Between the Lines | Supreme Court: Limitation period for appeal under Insolvency and Bankruptcy Code, 2016 begins from the date of pronouncement of order and delay in uploading the order cannot exclude limitation

The Supreme Court (“SC”) has in its judgment dated October 22, 2021 (“Judgement”), in the matter V Nagarajan v. SKS Ispat and Power Limited and Others [Civil Appeal No. 3327 of 2020], held that the period of limitation for filing of appeal against an order as per Section 61 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) will start running as soon as the same is pronounced, and that it is not dependent on the date when the order is uploaded.

Facts

The instant case is an appeal before the SC under Section 62 (Appeal to Supreme Court) of the IBC against the judgement of the National Company Law Appellate Tribunal, Delhi (“NCLAT”) dated July 13, 2020, wherein the NCLAT had dismissed the appeal filed by the resolution professional (“Appellant”) against the National Company Law Tribunal, Chennai’s (“NCLT”) order dated December 31, 2019 (“NCLT Order”), as barred by limitation. The NCLT had dismissed the Appellant’s application in a liquidation proceeding, seeking interim relief against the invocation of a bank guarantee by SKS Power Generation Chhattisgarh Limited (“Respondent No. 10”), the subsidiary of SKS Ispat and Power Limited (“Respondent No. 1”), against Cethar Limited (“Corporate Debtor”), a corporate entity, engaged in engineering and project consultancy, undergoing liquidation. After an unsuccessful attempt at resolution, the Appellant was appointed as its liquidator on April 25, 2018. Respondent No. 1 and Respondent No. 10 are collectively called “Respondents”. The Appellant instituted proceedings under Section 43 (Preferential transactions) of the IBC and Section 45 (Avoidance of undervalued transactions) of the IBC to avoid preferential and undervalued transactions of the Corporate Debtor, in which no relief was sought against Respondent No. 10. The Appellant subsequently discovered that Respondent No. 1 and Respondent No. 10 had colluded with the promoters of the Corporate Debtor and defrauded the latter of over INR 400 crores by entering into a fraudulent settlement of INR 4.58 crores. The Appellant alleged that these transactions formed a part of the ongoing investigation by the Central Bureau of Investigations and the Enforcement Directorate. Respondent No. 10, allegedly at the behest of Respondent No. 1, sought to invoke certain bank guarantees issued by the Corporate Debtor for its failure to perform its engineering services. The Appellant filed an application to resist the invocation of the performance guarantee until the conclusion of the liquidation proceedings.

The NCLT refused to grant an injunction against the invocation of the bank guarantee until the conclusion of liquidation proceedings. A copy of the NCLT Order was uploaded on the NCLT website only on March 12, 2020, with the incorrect name of the judicial member who had passed the order. The corrected order was uploaded on March 20, 2020. Subsequently, the Appellant awaited the issue of a free copy and allegedly sought the free copy on March 23, 2020, under the provisions of Section 420(3) of the Companies Act, 2013 (“Companies Act”) read with Rule 50 (Registry to send certified copy) of the National Company Law Tribunal Rules, 2016 (“NCLT Rules”). According to the Appellant, the free copy has not been issued till date. Owing to the COVID-19 (“Pandemic”) induced lockdown, the appeal before the NCLAT was filed by the Appellant on June 8, 2020 with an application for exemption from filing a certified copy of the order as it had not been issued. The NCLAT in its order dated July 13, 2020, citing Section 61(2) of the IBC which mandates a limitation period for appeals to be thirty days, extendable by fifteen days, held that the appeal filed under Section 61(1) of the IBC was barred by limitation. It noted that the statutory time limit of thirty days had expired and an application for condonation of delay had not been filed. Further, it noted that contrary to Rule 22 (Presentation of appeal) of the National Company Law Appellate Tribunal Rules, 2016 (“NCLAT Rules”) which provides that every appeal must be accompanied with a certified copy of the impugned order, the same had not been annexed in this case. Aggrieved, the Appellant filed the instant appeal before the SC against the order of the NCLAT on the question of limitation.

Issue

Whether ‘Success Fees’ was chargeable by the Appellant.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that after the NCLT Order, the constitution of the bench was changed shortly thereafter, hence the copy of the order was not uploaded until March 12, 2020, and the copy uploaded on March 12, 2020, was defective. The corrected copy was uploaded only on March 20, 2020. A request for the free copy was made at the NCLT registry on March 23, 2020, by the Appellant. The NCLAT was shut on account of the Pandemic from March 24, 2020 and a statement of purpose for commencement of virtual hearings was issued on May 30, 2020. The Appellant had immediately filed an appeal on June 8, 2020 with a downloaded copy, relying on the SC’s suo motu order dated March 23, 2020 (“Suo Motu Order”), extending limitation and the lack of receipt of a free certified copy. The Appellant argued that the Suo Motu Order had stopped the clock of limitation with effect from March 15, 2020 on account of the Pandemic. It was submitted that the appeal was de jure filed within three days of the order being received, within the thirty day limitation period prescribed under Section 61 (Appeals and Appellate Authority) of the IBC. It was argued that Rule 22 of the NCLAT Rules mandates a certified copy of the order for filing an appeal. However, Rule 14 (Power to exempt) of the NCLAT Rules permits a waiver from compliance with any of the rules, which has been usually granted in case of a downloaded online copy, in lieu of a certified copy of the order. The Appellant submitted that the appeal was not found defective under Rules 26 (Endorsement and scrutiny of petition or appeal or document) and 27 (Registration of proceedings admitted) of the NCLAT Rules as an application for waiver of filing a certified copy was duly filed and allowed.

The Appellant contended that Section 420(3) of the Companies Act read with Rule 50 of the NCLT Rules mandates a free copy of an order to be issued to every party, obviating the need for any party to obtain a certified copy of an order it seeks to impugn by way of an appeal. Therefore, it was submitted that the clock of limitation under Section 61 of the IBC would run from the date the free copy is issued to the party. Reliance was placed on the order of a three judge bench of the SC in Sagufa Ahmed v. Upper Assam Plywood Products Private Limited [2021 (2) SCC 317 ] (“Sagufa Ahmed”), albeit in the context of a case under the Companies Act, wherein it was held that the limitation period would run only from the date on which a copy of the order is made available to the aggrieved party. The Appellant submitted that Section 420(3) of the Companies Act and Rule 50 of the NCLT Rules would equally apply to proceedings under the IBC and the ratio in Sagufa Ahmed would squarely apply, by relying on the decision of the SC in BK Educational Services Private Limited v. Parag Gupta and Associates [2019 (11) SCC 633] (“BK Educational Services”).

It was pointed out that Section 12(2) of the Limitation Act, 1963 (“1963 Act”) was applicable from the date on which the copy of the order is made available and not from the date when such order is passed. The explanation to Section 12(2) of the 1963 Act, which states that “in computing under this section the time requisite for obtaining a copy of a decree or an order, any time taken by the court to prepare the decree or order before an application for a copy thereof is made shall not be excluded”, would not be attracted in cases where a free copy is mandated by the statute and online copies can be used for filing an appeal. Section 12(2) of the 1963 Act excludes the time taken from the date of order to it becoming available. Section 61 of the IBC prescribing a limitation period is subservient to the principle of lex non cogit ad impossibilia which states that the law cannot mandate a person to do an impossible act. Further, the Appellant submitted that an application for condonation of delay was not required when the Appellant had instituted the appeal in time and was statutorily entitled to a free certified copy.

Contentions raised by the Respondents:

It was submitted that since Section 61 of the IBC mandates an appeal against any order under the Companies Act to be filed within 30 days, the limitation to challenge the NCLT Order expired on February 15, 2020, even after accounting for the fifteen day extension, granted discretionarily under Section 61(2) of the IBC. Section 61(2) of the IBC does not state that limitation is to be applicable from the date of the order being ‘made available’, as against the provision enumerated under Section 421(3) of the Companies Act. It was argued that special acts override general enactments. It was contended that “made available” does not imply that parties can indefinitely wait until a free certified copy is provided to them. It was emphasized that a timely application for a certified copy has to be filed.

