A. INTRODUCTION
1.1. United Nations Global Programme Against Money Laundering defines Money Launderingas “a process which disguises illegal profits without compromising the criminals who wish to benefit from the proceeds”[1]. As a concept, money laundering has been around for long, but strangely was not dealt directly by an act or legislations in India. However, when the nations were liberalizing their economies, a need was felt to clamp on such illegal profits that had the potential to damage economies and especially when such proceeds were routed from foreign route. Such illegal profits, because they escape the formal economy of a country and are mostly in form of cash, can have significant impact on the monetary policy and exchange rates of a country and make them more volatile, while even resulting in high inflation in some cases.[2]
1.2. The first initiative came from the international community to address the problem of money laundering. The first convention in this regard was the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988. A delegation of 106 States participated in the convention. India is a party to the convention.[3] The convention called for prevention of laundering of proceeds of drug crimes and other connected activities and confiscation of proceeds derived from such offence. Subsequently, the International community took forward the subject by establishing the Financial Action Task Force[4] and the United Nations Global Programme Against Money Laundering[5] with a view to increase effectiveness of international action again money laundering.
1.3. In the Indian context, prior to Prevention of Money Laundering Act, 2002 (“PMLA” or “Act”) coming into force, the investigating agencies and enforcement agencies had loosely used provisions of the Income Tax Act, 1961, the Benami Transactions (Prohibition) Act, 1988, the Foreign Exchange Management Act, 2000, (FEMA) read along with other Acts to deal with the issue of money laundering. PMLArecognises the Political Declaration and Global Programme of Action, annexed to the resolution S-17/2 which was adopted by the General Assembly of the United Nations on February 23, 1990 to which India is a signatory and the Political Declaration adopted by the Special Session of the United Nations General Assembly, which calls upon the Member States to adopt national money-laundering legislation and programme. These find reference in the preamble of the Act itself.
2. Scope & Object
2.1. The Preamble of the Act provides that it is “An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.”
2.2. The Act seeks to combat money laundering in India and has three main objectives:-
a. To prevent and control money laundering/ proceeds of crime;
b. To confiscate and seize the property obtained from the laundered money/ proceeds of crime; and,
c. To deal with any other issue connected with money laundering/ proceeds of crime in India.
B. ATTACHMENT UNDER PMLA
3. Definitions
3.1. Section 3 of the Act defines the offence of money laundering and Section 2(1)(u) of the Act defines ‘proceeds of crime’. ‘Proceeds of crime’ mean any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a Scheduled Offence. Section 2(1)(u) also widens the scope by including the ‘value of any such property’ and includes property even if it is held outside the country, in which case, the property equivalent in value held within the country or abroad could be considered as ‘proceeds of crime’. Section 2(1)(u) also clarifies that ‘proceeds of crime’ include property not only derived or obtained from the Scheduled Offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the Scheduled Offence.
3.2. Every Scheduled Offence under the PMLA is a Predicate Offence. It may be pertinent to note that the occurrence of the Predicate Offence is a pre requisite for initiating investigation into the offence of money laundering. Section 2(1)(y) of the PMLA defines ‘Scheduled Offence’. The Scheduled Offences are divided in two parts – Part A & Part C. In part ‘A’, offences to the Schedule comprise of offences under Indian Penal Code 1860, Narcotic Drugs and Psychotropic Substances 1985, Unlawful Activities (Prevention) Act 1967, Prevention of Corruption Act 1988, etc., to name a few. Part ‘C’ deals with trans-border crimes. Prior to February 15, 2013, i.e., the date of notification of the amendment carried out in PMLA[6], the Schedule also had Part B which provided for monetary threshold of rupees one crore for initiating investigations for the offence of money laundering. However, all the offences under Part B of the Schedule have now been included in Part A of the Schedule w.e.f February 15, 2013. Consequently, as an effect of the above amendment, at present, there is no monetary threshold to initiate investigations under PMLA.
4. Authorities under the Act
4.1. It is pertinent to mention that, under the PMLA, the Directorate of Enforcement (“ED”) is the investigating agency, however, Predicate Offences are investigated by agencies such as Police, Customs, SEBI, NCB and CBI, etc. under their respective acts. If a Predicate Offence is made out, the investigating agency can notify the ED if there is apprehension of money laundering, and the ED is empowered to provisionally attach the properties which falls under the purview of proceeds of crime as defined under Section 2(1)(u). It may be noted that ED cannot act on its own till the time a First Information Report or a Regular Case (CBI registers a Regular Case instead of First Information Report) is registered highlighting the Predicate Offence. Under the provisions of the PMLA, ED is empowered to attach or provisionally attach the property obtained directly or indirectly from the proceeds of criminal activities constituting Scheduled Offence. Further, ED is also empowered to attach any other property of equivalent value of the offender on account of its link or nexus with the offence of money laundering.
5. Procedure of Attachment
5.1. It should be noted that the provisions of the Code of Criminal Procedure, 1973 (including the provisions as to bails or bonds), apply to the proceedings before a Special Court[7] and the Special Court is deemed to be a Court of Session that can try the Predicate Offence as well as the offence of money laundering. If an offence is committed under Section 3 of the PMLA, a complaint is to be made by ED to the Special Court[8], to take cognizance of offence and if the Special Court finds that the offence of money laundering has been committed, it can order that the property involved shall stand confiscated to the Central Government under Section 8 (5) of the Act.
5.2. However, if the ED has reason to believe (the reason for such belief to be recorded in writing basis of material in his possession), that any person is in possession of any proceeds of crime and such proceeds of crime are likely to be concealed or transferred, the ED may provisionally attach such property.[9] ED should proceed to attach a property, to the extent required, only when they have a prima facie case that the person is in possession of proceeds of crime.[10] Further, ED has to, within a period of thirty days, from such attachment; file a complaint stating the facts of such attachment before the Adjudication Authority[11]. However, it is important to note that such property, if provisionally attached, seized or frozen, can only be for a period not exceeding one hundred and eighty days from the date of the order.[12]
5.3. The ED also has the power of search and seizure provided under Section 17 of the Act to seize such proceeds of crime. Section 17 (1A) further allows that where it is not practicable to seize such record or property, ED may freeze such property. On seizing any record or property or freezing any record or property, the ED has to, within a period of thirty days from such seizure or freezing, file an application before the Adjudicating Authority requesting for retention of such record or property seized or for continuation of order of freezing[13]. Further, such property may, if seized, be retained or if frozen, may continue to remain frozen, for a period not exceeding one hundred and eighty days from the day on which such property was seized or frozen[14].
5.4. If the Adjudicating Authority decides that any property is involved in money laundering, it shall, by an order in writing, confirm that the attachment of the property shall continue during the pendency of the proceedings under PMLA.[15] Any party aggrieved by the decision of the Adjudication authority, may file an appeal before the Appellate Tribunal (PMLA)[16]. Any party aggrieved by the order of the Appellate Tribunal (PMLA) may prefer an appeal before the High Court, within the jurisdiction of which the aggrieved party ordinarily resides or carries on business or personally works for gain. Further, where the Central Government is the aggrieved party, the appeal may be filed before the High Court within the jurisdiction of which the respondent, or in a case of more than one respondent, any of the respondents, ordinarily resides or carries on business or personally works for gain.[17]
C. THIRD PARTY RIGHTS IN THE ATTACHED PROPERTY
6.1. The issue of bona fide third party claiming legal rights over the property attached by the ED under PMLA was decided by the Hon’ble Delhi High Court in The Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank & Ors.[18] It is important to note that the Hon’ble High Court in the said matter has also passed an interim order dated February 6, 2018, permitting Axis Bank to sell the property, by open auction, and deposit the proceeds, in the form of interest bearing fixed deposit, before the Registrar General of the High Court till the pendency of the appeal. The above interim order was issued by the Hon’ble Court on the ground that as the property attached by ED was in the nature of depreciating asset, the same should be immediately sold so that maximum value of the same may be realized at the end of the appeal.
6.2. The Delhi High Court in the above matter set the law in the judgment dated April 2, 2019 (“Judgment”) whereby it was held that rights under the acts like the RDBA, SARFAESI Act and Insolvency Code over PMLA, must co-exist and enforced in harmony, without one being in derogation of the other. Further, the Judgment observed that an order of attachment under PMLA is not illegal per se, if a secured creditor has a charge on the property, under the RDBA and SARFAESI Act, however, mere attachment of property under PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor.
6.3. Further, on the issue of nexus of the attached property with offence of money laundering and third party claims in the properties attached by ED under PMLA, the Bench, inter alia, held the following:
a. That the empowered enforcement officer has the authority under PMLA to not only attach a ‘tainted property’ but also any other asset or property of equivalent value of the offender of money laundering, even if such property was not tainted at all on account of its link or nexus with the offence (or offender) of money laundering;
b. If the ‘tainted property’ is a result of criminal activity relating to a Scheduled Offence and is not traceable, or cannot be reached, or is deficient, the empowered enforcement officer may attach any other asset of the accused person provided it is near or equivalent in value to the former;
c. If the person accused of the offence of money laundering objects to the attachment, the burden of proving facts in support of such claim is to be discharged by him;
d. If the property of a person other than the one accused of the offence of money laundering, i.e. a third party, is attached and there is evidence to show that such property before its acquisition was held by the person accused, or involved in a transaction of money laundering, the burden of proving facts to the contrary so as to seek release of such property from attachment is on the person who so contends;
e. The charge or encumbrance of a third party in a property attached under PMLA cannot be treated or declared as “void” unless material is available to show that it was created “to defeat” the said law, such declaration rendering such property available for attachment and confiscation under PMLA, free from such encumbrance;
f. A party in order to be considered as a ‘bona fide third party claimant’ for its claim in a property being subjected to attachment under PMLA must show, by cogent evidence, that it had acquired interest in such property lawfully and for adequate consideration, the party itself not being privy to, or complicit in, the offence of money laundering, and that it has made all compliances with the existing law;
g. If it is shown by cogent evidence by the bona fide third party claimant, staking interest in an alternative attachable property, claiming that it had acquired the same at a time around or after the commission of the proscribed criminal activity, in order to establish a legitimate claim for its release from attachment it must additionally prove that it had taken ‘due diligence’ to ensure that it was not a tainted asset and the transactions indulged in, were legitimate at the time of acquisition of such interest;
h. If it is shown by cogent evidence by the bona fide third party claimant, staking interest in an alternative attachable property claiming that it had acquired the same at a time anterior to the commission of the proscribed criminal activity, the property to the extent of such interest of the third party will not be subjected to confiscation so long as the charge or encumbrance of such third party subsists, subject to satisfaction of the charge or encumbrance of such third party and restricted to such part of the value of the property as is in excess of the claim of the said third party;
i. If the order confirming the attachment has attained finality, or if the order of confiscation has been passed, or if the trial of a case under Section 4 PMLA has commenced, the claim of a party asserting to have acted bona fide or having legitimate interest in the nature mentioned above will be inquired into and adjudicated upon only by the special court.
6.4. Another moot issue in such situations is whether after the approval of a resolution plan under the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”), is it open for the ED to attach the assets of the corporate debtor on the alleged ground of money laundering, by the erstwhile promoters/directors/employees. The above issue was considered by the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) in the recent case of JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors.[19]. It is pertinent to mention that, the ED, in the above matter, specifically submitted that under the provisions of the PMLA, ED has the power to seize the assets of the corporate debtor, even after the approval of the resolution plan under the Code. However, contrary to the stand of the ED, the Ministry of Corporate Affairs (“MCA”) submitted that the ED while conducting investigation under PMLA is free to deal with or attach the personal assets of the erstwhile promoters and other accused persons, acquired through proceeds of crime but not the assets of the corporate debtor which would have been financed by creditors and acquired by a bona fide third party resolution applicant through the statutory process, supervised and approved by the Adjudicating Authority under the Code. Therefore, upon an acquisition under Corporate Insolvency Resolution Process (“CIRP”) by a resolution applicant, the corporate debtor and its assets are not derived or obtained through proceeds of crime under the PMLA and need not be subject to attachment by the ED after approval of resolution plan by the Adjudicating Authorities.
6.5. Subsequently, during the pendency of the above matter, the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 was introduced wherein Section 32A was inserted in the Code. It is pertinent to note that Section 32A provides for Liability of Corporate Debtor for prior Offences. Sec 32A(1) states that liability of the corporate debtor for an offence committed prior to the commencement of CIRP shall cease and the corporate debtor shall not be prosecuted for such an offence once the resolution plan is approved by the Adjudicating Authority and if such resolution plan results in change in management and control of the corporate debtor. Further, Sec 32A(2) provides that no action can be taken against the property of a corporate debtor in relation to the offence committed prior to the CIRP of the corporate debtor and where such property is covered under the resolution plan approved by the Adjudicating Authority thereby resulting in change in the management and control of the corporate debtor or sale of liquidation assets. Further in explanation to this section it is also provided that an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor.
6.6. The NCLAT, in the above-stated case, after taking into notice of the newly inserted section, and taking into consideration the submissions made by MCA held that Section 32A(1) and (2) clearly suggests that the ED/ other investigating agencies do not have the powers to attach assets of a ‘Corporate Debtor’, once the ‘Resolution Plan’ stands approved and the criminal investigations against the ‘Corporate Debtor’ stands abated. The NCLAT further clarified that Section 32A of the Code does not in any manner suggest that the benefit provided thereunder is only for such resolution plans which are yet to be approved.
7. CONCLUSION
7.1. While PMLA is a complete code in itself, and PMLA, by virtue of section 71, PMLA has overriding effect over other existing laws in matters dealing with ‘money laundering’, and ‘proceeds of crime’ relating thereto.The Delhi High Court has laid down the principles and guidelines for the purposes of preserving the legitimate claims and rights of third parties in a ‘tainted property’. The Delhi High Court has also, through its interim order, set a precedent for preservation and maximization of the value of attached property or to extract the proceeds from it in order to preserve third party claims over an attached property.Similarly, the attachment of assets during CIRP drastically affects the stakeholders of the corporate debtor. Directly or indirectly, such litigation hampers the whole process of CIRP. Accordingly, the amendment made by Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 was introduced, which further clarified the situation and paves way for a smoother and more efficient CIRP. However, the interested parties, in properties that fall within the purview of ‘proceeds of crime’, now bear the burden of proving that such properties were acquired bona fide, and that they did not have knowledge that such properties were ‘proceeds of crime’. Additionally, there is an urgent need to devise a mechanism under PMLA to ensure that the rights and claims of bona fide third party in the attached property is sufficiently protected and not frustrated.
This article was published first on https://www.azbpartners.com/
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Vijayendra Pratap Singh is Senior Partner, Head – Dispute Resolution (Delhi), Priyank Ladoia is Senior Associate, Dispute Resolution (Delhi) and Tanmay Sharma is Associate, Dispute Resolution (Delhi) at AZB and Partners.
[1] “what is money laundering?” at https://www.imolin.org/imolin/gpml.html
[2] Ibid
[3] United Nations Convention Against Illicit Traffic In Narcotic Drugs And Psychotropic Substances, 1988 at http://www.unodc.org/pdf/convention_1988_en.pdf
[4] https://www.fatf-gafi.org/about/
[5] https://www.imolin.org/imolin/gpml.html#whatis
[6] Prevention of Money-Laundering (Amendment) Act, 2012
[7] Section 44 (1) (d) of the PMLA
[8] Section 44 (1) (b)
[9] Section 5 (1) of the PMLA
[10] Bikram Chatterji & Ors. v. Union of India & Ors. (W.P. (C) No.940/2017 (Order dated December 2, 2019 and May 22, 2019)
[11] Section 5(5) of the PMLA
[12] Section 5 (1) of the PMLA
[13] Section 17 (4) of the Act
[14] Section 20(1) of the PMLA
[15] Section 8 (3) of the PMLA
[16] Section 26 of the PMLA
[17] Section 42 of the PMLA
[19] Company Appeal (AT) (Insolvency) No. 957 of 2019
While at first glance this may seem like a good chance to strike when the iron is hot, registering the words ‘Covid’ or ‘Covid Kill’, ‘Covid Check’, ‘Corona’, etc. as a trademark faces several hurdles and rightly so: the trademark may not be distinctive and maybe considered immoral.
Profiting from tragedies is frowned upon but is not completely unheard of. While big companies try to benefit from overall unpleasant (if not disastrous) situations, sometimes such acts are tasteless enough to leave one wondering: “who thought this was a good idea to begin with?”
Attempts for the Trademark ‘COVID’
In India, since the government reported the first confirmed case of an acute respiratory disease (which is a symptom of Covid-19) in January, the Trademarks Office (TMO) has seen a surge in trademark applications containing with the word “Covid”, “Covid Kill”, “Covid Check”, etc. related to the virus, although a good deal of these bear uplifting connotations (one of them already saying “Covid Clean”). The TMO has in fact not issued any statement pertaining to these trademark applications. However, these applications certainly can be considered insensitive as the pandemic is still gripping the world.
But will the law allow such a trademark to be registered?
Can ‘COVID’ Trademarks be Distinctive?
For a trademark to be registered in India, it has to be inherently distinctive. It must indicate the origin of the good/service, thereby preventing consumer confusion. A mark, if it is used for related or descriptive goods/services, ceases to be inherently distinctive unless additional matter is shown. It is very unlikely for such a mark to be granted registration as it merely describes an attribute feature, end result or use of the product. However, what is initially a descriptive mark may later become protectable as a trademark if it is shown to have acquired secondary meaning. In other words, if a descriptive word is used and advertised exclusively as a trademark for a sufficient period of time, it may, in addition to having the primary meaning that is descriptive of the product, come to identify the mark as being associated with a single source of origin for that product/service. As has been held by jurisprudence, the level of scrutiny for a mark is much higher for pharmaceuticals or health related goods/services, given the dangers involved.
Another hurdle in India in registration of a trademark is that the applicant must show that they have bona- fide intent to use the proposed mark for a particular set of goods or services. This is so since the Indian trademark law reflects a first-to-use and not a first-to-file system.
Contrary to Public Morality or Good Faith?
Another ground of refusal of a trademark is when it is contrary to public order and/or morality. This would include applications that are in bad taste and unethical, especially in the context of the current situation of the world. In the same vein, the Intellectual Property administrations in many countries have released examination guidelines to address the filings of marks that would be considered malicious, based on morality concerns, relating to the Covid-19 pandemic. These concerns cover marks containing the names of people involved in the epidemic, marks related to the epidemic virus and disease, marks related to epidemic-related drugs, marks for protective and preventive products, and other marks related to the epidemic.
Refusal of trademark on the basis of lack of inherent distinctiveness and/or public morality concerns are well established principles of trademark law, which would be apparent to those who did not rush to be first-to-file. So in case you are still thinking of filing an application on “Covid”, “Covid Queen”, “Covid-Check” “Covid Cure”, “Covid Kill” and the likes thereof, take my word for it and just, don’t. However, how the Indian Trademarks Office reacts to such applications, remains to be seen.
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Sumit Rajput is an advocate practicing in the Delhi High Court.
Time and again, the Hon’ble Supreme Court (“Court”) had maintained the standard that the ambit of Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) is narrow and thus Court cannot sit as a court of appeal while checking the sanctity of the award. In the recent case of South East Asia Marine Engineering And Constructions Ltd. (SEAMEC Ltd.) vs Oil India Limited [1], Hon’ble Court, presided over by a three-Judge bench, set aside an arbitral award on the ground that the rule applied by the arbitral tribunal for interpretation of the contract was incorrect.
Brief Facts
SEAMEC Ltd. (“Appellant”) was awarded the work order dated 20.07.1995 pursuant to a tender floated by the Oil India Ltd. (“Respondent”) in 1994. The contract agreement was for the purpose of well drilling and other auxiliary operations in Assam, and the same was effectuated from 05.06.1996. During the subsistence of the contract, the prices of High Speed Diesel (“HSD”), one of the essential materials for carrying out the drilling operations, increased by Government Order. Appellant raised a claim that an increase in the price of HSD, triggered the “change in law” clause under the contract (i.e., Clause 23) and the Respondent became liable to reimburse them for the same. Clause 23 of the contract is reproduced hereinbelow
Subsequently Enacted Laws:
Subsequent to the date of price of Bid Opening if there is a change in or enactment of any law or interpretation of existing law, which results in additional cost/reduction in cost to Contractor on account of the operation under the Contract, the Company/Contractor shall reimburse/pay Contractor/Company for such additional/reduced cost actually incurred.
The dispute was referred to an Arbitral Tribunal comprising of three arbitrators.
Arbitral Award
The majority opinion of the arbitral tribunal allowed the claim of the Appellant and awarded a sum of Rs. 98,89,564.33 with interest @10%. The Arbitral Tribunal held that while an increase in HSD price through a circular issued under the authority of State or Union is not a “law” in the literal sense, but has the “force of law” and thus falls within the ambit of Clause 23.
Aggrieved by the award, the Respondent challenged the same under Section 34 of the Act before the District Judge. On 04.07.2006, the learned District Judge, upheld the award and held that the findings of the tribunal were not without basis or against the public policy of India or patently illegal and did not warrant judicial interference.
High Court
Respondent challenged the Order of District Judge before Hon’ble Guwahati High Court and it was held that the interpretation of the terms of the contract by the Arbitral Tribunal is erroneous and is against the public policy of India. On the scope of judicial review under Section 37 of the Act, the High Court held that the Court had the power to set aside the award as it was passed overlooking the terms and conditions of the contract.
Issue
Whether the interpretation provided to the contract in the award of the Tribunal was reasonable and fair, so that the same passes muster under Section 34 of the Arbitration Act?
Arguments Advanced
Appellant argued that the High Court has imparted its own personal view as to the intent for inclusion of Clause 23 and has sat in appeal over the award of the Arbitral Tribunal. The question of law decided by the Arbitral Tribunal is beyond judicial review and thus the High Court could not have interfered with a reasoned award which was neither against public policy of India nor patently illegal. Respondent, on the other side, argued that the award passed by the Arbitral Tribunal is contrary to the terms of the contract and essentially re-writes the contract.
Supreme Court Ruling
The interpretation of Clause 23 of the Contract by the Arbitral Tribunal, to provide a wide interpretation cannot be accepted, as the thumb rule of interpretation is that the document forming a written contract should be read as a whole. Further, the Court observed that it can be said that the contract was based on a fixed rate. The party, before entering the tender process, entered the contract after mitigating the risk of such an increase. Therefore, Court is of the view that if the purpose of the tender was to limit the risks of price variations, then the interpretation done by the Arbitral Tribunal cannot be said to be possible one, as it would completely defeat the explicit wordings and purpose of the contract. Thus, the Court upheld the order of High Court while setting aside the arbitral award.
