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True meaning and purport of the expression “entertain” in Section 9(3) of the Arbitration Act

Arbitration

In a recent matter of Arcelor Mittal Nippon Steel India Ltd. v. Essar Bulk Terminal Ltd. (Civil Appeal No. 5700 OF 2021) an interesting question of law arose. The issue was “whether the Court has the power to entertain an application under Section 9(1) of the Arbitration and Conciliation Act, 1996, (“Arbitration Act”) once an Arbitral Tribunal has been constituted and if so, what is the true meaning and purport of the expression “entertain” in Section 9(3) of the Arbitration Act?”

The issues arose when the Appellant in the matter approached the High Court of Gujarat at Ahmedabad under Section 11(6) of the Arbitration Act, for appointment of an Arbitral Tribunal. Simultaneously, the both the parties in the matter also filed their applications under Section 9 of the Arbitration Act before the Commercial Court at Surat. The Commercial Court, heard both the Section 9 applications and reserved the orders on 7th June, 2021.

In the interim but before the Commercial Court in Surat pronounced the order, the Gujarat High Court disposed of the application under Section 11 of the Arbitration Act and appointed a three-member Arbitral Tribunal. The Appellant immediately filed an interim application before the court to refer both the applications under section 9 filed by the parties, to the Arbitral Tribunal. The application was dismissed. The Appellant challenged the dismissal before the Gujarat High Court under Article 227 of the Constitution of India. The High Court dismissed the petition holding that the Commercial Court has the power to consider whether the remedy under Section 17 of the Arbitration Act is inefficacious.

The Appellant filed an appeal before the Apex Court.

Arguments on behalf of the Appellant:

  • Section 9(3) of the Arbitration Act restricts the power of the Court to entertain an application under Section 9(1) of the Arbitration Act once an Arbitral Tribunal has been constituted and since the Tribunal was constituted, the court cannot proceed with the matter, unless it finds that circumstances exist, which may render the remedy under Section 17 of the Arbitration Act inefficacious.
  • The term ‘entertain’ in Section 9(3) of the Arbitration Act, is to be interpreted to mean “adjudicate”. It would not merely mean admitting for consideration, but would mean the entire process upto its final adjudication and passing of an order on merits.
  • The objective behind insertion of the sub-clause was emphasized that is to reduce the interference of court, to reduce burden of court, and that to ensure that the relief is granted in a timely and efficacious manner.

Arguments on behalf of the Respondent:

  • Section 9(1) of the Arbitration Act provides that a party will apply to the court before, during or after the arbitral proceedings. The Courts therefore do not lose jurisdiction upon constitution of the Arbitral Tribunal.
  • Section 9(3) of the Arbitration Act was neither a non-obstante clause nor an ouster clause that would render the courts coram non judice, immediately upon the constitution of the Arbitral Tribunal.
  • In this case, only the formality of pronouncing the order in the Section 9 Applications remained and the application under Section 9 had been entertained, fully heard and arguments concluded;
  • ‘Entertain’ means “admit into consideration” or “admit in order to deal with”.
  • The Commercial Court has already given much judicial time for the matter.
  • An appeal from an order passed by the Arbitral Tribunal in an application under Section 17, lies before the superior Court. It cannot, therefore, be said that Section 17 proceeding flows any differently from a proceeding in Court under Section 9 of the Arbitration Act or has any distinct hierarchy.

The Court after hearing both the parties observed that post 2015 amendments to the Arbitration Act, the Arbitral Tribunal has the same power to grant interim relief under section 17 as the Court and the remedy under Section 17 is as efficacious as the remedy under Section 9(1). The Court also observed that a judgment is said to be pronounced when it is done so in an open court and not when it is reserved or merely dictated. A judge becomes functus officio when he pronounces, signs and dates the judgment.

