, in the absence of which, the Applicant is not entitled to invoke arbitration under the Arbitration Act. Further, the Respondent submitted that it cannot be assumed that the Applicant, which is an assignee of LIQ, has accorded its consent to the arbitration agreement. It was further submitted that since the Applicant has not signed the assignment letter containing an arbitration clause, the arbitration cannot be invoked by the Applicant, considering that Section 7 (Arbitration agreement) of the Arbitration Act necessitates an agreement in writing between the parties, from which, the intention to refer the disputes to arbitration must be evident. In view of the aforesaid contention, the notification of assignment in favour of Applicant does not amount to a binding arbitration clause. In other words, the Respondent’s submission is that in the absence of an existing arbitration agreement between the Applicant and the Respondent, the Applicant could not have invoked arbitration, and hence, the relief of appointment of sole arbitrator under Section 11 of the Arbitration Act cannot be granted.

Observations of the High Court

The High Court examined the notification of assignment letter and inter alia observed that the notification of assignment also consists of an arbitration clause, similar to the arbitration clause as stipulated in the MRA, except that the arbitration clause provided in the notification of assignment letter contemplates appointment of sole arbitrator by the Applicant. The High Court further observed that notwithstanding the contention raised by the Respondent that the notification of assignment letter which is not signed by the Applicant does not amount to a binding arbitration agreement in terms of Section 7 of the Arbitration Act; however, basis perusal of the MRA, it is clear that LIQ shall, on one hand, mean and include its successors in business, assigns and so on and the Respondent on the other hand. Hence, the arrangement between the parties would extend to their executors, administrators, substitutes, successors and permitted assigns. Hence, upon perusal of the clauses of MRA and the notification of assignment which was duly communicated to the Respondent and acknowledged by it, the High Court observed that the Applicant has stepped into the shoes of LIQ and stands substituted in its place. Further, by virtue of assignment, the Applicant is entitled to enforce all rights, discretions and remedies of the LIQ, as assigned to it, in respect of repayment of lease rental.

Further, on the issue as to whether the Applicant can invoke the arbitration when the arbitration clause contained in the notification of assignment is not signed by the Applicant, the High Court observed that the Applicant, by virtue of being an assignee, has stepped in the shoes of LIQ under the MRA, and is therefore entitled to invoke arbitration. Further, on the aspect of existence of a valid arbitration agreement between the parties, the High Court observed that an arbitration agreement can be a separate agreement between the parties agreeing that the disputes and difference arising between themselves to be referred for arbitration or an arbitration agreement may be in form of a clause contained in the agreement itself.

Therefore, the High Court dismissed the contention of the Respondent that the Applicant is not entitled to invoke arbitration because the arbitration clause comprised in an assignment document does not bind the Applicant, especially when the Respondent does not dispute the assignment of rights in favour of the Applicant. Hence, considering that the rights are specifically assigned in favour of the Applicant, the arbitration clause permitting the parties to refer the disputes for arbitration, can be invoked by the Applicant. Further, the High Court observed that merely because the notification of assignment is not signed by the Applicant, cannot be a bar against the Applicant from invoking arbitration.

Further, the High Court observed that the case of Vishranti CHSL v. Tattva Mittal Corporation Private Limited [ARBAP No. 3311 of 2020], which was relied upon by the Respondent to support its contention that it cannot be assumed that the Applicant had consented to the arbitration agreement, is not applicable to the facts and circumstances of the present case. Furthermore, the High Court analyzed an earlier decision of the High Court, in the matter of DLF Power Limited v. Mangalore Refinery and Petrochemicals Limited [2016 SCC OnLine Bom 5069] and arrived at the conclusion that an arbitration agreement can be assigned and particularly, in those cases where there is a specific provision for assignment of rights and liabilities and such assignment was duly accepted by the Respondent, the intention of the parties towards implementation of the rights, obligations, duties and benefits of the original contract is clearly evident.

The High Court observed that in the clauses of the MRA, it was permissible for LIQ to assign its rights under the MRA, in favour of any bank or financial institution, and the Respondent would acknowledge the assignee as the new owner of the equipment. Further, the High Court reiterated its observation that whether the notification of assignment letter was signed or not cannot be a determinative factor to decide whether the Applicant can invoke arbitration. Further, the High Court observed that the arbitration clause contained in the letter of assignment clearly stipulates that the Applicant has stepped into the shoes of LIQ and is therefore entitled to exercise and enforce all rights, discretions and remedies of the LIQ as assigned to them including the rights in respect of the payment of lease rental. Further, the High Court also observed that the letter of assignment was forwarded by LIQ and acknowledged by the Respondent, which amounts to acceptance that the Applicant has now stepped into the shoes of LIQ.

In view of the aforementioned facts and circumstances, the High Court arrived at the conclusion that from the intention of the parties, it can be clearly inferred that pursuant to assignment of rights and liabilities by LIQ in favour of the Applicant, the right to invoke arbitration also stands assigned. Therefore, when dispute arose between the Applicant and the Respondent with respect to payment of lease rental, the Applicant was entitled to invoke arbitration. Therefore, the High Court rejected the contention of the Respondent that there is no arbitration agreement between the Applicant and the Respondent and observed that there was no need for a separate execution of arbitration agreement the Applicant and the Respondent, considering that all the rights including the right to invoke arbitration had already been assigned by LIQ in favour of the Applicant and the same was acknowledged by the Respondent.

Decision of the High Court

In view of the abovementioned observations, the High Court was pleased to appoint a sole arbitrator to adjudicate the disputes having arisen between the parties.

VA View:

By way of the present judgment, the High Court has clarified a pertinent question of law that the Respondent cannot oppose the appointment of arbitrator(s) by resorting to the defense that the assignee of rights under contract cannot invoke arbitration under the Arbitration Act, merely because the assignee was not a party to the original agreement between the assignor and the alleged defaulter.

This judgment may be considered an important precedent which will preclude any defaulting party under a contract from trying to wriggle out of its legal obligations/liabilities, by opposing the appointment of arbitrator(s) and commencement of arbitration proceedings, and therefore secure the ends of justice and equity.

Pertinently, this judgment also clarifies the legal position that once the legal rights under a contract, including the right to invoke arbitration, has been assigned in favour of the assignee and the same has been acknowledged by the other party to the contract, there is no legal requirement for execution of a separate arbitration agreement between the assignee and the such other party.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Google loses appeal against CCI’s “Android Order” in India

Google loses appeal against CCI’s “Android Order” in India – NCLAT upholds the CCI decision on Google’s abuse of dominance but with some caveats on remedies.

Google has tasted another setback in India in its fight with the Antitrust regulator, Competition Commission of India (“CCI/Commission”). The appeal filed by Google against the CCI last order dated 20.10.2022 has been dismissed on merits and, except for some reliefs on some of the market correction directions issued by the CCI in its said order, Google has lost almost on all grounds.

