New Filters: Dispute Resolution and Arbitration

If you are not happy with the results, please do another search

Developments in Competition Law during October 2023

Please click here to download the Prism as PDF.

High Court

Madras High Court dismisses writ petition filed by Agni Steels challenging the CCI’s investigation

The Madras High Court (“MHC”) dismissed a writ petition filed by Agni Steels Private Limited (“Agni Steels”), challenging the investigation initiated by the Competition Commission of India (“CCI”) for alleged cartelisation.

Brief Background

In March 2021, Coimbatore Corporation Contractors Welfare Association (“Complainant”) filed a complaint before the Central Bureau of Investigation (“CBI”) alleging that 9 (nine) steel companies have formed a cartel through which they significantly increased the price of several steel products for illegal and wrongful gain.

Having received no response from the CBI, the Complainant approached the MHC seeking directions against the CBI to initiate the investigation. The CBI informed the MHC that it has already shared a copy of the complaint with the Director General (“DG”). Accordingly, the MHC disposed of the matter (“MHC Order”).

On August 17, 2021, in compliance with the MHC Order, the CCI convened a special meeting wherein it directed the DG to investigate the matter basis the MHC Order (“Meeting”). Subsequently, on March 14, 2023, the DG commenced investigation and issued the summons to the officers of Agni Steels to record their statement on oath.

On March 23, 2023, Agni Steels conducted inspection of case record available with the CCI and discovered that the CCI has not passed an investigation order under Section 26(1) of the Competition Act, 2002 (“Competition Act”) (referred to as the “Prima-Facie Order”). Thereafter, Agni Steels requested the CCI to provide a certified copy of the Prima-Facie Order and also sought exemption from appearing before the DG for recording the statement. However, on April 6, 2023, the CCI rejected Agni Steels’ request in relation to seeking exemption from appearing before the DG for recording their statement.

Proceedings before the MHC

Aggrieved, Agni Steels filed a writ petition before the MHC wherein it inter alia contended that: (a) the CCI is obligated to pass the prima-facie order before initiating an investigation, which is missing in this case; and (b) the DG cherry-picked the companies for investigation, even though their names were not there in the original complaint. Accordingly, it requested the MHC to quash the investigation.

MHC Judgment

The MHC dismissed the writ petition and inter alia held that:

the CCI vide the Meeting had deliberated upon the issues and concluded that a prima-facie case exists for the DG to investigate. Accordingly, the initiation of investigation is not in contravention of Section 26(1) of the Competition Act.
merely because the DG is investigating companies who are not part of the original complaint, cannot lead to a conclusion that the investigation is being conducted in an arbitrary manner. The investigation is ongoing and therefore, it would be premature to interfere with the ongoing investigation.

(Source: MHC judgment dated October 19, 2023)

Madras High Court dismisses appeals filed by cement companies against the CCI order

The Division Bench (2 (two) judge bench) of the MHC dismissed appeals filed by Dalmia Cement (Bharat) Limited (“Dalmia Cement”), and India Cements Limited (“India Cements”) (together as “Appellants”), challenging the order of the Single Judge of the MHC. The Single Judge, vide the said order dismissed the writ petitions filed by the Appellants challenging the order of the CCI, through which it impleaded Builders’ Association of India (“BAI”) as an interested party in the ongoing cartel proceedings before the CCI against cement companies.

Brief Background

On July 1, 2019, the CCI initiated suo motu investigation against several cement companies for alleged cartelisation. On December 7, 2021, BAI filed an application before the CCI seeking to be impleaded as a complainant in the investigation, which was rejected by the CCI (“Rejection Order”). Aggrieved, BAI filed a writ petition challenging the Rejection Order before the Delhi High Court (“DHC”). The DHC passed an order, whereby it granted liberty to BAI to submit an application to the CCI to seek a copy of the investigation report and provide its views/inputs, if desired (“DHC Order”).

Subsequently, the CCI vide order dated July 5, 2023 impleaded BAI as an interested party in the ongoing proceedings and accepted BAI’s request to conduct the inspection of the non-confidential version of the case records and also to file its response to the investigation report, if desired (“Impleadment Order”).

Aggrieved, the Appellants filed writ petitions challenging the Impleadment Order before the Single Judge of the MHC. In parallel, UltraTech Cement Limited (“Ultratech”) filed a writ petition before the DHC challenging the Impleadment Order.

The Single Judge of the MHC held that: (a) the cause of action arose from the Impleadment Order, which was passed on the basis of the DHC Order; and therefore, MHC has no territorial jurisdiction; and (b) UltraTech Cement Limited has also filed the writ petition before the DHC, challenging the Impleadment Order. The DHC heard the matter at length and reserved its judgment. Therefore, applying the principle of ‘comity of courts’, the Single Judge dismissed the writ petitions (referred to as the “Single Judge Order”).

Proceedings before the Division Bench of the MHC

Aggrieved, the Appellants filed an appeal before the Division Bench of the MHC challenging the Single Judge Order. The Appellants primarily contended that: (a) the CCI has contravened the principles of natural justice by failing to provide an opportunity of hearing to the Appellants before passing the Impleadment Order; and (b) if BAI is impleaded as a party, it would have access to commercially sensitive information of the Appellants and that would be detrimental to their commercial interest.

Division Bench Judgment

The Division Bench of the MHC dismissed the appeals and inter alia held that the CCI ought to have provided an opportunity of hearing to the Appellants before passing the Impleadment Order. However, by the time the appeals were filed, BAI had already conducted the inspection and received the non-confidential version of the investigation report. Therefore, the contention of the Appellants that BAI would have access to the certain information of the Appellants has become otiose.

