Preserving Equality in Online Education

The silver bullet of technology has not only managed to pierce sectors like finance, law, healthcare, etc. but also the predominantly conservative sector of education. Pandemic was the catalyst for steering a range of investments and innovation in the online learning space. Not surprisingly, the industry is set to grow by $2.28 billion during 2022-2026, progressing at a CAGR of 19.50% during the forecast period.[1]

The rapid adoption and need of online education platforms have inspired pedagogical approaches to make tech-based education more engaging and interactive. It is anticipated that integration of blockchain, gamification, artificial intelligence, immersive technologies, learning analytics, etc. will make the online learning experience more adaptative and personalised to the needs of each individual student.

While the world of virtual education may have opened lucrative avenues, its impact dwells differently on students, teachers, schools, parents, and the industry as a whole. 

 

Supreme Court’s View on Online Education

During the pandemic, schools switched to the digital medium, and as such, the right to education was virtually denied to children belonging to the disadvantaged group (DG) or economically weaker section (EWS). The Supreme Court, headed by a three-judge bench of Justices D.Y. Chandrachud, Vikram Nath and B.V. Nagarathna in October 2021, stated that the digital divide, against the backdrop of the COVID pandemic, has produced “stark consequences.”

The top court was hearing a plea by the Action Committee on Unaided Recognised Private Schools in connection with the access to technology by children who are attending online classes and the funding needed for the same. It was a petition filed by the private school managements challenging the Delhi High Court order of September 2020 directing them to provide their 25% quota of EWS/DG students online facilities free of charge. The High Court had said that the schools could get themselves reimbursed from the government.

The Delhi government appealed to the Supreme Court against the High Court’s order, saying it had no resources to reimburse the school for the online gadgets. Though the Supreme Court had stayed the High Court order in February 2021, the bench led by Justice Chandrachud said both the Centre and states like Delhi could not bow out of their responsibilities towards young children.

The court observed that the disparity exposed by online classes had been heart-rending. The technology gap caused by online classes defeated the fundamental right of every poor child to study in mainstream schools. The court also ruled that the right to education for little children hinged on who could afford gadgets for online classes and who could not. Many students had to take temporary breaks, and in the worst case, drop out, due to a lack of resources to access the internet, for online education as their families could not afford them. Moreover, the risk of the children, who dropped out of school, being drawn into child labour or child trafficking was high. The needs of young children, who are the future of the country, cannot be ignored, it said. Though schools were gradually opening due to the receding curve of the pandemic, the need to provide adequate computer-based equipment and access to online facilities for children is of utmost importance.

The needs of young children who represent the future of the nation cannot simply be ignored. A solution must be devised at all levels of Government – State and Centre to ensure that adequate facilities are made available to children across social strata so that access to education is not denied to those who lack resources. Otherwise, the entire purpose of the Right to Education Act, allowing EWS students to learn alongside mainstream students even in unaided schools, will be defeated.

The court further held that Article 21A (the right to free and compulsory education for children aged between 6 and 14) must be a reality. It directed the Delhi government to develop a plan to help children in the EWS category and added that the Centre and State governments should jointly work to develop a realistic and lasting solution to ensure children are not denied education due to lack of resources. The said bench further said: “It is necessary for the Delhi government to come with a plan to uphold the salutary objective of the RTE Act. Centre to also coordinate with state governments and share concurrent responsibilities for the purposes of funding.”

It also appreciated the Delhi High Court’s order directing the Delhi government to provide computer-based equipment and an internet package free of cost to EWS children in private and government schools. The Bench asked the Delhi Government to come out with a plan to effectuate the ‘salutary object’ upheld in the High Court’s decision. The court said the Centre should join in the consultations. The issues raised in the present proceedings will not only cover unaided schools but also government and aided schools. The Bench issued notice in the private school’s management petition and ordered it to be tagged with the pending Delhi Government petition.

 

Guidelines for Digital Education

COVID 19 accelerated the adoption of technology and brought about a dynamic shift in the sector. However, it was also realised that technology may improve the quality of dissemination of education; but it can never replace the classroom teaching and learning experience. While adopting the blended and hybrid model of education, a balance needs to be struck in learning and taking advantage of technology, and helping children become socially and emotionally healthy individuals and responsible citizens.

Bearing that in mind, Pragyata Guidelines for Digital Education were released by the Ministry of Human Resource Development’s Department of School Education and Literacy. At the beginning of the academic year 2021-22, the school education department informed all the schools to follow these guidelines while conducting online classes. According to the guidelines, the maximum screen time per day for kindergarten/preschool students has been limited to 45 minutes. However, for classes 1 to 5, schools can conduct two sessions of 1.5 hours per day for not more than 5 days in a week. For classes 6 to 8, screen time has been limited to 2 hours and for classes 9 to 12, limited to a maximum of 3 hours per day.

 

The Two Sides of Online Learning

Online classes offer a comfortable learning environment for students and offer tremendous growth opportunities, but it does instil a sense of isolation. Students, especially those belonging to younger age groups, thrive in a socially simulated environment. However, given the set-up of online classes, children fail to develop the ability to identify social norms and etiquettes. Further, online classes also limit the time and attention teachers can extend to their students. As a consequence, students that require extra attention and guidance fail to perform well. Also, online education may be accessible, but it is not affordable. Virtual learning requires expensive gadgets like computers, laptops, tablets, or smartphones. Hence, students in the economically weaker sections are left behind.

On the plus side, exhaustion and added costs of commuting are avoided in online education. In addition, online learning platforms offers a variety of courses and programmes that empower students to explore opportunities outside the realm of their curriculum. Moreover, since it is not possible for teachers to constantly monitor the activities of all students, online classes instil a sense of responsibility and self-discipline in them as they are made to realise that their actions and negligence will have a long-term impact on their future.

Mapping and understanding the positives and negatives of online education will enable educational institutes and the ed-tech industry to pioneer strategies for more efficient delivery of education. At the same time, the legislature must take a pro-active stance in ensuring that the fundamental right to education is protected in all manner and forms without any compromise on the well-being of learners.

During the pandemic, schools switched to the digital medium, and as such, the right to education was virtually denied to children belonging to the disadvantaged group (DG) or economically weaker section (EWS). The Supreme Court, headed by a three-judge bench of Justices D.Y. Chandrachud, Vikram Nath and B.V. Nagarathna in October 2021, stated that the digital divide, against the backdrop of the COVID pandemic, has produced “stark consequences.”