The National Company Law Appellate Tribunal (“NCLAT/Tribunal”) vide its Judgement dated 29.03.2023 has upheld the Commission’s order dated 20.10.2022 in Case No 39 of 2018[1] (“impugned order) against Google LLC and Google India Private (Collectively referred as Google).

For details of the impugned order or the Android Operating Software (OS) case order , please read my earlier blog dated 29.1.23 (Google concedes defeat in India? Agrees to change India App store policy after CCI order) made in the wake of voluntary concessions announced by Google in its App policies for OEMs, the Smartphone makers in India, by allowing them to license Applications individually, after losing its case for grant of interim stay against the slew of market corrections directed by CCI in the impugned order before the Supreme Court . [Incidentally, the Apex Court, while rejecting Google’s application for interim stay had, vide its order dated 20.1.2023, directed NCLAT to dispose off Google’s appeal before 31.3.2023.]

The NCLAT in the recent judgment dated 29.3.2023 , has reaffirmed the main findings of the Commission that Google has abused its dominant position in the five relevant markets , delineated in the Android OS case order and upheld that Google has contravened the provisions of Sections 4(2)(a)(i), Section 4(2)(b)(ii), Section 4(2)(c), Section 4(2)(d) and Section 4(2)(e) of the Competition Act, 2002 (“ the Act”)

Google’s main defense

Google in its appeal raised the fundamental question that dominance under Section 4 of the Act is not per se violation and “effect bases analysis/test” should be applied i.e., the adverse effect of the alleged anti-competitive conduct should be first proved before coming to conclusion that there is an abuse of dominant position. It was argued that the Commission had not done any ‘effect analyses’ as required under Section 4 of the Act.

Google had further challenged all the market correction remedies directed by the Commission; however , interestingly , it did not contest the findings of the Commission either with respect to delineation of any of the five relevant markets or the finding that Google holds dominant position in all the said relevant markets.

The Tribunal, on the basis of the submissions of the parties, had framed 14 issues for consideration in the appeal which are discussed , in brief, category wise , below.

Legal Issues framed by NCLAT.

Substantial Issues

Issue 1: whether for proving abuse of dominant position under Section 4 of the Competition Act, 2002 any ‘effect analysis’ of anticompetitive conduct is required to be done? And if yes; what is the test to be employed?

The Tribunal on the issue whether “effect test” analysis is required under Section 4, accepted the arguments of Google and held that for holding any abuse of dominant position, the effect of the conduct i.e. effect being anti-competitive has to be proved. In other words, the tribunal held that

“For proving abuse of dominance under Section 4, effect analysis is required to be done and the test to be employed in the effect analysis is whether the abusive conduct is anti-competitive or not.”[2]

Issue 2: whether the order of the Commission can be said to be replete with confirmation bias?

It was alleged by Google that the finding of the Commission is replete with confirmation bias by relying on the decision of European Commission in Case No. 40099, the Google Android case. However , the Tribunal disagreed with the Google and held that the Commission had considered all the material on record, submissions of the parties with respect to each of the markets and then had recorded the findings and conclusions and hence arguments of confirmation bias cannot be accepted.

Procedural issues

Issue 3: Whether the investigation conducted by the Director General was in violation of Principles of Natural Justice? And whether the investigation conducted by the Director General is vitiated due to DG framing leading questions to elicit information?

Google had also raised objections on the procedure of investigation followed by the Director General (DG) and argued that DG had violated the principles of natural justice and had put leading questions to the third parties which were intentionally framed to obtain the desired answers from the Original Equipment Manufacturers (OEMs) and had also alleged that DG was acting with predetermined mindset and had already decided the submit the report in line with the judgement of European Commission in Android Google case.

However, the Tribunal did not agree with the Google and held that judgement relied by the Google had no application in the facts of the present case and concluded that looking at the questions framed by the DG it cannot be said that DG had pre-decided the issue. Further the notices issued by the DG were with the objective of eliciting information and there is no occasion for violating principles of natural justice when he was only to inquire and collection information. His function is only inquisitive in nature.

Issue 4: Whether order of Commission is vitiated since the Commission did not have any Judicial Member?

The Tribunal also rejected the argument of Google that the presence of judicial member in mandatory requirement of law and the decision of Commission is liable to be set-aside on this ground alone. Google had relied on the judgement of Mahindra Electric Mobility Limited and Anr. Vs. Competition Commission of India[3].

The NCLAT rejected the above argument and agreed with the submissions of the Commission, following the judgment of Amazon.com NV Investment Holdings LLC vs. Competition Commission of India[4], held that the Order of Commission is not vitiated on the ground that Commission did not consist of a judicial member.

Issues raised on merits.

Issue 5&6: Whether pre-installation of entire GMS Suite amounts to imposing of unfair condition on OEMs which is in breach of Section 4(2)(a)(i) and 4(2)(d) and whether, while returning its finding of violation has not considered the evidence on record and has not returned any finding regarding the Appellants conduct being anti-competitive?

On the first core issue the Tribunal after considering the relevant clauses in the Mobile Applications Distribution Agreement (MADA), Android Compatible Commitment (ACC) and Revenue Sharing Agreements signed with OEMs, agreed with the findings of the Commission and rejected the contention raised by Google that MADA is an optional and per device agreement which is voluntary and not unfair or restrict competition. The terms of MADA are not imposed on OEMs.

The Tribunal noted that the Commission had done an in-depth analysis and had considered the submissions of all the parties before coming to a conclusion of abuse of dominance. The Tribunal reaffirms the findings of the Commission that OEM’s lack of bargaining power and lack of negotiating space with Google clearly proves harm to competition and weak countervailing buyer power restricting to bundled apps, pre-installation and premium placement are also anticompetitive. Various conditions in the MADA which include the condition under which Google retains sole discretion to change list/bundle of GMS Apps; condition that OEMs must seek approval of Google for launching devices, all this clearly prove anti-competitive practices.

Further the Tribunal also reaffirmed the finding with respect to supplementary obligations imposed through clause 4.4 of MADA. The Tribunal held that conditions which are applied on OEMs through MADA which is essentially to provide Google Applications, are in the form of “supplementary obligations” attracting Section 4(2)(d) of the Act whose contravention is evident.

Issue 7&8: Whether Google by making pre-installation of GMS Suite conditioned upon signing of AFA/ACC for all OEMs has reduced the ability and incentive of the OEMs to develop and sell devices operating on alternative versions of Android i.e Android Fork and thereby limited technical and scientific developments, in violation of Section 4(2)(b)(ii) of the Act? And Whether the Commission while returning its finding on this breach has not considered the evidence on record and has not returned any finding regarding the Appellants conduct being anti-competitive?