It was argued that as per the decision of the NCLAT in Pr. Director General of Income Tax v. Spartek Ceramics India Ltd, the period of thirty days for filing an appeal commences from the date of the ‘knowledge’ of the order. Section 12 (Exclusion of time in legal proceedings) of the 1963 Act prescribes that the limitation period can be ascertained only after an application for a certified copy of the judgement or order is filed within the limitation period, in order to not be declared as time barred. The time period of limitation can either be calculated from the date of the NCLT Order, or from the date of filing an application for a certified copy of the said order. In the absence of compliance with either, any appeal will be deemed as barred by limitation. It was further submitted that Rule 22(f) of the NCLAT Rules mandates an appeal to be accompanied with a certified copy of the order. The Appellant did not file for a certified copy of the NCLT order. Yet, the Appellant instituted its appeal before the NCLAT on the basis of an online copy without an application seeking exemption from filing a certified copy or an application seeking condonation of delay.

The Respondents further argued that the Appellant should have either waited to receive the free certified copy from the NCLT as per Section 420(3) of the Companies Act or applied for a certified copy within the limitation period, and could not selectively take shelter under one provision. Time is of the essence under the IBC, since it is a special enactment interpreted with strict limitation periods, due to which the Respondents expected diligence on the part of the Appellant. It was pointed out that in Mobilox Innovations Private Ltd v. Kirusa Software Private Ltd, the SC observed, in the context of appeals, that timelines are sacrosanct under the IBC as the best interests of all the stakeholders of the process lay in the time bound completion of resolution or liquidation of the company without being protracted.

Observations of the Supreme Court

The SC, noting the overriding effect of the IBC over the 1963 Act, observed that as per Section 9 (Courts to try all civil suits unless barred) of the Code of Civil Procedure, 1908, there is an inherent right to bring a suit of a civil nature, unless the suit is barred by a statute. The SC analyzed the comprehensive dispute resolution process, envisaged by the IBC, wherein the NCLT is the empowered adjudicating authority under Section 60 (Adjudicating Authority for corporate persons) of the IBC with the jurisdiction to entertain any proceeding in relation to insolvency resolution or liquidation proceedings under the IBC. An appeal lies against an order of the NCLT to the NCLAT, under Section 61(1) of the IBC, and an order of the NCLAT is subject to an appeal on a question of law to the SC under Section 62 of IBC. The jurisdiction of civil courts has been explicitly ousted by Section 63 (Civil court not to have jurisdiction) of the IBC. Section 61(2) of the IBC specifically provides for a limitation period of thirty days, extendable by a maximum of fifteen days on the demonstration of sufficient cause for the delay. The SC noted that in BK Educational Services, the SC had considered the interplay of the IBC, 1963 Act and the Companies Act constituting the NCLT and had held that the 1963 Act is applicable to proceedings under the IBC by virtue of Section 238A (Limitation) of the IBC.

In Sagufa Ahmed the SC held, in the context of a winding up petition under the Companies Act, that the aggrieved party could wait till it received its free copy under Section 420(3) of the Companies Act read with Rule 50 of the NCLT Rules, and was not obligated to file an application for a certified copy for the purposes of the computation of limitation. However, the SC in Sagufa Ahmed clarified that this would not apply once an application for a certified copy was made and the order was received. The SC observed in Sagufa Ahmed that irrespective of when the free certified copy is received, the limitation period would be computed from the date of receipt of the certified copy. In a field not covered by a special law which invests the NCLT with jurisdiction, the general principle for the computation of limitation for filing an appeal against an order of the NCLT is governed by the statutory mandate of Section 420(3) of the Companies Act read with Rule 50 of the NCLT Rules, which enables a party to compute limitation from the date of receipt of the statutorily mandated free certified copy, without having to file its own application. However, the statutory mandate of a free copy is not to enable litigants to take two bites at the apple where they could compute limitation from either when the certified copy is received on the litigant’s application or received as a free copy from the registry, whichever is later. The SC recognized that IBC is a complete code in itself and overrides any inconsistencies that may arise in the application of other laws. The notable difference between Section 421(3) of the Companies Act and Section 61(2) of the IBC is, in the absence of the words “from the date on which a copy of the order of the Tribunal is made available to the person aggrieved” in the latter. The absence of these words cannot be construed as a mere omission which can be supplemented with a right to a free copy under Section 420(3) of the Companies Act read with Rule 50 of the NCLT Rules for the purposes of reckoning limitation. This would ignore the context of the IBC’s provisions and the purpose of the legislation.

The SC observed that the power to condone delay is tightly circumscribed under the IBC and conditional upon showing sufficient cause, even within the period of delay which is capable of being condoned. The IBC sought to structure and  streamline the entire process of insolvency, right from the initiation of insolvency to liquidation, as a one-stop mechanism. Section 12(3) of the IBC prescribes a strict timeline for the completion of the corporate insolvency resolution process of one hundred and eighty days which is extendable by ninety days. The proviso to Section 12(3) of the IBC imposes an outer imit of three hundred and thirty days, including time taken in legal proceedings. When timelines are placed even on legal proceedings, reading in the requirement of an “order being made available” under a general enactment like the Companies Act, would do violence to the special provisions enacted under the IBC where timing is critical. The IBC, as a prescriptive mechanism, affecting rights of stakeholders who are not necessarily parties to the proceedings, mandates diligence on the part of applicants who are aggrieved by the outcome of their litigation. An appeal, if considered necessary and expedient by an aggrieved party, is expected to be filed forthwith without awaiting a free copy which may be received at an indefinite stage. Hence, the omission of the words “from the date on which the order is made available” for the purposes of computation of limitation in Section 61(2) of the IBC, is a consistent signal of the intention of the legislature to nudge the parties to be proactive and facilitate timely resolution.

The SC clarified that it could not be said that the parties can automatically dispense with their obligation to apply for and obtain a certified copy for filing an appeal. Any delay in receipt of a certified copy, once an application has been filed, has been envisaged by the legislature and duly excluded to not cause any prejudice to a litigant’s right to appeal. A person wishing to file an appeal is expected to file an application for a certified copy before the expiry of the limitation period, upon which the time requisite for obtaining a copy is to be excluded. However, the time taken by the court to prepare the decree or order before an application for a copy is made cannot be excluded. If no application for a certified copy has been made, no exclusion can ensue. It could not be said that the right to receive a free copy under Section 420(3) of the Companies Act obviated the obligation on the Appellant to seek a certified copy through an application.

The SC emphasized that owing to the special nature of the IBC, the aggrieved party was expected to exercise due diligence and apply for a certified copy upon pronouncement of the order it seeks to assail, in consonance with the requirements of Rule 22(2) of the NCLAT Rules. Section 12(2) of the 1963 Act allows for an exclusion of the time requisite for obtaining a copy of the decree or order appealed against. The person aggrieved by an order under the IBC could not await the receipt of a free certified copy under Section 420(3) of the Companies Act read with Rule 50 of the NCLT Rules and prevent limitation from running. Accepting such a construction will upset the timely framework of the IBC. The litigant has to file its appeal within thirty days, which can be extended up to a period of fifteen days, and no more, upon showing sufficient cause. Rule 22(2) of the NCLAT Rules mandates the certified copy being annexed to an appeal, which continues to bind litigants under the IBC. While it is true that the tribunals may choose to exempt parties from compliance with this procedural requirement in the interest of substantial justice, as reiterated in Rule 14 of the NCLAT Rules, the discretionary waiver does not act as an automatic exception where litigants make no efforts to pursue a timely resolution of their grievance.

Decision of the Supreme Court

The SC held that the period of limitation for filing an appeal under Section 61(1) of the IBC against the NCLT Order, expired on January 30, 2020, in view of the thirty days period prescribed under Section 61(2) of the IBC. Any scope for a condonation of delay expired on February 14, 2020, in view of the outer limit of fifteen days prescribed under the proviso to Section 61(2) of the IBC. The Pandemic induced lockdown from March 23, 2020 and the Suo Motu Order has had no impact on the rights of the Appellant to institute an appeal in this proceeding. The SC emphasized that the act of filing an application for a certified copy was not just a technical requirement for computation of limitation but also an indication of the diligence of the aggrieved party in pursuing the litigation in a timely fashion. The SC further held that since the Appellant failed to apply for a certified copy, it rendered the appeal filed before the NCLAT as clearly barred by limitation. The SC thus upheld the decision of the NCLAT of having dismissed the appeal on the ground of limitation, and accordingly dismissed the instant appeal under Section 62 of the IBC.

