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16 Apr

Does non-compliance of Section 29A of Arbitration and Conciliation Act, 1996 vitiates the Arbitral Award?

Section 29A of the Arbitration and Conciliation Act, 1996 prescribes the time limit for passing of arbitral award in case of domestic arbitrations. As per section 29A(1), the award shall be made by the arbitral tribunal within a period of 12 months from the date of completion of pleadings. As per sub-section (3), the parties by consent extend the period of 12 months for a further period not exceeding 6 months. As per sub-clause (4), the mandate of the arbitrator shall terminate in the event the award is not made within the period prescribed or within the extended period unless the court extends the period either prior to or after the expiry of the period so specified or extended. Any extension can be granted only on application of any of the parties stating sufficient cause. The Court may impose any terms and conditions while extending the time period. The Court deciding an application under section 29A of the 1996 Act is also empowered to order reduction in the fees of the arbitral tribunal if the Court is of the opinion that the delay in delivering award is attributable to the arbitral tribunal. The Court can further impose actual or exemplary costs upon any of the parties.

The question that arises for consideration is whether an award that is passed after the expiry of the period prescribed under section 29A of the 1996 Act or after the extended period, is a nullity and is unenforceable in law? The question is also whether section 29A addresses the said issue at all or it is a grey area? It is also important to understand as to under which proceeding the objection of award being nullity can be raised.

Hon’ble Division Bench of the Telangana High Court has recently in the matter of Roop Singh Bhatty v. M/s. Shriram City Union Finance Limited C.R.P.NO.1354 OF 2021 [decide on 08.04.2022] held that the award passed by the arbitral tribunal after one year of entering into reference is nullity and void ab initio since after one year so prescribed under Section 29A as it then existed, the arbitral tribunal became functus officio and is wholly incompetent to deal with the disputes or pass the arbitral award. Thus, in law there does not exist an arbitral award and therefore there is no question of enforcement of the award.

In the matter of Roop Singh Bhatty the dispute arose out of the default in repayment of loan by the petitioner to the respondent subsequent to which the Respondent invoked the arbitration clause. The arbitrator passed the award on 27.12.2017 in favour of the respondent. The respondent filed a petition in the Court seeking execution of the arbitral award which was allowed in favour of the Respondent. The Petitioner preferred a revision against the said execution order. The fulcrum of challenge was that award was not passed within one year from the date of filing claim, and therefore the award is a nullity and therefore cannot be enforced. When asked if such plea can be taken at the execution stage, it was submitted that plea of nullity can be raised in execution proceedings and not at the Section 34 proceeding as the scope of challenge to the award under Section 34 is limited. The Counsel for the respondent on the other hand argued that Section 29A of the 1996 Act only lays down procedure and non-compliance thereof does not vitiate the award.

The Hon’ble High Court began its analysis by looking into the relevant provision under section 29A and its scope as it stood at the time of adjudication of the disputes between the parties. As of then, Section 29A provided that the award should be passed within a period of twelve months from the date Arbitration Tribunal enters appearance. The relevant provision is reproduced herein below:

Section 29A. (1) The award shall be made within a period of twelve months from the date the arbitral tribunal enters upon the reference. Explanation:- For the purpose of this sub-section, an arbitral tribunal shall be deemed to have entered upon the reference on the date on which the arbitrator or all the arbitrators, as the case may be, have received notice, in writing, of their appointment.

(2) If the award is made within a period of six months from the date the arbitral tribunal enters upon the reference, the arbitral tribunal shall be entitled to receive such amount of additional fees as the parties may agree.

(3) The parties may, by consent, extend the period specified in sub-section (1) for making award for a further period not exceeding six months.

(4) If the award is not made within the period specified in sub-section (1) or the extended period specified under subsection (3), the mandate of the arbitrator(s) shall terminate unless the Court has, either prior to or after the expiry of the period so specified, extended the period: Provided that while extending the period under this sub-section, if the Court finds that the proceedings have been delayed for the reasons attributable to the arbitral tribunal, it may order reduction of fees of arbitrator(s) by not exceeding five per cent for each month of such delay.

(5) The extension of period referred to in sub-section (4) may be on the application of any of the parties and may be granted only for sufficient cause and on such terms and conditions as may be imposed by the Court.

(6) While extending the period referred to in sub-section (4), it shall be open to the Court to substitute one or all of the arbitrators and if one or all of the arbitrators are substituted, the arbitral proceedings shall continue from the stage already reached and on the basis of the evidence and material already on record, and the arbitrator(s) appointed under this section shall be deemed to have received the said evidence and material.

(7) In the event of arbitrator(s) being appointed under this section, the arbitral tribunal thus reconstituted shall be deemed to be in continuation of the previously appointed arbitral tribunal.

(8) It shall be open to the Court to impose actual or exemplary costs upon any of the parties under this section.

(9) An application filed under sub-section (5) shall be disposed of by the Court as expeditiously as possible and endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.