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Validity of an Arbitration Clause: No Strait-Jacket Formula

On September 7, 2022, the Hon’ble Supreme Court issued a significant ruling in the case of Babanrao Rajaram Pund v. Samarth Builders & Developers[1], holding that no strait jacket formula can be made under the Arbitration and Conciliation Act, 1996, to determine the particulars of an arbitration clause. It further held that an arbitration clause must be treated as final and binding even if specific words like “final” or “binding” are not used in such a clause.

Babanrao Rajaram Pund v. Samarth Builders & Developers

The case related to one Babanrao (the Appellant), who was the owner of a property situated in Aurangabad. The Appellant intended to build residential and commercial complexes on this property. Samarth Builders & Developers (Respondent No. 1), a company specialising in the building of homes and commercial buildings, learned of the Appellant’s intention to build such a residential and commercial complex and approached him. A “Development Agreement” (DA) was subsequently signed by the Appellant and Respondent No.1. The Appellant, thereafter, signed a General Power of Attorney (GPA) in favour of Respondent No. 1.  Respondent No. 2, in the civil appeal was the partner of Respondent No. 1.

According to the DA, Respondent No.1 had to build “Amay Apartments” on the property within 15 months. However, this deadline could have been extended with the payment of a penalty. Respondent No. 1 accepted the conditions of the DA and stated that he would build 45 percent of the constructed space before or on the deadline of the 15-month period, retaining the other 55 percent of the developed section for himself.

Respondent No.1 was, however, unable to finish the work within the allotted time. Aggrieved by this act, the Appellant gave notice to terminate the DA and to cancel the GPA. On 11.07.2016 the cancellation of the agreement and GPA were also publicised in a newspaper by the Appellant. Since, Respondent No.1 did not respond to the notice of the Appellant issued under Clause 18 of the DA, which carried an arbitration clause, the Appellant was constrained to approach the High Court.

Clause 18 of the DA reads as follows:

“18. All the disputes or differences arising between the parties hereto as to the interpretation of this Agreement or any covenants or conditions thereof or as to the rights, duties, or liabilities of any part hereunder or as to any act, matter, or thing arising out of or relating to or under this Agreement (even though the Agreement may have been terminated), the same shall be referred to arbitration by a sole arbitrator mutually appointed, failing which, two arbitrators, one to be appointed by each party to the dispute or difference, and these two Arbitrators will appoint a third Arbitrator and the Arbitration shall be governed by the Arbitration and Conciliation Act, 1996 or any re-enactment thereof.”

The Arbitration Clause

Before the Hon’ble High Court of Bombay, the Appellant had filed an application pursuant to Section 11 of the Arbitration Act, 1996, after receiving no response from the Respondents. The Respondents claimed that clause 18 of the DA could not be enforced because it lacked the precise phrase “to be bound by the decision of the Arbitral Tribunal.” The Hon’ble High Court ruled in favour of the Respondents and determined that the clause lacked necessary components of a legitimate arbitration agreement and did not expressly specify that the arbitrator’s ruling would be binding. Aggrieved by the order of the High Court, a Special Leave Petition was filed by the Appellant before the Hon’ble Supreme Court.

The Issue Before the Hon’ble Supreme Court

If an arbitration clause lacks specific language like “binding” or “final,” should it still be considered a valid agreement for the purpose of invoking powers under Sec. 11 of the Arbitration and Conciliation Act, 1996?

While analysing the issue, the Hon’ble Supreme Court made it clear that there is no precise form of an arbitration clause, and that Section 7 of the Arbitration Act of 1996 does not provide a specific form of arbitration agreement. The Hon’ble Supreme Court critically analysed Clause 18 of the DA and concluded that the terms of the agreement were clear. It made it clear that the term “disputes shall be” referred to arbitration, meant that the reference to arbitration was clear in the DA. Additionally, it was also observed that the contract contained clear instructions for choosing a third arbitrator and that the parties would be subject to the Arbitration and Conciliation Act, 1996. The Hon’ble Supreme Court further opined that the requirement and purpose of the parties to be bound by the arbitral tribunal are mandated by Clause 18 of the DA. The arbitral clause was held to be not invalidated by the omission of the phrases “final” and “binding.” The decision of the Hon’ble High Court of Judicature of Bombay was thus set aside by the Hon’ble Supreme Court and a sole arbitrator was appointed to resolve the dispute.

Key Takeaway

Though, the decision by the Hon’ble Supreme Court gives considerable breathing room for an arbitration clause, it is imperative to consider that an insufficiently written arbitration clause does hinder the process of arbitration. The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. This will also ensure that the parties will not be forced to approach the courts to determine the validity of the clause.

References: 

[1] 2022 SCC OnLine SC 1165.

The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. 

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Public Interest Litigation: A Knight in Shining Armour

The Preamble of our Indian constitution envisages ‘Justice for all’, amongst other tenets. Indian judiciary in the recent past has traversed an unbeaten road. From being the guardian of the interests of an individual, to enabling the recognition of public interest as mode of entrusting locus standi on an individual for securing fundamental rights entrenched in the constitution, the seventy-two odd glorifying years of the judiciary are marked by many momentous instances.

“Public interest” denotes the interest of the people of the land. These interests can be allied in varied directions. All in all, one that integrates itself with the obligations and rights laid out in the grundnorm, represents the public interest. With changing times, fluidity in the interpretation of the term “public interest” has also been under continuous deliberation and interpretation. Since an issue of public interest, denotes a collective representation of opinions, concerns and beliefs; one citizen or person, belonging to the aggrieved class, should not be made a sole party to the dispute. A blow to the public interest hits each and every class of citizens.[1] Therefore, representation by one, as a sentry for the protection of the public interest, denotes a new form of litigation, conceptualised as “public interest litigation”.[2]

 

Public Interest Litigation: Origin and Constitutional Aspects 

A result of outstanding debt, Public interest litigation was envisaged under the Constitution with a vision of bringing the people of India at parity with each other.[3] The marginalised sections of society have always dithered before striking the portals of the court for the establishment of their rights and obligations.[4] In such a scenario, the conventional rules of locus standi were appropriately bent by the Indian Courts to pursue the cause of justice for all and sundry.[5] Justice is not only essential for pursuing the entrenched precepts of the Indian Constitution, but also for harmonization and integration of the streams of human rights, which have latterly enveloped the course of rights-based litigation in India.[6] Therefore, an increase in the panoply of human rights, provides yet another rationale for the growth of public interest litigation in India. The executives and the legislature have been endowed with a quintessential role in the Indian Constitution. Article 12 of the Indian Constitution requires them not to pass laws that impede the attainment of fundamental rights. Recourse to the judiciary in achieving the mandates of the constitution and upholding the status of fundamental rights is in itself qualified as a fundamental right. Such being the case, the Indian judiciary introduced the concept of public interest litigation to provide an answer to the conundrum facing the ailing state functionaries.