VA View:

By this Judgement, the SC has reiterated that courts cannot condone delays beyond statutory prescriptions in special statutes containing a provision for limitation. The SC has upheld the integrity of the IBC and its fundamental purpose, that is, insolvency resolution in a speedy and time-bound manner. The SC has recognized the criticality of strict timelines under the IBC, which is crucial to the workability of the mechanism, health of the economy, recovery rate of lenders and valuation of the corporate debtor.

Since the IBC is a watershed legislation which seeks to overhaul the previous bankruptcy regime, which was afflicted by delays and indefinite legal proceedings, the SC has rightly ensured that a sleight of interpretation of procedural rules does not defeat the substantive objective of a legislation like the IBC that has an impact on the economic health of the nation.

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

Between the Lines | Supreme Court: Chairman, directors, and other key managerial personnel of a company cannot be automatically held vicariously liable for the offences committed by a company

The Hon’ble Supreme Court (“SC”) in Ravindranatha Bajpe v. Mangalore Special Economic Zone Limited and Others (decided on September 27, 2021), held that the chairman, directors, and other key managerial personnel of a company cannot be automatically held vicariously liable for the offences committed by a company unless specific allegations and averments against them are made with respect to their individual role.

Facts

Ravindranatha Bajpe (“Appellant/Complainant”), the original complainant, filed a private complaint against thirteen accused (accused nos. 1 to 13) in the Court of the learned Judicial Magistrate, First Class, Mangalore (“Magistrate”). The Complainant was the absolute owner and in possession and enjoyment of the certain immovable property (“Schedule Properties”).

Accused nos. 1 and 6 were companies incorporated under the Companies Act and accused nos. 2, 3 and 4 were the Chairman, Managing Director and Deputy General Manager (Civil & Env.) of accused no. 1, respectively. Accused no. 5 was the planner and executor of the project work. Accused nos. 7, 8 and 9 were the Chairman, Executive Director and Site Supervisor of accused no. 6. Accused no. 10 was the sub-contractor under accused no. 6 and accused nos. 11 to 13 were the employees of accused no. 10.

It was contended by the Complainant that accused no. 1 intended to lay water pipeline by the side of Mangalore-Bajpe Old Airport Road abutting the Schedule Properties, and for the said purpose, it had obtained permission from the Department of Public Works, Mangalore. Accused no. 2 on behalf of accused no. 1 appointed accused no. 6 as a contractor for execution of the said project of laying the water pipe line. They in turn had appointed accused no. 9 as Site Supervisor and the accused no. 10 being the sub-contractor engaged accused nos. 11 to 13 as labourers.

It was contended that accused nos. 2 to 5 and 7 to 13 had conspired with common intention to lay the pipeline beneath the Schedule Properties belonging to the Complainant without any lawful authority and right whatsoever. In furtherance thereof, they had trespassed over the Schedule Properties and demolished the compound wall. Further, they had cut and destroyed valuable trees and laid pipeline beneath the Schedule Properties. It was contended that when this high-handed act was committed by the accused, the Complainant was out of station and that he came back and noticed the destructive activities.

It was contended that the accused were having no right to commit trespass over the Schedule Properties, and each of the accused had common intention to lay the pipeline by damaging the property of the Complainant. With that intention, they committed criminal trespass and caused damages. It was contended that all the accused are jointly and severally liable to make good the loss to the Complainant.

The learned Magistrate by order dated September 24, 2013 (“Order”) directed to register the case against all the accused. Aggrieved, the accused preferred Criminal Revision Petition before the learned Sessions Court. The learned Sessions Court allowed the Criminal Revision Petition and quashed and set aside the Order passed by the learned Magistrate. The Complainant preferred revision applications before the High Court of Karnataka and by the impugned judgment and order, the High Court of Karnataka dismissed the said revision applications. Hence, the Complainant approached the SC.

Issue

Whether the accused, being officials of a company, can be held liable for the actions of a company in the absence of specific allegations on the role played by them.

Arguments

Contentions raised by the Appellant/ Complainant:

It was submitted that the accused have conspired with common intention to lay the pipeline beneath the Schedule Properties belonging to the Complainant, without any lawful authority and right whatsoever. In furtherance thereof, they committed trespass and demolished the stone compound wall and valuable trees of the Complainant.

It was further submitted that, even otherwise there was a specific allegation in the complaint that accused nos. 1 to 8 conspired with the co-accused to lay the pipeline under the Schedule Properties of the Complainant and, therefore, at the stage of issuing process/summons, the revisional court could not have interfered with the Order passed by the learned Magistrate summoning the accused. It was submitted that, being the administrators of the companies, all the executives are vicariously liable.

Contentions raised by the accused:

It was submitted that in the facts and circumstances of the case, and more particularly when it was found that there are no specific allegations and role attributed to the accused, except the bald statement that all of them have connived with each other, the learned Sessions Court was absolutely justified in setting aside the Order passed by the learned Magistrate issuing the process/summons against the accused. Further, it was submitted that, the SC in catena of decisions has held that issuing summons/process by the Court is a very serious matter and, therefore, unless there are specific allegations and the role attributed to each accused, the Magistrate ought not to have issued the process. It was further submitted that accused nos. 2 to 5 were arrayed as accused merely in their capacity as Chairman, Managing Director, Deputy General Manager (Civil & Env.) of accused no. 1. Accused no. 5 was the planner and executor of the project work and accused nos. 7 and 8 were arrayed merely in their capacity as being Chairman and Executive Director of accused no. 6. All of them were stationed at Hyderabad at the time of the commission of the alleged offence. Further, there are no allegations that at the time of commission of the alleged offence, they were present.

Observations of the Supreme Court:

The SC noted the reliance placed by the accused on the case of Sunil Bharti Mittal v. Central Bureau of Investigation [(2015) 4 SCC 609] wherein it was observed that an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. The second situation in which he can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.

Further, as observed by the SC in the case of GHCL Employees Stock Option Trust v. India Infoline Limited [(2013) 4 SCC 505] the Court held that the learned Magistrate has to record his satisfaction about a prima facie case against the accused who are Managing Director, Company Secretary and the Directors of the Company and the role played by them in their respective capacities which is sine qua non for initiating criminal proceedings against them. Looking to the averments and the allegations in the complaint, there were no specific allegations and/or averments with respect to role played by them in their capacity as Chairman, Managing Director, Executive Director, Deputy General Manager and Planner & Executor. Merely because they are Chairman, Managing Director/Executive Director and/or Deputy General Manager and/or Planner/Supervisor of accused nos. 1 and 6, without any specific role attributed and the role played by them in their capacity, they cannot be arrayed as an accused, more particularly they cannot be held vicariously liable for the offences committed by accused nos. 1 and 6.

Decision of the Supreme Court:

In absence of any specific allegations and the specific role attributed to the accused as Chairman, Managing Director, Deputy General Manager (Civil & Env.), Planner & Executor, Chairman and Executive Director, the learned Magistrate was not justified in issuing process against accused nos. 1 to 8 for the offences punishable under the Indian Penal Code, 1860.

In view of the above, the SC dismissed the present appeals.

VA View:

The instant judgment reinforces the jurisprudence on the criminal liability of chairman, managing director and other key managerial personnel when a company is made the accused. Vicarious liability of directors would arise only when the statute provides for the same.

The judgment passed by the SC along with the observations made, clarifies the position of accountability of directors and key managerial personnel of a company. In the absence of specific allegations proving culpability and the role played in the crime, the directors and key managerial personnel cannot be held accountable and proceeded against. This judgment would prevent key managerial personnel not being involved in the offence from being maliciously arrayed as an accused and being held accountable for the actions of the company.

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

Between the Lines | NCLAT: Security Deposit and the interest thereon would fall within the ambit of the definition of ‘Financial Debt’ under the IBC

The National Company Law Appellate Tribunal Principal Bench, New Delhi (“NCLAT”) has in its judgment dated October 07, 2021 (“Judgement”), in the matter of Sach Marketing Private Limited v. Resolution Professional of Mount Shivalik Industries Limited, Ms. Pratibha Khandelwal [Company Appeal (AT) (Insolvency) No. 180 of 2021], held that ‘Security Deposit’ and the interest thereon would fall within the ambit of the definition of ‘Financial Debt’ as defined under Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 (“Code”).