Analysis
Hon’ble Supreme Court in the case of Associate Builders Vs. Delhi Development Authority [2] held that it must clearly be understood that when a court is applying the “public policy” test to an arbitration award, it does not act as a court of appeal. Court further held that a possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus, an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score.
It is pertinent to note that in the instant case, the Court held that there is no evidence to suggest that the parties intended for the broad interpretation of clause 23 of the Contract despite of the undisputed factual position that Respondent was well aware that the oil prices are usually changed by the Government Order and not by any statutory obligation and therefore would fall within clause 23 of the contract. Thus, the said reasoning and reliance on the purported non-availability of the evidence is contrary to the ratio of the judgment of Associate Builders (supra).
It is settled law that a particular arbitral award can be set aside on the ground of ‘public policy’ would depend on factors such as a) disregarding orders of superior courts; b) lack of judicial approach, or an arbitrary approach; c) lack of application of principles of natural justice; d) a decision is so perverse or so irrational that no reasonable person would have arrived at the same conclusion. Thus, Court failed to test the award on the aforesaid judicially developed contours.
In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran,[3] the Hon’ble Supreme Court held that, if a clause was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of the contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.
In the instant case, the Court held that broad interpretation of the clause 23 of the Contract is not the possible interpretation as it would defeat the purpose of the contract. It is apposite to note that said reasoning does not specify whether narrow or broad interpretation would invite the Courts intervention to set aside the arbitral award. Moreover, interpretation of contract, irrespective of narrow or broad, would not itself entail the triggering of violation of public policy or perversity of award.
It is also imperative to note that Court did not categorically specified under which ground of Section 34 of the Act, the impugned award is set aside as Court merely set aside an arbitral award on the pretext that broad interpretation of the clause 23 is not possible one, thus judgment suffers from the legal infirmity.
Conclusion
Court through the said judgment uprooted the settled position of law that interpretation of the contract is the task of the arbitrator and cannot interfere unless suffers from grave perversity which goes to the root of the matter. The consequence of the said judgment would be that Section 34 would now be susceptible to misuse by the parties, as the issue involved in the instant case regarding interpretation of the contract, is a common issue in most of the contractual matters of arbitration and therefore would broaden the ambit of Section 34 of the Act which is not intended by the Legislature. This will further prolong the dispute under Section 34 of the Act and the parties will unnecessarily drag the arbitral award to the appellate court on the sole ground of interpretation of the contract, thereby diluting the sanctity of the arbitral tribunal.
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Abhinav Mathur is a Senior Associate (Litigation team) at Chir Amrit Legal LLP, Jaipur. Abhinav’s key areas of interest are Commercial Litigation and Arbitration.
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POLICY / OBJECT / HISTORY-
IPA, 1932 is premised on English Partnership Act, 1890 with modifications, additions & improvements. This Act has Chapters I-VIII.
IPA is not exhaustive as word ‘consolidated’ is not used in its preamble, rather word used is “define and amend”, implying that this act is to be read with other acts as being not complete in itself. Example – to be r/w ICA, 1872 and CPC, 1908 etc.
‘Partnership’ as a subject is given as “Item No.7 in Concurrent List” – implies that both State and Centre have power to make law on it.
‘Partnership’ is created by contract[2] and not by status eg: Hindu Undivided Family [3].
Partnership is an extension of law of agency[4], i.e. one partner acting for all (i.e. ultimate test[5] of partnership).
Statement of Objects & Reasons –
Disputes between business partners were dealt in India uptill middle of 19th century, based on its prevalent customs and usages.
Earlier, partnership law was dealt with under Chapter XI consisting of S.239-266 of ICA, 1872 which now stands repealed as same incorporated into IPA, 1932.
Brief outlines of bill are –
(1) Registration not made compulsory in IPA, 1932 as opposed to English Law;
(2) Framing of inducements given in this Act for registration of firm;
(3) Outgoing partners;
(4) Retired or expelled partners;
(5) Public notice be given before dissolution of the firm;
(6) One year window period given after registration of a firm so that firm are not blind-sided with litigation forthcoming, which is why, S.69 of the Act comes effect from 01.10.1933 as opposed to date of 01.10.1932 on which this Act came into force;
(7) Goodwill of a dissolved firm not dealt with properly in English Law but now given a separate general provision u/S.55 under this Act.
Partnership firm is not a legal entity like a company[6], and hence, there is no concept of limited liability and all partners are equally liable and owners of property of the firm.
Main tests of a partnership are –
Participation of profits is a strong test of partnership but not the conclusive test, eg: commission agent may be working for profit with someone but sharing of profit cannot merely term as partnership. One has to look at the whole contract between the partnership and the circumstances around it[8].
VARIOUS RELEVANT PROVISIONS -:
Law of partnership is an extension of law of agency, as is clear from following -:
I. Agency defined as representative capacity u/S.226 of ICA, 1872 (legal fiction), and this law of agency is extended to IPA, 1932 u/S.2(a), 4 & 8.
II. Notice to agent is notice to principle (S.229, ICA, 1872) i.e. constructive notice – similarly, notice to partner u/S.24 of IPA.
III. Express/implied authority u/ICA, 1872 vide S.186, 187, and similarly, S.19-22 of IPA, 1932 for implied/express authority (See: discuss here – difference between Trading Firm & Non-Trading Firm).
IV. Authority of agent in emergency for protecting principle under S.189, ICA, 1872 and similarly, also in S.21 in IPA, 1932 (i.e. partner can act in emergency in the interest to protect firm).
V. If agent earned something out of business of the firm or earned personal profit out of business of the firm, then it belongs to principal and partner liable to return it to firm u/S.16, IPA.
VI. Theory of indemnity in agency u/S.223 & 224 of ICA and similarly, in IPA, 1932 – S.13 (d),(e).
VII. Mutual good, faith and loyalty provided u/S.211 to 214, ICA, 1872 – similarly, Mutual trust and confidence principle provided in S.9 of IPA.
VIII. Principle of estoppel provided u/S.237, ICA, 1872 and also, similarly, provided in S.28, 32(3), 30(5) and S.45 of IPA, 1932.
Partnership depends upon “Delectus Persona” – implying that it depends upon capacity and hardwork of each partner and all parties are important for business and no one is inferior to other.
If no contract then no Partnership, as contract is the source of relationship (S.5).
Partnership is a mixed question of law and fact, and not mere question of fact as is clear from following:-
(a) Theory of ‘Holding Out’ (S.28, IPA) & theory of estoppel (S.114-117, IEA) – law
(b) Partnership by contract (S.4) – law
(c) Partnership by fact – fact
New definition of Partnership is an improvement over older definition as given u/S 239 of ICA, 1872 (Now repealed) as:- (1) introduction of concept of mutual agency (“acting for all”) in new definition which is crux of Partnership; (2) aspect of “minor” loosely worded as only two clauses dealt with it in old definition but now a whole provision given on it i.e. S.30, IPA; (3) in old law – no provision of registration of firm but now given in Chapter VII (S.69); (4) contribution not necessary now; (5) time of commencement of Partnership given via expression “carried on” in S.4 now; (6) who to manage business now i.e. all or any of them acting for all subject to contract (S.4)
Role of contract in partnership i.e. contract determines partnership as is clear from following:-
(a) Creation of Partnership (S.5)
(b) Continuation of Partnership
(c) Rights and duties of partners (S.11,12,13,15)
(d) Dissolution of firm (S.40)
(e) Preventing dissolution i.e. no dissolution of firm if contract says otherwise (S.42)
(f) Dissolution of firm (S.40) either by consent of all or with contract between the partners or by subsequent agreement (S.62, ICA, 1872)
(g) If any partner dies, then firm dissolved [S.42 (c),(d)]
Elements of S.4 –
(a)Relationship (i.e. abstract and not concrete like shop but firm is concrete)
(b) Persons (i.e. natural or legal, but must be competent to contract)
(c) Agreement (partners agree to do some business)
(d) Business must be there [i.e. condition precedent of Partnership & it may one transaction of business/venture[9] (S.8)]
(e) Share the profits of business (not the sole test, but prima facie test)
(f) Concept of mutual agency (S.18)– one acting for all (most important change in new definition)
(g) Firm (i.e. trading or non-trading firm)
Partnership at Will [S.7, 32 (c) & 43] is where no provision is made by contract either for its duration or for its determination.
Provisions providing for “Agreement in Restraint of Trade” in IPA, 1932 are -:
(a) S.16(b) – qua subsisting partner
(b) S.36(2) – qua outgoing partner
(c) S.53 – after dissolution but up till winding up of firm
(d) S.54 – after dissolution r/w S.27 of ICA, 1872
Proportion of sharing losses is same as sharing of profits, if nothing given re losses sharing in the contract[10].
As per S.14, goodwill also falls in the ‘property’ of the firm[11].
A partner cannot compromise any claim by the firm unless there is express authority given by all parties[12]. (See: Implied Authority- S.19 to 22, IPA)
S.25 – a partner is under no liability to the firm in respect of debts subsequently incurred by other partners at a time when he was not a partner[13].
A Principal is liable for fraud or other wrongful act of his agent if committed within the scope of his employment including a criminal act[14].
Concept of Holding-Out [S.28, 30(9), 32(3), 33(2) & 45] applies to a partner only via legal fiction, whereas; concept of ‘estoppel’ as given u/S.115, IEA, 1872 which applies to a representation made by a firm via legal fiction which is not rebuttable. Estoppel is a larger concept vis-à-vis ‘holding out’.
S.30 – Minor admitted to benefits of partnership – break up of provision:-
When minor is made full partner, the whole deed becomes invalid w.r.t. all partners, as a minor cannot be made full partner but only for benefits of partnership as per S.30(1)[15].
Minor cannot be made liable for losses as per S.30(2), and also that S.30(4) enables a minor to severe his connection with the firm and if he does so, then his share to be evaluated and determined in terms of S.48, IPA[16].
A guardian on behalf of minor can do all that is necessary to effectuate the conferment and receipt of all benefits pf partnership[17].
S.31 – for introduction of a new partner – does not apply to a partnership of two persons which is automatically dissolved on death of one of them, as in this case there is no partnership for any new partner to be introduced[18].
Liability of a Retired Partner under S.32 arises only through estoppel and in this case, the customer could either sue the late partner or the new firm and he could not sue all of them[19].
A partner who has retired is not liable even if no public notice of his retirement has been given, though creditors were informed individually[20].
Retiring partner is required to give notice to various classes of people, who might enter into transaction with the partnership firm[21].
Various types of dissolution provided under IPA are:- (1) Dissolution by agreement (S.40); (2) Compulsory Dissolution (S.41); (3) Dissolution on happening of certain contingencies (S.42); (4) Dissolution by notice of Partnership at Will (S.43); and (5) Dissolution by Court (S.44)
S.43 does not bar filing of a civil suit of comprehensive relief[22] by an appropriate remedy, in addition to notice in terms of dissolution of partnership at will.
S.44(g) deals with residuary clause of Dissolution by Court based on principle of Ejusdem Generis.
Valuation of the share of outgoing partner is to be ascertained u/S.48 on the basis of the value on the date of the retirement[23], unless there is a case where the valuation is directed by the Court in the exercise of its discretion, in which event the relevant date will be the date on which the share is actually valued.
Distribution of surplus u/S.48 at the time of dissolution of the firm is for the purpose of adjustment of the rights of the partners in the assets of the partnership, and it does not amount to transfer of assets and as such, does not require compulsory registration under S.17 of Indian Registration Act, 1908[24].
S.49 – in case of joint debts due from the firm and also separate debts from any partner, property of the firm is to be applied in first instance in payment of firm debts and then only in case of surplus, be utilized in payment of debts of individual partner.
Significance of goodwill – term ‘goodwill’ signifies the values of business in the hands of the successor and is generally considered to be an asset of the partnership and its value has to be worked out and divided between the partners[25].
Relevant provisions qua ‘Registration of Firm’ under Chapter VII are:-
S.69 for sake of convenience is broken into 4 parts:-
(a) Clause (1) – no present or past partner can file a suit against the firm to enforce a right arising from a contract or right conferred by this Act, unless: (1) firm is registered; and (2) person suing is or has been partner as shown in the register of firm (twin tests to be complied mandatory)[27].
(b) Clause (2) – no firm can file a suit against third party to enforce a right arising from a contract or right conferred by this Act, unless (1) firm suing is a registered one; and (2) person so suing is shown in register of firm as a partner.
(c) Clause (3) – provisions of clauses (1) & (2) apply to claim of set-off or other proceeding to enforce a right arising from a contract or right conferred by this Act, except: (1) Enforcement of right to sue for dissolution; & (2) Powers of Official Assignee, Receiver or Court u/Provincial Insolvency Act, 1920 or under Presidency Towns Insolvency Act, 1909.
(d) Clause (4) – this section not apply to place of business to which this Act extends to, or to suit or claim of set-off not exceeding Rs.100/- of value in Provincial Insolvency Act, 1920 or under Presidency Towns Insolvency Act, 1909.
Unregistered partnership firm notwithstanding bar of S.69 of this Act, can maintain complaint under Section 138 of this Act for dishonor of cheque, as it is neither a right conferred by a contract nor by the Partnership Act, 1932, rather it is a right conferred by a statute being penal in nature, as held by Rani Kapoor vs. Silvermount (J.Mukta Gupta – Delhi HC)[28], which took note of earlier case laws & discussed the view of P&H[29], Kerala[30], Karnataka[31] and Allahabad[32] High Court in line with Supreme Court (“BSI Ltd. Case”) view, except with Andhra Pradesh High Court[33], which gave a contrary view. BSI Ltd vs. Gift Holdings Pvt. Ltd[34] that “a criminal prosecution is neither for recovery of money nor for enforcement of any security etc. S.138 is a penal provision the commission of which offence entails a conviction and sentence on proof of the guilt in a duly conducted criminal proceedings. Once the offence u/S.138 is completed, the prosecution proceedings can be initiated not for recovery of the amount covered by the cheque but for bringing the offender to the penal liability”.
Supreme Court in Haldiram Bhujiawala & Anr.[35] – held that a suit is not barred by S.69(2) if a statutory right or a common law right is being enforced.
If a party applied for registration and in between the limitation period expired for filing the suit, then suit cannot be filed – that is why; the evil of non-registration cannot be cured later on.
U/S.69 of the Act – a partner can sue w.r.t other rights not arising out of contract or right conferred by IPA, 1932, for eg: right for damages under Law of Tort as held in VR Wonder Electricals and Electronics[36] (Delhi High Court) or that partner can sue for Trademark Right, Carriers Act, Insolvency Act or a partner can sue for right conferred under S.9 of Arbitration Act, 1996.
IMPORTANT RULINGS -:
[S V CHANDRA PANDIAN VS. S V SIVALINGA NADAR,Reported in (1993) 1 SCC 589 at P.7,8,10,12-18] & [N. KHADER VALI SAHEB VS. N GUDU SAHIB (DEAD), Reported in (2003) 3 SCC 229 (3-Judges) at P.4] – dealt with S.17 of Registration Act r/w S.48, IPA i.e. in case of distribution of share on dissolution of firm u/S.44 of IPA, no need for registration under S.17 of Registration Act, 1908, as partners are already owners of property, assets of the firm and there is no transfer.
[KRISHNA MOTOR SERVICE VS. H.B.VITTALA KAMATH, Reported in (1996) 10 SCC 88 at P.7] – dealt with ‘Exceptions to S.69(3)’ of IPA, as S.20 of Arbitration Act, 1996 is not hit by S.69(3) bar of IPA.
[UTTAM TRADERS RANGHRI VS. TULE RAM, Reported in 2018 HPHC 132 at P.29] – dealt with S.138, N.I. Act is not hit by bar of S.69 of IPA.
[BSI LTD. VS GIFT HOLDINGS PVT LTD., Reported in (2000) 2 SCC 737 at P.20 (lead case)] – S.69(2), IPA bar does not hit S.138, NI Act proceedings.
[RANI KAPOOR VS. SILVERMOUNT, Reported in (242) 2017 DLT 363 at P.11] – S.69(2), IPA bar does not hit S.138, NI Act proceedings.
[ROOMAL & ORS. VS. SIRI NIWAS, Reported in (27) 1985 DLT 188 at P.5,7,9,10,18-21 (DB) (lead case on minor provision – referred to English case laws and traced out the law)] S.30 of IPA – benefits to minor of partnership – law discussed in detail – doctrine of mutuality no more applies to Indian law of partnership, as opposed to English law.
[JAGDISH CHANDER GUPTA VS. KAJARIA TRADERS INDIA LTD., Reported in (1964) 8 SCR 50 at P.5-7,11 (lead case): 4 Judges] – bar of S.69 apply to S.8(2) of Arbitration Act, 1996 and thus, application under this Section 8(2) does not lie on behalf of unregistered firm.
[BANARASI DAS VS. KANSHI RAM, Reported in (1964) 1 SCR 316 at P.13-16 (lead case): 4 Judges] – dealt with partnership at will u/S.43 of IPA.
[BHAGWAN DAS (DEAD) THRU LRS VS. PYARE KISHAN AGARWAL, Reported in (2019) 4 SCC 731 at P.12-13: 2 Judges] – exceptions to S.69(3) of IPA r/w Application u/S.20 of Arbitration Act, 1996 – matter remanded back by SC to HC to decide afresh in view of lead case on this topic namely, (1996) 10 SCC 88.
[VINAY EKNATH LAD VS. CHIU MAO CHEN, Reported in 2020 (1) SCALE 206 at P.14-15,19] – dealt with S.45 of IPA.
[S.P MISRA & ORS. VS. MOHD. LAIQUDDIN KHAN & ORS., Reported in (2019) 10 SCC 329 at P.21-22: 2 Judges] – dealt with S.42(c) of IPA/ death of partner – dissolution of firm and liability of LRs thereafter.
[UMESH GOEL VS. HIMACHAL PRADESH COOPERATIVE GROUP HOUSING SOCIETY LTD., Reported in (2016) 11 SCC 313 at P.13,14,36 (Imp. Case): 2 Judges] – dealt with interpretation of expression “other proceedings” in S.69(3) of IPA.
[NAREDNRA KUMAR JAIN VS. KARAM VIR SINGH JAIN & ORS., at P.3,5,7] (J.Valmiki Mehta) – dealt with S.14 / 48(b)(iii) of IPA i.e. Rateable share received by a partner on capital on dissolution.
[ANIL KUMAR SUNIL KUMAR VS. ASHA RASTOGI, at P.1,4-8] (J.Valmiki Mehta) – dealt with twin conditions of S.69(1) of IPA to be met mandatorily, namely, (1) firm to be registered and, (2) partner name to be entered in the register of the firm u/S.59 of IPA r/w in RFA, Court allowed application u/O.41 R.27 CPC to bring on record the certified copy of register which showed that partner in issue had his name mentioned in the register of firm as per law.
[AERO CLUB VS. ONKAR TRAVELS, at P.5-8] & [(2012) 132 DRJ 858 at P.1,4] (J.Valmiki Mehta) – dealt with twin conditions of S.69(1) of IPA to be met mandatorily, namely, (1) firm to be registered and, (2) partner name to be entered in the register of the firm u/S.59 of IPA.
[BHAGWANTI & ORS. VS. KANSHI RAM, at P.5,9,13-16] (J.Valmiki Mehta) – dealt with S.37 of IPA / right of outgoing partner.
[V R WONDER ELECTRICALS & ELECTRONICS VS. C-QUEST CAPITAL GREEN VENTURES PVT LTD., at P.1,7,10-11] (J.Valmiki Mehta) –contention raised that bar of S.69(2) of IPA not apply as right sought to be enforced is under Law of Tort and not under Contract or Partnership Act, 1932 – Court dismissed this plea and hence, held that bar of S.69(2) apply with full force as right sought to be enforced purely contractual in nature. Suit dismissed at admission stage itself.
[MOHAR SINGH & ORS. VS SARDARI LAL 7 ORS., at P.6-11,13] (J.Valmiki Mehta) – dealt with S.4 of IPA i.e. foundational aspects, meaning of partnership Act discussed.
[SHADOW COMMUNICATIONS VS. PRINCE GUTKA LTD., Reported in 2003 (2) COMPLJ 262 (DEL) at P.1,5] (J.Valmiki Mehta) – winding up proceedings u/S434,439 of Companies Act, 1956 not affected by bar of S.69 of IPA, 1932.
[NAVIN KUMAR & ORS. VS. STANDARD RESTAURANT & ORS., Reported in (2003) 103 DLT 209 at P.24,25,27]– dealt with S.44 of IPA r/w Arbitration Act.
[ASHOK KUMAR MITTAL VS. ASHWANI KAPOOR & ORS., Reported in AIR 2005 DEL 323]– dealt with S.41, 43, 45, 46, 47 & 52 of IPA r/w Dissolution and appointment of Receiver.
[NOIDA TOLL BRIDGE CO. LTD. VS. MITSUI MARUBENI CORPORATION, Reported in (2005) 124 DLT 337 at P.1,5,6,8,9,12]– dealt with S.16, 34, 52 of IPA r/w bar of S.69 of IPA does not apply to arbitration proceedings.
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Rajat Mathur is a practicing lawyer in Delhi [B.Com (H) SRCC, DU] [LLB, Law Faculty, DU]. Despite gaining experience in Civil and Tax Law, he has worked extensively on the criminal side and has represented bureaucrats and Government Servants in matters related to the ‘Coal Block Allocation Scam case’. At 33 years of age, Mr. Mathur got the controversial acquittal of former Coal Secretary, Mr. H. C. Gupta, a decorated IAS office (now retired) in the high-profile case.
[1] Referred: Commentary on Partnership Act, 1932, Bare Act and Case laws
[2] Section 4 of IPA, 1932 (“this Act”)
[3] Section 5 of this Act
[4] Cox vs. Hickman, (1860) 8 HLC 268: 9 CB (NS) 47 (Lead case on this aspect)
[5] Mollow, March & Co. vs. Court of Wards, (1872) LR 4 PC 419 (Lead English case on test of partnership)
[8] Ibid 4 (Mollow, March & Co. case)
[11] AIR 1973 J&K 74
[13] (1949) 11 All ER 1033 [Tower Cabinet Co. vs. Ingram]
[14] (1903) 1 KB 81 [Hamlyn vs. Houston and Co.]
