Author Archives: pkp309

Mediation under the Consumer Protection Act 2019

Chapter V of the Consumer Protection Act 2019 provides for the Mediation.

It comprises of eight provisions – Sections 74 to 81. It has come into force from 20th July 2020.

Recently, Supreme Court of India has directed all State Governments and Union Territories to take measures to establish Mediation Cells and enable e-filing of complaints by consumers at District level (District Consumer Dispute Redressal Commissions) and at State level (State Consumer Dispute Redressal Commissions) by next date of hearing i.e.July 26, 2022.[In re: Inaction of the Governments in appointing President and members/staff of Districts and State Consumer Disputes Redressal Commission and inadequate infrastructure across India v. Union of India & Ors. In Suo Motu Writ Petition (Civil) Nos.2 of 2021, Order dt. April 12, 2022]

The Central Government has framed the Consumer Protection (Mediation) Rules, 2020, made operational from 20th July 2020.

Rule 3 requires that a Commission (District, State or National) shall have a Mediation Cell comprising of panel of mediators.

Rule 4 provides for matters not to be referred to mediation and it reads:

“The following matters shall not be referred to mediation, namely:-

(a) the matter relating to proceedings in respect of medical negligence resulting in grievous injury or death;

(b) matters which relate to defaults or offences for which applications for compounding of offences have been made by one or more parties;

(c) cases involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coersion;

(d) cases relating to prosecution for criminal and non-compoundable offences;

(e) cases which involve public interest or the interest of numerous persons who are not parties before the Commission:

Provided that, in any case other than those mentioned in this rule, the Commission before which the case is pending may choose not to refer it to mediation if it appears to the Commission that no elements of a settlement exist which may be acceptable to the parties or that mediation is otherwise not appropriate having regard to the circumstances of the case and the respective positions of the parties.”

Rule 6 also provides that the parties shall not resort to any arbitral or judicial proceedings in respect of a matter which is the subject matter of the mediation.

Further, the National Consumer Disputes Redressal Commission has made the Consumer Protection (Mediation) Regulations, 2020 and is made effective from 24th July 2020.

It provides fro eligibility o mediators for empanelment. It also provides (regulation 8) that mediator shall be entitled to a consolidated fee, as fixed by the President of the respective Consumer Commission considering the nature of the dispute. Fees are fixed case wise. And in an unsuccessful mediation, half of the fee will be paid to the mediator. And fee of the mediator shall be shared equally by the parties.

Regulation 9 requires that mediators shall undergo training from experts nominated by the Mediation Cell.

Regulations 10 to 15 are relevant from Mediators and parties perspective and hence is reproduced below:

“Regulation 10. Code of conduct.—(1) The empanelled mediators shall not communicate, directly or indirectly with any of the parties or their associates, affiliates, promoters, holding companies, subsidiaries companies, directors, partners or employees or with any of their counsel during pendency of the mediation proceedings, except during the course of the mediation, in the presence of the parties or their counsel.

(2) The empanelled mediator shall not accept any gift or hospitality from any of the parties or their associates, affiliates, promoters, holding companies, subsidiaries companies, directors, partners or employees or any of their counsel.

(3) In addition to the disclosure required under clauses (a) and (b) of Section 77 each mediator shall disclose the following information before commencement of the mediation in a case assigned to him, namely—

(i) whether he has or in the past had any personal, business or professional relationship or connection with any of the parties to the consumer dispute or other proceedings or any person associated or connected in any manner, to any of the parties or their associates, affiliates, parent companies, subsidiaries companies, directors, partners or employees;

(ii) whether there exists any circumstance which may give rise to be reasonable doubt as to his independence and impartiality.

Regulation 11 Mediation proceedings.—(1) The mediation shall be conducted in the presence of the parties or their authorised representatives or counsel.

(2) The mediation shall stand terminated on expiry of three months from the date of first appearance before the mediator unless the time for completion of mediation is extended by the Consumer Commission, in which case it shall stand terminated on expiry of such extended time.

(3) The parties shall be entitled to appear before the mediator in person or through their respective counsel or authorised representatives.

(4) The mediator shall be guided by the principles of natural justice and fair play but shall not be bound by the provisions of the Code of Civil Procedure, 1908 (5 of 1908) or the Indian Evidence Act, 1872 (1 of 1872).

(5) If a party does not participate in the mediation proceedings, the Consumer Commission may direct such a party to participate in the proceedings.

(6) The parties shall provide all such information to the mediator as may be reasonably required by him for conducting the mediation proceedings.

(7) The record of the proceedings shall be prepared by the mediator on every date and shall be signed by the parties or their Counsel, authorised representatives or Attorneys.

(8) The agreement executed between the parties shall be submitted by the mediator, to the Consumer Commission, in a sealed cover, with a forwarding letter.

(9) If no agreement is executed between the parties, within the time prescribed in these regulations, the mediator shall intimate so, to the Consumer Commission, without in any manner disclosing as to what transpired during the mediation proceedings, what was the stand taken by the parties or why the agreement could not be reached.

Regulation 12. Role of mediator.—(1) The mediator shall attempt to facilitate a voluntary resolution of the disputes between the parties, assist them in removing the misunderstandings, if any, and generating options to resolve their disputes, but shall not impose any term or any settlement upon the parties.

(2) The mediator shall explain the terms of the agreement, to the parties, before obtaining their respective signatures on it.

Regulation 13. Confidentiality.—(1) The parties and the mediator shall maintain confidentiality in respect of the events that transpire during the mediation proceedings and shall not use or rely upon any information, document etc. produced, the proposals and admissions made or the views expressed during the mediation proceedings.

(2) There shall be no audio or video recording of the mediation proceedings.

Regulation 14. Communications.—The mediator shall not communicate with the Consumer Commission except by way of his report, with copies to all the parties.

Regulation 15. Immunity.—(1) No mediator shall be liable for any civil or criminal proceedings, for any act done or omitted to be done bonafidely by him, in his capacity as a mediator.

(2) The mediator shall not be summoned by a party to appear in a Court or other forum, to testify in regard to any information received or the action taken by him during the mediation proceedings.”

Why mediation?

There could be various scenario for considering mediation to resolve existing or probable conflict.

One of the important reasons to opt mediation is that it allows you to resolve disputes on principles rather on as per feelings or intuition of parties. It helps you prevents hasty decisions and avoid pressure – even when it is necessary to conclude dispute at the earliest.

Also, the common sense approach is to resolve disputes through mediation because it saves time and cost involved in arbitration or litigation in court. There is no certainty about the final outcome in arbitration or court litigation as the third party (arbitrator or judge) imposes (by adjudication) what she/he considers as fair and hence it is quite often neither parties are happy with the result/decision. And that leads to further litigation and bitterness in relationships.

Many a times, after initially launching litigation (which might have been launched in anger, to teach lesson or just to delay the matter), parties soon realise that it is not what they wanted. First thing most people face in litigation is the sheer delay in outcome and the cost, besides efforts that goes into it. It also affects reputation, relationships (may be of several years old and/or possible future relationships) and value erosion (particularly for entities whose shares/stocks are listed). Sometimes, focus of business shifts from doing business to seeking ‘fairness’ from third party (arbitrator or Judge).

And where one goes through the roller coaster of loosing, winning, loosing, winning in litigation (remember roller coaster of emotions too), the final winner faces the harsh reality that final decree/award may not be honoured by the opposite party. And to make a final decree/award ‘the final’, one need to apply for execution proceedings in court! And execution proceedings itself can take several years. Just look at number of pending cases and for how many years from here. At the end, litigants may wonder and tend to agree that ‘justice is an illusion‘ and it was mistake to litigate (though rarely openly admitted).

As a contrast, in mediation, parties to a dispute resolve their differences themselves with the help of a third neutral party (mediator). Mediator creates environment for communication, understanding underlying interests and available options. Instead of doing reality check at end (as in litigation), mediator facilitates reality check early on in mediation. No wonder most disputes are resolved by parties themselves, on a mutually agreed terms, that meets their respective underlying interests.

Mediation is a voluntary process – agreed by all disputing parties to attempt in good faith to resolve their differences. It maintains confidentiality (names of parties, their dispute and settlement terms etc. are not made public) and thus reputation and brand images are preserved. And more importantly and often, relations amongst parties are restored /improved or where parties so decides, consciously, to end relations without bitterness.

Mediation based on principles (as opposed to positions) can perhaps be used to establish long lasting peace without sacrificing concerns of justice, fair play and equity.

To the contrary of strong belief, mediation can work even when one of the disputing parties is strong (an elephant in the room) and other party is comparatively weaker or even miniscule.

