Mohit RohatgiPartner
Ashwini TakAssociate
Karan TrehanAssociate
Key Developments
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Supreme Court affirms the applicability of the ‘group of companies’ doctrine under Indian arbitration law
Settling the dust on a long-contended issue, the Supreme Court, in Cox and Kings Ltd. v SAP India Private Ltd., has held that non-signatories can be bound by arbitration agreements entered into by their affiliates, sister and/or parent companies. The Court thereby upheld the applicability of the ‘group of companies’ doctrine under Indian arbitration law.
While harmoniously construing Section 2(1)(h) and Section 7 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), the Supreme Court held that though the Arbitration Act requires an arbitration agreement to be in writing, it does not exclude the possibility of binding non-signatory parties to such agreement. In doing so, the Supreme Court interpreted the definition of ‘party’ under Section 2(1)(h) to include both the signatory as well as non-signatory parties to an arbitration agreement, thereby holding that even parties who have not signed the arbitration agreement could be bound by it.
As regards the tests for the applicability of the ‘group of companies’ doctrine, the Court laid down the following factors to be considered:
- mutual intent of the parties;
- relationship of a non-signatory to a party which is a signatory to the agreement;
- commonality of the subject-matter;
- composite nature of the transactions; and
- performance of the contract.
Having held so, the Supreme Court partially overruled its earlier decision in Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc., in which the term ‘persons claiming through or under’ occurring under Section 45 of the Arbitration Act was relied on to refer to non-signatories to the arbitration. The Supreme Court also held that the principle of ‘alter ego’ or ‘piercing the corporate veil’ cannot be the basis for the application of the group of companies doctrine.
While emphasising the importance of ‘party consent’ in the context of arbitration, this decision also attempts to adopt a balanced approach by taking into consideration today’s commercial realities in which a non-signatory entity becomes implicated in a commercial transaction by way of its involvement in the execution of such a transaction. Parties are advised to be mindful of the involvement of other companies within a group and consider inserting clear language in cases where it is intended that only the signatory company be bound by the arbitration agreement.
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Supreme Court overrules its earlier decisions to hold that unstamped arbitration agreements are not void ab initio
In a recent decision1, a seven-judge bench of the Supreme Court overruled its earlier five-judge bench decision2, and held that arbitration agreements that are unstamped or insufficiently stamped are not rendered void or void ab initio or unenforceable. It further settled the law by holding that objections relating to stamping do not fall for the determination of courts at the stage of reference under Sections 8 and 11 of the Arbitration Act and must be left to the determination of the arbitral tribunal. The Supreme Court also clarified that the courts are not required to deal with the issue of stamping while deciding an application for interim reliefs under Section 9 of the Arbitration Act.
(To read our detailed update on the seven-judge bench’s ruling, click here.)
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Supreme Court dismisses review petitions against its ruling in Rainbow Papers which treated statutory dues at par with dues of secured creditors
In a decision which had disturbed the settled position, the Supreme Court, in State Tax Office v Rainbow Papers Ltd. (Rainbow Papers), had held that the dues pending to the government (state tax department, in this case) are to be considered at par with dues of secured creditors under Section 53(1)(b) of the Insolvency and Bankruptcy Code, 2016 (IBC). Recently, the Supreme Court dismissed a batch of five petitions seeking a review of the Rainbow Papers decision.
Before the decision on the review petitions in Rainbow Papers was rendered, the Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. v Raman Ispat Private Ltd. & Ors. (Paschimanchal Vidyut) had observed that the Rainbow Papers ruling did not take note of the waterfall mechanism under Section 53. The Court thus limited the findings under the Rainbow Papers ruling to its specific facts, thereby restoring the position of law that government dues have been specifically ranked below the dues of a ‘secured creditor’ under Section 53(1)(e) of IBC.
The dismissal of the review petitions against the Rainbow Papers ruling is likely to re-create the confusion on the classification of government dues as ‘secured’ dues, providing them a higher status under the waterfall mechanism under Section 53 of the IBC.
(To read our detailed analysis of the judgment dismissing these review petitions, click here.)
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Supreme Court upholds the constitutional validity of Sections 95-100 of the Insolvency and Bankruptcy Code, 2016, pertaining to insolvency resolution and bankruptcy of individuals and partnership firms
A three-judge bench of the Supreme Court has upheld the constitutional validity of Sections 95-100 of the IBC while disposing of more than 350 writ petitions in Dilip B Jiwarjka v Union of India.
Sections 95-100, contained in Part III of the IBC, deal with insolvency resolution and bankruptcy for individuals and partnership firms. These provisions were challenged before the Supreme Court primarily on the grounds that:
- pursuant to a creditor filing an application under Section 95 of the IBC to initiate an insolvency resolution process: (a) an interim moratorium automatically comes into force; and (b) a resolution professional is appointed, having the power to seek information; and
- Part III does not provide the debtor with the opportunity of being heard before the adjudicating authority prior to a resolution professional being appointed.
The Supreme Court dismissed the contentions of the petitioners and upheld the validity of Sections 95-100. It observed that:
- The interim moratorium for the purpose of Part III operates only against the debt and not the debtor, with the protective purpose of restraining the initiation or continuation of legal action or proceedings against the debt;
- a resolution professional is appointed with the purpose of reviewing the relevant facts and information and submitting a recommendation on the acceptance or rejection of the insolvency application, supported by cogent reasons;
- the statutory framework under Part III of the IBC does not violate the principles of natural justice. Here, it was observed that a recommendation made by a resolution professional was not binding on the adjudicating authority, which would decide on approving or rejecting the application filed by the creditor only after considering the recommendation of the resolution professional and affording a hearing to the debtor or the personal guarantor. The power of the resolution professional to collect information was only limited to those aspects necessary for examining the insolvency petition and preparing a report. Further, while seeking information under Section 99(4) of the IBC, fair opportunity would also be given by the resolution professional to the debtor to make its representation, which is “sufficient compliance of audi alterum partem requirements”.
The Supreme Court’s affirmation of the framework prescribed under Part III of the IBC should encourage lenders to file insolvency proceedings against personal guarantors. Though the Court has attempted to limit the scope of information that can be sought by the resolution professional under Section 99 to examination of the application, its ruling may be open to interpretation and result in future litigation.
[1] In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899
[2] M/s N.N. Global Mercantile Private Limited v M/s Indo Unique Flame Ltd. & Ors., and also SMS Tea Estate v Chandmari Tea Company and Garware Wall Ropes v Coastal Marine Constructions & Engineering Ltd.