Relying on Energo Engineering Projects Ltd. v. TRF Limited 2016 SCC Online Del 6560 and various other judgments passed post 2015 Amendments including one passed by the Delhi High Court in Avantha Holdings Limited v. Vistra ITCL India Limited 2020 SCC OnLine Del 1717, the Court approved the findings of law that the Court, while exercising its power under Section 9 of the Arbitration Act, has to be acutely conscious of the power vested in the arbitral tribunal by Section 17 of the Arbitration Act. The sections are identically worded thus giving identical powers of “interim measures”. The Court explained that it is for this reason Section 9(3) proscribes grant of interim measures by the Court after the constitution of the arbitral tribunal with the exception where the Court finds that circumstances exist, which may not render the remedy, under Section 17, to be efficacious.

However, the Court disapproved the finding of the Delhi High Court to the extent it stated that the “Court, while exercising jurisdiction under Section 9, even at a pre-arbitration stage, cannot usurp the jurisdiction which would, otherwise, be vested in the arbitrator, or the Arbitral Tribunal, yet to be constituted”. The Court instead held that “The bar of Section 9(3) operates after an Arbitral Tribunal is constituted. There can therefore be no question of usurpation of jurisdiction of the Arbitral Tribunal under Section 17 before the Arbitral Tribunal is constituted. The Court is obliged to exercise power under Section 9 of the Arbitration Act, if the Arbitral Tribunal is yet to be constituted. Whether the Court grants interim relief or not is a different issue,”

The Court then went on to analyse the meaning and purport of the term ‘entertain’. While analysing the judgments in Lakshmi Rattan Engineering Works Ltd. v Asstt. Commissioner Sales Tax, Kanpur and Anr (1968) 1 SCR 505, the Court stated that ‘entertain’ means “admitting to consideration”. In the matter of Hindustan Commercial Bank Ltd. v Punnu Sahu (1971) 3 SCC 124, the Court held that the expression “entertain” in the proviso to clause (b) Order 21 Rule 90 of the CPC (as amended by Allahabad High Court), means to “adjudicate upon” or “proceed to consider on merits” and not “initiation of proceeding”.

The Court therefore agreed with the argument of the Appellant and concluded that it was well settled that the expression “entertain” means to consider by application of mind to the issues raised. The Court entertains a case when it takes a matter up for consideration. The process of consideration could continue till the pronouncement of judgment. However, the Court also agreed with the argument of the Respondent that intent of section 9(3) was “not to turn back the clock and require a matter already reserved for orders to be considered in entirety by the Arbitral Tribunal under Section 17 of the Arbitration Act”.

The Court clarified that the bar of Section 9(3) would not operate, once an application has been entertained and taken up for consideration, as in the instant case, where hearing has been concluded and judgment has been reserved. The Court while agreeing with the Appellant that the process of consideration continues till the pronouncement of judgment, posed a question for its consideration – whether the process of consideration has commenced, and/or whether the Court has applied its mind to some extent before the constitution of the Arbitral Tribunal. If the answer is in positive, the application can be said to have been entertained before constitution of the Arbitral Tribunal.

The court in detail discussed the concept of Negative Kompetenz-Kompetenz which as per the decision of the Court is a sequel to the rule of priority in favour of the Arbitrators, that is, the requirement for parties to an arbitration agreement to honour the arbitration agreement to submit their disputes to arbitration. On the flip side the Courts are prohibited from hearing such disputes. In this regard the Court analysed the decision in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. (2013) 1 SCC 641 and Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1. The Court finally, in the light of the Kompetenz-Kompetenz principle and the principle of no judicial interference, held that the court always has the discretion to direct the parties to approach the Arbitral Tribunal, if necessary by passing a limited order of interim protection, especially in the matters where the proceedings have not commenced or are at the initial stage. However, in present matter, it was not necessary for the Commercial Court to consider the efficacy of relief under Section 17, since the application under Section 9 was already entertained and considered by the Commercial Court.

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Whether it is mandatory to deposit 75% of the awarded amount in terms of Section 19 of Micro, Small and Medium Enterprises Development Act, 2006?

MSME

In the recent judgment passed by the Hon’ble Supreme Court in Gujarat State Disaster Management Authority v. M/s Aska Equipments Limited [CIVIL APPEAL NO. 6252 OF 2021] the pure question of law that came for consideration was whether it is mandatory to deposit 75% of the awarded amount in terms of Section 19 of Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”).