Since mediation is not adversarial, it presents a possibility of looking at disputes not as “either or” approach or zero-sum games. In mediation, parties creates several possible options/possible solutions, and after evaluating them on mutually agreed objective criteria, finally they may agree to settle the dispute on a mutually agreed terms.

The best part is nothing is binding until final settlement is reached, written and signed. This allows party to work in good faith to resolve and openly discuss their respective concerns and interests. Advocate in mediation can represent parties in mediation and has a crucial role in making parties open, cautiously and gradually. Disputing parties too need to understand and pay their counsels (Advocate in mediation) in such a way that they are incentivised for mutually agreed terms of settlement than they might get over a period of prolonged litigation.

Out come in such a mediation provides an opportunity to reformulate relationships in the interests of all stakeholders, as it takes into consideration the future interests of parties, rather than past deeds (saying / actions) of parties.

Where mediation fails, parties still have options to come back to mediation or opt for conciliation, arbitration and court litigation.

Even cases pending before arbitrator or court may be referred to mediation.

There could be other scenario calling for mediation.

  • Say, businesses / corporates do negotiations. And when negotiations have reached an impasse, but both sides agree that they need help resolving the differences – particularly when both sides see 1+1 (i.e. their joining/working together) can make 11. In this scenario a neutral mediator is engaged to facilitate resolve the differences.
  • Also, when talks between negotiators turns into a dispute, they often develop negative opinions about each other. A negotiator might think, if only the other side was bargaining in good faith, we would have resolved this issue, probably long ago. Such views of parties sows seeds of skepticism and every proposal of other party gets biased with skepticism, which prevents them from reaching settlement. A mediator can help you overcome this barrier. 
  • In case of parties are in litigation for long and are looking for ‘face saving’ exit, mediation helps.

Still disputing parties are considering to litigate, before proceeding – consider what the Chief Justice of India, N. V. Ramana has to say about mediation:

  • “Reasons for conflicts are many. Misunderstandings, ego issues, trust and greed can lead to conflicts. Ultimately, small differences of opinion can lead to a major conflict. And even major conflicts can be resolved with some effort in understanding one other,” the CJI said. “My advice, after remaining in the legal profession for over 40 years, is that you must keep the option of knocking on the doors of a court as a last resort. Use this last resort only after exploring the option of ADR- arbitration, mediation and conciliation. Arbitration and mediation are efforts at restoring a relationship,” Justice Ramana said. See here.
  • Mahabharata teaches us significance of mediation, conciliation: CJI Ramana to business community Read here and here.

We assist you resolve dispute / impasse – by acting as Mediator as well as Advocate in Mediation.

Pre-pack under the IBC: an option for MSME Corporates to resolve its financial distress without losing control

India has made drastic change on the way insolvency is resolved for corporate entity with limited liabilities with the enactment of much coveted Insolvency and Bankruptcy Code, 2016 (the IBC). And recently it has witnessed the 6th amendment to the IBC. This shows that while the IBC is in the making (work in progress), what is heartening is that based on experience gained, necessary amendments are made, from time to time, to smoothen the process.

Earlier the Insolvency and Bankruptcy (Amendment) Ordinance, 2021 was promulgated on 4th April 2021, which introduced the Pre-packaged Insolvency Resolution Process (PPIRP) for corporates classified as micro, small and medium enterprises (MSMEs)[1]. 

The Preamble to the said Ordinance stated its objective as an attempt to provide an efficient alternative insolvency resolution process for MSMEs under the IBC, ensuring quicker, cost-effective and value maximising outcomes for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs[2].

Considering preamble to the said Ordinance, but not the provision of Sub-sec.(2) of Sec.54A of the IBC or the Rules and the Regulations thereunder[3], it can be said that the PPIRP is available only to corporate debtor (either LLP or Pvt Ltd or Ltd company)[4], classified as MSME[5]. 

On 11th August 2021, the said Ordinance is repealed and replaced with the Insolvency and Bankruptcy Code (Amendment) Act, 2021, with a savings clause for anything done or actions taken under the Ordinance. The said Amendment Act is operative (retrospectively) from 4th of April 2021 (same as the repealed Ordinance). However, unlike the said Ordinance, there is no pre-amble to the IBC (Amendment) Act, 2021. Thus, suggesting that PPIRP is not intended to be restricted to MSMEs only, though initially its available for MSMEs only.

The igniting point for PPIRP is a ‘default’ by a Corporate Debtor (CD), on or after 9th April 2021, of INR 10 lakh (INR 1 million) or more[6]. Unlike RBI circular no. DBR.No.BP.BC.18/21.04.048/2018-19 dated 1st January 2019, upper cap for default is not prescribed and hence MSME borrower (which is CD) with default of INR 10 lakh (1 mn.) or more (without upper limit) can avail the benefit of PPIRP.

And CD making default, on or after 25th March 2021, of INR 1 crore (INR 10 million) or more[7] can resolve its insolvency by Corporate Insolvency Resolution Process (CIRP) u/s.10 of the IBC. 

At present, the IBC does not permit creditors to initiate PPIRP. However, in case of default of INR 1 crore (INR 10 million) or more, creditors can initiate CIRP u/sec. 7 of IBC (by Financial Creditor / FCs) or u/sec. 9 of IBC (by Operational Creditor / OCs).

The consequence of two different limits for PPRIP and CIRP is explained with examples below:

Where amount of default by CD is of:

(1) INR 10 million or more, and CD which is classified as MSME has option of either initiating CIRP u/s.10 of the IBC or to initiate PPIRP u/s.54A(2) of the IBC. Here, FCs and OCs are eligible to initiate CIRP (but not PPIRP). It may be noted that, presently PPIRP can be initiated by CD only. 

(2) INR 1 million (10 lakh) or more but below INR 10 million, and CD is classified as MSME, then it may initiate PPIRP u/s.54A of IBC. In such cases, as the value of default remains below INR 10 million, CIRP cannot be initiated either by CD or by FCs and OCs.

(3) less than INR 1 million (INR 10 lakh), CD cannot initiate PPIRP u/s.54A of IBC. However, if such CD is MSME, it can avail RBI’s one-time restructuring facility for MSME (stated infra).

Introduction of PPIRP is timely and is of relevance considering that:

  • suspension of CIRP (due to Pandemic COVID-19) has ended on 24th March 2021. 
  • While default made by CD during 25th March 2020 to 24th March 2021 is shielded u/s.10A of the IBC, the said protection is not available from 25th March 2021, though disruption due to the pandemic continues. 

PPIRP for COVID-19 affected CD, is an alternative to:

  • the Reserve Bank of India’s (RBI) one-time restructuring facility for MSME borrower upto INR 25 crore (INR 250 million), which were classified by lenders as ‘standard’ as on 1st March 2020 but may have slipped into ‘Non-Performing Asset’ (NPA) category, has ended on 31st March 2021[8]. For those MSMEs who had not availed this facility, are eligible under extended facility[9] till 30thSeptember 2021, if accounts of MSMEs are classified by lenders as ‘standard’ as on 31st March 2021.
  • the RBI’s Resolution framework dated 6th August 2020[10] for borrowers (includes MSMEs as well) facing stress on account of Covid-19. It applies, inter alia, to borrowers whose aggregate exposure to lending institutions collectively, is more than INR 25 crore (INR 250 million); and 
  • the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, dated 7th June 2019.

Above resolution frameworks of RBI requires CD to approach and negotiate with individual lender banks/NBFCs (except under RBI’s 7th June 2019), whereas PPIRP requires that resolution is proposed and negotiated with all the unrelated FCs. Thus, PPIRP provides better option, as it avoids time, efforts and cost in negotiation with every lenders required under the RBI framework. PPIRP involves all unrelated FCs and not restricted to banks/NBFCs. PPIRP requires approval of only 66% in value of total debt due to unrelated FCs whereas RBI framework of 7th June 2019 requires inter-creditors agreement amongst lender banks/NBFCs and twin consent of (i) 75% in value of total debt due to banks/NBFCs and (ii) 60% in number of banks/NBFCs involved.

Lender(s) may treat ‘resolution’ under PPIRP as restructuring under above notifications, particularly the provisioning norms as per the Directions of 7th June 2019 shall apply. If this cannot be achieved, company’s account with lending banks/NBFCs cannot be upgraded. Therefore, to encourage PPIRP, RBI may consider tweaking its notification.

What is PPIRP?

PPIRP in its simplest form can be described as a legal process under which CD, prepares a plan to resolve its state of insolvency. Such a plan is called a ‘base resolution plan’, which may be proposed by the CD either alone or jointly with any other person to its creditors. It is called “pre-packaged” because before formally initiating insolvency resolution process, the CD prepares a draft base resolution plan, circulates to its creditors and negotiates. Once, it is agreed the same is put to the formal PPIRP process for ensuring transparency and seek independent judicial approval for making it legally binding. Thus, PPIRP comprises of informal and formal process, both recognised under the IBC (Amendment) Act 2021.