With a spurt in these lawsuits, Indian courts have cautiously attempted to lay out guidelines for how such litigation can be pursued. Not every lis draws public interest. As a result, under the guise of public interest, lis fails to provide a suitable remedy to the needy. The Supreme Court under Article 32 of the Constitution and the High Court under Article 226 of the Constitution have held that they have the power to entertain public interest litigation.[7] So much so that Courts under Articles 32 and 226 have, in furtherance of the public interest, treated a private interest case as a public interest case.[8] Both Article 32 and Article 226, vouch for an inquiry into locus standi.[9] This conventional rule of standing has been diluted to give way to class actions.[10] In public interest litigation, unlike a traditional dispute resolution mechanism, there is no determination of individual rights.[11] The compulsion for the judicial innovation of the technique of public interest litigation arises out of the constitutional promise of a social and economic transformation to usher in a welfare state.[12] 

 

Judicial Interpretation of Public Interest Litigation

Article 32 of the Constitution represents the heart and soul of this foundational document. The Indian Supreme Court has made a concerted effort to improve judicial access for the masses by relaxing the traditional rule of locus standi.[14], and it has allowed human rights organizations to intervene on behalf of victims, where it has determined that questions of broader public interest necessitate such intervention.[15] In Prem Shankar Shukla v. Delhi Administration,[16] a prisoner sent a telegram to a judge complaining of forced handcuff on him and demanded implicit protection against humiliation and torture. The court gave necessary directions by relaxing the strict rule of locus standi. 

In Municipal Council, Ratlam v. Vardhichand & Others,[17] Krishna Iyer, J. while relaxing the rule of locus standi, the Apex Court held that “ The truth is that a few profound issues of processual jurisprudence of great strategic significance to our legal system face us and we must zero-in on them as they involve problems of access to justice for the people beyond the blinkered rules of ‘standing’ of British Indian vintage. If the center of gravity of justice is to shift, as the Preamble to the Constitution mandates, from the traditional individualism of locus standi to the community orientation of public interest litigation, these issues must be considered… Why drive common people to public interest action? Where Directive Principles have found statutory expression in Do’s and Don’ts the court will not sit idly by and allow municipal government to become a statutory mockery. The law will be relentlessly enforced and the plea of poor finance will be poor alibi when people in misery cry for justice.” Justice Bhagwati of the Supreme Court in his judgment in S.P. Gupta v. President of India & Others,[18] altogether dismissed the traditional rule of standing and in its place, the Court prescribed the modern rule on standing while holding that “where a legal wrong or a legal injury is caused to a person or to a determinate class of persons by reason of violation of any constitutional or legal right or any burden is imposed in contravention of any constitutional or legal provision or without authority of law or any such legal wrong or legal injury or illegal burden is threatened and such person or determinate class of persons is by reason of poverty, helplessness or disability or socially or economically disadvantaged position, unable to approach the Court for relief, any member of the public can maintain an application for an appropriate direction, order or writ, in the High Court under Article 226, and in case of breach of any fundamental right, in this Court under Article 32.”

Indian Courts have become so inclined towards accepting litigation involving public interest that they have maintained relaxed procedural norms to entertain writs for continuing such litigations.[19] In Sheela Barse v. State of Maharashtra,[20] Sheela Barse, a journalist, complained of custodial violence against women prisoners in Bombay. Her letter was treated as a writ petition and the directions were given by the court. In Dr. Upendra Baxi (I) v. State of Uttar Pradesh & Another,[21] two distinguished law Professors of the Delhi University addressed a letter to this court regarding inhuman conditions that were prevalent in the Agra Protective Home for Women. The court heard the petition for a number of days and gave important directions by which the living conditions of the inmates were significantly improved in the Agra Protective Home for Women. 

In Labourers Working on Salal Hydro Project v. State of Jammu & Kashmir & Others,[22] on the basis of a news item in the Indian Express regarding the condition of the construction workers, the Court took notice and observed that construction work is hazardous employment and no child below the age of 14 years shall be employed in such work by reason of the prohibition enacted in Article 24. It also held that this constitutional prohibition must be enforced by the Central Government. In Paramjit Kaur (Mrs.) v. State of Punjab & Others,[23] a telegram was sent to a Judge of the Apex Court which was treated as a habeas corpus petition. The allegation was that the husband of the appellant was kidnapped by some people in police uniform from a busy residential area of Amritsar. The Court took serious note of it and directed that the investigation of the case be handled by the Central Bureau of Investigation.

 

Public Interest Litigations sans the Public Interest 

Though, the Indian Courts have entertained public interest litigation in the recent past, in a plethora of cases they have also shut the portals of the Courts to those who have come with unclean hands to avenge themselves in the guise of public interest litigation. In BALCO Employees’ Union (Regd.) v. Union of India & Others[24], the Court recognized that there have been, in recent times, increasing instances of abuse of public interest litigation. Accordingly, the Court has devised a number of strategies to ensure that the attractive brand name of public interest litigation is not used for suspicious products of mischief. 

Firstly, the Supreme Court has limited standing in public interest litigation to individuals “acting bonafide”. Secondly, it has sanctioned the imposition of “exemplary costs” as a deterrent against frivolous and vexatious public interest litigations. Thirdly, instructions have been issued to the High Courts to be more selective in entertaining public interest litigations. 

In S.P. Gupta v. President of India & Others,[25] the Court has found that this liberal standard makes it critical to limit standing to individuals “acting bona fide”. To avoid entertaining frivolous and vexatious petitions under the guise of public interest litigation, the Court has excluded two groups of persons from obtaining standing in public interest litigation petitions. First, the Supreme Court has rejected awarding standing to “meddlesome interlopers.” Second, it has denied standing to interveners bringing public interest litigation for personal gain. Further, the court cautioned that important jurisdiction of public interest litigation may be confined to legal wrongs and legal injuries for a group of people or a class of persons. It should not be used for individual wrongs because individuals can always seek redressal from legal aid organizations. This is a matter of prudence and not a rule of law. 