[18] AIR 1966 SC 24 – Imp
[19] (1882) 7 App Cas 345 (Scarf vs. Jardine)
[20] AIR 1986 Guj 162
[21] AIR 1984 Kan 55
[22] AIR 1994 NOC 26 (AP) [A.Chinna Ramanatham vs. B.Subbarami Reddy]
[23] AIR 1995 AP 49
[24] AIR 1968 SC 676 – Imp
[25] (2004) 1 SCC 497 – Imp
[26] AIR 1971 SC 1015 – Imp
[27] Sethia vs. Evan John, SC case
[28] 242 (2017) DLT 363 at P.11
[29] Capital Leasing and Finance Co. vs. Navrattan Jain at P.25
[31] (2003) 6 KANT LJ 205 at P.5
[33] (2001) 107 CompCas 22 at P.15
[34] (2000) 2 SCC 737 at P.19-20 (lead case)
[35] Anand Kumar Deepak Kumar & Anr. vs. Haldiram Bhujia Wala & Anr. : 2000 (1) Unreported Judgments 603
[36] VR Wonder Electricals and Electronics V. C -Quest Capital Green Ventures Pvt. Ltd. & Ors. at P.1,7,10-11
Introduction
With industry experts asking for clarification regarding the Government of India’s stand of investment from China, a period of speculation has taken over. As had been stated in our previous update (https://legiteye.com/revised-foreign-direct-investment-policy-to-prevent-hostile-take-over-by-rohitaashv-sinha/), The Department for Promotion of Industry and Internal Trade, the Ministry of Commerce and Industry, Government of India (DPIIT) vide Press Note No. 3 (2020 Series) dated April 17, 2020 amended para 3.1.1 of the current ‘Consolidated Foreign Direct Investment (FDI) Policy, 2017’ (FDI Policy) to curb opportunistic takeovers/acquisitions of Indian companies due to COVID-19 pandemic. The aforesaid was notified on April 22, 2020 (“Notification”). Similarly, with regard to Foreign Portfolio Investment (FPI) the DPIIT is seeking data and information from the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) around investments in Indian listed entities in order to determine whether Chinese investors directly or indirectly are taking advantage of the COVID-19 crisis.
Why FPI is also important to DPIIT
FPI [1] license allows investors to freely invest in up to ten percent (10%) of the share capital of an Indian company without any approval. However, as per reports, SEBI has suggested that all new licenses or their renewals from countries sharing land borders (“Neighboring Countries”) with India are to be referred to it. SEBI is also investigating investments routed through Hong Kong. As a result, no China-domiciled FPI would be able to buy beyond ten per cent (10%) in a listed company without prior permission from the Indian authorities.
The aforesaid proposed restriction and Notification has created an atmosphere of regulatory uncertainty with regard to investment from China. The Notification has also provided that any subsequent change (directly or indirectly) in the beneficial ownership of entities and/or citizens of the Neighbouring Countries would also require Government approval.
Beneficial owner
The concept of beneficial ownership was first brought to light in 1990, when the Financial Action Task Force (FATF) became the first international body to recommend international standards on beneficial ownership. It defines beneficial ownership to mean the “The natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.” Like in India, in other countries shareholders of a company need to report their details to government or regulatory authorities.
The Notification further places an approval for all from neighboring countries as well as investments by any such entity that may have its “beneficial owner”, in a nation sharing land border in China. Although there is ambiguity with regard to investments with regard to “beneficial owner”, it appears (as reports suggest) that the government is going to stick with the standard interpretation of ‘Significant Beneficial Ownership” as provided under the Companies Act, 2013. The term beneficial owner can be interpreted as per the Companies (Significant Beneficial Owners) Rules, 2018 and the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (“PMLA”). While the former defines it as 10 per cent (10%) ownership or voting rights, control or significant influence, the latter puts it at 25 per cent (25%) controlling ownership or profit share of the company or the person who holds the position of senior managing official.
The Beneficial Owner in an FPI can be determined in three (3) ways – first, whether the investor has put in twenty five per cent (25%) or more of the fund corpus; second, whether the investor ‘controls’ the board of directors of the asset management company of the fund; third, whether the investor has influence over the senior management persons of the FPI. An investor, who stays below the radar by owning less than twenty-five per cent (25%) and having no representation on the board, may still exercise control through senior managers. As portfolio investment, a single FPI can own up to nine point nine per cent (9.9%) equity of a listed stock. Beyond that, the entire holding is considered as FDI. With Chinese companies now required to take Government approval for any FDI, no Chinese FPI can buy beyond nine point nine per cent (9.9%) on the floor of the exchange without prior permission from Indian authorities.
Controversy
Hong Kong, Macau and Taiwan – Indian Government alters position
The addition of China in the definition of Neighboring Countries prohibiting it to make an investment in India other than via Government approval was the change brought about by DPIIT. Special administrative regions such as Hong Kong, Macau and Taiwan do not share land borders with India, they are recognized as part of China and India, as a member of the World Trade Organization (WTO), does not recognize Taiwan as an independent country and accepts Chinese sovereignty over the region since China treats Taiwan as a breakaway province and not as an independent nation. However, with the politically changed scenario, the news from the Government suggests that they are now willing to alter their position and investments from the aforesaid three regions may flow through smoothly. India considers investments from Taiwan separately and the investments from Taiwan were never sent for security clearance from the Ministry of Finance. The statements given by senior government officials to various private media houses clarify that investments from Taiwan will be treated as they were previously and would be excluded from the latest changes in the FDI Policy.
Protectionist outlook in line with other jurisdictions
The altered view from the industry appears to be that of distress and caution where it is being felt that India is being increasingly protectionist. However, it is interesting to note that even major jurisdictions like the European Union (EU) and USA have already taken or are taking steps similar to India to protect homegrown industries and hostile takeover. On March 25, 2020 the European Commission issued certain measures that EU members could adopt regarding the FDI and free movement of capital from third countries for protection of Europe’s strategic assets (“Communication”). This Communication is in addition to the speculative scenario regarding screening guidelines issued by EU, i.e. Regulation on foreign direct investment screening, Regulation (EU) 2019/452. The suggestions amongst other points suggest a review of portfolio investments where it is ‘relevant to security or public order’. The aforesaid is a clear suggestion to any ownership which gives any kind of rights to shareholders from third world countries over and above their EU counterparts.
Similarly, in the US, Representative Jim Banks has introduced the ‘Restricting Predatory Acquisition During COVID-19 Act’ in the US Congress. The aforesaid Bill amongst other aspects completely plans to restrict any Chinese investment in critical infrastructure in US in excess of 51%. Furthermore, another Bill, namely the ‘SOS ACT to Prevent Chinese-State Acquisition of Companies Affecting U.S. National Security’ was introduced by Representative Mark Green to possibly prevent strategic investment by Chinese state-owned companies is strategic US defence companies.
Conclusion
Seeing the position taken by EU and USA, it would be unfair to treat India’s move regarding China as “ultra-precautionary”. It appears that the Government of India is also following or providing the same measure of caution as their western counterparts. If at all challenged before the World Trade Organisation (WTO), India’s stand would be that of applying a new approval route and in no manner challenging the existing openness to foreign investment from China. China may also argue in the WTO as to this being “discrimination” by India. However, India may take the exceptions of ‘non-discrimination’ of the General Agreement on Tariffs and Trade and may take umbrage of the aspect that China itself places several restrictions on foreign investment in its various sectors, like pharmaceuticals. Hence, such stance by it justified.
Therefore, it would be interesting from a policy perspective what stand India takes with regard to “Chinese Investment”.
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Mr. Rohitaashv Sinha, is an Associate Partner with Agarwal Jetley & Co. (AJC), a law firm based in New Delhi. He has over 12 years of experience. His practice has been particularly focussed on corporate and commercial laws, foreign investment laws, mergers & acquisitions, joint ventures, labour and employment laws and regulatory issues. He is also actively involved in pro bono services on behalf of various NGOs. Mr. Sinha is an alumnus of ILS LAW COLLEGE, PUNE and received his BSLLB degree from Pune University in 2008. You can reach him at rohitaashv.sinha@agarwaljetley.com
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[1] Issued under the Operational Guidelines For Foreign Portfolio Investors & Designated Depository Participants Under SEBI (Foreign Portfolio Investors) Regulations, 2019.
For the uninitiated, the term “bad bank” is doing the rounds in the banking sector as Indian Banks’ Association (a representative body of all banks) has proposed to the government that it set up a bad bank. A bank works on the fundamental principle of lending and recovery of loans along with interest rate and with the economies of scale on their side, and is able to maintain a cyclic lending-borrowing ecosystem. But, for quite some time Indian banks are having a tough time with piling up of bad loans and non-performing assets (NPAs) and the situation is only going to nosedive in the prevailing pandemic period (and thereafter). Most of the businesses, be it brick-mortar or tech giants, have been hit hard by the coronavirus pandemic and simultaneously their repaying capacity has gone for a toss. Thus, some of the businesses are going bust while some others who might just manage to stay afloat have to part ways with assets that are securitized with the concerned banks.
The classification of loan by a bank is done over a period of time into two categories and the same has been simplified with the help of an example — A bank has granted a loan amounting to INR 1,000 crore in total, with a maturity period of 5 years. Subsequently, after the maturity date, it is able to recover INR 800 crores only and the rest of the borrowers have defaulted in payment of the principal or interest or a combination of both, to the tune of INR 200 crores. Thus, in banking terms the amount of money which has been duly paid or is being paid as per the schedule is termed as good loan, i.e. INR 800 crores and the default amount which the bank is not very hopeful of getting back is termed as bad loan, i.e. INR 200 crores in this case. So, when people like us get to know about their hard-earned money being substantially termed as bad loans, they panic and would like to withdraw their capital from the concerned bank. The economies of scale were earlier in favour of banks. Now that seems to be vanishing into thin air.
Therefore, in order to save the banks from going beyond a point of no return, the theory of bad bank was introduced which suggests that the government steps into the picture and creates a special institution having expertise in recovery of loans (very similar to the concept of asset reconstruction companies, just that the institution would now be funded by the government and would have a much larger corpus fund) and the bad loans along with underlying NPAs would be transferred from various banks to this institution and the institution would pay an amount after assessing the risk factor and other attributes of the underlying NPAs. So let us continue with the same example, after recalibration of risks and other factors the institution agrees to pay the bank INR 100 crores as opposed to the bad loans of INR 200 crores, it is still a win-win situation for both the entities as the bank had already considered INR 200 crores as bad loan and was willing to write-off the same from its balance sheet but now has found a new buyer and is willing to take a haircut, and on the other side, the institution owing to its specialization in recovery of loans is confident of squeezing out a higher value of the NPAs (say INR 120 crores) against consideration of INR 100 crores it has paid to the bank. This seems to be the perfect antidote to the poison of NPAs.
Although it appears good on paper but may not be as flawless in practice. The following are the grave concerns that plague the concept of bad bank-
Thus, the bad bank should be used as an institution to clean-up the mess of NPAs and excessive bad loans subject to strong legal and governance framework with the objective of revamping the banking system through structural and management reforms. Further, the entire mechanism should ensure that this is a limited time clean-up procedure and not a vicious circle of funding and bailouts.
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Suraj Pattanaik having completed his Masters from National Law University, Odisha has been working as an associate with KT Advisors LLP. He is primarily involved in private equity transactions, M&A and corporate advisory.
Introduction
Choosing a practice area to specialize in can be a daunting task for freshmen as well as senior law students, especially in today’s information age. There are so many practice areas to choose from. There are so many tracks and specializations within every practice area (e.g., debtor-side work in bankruptcy). There is also so much information that one needs to review before making a decision regarding a practice area.
I get it. It’s confusing, and you are spoilt for choice. Plus, it’s also highly likely that you have consciously decided against specializing right now and may want to explore a little further before making up your mind (which makes perfect sense too). Nevertheless, I still maintain that as a law student you will always be miles ahead if you choose and then specialize in a particular practice area while in law school itself. In this note, I will first explain the benefits of zeroing in on a practice area while in law school, and then share some tips with you on the steps that you can take in order to select and then specialize in a particular practice area.
Why zero in on a practice area while in law school?
There are multiple advantages of specializing in a particular practice area while in law school.
First, a prospective employer will value you tremendously if you are a specialist in an area that they practice in. The prospective employer knows that you will be productive from Day 1 on the job. They know that you won’t struggle with the basic legal principles governing that particular practice area. They know that they can freely have a technical conversation with you on an issue in that particular practice area without worrying about whether or not you understand them. They also won’t have any reservations about putting you before clients (provided, of course, that you have the required soft skills). All this translates into excellent professional growth opportunities at a fairly early stage in your career.
Second, you will be able to make substantial contributions during client/in-house meetings. You will not only understand and appreciate what is being discussed, but you will also be able to add to what is being discussed, and people will listen to you as you are the subject-matter expert. That translates into market recognition for you and a further bolstering of your reputation as a legal professional.
Third, as a specialist, your work product (e.g., a draft court pleading/a draft legal opinion) will be of a quality that is way beyond what an employer expects from a newbie in the profession, since you know the black letter law inside out. Undoubtedly, this will create multiple growth opportunities for you at a very junior stage in your career as you will be entrusted with important matters since you are the expert.
Fourth, if you are the competitive type, then being a specialist is the best way of differentiating yourself from the competition, and attracting attention from the people who matter in your field.
Now onto the next question.
How can you zero in on a practice area as a law student?
First and foremost, I would like to clarify that finding a practice area to specialize in is not as difficult as a law student may imagine. All you need to do is to ask yourself whether you feel passionate about a particular practice area. Would you be willing to work on a matter in that particular practice area for extended periods of time? Do you feel excited if you become privy to any discussion about that particular practice area? If yes, then you have found a practice area that you are passionate about and can now specialize in it.
I would also like to clarify that if you are serious about finding a suitable practice area to specialize in, then you have to do it on a war footing. No one else can do it for you. You need to make the time. You need to push yourself to take the adequate steps. You need to create a sense of urgency. The question that you want to ask yourself is— how badly do I want to find a practice area to specialize in?
I am hopeful that the pointers that I have shared below will help you in zeroing in on a practice area. Please note that they are exactly what I said they are— pointers. Not sermons. Pick the one that works best for you. If you don’t use any of the pointers and find a practice area to specialize in on your own, that’s even better. Okay, so here we go.
a) Read, read, and read some more- I cannot emphasize this enough. Reading is a critical habit for lawyers and law students alike. Read newspapers, magazines, blog posts, editorial columns, everything. It will help you in becoming a well-rounded individual. Very frequently, a particular area of law is in the news. For instance, recently the Insolvency and Bankruptcy Code, 2016 (“Code”) was in the news, as certain sections under the Code were suspended on account of the COVID-19 lockdown. Hence, if you come across a particular area of law in the news, and if you find it interesting, then maybe you could explore it further and see if it interests you to the extent that you would like to specialize in it.
b) Speak to your seniors, and not just about the parties- Your seniors in law school would most likely have had an exposure to multiple practice areas, either through academic/quasi-academic activities or by virtue of internships. Set up a coffee meeting with them and ask them questions about their experience in their practice areas. Ask them about competent lawyers and law firms that operate in their practice areas. Ask them about that one academic/practical assignment that taught them a great deal about their practice area. However, please bear in mind that the feedback they share with you regarding their experience in a particular practice area may be subjective and hearsay. Hence, don’t take them for their word. For instance, if your senior says that they did not like working on restructuring matters during one of their internships, then that does not mean that you should not even look at restructuring. It’s their individual experience, and hence it’s subjective. Look at their feedback as a secondary information source for you decide on the practice area you want to specialize in.
c) Pay attention in your classes (yes, you read that right)- If you really pay attention in class then you will most likely get academic and practice insights regarding a particular practice area from the comfort of a bench. Just hear what your professors have to say, and process it. For instance, a professor is teaching you Companies Act, 2013, and speaks about the liability of the independent directors, and you find that interesting. After the class, you dash to the library and find out some more literature on it. As you dig deeper and deeper, you realize ultimately that you have a penchant for company law. The point that I am trying to make is that you will get multiple leads and practice insights while in class itself. So please pay attention.
d) Use LinkedIn to your advantage- In today’s information age, all professionals, across all professions have realized the importance of disseminating and collating information. The legal profession is no exception. Hence, several respectable lawyers and law firms have LinkedIn accounts/pages, where they keep posting multiple updates regularly. You must keep reviewing these updates periodically. You might just find that one post that contains that one piece of information that really intrigues you and inspires you to explore further. Before you know, you have found a practice area that you are passionate about and would like to specialize in.
How to create and demonstrate specialist credentials?
Once you have identified a particular practice area to specialize in, you need to take active steps to create and demonstrate adequate credentials in the practice area of your choice. You could employ the following techniques to create and demonstrate specialist credentials as a law student:
Caveats
I would take the advice outlined in this note with a pinch of salt if I were you, in view of the fact that ‘no one size fits all’ and the element of subjectivity. Hence, I would keep in mind the following caveats if I were you:
Conclusion
Specialization is highly recommended, but not required at all at any stage of your career. Specialization decisions are career-altering and hence one should think through very carefully before committing to a particular practice area.
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Pranav M. Khatavkar is a lawyer with a keen interest in domestic and cross-border insolvency law. He holds a bachelor’s degree in law from Symbiosis International University, Pune, and a master’s degree in law from Northwestern University, Chicago, USA. He has authored four books on the Insolvency and Bankruptcy Code, 2016, and has worked with the Financial Restructuring and Insolvency Group at White & Case, LLP, New York.
BACKGROUND
The Hon’ble Supreme Court of India in the case of NALSA v. Union of India[1], a case concerning the grievances of the transgender community seeking legal declaration of their chosen gender identity rather than the one assigned to them as male or female, held that non-recognition of their gender identity violates Articles 14 and 21 of the Constitution of India.
The Court exhaustively dealt with various International human rights instruments to bring forth the rights enjoyed by the transgender community. Reference was drawn to Article 1 of Universal Declaration of Human Rights (UDHR) which states that all human beings are born free and equal. Article 3 of UDHR states that everyone has a right to life, liberty and security of person. Article 6 of UDHR, 1948 and Article 16 of International Covenant on Civil and Political Rights (ICCPR), 1966 which recognises the inherent right to life of every human being and also imposes responsibility on the states not to deny arbitrarily anyone of this right. Everyone shall have a right to recognition, everywhere as a person before the law. Article 5 of the UDHR and Article 7 of the ICCPR provide that no one shall be subjected to torture or to cruel inhuman or degrading treatment or punishment. Further, Article 12 of UDHR and Article 17 of the ICCPR state that no one shall be subjected to arbitrary or unlawful interference with his privacy, family, home or correspondence, nor to unlawful attacks on his honour and reputation and that everyone has the right to protection of law against such interference or attacks. Yogyakarta Principles on the application of International Human Rights Law, in relation to Sexual Orientation and Gender Identity, address a broad range of human rights standards and their application to issues of sexual orientation and gender identity. Yogyakarta Principles talks about the right to universal enjoyment of human rights, the right to equality and non-discrimination, the right to recognition before the law, the right to life, the right to privacy, the right to treatment with humanity while in detention, protection from medical abuses, the right to freedom of opinion and expression among others.[2]
The Court further went ahead and established that by virtue of Article 51 read with Article 253 of the Constitution, one of the interpretations would mean that in the absence of any contrary law, the municipal courts have to respect the rules of international law. The Court added that hence in pursuance of India’s international obligations which are not inconsistent with fundamental rights, these should be duly provided to transgenders.
After referring to judgements and legislations in various comparative jurisdictions, the Hon’ble Supreme Court was of the view that Art. 14 of the Constitution ensures equal protection and hence imposes a positive obligation on the State to ensure equal protection of laws by bringing in necessary social and economic changes, so that everyone including transgenders may enjoy equal protection of laws and nobody is denied such protection.
Articles 15 and 16 prohibit discrimination against any citizen on certain enumerated grounds, including the ground of ‘sex’, therefore, both the Articles prohibit all forms of gender bias and gender based discrimination.
Art 19 (1) guarantees those great basic freedoms which are recognized and guaranteed as the natural rights inherent in the status of the citizen of a free country. Article 19(1) (a) of the Constitution states that all citizens shall have the right to freedom of speech and expression, which is inclusive of one’s right to expression of their self-identified gender. Self-identified gender can be expressed through dress, words, action or behaviour or any other form.
Article 21 protects the dignity of human life, one’s personal autonomy, one’s right to privacy, etc. Right to dignity has been recognized to be an essential part of the right to life and accrues to all persons on account of being humans.[3] Recognition of one’s gender identity lies at the heart of the fundamental right to dignity. Gender, as already indicated, constitutes the core of one’s sense of being as well as an integral part of a person’s identity. Legal recognition of gender identity is, therefore, part of the right to dignity and freedom guaranteed under our Constitution.[4]
In Arunkumar v. IG of Registration, Chennai & Ors. (2019),[5] the Madras High Court held that a marriage solemnized between a male and a transwoman, both professing Hindu religion, is a valid marriage in terms of Section 5 of the Hindu Marriage Act, 1955 and the Registrar of Marriages is bound to register the same.
In Ashish Kumar Misra v. Bharat Sarkar (2015),[6] it was held that states have an obligation to provide ration cards for accessing social security and food security by transgenders.