It is available to CDs who has not undergone CIRP or PPIRP in 3 years prior to formally initiating PPIRP.

Benefits of PPIRP:

  1. Speed: The PPIRP is proposed to be faster than CIRP. If it is planned and implemented well, the pre-pack resolution plan can be completed within a week or even less after nod of NCLT to commence PPIRP! It is not some hype. Consider any delay or negligence can lead account of CD into NPA (if default continues for 90 days) and thereby lenders may need to make higher provisions in its book, though CD being MSME may remain eligible u/s.29A r/w sec.240A IBC, to propose PPIRP. Thus, balancing the needs of CD and lenders – for lenders, early resolution ensues saving higher provisioning in its books and for CD, to retain the control. Thus, it appears that PPIRP taking less than 90 days may become the norm.
  2. Retain management: Unlike CIRP, under the PPIRP, Board of Directors/ Designated Partners retains the control of CD during PPIRP and thereafter, whether the resolution plan is approved or not. (Section 54H).
  3. Least disruption in business and reputation: PPIRP provides opportunity for least disruption in business of CD, privacy and confidentiality, and if the securities of such CD are traded on stock exchanges, there will be least erosion in its stock prices. It also helps maintain reputation of promoters and the CD. 
  4. Moratorium: The moratorium (as in CIRP) is available till the date of closure of the PPIRP process[11]. It thus protects CD from actions of creditors while PPIRP is underway. However, there is no moratorium prior to date of admission of application by NCLT for commencing PPIRP. Thus, CD need to act with speed and in camouflage so that possible actions by OCs and others may be avoided before the draft base resolution plan is agreed by unrelated FCs and formal PPIRP is initiated.
  5. Avoid action by Creditors: PPIRP can be used by CD to avoid CIRP by creditors (as it is believed that in most cases debt and default would exceed Rs1 crore), which is lengthy and costly affairs and mostly results into management losing its control. It is believed that under PPIRP all major stakeholders takes timely action to avoid worst situation and thereby intends to provide win-win situation for all.
  6. Maximise value for stakeholders: It gives option to eligible CD for proposing its resolution plan proposal for quicker approval and implementation, thereby saving its business, saving jobs and maximise value for all stakeholders.

Legal provisions:

The IBC (Amendment) Act, 2021 has inserted 17 provisions. It has inserted new Chapter III-A (Ss.54A to 54P) providing for the PPIRP. Also interplay of applications for PPIRP and CIRP, where default by CD is of INR 1 crore (INR 10 million) or more, is provided by newly inserted S.11A. New provisions are also inserted to deal with fraudulent management during PPIRP (S.67A), punishment for offences related to PPIRP (S.77A); authority to AA to levy penalty for initiating PPIRP with intent to defraud any person or for purpose other than insolvency resolution (newly inserted Sub-sec.(3) to Sec.65); and provision for pro-active functions and duties of insolvency professional prior to formal initiation of PPIRP (newly inserted sub-sec.(1A) to Sec.208). The role of insolvency professional prior to commencement of PPIRP is now statutorily recognised[12]. Name of Insolvency Professional to act as Resolution Professional is to be proposed by unrelated FCs. And is appointed with consent of unrelated FCs with atleast 66% in value of financial debt[13].

To implement the provisions of PPIRP, Ministry of Corporate Affairs/MCA has notified the PPIRP Rules, 2021 dealing with manner of filing application for initiating PPIRP[14] and the Insolvency and Bankruptcy Board of India (IBBI) has notified the PPIRP Regulations, 2021 for the purpose[15]. 

Checks and balances under PPIRP:

To avoid misuse of PPIRP by CDs, safeguards are provided. If during the PPIRP process it is found that:

  • valuation is substantially different from the valuation represented by CD; or 
  • CD had indulged into avoidance transactions or fraudulent activities or 
  • where CD proposes a different plan than what was informally agreed as base resolution plan, 

the creditors may terminate the PPIRP process and in certain cases management gets transferred to Resolution Professional (RP) or CIRP may be initiated or CD may be liquidated.

Management of the CD is not intended to be vested with the RP. However, in exceptional cases, where during PPIRP the affairs of CD is conducted prejudicial to creditors or fraudulently or in case of gross mismanagement of the affairs of CD, the COC may decide with 66% voting to vest the management in the RP. And if the NCLT agrees with the COC, then the management of the CD vests with the RP[16].

The far reaching consequence of vesting management of CD with RP is that if the resolution plan for CD is not approved by the COC, then the NCLT shall order liquidation of CD[17].

Consider alternative options:

India is a competitive market economy. IBC is competing with other options for resolution of financial stress. There is no compulsion on CD to opt for PPIRP or upon bankers to approve base resolution plan under PPIRP proposed by defaulter CD

Other options could be, resolution under the RBI Prudential framework, or RBI’s one-time restructuring framework for MSMEs, or bilateral negotiation, or Scheme of arrangement or compromise under the Companies Act 2013 or even Corporate Insolvency Resolution Process (CIRP) under IBC or takeover / bailout by knight rider(s).

Thus, PPIRP is one more but a significant option and a tool with CD for resolving its insolvency. 

CD also need to factor about time, efforts and cost involved in resolving its insolvency under various options.

If pre-packaged negotiation fails, all concerned have other sets of options, and such options are driving force in negotiating the pre-packed resolution plan. It may be noted that limitation period is not stopped until moratorium is declared by NCLT.

Some of the important factors for CD in considering PPIRP

  1. Resolution applicant(s) shall be eligible under Section 29A of the IBC. It may be noted that for MSMEs, benefit of relaxation from the provisions of clause (c) of section 29A i.e. even if account of CD is classified as NPA and clause (h) of section 29A i.e. even if guarantee given by resolution applicant(s) is invoked by creditor(s) and remains unpaid (fully or partly). [Per section 240A IBC]
  2. To commence PPIRP, CD needs: (i) prior consent of members of CD by special resolution / and where CD is LLP, prior approval of three-fourth partners; and (ii) consent of unrelated FCs with atleast 66% in value of the financial debt[18]. 
  3. Early proposal of PPIRP may be better since limitation period of 3 years for FCs to initiate appropriate action starts from the time the loan becomes NPA. 
  4. CD need to furnish declaration regarding the existence of any avoidance transactions that may be within the scope of provisions under Chapter III or fraudulent or wrongful trading under Chapter VI of the IBC[19]. Also, the RP is duty bound (even under PPIRP) to determine existence of such transactions and seek its avoidance[20].
  5. From the date of admission of application for PPIRP by the Adjudicating Authority (NCLT), moratorium (as in CIRP) is available to CD till the date of closure of the process[21].
  6. During the PPIRP, the management remains with the CD. However certain transactions by CD requires prior approval of the COC and disclosure of information by CD is expected at a higher degree[22].
  7. RP to appoint two independent registered valuers to determine fair value and liquidation value of the CD. RP to maintain its confidentiality and share the same with COC members, only after receipt of a resolution plan, and upon written undertaking of confidentiality from the COC members[23].
  8. The public announcement (PA) upon admission of application for commencing PPIRP is to be sent, inter alia, to every creditor of the CD[24] for informing that CD is undergoing PPIRP and not for submission of claims. The claim details will be provided by the CD in the preliminary Information Memorandum prepared by it and submits the same to the Resolution Professional (RP). RP is proposed by unrelated FCs[25] and appointed by NCLT[26]. RP will confirm the amount of claim from the records of the CD and then inform about the same to each creditors of the CD and seek their objections, if any.
  9. Base resolution plan is prepared and proposed by the CD to its unrelated FCs for approval. It is only where a base resolution plan is not approved by the COC or if the base plan impairs the claims of OCs then RP shall call for competing resolution plan(s) for CD from open market, adopting a method commonly known as Swiss Challenge method[27].
  10. Unrelated FCs are grouped together and called Committee of Creditors (COC). Before approval of resolution plan, COC may with atleast 66% voting decide to either (i) terminate PPIRP at any time[28], or (ii) initiate CIRP, if default amount is INR 1 crore (10 million) or more[29], and thereby terminate PPIRP.
  11. COC may not approve a resolution plan, resulting in termination of PPIRP[30]. And in such an eventuality, CD need to bear the entire cost of PPIRP, if any[31].
  12. If the COC approves the resolution plan, further approval is required from the NCLT and then it becomes binding on all concerned[32].
  13. The approval of COC to the resolution plan need to be obtained in maximum of 90 days of commencement of PPIRP[33]. And thereafter, NCLT may either approve[34] or reject[35] the resolution plan within next 30 days. Thus, maximum period envisaged to complete PPIRP is 120 days.