In Chhetriya Pardushan Mukti Sangharsh Samiti v. State of U.P & Others[26], the Court withheld standing from the applicant on grounds that the applicant brought the suit motivated by enmity between the parties. The Court again, in this case, emphasized that Article 32 is a great and salutary safeguard for the preservation of the fundamental rights of the citizens. The superior Courts have to ensure that this weapon under Article 32 should not be misused or abused by any individual or organization.  In Neetu v. State of Punjab & Others[27], the Court concluded that it is necessary to impose exemplary costs to ensure that the message goes in the right direction and that petitions filed with an oblique motive do not have the approval of the Courts. In S.P. Anand v. H.D. Deve Gowda & Others[28], the Court warned that it is of the utmost importance that those who invoke the jurisdiction of this Court seeking a waiver of the locus standi rule must exercise restraint in moving the Court by not plunging into areas wherein they are not well-versed. 

In Sanjeev Bhatnagar v. Union of India & Others[29], this Court went a step further by imposing a monetary penalty of Rs10,000/- against an Advocate for filing a frivolous and vexatious petition. The Court found that the petition was devoid of public interest, and instead labelled it as “publicity interest litigation”.. In Dattaraj Nathuji Thaware v. State of Maharashtra & Others[30], the Supreme Court affirmed the High Court’s monetary penalty against a member of the Bar for filing a public interest litigation petition on the same grounds. The Court found that the petition was nothing but a camouflage to foster personal dispute. Observing that no one should be permitted to bring disgrace to the noble profession, the Court concluded that the imposition of the penalty of Rs. 25,000 by the High Court was appropriate. Evidently, the Supreme Court has set a clear precedent validating the imposition of monetary penalties against frivolous and vexatious public interest petitions, especially when filed by Advocates. The Court expressed its anguish on misuse of the forum of the Court under the garb of public interest litigation and observed that public interest litigation is a weapon which has to be used with great care and circumspection and the judiciary has to be extremely alert in ascertaining the true intentions behind the beautiful veil of social justice.  

The Court must not allow its process to be abused for oblique considerations. In Charan Lal Sahu & Others v. Giani Zail Singh & Another[31], the Supreme Court observed that “we would have been justified in passing a heavy order of costs against the two petitioners” for filing “a light-hearted and indifferent” public interest litigation petition. However, to prevent “nipping in the bud a well-founded claim on a future occasion” the Court opted against imposing monetary costs on the petitioners. In this case, this Court concluded that the petition was careless, meaningless, clumsy and against the public interest. Therefore, the Court ordered the Registry to initiate prosecution proceedings against the petitioner under the Contempt of Courts Act. Additionally, the court forbade the Registry from entertaining any future public interest litigation petitions filed by the petitioner, who was an Advocate in this case.

In J. Jayalalitha v. Government of Tamil Nadu & Others[32], the Court laid down that public interest litigation can be filed by any person challenging the misuse or improper use of any public property including the political party in power for the reason that interest of individuals cannot be placed above or preferred to a larger public interest. In Holicow Pictures Pvt. Ltd. v. Prem Chandra Mishra & Others[33], the Court observed that “It is depressing to note that on account of such trumpery proceedings initiated before the Courts, innumerable days are wasted, the time which otherwise could have been spent for disposal of cases of the genuine litigants. Though we spare no efforts in fostering and developing the laudable concept of public interest litigation and extending our long arm of sympathy to the poor, the ignorant, the oppressed and the needy, whose fundamental rights are  infringed and violated and whose grievances go unnoticed, un-represented and unheard; yet we cannot avoid but express our opinion that while genuine litigants with legitimate grievances relating to civil matters involving properties worth hundreds of millions of rupees and criminal cases in which persons sentenced to death facing gallows under untold agony and persons sentenced to life imprisonment and kept in incarceration for long years, persons suffering from undue delay in service matters -government or private, persons awaiting the disposal of cases wherein huge amounts of public revenue or unauthorized collection of tax amounts are locked up, detenu expecting their release from the detention orders etc. etc. are all standing in a long serpentine queue for years with the fond hope of getting into the Courts and having their grievances redressed, the busybodies, meddlesome interlopers, wayfarers or officious interveners having absolutely no public interest except for personal gain or private profit either of themselves or as a proxy of others or for any other extraneous motivation or for glare of publicity break the queue muffing their faces by wearing the mask of public interest litigation and get into the Courts by filing vexatious and frivolous petitions and thus criminally waste the valuable time of the Courts and as a result of which the queue standing outside the doors of the Courts never moves, which piquant situation creates frustration in the minds of the genuine litigants and resultantly they lose faith in the administration of our judicial system.”

The Court has to be satisfied with:

(a) the credentials of the applicant;

(b) the prima facie correctness or nature of the information given by him;

(c) the information being not vague and indefinite.

The information should show the gravity and seriousness involved. Court has to strike balance between two conflicting interests;

(i) nobody should be allowed to indulge in wild and reckless allegations besmirching the character of others; and

(ii) avoidance of public mischief and avoid mischievous petitions seeking to assail, for oblique motives, justifiable executive actions.

The Courts also have to practice great caution in ensuring that while redressing a public grievance, it does not encroach upon the sphere reserved by the Constitution to the Executive and the Legislature, while maintaining a balance while dealing with imposters and busybodies or meddlesome interlopers impersonating as public-spirited holy men. In Janata Dal v. H.S. Chowdhary & Others[34], the court rightly cautioned that the expanded role of courts in the modern `social’ state demands greater judicial responsibility. In Guruvayur Devaswom Managing Committee & Another v. C.K. Rajan & Others [35], it was reiterated that the Court must ensure that its process is not abused. Therefore, the Court would be justified in insisting on furnishing of security before granting an injunction in appropriate cases. The Courts may impose heavy costs to ensure that the judicial process is not misused.

The bandwagon of public interest litigation has attained new heights in the recent past. With all the parameters drawn by Courts to adjudge what constitutes litigation related to the public interest, still, with blindfolded certainty; it cannot be said that a strait jacketed formula would serve as a panacea for all vexatious litigants to sieve through. With the Courts, always loaded with backlogs, the utopian dream of ‘justice for all” and in the “interest of all,” might straddle.

References: 

[1] (Traditionally used to the adversary system, we search for individual persons aggrieved. But a new class of litigation public interest litigation- where a section or whole of the community is involved (such as consumers’ organisations or NAACP-National Association for Advancement of Coloured People-in America), emerges in a developing country like ours, this pattern of public oriented litigation better fulfils the rule of law if it is to run close to the rule of life…The possible apprehension that widening legal standing with a public connotation may unloose a flood of litigation which may overwhelm the judges is misplaced because public resort to court to suppress public mischief is a tribute to the justice system.) Bar Council of Maharashtra v. M. V. Dabholkar & Others, 1976 SCR 306.