The arbitral tribunal is deemed to have entered the appearance when he receives the notice for its appointment from the parties. The date on which the arbitral tribunal entered the appearance was not disputed between the parties. The award, however, was not made within 1 year from that date. As per the Court, the provision under section 29A is in mandatory terms. The Court observed that “The provision as it stood was in mandatory terms and leaves no scope to infer otherwise. The intention of the Parliament is made abundantly clear from the reading of Sub-sections (3) and (4). Subsection (3) enables parties by consent to extend the time by further period of six months. But it also makes it clear that it should not be extended beyond six months. According to sub-section (4), after the initial period of one year and extended period of six months, if extended by consent, the mandate of the arbitrator terminates. Thus, he becomes functus-officio after that period and, therefore, seizes to be an arbitrator. An arbitrator is a creature of the statute and has to work within the four corners of the Act.”

This provision was subsequently amended vide Arbitration and Conciliation (Amendment) Act, 2019. As per section 6 of the Amendment Act of 2019 – “In Section 29A of the principal Act,- (a) for sub-section (1), the following sub-section shall be substituted, namely:-“(1) The award in matters other than international commercial arbitration shall be made by the arbitral tribunal within a period of twelve months from the date of completion of pleadings under sub-section (4) of Section 23: Provided that the award in the matter of international commercial arbitration may be made as expeditiously as possible and endeavour may be made to dispose of the matter within a period of twelve months from the date of completion of pleadings under sub-Section (4) of Section 23.”; (b) in sub-section (4), after the proviso, the following provisos shall be inserted, namely:- “Provided further that where an application under sub-section (5) is pending, the mandate of the arbitrator shall continue till the disposal of the said application: Provided also that the arbitrator shall be given an opportunity of being heard before the fees is reduced”.”

As per the counsel of the respondent, the operation of amendment was retrospective in nature. The argument was rejected by the Court. Although the amendment takes care of the drawbacks in the earlier provision, the Court explained that “merely because word substitution is used [in section 6 of the Arbitration and Conciliation (Amendment) Act, 2019], the amended provision does not relate back to the date of original provision that was amended. It depends on the language employed, effect of the amendment and the intendment of the legislature.” The position is rather made clear by the notification which appointed the effective date for the amendments under 2019 Amendment Act as 30^th August, 2019.

The Court therefore finally concluded that the execution Court grossly erred in not appreciating the fact that the arbitral tribunal passed the award after one year of appearance when it became functus officio and wholly incompetent to deal with the disputes or pass the arbitral award. Thus, award passed by the arbitrator was nullity and void ab initio. Thus, in law there did not exist any arbitral award and there was no question of enforcement of the award.

The provision under section 29A of the 1996 Act or any other provision does not provide a clear answer to the question raised in the present case. It is however stated that the mandate of the arbitrator shall terminate after the expiry of the term provided under section 29A(1) or 29A(3) of the 1996 Act, as the case may be. The position remains unchanged so far as the two amendments of 2015 and 2019 in the 1996 Act are concerned and therefore the reasoning given by the Hon’ble Telangana High Court shall be equally applicable to the disputes being adjudicated by the arbitral tribunals after the amendment to section 29A of 1996 Act in 2019.

28 Nov

No Jurisdiction of NCLT can be Invoked if Termination of Contract is Unrelated to Insolvency of Corporate Debtor

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Insolvency and Bankruptcy, Uncategorized

In the recent case of TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited in Civil Appeal No 3045 of 2020, the Bench of Hon’ble Apex Court consisting of Dr. Dhananjaya Y Chandrachud, J and A S Bopanna J, decided an appeal preferred against the order of National Company Law Appellate Tribunal (NCLAT) upholding an ad-interim stay granted by the National Company Law Tribunal (NCLT) for staying termination by the Appellant of Facilities Agreement executed with the Corporate Debtor (SK Wheels Private Limited).

The Facilities Agreement obligated the Corporate Debtor to provide premises with certain specifications and facilities to the Appellant. The termination clause of the Facilities Agreement entitled the parties to terminate the agreement immediately by written notice to the other party provided that a material breach committed by the latter is not cured within thirty days of the receipt of the notice.

On account of alleged multiple lapses by the Corporate Debtor in fulfilling its contractual obligations, which were not cured satisfactorily, despite Appellant writing various e-mail communications, the Appellant issued the termination notice dated 10.06.2019 which immediately came into effect. This was subsequent to the initiation of Corporate Insolvency Resolution Process on 29.03.2019.

The corporate debtor denied the allegation of material breaches and challenged the termination of the Agreement on the ground that corporate debtor had cured the issues highlighted by the Appellant and that the Appellant did not serve mandatory notice of 30 days.

When RP filed application under section 60(5)(c) of the IBC, NCLT granted ad-interim stay on termination of the Agreement stating that it is the duty of Resolution Professional to preserve and protect the assets of the ‘Corporate Debtor’ (Section 25 of the IBC) along with the fact that moratorium under section 14 is imposed to ensure the smooth functioning of the Corporate Debtor and accordingly, granted stay on termination of the Agreement. The Order was upheld by NCLAT.