Facts

The challenge in this appeal under Section 61 of the Code read with Rule 11 of the National Company Law Appellate Tribunal Rules, 2016, was against the order dated January 18, 2021 (“Impugned Order”) passed by the National Company Law Tribunal, Jaipur Bench, (“NCLT”) wherein the decision of Ms. Pratibha Khandelwal, the resolution professional of Mount Shivalik Industries Limited (“Corporate Debtor”), (the “Resolution Professional”/ “Respondent”) was upheld, that is, she had considered the claim of Sach Marketing Private Limited (the “Appellant”) as an operational debt.

The Corporate Debtor is in the business of manufacturing and distributing beer in India. An agreement dated April 01, 2014, was executed between the Corporate Debtor and the Appellant appointing the Appellant as sales promoter for the promotion of beer for 12 months. Subsequently, after the expiry of the first agreement, on April 01, 2015, another agreement was executed, with similar terms and conditions except for one modification in Clause 10 of the agreement with respect to ‘Security Deposit’ as follows, “You have to deposit minimum security of Rs. 53,15,000/- with the Company which will carry interest at 21% per annum. We will provide you interest of Rs. 23,85,850/- at 21% per annum.”

An amount of Rs. 61,00,850/- was provided by the Appellant in the year 2014. While so, the Corporate Debtor unilaterally adjusted the remaining deposit amount of Rs. 25,00,000/- from the security balance lying in the interest fund account to the Security Deposit during the Financial Year 2015-16 as recorded in its ledgers. On March 31, 2016, the Corporate Debtor admitted the interest liability of Rs. 18,06,000/-. However, the Corporate Debtor failed to pay interest.

The Corporate Debtor was admitted into insolvency on June 12, 2018, and the Appellant filed their claim of Rs. 1,58,341/- as ‘Operational Debt’ and Rs. 1,41,39,410/- as ‘Financial Debt’ including the interest amount. The Resolution Professional addressed an e-mail dated March 18, 2019, stating that the claim for ‘Financial Debt’ has been considered as an ‘Operational Debt’. Aggrieved by the decision of the Resolution Professional, the Appellant preferred an application before the NCLT seeking a direction to quash the unlawful classification and for admitting the claim as ‘Financial Debt’. The NCLT negated the Appellant’s contention and in the Impugned Order observed that the Resolution Professional has rightly considered the claim as ‘Operational Debt’.

Issue

Whether Security Deposit and the interest thereon would fall within the ambit of the definition of ‘Financial Debt’.

Arguments

Contentions raised by the Appellant:

The Appellant argued that the NCLT has failed to appreciate that Section 5(8)(f) of the Code is a ‘residuary’ and ‘catch-all provision’ and would cover all transactions which have the commercial effect of borrowing. Further that as per the Insolvency Law Committee Report of March 2018, any transaction structure as a tool or means for raising finance would be included as ‘Financial Debt’ under Section 5(8)(f) of the Code. The Resolution Professional has no adjudicatory power and the NCLT did not take this aspect into consideration. It was further contended that one has to go into the intent of the parties while interpreting a memorandum of understanding, that the same was given by way of financial assistance attracting interest payable thereon.

It was contended that the amount deposited could not be a mere ‘Security Deposit’ as there were no other transactions between the parties and the money was mandatorily returnable after a fixed tenure without any deduction or forfeiture. It was not a fixed sum. It was argued that the Corporate Debtor has established a practice of securing ‘Financial Debt’ in the garb of ‘Security Deposits’ under various agreements, for attaining financial assistance from private entities instead of getting the same from financial institutions.

Contentions raised by the Respondent:

The Resolution Professional submitted that one of the ‘Financial Creditors’ namely, New View Consultants Private Limited had earlier challenged the decision of the Resolution Professional to include one Mahalakshmi Traders as a ‘Financial Creditor’ by way of an application before the NCLT wherein by order dated September 28, 2018, the NCLT had dismissed the application and observed that, “…sales agency commission and amounts due arising purely out of the agency relationship including the security deposit placed as between the Corporate Debtor and the respondent should be strictly excluded from the purview of ‘financial debt’ ….” (“Order”).

It was submitted that the Order had not been challenged and had since attained finality. Hence the same principle as enumerated in the Order is also applicable to the Appellant herein. Therefore, it was contended that ‘Security Deposit’ does not fall within the definition of Section 5(8) of the Code to be categorised as a ‘Financial Debt’. Further that, as per the agreement executed between the Appellant and the Corporate Debtor, the Appellant was termed as a “C&F Agent”, hired basically for promotion of sale of beer.

Observations of the NCLAT

The NCLAT noted that Clause 10 of the agreement was a conditional clause meaning thereby that only in the event of the Appellantmakingsuchadeposit,hewouldbeappointedasasalespromoter. ThesaidclausestipulatedthattheAppellant should deposit minimum security of Rs. 53,15,000/- with the Corporate Debtor which will carry interest at 21% per annum. Thereafter, though the minimum ‘Security Deposit’ of Rs. 53,15,000/- carrying interest at 21% per annum was retained, the amount against which interest at 21% per annum would be paid by the Corporate Debtor to the Appellant was modified to Rs. 32,85,850/-. The NCLAT further noted that, from the provisions of the agreement, it was clear that the Appellant was required to provide adequate funds to cover the operational and other expenses required for running the depot. Further, it was seen from the said agreement that over and above the interest of Rs. 53,15,000/- a further sum of Rs. 7,85,850/- was also to be provided by the Appellant and interest of 21% per annum would be paid for the said amount. It is significant to mention here that this amount was not even termed as ‘security’ in the agreement dated April 01, 2014.

The NCLAT observed that, for a debt to be termed as ‘Financial Debt’, the basic elements that are to be seen is whether (a) there is disbursal against consideration for the time value of money; and (b) whether it has a commercial effect of borrowing. The definitions provided in Sections 5(7) and 5(8) of the Code provide that a ‘Financial Creditor’ refers to a person to whom ‘Financial Debt’ is owed and includes even a person to whom such debt has been legally assigned or transferred to.

The NCLAT observed that the Legislature has included any financial transaction in the definition of ‘Financial Debt’ which are usually for a sum of money received today, to be paid over a period of time in instalments, or a single payment in future. The NCLAT noted that the expression time value has been defined in Black’s Law Dictionary as “the price associated with the length of time that an investor must wait until an investment matures or the related income is earned”. In the instant case, the word ‘Security Deposit’ mentioned in Clause 10 of the agreement has to be given the correct interpretation. The NCLAT observed that the true effect of the transaction ought to be determined from the terms of the agreement, keeping in view, the facts and circumstances of the case.

The NCLAT observed that, in the instant case, the ‘Sales Promotion Agreement’ mandated a ‘Security Deposit’ carrying interest at 21% per annum. It was not in dispute that the Corporate Debtor did not adhere to the payment of interest and that there was a default. In other words, neither the ‘Debt’ nor the ‘Default’ was disputed. The only question which arose was whether it is an ‘Operational Debt’ or a ‘Financial Debt’. The Appellant had specifically denied securing any ‘stocks’, ‘goods’ or other properties to the Corporate Debtor and was only appointed for the sole purpose of sales promotion of beer.

The NCLAT noted that the financial statement of the Appellant for the financial year 2017-18 shows revenue from interest on the ‘Security Deposit’. The financial statements mention the ‘Security Deposit’ under the head of other financial liabilities alongwith entries such as ‘interest accrued on borrowings’. The NCLAT observed that the said amounts were treated as long term loans and advances in the financial statement of the Corporate Debtor for the financial year 2015-16 and under ‘other long term liabilities’ for the financial year 2016-17. The NCLAT reiterated that the ‘Security Deposit’ amount had admittedly an element of interest payable at 21% per annum and hence could be construed as having commercial effect of borrowing.

