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NCLT Cuttack: Failure to implement the resolution plan cannot reset the clock back to day one to restart the insolvency process

The National Company Law Tribunal (“NCLT”), Cuttack in the case of State Bank of India v. Adhunik Metaliks Limited and Others (decided on July 8, 2019) rejected the resolution plan submitted by the resolution applicant on the ground of delay and ordered for liquidation of the corporate debtor.

FACTS
State Bank of India (“State Bank”) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) for initiation of the corporate insolvency resolution process (“CIRP”) against Adhunik Metaliks Limited and its subsidiary M/s. Zion Steel Limited (“Corporate Debtor”) before the NCLT, Kolkata. In pursuance thereto, Liberty House Group (“Liberty House”) submitted a resolution plan, which was accepted by the committee of creditors (“CoC”) and then was approved by the NCLT, Kolkata.

Liberty House did not take steps to implement the resolution plan. Hence, the CoC filed an application in the NCLT, Kolkata asking for directions to Liberty House for implementation of the resolution plan by making upfront payment or else to pass an order for liquidation of the Corporate Debtor. The NCLT, Kolkata issued notice to Liberty House asking them as to why order of liquidation should not be passed. On an appeal, the National Company Law Appellate Tribunal (“NCLAT”) directed Liberty House to make upfront payment within 30 days. Meanwhile, the NCLT Cuttack was functional and upon failure of Liberty House in making payment, the CoC approached the NCLT, Cuttack for cancellation of the resolution plan and requested to allow them to forfeit the money deposited by Liberty House as part of upfront payment claiming it to be performance security for implementation of the resolution plan.

ISSUE
Whether the resolution plan approved by the NCLT, Kolkata can be rejected for its non-implementation? If so, whether the resolution plan submitted by any other resolution applicant can be considered? If not, whether liquidation can be initiated against the Corporate Debtor?

ARGUMENTS
State Bank and the CoC contended that, since Liberty House failed to make the upfront cash payment of INR 410 crores for more than a year,t here is breach of terms of the resolution plan under Section 74(3) (Punishment for contravention of moratorium or the resolution plan) of the Code, and therefore, the said resolution plan should be rejected. The CoC also requested to forfeit INR 50 Crores deposited by Liberty House as performance security under Regulation 36B(4A) (forfeiture of performance security upon failure in implementation of the resolution plan) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulation, 2016 (“Regulations”).

The CoC argued that an order of liquidation can be passed under Section 33(1) (Initiation of liquidation) of the Code, only if: (i) contingencies are that the adjudicating authority does not receive any resolution plan during 180 or 270 days; or (ii) the adjudicating authority rejects the resolution plan under Section 31 of the Code. Since this case did not fall under any of the aforesaid contingencies, an order of liquidation cannot be passed. Hence, it requested the NCLT, Cuttack to revive the CIRP and allow consideration of the resolution plan submitted by the second highest bidder by excluding the days vested by Liberty House in non-implementation of their plan from the CIRP period.

Liberty House contended that the CoC did not co-operate with them in implementation of the resolution plan as they failed to issue offer letter of equity shares of the Corporate Debtor and thus it was difficult for them to invest funds as per the resolution plan. Liberty House argued that INR 50 crores were deposited as a part of upfront cash payment to show its readiness and willingness in implementation of the resolution plan and thus cannot be forfeited by treating it as performance security.

OBSERVATIONS OF THE NCLT, CUTTACK
The NCLT, Cuttack observed that non-compliance with the order of the NCLAT to make the upfront payment within 30 days amounts to breach of the terms of the resolution plan. Further, the NCLT, Cuttack rejected the arguments of Liberty House by stating that the word “upfront payment” used in the resolution plan cannot be qualified by any condition as sought to be attached subsequently by them.

The NCLT, Cuttack further observed that while approving the resolution plan, the CoC did not ask Liberty House for any performance security for successful implementation of the resolution plan. It also observed that Regulation 36B(4A) of the Regulations was added by an amendment dated April 24, 2019 and thus cannot be applied retrospectively. Hence, the upfront payment of INR 50 crores cannot be forfeited by the CoC.

With regard to reviving the CIRP and considering the resolution plan of the second highest bidder, the NCLT refused to accept the contentions of the CoC. It observed that the resolution plan submitted by second highest bidder was considered earlier and rejected because their investment in the Corporate Debtor was below its liquidation value. The NCLT, Cuttack held that it cannot re-set the clock back to day one. Further, if the second highest bidder was really interested in the affairs of the Corporate Debtor, they still have an opportunity to do so by filing an application under Section 230-232 of the Companies Act, 2013 for merger and amalgamation during liquidation.