[2] (Our current processual jurisprudence is not of individualistic Anglo-Indian mould. It is broad-based and people-oriented, and envisions access to justice through `class actions’, `public interest litigation’, and `representative proceedings’. Indeed, little Indians in large numbers seeking remedies in courts through collective proceedings, instead of being driven to an expensive plurality of litigations, is an affirmation of participative justice in our democracy. We have no hesitation in holding that the narrow concepts of `cause of action’, `person aggrieved’ and individual litigation are becoming obsolescent in some jurisdictions.) Akhil Bharatiya Soshit Karamchari Sangh (Railway) v. Union of India & Others, AIR 1981 SC 298.

[3] (Public Interest Law is the name that has recently been given to efforts to provide legal representation to previously unrepresented groups and interests. Such efforts have been undertaken in the recognition that ordinary market place for legal services fails to provide such services to significant segments of the population and to significant interests. Such groups and interests
 include the proper environmentalists, consumers, racial and ethnic minorities and others.) M/s Holicow Pictures Pvt. Ltd. v. Prem Chandra Mishra & Ors., AIR 2008 SC 913.

[4] (Public interest litigation is a cooperative or collaborative effort by the petitioner, the State of public authority and the judiciary to secure observance of constitutional or basic human rights, benefits and privileges upon poor, downtrodden and vulnerable sections of the society.) People’s Union for Democratic Rights & Others v. Union of India & Others, (1982) 3 SCC 235. 

[5] (Public interest litigation is part of the process of participative justice and `standing’ in civil litigation of that pattern must have liberal reception at the judicial doorsteps.) Fertilizer Corporation Kamagar Union Regd., Sindri & Others v. Union of India & Others, AIR 1981 SC 844.

[6] (Public interest litigation is for making basic human rights meaningful to the deprived and vulnerable sections of the community and to assure them social, economic and political justice.) Ramsharan Autyanuprasi & Another v. Union of India & Others, AIR 1989 SC 549.

[7] (The Court has all incidental and ancillary powers including the power to forge new remedies and fashion new strategies designed to enforce the fundamental rights.) M. C. Mehta & Another v. Union of India & Others, AIR 1987 SC 1086.

[8] Indian Banks Association v. Devkala Consultancy Service, AIR 2004 SC 2815.

[9] (Any person claiming of infraction of any fundamental right guaranteed by the Constitution is at a liberty to move to the Supreme Court, but the rights that could be invoked under Article 32 must ordinarily be the rights of the person who complains of the infraction of such rights and approaches the Court for relief.) Narinderjit Singh Sahni v. Union of India, AIR 2001 SC 3810; see also Ruqmani v. Achuthan, AIR 1991 SC 983; see also Delhi Administration v. Madan Lal Nangia, AIR 2003 SC 4672.

[10] (The law as to locus standi has been diluted by the advent of the doctrine of public interest litigation.) Bangalore Medical Trust v. Muddappa, AIR 1991 SC 1902.

[11] (The traditional rule is flexible enough to take in those cases where the applicant has been prejudicially affected by an act or omission of an authority, even though he has no proprietary or even a fiduciary interest in the subject-matter. That apart, in exceptional cases even a stranger or a person who was not a party to the proceedings before the authority, but has a substantial and genuine interest in the subject-matter of the proceedings will be covered by this rule.) Jasbhai Motibhai Desai v. Roshan Kumar, Haji Bashir Ahmed & Others, (1976) 1 SCC 671.

[12] (The old doctrine of only relegating the aggrieved to the remedies available in civil law limits the role of the courts too much as protector and guarantor of the indefeasible rights of the citizens. The courts have the obligation to satisfy the social aspirations of the citizens because the courts and the law are for the people and expected to respond to their aspirations.) Smt. Nilabati Behera alias Lalita Behera v. State of Orissa & Others, AIR 1993 SC 1960.

[13] (Today, unfortunately, in our country the poor are priced out of the judicial system with the result that they are losing faith in the capacity of our legal system to (sic) about changes in their life conditions and to deliver justice to them. The poor in their contact with the legal system have always been on the wrong side of the line. They have always come across ‘law for the poor & rather than law of the poor’. The law is regarded by them as something mysterious and forbidding–always taking something away from them and not as a positive and constructive social device for changing the social economic order and improving their life conditions by conferring rights and benefits on them. The result is that the legal system has lost its credibility for the weaker section of the community.) Hussainara Khatoon & Others v. Home Secretary, State of Bihar, Patna AIR 1979 SC 1369.

[14] The Mumbai Kamgar Sabha, Bombay v. Abdulbhai Faizullabhai Others, AIR 1976 SC 1455.

[15] Sunil Batra v. Delhi Administration & Others, AIR 1978 SC 1675.

[16] AIR 1980 SC 1535.

[17] AIR 1980 SC 1622.

[18] AIR 1982 SC 149.

[19] (public interest litigation should be encouraged when the Courts are apprised of gross violation of fundamental rights by a group or a class action or when basic human rights are invaded or when there are complaints of such acts as shock the judicial conscience that the courts, especially this Court, should leave aside procedural shackles and hear such petitions and extend its jurisdiction under all available provisions for remedying the hardships and miseries of the needy, the underdog and the neglected.)Shri Sachidanand Pandey & Another v. The State of West Bengal & Others, (1987) 2 SCC 295.

[20] AIR 1983 SC 378.

[21]  1983 (2) SCC 308.

[22] AIR 1984 SC 177.

[23]  (1996) 7 SCC 20.

[24] AIR 2002 SC 350.

[25] AIR 1982 SC 149.

[26] AIR 1990 SC 2060.

[27] AIR 2007 SC 758.

[28] AIR 1997 SC 272.

[29] AIR 2005 SC 2841.

[30] (2005) 1 SCC 590.

[31] AIR 1984 SC 309.

[32]  (1999) 1 SCC 53.

[33] AIR 2008 SC 913.

[34] (1992) 4 SCC 305.

[35] (2003) 7 SCC 546.

 

Image Credits: Image by Sasin Tipchai from Pixabay 

The bandwagon of public interest litigation has attained new heights in the recent past. With all the parameters drawn by Courts to adjudge what constitutes litigation related to the public interest, still, with blindfolded certainty; it cannot be said that a strait jacketed formula would serve as a panacea for all vexatious litigants to sieve through.