Recently, in the judgment of Navtej Singh Johar v. Union of India,[7] the Hon’ble Supreme Court affirmed:
there seems to be no reason why a transgender must be denied of basic human rights which includes right to life and liberty with dignity, right to privacy and freedom of expression, right to education and empowerment, right against violence, right against exploitation and right against discrimination. The Constitution has fulfilled its duty of providing rights to transgenders. Now it is time for us to recognise this and to extend and interpret the Constitution in such a manner to ensure a dignified life for transgender people.[8]
CRITICAL ANALYSIS OF THE ACT
Recently, the much awaited Transgender Persons (Protection of Rights) Act, 2019 was passed by the Parliament of India. Certain highlights of the bill include :
a) Prohibition of Discrimination (Section 3)
b) Recognition of Identity of Transgender Persons (Section 4-7)
c) Welfare measures by the Government to create an inclusive society, welfare schemes for creating sensitization, rescue, protection and rehabilitation (Section 8)
d) Obligation on establishment not to discriminate in matters relating to employment including, but not limited to, recruitment, promotion and other related issues, also, designated complaint officers to deal with matters relating to violations of the Act (Section 9-12)
e) Education, Social Security and Health of Transgenders to provide for medical care facility including sex reassignment surgery and hormonal therapy; before and after sex reassignment surgery and hormonal therapy counselling; bring out a Health Manual related to sex reassignment surgery in accordance with the World Profession Association for Transgender Health guidelines; review of medical curriculum and research for doctors to address their specific health issues; to facilitate access to transgender persons in hospitals and other healthcare institutions and centres; provision for coverage of medical expenses by a comprehensive insurance scheme for Sex Reassignment Surgery, hormonal therapy, laser therapy or any other health issues of transgender persons. (Section 13-15)
f) National Council for Transgender Persons (Section 16-17)
g) Offences and Penalties (Section 18)
Though the Act incorporates the fundamental human rights principle of non-discrimination and self-perceived gender identity, but, the Act seems to fail to portray the same sentiments as that of the decision rendered in NALSA judgment. The Act provides under Section 6 that the district magistrate has to issue a certificate of identity as a transgender person. Further, Section 7 states that if after the issue of a certificate under sub-section (1) of section 6, a transgender person undergoes surgery to change gender either as a male or female, such person may make an application, along with a certificate issued to that effect by the Medical Superintendent or Chief Medical Officer of the medical institution in which that person has undergone surgery, to the District Magistrate for revised certificate, in such form and manner as may be prescribed, then, the District Magistrate shall, on receipt of an application along with the certificate issued by the Medical Superintendent or Chief Medical Officer, and on being satisfied with the correctness of such certificate, issue a certificate indicating change in gender in such form and the manner and within such time, as may be prescribed. This seems to put an unnecessary procedural requirement in the form of having a certificate issued specifically for the purpose of being identified as a transgender. This goes against the very dicta of the court in the past and the nature of rights to be guaranteed to the transgenders in form of having an identity irrespective of any affirmations from any authority (against self-determination) . The Act also nowhere encompasses or focuses on reservations in educational institutions and public employment, but only talks about all-inclusive education for transgenders and non-discrimination in matters related to employment in any establishment. The Act fails to focus on the very primary socio-legal issues surrounding transgenders and their rights in the country. The Act very superficially and hypothetically deals with very sensitive issues related to transgenders. The Act though provides for coverage of medical expenses by a comprehensive insurance scheme for Sex Reassignment Surgery, hormonal therapy, laser therapy or any other health issues of transgender persons but fails to specify any mode or mechanism for the same. The Act at many instances refer to welfare schemes, but there is no clarity with regard to the implementation and distribution of funds for the same. The Act fails to address the very primary and fundamental issues regarding having a gender-inclusive society guaranteeing the rights and liberties of transgenders. The Act only seems to be a very hastily the drafted document which is based on the utopian state of affairs when it comes to transgender rights in the country. Even after the Supreme Court and various High Court decisions, the socio-legal issues seems to be a huge impediment in the fight by transgenders and there is still a long way to go for achieving the end-goal of having a sensitive society and legal system in place, where transgenders need no longer have to raise their voices or suffer in anguish for the protection of their Constitutionally guaranteed basic fundamental rights.
The aforesaid act came to force on 10th January, 2020, however, to add on to their woes, the Government recently released the draft rules under the Act (the copy of the draft is available on the website of Ministry of Social Justice and Empowerment). The draft was initially released on 18th April, 2020 and the last date of receiving comments and public reviews was kept on 30th April, 2020, however, later they extended it till 18th May, 2020. However, the constitutional validity of the Act has been challenged before the Supreme Court, on the loopholes mentioned above, the challenge thus, rests on the grounds of self-determination, equality, non-discrimination, right to privacy amongst others. Though the Supreme Court has sought response from the Central Government on the aforementioned issue, it is yet to seen that how the Apex Court of the country reacts to this regressive piece of legislation which suffers from the vice of arbitrariness and vagueness and tries to deliberate on the nuances surrounding rights of transgenders in the country, no doubt, it will have a much bigger challenge/impediment in form of NALSA judgment.
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Neha Tripathi and Soumya Rajsingh are both Assistant Professors (Law) at the Maharashtra National Law University, Aurangabad.
[2] https://yogyakartaprinciples.org/principles-en/about-the-yogyakarta-principles-2/
[3] Also see, Francis Coralie Mullin v. Administrator, Union Territory of Delhi, (1981) 1 SCC 608
[4] Also see, Anuj Garg v. Hotel Association of India, (2008) 3 SCC 1
[6] MISC. BENCH No. – 2993 of 2015
[7] Writ Petition (Criminal) No. 76 of 2016
[8] Id.
Introduction
It is trite that a company is a separate legal entity, and is distinct from its members.[1] As Lord Sumption observed in Prest v Petrodel Resources Ltd.[2], “The separate personality and property of a company is sometimes described as a fiction, and in a sense it is. But the fiction is the whole foundation of English company and insolvency law.” Equally sacrosanct is the principle that arbitration proceeds on the basis of an agreement between parties. After all, “like consummated romance, arbitration rests on consent”.[3] However, practical considerations have led to the marginal dilution of these otherwise fundamental principles.
There are instances where a company and its members are not treated as separate legal entities (i.e. where the corporate ‘veil’ is pierced). Similarly, there are cases where arbitral proceedings enjoin non-signatories.[4] A unique amalgam of these exceptions is found in cases where an arbitral award is sought to be executed against an entity that was never a party to the arbitral proceedings. For example, in Cheran Properties Limited v. Kasturi and Sons Limited and Ors.[5] (“Cheran Properties”), applying the ‘group of companies’ doctrine expounded in Chloro Controls,[6] and analysing Section 35 of the Arbitration and Conciliation Act, 1996 (“Act”) to ascertain who “persons claiming under them” would be for the purpose of binding such persons to the arbitral award, the Supreme Court permitted enforcement of an arbitral award against a third party/non-signatory. In this post, however, our focus is on whether Indian courts have pierced the corporate veil to execute an arbitral award against a third party to the arbitral proceedings when such third party’s unique relationship with the award debtor has been exploited to fraudulently circumvent or frustrate execution of the arbitral award.
Indian Judiciary’s Approach
In a recent judgment passed on February 7, 2020, in the case of Mitsui OSK Lines Ltd. (Japan) v Orient Ship Agency Pvt. Ltd. & Ors.[7] (“Mitsui”), the Bombay High Court has essentially held that the corporate veil cannot be lifted to implead individuals who were neither party to the arbitration agreement nor the Foreign Award. In this case, for execution of a Foreign Award as a decree of the court, a Chamber Summons was filed seeking impleadment of associate companies and common directors of the award debtor as additional respondents. These proposed additional respondents allegedly siphoned-off monies from the award debtor with a view to frustrate execution of the Foreign Award and were sought to be made personally liable for satisfaction of the decree in execution proceedings. In arriving at his conclusion, the Ld. Single Judge of the Bombay High Court inter alia observed as follows:
(a) lifting the corporate veil in this case would amount to proceeding behind and/or beyond the decree;
(b) the application is a desperate attempt by the award holder to enjoy the fruits of the Foreign Award passed in its favour by going against entities which were neither parties to the arbitration agreement, nor to the Foreign Award;
(c) the proposed additional respondents against whom the Foreign Award is sought to be executed ought to have been afforded an opportunity under Section 48 of the Act, to show cause as to why the Foreign Award should not be enforced against it;
(d) the question of whether the corporate veil can be lifted is an issue of trial and cannot be decided in a summary manner in a chamber summons; it would have to be decided in a substantial suit; and
(e) in any event, no case on facts is made out for lifting of the corporate veil.
The Bombay High Court analysed and distinguished several High Court judgments which held that the corporate veil may be lifted in the right circumstances even in execution proceedings. The following may be relevant to note in this regard:
Conclusion
On a combined reading of the judgments rendered by the Apex Court in the cases of Chloro Controls and Cheran Properties, it emerges that the Courts do have the power in appropriate cases to enjoin non-signatories in the enforcement of an arbitral award. However, in view of the judgments discussed in this post and those passed by various other High Courts, it remains to be seen how the Supreme Court will deal with a situation where the ‘group of companies’ doctrine does not apply, but where a fraudulent device is created using a non-signatory to the arbitration agreement so as to frustrate execution of the arbitral award/decree.
(This article was originally published on the Cyril Amarchand Mangaldas Corporate Blog)
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Indranil Deshmukh is Partner in the Dispute Resolution Practice Area at the Mumbai office of Cyril Amarchand Mangaldas. Indranil has extensive experience in a wide range of disputes, both of a general commercial litigation nature as well as public and regulatory disputes. His experience is diversified across numerous sectors including financial regulation, health, sports, local government, planning and environment and public sector projects. Indranil also routinely advises the Board of Control for Cricket in India (BCCI) in relation to their contracts and tenders.
Gathi Prakash is Principal Associate in the Dispute Resolution Practice at the Mumbai office of Cyril Amarchand Mangaldas. Gathi focuses on arbitration and corporate, commercial and regulatory litigation involving media rights, promoter/shareholder disputes, FEMA violations, offshore construction projects, healthcare and banking.
Rishabh Malaviya is Associate in the Dispute Resolution Practice at the Mumbai office of Cyril Amarchand Mangaldas.
[1] Saloman v A Saloman & Co. Ltd., [1896] UKHL 1.
[2] [2013] UKSC 34.
[3] William W. Park, “Non-Signatories and International Contracts: An Arbitrator’s Dilemma”, in Multiple Party Actions in International Arbitration 1 (2009).
[4] Section 8(1) of the Arbitration and Conciliation Act, 1996 (as amended by the 2015 amendment) which provides as follows: “A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists”; Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors., (2013) 1 SCC 641 at para 43 held as follows: “A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter, and the agreement between the parties being a composite transaction.” (followed in Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr., AIR 2018 SC 3041).
[7] Mitsui OSK Lines Ltd. (Japan) v Orient Ship Agency Pvt. Ltd. and Ors., 2020
[8] [2017] 201 CompCas 46 (Bom)
[10] [2016] 199 CompCas 636 (P&H).
[11] Section 47(1) of the Code of Civil Procedure provides as follows: “All questions arising between the parties to the suit in which the decree was passed, or their representatives, and relating to the execution, discharge or satisfaction of the decree, shall be determined by the Court executing the decree and not by a separate suit”.
The Use of Charges in Facilitating Financial Transactions: A Critical Analysis – By Preeti Ahluwalia
“At its most basic, a charge is simply the dedication of property to the performance of a particular obligation” (Colin Bamford, Principles of International Financial Law (2nd edn, Oxford University Press 2015) 310
INTRODUCTION
Financial transactions (FT) are almost always worried about the advent of a personal duty to pay money. This may be the reimbursement of a loan, payment of the purchase price of an asset, redemption of a bond, or the release of some other obligation accepted by an agreement. Sadly, the world is not so kind. An obligor (who owns an obligation to another) might not have the required resources with which to perform its obligations, might be prohibited from paying by governmental action, or might simply deny doing what it has promised. To safeguard itself in this condition, an obligee (to whom an obligation is owned) has two possible courses of action: firstly, it can arrange a substitute promisor; or on the other hand it can set up an arrangement which enables it to utilize an asset, which may or may not belong to the obligor; as the source of reimbursement. Although the desire to guard against the consequences of a failure by a promisor is the most clear purpose behind taking security, it is likely to identify a number of other motivations. Of particular importance in FT, one might indicate the following: legal authority for corporate insolvency or liquidation make provisions for the use of assets of the insolvent domain, in order to spread as fairly as possible the insufficiency resulting from the insolvency. In the case of banks, their capability to lend is controlled by capital requirements set by their regulators; banks are required to confirm that their assets are supported by capital on the bank’s balance sheet. Thus, an advance by the bank, which is secured, on the property of the debtor is often regarded as less risky than one, which is unsecured. For a bank, therefore, intriguing security may be encouraged only in parts by the fear of default, and possibly even more by the desire to decrease funding costs by lending in the way, which requires the minimum capital.1 Taking security is a key part of commercial dealings: especially when dealing in financial markets. The term security is the process of trying to utilize at least one of various legal structures to guard oneself against the menace that one’s counterparty may go into liquidation or fail to perform its promised duties.2 A financier taking security is worried to see that if the borrower’s assets are inadequate to meet the claims of all his creditors the financier will at least have the capacity to look to his security to acquire total or partial payment. So the main purpose of security is to decrease credit risk and attain priority over other creditors in the case of the borrower’s insolvency. However, it remains the general belief that a secured creditor has primacy over an unsecured creditor.3 The extent of security interest is a substance of some uncertainty but in Bristol Airport plc v Powdrill, the term security has been described in the following terms: security is created where the creditor (lender) to whom an obligation is owned by the debtor (borrower) by law or agreement, in addition to the personal guarantee of the borrower to discharge the duty, acquires rights exercisable against some property in which the borrower has an interest in order to enforce the discharge of the borrower’s obligation to the creditor.4
Before discussing and analyzing the use of charges in facilitating FT: it is imperative to provide a description of the nature of charge, kinds of charge i.e. fixed and floating charge. Then we will critically compare and contrast between the two charges. Finally, whether they are effective types of security along with the conclusion.
NATURE OF CHARGE
At it’s most basic, a charge is a consensual security that appropriates property for the release of an obligation. According to the English Companies Act, the definition of charge may include a mortgage, however, there are real differences between the two,5 one being the result of the common law, and the other of equity.6 Like, a charge takes property for the payment of a debt but a mortgage, on the other hand, goes further than a charge and operates to “transfer ownership in equity to the creditor, subject to the chargor’s equity of redemption”. Unlike a mortgage, the formation of a charge does not effect a transfer of legal ownership of that property. However, the significance of the distinction between mortgage and charge is said to lie in the variety of remedies offered to the creditor in the event of nonpayment. A chargee has access to a more limited range of remedies than is accessible to a mortgagee. In Re Bond Worth Ltd7 Slade LJ recognized that the words mortgage and charge are frequently used interchangeably.8 In Re Bank of Credit and Commerce International (No.8),9 Lord Hoffmann described the expression charge as being a proprietary interest allowed by way of security without a transfer of ownership or possession. In Carreras Rothmans v Mathews Treasure10 Peter Gibson J, said that a charge is created by an appropriation of specific asset to the discharge of a liability without being any change in possession either at law or equity.11 The current authors of Fisher and Lightwood’s Law of Mortgage described charge as a security whether real or personal property appropriated for the release of an obligation, “but which does not permit either an absolute or a special property in the subject of the security to the creditor”, nor any right to ownership. In the event of non-payment of an obligation, the creditor’s right of realization is by legal process.12 In the United Kingdom, the term charge is used to explain a loan security (a form of collateral). Typically, charges are categorized into fixed and floating charges, a significant factor in relation to the requisite to register. Previously, section 860(1) of the Companies Act (CA) 2006 set out that detail of certain fixed and all floating charges created by a company had to be sent to the registrar within 21 days after creation. This indicated that if a type of charge was not included on the list it was not necessary to be registered. The new reforms to revolutionize the corporate security. Currently, instead of setting out a prescribed list of registrable charge, the new regulation undertakes that all securities must be registered, subject to an exception;13 fixed charges over debts (BD), which are not BD, are the main exception to the requisite of registration.14 The new rule aims to improve the registration of security created by companies and limited liability partnership in numerous ways: firstly, by decreasing the cost to openly record the required information through the creation of a modern electronic filing system, secondly, by reducing confusion as to which charges must be registered. Thirdly, by establishing a single scheme for all UK registered companies. Fourthly, by improving the standard of information available about the security. Finally, to improve public access to information regarding the registered security tools that create the companies charges.15
FIXED CHARGE
In Illingworth v Houldsworth16 Lord Macnaghton, described fixed charge, ‘’being one that without more fastens on ascertained and definite property or property capable of being ascertained or definite tends to be used in respect of freehold or leasehold property and occasionally in respect of sticks and shares owned”. Such a charge supplies creditors with a specific security and ensures that the property burdened cannot be distributed with except subject to the credit’s interests.17 In Re Spectrum Plus Ltd18 Lord Walker repeated these views: “ under a fixed charge the assets charged as security are permanently taken to the payment of the sum charged, in such a way as to give the chargee a proprietary interest in the assets. So long as the charge remains unredeemed, the assets can be released from the charge only with the active concurrence of the chargee”.19 A fixed charge has been defined as: the seizure of real or personal property for the release of a debt or other obligation.20 Fixed charges are the charges that attach to a specific identifiable asset, which means that the debtor may not dispose of the charged property without permission from the creditor.21 The motive of the fixed charge is to protect the right for the secured party to be paid an amount of money, such that if the debtor fails to pay money then the creditor can apply to the court for authorization for a sale of the charged property. Simply, a fixed charge takes effect over identified asset and is fixed and thus limited to that identified asset. In relation to a fixed charge, it is essential that the charged property is appropriately identifiable.22 These are the charges that are held against some specified, tangible assets (such as land, vehicles, machinery, furniture, stock, bonds and cash). The charges are raised directly after it makes a contract with a bank, especially when it gets a loan. Fixed charges act as a security for the loan and the company is not permitted to sell them or exchange them with a third party until the fulfilment of the contract. Such a contract is obligatory for as long as the loan amount has not been fully paid by the company may continue to use it for internal dealings. The bank has the right to seize the assets and use it for recovering the missing amount usually through the auction of the property if the company fails to adhere to the contract binding for the loan terms hence resulting to nonpayment of the agreement. Therefore, such a charge can result in the loss of the specific asset used as security. This charge involves a high level of protection to the creditor as it permits the creditor to associate the credit offered to a particular tangible asset in the company. This form of charge carries a high level of priority in the insolvency law and is the commonly used form of charge for most of the agreements involving securities.23 The remedies available to the chargee under fixed charge are auction and appointment of a receiver.24
FLOATING CHARGE – A SECURITY DEVICE
The tremendous contribution of modern company law to the world of trade and commerce is, without doubt, the floating charge.25 Earlier there were only fixed charges. But there were problems if one wanted to create a fixed charge over an entire business: (I) some assets of the company would not yet exist; and (II) nature of some assets would change regularly. Where do floating charges come into this? In the nineteenth century it was thought to be essential corollary to there being a fixed charge over all the assets for a trading company, that this would disable the business. This was because in a fixed charge the chargee’s consent is required to any disposal of assets. Thus the courts interpreted what looked like fixed charges to be in fact floating charges in order to circumvent business disability and make the security work. This reasoning is referred to in the case of Agnew v IRC.26 The logical significance of this should have been that a fixed charge was to be taken to be a floating charge if that was necessary to evade business paralysis.27 Lord Macnaghten in his speech in Illingworth v Houldsworth28 described floating charge in these terms: “a floating charge is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subjects of charge within its reach and grasp”.29 The floating charge is one of the most subtle formations of equity, and despite the volume of case laws and literature dedicated to its analysis, it remains conceptually difficult. This is because a floating charge is an interest not in particular assets but in a constantly fluctuating fund of assets and English law has always found it elusive to struggle with the concept of a fund.30 In English law, the idea, of the floating charge is of vital importance in the constructing of security arrangements, where the security-giver is a company.