The NCLAT noted the fact that amounts were paid with a specific term and tenure as evident from the term loan dated April 01, 2014, and April 01, 2015, which specified the time periods. The Corporate Debtor had accepted the ‘Security Deposit’ from the Appellant and credited the interest for some time against such amounts for the period 2014-15. The NCLAT observed that the payment of interest on the amounts borrowed by the ‘Corporate Debtor’ is nothing but consideration for the time value of money and the interest is being paid to the Appellant for using the money belonging to the Appellant over a period of time. The NCLAT accordingly arrived at the conclusion that the status of Appellant is that of a ‘Financial Creditor’ vis-à-vis the amount of ‘Security Deposit’ as per Section 5(7) read with Section 5(8) of the Code.

Decision of the NCLAT

The NCLAT held that the ‘Security Deposit’ in question is a ‘Financial Debt’. Consequentially this appeal was allowed and the Impugned Order was set aside by the NCLAT.

VA View:

In this Judgement, the NCLAT has rightly analyzed that, any of the transactions specified in Clauses (a) to (i) of Section 5(8) of the Code would fall within the ambit of the definition of ‘Financial Debt’ only in the event if they include the essential elements stated in the principal clause that is an element of disbursal, against the consideration for the time value of money and has the commercial effect of borrowing.

The NCLAT relied upon precedents and observed that the case of a deposit is something more than a mere loan of money. It will depend on the facts of each case whether the transaction is clothed with the character of a deposit of money. The surrounding circumstances, the relationship and character of the transactions and the manner in which parties treated the transactions will throw light on the true form of the transactions. For a person to be defined as a Financial Creditor of the Corporate Debtor, it had to be shown that the Corporate Debtor owed a Financial Debt to such a person.

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

Between the Lines | Supreme Court: An arbitrator cannot grant pendente-lite interest under Arbitration and Conciliation Act, 1996 when expressly barred by the parties

The Hon’ble Supreme Court (“SC”) has in its judgement dated October 4, 2021, in the matter of M/s Garg Builders v. M/s. Bharat Heavy Electricals Limited (Civil Appeal No. 6216 of 2021), held that an arbitrator cannot grant pendente-lite interest as per the Arbitration and Conciliation Act, 1996(“1996 Act”) when barred by the parties (“Judgement”).

Facts

Bharat Heavy Electricals Limited (“Respondent”) floated a tender for construction of boundary wall at its 2×750 MW Pragati III Combined Cycle Power at Bawana, Delhi (“Project”). M/s. Garg Builders (“Appellant”) submitted its bid for the Project which was accepted by the Respondent. Pursuant to this, Respondent issued a letter of intent (“LOI”) dated September 9, 2008, to the Appellant and on October 24, 2008, the Respondent and the Appellant entered into a contract (“Agreement”) with respect to the Project. Clause 17 of the Agreement contained an interest barring clause which stated that “No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor” (“Clause 17”).

Subsequently, a dispute arose between the Respondent and the Appellant with respect to the Agreement and, after appointment of a sole arbitrator (“Arbitrator”), the arbitration proceedings were initiated between the parties under the 1996 Act. The Appellant, during the arbitration proceedings, apart from claiming various amounts under different heads, inter alia, claimed pre-reference, pendente lite (interest that accrues to the base amount while the pendency of the suit during the arbitration proceeding) and future interest at the rate of 24% on the value of the award. The Arbitrator, after hearing the contentions of both the parties, concluded that there is no prohibition in the Agreement and LOI about payment of interest for the pre-suit, pendente lite and future period and awarded pendente lite and future interest at the rate of 10% per annum to the Appellant on the award amount from the date of filing of the claim petition, that is, December 2, 2011, till the date of realization of the award amount (“Award”).

The Respondent challenged the Award under Section 34 (Application for setting aside arbitral awards) of the 1996 Act before the Delhi High Court (“DHC”) on various grounds, inter alia, on the ground that the Arbitrator, being creature of the arbitration agreement in the Agreement, travelled beyond the terms of the Agreement in awarding pendente lite interest on the Award amount as the same was expressly barred by Clause 17 of the Agreement. The DHC by its judgement and order dated March 10, 2017, set aside the Award to the extent of award of pendente lite interest by stating that the Arbitrator fell in error in holding that Clause 17 only prescribed pre-reference interest and not pendente lite interest (“Impugned Order”). Upon challenge, the division bench of the DHC also upheld the Impugned Order. Consequently, the Appellant filed an appeal before the SC challenging the Impugned Order.

Issues

  • Whether the Arbitrator is justified in granting pendente lite interest in the light of Clause 17 of the Agreement.
  • Whether Clause 17 of the Agreement is ultra vires in terms of Section 28 of the Indian Contract Act, 1872.

Arguments

Contentions raised by the Appellant:

The Appellant contended that the Arbitrator had taken a plausible view and Clause 17 of the Agreement does not bar the payment of interest for pendente lite period. This argument was advanced by citing the judgments of Ambica Construction v. Union of India [(2017) 14 SCC 323] (“Ambica Constructions Case”) and Raveechee and company v. Union of India [(2018) 7 SCC 664] (“Raveechee Case”), wherein it was held that the appellant was entitled for the payment of interest for the pendente lite period.

In addition, it was argued that Clause 17 of the Agreement, barring payment of interest to the contractor on any sum due to the contractor, is ultra vires and against the provisions of Section 28 (Agreements in restraint of legal proceeding void) of the Indian Contract Act, 1872 (“Contract Act”).

Contentions raised by the respondents:

The Respondent submitted that Section 31(7)(a) (Form and contents of arbitral award) of the 1996 Act gives paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselves have agreed to the contrary. It was further argued that if the contract itself contains a specific clause which expressly bars the payment of interest, then it is not open for the arbitrator to grant pendente lite interest.

The Respondent further contented that Ambica Constructions Case was not applicable to this matter because it was decided under the Arbitration Act, 1940 (“1940 Act”) whereas this dispute is in relation to the 1996 Act. In addition, the Respondent argued that Section 3 (Power of court to allow interest) of the Interest Act, 1978 (“Interest Act”) confers power on the court or arbitrator to allow interest in the proceedings for recovery of any debt or damages or in proceedings in which a claim for interest in respect of any debt or damages already paid. However, Section 3(3) of the Interest Act carves out an exception and recognizes the right of the parties to contract out of the payment of interest arising out of any debt or damages and sanctifies contracts which bar the payment of interest arising out of debt or damages. Therefore, Clause 17 of the Agreement was not violative of any of the provisions of the Contract Act.

Observations of the Supreme Court

The SC observed that the law relating to award of pendente lite interest by an arbitrator under the 1996 Act is something which has been examined before by courts. The provisions of the 1996 Act give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselves have agreed to the contrary. Section 31(7)(a) of the 1996 Act, which deals with the payment of interest, states that if the contract prohibits pre-reference and pendente lite interest, an arbitrator cannot award interest for the said period.

The SC, while analysing Clause 17 of the Agreement, stated that, the said clause barring interest was very clear and categorical and used the expression “any moneys due to the contractor” by the employer, which includes the amount awarded by the Arbitrator. It further stated that, in Sayeed Ahmed and Company v. State of Uttar Pradesh and Others [3 (2009) 12 SCC 26] and various other judicial pronouncements, it has held that as per Section 31(7)(a) of the 1996 Act, if the contract bars payment of interest, the arbitrator cannot award interest from the date of cause of action till the date of award. It further stated that both Ambica Constructions Case and Raveechee Case had no application to this case as these cases were decided under the 1940 Act whereas this case was in relation to the 1996 Act. Consequently, the SC came to the conclusion that if the contract contains a specific clause which expressly bars payment of interest, then it is not open for an arbitrator to grant pendente lite interest.

With respect to the second issue, the SC examined Section 28 of the Contract Act and observed that exception I to this section contains a rule that a contract by which two or more persons agree that any dispute which has arisen or which may arise between them in respect of any subject or class of subjects shall be referred to arbitration is not illegal. This exception saves contracts where the right to move the court for appropriate relief is restricted but where the parties have agreed to resolve their dispute through arbitration. Thus, a lawful agreement to refer the matter to arbitration can be made a condition precedent before going to courts and it does not violate Section 28 of the Contract Act. It further stated that no cause of action then accrues until the arbitrator has made the award and the only amount awarded in such arbitration is recoverable in respect of the dispute so referred. Section 31(7)(a) of the 1996 Act which allows parties to waive any claim to interest including pendente lite, and the power of the arbitrator to grant interest, is subject to the agreement of the parties.

