Experts CornerSiddharth R Gupta

It is the plain and unqualified obligation of every person against, or in respect of whom an order is made by a court of competent jurisdiction, to obey it unless and until that order is discharged.

Romer L.J.,

Hadkinson v. Hadkinson1

Disobedience of orders of a court strikes at the very root of the rule of law on which the judicial system rests. Judicial orders are bound to be obeyed at all costs. Howsoever grave the effect may be, is no answer for non-compliance of a judicial order. Judicial orders cannot be permitted to be circumvented.

J.S. Khehar, J.

Subrata Roy Sahara v. Union of India2

The present article delves into a subject of immense relevance for the judicial system of our country, with the ongoing debate on interpretation of interim orders regarding their extent, existence, and expiry after a particular passage of time. In other words, we would attempt to highlight how the question of duration and endurance of interim orders has been answered by the various courts, especially the constitutional courts of the country viz. (High Courts and the Supreme Court), when they were mentioned to be operative for a particular period/duration/time by the court passing the order granting interim relief.

As the analytical description would unfold, what will also be amusing to note is that the constitutional courts of the country have themselves left every corner of this issue ambiguous and ambivalent. It is highly desirable that the Supreme Court of India must step in and resolve the serious conundrum occasioned owing to mutually contradictory judicial verdicts of various High Courts. There is a sharp vertical cleavage of judicial opinion on the duration and expiry of interim orders, when they are passed for a fixed period/time.

The article shall be segregated into the following sub-topics:

1. Purpose and objective of an interim/interlocutory order by any court of law.

2. Classification of interim/interlocutory orders on the basis of their wordings.

3. Origins and applicability of the legal maxim – “actus curiae neminem gravabit”.

4. View of the Supreme Court of India.

5. Views of the High Courts favouring continuation of interim order in various contingencies.

6. Views of the High Courts against continuation of interim order, declaring their expiry date.


Discussions under topics A to D shall be undertaken in the current part of the article whilst discussions under topics E to G shall be dealt with in Part II of the article

Purpose and objective of an interim/interlocutory order by any court of law

The roots and origins of the concept of interim/interlocutory order in the Indian context can be traced to the provisions of Order 39 Rules 1 to 3 CPC, which are the repository of powers to grant interim relief and temporary injunctions.

Upon perusal of Order 39 Rule 1 CPC, it would indicate that wherein any suit, it is proved by affidavit or otherwise (i) that any property in dispute in a suit is in danger of being wasted, damaged or alienated by any party to the suit, or wrongfully sold in execution of a decree; or (b) that the defendant threatens, or intends, to remove or dispose of the property with a view to defrauding the creditors; (c) that the defendant threatens to dispossess, the plaintiff or otherwise cause injury to the plaintiff in relation to any property in dispute in the suit; the court may grant an order of temporary injunction to restrain such acts.

It has now been well settled that before a court grants a temporary injunction, it needs to be satisfied that a person seeking an injunction has a prima facie case in his favour and that the balance of convenience and possibility of irreparable injury being caused also lies in his favour.

The word “prima facie case” apparently indicates something which at the first impression makes out a triable case. The term “prima facie case” should not be confused with the term “prima facie title” which has to be established at the trial upon permitting the parties to lead evidence. Thus, it means a substantial question has been raised, which upon first sight needs to be investigated and decided on merits.

The word “balance of convenience” denotes that the court must be satisfied that the comparative mischief and hardship which is likely to be caused to the person seeking an injunction is more than the inconvenience likely to be caused to the other party by granting such injunction.

The word “irreparable injury” on the other hand guides the court to be satisfied that the refusal to grant the injunction would result in such injury which cannot be compensated in terms of costs or otherwise and the person seeking injunction needs to be protected from the consequences of apprehended injury.

The aforesaid three ingredients have been noticed by the House of Lords in the celebrated case of American Cyanamid Co. v. Ethicon Ltd.3 The principles regarding grant of injunction as laid down by the Lord Diplock in the Cyanamid case4 can be summarised as under:

(1) The plaintiff must first satisfy the court that there is a serious issue to decide and that if the defendants were not restrained and the plaintiff won the action, damages at common law would be inadequate compensation for the plaintiff’s loss.

(2) The court, once satisfied with these matters will then consider whether the balance of convenience lies in favour of granting an injunction or not, that is, whether justice would be best served by an order of injunction.

(3) The court does not and cannot judge the merits of the parties’ respective cases and that any decision of justice will be taken in a state of uncertainty about the parties’ rights.

The Supreme Court of India has also followed the same principle as followed by the English courts primarily the three considerations mentioned above. In Colgate Palmolive (India) Ltd. v. Hindustan Lever Ltd.,5 the Supreme Court of India referred to the Cyanamid case6. It also relied upon the Indian precedents and succinctly enumerated the broad parameters that should govern the judicial discretion in the passing of interim/interlocutory/temporary orders by Indian courts. Vide para 24, the Supreme Court Bench, comprising B.N. Kirpal and U.C. Banerjee, JJ., held thus:

24. We, however, think it fit to note hereinbelow certain specific considerations in the matter of grant of the interlocutory injunction, the basic being non-expression of opinion as to the merits of the matter by the court, since the issue of grant of injunction, usually, is at the earliest possible stage so far as the time-frame is concerned. The other considerations which ought to weigh with the court hearing the application or petition for the grant of injunctions are as below:

(i) Extent of damages being an adequate remedy.

(ii) Protect the plaintiff’s interest for violation of his rights though, however, having regard to the injury that may be suffered by the defendants by reason therefor.

(iii) The court while dealing with the matter ought not to ignore the factum of the strength of one party’s case is stronger than the other’s.

(iv) No fixed rules or notions ought to be had in the matter of grant of the injunction but on the facts and circumstances of each case — the relief being kept flexible.

(v) The issue is to be looked at from the point of view as to whether on the refusal of the injunction the plaintiff would suffer irreparable loss and injury keeping in view the strength of the parties’ case.

(vi) Balance of convenience or inconvenience ought to be considered as an important requirement even if there is a serious question or prima facie case in support of the grant.

(vii) Whether the grant or refusal of the injunction will adversely affect the interest of the general public which can or cannot be compensated otherwise.

The authorities and precedents on principles governing grant of interim relief are innumerable. However, the above ones have been referred to broadly explain the factors that should govern grant of interim relief by any judicial/quasi-judicial court or a tribunal.

Necessarily, therefore, the exercise of passing of any interim order granting any interim relief by necessary implication is an exercise to be undertaken by the courts with due application of mind, preferably through speaking order. The Supreme Court has been consistently holding that interim orders cannot be granted on mere asking or as a matter of force, but only on consideration governing them (as explained above). There has to be an active display of judicial conscience and mental thinking in the process of passing of interim order in favour of any party.

The present article delves into the moot question of whether the effect of an interim order granted to any party must dissipate on procedural grounds, when the time expires. Whether, despite all the diligent efforts of the parties, when the courts are not able to decide on the vacation or withdrawal of interim relief so granted to any party, should the party be denied the fruits of a judicially considered and well-deliberated interim order is the question to be answered.

Classification of interim/interlocutory orders on the basis of their wordings

Even though it may be a singular term  “interlocutory orders”, however the content of these orders may bear different colours. As stated earlier, the grant of interim relief to any party in any proceeding is dependent upon a host of factors. The courts may while granting interim relief, bracket it with certain conditions or riders. The tenure, extent and duration of the interim orders may be limited by the court whilst granting interim relief. Generally, the court restricts the extent and duration of the interim orders in the following words:

(i) “in the meanwhile … during the pendency of the matter”;

(ii) “till the next date of hearing of the matter”;

(iii) “till the next date of listing”;

(iv) “list on (date) … till then interim order (as specified) to operate”; and

(v) “parties are directed to maintain status quo (or any other similar interim order) till further orders of this Court”.

The interim orders of varied wordings may be passed by the court, but each of them has a separate import about its extent and duration. It is the dispute about the interpretation of these interim orders only that has been keeping jurists and Judges puzzled alike, with no definite answer. A one line interim order may at times cascade into another bigger litigation if the stakes on either side are volatile, for protection of which only the interim order of the court was passed.

Origins applicability of the legal maxim – “actus curiae neminem gravabit” for extension and restoration of interlocutory orders

The maxim is founded upon justice and good sense; and affords a safe and certain guide for the administration of the law. In virtue of it where a case stands over for argument from term to term on account of the multiplicity of business in the court, or for judgment from the intricacy of the question, the party ought not to be prejudiced by that delay, but should be allowed to enter up his judgment retrospectively to meet the justice of the case; and therefore, if  one party  to  an  action  dies  during  a  curia  advisari vult,  judgment may be entered “nunc pro tunc”, for the delay is the act of the court, and therefore neither party should suffer for it.

Cases do however, occur, in which injury is caused by the act of a legal tribunal, as by the laches or mistake of its officers; and where, notwithstanding the maxim as to actus curiae, the injured party is altogether without redress.

The maxim referred to above was relied on, referred and applied for by the courts at UK as far back in the beginning of 19th century in the judgment of Pulteney v. Warren7, wherein Lord Eldon in the context of above maxim, observed as under:

“If there be a principle, upon which courts of justice ought to act without scruple, it is this; to relieve parties against that injustice occasioned by its own acts or oversights at the instance of the party, against whom the relief is sought. That proposition is broadly laid down in some of the cases.”

This view was followed subsequently by the House of Lords in East India Co. v. John Campion8. In another case of Rodger v. Comptoir d’Escompte de Paris9, the principle enshrined above in the Latin maxim was reiterated again in following lines:

… One of the first and highest duties of all courts is to take care that the act of the court does no injury to any of the suitors and when the expression “the act of the court” is used, it does not mean merely the act of the primary court, or of any intermediate court of appeal, but the act of the court as a whole from the lowest court which entertains jurisdiction over the matter up to the highest court which finally disposes of the case….

In addition to the above, first few judgments which affirmed and followed the doctrine of “actus curiae neminem gravabit” is Turner v. London and South-Western Railway Co.10 In this case, the plaintiff had died after the hearing, but before the court rendered its judgment. The court ordered that its judgment be entered “nunc pro tunc”, as of the day when the argument terminated, noting that this would not cause an injustice to the other party and that such a result was appropriate in a case in which the delay had resulted from an act of the court.

Thus in essence, the Latin maxim “actus curiae neminem gravabit”, means “an act of the court should prejudice no one”. At times, judicial proceedings or orders of the court may itself perpetuate injustice. The doctrine therefore allows courts to rectify and undo the wrongs committed to any party due to its own mistakes, shortcomings in judicial proceedings or judicial orders.

The Privy Council as far back as in Debi Bakhsh Singh v. Habib Shah11 pointed out that an abuse of the process of the court may be committed by the court or by a party. Where a court employs a procedure in doing something, which it never intended to do and there is an abuse of the process of the court, it can always be corrected. Lord Shaw spoke for the Bench thus:

“Quite apart from Section 151, any court might have rightly considered itself to possess an inherent power to rectify the mistake which had been inadvertently made.”

Further, in another matter of The Bolivar12, the Privy Council applying the doctrine further stated thus:

“Where substantial injustice would otherwise result, the court has, in Their Lordships’ opinion, an inherent power to set aside its own judgments of condemnation so as to let in bona fide claims by parties….”

In Jang Singh v. Brij Lal13, the Supreme Court of India in relation to the maxim “actus curiae neminem gravabit” observed as follows:

6. … There is no higher principle for the guidance of the court than the one that no act of courts should harm a litigant and it is the bounden duty of courts to see that if a person is harmed by a mistake of the court he should be restored to the position he would have occupied but for that mistake. This is aptly summed up in the maxim:

“actus curiae neminem gravabit”.

Courts have held in many judgments said that to own up any mistake when judicial satisfaction is reached, does not militate against its status or authority. Perhaps it would enhance both.

What would happen if the interim order applicable up to a particular date or any interim arrangement determined by the court does not get extended due to procedural impediments on the part of the court; or owing to omission on the part of its Registry. Whether an interlocutory order passed after due consideration of merits and application of judicial mind with due exercise of judicial conscience and discretion must disappear for the faults in the machineries working in the judicial system. Courts in India have applied the aforementioned doctrine of “actus curiae neminem gravabit” to restore the previously passed interlocutory orders that expired for no fault of the parties.

In Pradip Kumar Saha v. Rajesh Rajak14, the ADJ Court at Siliguri (W.B.) had passed an order whereby the prayer for extension of ad interim order of stay of the operation of the order was refused against which the matter travelled to the High Court. Previously, an ad interim order of injunction was passed on an application filed by the plaintiffs/opposite parties on 17-8-2015 restraining the defendant-petitioner from disturbing the peaceful possession of the plaintiff till 16-9-2015. This interim order was extended from time to time until the Order No. 16 passed in the said suit. But from Order No. 16 till Order No. 24 passed in the said suit, this order was not extended by the trial court. No order came to be passed for extension of interim order, when the matter travelled to the High Court on the question of existence and continuation of interim order when the parties had made diligent efforts. The High Court applying the doctrine of “actus curiae neminem gravabit”, held that act of the court should not cause any prejudice to the litigant and therefore continued the ad interim order granted earlier by the trial court till the final disposal of the pending applications for the extension of the interim relief. Vide para 1, the High Court applying the said doctrine observed thus:

1. … An ad interim order of injunction was passed on an application filed by the plaintiffs/opposite parties on 17-8-2015 restraining the defendant-petitioner from disturbing the peaceful possession of the plaintiff till 16-9-2015. It is not in dispute that such ad interim order of injunction was extended from time to time until the Order No. 16 passed in the said suit. There is no reflection after the said Order No. 16 till the Order No. 24 passed in the said suit that the said ex parte ad interim order of injunction was extended by the trial court. A serious dispute was raised before this Court over the filing of an application seeking extension of the said interim order on each date of listing. My attention is drawn to the orders recorded in the said suit wherefrom it appears that an application seeking extension of ad interim order was filed but there is no reflection that the court extended the said ad interim order of injunction. By an order dated 10-1-2018 the learned Judge in the trial court took up the matter and noticed that the ex parte ad interim order of injunction granted on 17-8-2015 has not been extended on and from 1-7-2016. The learned Judge was of the opinion that it was a mistake on the part of the court in not extending ad interim order of injunction and extended in the manner as if the said ad interim order of injunction was operative through out the proceeding. What can be seen from the tenet of the said order is that the learned Judge in the trial court was swayed by the fact that the act of the court should not cause any prejudice to the litigant. Such principle is well recognised and based on the legal maxim “actus curiae neminem gravabit”.

Vide para 5, the High Court held thus:

5. This Court, therefore, modifies the order dated 10-1-2018 in exercise of the power of superintendence to the extent that the ad interim order of injunction passed on 17-8-2015 is reimposed from the said date and to continue till the disposal of the injunction applications.

A somewhat similar situation arose before the Madras High Court in T. Gnanasambanthan v. Board of Governors15. In this case, the writ petition was filed challenging the order of discharge passed by the respondents. Through an interim order, the court stayed the operation of the impugned order of discharge. Against this order, a vacate stay petition was filed by the respondents which was not decided within 14 days from the date of filing. Consequently, the respondents issued an office order dated 30-10-2013 relieving the petitioner with effect from 30-10-2013 on the ground that the interim stay automatically got vacated due to Article 226(3) of the Constitution of India. The main issue was whether the stand taken by the respondents on the basis of Article 226(3) to the effect that the stay automatically got vacated is correct or not.

The court noted that due to fault on the part of its Registry and listing section, the application for vacation of interim order could not get listed. This was titled as “act of omission” on the part of the court, warranting invocation of “actus curiae neminem gravabit”. Holding that when the court or its executive machinery is at fault, then the parties should not suffer. Vide para 65, the Madras High Court held thus:

65. But unfortunately, none of the High Courts, whose decisions are relied upon by the respondents, has considered the question from the pedestal of the most fundamental principle of law, namely, that no one shall be prejudiced by an act of court (actus curiae neminem gravabit). An act can either be an act of omission or be an act of commission. The non-listing of an application for vacation of an interim order, if not due to the fault of any of the parties, but due to the fault of the Registry of the court, would fall under the category of “act of omission”. No law can be so absurd as to say that if the court is at fault, the parties shall suffer. I do not think that any case law is required to support the proposition that an act of court shall not prejudice a party.

Vide paras 74-75, the Madras High Court further held as follows:

74. … Take for instance a case, where an application for vacating the stay is taken up for hearing within two weeks of its presentation and the court reserves orders. If orders were not pronounced on or before the expiry of the 14th day from the date of filing of the vacate stay application, could it be said that the party, who obtained an interim stay, should still suffer, despite ensuring that the application is heard within two weeks. It is not within the control of any party to have his application or the opposite party’s application listed for hearing. Even if a party succeeds in getting the application listed within two weeks, it is not in his control to ensure that the application is heard before the expiry of two weeks. Even if a party succeeds in making the court hear the application for vacation of the interim order within two weeks, it is not in his control (especially these days) to ensure that it is disposed of within two weeks from the date of filing of the vacate stay application.

75. Therefore, an interpretation that would put a party, who is not at fault, to disastrous consequences, for the failure of an institution or for the happening of something that is beyond his control, is wholly unjustified. If a statutory provision imposes an obligation upon one party and makes the opposite party suffer for the consequences of non-fulfilment of the obligation cast therein, such a provision cannot be said to be mandatory. Unfortunately, none of the High Courts, whose decisions are relied upon by the respondents, has taken note of this basic difference between the person, on whom, an obligation is cast and the person, on whom, the consequences are made to fall under Article 226(3). Hence, with great respect, I am unable to agree with the views expressed by the other High Courts.

From the above judgments, it is clear that the doctrine of “actus curiae neminem gravabit”, can be rightly invoked to continue and restore interim orders that expired due to faults on the part of Registry or the executing machinery of the court. However, a neat and clear case has to be made out by the party pleading for applicability of the doctrine that it is entitled for restitution due to fault on the part of the court, meaning thereby that more often than not one can claim restitution if due diligence is proved on his part.

View of the Supreme Court of India on extent, expiry and duration of interim orders

Not many judgments are available of the Supreme Court on the issue of duration and existence of interlocutory orders. However, there are two judgments that have taken a strict view on their operability, while there are some others on the other end of the spectrum. The first one at hand is the judgment of Arjan Singh v. Punit Ahluwalia16. In this case, through the interim order dated 2-2-1996, Dr Bawa, one of the respondents, was restrained from transferring the property, which order was to remain in effect till 16-10-1996. An application for extension of the said interim order was filed on this date, but extension could not be granted since the Presiding Officer was on leave on 16-10-1996. Thereafter, the matter was transferred to another court and the interim order was neither extended nor vacated. Therefore, the main issue that arose was whether the order of injunction was operative, so as to attract the provisions of Order 39 Rule 2-A of the Code of Civil Procedure or invoking the inherent jurisdiction of the court under Section 151 thereof. The court held that if the order of injunction was operative up to a particular date, technically the order of injunction shall not remain operative thereafter. Thus, the owner of the land Dr Bawa and Defendant 2 Sanjeev Sharma could have entered into the compromise, to be treating the interim order to be not operative beyond the date it was so held to be. Vide paras 16-17, the Supreme Court held thus:

16. The learned trial Judge passed an interim order on 2-2-1996, which was periodically extended. Indisputably, by reason thereof, Dr Bawa was restrained from transferring the property. A similar order of injunction was passed in Sanjeev Sharma’s case which was made absolute on 28-5-1997. It is, however, again beyond any dispute that the said order of injunction continued from time to time. It was operative till 16-10-1996. It has been noticed by the learned trial Judge that an application for extension was filed. However, because the Presiding Officer was on leave on 16-10-1996 and later the matter was transferred to another court, the interim order was neither extended nor vacated.

17. Was the order of injunction operative so as to attract the provisions of Rule 2-A of Order 39 of the Code of Civil Procedure or invoking the inherent jurisdiction of the court under Section 151 thereof? The learned trial Judge opined that it was so because it was for the court to pass an appropriate order thereunder. The High Court, however, differed with the aforementioned finding of the learned trial Judge to hold that no order of injunction was operative. It, furthermore, held that any transaction carried out in violation of the order of the court is void; it would be a nullity. The decision of the High Court is based on the decisions of different High Courts including Pranakrushna v. Umakanta Panda17, Phani Bhusan Dey v. Sudhamoyee Roy18 and Harbalas v. State of Haryana19. We agree with the High Court on this issue. If the order of injunction was operative up to a particular date, technically the order of injunction shall not remain operative thereafter. The owner of the land Dr Bawa and Defendant 2 Sanjeev Sharma, thus, could have entered into the compromise. The effect thereof would be that the said deed of sale was not binding on the appellant. It would be hit by the doctrine of lis pendens, as adumbrated under Section 52 of the Transfer of Property Act. The said deed of sale would not come in the court’s way in passing a decree in favour of the appellant. Its validity or otherwise would not be necessary to be considered as the appellant is not bound thereby. Sanjeev Sharma and consequently Punit Ahluwalia would be deemed to be aware of the pendency of the suit. Even Section 19 of the Specific Relief Act will be attracted.

A similar issue arose thereafter in Ashok Kumar v. State of Haryana20. The appellant landowners acquired the said lands in 1993 and raised certain construction thereupon. A notification was issued on 20-12-1996 for acquisition of the said lands by the State of Haryana. A suit was filed by the landowners in the Court of the Civil Judge, Senior Division, Panipat, questioning the validity of the said notification. On an application for grant of injunction filed by the appellants, an order of interim injunction was passed on 30-8-1997. The said interim order was extended from time to time. The matter was placed on 28-7-1998 on the ground that the Presiding Officer was to remain on leave on 29-7-1998. The matter was adjourned to 9-9-1998. However, the order of injunction was not extended. After some adjournments, the suit was dismissed for default on 19-8-2000. The main issue was whether the order of an interim injunction granted by the learned Civil Judge, Senior Division, Panipat, was operative till 9-9-1998 or 19-8-2000. The Supreme Court held that the interim order having been extended till a particular date, the contention raised by the respondents herein that they were under a bona fide belief that the injunction order would continue till it was vacated cannot be accepted. It was stated  that although in the earlier order dated 30-8-1997, the term “in the meantime” was used, which was repeated in order dated 24-9-1997, but in the subsequent orders beginning from 29-11-1997, the expression used was “till then”. Vide paras 11-12, the Supreme Court held thus:

11. The short question which arises for consideration in this appeal is as to whether the order of ad interim injunction granted by the learned Civil Judge, Senior Division, Panipat, was operative till 9-9-1998 or 19-8-2000. We have noticed hereinbefore the nature of the orders passed by the learned Civil Judge. Although in its order dated 30-8-1997, the learned Civil Judge, used the term “in the meantime”, which was repeated in its order dated 24-9-1997, but in the subsequent orders beginning from 29-11-1997, the expression used was “till then”.

12. The term of the order of the learned Judge, in our opinion, does not leave any manner of doubt whatsoever that the interim order was only extended from time to time. The interim order having been extended till a particular date, the contention raised by the respondents herein that they were under a bona fide belief that the injunction order would continue till it was vacated cannot be accepted.

From the above exposition, it is clear that a lot depends on the exact language of the interim order passed by the court. If the interim order passed by the court is intended to have a limited effect for a definite time, then in such circumstances, it cannot be held to possess an operation beyond its reach by presumptions. If one follows the view taken by the Supreme Court, then there is no warrant for the proposition, that unless an order of stay passed once even for the limited period is vacated by an express order or otherwise; the same would continue to operate.

However, till date, the Supreme Court of India has not dealt with or adjudicated any case, where arguments have been taken on the applicability of doctrine of “actus curiae neminem gravabit”. Both the judgments of Arjan Singh21 and Ashok Kumar22 were decided essentially on the facts of the case, without delving into the larger issue of applicability of the above Latin maxim. The argument always remains open for an aggrieved party to persuade the Supreme Court to take another view.

With this, the Part I of this article gets concluded. In the sequel to this part, the discussion shall veer around the sharp cleavage of judicial opinion amongst various High Courts on the subject. This cleavage of judicial opinion shows far more serious questions than it answers, requiring intervention by the Supreme Court of India at the earliest to solve one of the complex judicial enigmas which our legal fraternity faces every day.

The remaining discourse on the subject shall continue in Part II of this article to follow after a short while.


† Siddharth R. Gupta is an Advocate practising at Madhya Pradesh High Court and Supreme Court of India.

†† IVth year student, BA LLB (Hons), Dr B.R. Ambedkar National Law University, Sonepat.

1. (1952) 2 All ER 567 at para 288, p. 285.

2. (2014) 8 SCC 470 at para 185.2 : AIR 2014 SC 3241.

3. 1975 AC 396 : (1975) 2 WLR 316 : (1975) 1 All ER 504 : 1975 UKHL 1.

4. 1975 AC 396 : (1975) 2 WLR 316 : (1975) 1 All ER 504 : 1975 UKHL 1.

5. (1999) 7 SCC 1, 13, 14 : AIR 1999 SC 3105.

6. 1975 AC 396 : (1975) 2 WLR 316 : (1975) 1 All ER 504 : 1975 UKHL 1.

7. 6 Ves 73, 92 (1801) : (1801) 31 BR 944.

8. (1837) 11 Bli NS PC 158 : 6 ER 291 (1837).

9. [LR] 3 PC 465, 475 : 1871 UKPC 6.

10. [LR] 17 Eq 561.

11. 1913 SCC OnLine PC 15 : ILR (1913) 35 All 33.

12. 1916 SCC OnLine PC 30 : AIR 1916 PC 85.

13. AIR 1966 SC 1631 : (1964) 2 SCR 145.

14. 2018 SCC OnLine Cal 3056.

15. 2014 SCC OnLine Mad 235 : (2014) 3 Mad LJ 1.

16. (2008) 8 SCC 348, 355, 356 : AIR 2008 SC 2718.

17. 1988 SCC OnLine Ori 35 : AIR 1989 Ori 148.

18. 91 CWN 1078.

19. 1973 Punj LJ 84.

20. (2007) 3 SCC 470, 472, 473 : AIR 2007 SC 1411.

21. (2008) 8 SCC 348 : AIR 2008 SC 2718.

22. (2007) 3 SCC 470 : AIR 2007 SC 1411.

Experts CornerShantanu Mukherjee

Recap of Part 1

In Part I of our series on fitness wearables and the law, we noted how the use of wearable devices capable of identifying key human biomarkers (e.g. blood pressure and oxygen levels) sharply accelerated during the COVID-19 Pandemic. The deadly coronavirus came as an unpleasant reminder of the human body’s frailty and triggered a desire among many to lead healthier lives, leading to increased consumer demand for general wellness aids and fitness trackers. In the healthcare ecosystem, physicians and healthcare institutions, now physically removed from their patients, began to use these devices to remotely monitor those at risk.

 

Today, when your watch can track your heartbeat and oxygen levels, the line between patient and consumer, and fitness wearable and medical device, has blurred. Can these devices be accommodated within existing regulatory structures, or do they deserve sui generis treatment? In Part 1, we looked at how smart wearables are regulated in the United States, including the Food and Drug Administration (FDA’s) guidance on the regulation of wearables intended for general wellness purposes.

Here, in Part II, we navigate the regulatory and legal trends in respect of smart wearables in the European Union.

 

Background

Until recently, there were three primary regulations (prior legislation) governing medical devices in the EU:

(i) Directive 90/385/EEC on active implantable medical devices;

(ii) Directive 93/42/EEC on medical devices major depressive disorder (MDD); and

(iii) Directive 98/79/EC on in vitro diagnostic medical devices.

The European Commission felt the need, just as the US FDA had, to address the growing prominence of technology-driven health products. Towards that end, the European Commission on 25-5-2017, simultaneously enacted two major regulatory changes that replaced the prior legislation:

(i) EU Regulation 2017/745 on medical devices reporting (MDR); and

(ii) EU Regulation 2017/746 on in vitro diagnostic regulation medical devices (IVDR).[1]

 

Although the MDR was enacted in 2017, the EU provided for a three-year transition period for the MDR to come into effect. This transition period was later extended due to the impact of the COVID-19 Pandemic on healthcare and medical device stakeholders[2], and the MDR finally came into effect on 26-5-2021, replacing the existing MDD and the directive on active implantable medical devices. The MDR introduces new concepts, definitions, and rules which may be made applicable to technology-driven health products, some of which are discussed and analysed below.

 

Are Smart Wearables considered to be Medical Devices under the MDR?

What are Smart Wearables?

Although the term “smart wearables” is not defined anywhere in any of the EU directives, the European Commission[3] in an informational paper refers to it as “a body-borne computational and sensory devices which can sense the person who wears them and/or their environment. Wearables can communicate either directly through embedded wireless connectivity or through another device (e.g. a smartphone). The data collected by the wearable device about the user or its environment is processed in a processing unit located locally or in an external server, and the results are ultimately provided to the wearer. Smart wearables may have control, communication, storage and actuation capabilities”.

 

https://www.astrid-online.it/static/upload/smar/smartwearablesreflectionandorientationpaper.pdf

 

The paper also provides examples of such wearables, which include blood pressure monitors, ECG monitors, hearing aids, smartwatches, smart glasses, sleep sensors, and the like.

Intended Use of a Medical Device

To understand how the current framework of the MDR differs from the MDD, let us look at how medical devices are defined under both regimes.

Article 1(2) of the MDD defines a medical device as “any instrument, apparatus, appliance, software, material or other article, whether used alone or in combination, including the software intended by its manufacturer to be used specifically for diagnostic and/or therapeutic purposes and necessary for its proper application, intended by the manufacturer to be used for human beings for the purpose of” (among other things) “diagnosis, prevention, monitoring, treatment or alleviation of disease…” or for the “… investigation, replacement or modification of the anatomy or of a physiological process.…”[4]

From the above, it is clear that under the MDD, a medical device may include software, and that the manufacturer’s intended use for the device is key to determining the device’s nature. The intended purpose is defined as “the use for which a device is intended according to the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation”.[5]

Article 2(1) of the MDR defines a medical device as “any instrument, apparatus, appliance, software, implant, reagent, material or other article intended by the manufacturer to be used, alone or in combination, for human beings for one or more of the following specific medical purposes:

  • diagnosis, prevention, monitoring, prediction, prognosis, treatment or alleviation of disease,…
  • … providing information by means of in vitro examination of specimens derived from the human body, including organ, blood and tissue donations.…”[6]

 

The definitions above make it clear that under the MDD, if a manufacturer intends for its device to diagnose, prevent, monitor, treat, alleviate, or investigate a disease or a physiological process, then the device will be considered a medical device, and be subject to the MDD’s requirements.

 

The MDR, in its definition of a medical device, introduces the additional qualifying language: “prediction” and “prognosis”. Therefore, a fitness wearable that “predicts” or provides a “prognosis” of future disease indication, such as e.g. diabetes, through analysis of the data it collects, would arguably qualify as a medical device under the MDR (unlike under the erstwhile MDD), even if it does not diagnose, prevent or treat such disease.

 

The guidance document on the classification of medical devices[7] bears out this reading. For instance, under the MDD, most standalone software used for diagnostic or medical purposes fell under Class I (lower risk level) and therefore, was subject to fewer regulatory requirements. Under the MDR, most standalone software that falls within the definition of a medical device automatically falls under Class II-A or higher.

 

Therefore, for manufacturers of smart wearables, the advent of the MDR may mean potentially increased regulatory compliance requirements, and the need to demonstrate general safety and performance before legally placing their product on the European market. As with the MDD, the intended use of the device remains key.[8] The Preamble to the MDR also clarifies that “… software in its own right, when specifically intended by the manufacturer to be used for one or more of the medical purposes set out in the definition of a medical device, qualifies as a medical device, while software for general purposes, even when used in a healthcare setting, or software intended for lifestyle and well-being purposes is not a medical device”.[9]

 

Smart wearables that are intended for “lifestyle and well-being purposes” therefore, appear exempt. Arguably, a smartwatch capable of reading and monitoring the wearer’s heart rate may not qualify as a medical device when it is intended to be used for general fitness purposes but could qualify as a medical device if its stated purpose is to monitor or prevent cardiac disease.[10] Manufacturers would do well to keep this distinction in mind when designing their device packaging, product inserts, promotional materials, and their warranties and terms of use. For instance, the Garmin smartwatch, which is capable of monitoring heartbeat, sleep, stress, activity, and oxygen levels is not registered as a medical device and is disclaimed for use for medical purposes as reflected in the disclaimers and marketing materials.[11]

 

The European Court of Justice (ECJ), in Brain Products GmbH v. BioSemi VOF[12], took a similar view and held that “[where] a product is not conceived by its manufacturer to be used for medical purposes, its certification as a medical device cannot be required”. Therefore, how the manufacturer of a device advertises the product has an important bearing on the classification of a smart wearable as a medical device[13], which in other words, can be interpreted to mean that how a device is actually used has no bearing on how the device is regulated if the manufacturer does not intend for it to be a medical device.

Intended Versus Actual Use

Similar to the US, if the function or actual use of the device may be medical, despite any disclaimers to that effect, such devices should ideally be registered under the MDR. For instance, the Samsung Galaxy Watch 4 allows for tracking sleep, activity, blood pressure, stress, and heart rate. Although the smartwatch is intended for fitness and wellness purposes, calculation, monitoring, and analysis of blood pressure through its app is registered as a medical device across the EU, UK, Singapore, and UAE.[14]

 

Although the concept of intended use is aimed to encourage and ease market entry for fitness and “holistic wellness” wearables, there is increasing evidence that notwithstanding the stated intent of manufacturers, these wearables are sometimes used by consumers as the basis for medical decision-making.[15] The MDR aims to address this by providing for post-market surveillance where manufacturers may voluntarily collect, and review information to understand how their products are being used by the public to better align regulatory purposes with public health objectives and identify any preventive measures, where necessary.

 

Part III of our series on the law relating to fitness wearables will examine the legal and regulatory framework for smart wearables in India, contrasting it to the US and EU regulatory frameworks.

 


Shantanu Mukherjee, Founder, Ronin Legal.

††Anushka Iyer, Associate, Ronin Legal.

[1] See Regulation 2017/745 of the European Parliament and of the Council of 5-4-2017 on medical devices, amending Directive 2001/83/EC, Regulation (EC) No. 178/2002 and Regulation (EC) No. 1223/2009 and repealing Council Directives 90/385/EEC and 93/42/EEC [2017], Art. 20, O.J. (L 117/1) (EU);

See also Regulation 2017/746 of the European Parliament and of the Council of 5-4-2017 on in vitro diagnostic medical devices and repealing Directive 98/79/EC and Commission Decision 2010/227/EU [2017], Art. 18, O.J. (L 117/176) (EU).

[2] See Commission postpones application of the Medical Devices Regulation to prioritise the fight against coronavirus, HERE .