The notion of a floating charge, first acknowledged in the nineteenth century, is that a company may allow a charge, which floats over all of its resources or an identifiable class of its assets. Until, such time as it crystallizes, the company can contract with those assets free of any interest of the security-taker. On crystallization, however, the charge links to all the assets owned by the company in the class concerned, as a fixed charge. In Downsview case Lord Templeman said, the security for a debt suffered by a company may take the form of a fixed charge on property or the form of a floating charge, which becomes a fixed charge on the properties comprised in the security when the liability becomes due and payable.31 In spite of Re Panama, some judges found it really challenging to see how any security interest could be said to exist prior to crystallization. Undoubtedly a floating charge does not do much for the creditors prior to crystallization. He cannot exercise exclusive rights over the asset either as against the company or as against the third person nor does he have the right to appear in a court to obtain an order against the company to restrain dealing with its assets in the ordinary course of business where creditors security is not in jeopardy or subject to his veto and the dealings are not in breach of the debenture. Nevertheless, it is now recognized that a floating charge creates an immediate, though unattached, security interest. This idea is most clearly expressed In Evans v. Rival Granite Quarries Ltd, Buckley32 L.J. described the nature of a floating charge as33 “a floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it”.34 Then, how to identify a floating charge? What are the hallmarks of such a security? In Re Yorkshire Woolcombers Association Ltd35 Romer L.J. thinks that if a charge has the three characteristics that he mentioned then it is a floating charge: (1) if it is a charge on a group of assets whether present or future. (2) If that group is one, which in the normal course of business would fluctuate from time to time, and (3) the company has freedom to carry on its business in the ordinary way until some future steps is taken by or on behalf of those interested in the charge. According to Romer L.J. the judgment of Buckley L.J. previously quoted indicates that it is a present security in a fund of assets, which the borrower company is left free to manage in the normal course of business, however not completely free. In Re Bond Worth Ltd36 Slade J. gave a different opinion, he pointed out that while Romer L.J. in the passage quoted earlier had discussed about a floating charge as covering present as well as future assets, he had made clear that it was not essentially the case that a floating charge should possess all the three features. Similarly, Lord Millett in Re Agnew37 referring to the three characteristics of a floating charge described by Romer L.J. observed that Romer L.J.’s judgment offered an explanation, not a definition and while the first two characteristics he mentioned are usual of a floating charge they are not distinctive of it, and it was the third characteristic (freedom to deal) which was the hallmark of a floating charge.38 Floating charges lack one of the essential features related with security, which is that the security remains with the chargor or is readily recoverable from transferee.39 The fact that a floating charge could easily be appropriated over all the assets of a company meant that on imposition a chargee was in a position to take all the assets of the company that were not the subject of specific charge, to the payment of the company’s indebtedness to it. Moreover, if the company does become bankrupt, the creditor with a floating charge may find that other creditors have taken fixed charges ranking priority to the floating charge with the outcomes that the company has insufficient assets to satisfy the debt secured by the floating charge. By 2001, a floating chargee had little benefit in terms of priority given the huge number of claims that had statutory priority over it. The potential of a floating chargee to protect itself against the priority of subsequent secured creditors was also restricted. The ability of the chargor to dispose of the assets, though in some ways an advantage of the floating charge, also weakened the security. The only weapon available to the chargee to stop disposal of the assets was to crystallize the charge: as the only significant benefit of crystallization that remained was that it was effective to attain priority for the floating chargee against unsecured creditors imposing execution and to some extent against landowners imposing distress for rent and councils executing distress for rates.40 There are few devices available to strengthen the floating charge without demolishing its flexibility. Firstly, it is established that there are certain limitations on dealings, which are not incompatible with the floating nature of a floating charge, and the creditor can request to include these in the charge in order to protect its interests. Secondly the creditor can also protect its interest through provisions in the terms of the charge relating to crystallization.41
FIXED CHARGE V. FLOATING CHARGE
When deciding if a charge is fixed or floating, it does not matter that the actual security may change from time to time. The vital test for determining the class in which a charge falls is “whether or not the chargor is free to dispose of the charged assets without the consent of the chargor.” However, it is “sufficient to merely restrict the freedom of the chargor to deal with the charged assets” when trying to circumvent the creation of a floating charge. A fixed charge is a charge that attaches to a specific identifiable asset, which states that the borrower cannot dispose of the asset without the consent from the lender. A floating charge is a charge that does not firstly attach to a specific asset, which means that the borrower is permitted to dispose of the assets without having to get the consent of the lender.42 The legal significances of a charge being floating have acted as a robust incentive to charges to draft charge documents which create fixed charges over as many of the debtor’s assets as possible. Thus fixed charges would be created not only over specified assets but circulating assets as well. There is no problem with there being a fixed charge over present as well as future assets; however, realistically, the chargor will also need to dispose of circulating assets and an authority to do so without the chargee’s consent will lead to the charge being considered as floating.43 The Re Brumark44 case led to Lord Millett’s two-step process for differentiating a fixed charge from a floating charge, namely the ascertainment of the chargor’s and chargee’s intentions as concluded from the wording of the charge document, and secondly the classification or description of such charge, the latter being purely a matter of law. Lord Millett perceived that the nature of a charge should be concluded from the substance rather than through total dependence on the wording laid down by the parties. Lord Millett also highlighted that the pivotal feature that differentiates a floating charge from a fixed charge is the company’s ability to deal with the charged assets in its ordinary business rather than the changing nature of the assets. In Re New Bullas Trading Ltd45 Lord Millett was desirous to suggest that the banks “wanted the best of both worlds”, judging from their desire to create a security model with the nature of a fixed charge and the practical virtues of the floating charge while concurrently skipping the costs of reaching the same. Lord Millett specified that a debt cannot be detached from its proceeds as the two signify a single security interest. The following Court of Appeal decision in National Westminster Bank Plc v Spectrum Plus Ltd46 agreed with Lord Millett, and Lord Phillips MR “pointed to the mark of the floating charge as being the chargor’s liberty to deal with the charged assets in any manner that appealed to the chargor’s needs until the chargee stepped in”.47 A floating charge is dissimilar from a fixed charge in the manner that the chargor is allowed to deal with the assets over which the charge floats without reference to the chargee, unlike a fixed charge, which restricts the chargor from dealing with the charged assets without accounting to the chargee.48 The difference between a fixed and floating charge is mainly relevant in the case over book debts (BD).49 The legal ramification of such a distinction, have an important impact on the creditors right to the charged security. Fixed charges are considered particularly beneficial because they provide the creditor priority over preferential creditors and holders of floating charges when the debtor defaults. In the eyes of a bank giving businesses loans, the most obvious negative quality of a floating charge is that floating charges are paid only after fixed charges and preferential50 creditors have been paid. On the other hand, floating charges are more likely to be set aside than fixed charges during insolvency as a result of section 245 Insolvency Act 1986. The act permits for floating charges created within 12 months of the company becoming bankrupt to be set aside. When a bank has a fixed charge as security, it gives a bank a great deal of power over the valuable asset of the company that provides the working capital for the company. BD are considered the primary assets of the company, having them for security increases the creditor’s chances of recovering its money, which is one of the main reasons for taking security. Also, at the time of financial distress, the bank is able to exercise a great deal of power and force the company to do a multiple of things, including a rearrangement of management or anything else the bank may think will save the company from being insolvent. Section 2951 of the Insolvency Act 1986, also permits the holder of a charge to appoint an administrative receiver to enforce the charge – a powerful instrument since BD are the prime asset of a company and qualify as a considerable amount of the borrower’s assets. The Enterprise Act (EA) of 2002 also allows creditors to take control over charged assets without judicial intervention, which provides the creditor with a considerable degree of control when recovering their assets from a company in financial distress. The EA of 2002 has negatively impacted by specifying all floating charge created after September 15, 2003 are subject to the tax of the “prescribed part” fund. That indicates that about 20% of the net property remaining after fixed charges and preferential debts are paid, the assets, which could be subject to a floating charge, goes into the fund of unsecured creditors.52 There are many advantages of fixed charges, however, they do present some policy issues. One particularly relevant issue is that banks no longer need to engage in detailed investigation of the financial circumstances of the borrower, as they simply have to compare the value of the security to the loan to confirm the security covers the loan. The use of security in FT is attractive, particularly in the form of a fixed charge, where the bank has priority, because screening is expensive. The absence of a fixed charge over BD may urge banks to conduct more detailed investigations, which is beneficial as commercial lenders are better to spread risk than some other groups.53 On other hand, the possibility of having a floating charge set aside is also an incentive for the banks to conduct detailed investigations when lending to any borrower. One of the main magnetism of a floating charge over BD is that the borrower is permitted to continue using the charged property in the normal course of business as if the property was not charged, and can continue to use it until the secured creditor takes a step under the charge to stop it (crystallization). Therefore, floating charges provide a business-oriented solution that both gives banks safety and permit businesses to continue using the capital from BD in regular business. This benefit of a floating charge, however, does not curtail the difficulty for charges that English insolvency rule ranks preferential creditors and fixed charges ahead of floating charges, meaning a floating charge holder is less likely to recover their money.54
CONCLUSION
The fixed charge is created on a specified asset, no matter if they are tangible or intangible. Unlike floating charge, which includes the existing assets, which fluctuates from time to time. The floating charge has undergone many blows over the years, and yet maintains its popularity amongst lenders,55 because of some advantages; like it can be created when the company does not have any specific asset, offers freedom to the owners, the borrower is free to use the asset as if it was never secured until crystallization, does not need any consent from the lender before disposal of the asset, floating charge holders always protected than an unsecured creditor, and the main benefit to the floating charge holder in case of insolvency, is that they can appoint administrative receiver who will ensure maximum return to them.56 To some extent, this is hard to understand. As a priority tool, it is severely limited.57 “The strength or weakness of any security device must be measured by its ability to compete for priority with other security devices. Using this measure, the real strength of a floating charge is clearly its greatest weakness.” The floating charge possibly is to be considered as an additional security, most useful when appropriated in conjunction with a fixed charge.58 Therefore, the use of charges in facilitating FT is possible if taking fixed charge as a security in comparison with floating charge because of its various disadvantages, and it is most beneficial when taking floating charge in combination with a fixed charge.
****
Preeti Ahluwalia is an Advocate, who is currently practicing under a Senior Advocate at the Delhi High Court. She graduated from the University of Leeds, the United Kingdom with a specialisation in International Business Law (LL.M) in 2018 and from Amity University, Noida with a specialisation in Commercial Law (BA LL.B) (Hons.) in 2017. She is a highly qualified Legal Researcher with impeccable editing and legal citation abilities to support comprehensive and readable research outcomes. She is also well-versed in Civil, Arbitration, and Company’s law and skilled in case analysis.
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End Notes
[1] Colin Bamford, Principles of International Financial Law (2nd edn, Oxford University Press2015) 294-296
[2] Alastair Hudson, THE LAW OF FINANCE (2nd edn, Sweet & Maxwell 2013) 634-636
[3] Roy Goode, LEGAL PROBLEMS OF CREDIT AND SECURITY (3rd edn, Sweet & Maxwell 2003) 1-2
[4] Eilis Ferran, Principles of Corporate Finance Law (Oxford University Press Inc, New York 2008) 353-354
[5] Tan Cheng-han, ‘Charges, Contingencies and Registration‘ [2002] 2 (2) Journal of Corporate Law Studies 199-200
[6] Colin Bamford, Principles of International Financial Law (2nd edn, Oxford University Press2015) 294-296
[7] [1980] Ch 228,250
[8] Eilis Ferran, Principles of Corporate Finance Law (Oxford University Press Inc, New York 2008) 353-354
[9] [1988] AC 214 at 226
[10] [1985] 1 Ch 207 at 227
[11] Jordan Publishing, ‘Chapter 3 MORTGAGES AND CHARGES’ (Jordan Publishing,)<https://www.jordanpublishing.co.uk/system/uploads/attachments/0008/4395/chapter_3_extract.pdf>accessed 11 April 2020
[12] Falcon Chambers, Fisher and Lightwood’s Law of Mortgage (11th edn, Butterworth’s, 2002) 25
[13] Janice Denoncourt, ‘Legislation and Comment: Reform to the UK Company Registration of Charges Scheme’ [2013] 22() Nottingham Law Journal 138-140
[14] Louise Gullifer and Jennifer Payne, Corporate Finance Law Principles and Policy (Hart Publishing Ltd2011) 267
[15] Janice Denoncourt, ‘Legislation and Comment: Reform to the UK Company Registration of Charges Scheme’ [2013] 22() Nottingham Law Journal 138-140
[16] [1904] A.C.335 at 358
[17] Robert Burgess, Corporate Finance Law (2nd edn, Sweet & Maxwell 1992) 236-237
[18] [2005] 2 AC 680
[19]Eilis Ferran, Principles of Corporate Finance Law (Oxford University Press Inc, New York 2008) 368
[20] Eilis Ferran, ‘FLOATING CHARGES—THE NATURE OF THE SECURITY’ [1988] 47(2) Cambridge Law Journal, 213-214
[21] Lauren Pogue, ‘The Spectrum Plus Case: Fixed or Floating Charges over Book Debts in England’ [2005] 9(1) 9 NC BANKING INST 419 423
Available at: http://scholarship.law.unc.edu/ncbi/vol9/iss1/19
[22] Alastair Hudson, THE LAW OF FINANCE (2nd edn, Sweet & Maxwell 2013) 658-659
[23] Law Teacher, ‘Fixed and Floating Charges in United Kingdom Commercial Law Essay’ (Law teacher net, November 2013) <https://www.lawteacher.net/free-law-essays/commercial-law/fixed-and-floating-charges-in-united-kingdom-commercial-law-essay.php> accessed 11 January 2018
[24] Alastair Hudson, THE LAW OF FINANCE (2nd edn, Sweet & Maxwell 2013) 658-659
[25] Chrispas Nyombi, ‘Unfairness and confusion: inherent features of floating charge security‘ [25 May 2012] 46(2) The Law Teacher 197
[26] [2001] UKPC 28, [2001] 2 AC 710
[27] Joshua Getzler and Jennifer Payne, Company Charge spectrum and beyond (Oxford University Press Inc, New York 2006) 1-3
[28] [1904] A.C. 355 at 358
[29] Eilis Ferran, Principles of Corporate Finance Law (Oxford University Press Inc, New York 2008) 368
[30] Roy Goode, LEGAL PROBLEMS OF CREDIT AND SECURITY (3rd edn, Sweet & Maxwell 2003) 111
[31] Colin Bamford, Principles of International Financial Law (2nd edn, Oxford University Press2015) 311
[32] [1910] 2 K.B. 979 at 999
[33] Roy Goode, LEGAL PROBLEMS OF CREDIT AND SECURITY (3rd edn, Sweet & Maxwell 2003) 111
[34] Eilis Ferran, ‘FLOATING CHARGES—THE NATURE OF THE SECURITY‘ [1988] 47(2) Cambridge Law Journal, 214
[35] [1903] 2 Ch.284, at 295
[36] [1979] 3 AII E.R. 919
[37] [2001] 2 A.C. 710
[38] Roy Goode, LEGAL PROBLEMS OF CREDIT AND SECURITY (3rd edn, Sweet & Maxwell 2003) 113-116
[39] Eilis Ferran, Principles of Corporate Finance Law (Oxford University Press Inc, New York 2008) 369
[40] Louise Gullifer, ‘The Reforms of the Enterprise Act 2002 and the Floating Charge as a Security Device ‘[2008] 46(3) Canadian Business Law Journal 399-403
[41] Eilis Ferran, Principles of Corporate Finance Law (Oxford University Press Inc, New York 2008) 369-370
[42] Lauren Pogue, ‘The Spectrum Plus Case: Fixed or Floating Charges over Book Debts in England’ [2005] 9(1) 9 NC BANKING INST 419 423
Available at: http://scholarship.law.unc.edu/ncbi/vol9/iss1/19
[43] Louise Gullifer and Jennifer Payne, Corporate Finance Law Principles and Policy (Hart Publishing Ltd2011) 249-250
[44] [2001] 2 AC 710
[45] [1994] 1 BCLC 485
[46] [2004] EWCA Civ 670
[47] Chrispas Nyombi, ‘Unfairness and confusion: inherent features of floating charge security‘ [25 May 2012] 46(2) The Law Teacher 199
[48] Cw Routledge, ‘Mortgages, Charges and taking Security’ (Cw Routledge,)<http://cw.routledge.com/textbooks/9780415497718/downloads/chap23.pdf> accessed 11 April 2020
[49] Field Fisher, ‘Fixed and Floating Security’ (Field fisher Waterhouse, June 2011)<http://www.fieldfisher.com/media/1688186/Fixed-and-Floating-Security.pdf> accessed 14 April 2020
[50] Lauren Pogue, ‘The Spectrum Plus Case: Fixed or Floating Charges over Book Debts in England’ [2005] 9(1) 9 NC BANKING INST 419 423
Available at: http://scholarship.law.unc.edu/ncbi/vol9/iss1/19
[51] Ibid p 425
[52] ibid p 426
[53] ibid p 427
[54] ibid p 428
[55] Louise Gullifer and Jennifer Payne, Corporate Finance Law Principles and Policy (Hart Publishing Ltd2011) 260
[56] Efinancemanagement, ‘Floating Charges—THE NATURE OF THE SECURITY’ (EFinanceManagement,)<https://efinancemanagement.com/sources-of-finance/floating-charge> accessed 11 April 2020
[57] Louise Gullifer and Jennifer Payne, Corporate Finance Law Principles and Policy (Hart Publishing Ltd2011) 260
[58] A.K.M Masudul Haque, ‘The Floating Charge as a Security Device’ [2006] (10) University of Western Sydney Law Review 42-43bid p 427
POLICY /OBJECT–
Object of introducing Section 138 of the Negotiable Instruments Act, 1881 was to enhance the acceptability of cheques in settling liabilities, and to build a culture of use of cheques.
Statement of Objects and Reasons set out in The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 [Act 66 of 1988], which amendment inserted Section 138 in the statute book.
Statement of Objects and Reasons set out in the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 (w.e.f. 6-2-2003) (2002 Amendment).
N.I. Act, 1881 is not merely penal in nature but is to maintain the efficiency and value of a negotiable instrument by making the accused honour the negotiable instrument and paying the amount for which the instrument had been executed and object of bringing Sections 138 to 142 of the Negotiable Instruments Act on statute appears to be to inculcate faith in the efficacy of banking operations and credibility in transacting business of negotiable instruments. (See: Lafarge Aggregates & Concrete India (P) Ltd. vs. Sukarsh Azad) [2].
Avowed intendment of Amendment Act, 2002 was to enhance the acceptability of cheques. (See: Dashrath Rupsingh Rathod vs. State of Maharashtra) [3].
To safeguard the faith of the creditor in the drawer of the cheque” and “curb cases of issuing cheques indiscriminately by making stringent provisions and safeguarding interest of creditors. (See: Vinay Devanna Nayak v. Ryot Sewa Sahakari Bank Ltd) [4].
To restore the credibility of cheques as a trustworthy substitute for cash payment. (See: Goa Plast (P) Ltd. v. Chico Ursula D’Souza) [5].
Compensatory aspect is to be given priority over punitive aspect (See: Damodar S. Prabhu vs. Sayed Babalal [6]; Rangappa v. Sri Mohan [7]; R. Vijayan v. Baby [8] & Suganthi Suresh Kumar v. Jagdeeshan [9]).
Various amendments took place in N.I. Act in the years 1991 – 2002 – 2005 & lastly, in 2018 (jurisdictional amendments on account of Rathore case, supra)
N.I. Act is a strict liability offence or penal statute – See: SC decision of Aparna A. Shah [10].
N.I. Act to be tried as summons trial u/Chapter-XX (S.251-259, CrPC)
N.I. Act by virtue of 2018 amendment also to be tried u/Summary trial u/Chapter-XXI (S.260-265, CrPC) with addition of S.143, N.I. Act.
N.I. Act case to be tried by Magistrate Court and not Sessions Court.
As per settled view of Courts till date – case u/ N.I. Act case to be finished within 6 months, but invariably, the process of trial becomes a punishment for the Complainant than the result of filing it.
TEST FOR OFFENCE / GIST OF OFFENCE u/N.I. ACT, 1881–
Failure to pay the liability [11] (Note: inability to pay [12] does not kick start offence u/this Act).
Initial burden is on Complainant to show that cheque is a valid instrument u/S.138 proviso of N.I. Act r/w S.118(a) r/w S.139, N.I. Act, and after it, burden shifts on to accused to rebut.
BASIC PRESUMPTIONS U/N.I.ACT–
Presumptions (“shall”) in favour of Complainant u/ N.I. Act case –:
S.118 (‘a to g’) – Presumption of negotiable instrument for – valid consideration (a); as to date (b); time of acceptance (c); as to time of transfer (d); as to order of indorsements (e); as to stamp (f) and lastly, as to holder is a holder in due course (g).
S.139 – presumption in favour of holder of cheque (as referred in S.138) that cheque issued for valid discharge of debt or liability (whole or part).
S.140 – no defence in N.I. Act available to accused that he had no “reason to believe” that cheque would be dishonored on presentment.
S.146 – bank/s slip or memo is prima facie proof of dishonor of cheque
CHECK LIST TO KICK START OFFENCE U/N.I. ACT, 1881–
Complainant in order to file case u/ N.I. Act has to fulfill as pre-requisite the conditions as set out in proviso to S.138, N.I. Act [13].
INTER-PLAY OF N.I.ACT WITH OTHER STATUTES –
N.I. Act in its application to be r/w Civil Procedure Code, 1908 (for summons, production of documents, interrogatories etc.), Criminal Procedure Code, 1973 [applicability of S.202 (issue pending in SC) or applicability of S.251 (to be finally determined) and also with Indian Evidence Act, 1872 (for conducting evidence etc.), which makes applicability of N.I. Act very interesting yet complicated.
Also, there are various other linkages such as: with IBC, NCLT, DRT and other statutes, which are constantly developing.
TYPES OF DEFENCES AVAILABLE TO ACCUSED UNDER N.I. ACT, 1881 –
A. Possible Technical objections–:
Jurisdictional objection [S.142(2)]
Limitation objection [S.142(1)]
Defect in the notice to accused [S.138 proviso (b)], eg: notice issued to the wrong person or in case of more than one notice issued to accused, earlier notice termed as final, whereas, as per law, last notice sent is deemed to be the correct notice u/this Act.
If complaint u/this Act filed beyond limitation, then delay not condoned unless it is reasonable and sufficient cause shown as per [proviso to S.142(1)].
Complainant served notice only on AR/authorized representative of accused but not on accused company – law says: – both should have been made as accused (See: Anil Hada vs. Indian Acrylic Ltd.) [14] & followed up in Kejriwal Mining Private Ltd [15] and Madan Amlokchand Mutha [16].
B. Possible Defences on merit –
Cheque is without consideration – thus, not valid cheque.
No debt or liability as accused denies his signature on alleged cheque – thus, no valid cheque.
Material alteration in a cheque, signature etc. u/s 87, N.I. Act, 1881 – thus, not valid cheque.
Multiple cheques and notices – then last cheque and notice, respectively is valid and not earlier – thus, if complainant filed and relied upon earlier cheque and notice, then no valid u/N.I.Act.
Accused liable only when he fails to make payment and not because of inability of accused – in latter case, no offence made out in Kusum Ingots Alloys Ltd. vs. UOI [17].
C. No vicarious liability (Section 141 of N.I. Act, 1881)
3 categories of persons [18] can be discerned from S.141 as brought within purview of penal liability through legal fiction. They are: (1) The company which committed the offence, (2) Everyone who was in charge of and was responsible for the business of the company, (3) ‘any other person’ who is a director or a manager or a secretary or officer of the company, with whose connivance or due to whose neglect the company has committed the offence. (See: Anil Hada vs. Indian Acrylic Ltd.)
If the offence was committed by a company it can be punished only if the company is prosecuted. But instead of prosecuting the company if a payee opts to prosecute only the persons falling within the second or third category the payee can succeed in the case only if he succeeds in showing that the offence was actually committed by the company. In such a prosecution, accused can show that company has not committed the offence, though such company is not made an accused, and hence the prosecuted accused is not liable to be punished. Section 141 of this Act – provision do not contain a condition that prosecution of company is sine qua non for prosecution of the other persons who fall within the second and the third categories [19]. (See: Anil Hada vs. Indian Acrylic Ltd.)
Expression ‘Company’ in Explanation to S.141(2) of this Act also includes Body Corporate, a Firm or Association of Individuals (AOI) and director in relation to a firm, includes a partner in the firm.
Section 141 states – when company is the drawer of a cheque, then such company is the principal offender under Section 138 of the Act and the remaining persons are made offenders by virtue of the legal fiction created by the legislature as per the section. Hence the actual offence should have been committed by the company, and then alone the other two categories of persons can also become liable for the offence. (See: Anil Hada vs. Indian Acrylic Ltd.)
Section 141(1) – Offence by companies:- if person who committed an offence is a ‘company’, then every person who at relevant time was either “incharge of, and was responsible” to the company for conduct of business, as well as the company [20] – shall be deemed to be guilty of the offence.
If nominated or independent director [21] made accused without any specific averment in complaint filed u/N.I.Act – then he cannot be prosecuted merely by virtue of his holding office or employment with Private Company or PSU Company or Financial Corporation etc.
If retired director or partner of a company or partnership respectively, made accused even though, they retired before the date of issuance of the cheque.
There is no concept of vicarious liability u/CrPC nor under N.I. Act in view of Section 141, N.I. Act – however, u/s.141(2) [22], where offence committed by Co. and it is proved also that said offence is said to have been committed with consent, connivance or neglect of its Director, Manager, Secretary or other Officer of Co., then such persons shall be deemed to be guilty of that offence & shall be prosecuted.
Lead case is SMS Pharmaceutical case [23]– no vicarious liability of director under N.I. Act, 1881.
IMPORTANT PROPOSITIONS READ AS UNDER –:
Unregistered partnership firm can maintain complaint under Section 138 of this Act for dishonor of cheque, as it is neither a right conferred by a contract nor by the Partnership Act, 1932, rather it is a right conferred by a statute being penal in nature, as held by Rani Kapoor vs. Silvermount (Delhi HC) [24], which took note of earlier case laws & discussed the view of P&H [25], Kerala [26], Karnataka [27] and Allahabad [28] High Court in line with Supreme Court (“BSI Ltd. Case”) view, except with Andhra Pradesh High Court [29], which gave a contrary view. BSI Ltd vs. Gift Holdings Pvt. Ltd [30] that “a criminal prosecution is neither for recovery of money nor for enforcement of any security etc. Section 138 is a penal provision the commission of which offence entails a conviction and sentence on proof of the guilt in a duly conducted criminal proceedings. Once the offence under Section 138 is completed the prosecution proceedings can be initiated not for recovery of the amount covered by the cheque but for bringing the offender to the penal liability”.