DECISION OF THE NCLT, CUTTACK
The NCLT, Cuttack rejected the resolution plan submitted by Liberty House on account of its failure to implement the same and ordered for liquidation of the Corporate Debtor as a going concern under Section 33 of the Code. The NCLT, Cuttack held that the money deposited by Liberty House cannot be said to be performance security and hence, cannot be forfeited by the CoC. However, since Liberty House did not demand the same, the NCLT, Cuttack did not pass any order thereto at this stage.

Vaish Associates Advocates View
The NCLT, Cuttack draws a line between the underlined objective of the Code, that is, to ensure more resolutions than liquidations and basic tenets of the Code wherein a resolution plan once rejected cannot be later considered. An opportunity was given to the CoC to consider all bids received and it had at that point rejected the same by approving the resolution plan submitted by Liberty House.

Thus, in such a scenario, re-setting the clock would go against the spirit of the Code. The NCLT should adopt a stringent approach towards successful bidders who back track on their commitment to implement the plan, and thereby, frustrating the object of the Code to ensure resolution of the corporate debtor within the statutory time limit.

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

The fee structure contractually determined for the arbitral tribunal prevails over the fee structure provided under the Arbitration Act

The Supreme Court in the case of National Highways Authority of India v. Gayatri Jhansi Roadways Limited with Gammon Engineers and Contractors Private Limited v. National Highways Authority of India (decided on July 10, 2019) held that the fee structure for the arbitral tribunal previously agreed between the parties under the arbitration agreement, in case of a domestic arbitration, would prevail over the fee structure provided under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

FACTS
National Highways Authority of India (“Respondent”) and Gammon Engineers and Contractors Private Limited (“Appellant”) entered into a contract dated February 07, 2006. The arbitration clause of the contract fixed the fees for the arbitral tribunal as per a policy decision of the Respondent dated May 31, 2004. Disputes arose between the parties on May 23, 2017 and the arbitration clause was invoked by the Appellant. Once the arbitral tribunal was constituted and the matter with respect to the fees of the arbitrators came up before the arbitral tribunal, it was decided that the fees would be regulated as per provisions of the Fourth Schedule of the Arbitration and Conciliation (Amendment) Act, 2015 (“Arbitration Amendment Act”).

The Respondent, against this order, moved an application dated October 13, 2017 before the arbitral tribunal in which it sought to remind that the fees for the arbitrators had been fixed by the agreement and that, therefore, should be fixed in terms of the circular dated July 01, 2017 of the Respondent and not as per the Fourth Schedule of the Arbitration Act. The arbitral tribunal deliberated on the matter and decided that in view of the latest provisions of the Arbitration Amendment Act, the arbitral tribunal was competent to fix the fees regardless of the agreement between the parties. This was as per the judgment dated September 11, 2017 of the Delhi High Court in the matter of National Highways Authority of India v. Gayatri Jhansi Roadways (“NHAI Judgment”).

Respondent thereafter made an application to the Delhi High Court under Section 14 of the Arbitration Act, to terminate the mandate of the arbitrators. According to the Respondent, the arbitrators had wilfully disregarded the agreement between the parties and were, therefore, unable to act any further in the proceedings. Meanwhile, the arbitral tribunal passed another order in which it stated that it had no objection to payment of any fees as would be decided in the pending proceedings by the Delhi High Court. The Delhi High Court stated that the Fourth Schedule of the Arbitration Act not being mandatory, whatever terms were laid down as to arbitrator’s fees in the agreement, must be followed. In so doing, it disagreed with the NHAI judgment, wherein, it was held that Section 31(8) (Costs of an arbitration to be fixed by the arbitral tribunal) and Section 31A (Regime for costs) of the Arbitration Act would govern the aforesaid matters.

Further, since the expression ‘unless otherwise agreed by the parties’ had been omitted from Section 31A by the Arbitration Amendment Act, arbitrator’s fees would have to be fixed in accordance with the Fourth Schedule of the Arbitration Act instead of the agreement between the parties. The Delhi High Court vehemently disagreed with this view holding the said judgment per incuriam stating that the deletion of words “unless otherwise agreed by the parties” in Section 31A only signifies that the parties, by an agreement, cannot contract out of payment of ‘costs’ and deprive the arbitral tribunal a right to award ‘costs’ of arbitration in favour of the successful party. The decision of the Delhi High Court in NHAI judgment was challenged before the Supreme Court and a special leave petition was filed. The present matter as well as the special leave petition were clubbed and heard together by the Supreme Court.