(Source: MHC Judgment dated September 11, 2023)

National Company Law Appellate Tribunal

NCLAT sets aside the CCI order against sugar mills for alleged bid rigging cartel

The National Company Law Appellate Tribunal (“NCLAT”) disposed of the appeal filed by several sugar mills and their trade association (“Appellants”) by setting aside the order passed by the CCI against them for indulging in alleged bid rigging, in contravention of Section 3(3) of the Competition Act.

Brief Background

On September 18, 2018, the CCI passed a final order (“CCI Order”) against the Appellants for indulging in bid rigging in relation to the supply of ethanol, in contravention of Section 3(3) of the Competition Act. Accordingly, the CCI imposed a monetary penalty of INR 38.05 crore on the Appellants. For a detailed summary of the CCI Order, refer to JSA Newsletter of September 2018.

NCLAT Observations

Aggrieved, the Appellants challenged the CCI Order and inter alia contended that: (a) the CCI Order is in violation of principles of natural justice as 6 members heard the matter, and 3 (three) members passed the CCI Order. This is against the principle that ‘one who hears must decide’; and (b) the CCI ordered the DG to conduct a supplementary investigation, however, the CCI failed to provide an opportunity of hearing to the Appellants after the DG submitted its supplementary report to the CCI.

The NCLAT inter alia held that: (a) there was non-compliance of natural justice by the CCI as the same quorum who heard the matter did not pass the CCI Order. This is in violation of the principle of ‘one who hears must decide’. The CCI Order was passed 13 (thirteen) months after the hearing was concluded during which time, 3 (three) out of the 6 (six) CCI members who started hearing the matter retired from the CCI. It may be entirely possible that the members, who did not sign the CCI Order may have held a different point of view; and (b) the CCI should have provided an opportunity of oral hearing to the Appellants after the DG submitted its supplementary report and before passing the CCI Order especially when further investigation was initiated pursuant to request of the Appellants.

Given that the CCI Order was not in compliance with the principles of natural justice, the NCLAT did not deem it necessary to hear the appeals on merit. Accordingly, the NCLAT dismissed the appeals, thereby setting aside the CCI Order and remanded the matter back to the CCI for a fresh hearing.

(Source: NCLAT Judgment dated October 10, 2023)

Competition Commission of India

Merger Control

CCI approves acquisition of minority shareholding of BusyBees Logistics by Ontario Limited under Green Channel

The CCI approved the acquisition of minority shareholding of BusyBees Logistics Solutions Private Limited[1] by 1000632564 Ontario Limited[2] (“Proposed Transaction”). The parties notified the Proposed Transaction under green channel as there were no horizontal, vertical, or complementary overlaps between the activities of the parties in India.

(Source: Summary)

CCI approves internal restructuring of IDFC group under Green Channel

The CCI approved the internal restructuring of IDFC group (“Proposed Transaction”). The Proposed Transaction entailed the following steps:

merger of IDFC Financial Holding Company Limited (“IDFC Holding”)[3] with and into IDFC Limited (“IDFC”)[4], with IDFC being the surviving entity.
merger of IDFC with IDFC First Bank Limited (“IDFC Bank”)[5], with IDFC Bank being the surviving entity (“Step 2”).
cancellation of the existing shareholding of IDFC Holding in IDFC Bank and issuance of new shares of IDFC Bank to the shareholders of IDFC, as a consideration for step 2.
reduction of the securities premium account of IDFC Bank.

The parties notified the Proposed Transaction under green channel as there were no horizontal, vertical, or complementary overlaps between the activities of the parties in India.

(Source: Summary)

CCI approves acquisition of shareholding of Quest Global Services by Carlyle group and Bequest under Green Channel

The CCI approved the: (a) acquisition of shareholding of Quest Global Services Pte. Limited (“Target”)[6] by CA Plume Investments[7] belonging to the Carlyle group; (b) acquisition of additional shareholding of the Target by Bequest Inc.[8]; and (c) buyback of shareholding by the Target (referred to as the “Proposed Transaction”). The parties notified the Proposed Transaction under green channel as there were no horizontal, vertical, or complementary overlaps between the activities of the parties in India.

(Source: Summary)

CCI approves acquisition of shareholding of TBO Tek by General Atlantic under Green Channel

The CCI approved the acquisition of upto 27.5% shareholding of TBO Tek Ltd.^[9] by General Atlantic Singapore TBO Pte. Ltd.^[10], belonging to the General Atlantic group (referred to as the “Proposed Transaction”). The parties notified the Proposed Transaction under green channel as there were no horizontal, vertical, or complementary overlaps between the activities of the parties in India.

(Source: Summary)

Miscellaneous

CCI publishes draft lesser penalty (Leniency) regulations for public consultation

On October 16, 2023, the CCI released the draft CCI (Lesser Penalty) Regulations, 2023 (“Draft Lesser Penalty Regulations”) for public comments. The Draft Lesser Penalty Regulations will replace the existing CCI (Lesser Penalty) Regulations, 2009 (as amended) and incorporate the changes brought by the Competition (Amendment) Act, 2023 (“Amendment Act”).