Supreme Court in Haldiram Bhujiawala and Anr. [31] held that a suit is not barred by Section 69(2) if a statutory right or a common law right is being enforced.
Cross examination to be done by accused sparingly, necessary and delicately u/S.145(2) in light of his/her defence and also makes the ground of later defence evidence, he may choose to lead.
Defence evidence to be led only if need arises or else runs counter-productive.
For disputed signatures, accused may either refer signatures to private lab or may request Court by application to refer both ‘admitted’ signatures and ‘disputed’ signatures to Forensic Examination, which has more reliability as evidence as opposed to private lab.
In case of multiple cheques, the last cheque is valid & not earlier cheques u/N.I. Act (See: Sukumar Exports case”–2008/09 SC), unless successive cause of action is invoked, proved by Complainant.
Material variation in signatures is a valid defence u/s 87 N.I. Act, 1881.
Exclusion of arraignment of nominated or independent director of company in routine manner is deprecated in view of S.141, N.I.Act r/w S.149, Companies Act, 1956 (See: Sujata Shirolkar case, K.P.Balaraj case [32].
In Joseph vs. Phillips Carbon Black case [33], (followed up in Ghanshyamdas Lalchand Chandak [34]) issue is pending in SC whether Section 202 CrPC regarding conduct of inquiry, can be applied to N.I.Act, 1881 proceedings or not.
Inability of person to pay because of restraint order passed in BIFR-SICA-IBC proceedings is not the same as ‘failure to discharge the liability or debt as punishable u/N.I.Act, 1881. (Kusum Ingot case, supra)
Signatory person along with accused company both, are to be arraigned as accused persons for maintainability of S.138 case (Anil Hada case, supra).
Section 319 CrPC can be applied to N.I.Act, during course of trial, provided firstly, notice u/S.138 N.I.Act was served at origin to proposed accused and not otherwise, and secondly; if evidence comes up on record during trial against this proposed accused as per test laid down in Hardeep Singh Constitution Bench case (2014 – SC).
Parallel cheating criminal case be initiated against accused u/s 420 IPC, in addition to S.138, N.I.Act. [35]
In case of delay in filing of case u/N.I.Act, file condonation of delay application with sufficient cause [36] and not otherwise.
As per Associated Cement Co. Ltd case [37], it was held that held that if a Complaint is made in the name of an incorporeal person (like a company or corporation), it is necessary that a natural person represents such juristic person in the Court. Further, held that Court looks upon the natural person to be the Complainant for all practical purposes. When the Complainant is a body corporate, it is the de-jure Complainant; it must necessarily associate a human being as de-facto complainant to represent the former in Court. Thus, even presuming, that initially there was no authority, still the Company can, at any stage, rectify that defect. At a subsequent stage, the Company can send a person who is competent to represent the company. Complaints could thus not have been quashed on this ground.
Issue of criminal liability u/N.I.Act vis-à-vis IBC is a subject matter of debate and law is yet to be developed on this inter-play by SC.
In case of a merger of company and a partnership firm, the liability of original people of both entities, if any, will remain strictly as personal liability and not vicariously post-merger on new entity.
If case an accused company u/N.I.Act goes under liquidation during pendency or prior to commencement of case, then Complainant to implead and serve notice necessarily on the Official Liquidator and make him/her a party to this proceeding or else case cannot proceed further.
If person dies who is an accused u/N.I.Act, then his/her legal representative cannot be impleaded as accused, because firstly this Act does not allow vicarious liability and secondly, it is a strict liability offence. However, civil remedy of recovery via suit for recovery can be an option against LRs of the accused.
Section 173(8) CrPC cannot be applied to N.I.Act for the reason that this Act is a complaint case procedure and former applies only to Police Report Case Procedure.
Retired partner who has severed all ties with a firm, cannot be roped in as an accused post his retirement provided the cheque in issue is dated post his retirement or that if it is precedes his retirement then he had no tangible role in it to play.
Part payment of money by accused after commencement of case u/N.I.Act, will not absolve him from liability but it can at best be a mitigating circumstance and can use it in trial.
In case of non-payment on account of defective goods supplied by Complainant, accused can take the defence that said fact of defects in goods ought to be communicated to Complainant prior to commencement of case and this defence is in line with case of Indus Airways Pvt. Ltd [38] but was distinguished in Sampelly Satyanarayana Rao [39].
If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise and material or goods for which purchase order was placed is not supplied by the supplier, the cheque cannot be said to have been drawn for an existing debt or liability as held in Indus Airways Pvt. Ltd case, ibid.
An accused cannot press for discharge under this Act post the stage of S.251 CrPC [40] being governed by Summons case r/w Summary case procedure, implying that once plea of accused is recorded u/S.252 CrPC, then procedure contemplated under Chapter XX of CrPC has to be followed by taking the trial to its logical conclusion as held in Subramanium Sethuraman [41]. Equally, S.258 CrPC [42] also does not apply to N.I. Act proceedings, as former does not apply to complaint case. However, recently in 2017, SC in Meters and Instruments Pvt. Ltd. case [43], held that notwithstanding S.258 CrPC, on limited ground of compounding only, proceedings can be put to an end under this Act at any stage of the proceedings, by relying upon interpretation of necessary application of CrPC application to NI Act by use of expression as far as may be [44] used u/S 143 of this Act.
Delhi High Court has consistently taken a view since 2010 and till date, that in case of summons wrongly issued to accused persons under this Act, then the remedy available to accused is to approach the concerned Trial Court and not approach High Court directly and take all such pleas as available under this Act at the stage of S.251 CrPC, notwithstanding Adalat Prasad [45]coming in their way to take such pleas, ibid, at the stage of charge, ibid.
Even if a matter is referred by a criminal court under Section 138 of Act and by virtue of deeming provisions, the award passed by the “Lok Adalat” based on a compromise has to be treated as a decree capable of execution by a Civil Court as held in K.N. Govindan Kutty Menon vs C.D. Shaji [46].
In every complaint under Section 138 of Act, it may be desirable that the Complainant gives his bank account number and if possible e-mail ID of the accused. If e-mail ID is available with the Bank where the accused has an account, such Bank, on being required, should furnish such email ID to the payee of the cheque as held in Meters and Instruments Private Limited, ibid.
Re: Summons sent and procedure: – Magistrate should adopt a pragmatic and realistic approach while issuing summons. Summons must be properly addressed and sent by post as well as by e-mail address got from the complainant. Court, in appropriate cases, may take the assistance of the police or the nearby Court to serve notice to the accused. For notice of appearance, a short date be fixed. If the summons is received back un-served, immediate follow up action be taken – this direction given by SC in Indian Bank Association & Ors. v. Union of India [47].
Taking effect from Section 144 of the Act, Sections 62, 66 and 67 of CrPC and directions of this Court, the Magistrate may opt for one or many of the methods of service of summons, including service through speed post or the courier services, Police Officer or any other person, e-mail or through a Court having territorial jurisdiction – Despite service of summons issued through aforesaid mediums, the problem of non-execution of further process persists. While summon may be issued through aforementioned modes, bailable warrants and non-bailable warrants are to be executed through police as per Section 72 of CrPC. Many a time, police as serving agency, does not give heed to the process issued in private complaints. Courts also remain ambivalent of this fact, requiring the complainant to pay unjustified process fee, repeatedly and avoid taking action against negligent police officers. The coercive methods to secure the presence of accused viz. attachment indicated in Section 82 and 83 CrPC, are seldom resorted.
Mandatory directions for expeditious disposal of trial of cases under this Act: (a) Trial of cases relating to Section 138 of Act must be with nature of Summary Trial unless reasons call for Summons Trial, which is always exceptional. (b) Evidence of the Complainant must be conducted within 3 months of assigning the case. (c) Endeavour must be made to conclude the trial within 6 months from date of filing of Complaint. (d) Trial, as far as practicable, must be held on a day to day basis unless reasons exist to do otherwise. See: Indian Bank Association and Meters and Instruments cases, ibid [48].
(I am thankful to Sh. Sidharth Luthra, Senior Counsel)
***
Rajat Mathur is a practicing lawyer in Delhi [B.Com (H) SRCC, DU] [LLB, Law Faculty, DU]. Despite gaining experience in Civil and Tax Law, he has worked extensively on the criminal side and has represented bureaucrats and Government Servants in matters related to the ‘Coal Block Allocation Scam case’. At 33 years of age, Mr. Mathur got the controversial acquittal of former Coal Secretary, Mr. H. C. Gupta, a decorated IAS office (now retired) in the high-profile case.
[Assisted by Dishant Vashisht, Adv.]
[1] Referred: Sidharth Luthra, (Sr.Counsel) Online Lecture delivered @ https://youtu.be/2pv-LKtvyhk and referred Commentaries on Negotiable Instruments Act, 1881, Indian Partnership Act, 1932 and Code of Criminal procedure, 1973.
[2] (2014) 13 SCC 779 (P.7 & 8)
[3] (2014) 9 SCC 1291 (P.15, 15.1, 15.2 & 19)
[4] (2008) 2 SCC 305 (P.11, 16-17, 19)
[6] (2010) 5 SCC 663 (P.4,6,7,18,19,25)
[8] (2012) 1 SCC 260, (P.16-19)
[11] Offence punishable u/S.138, N.I. Act, 1881
[13] Proviso (a,b,c) of Section 138, NI Act, 1881
[14] (2000) 1 SCC 1 (P.12,13,21)
[15] (2019) 3 RCR Criminal 384
[16] MADAN AMLOKCHAND MUTHA V. ARVIND AMBALAL SHAH & ANR
[18] Anil Hada case – (2000) 1 SCC 1 at P.10
[19] Anil Hada case – (2000) 1 SCC 1 at P.13
[20] Company as well ‘every person’ as set out in clause (1) of S.141 shall be deemed to be guilty.
[21] Section 141(1) (2nd proviso) of NI Act, 1881
[22] Non Obstante Clause to S.141(1) of N.I. Act,1881
[24] 242 (2017) DLT 363 at P.11
[25] Capital Leasing and Finance Co. vs. Navrattan Jain at P.25
[27] (2004) 1 KCCR 49 at P.5
[29] (2000) CriLJ 2386 at P.15
[30] (2000) 2 SCC 737 at P.19-20 (lead case)
[32] Pending under challenge in SC (SLP) (subject to correction)
[33] (2016) 11 SCC 105 – pending challenge in SC (SLP: 2019-20)
[35] Illustration (d) of S.415 IPC (See: Pg.568 of Universal– Criminal Manual, 2019 Edition)
[36] Proviso to S.142(1)
[40] Framing of notice – akin to framing of charge
[41] (2004) 13 SCC 324 (P.4-8,16,17)
[42] Stopping of Proceedings
[44](1979) 2 SCC 529 (P.10,11)
[48] (2014) 5 SCC 590 and (2018) 1 SCC 560
Time for judiciary to introspect and see what can be done to restore people’s faith – Justice Lokur
Justice Madan B Lokur, was a Supreme Court judge from June 2012 to December 2018. He is now a judge of the non-resident panel of the Supreme Court of Fiji. He spoke to LegitQuest on January 25, 2020.
Q: You were a Supreme Court judge for more than 6 years. Do SC judges have their own ups and downs, in the sense that do you have any frustrations about cases, things not working out, the kind of issues that come to you?
A: There are no ups and downs in that sense but sometimes you do get a little upset at the pace of justice delivery. I felt that there were occasions when justice could have been delivered much faster, a case could have been decided much faster than it actually was. (When there is) resistance in that regard normally from the state, from the establishment, then you kind of feel what’s happening, what can I do about it.
Q: So you have had the feeling that the establishment is trying to interfere in the matters?
A: No, not interfering in matters but not giving the necessary importance to some cases. So if something has to be done in four weeks, for example if reply has to be filed within four weeks and they don’t file it in four weeks just because they feel that it doesn’t matter, and it’s ok if we file it within six weeks how does it make a difference. But it does make a difference.
Q: Do you think this attitude is merely a lax attitude or is it an infrastructure related problem?
A: I don’t know. Sometimes on some issues the government or the establishment takes it easy. They don’t realise the urgency. So that’s one. Sometimes there are systemic issues, for example, you may have a case that takes much longer than anticipated and therefore you can’t take up some other case. Then that necessarily has to be adjourned. So these things have to be planned very carefully.
Q: Are there any cases that you have special memories of in terms of your personal experiences while dealing with the case? It might have moved you or it may have made you feel that this case is really important though it may not be considered important by the government or may have escaped the media glare?
A: All the cases that I did with regard to social justice, cases which concern social justice and which concern the environment, I think all of them were important. They gave me some satisfaction, some frustration also, in the sense of time, but I would certainly remember all these cases.
Q: Even though you were at the Supreme Court as a jurist, were there any learning experiences for you that may have surprised you?
A: There were learning experiences, yes. And plenty of them. Every case is a learning experience because you tend to look at the same case with two different perspectives. So every case is a great learning experience. You know how society functions, how the state functions, what is going on in the minds of the people, what is it that has prompted them to come the court. There is a great learning, not only in terms of people and institutions but also in terms of law.
Q: You are a Judge of the Supreme Court of Fiji, though a Non-Resident Judge. How different is it in comparison to being a Judge in India?
A: There are some procedural distinctions. For example, there is a great reliance in Fiji on written submissions and for the oral submissions they give 45 minutes to a side. So the case is over within 1 1/2 hours maximum. That’s not the situation here in India. The number of cases in Fiji are very few. Yes, it’s a small country, with a small number of cases. Cases are very few so it’s only when they have an adequate number of cases that they will have a session and as far as I am aware they do not have more than two or three sessions in a year and the session lasts for maybe about three weeks. So it’s not that the court sits every day or that I have to shift to Fiji. When it is necessary and there are a good number of cases then they will have a session, unlike here. It is then that I am required to go to Fiji for three weeks. The other difference is that in every case that comes to the (Fiji) Supreme Court, even if special leave is not granted, you have to give a detailed judgement which is not the practice here.
Q: There is a lot of backlog in the lower courts in India which creates a problem for the justice delivery system. One reason is definitely shortage of judges. What are the other reasons as to why there is so much backlog of cases in the trial courts?
A: I think case management is absolutely necessary and unless we introduce case management and alternative methods of dispute resolution, we will not be able to solve the problem. I will give you a very recent example about the Muzaffarpur children’s home case (in Bihar) where about 34 girls were systematically raped. There were about 17 or 18 accused persons but the entire trial finished within six months. Now that was only because of the management and the efforts of the trial judge and I think that needs to be studied how he could do it. If he could do such a complex case with so many eyewitnesses and so many accused persons in a short frame of time, I don’t see why other cases cannot be decided within a specified time frame. That’s case management. The second thing is so far as other methods of disposal of cases are concerned, we have had a very good experience in trial courts in Delhi where more than one lakh cases have been disposed of through mediation. So, mediation must be encouraged at the trial level because if you can dispose so many cases you can reduce the workload. For criminal cases, you have Plea Bargaining that has been introduced in 2009 but not put into practice. We did make an attempt in the Tis Hazari Courts. It worked to some extent but after that it fell into disuse. So, plea bargaining can take care of a lot of cases. And there will be certain categories of cases which we need to look at carefully. For example, you have cases of compoundable offences, you have cases where fine is the punishment and not necessarily imprisonment, or maybe it’s imprisonment say one month or two month’s imprisonment. Do we need to actually go through a regular trial for these kind of cases? Can they not be resolved or adjudicated through Plea Bargaining? This will help the system, it will help in Prison Reforms, (prevent) overcrowding in prisons. So there are a lot of avenues available for reducing the backlog. But I think an effort has to be made to resolve all that.
Q: Do you think there are any systemic flaws in the country’s justice system, or the way trial courts work?
A: I don’t think there are any major systemic flaws. It’s just that case management has not been given importance. If case management is given importance, then whatever systematic flaws are existing, they will certainly come down.
Q; And what about technology. Do you think technology can play a role in improving the functioning of the justice delivery system?
I think technology is very important. You are aware of the e-courts project. Now I have been told by many judges and many judicial academies that the e-courts project has brought about sort of a revolution in the trial courts. There is a lot of information that is available for the litigants, judges, lawyers and researchers and if it is put to optimum use or even semi optimum use, it can make a huge difference. Today there are many judges who are using technology and particularly the benefits of the e-courts project is an adjunct to their work. Some studies on how technology can be used or the e-courts project can be used to improve the system will make a huge difference.
Q: What kind of technology would you recommend that courts should have?
A: The work that was assigned to the e-committee I think has been taken care of, if not fully, then largely to the maximum possible extent. Now having done the work you have to try and take advantage of the work that’s been done, find out all the flaws and see how you can rectify it or remove those flaws. For example, we came across a case where 94 adjournments were given in a criminal case. Now why were 94 adjournments given? Somebody needs to study that, so that information is available. And unless you process that information, things will just continue, you will just be collecting information. So as far as I am concerned, the task of collecting information is over. We now need to improve information collection and process available information and that is something I think should be done.
Q: There is a debate going on about the rights of death row convicts. CJI Justice Bobde recently objected to death row convicts filing lot of petitions, making use of every legal remedy available to them. He said the rights of the victim should be given more importance over the rights of the accused. But a lot of legal experts have said that these remedies are available to correct the anomalies, if any, in the justice delivery. Even the Centre has urged the court to adopt a more victim-centric approach. What is your opinion on that?
You see so far as procedures are concerned, when a person knows that s/he is going to die in a few days or a few months, s/he will do everything possible to live. Now you can’t tell a person who has got terminal cancer that there is no point in undergoing chemotherapy because you are going to die anyway. A person is going to fight for her/his life to the maximum extent. So if a person is on death row s/he will do everything possible to survive. You have very exceptional people like Bhagat Singh who are ready to face (the gallows) but that’s why they are exceptional. So an ordinary person will do everything possible (to survive). So if the law permits them to do all this, they will do it.
Q: Do you think law should permit this to death row convicts?
A: That is for the Parliament to decide. The law is there, the Constitution is there. Now if the Parliament chooses not to enact a law which takes into consideration the rights of the victims and the people who are on death row, what can anyone do? You can’t tell a person on death row that listen, if you don’t file a review petition within one week, I will hang you. If you do not file a curative petition within three days, then I will hang you. You also have to look at the frame of mind of a person facing death. Victims certainly, but also the convict.
Q: From the point of jurisprudence, do you think death row convicts’ rights are essential? Or can their rights be done away with?
A: I don’t know you can take away the right of a person fighting for his life but you have to strike a balance somewhere. To say that you must file a review or curative or mercy petition in one week, it’s very difficult. You tell somebody else who is not on a death row that you can file a review petition within 30 days but a person who is on death row you tell him that I will give you only one week, it doesn’t make any sense to me. In fact it should probably be the other way round.
Q: What about capital punishment as a means of punishment itself?
A: There has been a lot of debate and discussion about capital punishment but I think that world over it has now been accepted, more or less, that death penalty has not served the purpose for which it was intended. So, there are very few countries that are executing people. The United States, Saudi Arabia, China, Pakistan also, but it hasn’t brought down the crime rate. And India has been very conservative in imposing the death penalty. I think the last 3-4 executions have happened for the persons who were terrorists. And apart from that there was one from Calcutta who was hanged for rape and murder. But the fact that he was hanged for rape and murder has not deterred people (from committing rape and murder). So the accepted view is that death penalty has not served the purpose. We certainly need to rethink the continuance of capital punishment. On the other hand, if capital punishment is abolished, there might be fake encounter killings or extra judicial killings.
Q: These days there is the psyche among people of ‘instant justice’, like we saw in the case of the Hyderabad vet who was raped and murdered. The four accused in the case were killed in an encounter and the public at large and even politicians hailed it as justice being delivery. Do you think this ‘lynch mob mentality’ reflects people’s lack of faith in the justice system?
A: I think in this particular case about what happened in Telangana, investigation was still going on. About what actually happened there, an enquiry is going on. So no definite conclusions have come out. According to the police these people tried to snatch weapons so they had to be shot. Now it is very difficult to believe, as far as I am concerned, that 10 armed policeman could not overpower four unarmed accused persons. This is very difficult to believe. And assuming one of them happened to have snatched a (cop’s) weapon, maybe he could have been incapacitated but why the other three? So there are a lot of questions that are unanswered. So far as the celebrations are concerned, the people who are celebrating, do they know for certain that they (those killed in the encounter) were the ones who did the crime? How can they be so sure about it? They were not eye witnesses. Even witnesses sometimes make mistakes. This is really not a cause for celebration. Certainly not.
Q: It seems some people are losing their faith in the country’s justice delivery system. How to repose people’s faith in the legal process?
A: You see we again come back to case management and speedy justice. Suppose the Nirbhaya case would have been decided within two or three years, would this (Telangana) incident have happened? One can’t say. The attack on Parliament case was decided in two or three years but that has not wiped out terrorism. There are a lot of factors that go into all this, so there is a need to find ways of improving justice delivery so that you don’t have any extremes – where a case takes 10 years or another extreme where there is instant justice. There has to be something in between, some balance has to be drawn. Now you have that case where Phoolan Devi was gangraped followed by the Behmai massacre. Now this is a case of 1981, it has been 40 years and the trial court has still not delivered a judgement. It’s due any day now, (but) whose fault is that. You have another case in Maharashtra that has been transferred to National Investigating Agency two years after the incident, the Bhima-Koregaon case. Investigation is supposedly not complete after two years also. Whose fault is that? So you have to look at the entire system in a holistic manner. There are many players – the investigation agency is one player, the prosecution is one player, the defence is one player, the justice delivery system is one player. So unless all of them are in a position to coordinate… you cannot blame only the justice delivery system. If the Telangana police was so sure that the persons they have caught are guilty, why did they not file the charge sheet immediately? If they were so sure the charge sheet should have been filed within one day. Why didn’t they do it?
Q: At the trial level, there are many instances of flaws in evidence collection. Do you think the police or whoever the investigators are, do they lack training?
A: Yes they do! The police lacks training. I think there is a recent report that has come out last week which says very few people (in the police) have been trained (to collect evidence).
Q: You think giving proper training to police to prepare a case will make a difference?
A: Yes, it will make a difference.
Q: You have a keen interest in juvenile justice. Unfortunately, a lot of heinous crimes are committed by juveniles. How can we correct that?