[3] See Smart Wearables: Reflection and Orientation Paper, HERE.

[4] Council Directive 93/42/EEC of 14-6-1993 concerning medical devices, HERE .

[5] Art. 2(12), Regulation (EU) 2017/745 of the European Parliament and of the Council of 5-4-2017 on medical devices.

[6] Regulation (EU) 2017/745 of the European Parliament and of the Council of 5-4-2017 on medical devices, amending Directive 2001/83/EC, Regulation (EC) No. 178/2002 and Regulation (EC) No. 1223/2009 and repealing Council Directives 90/385/EEC and 93/42/EEC, HERE .

[7] MDCG 2021-2024 Guidance on Classification of Medical Devices, October 2021, HERE .

[8] See, MDCG 2021-2024 Guidance on Classification of Medical Devices, October 2021, HERE, The guidance document provides that while classifying a product as a medical device, the intended use and not the accidental use of the device will determines the class of the device. It is the intended purpose assigned by the manufacturer to the device that determines the class of the device and not the class assigned to other similar products.

[9] Regulation (EU) 2017/745 of the European Parliament and of the Council of 5-4-2017 on medical devices, amending Directive 2001/83/EC, Regulation (EC) No. 178/2002 and Regulation (EC) No. 1223/2009 and repealing Council Directives 90/385/EEC and 93/42/EEC, HERE .

[10] “Are Wearables Medical Devices Requiring a CE-Mark in the EU?”, Covington Digital Health, 22-1-2019, HERE .

[11] “Simple and Streamlined, Garmin Vivosmart 5 Fitness Tracker is the Effortless way to Take Charge of your Everyday Health”, Bloomberg, 20-4-2022, <HERE .

[12] Case C-219/11.

[13] “Are Wearables Medical Devices Requiring a CE-Mark in the EU?”, Covington Digital Health, 22-1-2019, HERE .

[14] Disclaimers, Samsung, HERE .

[15] Helen Yu, “Regulation of Digital Health Technologies in the European Union, Intended versus Actual Use”, Cambridge University Press, HERE .

Experts CornerSiddharth Batra

Just before the country stepped into the grasp of COVID-19 Pandemic, the Supreme Court of India delivered a verdict in Indore Development Authority v. Manoharlal[1] hereinafter “Indore Development Authority (5-Judge Bench)”, which gave a new interpretation to Section 24 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (hereinafter “2013 Act”).

 

Subsequently, the Court overruled the three-Judge Bench decision in Pune Municipal Corpn. v. Harakchand Misirimal Solanki[2] (hereinafter “Pune Municipal Corporation”) and even the decisions which were decided on the basis of Pune Municipal Corpn. case[3], which rose a wall of conflict because and leads to the question as to whether a case that has attained finality be “reopened” merely because there’s a change in interpretation of law?

In this piece we analyse whether overruling of a precedent on the basis of change in interpretation of Section 24 of the Land Acquisition Act, 2013 by a bigger Bench could lead to reopening of the cases which are already decided and have attained finality.

 

In 2013, the government brought the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, which replaced the Land Acquisition Act of 1894 (hereinafter “1894 Act”).

The 2013 Act was a ray of hope which was blocked since decades in terms of fair compensation and rehabilitation across the country.  The Act was said to correct the historical wrongs in the process of land acquisition by the state for development projects and insisted on fair compensation for landowners, past and present.

 

The Controversy Around “Section 24” of Land Acquisition Act, 2013

Section 24 of the 2013 Act provides for retrospective operation of the 2013 Act qua pending acquisition proceedings under the 1894 Act. Section 24(1) says that in case of a pending land acquisition proceeding, where a compensation award has not been passed under the 1894 Act, then the landowners would be entitled to compensation prescribed under the 2013 Act.

 

On the other hand, Section 24(2) says that in case the compensation award has been made under the Land Acquisition Act, 1894, then the land acquisition proceedings under the 1894 Act would be deemed to have lapsed.

  1. Land acquisition process under Act No. 1 of 1894 shall be deemed to have lapsed in certain cases.(1) Notwithstanding anything contained in this Act, in any case of land acquisition proceedings initiated under the Land Acquisition Act, 1894,—

(a) where no award under Section 11 of the said Land Acquisition Act has been made, then, all provisions of this Act relating to the determination of compensation shall apply; or

(b) where an award under said Section 11 has been made, then such proceedings shall continue under the provisions of the said Land Acquisition Act, as if the said Act has not been repealed.

  • Notwithstanding anything contained in sub-section (1), in case of land acquisition proceedings initiated under the Land Acquisition Act, 1894 (1 of 1894), where an award under the said Section 11 has been made five years or more prior to the commencement of this Act but the physical possession of the land has not been taken or the compensation has not been paid the said proceedings shall be deemed to have lapsed and the appropriate Government, if it so chooses, shall initiate the proceedings of such land acquisition afresh in accordance with the provisions of this Act:

Provided that where an award has been made and compensation in respect of a majority of land holdings has not been deposited in the account of the beneficiaries, then, all beneficiaries specified in the notification for acquisition under Section 4 of the said Land Acquisition Act, shall be entitled to compensation in accordance with the provisions of this Act.

 

Pune Municipal Corpn. v. Harakchand Solanki (three-Judge Bench)[4]

In 2014, a three-Judge Bench comprising of Justice Lokur, Justice Joseph and Justice Lodha in Pune Municipal Corpn. case[5] held that deposit of compensation amount in the government treasury is of no avail and cannot be held to be equivalent to compensation paid to the landowners/persons interested. The court remarkably said that if such compensation is not paid to the landowner then “the subject land acquisition proceedings shall be deemed to have lapsed under Section 24(2) of the 2013 Act”.

Indore Development Authority v. Shailendra (Three-Judge Bench)[6]

The precedent laid down in Pune Municipal Corpn. case[7] was overruled by another three-Judge Bench comprising of Justice Arun Mishra, Justice A.K. Goel and Justice Shantanagoudar in Indore Development Authority v. Shailendra[8] [hereinafter “Indore Development Authority (3-Judge Bench)”]. The Court opined that the compensation under Section 24 of the Act was deemed to have been paid if the money were deposited in the government treasury and the same need not be deposited in court.

 

  1. We unanimously agree to the answers given to all the questions except to the aspect decided by majority whether Pune Municipal Corpn. Harakchand Misirimal Solanki[9], is per incuriam or not. As the majority has taken the view that it is per incuriam, it is declared to be per incuriam. The questions referred stand answered in terms of the majority judgment. Hence, ordered accordingly.

 

The court remarked that the provision has been sought to be blatantly misused and the law never envisages such absurd results as is being sought to be achieved.

  1. 75. … The beneficial provisions of the 2013 Act are put to misuse that tantamounts to grossest abuse of the provisions of law to reopen such acquisitions and the court has to thwart all such attempts at the threshold and not to receive such cases even for consideration for a moment. We see development has taken place in the area that has been acquired….

Conflict between the two Benches

In 2020, there was a conflict whether a three-Judge Bench can overrule another three-Judge Bench judgment which we saw in Indore Development Authority[10] (3-Judge Bench). Accordingly, the same was referred to a larger Bench, which also turned out to be controversial as Justice Arun Mishra was part of the larger Bench.

 

In this regard, an application was filed before the court for the recusal of Justice Arun Mishra from the larger Bench, as he had decided the issue in the three-Judge Bench. Senior Advocate Shyam Divan, in the course of his submissions, referred to the phrase “no man can be a Judge in his own cause”.

 

Later, Justice Mishra refused to rescue from the larger Bench and said:

  1. (…) The previous judgment cannot constitute bias or a pre­disposition ­ nor can it seem to be such, so as to raise a reasonable apprehension of bias…. Accepting the plea of recusal would sound a death knell to the independent system of justice delivery where litigants would dictate participation of Judges of their liking in particular cases or causes.[11]

 

Indore Development Authority v. Manoharlal (Constitution Bench) [12]

In March 2020, a five-Judge Constitution Bench led by Justice Arun Mishra in Indore Development Authority[13] (5-Judge Bench), held that proceedings under Section 24 of the 2013 Act will not lapse if compensation has been deposited in the treasury, not requiring the payment to the landowner or court concerned. In doing so, the Court upheld an earlier judgment in Indore Development Authority[14] (3-Judge Bench) which was also headed by Justice Arun Mishra.

 

The Court further held that landowners cannot say in court that proceedings have lapsed if the Government has rendered the amount of treasury and there was no need to actually deposit the amount with landowners or court.

  1. Resultantly, the decision rendered in Pune Municipal Corpn.[15] is hereby overruled and all other decisions in which Pune Municipal Corpn.[16] has been followed, are also overruled. The decision in Sree Balaji Nagar Residential Assn. v. State of T.N.[17] cannot be said to be laying down good law, is overruled and other decisions following the same are also overruled. In Indore Development Authority v. Shailendra[18], the aspect with respect to the proviso to Section 24(2) and whether ‘or’ has to be read as ‘nor’ or as ‘and’ was not placed for consideration. Therefore, that decision too cannot prevail, in the light of the discussion in the present judgment. Held the Court in Indore Development Authority, [19] (5-Judge Bench).

 

In September 2020, Former Chief Justice of India, Sharad A. Bobde also questioned the infallibility of the Constitution Bench judgment in Indore Development Authority[20] (5-Judge Bench) delivered by Justice Arun Mishra.

 

Justice Bobde said the order gifted the Government “laxity” in several aspects, which even Parliament did not bother to provide under the 2013 Act.

“The judgment has given the Government laxity, which Parliament did not want the Government to have. Parliament had said the Government cannot do this, the law said the compensation should not be kept pending … the Government cannot just take over land and not pay compensation.” Chief Justice Bobde said:

 

The judgment in Indore Development Authority[21] (5-Judge Bench) also missed a chance to apply to the doctrine of prospective overruling and rather the Court held that other decisions which were finalised/decided on the base of Pune Municipal Corpn.[22] would also be overruled. This was not only problematic but bad in law also, because once the matter/suit has been concluded between the parties then it cannot be reopened due to a subsequent change in position of law.

 

There have been many instance where the courts have clarified that if matter has been concluded between parties, the same parties cannot be reopen the case due to a subsequent change in position of law which is not expressly retrospective.

Prospective and Retrospective Overruling

Prospective overruling

The doctrine of prospective overruling has been borrowed from the American judicial system. It states that when a decision made in a particular case would have operation only in the future and will not carry any retrospective effect on any past decisions.

 

The concept of prospective overruling was not into the picture before C. Golak Nath v. State of Punjab[23], as it was in C. Golak Nath case[24] that the said doctrine was firmly established by then Chief Justice Kokka Subba Rao. It was a judgment rendered by an eleven-Judge Bench in the C. Golak Nath[25]. Before C. Golak Nath[26], the prospective overruling was mostly used by American Courts and hence Indian law borrowed the concept from there.

Retrospective overruling

Retrospective overruling accords with the declaratory theory of common law that the Judges do not make or change the law but merely declare it. The retrospective overruling doctrine allows old transactions to be reopened.

Clarifying the position on retrospective operation in Rangarao v. Kamlakant[27], the Supreme Court in clearly stated that no judgment of any court can have any retrospective operation because that is the plenary power of Parliament (legislature as well).

 

  1. On our careful consideration, we find that the appellant is entitled to succeed. It is undeniable that on the date when the compromise memo fruitioned into a decree on 3-1-1985, the civil court had every jurisdiction to pass such a decree. It is true the notification issued under Clause 30 of C.P. and Berar Letting of Houses and Rent Control Order, 1949 came to be struck down as violative of Article 14 of the Constitution. This was on 19-6-1985. The decision rendered thereunder cannot have any effect of rendering the decree passed on 3-1-1985 a nullity which decree has become final. No judgment of any court can have any retrospective operation because that is the plenary power of Parliament (legislature as well). The courts do not have such power. If that be so, the High Court had clearly gone wrong in holding that the decree on the date of execution is a nullity. As correctly contended by Mr Sanghi, learned counsel for the appellant, the jurisdiction will have to be decided on the date of the decree, namely, 3-1-1985. On that date undoubtedly it had every jurisdiction. Therefore, we hold that the High Court fell into an error in upsetting the concurrent findings of the courts below. Accordingly, we set aside the judgment of the High Court and allow the civil appeal.

 

In ECIL v. B. Karunakar[28], the court placed reliance on Supreme Court of United States and highlighted that while overruling previous law or laying a new principle, the US Supreme Court had made its operation prospective and given the relief to the party succeeding and in some cases given retrospectively and denied the relief in other cases.

 

  1. As a matter of constitutional law, retrospective operation of an overruling decision is neither required nor prohibited by the Constitution but is one of judicial attitude depending on the facts and circumstances in each case, the nature and purpose of the particular overruling decision seeks to serve. The court would look into the justifiable reliance on the overruled case by the administration; ability to effectuate the new rule adopted in the overruling case without doing injustice; the likelihood of its operation whether substantially burdens the administration of justice or retard the purpose. All these factors are to be taken into account while overruling the earlier decision or laying down a new principle. The benefit of the decision must be given to the parties before the court even though applied to future cases from that date prospectively would not be extended to the parties whose adjudication either had become final or matters are pending trial or in appeal. The Court held.

Doctrine of Finality of Judgment and Res Judicata

Section 11 of the Code of Civil Procedure envisages the doctrine of res judicata or the rule of inclusiveness of a judgment, as to the points decided either of facts, or of law, or of fact and law in every subsequent suit between the same parties.

The doctrine of res judicata is based on three Roman maxims:

(a) Nemo debet bis vaxari pro una et eadem causa (no man should be vexed twice for the same cause);

(b) interest reipublicae ut sit finis litium (it is in the interest of the State that there should be an end to a litigation);

(c) re judicata pro veritate occipitur (a judicial decision must be accepted as correct).

The doctrine of finality of judgments puts an end to the judicial process, prohibiting subsequent appeals, new proceedings and disputing clearly established facts. Hence, the decision in Indore Development Authority (5J Bench)[29], where the Supreme Court had ordered the “reopening” of cases which have been already decides, goes against the aforementioned principle (doctrine of finality) and here are some of the decisions where the courts have taken a view about it.

 

In Chanchal Kumar Chatterjee v. State of W.B.[30], the Calcutta High Court held that the principle of finality of litigation is based on a sound firm principle of public policy and in the absence of such a principle great oppression might result under the colour and pretence of law inasmuch as there will be no end to litigation.

 

In this regard, the Court held:

  1. In a country governed by the rule of law, the finality of a judgment is absolutely imperative and great sanctity is attached to the finality of the judgment and it is not permissible for the parties to reopen the concluded judgments of the court as it would not only tantamount to merely an abuse of the process of the court but would have far-reaching adverse effect on the administration of justice. It would also nullify the doctrine of stare decisis, a well-established valuable principle of precedent which cannot be departed from unless there are compelling circumstances to do so. The judgments of the court and particularly of the Supreme Court of a country cannot and should not be unsettled lightly.

 

Further, in Indu Bhusan Jana v. Union of India[31], the Calcutta High Court also stressed that the principle of finality or res judicata is a matter of public policy and is one of the pillars on which a judicial system is founded. In this regard, the Court held:

  1.  … Once a judgment becomes conclusive, the matters in issue covered thereby cannot be reopened unless fraud or mistake or lack of jurisdiction is cited to challenge it directly at a later stage. The principle is rooted to the rationale that the issues decided may not be reopened, and has little to do with the merit of the decision. If it were to be otherwise, no dispute can be resolved or concluded. The principles of res judicata and constructive res judicata apply equally to proceedings under Article 226 of the Constitution[32].

 

Even, the Supreme Court in Union of India v. S.P. Sharma[33], held that the main object of the doctrine is to promote a fair administration of justice and to prevent abuse of process of the court.

 

  1. In M. Nagabhushana v. State of Karnataka[34] this Court held that the doctrine of res judicata is not a technical doctrine but a fundamental principle which sustains the rule of law in ensuring finality in litigation. The main object of the doctrine is to promote a fair administration of justice and to prevent abuse of process of the court on the issues which have become final between the parties. The doctrine is based on two age-old principles, namely, interest reipublicae ut sit finis litium which means that it is in the interest of the State that there should be an end to litigation and the other principle is nemo debet bis vexari, si constat curiae quod sit pro una et eadem causa meaning thereby that no one ought to be vexed twice in a litigation if it appears to the court that it is for one and the same cause. The Court held.

Hence, the finality of judgments, particularly at the Supreme Court is an aspect of public policy and fundamentally linked to the doctrines or res judicata and stare decisis.

Significantly, the Court also held that finality of judgment is absolutely imperative and great sanctity is attached to the finality of the judgment and it is not permissible for the parties to reopen the concluded judgments of the court.

The Court held:

  1. In a country governed by the rule of law, finality of judgment is absolutely imperative and great sanctity is attached to the finality of the judgment and it is not permissible for the parties to reopen the concluded judgments of the court as it would not only tantamount to merely an abuse of the process of the court but would have far-reaching adverse affect on the administration of justice. It would also nullify the doctrine of stare decisis a well-established valuable principle of precedent which cannot be departed from unless there are compelling circumstances to do so. The judgments of the court and particularly the Supreme Court of a country cannot and should not be unsettled lightly.

 

With regard to endless litigation and reopening of cases, the court said that the principle of finality of litigation is based on a sound firm principle of public policy. In the absence of such a principle great oppression might result under the colour and pretence of law inasmuch as there will be no end to litigation.

“The doctrine of res judicata has been evolved to prevent such anarchy” the court remarked.

In Atam Prakash v. State of Haryana[35],  the Court held that the suits which have been decreed and such decrees have become final since no appeals have been filed against the same, the said decrees are binding inter-parties and the declaration made by the Supreme Court is of no avail to the parties thereto.

 

The court was dealing with some suits which were pending in various courts, where decrees have been passed, appeals were pending in appellate courts.

 

In this regard, the Court opined that:

  1.  (…) Such suits and appeals will now be disposed of in accordance with the declaration granted by us. We are told that there are a few cases where suits have been decreed and the decrees have become final, no appeals having been filed against those decrees. The decrees will be binding inter-partes and the declaration granted by us will be of no avail to the parties thereto[36].

 

Similarly, the Supreme Court in Shanti Devi v. Hukum Chand[37], agreed with the position laid down in Atam Prakash case[38] and held:

 

  1.  (…) As such the direction of this Court in Atam Prakash case[39] that such decrees shall be binding inter-partes notwithstanding the declaration of this Court in the aforesaid judgment, was fully applicable in the present case. The High Court has rightly come to the conclusion that notwithstanding the judgment of the Constitution Bench in Atam Prakash[40] the decree in the suit for pre-emption filed on behalf of the respondent was binding between the parties.

 

Notably, while affirming with High Court’s view the Supreme Court in Union of India v. Ranbir Singh Rathaur[41], held that review of the earlier orders passed by this court was “impermissible” and approach of the High Court of reopening the case was “erroneous” and the issue of maintainability of the petitions was of paramount importance.

 

It further said that to say that “justice stood at the higher pedestal” then the finality of litigation was not an answer enabling the court to reopen a finally decided case.

 

Furthermore, in Kalinga Mining Corpn. v. Union of India[42], the Supreme Court held that it is well settled that judicial review of the administrative action/quasi-judicial orders passed by the Government is limited only to correcting the errors of law or fundamental procedural requirements which may lead to manifest injustice.

  1. (…) When the conclusions of the authority are based on evidence, the same cannot be reappreciated by the court in exercise of its powers of judicial review. The court does not exercise the powers of an appellate court in exercise of its powers of judicial review. It is only in cases where either findings recorded by the administrative/quasi-judicial authority are based on no evidence or are so perverse that no reasonable person would have reached such a conclusion on the basis of the material available that the court would be justified to interfere in the decision. The scope of judicial review is limited to the decision-making process and not to the decision itself, even if the same appears to be erroneous.

 

To conclude, it is pertinent to refer to what Supreme Court remarked in Ambika Prasad Mishra v. State of U.P. [43],

“6. It is wise to remember that fatal flaws silenced by earlier rulings cannot survive after death because a decision does not lose its authority ‘merely because it was badly argued, inadequately considered and fallaciously reasoned“.

 

The question that ultimately arises is whether Doctrine of Finality become a causality after Indore Development Authority: Can the cases where rights are already frozen be reopened? In my view, in case the cases decided are reopened, it will certainly lead to an anomaly in the settled principle of law.

 


†Siddharth Batra, Advocate on Record, Supreme Court of India. Email: siddharth.batra@satramdass.com

†† Chinmay Dubey, Associate Satramdass B & Co., Delhi Email: chinmay.dubey@satramdass.com

[1] (2020) 8 SCC 129.

[2] (2014) 3 SCC 183.

[3] (2014) 3 SCC 183.

[4] (2014) 3 SCC 183.

[5] (2014) 3 SCC 183.

[6] (2014) 3 SCC 183.

[7] (2014) 3 SCC 183.

[8] (2018) 3 SCC 412, 584, 477.

[9] (2014) 3 SCC 183.

[10] (2018) 3 SCC 412.

[11] Indore Development Authority v. Manohar Lal, (2020) 6 SCC 304, 359.

[12] (2020) 8 SCC 129

[13] (2020) 8 SCC 129.

[14] (2018) 3 SCC 412.

[15] (2014) 3 SCC 183.

[16] (2014) 3 SCC 183.

[17] (2015) 3 SCC 353.

[18] (2018) 3 SCC 412.

[19] (2020) 8 SCC 129, 393.

[20] (2020) 8 SCC 129.

[21] (2020) 8 SCC 129.

[22] (2014) 3 SCC 183.

[23] AIR 1967 SC 1643.

[24] AIR 1967 SC 1643.

[25] AIR 1967 SC 1643.

[26] AIR 1967 SC 1643.

[27] 1995 Supp (1) SCC 271, 273.

[28] (1993) 4 SCC 727, 783, 784.

[29] (2020) 8 SCC 129.

[30] 2018 SCC OnLine Cal 12970.

[31] 2014 SCC OnLine Cal 21487.

[32] Chanchal Kumar Chatterjee case, 2018 SCC OnLine Cal 12970.

[33] (2014) 6 SCC 351, 390, 391.

[34] (2011) 3 SCC 408.

[35] (1986) 2 SCC 249.

[36] (1996) 5 SCC 768, 769, 770.

[37] (1996) 5 SCC 768, 770.

[38] (1986) 2 SCC 249.

[39] (1986) 2 SCC 249.

[40] (1986) 2 SCC 249.

[41] (2006) 11 SCC 696.

[42] (2013) 5 SCC 252, 273.

[43] (1980) 3 SCC 719, 723.

Experts CornerTarun Jain (Tax Practitioner)

  1. Background

Without elaborating how and why, the Supreme Court recently declared that it “has consistently applied one test: substance over form” to opine that the form and style of employee secondment agreement was “not decisive of its nature” and recharacterise the relationship between the parties as of “manpower supply services” by one to another. This declaration in Commr. of Customs, Central Excise and Service Tax v. Northern Operating Systems (P) Ltd.[1] has brewed a storm in the tax fraternity — particularly in the sphere of indirect taxation to which this decision relates — given that it unsettles the relatively tranquil interpretative rule that the tax authorities cannot disregard the legal structure and recharacterise the transaction in the absence of fraud or overwhelmingly compelling circumstances.

Taking note of economic realities and the “substance” of the bargain struck between the parties, the Supreme Court rejected the legal framework of their agreement to confirm demand of service tax on the transaction. In this process, the court failed to advert to its earlier precedents revalidating the taxpayers’ choice of form of transaction which continue to hold the field in view of the conspicuous parliamentary abstinence to enact “general anti-avoidance rules” in indirect tax paradigm unlike the income tax law. This note seeks to dissect the dichotomy which arises in the jurisprudential confines of indirect tax law on account of this decision.

  1. A Caveat

Before advancing further on the recent decision, it is crucial to highlight that the “substance over form” test is not totally unheard of in the indirect tax realm[2] and instead been applied in limited context to determine the “substance” of the transaction.[3] However, in these decisions the “substance” test has received a fleeting reference, perhaps only to revalidate the conclusion apparent on the first glance of the transaction.

In another sense, substance also intrinsically forms the core of “substantial compliance” test which is a key pivot in the indirect tax laws. This principle dispenses complete compliance with the statutory provisions and it is sufficient in the event the taxpayer demonstrates that the provisions have been complied with substantially.[4] Thus, the “substance” test has indeed been in vogue, albeit indirectly, in the indirect tax framework, but to a limited extent.

  1. Dispute before the Supreme Court

With the aforesaid background, we traverse the recent decision in Northern Operating case[5]. The facts in this case were simple, yet extensive debate arose on the nature of the transaction and the economic relationship underlying the agreement. The dispute arose with a demand of service tax raised by the tax authorities against Northern Operating Systems Pvt. Ltd., an Indian company (hereinafter referred as “I Co.”). The demand was in respect of various agreements executed by I Co. with its group companies located in many countries, such as US, UK, Singapore, etc. (hereinafter collectively referred as “NR Co.”).

In terms of these agreements, I Co. would request NR Co. “for managerial and technical personnel to assist in (I Co’s.) business and accordingly the employees are selected by the (NR Co.) and they would be transferred to (I Co.). The employees shall act in accordance with the instructions and directions of (I Co.). The employees would devote their entire time and work to the (I Co.). The seconded employees would continue to be on the payroll of the (NR Co.) for the purpose of continuation of social security/retirement benefits, but for all practical purposes, (I Co.) shall be the employer. During the term of transfer or secondment the personnel shall be the employee of (I Co.). (I Co. shall) issue an employment letter to the seconded personnel stipulating all the terms of the employment. The employees so seconded would receive their salary, bonus, social benefits, out of pocket expenses and other expenses from (NR Co.). The (NR Co.) shall raise a debit note on (I Co.) to recover the expenses of salary, bonus, etc. and (I Co.) shall reimburse the (NR Co.) for all these expenses and there shall be no markup on such reimbursement.”[6]

According to the tax authorities, the aforesaid arrangement was one of “manpower recruitment or supply” service being provisioned by NR Co. to I Co. which was exigible to service tax. The raison d’être for this premise was the opinion of the tax authorities that through this arrangement NR Co. were “providing skilled manpower, on secondment basis” to I Co. wherein NR Co. are the service providers and I Co., which receives skilled manpower, on secondment basis, is the service recipient. The tax authorities highlighted that in this “secondment arrangement a secondee would continue to be employed by the original employer during the secondment, and will, following its termination return to the seconder/original employer. As a consequence of this, the secondee does not become integrated into the host’s organisation” which confirmed the presence of “manpower supply” element of the concerned service.

I Co. contested the premise of the tax authorities to put forth its understanding that it was incorrect to view NR Co. as supply suppliers given that the transaction was limited to the seconded personnel acting as “employees” of I Co., which transaction was outside the service tax framework under the law. This view of I Co. was accepted in adjudication and also approved by the Appellate Tribunal. According to the Tribunal, NR Co. were not engaged in supply of manpower; “those seconded to the assessee working in the capacity of employees and receiving salaries by (NR Co.) were only for disbursement purposes”; employee-employer relationship existed between such personnel and I Co.; in effect I Co. “obtained from (NR Co.) directly or by transfer, service of expatriate employees who were paid salaries by the (I Co.) in India, for which tax was deducted and paid to statutory benefits — such as provident fund”, etc. and thus the demand of service tax was unfounded. Being aggrieved by this conclusion, the tax authorities approached the Supreme Court seeking validation of their premise. It was in this background that the lis came up for consideration before the Supreme Court.

In the Supreme Court the tax authorities pitched their argument higher to reflect upon the attendant circumstances and the relationship between I Co. and NR Co. as well to impress upon the court that in reality NR Co. “provided the services of its employees to (I Co.) for the performance of agreed tasks” which in turn “were handed over to (I Co.) by (NR Co.). It was not as if (I Co.) was free in regard to the manner of performance of the jobs assigned to it.” The tax authorities also sought to project that the “real employer” of the seconded employees was not I Co. and “the mere fact that the temporary control over the manner of performance of duties of the employees seconded (was with I Co.) did not take away or diminish the fact that their real employer was none other than” NR Co. In essence, therefore, the tax authorities argued that the agreements between I Co. and NR did not reflect the true state of affairs as “real reason or purpose for the secondment” was not what was sought to be portrayed in those agreements.

  1. Dissecting the Decision of the Supreme Court

In the wake of absence of precedent in the service tax context, the Supreme Court made reference to its decisions in DIT (International Taxation) v. Morgan Stanley & Co. Inc.[7] and CIT v. Eli Lilly and Co. India (P) Ltd.[8] rendered in the context of income tax laws, to underscore that such situations are frequent in the tax paradigm where one is required to determine the question “who is the employer, and whether the relationship between an employee and another, is one of master servant, or whether there is an underlying contract for service, by which the real employer, lends the services of his employee to another”. Furthermore, by accepting the application of “real employer” test, the Supreme Court dissipated the legal rights and obligations of the parties as the sole factor of consideration to make the factual construct also relevant, which implies expanding the zone of considerations to a wide variety of variables including economic costs.

The Supreme Court also imported its labour law jurisprudence to enlist the tests for distinguishing between “contract of service” vis-à-vis “contract for service” in order to delineate the relationship between I Co. and NR Co. Concepts such as “master-servant” relationship, “control” test, etc. were, thus, brought and instituted within the fold of tax law as critical facets of inquiry. The Supreme Court, thereafter, exposited another principle that “the nomenclature of any contract, of document, is not decisive of its nature”. Thus the stage was set for the Supreme Court to declare that the “task for this court, therefore is to, upon an overall reading of materials presented by the parties, discern the true nature of the relationship between the seconded employees and the assessee, and the nature of the service provided — in that context, by (NR Co.) to (I Co.)”.

Before one dissects the substantive contours of the decision, it is expedient to take note of certain objections to the aforesaid approach of scrutinising the factual ingredients:

(a) In its own description, the decision emphasises the need for the Supreme Court to appreciate the factual parameters of the transaction. This approach is at variance with the appellate jurisdiction, which was being exercised by the Supreme Court, which is statutorily restricted to determination of the “substantial question of law”. Thus, the Supreme Court appears to have exceeded the periphery of its examination.

(b) No reason by the Supreme Court has been assigned to disregard the factual conclusions of two authorities below which have examined the factual paradigm and found no reason to doubt them. Thus, the decision muddles the legal threshold for the Supreme Court to consider facts which, it is now well settled, is occasioned only when the factual appreciation by the lower authorities is “perverse”.[9]

(c) The decision of the Supreme Court does not reveal whether the tax authorities alleged impropriety in the factual setting so as to reject the legal form of the transaction. Furthermore, despite noting that the tax officer who first adjudicated the lis himself rejected the case of the Tax Department and found nothing objectionable in the legal arrangement, the Supreme Court proceeded to redraw the factual confines on which the parties transacted.

Having thus concluded that a factual reappreciation was indeed warranted, the Supreme Court culled out the underlying aspects of the contractual terms which were perceived to exist by it. The court even reflected upon the changing global economic dimensions and international hiring of labour to re-emphasise the need for applying the test of “substance over form, requiring a close look at the terms of the contract, or the agreements”.

Having said that, however, the findings in the decision are clearly inconsistent and reveal a dichotomy in the perception of the facts. This aspect is best understood by a comparative analysis of certain observations of the court. In one of the paragraphs, the Supreme Court observed as under:

  1. 57. The above features show that the assessee had operational or functional control over the seconded employees; it was potentially liable for the performance of the tasks assigned to them. That it paid (through reimbursement) the amounts equivalent to the salaries of the seconded employees — because of the obligation of the overseas employer to maintain them on its payroll, has two consequences: one, that the seconded employees continued on the rolls of the overseas employer; two, since they were not performing jobs in relation to that employer’s business, but that of the assessee, the latter had to ultimately bear the burden. There is nothing unusual in this arrangement, given that the seconded employees were performing the tasks relating to the assessee’s activities and not in relation to the overseas employer. To put it differently, it would be unnatural to expect the overseas employer to not seek reimbursement of the employees’ salaries, since they were, for the duration of secondment, not performing tasks in relation to its activities or business.[10] (emphasis in original)

Were one to read only the aforesaid paragraph, as a representative sample of the Supreme Court’s reasoning, one would perhaps be pardoned for concluding that the Supreme Court declared I Co. to be the de facto employer. In this scenario, the substance over form test would compel a conclusion that master-servant relationship existed between I Co. and the seconded employees, which fact alone would be sufficient to disregard the premise that NR Co. is supplying manpower to I Co. However, the Supreme Court flipped this conclusion inter alia observing as under:

  1. 60. Facially, or to put it differently, for all appearances, the seconded employee, for the duration of her or his secondment, is under the control of the assessee, and works under its direction. Yet, the fact remains that they are on the pay rolls of their overseas employer. What is left unsaid and perhaps crucial, is that this is a legal requirement, since they are entitled to social security benefits in the country of their origin. It is doubtful whether without the comfort of this assurance, they would agree to the secondment. Furthermore, the reality is that the secondment is a part of the global policy — of the overseas employer loaning their services, on temporary basis. On the cessation of the secondment period, they have to be repatriated in accordance with a global repatriation policy (of the overseas entity).[11]

(emphasis in original)

Thus, by introducing a “doubt” which the court harboured[12] (though it was not a fact on record or even an allegation), the Supreme Court rewrote its own understanding to conclude that I Co. was not the de facto employer, basing its conclusion on a perceived “reality”.

  1. Substance over Form: Unanswered Questions

The decision has created more doubts than the controversy it has settled, that too not just in the indirect tax paradigm. To illustrate, the decision sheds doubt over the propriety and operability of the “deputation”/”secondment” related employment models in vogue in the country. Supposing the same fact pattern was to be tried under an industrial dispute setting, there are some glaring questions requiring advertence were the substance over form test to apply. For example: (i) Who would be held liable for omission to perform legal obligations qua the employees? Would it be I Co., being their “operational or functional” employer or NR Co. as their “legal employer”? (ii) Would I Co. be vicariously liable for acts of the deputed/seconded employees? (iii) Can the foreign deputed/seconded personnel be denied employment visa (by government authorities) in India on the ground that they are not the employees of I Co.? Many issue arise with this ruling.

Notwithstanding, it goes without saying that the emphatic emphasis placed in decision on the substance over form test poses issues in the specific context of indirect taxes. To address these aspects, one is compelled to review the decisions propelling against application of “substance over form” test in this realm.