On Appeal, it was argued before the Supreme Court that section 14 shall not be applicable as it is the Appellant who is availing the services of the Corporate Debtor and the Facilities Agreement was not the sole contract of the corporate debtor, termination of which would lead to its corporate death. The Appellant also insisted on third party’s contractual right of termination and argued that IBC does not permit a statutory override of all contracts entered with the Corporate Debtor. Further, it was argued that the obligation under section 25 cannot be stretched to convert a determinable commercial contract into a non-terminable contract. The Appellant further challenged the exercise of residuary jurisdiction by the NCLT under Section 60(5)(c) of the IBC to decide a contractual dispute.

The Appellant further submitted that the ratio in Gujarat Urja Vikas v. Amit Gupta & Ors [(2021) 7 SCC 209] shall not be applicable since in the present matter, the contract in question was the sole contract of the corporate debtor, and the termination of the contract by the third party was merely on the ground of initiation of CIRP without there being any contractual default on part of the corporate debtor.

On the other hand, it was argued on behalf of the RP that firstly, the Appellant had not served the 30 day notice and secondly, the judgment in Gujarat Urja Vikas shall apply since the corporate debtor had only one source of income left out of the two when one dealership was already terminated before the initiation of CIRP.

Accordingly, the Court framed two issues for its consideration -:

(i) Whether the NCLT can exercise its residuary jurisdiction under Section 60(5)(c) of the IBC to adjudicate upon the contractual dispute between the parties; and

(ii) Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement?

The Apex Court analysed the arbitration clause provided in the Agreement along with the provision under Section 238 of the IBC which provides that the IBC overrides other laws, including any instrument having effect by virtue of law. The Court accordingly observed that the Facilities Agreement, being an ‘instrument’ under Section 238 of the IBC, can be overridden by the provisions of the IBC.

On analysis of section 60(5)(c) of the IBC, the Court observed that the existence of arbitration clause does not oust the jurisdiction of the NCLT to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of the Corporate Debtor. The Court further clarified that while RP can approach the Adjudicatory Authority for adjudication of disputes which relate to the insolvency resolution process, however, “when the dispute arises dehors the insolvency of the Corporate Debtor, the RP must apply to the Adjudicatory Autority.”

With respect to the objection by the Appellant that the adjudicatory Authority has, through its order, changed the nature of the Agreement from determinable to non-terminable, the Court clarified that intervention of NCLT/NCLAT, which are vested with responsibility of ascertaining the survival of the Corporate Debtor, cannot be said to be re-writing of the contract.

On the question of applicability of section 14, the Court agreed that section 14 shall not be applicable in the facts of the present case since the Appellant is neither supplying any goods or services to the corporate debtor in terms of Section 14 (2) nor is it recovering any property that is in possession or occupation of the corporate debtor as the owner or lessor of such property as envisioned under Section 14 (1) (d). The Appellant is, in fact only availing of the services of the Corporate Debtor by using the property that has been leased to it by the Corporate Debtor.

The Court, however, while referring to Gujarat Urja, was quick to add that jurisdiction of NCLT is not limited by Section 14 and that it can exercise its residuary jurisdiction under Section 60(5)(c) to adjudicate on questions of law and fact that relate to or arise during an insolvency resolution process. It was quoted from the judgment of Gujarat Urja – “If the jurisdiction of NCLT were to be confined to actions prohibited by Section 14 of IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be exhaustive of the grounds of judicial intervention contemplated under IBC in matters of preserving the value of the corporate debtor and its status as a “going concern”.

Having laid down the background, the Court went on to analyse the facts of the case. It was observed that the termination by the Appellant was not motivated by insolvency but by Corporate Debtor clearly having failed to fulfil its contractual obligations which the Appellant had brought to the attention of the corporate debtor before the initiation of CIRP through various e-mails. The deficiency of service was also highlighted in the Termination Notice by the Appellant.

In this background, the Court distinguished the facts in Gujarat Urja where the contract in question was terminated on the ground of insolvency itself which, as per the contract, constituted an event of default. In other words, the contractual dispute between the parties arose in relation to the insolvency of the corporate debtor and therefore it was amenable to the jurisdiction of the NCLT under Section 60(5)(c). This Court quoted from the judgment that “….NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the corporate debtor… The nexus with the insolvency of the corporate debtor must exist”.

Therefore, while heavily relying on the reasoning in the judgment of Gujarat Urja, the Apex Court laid down the law that the residuary jurisdiction of the NCLT cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the corporate debtor and since NCLT has no jurisdiction in such matters, the NCLT had incorrectly imposed an ad-interim stay on the termination of the Facilities Agreement.

Additionally, the Court also issued a note of caution for the NCLT/NCLAT regarding interference with a party’s contractual right to terminate a contract in the following words – “Even if the contractual dispute arises in relation to the insolvency, a party can be restrained from terminating the contract only if it is central to the success of the CIRP. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor”. The Court finally observed that NCLT had failed to apply its mind to “the centrality of the Facilities Agreement to the success of the CIRP and Corporate Debtor’s survival as a going concern” and therefore, the judgment of NCLAT that confirmed NCLT order of ad-interim stay on termination was set aside.

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