Dispute Resolution

In the previous quarter, the Supreme Court decided on the constitutional validity of the amendment to the Foreign Contribution (Regulation) Act, 2010. It pronounced important judgements clarifying crucial aspects of arbitration and insolvency laws such as the arbitral tribunal’s discretion to award interest and the treatment of dues of workers of a corporate debtor undergoing insolvency resolution process. It referred the question of applicability of the ‘group of companies’ doctrine in arbitrations to a larger bench for finality. The Supreme Court also ordered the setting up of special courts to hear cheque dishonour cases.

Tine AbrahamPartner

Akshay PuriSenior Associate

Aayush MarwahAssociate

The second quarter of 2022 began with the Supreme Court upholding the constitutional validity of the Foreign Contribution (Regulation) Amendment Act, 2020 (Amendment Act), which imposed strict restrictions on foreign contributions/donations to persons in India. In arbitration law, the Court clarified that the arbitral tribunal's discretion to grant interest is subject to the agreement between the parties. In another case, it referred the issue of applicability of the ‘group of companies’ doctrine in arbitrations to a larger bench for clarity of law.

Given the rising pendency of cheque bouncing cases, the Court directed that a pilot study be conducted by setting up special courts to hear such cases. In the sphere of insolvency law, the Court held that wages or salaries of employees who actually worked when the corporate debtor was a going concern during the corporate insolvency resolution process (CIRP) should form part of the costs for running the CIRP, and thus, paid out before other stakeholders.

Key Developments

  • Supreme Court upholds the validity of the Foreign Contribution (Regulation) Amendment Act, 2020

    In the landmark judgement of Noel Harper v Union of India, the Supreme Court upheld the constitutional validity of the Amendment Act. The Foreign Contribution (Regulation) Act, 2010 was enacted to regulate the acceptance and utilisation of foreign contributions to prevent the contributions from being used for any activity detrimental to the national interest.The Amendment Act places strict limitations and restrictions on the (a) transfer and use of foreign contributions or donations to persons/organisations based in India; and (b) the manner in which the foreign contributions will be received and deposited. This amendment to the Foreign Contribution (Regulation) Act, 2010 has imposed various restrictions and conditions on trusts and non-government organisations in India to receive foreign donations/contributions, thus impacting their operations and, in some cases, their very survival.

    The constitutional validity of the Amendment Act was challenged before the Supreme Court on the grounds of being arbitrary and contrary to the fundamental rights guaranteed under the Constitution of India. The Court upheld the constitutional validity of the Amendment Act and held that receiving foreign donations/contributions is not a right available with any person since the national polity and socio-economic structure could be influenced by foreign contributions. Further, the Supreme Court observed that foreign contributions may tend to influence or impose political ideology of the nation. Therefore, in view of the cumulative effect of foreign contributions, the presence/inflow of foreign contributions in the country is to be restricted at a minimum level.

  • Supreme Court’s reference to a larger bench regarding applicability of the ‘group of companies’ doctrine in arbitrations

    The Supreme Court, in Chloro Controls India Private Limited v Severn Trent Water Purification Inc. (Chloro Controls) (pronounced by a three-judge bench), held that non-signatories to an arbitration agreement can be made parties to the arbitration based on the ‘group of companies’ doctrine. Briefly, the ‘group of companies’ doctrine provides that an arbitration agreement entered into by a company within a group of companies can bind its non-signatory affiliates, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties.

    However, a three-judge bench of the Supreme Court, in Cox and Kings Limited v SAP India Private Limited (Cox and Kings Judgement), also examined the application of the ‘group of companies’ doctrine and inquired whether the principles of party autonomy and corporate personality have been adequately safeguarded under the doctrine. The Court observed that the doctrine is based more on economics and convenience rather than law. Further, the Court doubted the correctness of the law laid down in Chloro Controls. Accordingly, the Supreme Court referred the question of the applicability of the doctrine in Indian law to a larger bench.

    Interestingly, only a week before the pronouncement of the Cox and Kings Judgement, the Supreme Court, in another decision by a three-judge bench in Oil and Natural Gas Corporation Ltd. v Discovery Enterprises Pvt. Ltd., set aside an award on the ground that the tribunal had failed to exercise its jurisdiction by not adjudicating claims against group companies which were alter egos of the signatories to the arbitration agreement.

  • Supreme Court directs setting up of special courts to hear cases under section 138 of the Negotiable Instruments Act, 1881

    Section 138 of the Negotiable Instruments Act, 1881 (NI Act) provides for adjudication of cheque bouncing cases and imposes criminal liability on the drawer of the cheque in the event the cheque is dishonoured upon presentation to the bank. However, due to delays in the adjudication of cheque bouncing cases, the Supreme Court has directed that a pilot study be conducted by setting up special courts to hear complaints under section 138 of the NI Act, to ascertain their efficacy. The duration of the study is one year, i.e., from 1 September 2022 to 31 August 2023. The pilot study will be conducted in the five states of Delhi, Maharashtra, Rajasthan, Uttar Pradesh and Gujarat that have the highest pendency of cheque bouncing cases. Under the pilot study, cases will be heard by retired judicial officers who would be assisted by retired court staff.

    The direction of the Supreme Court to create special courts is a welcome step for the speedy adjudication and disposal of cheque bouncing cases.

  • Supreme Court clarifies the legislative intent of section 31(7)(a) of the Arbitration Act with respect to awarding interest

    Under section 31(7)(a) of the Arbitration and Conciliation Act, 1996 (Arbitration Act), the arbitral tribunal has the discretion to (a) grant or not grant interest; (b) grant interest for the entire period or any part thereof; and/or (c) grant interest on the whole or any part of the awarded sum.

    In Delhi Airport Metro Express Private Limited v Delhi Metro Rail Corporation, the Supreme Court clarified the legislative intent of section 31(7)(a) of the Arbitration Act. The Court held that the arbitral tribunal has the discretion to grant interest only when there is no agreement to the contrary between the parties. In cases where the parties have agreed to any aspect of awarding interest, the arbitral tribunal would cease to have discretion to such extent.

    The findings of the Supreme Court are in furtherance of India’s policy of respecting the autonomy of parties in arbitrations. This judgement is important in the context of commercial transactions since it removes the ambiguity around the jurisdiction of an arbitral tribunal if the parties have agreed on the grant and manner of computation of interest.

  • Supreme Court clarifies that wages/salaries of those workers who actually worked when the corporate debtor was a going concern during the CIRP will be included in CIRP costs

    In Sunil Kumar Jain v Sundaresh Bhatt, the Supreme Court held that the wages/salaries of those workers who actually worked when the corporate debtor was a going concern during the corporate insolvency resolution process (CIRP) shall be included in the CIRP costs. Further, such workers would have priority and will have to be paid in full first, in case the corporate debtor is referred to liquidation. While considering the claims of workers towards the wages/salaries payable during CIRP, it must be proved that (a) the corporate debtor was a going concern during the CIRP; and (b) the concerned worker actually worked while the corporate debtor was a going concern during the CIRP. The wages and salaries of all other workers of the corporate debtor during the CIRP who did not work and/or perform their duties during the period the corporate debtor was a going concern, will not be included in the CIRP costs. Through this judgement, the Supreme Court has resolved the issues pertaining to the treatment of dues of workers/employees of corporate debtor during liquidation.

On 27 July 2022, the Supreme Court passed a judgement upholding the constitutional validity of the provisions of the Prevention of Money Laundering Act, 2002 (PMLA). The judgement addresses important aspects such as the powers of the Enforcement Directorate to investigate, arrest and seize, and the process of granting bail under the PMLA.

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