SC: No provision under the IBC requiring the resolution plan to match liquidation value; and an approved resolution plan cannot be withdrawn under Section 12A of the IBC

The Supreme Court (“SC”) has by its judgement (decided on January 22, 2020) held that there is no provision in the Insolvency and Bankruptcy Code, 2016 (“IBC”) that requires a resolution plan to match the liquidation value of the assets of the corporate debtor and that an approved resolution plan cannot be withdrawn by a successful resolution applicant under Section 12A of the IBC.

FACTS
M/s. Maharashtra Seamless Limited (“Appellant”) was a successful resolution applicant in the corporate insolvency resolution process involving United Seamless Tubulaar Private Limited (“Corporate Debtor”) and its creditors. The total debt of the Corporate Debtor was INR 1,897 crores, comprising of term loans aggregating to INR 1,652 crores availed from two entities of Deutsche Bank, and a working capital loan of INR 245 crores taken from an Indian Bank, which was also the initiator of the corporate insolvency resolution process before the National Company Law Tribunal, Hyderabad (“Adjudicating Authority”). Under an order dated January 21, 2019, the Adjudicating Authority approved the resolution plan submitted by the Appellant (“Resolution Plan”).

The Resolution Plan included upfront payment of INR 477 crores by the resolution applicant, that is, to the financial creditors, operational creditors and other creditors of the Corporate Debtor, as per the ratio suggested therein. Ancillary directions were issued by the Adjudicating Authority while giving its approval to the said Resolution Plan and observing that the said plan met all the requirements of Section 30(2) of the IBC. The aforesaid order passed by the Adjudicating Authority was however, taken up in appeal before the National Company Law Appellate Tribunal (“NCLAT”) by one of the promoters of the Corporate Debtor, by the name Padmanabhan Venkatesh, and the Indian Bank (“Respondents”). The Appellant herein had also preferred an appeal before the NCLAT challenging the order of the Adjudicating Authority dated February 28, 2019, on the ground that it was not given access to the assets of the Corporate Debtor.

Under a common order dated April 8, 2019, dealing with all the three aforementioned appeals, the NCLAT held that the Appellant should increase the upfront payment from INR 477 crores, as proposed under the Resolution Plan, to INR 597.48 crores, to make it at par with the average liquidation value of INR 597.54 crores and that such increased amount should be paid in the same ratio as suggested in the Resolution Plan. The NCLAT further held that if the Appellant failed to undertake the payment of the additional amount and deposit it in an escrow account within thirty days, the impugned order of approval of the Resolution Plan was to be treated as having been set aside.

The said order of the NCLAT was appealed against by the Appellant in the instant case before the SC on April 23, 2019. Similarly, the financial creditor, DB International (Asia Limited) also filed an appeal against the aforesaid order of the NCLAT on May 1, 2019 before the SC. In addition to the appeal, an Interlocutory Application (“IA”) was filed by the Appellant before the SC on August 2, 2019, seeking refund of the sum deposited by it in terms of the Resolution Plan along with interest, and withdrawal of the Resolution Plan. The Appellant’s grievance was that in order to take over the Corporate Debtor it had availed of a substantial term loan facility and deposited the sum of INR 477 crores for resolution of the Corporate Debtor in a designated escrow account on February 19, 2019, but due to delay in implementation of the Resolution Plan, it was compelled to bear the interest burden. Also, the export orders it had accepted in anticipation of successful implementation of the Resolution Plan were cancelled, as a result of which the takeover of the Corporate Debtor had become untenable.

ISSUES
(i) Whether the scheme of the IBC contemplates that the sum forming part of the Resolution Plan should match the liquidation value or not.
(ii) Whether Section 12A of the IBC is the applicable route through which a successful resolution applicant can retreat.

ARGUMENTS

Contentions raised by the Appellant:

The Appellant, inter alia, contended that the NCLAT had exceeded its jurisdiction in directing matching of the liquidation value in the Resolution Plan. The Appellant further contended that the final decision on the Resolution Plan should be left to the commercial wisdom of the committee of creditors and there is no requirement that the Resolution Plan should match the maximized asset value of the Corporate Debtor. Additionally, the counsel for DB International (Asia Limited), while supporting the main appeal of the Appellant, resisted the plea of the Appellant for withdrawal of the Resolution Plan and refund of the sum already remitted. On the aspect of withdrawal of the Resolution Plan, the counsel for the financial creditors submitted that the only route through which a resolution applicant can travel back after admission of the Resolution Plan was as per Section 12A of the IBC.

Contentions raised by the Respondents:

The Respondents’ primary contention was that approval of the Resolution Plan, under which the assets of the Corporate Debtor were valued at INR 477 crores, would ultimately entitle the Appellant to excessive gains as it would get assets valued at INR 597.54 crores at a much lower amount. They emphasized that there could be no reason to release the property valued at INR 597.54 crores to the Appellant at INR 477 crores. One of the Respondents further contended that another resolution applicant, namely, Area Projects Consultants Private Limited, had made a revised offer of INR 490 crores, which was more than the amount offered by the Appellant.