Google contended the findings of the Commission and argued that ACC does not restrict innovation and the OEMs are free to differentiate and innovate on top of minimal bases requirement and some of the OEMs (OPPO & Samsung) have actually done it. It was further contented that Google has legitimate interest in licensing its Apps only for those devices which meet the requirement set by it. Further Google also submitted that Commission in its findings had not considered the evidence on record and has selectively relied on the statements of third party like Xiaomi and Lava and had disproportionately relied on the statement of Amazon.

However, the Tribunal rejected the above are arguments of the Google and held that Commission had elaborately dealt with the evidence led by the OEMs and hence the argument of Google that evidence had not been considered in right perspective cannot be accepted. It was further noted that not only Amazon, but 8 other OEMs have made their submissions that various non-negotiable constraints in AFA/ACC ensures that folk developer cannot succeed. The Tribunal further noted that Commission had correctly returned the findings that AFA/ACC results in less choice of smart mobile OS and general service by consumers.

Lastly the Tribunal held that a clear finding has been recorded by the Commission in paragraph 583 of the impugned order, that restriction imposed vide various clauses in AFA/ACC are unreasonable and disproportionate in scope and has resulted in foreclosure of its competitors in OS market. Hence, the Commission conducted effect based analysis before coming to the conclusion that Google had breached Section 4(2)(b)(ii) of the Act.

Issue 9 & 10: Whether the Appellant has perpetuated its dominant position in the Online Search Market resulting in denial of market access for competing Search Apps in breach of Section 4(2)(c) of the Act ? And Whether the Commission while returning its finding has not considered the evidence on record and has not returned any finding regarding the Appellant’s conduct being anti-competitive?

Google had challenged the finding of the Commission that it has perpetuated its dominant position in the online search market in a way so as to result in the denial of market access for the competing search apps in violation of Section 4(2)(c) of the Act. Google had challenged this finding and argued that MADA, RSAs and AFA/ACC need not to be read together to come to conclusion that RSA precludes pre-loading of competing search Apps.

Google had further contended that the Commission had failed to consider the distinction between RSAs entered with OEMs prior to 2014 i.e. portfolio-wide RSAs and those entered subsequent to 2014 i.e. per device RSAs. It was further argued that the Commission erred in observing that if an OEM had pre-installed a competing general search service on any device within an agreed portfolio, it would have had to forego the revenue share payments not only for that particular device but also for all the other devices.

However , Tribunal after considering the relevant clauses of RSA and the submissions of the Commission rejected the arguments of Google and further relying on the judgement of Supreme Court in Chattanatha Kurayalar v. Central Bank of India [5]and Delhi High Court in Mercury Travels (India) Ltd and Ors. v. Mahabir Prasad and Ors.[6] held that all agreements in question have to be conjointly read and their cumulative effect has to be noticed especially in reference to the competition.

The Tribunal further noted that a positive finding has been recorded that that competing general search services are not able to counter the competitive edge secured by Google for itself through pre-installation which acts as an entry barrier for the competitors. On the issue of non-consideration of the evidence on record, the Tribunal categorically noted that the Commission in paragraph 410-419 had considered the evidence on record and had correctly concluded that Section 4(c) had been breached.

Issues 11, 12 & 13: leveraging of dominant position in Play Store market to protect its position in other related markets in violation of Section 4(2)(e)

The Commission in its order had held that Google is leveraging its dominant position in the following markets:

Google has leveraged its dominant position in the Play store market to protect its position in online general search.
Google has leveraged its dominant position in the Play store market to enter as well as protect its position in non-OS specific web browser market through Google Chrome App.
Google has abused its dominant position by tying up of You Tube application the Play store for Android OS to enter as well as protect its position in OVHPs market through YouTube.

Google had challenged the above findings of the Commission and contended that Commission’s analysis is solely based on the flawed premise that pre-installation per se results in foreclosure of competing apps and had also argued that MADA does not restrict OEMs from pre-installing competing search service apps on their devices.

However, the Tribunal did not concur with the arguments of Google and noted that pre-installation of Google Search engine give a status quo bias and further after entering RSA the OEMs are precluded from pre-installing competing search apps in particular device.

Further, considering the findings of the Commission with respect to tying of Play store with Google search (Para 410-419), importance of pre-installation as a distribution channel (paras 424-432); inability of the rival web browsers to neutralize the competitive edge secured by Google in the browser market (paras 433-434); Google setting the de-facto web standards due to its dominant position in the browser market (paras 435-441); impossible to uninstall Google Chrome on GMS devices (paras 442-445); and negative impact on competition in the relevant market(s) (para 446-448) concluded that finding of the Commission with respect to the above issues are based on relevant material and reason and does not warrant any interference at appellate jurisdiction.

Issues 14 -on monetary penalty=On the issue of monetary penalty, Google challenged the findings on the following ground:

The penalty has not been imposed in accordance with the judgement of Excel Crop Care Limited vs. CCI. CCI had held that the revenue of Google pertaining to India in relation to its apps and services shall be taken into account for computing the relevant turn over and the penalty levied on Google by the Impugned Order which is not correct.
Revenue from non-MADA devices is not subject of abuse of dominance and yet such revenue has also been considered in imposition of penalty on Google.

Penalty should be imposed in ‘one go’ and there is no provision to impose penalty on provisionalbasis with the possibility of its revision later.

The Tribunal held that three agreements, namely, MADA, AFA/ACC and RSA, are not mutually exclusive but are in the nature of inter-related, inter-woven agreements that should be read together while examining the anti-competitive effects of these agreements, Moreover, the multiple Google apps and Google online search drive the business of Google based on traffic and data generated from innumerable users . Thus, the entire ecosystem of Google sitting on Android OS in the mobile device becomes the source of revenue to Google services. and, therefore, the total revenue from all the apps and services in the device becomes the ‘relevant turnover”.

Based on the above observation the Tribunal noted that Google has not provided the financial information as sought by the CCI, this inadequacy has been specifically mentioned in the order and , therefore , under such situation, CCI has carried out the “best estimation” on the basis of a financial statements and information submitted by Google. The Tribunal, therefore, agreed with the CCI’s decision to quantify the monetary penalties on the basis of data presented by Google.

However, on the issue of “provisional penalty” , the Tribunal agreed with Google’s submissions and held that once the CCI has derived the “best estimate” of the relevant turnover for the last three preceding financial years and imposed a penalty of 10% of the average of such turnover, further revision of this penalty based on financial information or data that may come to light in future will not be in keeping with law. NCLAT, thus deleted the word ‘provisional’ used in imposition of penalty in para 650 and elsewhere in the Impugned Order and held that this penalty imposed is final and would not be subject to any revision upon Google furnishing any further financial details and supporting documents, as sought by CCI vide its order dated 19.9.2022.