The key changes introduced in the Draft Lesser Penalty Regulations are as follows:

Leniency Plus: The Amendment Act includes the mechanism for leniency plus where an enterprise who is a leniency applicant in 1 (one) cartel and helps in discovering a new/separate cartel, will be eligible to receive reduction in penalty for both the existing and the new cartel.
- Reduction in Penalty: If the leniency plus applicant makes full, true and vital disclosures about the new cartel which the CCI is unaware of, enabling the CCI to form its prima facie opinion, the applicant will be eligible for an additional reduction in monetary penalty of up to or equal to 30% in the first cartel in addition to the existing reduction in penalty as per it’s priority status; and up to 100% reduction in penalty in the new cartel.
- Information to be Provided: The leniency plus applicant must provide: (i) full, true and vital disclosures sufficient for the CCI to form a prima facie view about the new cartel; (ii) details of the first cartel where the leniency plus applicant has obtained a priority status; ; (iii) justification in relation to how the new cartel is a new / separate cartel; and (iv) any other information.
- Timeline: The applicant can make an application for leniency plus at any time prior to the DG submitting the investigation report (“DG Report”) in the first cartel to the CCI. In the case of more than 1 (one) applicant applying for leniency plus in respect of a new cartel, the CCI will not consider the application of a subsequent applicant unless the application of the first leniency plus applicant has been rejected.
- Factors that the CCI should consider: While granting reduction in penalty in leniency plus regime, the CCI must consider: (i) the likelihood of the CCI / DG detecting the new cartel in the absence of the leniency plus application; (ii) the factors differentiating the first and new cartel; and (iii) any other relevant factors.
Withdrawal: The leniency / leniency plus applicants will have an option to withdraw their applications any time prior to the CCI receiving the DG Report. However, the DG or the CCI can use the information or evidence submitted by the applicant except for the admission of guilt.
Forfeiture: The benefit of leniency / leniency plus to the applicant will stand forfeited if the applicant: (a) fails to comply with the conditions on which the CCI granted the benefit of the leniency / leniency plus to the applicant; or (b) gave false information or omitted to submit any material information knowing it to be material; or (c) makes a disclosure which is not vital.

In case of forfeiture, the applicant will be subjected to an inquiry in relation to the contravention in relation to which the leniency / leniency plus was granted and maybe liable to penalty.

Confidentiality: The CCI may disclose the evidence filed by the leniency / leniency plus applicant after the receipt of the DG Report by the CCI in accordance with Regulation 35 of the CCI general regulations which allows the disclosure of confidential information to members of a “confidentiality ring”.
Cartel Facilitators: The Amendment Act expands the scope of cartel provisions to include facilitators of cartels, even if they are not engaged in identical or similar trade, where they participate or intend to participate in furtherance of the cartel. The Draft Lesser Penalty Regulations allow cartel facilitators to apply for leniency/leniency plus.

Government issues rules for the CCI to issue guidelines

On October 26, 2023, the Government of India issued Competition (Form of Publication of Guidelines) Rules, 2023 (“Rules”) enabling the CCI to issue guidelines in relation to the provisions of the Competition Act.

Under Section 64B of the Competition Act, the CCI is empowered to issue non-binding guidelines in relation to the provisions of the Competition Act (including the rules and regulations) and computation of penalty amount. The Rules clarify that the guidelines will be published on the CCI’s website and in the official gazette. The guidelines published will be in English and inter alia specify: (a) title of the guidelines; (b) date from which such guidelines shall be effective; and (c) any other details relevant to the guidelines.

(Source: Notification dated October 26, 2023)

CCI launches market study on the cement sector

The CCI has launched a pan-India market study on the cement sector. Given that cement is a critical input to several industries and that the structural features of cement market makes it susceptible to collusion, the CCI proposes to develop a comprehensive understanding of the market and the competition therein. The main objectives of the study are to:

examine the evolving market structure in the cement sector across regions including inter aliamarket concentration, entry/exit and consolidation.
study the market trends including inter alia trends/movements in cement price, cost, production, capacity, capacity utilisation and profitability.
understand cement pricing in trade and non-trade segments including an in-depth analysis of the determinants of movements in cement price.
reach out to all relevant stakeholders for a holistic understanding of the sector and identify impediments to competition, if any.
ascertain enforcement and advocacy priorities for the CCI in the cement sector.

(Summary: Press Release dated November 3, 2023)

This Newsletter has been prepared by:

Vaibhav Choukse
Partner & Head of Practice (Competition Law)

Ela Bali
Partner

Aditi Khanna
Senior Associate

For more details, please contact [email protected]

[1] It is an express logistics service provider, catering to end-to-end supply chain solutions.

[2] It is controlled by Ontario Teachers’ Pension Plan Board (“OTPP”). OTPP administrates pension benefits and the investment of pension plan assets of active and retired teachers in the Canadian province of Ontario worldwide.

[3] It is a non-operative financial holding company and is not permitted directly to undertake any business activities in India. It is a wholly owned subsidiary of IDFC.

[4] It is a non-banking financial company and is not directly engaged in any business operations. It is the ultimate holding company of IDFC Bank.

[5] It is engaged in the business of providing banking services.

[6] It provides engineering services to for products and services across product lifecycle.

[7] It is an investment vehicle directly controlled by funds managed by affiliates of The Carlyle Group Inc.

[8] It is the holding company of the Target’s co-founder and Chief Executive Officer

[9] It is an investment holding company and is owned and controlled by the General Atlantic.

^[10] It is engaged in the business of providing services related to tours and travel to travel agents and independent travel advisors over its two-sided business-to-business technology platform namely “travelboutiqueonline.com”.

Tags CCI, Competition Law, High Court, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, Madras High Court, National Company Law Tribunal

“Seat” versus “venue” – the saga resurrects

Indian Arbitration scenario has faced the challenge of judicial intervention and conflicting judgements vis-a’-vis designation of “seat” and “venue”. While, venue is merely a geographical location where the arbitration is conducted, seat determines the legal jurisdiction governing the arbitration proceeding. Complications can arise when a contract designates a specific “seat” while at the same time, confer jurisdiction on Court located in a different place.

This aspect was settled by Supreme Court in celebrated judgement of BALCO vs. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552 and thereafter explained in judgement of BGS SGS Soma vs. NHPC (2020) 4 SCC 234. In these judgments concept of “contra indica” was developed as a test for determining “seat” of arbitration. However, recently various High Courts have given a different interpretation of contra indicia, again resurrecting confusion between seat and venue of arbitration.