An award dated 10.11.2017 passed by the Facilitation Council under section 18 of the MSME Act was challenged before Additional District Judge, Dehradun (“Appellate Court”) under Section 34 of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”) read with Section 19 of the MSME Act. The award was in favour of the MSME (Respondent) and the Appellant was directed to pay a sum of Rs. 105,053,387/- (“Awarded Amount”) to the MSME. The Appellant was required to deposit 75% of the Awarded Amount before the Appellate Court. As per section 19 of the MSME Act, “[n]o application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court”.

The issue arose when the Respondent did not deposit the requisite pre-deposit amount and filed a writ petition before the Uttarakhand High Court, challenging the order of the Appellate Court that directed the Appellant to deposit 75% of the awarded amount. The Hon’ble High Court dismissed the petition.

The Appellant therefore preferred an appeal before the Hon’ble Supreme Court. While issuing notice dated 23.10.2019 in the matter, the Supreme Court also directed the Appellant to deposit a sum of Rs.2,50,00,000/- before the Appellate Court and further directed the Appellate Court to take up the appeal under section 34 on deposit of the amount by the Appellant. Before the next hearing in the Supreme Court, the Appellant deposited the amount and the application under section 34 was heard by the Appellate Court and the order was reserved to be pronounced on 12.10.2021.

When the matter came for hearing before the Supreme Court, the Appellant appeared and prayed before the Supreme Court that the appeal be disposed of as the Appellate Court had heard the matter under section 34. However, the Respondent argued that the amount directed to be deposited by the Supreme Court vide notice dated 23.10.2019 was not even 25% of the Awarded Amount whereas as per the decision in Goodyear India Limited v. Norton Intech Rubbers Private Limited, (2012) 6 SCC 345, it was mandatory to deposit 75% of the awarded amount as a pre-deposit under section 19 of the MSME Act. The Respondent further argued that section 19 only gives to the court discretion to the extent of directing the ‘manner of deposit’  and no discretion has been given to deviate from the prescribed percentage of amount mandated under law.

The Hon’ble Supreme Court, on hearing the parties, reiterated the legal position that the “requirement of deposit of 75% of the amount in terms of the award as a pre-deposit is mandatory. However, at the same time, considering the hardship which may be projected before the appellate court and if the appellate court is satisfied that there shall be undue hardship caused to the appellant/applicant to deposit 75% of the awarded amount as a pre-deposit at a time, the court may allow the pre-deposit to be made in instalments.”

However, the Court also held that having laid the law, the interim arrangement as per order dated 23.10.2019 in the present matter be maintained till final disposal of the appeal under Section 34. However, the Court cautioned that the same will not be treated as a precedent.

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Commencement date for limitation period for appeals filed under the IBC – is the annexing of a certified copy mandatory

Insolvency and Bankruptcy

While drafting an appeal under section 61 of the Insolvency and Bankruptcy Code, 2016, against the order of the NCLT, we have often faced the difficulty of determining the commencement of limitation period. Section 61(1) and 61(2) of the Code provides that:

(1) Notwithstanding anything to the contrary contained under the Companies Act 2013 (18 of 2013), any person aggrieved by the order of the Adjudicating Authority under this part may prefer an appeal to the National Company Law Appellate Tribunal.

(2) Every appeal under sub-section (1) shall be filed within thirty days before the National Company Law Appellate Tribunal:

Provided that the National Company Law Appellate Tribunal may allow an appeal to be filed after the expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing the appeal but such period shall not exceed fifteen days.

As can be seen above, Section 61 (2), although prescribes the time line of 30 + 15 days, it does not state as to when the time period starts.

If one refers to the NCLAT Rules, we find the following relevant provisions:

22. Presentation of appeal.-

(1) Every appeal shall be presented in Form NCLAT-1 in triplicate by the appellant or petitioner or applicant or respondent, as the case may be, in person or by his duly authorised representative duly appointed in this behalf in the prescribed form with stipulated fee at the filing counter and non-compliance of this may constitute a valid ground to refuse to entertain the same.