ISSUES
Whether the fees to be paid to the arbitral tribunal should be as per the contract entered into between the parties or as per the Fourth Schedule of the Arbitration Act?

FINDINGS OF THE SUPREME COURT
The Supreme Court took note of the fact that a fee schedule for the arbitral tribunal was, in fact, fixed by the agreement between the parties. This fee schedule, based on an earlier circular of 2004 of the Respondent, was now liable to be amended from time to time in view of the long passage of time that has ensued between the date of the agreement and the date of the disputes that arose under the agreement. The Supreme Court accordingly held that the fee schedule that was contained in the circular dated July 01, 2017, substituting the earlier fee schedule, would now operate and the arbitrators should be entitled to charge their fees in accordance with this schedule and not in accordance with the Fourth Schedule to the Arbitration Act.

The Supreme Court further stated that the application that was filed before the Delhi High Court to remove the arbitrators stating that their mandate must terminate, was wholly disingenuous and would not lie. The reason is that an arbitrator does not become unable to perform his functions if by an order passed by such arbitrator(s), all that they have done is state that the agreement does govern the arbitral fees to be charged. The arbitrator(s) were bound to follow the NHAI judgment which clearly mandated that the Fourth Schedule and not the agreement would govern the arbitral fees.

The arbitrators merely followed the law laid down in NHAI judgment and cannot be said to have done anything wrong so that their mandate may be terminated as if they have now become de jure unable to perform their functions. The Supreme Court agreed with the conclusion of the Delhi High Court that the change in language of Section 31(8) read with Section 31A of the Arbitration Act which deals only with the costs generally and not with arbitrator’s fees is correct in law. The arbitrator’s fees may be a component of costs to be paid but it is a far cry to state that Section 31(8) and 31A of the Arbitration Act would directly govern contracts in which a fee structure has already been laid down.

DECISION OF THE SUPREME COURT
The Supreme Court held that the fee schedule agreed as per the arbitration agreement would prevail over the schedule provided under the Arbitration Act. The Supreme Court also held that the mandate of the arbitral tribunal would not be terminated merely because it passed an order following a previous judicial precedent which was not been held to be per incuriam on the date when such an order was passed.

Vaish Associates Advocates View
Party autonomy has been the bedrock of the Arbitration Amendment Act which has been upheld in several judicial decisions since then. Section 11(14) of the Arbitration Act provides that “For the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule. Explanation- For the removal of doubts, it is hereby clarified that this sub-section shall not apply to international commercial arbitration and in arbitrations (other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution.” This provision was inserted in the Arbitration Act on the recommendation of the Law Commission of India Report No. 246 (“Law Commission Report”) for the purpose of addressing the issue of high costs associated with ad hoc arbitrations including the arbitrary, unilateral and disproportionate fixation of fees by several arbitrators. It does not in any way put a restriction on the right of the parties to agree to a fee structure contractually in advance.

Further, the Law Commission Report acknowledges that international commercial arbitrations, which involve foreign parties, may have different values and standards for fees for arbitrators; similarly, institutional rules might have their own schedule of fees; and in both cases greater deference must be accorded to party autonomy. It would be an absurd reading of the provision if in international commercial arbitrations parties would be free to choose the fees to be paid to the arbitral tribunal in advance but not in case of domestic arbitrations. This judgement rightly upholds the intent of the legislature while giving the parties the elbow room to determine the fees of the arbitral tribunal in accordance with their financial capacity.

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

Courts can imply a term in a contract only if literal interpretation fails to give the result intended by both the parties

The Supreme Court of India in the case of Adani Power (Mundra) Limited v. Gujarat Electricity Regulatory Commission (decided on July 2, 2019) held that courts can imply terms in a contract only when literal interpretation fails, and has enunciated the scenarios in which such implication is allowed.

FACTS
Gujarat Urja Vikas Nigam Limited (“GUVNL”), a holding company engaged in the business of bulk purchases from the power generators and supply to the distribution companies in the State of Gujarat entered into a Power Purchase Agreement (“PPA”) with M/s. Adani Power Ltd. (“Appellant”). The Appellant herein contended that the bid submitted by it on the basis of which the PPA was entered was solely on the assurance given by Gujarat Mineral Development Corporation (“GMDC”) to supply four million tonnes of coal. Since GMDC was not abiding by the assurance given, the Appellant sent various notices to the Government of Gujarat to find a solution.