The SC further stated that interest payments are governed in general by the Interest Act in addition to the specific statutes that govern an impugned matter. Section 2(a) (Definitions) of the Interest Act defines a “Court” which includes both a tribunal and an arbitrator. In turn, Section 3 (Power of court to allow interest) allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3(3) of the Interest Act explicitly allow the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) of the Interest Act states that the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”. Thus, when there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the arbitrator to grant pendent lite interest.

Decision of the Supreme Court

Dismissing the case, the SC arrived at the conclusion that the DHC was justified in rejecting the claim of the Appellant seeking pendente lite interest on the award amount and Clause 17 of the Agreement is not ultra vires in terms of Section 28 of the Contract Act.

VA View:

The SC, in this Judgement, has rightly upheld the principle that an arbitrator is a creature of contract, and it cannot go beyond the four corners of contract. The issue of an arbitrator’s power to grant pendente lite interest was not clearly settled as the SC, at different instances, such as in the judgement of Raveechee Case and Chittaranjan Maity v. Union of India [(2017) 9 SCC 611], used different approaches to resolve the said issue. However, this Judgement rightly clarifies the said issue.

The Judgement clearly states that in case there is an express clause barring interest payment, the arbitrator does not have the power to grant pendente lite interest on the award. This is further clarified by another recent judgement of Punjab State Civil Supplies Corporation Limited v. Ganpati Rice Mills [LL 2021 SC 591] dated October 20, 2021, wherein the SC held that, unless otherwise agreed, the arbitrator has substantial discretion to award interest on arbitration award. In light of both these judgements, the parties, while drafting an agreement may consider mentioning about the power of arbitrator to grant pendente lite interest explicitly, to avoid any uncertainty and confusion at a later stage.

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

Between the Lines | NCLAT: ‘Success Fees’ which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable

The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) has in its judgment dated September 20, 2021 (“Judgement”), in the matter of Mr. Jayesh N. Sanghrajka v. The Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Private Limited [Company Appeal (AT) (Insolvency) No.392 of 2021], held that ‘Success Fees’ which is more in the nature of contingency and speculative is not part of the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Insolvency and Bankruptcy Board of India (“IBBI”) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”), and the same is not chargeable.

Facts

The corporate insolvency resolution process (“CIRP”) of Ariisto Developers Private Limited (“Corporate Debtor”) was initiated on November 20, 2018. In the first Committee of Creditors (“CoC”) meeting, Mr. Jayesh N. Sanghrajka was appointed as the resolution professional (“Resolution Professional”/“Appellant”). The ‘Monitoring Agency’ of the Corporate Debtor is the respondent herein (“Respondent”).

The NCLAT referred to the agenda of the 20th CoC meeting dated November 12, 2019, and the adjourned CoC meeting dated November 13, 2019, regarding evaluation of resolution plans, to finalize the distribution matrix and way forward. The ‘Item No.7 of the Agenda’ was relevant for the present matter, which was to ratify CIRP expenses incurred as on November 10, 2019, and decide the way forward. The amicus curiae (defined below) submitted that all copies of minutes of the CoC meetings were collected from the Appellant and he could not verify if the chart provided therein was part of the agenda circulated earlier, since the agenda did not have any link to the said chart. If the chart made available by the Resolution Professional was perused, the fine print had various entries of CIRP expenses including one entry ‘Success Fees*’ and a footnote stating that ‘Amount of Success Fees to be decided by the COC’.

Thereafter, the Appellant filed an application for approval of the resolution plan before the National Company Law Tribunal, Mumbai (“NCLT”). The NCLT by an order dated March 23, 2021 (“Impugned Order”), though approved the resolution plan submitted by Prestige Estates Projects Limited (“Resolution Applicant”), it disagreed with the CoC which had approved ‘Success Fees’ of an amount of INR 3 Crores to the Resolution Professional and directed distribution thereof. Consequently, the appeal was filed by the Resolution Professional to challenge certain observations made in the Impugned Order passed by the NCLT. The Respondent stated that, the approval of the ‘Success Fees’ was a commercial decision of the CoC and the NCLT could not have interfered while approving the resolution plan.

The NCLAT had on June 07, 2021, observed that it being more of a legal issue, it is not necessary to call the response of the Respondent or the CoC, as the CoC had expressed itself in the minutes of the meeting. Thus, to assist NCLAT, Advocate Mr. Sumant Batra was appointed as “Amicus Curiae” by an order dated June 14, 2021.

Issue

Whether ‘Success Fees’ was chargeable by the Appellant.

Arguments

Contentions raised by the Appellant:

The Appellant referred to various efforts undertaken as the resolution professional during the course of CIRP, such as, assets of the Corporate Debtor worth INR 1,089 Crores were handled and safeguarded, he convened 20th CoC meeting, pursued more than 20 hearings before the NCLT, NCLAT and the Supreme Court (“SC”) having different classes of stakeholders which included approximately, 100 financial creditors, 400 homebuyers, arranged various meetings between homebuyers and Resolution Applicant to harmoniously resolve the issues and concerns of homebuyers, further that the Appellant got CoC’s approval on the Resolution Plan. Further, the Appellant referred judgments of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta and Others [Civil Appeal No. 8766-67 of 2019] and K. Sashidhar v. Indian Overseas Bank and Others [MANU/SC/0189/2019], to argue that the NCLT or the NCLAT cannot interfere with the commercial decision of the CoC. It was claimed that the ‘Success Fee’ approved was part of commercial wisdom of the CoC. Hence, only the CoC can consider if the ‘Success Fee’ is to be paid and quantum of the ‘Success Fee’. Thus, the issue before NCLT or NCLAT could only be reasonableness of ‘Success Fees’. Further argued that, if the NCLT did not agree with the fee approved it should have sent back the Resolution Plan to the CoC. However, the Appellant accepted that there is no judgment of the SC which had considered whether or not quantum of fees accepted, is or not a commercial decision.

The Appellant referred to IBBI Discussion Paper dated April 01, 2018 (“Discussion Paper”), to submit that therein the IBBI had discussed the aspect with regard to the resolution fees payable to the resolution professional and the question was left open. The Appellant accepted that such Discussion Paper did not have any reference to ‘Success Fees’.

The Appellant relied on Regulation 34 of the Regulations to state that, the CoC had to fix the expenses to be incurred by the Resolution Professional including fee which will constitute CIRP costs. Thus, Appellant submitted that Para 23 of the Impugned Order cannot be maintained. Further, the Appellant referred the Impugned Order and submitted that, the NCLT did not mention that the ‘Success Fee’ could not be charged.

Submissions of the Amicus Curiae and observations of the NCLAT

The Amicus Curiae submitted that in the IBC and the Regulations, there is no express provision for grant of ‘Success Fee’. The Amicus Curiae referred to Section 208(2) of the IBC to submit that the Resolution Professional had to abide by the code of conduct mentioned therein and therefore, the Appellant was duty bound to take reasonable care and diligence while performing his duties. The Amicus Curiae also referred to the provisions of the Circular dated June 12, 2018 (“Circular”) and the Paras 25 to 27 of the Code of Conduct, First Schedule below IBBI (Insolvency Professionals) Regulations, 2016 (“Code of Conduct”). Further, the Amicus Curiae submitted that in the scheme of the IBC, the resolution professional was appointed in the first CoC meeting as per Section 22 of the IBC, at which stage, invariably and transparently the fee gets fixed. The NCLAT noted that, with regard to fees payable, there is no express provision in the IBC and the Regulations prescribing/quantifying or prohibiting the remuneration nor as to the form in which fees can be charged or paid. The NCLAT further noted that, it is against the principle of transparency if at the last moment, when the Resolution Plan is being approved, higher amounts as fees are squeezed in it.