Observations of the Supreme Court:

The SC noted that, in the course of appeal before the NCLAT, substantial argument was also advanced over failure on part of the Adjudicating Authority to maintain parity between the financial creditors and the operational creditors on the aspect of clearing dues. Thereafter, the SC referred to Section 30(2)(b) of the IBC which specifies the manner in which a resolution plan shall provide for payment to the operational creditors. The SC also referred to the decision dated November 15, 2019, of a co-ordinate bench of the SC in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [Civil Appeal Nos. 8766-8767], which dealt with the manner of handling claims of operational creditors in a corporate insolvency resolution process. The co-ordinate bench of the SC had observed that there is no doubt that a key objective of the IBC is to ensure that the corporate debtor keeps operating as a going concern during the insolvency resolution process and must therefore make past and present payments to its operational creditors, without which such operation as a going concern would become impossible. On the point of dealing with claims of the operational creditors, the SC, referring to the aforementioned judgment, held that the UNCITRAL Legislative Guide makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors and that there is a difference in payment of the debts of financial creditors and operational creditors, with operational creditors having to receive a minimum payment, being not less than the liquidation value, which does not apply to financial creditors. However, since none of the operational creditors in the instant case had questioned the legality of the Resolution Plan, the SC observed that the said issue had become academic.

On the question of whether the scheme of the IBC contemplates that the sum forming part of the Resolution Plan should match the liquidation value or not, the SC delved into the text of Section 31 of the IBC which specifies the manner of approval of a resolution plan. The SC then placed reliance on Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”) which deals with the determination of liquidation value of the assets of the corporate debtor. The SC held that no provision in the IBC or Regulations has been brought to its notice under which the bid of any resolution applicant has to match the liquidation value arrived at in the manner provided in Clause 35 of the Regulations. The SC stated that the object behind prescribing such valuation process is to assist the committee of creditors to take a decision on a resolution plan properly. Once a resolution plan is approved by the committee of creditors, the statutory mandate of the Adjudicating Authority under Section31(1) of the IBC is to ascertain whether the resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 of the IBC.

The SC held that it did not, per se, find any breach of the said provisions in the order of the Adjudicating Authority in approving the Resolution Plan. The SC further held that the NCLAT had proceeded on equitable perception rather than commercial wisdom in holding that the liquidation value was inequitable. The SC categorically stated that the NCLAT ought to cede ground to the commercial wisdom of the creditors rather than assess the Resolution Plan on the basis of quantitative analysis. The scope of interference by the Adjudicating Authority is limited to judicial review only. The SC thus, held that the NCLAT ought not to have interfered with the order of the Adjudicating Authority in directing the resolution applicant to enhance its fund inflow upfront.

With respect to the IA filed by the Appellant seeking refund of the amount remitted, coupled with the plea of withdrawal of the Resolution Plan, the SC held that the exit route prescribed in Section 12A of the IBC is not applicable to a resolution applicant. The procedure envisaged in the said provision applies only to applicants invoking Sections 7, 9 and 10 of the IBC for initiation of corporate insolvency resolution process by the financial creditor, operational creditor and corporate applicant respectively. The SC further held that the Appellant having appealed against the NCLAT order with the object of implementing the Resolution Plan could not be permitted to take a contrary stand in the IA filed in connection with the very same appeal for refund of the amount remitted. The SC further observed that considering the Appellant had raised funds for implementing the Resolution Plan by mortgaging the assets of the Corporate Debtor, it would, in the said circumstance, not engage in the judicial exercise of determining the question as to whether after having been successful in a corporate insolvency resolution process, a resolution applicant altogether forfeits its right to withdraw from such process or not.

Decision of the Supreme Court
In view of the above, the SC allowed the present appeal and set aside the order of the NCLAT dated April 8, 2019. The SC affirmed the order of the Adjudicating Authority passed on January 21, 2019 which approved the Resolution Plan, and directed the Appellant to remit an additional sum to the resolution professional for further remittance to the operational creditors as per their dues. Further, the IA filed by the Appellant seeking refund of the amount remitted, coupled with the plea of withdrawal of the Resolution Plan was dismissed. The SC accordingly directed the resolution professional to take physical possession of the assets of the Corporate Debtor and hand it over to the Appellant within a period of four weeks. The police and administrative authorities were directed to render assistance to the resolution professional to enable him to carry out the directions of the SC. The SC further ordered that all interim orders stand dissolved and connected applications disposed of.

Vaish Associates Advocates View:

The SC has, by this judgment, categorically held that there is no provision under the IBC requiring that the bid of any resolution applicant has to match the liquidation value arrived at. By endorsing the commercial wisdom of the committee of creditors in assessing the resolution scheme for the benefit of all stakeholders, the SC has clearly demarcated the scope and ambit of the adjudicating authority limiting it to only judicial review and barring interference by it in the commercial decision arrived at by the committee of creditors.