(2) Every appeal shall be accompanied by a certified copy of the impugned order.

…

 Form NCLAT-1  provides a fixed format and the relevant paragraphs of the format are reiterated for the ease of reference.

…

2. Date on which the order appealed against is communicated and proof thereof, if any.

…

6. Limitation The Appellant/s declare that the appeal is within the period specified in sub-section (3) of section 421 of the Act. (Explain how the appeal is within the period prescribed in case the appeal is preferred after the expiry of 45 days from the date of order/direction/decision against which this appeal is preferred). In case the appeal barred by limitation, the number of days of delay should be given along with interlocutory application for condonation of delay.

…

By the reading of the said provisions, it is not clear as to which is the starting point of the limitation period as prescribed under section 61(2) of the Code. Para 2 of the Form NCLAT-1, however mandates that the appeal should mention the date on which the order appealed against is communicated and also attach a proof of the same, if any. This might indicate that the time period should ideally start to run from the date on which the order appealed against is communicated. However, the question is whether under IBC, this is referring to the free certified copy, or the certified copy for which the appellant applies? If it is latter, when should the applicant apply for the certified copy?

In a judgment pronounced in the matter of V Nagarajan v. SKS Ispat and Power Ltd.& Ors. [Civil Appeal No. 3327 of 2020], the Hon’ble Supreme Court has clarified the very question as to when the limitation period under section 61 of the Insolvency and Bankruptcy Code, 2016 starts ticking.

The issue in the matter arose from the fact that the appellant in the matter had filed an appeal against the order of National Company Law Tribunal, Chennai dated 31st December 2019 which was uploaded on the NCLT website only on 12th March 2020 after which a corrected order was also uploaded on 20 March 2020. Thereafter, the Appellant, allegedly so, sought the free copy on 23rd March 2020, which according to the Appellant was never received by him. The Appellant filed the appeal before the NCLAT on 8th June 2020 with a downloaded copy accompanied with an application for exemption from filing a certified copy of the order as it had not been issued. Appellant did not file any application for the condonation of delay.

The Appellate Tribunal did not find any ground to interfere on merits. On the question of limitation period, the NCLAT observed that the appeal was barred by limitation since the statutory time limit of thirty days had expired and the Appellant had not filed an application for condonation of delay. Further, in violation of rule 22 of the NCLAT Rules, the appeal was neither accompanied with a certified copy of the impugned order nor had the Appellant provided any evidence to prove that a certified or free copy had not been issued to him.

Amongst other contentions before the Supreme Court, the Appellant argued that NCLAT, in its suo motu order dated 23rd March 2020 had stopped the clock of limitation with effect from 15th March 2020 on account of the COVID-19 pandemic and that he filed an appeal on 8th June 2020 when an SOP for commencement of virtual hearings was issued on 30th May 2020. Before this time, the NCLAT was shut on account of the COVID-19 pandemic from 24th March 2020. Therefore, according to the Appellant, the appeal was within the time period of 30 days. The Appellant also contented that although Rule 22 of the NCLAT Rules mandates a certified copy of the order for filing an appeal, however, Rule 14 of the NCLAT Rules permits a waiver from compliance with any of the rules. According to the Appellant, the waiver, as a matter of practice, was usually granted in case of a downloaded online copy filed in lieu of a certified copy of the order.

The Appellant further relied on the judgment of Sagufa Ahmed v. Upper Assam Plywood Products Pvt Ltd. (2021 (2) SCC 317), where the Hon’ble Supreme Court had held that the limitation period would run only from the date on which a copy of the order is made available to the aggrieved party and that even a delay in applying for a certified copy would not prejudice the right to appeal when a free copy is statutorily mandated.