Please click here to read the full article by Dheeraj Nair, Avni Sharma and Angad Baxi, published in Lexology.

Tags Arbitration, JSA, Leading Law Firm, Leading Lawyers, Supreme Court

JSA successfully represented Instakart Services Private Limited against Megastone Logiparks Private Limited in proceedings under Section 11 of Arbitration & Conciliation Act before the Gujarat High Court

JSA successfully represented Instakart Services Private Limited(“Instakart/Lessee”) against Megastone Logiparks Private Limited (“Megastone/Lessor”) in proceedings under Section 11 of Arbitration & Conciliation Act (“Act”) before the Gujarat High Court (“Court”).

The parties had initially entered into a lease deed and subsequently into a maintenance & amenities agreement (“M&A Agreement”), under which Megastone had agreed to provide various services for the leased premises. However, only the lease deed contained a dispute resolution clause through arbitration and the same was absent from the M&A Agreement.

The agreements were eventually terminated by Instakart, pursuant to which disputes had arisen between the parties. Therefore, Instakart filed a petition seeking appointment of Arbitrator for disputes arising both under the lease deed and M&A Agreement.

The Court vide its judgement allowed Instakart’s Petition and appointed an Arbitrator for disputes arising out of both the agreements.

This judgement is significant since Court decided two pertinent questions of law:

1. Territorial Jurisdiction: Whether place of arbitration is treated as the seat or exclusive jurisdiction clause acts as a contrary indicium?

According to the arbitration clause, the arbitration was to be conducted in Bengaluru, but Courts in Ahmedabad had exclusive jurisdiction. Megastone’s counsels relied on various judgments of coordinate benches and argued that parties intended that place of arbitration is to be considered the juridical seat and exclusive jurisdiction clause should be ignored as such clauses are for other proceedings and not arbitration proceedings. However, the Court accepted Instakart’s contention and held that that where a place is designated as venue and exclusive jurisdiction has been given to court of another place, the latter is a clear contra indicia that prevents venue from being the seat of arbitration.

2. Whether disputes under M&A Agreement are arbitrable under group company doctrine?

The Court held that despite M&A Agreement not having an arbitration clause, the disputes under the said agreement are arbitrable under group company doctrine. It was further held that performance of the lease deed (mother agreement) and M&A agreement (ancillary agreement) are co-terminus. Therefore, Court extended the dispute resolution clause of the lease deed to the M&A Agreement as well.

Our Disputes Team Comprised Partner – Dheeraj Nair and Manish Jha, Senior Associate – Angad Baxi, Associate – Tabish Samdani and Aishna Jain.

Tags Arbitration Act, Dispute Resolution, Gujarat High Court, JSA, Leading Law Firm, Leading Lawyers

The 2023 SIAC Draft Rules: Raising the Bar for Efficiency

On 22 August 2023, the Singapore International Arbitration Centre (“SIAC”) published the Draft 7th Edition of the SIAC Rules (the “Draft Rules”) for public consultation. The Draft Rules introduce several noteworthy changes as part of a concerted effort to “raise the bar on efficiency, expedition, and cost-effectiveness” (see SIAC Registrar’s Report). The public consultation period remains in effect until 21 November 2023 and comments can be submitted via email to [email protected] and [email protected] or via the SIAC website under “Feedback.”

A recent post in this blog covering the SIAC Symposium 2023 touched on practitioners’ views of different themes that can be found in the Draft Rules. This post places the spotlight on key provisions in the Draft Rules specifically aimed at bolstering efficiency.

Please click here to read the full article by Anjali Anchayil and Aiman Singh Kler, published in Kluwer Arbitration Blog.

Tags Arbitration, JSA, Leading Law Firm, Leading Lawyers, SIAC

Law once declared to be violative of Part-III of the Constitution to have retrospective effect

Please click here to download the Prism as PDF.

The Constitution Bench of the Supreme Court of India (“Constitution Bench”/“Supreme Court”) recently in the case of Central Bureau of Investigation vs R.R. Kishore[1] held that its decision in Subramanian Swamy vs. Central Bureau of Investigation[2] that Section 6A of Delhi Special Police Establishment Act, 1946 (“DSPE Act”) being unconstitutional, will have retrospective effect. Section 6A of the DSPE Act is held not to be in force from the date of its insertion i.e., September 11, 2003.

Brief Background

The present judgment arises out of an FIR registered by Central Bureau of Investigation (“CBI”) on December 16, 2004 for offences under the Prevention of Corruption Act, 1988 (“Corruption Act”) against the R.R. Kishore (“Respondent”) who was then a Joint Secretary level rank officer.
At such time, Section 6A of the DSPE Act was applicable which mandated prior consent of central government to conduct any investigation or inquiry under the Corruption Act against officials of the rank of Joint Secretary and above.
The Respondent challenged the entire proceedings on non-compliance of Section 6A of DSPE Act. In 2006, the High Court of Delhi (“Delhi HC”) upheld such contentions of the Respondent and set aside the proceedings against him under the Corruption Act. CBI challenged the Delhi HC’s order by way of a special leave petition which was subsequently converted into a Criminal Appeal in 2007.
During the pendency of the present matter in 2014, Section 6A of the DSPE Act was held to be unconstitutional by the Supreme Court being violative of Article 14 of Constitution of India (“Constitution”)[3].
Accordingly in the present matter, the issue arose if the Constitution Bench findings would apply retrospectively or prospectively.

Findings and Observations

The entire issue was examined by the Supreme Court on the touchstone of Article 13 and Article 20 (1) of the Constitution. The Supreme Court held that Section 6A of the DSPE Act is mere procedural in nature. It does not introduce any new offence, nor it enhances the punishment or sentence. Therefore, a challenge to Section 6A of DSPE Act being applicable ex-post facto will not lie as there is no vested right in procedure.