Due to the non-compliance of the Fuel Supply Agreement (“FSA”) between the Appellant and GMDC, the Appellant informed GUVNL that the FSA had not been finalized yet. In June 2008, GUVNL asked the Appellant to furnish an additional performance bank guarantee since it had not complied with the conditions of the PPA. The Appellant stated non-execution of the FSA as the reason for not supplying power, in their reply to GUVNL, and that the Appellant had no other option but to terminate the PPA unless the coal supply comes from the GMDC.

Thereafter, there was an attempt to amicably settle the matter amongst the Appellant, GUVNL, GMDC and the Government of Gujarat which was unsuccessful. Finally, the Appellant by a communication dated December 28,2009, issued a notice to GUVNL, terminating the PPA with effect from January 04, 2010. GUVNL addressed a communication to the Government of Gujarat on December 30, 2009, requesting the Government to impress upon the Appellant to withdraw its termination notice dated December 28, 2009 and also impress upon the GMDC for resolution of FSA with the Appellant. GUVNL also addressed a communication to the Appellant on January 05, 2010, requesting it to keep the notice of termination in abeyance. On January 06, 2010, the Appellant addressed another communication to GUVNL, informing it that since the period of termination has already expired, the PPA stands terminated with effect from January 04, 2010.

The Appellant also deposited an amount of INR 25 crores with GUVNL towards liquidated damages in addition to the performance bank guarantee of INR 75 crores. GUVNL returned INR 25 crores and asked the Appellant to withdraw the termination notice but the same was not accepted. GUVNL filed a petition under the Electricity Act, 2003, for adjudication of the dispute. The Gujarat Electricity Regulatory Commission (“Commission”) held that the termination of the PPA was illegal, and directed the Appellant to supply the power to the procurer at the rate determined in the PPA. The Appellant approached the Appellate Tribunal for Electricity (“Appellate Tribunal”) against the order of the Commission which was dismissed and the present appeal was filed before the Supreme Court.

ISSUES

Whether courts have the right to interpret the contract liberally if literal interpretation fails
Whether specific performance can be directed when the contract provided for liquidated damages?

ARGUMENTS
The Appellant argued that the bid which was initially submitted by the Appellant in furtherance of which the PPA was created, was only submitted on the basis of the commitment by the GMDC that it will supply the coal required for generation of power. This information was communicated by the Appellant to GUVNL. Thus, when GMDC failed to execute the FSA, non-compliance of Article 3.1.2 of the PPA was observed which entitled the Appellant to terminate the Agreement by giving seven days’ notice in accordance with Article 3.4.2 of the PPA.

The Appellant also argued that the Commission and the Appellate Tribunal have grossly erred in their judgment, wherein they stated that an express agreement between GUVNL and the Appellant stating the non-compliance under Article 3.1.2 would be the only way to invoke Article 3.4.2 of the PPA. The Appellant further argued that since the PPA provided for liquidated damages, the Commission and the Appellate Tribunal ought not to have given an order for specific performance. The Appellant further alleged that the Commission and the Appellate Tribunal have varied the terms of the contract executed between the parties which is not permissible in law.

GUVNL submitted that the PPA which was entered was not on the basis of the commitment by GMDC. It further argued that the source of coal is immaterial to GUVNL, and the PPA is only for the supply of power between the Appellant and GUVNL. The Respondent further argued that on the failure of GMDC to supply indigenous coal, the Appellant should have made an alternative arrangement and fulfilled their obligations under the PPA.

Therefore, by not doing so, it was the Appellant who was committing the default and hence, a party in default cannot be permitted to terminate the PPA. They have also contended that despite having a provision for liquidated damages in the PPA, the courts are not powerless to direct specific performance of the contract. GUVNL finally submitted that the contract is supposed to be read as a whole and the provisions of the contract cannot be read in isolation.

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court in the instant case referred to a number of precedents to determine the issue of the interpretation of clauses in the contract between the said parties. In the case of Satya Jain v. Anis Ahmad Rushdie [(2013) 8 SCC 131], the Supreme Court had emphasized on the principle of business efficacy. It was held that the principle of business efficacy is normally invoked to read a term in a contract to achieve the result or the consequence intended by the parties, acting as prudent businessmen. Thus, the test of business efficacy requires a term to be implied only if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties would not have reasonably foreseen.

The Supreme Court also observed the “Five Condition Test” which has been set out in the case of B.P Refinery (Westernport) Proprietary Limited v. Shire of Hastings [1977 UKPC 13] wherein the conditions to be fulfilled for an implied condition to be read into the contract are: (1) reasonable and equitable; (2) necessary to give business efficacy to the contract; (3) the Officious Bystander Test; (4) capable of clear expression; and (5) must not contradict any express term of the contract. Relying on the above judgments and a long line of precedents following the business efficacy test, the Supreme Court observed that the clauses in any agreement ought to be given their plain, literal and grammatical meaning, and terms may be implied in a contract only if they find that the literal interpretation fails to portray the intention of the parties.