It is pertinent to note that period of 90 days is the outer limit. And along with the Application for admission of PPIRP, consent of unrelated FCs (atleast 66% in value of total debt) is required. Thus, much water would have undergone before filing of application for PPIRP with the Adjudicating Authority. Considering no regulatory intervention provided before filing of application with NCLT for commencing PPIRP, the CD, its creditors and probable resolution professional would do a lot of homework, meetings and negotiations, documentation, draft base resolution plan etc. And where the market value is not being reflected in the base resolution plan, COC would go for a Swiss challenge otherwise it should be like a green channel process where CD can come and immediately get the regulatory benefit of PPIRP.

Thus, practically it may be that PPIRP may conclude much earlier than 90 days from the date of admission of application by NCLT.

  1. There is no provision under the IBC permitting CD to opt out of PPIRP, once the application to initiate PPIRP is admitted by NCLT. This is so because, prior to filing application with NCLT to initiate PPIRP, it is expected that CD and its FCs arrives at mutually acceptable resolution proposal.
  2. There is no provision in the IBC on ipso facto clauses in contracts whereby ‘event of default’ may be specified, such as filing of insolvency application and thereby give right to terminate contract. And until the IBC / law provides for the same, the validity of ipso facto clauses would be decided on facts of each case[36].

Conclusion:

PPIRP in India is an alternative to several options that may be available for CD to resolve its financial distress. PPIRP can be a safety valve to save CD particularly where financial stress is due to COVID-19 or due to factors other than mismanagement / fraud. 

It offers an option to promoters/ management to retain control of CD and propose a resolution to its financial distress in a fair and transparent manner, before it runs out of options.

The success of PPIRP is in (i) maintaining confidentiality thereby giving CD option to propose resolution without alerting OCs who may get panicked, (ii) speed as financial distress of CD and creditors’ action cannot be deferred for long; and (iii) ensuring transparency for instilling confidence in the process.

RBI may consider to recognise PPIRP in its prudential framework (of 7th June 2019 notification) so that PPIRP gets required clarity and boost.The objective is laudable and framework is in place. We need to see how it eventually turns out. 

[1] Section 54A(1) of the IBC.

[2] 6th, 7th and 8th Para of the Preamble to the IBC (Amendment) Ordinance, 2021.

[3] Sub-sec.(1) of Sec.54A states CD classified as MSME may initiate PPIRP and sub-sec.(2) thereof states without prejudice to sub-sec.(1) any CD (MSME or not) in default u/s.4 may initiate PPIRP. Further, neither the Rules notified by the MCA nor the Regulations framed by IBBI specifies that CD shall be MSME!!

[4] Section 3(8) r/w Sec. 3(7) of IBC.

[5] For criteria of classification see https://msme.gov.in/whatsnew/new-criteria-classification-micro-small-and-medium-enterprises-gazette-notification-1st

[6] Vide MCA’s notification no. S.O. 1543(E) dated 9th April 2021 (per second proviso to sec.4 of IBC). Hopefully MCA will notify the same amount under the IBC (Amendment) Act 2021.

[7] Vide MCA’s notification no. S.O. 1205(E) dated 24th March 2020, limit for CIRP was increased from INR 1 lakh (INR 100,000) to INR 1 crore i.e. INR 10 million (as per first proviso to sec.4 of IBC) and suspension of initiation of CIRP u/s.10A ended on 24th March 2021.

[8] RBI’s Circular No. DOR.No.BP.BC/4/21.04.048/2020-21 dated 6th August 2020 to be read with RBI’s Circular No. DOR.STR.REC.20/21.04.048/2021-22 dated 4th June 2021, whereby limit enhanced from INR 25 crore (INR 250 million) to INR 50 crore (INR 500 million).

[9] RBI’s Circular No. DOR.STR.REC.12/21.04.048/2021-22 dated 5th May 2021 to be read with the RBI’s Circular No. DOR.STR.REC.21/21.04.048/2021-22 dated 4th June 2021.

[10] Parts B and C of annex. to the RBI’s Circular No. DOR.No.BP.BC/3/21.04.048/2020-21 dated 6th August 2020

[11] Section 54E of the IBC

[12] Sec. 54B of the IBC prescribes duties of insolvency professional proposed to be appointed as the resolution professional for PPIRP purpose.

[13] Sec. 54A(2)(e) of the IBC.

[14] the Insolvency and Bankruptcy (prepackaged insolvency resolution process) Rules, 2021, notified on and effective from 9th April 2021. The same continues under the IBC Amendment Act 2021 by virtue of Sec.24 of the General Clauses Act, 1897 r/w ruling of Constitutional Bench of Hon’ble Supreme Court in West Ramnad Electric Distribution Co. Ltd. Vs. State of Madras, AIR 1962 SC 1753.

[15] the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021, notified on and effective from 9th April 2021. The same continues under the IBC Amendment Act 2021 by virtue of Sec.24 of the General Clauses Act, 1897 r/w ruling of Hon’ble Supreme Court in State of Punjab vs. Harnek Singh, AIR 2002 SC 1074.

[16] section 54J(1) and (2), r/w regulation 50 of the PPIRP Regulations

[17] section 54N(4)

[18] Section 54A(3) of the IBC

[19] Section 54C(3)(c) ibid r/w. regulation 16(2) of the PPIRP Regulations

[20] Regulation 41 of the PPIRP Regulations

[21] Section 54E of the IBC

[22] Section 54F r/w regulations 9, 10, 18, 20, 50 of the PPIRP Regulations

[23] Regulations 38 and 39 of the PPIRP Regulations

[24] Regulation 19(2)(b) of the PPIRP Regulations

[25] Section 54A(2)(e) of the IBC

[26] Section 54E(1)(b)

[27] Section 54K(5) of the IBC r/w Regulation 48 of the PPIRP Regulations

[28] Section 54N(2) of the IBC

[29] Section 54O(1) of the IBC

[30] Ss. 54D(3) and proviso to 54K(12), ibid r/w regulation 49(4) ibid

[31] Sec. 54N(3) of the IBC

[32] Section 54D(2) ibid

[33] Section 54D(2) of the IBC

[34] Section 54L(1) of the IBC

[35] Section 54L(3) of the IBC

[36] Hon’ble Supreme Court of India in Gujarat Urja Vikas Nigam Ltd vs. Amit Gupta and Ors., 2021 SCC OnLine SC 194, Para 145.

Mediation in India

In India, mediation can be a statutory requirement, generally before institution of a suit (majority of cases), or a court referred (rare) or a contractual i.e. requirement of private contract between parties (gaining momentum).

There is no specific law of mediation in India. However, the mediation is recognised in India under different statutes. The same is summarised below:

  • Civil and Commercial Matters
    • The Civil Procedure Code, 1908 – Court annexed mediation u/s.89 r/w Order 10 and rules framed by High Courts and Sec.16 of the Court Fees Act, 1870; Compromise of Suit per Order 23 r/w Rules 3, 3A, 3B; Order 27 Rule 5B; Family matters per Order 32A Rule 3

Court annexed mediation status:

The Supreme Court, all the High Courts, and District Courts now have full-fledged mediation centres.