However, after declaration of a statute as unconstitutional by a court of law, it is non-est for all purposes. Once a law is declared to be unconstitutional, being violative of Part-III of the Constitution, then it would be held to be void ab initio, still born, unenforceable and non-est in view of Article 13(2) of the Constitution and its interpretation by authoritative pronouncements.

Conclusion

The judgment reiterates the settled position of law that there is no vested right in procedure. However, to save past transactions, the Supreme Court can give prospective overruling in exercise of power under Article 142 of the Constitution.

Accordingly, unless held otherwise in situations like the present one, if prosecution is vitiated for want of sanction under Section 6A of DSPE Act, it would be liable to be set aside being premised on unconstitutional law.

This Prism has been prepared by:

Dheeraj Nair
Partner

Kumar Kislay
Partner

Ankit Tripathi
Associate

For more details, please contact [email protected]

[1] 2023 SCC OnLine SC 1146, Pronounced on 11-09-2023.

[2] (2014) 8 SCC 682.

[3] Id

Tags Disputes, JSA, Leading Law Firm, Leading Lawyers, Legal Updates

Sidharth Sethi | Speaker – NextGen Legal Rumination Summit | Corporate Counsel Association of India

Our Partner, Sidharth Sethi was a speaker on the session titled ‘Recent Trends in Dispute Resolution, Institutional Arbitration and Third-Party Funding’ at the recently concluded ‘NextGen Legal Rumination Summit’, organised by the Corporate Counsel Association of India (“CCAI”) in Shillong, Meghalaya.

The other notable speakers on the panel were Mr. Manish Lamba, General Counsel, DLF CyberCity Developers, Mr. Mohit Kapoor, EVP and Legal Head, SBI Cards & Payments Services Ltd., Mr. Umakanta Panigrahi, Managing Director, Kroll and Mr. Abhishek Anand, Co-founder, Sarvada.

The session was moderated by Ms. Steffi Mary Punnose, Strategy & Development Manager (South Asia), Singapore International Arbitration Centre.

CCAI comprises and represents leading in-house counsels, both from public and private sectors, and is aimed at providing networking opportunities, knowledge-sharing and continuing legal education to its members. This year’s summit was a unique 3 day-residential conference (from 30 September to 3 October) which brought together in-house counsels, lawyers, arbitrators, mediators, quantum experts and compliance, risk and investigation professionals.

Tags Arbitration, Disputes, JSA, Leading Law Firm, Leading Lawyers

Enforcement Directorate Is Not Expected To Be Vindictive: Supreme Court | Farid Karachiwala

The Supreme Court has recently held that that the Enforcement Directorate under the PMLA Act would have to provide grounds of the arrest in writing while taking the person to custody. Further the Supreme Court held that that the Enforcement Directorate should not engage in vindictive actions and instead conduct its investigations within the ambit of law with fairness and the highest level of integrity. In connection with this matter, our partner, FaridKarachiwala, took part in a special discussion hosted by Parikshit Luthra, Anchor and Chief of Bureau at CNBC TV18.

Tags Dispute Resolution, JSA, Leading Law Firm, Leading Lawyers, Supreme Court

Arbitration clause in a purchase order prevails over a conflicting arbitration clause contained in an invoice

Please click here to download the Prism as PDF.

The Bombay High Court (“Bombay HC”) has in Parekh Plastichem Distributors LLP vs. Simplex Infrastructure Limited[1] considered two conflicting arbitration clauses and held that an arbitration clause contained in a purchase order, which sets out the terms of engagement between the parties, prevails over an arbitration clause contained in an invoice raised by a party.

Brief Facts

Parekh Plastichem Distributors LLP (“Parekh”) supplied micro silica to Simplex Infrastructure Limited (“Simplex”) pursuant to various purchase orders issued by Simplex. These purchase orders contained the terms and conditions governing the relationship between the parties and included an arbitration clause which provided that the venue of arbitration would be Kolkata.

Parekh raised its invoices after successful delivery of the micro silica to Simplex. Simplex made payment of some of these invoices, however, an amount of INR 21,78,910 (Indian Rupees twenty one lakh seventy eight thousand nine hundred ten) remained outstanding. The invoices issued by Parekh also contained an arbitration clause which provided that the venue of arbitration would be Mumbai.

Parekh sent various reminders to Simplex for payment of the outstanding sum, however, Simplex failed to make payment. Given the same, the advocates for Parekh issued a notice dated July 15, 2021 to Simplex invoking the arbitration clause contained in the invoices issued by Parekh (which provided that the venue of arbitration would be Mumbai). Simplex did not issue any response to this notice.

Parekh filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 before the Bombay HC to seek appointment of an arbitrator in terms of the arbitration clause contained in the invoices issued by it to Simplex (“Application”).

Simplex inter alia contended that the Bombay HC did not have jurisdiction to entertain the Application since the purchase orders issued by it contained an arbitration clause which provided that the venue of the arbitration would be Kolkata. The arbitration clause was unilaterally inserted by the Applicant in the invoices and could not supersede the arbitration clause contained in the purchase orders.

Issue

Whether the parties intended to be bound by the arbitration clause in the purchase orders issued by Simplex or the arbitration clause in the invoices raised by Parekh?

