Mohit RohatgiPartner
Lisa MishraAssociate
Key Developments
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Developments in Arbitration
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Award holders not entitled to interest if execution of award delayed due to own conduct
In Engineer (R & B) & Ors. v Gokul Chandra Kanungo (Dead) Thr. His Lrs., the Supreme Court held that an award holder was not entitled to interest for periods during which the proceedings were delayed by him.
In this case, the award debtor had invoked the jurisdiction of the Supreme Court under Article 142 of the Constitution of India, 1950 to challenge an order of the Odisha High Court which upheld an arbitral award. Among other things, the arbitral tribunal had awarded interest at the rate of 18% per annum. On an analysis of the facts, the Supreme Court found that the award holder had unreasonably delayed execution of the award. In view of this, it held that it would be unjust for the award debtor to pay an exorbitant sum of interest. Finding this to be a fit case for exercise of jurisdiction under Article 142, the Supreme Court reduced the rate of interest from 18% per annum to 9% per annum. Importantly, the Supreme Court also directed that no interest would be payable for those periods of time where the award holder had delayed the execution.
The interest component of an arbitral award can make a significant difference, by dis-incentivisng the award debtor from pursuing a challenge, given the risk of dues increasing. This decision reinforces the view that litigants should act equitably, without abusing the process.
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Lack of clarity over appointment of arbitrators continues
In two recent decisions issued under Section 11 of the Arbitration and Conciliation Act, 1996, the Supreme Court adopted a hands-off approach by relegating the dispute to the arbitrator despite vigorous objections on arbitrability. In Meenakshi Solar Power Pvt. Ltd. v M/s. Abhyudaya Green Economic Zones Pvt. Ltd. & Ors., the party resisting arbitration argued that a novation of contract had nullified the arbitration clause. The Supreme Court held that such an issue must be left to the wisdom of the arbitral tribunal. It was not in the Court’s jurisdiction under Section 11 to decide an issue which might have a bearing on the merits of the case.
A similar decision was rendered in VGP Marine Kingdom Pvt Ltd & Anr. v Kay Ellen Arnold. The Supreme Court held that if the objection against appointment of the arbitrator required deeper consideration than a prima facie look at the arbitration clause, it should be left to the arbitral tribunal.
These decisions come on the heels of Emaar India Ltd v Tarun Aggarwal Projects LLP, in which it was held that even under Section 11, the Court should undertake a preliminary inquiry to ascertain if a dispute is arbitrable. The reasoning provided was that parties should not be compelled to arbitrate where the dispute appears to be non-arbitrable.
Recent Section 11 jurisprudence has been unpredictable. What was thought to be a simple procedure has proven to be one of the most contentious stages of the arbitral process. More clarity is expected to emerge from the Supreme Court as the constitutional bench is looking into some important questions of law that are likely to affect the process of appointing arbitrators.
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Delhi High Court holds an arbitration clause in a non-binding term sheet to be enforceable
In Welspun One Logistics Parks Fund I v Mr. Mohit Verma & Ors., the Delhi High Court held that an arbitration clause contained in a non-binding term sheet is enforceable and binding upon the parties. The parties had entered into a ‘Non-Binding Term Sheet’ containing an arbitration clause. The language in the term sheet specified that the arbitration clause was binding upon the parties, notwithstanding usage of the term ‘Non-Binding’. When disputes arose, the petitioner before the Court invoked the arbitration clause and appointed an arbitrator. Since the respondent refused the appointment on the ground that the arbitration clause was not binding, the petitioner was constrained to approach the Delhi High Court.
The Court examined several landmark judgements on the issue, such as Vidya Drolia v Durga Trading Corporation and N.N. Global Mercantile (P) Ltd. v Indo Unique Flame Ltd. and held that while deciding whether parties can be referred to arbitration, there should be a prima facie study of the arbitration agreement alone. It was held that reference to arbitration may be refused only where the arbitration agreement, as distinct from the main agreement, is void in law.