Another interesting argument of the Appellant was that mere absence of the words “from the date on which a copy of the order of the Tribunal is made available to the person aggrieved” in Section 61(2) of the IBC, in contradistinction to Section 421(3) of the Companies Act, has no material bearing since an appeal cannot be filed without a copy of the order. The Appellant further relied on the legal principles of lex non cogit ad impossibilia which states that the law cannot mandate a person to do an impossible act and actus curiae neminem gravabit– no person should suffer for an act of Court.

The Court framed two questions to be determined –

(i) when will the clock for calculating the limitation period run for appeals filed under the IBC; and

(ii) is the annexing of a certified copy mandatory for an appeal to the NCLAT against an order passed under the IBC.

Issue 1: When will the clock for calculating the limitation period run for appeals filed under the IBC?

The Court in the process of determination of the first issue, analysed the judgment in Sagufa Ahmed and observed that the Court in the matter had clarified that once an application for a certified copy is made and the order has been received, irrespective of when the free certified copy is received, the limitation period would then be computed from the date of receipt of the certified copy (as applied). Therefore, as per the court, “the statutory mandate of a free copy is not to enable litigants to take two bites at the apple where they could compute limitation from either when the certified copy is received on the litigant’s application or received as a free copy from the registry – whichever is later.”

The Court, once again adopting a purposive interpretation, emphasized on the fact that IBC was framed particularly to structure and streamline the entire process of insolvency with strict time-lines for the completion of the process. Under IBC, any extension of times beyond the outer limit prescribed by the Code is only granted in exceptional circumstances. In this regard the Court also referred to Section 64 of the IBC which ‘notably’ imposes an obligation on the NCLT and NCLAT to expeditiously dispose applications pending before it, along with recording of reasons for any delay from the prescribed limit to the President of the NCLT/NCLAT, who can then extend the period, not exceeding ten days. The Court relied on various cases including the decision in Essar Steel India Ltd v. Satish Kumar Gupta, Innoventive Industries Ltd v. ICICI Bank, (2018) 1 SCC 407, Mobilox Innovations Private Ltd v. Kirusa Software Private Ltd (2018) 1 SCC 353 and recently decided decision in Ebix Singapore Private Ltd v. Committee of Creditors of Educomp Solutions Ltd. 2021 SCCOnLine SC 707.

On the first issue, the Court concluded while clarifying reasons why there is a conscious omission of the words “from the date on which the order is made available” for the purposes of computation of limitation in Section 61(2) of the IBC.  The Court held that IBC affects rights of stakeholders who are not necessarily parties to the proceedings. Therefore applicants are expected to exercise diligence and file the appeal without awaiting a free copy. Thus, the omission of the words “is a consistent signal of the intention of the legislature to nudge the parties to be proactive and facilitate timely resolution.”

Issue 2: Is the annexing of a certified copy of the order mandatory?

On the question of whether the appeal should be accompanied by a certified copy of the order, the Court referred to Rule 22(2) of the NCLAT Rules and Section 12(2) of the Limitation Act. The Court held that the provisions assign the responsibility of applying for a certified copy of the order on a party. While Rule 22(2) of the NCLAT Rules mandates that an appeal has to be filed with a certified copy of the impugned order and the Section 12(2) of the Limitation Act excludes the time taken by a party for obtaining a certified copy of the order it seeks to appeal and thus, ensures that any delay in the receipt of the certified copy by the applicant shall not cause any prejudice to the applicant.

The obvious question that arises here is within what time should the person aggrieved of the order, apply for the certified copy. In this regard, the Court observed that “a person wishing to file an appeal is expected to file an application for a certified copy before the expiry of the limitation period, upon which the “time requisite” for obtaining a copy is to be excluded. However, the time taken by the court to prepare the decree or order before an application for a copy is made cannot be excluded. If no application for a certified copy has been made, no exclusion can ensue.”

In the findings of facts, the Court observed that in the matter in hand the appellant was present in court at the time of pronouncement of the order, and yet chose to file for a certified copy after five months. It clearly goes on to indicate that the Appellant failed to exercise diligence in pursuing the litigation in a timely fashion. The court further found that the period of 30 days + 15 days also expired much before the set in of pandemic and resultant lockdown in March. Further, the suo moto extensions made by the NCLAT only extended the period of limitation applicable in the proceedings, only in cases where such period had not ended before 15th March 2020.