The Supreme Court also observed that the Appellate Tribunal’s interpretation wherein they held that there is no need for an express agreement between the parties to be able to invoke the provisions of termination, would amount to inserting a whole new condition and re-writing of the contract, and is therefore not equitable.

DECISION OF THE SUPREME COURT
The appeal of the Appellant was allowed, and the notice of termination and the consequent termination was held valid and legal. The Appellant was directed to approach the Central Electricity Regulatory Commission for determination of the compensatory tariff, including various other aspects payable to it from the date of supply of electricity.

Vaish Associates Advocates View
This decision of the Supreme Court is in line with a catena of precedents on interpretation of contracts pertaining to situations wherein contractual provisions can be implied. However, this judgment creates an exception by including a third party within the ambit of the contract. The Supreme Court has given the concept of business efficacy and the Five Condition Test a very wide ambit by including a third party with no privity of contract into the application of the contract. The Supreme Court has taken a liberal approach by looking at the conduct of the parties and the communications exchanged inter-se, to establish that the third party was a major factor to the successful execution of the contract, and both the parties were aware of the same.

Therefore, the Supreme Court has made a positive move in the fora of contract law by widening the horizon for implication in contracts. This precedent marks a new era of reading between the lines and extracting the intention of the parties, who may otherwise choose to hide behind literal interpretations, while being fully aware of extraneous circumstances as in the instant case. Further, this judgment is pertinent in situations wherein the government or the public sector undertakings are parties and try to hide behind the veil of ignorance of what prevails in other departments, even though they are closely associated.

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

CCI introduces fast track merger approval process – Green Channel route!

Competition Commission of India (‘CCI’) introduces “green channel” for Fast Track approvals of certain combinations – further amends Combination regulations.

By way of a notification dated 13 August 2019 (“Notification”), the CCI has further amended the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (‘Combination Regulations’). The amended Combination Regulations are effective from 15 August 2019.

The Combination Regulations provide the procedural framework for notifying the CCI of any acquisition, merger, or amalgamation, which constitutes a ‘combination’ under the Act. Parties to a combination are obliged to notify the CCI disclosing the details of the proposed combination before consummation of the combination.

The significant changes effected by way of this amendment are as follows:

A. APPROVAL OF COMBINATIONS UNDER “GREEN CHANNEL”
The newly inserted Regulation 5A enables parties to avail of a “green channel” for approval of certain categories of combinations. The categories of combinations which can avail of the Green Channel route are set out under the newly inserted Schedule III to Form I.

Combinations falling under Schedule III shall be deemed to be approved by the CCI upon filing.

When can parties avail the “Green Channel” route?
The parties to the combination may avail of the Green Channel route where their respective group entities and/or entities in which they directly/indirectly hold shares or which they control:
- No horizontal overlap – Do not produce/provide similar or identical or substitutable product(s) or services(s);
- No vertical relationship – Are not engaged in any activity relating to production, supply, distribution, storage, sale and service or trade in product(s) or provision of service(s) which are at a different stage or level of the production chain; and
- No complimentary products or services – Are not engaged in any activity relating to production, supply, distribution, storage, sale and service or trade in product(s) or provision of service(s) which are complementary to each other.

How to notify for Green Channel route to CCI?
The notification to the CCI under the Green Channel route is also to be made in Form I. The
Notification also prescribes a new Form I, setting out additional information requirements, including, for instance, details of interconnected transactions etc. Moreover, the Form I notice under the Green Channel route is also to be accompanied by a declaration under Schedule IV to Form I, which inter alia requires the notifying party to state whether or not the combination is covered under Schedule III.

Effect of incorrect declaration under Schedule IV
If the CCI finds that the declaration under Schedule IV is incorrect and that the parties have incorrectly availed of the benefit under the Green Channel route, the approval granted shall be held void ab initio. In such cases, the CCI shall deal with the combination in accordance with the provisions of the Competition Act, 2002 (“Act”).

However, the Regulations grant a right of hearing to the parties to combination, before the CCI arrives at a finding that a combination is not eligible for the green channel benefit.3

B. “SINGLE SUMMARY” INSTEAD OF SHORT AND LONG SUMMARIES EARLIER
The new Regulation 13A of the Combination Regulations provide for a single summary of the proposed combination, whereas, the Combination Regulations earlier prescribed both a short as well as a long summary.