This judgment also clears the air on the aspect of withdrawal of the resolution plan upon admission by explicitly elucidating that such an exit option is not available to a resolution applicant. A plethora of judgments of the SC have held that any insolvency resolution process is a case of a mutual contract between the creditors and the debtor. Upon getting the seal of approval of the adjudicating authority the resolution plan becomes a statutory contract. A resolution is, therefore, a consensus in substance. However, withdrawal of an approved resolution plan under the garb of Section 12A would render lock down of economic resources, and unsuccessful/unscrupulous promoters continuing to manage the businesses, which is against the purpose and intent of the IBC.

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

NCLT: RP can take possession of a corporate debtor’s assets which are subject matter of litigation to facilitate the corporate insolvency resolution process

The National Company Law Tribunal, Mumbai Bench (“NCLT”) in the case of Pravin Blaggan, in the matter of Goa Auto Accessories v. Suresh Saluja (decided on December 12, 2019) held that a resolution professional (“RP”) could take possession of a corporate debtor’s assets which were subject matter of litigation, to facilitate the Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

FACTS
The case relates to the possession of a property at the Honda Industrial Estate (“Property”) by one Mr. Pravin Blaggan (“Applicant”), which was in actuality, under the ownership of Goa Auto Accessories (“Goa Auto”). The NCLT had, pursuant to an application filed by Goa Auto in the capacity of a corporate applicant under section 10 of the IBC, passed an order dated December 11, 2018 (“Order 1”). Order 1 commenced the CIRP for Goa Auto. Consequently, the NCLT appointed Mr. Suresh Saluja as the IRP for the same.

Thereafter, a miscellaneous application was filed by the Applicant before the NCLT, challenging the direction of the Interim Resolution Professional (“IRP”) by letter dated December 21, 2018 (“Letter”), wherein the IRP had called upon the Applicant to hand over the possession of the property owned by Goa Auto in view of the commencement of CIRP. The Applicant was called upon to comply with the aforesaid direction with twenty-four hours of the receipt of the said Letter. By way of the Letter, the IRP had also alleged that the Applicant was in illegal occupation of the property. The division bench of the NCLT heard the miscellaneous application and passed an order directing the RP to take possession of the property from the Applicant. However, a dissenting order dismissing the miscellaneous application was passed on August 20, 2019. The matter was then referred to Honourable Suchitra Kanuparthi as the third member to resolve the difference of opinion due to the previous two orders.

ISSUE
Whether the NCLT could order possession of the property of Goa Auto to facilitate the CIRP and allow the RP to take possession of the same, pending adjudication of suits filed by the Goa Auto and the Applicant.

ARGUMENTS

Contentions of the Applicant:

The Applicant submitted that he had not been occupying the Property illegally, and in fact had been occupying the same as per an agreement dated January 28, 1997, which was entered into between Goa Auto and the Applicant (“Agreement”). Further, the Applicant submitted that he was an erstwhile employee of Goa Auto and had worked from 1982 to January 1983. Following this period, the Corporate Applicant started his own proprietary entity and carried on business from the shed, of the job work assigned by Goa Auto in respect of components of spare parts of automobiles. It was also submitted by the Applicant that he had filed a special suit for the recovery of monies from Goa Auto. It was further contended that in view of section 18(1)(f)(vi) (assets subject to the determination of ownership by a court or authority) of the IBC the assets which were subject to determination of court/authority, possession of the same could not be sought for by a resolution professional pending adjudication of a suit. Resultantly, in the instant case, pending finalization of the suit in respect of the Property, the RP could not seek possession of the same. Further, the RP only had to fulfill an administrative function as he did not possess any adjudicatory powers to claim possession of the Property.

Contentions of Goa Auto:
It was argued by Goa Auto that while a resolution professional was duty bound to take control and custody of an asset of a corporate applicant, the same was subject to determination of ownership by a court/authority.Given the fact that suits were pending for finalization before the courts in Goa, the possession of the Property could not be sought for by the RP. Goa Auto also relied upon the judgment of the Bombay High Court in Tata Steel BSL Limited v. Varsha [2019 3 AIRBOMR 351], wherein it was held that merely because a CIRP had been undertaken, a dispute which was recognized as sub judice for which accommodation was made in the resolution plan could not be extinguished.

Contentions by the Resolution Professional:
The RP submitted that he had filed a reply to the miscellaneous application, wherein he had submitted that by way of the Agreement, Goa Auto had conferred upon the Applicant the right to use the Property for the purpose of setting up a welding, fabrication, milling, drilling and deburring unit in order to carry out the job work for Goa Auto. It was also submitted that certain disputes had arisen between Goa Auto and the Applicant, as the latter had breached certain conditions of the Agreement. In view of the breach, Goa Auto had called upon the Applicant to vacate the Property by notice dated August 22, 2008. In any case, as per clause 7 of the said Agreement, Goa Auto was entitled to ask the Applicant to vacate the Property within one month of such notice. Notably, Goa Auto had also filed a special suit before the Honourble Civil Court at Bicholim, Goa, seeking possession of the Property from the Applicant.