The Court further held that, “In this case, owing to the specific language of Section 61(1) and 61(2), it is evident that limitation commenced once the order was pronounced and the time taken by the Court to provide the appellant with a certified copy would have been excluded, as clarified in Section 12(2) of the Limitation Act, if the appellant had applied for a certified copy within the prescribed period of limitation under Section 61(2) of the IBC.”   

The Appeal was thus rightly dismissed by the NCLAT as time barred.

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Maintainability of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by a power of attorney holder

Insolvency and Bankruptcy

In the recent matter of Rajendra Narottamdas Sheth & Anr. vs. Chandra Prakash Jain & Anr. decided by the Hon’ble Supreme Court (Civil Appeal No.4222 of 2020), two essential issues arose for consideration, namely, (i) What is the maintainability of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by a power of attorney holder; and (ii) whether an application filed beyond three years from the date of default is barred by limitation?

The first issue arises from the fact that Union Bank of India (the financial creditor) had issued power of attorney as an authority document. The PoA was executed by the general managers in 2011 pursuant to the resolution passed by the board of directors of the Bank in 2008. The Bank through the PoA appointed the person to conduct and manage and to assist in all the business and affairs of the Bank. Additionally the person was also authorised to commence, prosecute, endorse, defend, answer and/or oppose any suit or other legal proceedings and to make sign, execute, present and file all applications, plaints, petitions etc. The Corporate Debtor while relying on Palogix Infrastructure Private Limited v. ICICI Bank Limited, [2017 SCC Online NCLAT 266] argued that the application under Section 7 of the Code was not maintainable as it was filed by a power of attorney holder. Interestingly Counsel appearing for the Financial Creditor, also relied upon the same judgment and argued that a person authorised by way of a power of attorney can file an application under Section 7 of the Code.

The Supreme Court while referring to  the judgment in Palogix Infrastructure observed that if a general authorisation is made by a creditor/corporate applicant in favour of its officer to do needful in legal proceedings, mere use of the words ‘Power of Attorney’ while delegating such power, will not take away the authority of such officer. The Court, while approving the view taken by NCLAT in Palogix Infrastructure, further indicated that if the officer was authorised to sanction loans and had done so, such officer having power to recover the loan amount, can also initiate corporate insolvency resolution process.

The second issue arises from the fact that the date of default of payment by the corporate debtor was 30.09.2014 i.e. the date on which the account of the Corporate Debtor was declared as non-performing asset (NPA) and the application under section 7 of IBC was filed on 25.04.2019. The Financial Creditor, along with the application had only filed a copy of the debit balance confirmation letter dated 07.04.2016. The Financial Creditor, however, had made no plea with respect to extension of the limitation period and application of Section 18 of the Limitation Act. In such circumstances of there being no specific plea, the application was liable to be dismissed.

However, the Corporate Debtor had, in its reply before the Adjudicating Authority, placed on record a letter dated 17.11.2018, which detailed the amount repaid till 30.09.2018 and acknowledged the amount outstanding as on 30.09.2018. On the basis of the said letter and the record as presented in the reply by the Corporate Debtor showing that the Corporate Debtor had executed various documents amounting to acknowledgement of the debt even in the financial year 2019-20, the Court was of the opinion that Section 18 of the Limitation Act was applicable and therefore, the application under section 7 was well within the limitation period.

Analysis of the Recent Case Laws on Definition and Scope of Financial Debt

Insolvency and Bankruptcy

Insolvency and Bankruptcy Code, 2016 (the “IBC”) was enacted because the earlier legislations were lopsided and favoured the corporate debtors resulting into huge outstanding debts to banks and financial institutions. Say for example, according to section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, the protection also extended to the guarantors and therefore, creditors could not proceed against the guarantors if the debtor company was declared ‘sick’ under the said Act. The IBC further facilitates the resolution of corporate bankruptcy in a time bound manner.

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