Relief on market correctional directions

NCLAT, after considering Google’s submissions and rebuttal by the CCI , however, did not agree with four market correction related remedies[7] directed by the . NCLAT has accordingly, set aside the following directions passed in the impugned order:

Google shall allow the developers of app stores to distribute their app stores through Play Store.
Google shall not restrict the ability of app developers, in any manner, to distribute their apps through side-loading.
Google shall not deny access to its Play Services APIs to disadvantage OEMs, app developers and its existing or potential competitors. This would ensure interoperability of apps between Android OS which complies with compatibility requirements of Google and Android Forks. By virtue of this remedy, the app developers would be able to port their apps easily onto Android forks.
Google shall not restrict un-installing of its pre-installed apps by the users.

COMMENT: The NCLAT decision, passed in a hurried and time bound manner to comply with the Supreme Court’s directions passed vide order dated 20.1 23 , while upholding the substantive decision of CCI on Google’s abusing its dominant position in the Android OS market and Play store market for Android OS based Smartphones and leveraging the same to protect its market power in the other related markets , is although on expected lines but by upholding Google’s main defense on the application of “effect based analysis “ for Section 4 of the Act, has opened a pandora’s box and is debatable being not in sync with the existing statutory position on the interpretation of Section 4 on abuse of dominant position . Though , the Tribunal has confirmed and upheld CCI’s decision ( primarily because it was uncontested by Google either on determination of the relevant markets or on the position of dominance held by Google in each market) yet by laying down the effect based analysis test for Section 4 ,the Tribunal has unsettled the existing jurisprudence on the topic of abuse of dominance , which has not been changed even in the recent Competition (Amendment) Bill, 2022, passed by the Lok Sabha on 29.3.2023 . In my view, CCI is most likely to challenge the decision in appeal before the Supreme Court on this issue as well as on the quashing of the four market correctional directions .

[1] In Re: Mr. Umar Javeed & Ors. And Google LLC and Google India Private Limited

[2] This is a substantial decision by NCLAT , which , if upheld by the Supreme Court , is likely to change the entire legal jurisprudence on Section 4 of the Act , which , as of now , does not prescribe any effect based analysis . The 5 prohibited conducts under Section 4 of the Act are per se violations based on unilateral conduct by a dominant enterprise and even the CLRC Report had overruled the suggestion to make it effect based, which suggestion has been accepted in the recent Competition (Amendment) Bill, 2022 passed by the passed by the Lok Sabha on 29.3.2023. This is certainly going to be challenged by CCI in the RSA before Supreme Court.

[3] (2019) SCC OnLine Del 8032

[4] Competition Appeal (AT) No.01 of 2022

[5] (1965) 3 SCR 318

[6] R.F.A. No. 680/98

[7] Directions in Paragraphs 617.3, 617.7, 617.9 & 616.10 in the impugned order

Authored by

MM Sharma
Head – Competition Law & Policy
[email protected]

and

Sudhanshu Prakash Singh
Associate – Competition Law & Policy
[email protected]

Lok Sabha Passes the Competition Amendment Bill, 2022

Lok Sabha , the Lower House of the Indian Parliament on 29.03.2023 passed the much awaited Competition Amendment Bill, 2002 (“the Bill”). The Bill was introduced in the Lok Sabha on 05.08.2022 and was referred to Standing Committee on Finance for examination and report thereon on 17.8.2022.

The Standing Committee on Finance (under the chairmanship of Shri Jayant Sinha) submitted its report on the Competition (Amendment) Bill, 2022 on 13.12.2022 in the form of 52nd Report, Standing Committee on Finance (2022-2023). The report was presented before the Lok Sabha and Rajya Sabha on 13.12.2022.

The Lok Sabha passed the Bill, with 13 amendments, on Wednesday, 29.3.2023.

The key highlights of the Amendments proposed in the Bill are:

More clarity is provided in certain definitionslike “enterprise”, “relevant product market”, “Group”, “Control”, etc.
The concept of “Hub and Spoke” Cartelhas been introduced by broadening the scope of vertical anti-competitive agreements and inclusion of a party facilitating an anti-competitive horizontal agreement under such agreements.
Reduction of time-limit for approval of combinationsfrom two hundred and ten days to one hundred and fifty days and for forming a prima facie opinion by the Commission within twenty days (from existing 30 days) for expeditious approval of combinations.
Provisions for “value of transaction”which expands the definition of combinations to include transactions with a deal value above Rs 2,000 crore.
Change in definition of “control” from “decisive influence” to ‘material influence’while assessing mergers & acquisitions .
Limitation period of three years for filing informationon anti-competitive agreements and abuse of dominant position before the Commission.
Introduction of Settlement and Commitmentframework to reduce prolonged litigations.
Introduction of Leniency plus: Incentivizing parties in an ongoing cartel investigation in terms of lesser penalties to disclose information regarding other cartels.
Substitution of a provision which provides for penalty up to rupees one crore or imprisonment up to three years or both in case of contravention of any order of the National Company Law Appellate Tribunal with provision for contempt.

The Bill now will be introduced in Rajya Sabha, and with the Government having majority in the Upper House, this Bill becoming an Act is just a matter of time.

COMMENT: The Bill is definitely coming up with some major and forward looking amendments, however, this will come with a challenge for the Commission too. The introduction of concepts of Settlement and Commitment will require framing new regulations, similar is the case with the “Deal Value Threshold”. The post of the Chairman , CCI is itself vacant for almost five months now and due to lack of statutory quorum, the CCI adjudicatory function has almost come to a standstill. With the proposed amendments in the Bill ,ushering the new “Competition Act 2.0” regime, the road of growth of Competition Law in India does not look smooth ahead at least for now.

Authored by

MM Sharma
Head – Competition Law & Policy
[email protected]

and

Sudhanshu Prakash Singh
Associate – Competition Law & Policy
[email protected]

NCLAT: The nature and character of financial debt does not change upon breach of consent terms

The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) has in its judgement dated February 1, 2023 (“Judgement”), in the matter of Priyal Kantilal Patel v. IREP Credit Capital Private Limited and Another [Company Appeal (AT) (Insolvency) No. 1423 of 2022], held that the nature of financial debt would not change on account of breach of consent terms that have been agreed between the parties.

Facts

Rajesh Landmark Projects Private Limited (“Corporate Debtor”) had issued debentures to IREP Credit Capital Private Limited (“Financial Creditor”). On December 20, 2019, the Financial Creditor filed a petition under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor (“Original Petition”).

During the pendency of the Original Petition, the Financial Creditor and the Corporate Debtor entered into consent terms recorded in a settlement agreement (“Consent Terms”) where under the Financial Creditor agreed to withdraw the Original Petition. Further, the Consent Terms placed an obligation on the Corporate Debtor to release the amounts agreed to thereunder and entitled the Financial Creditor to claim the entire outstanding amount as would be due on the date of the Corporate Debtor’s default of the Consent Terms. The Consent Terms also contemplated revival of the Original Petition in the event of default of the Consent Terms on part of the Corporate Debtor.