The RP also argued that since the time he was appointed as an IRP, it was his duty to take control and custody of any asset over which Goa Auto had an ownership right, including those which may or may not be in its possession. It was contended that merely because the Applicant was claiming a lien on the Property under the guise of a pending suit before a civil court, the same could not prejudice the right of the RP under the provisions of IBC. Further, no interim order had been passed in respect of such suit.

The RP further submitted that he had a right to claim possession of the Property under section 18(1)(f)(ii) (assets that may or may not be in possession of the corporate debtor) of the IBC and that his right to claim possession was not affected under section 18(1)(f)(vi) of IBC. Pertinently, it was pointed out that there was no dispute of ownership in respect of the Property. The bone of contention was with regard to the possession of the Property and right to use the same.

OBSERVATIONS OF THE NCLT
It was held that the NCLT alone had jurisdiction when it came to applications and proceedings by or against a corporate applicant covered by the IBC. Thus, no other forum has jurisdiction to entertain or dispose of any such applications or proceedings. If it were to be held that a civil court also had jurisdiction, the same would introduce manipulations to frustrate the resolution process.

Through a plain reading of section 60(5)(b) (NCLT shall have jurisdiction to entertain/ dispose of any claim made by or against the corporate debtor) of the IBC and section 60(5)(c) (NCLT shall have jurisdiction to entertain or dispose of any question of priorities, law or facts, arising out of the insolvency resolution or liquidation proceedings) of the IBC, it was concluded that the IBC empowered the NCLT to entertain the dispute raised in the suit. Further, section 63 (civil court not to have jurisdiction) of the IBC, barred the jurisdiction of the civil court in matters pertaining to the National Company Law Appellate Tribunal (“NCLAT”). Section 231 (bar of jurisdiction) of the IBC also barred the civil court from granting any injunction in respect of any action taken or in pursuance of any order passed by the adjudicating authority under the IBC. Therefore, upon a conjoint reading of the above mentioned provisions of IBC, the jurisdiction of the civil court was excluded when matters fell under the purview of the IBC. It was also noted that the IBC was a self-contained code that conferred supervisory powers on the NCLT with respect to the entire CIRP. The principles of comity would be affected if conflicting orders were passed by a civil court and the NCLT. Ultimately, such a course of action would be detrimental to the conduction of the CIRP.

It was stated that the office of the RP had become functus officio upon completion of his tenure, and thereafter, the RP had been appointed as a liquidator. Subsequent to the same, the RP had not taken any steps to amend his status. Subject to the directions of the adjudicating authority under section 35(1)(b)of the IBC a liquidator had the power to take into custody or control all the assets, property effects, and actionable claims of Goa Auto. The NCLT observed that similar provisions also existed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. Importantly, the non-obstante clause under section 238 of the IBC, enabled the IBC to have an overriding effect over anything inconsistent in any other law or instrument.

It was observed that there were two pending suits in question: (i) one filed by Goa Auto seeking, inter alia, the possession of the Property and, (ii) the other, filed by the Applicant, claiming for the recovery of monies from Goa Auto. In respect of both aforesaid suits, it was observed that no restraint orders had been passed. Hence, it was held that the RP’s claim for possession of the Property before the adjudicating authority in view of CIRP order could be entertained under the provisions of IBC.

In view of the moratorium, even though the suit filed by the Applicant though temporarily stayed, the suit filed for recovery of possession filed by Goa Auto was deemed to continue. Further, the NCLT noted that the RP had filed an application to liquidate Goa Auto under section 31 of the IBC as no resolution plan had been received by him.

DECISION OF THE NCLT
Thus, in view of the overriding power under section 238 of the IBC, the NCLT directed that the RP/ liquidator be allowed to take possession of the Property from the Applicant.

Vaish Associates Advocates View:

The NCLT concluded by reiterating that no civil court would have the jurisdiction to entertain any suit or proceeding in a matter over which the NCLT has jurisdiction in accordance with the IBC. Further, the civil suit filed by the Applicant was only for the recovery of monies and would therefore, have a limited bearing on the suit for possession by the RP. Hence, the pendency of civil proceedings did not bar the RP from exercising his duty of taking control and custody of the assets of Goa Auto.

This judgment will go a long way in establishing the rights of an insolvency professional under the IBC, and in clarifying that possession of property that is not under the possession of a corporate debtor but which is owned by the corporate debtor could be taken back by the insolvency professional on behalf of the corporate debtor.