The Amicus Curiae submitted that a harmonious reading of the relevant provisions of the IBC and the Regulations clarified that the charging of fees by the resolution professional and manner/ method of payment shall be subject to the following:-

  • Approval of the CoC by prescribed majority;
  • Fee should be a reasonable reflection of the work necessarily and properly undertaken;
  • Fee should be charged in a transparent manner and the resolution professional shall maintain written contemporaneous record of decision taken in respect of fees;
  • The resolution professional shall take reasonable care and diligence while performing his duties associated with charging fees and process associated therewith;
  • There shall be item wise disclosure by resolution professional to all stakeholders; and
  • Not be inconsistent with the applicable regulations.

The Amicus Curiae stated that the Circular only guides the stakeholders as to what could constitute “reasonable” in the matter of charging fees and it does not provide, prescribe, recommend, promote, endorse or sanctify payment of ‘Success Fee’. Accordingly, the claim of the Appellant that the Circular provides for payment of ‘Success Fee’ was misplaced.

The provisions of the IBC and the Regulations read with the Code of Conduct, indicate that the IBC and the Regulations intend to control the manner in which resolution professional charged fees. The NCLAT noted that, according to Amicus Curiae, the quantum of fees payable could be fixed by the CoC but it was justiciable before the NCLT. Further, the NCLAT noted that, the judgments relied on by the Appellant, did not bar the jurisdiction of the NCLT to review the quantum of fees charged by the Resolution Professional or that approved by the CoC. It was noted that, had this not been so, there would have been no need of sections and regulations referred in the Circular harping on transparency and reasonableness and it could have been blankly left for CoC to decide fees, which is not the case. The NCLAT noted that, the IBBI has power to take disciplinary action in the event of misconduct or breach by insolvency professional. In the case of Parish Tekriwal v. VRG Digital Corporation Private Limited [C.P. (IB) No. 859 of 2019] the NCLT held that fixation of the fees of professionals does not come within the domain of the commercial wisdom of CoC and hence is justiciable.

The NCLAT noted that, through the Circular and the Discussion Paper, in substance, the IBBI has directed the insolvency professional that the fee payable to them should be reasonable; that the same should be ‘directly related to and necessary for the CIRP’ and that the fee should be determined on an arms’ length basis, in consonance with the requirements of integrity and independence. The NCLAT noted that, Section 208(2)(a) of the IBC requires the insolvency professional to take reasonable care and diligence while performing his duties, including incurring expenses. The NCLAT further noted that, the Amicus Curiae was right in his submissions that the Circular is only a circular which cannot be equated with the rules and regulations framed under the provisions of the IBC. Apart from the fact that the IBC or the Regulations as existing do not provide for fee on speculative basis. The Circular also, in the portion where directions are given or clarification issued, does not make any such ‘Success Fee’ or ‘contingency fee’ payable. Thus, it cannot be said that charging of ‘Success Fee’ is within the provisions of the IBC or the Regulations.

The Amicus Curiae further submitted that the minutes of 20th CoC meeting recorded that it was the Resolution Professional who brought about the successful Resolution Plan. However, this cannot be accepted as a reason for the ‘Success Fee’ since as per the scheme of the IBC, the Resolution Professional is merely a facilitator. Further, it is the CoC who had to deliberate with the Resolution Applicant and it is their efforts which lead to the resolution plan getting settled down so as to be approved. The NCLAT noted that, the Amicus Curiae rightly submitted that if the minutes of the 20th CoC meeting are perused, it is a case of approving a big gift for the Resolution Professional, which can be only at the cost of creditors waiting in line and whose percentage of dues would consequently get reduced.

The NCLAT noted that, fees payable to resolution professionals have been made part of CIRP costs so as to safeguard their interests. Further that, the protection for payment of CIRP costs in priority to the payment of other debts of the Corporate Debtor under Section 30(2) of the IBC, is for the CIRP costs that are validly incurred. The Amicus Curiae relied on the judgment of Alok Kaushik v. Bhuvaneshwari Ramanathan & Others [(2015) 5 SCC 787] to submit that the SC held that NCLAT had powers to determine fees and expenses, etc. payable to a professional as an intrinsic part of the CIRP.

On the submission that, the NCLT should have sent the matter back to the CoC if it was not approving the ‘Success Fee’, the NCLAT observed that, this submission deserves to be discarded, as the NCLT, while not accepting the ‘Success Fee’, merely asked proportionate distribution which would even otherwise have happened if ‘Success Fee’ was set aside, as the money would become available improving percentage of other creditors’ dues.

Decision of the NCLAT

The NCLAT held that ‘Success Fee’ which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable. Apart from this, even if it was to be said that ‘Success Fee’ was chargeable, the NCLAT found that in the present matter, the manner in which it was included at the last minute at the time of approval of the resolution plan, and the quantum, are both improper and incorrect. The NCLAT did not find any substance and dismissed the appeal.

VA View:

In this judgement, the NCLAT has rightly analysed that, if the Resolution Professional sought to have ‘Success Fee’ at the initial stage of CIRP, it would interfere with independence of Resolution Professional which can be at the cost of Corporate Debtor. If ‘Success Fee’ was claimed when the Resolution Plan was going through or after the Resolution Plan was approved, it would be in the nature of gift or reward instead of being expenditure incurred on or by the Resolution Professional, as in the instant case. Further, the term “Success fee” was contrary to what the IBBI provided in its circulars, that the Resolution Professional shall render services for a fee which is a reasonable reflection of his work. The absence of a provision quantifying the fee is with the expectation that the market players will self-regulate themselves and behave in a reasonable manner.

The role of the resolution professional was to be like a dispassionate person concerned with performance of his duties under the IBC and thus it cannot be result oriented. The NCLAT observed that, the CoC exercised commercial decision with regard to approval or rejection of a resolution plan but the reasonableness of fees charged was not part of commercial decision. Therefore, when the fees have to be on the basis of the case and work related to acts performed or to be performed in furtherance of the CIRP, the reasonability or otherwise would be justiciable.

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

Between the Lines | Supreme Court: The bar under Section 9(3) of the Arbitration and Conciliation Act operates only when the application under Section 9(1) had not been entertained

The Hon’ble Supreme Court (“SC”) in the matter of M/s Arcelor Mittal Nippon Steel India Limited v. M/s Essar Bulk Terminal Limited [Special Leave Petition [(Civil) No. 13129 of 2021], decided on September 14, 2021, (“Judgement”) held that a bar under Section 9(3) of the Arbitration and Conciliation Act, 1996 (“Act”) only operates when the application under Section 9(1) of the Act had not been entertained.

Facts

M/s Arcelor Mittal Nippon Steel India Limited (“Appellant”) and M/s Essar Bulk Terminal Limited (“Respondent”), entered into an agreement for handling cargo (“Agreement”) at the Hazira Port, Surat. Clause 15 of the Agreement provided that all disputes arising out of the Agreement were to be settled in courts, in accordance with the provisions of the Act and be referred to a sole arbitrator appointed mutually by the parties. The Appellant invoked the said arbitration clause in the Agreement by a notice of arbitration dated November 22, 2020 (“Notice”). On December 30, 2020, the Respondent replied to the Notice by contending that the dispute is not arbitrable. In response, the Appellant, for the appointment of an arbitral tribunal, approached the Hon’ble High Court of Gujarat at Ahmedabad (“GHC”) under Section 11 (Appointment of arbitrators) of the Act (“Section 11 Application”).

On January 15, 2021 and March 16, 2021, the Appellant and the Respondent also filed an application under Section 9 (Interim measures by the court) of the Act in the commercial court (“CC”), respectively (“Section 9 Applications”). The CC heard the Section 9 Applications, and, after multiple adjournments, reserved the same for orders on July 20, 2021. On July 9, 2021, the Section 11 Application was disposed of by appointing a three-member arbitral tribunal (“Tribunal”). Thereafter, on July 16, 2021, the Appellant filed an interim application before the CC praying for reference of Section 9 Applications to the Tribunal, however, the CC dismissed the said application. The Appellant, challenging the said order of the CC, filed an application before the GHC under Article 227 of the Constitution of India, 1950. The said application was heard by a division bench of the GHC and by an order dated August 17, 2021, the GHC dismissed the application, holding that the CC has the power to consider whether the remedy under Section 17 of the Act is inefficacious and pass necessary orders under Section 9 of the Act (“Impugned Order”). On account of the Impugned Order, a special leave petition was filed by Appellant before the SC challenging the Impugned Order.