For any further details and clarifications, please feel free to write to:
Mr. M M Sharma, Head – Competition Law, [email protected]

Court allows simultaneous proceedings against directors for alleged antitrust violation

Introduction
On 18 December 2018 the division bench of the Delhi High Court (comprising Chief Justice Rajendra Menon and Justice V K Rao) reconfirmed its earlier decision in Cadila(1) and held that simultaneous inquiries could be undertaken into Monsanto and its directors and officers for their alleged violation of the Competition Act 2002 (for further details please see “Delhi High Court clarifies procedural and jurisdictional issues in CCI antitrust inquiry”). The court also clarified that under Section 27 of the act, penalties could be imposed on the individuals in question based on their Monsanto-derived income.

Background
In 2016 the Competition Commission of India (CCI) – by way of its common prima facie order of 9 June 2016 made under Section 26(1) of the act – ordered an investigation into Monsanto, Monsanto Holdings Private Limited, Maharashtra Hybrid Seeds Company and Mahyco Monsanto Biotech for abuse of their dominant position in the country’s bacillus thuringiensis cotton seed market. The CCI ordered the investigation after finding evidence of unfair and discriminatory conditions in the sublicence agreements through which Bt Cotton technology was sublicensed to seed manufacturers in India.

Although the director general submitted an investigation report, the CCI could not pass a final order due to the fact that Monsanto and Monsanto Inc’s writ petitions against the CCI’s prima facie order were pending in the Delhi High Court. On 12 October 2018 the single bench of the High Court (comprising Justice Vibhu Bhakru) dismissed the writ petitions.

High Court decision
Monsanto filed a letter patents appeal against the judgment of the single bench of the Delhi High Court to the division bench of the Delhi High Court. The appeal centred on the following questions:

Must the CCI find that a company has indulged in anti-competitive activities under Sections 3 and 4 of the Competition Act before a notice can be issued to the directors or persons in charge of the company?
Does Section 48 of the act, which provides for vicarious liability of persons responsible for a company’s conduct, apply only to contraventions of orders of the CCI or the director general under Sections 42 to 44 of the act (and not to contraventions of Sections 3 and 4 of act)?

On the first issue of whether a simultaneous proceeding could continue against the managing director and other officials of Monsanto, the court reiterated its earlier judgment in Cadila, wherein the division bench had relied on the High Court’s judgment in Pran Mehra v CCI,(2) and held that:

there cannot be two separate proceedings in respect of the company and the key-persons, as the scheme of the Act does not contemplate such a procedure. In the course of the proceedings qua a company, it would be open to the keypersons to contend that the contravention, if any, was not committed by them, and that, they had in any event employed due diligence to prevent the contravention. These arguments can easily be advanced by key- persons without prejudice to the main issue, as to whether or not the company had contravened, in the first place, the provisions of the Act, as alleged by the Director General, in a given case.

Accordingly, the court held that the appellant’s grievance with regard to the issuance of a notice to its managing director and other officials under Section 48 of the act was without substance. On the second issue, in view of its conclusion regarding the first issue and while affirming the order passed by the single bench, the division bench held that in case of an alleged violation of the act, proceedings can be opened against directors and officers, alongside their company. If the company is found to have indulged in an anti-competitive act, a penalty can also be imposed on the directors or officers in charge pursuant to Sections 27 and 48 of the act. As regards the aim of Sections 27(b) and 48, the court held that a penalty can be imposed on directors and officers even if they are found to have violated Sections 3 and 4 and observed that:

on a perusal of Section 27 of the Act, it is clear that if there is a contravention of Section 3 or Section 4, the Commission can pass orders against an ‘enterprise’ and a ‘person’ i.e. individual, who has been proceeded against, imposing [a] penalty.

For further information on this topic please contact Mr. M M Sharma at [email protected]

Endnotes:
(1) LPA 160/2018 & CM APPL 11741-44/2018, decided on 12 September 2018.
(2) WP (C) 6258/2014, decided on 26 February 2015.

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This article has also been published in International Law Office

Madras High Court: Contractual relations between private institutions performing public functions and individuals can be enforced under Article 226 of the Constitution of India

The Madras High Court in case of Jasmine Ebenezer Arthur v. HDFC ERGO General Insurance Company Limited and Others (decided on June 6, 2019) held that a writ petition is maintainable against a private body, if it has a public duty imposed on it. Consequently, an insurance company is amenable to the writ jurisdiction of a court, as it performs public functions and have a public duty imposed on it.