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

Supreme Court: Difference between inadequacy of reasons in arbitral award and unintelligible awards

The Supreme Court of India (“SC”) has vide its judgment dated December18, 2019 (“Judgment”), highlighted the difference between inadequacy of reasons in an arbitral award and unintelligible arbitral awards passed under the Arbitration and Conciliation Act, 1996 (“Act”).

FACTS
DCM Shriram Aqua Foods Limited (“DCM”) had entered into a contract (“Contract”) with M/s. Crompton Greaves Limited (“Respondent”) for the construction of an aquaculture unit by the former. Pursuant to the said Contract, the Respondent, on behalf of DCM, invited tenders for carrying out certain works for construction of ponds, channels, drains and associated works (“Project”). M/s. Dyna Technologies Private Limited (“Appellant”) gave its proposal, estimate and quotation for carrying out the Contract. Thereafter, a Letter of Intent (“LOI”) dated July 25, 1994, was placed by the Respondent. Subsequently, pursuant to Appellant’s suggestion, the Contract was amended by way of LOI dated October 10, 1994. Thereafter, the Respondent issued a work order dated November 15, 1994, (“Work Order”) setting out terms and conditions for carrying out the Project. After commencement of the Project, the Respondent on January 5, 1995, instructed the employees of the Appellant to stop the work. The Appellant, thereafter, claimed compensation for premature termination of the Contract and the dispute was ultimately referred to an arbitral tribunal consisting of three arbitrators (“Tribunal”). The Appellant made claims on the grounds of: (1) losses due to idle charges; (2) losses due to unproductivity of the men and machineries which could not work due to hindrances; (3) loss of profit as the contract got dissolved; (4) interest on all the claims, that is, (1), (2) and (3); and costs (collectively “Claims”).

The sole objection herein, was with reference to claim No. (2), that is, with respect to losses due to unproductivity of the men and machineries (“Claim”). The Claim was accepted by the Tribunal, whereupon a sum amounting to INR 27,78,125/- with interest at the rate of 18% per annum was awarded by an award dated April 30, 1998. Aggrieved by the award, an original petition was filed by the Respondent before a single judge of the High Court of Judicature at Madras (“HC”), under section 34 of the Act (application for setting aside arbitral award). The single judge of the HC upheld the award passed by the Tribunal and observed that the Respondent was liable to reimburse the losses sustained by the Appellant. Aggrieved by the aforesaid verdict, the Respondent appealed before the division bench of the HC. The division bench, by its judgment dated April 27, 2007, partly allowed the aforesaid appeal and set aside the award of the Tribunal relating to the Claim. In doing so, the division bench was of the opinion that the award did not contain sufficient reasons and moreover, certain statements in the award did not provide for any reasons, discussions or conclusion. Upon concluding that the award was deficient due to the lack of reasoning, the division bench noted that compensation could not have been claimed by the Appellant considering the fact that the Work Order had a provision barring the Claim. The division bench also noted that the arbitral proceeding was beyond the competence of the Tribunal. Subsequently, an appeal was filed by the Appellant against the impugned judgment of the division bench, and the judgment was delivered by the SC pursuant thereto.

ISSUE
Whether the award passed by the Tribunal satisfied the requirements of a reasoned award in accordance with section 31 of the Act, having regard to the nature of issues falling for consideration.

ARGUMENTS

Contentions raised by the Appellant:

The Appellant, inter alia, contended that the Tribunal had looked into the entire material available on record and had arrived at a finding in reference to the Claim based on the case set up by the parties, taking note of section 73 of the Indian Contract Act, 1872 (compensation for loss or damage caused by breach of contract) and relying upon the evidence, including appraisal of the log books as approved by the Respondent. Thereafter, the division bench held that actual losses/ expenses were incurred by the Appellant. In the given circumstances, it was not open for the division bench in appeal to reappraise and substitute its own view in contravention of the Contract pursuant to which the arbitral dispute was raised. Further, the interference made by the division bench was beyond the scope of section 37 (appealable orders) of the Act. It was also contended that the division bench did not hold that the evidence relied upon by the Tribunal was not proper. There was also no challenge to the same in the appeal filed by the Respondent under section 37 of the Act and in fact, only the liability factor was questioned. The Appellant further contended that the Respondents only contention before the single judge of the HC and the Tribunal was that there was no provision under the Contract for granting compensation in respect of loss incurred for unproductive use of machinery and that the Tribunal had exceeded its jurisdiction.

Contentions raised by the Respondent:

The Respondent on the other hand argued that the Claim disallowed by the division bench in the impugned judgment was basically a claim for payment of compensation or damages on account of premature termination of the Contract. It was pertinent that neither the Tribunal nor the HC had considered the terms of the said Contract in appreciating the right of the Appellant to claim compensation for damages and the corresponding liability of the Respondent to settle the Claim. In the present case, the terms of the Contract expressly prohibited any payable compensation if the said Contract were to be terminated on account of termination of the Project. It was also argued that section 34(2)(a)(iv) of the Act clearly envisaged that such an arbitral award could be set aside if the arbitral award dealt with a dispute not contemplated by or not falling within the terms of the submission to arbitration. When there was a specific exclusion/prohibition in the said Contract, it was not open for the Tribunal to travel beyond the terms of the Contract. The Respondent contended that this point had been taken note of by the division bench in its impugned judgment.