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Legal Implications of Offering Gifts to Public Servants

Offering gifts to Public Servants is an act which might call for interference with the provisions of the Prevention of Corruption Act, 1988 (“Act”). Many companies grapple with whether they should be offer gifts to Public Servants as a gesture of celebration during festivals. It is pertinent to note that the concern involved might be looked at from different perspectives. The leitmotif of this piece is to only provide a picture from the standpoint of the Act.

The Act was enacted to eradicate corruption. Section 2 (c) of the Act provides for an elaborate definition of the term “Public Servant”. The definition of the term “Public Servant” has time and again been under wide judicial interpretation. Interestingly, the Act does not define the term bribe, gift or gratification. Instead, the it uses the terminology ‘undue advantage’. The term ‘undue advantage’ is defined under section 2(d) which means “any gratification whatever, other than legal remuneration”. The term “gratification” is not limited to pecuniary gratifications or to gratifications estimable in money. The expression “legal remuneration” is not restricted to remuneration paid to a public servant but includes all remuneration that the public servant is permitted by the Government or the organisation, which he serves, to receive. Therefore, any gift to a Public Servant can qualify as an undue advantage given to him.

Section 7 of the Act provides for punishment to a Public Servant for accepting bribe. The Section provides that obtaining or accepting or attempting to obtain “undue advantage” from any person as a reward or with an intention to perform or cause performance of a public duty improperly or dishonestly or to forbear the performance of any such duty would amount to a punishable offence. It further provides that if a public servant abets any other public servant to perform the aforesaid acts, the said public servant would be liable under the provisions of Section 7. The explanation to Section 7 provides that the act of obtaining or accepting or attempting to obtain any “undue advantage” shall by itself constitute an offence, even if the performance of the public duty by the public servant is not or has not been improper. Thus, the explanation makes it clear that, whether the public servant has discharged the duty improperly or not, he can be prosecuted, if he has obtained or attempted to obtain any undue advantage for the discharge of his official duty.

The Act further provides for the punishment of any person who commits the offence of bribing a public servant. Section 8 of the Act states that any person who gives or promises to give an undue advantage to other person/persons with an intention to induce a public servant to perform improperly, a public duty or to reward such public servant for such improper performance shall be punished with imprisonment or with fine or with both. Further, Section 9 of the Act deals with an offence relating to bribing a public servant by a commercial organization. Under the Section, a commercial organization not only includes a company or partnership incorporated in India and carrying on business in India or outside India, but also a body or partnership incorporated or formed outside India but carrying on business in India. Moreover, Section 9 makes the commercial organization guilty and punishable with a fine if any person(s) associated with them gives/promises to give any undue advantage with the intent to:

  • Obtain/retain any business, or
  • Obtain/retain an advantage in the conduct of business for such a commercial organization.

It is pertinent to note that, under Section 9, it shall be a defence for the commercial organization to prove that it had in place adequate procedures for the compliance of such guidelines as may be prescribed to prevent persons associated with it from undertaking such conduct.

Section 10 of the Act provides that a person in charge of a commercial organization who has committed an offence under section 9 of the Act shall be guilty of the offence and shall be liable to be proceeded against. That is to say that when an offence under Section 9 of the Act is committed by a commercial organization and such offence is proved in the Court to have been committed with the connivance of any director, manager, secretary or another officer of the commercial organization; such director, manager, secretary or another officer shall be guilty of the offence and shall be liable to be proceeded against and shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to a fine.

Having understood the conspectus of sections, it is pertinent to note that gifts given to a public servant might be considered as “undue advantage” under Section 2 (d) of the Act. The term “undue advantage” has been defined in a broad manner under the Act to mean any gratification, other than the entitled legal remuneration. Therefore, gifts which do not form part of the legal remuneration of a Public Servant could be held as an “undue advantage”. In such a case, both the person giving such undue advantage and the Public Servant accepting such undue advantage might be booked under the provisions of the Act. Therefore, in this regard that when it comes to criminal prosecution, both mens rea and actus reus are important to be established. Even if the intention of the person giving such gifts was not to gain any undue benefits from the Public Servant, in deviation of his duty, that would have to be established before a Court of law. Lack of intention would not stop the State authorities to initiate an action under the provisions Act.

Therefore, both people giving gifts to Public Servants and Public Servants accepting gifts are to be cautious of its legal implications.

Image Credits: Photo by Shameer Pk from Pixabay 

The term “undue advantage” has been defined in a broad manner under the Act to mean any gratification, other than the entitled legal remuneration. Therefore, gifts which do not form part of the legal remuneration of a Public Servant could be held as an “undue advantage”. In such a case, both the person giving such undue advantage and the Public Servant accepting such undue advantage might be booked under the provisions of the Act. Therefore, in this regard that when it comes to criminal prosecution, both mens rea and actus reus are important to be established.

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PUFE Transaction Under IBC Vis-À-Vis Real Estate Sector

Since the implementation of the Insolvency and Bankruptcy Code, 2016, (“Code”), the Real Estate Sector has been in turmoil, with many transactions entered into by the Builder(s) undermining and jeopardising the legitimate interests of innocuous creditors. The Code encompasses a collection of transactions that the Interim Resolution Professional (“IRP”) and the liquidator appointed by the National Company Law Tribunal (“NCLT”) for companies in insolvency or liquidation should avoid, as stated below. Preference, Undervalued, Fraudulent, and Extortionate Transactions (“PUFE Transactions”) is how the group of transactions is known. Each of the aforementioned has been examined in relation to the Indian real estate sector in order to advance the conceptual nature.

Understanding PUFE Transactions

 

Preferential Transactions

The factors that may lead to transactions being classified as preferential in character are discussed in Section 43 of the Code. Thus, if specific criteria exist in a set of transactions conducted by the corporate debtor that may be preferential in character, they can only be avoided if the IRP or liquidator files an application with the NCLT.

When a court determines that a transaction was not carried out in the ordinary course of business to create a new value in the corporate debtor’s interest, but instead acted to give preferential advantage to a related party or other parties, the transaction is to be avoided under Section 44 of the Code. Its main goal was to reverse the consequences of preferential transactions by requiring the person who received the preference to refund any profit gained as a result of the preference.

 

Undervalued Transactions

An undervalued transaction occurs when a corporate debtor has the malafide intention of causing a wrongful gain to a linked party or selling assets for a cheap price in a short period of time to boost cash liquidity.