A: You see it depends upon what perspective we are looking at. Now these heinous crimes are committed by juveniles. Heinous crimes are committed by adults also, so why pick upon juveniles alone and say something should be done because juveniles are committing heinous crimes. Why is it that people are not saying that something should be done when adults are committing heinous crimes? That’s one perspective. There are a lot of heinous crimes that are committed against juveniles. The number of crimes committed against juveniles or children are much more than the crimes committed by juveniles. How come nobody is talking about that? And the people committing heinous crimes against children are adults. So is it okay to say that the State has imposed death penalty for an offence against the child? So that’s good enough, nothing more needs to be done? I don’t think that’s a valid answer. The establishment must keep in mind the fact that the number of heinous crimes against children are much more than those committed by juveniles. We must shift focus.
Q: Coming to NRC and CAA. Protests have been happening since December last year, the SC is waiting for the Centre’s reply, the Delhi HC has refused to directly intervene. Neither the protesters nor the government is budging. How do we achieve a breakthrough?
A: It is for the government to decide what they want to do. If the government says it is not going to budge, and the people say they are not going to budge, the stalemate could continue forever.
Q: Do you think the CAA and the NRC will have an impact on civil liberties, personal liberties and people’s rights?
A: Yes, and that is one of the reasons why there is protest all over the country. And people have realised that it is going to happen, it is going to have an impact on their lives, on their rights and that’s why they are protesting. So the answer to your question is yes.
Q: Across the world and in India, we are seeing an erosion of the value system upholding rights and liberties. How important is it for the healthy functioning of a country that social justice, people’s liberties, people’s rights are maintained?
A: I think social justice issues, fundamental rights are of prime importance in our country, in any democracy, and the preamble to our Constitution makes it absolutely clear and the judgement of the Supreme Court in Kesavananda Bharati and many other subsequent judgments also make it clear that you cannot change the basic structure of the Constitution. If you cannot do that then obviously you cannot take away some basic democratic rights like freedom of assembly, freedom of movement, you cannot take them away. So if you have to live in a democracy, we have to accept the fact that these rights cannot be taken away. Otherwise there are many countries where there is no democracy. I don’t know whether those people are happy or not happy.
Q: What will happen if in a democracy these rights are controlled by hook or by crook?
A: It depends upon how much they are controlled. If the control is excessive then that is wrong. The Constitution says there must be a reasonable restriction. So reasonable restriction by law is very important.
Q: The way in which the sexual harassment case against Justice Gogoi was handled was pretty controversial. The woman has now been reinstated in the Supreme Court as a staffer. Does this action of the Supreme Court sort of vindicate her?
A: I find this very confusing you know. There is an old joke among lawyers: Lawyer for the petitioner argued before the judge and the judge said you are right; then the lawyer for the respondent argued before the judge and the judge said you’re right; then a third person sitting over there says how can both of them be right and the judge says you’re also right. So this is what has happened in this case. It was found (by the SC committee) that what she said had no substance. And therefore, she was wrong and the accused was right. Now she has been reinstated with back wages and all. I don’t know, I find it very confusing.
Q: Do you think the retirement age of Supreme Court Judges should be raised to 70 years and there should be a fixed tenure?
A: I haven’t thought about it as yet. There are some advantages, there are some disadvantages. (When) You have extended age or life tenure as in the United States, and the Supreme Court has a particular point of view, it will continue for a long time. So in the United States you have liberal judges and conservative judges, so if the number of conservative judges is high then the court will always be conservative. If the number of liberal judges is high, the court will always be liberal. There is this disadvantage but there is also an advantage that if it’s a liberal court and if it is a liberal democracy then it will work for the benefit of the people. But I have not given any serious thought onthis.
Q: Is there any other thing you would like to say?
A: I think the time has come for the judiciary to sit down, introspect and see what can be done, because people have faith in the judiciary. A lot of that faith has been eroded in the last couple of years. So one has to restore that faith and then increase that faith. I think the judiciary definitely needs to introspect.
‘A major issue for startups, especially during fund raising, is their compliance with extant RBI foreign exchange regulations, pricing guidelines, and the Companies Act 2013.’- Aakash Parihar
Aakash Parihar is Partner at Triumvir Law, a firm specializing in M&A, PE/VC, startup advisory, international commercial arbitration, and corporate disputes. He is an alumnus of the National Law School of India University, Bangalore.
How did you come across law as a career? Tell us about what made you decide law as an option.
Growing up in a small town in Madhya Pradesh, wedid not have many options.There you either study to become a doctor or an engineer. As the sheep follows the herd, I too jumped into 11th grade with PCM (Physics, Chemistry and Mathematics).However, shortly after, I came across the Common Law Admission Test (CLAT) and the prospect of law as a career. Being a law aspirant without any background of legal field, I hardly knew anything about the legal profession leave alone the niche areas of corporate lawor dispute resolution. Thereafter, I interacted with students from various law schools in India to understand law as a career and I opted to sit for CLAT. Fortunately, my hard work paid off and I made it to the hallowed National Law School of India University, Bangalore (NSLIU). Joining NLSIU and moving to Bangalorewas an overwhelming experience. However, after a few months, I settled in and became accustomed to the rigorous academic curriculum. Needless to mention that it was an absolute pleasure to study with and from someof the brightest minds in legal academia. NLSIU, Bangalore broadened my perspective about law and provided me with a new set of lenses to comprehend the world around me. Through this newly acquired perspective and a great amount of hard work (which is of course irreplaceable), I was able to procure a job in my fourth year at law school and thus began my journey.
As a lawyer carving a niche for himself, tell us about your professional journey so far. What are the challenges that new lawyers face while starting out in the legal field?
I started my professional journey as an Associate at Samvad Partners, Bangalore, where I primarily worked in the corporate team. Prior to Samvad Partners, through my internship, I had developed an interest towards corporate law,especially the PE/VC and M&A practice area. In the initial years as an associate at Samvad Partners and later at AZB & Partners, Mumbai, I had the opportunity to work on various aspects of corporate law, i.e., from PE/VC and M&A with respect to listed as well as unlisted companies. My work experience at these firms equipped and provided me the know-how to deal with cutting edge transactional lawyering. At this point, it is important to mention that I always had aspirations to join and develop a boutique firm. While I was working at AZB, sometime around March 2019, I got a call from Anubhab, Founder of Triumvir Law, who told me about the great work Triumvir Law was doing in the start-up and emerging companies’ ecosystem in Bangalore. The ambition of the firm aligned with mine,so I took a leap of faith to move to Bangalore to join Triumvir Law.
Anyone who is a first-generation lawyer in the legal industry will agree with my statement that it is never easy to build a firm, that too so early in your career. However, that is precisely the notion that Triumvir Law wanted to disrupt. To provide quality corporate and dispute resolution advisory to clients across India and abroad at an affordable price point.
Once you start your professional journey, you need to apply everything that you learnt in law schoolwith a practical perspective. Therefore, in my opinion, in addition to learning the practical aspects of law, a young lawyer needs to be accustomed with various practices of law before choosing one specific field to practice.
India has been doing reallywell in the field of M&A and PE/VC. Since you specialize in M&A and PE/VC dealmaking, what according to you has been working well for the country in this sphere? What does the future look like?
India is a developing economy, andM&A and PE/VC transactions form the backbone of the same. Since liberalization, there has been an influx of foreign investment in India, and we have seen an exponential rise in PC/VA and M&A deals. Indian investment market growth especially M&A and PE/VC aspects can be attributed to the advent of startup culture in India. The increase in M&A and PE/VC deals require corporate lawyersto handle the legal aspects of these deals.
As a corporate lawyer working in M&A and PE/VC space, my work ranges from drafting term-sheets to the transaction documents (SPA, SSA, SHA, BTA, etc.). TheM&A and PE/VC deal space experienced a slump during the first few months of the pandemic, but since June 2021, there has been a significant growth in M&A and PE/VC deal space in India. The growth and consistence of the M&A and PE/VC deal space in India can be attributed to several factors such as foreign investment, uncapped demands in the Indian market and exceptional performance of Indian startups.
During the pandemic many businesses were shut down but surprisingly many new businesses started, which adapted to the challenges imposed by the pandemic. Since we are in the recovery mode, I think the M&A and PE/VC deal space will reach bigger heights in the comingyears. We as a firm look forward to being part of this recovery mode by being part of the more M&A and PE/VC deals in future.
You also advice start-ups. What are the legal issues or challenges that the start-ups usually face specifically in India? Do these issues/challenges have long-term consequences?
We do a considerable amount of work with startupswhich range from day-to-day legal advisory to transaction documentation during a funding round. In India, we have noticed that a sizeable amount of clientele approach counsels only when there is a default or breach, more often than not in a state of panic. The same principle applies to startups in India, they normally approach us at a stage when they are about to receive investment or are undergoing due diligence. At that point of time, we need to understand their legal issues as well as manage the demands of the investor’s legal team. The majornon-compliances by startups usually involve not maintaining proper agreements, delaying regulatory filings and secretarial compliances, and not focusing on proper corporate governance.
Another major issue for startups, especially during fund raising, is their compliance with extant RBI foreign exchange regulations, pricing guidelines, and the Companies Act 2013. Keeping up with these requirements can be time-consuming for even seasoned lawyers, and we can only imagine how difficult it would be for startups. Startups spend their initial years focusing on fund-raising, marketing, minimum viable products, and scaling their businesses. Legal advice does not usually factor in as a necessity. Our firm aims to help startups even before they get off the ground, and through their initial years of growth. We wanted to be the ones bringing in that change in the legal sector, and we hope to help many more such startups in the future.
In your opinion, are there any specific India-related problems that corporate/ commercial firms face as far as the company laws are concerned? Is there scope for improvement on this front?
The Indian legal system which corporate/commercial firms deal with is a living breathing organism, evolving each year. Due to this evolving nature, we lawyers are always on our toes.From a minor amendment to the Companies Act to the overhaul of the foreign exchange regime by the Reserve Bank of India, each of these changes affect the compliance and regulatory regime of corporates. For instance, when India changed the investment route for countries sharing land border with India,whereby any country sharing land border with India including Hong Kong cannot invest in India without approval of the RBI in consultation with the central government,it impacted a lot of ongoing transactions and we as lawyers had to be the first ones to inform our clients about such a change in the country’s foreign investment policy. In my opinion, there is huge scope of improvement in legal regime in India, I think a stable regulatory and tax regime is the need for the hour so far as the Indian system is concerned. The biggest example of such a market with stable regulatory and tax regime is Singapore, and we must work towards emulating the same.
Your boutique law firm has offices in three different cities — Delhi NCR, Mumbai and Bangalore. Have the Covid-induced restrictions such as WFH affected your firm’s operations? How has your firm adapted to the professional challenges imposed by the pandemic-related lifestyle changes?
We have offices in New Delhi NCR and Mumbai, and our main office is in Bangalore. Before the pandemic, our work schedule involved a fair bit of travelling across these cities. But post the lockdowns we shifted to a hybrid model, and unless absolutely necessary, we usually work from home.
In relation to the professional challenges during the pandemic, I think it was a difficult time for most young professionals. We do acknowledge the fact that our firm survived the pandemic. Our work as lawyers/ law firms also involves client outreach and getting new clients, which was difficult during the lockdowns. We expanded our client outreach through digital means and by conducting webinars, including one with King’s College London on International Treaty Arbitration. Further, we also focused on client outreach and knowledge management during the pandemic to educate and create legal awareness among our clients.
‘It’s a myth that good legal advice comes at prohibitive costs. A lot of heartburn can be avoided if documents are entered into with proper legal advice and with due negotiations.’ – Archana Balasubramanian
Archana Balasubramanian is the founding partner of Agama Law Associates, a Mumbai-based corporate law firm which she started in 2014. She specialises in general corporate commercial transaction and advisory as well as deep sectoral expertise across manufacturing, logistics, media, pharmaceuticals, financial services, shipping, real estate, technology, engineering, infrastructure and health.
August 13, 2021:
Lawyers see companies ill-prepared for conflict, often, in India. When large corporates take a remedial instead of mitigative approach to legal issues – an approach utterly incoherent to both their size and the compliance ecosystem in their sector – it is there where the concept of costs on legal becomes problematic. Pre-dispute management strategy is much more rationalized on the business’ pocket than the costs of going in the red on conflict and compliances.
Corporates often focus on business and let go of backend maintenance of paperwork, raising issues as and when they arise and resolving conflicts / client queries in a manner that will promote dispute avoidance.
Corporate risk and compliance management is yet another elephant in India, which in addition to commercial disputes can be a drain on a company’s resources. It can be clubbed under four major heads – labour, industrial, financial and corporate laws. There are around 20 Central Acts and then specific state-laws by which corporates are governed under these four categories.
Risk and compliance management is also significantly dependent on the sector, size, scale and nature of the business and the activities being carried out.
The woes of a large number of promoters from the ecommerce ecosystem are to do with streamlining systems to navigate legal. India has certain heavily regulated sectors and, like I mentioned earlier, an intricate web of corporate risk and compliance legislation that can result in prohibitive costs in the remedial phase. To tackle the web in the preventive or mitigative phase, start-ups end up lacking the arsenal due to sheer intimidation from legal. Promoters face sectoral risks in sectors which are heavily regulated, risks of heavy penalties and fines under company law or foreign exchange laws, if fund raise is not done in a compliant manner.
It is a myth that good legal advice comes at prohibitive costs. Promoters are quick to sign on the dotted line and approach lawyers with a tick the box approach. A lot of heartburn can be avoided if documents are entered into with proper legal advice and with due negotiations.
Investment contracts, large celebrity endorsement contracts and CXO contracts are some key areas where legal advice should be obtained. Online contracts is also emerging as an important area of concern.
When we talk of scope, arbitration is pretty much a default mechanism at this stage for adjudicating commercial disputes in India, especially given the fixation of timelines for closure of arbitration proceedings in India. The autonomy it allows the parties in dispute to pick a neutral and flexible forum for resolution is substantial. Lower courts being what they are in India, arbitration emerges as the only viable mode of dispute resolution in the Indian commercial context.
The arbitrability of disputes has evolved significantly in the last 10 years. The courts are essentially pro-arbitration when it comes to judging the arbitrability of subject matter and sending matters to arbitration quickly.
The Supreme Court’s ruling in the Vidya Drolia case has significantly clarified the position in respect of tenancy disputes, frauds and consumer disputes. It reflects upon the progressive approach of the court and aims to enable an efficient, autonomous and effective arbitration environment in India.
Law firms stand for ensuring that the law works for business and not against it. Whatever the scope of our mandate, the bottom line is to ensure a risk-free, conflict-free, compliant and prepared enterprise for our client, in a manner that does not intimidate the client or bog them down, regardless of the intricacy of the legal and regulatory web it takes to navigate to get to that end result. Lawyers need to dissect the business of law from the work.
This really involves meticulous, detail-oriented, sheer hard work on the facts, figures, dates and all other countless coordinates of each mandate, repetitively and even to a, so-called, “dull” routine rhythm – with consistent single-mindedness and unflinching resolve.
As a firm, multiply that effort into volumes, most of it against-the-clock given the compliance heavy ecosystem often riddled with uncertainties in a number of jurisdictions. So the same meticulous streamlining of mandate deliverables has to be extrapolated by the management of the firm to the junior most staff.
Further, the process of streamlining itself has to be more dynamic than ever now given the pace at which the new economy, tech-ecosystem, business climate as well as business development processes turn a new leaf.
Finally, but above all, we need to find a way to feel happy, positive and energized together as a team while chasing all of the aforesaid dreams. The competitive timelines and volumes at which a law firm works, this too is a real challenge. But we are happy to face it and evolve as we grow.
We always as a firm operated on the work from anywhere principle. We believed in it and inculcated this through document management processes to the last trainee. This helped us shut shop one day and continue from wherever we are operating.
The team has been regularly meeting online (at least once a day). We have been able to channel the time spent in travelling to and attending meetings in developing our internal knowledge banks further, streamline our processes, and work on integrating various tech to make the practice more cost-effective for our clients.
Right to Disclosure – Importance & Challenges in Criminal Justice System – By Manu Sharma
Personal liberty is the most cherished value of human life which thrives on the anvil of Articles 14 and 21 of the Constitution of India (“the Constitution”). Once a person is named an accused, he faces the spectre of deprivation of his personal liberty and criminal trial. This threat is balanced by Constitutional safeguards which mandate adherence to the rule of law by the investigating agencies as well as the Court. Thus, any procedure which seeks to impinge on personal liberty must also be fair and reasonable. The right to life and personal liberty enshrined under article 21 of the Constitution, expanded in scope post Maneka Gandhi[1], yields the right to a fair trial and fair investigation. Fairness demands disclosure of anything relevant that may be of benefit to an accused. Further, the all-pervading principles of natural justice envisage the right to a fair hearing, which entails the right to a full defence. The right to a fair defence stems from full disclosure. Therefore, the right of an accused to disclosure emanates from this Constitutional philosophy embellished by the principles of natural justice and is codified under the Code of Criminal Procedure, 1973 (“Code”).
Under English jurisprudence, the duty of disclosure is delineated in the Criminal Procedure and Investigations Act, 1996, which provides that the prosecutor must disclose to the accused any prosecution material which has not previously been disclosed to the accused and which might reasonably be considered capable of undermining the case for the prosecution against the accused or of assisting the case for the accused, except if such disclosure undermines public interest.[2] Fairness ordinarily requires that any material held by the prosecution which weakens its case or strengthens that of the defendant, if not relied on as part of its formal case against the defendant, should be disclosed to the defence.[3] The duty of disclosure under common law contemplates disclosure of anything which might assist the defence[4], even if such material was not to be used as evidence[5]. Under Indian criminal jurisprudence, which has borrowed liberally from common law, the duty of disclosure is embodied in sections 170(2), 173, 207 and 208 of the Code, which entail the forwarding of material to the Court and supply of copies thereof to the accused, subject to statutory exceptions.
II. Challenges in Enforcement
The right to disclosure is a salient feature of criminal justice, but its provenance and significance appear to be lost on the Indian criminal justice system. The woes of investigative bias and prosecutorial misconduct threaten to render this right otiose. That is not to say that the right of an accused to disclosure is indefeasible, as certain exceptions are cast in the Code itself, chief among them being public interest immunity under section 173(6). However, it is the mischief of the concept of ‘relied upon’ emerging from section 173(5) of the Code, which is wreaking havoc on the right to disclosure and is the central focus of this article. The rampant misuse of the words “on which the prosecution proposes to rely’ appearing in section 173(5) of the Code, to suppress material favourable to the accused or unfavourable to the prosecution in the garb of ‘un-relied documents’ has clogged criminal courts with avoidable litigation at the very nascent stage of supply of copies of documents under section 207 of the Code. The erosion of the right of an accused to disclosure through such subterfuge is exacerbated by the limited and restrictive validation of this right by criminal Courts. The dominant issues highlighted in the article, which stifle the right to disclosure are; tainted investigation, unscrupulous withholding of material beneficial to the accused by the prosecution, narrow interpretation by Courts of section 207 of the Code, and denial of the right to an accused to bring material on record in the pre-charge stage.
A. Tainted Investigation
Fair investigation is concomitant to the preservation of the right to fair disclosure and fair trial. It envisages collection of all material, irrespective of its inculpatory or exculpatory nature. However, investigation is often vitiated by the tendencies of overzealous investigating officers who detract from the ultimate objective of unearthing truth, with the aim of establishing guilt. Such proclivities result in collecting only incriminating material during investigation or ignoring the material favourable to the accused. This leads to suppression of material and scuttles the right of the accused to disclosure at the very inception. A tainted investigation leads to miscarriage of justice. Fortunately, the Courts are not bereft of power to supervise investigation and ensure that the right of an accused to fair disclosure remains protected. The Magistrate is conferred with wide amplitude of powers under section 156(3) of the Code to monitor investigation, and inheres all such powers which are incidental or implied to ensure proper investigation. This power can be exercised suo moto by the Magistrate at all stages of a criminal proceeding prior to the commencement of trial, so that an innocent person is not wrongly arraigned or a prima facie guilty person is not left out.[6]
B. Suppression of Material
Indian courts commonly witness that the prosecution is partisan while conducting the trial and is invariably driven by the lust for concluding in conviction. Such predisposition impels the prosecution to take advantage by selectively picking up words from the Code and excluding material favouring the accused or negating the prosecution case, with the aid of the concept of ‘relied upon’ within section 173(5) of the Code. However, the power of the prosecution to withhold material is not unbridled as the Constitutional mandate and statutory rights given to an accused place an implied obligation on the prosecution to make fair disclosure.[7] If the prosecution withholds vital evidence from the Court, it is liable to adverse inference flowing from section 114 of the Indian Evidence Act, 1872 (“Evidence Act). The prosecutor is expected to be guided by the Bar Council of India Rules which prescribe that an advocate appearing for the prosecution of a criminal trial shall so conduct the prosecution that it does not lead to conviction of the innocent. The suppression of material capable of establishment of the innocence of the accused shall be scrupulously avoided. [8]
C. Scope of S. 207
The scope of disclosure under section 207 has been the subject of fierce challenge in Indian Courts on account of the prosecution selectively supplying documents under the garb of ‘relied upon’ documents, to the prejudice of the defence of an accused. The earlier judicial trend had been to limit the supply of documents under section 207 of the Code to only those documents which were proposed to be relied upon by the prosecution. This view acquiesced the exclusion of documents which were seized during investigation, but not filed before the Court along with the charge sheet, rendering the right to disclosure a farce. This restrictive sweep fails to reconcile with the objective of a fair trial viz. discovery of truth. The scheme of the code discloses that Courts have been vested with extensive powers inter alia under sections 91, 156(3) and 311 to elicit the truth. Towards the same end, Courts are also empowered under Section 165 of the Evidence Act. Thus, the principle of harmonious construction warrants a more purposive interpretation of section 207 of the code. The Hon’ble Supreme Court expounded on the scope of Section 207 of the Code in the case of Manu Sharma[9] and held that documents submitted to the Magistrate under section 173(5) would deem to include the documents which have to be sent to the magistrate during the course of investigation under section 170(2). A document which has been obtained bona fide and has a bearing on the case of the prosecution should be disclosed to the accused and furnished to him to enable him to prepare a fair defence, particularly when non production or disclosure would affect administration of justice or prejudice the defence of the accused. It is not for the prosecution or the court to comprehend the prejudice that is likely to be caused to the accused. The perception of prejudice is for the accused to develop on reasonable basis.[10] Manu Sharma’s [supra] case has been relied upon in Sasikala [11] wherein it was held that the Court must concede a right to the accused to have access to the documents which were forwarded to the Court but not exhibited by the prosecution as they favoured the accused. These judgments seem more in consonance with the true spirit of fair disclosure and fair trial. However, despite such clear statements of law, courts are grappling with the judicial propensity of deviating from this expansive interpretation and regressing to the concept of relied upon. The same is evident from a recent pronouncement of the Delhi High Court where the ratios laid down in Manu Sharma & Sasikala [supra] were not followed by erroneously distinguishing from those cases.[12] Such “per incuriam” aberrations by High Court not only undermine the supremacy of the Apex Court, but also adversely impact the functioning of the district courts over which they exercise supervisory jurisdiction. Hopefully in future Judges shall be more circumspect and strictly follow the law declared by the Apex Court.