OBSERVATIONS OF THE SUPREME COURT

At the outset, the SC made certain observations on the aspect of jurisdiction of courts under section 34 of the Act and held that section 34 of the Act limited challenges to an award only on the grounds provided under the said section or as per interpretation by various courts. Therefore, arbitral awards should not be interfered with in a casual and cavalier manner unless the perversity of an arbitral award went to the root of the matter without there being a possibility of alterative interpretation which may sustain such an arbitral award. The SC noted that courts should not interfere with an arbitral award merely because an alternative view on facts and interpretation of contract exists. Section 34 of the Act could not be equated to a normal appellate jurisdiction.

It was pertinent that the mandate under section 34 of the Act was to respect the finality of an arbitral award and the party autonomy to get their dispute adjudicated as an alternative forum under the law. The SC also made note of section 31 (form and contents of arbitral award) of the Act and Article 31 of the UNCITRAL Model Law on International Commercial Arbitration which elucidated the necessity of providing reasons for an arbitral award. The SC noted that India had adopted a default rule to provide for reasons in an arbitral award unless parties agreed otherwise, that is, Indian law recognized enforcement of a reasonless arbitral award if it had been so
agreed by the parties.

The SC also delved into the scope of section 30 (grounds for setting aside award) of the Arbitration Act, 1940, that is, predecessor to the Act by referring to the case of Raipur Development Authority v. Chokhamal Contractors [AIR 1990 SC 1426]. Herein, it was held by the SC that the arbitrator or umpire was under no obligation to give reasons in support of the decision reached by him unless he was required to do so under the arbitration agreement or in the deed of submission and it was open to the court to set aside the arbitral award if it found that an error of law had been committed by the arbitrator or umpire on the face of the record, on perusing such reasons. However, the ratio of this case did not find favour of the legislature and accordingly section 31(3) (form and contents of arbitral award) was enacted in the Act.

The SC observed that section 31(3) of the Act mandated an arbitral award, which was intelligible and adequate in its reasoning and which, in appropriate cases could be implied by the courts by a fair reading thereof and from the documents referred. However, the aforesaid section did not require an elaborate judgment to be passed by the arbitral tribunal having regard to the aspect of speedy resolution of dispute.

The SC further considered the requirements for a reasoned arbitral award and stipulated the following of the three characteristics for the same: (i) proper; (ii) intelligible; and (iii) adequate. The SC at this juncture referred to section 34(4) of the Act and noted that the legislative intent of the said section was to make an arbitral award enforceable, after giving an opportunity to an arbitral tribunal to undo curable defects attributable to absence of reasoning, or gap in reasoning or otherwise. This could assist in avoidance of a challenge under section 34 (4) of the Act. Therefore, section 34(4) of the Act could not be brushed aside and the HC could not have proceeded further to determine issue on merits.

Accordingly, the SC noted that if the challenge to an arbitral award was based on impropriety or perversity in the reasoning, then it could be challenged on the grounds provided under section 34 of the Act. If the challenge to an arbitral award was based on the ground that the same was unintelligible, the same would be equivalent of providing no reasons at all.

On the aspect of challenge relating to adequacy of reasons, the SC held that a court while exercising jurisdiction under section 34 of the Act should adjudicate the validity of such an arbitral award based on the degree of particularity of reasoning required. The court while adjudicating such an application under section 34 of the Act, must have regard towards the nature of issues falling for consideration. However, the degree of particularity could not be stated in a precise manner as the same would depend on the complexity of the issue.

The SC further noted that even if the court came to a conclusion that there were gaps in the reasoning reached by the arbitral tribunal, the court needs to have regard for the documents submitted by the parties so that arbitral awards with inadequate reasons are not set aside in a casual and cavalier manner. Therefore, the courts are required to be careful while distinguishing between inadequacy of reasons in an arbitral awards and unintelligible arbitral awards.

Whilst, the SC noted that section 34(4) of the Act could not be brushed aside, and the division bench could not have proceeded further to determine the issue on merits, remanding the present case back to the Tribunal for adjudication would not be beneficial as the present case had already taken more than twenty five years for its adjudication.

The SC finally observed that in the instant case, although the Tribunal had dealt with the claims separately under different sub-headings, the award was confusing and had jumbled the contentions, facts and reasoning, without appropriate distinction. The SC held that in spite of its independent application of mind based on the documents relied upon, it could not sustain the award in its existing form as there was a requirement of legal reasoning to supplement the conclusion of the award.