Issue

  • Whether the court has the power to entertain an application under Section 9(1) of the Act, once an arbitral tribunal has been constituted, and if so, what is the true meaning and purport of the expression ‘entertain’ in Section 9(3) of the Act.
  • Whether the court is obliged to examine the efficacy of the remedy under Section 17 (Interim measures ordered by the arbitral tribunal) of the Act, before passing an order under Section 9(1) of the Act, once an arbitral tribunal is constituted.

Arguments

Contentions raised by the Appellant:

The Appellant, inter alia, contended that Section 9(3) of the Act, as amended, restricts the power of the court to entertain an application under Section 9(1) of the Act once an arbitral tribunal has been constituted and, therefore, the CC cannot proceed with the Section 9 Applications under the Act. The Appellant, citing the 246th Law Commission Report, the UNCITRAL Model Law and Amazon NV Investment Holdings LLC v. Future Retail Limited & Others [2021 SCC Online SC 557], emphasised that the purpose of insertion of Section 9(3) of the Act was to reduce the role of the court in relation to grant of interim measures once the arbitral tribunal has been constituted and even though Section 9(3) of the Act does not completely oust the jurisdiction of the court under Section 9(1) of the Act, it restricts the role of the court post the constitution of an arbitral tribunal and once an arbitral tribunal is constituted, the court should not entertain an application under Section 9 of the Act unless it finds that such circumstances exist, which may render the remedy under Section 17 of the Act inefficacious.

The Appellant argued that the fact that an order is reserved does not mean that the court has stopped entertaining the Section 9 Applications and since the CC had not passed its orders in the Section 9 Applications, as on the date of the Impugned Order, the CC was ‘entertaining’ the Section 9 Applications. The Appellant substantiated this argument by submitting that the term ‘entertain’, under Section 9(3) of the Act, would not mean admitting for consideration, but would mean the entire process upto its final adjudication and passing of an order on merits and the fact that an order was reserved does not mean that the court has stopped ‘entertaining’ the Section 9 Applications.

The Appellant further emphasised that the word ‘entertain’ in Section 9(3) of the Act has to be interpreted in the context of Section 9(1) of the Act. Section 9(1) of the Act provides for the ‘making of orders’ for the purpose of grant of interim relief. The internal aid to construction provided under Section 9 of the Act substantiates its submission that the term ‘entertain’ would necessarily mean all acts including the act of making orders under Section 9(1) of the Act. Lastly, the Appellant argued that, after the constitution of the arbitral tribunal, a court can only grant interim relief under Section 9 of the Act, if circumstances exist which might not render the remedy under Section 17 of the Act efficacious, which were not present in the case. Therefore, the CC cannot proceed with the Section 9 Applications under the Act as it is barred by Section 9(3) of the Act.

Contentions raised by the Respondent:

The Respondent, on the other hand, submitted that the prayers of the Appellant should be answered in the negative since the Section 9 Applications were heard on merits and reserved for orders before the constitution of the Tribunal. The Respondent argued that a party can apply to the court under Section 9(1) of the Act, before, during or after the arbitral proceedings and the courts do not lose jurisdiction upon constitution of the tribunal as Section 9(3) of the Act is neither a non-obstante clause nor an ouster clause that would render the courts coram non judice, immediately upon the constitution of the arbitral tribunal.

The Respondent argued that Section 9(3) of the Act restrains the court from entertaining an application under Section 9, unless circumstances exist which may not render the remedy provided under Section 17 of the Act efficacious. However, in this matter, before the constitution of the Tribunal, the Section 9 Applications had already been entertained, fully heard and since only the formality of pronouncing the order in the Section 9 Applications was remaining, Section 9(3) of the Act would not apply in this case.

The Respondent, on the basis of various judicial pronouncements, argued that an application is ‘entertained’ when the court takes up the application for consideration and applies its mind to it. It further substantiated that the word entertain means “admit into consideration” or “admit in order to deal with” and in this case, Section 9 Applications had already been “admitted into consideration”, and the CC had already applied its mind to the Section 9 Applications. Therefore, the Section 9 Applications had gone past the stage of “entertainment”, as contemplated under Section 9(3) of the Act. Lastly, the Respondent submitted that the Act did not confer any power on the court, to relegate or transfer a pending application under Section 9(1) of the Act to the arbitral tribunal, the moment an arbitral tribunal is constituted.

Observations of the Supreme Court:

The SC, while examining Section 9 of the Act, stated that Section 9(3) of the Act has two limbs. The first limb prohibits an application under Section 9(1) of the Act from being entertained once an arbitral tribunal has been constituted. The second limb carves out an exception to that prohibition, if the court finds that circumstances exist, which may not render the remedy provided under Section 17 of the Act efficacious. It was further observed that even after an arbitral tribunal is constituted, there may be myriads of reasons why the arbitral tribunal may not be an efficacious alternative to Section 9(1) of the Act due to any reason such as temporary unavailability of any one of the arbitrators of an arbitral tribunal by reason of illness, travel, etc.

The SC noted that the court is obliged to exercise power under Section 9 of the Act, if the arbitral tribunal is yet to be constituted and the expression ‘entertain’, under Section 9(3) of the Act, means that, once the arbitral tribunal is constituted, the court cannot take up an application under Section 9 for consideration, unless the remedy under Section 17 is inefficacious. However, once an application is ‘entertained’ in the sense that it is taken up for consideration, and the court has applied its mind to the case, the court can certainly proceed to adjudicate the application. The SC further noted that the intent behind Section 9(3) of the Act was not to turn back the clock and require a matter already reserved for orders to be considered in entirety by the arbitral tribunal under Section 17 of the Act. The bar of Section 9(3) of the Act would not operate, once an application has been entertained and taken up for consideration, as in the instant case, where hearing has been concluded and judgment has been reserved.

In relation to examining the efficacy of the remedy under Section 17 of the Act, the SC stated that when an application has already been taken up for consideration and is in the process of consideration or has already been considered, the question of examining whether remedy under Section 17 is efficacious or not would not arise. The requirement to conduct the exercise arises only when the application is being entertained and/or taken up for consideration.

Lastly, the SC concluded by reiterating that Section 9(1) of the Act enables the parties to an arbitration agreement to approach the appropriate court for interim measures before the commencement of arbitral proceedings, during arbitral proceedings or at any time after the making of an arbitral award but before it is enforced in accordance with Section 36 of the Act. The bar of Section 9(3) of the Act operates where the application under Section 9(1) had not been entertained till the constitution of the arbitral tribunal. If an application under Section 9 had been entertained before the constitution of the arbitral tribunal, the court always has the discretion to direct the parties to approach the arbitral tribunal, if necessary, by passing a limited order of interim protection, particularly when there has been a long time gap between hearings and the application has to be, for all practical purposes, be heard afresh, or the hearing has just commenced and is likely to consume a lot of time.

Decision of the Supreme Court:

In light of the above mentioned, the SC stated that the Impugned Order has rightly directed the CC to proceed to complete the adjudication of Section 9 Applications and allowed the appeal only to the extent of clarifying that it shall not be necessary for the CC to consider the efficacy of relief under Section 17 of the Act, since the Section 9 Applications have already been entertained and considered by the CC.

VA View:

The interim measures under Section 9 and Section 17 of the Act form an integral aspect of arbitration proceedings in India and the SC in this Judgement clarifies the important aspects of the scope and interplay between Section 9 and Section 17 of the Act.

The SC in this Judgement, first, by interpreting the word ‘entertain’ under Section 9(3) of the Act, clarifies that the parties to the arbitration proceedings are not required to argue afresh before the arbitral tribunal for an interim measure when the matter is already ‘entertained’ by the court prior to the constitution of the arbitral tribunal. However, at the same time, it also provided the court with the discretion to direct the parties to approach the arbitral tribunal, if necessary. Secondly, the SC clarified the powers of court under Section 9 of the Act by stating that, when an application under Section 9 of the Act is entertained, the court shall not consider the efficacy under Section 17 of the Act. This is a welcome clarification by the SC as it ensures that there is no undue repetition in the arbitration proceedings which would eventually result in a speedy dispute resolution of the arbitration proceedings.

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

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