In addition, the time frame for challenging an undervalued transaction has been classified according to whether the party is linked or unrelated. As a result, an undervalued transaction with a ‘related party’ might be called into question two years prior to the start of insolvency proceedings, whilst an undervalued transaction with a ‘unrelated party’ could be called into question one year prior to the start of bankruptcy proceedings.

If the NCLT determines that the transaction was undervalued and that the Resolution Professional (“RP”) or liquidator failed to report it despite having sufficient information or opportunity, the NCLT can order the position to be restored to its pre-transaction state and order the insolvency board to initiate proceedings against the liquidator or RP.

 

Fraudulent Transactions

The Code’s scope and ambit for identifying fraudulent transactions are rather broad in order to protect creditors’ legitimate rights against the corporate debtor. The phrasing used in Section 66(1) of the Code, which deals with deceptive dealing, demonstrates the same. As a result, if the corporate debtor conducted business with the intent to defraud creditors or for any other fraudulent purpose, the NCLT can issue an order directing any individual who was knowingly a party to the corporate debtor’s business conduct to make such contributions to the corporate debtor’s assets as the NCLT deems appropriate during the insolvency process.

While Section 66(2) of the Code covers wrongful trading (i.e., conduct that is not fraudulent but falls short of the standards governing directors’ duty to behave correctly in the case of insolvency), the NLCT has the authority to impose a pecuniary penalty on the director or partner.

 

Extortionate Transactions

Extortionate transactions are covered under Section 50 of the Code, which requires the corporate debtor to make exorbitant payments to any of its creditors in the two years preceding the bankruptcy beginning date. An NCLT order may be used to prevent such transactions. If a person’s debt is in line with the law, this rule does not apply.

The two-year period before the start of bankruptcy is crucial for establishing whether a transaction is excessive.

As a result, before engaging in any transaction, contractual parties and creditors must confirm that they have evaluated the company’s most recent financial status, particularly those involving the transfer of assets or value from such a business, to identify any financial crisis indicators.

 

Analysis

Troubled businesses must be prohibited from engaging in activities that may block creditor recovery if insolvency proceedings were to be commenced. In India, where promoter groups typically control enterprises, such measures are essential. Through opaque arrangements, promoter groups may seek to move income from assets to other group companies for their own benefit. As a result, the NCLT has the jurisdiction under the Code to reverse any such transaction in order to safeguard creditors’ and other stakeholders’ interests.

The case of IDBI Bank Ltd. v. Jaypee Infratech Ltd[1]. (“IDBI”), which was confirmed by the Supreme Court in Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd.[2], is an important precedent for PUFE Transactions.

M/s Jaiprakash Associates (“JAL”) established a special purpose firm, M/s Jaypee Infratech Ltd. (“JIL”), to manage the project design, engineering, development, and construction. JAL controlled 70 percent of JIL’s equity. Significantly, JIL encountered financial difficulties and failed to satisfy contractual deadlines for project completion and debt repayment. As a result, JIL’s account was designated non-performing by the Life Insurance Corporation (“LIC”). Since JIL’s account was deemed non-performing, its financial creditors, including IDBI, filed an application with the NCLT’s Allahabad Bench under Section 7 of the Code, which was granted, and the NCLT appointed an IRP. The IRP filed an application with the NCLT after reviewing the transactions, requesting that they be declared as PUFE Transactions.

According to the NCLT, JIL failed to strive diligently to decrease the creditors’ losses and mortgaged the land without JAL’s counter-guarantee since it completed the series of transactions while in financial distress. JIL had also failed to acquire the essential approvals for the challenged acquisition from the JLF lenders as well as the shareholders. As a result, the NCLT determined that the contested transactions occurred during the relevant period and that they were preferential transactions under Section 43 of the Code.

 

Conclusion

PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

On the other hand, a careful examination of the modifications reveals that they are helpful to homebuyers. The amendment to the Code is favourable to buyers who are facing difficulties due to incomplete real estate developments. Homebuyers are affected by project delays since they invest a considerable portion of their cash in a down payment and an EMI on the loan while continuing to pay rent in their current location. This situation has now altered as a result of the recent Code modification.

References:

[1] Company Petition NO.(IB)77/ALD/2017

[2]  Civil Appeal NOS. 8512-8527 OF 2019

Photo by: Tierra Mallorca on Unsplash

PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

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Women’s Right to Residence under the Domestic Violence Act: An Expansive Interpretation

In an important verdict safeguarding the interests of women victims of domestic violence, the Supreme Court on May 12, 2022, held that a victim of domestic violence can enforce her right to reside in a shared household, irrespective of whether she lived in the shared household. The Court dealt with the expression ‘the right to reside in a shared household’ in the context of Indian women and said it needed “expansive interpretation” and “cannot be restricted to the actual residence but can be extended to other homes irrespective of one’s right over the property.”

A bench of Justices M R Shah and B V Nagarathna in Criminal Appeal No. 511 of 2022 in the case of Prabha Tyagi v. Kamlesh Devi, while hearing a plea of a domestic violence victim after she was widowed, dealt with the unique situation of Indian women who live at places different from matrimonial homes, such as the workplaces of their husbands. The court also went on to treat each individual aspect of the expression ’women’s right to reside in a shared household’ under the Domestic Violence Act of 2005 (D.V. Act), giving to rest the varied opinions of multiple High Courts on the matter.

 

Constructive Residence Sufficient

The court clarified that it was not mandatory for an aggrieved person, when she was related by consanguinity, marriage or through a relationship in the nature of marriage, adoption or family members living together as a joint family, to actually reside with those persons against whom the allegations had been levelled at the time of the commission of domestic violence.

 

The court explained the matter by way of illustration, stating that there could be several situations and circumstances in which every woman in a domestic relationship can enforce her right to reside in a shared household irrespective of whether she has any right, title or beneficial interest in the same, and that the said right could be enforced by any woman under the said provision as an independent right.

 

The court further added that in India, it is a societal norm for a woman, on her marriage, to reside with her husband, unless due to professional, occupational or job commitments, or for other genuine reasons, the husband and wife decide to reside at different locations. Even in a case where the woman in a domestic relationship is residing elsewhere on account of a reasonable cause, she has the right to reside in a shared household.

 

Moreover, a woman who is, or has been, in a domestic relationship has the right to reside not only in the house of her husband, if it is in another place which is also a shared household, but also in the shared household, which may be in a different location that where the family of her husband resides.