Subsequently, the cheques which were issued to the Financial Creditor were dishonored and thereby the Consent Terms were defaulted on part of the Corporate Debtor. The Financial Creditor, instead of reviving the Original Petition, filed a fresh company petition against the Corporate Debtor under Section 7 of the IBC (“Fresh Petition”).

In the Fresh Petition, the Financial Creditor based its claim on the initial financial debt that was claimed by it in the Original Petition along with giving details of the Consent Terms and the subsequent events which took place. The Fresh Petition was admitted by the National Company Law Tribunal, Mumbai (“Adjudicating Authority”) in its order dated October 10, 2022 and CIRP was initiated against the Corporate Debtor (“Impugned Order”).

Aggrieved by the Impugned Order, the present appeal has been filed before the NCLAT by the director of the Corporate Debtor namely, Priyal Kantilal Patel (“Appellant”).

Issue

Whether the nature and character of financial debt changes upon breach of Consent Terms.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the Fresh Petition filed by the Financial Creditor was not maintainable. A breach of the Consent Terms by the Corporate Debtor did not furnish any right on the Financial Creditor to file a Fresh Petition initiating CIRP against the Corporate Debtor, given that a breach of Consent Terms could not be treated as a financial debt.

The Appellant placed reliance on the judgment passed by the NCLAT in the case of Amrit Kumar Agarwal v. Tempo Appliances Private Limited [2020 SCC OnLine NCLAT 1202] (“Amrit Kumar Case”) wherein it was held that “mere obligation to pay under a Settlement Agreement would not amount to disbursal of amount for consideration against the time value of money and breach thereof would not entitle the Appellant in the instant case to trigger Corporate Insolvency Resolution Process against the Respondent. Viewed from this prospective, we find that bouncing of cheques issued in discharge of obligation under the Settlement Agreement would not fall within the purview of default in regard to financial debt.”

The Appellant also submitted that there was no consensus amongst the majority debenture holders for initiating CIRP against the Corporate Debtor under Section 7 of the IBC and that the Financial Creditor amounted to a mere 12% of the total debenture holders.

Lastly, the Appellant submitted that the Adjudicating Authority had committed an error by admitting the Fresh Petition filed by the Financial Creditor.

Contentions raised by the Financial Creditor:

The Financial Creditor contended that the debt which was claimed by it under the Fresh Petition remained a financial debt and that the nature of the debt would not change merely by virtue of the Consent Terms being entered into between the parties.

Moreover, in the present case, the Financial Creditor by filing the Fresh Petition, was not trying to enforce the Consent Terms entered into between the parties, but was rather claiming the original financial debt.

The Financial Creditor also submitted that while the Consent Terms stipulated that any default on part of the Corporate Debtor in abiding by the Consent Terms would entitle the Financial Creditor to revive the Original Petition, the mere filing of a Fresh Petition instead of reviving the Original Petition, could not be a ground to defeat the Fresh Petition.

The Financial Creditor therefore contended that the Fresh Petition had been rightly admitted by the Adjudicating Authority.

Observations of the NCLAT

The NCLAT observed that there was no dispute on the fact that the Original Petition was withdrawn basis the Consent Terms that were entered into between the parties.

The NCLAT took note of clause 9 of the Consent Terms wherein the Corporate Debtor had undertaken to fully comply with the payment schedule set out thereunder and to not commit any default in releasing the amounts agreed under the Consent Terms. The NCLAT also observed that in the event of Corporate Debtor’s default of the Consent Terms, the Financial Creditor was at liberty to claim the entire outstanding amount and revive the Original Petition.

Further, the NCLAT observed that the Amrit Kumar Case relied upon by the Appellant, was a case wherein an application under Section 7 of the IBC was filed on the ground of default in payment of a settlement agreement and therefore the NCLAT had opined that a default in payment of settlement agreement does not constitute a financial debt. However, in the eyes of the NCLAT, the facts of the instant case were distinguishable from that of the Amrit Kumar Case, considering that in the instant case, the Fresh Petition had been filed by the Financial Creditor not only for default of the Consent Terms on part of the Corporate Debtor, but also, for claiming the original financial debt which was extended by the Financial Creditor to the Corporate Debtor.

The NCLAT also observed that a mere breach of the Consent Terms on part of the Corporate Debtor would not extinguish the financial debt which was claimed by the Financial Creditor nor would the nature and character of the financial debt change due to breach of the Consent Terms. Besides, permitting such an interpretation would give a premium to the Corporate Debtor who has breached the Consent Terms.

Furthermore, although a reading of clause 9 of the Consent Terms made it evident that the Financial Creditor would be entitled to revive the Original Petition upon Corporate Debtor’s breach of the Consent Terms, the mere fact that instead of reviving the Original Petition, the Financial Creditor chose to file the Fresh Petition, could not be a reason to reject the Fresh Petition altogether.

With regard to the contention of the Appellant that there was no consensus amongst the debenture holders for initiating CIRP against the Corporate Debtor under Section 7 of the IBC and that the Financial Creditor amounted to a mere 12% of the total debenture holders, the NCLAT observed that the fact that the majority debenture holders had not initiated CIRP under Section 7 of the IBC against the Corporate Debtor, would not preclude the Financial Creditor from initiating the same on its own right.

Decision of the NCLAT

The NCLAT held that the Corporate Debtor’s breach of the Consent Terms, would not extinguish the financial debt which was claimed for by the Financial Creditor nor would the nature and character of the financial debt change due to breach of Consent Terms.

In view of the above, NCLAT did not find any reason to interfere with the Impugned Order passed by the Adjudicating Authority and therefore dismissed the appeal filed by the Appellant.

VA View:

The NCLAT has, through this Judgment, rightly opined that a mere breach in Consent Terms on part of the Corporate Debtor would not wipe out the original financial debt nor would the nature and character of the financial debt change.

Pertinently, in relation to filing of a Fresh Petition by the Financial Creditor instead of reviving the Original Petition as stipulated in the Consent Terms, the NCLAT reiterated that the same could not be a ground to reject the Fresh Petition filed under Section 7 of the IBC.

This Judgement emphasizes that although the parties have mutually agreed upon ‘revival’ of the proceedings, a financial creditor may, at its will, also proceed to file a fresh application for initiation of CIRP against a corporate debtor, thereby safeguarding the financial creditor’s interest. Therefore, consent terms cannot alter the nature or character of a financial debt whereby the statutory rights of a financial creditor are stripped away.