  • Mandatory pre-institution mediation under the Commercial Courts Act, 2005 – Sections 2(c), 12A r/w the Commercial Courts (Pre-Institution Mediation and Settlement) Rules 2018
    • SARFAESI Act – Section Section 11 – conciliation or arbitration
    • Mandatory conciliation (before arbitration) under the Micro Small and Medium Enterprises Development Act, 2006 – section 18 – Facilitation Council and eSamaadhan Scheme of Government
    • Mediation and Conciliation Panels under
      • the Companies Act, 2013 – Section 442 r/w the Companies (Mediation and Conciliation) Rules, 2016
      • Real Estate (Regulation and Development) Act, 2016
    • The Legal Services Authorities Act, 1987 – Lok Adalats – Chapter VIA and Sections 22A to 22E
    • Conciliation under Part III of the Arbitration and Conciliation Act, 1996
  • Consumers related matters
    • Mediation cells under the Consumer Protection Act, 2019 – the Consumer Protection (Mediation) Rules and Regulations 2020 – click here to know more.
    • Ombudsperson is empowered to act as mediator in complaints from consumers in electricity – Section 42 of the Electricity Act 2003
    • For telecom disputes – the TRAI Act 1997. However individual consumers cannot avail it. It is only for group of consumers. Individual consumers may compliant under the Consumer Protection Act 2019.
    • Insurance Ombudsman Rules 2017 for consumer disputes with insurance companies .
    • RBI ombudsman for complaint against banks and NBFCs
  • SEBI Act 1992 – Section 15JB(3) – Ombudsman to promote settlement of complaint by agreement or mediation.
  • Labour laws
    • the Industrial Disputes Act, 1947 – Conciliation u/Sections 2(p), 4, 5, 12(3) and (4), and 18(3)
    • Provisions of Industrial Disputes Act is made applicable to newspaper employees, sales promotion employees and bead and cigar workers and thus have conciliation procedure is applied for resolving their disputes
    • the Cine Workers and Cinema Theatre Workers (Regulation of Employment) Act 1981 – Ss.4 and 5 r/w Chapter VI of the Rules of 1984
    • Some State Laws on labour also provides for conciliation – Kerala Agricultural Workers Act 1974, Kerala Headland Workers Act 1978, Madhya Pradesh Industrial Relations Act 1960, Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act 1971, etc.
  • Personal and matrimonial matters
    • The Hindu Marriage Act, 1955 and the Special Marriages Act, 1954 -Section 23(2) – court in the first instance to attempt mediation between parties – r/w the Family Courts Act1984 and rules framed thereunder by States in India
    • The Protection of Women from Domestic Violence Act, 2005 – requires appointment of counsellor
    • Conciliation under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 – Section 10
    • Conciliation under the Maintenance and Welfare of Parents and Senior Citizens Act, 2017
    • The Gram Nyayalayas Act, 2008

Since there is no single statute on mediation, contractual and private mediations are based on mutually agreed terms of mediation, including confidentiality clause, without prejudice clause and implementation and enforceability clause on settlement agreement that may be arrived at.

The role of advocate in mediation is gaining momentum with cautious approach. Still, majority of lawyers are apprehensive of loss of their remuneration which they would earn in traditional court litigation.

Online mediation / Online Dispute Resolution (ODR) is also gaining momentum in India. Though, appropriate safeguards are applied by mutual agreement on confidentiality, not recording online sessions and restricting participants / access to room from where online participation is made and records are shared through mutually acceptable secured means.

Still offline or online mediation has a base of willingness of parties to settle dispute through mediation and acceptance of independence of mediator / organisation providing mediation services.

The draft Mediation Bill 2021

While India is signatory of United Nations Convention on International Settlement Agreements Resulting from Mediation (New York, 2018) (the “Singapore Convention on Mediation”), but has not ratified it yet. Department of Legal Affairs of the Ministry of Law and Justice has recently placed on its website the Draft Mediation Bill 2021 for public comments.

The said Bill of 2021 proposes to ratify the Singapore Convention on Mediation and mandates pre-litigation mediation in civil and commercial litigation. Mediation is a voluntary process and the draft Bill requires that parties make a good faith attempt to settle their dispute amicably. Mediator explains the mediation process in a substantive session. However, for urgent interim reliefs parties may approach courts without first attempting mediation. It also provides for community mediation. It proposes to exclude limitation period for time taken in mediation and also recognises confidentiality, settlement agreement and its enforceability as of decree of court. It proposes to create the Council of Mediation with which Mediator, Mediation Institution and Mediation Service Provider needs to register. The Council will frame regulations for them including for qualification, experience and accreditation requirement of mediator. It proposes to recognise foreign mediators and settlement agreement reached outside India.

About Mediator:

The mediator is understood to be a catalyst (as an agent in chemistry) or a facilitator (being a neutral person) to arrive at mutually agreeable settlement by and between disputing parties. He is someone in whom confidence is posed in by parties as an independent, neutral person with skill to facilitate an attempt of parties to settle their disputes outside the arbitration and litigation process.

Mediator does not intervene in the process of arriving at settlement by parties. He is not an adjudicator or arbitrator who imposes his decision. He does not express opinion on right and wrong, ethical or otherwise or take sides. He does not validate or condemn act of parties.

Mediator is an independent professional with skills of mediation. His independence and role as mediator is accepted voluntarily by parties. Mediator is someone before whom parties, in private sessions, can openly express their feelings about the problem. He helps parties see the core issue and surrounding emotions (like separating a needle from a haystack), and invite parties to see the future for themselves – on the issue and/or relation with other parties. He facilitates parties to arrive at settlement and often brings to their attention any deviation from the goal of arriving at solution/settlement.

We do not guarantee result in litigation – why…

We do not guarantee result, one way or the other, in litigation. In fact no one can. Why ….. keep reading.

The out come of litigation depends upon a lot many factors like facts, legal position, manner of presenting the case, the efficiency and skill of the advocates, the care taken by the clients in presenting all relevant facts and the understanding capacity, personal beliefs/prejudices and philosophy, integrity and impartiality of Judges. Consider this :

A litigant may win in the trial court, but may loose in the first appeal; may win in appeal but loose in second appeal. Or a litigant may loose at trail and first appellate court but win at the second appellate court. The hierarchy of appeals, revisions and reviews may lead to reversal and further reversal.

If litigating before tribunals (quasi courts), chances are Judges are not trained or experienced. Also there may not be sufficient number of Judges at tribunal (which is common even for Courts in India). Add to that the lack of judicial discipline like a Judge fully aware of the fact that she/he is retiring, still continues to hear matters and may even reserve orders for pronouncing at a later date. And before his last date of retirement may not be able to pronounce the orders which were reserved. In such situation, litigant need to wait for reconstitution of the bench of tribunal and then hearing starts again from the beginning. All this at the cost of the litigant.

This leads to a lot of uncertainty and if any one tells you or promises about certainty of result and if you know what is stated here … you know there is no guarantee of result in litigation.

Also remember that Judges are first human being like us. And, like us, they are bound to be guided by self compass of “good person” and hence biased. To know more on ‘good person’, check Dolly Chugh’s TED Talk – which was named one of the 25 Most Popular TED Talks of 2018.

If you want to know how judges decide the cases, search on internet “Nature of the Judicial Process”.

When can you initiate IBC action, if the Arbitration award is in your favour?

Hon’ble Supreme Court in K. Kishan vs. M/s. Vijay Nirman Company Pvt. Ltd. (in Civil Appeal No.21824 of 2018, decided on 14.08.2018) addressed – whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the IBC”) can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon.

M/s Vijay Nirman Company Pvt. Ltd. (the Respondent) entered into a sub-Contract Agreement with one M/s Ksheerabad Constructions Pvt. (‘KCPL’) on 01.02.2008.

Apart from this Agreement, a separate agreement of the same date was entered into between the said KPCL and one M/s SDM Projects Private Limited, Bangalore, as a result of which, a tripartite Memorandum of Understanding was entered into on 09.05.2008 between KCPL, M/s SDM Projects Pvt. Ltd. and the Respondent.

During the course of the project, disputes and differences arose between the parties and the same were referred to an Arbitral Tribunal, which delivered its Award on 21.01.2017. One of the claims that was allowed by the said Award was in favour of the respondent for a sum of Rs.1,71,98,302/-.

At this stage, a notice dated 06.02.2017 was sent by the Respondent to KCPL to pay an amount of Rs. 1,79,00,166/-. This notice was stated to be a notice under Section 8 of the IBC. Within 10 days, by a letter dated 16.02.2017, KCPL disputed the invoice that was referred to in the said notice, stating that the said amount was, in fact, the subject-matter of an arbitration proceeding.

After the notice and reply, on 20.04.2017, a Section 34 petition was filed by KCPL under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”) challenging the aforesaid Award. The same was filed within the period of limitation set down in Section 34(3) of the Arbitration Act.

It is only thereafter that a petition was filed under Section 9 of the IBC, on 14.07.2017 with the National Company Law Tribunal (NCLT).

According to the NCLT, the fact that a Section 34 petition was pending was irrelevant for the reason that the claim stood admitted, and there was no stay of the Award. For these reasons, therefore, the Section 9 petition was admitted.

An appeal filed to the National Company Law Appellate Tribunal (NCLAT) met with the same fate, as according to the NCLAT, the non-obstante clause contained in Section 238 of the IBC would override the Arbitration Act. Also, according to the NCLAT, since Form V of Part 5 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires particulars of an order of an arbitral panel adjudicating on the default, this would have to be treated as “a record of an operational debt”, as a result of which the petition would have to be admitted, as was correctly done by the NCLT.

The Apex Court relied upon its ruling in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, (2018) 1 SCC 353 – in particular para 13 thereof on the legislative history; para 27 on the notes on clauses annexed to the Bill; para 32 where it is noticed that the original Bill which ultimately became the IBC had the expression “bona fide dispute” contained in an inclusive definition. It is significant to note that by the time the IBC was enacted the expression “bona fide” was dropped and an observation therein that what is important is that the existence of the dispute and/or a suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice; para 38 and para 51 of the said ruling in Mobilox case.