One of the leading decisions in indirect taxation is the three-Judge Bench verdict in the CCE v. Acer India Ltd.[13] While determining the valuation of supply a unanimous Supreme Court categorically ruled out the application of the substance over form test in this sphere of tax laws. Explaining the relevant propositions in the decision, under the heading “principles of interpretation of a taxing/fiscal statute”, the Supreme Court inter alia culled out the following rules governing the interpretation:

  1. It is also well-settled rule of construction of a charging section that before taxing a person it must be shown that he falls within the ambit thereof by clear words used as no one can be taxed by implication.
  2. It is further well settled that a transaction in a fiscal legislation cannot be taxed only on any doctrine of “the substance of the matter” as distinguished from its legal signification, for a subject is not liable to tax on supposed “spirit of the law” or “by inference or by analogy”.
  3. The taxing authorities cannot ignore the legal character of the transaction and tax it on the basis of what may be called “substance of the matter”. One must find the true nature of the transaction.[14]

Thus, unequivocally, the Supreme Court in Acer case[15] equated the “substance over form” test as falling with the prescription against taxation “by inference or by analogy”. There are many similar declarations, to enlist a few;

(a) It was also exemplified in State of Rajasthan v. Basant Agrotech (India) Ltd.[16] wherein the Supreme Court quoted with approval the opinion of the Privy Council in the celebrated Bank of Chettinad v. CIT[17] and other leading decisions[18] to conclude that taxation based on “substance of the matter” was antithetical to the settled jurisprudential norms.

(b) A five-Judge Bench in Kone Elevator India (P) Ltd. v. State of T.N.[19] reversed an earlier three-Judge Bench decision[20] which had inter alia opined that “[i]t is settled law that the substance and not the form of the contract is material in determining the nature of transaction”.

(c) Similarly a three-Judge Bench in BSNL v. Union of India[21] reversed a two-Judge Bench decision in State of U.P. v. Union of India[22] which had stressed upon the substance test.[23]

Thus clearly, the substance over form debate has generally been rejected in its application in the realm of indirect taxes.

Having said that, it would not be correct to state that in the indirect tax realm the “substance” debate has never arisen. For illustration, tax benefits have been denied by the courts in situations where allegations of fraud and subterfuge have been factually demonstrated.[24] The issue with the decision in Northern Operating case[25], however, is that there is neither an allegation of deceit nor a finding that the legal arrangement between the parties was a “sham” warranting its disregard.

Our quest to position substance over form rule in indirect tax paradigm gets further thrust from a review of developments in the context of income tax law, wherein the restatement of law in Cape Brandy Syndicate v. IRC[26] and the IRC v. Duke of Westminster principle[27] were emphatically approved by the Supreme Court to the effect that “what is material in the tax jurisprudence is the evasion of the tax, not the beneficial lawful adjustment thereof”[28] and consistently genuine commercial transactions, even if leading to a reduction in tax liability, have been accepted without demur.[29] There is no dearth of such judicial opinion,[30] though it was interjected briefly by in McDowell and Co. Ltd. v. CTO[31], but only to be reiterated subsequently.[32] Subsequently, to quell the debate once and for all, the Parliament intervened and enacted the provisions (i.e. general anti-avoidance rules or GAAR[33]) which enable the tax authorities to invoke the substance over form rule and recharacterise the transaction. However, the application of GAAR is permitted only in the wake of an elaborate set of procedural regimentation and substantive declaration of safeguards of taxpayer’s rights. Thus, a question arises whether substance over form test is permissible within the confines of indirect tax laws given the Parliament’s abstinence to enact such laws in this space despite making amends in income tax framework.

  1. Conclusion

A larger critique of substance over form test is the overwhelmingly disproportionate emphasis on facts in this line of inquiry which virtually renders impossible a dispassionate evolution of legal principles, thereby rendering each case a precedent confined to its own factual setting. The same is the case with the Northern Operating[34] decision which premises the conclusion so deep on the factual paradigm that it would give little trouble to ingenuine lawyers in identifying factors which would distinguish its application. In another sense, such decisions also dilute (if not obviate) the precarious tax certainty which is craved upon not just by the stakeholders but judiciary alike,[35] rendering the outcome of the lis rests more on the subjective assessment of facts instead of an objective implementation of the legal standards.

 


Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics

[1] 2022 SCC OnLine SC 658.

[2] See generally, Larsen & Toubro Ltd. v. State of Karnataka, (2014) 1 SCC 708 : (2014) 303 ELT 3 wherein the Supreme Court acknowledged existence of certain decisions which tested the substance of the contract (in order to ascertain whether they were exigible to sales tax) to opine that such decisions have lost precedential value in view of a constitutional amendment.

[3] For illustration, in Great Eastern Shipping Co. Ltd. v. State of Karnataka, (2020) 3 SCC 354 : (2020) 32 GSTL 3 the Supreme Court referred to the “substance” test in order to determine the true nature of the lease of the ship where the transaction was characterised as a time charter agreement.

[4] For illustration, see CCE v. Hari Chand Shri Gopal, (2011) 1 SCC 236 : (2010) 260 ELT 3.

[5] 2022 SCC OnLine SC 658.

[6] The relevant clauses of the agreements, as reproduced in the Supreme Court’s decision.

[7] (2007) 7 SCC 1.

[8] (2009) 15 SCC 1.

[9] For illustration, see Chandna Impex (P) Ltd. v. Commissioner of Customs, (2011) 7 SCC 289 : (2011) 269 ELT 433; Nicholas Piramal India Ltd. v. CCE, (2010) 14 SCC 635 : (2010) 260 ELT 338; CCE v. Sai Mirra Innopharma (P) Ltd., 2015 SCC OnLine SC 1398 : (2015) 326 ELT 633.

[10] 2022 SCC OnLine SC 658.

[11] 2022 SCC OnLine SC 658.

[12] “[i]t is doubtful whether without the comfort of this assurance, they would agree to the secondment”.

[13] (2004) 8 SCC 173, 184 : (2004) 172 ELT 289. This decision was subsequently approved by a five-Judge Bench of the Supreme Court in CCE v. Grasim Industries Ltd., (2018) 7 SCC 233 : (2018) 360 ELT 769.

[14] Relying upon Union of India v. Playworld Electronics (P) Ltd., (1989) 3 SCC 181.

[15] (2004) 8 SCC 173 : (2004) 172 ELT 289.

[16] (2013) 15 SCC 1 :  (2014) 302 ELT 3.

[17] 1940 SCC OnLine PC 29 .

[18] Such as, A.V. Fernandez v. State of Kerala, AIR 1957 SC 657, Partington v. Attorney General, (1869) 4 HL 100.

[19] (2014 ) 7 SCC 1 : (2014) 304 ELT 161.

[20] State of A.P. v. Kone Elevators (India) Ltd., (2005) 3 SCC 389 :  (2005) 181 ELT 156.

[21] (2006) 3 SCC 1.

[22] (2003) 3 SCC 239 : (2004) 170 ELT 385.

[23] “The terminology employed to describe an activity as sale or service is not conclusive in itself. By calling sale as service or vice versa, the substance of the transaction will not get altered. The question has to be determined, by discerning the substance of the transaction in the context of the contract between the parties or in a case of statutory contract in the light of the relevant provisions of the Act and the Rules.” (2003) 3 SCC 239 : (2004) 170 ELT 385.

[24] For illustration, see Commr. of Customs v. Pundrick Ravindra Trivedi, (2015) 16 SCC 702 : (2015) 322 ELT 812, following Commr. of Customs v. Phoenix International Ltd., (2007) 10 SCC 114 : (2007) 216 ELT 503.

[25] 2022 SCC OnLine SC 658.

[26] (1921) 1 KB 64 that “[i]n a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”. Cited with approval inter alia in Ranbaxy Laboratories Ltd. v. Union of India, (2011) 10 SCC 292; CCE v. Acer India Ltd., (2004) 8 SCC 173.

[27] 1936 AC 1 that “every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”.

[28] CIT v. Sarabhai Holdings (P) Ltd., (2009) 1 SCC 28 : (2008) 307 ITR 89.

[29] For illustration, see Aruna Group of Estates v. State of Madras, 1961 SCC OnLine Mad 252 : (1965) 55 ITR 642 wherein it has been inter alia observed that “[a]voidance of tax is not tax evasion and it carries no ignominy with it for it is sound law and, certainly, not bad morality for anybody to so arrange his affairs as to reduce the brunt of taxation to a minimum”. See also CIT v. Sri Abhayananda Rath Family Benefit Trust, 2002 SCC OnLine Ori 307 : (2002) 255 ITR 436.

[30] For illustration, see CIT v. Calcutta Discount Co. Ltd., (1974) 3 SCC 260 : (1973) 91 ITR 8, CIT v. A. Raman & Co., AIR 1968 SC 49 :  (1968) 67 ITR 11.

[31] (1985) 3 SCC 230 : (1985) 154 ITR 148.

[32] For illustration, see Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 : (2003) 263 ITR 706; CIT v. Walfort Share and Stock Brokers (P) Ltd., (2010) 8 SCC 137 : (2010) 326 ITR 1.

[33] Income Tax Act, 1961, Ch. X-A.

[34] 2022 SCC OnLine SC 658.

[35] For illustration, see Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 341 ITR 1.

Experts CornerKhaitan & Co

“There’s one issue that will define the contours of this century more dramatically than any other, and that is the urgent and growing threat of a changing climate.”

Barrack Obama

A common consensus seems to be rapidly emerging around the world that hydrogen will play a decisive factor if we were to attain the goals set out in the Paris Agreement, 2015 — of achieving net zero carbon emissions by 2050 to limit the global warming below 2 degrees celsius above pre-industrial levels. The phrase “hydrogen economy” is not a new concept. Currently, hydrogen is primarily utilised in the refining and chemical sectors and mostly produced from fossils, attributing for 6% of global natural gas use and 2% of coal consumption and is the primary cause for 830 MtCO2 of annual CO2 emissions[1]. In order to reduce the costs for producing and using clean hydrogen with carbon capture, usage and storage technologies, scaling the production of clean hydrogen will play a massive role.[2]

It is abundantly transparent that hydrogen energy presents diverse benefits over other power sources including:

  1. clean energy source for sustaining zero carbon energy programmes;
  2. abundance in source;
  3. diminishes carbon footprints;
  4. almost zero emissions; and
  5. usage in the automotive industry.

Therefore, the immediate need to capitalise the potential of low-carbon hydrogen and use it for a comprehensive range of applications as a feasible surrogate to liquid and fossil fuels cannot be overstated.

Hydrogen is generally categorised in accordance with the way it is produced and is catalogued by colour. Some of the colours of hydrogen rainbow are listed below[3]:

  1. Blue – Blue hydrogen is generated using methane gas, but the carbon is captured and
  2. Brown/Black – Brown/black hydrogen is extracted from fossil fuels out which mainly it is coal.
  3. Turquoise – Turquoise hydrogen is produced by a process known as “methane pyrolysis” to produce hydrogen and solid carbon.
  4. Grey – Grey hydrogen is the most common form and is generated through steam reformation of natural gas or methane.
  5. Green – Green hydrogen is produced by electrolysis using electricity generated by renewable sources such as wind energy and solar energy.
  6. Pink – Pink hydrogen is generated via electrolysis using electricity generated from nuclear power.
  7. Purple – Purple hydrogen is made using nuclear power and heat through combined chemo thermal electrolysis splitting of water.
  8. White – White hydrogen is naturally occurring geological hydrogen found in underground deposits and produced through fracking.
  9. Yellow – Yellow hydrogen is produced by electrolysis using solar power.

Many experts believe that distinct legal mechanisms will have to be administered in connection with production and usage of hydrogen production, depending on numerous factors such as the manner in which it is produced or if the production is using renewable or non-renewable energy.

India’s regulatory framework

Recent global incidents of uncommon wildfires, droughts and floods and immense apprehensions about changing climatic conditions have prompted even a developing country like India to contemplate a swift shift towards sustainability and aggrandise its sustainable goals by dint of policy framework.

The Ministry of New and Renewable Energy (MNRE) pioneered its first hydrogen and fuel cell roadmap in the year 2006[4] and MNRE has always considered “hydrogen” as its vision towards a sustainable future. However, the framework around “hydrogen” related policies was never formulated in a specific legislation. For example, renewable energy resources are regulated by MNRE, usage of pipelines to transport fuel and like products are governed by the Ministry of Petroleum and Natural Gas. Lately, amendments in the Oilfield (Regulation and Development) Act, 1984 were suggested by the Ministry of Petroleum and Natural Gas Oilfields (Regulation and Development) Amendment Bill, 2021[5] dated 15-6-2021 wherein hydrogen was included in the definition of “mineral oils” in order to facilitate the Government to permit a licence for its exploration and production. Scenarios like this has led for a push for an aerodynamic legislation which governs the framework in relation to hydrogen.

The National Hydrogen Mission (NHM) was launched on 15-8-2021 with the objective to make India a global hub for green hydrogen production and export. The NHM aims to enable production of 5 million tonnes of green hydrogen by 2030 and the related development of renewable energy capacity. As a positive step in the direction envisaged by NHM, on 17-2-2022, the Ministry of Power announced the green hydrogen policy (GHP).[6]

Green Hydrogen Policy (GHP)

Some of the salient features of GHP inter alia include:

  1. Production and development of green hydrogen as well as green ammonia.
  2. Waiver of inter-State transmission charges for a period of 25 years if the projects are commissioned before 25-6-2025.
  3. Banking shall be permitted for a period of 30 days for renewable energy used for making green hydrogen and green ammonia and the charges in relation to the same will be as per the charges fixed by the State Electricity Regulatory Commission, which shall not be more than the cost differential between the average tariff of renewable energy bought by the distribution company in the previous year and the average market clearing price in day ahead market during the month in which the renewable energy is banked.
  4. Distribution companies are also authorised to acquire and supply renewable energy to the manufacturers of green hydrogen and green ammonia which shall only be charged at the cost of such procurement including wheeling charges and a small margin as may be determined by the State Commission.
  5. Allotment of land in renewable energy parks for manufacturing green hydrogen/green ammonia. Further, it also permits manufacturers of green hydrogen/green ammonia to set up bunkers near ports for storage of green ammonia for export/use by shipping, at applicable charges.
  6. Additionally, MNRE will establish a single portal for all statutory clearances and permissions required for manufacture, transport, storage and distribution of green hydrogen/green ammonia and such agencies/authorities are time-bound to clear such clearances/permissions, preferably within 30 days from the date of application.

Challenges faced by the Hydrogen Sector

One of the foremost obstacles faced by the hydrogen sector is that the production of low-carbon hydrogen is still in the embryo phase in commercial terms. As there is minuscule commercial scale at the present, low-carbon hydrogen production is not a commercially feasible substitute. Another challenge is that there is no resolute hydrogen legislation in place in most of the countries and dedicated framework governing manufacture, usage, storage and transport of hydrogen needs to be put forth in order to facilitate growth.

 

Hydrogen projects are expected to play a colossal role in decarbonising our energy usage and working towards a clean and sustainable future. National strategies and efficacious public-private partnerships will be essential to nail the big fish and to warrant assured success.

India, by announcing the GHP has taken a step in the right direction towards attaining energy sufficiency using clean and renewable sources of energy. Further, MNRE is supporting industrial, academic and research institutions to tackle the obstacles in production of hydrogen from renewable energy sources, its safe and efficient storage, and its usage for energy and transport applications. MNRE has extended substantial support to R&D in this field resulting in development and demonstration of internal combustion engines, two wheelers, three wheelers, and minibuses that run on hydrogen fuel. India has already set up two hydrogen refuelling stations at Indian Oil R&D Centre, Faridabad and National Institute of Solar Energy, Gurugram.[7]

While it is paramount that India accelerates in the field of development and manufacturing of hydrogen technologies, it will also be fundamental for other countries to progress towards the same goal. In the words of Christine Lagarde, Managing Director of the International Monetary Fund, “Climate Change is a collective endeavour, it is collective accountability, and it may not be too late.” The only hope to achieve the targets set at Paris Agreement is to massively scale the manufacturing and deployment of hydrogen technologies which will result in significant reductions in the cost thereby making utilisation of hydrogen as an indisputable substitute to fossil fuels.


† Partner, Khaitan & Co.

†† Associate, Khaitan & Co.

[1] See HERE.

[2] See HERE .

[3] See HERE .

[4] See HERE.

[5] See HERE .

[6] See HERE.

[7] See HERE .

Akaant MittalExperts Corner


A. Introduction


The IB Code differentiates between financial creditors and operational creditors. Financial creditors are those having a relationship with the corporate debtor that is purely a financial contract, such as a loan or a debt security. Whereas, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[1]

 

For the purposes of the definition of the term “goods”, the Sale of Goods Act, 1930 can be referred to; whereas, the definition of the term “services” is still not concretely defined. A claim on operational debt may be on account of breach of an agreement or a decree of a court of law; still the same must relate to the supply of goods and services.

 

Now issue arises as to the status of lease dues forming an “operational debt”. The question has two aspects, namely, one whether the landlord could claim to be an operational creditor against the tenant for the rental dues outstanding; and two whether a tenant while using the tenanted premise, if suffers any damages, could claim to be an operational creditor.

 


B. Landlord claiming to be an Operational Creditor


The Bankruptcy Law Reforms Committee Report that formed the basis of the IB Code illustratively suggested that the definitions of “operational creditor” and “operational debt” include wholesale vendors of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold, thus making them operational creditors. Similarly, the lessor who rents out space to an entity is an operational creditor to whom the entity owes monthly rent on a three-year lease.[2] Operational creditors, in other words, maybe employees, rental obligations, utilities payments and trade credit.[3]

 

While the landlord certainly could claim to be an operational debtor in light of what the Bankruptcy Law Reforms Committee seems to suggest, however, in Annapurna Infrastructure (P) Ltd. v. SORIL Infra Resources Ltd.[4], such an issue was left open by the NCLAT to be decided by the NCLT. In this case, the landlord had initiated proceedings under Section 9 against the tenant on the basis of an arbitral award which awarded rent due towards the landlord on the part of the tenant. The NCLAT, however, left this contention unaddressed and remitted the matter on other grounds.

 

In Sarla Tantia v. Nadia Health Care (P) Ltd.,[5] the question before the NCLT was whether the recovery of arrears of rent can be claimed as operational debt within the meaning of Section 5(21) of the IB Code. The counsel for the corporate debtor i.e. Nadia Health Care relied on the input output test arguing that the operational debt are only those debts that have “a correlation of direct input to output produced or supplied by the corporate debtor”. However, the NCLT herein relied on the observations from the decision of the Supreme Court in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.,[6] to conclude that the Supreme Court in the affirmative settled the issue of lease dues being an operational debt.

 

It is submitted that the same is erroneous because (i) the Supreme Court in Mobilox Innovations[7] did not discuss the issue of lease deeds in its own observations. The court had merely reproduced paragraphs from the report of the Bankruptcy Law Reforms Committee, a part of which had also touched upon rental and lease dues as a type of operational debt; and (ii) to begin with, the issue was not the subject-matter of dispute before the Supreme Court at all.

Therefore, the opinion of the NCLT in Sarla Tantia[8] may not be on strong footing.

 

Split in jurisprudence

A split in the jurisprudence before the NCLAT is found in the two rulings rendered by the NCLAT in M. Ravindranath Reddy v. G. Kishan,[9] on one side and Anup Sushil Dubey v. National Agriculture Coop. Mktg. Federation of India Ltd.[10] on the other.

 

In Ravidranath, the specific query was addressed by the NCLAT on whether a landlord by providing lease could be treated as operational creditor. The same was held by the Full Bench of NCLAT to not fall within the ambit of the definition of the term “operational debt”.[11] The NCLAT in Ravidranath[12] opined that the recommendation of the Bankruptcy Law Reforms Committee pertaining to the treatment of lessors/landlords as operational creditors, was not adopted by the legislature and only the claim in respect of goods and services were kept in the definition of operational creditor and operational debt under Sections 5(20) and 5(21) of the IB Code. Resultantly, it was concluded that the definition of an operational debt and operational creditor could not be interpreted to include rent dues as operational debt. Therefore, non-payment of rent does not amount to an operational debt.

 

There is a qualification added to the ruling in M. Ravindranath[13], when the NCLAT in Sanjeev Kumar v. Aithent Technologies (P) Ltd.[14] distinguished the former. In Sanjeev Kumar, the relationship between the creditor landlord and the debtor tenant was found to be not merely of the one to that of a landlord tenant but was held to also include certain provision of services such as electricity, diesel, sewer and water charges amongst others given to the debtor tenant. In such cases once the dues were found to be more than the pecuniary threshold, the debt was held to fall under the definition of an operational debt and an application under Section 9 of the Code was admitted.[15]

 

On the other hand in Anup Sushil Dubey[16] the NCLAT held that lease and licence agreements fall within the ambit of Section 5(21) of the IB Code. The NCLAT here noted that the appellants had leased out the premises for “commercial purpose” and the same fell within the meaning of term “service” under Section 5(21) of the IB Code. Then the NCLAT found the definition of “service” under the Consumer Protection Act, 2019 to be of relevance, which defines a service in the following manner :

(42) “service” means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, telecom, boarding or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.

 

The NCLAT similarly referred to the provisions of the Central Goods and Services Tax Act, 2017, which under the Schedule II lists down the activities that are to be treated as supply of goods or services, and in Para 2 of the Schedule stipulates as follows:

(a) any lease, tenancy, easement, licence to occupy land is a supply of services;

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

 

On the basis of the above, taking into account that the premises were leased out for a commercial purpose, it was held that the dues claimed by the creditor squarely fell within the ambit of the definition of “operational debt” as defined under Section 5(21) of the Code.

 

It is essential to note that while M. Ravindranath[17] was a decision by a Full Bench of the NCLAT, the ruling in  Anup Sushil Dubey[18] was by a Division Bench. Furthermore, the NCLAT in Anup Sushil Dubey[19] while noted that the corporate debtor appellant before it, cited the ruling in M. Ravindranath[20]; the NCLAT however did not render any findings on the reference to M. Ravindranath[21].

 


C. Tenant claiming to be an Operational Creditor


On the other hand, as regards the claim of a tenant in its tenant landlord relationship is concerned, the position seems to be settled in Jindal Steel & Power Ltd. v. DCM International Ltd.[22] wherein it was held that tenants do not come within the meaning of “operational creditor” as defined under Sections 5(20) and (21), IB Code. In this case, the tenant sought to recover the security deposit on account of the termination of the lease agreement with the landlord. The NCLAT upheld the order of the NCLT rejecting the application filed under Section 9 by the tenant holding that the tenant does not come within the meaning of the term “operational creditor”.

 

It must also be noted here that while in Sarla Tantia,[23] the NCLT had referred to the Schedule II of the CGST Act, 2017[24] which in context of land and buildings, classifies “any lease, tenancy, easement, licence to occupy land” as a supply of services. Here in Jindal Steel[25], the NCLT held that the definition of “service” in the fiscal statutes has no bearing because the purpose of fiscal statutes is to generate revenue for the Government in the form of taxes, whereas the purpose of the IB Code is to consolidate and amend the laws relating to reorganisation and insolvency resolution.

 

Similar position was maintained in  D & I Taxcon Services (P) Ltd. v. Vinod Kumar Kothari,[26] where a tenant filed a claim on account of suffering damage in the tenanted premises due to a fire incident. The NCLAT clarified that the claim of the tenant does not constitute any operational debt since by using the demised premises as a tenant, the appellant could not be said to have been providing any “services”.

 

However, sub-tenants cannot be treated as a corporate debtor even if part of the payment is made directly by such sub-tenants to the operational creditor since the same will not create any relationship of operational creditor and debtor.[27]


Conclusion


On account of the differing viewpoints expressed by the NCLT and NCLAT, the issue on whether a landlord could claim to be an operational creditor remains unresolved.

 

Since different types of creditors are granted distinct rights under the IB Code framework, it is necessary to determine to which category, a creditor belongs to. In this context, it is possible that, in the future, a leasing agreement may not fall within either of the two categories of creditors who can file for initiating a corporate insolvency resolution process (CIRP), namely, financial and operational creditors, and that they will have to make a claim as other creditors. Categorisation as such would also lead to a significant loss of rights as such creditors would have no participatory role (whatsoever) in the CoC working.

The issue is now pending before the Supreme Court in Promila Taneja.[28]

 

Given the ambiguity surrounding the problem, the Supreme Court must evaluate the larger issue of claims resulting from the use of immovable property and other associated costs, and eventually resolve the question of whether rent arrears constitute as operational debt.

 

To sum up, unless the existing gaps in the Code regarding lease transactions, their treatment as secured creditors, the right to relinquish, and other factors discussed above are addressed, the true devil will lie in the strategically drafting of lease agreements, which will essentially make or break the rights available to the lessor.


Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the National Law University, Mumbai and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.

“The author gratefully acknowledge the research and assistance of Sh. Priyanshu Fauzdar, pursuing law at NLU, Assam in writing this article.”

[1] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design (Nov. 2015), Ch. 5.2.1, available online at HERE .

[2] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.

5.2.1.

[3] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.3.2.2.

[4] 2017 SCC OnLine NCLAT 380.

[5] 2018 SCC OnLine NCLT 16726.

[6] (2018) 1 SCC 353.

[7] (2018) 1 SCC 353.

[8] 2018 SCC OnLine NCLT 16726.

[9] 2020 SCC OnLine NCLAT 84.

[10] 2020 SCC OnLine NCLAT 674.

[11] The ruling in M. Ravindranath case, 2020 SCC OnLine NCLAT 84 has been followed subsequently in Aurora Accessories (P) Ltd. v. Ace Acoustics & Audio Video Solutions (P) Ltd., 2020 SCC OnLine NCLAT 527; Promila Taneja v. Surendri Design (P) Ltd., 2020 SCC OnLine NCLAT 1105.

[12] 2020 SCC OnLine NCLAT 84.

[13] 2020 SCC OnLine NCLAT 84.

[14] 2020 SCC OnLine NCLAT 734.

[15] 2020 SCC OnLine NCLAT 734.

[16] 2020 SCC OnLine NCLAT 674.

[17] 2020 SCC OnLine NCLAT 84.

[18] 2020 SCC OnLine NCLAT 674.

[19] 2020 SCC OnLine NCLAT 674.

[20] 2020 SCC OnLine NCLAT 84.

[21] 2020 SCC OnLine NCLAT 84.

[22] Jindal Steel & Power Ltd. v. DCM International Ltd., 2017 SCC OnLine NCLAT 441 upholding the order of the NCLT in Jindal Steel and Power Ltd. v. DCM International Ltd., 2017 SCC Online NCLT 989.

[23] 2018 SCC OnLine NCLT 16726.

[24] Central Goods and Services Tax, 2017, Schedule II read with S. 2(a).

[25] 2017 SCC Online NCLT 989.

[26] 2020 SCC OnLine NCLAT 878.

[27] Rahul Gupta v. Mahesh Madhavan, 2018 SCC OnLine NCLAT 263.

[28] Promila Taneja v. Surendri Design (P) Ltd., Civil Appeal No. 4237 of 2020, order dated 28-1-2021. (SC)

'Lex Mercatoria' by Hasit SethExperts Corner


A.    Introduction


Complex disputes are not easy to define as a class. But they do occur frequently in court litigation or arbitrations. Hallmarks of complex disputes are multiplicity of parties and issues, both legal and factual. Various jurisdictions have built mechanisms to deal with complex disputes through special rules and procedures. This article focuses on litigation and arbitration as methods for resolving complex disputes, though other methods like mediation are also useful. In particular, this article analyses the need for improving Indian legal system’s tools and capacities to resolve complex disputes by adapting global best practices.


B.    Nature of Complex Dispute Resolution


Black’s Law Dictionary, defines complex litigation[1] as, “litigation involving several parties who are separately represented, and usually involving multifarious factual and legal issues”. Right below the definition, the same dictionary quotes from Tidmarsh and Trangsrud’s 2002 book titled, Complex Litigation. The quote partly states, “complex civil litigation has an ‘I know it when I see it’ quality. Nearly everyone agrees that matters like the massive asbestos litigation, the AT&T anti-trust suit, or the remedial phase of a school desegregation case are complex”.

 

Complex litigation is now taught in several US law schools as a formal course[2]. Alternative methods of resolving complex disputes exist, for example, mediation, which may be very effective in a given factual matrix. Many mass tort or class action litigation of a complex nature end in a conciliation expressed as a settlement with payouts to the victims.

 


C.   Difficulties of Resolving Complex Disputes in India


Post-independence, India’s first brush with complex dispute was the Bhopal gas leak disaster (1984) related litigation. The leak of methyl isocyanate (MIC) poisonous gas killed thousands (est. 3,000-5,000) of people and with thousands more disabled. In 1985, Indian Government joined a claim against the American company, Union Carbide, in the United States District Court,  Southern District of New York[3] (US Bhopal Case). The core issue raised in a motion filed by Union Carbide was forum non conveniens. Union Carbide argued that Indian courts were a more appropriate forum rather than US courts for claims by gas leak victims. Indian Government’s position in the case was that US courts were appropriate forum to assert their claims.

 

The underlying strategy of parties in Bhopal gas disaster’s US litigation was simple. Union Carbide wanted Bhopal gas leak claims to be not litigated in US courts before juries as that would result in multi-billion dollar judgments or settlements. The track record of US juries for mass torts was pro victim having granted multi-billion dollar verdicts — one of those could have bankrupted Union Carbide. While, Indian Governments, at least initially, and victims wanted substantial damages for their injuries which could only be possible in US courts’ jury trials.

 

In the US Bhopal case, Prof. Marc Galanter filed an affidavit pointing out severe handicaps of Indian legal system in handling complex personal injury litigation involving mass torts[4]. One problem that his affidavit highlighted was at Para VII.C tilted, “Indian Civil Procedure Contains no Special Provisions or Devices for the Conduct or Management of Complex Cases.”

 

In response, the eminent Indian lawyer, Mr Nani Palkhivala, and others legal experts had filed affidavits asserting the competence of Indian legal system to handle mass tort claims. Mr Palkhivala’s affidavit detailed how Indian Bar and judiciary was capable of handling complex litigation including mass torts[5]. Which opinion turned out to be true after nearly 38 years can be seen from Government’s own data: of the 1,029,517 claims only 574,366 were awarded a mere Rs 3,840 crores in total while 455,151 claims were rejected[6]. And the litigation to demand more compensation still continues[7]. Clearly, India legal system needs tools to manage complex litigations that compensate claimants adequately and within a short time.

 

Ultimately, Union Carbide got away easily with a relatively small payment of US $470 million as settlement to Indian Government, though they have given explanations for the same on a specially created website[8]. The trial(s) where Indian courts could have granted multi-billion dollar equivalent award for the Bhopal mass torts and execution of that judgment or judgments in US never arrived due to the paltry settlement by Union Carbide accepted by the Indian Government.

 

In current times, a new category of complex arbitrations has arisen in India. As there are no specialised constructions courts across India (exceptions exist in a few States as tribunals), construction disputes now are invariably arbitrated rather than being litigated in courts. As India constructs infrastructure like roads, high speed rails, airports, etc. inevitably disputes arise between contractors and the public sector. Construction disputes has become a large category of complex disputes in India in last two decades. But the conduct of construction arbitrations in India can be made much more efficient. The delays in arbitration process involving thousands of documents of any construction project are common. Later in this article, recommendations are made to speed up complex arbitrations in India.

 


D.   Current Dispute Resolution Methods in India


The core statute that defines civil litigation in India is the venerable Civil Procedure Code, 1908 (CPC). All other judicial and quasi-judicial procedures in India are derivatives of the CPC. For a country as vast as India, to have a common country-wide Civil Procedure Code for Federal or State Courts in the CPC is a magnificent achievement. Contrast this with the United States, the only nearest comparable common law jurisdiction in its scope to the Indian legal landscape. The United States of America has a Federal Rules of Civil Procedure for Federal Court litigation and as many State Civil Procedure rules as there are States in the United States[9].

 

The CPC has a core set of 158 sections that are enacted by the Central Government and rules (organised in groups of 51 “orders”) that can be modified by the High Court of State with State wide applicability[10]. The CPC is flexible in its legislative design but due to a complex set of factors it is somehow always blamed for delays in courts. But when one generally compares the broad structure of England and Wales’ Civil Procedure Rules or US’s Federal Rules of Civil Procedure, they are pari materia to the CPC except that the CPC includes a detailed execution mechanism.

 

The CPC in its original design was to be the minimum common code for all courts, for disputes small or large, lacks tools for managing complex litigation.The Commercial Courts Act, 2015’s amendments to the CPC are a step in right direction for resolving complex commercial disputes. The CPC’s basic tool for multiparty representative litigation is the Order 1 Rule 8 (one person may sue or defend on behalf of all in same interest) that permits a “representative suit”. The requirements for applying Order 1 Rule 8 are: (i) parties are numerous; (ii) parties have same interest; and (iii) necessary permission is obtained, and a notice is given[11].

 

Arbitration is the preferred option for commercial dispute resolution in India, particularly for construction disputes. As a country building large scale infrastructure, construction disputes are increasing. But efficiency of arbitrating these disputes is questionable. Several reasons exist for inefficiencies in arbitrating construction disputes. Some causes of these inefficiencies are: inability of parties to narrow down disputes to a few key issues, lack of proper documentation and correspondence, inadequately experienced tribunals, archaic evidentiary methods, etc. This article offers some suggestions to remove inefficiencies in commercial and construction litigation through better practices.

 

While the Companies Act, 2013 includes a Section 245 for class action litigation and the Consumer Protection Act has a class action provision, these remain largely unused being untested by litigants[12]. Some class actions are asserted via public interest constitutional writ litigation. In a nutshell, class action or mass tort actions that grant substantial damages to victims are virtually absent in India.

 

There is no doubt that some judicial administrative policy work is happening in India too. But it is all ad hoc. Some examples of judicial policy innovation exist. For example, like the Restatement of Values of Judicial Life,  adopted by Full Court meeting of the Supreme Court of India in 1997[13]. But ad hoc nature of these efforts is illustrated by an observation in a recent case concerning electronic evidence: Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal[14]. Here, the Supreme Court hoped that authorities will take notice of effort put in by a committee of Judges to create a set of rules for electronic evidence:

 

  1. 65. … A five-Judge committee was accordingly constituted on 28-7-2018. After extensive deliberations, and meetings with several police, investigative and other agencies, the Committee finalised its report in November 2018. The report suggested comprehensive guidelines, and recommended their adoption for use in courts, across several categories of proceedings. The report also contained draft rules for the reception, retrieval, authentication and preservation of electronic records. In the opinion of the court, these draft rules should be examined by the authorities concerned, with the object of giving them statutory force, to guide courts in regard to preservation and retrieval of electronic evidence.[15]

 


E.    Global Best Practices for Complex Dispute Resolution


The United States of America’s Federal Rules of Civil Procedure includes provisions for complex litigation. For example, Rule 16 concerns, “Pretrial Conferences; Scheduling; Management”. Specifically, Rule 16(c)(2)(L) permits the trial Judge to adopt special procedures for , “managing potentially difficult or protracted actions that may involve complex issues, multiple parties, difficult legal questions, or unusual proof problems”. This provides flexibility to a federal court’s trial Judge to customise procedures in complex litigation to manage  issues related to multiplicity of parties, legal challenges, or evidence.

 

The Federal Judicial Centre has published a “Manual for Complex Litigation”[16]. This manual has excellent guidance on managing judicial supervision, role of counsel, pretrial issues like discovery, trials, settlement, and class actions as a specific type of complex litigation. The Judicial Conference of the United States has published a “civil litigation manual”[17]. This manual has detailed guidance for Judges to execute a case management plan, pretrial discovery, electronic discovery, pretrial motions, alternative dispute resolution methods, trial planning and actual trial itself. Of specific interest is its Chapter 7, “special case matters”, that deals with complex litigation. The Chapter 7 includes general guidance on complex cases, mass torts cases, class action litigation and expert evidence. Further guidance is given on high profile cases. Interestingly, there is guidance on media management in high profile cases, an increasing need in India too.

 

There is academic guidance on complex litigation available too through dedicated research centres in American universities. For example, George Washington Law School’s James F. Humphreys Complex Litigation Centre has published “Guidelines and Best Practices in Class-Action Litigation” for public comments[18].

 

The Business and Property Courts of England and Wales’ publishes various litigation guides, for example, commercial court guide[19] (incorporating the admiralty court guide) and the technology and construction court guide[20] and the intellectual property enterprise court guide[21]. While these are non-binding and litigation guides for specific courts, they include elements of managing complex litigations.

 

Arbitral rules or guidance notes from arbitral institutions provide specific guidance to manage key aspects of complex disputes. There is guidance available for discovery best practices in construction arbitration specially[22]. Specialised arbitration centres and their rules for complex disputes like construction are also emerging fast[23]. There is ongoing research by arbitral institutions to streamline document production[24].

 


F.    Suggested Remedies for Efficient Dispute Resolution in India


A few suggestions for improving methods of complex dispute resolution in India are describe next:

 

(a) A dedicated body for judicial procedural innovation. India needs a permanent judicial body with a statutory basis that is focussed on process innovation in judiciary from District Court to Supreme Court level. An example of this is the Judicial Conference of the United States, a century old body, that includes Judges across Full Federal judiciary from District Court upwards that makes direct recommendations to the US Congress on federal judicial issues[25]. The Judicial Conference of the United States does useful work through its sub-committees. Integration of trial and tribunal judiciary is critical in any such body. Some innovations have happened in Indian judicial meetings held at times but there is no institutional basis to these nor any regular published outputs of such ad hoc efforts.

 

(b) A guide for best practices in implementing Commercial Courts Act, 2015 is much needed. While a few high courts have amended their original side rules for commercial courts, but much needs to be done to separate conventions and practices of the ordinary civil trials from commercial court trials. There needs to be a scale of sanctions that include fines for violating case management timelines. These can be implemented by amendments to the law or through rules to make the commercial courts effective.

 

(c) A great opportunity exists for arbitration centres with their dedicated set of rules to innovate on complex arbitrations. Indian arbitral institutes can create dedicated construction or complex arbitration rules to expedite construction arbitrations considering the industry practices in India. In particular, voluntary disclosure of documents is a much required feature in expediting construction arbitration in India. Guidance in form of how to claim and prove common heads of construction claims would be very useful. Further, guidance on how to effectively produce and manage massive documentary evidence by building a common correspondence index and a statement of jointly agreed facts can be done.

 


G.   Conclusion


Indian legal system needs to build its complex litigation capabilities by continuous research in rules, training for lawyers and Judges, and creating non-binding court guides. The Commercial Courts Act, 2015 provides a great opportunity to build a new system within the existing courts that can handle complex litigation. But it seems there is more emphasis on aligning commercial courts with existing court practices and conventions than a radical rethink in the method and speed of conducting commercial trials. A parallel opportunity exists for arbitration centres in India to innovate on complex disputes by providing industry specific rules, particularly for construction disputes.

 


† Hasit B. Seth practices as a counsel in the Bombay High Court, India and in arbitrations.

[1] Black’s Law Dictionary, (9th Edn.) p. 1017.

[2] For example, See Harvard Law School’s Prof. Richard Clary’s Spring 2022 course titled “Complex Litigation: Legal Doctrines, Real World Practice”. See HERE.

[3] See, Union Carbide Corpn. Gas Plant Disaster, In re, 634 F Supp 842 (SDNY 1986).

[4] See, Prof. Marc Galanter’s Affidavit, Law School Digital Repository, University of Wisconsin, HERE .

[5] See, Affidavit of N.A. Palkhivala In Support of Defendant’s Motion for Dismissal on Forum Non Conveniens Grounds.  See HERE (Part of Baxi, et al., Mass Disasters and Multinational Liability: The Bhopal Case, 1986, Indian Law Institute).

[6] Facts and Figures, Bhopal Gas Tragedy Relief and Rehabilitation, Government of Madhya Pradesh. See HERE.

[7] See, “Bhopal Gas Tragedy: New SC Bench to Hear Compensation Case”. See HERE .

[8] See, Union Carbide’s Bhopal Website. See HERE .

[9] See, Civil Procedure – State Laws, Legal Information Institute, Cornell. See HERE .

[10]Civil Procedure Code, 1908, S.122.

[11] Mulla, The Code of Civil Procedure: Abridged (12th Edn.) p. 421.

[12] Consumer Protection Act, 2019, S. 2(5)(v).

[13] See, Restatement of Values of Judicial Life. See HERE .

[14] (2020) 7 SCC 1, 57.

[15] The draft of these rules cannot be found online as there is not even a website collating such efforts, though good effort has gone into creating these electronic evidence rules can be seen from this note on Centre for Development of Advanced Informatics (C-DAC) website: HERE .

[16] Federal Judicial Center, Manual for Complex Litigation, Fourth, 2004. See HERE

[17] The Judicial Conference of the United States Committee on Court Administration and Case Management, Civil Litigation Management Manual (2nd Edn.) 2010. See HERE .

[18] See, James F. Humphreys Complex Litigation Center, Guidelines and Best Practices In Class-Action Litigation, See: HERE .

[19] See, The Commercial Court Guide, (11th Edn.) 2022. See HERE .

[20] See, The Technology and Construction Court Guide, (2nd Edn.) 2005. See  HERE .

[21] See, The Intellectual Property Enterprise Court Guide, 2019. See HERE

[22] See, American Arbitration Association, Construction Discovery Best Practices. See HERE .

[23] See, American Arbitration Association’s Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes). See: HERE. JAMS Construction Arbitration Rules. See HERE . International Institute for Conflict Prevention & Resolution’s Rules for Expedited Arbitration of Construction Disputes. See HERE .

[24] See, ICC Arbitration Commission Report on Managing E-Document Production. HERE .

[25] Judicial Conference of the United States. See HERE . Note that this is very different from Indian judicial academies which are roughly comparable to the Federal Judicial Center (FJC) in United States that focuses on policy-making and training: HERE , though Indian judicial academies have no formal role in judicial policy-making. The FJC produces excellent research as seen Here

Experts CornerTariq Khan

For many years, alternative dispute resolution (ADR) has been used to describe arbitration, conciliation and mediation as alternatives to litigation. The idea behind calling these methods of dispute resolution “alternate”, is that litigation has been, and will always be the primary mode of dispute resolution. However, in the last one decade, we have seen a paradigm shift in this approach. Young lawyers, general counsel, micro, small and medium enterprises (MSMEs) as well as companies are moving away from protracted litigation and accepting ADR as primary modes of dispute resolution. Litigation is a time-consuming and costly affair. Pursuing a case in court may result in loss of time, efforts and money whereas resolving a dispute by ADR can be quicker and cheaper. Another reason why ADR gained popularity is perhaps the dissatisfaction created by the litigation process. However, it cannot be denied that formal adjudication system will always be there as there will always be certain disputes that can only be resolved through it. Barring such disputes, all other disputes that one can resolve without burdening the court system, can be efficaciously resolved through ADR.

 

Over the last decade, ADR has gained traction in India. Both legislative framework as well as judicial precedents have aimed at promoting ADR as a preferred mode of dispute resolution rather than a mere substitute or alternative to the formal judicial system. In particular, the Arbitration and Conciliation Act, 1996 (Arbitration Act) has been amended[1] time and again with the view of keeping at par with other legal regimes and making India an arbitration-friendly jurisdiction. This has been buttressed by the Indian judiciary which has also actively adopted and recommended a minimal intervention approach, such that confidence is instilled in the arbitral process, amongst parties.

 

Particularly, with the current arbitration regime in place in India, the arbitral process is party friendly, time bound and confidential. The courts are slow in granting anti-arbitration injunctions, interfering with foreign awards, and a challenge to an arbitral award is now available to a party on limited grounds. This has allowed parties to attain a final and binding decision in a shorter timeline as against long-drawn battles before judicial fora.

 

The global business community has reaped benefits of ADR, both for containment of disputes as well as quick resolution. Across various sectors, the growing trend now, particularly in relation to commercial contracts, is to opt for an arbitration clause or med-arb clause for dispute resolution to ensure access to justice in reduced time and cost and in an efficient and satisfactory manner.

 

While the course of arbitration in India has been flourishing, mediation in India has been slowly gaining recognition. Mr Justice N.V. Ramana, the Chief Justice of India, recently said that prescribing mediation as a mandatory first step for resolution of every allowable dispute will go a long way in promoting mediation[2].

 

The primary reason for slow growth of mediation in India was the lack of awareness and its acceptance as a mode of dispute resolution. Other reasons why mediation could not gain popularity include lack of domain experts and suitable infrastructure. Recently, the Mediation Bill, 2021 (Mediation Bill) has been introduced with the aim of promoting domestic and international mediation in India, including online mediation, and is currently pending before the Rajya Sabha.

 

In April 2022, the Ministry of Law and Justice, India, indicated that the cases pending before the Supreme Court of India are 70,154, before various High Courts are 58,90,726 and 4,09,85,490 before District and Subordinate Courts, as of March 2022[3]. Further, on 15-4-2022, the Chief Justice of India while addressing the inaugural session of Telangana State Judicial Officers Conference, 2022 said that the judiciary is overburdened.[4]

 

In view of this surmounting pendency, adopting ADR as a primary mode of dispute resolution, as opposed to a mere alternative, is now the need of the hour. This will also result in decongesting the court system and bring about much-needed relief to the judiciary, which is overburdened.

 


Legislative Framework and Other Initiatives


Section 89 of the Code of Civil Procedure 1908 (CPC) was introduced in 2002 with the objective of promoting non-judicial dispute resolution. Section 89 contemplates reference of a dispute to arbitration, conciliation, judicial settlement through Lok Adalat or mediation, where there exists an element of settlement in the opinion of the court.

 

In 2018, Section 12-A was introduced in the Commercial Courts Act, 2015, mandating mediation before a party can approach a commercial court with a suit. The exception to pre-litigation mediation is cases where urgent interim relief is being sought. Thereafter, the Commercial Courts (Pre-Institution Mediation and Settlement) Rules, 2018 were notified, which enumerate the manner in which the mediation proceedings would be conducted for reconciling and settling commercial disputes between the parties.

 

The Arbitration Act, from its inception, has endorsed a minimum interference approach. Recently, the judiciary has also strongly adopted a minimal intervention approach to encourage more parties to arbitrate. The key amendments introduced to the Arbitration Act in 2015 and 2019 are also in keeping with the objective of promoting arbitration as well the minimal interference approach, such that India can be transformed into a global hub for arbitration.

 

Before the 2015 Amendment, in relation to Section 34 proceedings, certain High Courts had the practice of allowing new evidence, documentary as well as oral, at the stage of challenge which was akin to a trial. With the amendment in 2015, this practice is now eliminated, and challenge proceedings are strictly summary in nature, requiring parties to establish a challenge based on the arbitral record filed before the Arbitral Tribunal.

 

The 2019 Amendment also provided for establishing an independent body, the Arbitration Council of India (ACI). ACI’s envisaged duties include promoting alternative dispute resolution, policy making, operation and maintenance of uniform professional standards, grading arbitral institutions and accrediting arbitrators.

 

Additionally, the real estate sector, recognising the benefits to parties of a quick and cost-effective resolution of disputes, has adopted conciliation as a mode of dispute resolution. In 2016, the Real Estate (Regulation and Development) Act, 2016 (RERA) was enacted with the aim of protecting homebuyers from unscrupulous real estate developers and to provide quick dispute resolution. RERA has established a Real Estate Regulatory Authority (Authority) in each State for regulation of the real estate sector, which also acts as an adjudicating body for dispute redressal. Section 32(g) of the RERA provides for measures to be taken by the Authority to facilitate amicable conciliation of disputes between the promoters and the allottees through dispute settlement forums comprising of representatives from consumers and promoters associations. In line with this provision, several States have set up conciliation forums.

 

The Mediation Bill seeks to set up a Mediation Council of India (MCI) to promote and regulate domestic and international mediation in India, including online mediation. The Mediation Bill contemplates pre-litigation mediation or a subsequent reference, at the request of the parties, at any stage of the proceeding before a forum. The mediation proceedings envisaged are time bound, to be completed within 180 days, which is further extendable with the consent of the parties by another 180 days. The mediation settlement agreement, being a culmination of the disputes, is envisaged to be final, binding and enforceable in the same manner as courts judgments.

 

The First Schedule of the Mediation Bill enlists the disputes or matters which are not fit for mediation. Further, the Second Schedule enumerates an extensive list of matters which cannot be subjected to mediation. In cases where the Government is a party, the reference is confined to commercial disputes. Although the provisions in the Mediation Bill suggest that these are indicative, the legislature has adopted a restrictive approach and has failed to appreciate that there is a need to make the mediation process more inclusive and that only certain categories of proceedings should be reserved for adjudication by the judicial system, as a matter of public policy. In this regard, the principles set out in the decision of the Supreme Court in Vidya Drolia v. Durga Trading Corpn.[5] on arbitrability of disputes can be a yardstick to determine whether disputes can be referred to mediation or not.

 

The advancement and adoption of technology, as well as the shift towards online dispute resolution, has resulted in popularisation of online mediation. Online mediation has the potential to revolutionise the justice-delivery system by promising simple and affordable justice for all[6]. This shift will likely depend on the legislative framework, which is ultimately adopted by India and steps taken for its enforcement.

 

In a step forward, the Law Department of the Government of Telangana has issued an order dated 17-3-2022 designating the International Arbitration and Mediation Center, Hyderabad (IAMC) as the arbitral or mediation institution (as the case may be) in cases where ministries, departments, public sector companies, or other entities controlled or managed by the Government of Telangana are a party and where the value of the dispute is more than Rs 3 crores. In relation to existing contracts where the contract value is Rs 10 crores or above, parties have been directed to consider amending the dispute resolution clause, in consultation with the other parties to the contract, to designate IAMC.

 


Recommendations


All stakeholders have a role to play to pave the way for ADR to become more seamless, time and cost-efficient, and as such, a preferred and complete system for accessing justice.

 

The non-intervention approach adopted and recommended time and again by the Supreme Court of India should be followed by High Courts as well as lower courts as a rule. In addition, an active role by courts to recognise ADR and encourage parties to mandatorily explore settlement through mediation, before litigation can proceed, could result in early resolution of cases that are fit for settlement.

 

The promptness with which arbitration-related litigation, which comes before a court, either before, during or after the conclusion of the arbitral proceedings, is disposed of by courts is also crucial to increase the efficacy of arbitration as a dispute resolution method.

 

Particularly, expeditious disposal of challenge proceedings under Section 34 of the Arbitration Act, which applies to arbitral proceedings where the legal or juridical seat of arbitration is India. Although, challenge proceedings are now summary in nature and time bound, delays are inevitable in view of an overburdened judiciary. In addition, an appeal lies from an order setting aside or refusing to set aside an arbitral award, under Section 37 of the Arbitration Act, making it a two-tier challenge. The legislature could consider doing away with a Section 37 appeal currently in place, in order to ensure that awards attain finality at the earliest and enforcement can proceed. Additionally, heavy costs should be imposed on litigants where the court finds that the challenge proceedings have simply been preferred as a delay tactic to stall the enforcement of an award.

 

The State Governments could take steps to support and promote institutional arbitration and mediation in a similar manner as the State of Telangana. Both development and promotion of institutional forums for resolution of disputes have the potential of converting India into a global hub for arbitration and mediation, like London and Singapore.

 

In addition, strengthening the pool of arbitrators and professionals conducting mediation proceedings to ensure effective dispute resolution, and in case of arbitration, to reduce the susceptibility of awards to legal challenges is also of significance.

 

Lastly, while there is recognition and public awareness amongst individuals in relation to arbitration as a mode of dispute resolution, the awareness and understanding of ADR as a whole system is lacking. The role of legal professionals, therefore, assumes relevance both for promoting ADR as well as advising on the non-judicial options available to parties.

 


Conclusion


A rapid paradigm shift is the need of the hour where stakeholders start accepting arbitration, conciliation and mediation as primary modes of dispute resolution (PDR). The journey from ADR to PDR is underway and with the efforts of the Supreme Court of India and the legislature, the gap between the two is diminishing. Whether arbitration, conciliation and mediation will become the primary mode of dispute resolution or not will depend on the implementation and enforcement of the existing framework. The implementation must be in line with the overall objective i.e. minimum judicial interference, meeting the interests of disputing parties, cost-effective and speedy justice. Moreover, apart from creating an appropriate regulatory framework for arbitration and mediation, promoting awareness amongst stakeholders is crucial. Further, developing capacities both in terms of infrastructure as well as professionals with the required skill set and specialisation for successfully administering ADR mechanisms for dispute resolution is also critical. The phrase alternative dispute resolution is going to stay but we hope that in times to come it will be used as a reference to litigation at least in commercial disputes.


† Registrar, International Arbitration and Mediation Centre.

†† Advocate.

[1] Arbitration and Conciliation (Amendment) Act, 2015; the Arbitration and Conciliation (Amendment) Act, 2019.

[2]Mediation for Everyone: Realising Mediation’s Potential in India, India-Singapore Mediation Summit, 2021.

[3]Government of India Ministry of Law and Justice, Answer to Unstarred Question No. 5042, Lok Sabha.

[4] See HERE .

[5] (2019) 20 SCC 406.

[6] Speech delivered by Chief Justice of India Shri N.V. Ramana at Mediation and Information Technology Conference, 9-4-2022.

Advani LawExperts Corner


Introduction


Over the years, smart contracts have played a significant role in transforming blockchain technology, enabling a decentralised system. The World Economic Forum, in its 2015 survey recognised that by 2025-2027, about 10% of the global GDP would be stored in blockchains, owing to its efficient attributes of data security management. By the means of smart contracts, fully automated legal obligations can be enforced without the involvement of third parties. Much like conventional contracts, smart contracts on the blockchain are susceptible to a variety of problems, including non-transactional disputes, off-chain governance issues, and on-chain disputes. An on-chain dispute resolution system is still in its infancy. It is said that an on-chain smart contract is contained in a self-executing code that automatically executes the terms of the parties’ agreements without the intervention of a third party, leaving little space for human mistakes or disagreement. Smart contracts, on the other hand, do not eliminate the possibility of a disagreement. Thus, it becomes imperative to implement a dispute resolution mechanism governing digital relationships set out in such smart contracts.

 


Understanding Blockchain and Smart Contracts


According to the chamber of digital commerce, a smart contract is an instrument that executes underlying contractual terms. Smart contracts themselves are not the legal agreement — the agreement between the two parties is the contract, and the smart contract program simply executes the agreed-upon actions.[1] Smart contracts are like real contracts, but they are digital and are stored and executed on a blockchain. Blockchain is a particular type of distributed ledger technology (DLT), a way of recording and sharing data across multiple data stores where each has the same data records and is collectively maintained and controlled by a distributed network of computer servers called nodes.[2] A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract allowing the performance of credible, trackable, and irreversible transactions without third parties. The contractual clauses are embedded as computer code in the blockchain. Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without an intermediary’s involvement or time loss.[3] Thus, the algorithms work something similar to an “artificial agent” in the context of the formation of a contract.


Legal Recognition of Smart Contracts


The prevalence of the following provisions conventions suggests widespread acceptance of contracts that are concluded and enforced digitally.

  • Article 2.1.1 of the UNIDROIT Principles of International Commercial Contracts, 2016 covers contracts involving automated performance arrangements, where parties agree on self-executing electronic platforms without the involvement of a natural person to ensure performance. [4]
  • Article 11 of the UNCITRAL Model Law on E-Commerce, 1996 states that an offer and the acceptance of an offer may be expressed by means of data messages, which shall not be denied legal validity and enforceability. Further, Article 2 clarifies that these “data messages” include not only communication exchanged electronically but also include computer-generated records that are not intended for communication.[5]
  • The UNCITRAL Model Law on Electronic Transferable Records, 2017 explicitly accommodated distributed ledger technology in its explanatory notes.[6]
  • The UNCITRAL Convention on Electronic Communications in International Contracts (2007 Convention) provides legal recognition to on-chain arbitrations. Articles 6 and 18 allow electronic data and transactions in arbitral proceedings.[7]
  • In the United States, many States have amended their versions of the Uniform Electronic Transactions Act (UETA) to address blockchain and smart contracts.[8]
  • On 18-11-2019, UK Jurisdictional Taskforce published a legal statement expressing the view that smart contracts were contracts under English law.[9]
  • On 28-5-2021, for the first time in blockchain arbitration history, Mexican courts enforced an arbitral award relying on a blockchain arbitration protocol (blockchain arbitral award). [10]
  • Recently, the High Court of England and Wales in Tulip Trading Ltd. Bitcoin Assn. for BSV[11] while considering whether security for costs could be satisfied by a party providing cryptocurrency refused the Bitcoin offered since it did not meet the required standards for security, however, allowed for other more sophisticated cryptocurrencies can be accepted at a later date.

Out of the available alternative dispute resolution mechanisms available, arbitration is the most accurate and optimal dispute resolution mechanism. The blockchain arbitration can be bifurcated into “on-chain” and “off-chain”.

  • On-chain arbitration involves the use of a smart contract in a classic dispute resolution mechanism.
  • Off-chain arbitration involves automatic recognition of awards but with automation of certain elements of the procedure before the Arbitral Tribunal.

Dispute Resolution Mechanism in Smart Contracts: Blockchain Arbitration


The on-chain arbitration process can be a desirable option from an efficiency perspective. A typical on-chain arbitration process is well envisioned in the Digital Dispute Resolution Rules (the “Digital DR Rules”)[12] published on 22-4-2021 after extensive public and private consultation with lawyers, technical experts and financial services and commercial parties by the UK Jurisdictional Taskforce (UKJT), that are to be used for and incorporated into on-chain digital relationships and smart contracts.

 

The Digital DR Rules define a smart contract as a digital asset. To incorporate these rules into a smart contract on a blockchain, the text “any dispute shall be resolved in accordance with UKJT Digital Dispute Resolution Rules” has to be included in an on-chain contract. The Digital DR Rules allow these words to be incorporated into codes. Since a blockchain is programmed into codes, these words can be incorporated intothe encoded form. Under the remit of the Digital DR Rules, disputes relating to smart contracts can be resolved without the interference of the courts. Disputes under the Digital DR Rules can be solved via an automatic dispute resolution process. Alternatively, such disputes can also be submitted to an arbitrator or expert determination.

 

  • Automatic dispute resolution process: The rules provide an idiosyncratic automated dispute resolution mechanism that allows the parties to choose a person, panel, or artificial intelligence agent to decide disputes automatically. The decision is then immediately applied to the digital asset system i.e. the platform where the digital asset exists. Rule 8 makes the outcome of the automatic dispute resolution process legally binding on the parties.
  • Submission to an arbitrator: Alternatively, any dispute between parties arising out of the relevant contract/digital asset that was not subject to an automatic dispute resolution process can be presented to an arbitrator. The procedure for commencement, appointment, and submission is quite similar to the regular arbitration procedure. The rules allow arbitrators to use a private key to implement their decision directly on the blockchain.

Recently in the fourth edition of the International Conference on Arbitration in the Era of Globalisation[13] held in Dubai, Justice D.Y. Chandrachud, Judge of the Supreme Court of India made reference to smart contracts in his speech to demonstrate the technological advancements in the sphere of commercial transactions and identified arbitration as the means to resolve disputes relating to smart contracts.

One of the most significant advantages of blockchain arbitration is that it removes human intervention, allowing for quicker and more cost-effective dispute settlement. On the blockchain, the proper examination of evidence may be done online, leaving less room for facts to be tampered with or evidence to be manipulated. However, smart contracts and blockchain arbitration, while gaining traction among governments and experts throughout the world, are still in their early stages of development and would require additional legislation to become a viable option for dispute settlement. Privacy concerns and the enforceability of smart awards continue to be a source of concern. Because blockchain arbitration is a component of technical evolution that allows artificial intelligence to generate self-enforcing decisions, it is still solar systems apart from being used in countries going through development.


† Managing Partner Advani Law LLP.
†† Senior Partner Advani Law LLP.
††† Associate Advani Law LLP.

[1] “Why Smart Contracts are Valid under Existing Law and do not Require Additional Authorization to be Enforceable”, Chamber of Digital Commerce, January 2018, <HERE>, accessed on 18-4-2022.

[2] Niki Wiles, The Radical Potential of Blockchain Technology, 6-6-2015, <HERE >.

[3] What are Smart Contracts on Blockchain?, (IBM), <HERE> accessed 10-4-2022.

[4] UNIDROIT Principles of International Commercial Contracts 2016, Art. 2.1.1, <HERE>.

[5] UNICITRAL Model Law Model Law on E-Commerce (adopted 21-6-1985), Art. 11, <HERE >.

[6] UNICITRAL Model Law on Electronic Transferable Records (adopted on 13-7-2017 by UNCITRAL), Art. 1, (Para 18, P. 23), <HERE>.

[7] United Nations Convention on the Use of Electronic Communications in International Contracts, P. 5, <HERE >.

[8] Uniform Electronic Transactions Act (UETA) adopted in 1999.

[9] UK Jurisdiction Taskforce, “Legal Statement on Cryptoassets and Smart Contracts”, November 2019, <HERE >.

[10] Maxime Chevalier, “Arbitration Tech Toolbox: Is a Mexican Court Decision the First Stone to Bridging the Blockchain Arbitral Order with National Legal Orders?”, Kluwer Arbitration Blog, 4-3-2022, <HERE > accessed on 18-4-2022.

[11] 2022 EWHC 141 (Ch).

[12] Digital Dispute Resolution Rules, 2021<HERE >.

[13] Dr D.Y. Chandrachud, International Conference: Arbitration in the Era of Globalization (4th Edn., Dubai, 19-3-2022).

Experts CornerPramod Rao

An explainer of sanctions, its brief history, issues in global, regional and country level sanctions and complying with sanctions regime, and what India can think of and do about sanctions strategically.

Even as Russia has invaded Ukraine, sanctions have been imposed by many countries — the United States, Canada, European Union, the United Kingdom – either on individuals (including President Putin) or on dealings with Russia.

 

What are Sanctions?

Simply expressed, sanctions are akin to boycotts. Sanctions can also be described as trade embargoes or bans on dealing in specific goods, commodities or services with the sanctioned individuals, entities or nation State.

In case of boycott, one refrains from (or is urged to refrain from) buying or dealing with someone being subjected to the boycott.

Similarly, when nation States or multilateral organisations (such as the United Nations) impose sanctions, such nation States or organisations are in essence asking their own nationals, members or those subject to its jurisdiction to refrain from dealing with the notified individuals or entities or the proscribed nation State.

 

Historic evolution, the League of Nations and the United Nations

Sanctions can trace their origins to naval blockades1 when countries were at war or to even earlier examples of castles or forts being under siege. Such a siege or blockade prevented the delivery of supplies to or the exports[1] from the nation State (or castle or fort) that was subjected to a siege or blockade.

Sieges or blockades could coerce or pressure the nation State or the castle or forts into surrender even as it would inevitably run out of essential supplies including food. Such siege or blockades also meant huge tolls and adverse impact on the civilian population. Hence, where a war could have only placed the soldiers in harm’s way, siege or blockade escalated the costs and impact to a broader swath of society[2].

 

Blockades were deployed in World War 1 including by the allied and associated powers. After the great war, with the formation of the League of Nations, and a desire to ensure peaceable resolution of disputes among nation States (including by means of arbitration, judicial settlement, enquiry, settle by means of diplomacy or being referred to the Council for its determination) and hence abiding by rule of law, also meant that if there was non-adherence, there could be consequences. One such consequence was envisaged in Article 16 of the Covenants of the League of Nations[3]. It elevated blockades to the level of financial, economic and special measures against a warring nation or one which did not adhere to the rule of law.

 

Nicholas Mulder in his book The Economic Weapon: The Rise of Sanctions as a Tool of Modern War examines this particular period and logic, rationale and theoretical underpinnings of sanctions[4] and is highly recommended for those interested in the subject. He also observed: “When the victors of World War I incorporated the economic weapon into Article 16 of the Covenant of the League of Nations, they transformed it from a wartime to a peacetime institution.”

 

A further observation that he makes would appeal to the legal community: “The history of sanctions is a prime example of how legal institutions shaped material outcomes and affected the tissue of globalisation and the everyday lives of civilians. Law was no mere abstraction or scrap of paper but a core domain for the elaboration of statecraft and strategy.”

The league did apply sanctions in many situations, and which appears to have bolstered the idea of sanctions in general.

 

It is no surprise then that the United Nations Charter also features the ability to adopt measures and actions with respect to threats to peace, breaches of peace or for acts of aggression under Chapter VII of the Charter[5] (and specifically, Article 41).

 

It is noteworthy that from its inception until 1990[6], the United Nations had imposed sanctions only twice – in form of voluntary sanctions on the apartheid regimes in South Africa in 1963 and in Southern Rhodesia in 1965, and which became mandatory in 1968 for Rhodesia and in 1977 for South Africa.

 

The pace of imposing sanctions increased in the immediate aftermath of the Cold War. To date[7], the United Nations Security Council established 30 sanctions regimes in total, concerning: Southern Rhodesia, South Africa, the former Yugoslavia (2), Haiti, Angola, Liberia (3), Eritrea/Ethiopia[8], Rwanda, Sierra Leone, Côte d’Ivoire, Iran, Somalia/Eritrea, ISIL (Da’esh) and Al-Qaida, Iraq (2), DRC, Sudan, Lebanon, DPRK, Libya (2), the Taliban, Guinea-Bissau, CAR, Yemen, South Sudan and Mali. As on date, there are fourteen active regimes – with the oldest concerning Somalia (established in 1992) and the newest concerning Mali.

 

Limitations of UN sanctions

Imposition of sanctions by the United Nations takes place in certain defined situations (itself an expanded set of situations from what the League of Nations contemplated).

The United Nations has applied sanctions to:

  • support peaceful transitions;
  • deter non-constitutional changes;
  • constrain terrorism;
  • protect human rights; and
  • promote non-proliferation.

 

The measures have ranged from comprehensive economic and trade sanctions to more targeted measures such as arms embargoes, travel bans, and financial or commodity restrictions. Each set of sanctions are administered by a sanctions committee chaired by a non-permanent member of the Security Council. Member States are expected to give full force and effect to the sanctions regime.

However, imposition of sanctions itself requires unanimity among the permanent members of the Security Council of the United Nations viz. China, France, Russia, the UK and the US.

 

If any of these countries vetos or blocks the placing of sanctions, then no UN sanctions can be imposed. The reasons for a veto could be geopolitical conflict or ideological differences or it plainly being against the interests of the concerned permanent member.

It also means that none of the permanent members of the Security Council would ever be in a position of facing the United Nations sanctions no matter the provocation.

 

Sanctions imposed by regional groupings or countries

Sanctions can also be placed at a regional grouping level (e.g. by the European Union) or by individual countries (the UK or the US). This is especially utilised when no UN sanctions can be imposed due to opposition by any permanent member of the Security Council, or when the issue is of particular concern to that regional grouping or country. These sanctions can also supplement the sanctions if any imposed by the United Nations.

 

Such measures can range from comprehensive economic and trade embargoes to restrictions on exports or imports of arms or specified commodities, or financial dealings or logistics support, or any dealings with notified entities or individuals.

 

These apply to those that are the subject of such regional groupings or countries. The subjects themselves could be:

  • Citizens or permanent residents of the country, wherever located.
  • Individuals physically located in that country (irrespective of their nationality).
  • Companies incorporated in the country, or having offices, operations or other nexus with the country.
  • Transactions through the country’s financial system (including transactions in the country’s currency).

 

Consider especially that the US does utilise sanctions as part of its statecraft and strategy, and combined with the fact of the US dollar being a reserve currency as well used the most in international commercial transactions (and hence clearing and settlement necessarily involves US banks), sanctions imposed by the US can have far-reaching consequences.

 

Complying with sanctions

Member States of the UN have enabling legal frameworks to ensure compliance by their country, citizenry or corporates with the sanctions imposed by the UN. India does so vide the United Nations (Security Council) Act, 1947, orders issued thereunder, the Unlawful Activities (Prevention) Act, 1967 and to a lesser extent, vide notifications under the Foreign Trade (Development and Regulation) Act, 1992 and Foreign Exchange Management Act, 1999.

Member States by and large ensure compliance by harnessing the banking and payment systems, and logistics providers (shipping lines, airlines).

 

Logically, every (international) commercial transaction requires payment or settlement system being harnessed, and hence requiring the banking system to scrutinise and block and report the transactions with proscribed countries, entities, persons or commodities is an easy call. Where there are physical goods involved, then logistics providers become a strong staging ground for ensuring non-shipment to or non-delivery from a sanctioned country, entity, person or commodity.

 

Sanctions that are may also have exceptions that are specified. For instance, delivery of food and medicines, and receipt of payment for the same, or export/import basis waivers, special licence or permit issued by the agency administering the sanctions (issued especially to comply with pre-existing obligations) could be exceptions to the sanctions imposed.

 

Equally, when sanctions are imposed by individual countries or regional groupings (and not the UN), there can be different choices and consequences. For instance, completely avoiding involvement of any individual or corporate who has nexus with the country imposing the sanctions for conducting the transactions or utilising a different currency or mode of payment or settlement (as opposed to using the currency of the country which imposed the sanctions) for the transactions would bypass the sanctions without violating the same[9].

 

In an earlier not so recent past, on account of the historic trade ties between India and Iran and India’s oil imports from Iran, even as Iran faced US sanctions, India used Euros (instead of US dollars) for settling the payment obligations[10]. When the EU also imposed sanctions on Iran, India even considered utilising gold as an intermediate solution for making payments[11] and finally, settled upon instituting a rupee-rial trade, whereby India would pay for the Iranian imports in rupees and Iran could spend the rupees in India to make necessary purchases[12]. The US/EU sanctions also meant that no bank having operations in the US or EU could be engaged in the Indo-Iran trade transactions.

 

Similar approaches or workarounds can be expected to be instituted when India differs with the sanctions placed by regional groupings or individual countries, including in respect of the Russian Federation (as arising from its action in Crimea and now in Ukraine).

A simple manner to ascertain the applicability of sanctions is to imagine a venn diagram:

  • If the citizen or the corporate has overlap of interest with the country imposing the sanctions and the country facing the sanctions, she/it needs to abide by the sanctions.
  • If the venn diagram has no overlap, then the sanctions may not apply[13].

 

What is different this time?

Russia faced limited US sanctions for its conquest of Crimea[14]. In respect of the conflict of 2022 involving Ukraine, Russia faces far more stronger sanctions[15].

Certain unprecedented measures merit a callout:

  • Coordinated and swift action by major countries including the US, UK, EU, Japan, Australia and Canada[16].
    • The coordinated action done so speedily speaks to the angst at the actions of Russia.
  • Disconnecting certain Russian and Belarusian Banks (and their subsidiaries) from Society for Worlwide Interbank Financial Telecommunication (SWIFT)[17].
    • SWIFT, a Belgium based global cooperative of banks and financial institutions, operates a secure financial messaging system, and is critical for cross-border interbank settlements and which supports cross-border trade.
  • Prohibition on the financing of the Russian Government and Central Bank as well as banning all those transactions related to the management of the Central Bank’s reserves and assets[18] including its gold reserves[19].
    • A Central Bank facing sanctions is unprecedented.

 

In an interconnected, globalised world, where cross-border trade and finance are a reality, these measures are indeed quite strong.

These measures could also be a very strong message against adventurism by any other country coveting territory or sovereignty of another country.

 

Considering sanctions strategically

There needs to be a recognition that sanctions, whether imposed by the United Nations, a regional grouping such as the EU or by individual countries such as the US is a reality and here to stay. If at all, the last century has elevated the significance of sanctions in statecraft and its implications will be felt far more so in the highly globalised and interconnected and highly interdependent world.

Considering sanctions strategically within India

India appears to only have a legislative framework to implement the UN Sanctions, and which also appears to be only against terrorist organisations (observable in terms of linkage and usage of the Unlawful Activities Prevention Act). It also utilises the framework under the Foreign Trade (Development and Regulation) Act or the Foreign Exchange Management Act infrequently. Hence, implementation via the foreign trade policy[20] is sketchy.

Accordingly, there is a need to develop a specific legislation that outlines how and to what extent Indian citizens, residents and corporates would comply with the sanctions process. This would serve to both inform and also reduce or eliminate any angst, confusion or doubt that may arise when measures for implementing sanctions are undertaken.

 

The legislation should also deal with insulating Indian citizens, residents and corporations when sanctions are placed by regional groupings or countries against other countries and counterparties in such countries. This should cover a scenario when India supports such sanctions and a scenario when India does not support or endorse such sanctions. Expressing support or lack of support is a sovereign entitlement of each nation, and which takes into account its own interests, that of its trade partners or the ancient, historic or strategic partners, the public reactions and so on.

 

In the latter scenario, as observed in a major Indian law firm’s blog post[21]:

“India may consider protecting its companies by using countermeasures such as blocking statutes, non-recognition of foreign judgments, clawback rights, reporting requirements – which all aim at preventing citizens or national entities from complying with the sanctions. A blocking statute is a mechanism used by countries to reduce or mitigate the impact of sanctions on their citizens and businesses. It essentially includes passing of a local law that makes it illegal for any national to abide by the terms of the sanction imposed.”

Such measures exist in very many countries, including the US.

 

Finally in such a legislation, given the crucial role that the sanctions regime plays in international geopolitics and diplomacy, the legislation should also empower the Indian Government to institute sanctions, embargoes or bans, and constitute a due administrative machinery to implement such sanctions, modeled on the US’s Office of Foreign Assets Control (OFAC). Such an office can undertake due enforcement including imposing civil penalties or criminal prosecutions depending on the gravity of the breach.

 

Many will recall the reaction of the Indian public to certain social media messages by MNC operating in Pakistan, which resulted in official protests being expressed by India to Korea (as many of such MNCs were Korean in origin)[22]. This was merely prompted by social media messages that were deemed inappropriate. Consider situations when India has armed conflict or serious hostilities with a country, and an MNC supports or contributes to the war effort of such a hostile nation (including providing it war supplies or war materials). A legislative measure that such an MNC can face sanctions, will ensure curbing or curtailing of any support or contribution to the war efforts of such a nation upfront, especially if it wants to continue to do business with India or in India.

 

Finally, in case of situations where the UN Security Council refuses to act, or cannot act due to any permanent member vetoing or blocking imposition of sanctions, and India desires to act, such a legislation would be of value. Similarly, if India is in an armed conflict with any nation, it could institute sanctions to ensure that the warring nation faces economic and trade pressures by common counterparties suspending or withdrawing from such nations.

Considering Sanctions Strategically Globally

On a broader perspective, India and other like thinking nations should seek that SWIFT as well as other global payments infrastructure (such as VISA, MasterCard) are immunised from being coerced or pressured by individual countries or regional groupings or being subject to regional or local level sanctions. Similar protections need to extend to organisations in the global logistics and telecommunications sector.

 

Similarly, imposing sanctions on a Central Bank can also spell breakdown of trust amongst nations as their foreign exchange reserves and assets become hostage to ebbs and flows of international geopolitics and diplomacy. It could contribute to countries becoming more insular and insistent on localisation of assets and reserves, and will reduce international peace and cooperation.

 

Imposition of sanctions for such organisations should be only when the Security Council of the United Nations so authorises the same. These global payments, logistics and telecommunications infrastructure and the Central Banks underpin international trade and commerce in a major way, and their weaponisation (abuse or misuse) at a regional or local level should be curbed or rolled back.

 

Finally, and more for the international scholars and diplomats, is considering a deep reform of the Security Council[23] in finding a balance between the veto powers of the permanent members’ and holding permanent members accountable when their own actions require a coordinated response.


Pramod Rao, Group General Counsel at ICICI Bank. Views are personal.

1 See HERE

[1] Critical to earn foreign exchange to pay for essential supplies and imports.

[2] See HERE

[3] See HERE .

[4] See HERE .

[5] See HERE .

[6] See HERE.

[7] See HERE .

[8] The shortest sanctions regime to date, concerning Eritrea/Ethiopia, was implemented from 17-5-2000 to 15-5-2001, id.

[9] See HERE  and See HERE

[10] See HERE

[11] See HERE

[12] See HERE and See HERE

[13] Terms and conditions apply: do study the fine print of the sanctions, and obtain definitive legal advise.

[14] There are four primary prohibitions vide US sanctions related to Crimea region:

  • A prohibition against new investment in the Crimea region of Ukraine by a United States person, wherever located.
  • A prohibition against the importation into the United States, directly or indirectly, of any goods, services, or technology from the Crimea region of Ukraine.
  • A prohibition against the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, services, or technology to the Crimea region of Ukraine.
  • A prohibition against any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a United States person or within the United States.

Cited HERE

[15] See HERE

[16] See HERE

[17] See HERE

[18] See HERE

[19] See HERE

[20] See HERE

[21] See HERE

[22] See HERE

[23] Which should extend to expanding the Security Council permanent members (and honouring India’s long-standing claim).

Advani LawExperts Corner

  1. Introduction

The internationalisation of sports has resulted in making it a huge industry and has also, owing to globalisation and commercialisation of sports in general, led to the integration of sports and law. The sports industry has witnessed huge growth in a short span of time, which has completely transformed the nature of the industry as a whole and has led it to become a more commercialised set-up rather than being considered only a leisure activity, especially owing to the exorbitant amounts of monies involved in a few of the major sports. As a result, it is no surprise that the industry produces a large number of legal disputes which require speedy adjudication and well-settled bodies to deal with the specificity of the subject-matter. Like any other sector depending largely on arbitrations as a means of resolving disputes, sports arbitrations entail a method of resolving sports-related disputes by submitting them before a person/tribunal for final and binding decisions. The only difference between sports arbitrations and any other arbitrations is merely the subject-matter of the former. Although procedurally all arbitrations are the same, sports arbitrations do have their unique set of challenges that make them different from other forms of arbitrations. While sports arbitrations offer the same advantages as arbitrations in commercial disputes like a neutral setting, flexible procedures and specialised arbitrators; however, sports arbitrations do not conform to the New York Convention since the governing bodies have their internal rules and regulations in place to deal with the disputes that arise in the industry. Hence, the enforcement of awards through sports arbitrations is different from those arising through commercial or investment arbitrations.

The following paragraphs would trace the history of the development of jurisprudence for sports arbitration and the creation of the Court of Arbitration for Sports (CAS) in Switzerland for adjudication of sports-related disputes. Additionally, the focus would also be given to the development of mechanisms of sports arbitrations in India and its ratification of foreign principles in its municipal jurisdiction.

Development of Court of Arbitration for Sports and significance of Switzerland in sports arbitration

Switzerland is home to a number of international sports organisations. International Olympic Committee (IOC), the International Council of Arbitration for Sport (ICAS) and the CAS are all headquartered in Lausanne, Switzerland. The presence of such important sports organisations/authorities has led to Switzerland becoming the hub for adjudication of sports arbitration globally. Once read in detail, Swiss law is extremely flexible, which ultimately allows potential litigants a significant level of control and flexibility in the entire process of dispute resolution.[1]

The CAS was a result of the efforts of the President of IOC in 1981, Juan Antonio Samaranch, who recognised the requirement of such an independent adjudicating body, which would be understood to take up the role of “the Supreme Court of world sport”. In 1982, at an IOC meeting, late Judge Kéba Mbaye, who was acting as a Judge in the International Court of Justice was asked to chair a working party with the aim to create statutes of a sports dispute resolution body which would be known as the “Court of Arbitration for Sports”. It was in 1983 that IOC officially ratified the statutes of the CAS which came into force on 30-6-1984 and CAS began its operation.[2]

The CAS witnessed several reforms and revisions in its functioning in 1994. Since the institution of the body, the IOC has held a great degree of control in the working of CAS. In order to allow the CAS to work distinctively from the IOC, the International Council of Arbitration for Sports (ICAS) was established solely to deal with the management and operation of CAS. One of the primary functions of the ICAS was to ensure that CAS functions as an independent body and overlooks its administration, financing and overall running of the organisation.[3]

Working of Court of Arbitration for Sports

Arbitration, as a dispute resolution process, has been developed to tackle the unnecessarily long and stretched court proceedings and provide for a quicker and more efficient mode of dispute resolution. Even though all forms of arbitrations are inherently supposed to be a quicker means of dispute resolution, in sports arbitrations, this requirement is proliferated. Given the nature of the industry involved, it becomes essential that the decision to the disputed point of question is provided at the earliest opportunity to ensure that the even runs as per schedule. In order to ensure that decisions are pronounced in a timely manner, ICAS established an ad hoc division in 1996 which was given the responsibility to resolve disputes arising from the Olympic Games in Atlanta within twenty-four hours. Since the ad hoc division proved to be a huge success, similar divisions were set up for all succeeding Olympic events thereafter.[4] Furthermore, to help aid and quicken the entire resolution process in sports arbitrations, arbitrators hold a more active function in the entire procedure as compared to commercial and investment arbitrations. However, there are certain rules and regulations that the parties cannot circumvent. This includes the strict liability rule under the anti-doping regulations wherein the sports persons are instantly disqualified and abstained from getting any medals or prizes through the event concerned. In Alain Baxter v. International Olympic Committee,[5] a British skier was disqualified from the Alpine Skiing Slalom even at the Salt Lake City Olympics for having tested positive for a prohibited substance under the Olympic Movement Anti-Doping Code. Appellant suffered from chronic nasal congestion for which he used a non-prescription Vicks vapour inhaler to manage his symptoms. However, the version of the drug present in the US contained certain prohibited substances which the appellant was unaware about. The panel found, in line with the previous CAS rulings, that the appellant is strictly responsible for the substances they place in their body, and for the purposes of disqualification neither intent nor negligence needs to be proven. Another rule that the parties cannot derogate from includes that all the arbitrations before CAS are seated in Lausanne, Switzerland, including the cases coming through ad hoc divisions. In a way, this adds to the swift nature of the entire process since it eliminates any scope of debate between the parties over the question of competent jurisdiction presiding in an arbitration.[6]

To guarantee expertise on the panels adjudicating upon the disputes, CAS maintains a closed list of a group of arbitrators from which the parties are required to appoint arbitrators for their disputes. CAS arbitrators are required to undergo appropriate legal training which involves proficiency with respect to sports law and/or international arbitrations and a good knowledge of sports in general. In 2003, this rule was challenged before the Swiss Federal Tribunal where it was contented that the parties’ freedom to choose their arbitrator is curtailed and they should not be bound by CAS’s closed list of arbitrators. However, the Tribunal rejected this challenge establishing that the rule was justified by the need for sports-specific legal expertise for timely resolution of disputes and to ensure consistency arising through the decisions given by CAS.[7]

 

Another important feature of arbitrations before the CAS includes the transparent nature of the proceedings. In comparison to other forms of arbitrations, CAS is comparatively more transparent when it comes to releasing their awards. Despite a certain level of transparency in their proceedings, CAS arbitrators are bound by a duty of confidentiality which refrains them from disclosing any facts to a third party. If the arbitrator fails to abide by this duty, it may lead to cancellation of their empanelment.[8] Other than the responsibility of the arbitrator, rules for publication of awards are different depending upon whether the proceedings are initiated in the ordinary or appeals division. While ordinary proceedings are confidential and none of the stakeholders are allowed to disclose any information to the non-concerned party without prior permission from CAS and an agreement between the parties to disclose the award publicly, the appeals division works very differently and has the opposite principles attached to it. As a rule, the awards passed from the appeals division are published for the general public, unless otherwise agreed by the parties.[9]

Authority of awards passed by the Court of Arbitration for Sports

CAS awards do not carry a binding authority with them, and the arbitrators are free to deviate from the rulings previously given while they adjudicate upon a dispute. However, CAS panels often refer to previous decisions for persuasive guidance or to make a different ruling by distinguishing cases upon facts. This has led to the harmonisation of the rulings given by CAS even though there is no binding authority that the awards carry. Nevertheless, given that the closed list of arbitrators that CAS consists of arbitrators that belong to different legal backgrounds, coupled with a lack of institutional scrutiny of the awards being passed, there is always a certain degree of uncertainty present before the award is rendered by the Tribunal.

Thus, while CAS has created an organised structure for sports industry, there are certain aspects that still need to be developed better in order to ensure that the rulings remain consistent, and the participants are provided with a fair platform for the resolution of disputes.

Sports Arbitration in India

The sporting industry and the horizon of sports entertainment have had a significant boom in the past decade with a surge in viewership and investment thanks to multiple sporting leagues. With this surge has come a rising demand for a conducive infrastructure for dispute resolution for resolving sports disputes. Sports competitions and tournaments have acted as a platform for national recognition on the horizon of global politics alongside acting as a source of income for the economy. The need for utilising the same was realised by India years after independence. This led to a mirage of developments towards developing an organised structure for the sports community. Parallel to the developments happening globally, India also witnessed their initial developments in the field of sports.

Matters relating to sports, development or otherwise, come under the purview of the State Government as per Entry 33 of the State List under the Constitution of India. However, with respect to issues of international sports, it is the Union Government that has the responsibility of enacting laws as per Entry 10 of List 1 of the Constitution. Despite the State and Central Government having the responsibility to control the developments happening in the country with respect the sports industry, there are many private bodies that take up this responsibility in practice. The concern arises when there exists ambiguity in accountability of functioning of bodies that work independently of the Governments i.e. when the bodies that hold the primary power to regulate and sway the events that may take place in the sports community are privately functioning bodies,  for e.g. the Board of Control for Cricket in India (BCCI), which is the self-governing body in nature and would not fall under the definition of the State, thus escaping the statutory accountability that comes with the same, for example, the enforcement of Article 12 of the Constitution. Thus, having an entity created by the State, specifically catering to the intricacies of the needs of an effective dispute resolution in the field of sports, is integral. This drawback is overcome by the establishment of the Sports Arbitration Centre of India (SACI), which has been further elaborated on in the following paragraphs.

Following the events of the Asian Games in 1982, a need for development in the field of sports and education was realised. The year 1984 has been marked as the year of the creation of the Sports Authority of India (SAI), which is an autonomous registered society. This was followed by the creation of a National Sports Policy in 1984, the first milestone in the development being aimed for in the country. It was an amalgamation of all aspirations and ideals in furthering the Indian Sports Community. It could be observed in the trends that there did not exist an active inclination and interest within the nation towards developing and pursuing sports activities as a skill. Thus, the policy largely focused on promoting sports infrastructure and situating physical education as a part of school curriculums.[10] However, the policy did not focus enough to create a more organised and equipped environment with a formal set of rules, along with institutional bodies to enforce the same.

Upon the lack of success of the National Sports Policy of 1984, a new National Sports Policy was envisaged and created in 2001. It was a joint effort initiated by the State and Central Government in consonance with the Olympic Association and National Sports Federation and their primary objective of the policy was to further excellence in sports events internationally along with the “broad-basing of sports”.[11] It still retained a focus on amalgamating physical education within the existing academic curriculum. The policy placed the responsibility of enforcement on the Central and State Governments to provide them with appropriate powers to institute legislation,  which constituted a hurdle for effective implementation of the rules.

In furtherance to these efforts, the Indian Court of Arbitration for Sports (ICAS) was set up in 2011 with Dr A.R. Lakshmanan at the helm as Chairman.[12] ICAS was one of India’s first concrete steps toward laying the groundwork for having a robust dispute resolution mechanism specifically catering to the nuances of issues involved in sport. The court was centred around the principle of effective and speedy resolution of sports disputes keeping in mind the limited time span that a sportsperson enjoys during their career in sport.

Another major step in the evolution of sports regulations guidelines concerning safeguarding the interests of sportspersons and provision of effective grievance redressal system in the Constitution of National Sports Federations were brought forth. In the aftermath of Sushil Kumar v. Union of India,[13] before the High Court of Delhi in 2016, the Youth Affairs and Sports Ministry issued a notification through which they laid down guidelines with respect to dispute resolution in the area of sports. The guidelines titled, “Safeguarding the Interests of Sportspersons and Provision of Effective Grievance Redressal System in the Constitution of National Sports Federations”, emphasised two major points that are:

  1. The establishment of a transparent, free and fair grievance redressal system aimed to protect the interests of the persons involved in sports.
  2. Directed all sports federations to include a clause for appealing to the Court of Arbitration of Sports in their contracts and their Constitutions to address those cases where the sportsperson is unhappy with the ruling made by the sports association/federation. Directing the Sports Federations to include within their Constitution and their contracts a clause to appeal to the Court of Arbitration of Sports in case they are aggrieved by any decision or ruling of the federation/association.[14]

 

At present most sporting disputes in India are attempted to be resolved through the constitution of an internal commission typically appointed by the Sports Authority/Federation incharge of the sport in India or the State in question.  Failing the commission route, disputes usually go through litigation in either the  Supreme Court or the respective High Court.[15] There is a salient need for a specialised dispute resolution mechanism for disputes in sports and the sporting industry. To tackle these issues head-on there have been a plethora of suggestions made by the Law Commission of India primarily centred around the prospective setting up of a practice-friendly and modern law to govern the settlement of disputes in the field and the set up of a specialised body for Sports Arbitration in India.

To address this lacuna, the Sports Arbitration Centre of India was founded in 2021. Sports Arbitration Centre of India (SACI) was inaugurated by Minister of Law and Justice, Kiren Rijiju in September 2021 in Ahmedabad, Gujarat to serve as an independent body to fast track disputes in the sports sector and serve as a mechanism to redress issues related to sports.[16] The SACI will be promoted by Ahmedabad based SE TransStadia Pvt. Ltd. and all legal backing will be provided by the Ministry of Law and Justice. The SACI will have a far-reaching impact on the sports sector of the country by creating a reputation and establishing credibility for itself through the provision to settle disputes and other issues and concerns of the sports sector in a fast, transparent and very accountable manner.

It answers to the need for an independent body specifically catering to the intricate needs of the up and coming era of sports within a country by providing a neutral platform that’s more efficient and caters only to dispute matters within the sports community. Since the centre has been set up by the Ministry of Law and Justice, and in a way it is an extension of the same, providing a level of accountability that remained ambiguous before this venture. While there have been multiple ventures in the past in India, aiming to aid and facilitate the development of the sports communities, they failed to accomplish these aspirations owing to a lack of vision. For the development of the sports community of India, focusing on expanding the infrastructure alone is not enough. There existed a need to provide appropriate amenities, regulations, rights and rules to sportsmen partaking in the world of sports activities. It is important to give access to all sportsmen these rights and follow through on this ideal vision by implementation by giving them a platform that can efficiently act as a redressal mechanism. Turning to the hierarchy of courts in India for dispute redressal, as they themselves remain afflicted by administrative hurdles that make the entire process extremely time-consuming and technical, not to mention the lack of expertise required to address matters of such nature, does not suffice. Having a Sports Arbitration Centre in India acts as an effective safeguard available to the sportsmen in India that’s time efficient and possesses the requisite knowledge to appropriately address the disputes that may arise.

The most important venture after the inauguration of SACI is to raise awareness about the regulations rights and that commands and are available to the community. Despite being significantly behind in the field of dispute resolution and arbitration, India has made efforts to develop the infrastructure for the sports community, essentially moving to the commercialisation of the field. What the need of the hour calls for are steps towards formalisation, to have more organised structures that provide aid and amenities to the sportsmen to develop and flourish.


Kanika Arora Partner, Advani Law LLP

†† Vidyotma Malik, Associate, Advani Law LLP

[1] Daniel Girsberger and Nathalie Voser, “Sports Arbitrations”, International Arbitration: Comparative and Swiss Perspectives (4th Edn.) .

[2] Ian Blackshaw, “Access to Justice in Sports Arbitration”, Access to Justice in Arbitration: Concept, Context and Practice.

[3] Ian Blackshaw, “Access to Justice in Sports Arbitration”, Access to Justice in Arbitration: Concept, Context and Practice.

[4] Philippe Cavalieros and Janet Kim, “Can the Arbitral Community Learn from Sports Arbitration?” 32 Journal of International Arbitration 237.

[5] CAS 2002/A/376.

[6]  Philippe Cavalieros and Janet Kim, “Can the Arbitral Community Learn from Sports Arbitration?” 32 Journal of International Arbitration 237.

[7] A, B v. Comité International Olympique et Fédérations Internationale de Ski (Swiss Federal Tribunal, 1st Civil Law Chamber, 4P267/2002).

[8] Court of Arbitration for Sports, ICAS statutes, S19.

[9] CAS Procedural Rules, General Provisions, R. 43.

[10] Dr Awadhesh Kumar Shirotriya, “Conceptual Framework for Redesigning the Sports Policy of India” (2019) 8(1) International Journal of Physical Education Health & Sports Sciences.

[11] Dr Awadhesh Kumar Shirotriya, “Conceptual Framework for Redesigning the Sports Policy of India” (2019) 8(1) International Journal of Physical Education Health & Sports Sciences.

[12] Mukesh Rawat, “Choice of Law in Court of Arbitration for Sport: An Overview” SSRN (23-1-2021).

[13] 2016 SCC OnLine Del 3660.

[14] Safeguarding the Interests of Sportspersons and Provision of Effective Grievance Redressal System in the Constitution of National Sports Federations.pdf

[15] Arka Majumdar and Kunal Dey, “Significant Judgments on Arbitration and Conciliation Act, 1996 – May 2020 to July 2020 – Litigation, Mediation & Arbitration – India” (25-8-2020).

[16] “Kiren Rijiju Inaugurates Country’s First Sports Arbitration Centre, Says it Will Have Far-Reaching Impact” (The Times of India, 26-9-2021).

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction

It is a well-known fact that there is an innate complexity in fiscal law and policy. It has been commented upon by many Judges, much less the experience of ordinary citizens, that it is not easy to decipher the fine text of the tax law. Such policy choices in fiscal laws, however, are there for specific reasons. Larger underlying objectives and competing priorities are often the reason for the crisscross in tax law and policy. A fairly recent debate upon the scope of appellate remedies under the anti-dumping duty (ADD) law is one such illustration which explains the reasons for controversies in the fiscal space. The issue at hand is an innocuous question regarding the jurisdiction of the Customs Excise and Service Tax Appellate Tribunal (CESTAT) and whether there is a provision to file an appeal in ADD dispute in a particular situation. In order to appreciate the controversy some background is necessary. It relates to the peculiar scheme of how the circumstances warranting the levy (or non-levy) of ADD are appreciated under the administrative and legal framework in India which will also explain the reason for the controversy.

  1. Legal framework for levy of anti-dumping duty in India

ADD is administered under the overall customs law framework in India. The Customs Act, 1962 (1962 Act) provides for the legal framework governing import and export of goods in India. However, the 1962 Act does not carry the rate of tax leviable as customs duty. The classification and rate of tax is provided for under the Customs Tariff Act, 1975 (1975 Act). The 1975 Act is also a repository of a host of other taxes which are imposed at the time of import or export of goods. For illustration, safeguard duty, countervailing duty, etc. are certain other illustrations of taxes imposed under the overall customs law framework. However, conceptually ADD is not a customs duty, the latter being levied upon the act of importation of goods in a particular country. Instead ADD is understood as a trade protection measure which is deployed by the importing country in order to deal with the pernicious activity of dumping of goods by another country in the importing country.

The levy of ADD is now internationally aligned in terms of the legal framework mooted by the World Trade Organisation (WTO), as codified in terms of the “Agreement on Implementation of Article 6 of the General Agreement on Tariffs and Trade 1994[1].” This agreement sets out the international consensus and standards on the ingredients to be satisfied for levy of ADD besides the procedural steps and safeguards which are to be observed by the importing country for the levy of ADD. India as a member of the WTO has adopted this framework on ADD both in letter and spirit. In fact the Supreme Court of India has categorically declared that the levy of ADD under the Indian law must be in due compliance of India’s commitment to agree and abide by the WTO Agreement on ADD.[2]

The legal framework in India relating to ADD is set out in Section 9-A of the 1975 Act. This provision is a standalone code governing the levy of ADD and is supplemented by three other provisions in the 1975 Act; (a) Section 9-AA, which provides for refund of ADD in certain cases; (b) Section 9-B, which specifies certain situations in which ADD is not to be levied; and (c) Section 9-C, which provides for appeal to CESTAT in ADD cases. The present controversy relates to the interpretation of this Section 9-C. However, we shall come back to it after a brief appreciation of the administrative position in which ADD is levied in India.

  1. Administrative scheme for levy of anti-dumping duty in India

The Government of India had adopted a peculiar scheme for levy of ADD. Ordinarily the Ministry of Finance (MoF) is the sole repository for the levy of taxes enacted by the Union Parliament. For illustration, income tax, wealth tax, service tax, central excise duty, customs duty, etc. are the various union taxes which have been implemented and enforced by the MoF. The levy of ADD is also the responsibility of the MoF. However, unlike other taxes where the MoF is this sole Judge and authority on the executive and administrative framework of all union taxes, such is not the case in ADD. Instead, an inquiry as to whether ADD should be levied or not is undertaken by the Ministry of Commerce and Industry (MoC) of the Government of India.

The Directorate General of Trade Remedies (DGTR), as a department of the MoC, undertakes the investigation if there is dumping and whether ADD is required to be levied in a given situation. This investigation is undertaken in terms of the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 (1995 Rules). These 1995 Rules supplement the legal framework for levy of ADD by laying out the detailed procedural framework to be followed by the DGTR during the investigation, including rights and obligations of the affected parties.

What is notable in the aforesaid scheme is that the principal agency empowered to carry out the investigation (i.e. MoC), however, does not have the authority to implement the levy of ADD. The MoC, in a situation in which it considers that levy of ADD is warranted after a technical evaluation of the prescribed variable, can only make a recommendation to the MoF to such effect. It is thereafter the MoF which is the final arbiter as regards the decision whether or not to levy ADD. This is not a mere procedural mechanism whereby the MoC would recommend and the MoF would routinely impose ADD. Instead, it is the MoF which independently evaluates, having regard to other factors which it finds relevant to adjudge the recommendations of the MoC and thereafter arrives at a conclusion whether or not the levy of ADD is warranted. In other words, the MoF can approve or reject the recommendations of MoC. There are multiple illustrations with many such frequent instances, where the MoF disagrees with the MoC and refuses to levy ADD despite a positive recommendation of the MOC to such effect.

  1. Contextualising the issue

It is in the aforesaid legal and administrative framework that the issue arises. Under law as also under the administrative framework, neither any parameter is set out as regards the obligation of MoF while considering the recommendations of MoC nor any enumeration of factors has been made which must be considered by the MoF in order to decide whether or not levy of ADD is warranted in a given fact pattern. Resultantly, the MoF only publishes its conclusion upon review of the recommendations of the MoC. In the event the MoF agrees with the recommendations of the MoC, it will issue a notification under the relevant legal provisions providing for levy of ADD. In such circumstances, the recommendations and the detailed findings of the MoC reflect the rational for the levy of ADD. The affected parties can rely upon such recommendations and findings in order to canvas appropriate legal action in case of prejudice being caused through such levy. In a reverse situation i.e. where the MoF disagrees with the recommendation of the MoC and chooses not to levy any ADD, in such a case the MoF publishes its conclusions regarding the disagreement. However, as a matter of convention, the MoF does not set out the reasons as to why it disagrees with the recommendations and findings of the MoC. It is at this stage that the issue arises because a decision not to levy ADD can also cause prejudice to certain persons.

The precise issue to be answered is whether there is a right of appeal in the event MoF rejects the recommendations of the MoC and decides not to levy ADD.

  1. Appreciating the appellate mechanism for anti-dumping duty

This takes us to legal framework relating to CESTAT as the Appellate Tribunal. Though CESTAT is constituted under the 1962 Act, it is also the Appellate Tribunal for the purposes of ADD. Section 129-B of the 1962 Act provides for the remedy of appeal before the CESTAT in respect of a matters arising in relation to customs law. There is, however, a distinct provision for appeal in relation to ADD. The difference between the scope of two provisions is stark and accordingly warrants a closer review.

Section 129-B of the 1962 Act provides for the appellate remedy against “any order” passed by the specified officer of customs.[3] This is, however, not the case with Section 9-C of the 1975 Act which provides for an appeal remedy before CESTAT in relation to the ADD. In this situation, the appeal provision permits an appeal only “against an order of determination or review” in relation to ADD.[4]

In the aforesaid background, a question has arisen as to whether an appeal can be filed before the CESTAT in a situation where the MoC recommends for levy of ADD but the MoF decides to the contrary and does not levy ADD. Before that, one may ask, why does the issue of filing of appeal even arises when no ADD is levied. This is an interesting question, the response to which lies in appreciating the scheme of ADD. There are multiple interested parties in an ADD contest. As noted above, ADD is a trade protection measure invoked by an importing country the situation of dumping is not conducive to its interests. This is because dumping hurts the domestic industry of the importing country engaged in the manufacture or trade of such goods which have been dumped from abroad. Thus, in a situation where the MoC has concluded and recommended upon the levy of ADD, it implies that there is indeed dumping of goods being carried out in India by the exporters of another country which is creating injury to the domestic industry of India. Thus, in a situation where the MoF disagrees with the recommendation made by the MoC to levy ADD, the view of MoF prejudices the interests of the domestic industry of India insofar as no ADD would be imposed despite the conclusion by the MoC that such ADD is warranted in order to protect the interests of the domestic industry. In such a circumstance, therefore, it is obvious to expect that the domestic industry would be aggrieved by the decision of MoF not to impose ADD and may like to claim legal remedies against the refusal of the MoF to impose ADD. This takes us to the conjoint questions, whether CESTAT has jurisdiction in such a situation and whether the domestic industry (being an aggrieved party) can successfully prosecute an appeal against the MoF’s refusal to levy ADD.

  1. Stock-taking the rival contentions and the current position

There are certain well-settled legal aspects regarding right to appeal; (a) an appeal is a creature of statute; (b) there is no inherent right to file an appeal; (c) a remedy by way of appeal must be specifically provided by law; and (d) no appeal is maintainable in the absence of a specific law providing for an appeal remedy.[5]

Applying this standard, a view has arisen that there is no right of appeal in a situation where the MoF refuses to levy ADD. The proponents of this view indicate two broad reasons to substantiate their position; (a) Section 9-C of the 1975 Act which provides the appellate remedy is limited to a situation where there is an “order of determination or review” in relation to ADD whereas no such order exists in wake of MoF’s refusal to accede to the views of the MoC; and (b) Section 9-C of the 1975 Act, which is specific to ADD, is at contrast with the appeal provision relating to customs duty under the 1962 Act. Under the latter, any person aggrieved has the right to file an appeal against any order passed by the specified customs officer. The contrast between the two provisions is crucial and determinative because this implies that a person being aggrieved is irrelevant under the 1975 Act, and also there is no right of appeal against every order of MoF. Accordingly it is argued that there is no legislative intent to provide for an appeal against MoF’s refusal to impose ADD.

Conversely, those carrying the opposite view contend that the refusal of the MoF to impose ADD despite a positive recommendation of the MoC warrants a judicial review and the appeal mechanism cannot be made defunct by the MoF’s refusal to provide reasons for its disagreement with the detailed findings of the MoC. The proponents of this view highlight that the constitutional scheme neither permits any wing of the Government to act unilaterally or arbitrarily so as to trample upon the legal rights of the citizens nor can the government’s decisions affect the citizens without being substantiated with valid rationale and adequate reasons to support its decision. On this account it is argued that irrespective of the correctness of the view of the MoF that ADD should not be imposed, the MoF does not have an unbridled discretion and it is obliged to give reasons for its decision not to impose ADD. Such reasons it is further contended, must be also subjected to judicial review as non-levy of ADD (particularly when one wing of the Government has concluded and recommended levy of ADD) has serious consequences and severely prejudices the affected domestic industry.

It is crucial to note that the aforesaid discussion and the rival positions are not a hypothetical or mere academic inquiry and in fact have received judicial advertence. In Jindal Poly Film Ltd. v. Designated Authority[6] the Delhi High Court by way of a detailed order rejected a writ petition (as non-maintainable) against refusal of the MoF to levy ADD being of the view that even in such a situation an appeal was maintainable before the CESTAT.[7] This order of the High Court was premised principally upon the conclusion that the refusal of the MoF to levy ADD also constitutes an “order of determination” and thus appeal is indeed maintainable. This order actually reversed the tide as prior to this delineation by the Delhi High Court, the CESTAT was taking a consistent view that no appeal is maintainable when no ADD is levied by the MoF.[8]

The High Court’s exposition of the statutory provisions, however, appears not to have extinguished the debate. For illustration, the Government continues to hold the view that an order of the MoF refusing to levy ADD cannot be subjected to appeal before the Appellate Tribunal. This view of the Government has been noted by the Appellate Tribunal but only to be rejected.[9] However, at this stage, it is not clear if the Government has accepted the position emanating from the legal exposition of the Delhi High Court or would seek the final view by way of appeal to Supreme Court. Thus, as of date, precarious tranquillity prevails on the lis and the aggrieved domestic industry.

  1. Factoring the policy considerations

It is critical to note that the determination whether or not an appeal lies against the MoF’s decision not to levy ADD does not depend only on the interpretation of Section 9-C of the 1975 Act. Instead, there are multiple policy considerations which are relevant in order to arrive at a balanced position. Some of these are enlisted below:

  • The 1995 Rules provide the statutory framework for the levy of ADD. Of these, Rule 18 is relevant for the purpose of our inquiry. It states that “[t]he Central Government may, within three months of the date of publication of final findings by the designated authority under Rule 17, impose by notification in the Official Gazette, … anti-dumping duty ….” Two aspects of this provision are relevant. First, there is no obligation upon the Central Government to impose ADD as Rule 18 states “may”. The contours of this expression are well settled, especially when contrasted from the expression “shall”, which is also frequently employed[10] in the 1995 Rules. Put differently, there is no obligation upon the Government to impose ADD and instead it is the discretion of the Government to impose a tax. Thus, the necessity for judicial review is doubtful. Second, Rule 18 clearly delineates the position of MoC vis-à-vis MoF. The MoC, acting through the DGTR is referred only as the “designated authority” in the 1995 Rules whereas it is the MoF which acts as the “Central Government” in the setting of Rule 18. Thus, the decision to levy or not to levy the ADD is of the MoF and no legal consequences should arise from the determination and recommendations of the MoC alone.
  • In addition to the aforesaid aspect a critical and noteworthy aspect is that ADD is a tax. Under the constitutional scheme, the judiciary is certainly competent to annul a tax liability or even quash the statutory provision levying a tax. However, it is doubtful if the judiciary can direct the Government to issue a particular notification[11] or levy the tax itself. Equally, levy of tax is policy matter where is generally beyond the judicial prowess, especially in the fiscal realm.[12] In fact, in the very context of ADD, there are decisions to support that levy of ADD is a legislative function.[13]
  • The decision of the Gujarat High Court in Alembic[14] provides an added perspective insofar as it highlights the limited role of MoC and the larger balancing rule of MoF in the context of ADD so as to approve the MoF’s exclusive role by enumerating a host of factors which require appreciation. One of these overwhelming reasons assigned by the High Court to approve independent role and overriding authority of the MoF relates to the finer distinction between the role of MoF and the MoC. According to the High Court, the role of MoC is limited and “specific, to ascertain existence, degree and effect of any alleged dumping and various factors connected therewith”. In comparison, the role of MoF is much wider as it needs to appreciate a “[n]umber of other questions of larger public interest such as possible impact of ADD on other industries, on consumption, on supply, etc. of such articles may not possibly be within the purview of designated authority while carrying out investigation envisaged under the rules”. Hence, the statutory provisions should not be interpreted in a manner which renders MoF to “be oblivious of all such factors and once through mathematical exercise, task of ascertaining extent of dumping and causal injury to the domestic industry is completed, necessarily to such extent, ADD must follow. Any such proposition would be putting the Central Government into too straitjacket a situation wherein on a mere ascertainment of dumping and its impact on domestic industry, the Government in all cases invariably be bound to impose duty irrespective of fact that such imposition may for valid reasons found to be not in public interest”.
  • The decision in Alembic[15] is also relevant from the perspective of the wide-ranging non-legal variables which form the MoF’s zone of consideration while evaluating MoC’s recommendations. In this case the MoF defended non-levy of ADD inter alia citing lack of domestic industry’s capacity to address the local demand, which defence was accepted by the High Court. Courts are clearly not the best forums for adjudication of such economic and financial variables.[16]
  • Also relevant is the perspective that there are inherent differences in scope and approach of judicial review between an appeal remedy before the CESTAT versus a writ petition before the High Court. This is because it is well settled that the appellate forum is obliged to examine validity of appeal and all antecedents to it, including review of all aspects relating to the order challenged before it.[17] This scope of appeal is at contrast with the scope of inquiry in a writ petition wherein the High Court generally has a limited scope to address violation of constitutional rights or legal errors without adverting to disputed questions of facts. Thus, pragmatically there is a significant distinction in the standard of judicial review by CESTAT in appeal vis-à-vis High Court in writ petition. Thus, there is added reason to determine the correct forum to address propriety of MoF’s refusal to levy ADD.
  • In any case, the scheme of appeal before the CESTAT in an ADD dispute is also peculiar. Unlike the provision under the 1962 Act which confers wide powers upon the CESTAT, limited powers are vested in the CESTAT under the 1975 Act in respect of ADD disputes. To elaborate, Section 9-C(4) of the 1975 Act states that “the provisions of sub-sections (1), (2), (5) and (6) of Section 129-C of the Customs Act, 1962 shall apply to the Appellate Tribunal in the discharge of its functions under this Act as they apply to it in the discharge of its functions under the Customs Act, 1962”. Section 129-C of the 1962 Act, however, has clauses (1) to (8). Thus, clauses (7) and (8) of Section 129-C of the 1962 Act do not apply to CESTAT while considering ADD appeals under Section 9-C of the 1975 Act. This has a crucial relevance because clause (7) vests the powers of a civil court in the CESTAT thereby authorising it to pass orders for “(a) discovery and inspection; (b) enforcing the attendance of any person and examining him on oath; (c) compelling the production of books of account and other documents; and (d) issuing commissions”. Clause (8) deems “any proceeding before the Appellate Tribunal … to be a judicial proceeding within the meaning of Sections 193 and 228 and for the purpose of Section 196 of the Penal Code”. By exclusion of these clauses (7) and (8), therefore, the 1975 Act has severely restricted the powers and scope of inquiry by the CESTAT. Does this aspect manifest the legislative intent of a limited scope of review by the CESTAT in ADD matters generally?

8. Conclusion

The aforesaid discussion, even though hinged upon the interpretation of statutory provisions governing appeal in ADD matters, reveals the complexities which are inherent in tax policy. Viewed from the judicial perspective, the observations of the Delhi High Court and the CESTAT’s current outlook appear to be a reasonable interpretation to subject MoF’s refusal to levy ADD within the appellate framework. However, examined from the larger policy perspective, many other variables require appreciation in order to arrive at a balanced conclusion which takes into consideration the innate limitations of a judicial review whether to impose a tax, such as the ADD. One would hope that the debate attains a quietude sooner than later, given the larger implications the conclusion has on the role of judiciary in rejudging the government’s decision not to levy a tax.

 


Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics

[1] Available HERE

[2] Commr. of Customs v. G.M. Exports, (2016) 1 SCC 91.

[3] S. 129-B of the Customs Act, 1962, providing for “appeals to the Appellate Tribunal” inter alia states that “any person aggrieved by any of the following orders may appeal to the Appellate Tribunal against such order ….”

[4] S. 9-C(1) of the Customs Tariff Act, 1975, providing for “appeals” states that “an appeal against the order of determination or review thereof shall lie to the Customs, Excise and Service Tax Appellate Tribunal constituted under S. 129 of the Customs Act, 1962 (hereinafter referred to as “the Appellate Tribunal”), in respect of the existence, degree and effect of – (i) any subsidy or dumping in relation to import of any article; or (ii) import of any article into India in such increased quantities and under such condition so as to cause or threatening to cause serious injury to domestic industry requiring imposition of safeguard duty in relation to import of that article”.

[5] See generally, Raj Kumar Shivhare v. Directorate of Enforcement, (2010) 4 SCC 772.

[6] 2018 SCC OnLine Del 11395 : (2018) 362 ELT 994.

[7] 2018 SCC Online Del 11395 : (2018) 362 ELT 994.

[8] For illustration, see SI Group India (P) Ltd. v. Designated Authority Anti-Dumping Appeal No. 50456 of 2017, decided by CESTAT, Delhi on 17-8-2017 vide Final Order No. 56445 of 2017, following Panasonic Energy India Co. Ltd. v. Union of India Anti-Dumping Appeal No. 50452 of 2017 decided by CESTAT, Delhi on 20-7-2017 vide Final Order No. 55305 of 2017.

[9] Jubilant Ingrevia Ltd. v. Union of India, Anti-Dumping Appeal No. 50461 of 021, decided by CESTAT, Delhi on 27-10-2021 vide Final Order No. 51988 of 2021. This final order has been followed subsequently by the CESTAT in Assn. of Chloromethanes Manufacturers REGUS v. Union of India, 2021 SCC OnLine CESTAT 2622 and SI Group India (P) Ltd. v. Union of India, 2021 SCC OnLine CESTAT 2623.

[10] For illustration, Rule 4 states that “[i]t shall be the duty of the designated authority, in accordance with these rules, ….” As another illustration, Rule 5 states, “the designated authority shall initiate an investigation to determine the existence, degree and effect of any alleged dumping only upon receipt of a written application by or on behalf of the domestic industry”.

[11] See generally Mangalam Organics Ltd. v. Union of India, (2017) 7 SCC 221.

[12] See generally, Federation of Railway Officers Assn. v. Union of India, (2003) 4 SCC 289 inter alia observing that “[i]n examining a question of this nature where a policy is evolved by the government judicial review thereof is limited. When policy according to which or the purpose for which discretion is to be exercised is clearly expressed in the statute, it cannot be said to be an unrestricted discretion. On matters affecting policy and requiring technical expertise court would leave the matter for decision of those who are qualified to address the issues. Unless the policy or action is inconsistent with the Constitution and the laws or arbitrary or irrational or abuse of the power, the court will not interfere with such matters”.

[13] This aspect, however, is a debatable proposition. For rival positions, see generally, Haridas Exports v. All India Float Glass Manufacturers’ Assn., (2002) 6 SCC 600 and Reliance Industries Ltd. v. Designated Authority, (2006) 10 SCC 368.

[14] Alembic Ltd. v. Union of India, 2011 SCC OnLine Guj 7686.

[15] 2011 SCC OnLine Guj 7686.

[16] See generally, Manohar Lal Sharma v. Narendra Damodardas Modi, (2019) 3 SCC 25.

[17] Kapurchand Shrimal v. CIT, (1981) 4 SCC 317.

Experts CornerSanjay Vashishtha

Introduction

On 28-3-2022, the Criminal Procedure (Identification) Bill, 2022 was tabled in the Lok Sabha[1]. The Bill seeks to repeal the Identification of Prisoners Act of 1920, which permits the acquisition of personally identifiable information about certain people, such as criminals, in order to conduct criminal investigations. The Bill was introduced with the objective of authorising the taking of measures of convicts and other persons for the sake of identification and investigation in criminal circumstances, as well as the preservation of records, among other things. This Bill expands the reach of such information as well as the people who can get it. It authorises the National Crime Records Bureau to collect, store, and maintain specified records. It must have been developed to allow for the use of contemporary technology to take and record accurate body measurements. Finger imprints, palm print and footprint impressions, photos, iris and retina scan, physical, biological samples and their analysis are all included in the Bill’s definition of “measurements”.

Key factors of the Bill

It has surfaced:

  • To allow for the application of contemporary technology to take and record accurate body measurements.
  • Invest the National Crime Records Bureau (NCRB) with the authority to collect, store, and preserve records of measurements, as well as to share, disseminate, destroy, and dispose of records.
  • To allow a Magistrate to order anyone to take measures; additionally, a Magistrate can order law enforcement officials to collect in the case of a specific category of convicted and non-convicted individuals, “fingerprints, palm print impressions, footprint impressions, photographs, iris and retina scan, physical, biological samples and their analysis, behavioural attributes including signatures, handwriting, or any other examination”.
  • To any person who resists or refuses to offer measures should be able to be measured by police or jail authorities.

For the purposes of inquiry, the Bill also permits police to keep track of signatures, handwriting, and other behavioural characteristics referred to in Section 53 or Section 53-A of the Code of Criminal Procedure, 1973.

On the direction of a Magistrate, finger and footprint impressions, as well as a limited category of convicted and non-convicted persons’ pictures, are permitted.

According to the Bill’s criteria, anyone convicted, imprisoned, or held under any preventive detention act will be obliged to give “measurements” to a police officer or a prison official.

Necessity of the Bill

  • The Bill was introduced to enable for the use of modern means to capture and record acceptable body dimensions, as the existing law, the “Identification of Prisoners Act, 1920,” only allowed for the capturing of fingerprint and footprint impressions of a select group of convicted individuals.
  • In addition, the Bill aims to broaden the “ambit of persons” who can be measured, which will aid investigative authorities in gathering adequate legally admissible evidence and establishing the accused person’s crime.
  • In addition, the Bill stipulates legal authority for taking proper body measurements of those who are compelled to submit such measurements, which would improve the efficiency and speed of criminal investigations while also enhancing the conviction rate.

Constitutional validity of the Bill with respect to privacy

By altering the Act’s scope and repealing it, the legislation has expanded the jargons of the Identification of Prisoners Act of 1920. The Bill has defined the term measurements under Section 2(1)(b), which includes finger impressions, palm impressions, foot impressions, photographs, iris and retina scan, physical, biological samples and their analysis, behavioural attributes such as signatures, handwriting, or any other examination referred to in Section 53 or Section 53-A of the Code of Criminal Procedure, 1973.

The legislature’s intention to make the word measurement exclusive in nature by including general words like physical and biological samples could lead to narcoanalysis and brain mapping through the use of force implicitly in collection, directly violating Article 20(3), right to self-incrimination, and Article 21, right to life, of the Indian Constitution.

According to Article 20(3) of the Constitution of India (COI), no person accused of a crime may be forced to testify against himself. It has become a source of concern regarding the privacy of individuals, which is in jeopardy.

  • It should be noted that it is also in violation of the United Nations Charter’s Human Rights requirements. Privacy is a fundamental human right, and there are various aspects of privacy such as privacy of space, privacy of body, privacy of information, and privacy of choice that have evolved over time through a catena of Supreme Court judgments beginning with K. Gopalan v. State of Madras[2], Kharak Singh v. State of U.P.[3], Charles Sobraj v. Supt. Central Jail[4], Sheela Barse v. State of Maharashtra[5] and Pramod Kumar Saxena v. Union of India[6].
  • In addition, Clause 4(2) of the Bill allows for the retention of measurement records for 75 years, which is a clear infringement of the right to be forgotten, as recognised by the Supreme Court in S. Puttaswamy v. Union of India[7].
  • Furthermore, it contradicts the core concept of criminal law that no one is guilty until proven guilty in a court of law.
  • Further, In Narayan Dutt Tiwari Rohit Shekhar[8], the Court declared that nobody should be compelled to be subjected to any techniques in question in any circumstances, even when it is in the context of an investigation in a criminal matter. Such actions would constitute an unjustified infringement into an individual’s personal liberty.
  • In Kharak Singh State of U.P.[9], the Court determined that the term “life” refers to more than animal existence. The resistance to its loss spreads to all of our limbs and faculties, allowing us to appreciate life. The right to life, it could be argued, does not only apply to animals. It refers to more than a person’s physical well-being.
  • The Supreme Court added a new dimension to Article 21 in Maneka Gandhi Union of India[10], declaring that the “right to life or live” includes not just bodily existence but also the right to live with dignity. This Bill puts a person’s life on hold, and he will always be under government observation, which is a serious invasion of privacy.
  • The Supreme Court ruled in State of A.P. Challa Ramakrishna Reddy[11] that one of the basic human rights guaranteed to everyone is the right to life. It is so fundamental that no one, including the Government, has the authority to violate it. Even when incarcerated, a person retains his or her humanity. He retains his human status and is thus entitled to all fundamental rights, including the right to life.

Conclusion

As a result, the Bill was introduced in order to allow for the use of modern means to capture and record acceptable body dimensions, with the goal of authorising the taking of measurements of convicts and other people for the purposes of identification and investigation in criminal cases, as well as the preservation of records, among other things. The Bill has infringed citizens’ fundamental rights by granting the State broad powers to store prisoner records and conduct physical and biological tests with the implied force of law, which is contrary to the rule of law and arbitrary in character. People do not lose their humanity while they are imprisoned.

The Supreme Court of India, as well as many other Indian courts, have reaffirmed this position in a number of cases to ensure that prisoners do not become victims. Since then, the legislature has been unable to qualify the intangible differentia and rational connection tests. As a result, it is a blatant infringement of the citizen’s fundamental rights stated in Sections 14, 19, 20(3), and 21 of the Constitution of India.


† Advocate is a practicing counsel at the Supreme Court of India, BA LLB (Hons.), LLM in Comparative Criminal Law from McGill University, Canada and MSc, Criminology and Criminal Justice from University of Oxford and Research Associate (India) University of Oxford, United Kingdom.

[1] See HERE .

[2] AIR 1950 SC 27.

[3] AIR 1963 SC 1295 : (1964) 1 SCR 332.

[4] (1978) 4 SCC 104.

[5] (1983) 2 SCC 96.

[6] (2008) 9 SCC 685.

[7] (2017) 10 SCC 1.

[8] (2012) 12 SCC 554.

[9] AIR 1963 SC 1295 : (1964) 1 SCR 332.

[10] (1978) 1 SCC 248.

[11] (2000) 5 SCC 712.

Experts CornerMurali Neelakantan

A previous post[1] discussed the difficulties in criminal prosecution of trade mark infringement in cases involving medicines. It seemed from that discussion that the justice system deterred trade mark owners from being able to successfully prosecute for offences under the Trade Marks Act. That post also contained a few suggestions to reform the law and practice of drug labelling.

 

If the Trade Marks Act is not effective in prosecutions for infringement, is there a remedy elsewhere to prevent fraudsters gambling with peoples’ lives? In a recent discussion with senior police officers, the answer proffered was that there was a better remedy in the Drugs and Cosmetics Act. However, the police officers seemed unaware of these provisions.

 

In the recent case involving the cancer drug, Adcetra, manufactured by Takeda, the police registered an FIR citing the provisions of Sections 420, 336, 483, 486 and 34 IPC, and provisions of the Trade Marks Act and the Copyright Act, but not the Drugs and Cosmetics Act (Drugs Act),[2] and seized counterfeit drugs from a dealer in Mumbai. The only explanation that can be offered for this is the lack of awareness of the provisions of the Drugs and Cosmetics Act among the police and the pharma industry.

 

Here are the various provisions of the Drugs and Cosmetics Act, 1940 that could have been applied to that case and included in the FIR:

Section 17(c) – a drug shall be deemed to be misbranded if its label or container or anything accompanying the drug bears any statement, design or device which makes any false claim for the drug or which is false or misleading in any particular.

Section 17-B – a drug shall be deemed to be spurious if,–

(a) it is manufactured under a name which belongs to another drug; or

(b) it is an imitation of, or is a substitute for, another drug or resembles another drug in a manner likely to deceive or bears upon it or upon its label or container the name of another drug unless it is plainly and conspicuously marked so as to reveal its true character and its lack of identity with such other drug; or

(c) the label or container bears the name of an individual or company purporting to be the manufacturer of the drug, which individual or company is fictitious or does not exist; or

(d) it has been substituted wholly or in part by another drug or substance; or

(e) it purports to be the product of a manufacturer of whom it is not truly a product.

Section 18. Prohibition of manufacture and sale of certain drugs and cosmetics.— No person shall himself or by any other person on his behalf (a) manufacture for sale or for distribution, or sell, or stock or exhibit or offer for sale or distribute (i) any drug which is misbranded, adulterated or spurious.

Would the procedure and the outcome be different if these provisions were used to prosecute the dealer of counterfeit drugs?

 

To begin with, the FIR would have disclosed a more serious offence than just trade mark infringement or fraud under the IPC. The punishment for the offence of dealing in spurious drugs is seven years to life imprisonment[3] and this would make the offence cognizable and non-bailable. It is also likely that the court would be reluctant to grant bail to the accused given the seriousness of the offence and the likely harm caused to public if the accused was allowed to be free on bail.

 

Mens rea of the accused in trade mark infringement and IPC cases would be a burden on the prosecution and that is perhaps one of the reasons for low rates of conviction and the rare case of imprisonment in such cases. However, there is no need to prove mens rea in cases like this thanks to Section 19 of the Drugs Act which states unequivocally that “it shall be no defence in a prosecution under this chapter to prove merely that the accused was ignorant of the nature, substance or quality of the drug in respect of which the offence has been committed or of the circumstances of its manufacture or import”. Therefore all that the prosecution has to state in the charge-sheet is that the dealer did not have a licence for the import and sale of that counterfeit drug and had not acquired it from a licensed distributor. It would then fall on the accused to show that he was duly licensed and had imported the drug in accordance with such licence or that the drug was purchased from a licensed distributor.

 

It should now be evident that the procedure for trial under the Drugs Act is simple, almost a summary trial given how little has to be proved by the prosecution and the limited defences available to the accused. It is a mystery why pharma companies, the State drug regulator and the police are not using the stringent provisions of the Drugs Act more effectively to enforce the law and save lives. Is it because the courts have not been keen to impose the punishment of seven years to life imprisonment[4]? Are the cases of violation of the Drugs Act that have been brought before the courts merely “technical violations” and not the kind that occurs in the case of Adcetra?


† Murali Neelakantan is currently Principal lawyer at Amicus. He is a dual qualified lawyer (India and UK) and among other positions, he was formerly a partner at an international law firm in London, Cipla’s first global general counsel, and Executive Director and Global General Counsel of Glenmark Pharmaceuticals.

[1] Criminal Trade Mark Infringement for Medicines – An Ineffective Remedy. See Here

[2]Mumbai : Women Arrested for selling fake medicines to cancer patients, See HERE .

[3] Drugs and Cosmetics Act, 1940, S. 27.

[4] A search on SCC Online shows that in all the cases before the Supreme Court where punishment under S. 27 was in issue, the punishment was usually a small fine and occasionally simple imprisonment for a few months. There were no cases where imprisonment of more than a year was imposed.

Experts CornerKhaitan & Co

Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is an act “to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights, and for matters connected herewith or incidental thereto”. As per Section 13(2) of the SARFAESI Act, where any borrower, who is under a liability to a secured creditor makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as a non-performing asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 (sixty) days from the date of the notice, failing which, the secured creditor shall be entitled to exercise all or any of the rights to take possession of the secured assets under Section 13(4) of the SARFAESI Act and sell the same without the intervention of the court.

 

With that background, we aim to analyse whether the auction-purchasers can purchase the secured asset from the secured creditors under SARFAESI Act and the Security Interest (Enforcement) Rules, 2002 (SARFAESI Rules) (collectively “SARFAESI”) free from encumbrance including those arising out of pending statutory dues.

 

Priority of dues: An analysis

 

With the introduction of the SARFAESI Act, several banks contended that given the non obstante clause in Section 35, the banks being the secured creditors will have priority over the State’s first charge. However, the Supreme Court in Central Bank of India v. State of Kerala[1] clarified that SARFAESI Act does not provide for first charge to the secured debts due to banks and State sales tax law which are creating first charge in favour of the State shall prevail. Further, the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.[2] has held that the crown debts have priority over secured debts only if a statute gives such priority to its dues. Above stated, we understand that the position of law was that if State law provides for priority to statutory dues that shall prevail over secured debts of the banks.

 

However, with the insertion of Section 26-E via the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (amending Act), the above discussed position underwent a change and now any security created and recorded with the Central Registry3 is accorded statutory priority in accordance with Section 26-E of the SARFAESI Act. The text of Section 26-E of the SARFAESI Act (Section 26-E) reads as under:

 

26-E. Priority to secured creditors.— Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

Explanation.— For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.[3]

Various litigations came before different courts on the interpretation of Section 26-E and brought forth certain pressing common questions. To understand the current position, we shall be discussing certain important judgments below and presenting our analysis:

(i) If a State tax act also has a non -obstante clause, will Section 26-E prevail over it?

a) The Gujarat High Court in Kalupur Commercial Cooperative Bank Ltd State of Gujarat[4] (Kalupur) has dealt with the non obstante clause in detail while analysing whether Section 26-E which is a part of the central legislation would prevail over Section 48 of the Gujarat Value Added Tax Act, 2003 (GVAT), a State Act. It referred to the decisions of the Supreme Court in Kumaon Motor Owners’ Union Ltd v. State of U.P.[5] (Kumaon Motor) and Solidaire India Ltd. v. Fairgrowth Financial Services Ltd.[6] (Solidare).

 

The Supreme Court in Kumaon Motor[7] had discerned three principles in case of conflict between the provisions of two statutes viz:

  • If there is a conflict between the provisions of two statutes and nothing is repugnant, the provisions in the later statute would prevail;.
  • While resolving such conflict, the court must look into the object behind the two statutes. In other words, what is to be looked at is what necessitated the legislature to enact a particular provision later in point in time, which may be in conflict with the provisions of earlier statute.
  • The court must look into the language of the provisions. If the language of a particular provision is found to be more emphatic, the same would be indicative of the intention of the legislature that the same shall prevail over other statutes.

 

The Supreme Court in Solidare[8] stated that the principles of law discernible are that, if there is a conflict between two special legislations, the later must prevail. The simple reasoning is that at the time of enactment of the later statute, the legislature could be said to be aware of the earlier legislation and its non obstante clause. If the legislature still confers the later enactment with a non obstante clause, it means that the legislature wanted that enactment to prevail.

 

Having discussed the above, the Gujarat High Court, in Kalupur[9], noted that Section 48 of GVAT “would come into play only when the liability is finally assessed and the amount becomes due and payable”. Basis the above, it came to the conclusion that priority shall be that of the bank under Section 26-E and not of the State.

(b) The Nagpur Bench of the Bombay High Court in Union Bank of India v. State of Maharashtra[10] analysed the language of Section 37(1) of the Maharashtra Value Added Tax Act, 2002 (reproduced below) and ruled that though it begins with a non obstante clause, it is made subject to any provisions of the central legislation dealing with the issue in question. Hence, Section 26-E shall prevail.

    1. Notwithstanding anything contained in any contract to the contrary, but subject to any provision regarding creation of first charge in any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer or, as the case may be, person.

 

Similar view was also recently taken by the Division Bench of the Bombay High Court in SBI v. State of Maharashtra[11] (SBI judgment).

 

We further note that recently in Punjab National Bank v. Union of India[12], Supreme Court while dealing with the issue of whether the dues of the Excise Department would have priority over the dues of the secured creditors under Section 11-E to the Central Excise Act (which provides for first charge on the property of the defaulter for recovery), held that since Section 35 of the SARFAESI Act gives it an overriding effect on all other laws, the property shall be subject to the SARFAESI Act. Thus, the right of a secured creditor cannot be hampered and the State’s right to recover debts would prevail over other creditors only in cases where such creditors are unsecured.

 

(ii) Is the auction-purchaser liable to pay off the statutory dues?

(a) The Andhra Pradesh High Court in SBI v. CTO[13] (CTO case) held that the debts advanced by banks/financial institutions have precedence over the statutory dues of the government authorities. Accordingly, any secured asset sold by such bank or financial institution to any purchaser cannot be denied registration due to pending statutory dues and the banks are not entitled to withhold the sale certificate pursuant to the auction held. Further, it was clarified that if any balance of sale consideration amount is available post satisfaction of dues towards the banks, it shall be adjusted towards the dues, if any, of the department concerned.

(b) Similarly, the Gujarat High Court in Kalupur[14] set aside the attachment orders passed under the Section 48 of GVAT and held that as per Section 26-E, the bank/financial institutions had first charge over the mortgaged property. It is pertinent to note that despite the existence of the attachment orders, the Gujarat High Court validated sale of the mortgaged properties conducted by the bank and categorically stated that:

 

  1. 78. It is further clarified that the excess, if any, shall be adjusted towards the dues of the State under the Value Added Tax, 2005 Act. It is further declared that the respondents cannot proceed against the purchasers of the properties sold under the SARFAESI Act.

 

Further, in CTO case[15], as discussed above, the Andhra Pradesh High Court has held that the secured asset sold to any purchaser cannot be denied registration due to pending statutory dues and the banks are not entitled to withhold the sale certificate pursuant to the auction held. In SBI v. State of A.P.[16] and Pridhvi Asset Reconstruction and Securitisation Co. Ltd. v. State of A.P.[17], orders similar to the CTO case[18] were passed.

 

In SBI v. State of Maharashtra[19], the Bombay High Court have taken a similar view with regard to the registration of the sale certificate as upheld in the CTO case[20] i.e. the registration of sale certificate cannot be denied on account of pending statutory dues. This case has also highlighted that a Registrar does not have a quasi-judicial power and is only expected to ensure that the documents to be registered is accompanied by supporting documents.

 

However, having discussed the above position, it is pertinent to look at the judgment recently passed by the Supreme Court of India in Kotak Mahindra Bank Ltd. v. District Industries Centre[21] (Kotak case), disposing of the special leave petition that arose out of the order passed by the Bombay High Court in Medineutrina (P) Ltd. v. District Industries Centre[22] (Medineutrina case). The position taken by the Supreme Court in this case goes contrary to what has been established till now and hence needs a detailed mention.

 

In Medineutrina case[23], the petitioner was the auction-purchaser of the immovable property which was attached and auctioned by Punjab National Bank (PNB), under the SARFAESI Act. However, as certain statutory dues were due to the Sales Tax Department, PNB was not transferring the property in favour of the petitioner until such payment.  The petitioner thus came before the Bombay High Court challenging such non-transfer and additionally, relief was claimed against PNB to issue a no-objection certificate and to issue a fresh sale certificate, free from all encumbrances in favour of the petitioner. The petitioner also contended that there was the absence of notice, and it had no prior knowledge of such an encumbrance.

 

The Bombay High Court on the above set of facts dismissed the reliefs claimed by the petitioner and held that the petitioner was liable to pay the pending sale tax dues on the secured asset even if there was absence of any notice or prior knowledge of such encumbrance. It further ruled contrary to the principle established by the Supreme Court in the case of Ahmedabad Municipal Corpn. of the City of Ahmedabad v. Haji Abdulgafur Haji Hussenbhai[24] that a charge may not be enforced against a transferee if it had no notice of the same unless the requirement of such notice has been waived by law. This was held by following the reasoning that the above position would hold only when a charge is created under Section 100 of the Transfer of Property Act, 1882 in terms of which charge is not on the property. It further referred to AI Champdany Industries Ltd. v. Official Liquidator[25], wherein the Supreme Court had differentiated between an encumbrance as understood in the general parlance and an encumbrance which is a charge on the property and runs with the property.

 

In this regard, Bombay High Court observed that[26]:

  1. 34. … It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever’s hands the property goes.
  1. Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same.
  1. As Section 37(1) of the Maharashtra Value Added Tax Act, 2002, creates a charge on the property, a successful auction-purchaser, thus would hold the property, upon which a statutory charge has been created, subject to such charge and the property would thus continue to be liable for any statutory charges created upon it, even in the hands of such auction-purchaser, though for non-disclosure of such charge by the secured creditor, the auction-purchaser may sue the secured creditor and have such redress, as may be permissible in law. This is more so for the reason that the priority given in Section 26-E of the SARFAESI Act, to the banks, which is a secured creditor, would only mean that it is first in que for recovery of its debts by sale of the property, which is a security interest, the other creditors being relegated to second place and so on, in the order of their preference as per law and contract, if any, as the case may be. Thus the dues under Section 37(1) of the MVAT Act, 2002, being a statutory charge on the property, would also be recoverable by sale of the property, and that puts a liability upon the auction-purchaser, who, in case he wants an encumbrance free title, will have to clear such dues.

 

Aggrieved by the same, the above decision in the Medineutrina case[27] was challenged before the Supreme Court of India.

 

The Supreme Court vide its order[28] dated 18-11-2021, disposed of the special leave petition, and upheld the decision of the Bombay High Court by noting that the agreement pursuant to which the auction-purchaser purchased the immovable property specifically stated that the auction-purchaser shall bear all statutory dues inter alia other dues and having agreed to these stipulations, auction-purchaser cannot shy away from the obligation. The specific portion of the agreement is reproduced below:

“It is not necessary for us to examine the other aspects dealt with by the High Court in the impugned judgment. For, the agreement executed by the petitioner pursuant to which the auction was concluded in favour of the petitioner reads thus:

  1. All statutory dues/attendant charges/other dues, including registration charges, stamp duty, taxes, any other known, unknown liability, expenses, property tax, any other dues of the Government or anybody in respect of properties/assets sold, shall have to be borne by the purchaser…. ”

 

Further, the fact that the State has the first charge on the property concerning statutory dues, the auction-purchaser cannot resile from the liability to discharge the same. Additionally, the Supreme Court acceded to the request that once such statutory dues have been paid, a fresh sale certificate shall be issued which shall note that the immovable property has been transferred free from all known encumbrances.

 

Conundrum around enforcement of Section 26-E

 

We further deem it necessary to discuss the conundrum around the enforcement of Section 26-E. We note that the amending Act did not come into force all at once but in parts. While certain sections including Section 31-B, Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) (Section 31-B) came into force on 1-9-2016; Section 26-E was brought into force much later, from 24-1-2020 vide Notification No. 4133 dated 26-12-2019. However, we observe that various judgments viz, Union Bank of India v. State of Maharashtra[29] and Medineutrina case[30] have been ruled on the premise that Section 26-E came into force on 1-9-2016.

 

However, the Gujarat High Court in Kalupur[31] which was decided on 23-9-2019, took into consideration the fact that Section 26-E was not yet enforced and had observed the below:

  1. While it is true that the bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under the RDB Act, Section 31-B of the RDB Act, being a substantive provision giving priority to the “secured creditors”, the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(l-a) of the RDB Act defines the phrase “secured creditors” to have the same meaning as assigned to it under the SARFAESI Act. Moreover, Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to and not in derogation of inter alia the RDB Act. As such, the SARFAESI Act was enacted only with the intention of allowing faster recovery of debts to the secured credits without intervention of the court. This is apparent from the Statement of Objects and Reasons of the SARFAESI Act. Thus, an interpretation that, while the secured creditors will have priority in case they proceed under the RDB Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors.

 

58 . The insertion of Section 31-B of the RDB Act will give priority to the secured creditors even over the subsisting charges under other laws on the date of the implementation of the new provision i.e. 1-9-2016. The Supreme Court, in State of M.P. v. State Bank of Indore[32], has held that a provision creating first charge over the property would operate over all charges that may be in force.

 

The text of Section 31-B is reproduced below for ease of reference:

31-B. Priority to secured creditors.— Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.

 

Following this reasoning given in Kalupur[33], Bombay High Court in SBI judgment[34] has recently ordered that even if Section 26-E was effective only prospectively from 24-1-2020 and thus not applicable to the facts at hand as they were prior in time, that would not make any difference; as Section 31-B itself would be sufficient to give priority to a secured creditor over the statutory dues.

 

Similarly, the Division Bench of the Bombay High Court in Axis Bank Ltd. v. State of Maharashtra[35] quashed and set aside the impugned notices issued by the Assistant Commissioner of Sales Tax after taking into consideration Section 529-A of the Companies Act, 1956 while also noting the statutory recognition of priority claim of the secured creditor in view of the amendment brought into effect by virtue of introduction of Section 26-E providing for priority to secured creditor over all other debts and all taxes, cess and other rates payable to Central Government or the State Government or the local authority while stating that the applicability of provisions of Section 31-B is pari materia to Section 26-E.

A similar view has been upheld by various High Courts in ASREC (India) Ltd. v. State of Maharashtra[36], GMG Engineers & Contractor (P) Ltd. v. State of Rajasthan[37], Bank of Baroda v. CST[38], and Commr. v. Indian Overseas Bank[39].

 

Analysis and conclusion

We understand from the above discussion that there is plethora of judgments that have dealt with subject-matter regarding priority of claims of secured creditor over the statutory dues. Post introduction of Section 26-E, it is now a settled position that the dues of the secured creditor will stand in priority.

 

We however note that, in terms of liability to pay statutory dues, the decision of the Supreme Court in the Kotak case[40] has caused ripples to an otherwise settled position that the statutory dues are to be paid from the excess of auction amount and that the sale certificate cannot be withheld on such statutory dues being pending. The Supreme Court in Kotak case[41] held that the auction-purchaser cannot resile from the liability to pay statutory dues and a sale certificate free from all encumbrances can be issued only once such dues have been cleared.

 

We, however, would like to point to the fact that the above decision seems to be very case specific as the auction-purchaser had specifically agreed to such payment liability under the auction agreement and cannot be seen as laying down the law that an auction-purchaser is liable to pay statutory dues in the absence of a contractual arrangement specifically stating so.

 

Further, we note that many judgments have been passed considering that Section 26-E came into force on 1-9-2016, which as discussed above is not the correct factual position. However, certain courts have rightly acknowledged the correct position and have reasoned priority of secured creditors in line with Kalupur[42] judgment, that is:

  • Section 31-B came into force on 1-9-2016;
  • Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to, and not in derogation of inter alia the RDB Act and as such the SARFAESI Act was enacted only with the intention of allowing faster recovery of debts to secured creditors without the intervention of the court;
  • The definition of secured creditors is the same in both RDB Act and SARFAESI Act; and
  • An interpretation that, while the secured creditors will have priority in case they proceed under the RDB Act and that they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors.

 

Taking into consideration the above and ruling of Supreme Court in State of M.P. v. State Bank of Indore[43], we understand that the priority of secured creditors can be said to have been established from coming into force of Section 31-B.


† Partner, Khaitan & Co.

††  Associate, Khaitan & Co.

††† Associate, Khaitan & Co.

[1] (2009) 4 SCC 94.

[2] (2000) 5 SCC 694.

[3] Central Registry means the registry set up or cause to be set up under S. 20(1) of the SARFAESI Act.

[4] 2019 SCC OnLine Guj 1892

[5] AIR 1966 SC 785.

[6] (2001) 3 SCC 71.

[7] AIR 1966 SC 785.

[8] (2001) 3 SCC 71.

[9] 2019 SCC OnLine Guj 1892

[10] 2021 SCC OnLine Bom 6070.

[11] 2020 SCC OnLine Bom 4190.

[12] 2022 SCC OnLine SC 227.

[13] 2021 SCC OnLine AP 343 : AIR 2021 AP 87.

[14] 2019 SCC OnLine Guj 1892

[15] 2022 SCC OnLine SC 227.

[16] 2021 SCC OnLine AP 168 : AIR 2021 AP 108.

[17] 2020 SCC OnLine AP 1936 : (2021) 3 ALT 104.

[18] 2022 SCC OnLine SC 227.

[19] 2021 SCC OnLine Bom 2568.

[20] 2022 SCC OnLine SC 227.

[21] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021 (SC).

[22] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[23] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[24] (1971) 1 SCC 757.

[25] (2009) 4 SCC 486.

[26] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.)

[27] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[28] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021 (SC).

[29] 2021 SCC OnLine Bom 6070.

[30] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[31] 2019 SCC OnLine Guj 1892 : (2019) 156 SCL 668.

[32] (2002) 10 SCC 441

[33] 2019 SCC OnLine Guj 1892 : (2019) 156 SCL 668.

[34] 2020 SCC OnLine Bom 4190.

[35] 2017 SCC OnLine Bom 274 : (2017) 3 AIR Bom R 305.

[36] 2019 SCC OnLine Bom 5480 : (2020) 6 AIR Bom R 561.

[37] S.B. Civil Writ Petition No. 6872 of 2017, decided on 5-7-2017.

[38] 2018 SCC OnLine MP 1667 : (2018) 55 GSTR 210.

[39] 2016 SCC OnLine Mad 10030 : (2017) 1 Mad LJ 769.

[40] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021.

[41] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021.

[42] 2019 SCC OnLine Guj 1892 : (2019) 156 SCL 668 .

[43] (2002) 10 SCC 441.

Cyril Amarchand MangaldasExperts Corner

Insolvency and Bankruptcy Code, 2016 (IBC) has been a hot topic since its inception. However, despite it being in force for almost 6 years now, and witnessing innumerable challenges and disputes, there are still some areas which lacks clarity. “Interest” qua debt is one such zone. There has been some discussion around this issue before courts, however, there are still certain nuances that are yet developing. In this blog, we attempt to consolidate the prevalent views on some of such issues. More precisely, the following:

  1. Why is there a distinction in treatment of “interest” qua “financial debt” and “operational debt” under IBC.
  2. Whether “interest” is chargeable on “operational debt”.
  3. Whether “interest” alone would qualify as “operational debt” to maintain insolvency application.
  4. Whether “interest” can be clubbed with principal debt to crossover the threshold limit of INR 1 crore.

 

Distinction in treatment of “interest” under “financial debt” versus “operational debt”

Prior to IBC, financial debt and operational debt were not considered differently for the purpose of initiating winding-up proceedings against a company for its inability to pay debt under the Companies Act.[1] However, with the introduction of IBC, the debts have been classified into two categories, namely, (i) financial debt; and (ii) operational debt. For both these debts, IBC provides for different procedures with corresponding rules and regulations.

 

Amongst many, one relevant distinction between the two debts is in relation to the component of “interest”. The term “financial debt” is defined to include “interest” (if any), while there is no mention of “interest” in the definition of “operational debt”. The definitions are reproduced below:

    1. […]

(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes […]

*          *          *

(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

 

Although, the distinction in the treatment of “financial” and “operational” debt and creditor has been sufficiently deliberated and upheld by the Supreme Court in the celebrated case of Swiss Ribbons (P) Ltd. v. Union of India[2], the distinction viz. the component of “interest” is not explicitly dealt with yet.

 

Some guidance, however, in this regard may be drawn from the Supreme Court decision in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[3] wherein while classifying home buyers as “financial creditors” and not as “operational creditors”, Supreme Court noted that:

  1. 42. One other important distinction is that in an operational debt, there is no consideration for the time value of money—the consideration of the debt is the goods or services that are either sold or availed of from the operational creditor.

 

Evidently, there is no concept of “time value of money” for a debt to qualify as an “operational debt”, unlike a “financial debt”. Thus, “interest” which may be considered as a factor evidencing “time value of money” against a debt is not a sine qua non for an “operational debt”,[4] justifying absence of the term “interest” from the definition of operational debt.

 

In other terms, “interest” is not necessary for an “operational debt”, as there the consideration is the value of the goods or services sold or availed by the corporate debtor from the operational creditor. Limited relevance it may drawis when payment of the said consideration is delayed beyond a due date, and the “interest” is levied. Such interest, however, is in the form of “penalty” and not a return on investment. Thus, it could be argued that the distinction in definition do hold some rationale.

 

However, this distinction has expansive implications under IBC and has given light to newer issues such as whether “interest” is even chargeable upon an “operational debt”, and if yes, whether such interest is an “operational debt” capable of giving rise to an action under IBC Section 9, or whether can it be clubbed with the principal component of the debt to cross-over the threshold limit of INR 1 crore for filing an insolvency application. Lets see the position of law as it exists today on these issues.

Whether “interest” is chargeable on “operational debt”

There has been a difference in reasoning of different NCLTs in regard to this issue. Some have held it appropriate for “interest” to be charged as default, while others consider it more appropriate if there is a mutual agreement between parties to charge interest.

 

In the case of the former, for e.g. NCLT Mumbai in D.F. Deutsche Forfait AG  v. Uttam Galva Steel Ltd.,[5] observed that there is also some time value of money for an “operational debt” as goods or services are supplied against money as consideration. It observed that it is not expected that delay in payments of consideration beyond time is left uncharged. It is a known fact that the money today will worth less from what it was worth yesterday, and hence, any delay beyond the credit period should entitle the creditor to claim “interest”. NCLT noted that:

“[…] On commercial side, the [operational] creditor claiming interest is quite normal and justifying, after all, business always runs keeping in mind the time value of money […]”

 

Against this, NCLT Chandigarh[6] and Kolkata[7] have aligned more in line with the latter approach and held that it ismust that there is a mutual understanding between the parties for interest to be chargeable and that it cannot be a unilateral act of the creditor. For instance, in Wanbury Ltd. v. Panacea Biotech Ltd.,[8] NCLT Chandigarh held that in absence of an agreement stipulating “interest”, interest is not chargeable. It was observed that IBC does not empower the adjudicating authority to impose interest on the parties, much less determine the rate of such interest.

 

Subsequently, even NCLT Mumbai revisited this question in Vitson Steel Corp (P) Ltd. v. Capacite Infraprojects Ltd.,[9] and united with the latter approach by holding that interest cannot be claimed as an “industry practice” on an operational debt. It held:

 

24. The object of the Code is not advanced by surprising the corporate debtor with a claim for interest firstly by claiming that it was as per industry practice and thereafter making a pitch that it was as per (MSME Act) Micro, Small and Medium Enterprises Development Act, 2006, when the operational creditor was confronted with a question posed by this Bench as to how the claim for interest was sustainable when neither the purchase order nor the invoices carried a provision therefor. […]

    1. For the reasons stated above, the present petition fails and therefore, the same is rejected.”

NCLAT too in Steel India v. Theme Developers (P) Ltd.,[10] upheld the latter approach and held that interest cannot be claimed if not agreed upon between the parties.

“[…] It is settled that the charging of interest, ought to be an actionable claim, enforceable under law, provided it was properly agreed upon between the parties.”

Thus, while there is still scope for a Supreme Court decision to settle the issue conclusively, the NCLAT decision does clarifies the position of law on this issue that “interest” is chargeable on an “operational debt” provided there is an agreement to that effect.

Whether “interest” would qualify as “operational debt” to file insolvency application under Section 9 of IBC.

While it is a good development that the interest on operational debt is being recognised and considered, there is also an unintended upshot of it as the creditors have started approaching NCLT seeking initiation of insolvency proceedings basis solely their claim towards interest even though the principal debt stands paid. This practice has, however, been deprecated regularly by both NCLT and NCLAT.

 

One of the earliest pronouncement on this issue was NCLAT decision in Krishna Enterprises v. Gammon India Ltd.[11] Here, the creditor filed a Section 9 Petition based merely upon “interest”. No principal amount was due. NCLAT Delhi although rightly dismissed the Section 9 petition but it was based on an incorrect reasoning that “interest” does not qualify as “debt” under IBC unless the interest is payable under the terms of the agreement. In other words, as per this decision, interest would qualify as “debt” if agreed between the parties.

 

  1. 5. […] the principle amount has already been paid and as per agreement no interest was payable, the applications under Section 9 on the basis of claims for entitlement of interest, were not maintainable. If for delayed payment appellant(s) claim any interest, it will be open to them to move before a court of competent jurisdiction, but initiation of Corporate Insolvency resolution process is not the answer.

Subsequently, however, NCLAT in S.S. Polymers v. Kanodia Technoplast Ltd.,[12] moved beyond the ruling in Gammon[13] and dismissed the Section 9 petition noting that it was being pursued only for realisation of interest amount in gross misuse of the IBC process as recovery mechanism. NCLAT held:

  1. Admittedly, before the admission of an application under Section 9 of the I&B Code, the “corporate debtor” paid the total debt. The application was pursued for realisation of the interest amount, which, according to us is against the principle of the I&B Code, as it should be treated to be an application pursued by the applicant with malicious intent (to realise only interest) for any purpose other than for the resolution of insolvency, or liquidation of the “corporate debtor” and which is barred in view of Section 65 of the I&B Code.

 

In a more recent decision, Amsons Communication (P) Ltd. v. ATS Estates (P) Ltd.[14], NCLAT Delhi reaffirmed this position and held that the provisions of IBC cannot be allowed as a recovery mechanism or to recover the claim of interest by operational creditor. It was held that Section 9 petition cannot be converted into proceedings for recovery of interest by operational creditor on delayed payment, as that is not the object of IBC.

Thus, it has been settled that “interest” in itself is not sufficient to maintain a Section 9 petition under IBC.

Whether “interest” can be clubbed with principal debt to cross-over the threshold limit of 1 crore

Post Notification dated 24-3-2020[15], the executive has revised the threshold for initiating insolvency proceedings under IBC to INR 1 crore from INR 1 lakh. Consequent thereto, courts[16] have held that if the insolvency application is filed after 24-3-2020, the increased threshold will apply. High Court of Kerala too, more recently, in Tharakan Web Innovations (P) Ltd. v. NCLT,[17] held that from the date of notification, IBC can apply only to matters relating to insolvency and liquidation of corporate debtors, where the minimum amount of default is INR 1 crore. Thus, no application can be filed after 24-3-2020 regarding an amount where the default is less than INR 1 crore.

 

This revision was intended to weed out applications filed for smaller defaults and to provide a breathing space to debtors during the COVID crisis. However, parties attempted to circumvent this by clubbing “interest” with “principal” debt to crossover the threshold limit.

 

Recently, in one such situation, NCLT Delhi in CBRE South Asia (P) Ltd. v. United Concepts and Solutions (P) Ltd.,[18] dismissed the Section 9 petition and held that interest amount cannot be clubbed with the principal amount to arrive at the minimum threshold of INR 1 crore. In this case, operational creditor had claimed a default of total amount of Rs. 1,39,84,400, out of which INR 88,50,886 was towards principal whereas the remaining INR 51,33,514 was towards interest. Since the principal outstanding was less than INR 1 crore, NCLT dismissed the petition as not maintainable. NCLT held:

“[…] it can be inferred that the ‘interest’ can be claimed as the financial debt, but neither there is any provision nor there is any scope to include the interest to constitute as the operational debt.”

 

While this reasoning is in line with the position of law as settled on related issues of “interest” viz. operational debt (as dealt above), it remains to be seen how different NCLTs and NCLATs look at this issue in the times to come. However, in order to prevent divergent views, it would be more apposite if these issues are settled through an authoritative judgment from NCLAT or Supreme Court and help avoid congestion before NCLT on account of filing of numerous otherwise non-maintainable Section  9 petitions.


†Partner, Cyril Amarchand Mangaldas.

†† Associate, Cyril Amarchand Mangaldas.

[1] See Delhi Cloth & General Mills Co. Ltd. v. Stepan Chemicals Ltd., 1984 SCC OnLine P&H 546 : (1986) 60 Comp Cas 1046; Krishna Chemicals v. Orient Paper and Industries Ltd., 2005 SCC OnLine Ori 159 : (2005) 128 Comp Cas 412.

[2] (2019) 4 SCC 17.

[3] (2019) 8 SCC 416.

[4] ‘Interest’ is not a sine qua non even for “financial debt” as held in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd., 2021 SCC OnLine SC 513.

[5] 2017 SCC OnLine NCLT 546. In this case, there were two bills of exchange and the debtor agreed to pay within 180 days. Since, the payments were not made, interest was sought to be levied by the creditor. This order was however later set-aside by NCLAT on different grounds.

[6] Wanbury Ltd. v. Panacea Biotech Ltd., 2017 SCC OnLine NCLT 475.

[7] Gulf Oil Lubricants India Ltd. v. Eastern Coalfields Ltd., 2019 SCC OnLine NCLT 7749. In this case, invoices carried a stipulation of interest on overdue payment and the debtor countersigned the same. This order was, however, later set aside by NCLAT in view of settlement between parties.

[8] 2017 SCC OnLine NCLT 475

[9] C.P. (IB) No. 1579/MB/C-IV/2019, order dated 28-4-2020.

[10] 2020 SCC Online NCLAT 200.

[11] 2018 SCC OnLine NCLAT 360.

[12] 2019 SCC OnLine NCLAT 1310.

[13] 2018 SCC OnLine NCLAT 360.

[14] 2021 SCC OnLine NCLAT 223.

[15] See MCA Notification dated 24-3-2020 increasing the threshold from INR 1 lakh to INR 1 crore.

[16] Jumbo Paper Products v. Hansraj Agrofresh (P) Ltd., Company Appeal(AT)(Ins) – 813 of 2021 (25-10-2021). Civil Appeal No. 7092 of 2021 is pending against the NCLAT Order. No Stay is ordered yet.

[17] 2020 SCC Online Ker 23744.

[18] CP (IB) No. 797/(ND)/2021.

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction: Setting the context

 

The doctrine of “clean hands”[1] has been influencing exercise of judicial discretion in India for long, the common law tradition being the inspiration. So much so that it is arguably an axiomatic proposition in Indian jurisprudence. Originally an equitable principle, though not without exceptions[2], the doctrine has found its feet in India and has been successfully transposed in various as judicial dimensions. For instance, it has been deployed as a filter to screen public interest litigations,[3] besides being a paramount disqualifying criteria for exercise of extraordinary writ jurisdiction[4]. The doctrine has, since, metamorphosed into various other dimensions which are deployed as a ground to refuse judicial redress.

 

In this context, this article reviews five decisions of the Supreme Court released in this first quarter of the calendar year 2022, to reflect upon the judicial attitude which has unrestrainedly applied the expanded version of this doctrine to deny relief to the claimants. The foremost criteria for choice of these decisions is pedestaled on the fact that in all these cases the State instrumentalities were the defendants. The intent of the analysis is to test the hypothesis that there is a change in the judicial stance insofar balancing of equities versus the constitutional and legal obligations of the State instrumentalities is concerned.

 

Unarguably, some of the propositions emerging from the decisions examined in this article are not novel. However, the premise of this article is to highlight how the expanded version of the clean hands doctrine is being allowed to give leeway to the State through complete judicial abstinence to scrutinising the propriety of State instrumentalities. Through these case studies, the article argues that the application of the expanded contours of the doctrine implies that the resultant propositions may soon claim a near axiomatic status.

 

  1. Venus Stampings – Overriding legal stipulations to arrest hoodwinking tactics

The facts and outcome in Venus Stampings (P) Ltd. v. CCE[5] make an interesting case study, even though the decision of the Supreme Court and the impugned order of the Appellate Tribunal were rather brief. In order to appreciate the issue, a brief background on the “valuation” related provisions under the central excise law is relevant. Central excise is a tax on “manufacture” of goods. The tax collection, however, is deferred till the clearance of the goods from the factory. The statute provides for two different valuation methodologies. Originally the levy of Central Excise duty was computed on the basis of actual selling price of such manufactured goods. In the 1980s, an additional valuation methodology was introduced whereby the central excise duty began to be computed on the basis of the maximum retail price (MRP) of certain notified goods. The validity of this new methodology was upheld by the Supreme Court[6] and since then the two valuation methodologies i.e. one on actual selling price (referred as “Section 4 valuation”) and other on MRP basis (referred as “Section 4-A valuation”) have been in parallelly in vogue. The critical aspect is that these methodologies are mutually exclusive and once a particular commodity has been notified for MRP based valuation, the actual selling price as a basis for valuation becomes irrelevant.

In Venus Stamping[7], the issue related to sale of a commodity which was notified for MRP based valuation. However, in reality the commodity was being sold at a price more than MRP; the actual sale price being 830 whereas the declared MRP was only 675. Venus took a view that owing to the Section 4-A notification the Tax Department was obliged to compute the central excise duty only on the MRP without recourse to the actual sale price. This view was contested by the tax authorities who insisted upon ignoring the MRP because the actual sale price was much higher than the MRP. In a short order[8] the Appellate Tribunal concluded that the actual sale price being much higher implied that MRP “has no relevance”. Thus, the Appellate Tribunal ignored the legal stipulations of Section 4-A valuation in the wake of unacceptable factual position adopted by Venus.

 

The decision of the Supreme Court was shorter than that of the Appellate Tribunal and confirmed the latter’s views with an additional reason. The Supreme Court opined that Section 4-A valuation preceded on the premise of “retail price” and thus where the actual sale price was more than the stipulated MPR, the MRP lost its relevance as the “retail price”. Thus the Supreme Court rejected the taxpayer’s argument “that the mandate of Section 4-A(2) obligates the taxing authority to assess the excise duty only in reference to the market selling price printed on the packing of the product”.

 

Even though the decisions of both the Appellate Tribunal and the Supreme Court are silent on the aspect of the conduct of the taxpayer, both clearly evidence the displeasure at the hoodwinking tactics employed by the taxpayer to reduce the tax incidence. This is because under law the taxpayer is obliged to predetermine and notify the MRP while also ensuring that the sale price does not exceed MRP. Thus, by selling the goods above the MRP the taxpayer was already committing a legal violation and it was in the teeth of such unacceptable (in fact illegal) conduct that the taxpayer argued that the tax authorities must nonetheless accept the MRP. The judicial approach in this case in declining to adopt a purely technical interpretation of the tax law confirms that it would not shy away from overriding legal stipulations to address untenable conduct, notwithstanding the general non-application of equity or morality in the canons of tax law[9].

 

  1. Devas – Fraud as a vitiating variable to override to all claims against the State

With the decision in Devas Multimedia (P) Ltd. v. Antrix Corpn. Ltd.[10] there is no better contemporary precedent to support the proposition that fraud vitiates everything because this decision dissects the legal theory and reflects the pragmatic variables which influence judicial choices and determine the real treatment to be meted to legal claims. Even though this case arose in the context of company law, the decision is essentially in the public law realm as it was a challenge to correctness of approach and motive underlying the government’s decision on corporate winding up. If one were to exclude a rather large part of the decision which interprets company law provisions relating to winding up, the factual part of the decision reveals that it was the overwhelming presence of factual elements which really swayed the Supreme Court in deciding what it decided.

 

In this case the Supreme Court was examining allegations of fraud by the management of Devas, which as a legal entity executed a contract for provision of certain service to a government company. Citing various unacceptable acts of the entity (inter alia being “(i) the offer of a non-existent technology; (ii) misrepresentation about the possession of intellectual property rights over a device; (iii) violation of SATCOM policy; (iv) securing of an experimental licence fraudulently; (v) manipulation of the minutes; and (vi) the trail of money brought in through Foreign Investment Promotion Board (FIPB) approvals”, etc.), the Supreme Court approved the allegations of undue favour being extended to the entity and fraud being perpetrated by it.

 

The Supreme Court engaged in a rather expanded scope of evaluation by refusing to be cowed down by statutory provisions to hold that the review (to determine whether fraud was committed) could not be confined only to that government entity which transacted with the defrauder. Opining that the “principle that fraud vitiates all solemn acts, will itself be rendered nugatory, if the understanding of fraud is confined only to the realm of contract”, the Supreme Court highlighted that there “are cases where a party may perpetrate a fraud either upon non-contracting parties or upon the Government or even upon the courts”. Thus, the entirety of circumstances (and all stakeholders) were held to be relevant in order to assess the allegations of fraudulent conduct.

 

The Supreme Court also did not allow the corporate management to hide under the auditor’s confirmation. It inter alia observed that (a) “auditors are not experts either in criminal law or in the technology that formed the subject-matter of the agreement”; (b) “the auditor’s report can neither be taken as gospel truth nor act as estoppel against the company”; and (c) “statement in the auditor’s report, is as per the information given to them or as per the information culled out to the best of their ability”, and therefore, a clean chit by the auditors does not absolve the corporate management. Discussing event after event and action after action of the entity, which established contumacious conduct, the Supreme Court took head-on the contention of the entity that the impugned order of the Company Tribunal permitting winding up was “completely perverse and erroneous”,[11] only to reject it.

 

Notwithstanding the aforesaid, the real takeaway for our analysis from this decision is the contention of the entity that the winding up initiated by the Government was with an ulterior motive. It was argued before the Supreme Court “that the actual motive behind Antrix seeking the winding up of Devas, is to deprive Devas, of the benefits of an unanimous award passed by the ICC Arbitral Tribunal presided over by a former Chief Justice of India and the two BIT awards and that such attempts on the part of a corporate entity wholly owned by the Government of India would send a wrong message to international investors”. An unimpressed Supreme Court[12] refused to indulge, tersely rejecting this contention with the following observations:

  1. 167. We do not find any merit in the above submission. If as a matter of fact, fraud as projected by Antrix, stands established, the motive behind the victim of fraud, coming up with a petition for winding up, is of no relevance. If the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas, every part of the plant that grew out of those seeds, such as the agreement, the disputes, arbitral awards, etc., are all infected with the poison of fraud. A product of fraud is in conflict with the public policy of any country including India. The basic notions of morality and justice are always in conflict with fraud and hence the motive behind the action brought by the victim of fraud can never stand as an impediment.
  2. 168. We do not know if the action of Antrix in seeking the winding up of Devas may send a wrong message, to the community of investors. But allowing Devas and its shareholders to reap the benefits of their fraudulent action, may nevertheless send another wrong message, namely, that by adopting fraudulent means and by bringing into India an investment in a sum of INR 579 crores, the investors can hope to get tens of thousands of crores of rupees, even after siphoning off INR 488 crores.

 

Undoubtedly the most critical part of the Supreme Court’s observations is that “every part of the plant that grew out of those seeds … are all infected with the poison of fraud”, which shall render all rights unenforceable because of “a product of fraud [being] in conflict with the public policy of any country including India”. Also evident from the aforesaid is the Supreme Court’s affirmation that “the motive behind the action brought by the victim of fraud can never stand as an impediment”. This unqualified conclusion of the Supreme Court does not make exception or factor that it was the Government’s “motive” which was under challenge. In other words, the presence of fraud is concerned as a sufficient ground to reject an examination of even the actions of the State instrumentality and its propriety on the touchstone of constitutional and other obligations under the law of the realm.

 

  1. Adiraj Manpower – Disdain for camouflage

In Adiraj Manpower Services (P) Ltd. v. CCE[13] the Supreme Court was appraising the correctness of the determination made by the Service Tax Appellate Tribunal (CESTAT) which had declined to extend exemption to Adiraj. The claim for exemption arose in the context of a change in regime in the service tax law. Prior to the change Adiraj was discharging service tax liability, considering itself to be a manpower supplier. After the change in law, a new agreement was executed by Adiraj with the existing customer purportedly claiming a revisit to the terms of engagement and transformation of the service provider relationship as one of manufacturing. By doing so, Adiraj claimed, it became entitled to claim exemption under the changed service tax law which exempted manufacturing activities. This claim, however, was not acceded to by the CESTAT.[14]

 

Dismissing the appeal, the Supreme Court did not just approve of the conclusion of the CESTAT, but it went beyond to record its own factual findings to justify the denial of exemption to Adiraj. Reviewing the contractual stipulations threadbare, the Supreme Court noted with disdain the “fact that the appellant is not a job worker [which] is evident from a conspicuous absence in the agreement of crucial contractual terms which would have been found had it been a true contract for” carrying out manufacturing activity. On its own accord the Supreme Court listed the following five ingredients which were missing in the new agreement i.e. “(i) the nature of the process of work which has to be carried out by the appellant; (ii) provisions for maintaining (a) the quality of work; (b) the nature of the facilities utilised; or (c) the infrastructure deployed to generate the work; (iii) the delivery schedule; (iv) specifications in regard to the work to be performed; and (v) consequences which ensue in the event of a breach of the contractual obligation”. According to the Supreme Court in the absence of these stipulations “it is apparent that the contract is pure and simple a contract for the provision of contract labour”. Not stopping at a mere rejection of the claim, the Supreme Court in Adiraj Manpower[15] proceeded to criticise the actions of Adiraj because it opined that an “attempt has been made [by it] to camouflage the contract as a contract for job work to avail of the exemption from the payment of service tax”.

 

The stance of the Supreme Court, in not merely refusing the claim for exemption but going ahead to characterise the claim as an outcome of abuse, is a rare occurrence in the sphere of fiscal laws, though not unheard of in the jurisprudential sphere. For illustration, the Supreme Court earlier in McDowell & Co. v. CTO [16] gave a sermon on the moral responsibility of the taxpayers to the effect that “[i]t is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges”and in Commr. of Customs v. Phoenix International Ltd.[17] declared that “intention plays an important role in matters in which there is an allegation of duty evasion”. Even though the Supreme Court itself, time and again, has advised against introduction of such moralistic canons in the sphere of tax laws[18] and, more recently, declared that the Tax Department “has no business to second guess commercial or business expediency of what parties at arms length decide for each other”,[19] still decisions like Adiraj Manpower[20] find a way to disturb the precarious tranquillity where the parties’ conduct becomes a relevant parameter for statutory interpretation in the fiscal realm. This is a strong message flowing from this decision which reveals that judiciary continues to detest colourable devices, whose very presence implies that the judicial ruling would favour the State.

 

  1. Apex Labs – Consequence-driven interpretation trumps settled principles of statutory interpretation

In Apex Laboratories (P) Ltd. v. CIT[21] the Supreme Court was concerned with the interpretation of Section 37 of the Income Tax Act, 1961. This provision allows deduction of certain expenses incurred by a business entity for the purpose of computing the income tax liability of such entity. The condition for this provision to apply is that the expenditure must be “laid out wholly and exclusively for the purposes of the business” of the entity. The provision, however, debars expenditure incurred “for any purpose which is an offence or which is prohibited by law”. The issue before the Supreme Court was whether expenses incurred by pharmaceutical and allied healthcare industries for distribution of incentives to medical practitioners could be allowed as deduction. Apex argued before the Supreme Court that though there was a prohibition issued by the Medical Council to the medical professionals from accepting such incentives, there was no corresponding prohibition attached to the pharmaceutical companies from giving such incentive and thus the exception to Section 37 was not attracted. The Supreme Court, however, did not approve the contention and rejected the claim for deduction.

 

What makes the decision in Apex Laboratories[22] relevant in our quest is its emphasis upon a purposive interpretation of the provision to give meaning to the purported legislative intent. The Supreme Court rejected the claim being of the view that the literal reading of the statutory provision, which otherwise is the settled norm in interpretation of fiscal statutes, would result into a “narrow interpretation” of the provision which logically cannot be apprehended as intended by the legislature.[23] The Supreme Court, thereby, refused to “lend its aid to a party that roots its cause of action in an immoral or illegal act”, which in this case was undue influence by the pharmaceutical companies through the incentives to the fiduciary relationship between doctors and their patients. The Supreme Court also observed that “one arm of the law cannot be utilised to defeat the other arm of law – doing so would be opposed to public policy and bring the law into ridicule” besides declaring that it would not sustain the claim for deduction as the “pharmaceutical companies have misused a legislative gap to actively perpetuate the commission of an offence”.

 

The decision in Apex Laboratories[24] is a quintessential illustration to the effect that the ordinary principles of statutory interpretation can be a give a go by in light of blemished conduct of the party contesting against the State. To exemplify this proposition, one must recall the often-quoted restatement of law by Rowlett, J., which has been consistently followed by Indian courts, that “[i]n a taxing Act one has to look merely at what is already said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.[25] Thus, applying this strict interpretation standard,[26] the claim of the pharmaceutical companies was well founded. The Supreme Court, however, in Apex Laboratories[27], got over this principle by observing that the “well-settled principle of interpretation of taxing statutes – that they need to be interpreted strictly – cannot sustain when it results into an absurdity contrary to the intentions of the Parliament” and preferred to adopt that meaning which “gave shape to the intent of the lawmakers” after “discerning the social purpose which the specific provision subserves”.

 

The penultimate paragraph of the decision in Apex Laboratories[28] clearly contextualises unworthy conduct as the overwhelming disentitling variable when it inter alia observes, “[i]n the present case too, the incentives (or ‘freebies’) given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their medical practice” and therefore, the fact that “medical practitioners were forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of the given, or donor i.e. Apex”.

 

  1. Loop Telecom–Impropriety strips legitimacy of claims for legal entitlements

The decision in Loop Telecom and Trading Ltd. v. Union of India[29] was in a sense another round in a decade old dispute relating to the 2G scam. The genesis of this lis was engrafted by the earlier decision of the Supreme Court in Centre for Public Interest Litigation v. Union of India (CPIL)[30] wherein the government policy on grant of 2G telecom licences and all licences granted in pursuance of the policy were quashed. Pursuant thereto, Loop applied for refund of entry fee paid as a condition for grant of telecom licence to it which since thereafter stood quashed. The propriety of refund claim was the subject-matter of consideration of the Supreme Court in this Loop Telecom[31] decision.

 

Recalling the observations made in the CPIL case[32], the Supreme Court in Loop Telecom[33] refused to hold the Government alone as accountable and absolve Loop “from taint or wrong doing” as the earlier decision “did not exculpate the private business entities who obtained [the licences] and became the beneficiaries” of the government’s actions. Thus being found “in pari delicto[34] with the Union Government”, the Supreme Court denied any relief to Loop. The Court further categorised this this overriding blot on claim of Loop as an attempt “to take another bite at the cherry by initiating proceedings over various forums, particularly to circumvent the jurisdiction of this Court which is in seisin of the matter”, which was “a dilatory tactic” and even “an attempt at forum shopping”.

 

In view of the foregoing characterisation of its conduct, the Supreme Court in Loop Telecom[35] refused to extend relief which was other available under the contract law.[36] To this end it was declared by it that the contract law provisions do not operate in derogation of equitable standards and “restitution” as a relief will not be allowed to “those who aim to perpetuate illegality”. In fact the Supreme Court described Loop as a “beneficiary of a manifest arbitrary policy which was adopted by the Union Government” and thus even the legal principle of restitution could not come to its aid.

 

In parting, the Supreme Court categorically declared that “as a beneficiary and confederate of fraud, the appellant cannot be lent the assistance of this Court for obtaining the refund of the entry fee”. Clearly therefore, the conduct of Loop was considered as disqualifying criteria which stripped it of any entitlement to claim any reliefs, including those founded in statutory provisions.

 

  1. Conclusion

In a contest between private parties, unworthy conduct has always been a ground for refusal to judicial relief. These case studies illustrate that courts have now steadily started applying this principle even in lis against the State and its instrumentalities. This aspect has serious consequences because, unlike private parties who can define their own rules of conduct, the State and its instrumentalities can never be absolved of their obligations under law irrespective of the conduct of the citizens. Much less, the State can never be heard to argue that it would derive advantage from lack of diligent conduct of the citizens.[37] Nonetheless, if these case studies are considered as crystallisation of the legal proposition, through this clear and unequivocal transposition of equitable principles and judicial exposition in the context of private disputes, the Supreme Court appears to have permitted the State to deny legal entitlements to citizens citing their dubious conduct. One would hope that this shift in trend is an exception reserved for those cases alone which fall within the adage; hard cases make bad law.


† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics

[1] “Clean hands: A phrase from a maxim of equity — he who comes to equity must come with clean hands i.e. a person who makes a claim in equity must be free from any taint of fraud with respect to that claim.” P. Ramanatha Aiyar’s The Major Law Lexicon, p. 1194, 4th edn., 2010.

[2] For illustration, see Siraj Ahmad Siddiqui v. Prem Nath Kapoor, (1993) 4 SCC 406; MCD v. Nirmal Sachdeva, (2001) 10 SCC 364.

[3] For illustration, see Kalyaneshwari v. Union of India, (2011) 3 SCC 287.

[4] For illustration, see Raj Kumar Soni v. State of U.P., (2007) 10 SCC 635.

[5] Civil Appeal No. 63 of 2022, decided on  4-1-2022. (SC)

[6] Union of India v. Bombay Tyre International Ltd., (1984) 1 SCC 467 : (1983) 14 ELT 1896.

[7] Civil Appeal No. 63 of 2022, decided on  4-1-2022. (SC)

[8] 2017 SCC OnLine CESTAT 2738.

[9] For illustration, see CTT v. National Industrial Corpn. Ltd., (2008) 15 SCC 259 : (2009) 233 ELT 146.

[10] Devas Multimedia (P) Ltd. v. Antrix Corpn. Ltd., 2022 SCC OnLine SC 46.

[11] Devas Multimedia case, 2022 SCC OnLine SC 46, para 167, 168

[12] Devas Multimedia case, 2022 SCC OnLine SC 46.

[13] 2022 SCC OnLine SC 203.

[14] Vide Final Order No. A/86237/2019(Mumbai) dated 15-7-2019 in Service Tax Appeal No. 86153/2015 (CESTAT, Mumbai).

[15] 2022 SCC OnLine SC 203.

[16] (1985) 3 SCC 230.

[17] (2007) 10 SCC 114 : (2007) 216 ELT 503.

[18] For illustration, see CWT v. Arvind Narottam, (1988) 4 SCC 113 : (1988) 173 ITR 479; Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 : (2003) 263 ITR 1; Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 341 ITR 1; etc.

[19] Shiv Raj Gupta v. CIT, 2020 SCC OnLine SC 589.

[20] 2022 SCC OnLine SC 203.

[21] 2022 SCC OnLine SC 221.

[22] 2022 SCC OnLine SC 221.

[23] The Supreme Court inter alia observed, “[i]t is but logical that when acceptance of freebies is punishable by the Medical Council of India (MCI) (the range of penalties and sanction extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium”.

[24] 2022 SCC OnLine SC 221.

[25] Mangin v. Inland Revenue Commr., 1971 AC 739 : (1971) 2 WLR 39. See also, Bansal Wire Industries Ltd. v. State of U.P., (2011) 6 SCC 545 : (2011) 269 ELT 145 to similar effect.

[26] See generally, Commr. of Customs v. Dilip Kumar & Co., (2018) 9 SCC 1 : (2018) 361 ELT 577(5 Judges) for an exposition of the strict interpretation principle in the context of fiscal laws. See also, Krishi Upaj Mandi Samiti v. CCE, 2022 SCC OnLine SC 224 for the most recent elucidation of the legal position on the subject.

[27] 2022 SCC OnLine SC 221.

[28] 2022 SCC OnLine SC 221.

[29] 2022 SCC OnLine SC 260.

[30] (2012) 3 SCC 1.

[31] 2022 SCC OnLine SC 260.

[32] (2012) 3 SCC 1.

[33] 2022 SCC OnLine SC 260.

[34] The Supreme Court explained this expression in this case to state that “when the party claiming restitution is equally or more responsible for the illegality of a contract, they are considered in pari delicto”.

[35] 2022 SCC OnLine SC 260.

[36] To this end the Supreme Court discussed S. 56 (“agreement to do impossible act”) and S. 65 (“obligation of a person who has received advantage under void agreement or contract that becomes void”) of the Contract Act, 1872.

[37] For illustration, see State of Haryana v. Mukesh Kumar, (2011) 10 SCC 404.

Experts CornerKhaitan & Co

Overview

The Indian Government recently announced its intention to open the Indian space sector to FDI. This article analyses the implications of allowing FDI in space and gives an overview of the Indian space regime.

 

Introduction

India is one of the few nations in the world to dominate the space arena. For a developing nation, India has achieved a great feat in exploring outer space. Despite being a space faring nation, India accounts for only 2% of the global space economy. India’s achievements in the space sector fall short behind countries like US and China which hold a greater contribution in the $447 billion dollar global space economy. The reason for India holding only a small share in the global space economy stems from the Indian space sector being primarily Government controlled.

 

Indian space program was started in the 1960s and has revolutionised the space domain through its national space agency ISRO (Indian Space Research Organisation) which functions under the aegis of Indian Department of Space. For more than 5 (five) decades under Department of Space administration, ISRO has functioned as both an operator and regulator of space activities. This consolidation of complete control over Indian space sector in the hands of statutory bodies has impeded participation from private players. Cognizant about the importance of collaboration with private foreign players, the Indian Government recently announced its intention to open the Indian space sector to foreign direct investment.

 

Overview of Indian Space Sector

As mentioned above, the Indian space sector has been predominantly Government operated. Under the umbrella of Department of Space and ISRO, private players never got the opportunity to fully participate and spearhead space activities. While ISRO has had a long-standing relationship with numerous private players, their role has always been limited to being a vendor, subcontractor, or supplier for ISRO and this constraint on private collaboration has severely inhibited the growth of the Indian space domain.

 

In the year 2020, the Indian space sector welcomed its first set of major reforms to boost private sector participation. As part of these reforms a new body, namely, IN-SPACe (Indian National Space Promotion and Authorisation Centre) was created to regulate and promote private sector participation in space activities.

 

IN-SPACe is contemplated to be the main interface for collaboration between Government and private actors. The private players have responded well to these new government initiatives of providing a level playing field in a once closed off sector. As of 2022, about 75 (seventy-five) startups have registered on the government portal with novel ideas to take the Indian space sector to newer heights. IN-SPACe will enable private players to be more than a vendor and provide them with the option to build and launch space objects, set up base at Department of Space premises, utilise ISRO facilities and infrastructure and develop new space infrastructure for ISRO.

 

Despite the government’s encouragement towards private participation, the issue remains that there has been a lack of foreign investment to augment the Indian space economy. Foreign investors have been on fence about investing in Government monopolised Indian space sector. The conflict of interest with ISRO as a competitor had perpetuated apprehension in minds of foreign investors who could not see a way ahead to reap the benefits of the Indian space program initiatives.

 

FDI in Space

Presently, FDI in space is allowed under government route only for satellite establishment and operations. Further, FDI in space is approved by the Government on a case-by-case basis and often this approval takes years. However, witnessing the change in approach of the Indian Government towards private players involvement, foreign companies have expressed interest in investing in this space.  Soon after opening the Indian space sector to private actors, the next step has been to seek foreign direct investment. ISRO officials have called for introduction of a new FDI policy to engage with foreign firms and make the Indian space sector accessible to both domestic and foreign players.

 

In February 2022, the Indian Minister of Space informed the Indian Parliament about the government’s intention to allow FDI in space. While currently FDI is limited to satellite making operations, we can expect the new FDI policy to attract investment in other space activities as well. As per ISRO officials this new FDI approach would enable foreign companies to set up base in India and utilise ISRO facilities for undertaking a diverse range of space activities. While we are yet to see the exact sectoral guidelines that the Government will impose on FDI but as per ISRO Chairman the sectors that were previously closed off to FDI will be opened up to forge mutually beneficial relationship between Government and private players.

 

To ensure effective collaboration between Indian and foreign players, IN-SPACe would be the agency in charge for facilitating foreign investment in space sector and will provide a one-stop interface for foreign players to enter Indian space market. For a foreign investor, investing in Indian space domain presents numerous benefits:

  • Cost-effective: The operating costs of setting up base and launching space vehicles in India is comparatively much less compared to its counterparts like NASA. Nothing illustrates the economical nature of Indian space endeavours better than the words of the Indian Prime Minister Narendra Modi on the Indian mission to Mars costing less than the whole budget of the Hollywood movie Gravity.
  • Exceptional success rate: ISRO is the 6th (sixth) largest space agency in the world and holds an exceptional success rate. India has made a name for itself by successful launch of about 342 (three hundred and forty-two) foreign satellites from over 34 (thirty-four) countries.
  • Innovative equipment: ISRO holds the cutting edge equipments and is also in process to launching SSLV (small satellite launch vehicle) in partnership with private companies. This will provide a greater avenue for foreign players to form partnerships with the Indian space sector.
  • Liberalised space sector: Over the years, ISRO has forged strong relationships with numerous industrial ventures that will be beneficial to foreign players who wish to set up base in India.

Draft Space Activities Bill

As India tries to meet the rising commercial needs of its Indian space program it must balance this against its international obligations to ensure safe and peaceful use of outer space. Regulation of space activities comes under the ambit of international law and to solidify the obligation of sovereign States the UN Committee on Peaceful Use of Outer Space (UNCOPUOS) obligates the State parties to execute domestic space legislations to govern space activities.

 

Pursuant to this, India is in the process of passing a Space Activities Bill that will provide a conducive environment for private participation and lay down a strong regulatory framework for managing space activities. It is proposed the Space Activities Bill will provide guidelines for attracting FDI and regulating private sector participation. The 2017 draft of the Bill provides for a licence mechanism for undertaking commercial space activities. As per the Bill, the Indian Government on an application made by an entity stipulating the proposed commercial space activity will be issued a licence. Based on this, domestic and foreign private players can apply for a licence and undertake commercial space activities on ISRO’s playground.

 

Conclusion

In conclusion, with India having one of the best space programs in the world, the move to allow FDI in space will make India a bigger player in the global space economy. FDI in space will allow foreign players with a window to venture into the India space domain, this will contribute to Indian national and foreign reserves, promote technology transfer and research innovations. Further, the introduction of Indian Space Activities Bill will give greater clarity to private players on how to be an integral part of the space sector.

 

Lastly, at the 72nd International Astronautical Congress held in 2021, the ISRO Chairman emphasised on the government’s intention to create a favourable environment for foreign investment and suggested foreign participants to start investing in India. Therefore, the time is now ripe for foreign enterprises to penetrate and establish a presence in the Indian space market.


† Partner, Khaitan & Co.

†† Counsel, Khaitan & Co.

††† Associate, Khaitan & Co.

 

Experts CornerTariq Khan

An average lawyer writes more in their lifetime than an author. A literary bent of mind inevitably helps lawyers draft and argue better. Literature is often used by judges to explain the law to common man. The best example is that of late Justice VR Krishna Iyer, whose inimitable style of writing judgments reflected literary merit. Legal writing and research, in varying degrees, are the alpha and omega of the legal profession. They are an indispensable skill for a lawyer or a legal scholar to cultivate, compete, survive, and flourish in this profession. However, legal writing is an art which always allows scope for improvement. The challenge in legal writing is for the written piece to respect the fundamentals of high-quality writing, i.e., plain , clear[1], concise and precise text[2]. Further, vetting the text for spelling, grammar and syntax is a must for any form of legal writing. Incidentally, reading can have an exceptional influence on improving one’s writing. While there can never be enough guidance on ameliorating one’s legal prose, one may consider the following key principles to master the art of legal writing[3]:

1. Know your Audience

Before finalizing the tone of the written piece, ask yourself, “who is the audience to these words?” A jurist? A student? A policy drafter? If nobody is in sight, create the person in your head that could be the prospective reader of the article. Now, tether your article to the benefit of this person. For instance, a brief submitted to the court must advocate and persuade. A memorandum to a client must analyse the issues solicited, report the state of the law on a subject matter, and recommend the most appropriate course of action. Thinking from the reader’s perspective makes it easier to use the language which is reader friendly and decide the length of the article keeping in mind the reader’s time.

2. Eliminate Distractions

It is a possibly flawed understanding that multitasking gets more work done. Legal writing is the writer’s brainchild. The scholar must devote abiding attention to the research and writing at hand to reproduce his thoughts in the most articulate and cohesive manner. The best written pieces necessitate complete attention of the writer. Thus, put distractive elements such as technology, disturbances from other deadlines and emergencies aside. Devote the mind space purely to the task at hand to produce clear and comprehensive thoughts.

3. Ideas become Scholarly Articles

It is often said that the reason why an idea occurs to us, is that we have it within us to execute the idea. Ideas represent the lacunae in the existing understanding of the common readers. Thus, the moment an idea occurs, jot it down where you are most likely to revisit it. It could be a scratchpad or your phone; note it where you can safely compile and revisit it. Ideas are points where a legal writing piece can commence to take shape from. Ensure that the ideas which occur to you at random find a secure place to be clearly expressed and refined for future use. Inspiration comes when you least expect it. One trick is to always note down one’s thoughts in the moment they occur to you, lest they disappear from your memory.

4. Legal Research is the Cornerstone

Legal writing is an outcome of extensive legal research. While legal research merits a discussion at length on its own, for now it is sufficed to state that the foundations of legal writing are adept legal research skills. While the legal scholar is free to assimilate facts and to produce his/her rational opinion, they must back it up by literary sources which expound, support, refute or shape their thought and opinion. The writer must be clear on whether the source holds value as precedent or is merely persuasive in nature. Present a balanced point of view. Do not feel obliged to present just one side of the coin instead acknowledge the legal research available in a wholesome manner and present conflicting or unfavourable views which could challenge the ideas of the written piece. However, in citing judgements, as a rule of thumb, more recent rulings are always more preferred compared to much older cases. It would help to develop a habit to refer to physical compendiums of judgements. These tend to be significantly more detailed and will help you understand the subject matter more thoroughly.

5. Structure the writing

Any written work should have an introduction, an exposition, analysis, and a conclusion. Punctuating the writing through headings adds greater clarity[4]. Limit each expository paragraph to one idea or closely related ideas. Link those ideas of one paragraph to the next one. Pay attention to font size and para length[5]. Moreover, since it is better to be strictly adherent to the guidelines of respectful academia, a scholar must cite all their resources. It is unlawful in various jurisdictions to borrow words written or spoken, without giving due credit to their author. In brief, it makes for a poor scholarly attitude. Thus, when in doubt, always cite the sources.

6. A Heading Speaks a Thousand Words

Choose the most deserving title to your written piece. It should be impactful enough to make the reader want to read the entire article. It should be promising enough to speak for the contents of the article. The title of the written work must be directional, clear, and crisp, instead of vague, lazy and winding. For instance, someone is unlikely to click on an article titled, ‘Arbitration update’ or ‘Insolvency Laws’ unless by mistake a reader clicks on it or if it comes from a renowned source or authority in the subject.

7. Illustrate, Question, Engage

While the introduction of the written piece could captivate or bore the prospective reader, the writer must know that most audiences do not bother to read the article to the very end. What could possibly make the exigent reader find the article worthy of their time and attention? Not merely a catchy introduction, but perhaps an appropriate image that goes with the gist of the scholarly piece. Illustrating the article helps the reader visualize the information they are attempting to navigate. Moreover, when they come across rhetorical questions through the article they read, they are compelled to wonder more, engage more and contemplate more[6].

8. Brevity is the soul of wit

Mark Twain was so right when he said: “I apologize for such a long letter – I did not have time to write a short one.” At all cost, repetition should be avoided. Every word written in the article, or an opinion must only further the motive of the legal scholar. Legal writing must remain free from blind adaptation of worn-out writing habits. These habits could be using complex sentences, redundant vocabulary, and verbosity. Pompous language could dissuade the reader from ever engaging with the writer’s future works on a bad day. Additionally, well intended legalese[7] could leave the reader completely befuddled as to what the author is trying to convey. Write and expand bullet points, exercise brevity[8] through the entire written piece, omit the unnecessary words to keep the written piece more effective.

9. Use action words

It is a weak construction to state that ‘the claimant was not honest’, if the author could have stated that ‘the claimant lied’. Both sentences convey the same meaning, only the latter does it more directly. Endeavour to utilize words which help visualize the act being spoken of. For instance, replace ‘very angry’ with ‘enraged’, ‘silly’ with ‘preposterous’ while keeping in mind the magnitude of the action the writer wants to refer to.

10. Avoid passive voice

The usage of passive voice[9] leads to the sentences becoming winding and long, testing the attention span of the reader. Instead of saying, ‘a crime was committed by the defendant’, the same could be rephrased as ‘the defendant committed a crime’. The usage of passive voice is an announcement of the sloth of thinking process and must be weeded out.

11. Edit, rinse, repeat

Amongst the grave errors committed by writers, instances of misplaced punctuations threaten the credibility of the writer. Performing at least two cycles of editing the written piece, vetting it for errors, for quality of language and for appropriateness of citations add value to the author’s work. It is preferable also to edit the written piece only after the body of the text is ready, to optimize time and ideation of the author. One can never edit a piece enough, but a few cycles of editing are quintessential to do justice to the written piece. Nevertheless, always encourage editorial input by a third-party. Remember, that here is always scope for improvement. Over time, the caricature of the thought process and ideation of the author become evident to their avid readers.

 


Conclusion


Legal writing is a mirror that is held back at the author who thence learns of their own thoughts and ideas. In doing so, ameliorating legal writing skills help the author identify the evolution of their thought. Legal writing could possibly be done not for an audience, but rather for personal consumption. It is a measure of the author’s patience to express in written words, with adeptness and precision. Legal writing could be a possible representation of the author’s philosophy and remains one of the most important skills within the legal profession today.


† Advocate and Registrar at the International Arbitration and Mediation Centre, Former Partner Advani & Co., e-mail: <advocate.tariqkhan@gmail.com>.

†† First year Law Student, Campus Law Centre (CLC), University of Delhi.

[1] Cardozo, B.N. (1986). Law and literature and other essays and addresses. Littleton, Colo.: F.B. Rothman

[2] Antonin Scalia and Garner, B.A. (2008). Making your case : the art of persuading judges. St. Paul, Minn.: Thomas/West.

[3] Khan, A. (2011). A Compendium of Legal Writing Sources. [online] papers.ssrn.com. Available HERE [Accessed 11 Mar. 2022]

[4]. Hardwick, L.B. (2008). Classical Persuasion Through Grammar and Punctuation. [online] papers.ssrn.com. Available HERE  [Accessed 11 Mar. 2022]

[5] Shapo, H.S., Walter, M.R. and Fajans, E. (2013). Writing and analysis in the law. St. Paul, Mn Foundation Press.

[6] White, J.B. (1985). Law as Rhetoric, Rhetoric as Law: The Arts of Cultural and Communal Life. The University of Chicago Law Review, 52(3), p.684.

[7] Lifting the Fog of Legalese. (n.d.). [online] Available at: https://cap-press.com/pdf/1549.pdf [Accessed 12 Mar. 2022].

[8] Charrow, V., Erhardt, M.K. and Charrow, R. (2007). Clear and effective legal writing. Austin, Tex.: Wolters Kluwer Law & Business, Aspen Publishers.

[9] Fischer, J. (n.d.). Montana Law Review Why George Orwell’s Ideas about Language Still Matter for Why George Orwell’s Ideas about Language Still Matter for Lawyers WHY GEORGE ORWELL’S IDEAS ABOUT LANGUAGE STILL MATTER FOR LAWYERS. [online] Available at: https://scholarworks.umt.edu/cgi/viewcontent.cgi?article=2041&context=mlr [Accessed 12 Mar. 2022].

Akaant MittalExperts Corner

The Insolvency and Bankruptcy Board of India (IBBI) recently amended the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 vide IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021. The same is enacted pursuant to the discussion paper (“IBBI discussion paper”) circulated by the IBBI soliciting feedback on its proposals. The latest set of amendments[1] to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) proposes some very critical changes with respect to the flow of a CIRP and its regulation. Most importantly, it proposes a code of conduct regulating the Committee of Creditors (CoC).[2] Further, it introduces challenge method as an option for the resolution professional to call resolution plans.[3] Amongst these, there are alterations that seek to ensure strict adherence to the timeline of the CIRP to ensure time boundedness.

 


A. Deconstructing the Amendments


The first amendment has been made in Regulation 17 by inserting the sub-regulation (1-A) after sub-regulation (1) to it.

The said Amendment read as follows:

Regulation 17(1-A) The committee and members of the committee shall discharge functions and exercise powers under the Code and these regulations in respect of the corporate insolvency resolution process in compliance with the guidelines as may be issued by the Board.[4]

 

The IBBI is yet to issue any recommendations. However, the guidelines that could be released by the IBBI are expected to lay out the principles provided in the annexure of the IBBI discussion paper[5] which are as follows:

  1. A member of the Committee of Creditors, while discharging its duties shall abide by the following code of conduct, as an individual and jointly with other members of the committee.
  2. A member of the committee shall, amongst other guidelines:

(a) Maintain integrity in performing its roles and functions under the Code.

(b) Must not misrepresent any facts or situations and should refrain from being involved in any  action that is detrimental to the objectives of the Code.

(c) Must maintain objectivity in exercising decisions on the subject-matter bestowed to the  committee under the Code.

(d) Must disclose the details of any conflict of interests to the stakeholders, whenever it comes across such conflict of interest during a process.

(e) Not acquire, directly or indirectly, any of the assets of the debtor, nor knowingly permit any relative of the committee member to do so, without making a disclosure to the stakeholders.

(f) Not adopt any illegal or improper means to achieve any objective.

(g) Cooperate with the insolvency professional in discharging his duties under the Code.

(h) Not influence the decision or the work of committee so as to make undue gain or advantage for itself or its related parties.

(i) Disclose the existence of any pecuniary or personal relationship with any stakeholders entitled to distribution, as soon as it becomes aware of it.

(j) Ensure that decisions are made without any bias, favour, fear, coercion, undue influence or conflict of interest.

(k) Maintain transparency in all activities and decision making.[6]

 

In order to understand why IBBI brought these guidelines, one may look to the Parliamentary Standing Committee Report which made recommendations to have a professional code of conduct for CoC, which will define and circumscribe their decisions and also recommended the IBBI to frame guidelines for the selection of RPs by the CoC in a more transparent manner.[7]

 

The 2nd amendment is to ensure that the process of resolution is timely executed. Prior to the amendment, Regulation 36-A of the CIRP Regulations contained provision regarding the invitation for expression of interest (EoI). The said invitation is to contain details regarding the criteria for prospective resolution applicants and also provide such basic information about the corporate debtor as may be required by a prospective resolution applicant for expression of interest, amongst other guidelines. However, there is no stipulation on how many times this invitation could be amended.

 

Similarly, Regulation 36-B of the CIRP Regulations contained provision regarding the request for resolution plans. It provided for a minimum of 30 days for prospective resolution applicants to submit the plans and allows for revision/modification of the request for resolution plan (RFRP) subject to the 30 days timeline but there was no cap on the number of revisions that may be allowed in a resolution plan.

The same was found by the IBBI to afflict the resolution process with delay.

Resultantly, the amendment adds clause (4-A) to Regulation 36-A and a proviso to Regulation 36-B(5), which stipulate:

 

Regulation 36-A (4-A)— Any modification in the invitation for expression of interest may be made in the manner as the initial invitation for expression of interest was made:

Provided that such modification shall not be made more than once.

Regulation 36-B (5)— Any modification in the request for resolution plan or the evaluation matrix issued under sub-regulation (1), shall be deemed to be a fresh issue and shall be subject to timeline under sub-regulation (3).

Provided that such modifications shall not be made more than once.

The 3rd amendment was with respect to the instances where the resolution applicants revise the resolution plans multiple times, with or without the consent of the CoC, leading to delays in completing the process.

 

To this, the Committee suggested a Swiss challenge method, wherein once a bid from one bidder is received and approved, then the floor is opened to the challenger. If the original bidder agrees to match the offer given by the challenging bidder in its own proposal, then bid is awarded to him, else it is awarded to the challenging bidder.

 

To this effect, sub-clause (1-A) is added to Regulation 39, which stipulates:

39A (1-A) – The resolution professional may, if envisaged in the request for resolution plan

(a) allow modification of the resolution plan received under sub-regulation (1), but not more than once; or

(b) use a challenge mechanism to enable resolution applicants to improve their plans.

(1-B) The Committee shall not consider any resolution plan—

(a) received after the time as specified by the committee under Regulation 36-B; or

(b) received from a person who does not appear in the final list of prospective resolution applicants; or

(c) does not comply with the provisions of sub-section (2) of Section 30 and sub-regulation (1).

 

Regulation 39-A(1-A)(b) expressly crystallises the swiss challenge mechanism into the resolution process under the IB Code. It must be noted here that Regulation 39-A earlier did not contain any prohibition on the usage of swiss challenge method during the CIRP process.[8]

 

Furthermore, the amendment also put an embargo on the CoC from considering resolution plans that are: (1) received after a certain time; or (2) received from persons who are not part of the final list of prospective resolution applicants; and (3) not compliant with Section 30 of the Insolvency and Bankruptcy Code, 2016.


B. Broader Issues with the Amendment


Now that the salient features of the amendment are discussed, and before we proceed with the brief analysis, it is important to understand what powers does the CoC enjoy and why there is a need felt for bringing a code of conduct.

Need to balance the “commercial wisdom of the CoC” with the absoluteness of power

 

The IB Code is designed so that those stakeholders who have the biggest stake, at the same time possess the financial expertise to resolve insolvency resolution, play the prominent role. It is in furtherance of this objective that the judicial interference of the NCLT, NCLAT and the Supreme Court is sought to be minimum and majority of the decisions taken by the CoC are held to be non-justiciable.

 

For instance, the CoC enjoys complete autonomy in the following matters:

(i) who to appoint as the RP;

(ii) replace the RP;

(iii) direct liquidation of the corporate debtor whenever it wants;

(iv) negotiate with the bidders and seek revisions of the bids;

(v) specify the criteria for prospective resolution applicants when inviting expression of interests; and

(vi) seek extension of the time period of resolution process.

In such matters, the decision of the CoC is beyond the purview of judicial interference.

 

The Supreme Court through various judicial pronouncements have clarified the role and responsibilities of the CoC and established the primacy of “commercial wisdom of CoC” in deciding the fate of the corporate debtor undergoing CIRP.[9] As a result, the Supreme Court has consistently acknowledged the relevance of the CoC and relies on the commercial wisdom of the CoC.

 

Now with the adoption of a code of conduct, the expansive scope of power available to the CoC stands to get circumscribed. The avoidable experiences borne during the working of the IB Code, such as the following, are the reasons why the code of conduct was felt necessary:

(i) When the CoC, usurping the role of the RP, on its own, adjudicated on if a creditor is a financial or an operational creditor.

(ii) When the decision-making by the CoC members is riddled with red tapism, so much so that in an instance the CoC did not approve appointment of IRP as RP since two of the four financial creditors, having aggregate voting rights of 77.97% required internal approvals from their competent authorities.

(iii) When a financial creditor decided to engage an entity for services during CIRP. It proposed the name of an IP for appointment as IRP in the application, after having an understanding with him that on his appointment as the IRP, he shall appoint that entity. The IRP appointed the said entity on the date of commencement of CIRP. The fee of entity was 20 times of the fee of the IRP/RP.

(iv) When the lead FC recovered debt during moratorium from the company’s account it was maintaining. In liquidation, even when the company was a going concern and a scheme under Section 230 of the Companies Act, 2013 was under consideration, and despite instruction to contrary from the NCLT, the liquidator distributed Rs 26 crore to FCs under their pressure.

 

Clearly, the above-mentioned instances are outside the ambit of the IB Code and could not be saved from the broad ambit of the commercial wisdom of the CoC.

 

Now the fundamental concerns with respect to these amendments seem to not stem from the objective sought to be achieved, but they seem rather focused on the effect that these amendments could directly (or indirectly) end up bringing about to the insolvency process.

 

(a) Lack of enforcement mechanism

It is unclear on how the breach of the guidelines by any member of the CoC would be addressed. The well-known latin maxim ubi jus, ibi remedium encapsulates the dilemma, which essentially means that where there is a right, there is a remedy. In other words, it postulates that where the law has established a right there should be a corresponding remedy for its breach.

 

In a situation, if any member of the Committee of breaches any of the guidelines, it is unclear that what would be the impact of such breach. In other words, the grey area is whether such breach will just impact that particular member of the CoC or the CoC (and the resolution process) as a whole.

 

The same is to be kept in juxtaposition with one of the primary objectives behind the present amendment, which is a speedy and timely conduct of the resolution process. If the breach of the guidelines results in more judicial intervention and justiciability, then the model timelines in the conduct of a CIRP may become more difficult to achieve.

 

It must also be noted that the CoC has been given a long rope by the judicial authorities, so much so that even when the CoC entertains late bids,[10] or approves a resolution plan while being aware of the fact that the workers were seeking for the revival of certain production units of the debtor but the plan itself stipulates the closure of these units; in such instances the judicial authorities had held that the adjudicating authority would still have to go by the commercial wisdom of Committee of Creditors.[11]

 

Therefore, the Board would have to work out these aspects in consultation with the stakeholders before issuing any guidelines and the accompanying mechanism for its enforcement.

 

(b) Vague and open-ended provisions.

A provision must not be so vague, and overbroad that no reasonable standards are laid down and no clear guidance could be gauged.

 

The Supreme Court in Shreya Singhal v. Union of India,[12] applied the doctrines of vagueness, overbreadth, and chilling effect to strike down Section 66-A of the IT Act, reasoning that the impugned provision of Section 66-A “is cast so widely that virtually any opinion on any subject would be covered by it, as any serious opinion dissenting with the mores of the day would be caught within its net. Such is the reach of the section and if it is to withstand the test of constitutionality, the chilling effect on free speech would be total … therefore, [it would] have to be struck down on the ground of overbreadth”.

 

The proposed Code of Conduct in the discussion paper contains some very vague and open-ended obligations for the members of the CoC. For instance, it requires the CoC (i) to cooperate with the insolvency professional in discharging his duties under the Code; or (ii) maintain objectivity in exercising decisions on the subject-matter bestowed to the Committee under the Code; or (iii) ensure that decisions are made without any bias, favour, fear, coercion, undue influence or conflict of interest; or (iv) bear the collective interest of all stakeholders in mind in all activities and decision-making.

 

Such generic provisions may become a cause for major concern, where the conflict between the commercial wisdom of the CoC with these guidelines could give rise to challenges against an approved resolution plan. Currently, there are instances where objections have been raised against the approved resolution plan on the grounds that

 

(a) the approved plan had reserved a portion of the assets of the corporate debtor (in the present case, the same were the preference shares held by subsidiary of the corporate debtor) for distribution amongst the financial creditors alone;[13] or

(b) while the CoC had persuaded the successful resolution applicant to increase the worth of the resolution plan to the extent of Rs 235.86 crores (from the previous amount of Rs 217.98 crores) but in the process, it had allowed the portion of the claim payable to the operational creditors to be reduced from Rs 1.64 crores to Rs 0.50 crores.[14]

 

In such instances, the courts have at the altar of commercial wisdom of the CoC and quantitative; still refused to intervene.

 

The past experience tells us that most of the unsuccessful resolution applicants challenge the validity of the CIRP on one ground or the other. Thus, if a guideline with such broad obligations is issued by the IBBI, then it will provide the unsuccessful resolution applicants, or even other creditors with additional causes of action for challenging the approved resolution plans. The biggest concern with respect to this is that it will cause further delay in the completion of CIRP, in turn causing further deterioration of the value of assets of the corporate debtors.

 

(c)The limited opportunities to revise plans

In a scenario post COVID, successful resolution applicants may not be financially as sound as they used to, the limit on the applicants in modifying the plans. Furthermore, the amendment disallows the CoC from considering resolution plans that are received after a certain time. There are instances, where late bids have been considered,[15] and even approved[16] by the CoC in the interests of maximising the assets of the corporate debtor, which has even been upheld by the Supreme Court.

 

It remains to be seen on whether the same will be directory or mandatory.


Conclusion


The amendments certainly are based out of the pressing need to address the loopholes in a resolution process and learn from the avoidable experiences borne during these many years of the operation of the IB Code. However, despite the well-intended objective of checking the arbitrary powers of the CoC and promote a quicker resolution mechanism, the guidelines may require certain tailoring and at certain places, an enforceable mechanism.

 

 


† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the National Law University, Mumbai and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.

The author gratefully acknowledges the research and assistance of Sh Mahesh Kumar, 4th Year, BA LLB (Hons.), student at Sharda University, Greater Noida, Uttar Pradesh; Ms Jyotshna Yashaswi and Prince Chandak in writing this article.

[1] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, Notification No. IBBI/2021-22/GN/REG078, dated 30-9-2021 (w.e.f. 30-09-2021) Read HERE.

[2] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, S. 2, HERE.

[3] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, S. 5, HERE.

[4] Id., Regn. 17(1-A).

[5] Insolvency and Bankruptcy Board of India Discussion paper published on 27-8-2021, accessible HERE.

[6] Id., Annexure.

[7] 32nd Report of the Parliamentary Standing Committee on Finance in 17th Lok Sabha, titled “Implementation of Insolvency and Bankruptcy Code – Pitfalls and Solutions”, published in August 2021, Part II, para 3, accessible HERE .

[8] Ngaitlang Dhar v. Panna Pragati Infrastructure (P) Ltd., 2021 SCC OnLine SC 1276.

[9]  See K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150 : (2019) 4 SCC (Civ) 222; Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17; Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 : 2019 SCC OnLine SC 1478.

[10] See Kalpraj Dharamshi v. Kotak Investment Advisors Ltd., (2021) 10 SCC 401.

[11] Santosh Wasantrao Walokar v. Vijay Kumar V. Iyer,  2020 SCC OnLine NCLAT 128.

[12] (2015) 5 SCC 1.

[13] Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Ltd., (2021) 10 SCC 623 : 2021 SCC OnLine SC 569.

[14] Power2SME (P) Ltd. v. Allied Strips Ltd., 2020 SCC OnLine NCLAT 1056.

[15] See IMR Metallurgical Resources AG v. Ferro Alloys Corpn. Ltd., (2020) 220 Comp Cas 528.

[16] See Kalpraj Dharamshi v. Kotak Investment Advisors Ltd., (2021) 10 SCC 401.