The arbitration clause that was before the Court commonly appears in non-binding term sheets. Given the approach taken by the Court, clauses in such term sheets which explicitly bind the parties may require reconsideration.
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Developments in Insolvency
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Amendments to the insolvency regime
Regulations issued by the Insolvency and Bankruptcy Board of India (IBBI) under the Insolvency and Bankruptcy Code, 2016 (IBC) have seen several amendments in the last two quarters. These amendments were made with the intent to strengthen the IBC regime and address practical concerns raised by stakeholders.
The Model Bye-Laws and Governing Board of Insolvency Professional Agencies (Second Amendment) Regulations, 2022 were issued on 31 October 2022 to improve IBBI’s ability to oversee and regulate the activities of insolvency professionals. In parallel, several other amendments were rescinded by a circular dated 9 November 2022, to facilitate greater efficiency in the corporate insolvency resolution process (CIRP). IBBI found that the revoked amendments were already understood in the existing regulations and did not add value to the statutory framework. The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 were also amended from 1 October 2022 to provide for the payment of a regulatory fee to the IBBI at the rate of 0.25% of the realisable value under an approved resolution plan.
These amendments lend greater transparency and credence to the institution of insolvency professionals, while simultaneously strengthening IBBI’s regulatory role.
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Proposal published by SEBI to protect public shareholders of companies undergoing corporate insolvency resolution process
Currently, once a listed company is undergoing CIRP, it is open to the incoming resolution applicant to delist the company’s shares without the consent of its shareholders. Public shareholders often get the raw end of this deal as their only entitlement is the ‘liquidation value’ of their shares, which is usually zero. India’s securities watchdog, the Securities and Exchange Board of India (SEBI), has published an interesting consultation paper on 10 November 2022 that may change the current state of affairs.
SEBI has proposed that an existing public equity shareholder should have the opportunity to acquire equity (up to an extent) in the new entity that will emerge pursuant to completion of the CIRP. The offer would be on the same pricing terms as agreed upon by the resolution applicant. This would serve twin objectives as it would: (i) enable public shareholders to participate in the process to a limited extent while preserving their interest, and (ii) serve as a means to raise funds for the new entity.
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Supreme Court clarifies standard for determining pre-existing dispute under the IBC
When an operational creditor petitions the National Company Law Tribunal (NCLT) under Section 9 of the IBC to admit a company into CIRP, the company can resist the admission by demonstrating the existence of a prior dispute in respect of the debt. In several landmark judgements, the Supreme Court has held that the pre-existing dispute cited by the company must be bona fide and not illusory.
Taking this line of thinking forward, the Supreme Court has explained the standard of inquiry to be conducted while ascertaining the presence of a pre-existing dispute in Rajratan Babulal Agarwal v Solartex India Pvt. Ltd. & Ors. In this case, the appellant’s debt was in relation to coal supplied by the respondent. Although the appellant had notified the respondent about the poor quality of the coal supplied, it had also subsequently utilised the coal. In this context, the National Company Law Appellate Tribunal (NCLAT) held that there was no real pre-existing dispute between the parties.
Overturning the NCLAT’s decision, the Supreme Court held that the standard for ascertaining presence of a pre-existing dispute under IBC is even lower than the standard employed in ordinary civil disputes. In civil disputes, courts adjudicate based on the principle of ‘preponderance of probabilities’, i.e., whether one finding is more probable than the other. With this judgement, the Supreme Court has found that jurisdiction of the NCLT under Section 9 is even more limited, and the presence of a pre-existing dispute must be determined by applying an even lower standard than in ordinary civil disputes.
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In the coming months, we expect interesting and contentious issues in the realm of commercial law to come up before the Supreme Court. In N.N. Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd., the constitutional bench is looking into the legal validity of an unstamped arbitration agreement, an issue which has been litigated for decades. Another question that has been referred by the Supreme Court to a constitutional bench in Cox and Kings v SAP India (P) Ltd. is whether non-parties to an arbitration agreement can be compelled to arbitrate based on the ‘group of companies’ doctrine.