Hon’ble Supreme Court observed that “the alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees”. And that that the judgment in Mobilox Innovations (supra) has made it clear that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.

And held that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.

The Apex Court has thrown important light by making its observation that-

(i) that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. And in such cases insolvency process under the IBC can commence.

(ii) There may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process under the IBC cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

Whether SFIO needs to complete the investigation within the time specified by the Central Govt.?

The Apex Court held that the period that the Central Govt. may prescribe to complete investigation u/s.212(3) is directory and no fixed period is provided for completion of investigation by SFIO; transfer of investigation by other agencies to SFIO u/s.212(2) of the Companies Act 2013 is irrevocable; when accused is directed to remand by a competent court in exercise of judicial function then the same cannot be challenged by writ of habeas corpus; and about territorial jurisdiction of High Court held that even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of the Companies Act 2013, the High Court ought not to have entertained the writ petition.

Hon’ble Supreme Court in  SFIO vs. Rahul Modi and Another etc. 2019 SCC OnLine SC 423 vide judgement dt. 27/03/2019:

Factual matrix:

a) The investigation into the affairs of Adarsh Group of Companies and LLPs was assigned by the Central Government to SFIO vide Order dated 20.6.2018, per section 212(1)(c) of the Companies Act, 2013. This Order did stipulate in para 6 that the Inspectors should complete their investigation and submit their report to the Central Government within three months.

b) On 20.6.2018 itself, the Director, SFIO appointed investigating officers.

c) The period of three months expired on 19.09.2018. However, the investigation was not over.

d) The proposal to arrest three accused persons was placed by the Investigating Officers before the Director, SFIO and after being satisfied in terms of requirements of Section 212(8) of 2013 Act approval was granted by Director, SFIO on 10.12.2018.

e) After they were arrested on 10.12.2018, the accused were produced before the Judicial Magistrate, Gurugram, Haryana, who by his order dated 11.12.2018 remanded them to custody till 14.12.2018 and also directed that they be produced before the Special Court, Gurugram on 14.12.2018.

f) On 13.12.2018 a proposal seeking extension of time for completing investigation in respect of 57 cases including the present case was preferred by SFIO before the Central Government.

g) On 14.12.2018 the Special Court, Gurugram remanded the accused to custody till 18.12.2018.

h) On the same date i.e. on 14.12.2018 the proposal for extension was accepted by the Central Government in respect of the Group and extension was granted upto 30.06.2019.

i) On 17.12.2018 the Writ Petitions were preferred, inter alia, seeking prayer of writ of habeas corpus, which came up for the first time before the High Court of Delhi on 18.12.2018.

j) On 18.12.2018 itself the accused were further remanded to police custody till 21.12.2018 by the Special Court, Gurugram.

k) On 20.12.2018 Hon’ble High Court at Delhi issued notice returnable on 31.1.2019 and proceeded to consider ad interim relief for immediate release of the accused. It held arrest as illegal detention which cannot be sanctified by subsequent remand orders passed by the concerned Magistrate. And pursuant to said order, the original Writ Petitioners were released on bail. This ad interim relief was challenged by the SFIO before Hon’ble Supreme Court in the present case.

  1. Whether the the date with reference to which the legality of detention can be challenged in a Habeas Corpus proceeding is the date on which the return is filed in such proceedings and not with reference to the initiation of the proceedings?

Held yes, as decided by the Federal Court in Basanta Chandra Ghose vs. King Emperor (1945)7 FCR 81. Similar question was considered in Kanu Sanyal vs. District Magistrate, Darjeeling and Others (1974) 4 SCC 141. The law is thus clear that “in Habeas Corpus proceedings a Court is to have regard to the legality or otherwise of the detention at the time of the return and not with reference to the institution of the proceedings”.

Hon’ble Supreme Court also considered its recent decision of division bench in Manubhai Ratilal Patel through Ushaben vs. State of Gujarat and others (2013) 1 SCC 314; in Saurabh Kumar vs. Jailor, Koneila Jail and another (2014) 13 SCC 436 and a bench of three learned judges in State of Maharashtra and Others vs. Tasneem Rizwan Siddiquee (2018) 9 SCC 745 and held that act of directing remand of an accused is thus held to be a judicial function and the challenge to the order of remand is not to be entertained in a habeas corpus petition.

  1. Whether Delhi High Court have territorial Jurisdiction?

Section 435 of the Companies Act 2013 contemplates establishment of Special Courts for the purpose of providing speedy trial of offences under the said Act. Section 436 then provides that “offences specified under sub-section (1) of Section 435 shall be triable only by Special Court established or designated for the area in which the Registered Office of the Company, in relation to which the offence is committed ……”. Soon after the arrest, the accused were produced before the Judicial Magistrate, Gurugram and then before the Special Court, Gurugram. Special Court, Gurugram would be competent to deal with the matter in terms of Section 436.

However, Learned counsel for the writ petitioners, however, contend that since the accused were arrested in Delhi, were kept in custody in Delhi, and the SFIO office being in Delhi, the High Court of Delhi was competent to entertain and consider the writ petitions so preferred by the writ petitioners. Reliance was placed by them on the decision of this Court in Navinchandra N. Majithia v. State of Maharashtra and others (2000) 7 SCC 640.

However, the Apex Court found that the judgement in Navinchandra Majithia, was not dealing with the matter.  And it relied upon Dashrath Rupsingh Radhod vs. State of Maharashtra and another (2014) 9 SCC 129 and found that “It is true that the decision in Dashrath Rupsingh Radhod 15 was in the context of a criminal complaint under Section 138 of the Negotiable Instruments Act and not while dealing with an issue of maintainability of a writ petition under Article 226 of the Constitution. It cannot, therefore, be said that in the present case, the High Court completely lacked jurisdiction to entertain the petition. However, since the challenge was with respect to the detention pursuant to valid remand orders passed by the Judicial Magistrate and the Special Court, Gurugram, in our considered view, the High Court should not have entertained the challenge. If the act of directing remand is fundamentally a judicial function, correctness or validity of such orders could, if at all, be tested in a properly instituted proceedings before the appellate or revisional forum. In the circumstances even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of 2013 Act, the High Court ought not to have entertained the writ petition. “

  1. The period within which an investigation report is contemplated to be submitted to the Central Govt. u/s.212(3) is mandatory or directory? And where the initial Order of arrest itself was invalid then can such illegality be sanctified by subsequent Order of remand?

Under sub-Section (3) where the investigation is so assigned by the Central Government to SFIO, the investigation must be conducted in the manner and in accordance with the procedure provided in the Chapter and a report has to be submitted to the Central Government within such period as may be specified. This provision contemplates submission of a report within the period as may be specified. The subsequent provisions then contemplate various stages of investigation including arrest under sub-Section (8) and that SFIO is to submit an interim report to the Central Government, if it is so directed under sub Section (11). Further, according to sub-Section (12), on completion of the investigation, SFIO is to submit the “investigation report” to the Central Government. This report under sub-Section (12) may lead to further follow up actions. Under sub-Section (13) a copy of the “investigation report” could be obtained by any concerned person by making an application in that behalf to the Court while under sub-Section (14) on receipt of said “investigation report” the Central Government may direct SFIO to initiate prosecution against the Company. And the provisions of Section 43(2) of the Limited Liability Partnership Act, 2008 do not postulate any such period. Hon’ble Apex Court finds that Section 212(3) of 2013 Act by itself does not lay down any fixed period within which the report has to be submitted. Even under sub-Section (12) which is regarding “investigation report”, again there is no stipulation of any period. In fact such a report under sub-Section (12) is to be submitted “on completion of the investigation”. There is no stipulation of any fixed period for completion of investigation which is consistent with normal principles under the general law. For instance, there is no fixed period within which the investigation under Criminal Procedure Code must be completed.

Again, sub-Section (2) of Section 213 of 2013 Act does not speak of any period for which the other Investigating Agencies are to hold their hands, nor does the provision speak of any re-transfer of the relevant documents and records from SFIO back to said Investigating Agencies after any period or occurring of an event (unlike Section 7 of the National Investigation Agency Act, 2008). The idea under sub-Section (2) is complete transfer of investigation. The transfer under sub-Section (2) of Section 213 would not stand revoked or recalled in any contingency.