For any query, please write to Mr. Bomi Daruwala at [email protected]

NCLAT: Majority shareholders of a company have the locus to challenge an admission of CIRP against the corporate debtor where the admission took place on account of collusion amongst the creditors

The National Company Law Appellate Tribunal (“NCLAT”), in the case of Ashish Gupta v. Delagua Health India Private Limited and Others [Company Appeal (AT) (Ins.) No. 17 of 2022], has held that majority shareholders of a company have the locus to challenge an admission of corporate insolvency resolution process (“CIRP”) against the corporate debtor where the admission took place on account of collusion amongst the creditors of the corporate debtor.

Facts

Ashish Gupta (“Appellant”) was employed with Delagua Health India Private Limited (“Corporate Debtor/ Respondent No. 1”) with effect from February 11, 2014 as director of the Corporate Debtor and tendered his resignation on July 2, 2017 with immediate effect. He had not been paid salary for the period from January, 2016 till June, 2017 and submitted that the said operational debt of the Corporate Debtor fell due on June 30, 2017. Not having received the said payment, a demand notice was sent to the Corporate Debtor on June 15, 2019 (“Demand Notice”). An application under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was filed after the Appellant did not receive any response from the Corporate Debtor (“Application”).

The National Company Law Tribunal, New Delhi (“Adjudicating Authority”), by the order dated October 11, 2021 (“Impugned Order”), rejected the Application. The present appeal was preferred by the Appellant under Section 61 (Appeals and Appellate Authority) of the IBC against the Impugned Order.

Issues

Whether the Application filed before the Adjudicating Authority was a collusive petition.
Whether, in the given facts and circumstances of the present case, Delgua Health Limited (Grand Bahamas) (“Respondent No. 2”) and Delgua Water Testing Limited (“Respondent No. 3”) as shareholders are entitled to defend the interests of Respondent no.1.
Whether there is any pre-existing dispute surrounding the operational debt.

Arguments

Contentions of the Appellant:

The Appellant contended that the Demand Notice was addressed by the Appellant to the Corporate Debtor at its registered office address, as mentioned in the company master data. Further, proof of service of the Demand Notice was provided.

In response to the contentions of the Respondents that the Appellant was in control of the registered office address and the official e-mail ID of the Corporate Debtor, the Appellant had stated that he had taken efforts to delete his name and e-mail address from the company master data besides taking initiative for a new board of the Corporate Debtor by calling extraordinary meeting of the Corporate Debtor in 2018 but was not allowed to do so by the majority shareholders.

The Appellant contended that the Corporate Debtor did not appear before the Adjudicating Authority. Instead, Respondent No. 2 and Respondent No. 3, together holding 98.98% shareholding of the Corporate Debtor, subsequently filed an intervening application though they did not have any locus in the matter. The Adjudicating Authority on October 11, 2021 wrongly proceeded to dismiss the Application by holding it to be a collusive petition without giving any reasons.

The Appellant contended that since the Demand Notice had been sent at the registered office address of the Corporate Debtor, as mentioned in the company master data, there was no infirmity in the service of the Demand Notice.

It was also the contention of the Appellant that the consultancy agreement dated November 4, 2013 (“Consultancy Agreement”) being referred to by the Respondents was superseded by an employment agreement dated August 1, 2014 (“Employment Agreement”) and since the dues arose from the Employment Agreement, only the Employment Agreement was mentioned in the Application. Thus, there was no attempt on the part of the Appellant to suppress the Consultancy Agreement and that it was the Respondents who were misleading the NCLAT by making a mention of the Consultancy Agreement which has been superseded by the Employment Agreement.

Further, with respect to the contention of the Respondents that the Appellant had violated the clauses of the Consultancy Agreement pertaining to non-compete, the Appellant contended that Caya Constructs (“Caya”) and the Corporate Debtor are in different businesses hence clauses 9.1 and 9.2 of the Consultancy Agreement was not attracted and there was no violation of the Consultancy Agreement.

Contentions of the Respondents:

The Respondent No. 2 and Respondent No. 3 submitted that the Appellant and Respondent No. 2 had signed the Consultancy Agreement on November 4, 2013 by virtue of which the Appellant had agreed to provide certain services to Respondent No. 2 to assist them in setting up an entity in India and for overseeing its operations. However, this fact had not been deliberately disclosed by the Appellant before the Adjudicating Authority. The Corporate Debtor had been subsequently incorporated on February 11, 2014. Post incorporation of the Corporate Debtor, the Appellant along with one Mr. K.K. Vashishtha (“KKV”) were appointed as directors of the Corporate Debtor and thereafter their fees/ remuneration was paid directly by the Corporate Debtor. Both the Appellant and KKV resigned from the directorship of the Corporate Debtor with effect from July 2, 2017 without sending proper intimation to the shareholders of the Corporate Debtor. The abrupt resignation of both directors had caused a void in the board of the Corporate Debtor. Further, because of the said void on the board, the Appellant continued to remain in control of all modes of communications in respect of Corporate Debtor and hence by design ensured that the Demand Notice never actually got served upon the Corporate Debtor. In this way, the Appellant intentionally and deliberately shut the opportunity for the Corporate Debtor to respond to the Demand Notice.

Furthermore, though the Appellant and KKV had submitted their respective resignations on the same day and the Appellant had full knowledge of the resignation of KKV, he acted in collusion with KKV and chose to serve the Demand Notice upon KKV with an ulterior motive. KKV, even though he had already resigned as director of the Corporate Debtor, presented himself before the Adjudicating Authority on behalf of Corporate Debtor and unauthorisedly expressed inability to pay the amount claimed by the Appellant in the Demand Notice during the hearing of the Application. The Adjudicating Authority, having observed this act of connivance between the Appellant and KKV, correctly dismissed the petition as collusive.

It was further argued by the Respondents that the Corporate Debtor having been denied opportunity to respond to the collusive Demand Notice or to defend their interests before the Adjudicating Authority in the context of the Application, Respondent No. 2 and Respondent No. 3 had filed an intervention application before the Adjudicating Authority. It was strenuously contended that as the Corporate Debtor being a subsidiary of Respondent No. 2, they were fully entitled to file the intervention application to protect the interest of the shareholders of the Corporate Debtor.

It was submitted by Respondent No. 2 and Respondent No. 3 that the Appellant had deliberately withheld information from the Adjudicating Authority about the Consultancy Agreement which had been signed between the Appellant and Respondent No. 2 on November 4, 2013. The Respondents further submitted that this Consultancy Agreement was placed on record much later by the Appellant and that too only after directions were issued on September 6, 2019 by the Adjudicating Authority to produce the original documents. It was also contended that the Consultancy Agreement constituted the basis of relationship between the Appellant and the Corporate Debtor and that it continued to subsist.