DECISION OF THE SUPREME COURT
In view of the above, the SC held that the award passed by the Tribunal had been rendered without reasons. The SC held that the aspect of inadequate reasoning in the award and furthermore, basing the award on the approval of the Respondent, was not appropriate, in view of the complex issue involved. Consequently, the SC held that the award was unintelligible and could not be sustained. However, since the litigation had protracted for more than twenty five years, the SC considered it appropriate to direct the Respondent to pay a sum of INR three million to the Appellant in full and final settlement of the Claim, within a period of eight weeks, failing which the Appellant would be entitled to interest at a rate of 12% per annum until payment. The appeal was accordingly disposed of.

Vaish Associates Advocates View:

The SC has, by this judgment, made noteworthy observations on the form and manner of arbitral awards. It is imperative that an arbitral award should be intelligible, reasoned and adequate, in order to avoid the myriad legal conflicts and expenditure of time for the parties to the dispute. Muddled or ambivalent arbitral awards are detrimental to the very purpose of arbitration, which is speedy resolution of disputes. While it may not be necessary for arbitral tribunals to address each and every specific argument set forth by the parties in a convoluted/complex arbitration, the arbitral tribunal not revealing the basis or reasoning for a particular ruling with respect to a major claim can be a valid ground to set aside an arbitral award.

However, the judgment also upholds the intent of the legislature under section 34 of the Act by maintaining that interference by courts in arbitral awards should be limited to the said section. Thereby, the SC also seeks to restrain courts from dismissing an arbitral award merely on the ground of inadequate reasoning.

This verdict is significant in the light of the government declaring its goals of placing India on the global map, as an international hub for speedy and unimpeded settlement of disputes by arbitration.

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

Supreme Court: State legislature cannot enact law which affects the jurisdiction of the Supreme Court

On December 10, 2019, the constitutional bench of the Supreme Court (“SC”) in the case of Rajendra Diwan v. Pradeep Kumar Ranibala and Another, has held that section 13(2) of the Chhattisgarh Rent Control Act, 2011 (“Act”) is unconstitutional. The provision stipulates that an appeal directly to the SC against the order of RentControl Tribunal, Chhattisgarh, is unconstitutional and against the legislative competence of the State of Chhattisgarh.

FACTS
The present case is an appeal to the SC against the order passed by the Rent Control Authority. An application that was filed by the landlord against the tenant under section 12 of the Act. The SC expressed serious concerns about maintainability of the petition due to lack of legislative competence of the state of Chhattisgarh for providing a statutory appeal directly to the SC against the order of Rent Control Authority. As it involved a substantial question of law regarding the interpretation of the constitution, the case was referred to the constitutional bench of the SC.

ISSUE
Whether section 13(2) of the Act was ultra vires the Indian Constitution due to lack of legislative competency of the State Legislature of Chhattisgarh to enact a provision providing for appeal directly to the SC against an order of the Tribunal.

ARGUMENTS
Counsel for Rajendra Diwan (“Appellant”) argued that section 13(2) of the Act grants SC an appellate jurisdiction which it already had under Article 136 (special leave to appeal by the SC) of the Constitution. Further, Article 138(1) of the Constitution provides that the SC shall have such further jurisdiction and powers with respect to any of the matters in the union list, as Parliament may by law confer and Article 138(2) of the Constitution provides that the SC shall have such further jurisdiction and powers with respect to any matter, as Government of India and the government of any state may, by special agreement, confer, provided that Parliament by law provides for exercise of such jurisdiction and powers by the SC. It was argued that section 13(2) of the impugned Act was in consonance with Article 138 read with Article 200 of the Constitution which attempts to curtail the jurisdiction of High Courts subject to the assent of the President. It was submitted that the President acts on the aid and advice of the council of ministers which amounts to an agreement between the state government and Government of India, therefore the said provision was in compliance with Article 138(2) and Article 200 of the Constitution.

Counsel for Pradeep Kumar Ranibala and others (“Respondent”) on the other hand, argued that the impugned provision is unconstitutional. This is evident from the bare reading of Entry 77 (jurisdiction, powers, etc. of the SC) in List I (Union List), Entry 65 (fees in respect of any of the matters, not including fees taken in any court) in List II (State List) and Entry 46 (jurisdiction and powers of all courts, except the SC) of List III (Concurrent List). Entry 77 read with Article 146(1) (officers, expenses, etc. of the SC) of the Constitution confers exclusive jurisdiction to Parliament to legislate regarding jurisdiction and powers of SC only which is prohibited for state legislature as per Entry 65 in List II and 46 in List III. It was argued that neither the Governor nor the President of India has the power to confer legislative competence on a legislative body contrary to provisions of the Constitution.