“It is well settled that while laying down a particular procedure if no negative or adverse consequences are contemplated for non-adherence to such procedure, the relevant provision is normally not taken to be mandatory and is considered to be purely directory. Furthermore, the provision has to be seen in the context in which it occurs in the Statute. There are three basic features which are present in this matter:-

1. Absolute transfer of investigation in terms of Section 212(2) of 2013 Act in favour of SFIO and upon such transfer all documents and records are required to be transferred to SFIO by every other Investigating Agency.

2. For completion of investigation, sub-Section (12) of Section 212 does not contemplate any period.

3. Under sub-Section (11) of Section 212 there could be interim reports as and when directed.”

And held that In the absence of any clear stipulation an interpretation that with the expiry of the period, the mandate in favour of SFIO must come to an end, will cause great violence to the scheme of legislation. If such interpretation is accepted, with the transfer of investigation in terms of sub Section (2) of Section 212 the original Investigating Agencies would be denuded of power to investigate and with the expiry of mandate SFIO would also be powerless which would lead to an incongruous situation that serious frauds would remain beyond investigation. That could never have been the idea. The only construction which is, possible therefore, is that the prescription of period within which a report has to be submitted to the Central Government under sub-Section (3) of Section 212 is purely directory.

And further held that therefore it cannot be said that in the instant case the mandate came to an end on 19.09.2018 and the arrest effected on 10.12.2018 under the orders passed by Director, SFIO was in any way illegal or unauthorised by law.

Asset held in trust not subject to the moratorium u/s.14 of the IBC

Asset held in trust not subject to the moratorium u/s.14 of the IBC.

Sun Pharmaceutical Industries Ltd. filed application before NCLT, Chandigarh bench seeking its direction to allow it to lift its stock of raw materials of approx. Rs.14 crore in possession of the Parabolic Drugs Ltd (Corporate Debtor). The Corporate Debtor was undergoing the corporate insolvency resolution process and the Resolution Professional appointed was managing the affairs. In terms of “Manufacturing & Supply Agreement” dated 11.02.2010 entered with the Corporate debtor. And as per the said agreement, Sun Pharma supplied the raw-material to the Corporate Debtor for the purpose of manufacturing of the agreed Drug. As per the agreement, the Corporate Debtor agreed to keep the raw materials supplied by the Sun Pharma in trust and to be used only for the purpose of manufacturing finished product and such finished product should be supplied to Sun Pharma only. Further, as per the said agreement, the property and ownership in the raw materials, packaging or other materials and the finished Products or stock in-process of manufacture shall at all times remain and shall be deemed to be vested in RANBAXY (as acquired by Sun Pharma).

The grievance of the Sun Pharma was that neither the manufactured product was made available nor raw material was returned to the Sun Pharma. And after the

pronouncement of moratorium Sun Pharma had not been allowed to visit the manufacturing unit and even electricity connection at the factory of the Corporate Debtor was disconnected. The apprehension is that the raw material being a sensitive chemical might get perished by the passage of time.

Representatives appeared on behalf of the CoC and the Resolution Professional,  opposed the application. It is pleaded that once the Moratorium u/s 14 of IBC is in operation, then the recovery of any property by any owner which is in possession of the Corporate Debtor is prohibited, referred section 14(1)(d) of the Code.

It was also argued that the term “property” is defined u/s 3(27) of the insolvency code which includes money, goods, actionable claim, land, etc. The raw material which is supplied is the “Property” as mentioned in section 14(1)(d) which is under prohibition, therefore, cannot be recovered from the possession of the Corporate Debtor.

Held: The statute has mandated vide section 18(1)(f) that the Interim Resolution Professional shall perform several duties such as ‘take control and custody of any asset over which the Corporate Debtor has ownership rights as recorded in the Balance Sheet of the Corporate Debtor’. Tangible assets whether movable or immovable is within the category of “Assets” as defined in this section vide insertion of an Explanation. Through this explanation an exception is carved out that for the purpose of this section i.e. section 18(1)(f) the followings shall not constitute an Asset and therefore, an Asset owned by a third party, however, in possession of the Corporate Debtor, held under trust or under contractual arrangement.

In the light of this provision if we examine the facts of this case, it is not in dispute that the Operational Creditor M/s. Sun Pharmaceutical Ltd. has supplied the raw material which is in possession of the Corporate Debtor i.e. Parabolic Drugs Ltd. should be released without delay being perishable in nature, following section 18(1)(f) r/w Explanation.

The distinction between Sec.14 and Sec.18 was considered and held that the general rule of Sec.14 is that property in possession of the Corporate Debtor at the commencement of corporate insolvency resolution process cannot be recovered. However, an exception to the said general rule is carved out in the explanation to section 18. When Sec. 18 r/w explanation the term ”asset” shall not include an asset owned by third party in possession of Corporate Debtor, either (i) under trust, or under (ii) contractual arrangements including bailment.

[CA 206/2019, decided on 26/4/2019]

An arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped

The Hon’ble Supreme Court on 10 April 2019 in Garware Wall Ropes Ltd vs Coastal Marine Constructions & Engineering Ltd. (Civil Appeal No. 6361/2019) ruled that when the Supreme Court or the High Court when considers an application under Section 11(4) to 11(6) under Arbitration and Conciliation Act, 1996 (Act or Arbitration Act) and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act, 1899 (Indian Stamp Act) to first impound the agreement or conveyance and see that stamp duty is paid before the agreement can be acted upon.

Thus, held that an arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped.

Facts in brief:

The respondent filed a petition under Section 11 of the Arbitration Act. The Bombay High Court allowed the Section 11 petition and appointed an arbitrator. The appellant challenged the same in the present appeal before the Supreme Court.

Issues before the Court:

The question before the Supreme Court was the effect of an arbitration clause contained in a contract which was not stamped.

This itself involved another question – whether the judgment of the Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66] was still valid or not?

  • In SMS Tea Estate, the issue before the Supreme Court was whether an application under Section 11 of the Act can be rejected on the ground that the arbitration agreement was contained in a lease deed which was not sufficiently stamped.
  • Referring to Sections 33 and 35 of the Indian Stamp Act, the Supreme Court had ruled in that case that unless the stamp duty and penalty due on the instrument is paid, the Court cannot act upon the instrument, which means it cannot act upon the arbitration agreement also which is part of the instrument.

However, Section 11(6A) was introduced in the Arbitration Act by way of 2015 amendment. Hence, the question was whether Section 11 (6A) removed the basis of this judgment, so that the stage at which the instrument is to be impounded is not by the Judge hearing the Section 11 application, but by an arbitrator who is appointed under Section 11.

Decision:

The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

SMS Tea Estates has taken account of the mandatory provisions contained in the Indian Stamp Act and held them applicable to judicial authorities, which would include the Supreme Court and the High Court acting under Section 11.

A close look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty is paid before the agreement, as a whole, can be acted upon.

Further, the Court held that the judgments contained in JMD Ltd. v. Celebrity Fitness India Pvt. Ltd., 2019 SCC OnLine Del 6483, B.D Sharma v. Swastik Infra Estate Pvt. Ltd., 2018 SCC OnLine Del 13279, Sandeep Soni v. Sanjay Roy, 2018 SCC OnLine Del 11169, and N.D Developers Pvt. Ltd. v. Bharathi, 2018 SCC OnLine Kar 2938  have not declared the law correctly, and are consequently, overruled.

Further, the Court also held that the recent Bombay High Court judgment (Full bench decided on 04.04.2019 ) in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors by Full Bench, has incorrectly decided on unstamped instrument.

Supreme Court holds that the RBI Circular of 12 Feb 2018 not valid

Hon’ble Supreme Court, in Dharani Sugars and Chemicals Ltd v Union of India and Others, on 02 April 2019 held the constitutional validity of Ss. 35AA and 35AB of the Banking Regulations Act, 1949 (the Banking Regulation Act) and also held that the RBI circular of 12.02.2018 directing banking and non-banking companies to initiate action under the Insolvency and Bankruptcy Code 2016 (the Insolvency Code) as invalid being violative of Section 35AA of the said Act and hence action under the said circular shall fail. Here is the brief analysis of the said judgement.

The Banking Regulation (Amendment) Ordinance, 2017 introduced Sections 35AA and 35AB as amendments to the Banking Regulation Act on 04.05.2017. The same reads as under:

“35AA. The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016. 

Explanation. – For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016. 

35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets. 

(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.” 

Hon’ble Supreme Court has upheld the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949.

The constitutional validity is upheld by replying upon the following principles:

(i) economic legislation to be viewed with great latitude (referring to para 85 of Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors., 2019 (2) SCALE 5).