The Respondents submitted that clause 9.1 of the Consultancy Agreement stipulated that without the prior written consent of the Corporate Debtor, the consultant could not accept any engagement or employment or have any concern in any business which is similar to or in any way competitive with any of the businesses of the company or any group company. The Appellant while still serving as consultant with Corporate Debtor started engaging himself in the activities of a competing entity, Caya, thus, breaching the terms of the Consultancy Agreement and causing loss to the business of the Corporate Debtor. Furthermore, the Appellant had made excess withdrawals from the accounts of the Corporate Debtor. Pointing out at these pre-existing disputes, it was submitted that the Application is not maintainable.

Observations of the NCLAT

With respect to issue nos. 1 and 2, the NCLAT observed that on the date of issue of the Demand Notice, the Appellant having admitted that both KKV and he had already tendered their respective resignations from the position of director of the Corporate Debtor with effect from July 2, 2017, it defied logic as to why the Appellant sent the Demand Notice at the given address at a time when the board of Corporate Debtor had ceased to exist. Further, the other copy of the Demand Notice has admittedly been addressed to KKV who at that point of time had also resigned from the position of director of the Corporate Debtor. The Appellant in spite of having full knowledge of the fact that KKV had already resigned, yet, addressed the Demand Notice to him which puts question marks on the intention of the Appellant.

Furthermore, the NCLAT observed that when the Application was filed before the Adjudicating Authority, at which time KKV had already resigned as a director, he still appeared before the Adjudicating Authority, not only recording his presence but also making a statement expressing inability on the part of the Corporate Debtor to pay the amount claimed by the Appellant. In view of the above, the NCLAT stated that the Appellant had connived with KKV to manipulate the Section 9 proceedings in his favour by making KKV unauthorisedly represent on behalf of the Corporate Debtor.

With respect to the contention of the Appellant that intervention on part of shareholders is not permissible, the NCLAT stated that, in view of the peculiar circumstances of the case where the Demand Notice could not be responded to by the Corporate Debtor for reasons beyond their control and a collusive petition having been filed, Respondent No. 2 and Respondent No. 3, being majority shareholders of the Corporate Debtor deserved to be heard in the interest of justice. Hence, the NCLAT held that present appeal deserved to be considered on merit.

With respect to issue no. 3, the NCLAT observed that it was an admitted fact by both parties that the Consultancy Agreement is dated November 4, 2013 while the Employment Agreement is dated August 1, 2014. The Appellant was appointed as director in the Corporate Debtor on February 11, 2014 which was before the Employment Agreement was signed. Based on the chronological sequencing of the two agreements, it was the contention of the Appellant that the Employment Agreement supersedes the terms and conditions of the Consultancy Agreement. However, the Respondents had questioned the validity of the Employment Agreement since it was a document signed only between the Appellant and KKV. The Corporate Debtor or the shareholders or their authorised representatives do not figure anywhere in the document as signatories and therefore was not binding on them. It had also been submitted that the Employment Agreement was not a registered document and hence legally untenable. On the other hand, the Consultancy Agreement was signed between the Appellant and Respondent No. 2.

The NCLAT was of the considered view that given the framework of Section 9 of IBC, the remit of the tribunal is summary in nature and it therefore does not behove the tribunal to undertake either the comparative examination of the areas of specialisation of Caya and the Corporate Debtor. All that the NCLAT observed at this stage is that a dispute centring on breach of fiduciary duty by the Appellant in the context of Consultancy Agreement has been raised by the Respondents as their defence against the claim of the Appellant which is evidenced from the material placed on record.

Hence, in the light of the submissions and pleadings made by Respondent No. 2 and Respondent No. 3 and after seeing the material on record, NCLAT was satisfied that dispute raised on behalf of the Corporate Debtor is not a moonshine dispute or a bluster. In respect of issue no. 3, the NCLAT answered in the affirmative.

Decision of the NCLAT

The NCLAT held that the Adjudicating Authority had not committed any mistake in observing that the Application was collusive and dismissed it on the same grounds.

VA View:

The NCLAT has upheld the spirit of the IBC and protected the interests of stakeholders involved by preventing an unjust admission of a company into CIRP. In cases of collusion such as the above, it is important to look at the circumstances surrounding the facts in order to unveil the true picture which is falsely portrayed by the creditors.

It is a well settled canon of natural justice that anything which eludes or frustrates the recipient of justice should be avoided and reasonable opportunity of hearing be allowed to advance the cause of justice. By taking cognizance of the apparent dispute in existence, the NCLAT has also protected the interests of the shareholders of the Corporate Debtor, namely Respondent No. 2 and Respondent No. 3 and adhered to this well settled position of law and equity.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Delhi High Court: Arbitrator has no jurisdiction to set aside sale notice issued by secured creditor under Section 13(4) of the SARFAESI Act

The High Court of Delhi (“High Court”) has, by a common judgement dated February 21, 2023, in a batch of appeals namely, Arb. Appeal (Comm.) No. 36 of 2022, Arb. Appeal (Comm.) No. 37 of 2022 and Arb. Appeal (Comm.) No. 38 of 2022 (“Arbitration Appeals”) arising under Section 37(2)(b) (Appealable orders) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), filed by Indiabulls Housing Finance Limited (“Indiabulls”) and Edelweiss Asset Reconstruction Company Limited (“Appellants”) against Shipra Estate Limited, Shipra Hotels Limited and Shipra Leasing Private Limited (“Respondents”) respectively, held that arbitrator has no jurisdiction to set aside sale notice issued by secured creditor under Section 13(4) (Enforcement of security interest) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).

Facts

In an arbitration proceeding involving the above-mentioned parties, the Learned Arbitrator, by an order dated June 11, 2022 (“Impugned Order”), had set-aside a sale notice dated April 29, 2022 issued by Indiabulls (“Sale Notice”) under Section 13(4) of the SARFAESI Act read with the Security Interest (Enforcement) Rules, 2002 (“SARFAESI Rules”) seeking enforcement of their “security interest” in the secured asset being Shipra Mall, Ghaziabad (“Mall Asset”). In view of the aforesaid order dated June 11, 2022, Arbitration Appeals arose before the High Court and were disposed of by order dated July 8, 2022. Thereafter, in view of the Learned Arbitrator reiterating his previous order dated June 11, 2022, the aforesaid proceedings were sought to be revived by the Appellants by way of filing of applications, namely, I.A. No. 14180 of 2022, 14179 of 2022 and 14181 of 2022. In view thereof, the High Court allowed the aforesaid applications and was pleased to take on record the Arbitration Appeals.

Subsequently, by an order dated August 30, 2022, the Learned Arbitrator clarified that the Impugned Order continues to apply, thereby prohibiting enforcement of security interest in the Mall Asset and restraining Indiabulls from confirming the sale of the Mall Asset.

In view of the above-mentioned, the Appellants approached the High Court, challenging the Impugned Order.