Findings and Analysis

The Bombay HC dismissed the Application and inter alia observed as follows:

The purchase orders issued by Simplex constituted the main agreement between the parties which contained the terms and conditions for supply of goods. It cannot be disputed that the arbitration clause contained in the purchase orders was agreed to by the parties.
In order to consider whether there is any arbitration agreement between the parties and also in order to consider what is that arbitration agreement, the intention of the parties is paramount. The parties intended to be bound by the arbitration clause in the purchase orders and not the arbitration clause contained in the invoices.
The act of Simplex in accepting the supplies made by Parekh and making payment towards the supply would not have the effect of the arbitration clause in the invoices superseding the arbitration clause in the purchase orders. There was no express agreement between the parties to override or supersede the arbitration clause contained in the purchase orders with the arbitration clause contained in the invoices.
The Supreme Court’s decision in Balasore Alloys Limited v. Medima LLC[2] considered a similar situation. In that case, the Supreme Court held that there was consensus ad idem between the parties to an arbitration clause contained in the comprehensive and all-encompassing agreement to the exclusion of the arbitration clause contained in an ancillary agreement. The ratio of this decision would apply to the facts of the present case since the purchase orders were comprehensive and contained all the terms of engagement between the parties. The arbitration clause in the purchase orders would govern the parties and not the arbitration clause contained in the invoices issued by Parekh.

Conclusion

This judgment may be of significance in cases where parties have standard form purchase orders containing an arbitration clause and subsequent documents which contain a conflicting arbitration clause. In such cases, the court will look at the contents of the documents under reference and the intention of the parties to decide which arbitration clause prevails.

This Prism has been prepared by:

Farhad Sorabjee
Partner

Pratik Pawar
Partner

Siddhesh Pradhan
Senior Associate

Meher Mistri
Associate

For more details, please contact [email protected]

[1] Arbitration Application No. 250 of 2021

[2] (2020) 9 SCC 136

Tags Arbitration, Bombay HC, Corporate, Dispute Resolution, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, Merger and Acquisition

JSA Prism | Insolvency | September 2023

Please click here to download the Prism as PDF.

NCLAT: Stock broking companies are ‘financial service providers’ under IBC, proceedings for initiation of CIRP not maintainable against them

In a recent decision in the case of Nitin Pannalal Shah Vs. Vipul H Raja & Ors.[1] and National Stock Exchange of India Limited Vs. Mr. Hemant Kumar Gupta[2], the principal bench of the NCLAT has held that a stock broking company is a ‘financial service provider’ under Section 3(16) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), and thus, outside the purview of the IBC. Therefore, an application for corporate insolvency resolution process (“CIRP”) against a stockbroker (being a financial service provider) is not maintainable.

Financial service providers under IBC

Under the IBC, CIRP can be initiated against a ‘corporate debtor’. A corporate debtor is a ‘corporate person’ who owes a debt to any person.
A ‘corporate person’ means a company defined under Section 2(20) of the Companies Act, 2013, a limited liability partnership under Section 2(1)(n) of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force “but shall not include any financial service provider” (Section 3 (7) of the IBC).
Under Section 227 of the IBC, the central government has the power to notify ‘financial service providers’ against whom CIRP can be conducted under the IBC.
A ‘financial service provider’ means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator (Section 3(17) of the IBC).
The list of ‘financial services’ is listed in Section 3(16) of the IBC and a ‘financial sector regulator’ means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India (“SEBI”), the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the central government (Section 3(18) of the IBC).

Brief Facts

This decision arises out of 2 (two) appeals decided together by the NCLAT on a common issue:

The first appeal arises out of an erstwhile director’s challenge to NCLT, Ahmedabad’s order admitting Simandhar Broking Ltd. into CIRP[3]; and
The second appeal arises out of the National Stock Exchange’s (“NSE”) challenge to NCLT, Delhi’s order admitting Astitva Capital Market Pvt. Ltd into CIRP[4].

Appeal regarding Simandhar Broking Ltd.:

Simandhar Broking Ltd. was a registered stockbroker with SEBI and a trading member of the NSE. A client of Simandhar Broking Ltd. filed an application under Section 7 of the IBC seeking initiation of CIRP against the stockbroker.
In a nutshell, NCLT, Ahmedabad held that if companies engaged in the stock broking business, or in derivative transactions, were considered as a ‘financial service provider’ and were excluded from the purview of the IBC, then Section 5(8)(g) of the IBC[5] would have not been in existence. Hence, NCLT, Ahmedabad concluded that Simandhar Broking Ltd. was not a financial service provider, and upon proof of debt and default, there was no bar in admitting this company into CIRP.
In the appeal by the erstwhile director of Simandhar Broking Ltd., NSE intervened to clarify the position on NSE trading members and SEBI-registered stockbrokers being a financial service provider.

Appeal regarding Astitva Capital Market Pvt. Ltd.:

Astitva Capital Market Pvt. Ltd was also stockbroker registered with SEBI and a trading member of the NSE.
The erstwhile director of Astitva Capital Market Pvt. filed an application under Section 7 of the IBC seeking initiation of CIRP against the stockbroker.
NCLT, Delhi admitted the petition and NSE (a non-party to the Section 7 IBC proceedings) filed an appeal against the admission order, being an ‘person aggrieved’ under Section 61(1) of the IBC.

Issue

Whether a stockbroker registered with SEBI is a ‘financial service provider’ under Section 3(16) of the IBC and should, therefore, be kept outside purview of the IBC.