(ii) Petitioners failed to point out how either of these provisions are manifestly arbitrary [referring to ‘manifestly arbitrariness’ as in Shayara Bano v. Union of India, (2017) 9 SCC 1]. And further observing that these provisions (Ss. 35AA and 35AB) are not different in quality from any of the sections which have already conferred such powers (Sections 14A, 17, 18, 20, 21, 22 – Sec.22(3) in particular, 25, 29, 30 and 31 of the Banking Regulation Act). Further, Hon’ble Court also found that the amendment does not suffer from adequate guidelines [referring to Harishankar Bagla v. State of M. P., (1955) 1 SCR 380 – para 9]; and Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax and Ors. – paras 13, 15, 17 and 18].

Section 35AA makes it clear that the Central Government may, by order, authorise the RBI to issue directions to any banking company or banking companies when it comes to initiating the insolvency resolution process under the provisions of the Insolvency Code. The first thing to be noted is that without such authorisation, the RBI would have no such power. 

In exercise of power under section 35AA, the Central Government authorised the RBI vide its order dated 05.05.2017 to take defaulters to NCLT under the Insolvency and Bankruptcy Code, 2016 (‘the Insolvency Code’). Thereupon, the RBI issued circular dated 12.02.2018.

The salient features of the RBI circular dated 12.02.2018 are that restructuring in respect of borrower entities de hors the Insolvency and Bankruptcy Code, 2016 can only occur if the resolution plan that involves restructuring is agreed to by all lenders, i.e., 100 per cent concurrence. Secondly, what has been chosen to be the subject matter of the circular is debts with an aggregate exposure of INR 2000 crore and over on or after 01.03.2018. With respect to such debts, if default persists for 180 days from 01.03.2018, or if the date of first default is after 01.03.2018, then 180 days calculated with effect from that date, lenders shall file applications singly or jointly under the Insolvency Code within 15 days from the expiry of the aforesaid 180 days. In short, unless a restructuring process in respect of debts with an aggregate exposure of over INR 2000 crore is fully implemented on or before 195 days from the reference date or date of first default, the lenders will have to file applications as financial creditors under the Insolvency Code.

It was contended before Hon’ble Supreme Court that the RBI already had such power under Section 35A of the Banking Regulation Act, however it was countered by the Petitioners that when section 35A was introduced in the said Act, at that time the Code was not prevalent and hence RBI directing banks and NBFCs to take action under the Code u/s.35A cannot be accepted.

Held, all statutes are to be interpreted as “always speaking statutes”, unless they reveal a contrary intention. Meaning with change of time meaning in words in statute also gets changed. And thus, has section 35AA not been brought to the Statute book, RBI could have exercised its power u/s. 35A of the Banking Regulations Act, even for IBC.

“The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA. 

The matter can be looked at from a slightly different angle. If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed.

The contention that though RBI had enough power u/s. 21 and u/s.35A, new section 35AA was introduced to the Banking Regulation Act as an abundant caution, was not accepted. Hon’ble Supreme Court held that it cannot be so accepted as (i) two conditions precedent introduced in section 35AA, without which, powers cannot be exercised by RBI; and (ii) it is well settled that Parliament does not legislate when no legislation is called for.

Further Hon’ble Supreme Court concluded that “Therefore, the scheme of Sections 35A, 35AA, and 35AB is as follows: 

  • (a)  When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency Code, Section 35AA is the only source of power.
  • (b)  When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within Section 35A read with Section 35AB. This also becomes clear from the fact that Section 35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets. This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the Insolvency Code provisions would then take over and have to be followed. 
  • Further Hon’ble Supreme Court concluded that it is clear also from the Press Note dated 05.05.2017 of the Central Government (Ministry of Finance), which introduced the Ordinance and specifically referred to resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The Statement of Objects and Reasons for introducing Section 35AA also emphasises that directions are in respect of “a default”. Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA. 

Then Section 13 of the General Clauses Act, 1897 [“General Clauses Act”] was relied upon to state that the singular would include the plural. To which Hon’ble Court noted that there is no doubt whatsoever that this would be so unless the context otherwise requires, as is provided by Section 13 of the General Clauses Act itself. In the present case, the context of Section 35AA makes it clear that the power to be exercised under the authorisation of the Central Government requires “due deliberation and care” to refer to specific defaults. 

Finally it is held that “Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est.”

Our comments:
Consequently, proceedings taken by banks and /or NBFCs by virtue of the RBI Circular by taking corporate persons to NCLT under the Insolvency Code has become nullity and without support of law. However, that does not mean that banks / NBFCs are not entitled to recover their debts. Banks/ NBFCs may decide to restructure the debt of such cases outside the Insolvency Code, including under the Sashakt Project. And also equally possible that any one of the Banks / NBFCs may initiate fresh action under the Insolvency Code.

It is believed that the RBI may issue a fresh circular and thereby direct banks and/or NBFCs on steps to be taken due to strike down of its Circular dt. 12.02.2018 by Hon’ble Supreme Court.

Genesis of the RBI Circular 12.02.2018 and impact of the judgement in Dharani Sugars case: To better understand the situation, it is relevant to know the genesis in brief.

Asset Quality Review (AQR) for banks was implemented by RBI in the second half of 2015 and it revealed the true picture of NPA problem. The gross NPAs of Scheduled Commercial Banks (SCBs) rose to Rs.10.4 trillion in March 2018 from Rs.3.2 trillion in March 2015. The problem was more severe for the Public Sector Banks (PSBs) with gross NPAs reaching Rs.9 trillion from Rs.2.8 trillion during the same period.

RBI tried to resolve the NPA problem through several initiatives, including CDR, SDR, S4A, JLF etc.  Two major initiatives have been the Prompt Corrective Action (PCA) by RBI and the recapitalisation of the PSBs by the Government. In April 2017, RBI revised the PCA framework and in October 2017 the Government announced Rs.2.11 trillion recapitalisation package for ailing PSBs, of which Rs.1.53 trillion would be infusion by Government and balance to be raised from the market. 

As these experiments failed, and upon implementation of the IBC, the RBI scrapped all these initiatives and issued a revised guideline on 12 Feb. 2018 for early resolution of stressed assets.

Thereafter, in July 2018, the scheme, called ‘Sashakt’, was recommended by a bankers’ committee and accepted by the government. It is inter-lenders agreement. And it proposes to have a resolution plan for defaulting borrowers and the same to be implemented in a time bound manner. The nature of the resolution plans approved under the inter-creditor agreements would be similar to those under consideration as part of the Insolvency process. However, in this case promoters would continue to be in-charge.

Since this was not enough, particularly after remaining in ICU under PCA for over two years, merger of PSBs is also adopted, as has been done since bank nationalisation. A compulsory merger of banks under section 45 of the Banking Regulation Act, 1949. Amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda has been notified on January 2, 2019. The notification has come into force on April 1, 2019.

And now comes the ruling of the Hon’ble Supreme Court of India, whereby it precludes the RBI from issuing any general directions to banks to initiate insolvency under the Insolvency and Bankruptcy Code, 2016. What is now left for the RBI and the Government is action under Section 35AA and 35AB of the Banking Regulations Act. The Central Government may now analyse specific cases of defaults and issue directions to the RBI in respect of those specific cases. 

Technically, the judgment revives the ability of borrowers to rely on CDR, SDR, S4A, JLF and other restructuring measures (“Traditional Measures”), which were repealed by the RBI Circular of 12 Feb. 2018. However, the market awaits clarity from the RBI on these Traditional Measures.

Given that these Traditional Measures have not achieved much success in resolving NPA issue, Banks are likely to exercise their rights to initiate insolvency proceedings on their own, being their statutory right under section 7 the Code as a financial creditor, probably after taking defaulting borrowers through the Sashakt framework. However, in deserving cases, Banks may take defaulting borrowers directly to NCLT under the Code instead of the Sashakt framework. The Code has given lenders ‘stick’ to deter enough the defaulting Corproate Borrowers to remain on edge.

Way forward: 

Upon request of RBI, from time to time, the Central Govt. to consider ‘specific’ cases for taking under the Insolvency Code and authorise RBI to issue direction to banks and NBFCs to take such specific defaulting borrowers to NCLT under the Insolvency Code. Obviously, such ‘specific’ cases could be where banks on their own are not taking companies to NCLT under the Code.

Alternatively, the Government (mostly after election) may either modify / scrap section 35AA of the Banking Regulations Act and thus enable RBI to bring back the general circular, based on observation of Hon’ble Supreme Court in Dharani Sugars case that RBI could have issued circular similar to circular dt. 12.2.2018 had section 35AA was not legislated. And before deciding on such actions, the Government need to take policy decision on whether to allow further time to specific sectors like power, cement etc. considering their contribution to employment and the economy.

While some of the defaulting corporate borrowers might be happy for now, it’s not going to last long.