D. Pre-Charge Embargo
Another obstacle encountered in the enforcement of the right to disclosure is the earlier judicial approach to stave off production or consideration of any additional documents not filed alongwith the charge sheet at the pre-charge stage, as the right to file such material was available to the accused only upon the commencement of trial after framing of charge.[13] At the pre-charge stage, Court could not direct the prosecution to furnish copies of other documents[14] It was for the accused to do so during trial or at the time of entering his defence. However, the evolution of law has seen that at the stage of framing charge, Courts can rely upon the material which has been withheld by the prosecutor, even if such material is not part of the charge sheet, but is of such sterling quality demolishing the case of the prosecution.[15] Courts are not handicapped to consider relevant material at the stage of framing charge, which is not relied upon by the prosecution. It is no argument that the accused can ask for the documents withheld at the time of entering his defence.[16] The framing of charge is a serious matter in a criminal trial as it ordains an accused to face a long and arduous trial affecting his liberty. Therefore, the Court must have all relevant material before the stage of framing charge to ascertain if grave suspicion is made out or not. Full disclosure at the stage of section 207 of the code, which immediately precedes discharging or charging an accused, enables an accused to seek a discharge, if the documents, including those not relied upon by the prosecution, create an equally possible view in favour of the accused.[17] On the other hand, delaying the reception of documents postpones the vindication of the accused in an unworthy trial and causes injustice by subjecting him to the trauma of trial. There is no gainsaying that justice delayed is justice denied, therefore, such an approach ought not to receive judicial consent. A timely discharge also travels a long way in saving precious time of the judiciary, which is already overburdened by the burgeoning pendency of cases. Thus, delayed or piecemeal disclosure not only prejudices the defence of the accused, but also protracts the trial and occasions travesty of justice.
III. Duties of the stakeholders in criminal justice system
The foregoing analysis reveals that participation of the investigating agency, the prosecution and the Court is inextricably linked to the enforcement of the right to disclosure. The duties cast on these three stakeholders in the criminal justice system, are critical to the protection of this right. It is incumbent upon the investigating agencies to investigate cases fairly and to place on record all the material irrespective of its implication on the case of prosecution case. Investigation must be carried out with equal alacrity and fairness irrespective of status of accused or complainant.[18] An onerous duty is cast on the prosecution as an independent statutory officer, to conduct the trial with the objective of determination of truth and to ensure that material favourable to the defence is supplied to the accused. Ultimately, it is the overarching duty of the Court to ensure a fair trial towards the administration of justice for all parties. The principles of fair trial require the Court to strike a delicate balance between competing interests in a system of adversarial advocacy. Therefore, the court ought to exercise its power under section 156(3) of the Code to monitor investigation and ensure that all material, including that which enures to the benefit of the accused, is brought on record. Even at the stage of supply of copies of police report and documents under section 207 of the Code, it is the duty of the Court to give effect to the law laid down by the Hon’ble Supreme Court in Manu Sharma (supra) and Sasikala (supra), and ensure that all such material is supplied to the accused irrespective of whether it is “relied upon” by the prosecution or not.
IV. Alternate Remedy
The conundrum of supply of copies under section 207 of the code abounds criminal trials. Fairness is an evolving concept. There is no doubt that disclosure of all material which goes to establish the innocence of an accused is the sine qua non of a fair trial.[19] Effort is evidently underway to expand the concept in alignment with English jurisprudence. In the meanwhile, does the right of an accused to disclosure have another limb to stand on? Section 91 of the Code comes to the rescue of an accused, which confers wide discretionary powers on the Court, independent of section 173 of the Code, to summon the production of things or documents, relevant for the just adjudication of the case. In case the Court is of the opinion that the prosecution has withheld vital, relevant and admissible evidence from the Court, it can legitimately use its power under section 91 of the Code to discover the truth and to do complete justice to the accused.[20]
V. Conclusion
A society’s progress and advancement are judged on many parameters, an important one among them being the manner in which it administers criminal justice. Conversely, the ironic sacrilege of the core virtues of criminal jurisprudence in the temples of justice evinces social decadence. The Indian legislature of the twenty first century has given birth to several draconian statutes which place iron shackles on personal liberty, evoking widespread fear of police abuses and malicious prosecution. These statutes not only entail presumptions which reverse the burden of proof, but also include impediments to the grant of bail. Thus, a very heavy burden to dislodge the prosecution case is imposed on the accused, rendering the right to disclosure of paramount importance. It is the duty of the Court to keep vigil over this Constitutional and statutory right conferred on an accused by repudiating any procedure which prejudices his defence. Notable advancement has been made by the Apex Court in interpreting section 207 of the Code in conformity with the Constitutional mandate, including the right to disclosure. Strict adherence to the afore-noted principles will go a long way in ensuring real and substantial justice. Any departure will not only lead to judicial anarchy, but also further diminish the already dwindling faith of the public in the justice delivery system.
**
Advocate Manu Sharma has been practising at the bar for over sixteen years. He specialises in Criminal Defence. Some of the high profile cases he has represented are – the 2G scam case for former Union minister A Raja; the Religare/Fortis case for Malvinder Singh; Peter Mukerjee in the P Chidambaram/ INX Media case; Devas Multimedia in ISRO corruption act case; Om Prakash Chautala in PMLA case; Aditya Talwar in the aviation scam case; Dilip Ray, former Coal Minister in one of the coal scam cases; Suhaib Illyasi case.
**
Disclaimer: The views or opinions expressed are solely of the author.
[1] Maneka Gandhi and Another v. Union of India, (1978) 1 SCC 248
[2] S. 3 of the Criminal Procedure and Investigations Act, 1996
[3] R v. H and R v. C, 2004 (1) ALL ER 1269
[4] R v. Ward (Judith), (1993) 1 WLR 619 : (1993) 2 ALL ER 577 (CA)
[5] R v. Preston, (1994) 2 AC 130 : (1993) 3 WLR 891 : (1993) 4 ALL ER 638 (HL), R v. Stinchcome,
(1991), 68 C.C.C. (3d) 1 (S.C.C.)
[6] Vinubhai Haribhai Malaviya and Others v. State of Gujarat and Another, 2019 SCC Online SC 1346
[7] Sidhartha Vashishth alias Manu Sharma v. State (NCT of Delhi), (2010) 6 SCC 1
[8] R. 16, part II, Ch. VI of the Bar Council of India Rules
[9] Manu Sharma, (2010) 6 SCC 1
[10] V.K. Sasikala v. State, (2012) 9 SCC 771 : AIR 2013 SC 613
[11] Sasikala, (2012) 9 SCC 771 : AIR 2013 SC 613
[12] Sala Gupta and Another v. Directorate of Enforcement, (2019) 262 DLT 661
[13] State of Orissa v. Debendra Nath Padhi¸(2005) 1 SCC 568
[14] Dharambir v. Central Bureau of Investigation, ILR (2008) 2 Del 842 : (2008) 148 DLT 289
[15] Nitya Dharmananda alias K. Lenin and Another v. Gopal Sheelum Reddy, (2018) 2 SCC 93
[16] Neelesh Jain v. State of Rajasthan, 2006 Cri LJ 2151
[17] Dilwar Balu Kurane v. State of Maharashtra, (2002) 2 SCC 135, Yogesh alias Sachin Jagdish Joshi v. State of Maharashtra, (2008) 10 SCC 394
[18] Karan Singh v. State of Haryana, (2013) 12 SCC 529
[19] Kanwar Jagat Singh v. Directorate of Enforcement & Anr, (2007) 142 DLT 49
[20] Neelesh, 2006 Cri LJ 2151
Disclaimer: The views or opinions expressed are solely of the author.
Validity & Existence of an Arbitration Clause in an Unstamped Agreement
By Kunal Kumar
January 8, 2024
In a recent ruling, a seven-judge bench of the Supreme Court of India in its judgment in re: Interplay between arbitration agreements under the Arbitration & Conciliation Act 1996 and the Indian Stamp Act 1899, overruled the constitutional bench decision of the Supreme Court of India in N. N. Mercantile Private Limited v. Indo Unique Flame Ltd. & Ors. and has settled the issue concerning the validity and existence of an arbitration clause in an unstamped agreement. (‘N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. – III’)
Background to N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. – III
One of the first instances concerning the issue of the validity of an unstamped agreement arose in the case of SMS Tea Estate Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd. In this case, the Hon’ble Apex Court held that if an instrument/document lacks proper stamping, the exercising Court must preclude itself from acting upon it, including the arbitration clause. It further emphasized that it is imperative for the Court to impound such documents/instruments and must accordingly adhere to the prescribed procedure outlined in the Indian Stamp Act 1899.
With the introduction of the 2015 Amendment, Section 11(6A) was inserted in the Arbitration & Conciliation Act 1996 (A&C Act) which stated whilst appointing an arbitrator under the A&C Act, the Court must confine itself to the examination of the existence of an arbitration agreement.
In the case of M/s Duro Felguera S.A. v. M/s Gangavaram Port Limited, the Supreme Court of India made a noteworthy observation, affirming that the legislative intent behind the 2015 Amendment to the A&C Act was necessitated to minimise the Court's involvement during the stage of appointing an arbitrator and that the purpose embodied in Section 11(6A) of A&C Act, deserves due acknowledgement & respect.
In the case of Garware Wall Ropes Ltd. v. Cosatal Marine Constructions & Engineering Ltd., a divisional bench of the Apex Court reaffirmed its previous decision held in SMS Tea Estates (supra) and concluded that the inclusion of an arbitration clause in a contract assumes significance, emphasizing that the agreement transforms into a contract only when it holds legal enforceability. The Apex Court observed that an agreement fails to attain the status of a contract and would not be legally enforceable unless it bears the requisite stamp as mandated under the Indian Stamp Act 1899. Accordingly, the Court concluded that Section 11(6A) read in conjunction with Section 7(2) of the A&C Act and Section 2(h) of the Indian Contract Act 1872, clarified that the existence of an arbitration clause within an agreement is contingent on its legal enforceability and that the 2015 Amendment of the A&C Act to Section 11(6A) had not altered the principles laid out in SMS Tea Estates (supra).
Brief Factual Matrix – N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.
Indo Unique Flame Ltd. (‘Indo Unique’) was awarded a contract for a coal beneficiation/washing project with Karnataka Power Corporation Ltd. (‘KPCL’). In the course of the project, Indo Unique entered into a subcontract in the form of a Work Order with N.N. Global Mercantile Pvt. Ltd. (‘N.N. Global’) for coal transportation, coal handling and loading. Subsequently, certain disputes arose with KPCL, leading to KPCL invoking Bank Guarantees of Indo Unique under the main contract, after which Indo Unique invoked the Bank Guarantee of N. N. Global as supplied under the Work Order.
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Subsequently, N.N. Global initiated legal proceedings against the cashing of the Bank Guarantee in a Commercial Court. In response thereto, Indo Unique moved an application under Section 8 of the A&C Act, requesting that the Parties to the dispute be referred for arbitration. The Commercial Court dismissed the Section 8 application, citing the unstamped status of the Work Order as one of the grounds. Dissatisfied with the Commercial Court's decision on 18 January 2018, Indo Unique filed a Writ Petition before the High Court of Bombay seeking that the Order passed by the Commercial Court be quashed or set aside. The Hon’ble Bombay High Court on 30 September 2020 allowed the Writ Petition filed by Indo Unique, aggrieved by which, N.N. Global filed a Special Leave Petition before the Supreme Court of India.
N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. – I
The issue in the matter of M/s N.N. Global Mercantile Pvt. Ltd. v. M/s Indo Unqiue Flame Ltd. & Ors. came up before a three-bench of the Supreme Court of India i.e. in a situation when an underlying contract is not stamped or is insufficiently stamped, as required under the Indian Stamp Act 1899, would that also render the arbitration clause as non-existent and/or unenforceable (‘N.N. Global Mercantile Pvt. Ltd. v. Indo Flame Ltd. – I’).
The Hon’ble Supreme Court of India whilst emphasizing the 'Doctrine of Separability' of an arbitration agreement held that the non-payment of stamp duty on the commercial contract would not invalidate, vitiate, or render the arbitration clause as unenforceable, because the arbitration agreement is considered an independent contract from the main contract, and the existence and/or validity of an arbitration clause is not conditional on the stamping of a contract. The Hon’ble Supreme Court further held that deficiency in stamp duty of a contract is a curable defect and that the deficiency in stamp duty on the work order, would not affect the validity and/or enforceability of the arbitration clause, thus applying the Doctrine of Separability. The arbitration agreement remains valid and enforceable even if the main contract, within which it is embedded, is not admissible in evidence owing to lack of stamping.
The Hon’ble Apex Court, however, considered it appropriate to refer the issue i.e. whether unstamped instrument/document, would also render an arbitration clause as non-existent, unenforceable, to a constitutional bench of five-bench of the Supreme Court.
N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. – II
On 25 April 2023, a five-judge bench of the Hon’ble Supreme Court of India in the matter of N. N. Mercantile Private Limited v. Indo Unique Flame Ltd. & Ors. held that (1) An unstamped instrument containing an arbitration agreement cannot be said to be a contract which is enforceable in law within the meaning of Section 2(h) of the Indian Contract Act 1872 and would be void under Section 2(g) of the Indian Contract Act 1872, (2) an unstamped instrument which is not a contract nor enforceable cannot be acted upon unless it is duly stamped, and would not otherwise exist in the eyes of the law, (3) the certified copy of the arbitration agreement produced before a Court, must clearly indicate the stamp duty paid on the instrument, (4) the Court exercising its power in appointing an arbitration under Section 11 of the A&C Act, is required to act in terms of Section 33 and Section 35 of the Indian Stamp Act 1899 (N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. – II).
N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. – III
A seven-judge bench of the Supreme Court of India on 13 December 2023 in its recent judgment in re: Interplay between arbitration agreements under the Arbitration & Conciliation Act 1996 and the Indian Stamp Act 1899, (1) Agreements lacking proper stamping or inadequately stamped are deemed inadmissible as evidence under Section 35 of the Stamp Act. However, such agreements are not automatically rendered void or unenforceable ab initio; (2) non-stamping or insufficient stamping of a contract is a curable defect, (2) the issue of stamping is not subject to determination under Sections 8 or 11 of the A&C Act by a Court. The concerned Court is only required to assess the prima facie existence of the arbitration agreement, separate from concerns related to stamping, and (3) any objections pertaining to the stamping of the agreement would fall within the jurisdiction of the arbitral tribunal. Accordingly, the decision in N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. – II and SMS Tea (supra) was overruled, by the seven-judge bench of the Supreme Court of India.
Kunal is a qualified lawyer with more than nine years of experience and has completed his LL.M. in Dispute Resolution (specialisation in International Commercial Arbitration) from Straus Institute for Dispute Resolution, Pepperdine University, California.
Kunal currently has his own independent practice and specializes in commercial/construction arbitration as well as civil litigation. He has handled several matters relating to Civil Law and arbitrations (both domestic and international) and has appeared before the Supreme Court of India, High Court of Delhi, District Courts of Delhi and various other tribunals.
No Safe Harbour For Google On Trademark Infringement
By Mayank Grover & Pratibha Vyas
October 9, 2023
Innovation, patience, dedication and uniqueness culminate in establishing a distinct identity. A trademark aids in identifying the source and quality, shaping perceptions about the identity's essence. When values accompany a product or service's trademark, safeguarding against misuse and infringement becomes crucial. A recent pronouncement of a Division Bench of the Delhi High Court dated August 10, 2023 in Google LLC v. DRS Logistics (P) Ltd. & Ors. and Google India Private Limited v. DRS Logistics (P) Ltd. & Ors. directed that Google’s use of trademarks as keywords for its Google Ads Programme does amount to ‘use’ in advertising under the Trademarks Act and the benefit of safe harbour would not be available to Google if such keywords infringe on the concerned trademark.
Factual Background
Google LLC manages and operates the Google Search Engine and Ads Programme, while, Google India Private Limited is a subsidiary of Google that has been appointed as a non-exclusive reseller of the Ads Programme in India. The Respondents, DRS Logistics and Agarwal Packers and Movers Pvt. Ltd. are leading packaging, moving and logistics service providers in India.
On 22.12.2011, DRS filed a suit against Google and Just Dial Ltd. under provisions of the Trademarks Act, 1999 (‘TM Act’) inter alia seeking a permanent injunction against Google from permitting third parties from infringing, passing off etc. the relevant trademarks of DRS. The core of the dispute revolved around Google’s Ads Programme. DRS claimed that its trade name 'AGARWAL PACKERS AND MOVERS' is widely recognized and a 'well-known' trademark. Use of DRS’s trademark as a keyword diverts internet traffic from its website to that of its competitors and they were entitled to seek restraint against Google for permitting third parties who are not authorized to use the said trademark. DRS further argued that Google benefits from these trademark infringements. This practice involved charging a higher amount for displaying these ads, constituting an infringement of their trademarks. Whereas, Google contended that the use of the keyword in the Ads Programme does not amount to ‘use’ under the TM Act notwithstanding that the keyword is/or similar to a trademark. Thus, the use of a term as a keyword cannot be construed as an infringement of a trademark under the TM Act, and being an intermediary, it claimed a safe harbour under Section 79 of the Information Technology Act, 2000. (‘IT Act’).
In essence, the dispute between the parties was rooted in DRS’s grievance concerning the Ads Programme. The Learned Single Judge vide judgment dated 30.10.2021interpreted relevant provisions of the TM Act and drew on multiple legal precedents to arrive at the decision that DRS can seek protection of its trademarks which were registered under Section 28 of the TM Act and issued directions to investigate complaints alleging the use of trademark and/or to ascertain whether a sponsored result has an effect of infringing a trademark or passing off.
Being aggrieved, Google LLC and Google Pvt. Ltd. filed appeals before the Division Bench. Google LLC argued that the Single Judge’s findings were erroneous and the directions issued were liable to be set aside. Google India claimed that it doesn’t control and operate the Search Engine and the Ads Programme making it unable to comply with the directions passed in the impugned judgment.
Analysis & Decision of Court
The Division Bench found Single Judge’s rationale for assessing trademark infringement through keywords and meta-tags valid. Meta-tags are a list of words/code in a website, not readily visible to the naked eye. It serves as a tool for indexing the website by a search engine. If a trademark of a third party is used as a meta-tag, the same would serve as identifying the website as relevant to the search query that includes the trademark as a search term. The use of keywords in the Ads Programme also serves similar purpose. The Division Bench was unable to accept that using a trademark as a keyword, even if not visible, would not be considered trademark use under the TM Act.
Google placed heavy reliance on the decisions rendered by Courts across jurisdictions of United Kingdom, United States of America, European Union, Australia, New Zealand, Russia, South Africa, Canada, Spain, Italy, Japan and China; in the cases of Google France SARL and Google Inc. v. Louis Vitton SA & Ors.[1], Interflora Inc. v. Marks & Spencer Plc.[2], and L’Oreal SA v. eBay International AG[3] in support of the contention that the use of trade marks is by the advertiser and not by Google. However, the Division Bench rejected Google’s passive role; highlighting its active involvement in recommending and promoting trademark keywords for higher clicks in its Ads Programme. Division Bench referred to a few judicial decisions rendered in the United States of America that captured the essence of the controversy for perspective, concluding that Google actively promotes and encourages trademarks associated with major goods and services, rather than having a passive role.
It was held that the contention that the use of trademarks as keywords, per se constitutes an infringement of the trademark is unmerited; the assumption that an internet user is merely searching the address of the proprietor of the trademark when he feeds in a search query that may contain a trademark, is erroneous.
The Doctrine of 'Initial Interest Confusion' addresses trademark infringement based on pre-purchase confusion. The doctrine is applied when meta-tags, keywords, or domain names cause initial confusion similar to a registered trademark. If users are misled to access unrelated websites, trademark use in internet advertising may be actionable and reliance was placed on US precedents. Referring to Section 29 of the TM Act, it was directed that Section 29 does not specify the duration for which the confusion lasts but, even if the confusion is for a short duration and an internet user is able to recover from the same, the trade mark would be infringed and would offend Section 29(2) of the TM Act.
It was held that the Ads Programme is a platform for displaying advertisements. Google, being an architect and operator of its own programme makes it an active participant in the use of trademarks and determining the advertisements displayed on search pages. Their use of proprietary software makes them utilize trademarks and control the distribution of information related to potentially infringing links, ultimately leading to revenue maximization. Hence, a substantial link exists between Google LLC and Google India, rendering it impossible for Google India to deny its role in operating the Ads Programme. It was further held that Google sells trademarks as keywords to advertisers and encourages users to use trademarks as keywords for ads. It is contradictory for Google to encourage trademark use while claiming data belongs to third parties for exemption. After 2004, Google changed policies to boost revenue and subsequently, introduced a tool that searches effective terms, including trademarks. Google's active involvement in its advertising business and online nature does not necessarily qualify it for benefits under Section 79 of the IT Act. The Division Bench agreed with the view of the Single Judge that Google would not be eligible for protection of safe harbour under Section 79(1) of the IT Act, if its alleged activities infringe trademarks.
Conclusion
This is a seminal decision governing (and rather, restricting) the operations of intermediaries and redefining the jurisprudence of safe harbour under the IT Act. The decision is well-reasoned and establishes a significant precedent for safeguarding trademarks by uniquely holding Google accountable under its Ads Programme. The same will prevent usage of tradenames as a third-party trademark in keyword search or metatags by advertisers on Google’s search engine. While keywords and meta-tags have different levels of visibility, their purpose is similar i.e. advertising and attracting internet traffic. The use of trademarks as meta-tags by a person who is neither a proprietor of the trademark nor permitted to use the same leads to confusion amongst public at large due to the automated processes of search engines and consequently, constitutes trademark infringement.
About the Authors: Mayank Grover is a Partner and Pratibha Vyas is an Associate at Seraphic Advisors, Advocates & Solicitors
[1] C-236/08 to C-238/08 (2010) [2011] All ER (EC) 41
[2] [2014] EWCA Civ 1403
[3] 2C- 324/09 (2010)
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