Findings and Rationale

The NCLAT allowed both the appeals and set aside the orders of the respective NCLTs, answering the issue in the affirmative to hold that stockbrokers registered with SEBI and being trading members of NSE are financial service providers under IBC. The NCLAT held that:

Section 3(16) of the IBC is an inclusive definition. Hence, in view of Section 3(16)(e)[6], the stockbrokers that are registered with SEBI and are NSE trading members are providing ‘financial services’, these stockbrokers are “financial service providers”.
The definition of ‘corporate debtor’ under Section 3(17) expressly excludes any ‘financial service provider’. Therefore, in view of Sections 3(7), Section 3(8) and Section 227 of the IBC, the IBC applications filed against the stockbrokers are not maintainable.
The NCLAT relied upon the Report of Sub-Committee of the Insolvency Law Committee (constituted for insolvency of financial service providers)[7] which recognised that SEBI-Registered Stockbrokers are financial service providers.
On a consideration of – (a) the nature of activities contained in the memorandum of association of both the stockbrokers, (b) the registration of these stockbrokers with SEBI, and that (c) these stockbrokers are regulated by SEBI (Stockbrokers and Sub-Brokers) Regulations, 1992, and (d) these stockbrokers were subject to various obligation and duties towards Investors, the NCLAT concluded that these stockbrokers fall within the definition of ‘financial service provider’ under the IBC.
In the case of Simandhar Broking Ltd., the NCLAT held that the NCLT’s application and interpretation of Section 5(8)(g) of the IBC is also incorrect. Section 5(8)(g) has to be read harmoniously with Section 7, Section 5(7) and Section 5(8) of the IBC. The derivative transactions contemplated under Section 5(8)(g) cannot be read to include the services of financial service providers, thus, these services cannot constitute ‘financial debt’ under IBC.
In the case of Astitva Capital Market Pvt. Ltd., the NCLAT held that the NCLT failed to consider that the erstwhile director of the stockbroker had maliciously initiated CIRP proceedings against itself to take shelter under the moratorium to stall the proceedings initiated by the NSE against this stockbroker.

Conclusion

In a big relief to stockbrokers, the NCLAT brings quietus to the conflicting views of the NCLTs and NCLAT to finally decide that stockbrokers do not fall under the purview of IBC.

The NCLAT has applied a literal interpretation of the IBC provisions to determine the status of stockbrokers as a ‘financial service provider’ under the IBC. The NCLAT’s reliance on the NSE’s submissions and the Sub-Committee Report will go a long way in this decision attaining finality.
This judgement throws light on the Sub-Committee’s rationale behind the exclusion of financial service providers from the purview of the IBC. The Sub-Committee takes a view that financial firms are different from other firms. The Sub-Committee takes a view that while other firms mostly rely on equity and debt, many financial service providers handle large amounts of consumers’ money. Thus, some of these financial service providers are systemically important as their failure has the effect of disrupting the financial system and having an adverse effect on the country’s economy.

The NSE’s proactivity in these proceedings is laudable and noteworthy. It is unusual and noteworthy for the NSE to proactively file an appeal and an intervention (in cases where it was not a party) to safeguard its trading members from the purview of the IBC. Typically, regulators only plead their position on sectoral matters when they are called upon by courts and do not usually interfere unless the regulator is directly affected.

This Prism has been prepared by:

Dheeraj Nair
Partner

Vishrutyi Sahni
Senior Associate

Vedika Gandhi
Associate

For more details, please contact [email protected]

[1] (Company Appeal (AT) (Insolvency) No. 379 of 2021.

[2] Company Appeal (AT) (Insolvency) No. 749 of 2022.

[3] Order dated April 6, 2021, CP (IB) No.510/7/NCLT/ AHM/2019, NCLT, Ahmedabad.

[4] Order dated November 25, 2021, CP(IB) No.397 of 2021, NCLT, Delhi.

[5] (8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes– (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

[6] 3(16) “financial service” includes any of the following services, namely: – (e) rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of––

(i) buying, selling, or subscribing to, a financial product;

(ii) availing a financial service; or

(iii) exercising any right associated with financial product or financial service.

[7]Sub-Committee constituted under Section 227 of the IBC by the MCA’s order dated August 16, 2019.

Tags Dispute Resolution, Insolvency Law, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, Nclat

JSA Prism | Dispute Resolution | September 2023

Please click here to download the Prism as PDF.

Delhi High Court delineates the procedure and modalities that can be followed while dealing with petitions under Section 11 of the Arbitration Act involving unstamped or insufficiently stamped arbitration agreement(s).

Recently, the Hon’ble High Court of Delhi (“Delhi HC ”), in Splendor Landbase Ltd. vs. Aparna Ashram Society & Anr.[1], disposed of a batch of petitions under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), where the arbitration agreement, or the instrument/agreement containing the arbitration agreement, was unstamped or inadequately stamped.

The Delhi HC outlined the procedure and modalities that can be followed while dealing with petitions under Section 11 of the Arbitration Act, where appointment of an arbitrator was sought, involving unstamped or insufficiently stamped arbitration agreement(s). The Delhi HC, while doing so, considered the observations made by the Hon’ble Supreme Court of India (“Supreme Court”) in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[2] (“N.N. Global”). For a detailed analysis, please refer to the JSA Prism of May 6, 2023.

Issues

The Delhi HC framed and answered the following 4 (four) issues:

Issue No. 1. Whether it is incumbent on the petitioner, in a petition filed under Section 11 of the Arbitration Act, to file the original of the duly stamped arbitration agreement or whether it would suffice for a ‘true copy’ thereof to be filed?
Issue No. 2. Whether, under the Indian Stamp Act, 1899 (“Stamp Act”), it is permissible for the petitioner to pay the deficient stamp duty together with the penalty in these proceedings or whether it is mandatory to send the concerned agreement to the Collector for adjudication as to the proper stamp and penalty payable thereon?
Issue No. 3. Whether the adjudication by the Collector under Section 40 of the Stamp Act can be made time bound?
Issue No. 4. Whether the stamping of the arbitration agreement must conform to the local laws prescribed at the place where the arbitration agreement was executed and/or the place where the petition under Section 11 of the Arbitration Act has been filed?