Issues

Whether the Learned Arbitrator was within his powers to interdict and set aside the Sale Notice.
Whether the Learned Arbitrator could have curtailed the rights of a secured creditor in relation to a security interest created under the SARFAESI Act, being a special statute, in relation to which the Respondents have a specific remedy under Section 17 (Application against measures to recover secured debts) of the SARFAESI Act, before the Debts Recovery Tribunal.

Arguments

Contentions raised by the Appellants:

It was contended by the Appellant that by restraining Indiabulls from confirming sale of the Mall Asset, the Learned Arbitrator has exceeded his jurisdiction and stepped into the domain of the Debts Recovery Tribunal, which is exclusively empowered to decide on the legal issues pertaining to enforcement of security interest under the SARFAESI Act. Further, the Appellant relied upon the judgment of the Supreme Court in the matter of Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1] (“Vidya Drolia Judgment”), wherein it is held that the matters falling within the purview of SARFAESI Act are non-arbitrable. In order to substantiate the contentions, Indiabulls submitted that they are a “financial institution” and a “secured creditor” within the meaning of Section 2(m) and 2(zd) of the SARFAESI Act qua the Respondents, who are covered within the meaning of “borrower” in terms of Section 2(f) of the SARFAESI Act and a “security interest” has been created in favour of the Mall Asset, in terms of Section 2(zf) and Section 2(zc) of the SARFAESI Act.

Further, it was contended that Indiabulls is legally empowered to enforce its security interest over the secured asset as per Section 13(4) of the SARFAESI Act, thereby taking possession of the Mall Asset and giving effect to sale of the Mall Asset as per the terms stipulated under Rule 8 of the SARFAESI Rules.

The Appellants further contended that legal remedy against enforcement of secured asset by the secured creditor lies before the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. The Appellant relied upon various judicial pronouncements in order to substantiate the aforesaid contention that, when an efficacious remedy is available to the aggrieved borrower exclusively before the Debts Recovery Tribunal, even the High Court cannot exercise extraordinary writ jurisdiction to entertain a challenge to a sale notice issued under Section 13(4) of the SARFAESI Act. Similarly, by virtue of Section 34 (Civil court not to have jurisdiction) of the SARFAESI Act, even Civil Courts are barred from entertaining any challenge to the legality of enforcement of security interest.

It was further argued that enforcement of a ‘mortgage’, which is a right in rem, cannot be decided by an arbitral tribunal. Further, it was contended that since remedy against enforcement of security interest exists under SARFAESI Act being a special statute, the Arbitration Act cannot over-ride such special remedy, and hence, the “doctrine of election” is not applicable in the present case.

Contentions raised by the Respondents:

It was contended on behalf of the Respondents that the Learned Arbitrator was well within his jurisdiction and has not entered into the domain of SARFAESI Act. The Respondent further submitted that the Learned Arbitrator was empowered to pass such orders which were necessary to preserve the asset, which is the subject-matter of arbitration by way of interim measure of protection, so that the arbitral proceedings are not rendered infructuous. Further, the Respondents contended that the Learned Arbitrator had only prohibited Indiabulls, being the respondent party in the Arbitration proceeding, from confirming the sale of the Mall Asset, through subsequent auction proceedings, without impeding their right to issue sale notice or call for bids.

Further, it was submitted that once the parties had chosen to refer the dispute to arbitration and submit themselves before the Learned Arbitrator, the Appellant in the present Arbitration Appeal have by implication, waived their right to file a civil suit or to adopt remedies under the SARFAESI Act.

Further, the Respondent made an attempt to demonstrate that the Vidya Drolia Judgment is factually distinguishable from the present case. More particularly, it was contended that Vidya Drolia Judgment has been pronounced in the context of rent control legislation and has no relation to SARFAESI Act.

Further, the Respondents sought reliance upon the principle of “doctrine of election”, thereby submitting that if there exist remedies under two statutes, a party is free to elect any one of them. In the context of the present case, it was argued that once the parties to the dispute had elected to resolve their disputes under the Arbitration Act, remedies under SARFAESI Act would no more be available to them.

Observations of the High Court

At the outset, the High Court made it clear that by way of the present judgment, the High Court does not propose to decide on the arbitrability or non-arbitrability of matters covered under SARFAESI Act at large, since the same would depend upon the nature of the dispute and other factors.

In the present case, the High Court relied upon the Vidya Drolia Judgment, and came to the finding that since Section 13(4) of the SARFAESI Act provides for a specific right vested in the secured creditor to enforce security interest, by issuance of sale notice, the aforesaid right cannot be ousted by an order passed by an arbitral tribunal. Further, the High Court observed that the remedy available to the borrower aggrieved by enforcement of security interest at the behest of the secured creditor lies before the Debts Recovery Tribunal under Section 17 of the SARFEASI Act. In view of the above-mentioned, the High Court observed that the “doctrine of election” is not applicable in the present case, since the question of choice does not arise. It was further observed that the question of remedy under the Arbitration Act as an alternative to a proceeding before the Debts Recovery Tribunal does not arise, since there is no inconsistency or repugnancy before the provisions of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, 1993 on the one hand and the Arbitration Act on the other hand.

Further, the High Court observed that the challenge to a sale notice issued under Section 13(4) of the SARFAESI Act is non-arbitrable and hence, the Learned Arbitrator had no discretion or jurisdiction to pass any order in this regard. Therefore, grant of an interim measure under Section 17 of the Arbitration Act, which is wholly outside the scope of arbitration, cannot be permitted. Thus, the High Court observed that it is empowered under Section 37(2)(b) of the Arbitration Act to interfere in the Impugned Orders.

Decision of the High Court

In view of the aforesaid observations and precedents, the High Court held that the Learned Arbitrator clearly exceeded his powers and jurisdiction in interdicting and setting aside sale notices issued by Indiabulls. Accordingly, the High Court was pleased to set aside the aforesaid orders.

VA View:

By way of the present judgment, the High Court has answered a pertinent question of law and clarified the legal position that in the event of the borrower being aggrieved by enforcement of security interest by the secured creditor, the remedy would exclusively lie before the Debts Recovery Tribunal under Section 17 of the SARFAESI Act and no other forum including arbitral tribunal can step into the unchartered territory of SARFAESI regime, for which purpose, only the Debts Recovery Tribunal was empowered to grant appropriate relief(s).

This judgment is relevant, particularly for the reason that it reiterates the exclusivity of jurisdiction and powers vested with the Debts Recovery Tribunal in matters falling within the domain of SARFAESI Act (which is a special statute) and makes it clear that even an arbitral tribunal, whilst deciding an application seeking interim reliefs, cannot grant such interim measures, which are supposed to be adjudicated upon by the Debts Recovery Tribunal.

For any query, please write to Mr. Bomi Daruwala at [email protected]