The case of H.S Yadav v. Shakuntala Devi Parakh [(Civil Appeal No(S). 5153 of 2019], (decided on October 15, 2019) was also referred to by the Respondent, which struck down section 13(2) of the Rent Control Act as unconstitutional due to lack of legislative power of the state legislature. The SC has been established under Article 124 and its jurisdiction and powers are defined in Article 131 to Article 145 of the Constitution. There is no provision providing for direct appeal to SC from a tribunal order established by law of a state legislature.

OBSERVATIONS OF THE SUPREME COURT
It was observed by the SC that when the question of vires of an act is to be considered, the whole act has to be looked upon to decide whether the legislature has a competence to enact such a law. Once it is ascertained affirmatively, the power extends to all the ancillary and incidental matters which are reasonably and logically within the ambit of such area as held in the case of United Provisions v. Atika Begum [AIR 1941 FC 16]. The impugned section which provided for a direct appeal to the SC was not ancillary or incidental to the powers of State of Chhattisgarh to enact the Act. Evidently, in this instance, the State Legislature had transgressed its legislative powers.

All the entries in the Seventh Schedule have to be interpreted in the widest terms but at the same time harmonized with the other entries. Entry 18 of the State List which enables the state legislature to make laws with respect to landlord tenant relationship, collection of rents, etc. does not allow it to circumvent Entry 64 (offences against laws) of the State List and 46 of the Concurrent List which enable the state legislature to enact laws with respect to the jurisdiction and powers of courts, except the SC. The aforesaid entries therefore prohibited the state legislature from exercising jurisdiction in respect of the SC. Neither does Entry 18 of the State List render otiose Entry 77 of the Union List which exclusively confers law making power with respect to jurisdiction of the SC to the Parliament. Section 13(2) of the Act which provides for the direct appeal to the SC is not ancillary or incidental to the powers of State of Chhattisgarh to enact the Act.

Both the state and union derive their powers to make laws under Article 245 of the Constitution and unlike Article 245(2), where union laws made by the Parliament are saved with extraterritorial operation, there is no provision in the Constitution which saves state laws made by the state legislature for the same.

Since the Tribunal under the Act is established under Article 323B (tribunals for other matters) of the Constitution, the curtailing of jurisdiction of High Court except under Article 226 and 227 of the Constitution would be saved by Article 323(3)(d) (law made under clause 1 may exclude jurisdiction of all courts except that of the SC with respect to matters falling within the jurisdiction of tribunals) of the Constitution. However, Article 323B of the Constitution does not provide state legislature power to expand appellate jurisdiction of the SC.

The SC also analysed the scope of Article 136 of the Constitution which confers a discretionary power on the SC to intervene in appropriate cases which can be exercised in spite of other provisions in the Constitution or any other law, and the statute providing for the conclusiveness of the decision of tribunal does not bar such power of the SC. Exercising such powers, the SC settles only questions of law involving public importance and does not intervene in facts and findings by lower courts. On the contrary, an appeal is the continuation of the original proceedings in which the appellate court is obliged to re-appreciate facts and evidence on record. Section 13(2) of the Act purports to confer a right of statutory appeal to the SC on issues which may not involve serious questions of law, and is clearly beyond the legislative power of the state.

Further, presidential assent makes no effect on the legislative competence to make laws. Moreover, for an agreement between state and the union government, a special agreement is required between them through negotiations and deliberations rather than the assent of the President on the aid and advice of the council of ministers. Subsequently, the Parliament is required to enact a law enabling the SC to exercise jurisdiction pursuant to such agreement. Therefore, in the present case, the provision of special agreement of Article 138(2), as discussed aforesaid, could not apply.

DECISION OF THE SUPREME COURT
The SC held that it affirms the decision of H.S. Yadav v. Shakuntla Devi Parikh and further held that section 13(2) of the Chhattisgarh Rent Control Act is ultra vires the Constitution, beyond the scope of power of the state legislature, and therefore null and void.

Vaish Associates Advocates View

Although a perusal of the judgement indicates that the SC has made a rational application of the doctrine of ultravires, and struck down a law wherein the state has overstepped its bounds, there are certain noteworthy points that have not been taken into consideration by the SC.

The point made by the Appellant that section 13(2) of the Act does not in reality deal with the powers of the SC is a logical one. The provision only enables an appeal to the SC, and does not in any way circumscribe the wide powers it already has (and given the scope of a special leave petition, it is unlikely that the powers can be increased).

The SC also did not consider the doctrine of “pith and substance” for deciding the constitutionality of the provision and the argument of the Appellant that “rent control” falls squarely within Entry 18 of State List of the Seventh Schedule, is in sync with the doctrine. At best, the infringement upon the union’s powers is incidental in nature, as even without the provision in question, the SC would have the power to entertain an appeal from the orders of the Rent Control Tribunal.

The judgement limits the direct runway granted by section 13(2) of the Act to the SC, although it will have no tangible effect on the appeals that emanate from the orders of the Rent Control tribunal, as they will end up going to the SC in the form of a special leave petition.

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