Findings and Analysis

While answering Issue No.1, the Delhi HC observed that while entertaining a petition under Section 11 of the Arbitration Act, the function being performed by the court is akin to receiving evidence. Accordingly, it was held that whether the agreement/instrument is duly stamped or not, has to be examined in the backdrop of Section 17 of the Stamp Act, which contemplates that all instruments chargeable with duty and executed by a person in India, will be stamped before or at the time of execution. The Delhi HC observed that this task of examining and impounding any instrument can be delegated to an officer appointed by the court in terms of proviso (b) to Section 33(2) of the Stamp Act.

After reproducing the observations made by the Delhi HC in N.N. Global and reading the same in conjunction with the scheme of the Arbitration Act and Stamp Act, the Delhi HC held that it would be incumbent for a petitioner who files a petition under Section 11 of the Arbitration Act on the basis of an unstamped/insufficiently stamped agreement to file the original instrument as executed.

However, the requirement of filing the original of the concerned agreement/instrument can be obviated when the instrument/agreement is duly stamped and a statement to that effect has been specifically made in the petition under Section 11 of the Arbitration Act.

As per N.N. Global, if a certified copy of an agreement is filed along with a petition under Section 11 of the Arbitration Act, the party filing it must necessarily declare the stamp duty which has been paid in respect of the original instrument.

When, at any stage, the issue as to the sufficiency of stamping arises, it would be open for the court to require the concerned party (in possession of the original agreement) to file the same.

While dealing with Issue No.2, the Delhi HC held that after impounding the unstamped instrument/agreement, as mandated under Section 33 of the Stamp Act, it would be open for the court to either:

Send the impounded agreement/ instrument to the concerned Collector of Stamps, who will adopt the procedure under Section 40 of the Stamp Act to require payment of stamp duty along with the penalty (as contemplated).

Take recourse under Section 35 of the Stamp Act to enable deposit of the requisite stamp duty along with penalty.

The Delhi HC recommended following the latter procedure in cases where the quantum of stamp duty payable was not in dispute. In such cases, Section 40 of the Stamp Act would not apply. After payment of stamp duty (along with penalty), such amount will be sent to the concerned Collector of Stamps, along with an authenticated copy of such duly endorsed instrument and a certificate in writing stating the amount of duty levied in respect thereof.

The Delhi HC observed that following the abovementioned procedure would effectuate the mandate under Section 11(13) of the Arbitration Act and ensure that the disposal of petitions under Section 11 of the Arbitration Act is not inordinately delayed on account of the adjudicatory exercise to be carried out by the Collector of Stamps.

The Delhi HC further observed that, as per the Supreme Court’s decision in Black Pearl Hotels Pvt. Ltd. v. Planet M. Retail Ltd.[3], while taking recourse to Section 35 of the Stamp Act, the following duties can be delegated to its office or the registrar of the court in exercise of the powers conferred under Chapter-II of the Delhi High Court (Original Side) Rules, 2018:

Duty of examining and impounding an unstamped or insufficiently stamped instrument; and
Duty to prepare “report” on the nature and character of the document and the amount of duty and penalty payable thereon; and
Duty to endorse on the original instrument, in terms of Section 42(1) of the Stamp Act, and confirm payment of the deficit stamp duty and penalty (if any) stating the details of the payee; and
Duty to prepare a copy of the original instrument (after endorsement), to ensure authenticity of the contents thereof and expressly marking the copy thus prepared as an ‘authenticated copy’ of the original instrument; and
Duty to transmit the authenticated copy, certificate, and the amounts collected to the concerned Collector of Stamps, located at the place where the instrument was executed.

Answering Issue No.3, the Delhi HC held that it would be appropriate for a court to issue time bound directions to the concerned Collector of Stamps, to ensure that the statutory mandate under Section 11(13) of the Arbitration Act is not defeated. In arriving at this conclusion, the Delhi HC took note of its earlier decision in Uno Minda Ltd. v. Revenue Department[4] (“Uno Minda”), wherein 30 (thirty) days were granted to the Collector of Stamps to adjudicate the stamp duty payable and communicate it to the parties therein. The Delhi HC in Uno Minda observed that a maximum of 3 (three) months’ time can be granted to the Collector of Stamps to determine the stamp duty payable in cases where the matter involved any complex/extraordinary circumstances. The Delhi HC also took note of its inherent powers as conferred on it under Rule 16 of Chapter I of the Delhi High Court (Original Side) Rules, 2018 to come to this conclusion.

While answering Issue No.4, the Delhi HC relied on the Supreme Court’s judgment in New Central Jute Mills Co. Ltd. v. State of West Bengal[5]. In that judgment, the Supreme Court held that the instrument must first be stamped in accordance with the law of the state where it has been executed, since the liability of an instrument to stamp duty arises on execution. It held that in cases where the stamping rate on the instrument is higher in a state where the document is sought to be enforced (“second state”), the instrument would be required to be stamped only with the excess amount and in accordance with the law and the rules in force in such second state.

Conclusion

The judgment offers a much-needed roadmap for navigating the legal procedures involved in cases where parties seek to rely on an unstamped or insufficiently stamped arbitration agreement in a petition under Section 11 of the Arbitration Act.

Recently, issues pertaining to stamp duty have acted as impediments in appointment of arbitrators, leading to inordinate delays in the initiation of the arbitration proceedings. Parties often opt for arbitration to avoid the delays usually faced in conventional litigation, and such issues can defeat this very purpose. By outlining a clear procedure for courts to follow in these instances, the judgment is likely to fulfil 2 (two) crucial objectives. First, it advances the overarching goal of the Arbitration Act by promoting a more efficient arbitration process. Second, it aligns with the parties’ original intention in choosing arbitration as a dispute resolution mechanism, thus facilitating a more seamless path to resolution.

This Prism has been prepared by: