Legislation UpdatesStatutes/Bills/Ordinances

The Ministry of Finance has passed the Taxation Laws (Amendment) Act, 2021 on August 13, 2021. The Act amends the Income Tax Act, 1961 and the Finance Act, 2012.

Key amendments under the Act are:

Levy of Tax on income earned from the sale of shares outside India: 

Under the Income Tax Act, 1961 the non-residents are required to pay tax on the income accruing through or arising from any business connection, property, asset, or source of income situated in India. The Finance Act, 2012 amended the Income Tax Act, 1961 and clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India.  As a result, the persons who sold such shares of foreign companies before the enactment of the Finance Act, 2012, also became liable to pay tax on the income earned from such sale. The Taxation Laws (Amendment) Act, 2021, omits this tax liability if following conditions are met:

  1. An appeal or petition filed in this regard must be withdrawn or the person must submit an undertaking to withdraw it
  2. The notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them
  3. The person should submit an undertaking to waive the right to seek or pursue any remedy or claim in this regard, which may otherwise be available under any law in force or any bilateral agreement.

The Act prescribes that if all the above conditions are fulfilled by the concerned person, then all the assessment or reassessment orders issued with respect to such tax liability will be deemed to have never been issued. Also, if a person becomes eligible for refund after fulfilling these conditions, the amount will be refunded to him, without any interest.


*Tanvi Singh, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: Anup Jairam Bhambhani, J., emphasizing the principle of res ipsa loquitur and placing a detailed explanation on the same granted just and fair compensation to a person who was 100% disabled due to an accident at his place of work.

Factual Backdrop

Petitioner’s son (Bharat) who was 28 years of age was the victim of an accident at the age of about 21 years which had left him 100% disabled. Instant petition was filed by petitioner’s father since petitioner was stated to be virtually bed ridden and not in a position to file to pursue his claim against the respondents.

Petitioner had made claims against the respondents BSES Rajdhani Power Limited and Bryn Construction Company.

Further, it was submitted that petitioner had suffered an accident due to certain work performed by Bryn for BRPL, which led to the filing of the present petition.

Cause of Permanent Disability

 Bharat, who was then about 21 years of age, while working as an electrician with Bryn, was tasked with rectifying a fault in an electricity pole that was causing fluctuation in the electricity supply at a farmhouse and suffered a fall while performing the task since the electricity pole that he had climbed on, snapped and fell.

Bharat’s dismal physical state apart, it was also evident to this court that Bharat was a psychological wreck, not least because in the course of interaction with this court, he broke- down on several occasions.

Depression and Anxiety

 As per medical opinion in regard to Bharat’s psychological state, his level of mental depression and anxiety fall in the “abnormal range”.

Questions for Consideration

  • Given his medical condition, what course of action should be adopted for Bharat’s further rehabilitation, continuing care and welfare?
  • Is Bharat entitled to receive any monetary compensation for the injury suffered by him as a result of the accident; if so, from which of the respondent or respondents?
  • If the answer to (ii) above is in the affirmative, in what manner should the compensation be calculated?

Analysis, Law and Decision

While analyzing and penning down this interesting decision, Court addressed a very fundamental issue, whether Bharat was an ‘employee’ of Bryn or was engaged by Bryn to perform the task that led to the accident.

It was noted that Bryn did not expressly admit that Bharat was their employee; nor that he had been engaged by them to perform the task in question.

However, there was also no denial of any kind, whether express or implied, that Bharat was working for Bryn. The thrust of Bryn’s counter-affidavit is that BRPL is responsible to compensate Bharat for the injury, since at the relevant time Bharat was working under BRPL’s supervision and performing BRPL’s tasks.

Court took note of the fact that while BRPL and Bryn both contended that all requisite safety equipment and precaution were made available by them, neither BRPL nor Bryn explained why such equipment, if available, failed to protect Bharat from the serious injury he suffered. 

Opinion of the Court

Bench opined that Bharat was working for Bryn and was tasked with certain maintenance work to be performed on an electricity pole owned by BRPL; which pole, it turned-out, was not strong enough to take Bharat’s weight or was not rooted securely in the ground, and thereby fell, as a result of which Bharat sustained serious injuries. It is also evident that Bharat was not provided any safety gear before he was directed to climb the pole to undertake the task.

 Principle of res ipsa loquitur

High Court added to its analysis that the instant matter would be squarely covered by the principle of res ipsa loquitur, whereby no detailed evidence, much less a trial, is required to establish ex-facie negligence on the part of BRPL and Bryn.

The said maxim was lucidly explained in the leading Supreme Court decision of Shyam Sundar v. State of Rajasthan, (1974) 1 SCC 690,

 The maxim res ipsa loquitur is resorted to when an accident is shown to have occurred and the cause of the accident is primarily within the knowledge of the defendant. The mere fact that the cause of the accident is unknown does not prevent the plaintiff from recovering the damages, if the proper inference to be drawn from the circumstances which are known is that it was caused by the negligence of the defendant. 

Elaborating further, the Court stated that the accident could not have occurred had Bryn and/or BRPL not been negligent in taking reasonable precautions to avoid it; which gave rise to their strict liability for the injuries sustained by Bharat.

The undated declaration with no proof of payment made to Bharat, though the declaration signed by Bryn accepting payment of a small sum of compensation in full and final settlement from Bryn and absolving them of any further liability.

In Court’s view, the above-mentioned declaration, deserved no credence or value since it smacked of being a document procured by Bryn precisely for the purpose of absolving itself of any further claim or liability vis-à-vis Bharat, by suborning a hapless and resourceless victim with a small amount of monetary bait, knowing full well that their actual liability would be much more.

Bench further expressed that merely because there were more than one respondent attempting to foist blame or liability on each other, that would not defeat the just claim of the petitioner’s son.

Hence, both respondents would be held jointly and severally liable, giving them liberty to recover the whole or any part of compensation paid, from one another.

High Court’s Inference

  • Without delving into the technical semantics of whether Bharat was an ‘employee’ of Bryn within the meaning of the Employee’s Compensation Act, suffice it to say that Bharat was performing the task in question for Bryn and at their instance
  • Bharat is unable to perform even the most basic, personal, daily chores himself and is all but 100% dependent on others; and as a result, though Bharat is living, he is barely alive;
  • On the principle of ‘strict liability’, both Bryn and BRPL are, jointly and severally, liable to compensate Bharat for putting him in his current state;
  • Section 4(2)(a) of the Employee’s Compensation Act mandates that apart from the liability to pay compensation, the employer is also under obligation to reimburse all actual medical expenses incurred by an employee for treatment of injuries. Furthermore, section 4-A provides that failure of an employer to pay compensation in a timely manner would attract payment of both interest and penalty for the delayed payment of compensation;
  • Reading the Bryn-BRPL Agreement and section 12 of the Employee’s Compensation Act together, it is seen that section 12 also fixes liability upon the “principal” for payment of compensation to an injured employee, with a right in the principal to recover the same from the contractor, if work was being carried-out by a contractor. In the present case the principal would therefore be BRPL and the contractor would be Bryn
  • Allowing the petition, Court awarded Bharat relief in two broad categories:
  1. Monetary Relief
  2. Non-Monetary Relief by way of directions.

Details of the relief can be referred to in the Judgment.

In view of the above discussion, petition was disposed of. [Kehar Sigh v. GNCTD, 2021 SCC OnLine Del 4198, decided on 25-08-2021]


Advocates before the Court:

For the Petitioner: Prabhsahay Kaur, Amicus Curiae.

Saraswati Thakur, Advocate.

For the Respondents: Satyakam, Additional Standing Counsel for GNCTD/R1

Ravi Gupta, Senior Counsel with Sunil Fernandes, Standing Counsel for BRPL-RPL with Anju Thomas, Shubham Sharma and Sachin Jain, Advocates for R2.

A.K. Sharma, Advocate for R3. Saurabh Sharma, Advocate for Indian Spinal Injuries Centre.

Sayli Petiwale, Advocate for Anil Mittal, Advocate for State of U.P.

Op EdsOP. ED.

Recently, the Division Bench (DB) of High Court of Delhi in “DLF Ltd. v. Leighton India Contractors (P) Ltd.[1]”, determined that the Court while exercising the jurisdiction under Section 9[2] of the Arbitration and Conciliation Act, 1996 (Arbitration Act), shall not embark into an assessment of material on record to determine who was at fault; whether the bank guarantee (BG) have been encashed in terms of the agreement or illegally and unlawfully and granting interim relief of the nature of a final relief of refunding or restitution of BG and claim.

Background 

That Leighton India Contractors Private Ltd. (Leighton) and DLF entered into the contract agreement dated 19-7-2013 (contract), for the development of DLF residential project “The Camellias” in Gurugram. As provided in the contract, Leighton executed six BGs i.e., two for retention money guarantee for worth of INR 78,18,77,583 and four towards performance security guarantee for worth of INR 1,43,87,22,708. On arising of the dispute between the parties, DLF encashed the BGs furnished by Leighton. Thus, Leighton was forced to approach the Court under Section 9 of the Arbitration Act, seeking interim relief to injunct DLF from invoking the submitted BGs or in alternative, seeks restoration of the BGs enchased by DLF.

Single Bench order under Section 9 of the Arbitration Act

That on perusing the exchange of communication between DLF & Leighton, the Court opined that no notice of invocation of bank guarantee or a letter of termination of contract, is issued to the Leighton, before encashment of BGs. In fact, the BGs were invoked before Leighton could have approached the Court. That Leighton was not afforded with the slightest opportunity to avail of its legal remedy in law, against the invocation of the BGs by DLF. Thus, in the opinion of the Court, the manner in which the BGs, have been invoked, is not completely bona fide.

That with the aforesaid observation, the Court passed an order granting interim relief to Leighton, wherein, DLF was directed that the amount credited by the bank to DLF from encashment of BGs, the DLF shall create a fixed deposit for a sum of Rs 1,43,87,22,708 and place the same in an interest-bearing fixed deposit on auto renewal mode. That the same shall be made out in the name of the Registrar General of Delhi Court, until further order of the Court.

Division Bench

The order of Single Bench was challenged in appeal under Section 37[3] of the Arbitration Act. As far as the issue of invocation of BG is concerned, the Court cited several binding precedents of Supreme Court, to say that BG is an independent contract distinct from the main contract. If terms of BG prescribed that it can be invoked unconditionally, being independent from the main contract, bank is bound to honour the demand and transmit the value of the unconditional BG, so invoked by the beneficiary, into the account of such beneficiary account, except if it involves the element of “egregious fraud or special equity”. That the beneficiary, is within its right to invoke the unconditional BG at its instance and whether if it is done rightly or wrongly, is subjected to the decision of the Arbitral Tribunal, a forum which parties have mutually agreed for resolution of their dispute.

(i) Governing principles of Civil Procedure Code is binding on arbitration court

 That the Single Bench, directed DLF to deposit a sum of INR 1,43,87,22,708 received from encashment of performance BGs, into a fixed deposit on auto renewal mode, in the name of Registrar General of Delhi High Court. DLF argued that the interim relief granted to Leighton, was analogous to the relief provided under Order 38 Rule 54 CPC “Where defendant may be called upon to furnish security for production of property”, even though the Leighton failed to disclose any grounds that warrants granting a relief under Order 38 Rule 5 CPC.

To adjudicate upon this issue, the Court cited the judgment of Delhi Hight Court in C.V. Rao v. Strategic Port Investments KPC Ltd.5 wherein it was held that while exercising the jurisdiction under Section 9 of the Arbitration Act, the Court cannot ignore that underlying principles which governs the analogous powers conferred under Order 39 Rules 1 and 26 and Order 38 Rule 5 CPC. The power of Section 9 court is to examine the existence of valid arbitration agreement and grant interim relief pertaining to the matters specified under Sections 9(ii)(a) to (e) of the Arbitration Act, for limited purpose of preservation of the property, which is subject-matter of the dispute, till constitution of the Arbitral Tribunal. That the order for specific performance of the contract, exceeds the jurisdiction of the Court under Section 9 of the Arbitration Act.

To further reiterate the governing principle for granting injunction under civil law, the Court referred to the judgment of Supreme Court in Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd.7, wherein it was held that grant of interim injunction or mandatory injunction is governed by the settled legal principles, which is equally binding on the court exercising its power under Section 9 of the Arbitration Act. Thus, it would not be possible to keep out the concept of “balance of convenience”, “prima facie case”, “irreparable injury” and the concept of “just and convenient”, while passing interim measures under Section 9 of the Arbitration Act.

That the Single Bench passed an interim order granting relief analogous to Order 38 Rule 5 CPC, on being satisfied of existence of specific equity, without considering that Leighton, never laid out the necessary grounds to satisfy the use of power provided under Order 38 Rule 5 CPC. In the absence of any averments or pleas taken, that satisfy the requirements of Order 38 Rule 5 CPC, no case for an order of attachment before judgment or for furnishing of security was made out. The orders of the learned Single Judge directing furnishing of security had to be founded on Order 38 Rule 5 CPC in the light of the view taken by the Supreme Court and a Division Bench of this Court, which it is not. 

(ii) Jurisdiction of Court under Section 9 of the Arbitration Act

 That Single Judge, extensively dealt with dispute lies between the parties, ascertaining their rights and liabilities and interpreting the terms of the contract. The Division Bench, held that such a venture by the Court under Section 9 of the Arbitration Act, are not allowed. That dealing with the question of illegality and who is at fault for encashment of BGs, are to be referred and dealt in the arbitrational proceeds by the Arbitration Tribunal. That, in the interest of fair play, Section 9 court should not embark into the assessment of material on record to determine who was at fault and whether the BGs are encashed in terms of the clauses of contract or illegally or unlawfully and further grant a relief of the nature of a final relief of refunding or restituting, as claimed by Leighton.

The Court relied upon the judgment of Delhi High Court in National Highways Authority of India v. Bhubaneswar Expressway (P) Ltd.8 wherein it was opined that Court exercising jurisdiction under Section 9 of the Arbitration Act, if allowed to adjudicate whether there is any legal merit in the said grounds or not, it would mean to adjudicate the dispute, which the parties have agreed to be adjudicated by arbitration, which would leave nothing for the Arbitral Tribunal to decide. Furthermore, it is a common trend that once there is a judicial order on the merit of the dispute relating to interim relief, then the Arbitral Tribunal will hesitate from deciding contrary to the findings returned by the Court on interpretation of the contract.

To ascertain the power of Section 9 court in matter of invocation of BG, the Court relied upon the judgment of Delhi High Court in CRSC Research and Design Institute Group Co. Ltd. v. Dedicated Freight Corridor Corporation of India Ltd.9, wherein it was held that parties seeking interim measure of interference with unequivocal, absolute and unconditional BGs, is required to interpret the clauses of the contract, to form a prima facie opinion that whether the beneficiary involved BGs rightly or wrongly. Such an exercise involves substantive proceedings, to be embarked upon for recovery of money of the BGs, if averred to have wrongly taken by the beneficiary, which falls outside the jurisdiction of court under Section 9 of the Arbitration Act.

That, it would be beyond jurisdiction to direct restitution in proceedings under Section 9 of the Arbitration Act as restitution by its very nature involves a final determination of rival contentions even if it were to appear just and proper to do so. Substantive questions have to be left to be decided in arbitration, the mode of dispute resolution chosen by the parties.

Conclusion

 That by setting aside the order of Single Bench, the Division Bench reasserted that the legal principal instrumental for granting a relief available under Civil Procedure Code, 190810 are equally applicable on the court exercising its power under Section 9 of the Arbitration Act, unless exclusion is express or implied. The courts should avoid grating a relief at the interim stage, if party fail to showcase the existing necessary grounds of “balance of convenience”, “prima facie case”, “irreparable injury” and the concept of “just and convenient”, in their favour. Moreover, granting an interim relief, in the nature of the final relief, would not only imply the fear of judicial intervention in the jurisdiction of Arbitral Tribunal, but would defeat the purpose of arbitration between the parties.

Courts under Section 9 of the Arbitration Act should refrain from deciding upon the issues related to rights and liabilities of the parties to the contract; illegality of action, entitlement, liability, damages, etc., as that would amount to sit upon the jurisdiction of the Arbitral Tribunal, who then have nothing left to decided upon. Certainly, an observation can be made by the Court, to justify the fair exercise of judicial discretion of the Court, to grant interim measure at the initial stage, till commencement of the arbitration proceedings. However, the observation to that effect, be limited to the extent of preservation of the property, which is subject-matter of the dispute, till constitution of the Arbitral Tribunal.


Practicing Advocate of the Delhi High Court and Supreme Court of India.

[1] 2021 SCC OnLine Del 3772.

[2] <http://www.scconline.com/DocumentLink/8p216XFz>.

[3] <http://www.scconline.com/DocumentLink/0Vi7sQsH>.

4 <http://www.scconline.com/DocumentLink/B63wAYb4>.

5 2014 SCC OnLine Del 4441.

6 <http://www.scconline.com/DocumentLink/B63wAYb4>.

7 (2007) 7 SCC 125.

8 2021 SCC OnLine Del 2421.

9 2020 SCC OnLine Del 1526.

10 <http://www.scconline.com/DocumentLink/fW5E2p7z>.

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): P. Dinesha (Judicial Member) allowed an appeal which was filed after being rejected by the Adjudicating Authority and First Appellate Authority in relation to refund claim in the chit fund business.

The appellant engaged in the chit fund business and after the introduction of negative taxation regime, they were compelled to pay Service Tax on the foreman charges collected for their chit fund activities for the period from 01-07-2012 to 31-05-2013.

The counsel for the appellant, Mr A. Niraikulam also submitted that in the case of Delhi High Court of Delhi Chit Fund Association v. Union of India, 2013 (30) S.T.R. 347 (Del.) it was ruled that Service Tax was not chargeable on the services rendered by the foreman in the chit fund business which was upheld by the Supreme Court by dismissing the Revenue’s Special Leave Petition as reported in 2015 (38) S.T.R. J202 (S.C.). The appellant had filed its refund claim and the Adjudicating Authority had rejected the refund claim as being hit by the limitation of time as prescribed under Section 11B of the Central Excise Act, 1944. On first appeal, the First Appellate Authority also having rejected the appellant’s appeal, the present appeal had been filed before this forum.

The Tribunal was of the opinion that the decision of the Supreme Court was the law of the land and therefore if it had held that when there was no question of liability to Service Tax, then, any amount collected under the guise of Service Tax becomes a collection of the said amount without the authority of law and the Revenue can never, therefore, claim any right over such amount; the same will have to be refunded forthwith to the concerned person.

The Tribunal held that the collection of amount, which according to the appellant was out of compulsion, being a collection without any authority of law, will have to be refunded. The Tribunal while allowing the appeal set aside the orders by the lower authorities. However. Tribunal was of the view that the application for refund was filed on 19-01-2018; the date of the judgement of the Supreme Court was 07-01-2014 so there was a clear four-year delay in filing the refund claim therefore appellant is not entitled to any interest for the delay caused by it as the appellant cannot take advantage of its own mistake of filing a delayed refund claim and thus cannot claim the interest for that delayed period during which time it slept over its rights.[Sivamurugan Chit Fund (P) Ltd. v. Commr. Of G.S.T. & CE, 2021 SCC OnLine CESTAT 371 , decided on 06-08-2021]


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: A Division Bench of Sanjay Kishan Kaul and Hemant Gupta, JJ. reiterated that a Letter of Intent merely indicates a party’s intention to enter into a contract with the other party in future. No binding relationship between the parties at this stage emerges and the totality of the circumstances have to be considered in each case.  

The Court was deciding whether, in the facts of the case, the respondent−successful bidder who was awarded a tender by the appellant−South Eastern Coalfields Ltd., was liable for the execution of work by another contractor at the risk and cost of the successful bidder.

Factual Matrix

South Eastern Coalfields Ltd. (“Company”) floated a tender for certain works in June 2009. Bids were received and the respondent was the successful bidder. A Letter of Intent (“LoI”) was issued by the Company in October 2009 awarding the contract for a total work of over Rs 3.87 crore. In pursuance of the LoI, the successful bidder mobilised resources at site. On 28-10-2009, the Company issued a letter of site handover/acceptance certificate, which was to be taken as the date of commencement of the work.

Sometime in December 2009, the machinery deployed by the successful bidder suffered major breakdown and the work had to be suspended. After this, contractual relationship deteriorated and the Company alleged breach of contractual terms and rules and regulations applicable. The Company brought to successful bidder’s notice that they failed to submit the performance security deposit which was required to be submitted within 28 days from the date of receipt of LoI as per the terms of the tender.

The Company issued a show cause notice that they were left with no option except to terminate the work awarded to the successful bidder and get it executed by another contractor at the risk and cost of the successful bidder in terms of Clause 9 of the General Terms and Conditions of the Notice Inviting Tenders (“NIT”). Ultimately, final termination of work was carried out in April, 2010. Thereafter, the work was awarded to another contractor at a higher price and on account thereof a letter was issued by the Company to the successful bidder seeking an amount of over Rs 78 lakh being the difference in the contract value between the successful bidder and the new contractor.

Appeal

The successful bidder filed a writ petition before the Chhattisgarh High Court seeking quashing of the termination letter as well as the recovery order. The High Court held that the Company was within their rights to cancel the award of work and forfeit the bid security. However, endeavour of the Company to recover the additional amount in award of contract to another contractor as compared to the successful bidder was held not recoverable. Aggrieved, the Company approached the Supreme Court.

Analysis and Observations

The task before the Court was to decide whether there was a concluded contract between the parties, the breach of which will make the successful bidder liable for execution of work by another contractor at the risk and cost of the successful bidder. Considering the conspectus of pleas put forward by the parties, the Court was of the view that it could not be said that a concluded contract had been arrived at inter se the parties.

Perusing the terms of the LoI and what it mandated the successful bidder to do, the Court concluded that none of the mandates were fulfilled except that the successful bidder mobilised the equipment at site, handing over of the site and the date of commencement of work was fixed vide letter dated 28-10-2009. The successful bidder neither submitted the Performance Security Deposit nor signed the Integrity Pact as required. Consequently, the work order was also not issued nor was the contract executed.

The Court stated that the issue of whether a concluded contract had been arrived at inter se the parties is in turn dependent on the terms and conditions of the NIT, the LoI and conduct of the parties. It reiterated the proposition that an LoI merely indicates a party’s intention to enter into a contract with the other party in future. No binding relationship between the parties at this stage emerges and the totality of the circumstances have to be considered in each case. The Court further observed:

It is no doubt possible to construe a letter of intent as a binding contract if such an intention is evident from its terms. But then the intention to do so must be clear and unambiguous as it takes a deviation from how normally a letter of intent has to be understood.

Turning then to the NIT, the Court noted that Clause 29.2 clearly stipulated that the notification of award will constitute the formation of the contract “subject only” to furnishing of the Performance Security/Security Deposit. Thus, it was clearly put as a pre-condition and that too to be done within 28 days following notification of the award. The failure of the successful bidder to comply with the requirement “shall constitute sufficient ground for cancellation of the award work and forfeiture of the bid security” as per Clause 30.2. Further, in terms of Clause 34 dealing with the Integrity Pact, the failure to submit the same would make the tender bid “as not substantially responsive and may be rejected.”

Decision

Holding that there was no concluded contract inter se the parties, the Supreme Court affirmed the High Court’s decision that all that the Company can do in the instant case is to forfeit the bid security amount and it was so directed. [South Eastern Coalfields Ltd. v. S. Kumar’s Associates AKM (JV), 2021 SCC OnLine SC 486, decided on 23-7-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Madras High Court: Dr G. Jayachandran, J., refused to pass a decree in favour of the plaintiff who relied on general admission of facts made by the defendant.

In the instant matter, it was stated that the plaintiff was engaged in the business of providing and arranging finance to various borrowers and had lent a loan to the first defendant company, which is an NBFC.

On the date of filing the suit, a sum of Rs 38,16,45,711/- was due and payable to the plaintiff. While advancing the loan, the second defendant provided personal guarantees for each of the facility agreements entered by the first defendant.

The second and third defendants were jointly and severally liable to pay the suit claim.

According to the plaintiff, since 2014, the transaction between the plaintiff and the first defendant company was regular without any default till the month of September 2020.

Further, it was submitted that the misappropriation of the fund by the Management of the Company came to light, when there was a default and when the Chief Financial Officer of the first defendant issued a Circular on 07-10-2020 disclosing diversion of the fund of the first defendant company by the second defendant as a consequence, criminal proceedings had been initiated by the plaintiff and the matter had been seized by the Directorate of Enforcement Wing.

Extracting a certain portion of the pleadings in the written statement, the plaintiff sought passing of a decree and judgment upon the said statement as admission.

Bench stated that the three admissions which were relied upon by the applicant were all general admissions and did not admit the suit claim.

Further, the Court added that the admission that fraud was committed per se will not entail the plaintiff for a decree as claimed in the suit. Whatever claimed in the suit has to be proved through evidence in the manner known to law and the portions of the admission relied upon by the plaintiff/applicant is a general admission of fact regarding the liability of the first defendant company and its inability to pay his creditors. The general admissions of fact cannot be construed as an admission of suit claim to pass a judgment and decree.

In view of the above application was dismissed. [Northern Arc Capital (P) Ltd. v. Sambandh Finserve (P) Ltd., 2021 SCC OnLine Mad 2577, decided on 5-07-2021]


Advocates before the Court:

For Applicant: Mr Anirudh Krishnan

For 1st Respondent: Mr. Supriyo Ranjan Mahaptra

For 2nd respondent: Mr Prashant Rajapogal

Case BriefsForeign Courts

Supreme Court of United Kingdom: The 7-Judges Bench comprising of Lord Reed, President Lord Hodge, Dy. President, Lady Black. Lord Kitchin, Lord Sales, Lord Leggatt, Lord Burrows, JJ., addressed the issue concerned with the application of the concept of scope of duty in the tort of negligence for professional advice given by expert accountants.

The similar issues were placed before the Bench in Khan v Meadows [2021] UKSC 21 with regard to professional advice given by a medical expert. The Bench addressed the issue in detail by analysing landmark cases of South Australia Asset Management Corpn. v York Montague Ltd. (SAAMCO), [1996] 3 WLR 87 and Hughes-Holland v BPE Solicitors, [2017] 2 WLR 1029.

Facts of the Case

The claimant- Manchester Building Society (MBS) was a small mutual building society. From 1997 until 2012, the society’s accounts were audited by the defendant, Grant Thornton, a large firm of accountants. The said firm allegedly advised the society, incorrectly and negligently, that the society’s accounts could be prepared using a method known as “hedge accounting” and that the accounts prepared using that method gave a true and fair view of the society’s financial position. In reliance on that advice, the society carried on a strategy of entering into long-term interest rate swap contracts as a hedge against the cost of borrowing money to fund mortgage lending. The misstated accounts served to hide volatility in the society’s capital position and became a severe mismatch between the negative value of the swaps and the value of the mortgage loans which the swaps were supposed to hedge. When after seven years the accountants realised their error, the society had to restate its accounts to show substantially reduced net assets and insufficient regulatory capital. To extricate itself from this predicament, the society closed out the swaps at a cost of over £32m.

The issue in appeal was whether the society can recover this cost as damages from the accountants (reduced by 50% for the society’s contributory negligence)?

Trial Court’s findings

 The Trial Judge awarded damages to the society of only £316,845-the main item of damages being the transaction costs payable to terminate the swaps early; as the judge found that Grant Thornton’s negligent advice was an effective cause in law of that loss and that the loss was a reasonably foreseeable consequence of Grant Thornton’s negligence and therefore not too remote to be recoverable. However, it was held by the Trial Court that the society could not recover damages for this loss from Grant Thornton (apart from the transaction costs paid to terminate the swaps early) because, in the opinion of the Court, the losses flowed from market forces for which Grant Thornton did not assume responsibility, that the case did not fall within the principle as laid down in SAAMCO, and that the society had itself been negligent which contributed to its loss.

Judgment of the Court of Appeal

 The Court of Appeal dwelled on the distinction between “advice” and “information” as explained by this court in Hughes Holland, and applying that distinction, the Court concluded that, that was an “information” case, such that Grant Thornton was legally responsible only for the foreseeable financial consequences of its information/advice being wrong. To show that the society suffered a loss by terminating the swaps, it would have to prove that it would have been better off if it had continued to hold the swaps, which the society was unable to establish. Hence, the Appellate Court dismissed the society’s appeal.

Analysis and Observations by the Court

 The auditor’s duty of care

 “Like other professional advisers, an accountancy firm acting as an auditor owes a duty, as an implied term of the contract by which the firm is retained and also in tort, to carry out the service which it has agreed to supply with reasonable care and skill.”

However, the auditor’s duty of care is limited to protecting the audited entity and its members against the risk that its audited accounts are inaccurate It is no part of the auditor’s duty to advise the audited entity what business decisions it should make nor to identify what considerations apart from the accuracy of its audited accounts are relevant for the entity to take into account in making such decisions. Those are exclusively matters for the entity’s directors and members (or possibly other advisers) to assess.

Scope of Grant Thornton’s duty

 In accordance with the normal role of an auditor, Grant Thornton owed a duty to advise the society with reasonable care and skill whether its accounts had been properly prepared and gave a true and fair view of the society’s financial position. That included a duty to advise the society whether the lifetime mortgages and interest rate swaps entered into by the society were correctly accounted for in a manner which complied with applicable accounting rules and standards which governed hedge accounting. The Bench was of the view that Grant Thornton did not advise the society whether it should enter into lifetime mortgages or interest rate swaps or about which particular mortgages or swaps to enter into. In particular, Grant Thornton gave no advice about the desirability of entering into swaps with 50-year terms. Neither was it asked to advise the society about the commercial wisdom of its intended hedging strategy nor about whether it would be sensible or desirable to enter into interest rate swaps (and, if so, in what amounts and of what duration). 

Impact of Contributory Negligence by the Society

  • As found by the Trial Judge that the society had itself been negligent in two respects which contributed to its loss; i.e. entering into 50-years waps and fault of its Finance Director in devising the society’s approach to hedge accounting and considering that hedge accounting was available when it was not. The society’s own negligence which contributed to this state of affairs was properly reflected in the reduction of 50%, however, rejecting the findings of the Court of Appeal that the loss sustained by the society as a result of entering into long term interest rate swaps in reliance on Grant Thornton’s negligent advice was not within the scope of Grant Thornton’s duty, the Bench held that it was a loss from which Grant Thornton owed a duty of care to protect the society. Hence, after giving credit for the value of the mortgages and the 50% reduction for its contributory negligence, the society was entitled to recover damages, in addition to the amount awarded by the judge, of some £13.4m (50% of £26.7m).

 Application of SAAMCO-style counterfactual analysis

The SAAMCO case proposed a form of counterfactual analysis as a way to assist in identifying the extent of the loss suffered by the claimant which falls within the scope of the defendant’s duty, by asking in an “information” case whether the claimant’s actions would have resulted in the same loss if the advice given by the defendant had been correct. This procedure generates a limit to the damages recoverable which had been called the SAAMCO “cap”.

The Bench opined that though the counterfactual test maybe regarded as a useful cross-check in most cases, but that it should not be regarded as replacing the decision that needs to be made as to the scope of the duty of care. Analysis using the counterfactual “tool” as deployed in SAAMCO was designed to assist with looking at the scope of duty question from a causation-based perspective. Therefore, once it is accepted that the scope of duty inquiry turns on identifying the purpose of the duty, it can readily be seen that a SAAMCO-type counterfactual analysis is just a cross-check, rather than the foundation of the relevant analysis.

Where the Appellate Court’s Analysis went wrong?

The society sought to argue that its basic loss was within the scope of Grant Thornton’s duty on the ground that this loss resulted from having to break the swaps before term and that the risk of that happening was a risk which Grant Thornton owed a duty of care to protect the society against. The Courts below erred which reaching to the conclusion that the society did not suffer loss from having to break the swaps before term and the said loss was caused by entering into swaps with 50-year terms and retaining them for several years (as a result of a combination of its own imprudence and Grant Thornton’s negligent advice). The Bench opined that the evidence did not show that the loss suffered would have been avoided or reduced if the society had not needed to break the swaps.

To the contrary, the evidence indicated that the society’s loss would have been even greater if the swaps had not been broken. Therefore, the judge was bound to conclude that the society’s decision to enter into swaps with terms far longer than the likely duration of the mortgages, combined with the way that interest rates turned out, were the only effective causes of its loss. Hence,

“An equally effective cause was Grant Thornton’s negligent professional advice, maintained over a period of some seven years, that it was permissible to use hedge accounting and prepare accounts which showed the swaps to be a highly effective hedge for the lifetime mortgages, thereby hiding the mismatch between the values of the swaps and mortgages and the society’s inadequate regulatory capital.”

Conclusion

In the backdrop of above, the appeal was allowed and it was held that Grant Thornton was liable to pay the overall net loss of (approximately) £26.7m to the said society, subject to a 50% reduction for contributory negligence.[Manchester Building Society v. Grant Thornton UK LLP, (2021) 3 WLR 81, decided on 18-06-2021]


Kamini Sharma, Editorial Assistant has reported this brief.

Case BriefsForeign Courts

UPDATE: Appeal preferred by the respondent against this decision before the UKSC has been unanimously dismissed.[Khan v. meadows, [2021] UKSC 21, decided on 18-06-2021]


Court of Appeal (Civil Division): The Division Bench of Lord Justice Hickinbottom and Lady Justice Nicola Davies DBE decided that the appellant doctor was not liable for the development of a “coincidental injury” in the newborn child, which was not within the scope of his duty to diagnose when the mother of the child consulted her before pregnancy.

Factual Matrix

The appellant was the mother of a child with haemophilia and autism. Before her pregnancy, she asked Dr Khan to establish whether she carried the haemophilia gene. Following blood tests, the mother was wrongly led to believe that any child she had would not have haemophilia. Had she known that she carried the haemophilia gene, she would have undergone foetal testing for haemophilia when she was pregnant. This would have revealed the foetus was affected. Appellant would then have chosen to terminate her pregnancy, and her child would not have been born.

Appellant sought damages from Dr Khan based on wrongful birth.

Further, she argued that Dr Khan was liable for all the consequences of the pregnancy. Dr Khan admitted liability for the consequences of the child’s haemophilia but denied liability in relation to the autism.

Issue for Consideration

If a child born with more than one disability would not have been born but for a doctor’s failure to advise of the risk of their being born with one of those disabilities, can the mother sue the doctor for the costs associated with all of the child’s disabilities, or only for the costs associated with the disability the doctor was consulted on?

Court’s Discussion

Bench stated that the scope of duty test identified by Lord Hoffman in South Australian Asset Management Corporation v. York Montague Ltd (“SAAMCO”) [1997] AC 191 is determinative of the issues which have to be addressed by a court.

Following were the questions:

i) What was the purpose of the procedure/information/advice which is alleged to have been negligent;

ii) What was the appropriate apportionment of risk-taking account of the nature of the advice, procedure, information;

iii) What losses would, in any event, have occurred if the defendant’s advice/information was correct or the procedure had been performed?

Court found that:

i) The purpose of the consultation was to put the respondent in a position to enable her to make an informed decision in respect of any child which she conceived who was subsequently discovered to be carrying the haemophilia gene. Given the specific enquiry of the respondent’s mother, it would be inappropriate and unnecessary for a doctor at such consultation to volunteer to the person seeking specific information any information about other risks of pregnancy including the risk that the child might suffer from autism. In giving such information it would be incumbent on a doctor, consistent with her/his own professional obligations, to take account of a variety of factors which on the facts of this case the appellant was unaware of.

ii) As to the apportionment of risk, the doctor would be liable for the risk of a mother giving birth to a child with haemophilia because there had been no foetal testing and consequent upon it no termination of the pregnancy. The mother would take the risks of all other potential difficulties of the pregnancy and birth both as to herself and to her child.

iii) loss which would have been sustained if the correct information had been given and appropriate testing performed would have been that the child would have been born with autism.

It was held that the appellant had no duty to prevent the birth of Adejuwon. The purpose and scope of the appellant’s duty were to advise and investigate in relation to haemophilia in order to provide the respondent with an opportunity to avoid the risk of a child being born with haemophilia.

Conclusion 

Bench expressed that the development of autism was a coincidental injury and not one within the scope of the appellant’s duty.

In view of the above discussion, the appeal was allowed. [Dr Hafshah Khan v. Ms Omodele Meadows, [2019] EWCA Civ 152, Hearing date: 17 October 2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

State Consumer Disputes Redressal Commission, Telangana: Justice MSK Jaiswal (President) and Meena Ramanathan (Member) upheld the District Commission’s Order observing the consequence of suppressing the material fact while taking an insurance policy.

If the insurer can show that prior to the date of declaration of being healthy, the insured was suffering with ailment which was within her knowledge but was suppressed, then the insurance company is well within its right to repudiate the claim on the ground of suppression veri.

Complainant had submitted that his wife has obtained new money back policy from the OPs with a duration of 20 years for an assured sum of Rs 10,00,000. At the time of accepting the policy, the OPs carried out mandatory medical tests on the proponent and issued the policy in question.

While the policy was in force, the holder died due to cardiorespiratory arrest.

Being the nominee, complainant made the claim with the OPs and to the utter shock and surprise, the OPs repudiated the claim on the ground that the deceased life assured was suffering from lung cancer and took treatment prior to obtaining the policy, hence the claim was repudiated.

Complainant prayed to direct the OPs to pay the amount.

It was stated that OPs investigated the matter, and it was revealed that the deceased life assured suppressed the material fact relating to her health condition giving incorrect answers in the proposal form.

Analysis, Law and Decision

Bench noted that OPs submission was that the insured was suffering from serious ailment viz., lung cancer and suppressed the said fact.

Commission reiterated the legal position that if the insured is found to have suppressed the information which was material for the insurer to decide about the issuance of the policy is made out, the insurance company cannot be made liable to indemnify the insured on the ground that contractual obligations between insured and insurer are based purely on good faith and if insured has knowingly failed to reveal the information which was within her exclusive knowledge, the insurer could not be said to be liable to indemnify the insured.

In the present case, the insurance company contended that even before taking the policy, the insured was suffering from a serious ailment and was undergoing treatment and evidence was placed on record with regard to the said contention.

Coram held that perusal of the crucial documents on record leaves no room for doubt that the insured was aware that she was suffering from a serious ailment for more than 6 months prior to taking the insurance policy and suppressing all those facts, she took the policy.

Therefore, District Commission’s Order holding that complainant was not entitled to any relief was upheld and the complaint was dismissed.[K.N. Vidyakarji v. Life Insurance Corporation of India, FA No. 402 of 2020, decided on 15-06-2021]


Advocates before the Commission:

Counsel for the Appellant: Karakot Nagekar Sai Kumar

Counsel for the Respondents: KRL Sarma

Op EdsOP. ED.

The Insolvency and Bankruptcy Code, 20161 (I&B Code) is a complete code, containing all the necessary provisions for providing a safe haven to corporate debtors under distress. However, the I&B Code being a relatively new enactment, still seems to be working out the kinks. One such ambiguity is that the I&B Code fails to provide a defined procedure for conduct of proceedings that tend to last beyond the duration of Corporate Insolvency Resolution Process (CIRP).

Avoidable transactions or vulnerable transactions, sub-classified into preferential transactions (Sections 43[2]-44[3]), undervalued transactions (Section 45[4]) transactions defrauding creditors (Section 49[5]) and extortionate credit transaction (Section 50[6]) are red-flagged transactions that may be avoided by the corporate debtor for shifting undue onerous burden that places the corporate debtor into distress or defrauds the creditors of the corporate debtor. The resolution professional (RP) in the course of CIRP, is required to identify such vulnerable transactions and files an application before the adjudicating authority for avoiding the said liability. While the said proceedings are an integral part of the I&B Code, they run parallel to the main proceedings which are more focused towards resolution of the corporate debtor and ensuring maximisation of value of assets of the corporate debtor. However, the question as to what happens if the corporate debtor is successfully resolved, thereby concluding CIRP, before the avoidance proceedings are adjudicated or even heard, has not been clearly laid down under the I&B Code. In many of the instances, it has been seen that such proceedings have continued even after the passing of the order under Section 31[7] of the I&B Code (thereby concluding the CIRP), for instance, Bhushan Steel, Essar Steel, etc.

The High Court of Delhi recently identified the present ambiguity in Venus Recruiters (P) Ltd.  v. Union of India[8] (Venus Recruiters). The High Court of Delhi, observed that the present matter raises three important questions:

  1. (i) Whether a RP can continue to act beyond the approval of the resolution plan?

(ii) Whether an avoidance application can be heard and adjudicated after the approval of the resolution plan?

(iii) Who would get the benefit of an adjudication of the avoidance application after the approval of the resolution plan?

While the High Court of Delhi decided the aforesaid questions in a comprehensive manner, the authors herein restrict the scope of the present article to the below mentioned findings/ observations and their implications:

(i) Resolution applicant cannot be permitted to file an avoidance application: A successful resolution applicant (RA) whose resolution plan is approved itself cannot file an avoidance application. The avoidance applications are neither for the benefit of the resolution applicants nor for the company after the resolution is complete. It is for the benefit of the corporate debtor and the creditors of the corporate debtor.

(ii) Avoidance application cannot be adjudicated beyond the period of CIRP: Where preferential transactions are permitted to be adjudicated after the resolution plan is approved, it would, in effect, lead the National Company Law Tribunal (NCLT) to step into the shoes of the new management to decide what is good or bad for the company. Once a resolution plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not.

The ambiguity and the loose ends

The I&B Code had always envisaged that the avoidance proceedings were to proceed independent of the CIRP proceedings. This can be inferred from Section 26[9] which provides that the filing of an avoidance application by the RP shall not affect the CIRP proceedings. However, the Venus Recruiters[10] judgment has linked the two proceedings that may lead to contradictions within the I&B Code. Correspondingly, Regulation 44 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016[11] (Liquidation Regulations) also states that liquidator shall liquidate the corporate debtor within a period of one-year from the liquidation commencement date, notwithstanding pendency of any avoidance application under Chapter III of Part II of the I&B Code.

While the Venus Recruiters[12] judgment held that the resolved corporate debtor can take any decision in respect of an agreement which is deemed to be not beneficial, including termination of the onerous contracts, the I&B Code does not contain any provision for terminating existing contracts by way of a resolution plan. In fact, the NCLT, Mumbai Bench has specifically held that resolution applicants do not have any right to terminate legally binding contract unilaterally without following the due process for termination as per applicable law under the garb of a resolution plan13. Therefore, the same would have to be done without any assistance of the statutory scheme, for taking over or acquiring the corporate debtors, envisaged under the I&B Code.  The judgment seems to have not factored the views of the Insolvency and Bankruptcy Board of India (IBBI) on avoidable transactions. IBBI has specifically observed that there is a distinction between preferential transactions and undervalued transactions. In preferential transaction, the question of intent is not involved and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time, while undervalued transaction requires different enquiry under Sections 45 and 46[14] where the adjudicating authority is required to examine the intent, to examine if such transactions were to defraud the creditors.

The Venus Recruiters[15] judgment observes that avoidance proceedings are only for the benefit of the creditors of the corporate debtor. However, a perusal of the reliefs contemplated under Sections 44 and 48[16] of the I&B Code leads to an inescapable conclusion that the said provisions are all status quo ante in nature i.e. such directions were required to be issued that would place the corporate debtor in its original position before such onerous contracts were executed, therefore, it is clear that the avoidance proceedings are not just for the benefit of the creditors of the corporate debtor but for the resolved corporate debtor as well. Further, the Report of the Insolvency Law Committee published by the Ministry of Corporate Affairs in February 2020 (ILC Report) leaves the discretion to the adjudicating authority to decide the way the proceeds from the avoidance proceedings are to be distributed among the stakeholders.

At this juncture, it is also pertinent to state that the Supreme Court in Jaypee[17] laid out an elaborate mechanism for identification of avoidance transactions by the resolution professional and the determination of avoidance applications by the adjudicating authorities[18].  As is evident from the Jaypee[19] judgment, the Supreme Court have envisaged a high standard for ensuring that tainted transactions are identified and the proceeds are restored to the benefit of the lenders of the corporate debtor as well as the corporate debtor itself.

Pertinently, the I&B Code imposes no bar for the avoidance proceedings to continue beyond the conclusion of CIRP.  In fact, Regulation 39(2)[20] of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provides that the resolution professional must, at the time of approval of the resolution plans, place the resolution plans along with the details of avoidance transactions and orders, if any, passed therein before the committee of creditors. The use of the words “if any” connotes a liberal interpretation to the timeline for such avoidance proceedings and appears to envisage continuance of such proceedings beyond the period of CIRP. Similarly, Form H of CIRP Regulations i.e. Compliance Certificate, also requires the RP to disclose pendency of avoidance applications at the time of submission of the resolution plan for approval before the adjudicating authority. While this argument has been rejected by the High Court of Delhi, it appears that the cumulative effect of Section 26 of the I&B Code, Regulation 44 of the Liquidation Regulations and the aforementioned provisions was not analysed in the judgment. The aforesaid argument also finds favour in the Indian Institute of Insolvency Professionals of India in its report titled Statement of Best Practices 1:”Role of IPs in Avoidance Proceedings”[21] and the ILC Report[22].

Implications and fallouts

The Venus Recruiters[23] judgment has sought to delineate from the present framework of the I&B Code and attempted to link the two proceedings together. The present modification will have a cascading effect resulting in one of the two following eventualities:

Event 1: The adjudicating authority will mandatorily be required to determine the avoidance proceedings prior to approval of the resolution plan under Section 31 of the I&B Code resulting in further delay in resolution of the corporate debtor under CIRP.

Fallout

(a) It appears that the dual objective, namely, timely resolution of the corporate debtor and identification and annulment of onerous and fraudulent contracts, for which the two proceedings were delinked would not be successfully achieved. Essentially, it would lead to a situation where one is achieved at the cost of the other.

(b) Alternatively, the only way in which the aforesaid dual objective would be obtained is if the avoidance proceedings are dealt summarily. However, considering the procedure formulated by the Supreme Court in Jaypee[24], it can safely be stated that the avoidance applications cannot be disposed off summarily and the linkage of the two proceedings may inevitably lead to a cascading effect.

(c) The emphasis on timely resolution emanated from the needs of India’s plagued financial sector. Time-bound resolution, which is critical for the I&B Code to be a success, would be compromised.

(d) It has been noticed by the Supreme Court in Essar[25] that NCLTs have limited infrastructure and the outside time-limit of 330 days is not mandatory. The issue of lack of institution infrastructure, in particular National Company Law Appellate Tribunal (NCLATs) (which was only established Delhi at the time), was also raised in Swiss Ribbons[26]. The Court, while observing that litigants should be allowed to avail remedy under law and cannot be prejudiced due to lack of infrastructure, had received specific assurance from the learned Attorney General at the time that more NCLATs will be established as soon as it is practicable. Since the requirements to dispose off these applications before the conclusion of CIRP has been introduced vide the Venus Recruiters[27] judgment, the NCLT’s would be left with no other alternative but to find justifications to extend the CIRP in order to dispose of these applications.

Event 2: It will be the duty of the RP to ensure determination of avoidance applications before approval of the resolution plan, failing which the avoidance application will be deemed to be infructuous.

(a) This will provide a window of escape to the offenders engaging in fraudulent transactions and further burden the resolved corporate debtor in protracted rounds of litigation for terminating the onerous contracts.

(b) The disposal of avoidance proceedings without a hearing will be a form of blessing towards the illegal/wrongful transactions made by the errant promoters and provide such errant promoters to escape liability. Such a conclusion is completely antithetical to the I&B Code as it does not intend to grant any benefits for the errant promoters.

(c) The only remedy available with the successful resolution applicants would be to terminate the contracts/transactions after implementing the resolution plan. The termination of the said contracts will expose the resolution applicants to protracted rounds of litigation on a contract which, in all likelihood, would be inordinately favourable to the counterparties and also expose the resolved corporate debtor to damages. Ultimately, the resolution of the corporate debtor will become a near impossibility.


  Naman Singh Bagga (2010-2015) National Law University Odisha, now working as Senior Associate at L&L Partners Law Offices and may be reached at e-mail: namansinghbagga@gmail.com.

†† Maneesh Subramaniam (2014-2019), Amity Law School, Amity University, now working as an Associate at L&L Partners Law Offices and may be reached at e-mail: maneesh.ms10@gmail.com.

†† Anurag Tripathi (2009-2014) National Law University Odisha, now working as in-house counsel at an Indian Conglomerate and may be reached at e-mail: anuragnluo@gmail.com.

1 <http://www.scconline.com/DocumentLink/86F742km>.

2 <http://www.scconline.com/DocumentLink/9kKr2L6f>.

3 <http://www.scconline.com/DocumentLink/6k1QKjWn>.

4 <http://www.scconline.com/DocumentLink/G98723Qc>.

5 <http://www.scconline.com/DocumentLink/52aWIpgI>.

6 <http://www.scconline.com/DocumentLink/h2o3bY7O>.

7 <http://www.scconline.com/DocumentLink/gvPKCciX>.

8 2020 SCC OnLine Del 1479

9 <http://www.scconline.com/DocumentLink/KaRKCw3S>.

10 2020 SCC OnLine Del 1479

11 <http://www.scconline.com/DocumentLink/PRN1Rndd>.

12 2020 SCC OnLine Del 1479

13 DBM Geotechnics and Constructions (P) Ltd. v. Dighi Port Ltd., 2019 SCC OnLine NCLT 8142

14 <http://www.scconline.com/DocumentLink/pit9G4eg>.

15 2020 SCC OnLine Del 1479

16 <http://www.scconline.com/DocumentLink/rB6ALe98>.

17 Jaypee Infratech Ltd., Interim Resolution Professional  v. Axis Bank Ltd., (2020) 8 SCC 401 

18 Id., paras 28.1 and 28.2.

19 (2020) 8 SCC 401 

20  <http://www.scconline.com/DocumentLink/LhNrU8Vb>

21 IIIPI in its report, titled Statement of Best Practices 1: “Role of IPs in Avoidance Proceedings”, had observed that the pendency of proceedings will not bar the resolution/liquidation or voluntary liquidation of the corporate debtor. It further observed that the two proceedings should be treated separately and even if the corporate debtor is resolved/ liquidated, the application of avoidance transactions will be carried on.

22 Similarly, ILC Report also states that where the adjudicating authority comes to the conclusion that the avoidance proceedings may not be concluded prior to dissolution of the corporate debtor, due to any countervailing factors, it should also provide the manner of continuation of the proceeding after such dissolution.

23 2020 SCC OnLine Del 1479

24 (2020) 8 SCC 401

25 Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531

26 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 

27 2020 SCC OnLine Del 1479

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, BR Gavai and Hrishikesh Roy, JJ has held that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act, 1963.

The Court referred to a number of authorities and in particular the decision in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128, wherein it was held that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgement of debt for reasons given in the said note.

The bench explained that the filing of a balance sheet in accordance with the provisions of the Companies Act, 2013 is mandatory, any transgression of the same being punishable by law. However, what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7) of the Companies Act, 2013. Under Section 134, financial statements are to be approved by the Board of Directors before they are signed, and the auditor’s report, as well as a report by the Board of Directors, is to be attached to each financial statement. Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet.

The Court, hence, held that,

“… it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.”

[Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, 2021 SCC OnLine SC 321, decided on 15.04.2021]


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by

For appellant: Senior Advocate Ramji Srinivasan, learned Senior Advocate appearing on behalf of the appellant,

For respondent: Advocate Abhijeet Sinha

Case BriefsHigh Courts

Allahabad High Court: The Division Bench of Dr Kaushal Jayendra Thaker and Ajit Singh, JJ., allowed the appeal of the claimants in a motor vehicle accident claim while dismissing the appeal of the insurance company.

Claimants and Insurance Company on being aggrieved by the award and decree passed by Motor Accident Claims Tribunal, filed the present appeal.

Claimants were the legal heirs namely widow and parents of the deceased who died in the vehicular accident.

Deceased was earning Rs 25,00,000 and claimants claimed a sum of Rs 3,40,50,000.

Respondent’s truck was being driven by Afzal Sekh and was insured with National Insurance Company Limited who had been saddled with the liability to make good the amount of compensation.

Due to the truck rash and negligent driving the motorcycle of the deceased was dashed by the truck.

Insurance Company challenged the award on the grounds that the deceased was a contributor to the accident having taken place, that income considered by the Tribunal was on the higher side and the same would not have been made the basis of compensation.

Claimants felt aggrieved as the tribunal did not consider the amount for future loss of income and did not even grant proper interest. Tribunal also erred in directing 2/3rd of the compensation to be paid to the parents and 1/3rd to the widow.

What is Negligence?

Negligence means failure to exercise care towards others which a reasonable and prudent person would in a circumstance or taking action which such a reasonable person would not. Negligence can be both intentional or accidental which is normally accidental.

More particularly, it connotes reckless driving and the injured must always prove that the either side is negligent. If the injury rather death is caused by something owned or controlled by the negligent party then he is directly liable otherwise the principle of “res ipsa loquitur” meaning thereby “the things speak for itself” would apply.

Contributory Negligence

It means that a person who either contributes or author of the accident would be liable for his contribution to the accident having taken place.

In the present set of facts and circumstances, Bench while referring to the recent decision of the Supreme Court in Md. Siddiqui v. National Insurance Co. Ltd (2020) 3 SCC 57 would come to the aid of the claimants as there was no colossal connection of the deceased having contributed to the accident.

What is Liability?

Liability of the Insurance Company.

While considering the issue of breach of policy condition under Section 149 of the Act Bench relied to elaborately sift the documentary evidence on record and whether the owner had taken proper care and caution to see that the driver was authorised to drive the vehicle or not.

High Court opined that the Insurance Company’s contention that the driver was not holding valid and effective driving licence could not be accepted.

While considering the case of the Insurance Company, can it be said that the driver did not have valid driving licence? This question has to be answered in favour of the claimants and owner.

Owner of the vehicle was satisfied, and it was proved that he had taken all care and caution that vehicle was being driven by a person who was authorised to drive the same which was even apparent from the fact that the owner had gone to the extent of producing evidence so as to bring home the fact that there was no breach of policy condition.

Hence, it was held that no breach of policy conditions was committed.

Compensation

It was submitted that the tribunal did not grant the proper amount under the head of non-pecuniary damages to the widow who became a widow at the age of 24 and who was not re-married.

Even the Insurance Company felt aggrieved and challenged the compensation.

Supreme Court held that in the case of motor accident compensation, guess work is inevitable.

Compensation payable to the appellants in view of the decision of the Supreme Court in National Insurance Company Ltd. v. Pranay Sethi, (2017) 16 SCC 680

With respect to the issue of rate of interest, it should be 7.5% in view of the Supreme Court decision in National Insurance Co. Ltd. v. Mannat Johat, 2019 (2) T.A.C 705 (S.C.)

Disbursement and Tax at Source

Claimants Counsel Ram Singh submitted that several years elapsed, parents are at the fag end of their lives, therefore, on additional deposit being made, this Court may not direct deposit of said amounts in fixed deposits and though this Court had time and gain directed the Insurance Companies not to deduct TDS, the same was being deducted.

Bench relied on the Supreme Court decision in A.V. Padma v. R. Venugopal, (2012) 3 SCC 378.

Further, Court stated that people even rustic villagers’ have bank account which had to be compulsorily linked with Aadhar, therefore, what is the purpose of keeping money in fixed deposits in banks where a person, who suffered injuries or lost his kith and kin, was not able to see the colour of compensation.

“..time is now ripe for setting fresh guidelines as far as the disbursements are concerned.”

Court expressed that the guidelines in General Manager, Kerala, SRTC, Trivandrum v. Susamma Thomas, (1994) 2 SCC 176, are being blindly followed causing more trouble these days to the claimants as the Tribunals are overburdened with the matters for each time if they require some money, they have to move the tribunal where matters would remain pending and the tribunal on its free will, as if money belonged to them, would reject the applications for disbursements, which is happening in most of the cases.

The parties for their money have to come to court more particularly up to High Court, which is a reason for our pain.

In High Court’s opinion, Tribunal may release the money with certain stipulations and that guidelines have to be followed but not rigidly followed as precedents.

Further, it was added that while sitting in Single Bench of this Court, Dr Justice Kaushal Jayendra Thaker held that the Insurance Company should not deduct any amount under T.D.S in the case of Sudesna v. Hari Singh, F.A.F.O. No.23 of 2001, decided on 26.11.2020, which should be strictly adhered to.

Hence, appeals by claimants were partly allowed and the appeal preferred by the Insurance Company was dismissed.

Respondents shall jointly and severally liable to pay the additional amount with an interest at the rate of 7.5%

Court directed that on deposit of amount, Tribunal shall disburse the entire amount by way of account payee cheque or by way of RTGS to the account of the claimants. [National Insurance Co. Ltd. v. Anuradha Kejriwal, 2021 SCC OnLine All 269, decided on 13-04-2021]


Advocates before the Court:

Counsel for Appellant: Kuldip Shanker Amist, Manoj Nigam

Counsel for Respondent: Manoj Nigam, Amit Kumar Sinha, Deepali Srivastava Sinha, Mata Pher, Ram Singh

Case BriefsForeign Courts

High Court of Republic of Singapore, General Division: Aedit Abdullah, J., while addressing the matter on contributory negligence, observed that:

Having the right of way does not equate to a licence to collide with another road user in exercising that right.

Plaintiff was a passenger with a few others aboard on the taxi driven by the first defendant.

Factual Matrix

While the first defendant was executing a right turn at a junction, the vehicle was driven by the second defendant, who had priority as the lights were in his favour, collided with the taxi, causing injury to the plaintiff and some other passengers, and unfortunately, the death of one of them.

In view of the above incident, the first defendant was charged with a number of offences including a charge under Rule 5 of the Road Traffic (Motor Vehicles, Wearing of Seat Belts) Rules 2011 due to failing to ensure that his rear-seat passengers were belted up (Seat Belt Offence).

Plaintiff had claimed damages against the first and second defendant for negligence in driving their vehicles.

During the Trial the key issue was the apportionment of liability between the first and second defendant and another issue was whether the plaintiff had indeed used his seatbelt.

Bench had found no contributory negligence on the part of the plaintiff and the primary liability laid upon the defendants. Amongst them, the first defendant bore the greater part of the responsibility, at 65% liability and the second defendant at 35%.

Primary Issues:

(a) the respective liabilities of the two defendants, considering, in particular, the experts’ opinions concerning the speed of the second defendant’s vehicle up to and at the point of collision; and

(b) whether there was contributory negligence by the plaintiff in not wearing his seatbelt.

Analysis of the High Court

Bench while determining the second defendant’s speed, found that the momentum exchange analysis was less reliable than the video analysis and concluded that the video evidence was more reliable and preferred.

Adding to the above, Court also found that the second defendant failed to keep a proper lookout and drive with proper care at the junction.

Determination of second defendant’s responsibility in driving

Having the right of way essentially means that other users should yield or give way.

It was expressed in view of “right of way” that the said right would not absolve that particular road user of the need to exercise due care. In exercising such care, a driver must take heed of other road users, and adjust his speed lower if needed in the circumstances to reduce the risk of an accident occurring.

Though the second defendant was not going beyond the speed limit, yet since it was a large and busy junction, he ought to have proceeded slower than the speed limit so as to keep a proper lookout and respond to the turning traffic.

“Upon seeing vehicles turning, or at least one vehicle doing so, the appropriate reaction would have been to slow down, sound the horn if need be, and make sure no other vehicle was following suit in turning, either from behind or next to the one that took its chances.”

Apportioning liability between the defendants

Major Factors to be considered while apportioning the Contributory Negligence:

(a) the relative causative potency and

(b) the relative moral blameworthiness of parties’ breaches

Causative potency is the extent to which each party’s conduct contributed to the damage in question, whereas the assessment of blameworthiness entails a consideration of a wide range of conduct to arrive at a just and equitable result on the facts.

The above two factors are also to be considered in the case when liability is to be apportioned in respect of two tortfeasors who were both sued for negligence by the same plaintiff in the same suit.

In the Court’s opinion, the conduct of both the defendants’ were equally causatively potent. but since the blameworthiness attached is different, there would be a difference in their liability.

Hence, Bench found the 33% responsibility on the part of second defendant to be appropriate.

But while the first defendant could have avoided the collision if he had exercised due care, this did not mean that the second defendant was wholly without blame.

Bench observed that, the two defendants’ conduct were equally causatively potent – each of their acts and omissions was equally important in forming a continuous causal link leading to the plaintiff’s eventual injuries.

With regard to blameworthiness, Court expressed that:

Greater blameworthiness lay on the party executing the turn, as the signal light was in favour of oncoming traffic. The second defendant could not be made to assume the same degree of liability as the first defendant, even if the second defendant was speeding.

In view of the above discussion, High Court held that the first defendant should be responsible for 65% of the liability whilst the second defendant shall bear the remaining 35%.

Contributory negligence by the plaintiff

Determination of whether the plaintiff wore a seat belt

There was no evidence that the plaintiff’s injuries pointed to the likelihood or probability that the plaintiff had in fact not worn the seatbelt.  He was not even party to the criminal proceedings, nor was he convicted of any offence of not wearing a seatbelt.

Lastly, while concluding the Court held that the plaintiff was not contributorily negligent for his loss.[Ting Jun Heng v. Yap Kok Hua, [2021] SGHC 44, decided on 25-02-2021]

Case BriefsHigh Courts

Madras High Court: P.N. Prakash, J., decided a criminal original petition addressing an issue with regard to an offence under Section 138 of Negotiable Instruments Act, 1881.

Sree Gokulam Chits and Finance Corporation Private Limited initiated prosecution in the Court of Judicial Magistrate for the offence under Section 138 of the Negotiable Instruments Act, 1881 against Jaishankar (A1) and Nagalakshmi (A2).

Gokulam’s case was that Jaishankar (A1) joined some chit groups floated by them and became a subscriber. Jaishankar was given chit amounts towards which, he issued some cheques as security while so, Jaishankar defaulted on the repayment of the chits and when Jaishankar was informed that legal action would be taken against him, he and his wife came for settlement. His wife issued cheque, which on presentation at the bank was returned unpaid with endorsement “payment stopped by the drawer”.

Gokulam after the above incident issued a statutory demand notice and on non-completion of the said demand, Gokulam initiated a prosecution under Section 138 of the NI Act against them.

Decision

Bench noted that the impugned cheque in the present case was issued by the accused 2, i.e. Nagalakshmi from her personal bank account in discharge of the debt of her husband Jaishankar (A1).

Court added that the said cheque was not issued from the bank account of any juristic entity for invoking vicarious liability provisions viz. Section 141 of the NI Act.

If a cheque is issued by a person in discharge of the liability of another person and if the cheque is dishonored, the person, who issued the cheque can be prosecuted under Section 138 NI Act.

 High Court stated that just because Jaishankar (A1) was the beneficiary of the loan, he could not be prosecuted under Section 138 of the NI Act for the dishonour of the cheque issued by his wife Nagalakshmi (A2).

Hence, in view of the above discussion, Court while partly allowing the petition issued the following directions:

  • Prosecution against Jaishankar (A1) quashed.
  • Nagalakshmi was asked to appear before the Judicial Magistrate.
  • Nagalakshmi shall file a bail petition and cooperate in the expeditious disposal of the case without adopting any dilatory tactics.
  • If Nagalakshmi absconds, a fresh FIR can be registered under Section 229 A.

[M. Jaishankar v. Sree Gokulam Chits and Finance Corpn. (P) Ltd., 2020 SCC OnLine Mad 5550, decided n 04-12-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): C. Vishwanath (Presiding Member), held that since the Insurance Company itself insured the complainant’s vehicle and the vehicle had been stolen during the currency of the Policy and the Police were informed immediately, the Insurance Company could not repudiate the claim.

The instant revision petition was filed under Section 21(b) of the Consumer Protection Act, 1986 against the Order passed by Rajasthan State Consumer Disputes Redressal Commission.

Facts of the case

Respondent obtained an Insurance Policy from the petitioner for his Car being temporary registration for a sum of Rs 6,17,800.

In the night of 28-07-2011, Complainant’s car was stolen from Geeta Guest House, Jodhpur. Police could not trace the vehicle and submitted a negative final report. Complainant submitted an insurance claim with the Opposite Party/Insurance Company. Petitioner/Opposite Party repudiated the claim, on the ground that intimation of theft of the vehicle was given to the Insurance Company with delay, which was in violation of the Policy condition and though temporary registration of the vehicle expired on 19-07-2011, the Complainant did not get the vehicle permanently registered. Thirdly, the Complainant left the vehicle unattended outside the guesthouse, in violation of the Policy condition.

District Forum dismissed the complaint stating “as at the time of the theft the vehicle is not registered, there was no deficiency in service on the part of the Opposite Party”.

Against the order of the District Forum, the Complainant preferred an Appeal before the State Commission and State Commission set aside the order of the District Forum while allowing the appeal.

Aggrieved by the State Commission’s Order, Opposite Party/Insurance Company preferred the present Revision Petition.

Analysis and Decision

Core issue for the adjudication was in regard to the registration of the vehicle after expiry of temporary registration.

Since the Petitioner/Insurance Company had received the insurance premium and there was no violation of any specific condition in the Insurance Policy, the Insurance Company was liable to indemnify the insured for the loss suffered by the insured.

Though plying a vehicle on road without registration is a violation of provisions of Motor Vehicle Act, the Competent Authority to take action against a non-registered vehicle is the Police and other Government authorities. Insurance Company after accepting the premium, cannot escape from its liability and repudiate the claim on this technical ground.

Commission in view of the instant matter stated that:

The temporary registration of the vehicle expired on 19-07-2011 and the car got stolen on 28-07-2011, mere 9 days later. The Motor Vehicle Act does provide for registration of vehicle after its expiry on payment of certain fee.

Commission held that when the Insurance Company itself insured the complainant’s vehicle and the vehicle had been stolen during the currency of the Policy and the Police was informed immediately, the Insurance Company cannot repudiate the claim of the Complainant on a technical ground.

In view of the above-discussion, State Commission’s Order was justified and the same did not suffer from any illegality, therefore revision petition was dismissed. [United India Insurance Co. Ltd. v. Sushil Kumar Godara, 2020 SCC OnLine NCDRC 494, decided on 11-12-2020]


Advocates for the parties:

For the petitioner: Ms Suman Bagga, Advocate

For the Respondent: NEMO

Case BriefsHigh Courts

Chhattisgarh High Court: A Division Bench of P. R. Ramchandra Menon and Parth Prateem Sahu JJ., allowed the appeal and modified the impugned award.

The facts of the case are such that on 18-05-2011, Karan along with other labourers was travelling on a Dumper i.e. ‘offending vehicle’ to village Badeli when they met with an accident due to rash and negligent driving of offending vehicle by non-applicant 4 and Karan came under the offending vehicle and died. A claim application under Section 166 of the Motor Vehicle Act was filed before the learned Claims Tribunal and liability to pay the compensation was fastened on the insurance company.

Counsel for the appellants submitted that deceased was travelling as ‘gratuitous passenger’ in a ‘goods carriage vehicle’; the driver of offending vehicle was not possessing valid and effective driving licence, claimants are not entitled to any amount of compensation as it is a breach of conditions of the insurance policy.

Counsel for respondents submitted that it was a burden upon the Insurance Company to prove that on the date of accident, driver of the offending vehicle was not possessing a valid and effective driving licence, in which, it failed and no evidence has been brought on record by Insurance Company in support of their ground to prove that non-applicant No.4 was not possessing valid and effective driving licence.

Issue 1: The Court observed that in view of undisputed facts and evidence available on record it was clear that deceased was travelling in a goods carriage vehicle, he was not an employee of the owner of offending vehicle; the policy issued was only ‘Liability Only Policy’, no premium paid for any gratuitous passenger travelling in the vehicle, Insurance Company cannot be held liable to satisfy the amount of compensation against the death of Karan alias Phekan whose status was of ‘gratuitous passenger’.

Issue 2: The Court further observed that as far as the ground relating to no licence is Concerned the licence itself was not placed on record, then it cannot be said that Insurance Company has not discharged its burden to prove that non-applicant No.4 was not possessing valid and effective driving licence, in fact, it is a case of no licence. The Court thus held that nonapplicant No.4 was possessing valid and effective driving licence is perverse and it is hereby set aside.

Issue 3: The Court observed that as far as the ground that claimants are not entitled to any amount of compensation as they are not legal representatives and dependant upon the deceased is concerned, it was stated that In view of aforementioned evidence available on record when the claimants have not filed any document to show their relationship with deceased nor examined any independent witness of the village where the deceased was residing to prove that deceased was residing with claimants on the date of the accident.

The Court respect to maintaining an application by a person not dependant on the deceased observed that “the definition contained in Section 2(11) CPC is inclusive in character and its scope is wide, it is not confined to legal heirs only. Instead, it stipulates that a person who may or may not be legal heir competent to inherit the property of the deceased can represent the estate of the deceased person. It includes heirs as well as persons who represent the estate even without title either as executors or administrators in possession of the estate of the deceased. All such persons would be covered by the expression ‘legal representative’.”

 The Court thus held that the claimants failed to prove that they were dependant upon deceased, the relationship being respondent 1 to be real sister of deceased not proved. Non-applicant 2 is earning and nothing is mentioned about the husband of applicant 1 and father of applicants 2 to 7.

In view of the above, the appeal was allowed and Insurance Company was exonerated from its liability to satisfy the amount of compensation and instead it was cast upon non-applicant 3/registered owner of the offending vehicle.[United India Insurance Company v. Kimani Devi,  2020 SCC OnLine Chh 881, decided on 09-10-2020]


Arunima Bose, Editorial Assistant has put this story together

COVID 19Op EdsOP. ED.

1. INTRODUCTION

The on-going global Coronavirus disease (“COVID-19”) has affected a countless number of people around the world, businesses and the global economies alike. On March 11, 2020, the World Health Organisation declared COVID-19 a pandemic. In India too, the government has also termed COVID-19 as a pandemic. In testing times like these, India is slowly coming out of an unprecedented nationwide lockdown; which incidentally has been termed to be as one of the biggest lockdown in the world and has resulted in a temporary or partial shutdown of many businesses in India.

The Ministry of Home Affairs (“MHA“) along with various other relevant Indian governmental authorities to safeguard the interests of employees — ­particularly the inter-State migrant workers have come out with a series of notifications, advisories, circulars and orders (collectively referred to as  “the COVID Circulars”), many of which have cast onus on the ’employers’ and companies – whether they be in the industry or shops and commercial establishments,which (broadly) include but are not limited to the following:

(i) making payment of wages to their workers at their workplace, on the due date, without any deduction, for the period their establishments are or previously have been under closure during the lockdown (“MHA Circular”)[1]; and

(ii) ensuring fixed working hours and adequate safety of their employees[2], for the safety measures announced by the relevant governmental authorities, in light of the COVID-19 pandemic. ­

This article seeks to discuss in light of the COVID Circulars and keeping in view the ever-increasing popularity of the appointment of non-executive directors (“NED”) in Indian companies, whether such NEDs can be held liable for non-compliance of the obligations which the COVID Circulars have cast upon companies and employers.

2. ROLE OF NON-EXECUTIVE DIRECTORS WITH REGARD TO COVID CIRCULARS AND APPLICABLE INDIAN LEGISLATIONS  

2.1  Due to the ever-growing participation of private equity and venture capital investments by investors in Indian companies, as a recently evolving trend, such investors in return for their investments have been demanding a board seat of an authorised individual representative of their choice, usually by way of appointing a NED.

2.2 Obligations of Employers with Regard to the COVID Circulars

 As indicated above, several COVID Circulars have cast obligations on ’employers’, especially, when it comes to payment of wages to their workers employed at their workplace, during the period of lockdown. For instance, Labour Departments of States such as Maharashtra and Telangana had even prior to the MHA Circular, directed that during the lockdown period (which was announced by the said States before the nationwide lockdown was announced on March 24, 2020), the employees/workers were to be paid salary and allowances in full, as a paid holiday during such period. As on date, however, there is no clarification from the relevant governmental authorities as to whether a NED will constitute as an ’employer’ and hence, there remains ambiguity regarding whether a NED can be held accountable for any act of non-compliance by a company, in light of the COVID Circulars.

With no ‘explicit’ clarity on the issue of liability of a NED, with regard to COVID Circulars, as a stop-gap measure, guidance on the role and responsibilities, and general actions from the definitions, and cases which have dealt with the said issue in the past, interpretation can be drawn, in terms of the relevant Indian statutes, which include but are not limited to: (i) the  Companies Act, 2013[3] (“the Act”); and (ii) applicable provisions of the Indian labour legislations, which have been analysed (in brief) below.

2.3 Definition and analysis of a NED in line with the Act and the allied Rules made thereunder

 NEDs in India are viewed as a custodian of the company[4]. Under the Act, the liability in case of a default is cast upon the “officer who is in default”[5]. The question which has been repeatedly tested and challenged in the competent court(s) of law is whether a NED in a company can be equated on the same footing as an “officer who is in default”[6]. The extant law, provides a way out for the directors of a company including the NEDs, who can prove that any breach or non-compliance was not intentionaland neither was it an intentional breach by him/her, however, the burden to establish innocence would always lie on the NED. Additionally, the Act provides that a NED should be held liable only in respect of any contravention of any provisions of the Act which had taken place with his knowledge (attributable through board processes) and where he has not acted diligently, or with his consent or connivance[7], a fact which has been reiterated by the MCA, on numerous occasions[8].

To clear the ambiguity around the issue of liability of a NED, the Ministry of Corporate Affairs (“MCA”) had issued a circular[9] (“the Circular”), wherein it clarified that the liability of a NED (not being a promoter or KMP) under the Act, is only for the acts of omission or commission by a company which had occurred with his knowledge, attributable through the ‘board’ process, and with his connivance or where he had not acted diligently (“the Criteria”). The Circular further states that unless the Criteria is met, a NED (who is not a promoter or KMP), should not be arrayed in any criminal or civil proceedings under the Act. The Circular also discusses the need to examine the Criteria, before serving notices to the NED of a company, for a potential non-compliance and default by him/her.

The MCA, through the said Circular, has also prescribed SOPs (standard operating procedures) for the Registrars, before initiating proceedings against the ‘officers in default’, for offences which include but are not limited to ascertaining the nature of default and officer in default. The MCA has further clarified that in case of any doubts pertaining to the liability of any director for proceedings to be initiated, guidance may be sought from the office of the Director General of Corporate Affairs, MCA, and consequently, such proceedings must only be initiated after receiving due sanction from the MCA. Also note, only where lapse(s) are attributable to the decisions which are taken by the board or its committees which include the NED, adequate care and responsibility must be taken to ensure that unnecessary proceedings are not initiated against such NEDs unless there is evidence to the contrary.

2.4 Definition of ‘Employer’: Guidance from various Indian labour statutes

In light of the COVID-19 Circulars, it appears that most of the advisories seem to be directed towards “employers”, and the roles and responsibilities which would need to be followed during the lockdown. For instance, in light of the hardships faced by the inter-State migrant workers, the MHA Circular called upon all “employers”– whether in industry or in shops and commercial establishments, to make payment of wages of their workers at their workplace on the due date without any deduction in the wages during the lockdown period. On similar lines, relevant State Government authorities of various States, such as (i) Maharashtra; (ii) Uttar Pradesh; (iii) Haryana; and (iv) Karnataka, had issued advisories/orders on similar lines refraining employers from terminating their employees and workers, and/ or to reduce their wages.

As indicated at Point 2.2. above, since the COVID Circulars are silent on who an “employer” is, nor have the relevant governmental authoritiesas on date clarified on who would fall under the definition and ambit of an “employer”, in the interim reliance can be placed on the relevant provisions of the applicable Indian labour laws, where an “Employer” has been defined under various statutes.

For instance, Section 2(7) of the Bombay Shops and Establishment Act, 1948[10], defines an “employer” as a person who owns or has ultimate control over the affairs of an establishment, whereas Section 2(g) of the Industrial Disputes Act, 1947, defines an “employer” to be: ‘(i) in relation to an industry carried on by, or under the authority of any department of the Central Government or a State Government, the authority prescribed in this behalf, or where no authority is prescribed, the head of the department; (ii) in relation to an industry carried on, by or on behalf of a local authority, the chief executive officer of that authority’. Additionally, Section 2(l) of the Code on Wages, 2019, defines an “employer” as: “a person who employs, whether directly or through any person, one or more employees in his establishment”.

Hence, who would fall under the definition of an “employer” would depend on factors such as:

(i) the nature of the business;

(ii) the type of workers employed; and

(iii) the place of operations of a business or an establishment.

3. JUDICIAL PRECEDENTS AND SUBSEQUENT RELAXATIONS BY RELEVANT GOVERNMENTAL AUTHORITIES

3.1 Judicial Precedents

3.1.1 The question of liability of the NEDs has been challenged and discussed upon in the court of law, time and again. Listed below is a brief analysis of the important judicial precedents on this issue, in the recent past:

  • In Chaitan M. Maniar v. State of Maharashtra[11], the Bombay High Court observed that for the acts of a few dishonest people, the NEDs, who were not concerned with the day-to-day functioning of the company will not be held responsible, unless there is valid evidence backed by proof, to prove the active participation of the NEDs in question.
  • In Poonam Garg v. Securities and Exchange Board of India[12],  the appellant (i.e. Poonam Garg) acted in the capacity of a NED in the company and her husband was the promoter, managing director and the compliance officer in the company. The Securities Appellate Tribunal, Mumbai Bench after examining the merits of the case held that: (i) as the appellant’s (i.e. Poonam Garg) husband, was also a promoter/Managing Director/Compliance Officer of the company, the same was sufficient to hold that the appellant (i.e. Poonam Garg) was an ‘insider’ ; (ii) it could be deduced that she was reasonably privy to the PSI or ‘Price Sensitive Information’; (iii) it was not open to the appellant (i.e. Poonam Garg) to feign ignorance of the Prohibition of Insider Trade Regulations; and (iv) take shelter under the violations committed by her husband.
  • For cases pertaining to liability under the Negotiable Instruments Act, 1881, the Supreme Court of India in Pooja Ravinder Devidasani v. State of Maharashtra[13] held that: “a non-executive director is no doubt a custodian of the governance of the company but is not involved in day-to-day affairs of the running of its business and only monitors the executive activity”.

As can be seen from the cases cited above the courts usually examine the liability of a NED, individually on a case-to-case basis, and as such, there is no ‘one size fits all’ formula of the judicial tests, which the judicial courts, examine and has been laid down, to determine the liability of a NED.

3.1.2 Further, as discussed above, several COVID Circulars have imposed various obligations on the “employers” until a few relaxations by the relevant governmental authorities were announced[14]. Additionally, many COVID Circulars, such as the MHA Circular has been challenged by numerous aggrieved parties, before various courts having judicial jurisdiction, primarily on account of the inability of companies to pay wages during the period of lockdown. Listed below is a brief analysis of a few of such cases:

  • The Supreme Court of India in the matter of Hand Tools Manufacturers Association v. Union Of India[15], in its order stated that no coercive action was to be taken against an association of 52 (fifty-two) companies from Punjab for failing to comply with the MHA Circular, wherein the employers were compelled to pay wages to workers during the period of lockdown on account of COVID-19. The Hand Tools Manufacturers Association had challenged the constitutional validity of the Notification dated March 20, 2020, issued by the Secretary (Labour & Employment) and select portion of Clause III of the MHA Circular, both of which compelled payment of full wages to workers and employees during the period of lockdown.
  • The MHA Circular was also  challenged in  Ficus Pax Pvt.    v. Union of India[16], in the Supreme Court of India, wherein the appellant (Ficus Pax Pvt. Ltd. ) approached the Court to quash the MHA Circular directing payment of full wages to workers and employees during the lockdown as  “arbitrary, illegal, irrational, unreasonable and contrary to the provisions of law including Article 14 and Article 19(1)(g) of the Constitution of India.”

3.2  Subsequent relaxations by the relevant governmental authorities at the Central level

 There have been a few relaxations announced by the relevant governmental authorities with regard to the liabilities which the COVID Circulars have placed on the ’employers’.  For instance, the relevant governmental authority on the issue of ‘payment of wages’ to temporary/casual/daily wage workers in light of the lockdown, has clarified that the lockdown period is part of the moral/humanitarian/contractual obligations of all companies irrespective of whether they have any legal obligation for CSR contribution under Section 135 of the Companies Act, 2013, and hence, payment of wages to temporary or casual or daily wage workers during the lockdown period will not count towards CSR expenditure[17].

Additionally, the MHA has by way of issuing an order[18] dated May 17, 2020 (“New Order”) announced various relaxations, wherein the previously issued SOPs, including the MHA Circular, has now been replaced with new guidelines. This would mean that the restrictions which had been imposed by the MCA Circular pertaining to mandatory payment of wages, during the period of lockdown would with effect from May 18, 2020, no longer be applicable and as a result of this move, any termination measures or reduction in wages by an employer would be governed by applicable provisions of the Indian labour statutes.

As on date, however, there appears to be ambiguity regarding the New Order i.e. whether it would apply to establishments which were not operational previously during the period of lockdown, and unless the courts decide otherwise, companies including the employers would be bound by guidelines issued by the MHA Circular from its enforcement (i.e. March 29, 2020), until the day of enforcement of New Order (i.e. May 18, 2020). Additional relaxations in the form of the previously issued standard operating protocol (“SOP”) have been now replaced with the new lockdown guidelines, for instance, it is no longer mandatory for the employer to ensure that its employees have installed the ‘Arogya Setu’ app but the same is to be done by the employer on a ‘best effort basis’ only.

3.3. Subsequent Relaxations by Various State Governments

In light of the COVID-19 pandemic, many State Governments have also provided a few relaxations in the compliance requirement for a few of the applicable labour laws, as a result of which the onus on the part of the employers or the “officer in charge” which may include NEDs by virtue of the role played by them in the company has significantly been reduced. For instance, the State of Uttar Pradesh provided relaxations to the “employers”, by way of issuing an Ordinance[19], in complying with certain requirements of the applicable legislation, such as exemptions from complying with the provisions of the Industrial Disputes Act, 1947 (“IDA”) and the Factories Act, 1948 for 3 (three) years, starting from the date of the said Ordinance.

4. CONCLUSION

4.1 To conclude and to answer whether a NED can be held liable for any non-compliance in light of the  COVID Circulars, the following points provide an overview of the issue:

(i) As discussed above, as on the date of this article, there is no explicit clarity from the relevant governmental authorities, regarding whether a NED would fall under the definition of an “employer”. Hence, the liability of a NED, would need to be determined individually and on a case to case basis, till the time further clarity by a relevant governmental authority is provided.

(ii) In the interim, guidance can be drawn to applicable provisions of the Indian legislations, as discussed in line at Points 2.3 and 2.4 of this article (i.e. the definition of NED and definition of an ’employer’).

(iii) Several petitions challenging the legality of the COVID Circulars, have been filed by affected parties, many of which are still pending to be adjudicated upon by the courts, and are likely to be answered in the coming few days.

4.2 In the interim, in light of the COVID Circulars, to better protect the interest of the NEDs, the following measures should ideally be adopted by the companies:

(i) Obtaining a D&O (director and officer) insurance to better protect the interests of NEDs in a company;

(ii) Indemnification rights as part of the definitive agreements to protect the rights of the NED should be sought by the investors wanting to appoint a NED (i.e. in the form of their representative on the board of a company);

(iii) Clear demarcation of the roles and responsibilities of a NED in the company should be ideally defined and documented; and

(iv) As a stop-gap arrangement, companies may choose to nominate an individual/group of individuals (which may also include NEDs), to oversee the compliance requirements, including the requirements stemming from the COVID Circulars. This may however not be a fool-proof method to safeguard the interest of NEDs, as different courts, may take a different view on this.

4.3 In continuation to recommendations discussed at Point 4.2 above, NEDs may also make a recommendation to the KMPs or the members of the board of directors (as the case may be) and ensure that the employees are paid their wages on time – in line with the advisories issued by the relevant governmental authorities from time-to-time, and further, written consent of employees stating that the company is complying with the norms laid down by the relevant governmental agencies can be obtained, to protect the interests of the NEDs in a company.


*Lawyer from New Delhi/Mumbai, India. Author can be reached at ‘aseem.sahni@outlook.com’.

[Disclaimer: The content of this article is intended to provide a general guide to the subject. Specialist advice should be sought about your specific circumstances.]

[1] Refer to Order issued by the Ministry of Home Affairs – No. 40-3/ 2020- DM-I (A), dated March 29, 2020.

[2]MHA in its directive issued on May 1, 2020 had made installation of ‘AarogyaSetu’ App mandatory for both private and public sector employees and had called upon the head of the respective organisations to ensure 100 per cent coverage of the app among the employees.

[3] The Companies Act, 2013

[4] Chintalapati Srinivasa Raju  v. Securities and Exchange Board of India, (2018) 7 SCC  443, dated May 14, 2018.

[5] Section 2(60) of the Act defines an “Officer who is in default” and provides a list of officers of a company, who will be held accountable in case of default by the company, which include but are not limited to: (i) whole-time director; (ii) key managerial personnel; or (iii) any person in accordance with whose advice, directions or instructions, the board of directors of the company is accustomed to act, other than a person who gives advice to the board of directors in a professional capacity.

[6]Please refer to Point 3.1 of this article, for a discussion on an overview of the judicial interpretation.

[7]Section 149(12) of the Companies Act, 2013.

[8]Refer to ‘Report of Expert Committee’, available at:http://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter4.html (last visited on May 24, 2020).

[9]Refer to General Circular No. 1 / 2020 (F.No. 16/1/2020-Legal) dated March 2, 2020.

[10]Also referred to as the Maharashtra Shops and Establishment Act, 1948.

[11]2004 SCC OnLine Bom 139

[12]  2018 SCC Online SAT 99.

[13] (2014) 16 SCC  1 

[14]Brief analysis of the relaxations announced by the various relevant governmental authorities in light of the COVID Circulars has been discussed at Point(s) 3.2 and 3.3 of this article.

[15]Writ Petition (Civil) Diary No. 11193/2020, order dated 15-5-2020.

[16] (2020) 4 SCC 810

[17]Ministry of Corporate Affairs  General Circular No. 15/2020 (F. No. CSR-01/4/2020-CSR-MCA), ‘COVID-19 related Frequently Asked Questions (FAQ No. 6) on Corporate Social Responsibility (CSR)’ dated April 10, 2020.

[18]Refer to order issued by the Ministry of Home Affairs – No. 40-3/2020-DM-I(A) – dated May 17, 2020, available at https://www.mha.gov.in/sites/default/files/MHAOrderextension_1752020_0.pdf

[19]Refer to Ordinance entitled “Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance, 2020”, dated May 08, 2020. It has since been withdrawn.

Case BriefsHigh Courts

Kerala High Court: R. Narayana Pisharadi, J., while observing the instant matter asked the trial court to reconsider the question whether the suit document is a bond or an agreement.

The instant suit was filed for the realisation of money and certain other reliefs. The claim for money was based on the document allegedly executed by the first defendant in favour of the plaintiff.

When the said document was tendered in evidence, the defendants raised an objection to the marking of the document on the ground that it is a bond and it is an insufficiently stamped document.

Trial Court in its decision had found that the suit document was only an agreement and not a bond.

Defendants had also raised an objection contending that the document was a mortgage deed and it should be compulsorily registrable.

Analysis

Section 2(a) of the Kerala Stamp Act, 1959 defined a bond as follows:

“(a) ‘bond’ includes —
(i) any instrument whereby a person

obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be;

(ii) any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and

(iii) any instrument so attested, whereby a person obliges himself to deliver grain or other agricultural produce to another;”

It was observed that the above-stated definition is identical to the definition of bond in Section 2(5) of the Indian Stamp Act, 1899. The said definition includes all types of instruments.

Petitioner’s Senior Counsel submitted that the suit document comes under Clause (ii) mentioned above. But, learned counsel for the first respondent would contend that in order to attract Clause (ii) of Section 2(a) of the Act, the obligation created by the document shall be to pay a definite or specified amount and not something to be determined by the Court.

Further, it was submitted that in the instant case the document does not create an obligation to pay a definite or specified amount and therefore, it is not a bond but only agreement.

Suit document is styled as an agreement. But, for finding out the true character of the instrument, one has to read the instrument as a whole and then find out the dominant purpose. The test is not what the document calls itself or what form it adopts but what is the true meaning and effect of the terms contained therein.

Delhi High Court’s decision in Hamdard Dawakhana (Wakf),1967 SCC OnLine Del 36, the full bench of the court considered the distinction between the bond and an agreement. In this decision, it was observed that it is trite to say that every bond is an agreement and so is the case with a mortgage or sale or exchange but what the court has to see is whether that agreement has acquired the character of a “bond”.

Distinguishing Feature of a Bond

Bond has an obligation to pay money created by the instrument itself.

A document which evidences acknowledgement of an antecedent obligation or a pre-existing liability would not normally become a bond.

The real test to decide whether a particular document is a bond or not is to find out, after reading the document as a whole, whether an obligation is created by the document itself or whether it is merely an acknowledgment of a pre-existing liability.

Where the obligation is a pre-existing one, the subsequent document or the document executed subsequently, giving the nature of the obligation or the terms and conditions of the contract, shall be a mere agreement.

Trial Court failed to take into consideration the fact that, as per the terms of the document, a liability is created for a fixed amount, that is, the amount borrowed and 10% of that amount. Adding to this, it also did not consider whether the stipulation in the document is sufficient to treat it as a bond. Principles mentioned in the Supreme Court cases have also not been referred by the trial court.

High Court allowed the original petition and further stated that the trial court shall consider the question of whether the suit document is a bond or an agreement. [A.V. Ravi v. M.M. Abdulkhadar,  2020 SCC OnLine Ker 8185, decided on 01-12-2020]

Case BriefsHigh Courts

Allahabad High Court: Dr Kaushal Jayendra Thaker, J., directed the insurance company to indemnify the claimants of the deceased who died in an accident, subject, inter alia, to recovery/deduction of 10% of the amount since the present is a case of contributory negligence.

 Present appeal arose from the accident which injured the family of the deceased (late District Judge) and in which the sole bread earner of the family lost his life in the accident. It has been stated that both the driver of the car and owner of the car died whereas the driver of the truck also lost his life.

Claimants preferred the present appeal against the judgment and award passed by Additional District Judge/Motor Accident Claims Tribunal, Allahabad.

Insurance company challenged the grant of compensation in Durga Verma v. Ranno Devi, FAFO No. 1359 of 2001 and FAFO No. 1365 of 2001 whereby the insurance company challenged the judgments qua quantum and alleged breach of policy condition and have also challenged the finding of the tribunal as far as negligence attributed to the driver of the truck was concerned.

Facts that lead to the present appeals

Husband and father of the claimants respectively died in an accident which occurred in the year 1994. The car which the deceased was driving dashed with another vehicle (a truck) causing the death of drivers of both the vehicles who succumbed to injuries caused by the said accident.

The insurance company contested that the vehicle in which the Fiat car dashed was not involved in the accident and the insurance company was not liable and the driver was not having a valid driving license, hence there was a breach of a policy condition. Insurance company contended that it was a case of contributory negligence on the part of the driver of the car.

Insurance Company preferred two appeals against the award in favour of the heirs of driver of Fiat car and heirs of owner of Fiat car. The injured and heirs of both driver and owner have also filed appeals for enhancement.

Analysis & Decision

The Bench stated that it will advert to the principles of negligence: both contributory as well as composite negligence. Further, it added that it is a case of composite negligence but qua the driver of the Fiat car, it can be a case of contributory negligence.

Relying on the decision of Supreme Court in Pappu v. Vinod Kumar Lamba, (2018) 3 SCC 208 and Sant Lal v. Rajesh, (2017) 8 SCC 590, the Bench stated that the liability would arise if a number of the licence was given and issuing authorities whereabouts were given in absence of the same, the insurance company has to be granted recovery rights from the owner of the truck to recover subject to the procedure suggested in the above two cases.

Insurance company did not file any documentary evidence, however, subject to the fact that the driver of the truck did not possess a proper driving license, they are granted recovery rights from the owner.

Negligence

Negligence means failure to exercise the required degree of care expected of a prudent driver. Negligence is the omission to do something which a reasonable man, guided upon the considerations, which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. Negligence is not always a question of direct evidence. It is an inference to be drawn from proved facts.

What may be negligence in one case may not be so in another.

Well-Settled Law

At the intersection where two roads cross each other, it is the duty of a fast-moving vehicle to slow down and if the driver did not slow down at the intersection, but continued to proceed at a high speed without caring to notice that another vehicle was crossing, then the conduct of driver necessarily leads to the conclusion that vehicle was being driven by him rashly as well as negligently.

In the instant matter, the Bench observed that:

“Merely, because the driver of the truck was driving a vehicle on the left side of road would not absolve him from his responsibility to slow down vehicle as he approaches the intersection of roads, particularly when he could have easily seen, that the car over which deceased was riding, was approaching intersection.”

Court added that, even if courts may not by interpretation displace the principles of law which are considered to be well settled and, therefore, court cannot dispense with proof of negligence altogether in all cases of motor vehicle accidents, it is possible to develop the law further on the following lines; when a motor vehicle is being driven with reasonable care, it would ordinarily not meet with an accident and, therefore, rule of res-ipsa loquitor as a rule of evidence may be invoked in motor accident cases with greater frequency than in ordinary civil suits [per three-Judge Bench in Jacob Mathew v. State of Punjab, (2005) 6 SCC 1.

It was held that by the above process, the burden of proof may ordinarily be cast on the defendants in a motor accident claim petition to prove that motor vehicle was being driven with reasonable care or that there is equal negligence on the part the other side. In the present case, the vehicles are of unequal magnitude: one is a fiat car and the other a truck; the oral testimony of the witnesses go to show that the truck driver driving the vehicle at an exorbitant speed could not control itself, but at the same time if the driver of the Fiat car would also had been cautious, he would have averted the accident taking place and therefore he is held to be also “co-author” of the accident but to the tune of 10%.

Bench held that, it is case of composite negligence as far as the other inmates of Fiat car are concerned and therefore the insurance company will have to indemnify the claimants however it may recover the said amount to the tune of 10% from the owner-driver and insurance company of the Fiat car. As far as the claimant is concerned who is the widow of the driver of the Fiat car the compensation would be lessened to the tune of 10% as the driver has been held to be negligent to that effect. The driver of the Fiat car should have also taken proper caution and having not done so some negligence is attributed to him also.

Hence, the appeals preferred by the insurance company are decided likewise.

Appeals of claimants were partly allowed. [National Insurance Co. Ltd. v. Durga Verma,  2019 SCC OnLine All 6696, decided on 10-12-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): Anil Choudhary (Judicial Member), allowed an appeal which was filed aggrieved by the judgment and order given by Commissioner (Appeals). The issue before the Tribunal was whether the demand of interest was to be calculated from the date of clearance of goods upto the date of actual payment of duty or from the date of determination of due amount till the actual date of payment of duty.

Appellant was engaged in the manufacture of chewing tobacco falling under Chapter 24 of the CETA and the goods being notified under Section 3 A of the Central Excise Act, the appellant was working under Chewing Tobacco and Unmanufactured Tobacco Packing Machines (Capacity Determination and Collection of Duty Rules) 2010 (CTPM Rules). Appellant valued and paid excise duty under Section 4 A of the Excise Act. The officers of Anti-Evasion visited the factory premises of the appellant and objected to the clearance of retail packages of less than 10 gms, show cause notice was issued proposing to demand differential excise duty on wholesale packages This show cause notice was adjudicated by the Dy. Commissioner confirming the proposed demand. This show cause notice was adjudicated by the Dy. Commissioner confirming the proposed demand, the first appeal before the Commissioner (Appeals) was rejected further, the appeal before this Tribunal was dismissed by the Tribunal confirming the demand. The appeal of the appellant /assessee was allowed by the Commissioner (Appeals) observing that the retail packs weighing upto 10 gms were not liable for MRP based assessment and excise duty has been rightly paid under Section 4 of Central Excise Act. Accordingly, being successful in appeal, they filed a refund claim, which was allowed. Against the Order-in-Appeal Revenue preferred an appeal before this Tribunal in favour of the appellant and against the Revenue. Pending litigation before this Tribunal, Revenue had issued 25 show cause notices for the succeeding period Meanwhile, Rule 2 (j) and Rule 17 of the Package Commodity Rules (Successive Rules to SWM Rules) were omitted from the Statute. Pending adjudication of the aforementioned 25 show-cause notices, the appellant closed down its manufacturing activities and surrendered its registration, the Additional Commissioner confirmed the demand raised under 25 show cause notices with interest and also imposed penalty equivalent to 50% of the duty confirmed.

Being aggrieved, the appellant/assessee preferred appeals before the Commissioner (Appeals) which were rejected. In order to buy peace with the Department, the appellant deposited the differential duty. Further, being aggrieved with the imposition of penalty the appellant preferred appeal before this Tribunal. This Tribunal allowed the appeal and dismissed all the appeals filed by the Revenue. During the pendency of the appeals before the Tribunal the Department directed the appellant to pay interest on differential duty, in response, the appellant objected to the manner of calculation adopted by the Department for demanding interest. The appellant against the Department’s letter being coercive in nature, filed an appeal before the Commissioner (Appeals), Central Excise & CGST, Jaipur which was rejected. Finally aggrieved by which the instant appeal was filed.

The Tribunal applied the ruling in the judgment of CCE v. Lucas TVS Ltd. – 2010 (262) ELT 444 (Tribunal-Chennai), and held that setting aside of the original order and remanding the matter for de novo consideration means, that there is no order and party is relegated to fresh adjudication and adjudication culminates into an order.

The Tribunal while allowing the appeal found that in the facts of the present case the Commissioner (Appeals) has redetermined the duty liability by his order as the demand was set aside and only re-determined for the further period. The Tribunal observed that the appellant /assessee was liable to pay interest for one month which they have admittedly paid, thus the impugned order is set aside.[Arora Products v. Commr., CE & CGST,  2020 SCC OnLine CESTAT 255, decided on 26-10-2020]


Suchita Shukla, Editorial Assistant has put this story together