FACTS
Jasmine Ebenezer Arthur (“Petitioner”) and her husband had availed a home loan from HDFC Bank Ltd. (“HDFC”) for a property located in Chennai, for an amount of INR 35,00,000, to be repaid in 120 equal monthly installments. A home loan agreement was also executed between the parties. The Petitioner’s husband also availed an insurance coverage along with the home loan, via a policy called Home Suraksha Plus (“Policy”) by paying a premium of INR 1,45,812, which covered ‘Critical Illness Diagnosis’. Section 3(c) of the Policy specifically provided coverage for “Myocardial Infarction”.

The Petitioner’s husband suffered massive cardiac arrest while driving to his office in Abu Dhabi, and was admitted to a hospital where it was diagnosed that he suffered from cardiac arrest and ventricular fibrillation. He died in Abu Dhabi, and no post mortem could be conducted. The Petitioner filed the claim with the HDFC ERGO General Insurance Company Limited (“Insurance Company”), but no action was taken to process the claim. Due to this inaction, the Petitioner was constrained to lodge a complaint with the grievance cell. Upon request of the Insurance Company, the required document with respect to the “cause of Ventricular Fibrillation and Cardiac Arrest” from the treating doctor was submitted by the Petitioner. As per the report, the cause of the death of her husband was “acute coronary artery syndrome”. The claim of the Petitioner was repudiated on the ground that the cause of her husband’s death was not covered under “Major Medical Illness”. The aggrieved Petitioner filed a complaint with the grievance cell which did not yield any positive response.

Thereafter, the Petitioner filed a complaint with the Insurance Ombudsman, Chennai and the same was dismissed. Aggrieved by the order of the Insurance Ombudsman, the Petitioner instituted a writ petition under Article 226 of the Constitution of India (“Constitution”) before the Madras High Court, praying for a writ of mandamus directing the Insurance Company to honor the claim made by the Petitioner in respect of insurance policy availed by Petitioner’s husband without insisting for any further documentations or particulars.

ISSUES
1. Whether the petition to enforce a contractual relationship is maintainable under Article 226 of the Constitution before the Madras High Court?
2. Whether the private bodies performing public duties can be brought within the purview of judicial review?

ARGUMENTS
The Insurance Company questioned the appropriateness of the forum approached, as there exists only a contractual relationship between the Insurance Company and the Petitioner. The Insurance Company also contends that the cardiac arrest suffered by the Petitioner’s husband is not “Myocardial Infarction” and thus, not covered under the Policy. HDFC filed a counter affidavit for dismissal of the writ petition on same grounds, and contended that they being the secured creditor, must be entitled to take recourse to legal remedies for recovery of dues with respect to the home loan. In light of the second issue raised, the Insurance Company argued that they are not performing any statutory function or obligations. The Insurance Company argued that it is not “State” under Article 12 of the Constitution, and hence the petition is not maintainable.

The Petitioner contended that the Insurance Company is a registered insurance entity with Insurance Regulatory and Development Authority of India (which is a regulatory authority) and hence, the writ petition is maintainable in law. The Petitioner cited the judgment of the Hon’ble Supreme Court in case of Life Insurance Corporation of India and Others v. Asha Goel and Another [(2001) 2 SCC 160], to support its argument that a writ petition to enforce a contractual right is maintainable.

OBSERVATIONS OF THE MADRAS HIGH COURT

Issue 1:
The basic object of the Insurance Act, 1938 is to prevent the abuse of power concentrated in the hands of insurance companies. The Madras High Court observed that since certain public functions such as insurance are allowed to be performed by private bodies, it has to extend its powers under the writ jurisdiction, to keep in check the public functions performed by such private bodies. The Madras High Court further perused Article 226 of the Constitution and held that a writ can be directed towards any person, not only for infringement of fundamental rights, but also for any other purpose.

Issue 2:
The Madras High Court observed that when the public monopoly power is replaced by private monopoly power, it becomes imperative that the private bodies should be made accountable to the judiciary within its scope of judicial review. If any private body has a public duty imposed on it, the court has jurisdiction to entertain the writ petition. Madras High Court also referred to the case of LIC v. Escorts Ltd. [AIR 1986 SC 1370], where it was held that the court will examine actions of the State, if they pertain to the public law domain, and refrain from examining them, if they pertain to the private law field.

It was also observed by the Madras High Court that there is no equality between the parties in an insurance agreement, as the insurer is a rich corporation and the insured is usually an ordinary individual. In most of the cases, the individual has no legal knowledge about the ambiguous language used in the insurer’s policy. The need to have more transparent, accurate and unambiguous facts and provisions in an insurance policy was noted. With reference to the merits of the case, the Madras High Court observed that from the reports of the expert cardiologist, it was further observed that as per Section 3 of the Policy, the medical event of “Myocardial Infarction” was covered under the Policy, which was denied by the Respondents. It was established that the cause of death of the insured was well within the defined medical events prescribed in the Policy.

DECISION OF THE MADRAS HIGH COURT
The Madras High Court held that the petition is maintainable against the Insurance Company, and the Insurance Company was directed to honor the claim made by the Petitioner, without seeking any further documents or particulars, within a period of 8 weeks from the receipt of the order.

Vaish Associates Advocates View
The evolving jurisprudence of a company, corporation, trust or society being amenable to the writ jurisdiction comes from a catena of judgments over the years. The Supreme Court and various High Courts normally evaluate the extent of the public function being performed by the company, and balance it against the possible harm that can be caused if the writ jurisdiction is not exercised. Initially, the factors for testing the applicability of the writ jurisdiction rested on a few key factors such as incorporation via a statute, financial assistance, controlling authorities, composition of the board and shareholding, deep and pervasive control of the State, and functions holding importance for the public. Essentially, the test involved financial, administrative and functional control over the company.

Over a period of time, the courts have increased the ambit of applicability of writ jurisdictions from educational institutions, government corporations, airport authorities, to private entities like the Board of Control for Cricket in India. The fulcrum of the court’s rationale for extending this jurisdiction hinges mostly upon the nature of the function performed by the entity, and whether the function spills into the public function sphere, affecting masses at large, in a domain where arbitrariness would create an absolutely unfair result. Courts have often curbed misuse of power by intelligent interpretation, of not including the entity under “State” under Article 12 of the Constitution, but nonetheless holding them amenable to the writ jurisdiction only by virtue of the nature of powers it exercises. This liberal approach in extending the writ jurisdiction and binding private entities to constitutional standards has mostly had a positive impact, until the judgment in question.

In the present judgment, the Madras High Court has tried to do the morally correct thing, but has overstepped in its interpretation of public functions/duties, which may lead to the opening of floodgates, and burdening the court with vexatious writ petitions. The Madras High Court’s justification for extending the writ jurisdiction to private companies is threefold: first, writ jurisdiction can be extended to persons for “any other purpose”; second, insurance companies have a public duty imposed on it; and third, it is a rampant practice nowadays that insurance companies enter into agreements with laymen who are incapable of understanding the nitty-gritties of the agreement, and often end up being cheated.

In response to the first justification, the Madras High Court has erred in considering the Hon’ble Supreme Court’s judgment in G. Bassi Reddy v. International Crops Research Institute and Another [(2003) 4 SCC 225], wherein the Supreme Court while considering the ambit of the writ jurisdiction and its extension to “a person” and for “any other purpose” has circumscribed the powers and held that “It is true that a writ under Article 226 also lies against a “person” for “any other purpose”. The power of the High Court to issue such a writ to “any person” can only mean the power to issue such a writ to any person to whom, according to the well-established principles, a writ lay. That a writ may issue to an appropriate person for the enforcement of any of the rights conferred by Part III is clear enough from the language used. But the words “and for any other purpose” must mean “for any other purpose for which any of the writs mentioned would, according to well-established principles issue”.

Therefore, the Madras High Court failed to consider the well settled principles of functional, administrative and financial control enunciated in a number of landmark judgments, and has relied solely on the letter of the law to extend its writ jurisdiction.

With respect to the second justification, the background and history of insurance as a concept and its advent in India makes it abundantly clear that it is a purely commercial transaction, with no public duty imposed on the same, and the only form of regulation that can be put in place is legislative in nature. This legislative control is already in place by virtue of the Insurance Act, 1938 and Insurance Regulatory and Development Authority, with the Insurance Ombudsman available as a forum for resolving disputes. It is true that over a period of time insurance has become an essential part of a person’s life, and a majority of citizens purchase insurance in some form or the other, but this is only a commercial product gaining significant momentum and market cap, and does not tantamount to any form of public duty being imposed on the insurance companies.

With respect to the third justification, the incapacity of the Insurance Ombudsman, along with the fact that insurance contracts are worded in such a manner as to confuse the layman, are policy and enforcement issues which cannot be overcome by extending jurisdictions way beyond the prescribed domain.

In conclusion, although the Madras High Court had a bonafide intention of helping a litigant who was facing immense trouble due to the arbitrariness of the insurance company, the means of achieving the remedy comes at a much higher cost of altering well settled principles of law, and tweaking the jurisprudence of writs and State under the Constitution.

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