 

Subsisting Domestic Relationship

The court categorically stated that the words ‘has been’ and ‘have lived’ appearing in the definition of ‘aggrieved person’ and ‘respondent’ in the D.V. Act were plain and clear and they took in their sweep even a past relationship. Therefore, it was not necessary that at the time of filing of an application by an aggrieved person, the domestic relationship should be subsisting, and if the accused, at any point of time, had lived with the aggrieved person or had the right to live and had been subjected to domestic violence or later subjected to domestic violence on account of a domestic relationship, then the aggrieved person is entitled to file an application under Section 12 of the D.V. Act and claim relief under the law.

 

Person Aggrieved

The bench further clarified that a woman in a domestic relationship who is not aggrieved, in the sense that she has not been subjected to an act of domestic violence by the respondent, has a right to reside in a shared household. Thus, a mother, daughter, sister, wife, mother-in-law and daughter-in-law or such other categories of women in a domestic relationship have the right to reside in a shared household de hors a right, title or beneficial interest in the same. Therefore, the right of residence of the aforesaid categories of women and such other categories of women in a domestic relationship is guaranteed under Sub-Section (1) of Section 17 and she cannot be evicted, excluded or thrown out of such a household even in the absence of there being any form of domestic violence. Hence, the expression ‘right to reside in a shared household’ has to be given an expansive interpretation. If any of the categories of women mentioned above is evicted from a shared household, she becomes an ‘aggrieved person’ within the meaning of Section 17 of the DV Act.

 

Joint Family

The court further clarified that the act, being a piece of civil code, is applicable to every woman in India, irrespective of her religious affiliation and/or social background, for a more effective protection of their rights. Thus, the expression ‘family members living together as a joint family’, means the members living jointly as a family. In such an interpretation, even a girl child or children who are cared for as foster children also have a right to live in a shared household and are conferred with the right.

 

Domestic Incidence Report

The court pointed out that in cases where an aggrieved person independently makes an application before the Magistrate, there would be no requirement on the part of the Magistrate to consider or call for a Domestic Incident Report. However, in cases where the application has been made by a Protection Officer or a service provider on behalf of the aggrieved person, the same shall be mandatorily accompanied by a Domestic Incident Report and when such a report is submitted, the Magistrate is required to take such report into consideration.

 

Hence, Section 12 of the DV Act does not make it mandatory for a Magistrate to consider a Domestic Incident Report filed by a Protection Officer or service provider before passing any order under the Act. Even in the absence of a “Domestic Incident Report”, relief such as the right to reside in shared matrimonial homes can be enforced and the Magistrate is empowered to pass both an ex parte or interim as well as a final order.

 

Expansive Interpretation

 

The court in this case, provided a massive relief to women considering the unique societal context in India where most women are not educated and do not have financial independence so as to live alone. In that scenario, they may be dependent for residence in a domestic relationship not only for emotional support but also for economic support.

 

With additional clarification of the applicability of the code irrespective of religion, relationship, or rights over property, the court has conjured up a clear picture of the scope of the act. In doing so, the court sought to reflect the legislative intent and internal policy as apparent from the language in the enactment and its object. However, the bench in a later case did observe that it was not in favour of a carte-blanche right of residence to women in matrimonial homes. If the woman was accused of misbehaving, conditions could be imposed by the court not to trouble the elderly and family members. The court could also direct the provider to offer alternate accommodation or monetary value of rent in such circumstances.

Image Credits:

Photo by Click’r Sharad Patil Sp-dv: https://www.pexels.com/photo/photo-of-elderly-woman-wearing-saree-2450195/

With additional clarification of the applicability of the code irrespective of religion, relationship, or rights over property, the court has conjured up a clear picture of the scope of the act. In doing so, the court sought to reflect the legislative intent and internal policy as apparent from the language in the enactment and its object.

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Remuneration of Insolvency Professionals – A Progressive and Performance Oriented Approach  

An Insolvency Professional (IP) is entrusted with the management and administration of a Corporate Debtor’s affairs throughout the Corporate Insolvency Resolution Process (CIRP). He is responsible for managing, operating, and running the Corporate Debtor as a going concern during the said period by taking over the day-to-day affairs of the Corporate Debtor, complying with all the applicable laws, etc. An IP is also entrusted with the obligation of calling for the Resolution Plans, putting them before the Committee of Creditors (CoC) and having the best of all the Resolution Plans approved by the CoC, putting in his best efforts while doing so, and then by the Adjudicating Authority (AA). His obligations necessitate the highest level of professionalism, dexterity, and honesty. Therefore, taking into account his abilities, obligations, and responsibilities that he discharges, he needs to be compensated fairly for the professional services he provides.

Insolvency Professional’s Remuneration in Foreign Jurisdictions

Different jurisdictions have different frameworks for dealing with the insolvency matters arising in their jurisdictions. As a result, it is only natural for such jurisdictions to have different parameters for determining fees for their IPs (or the person equivalent to or performing the functions and duties of Indian IP in their jurisdictions).

In the United Kingdom (UK), matters relating to insolvency are dealt with under the Insolvency (England and Wales) Rules, 2016. The said rules provide for the determination of the “administrator, liquidator or trustee” (the IP equivalent) on the basis of either a percentage of the value of the property realised or distributed, or time spent in attending to the matter, or a fixed amount, or any combination of the aforesaid three parameters. In the United States of America (US), Section 326 of the US Bankruptcy Code provides that a court may allow a reasonable compensation to the “trustee” (the IP equivalent) that should not be more than a varied percentage of the amount disbursed or turned over by him to the creditors. While the US and UK follow a variable fee model, in Canada, the law relating to insolvency provides that the trustee’s (the IP equivalent) fees are to be fixed by the creditors by way of an ordinary resolution and in case the creditors fail, the trustee shall be entitled to a maximum of 7.5% of the amount remaining after the secured creditors have been paid out of the amount realised from the properties of the Corporate Debtor.

Insolvency Professional’s Remuneration in India

In India, the relevant provisions having a bearing on fees and other expenses of CIRP are envisaged under the Insolvency and Bankruptcy Code, 2016 (the Code) and regulations made thereunder. Section 5(13) & Section 208(2) of the Code, regulations 31, 33, 34 and 34A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, (CIRP Regulations) clauses 16, 25, 25A, 26, and 27 of the First Schedule (under regulation 7(2)(h)) to Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, and the circulars issued by the Insolvency and Bankruptcy Board of India (the IBBI) dated 16th January 2018 bearing no. IBBI/IP/004/2018 and 12th June 2018 bearing no. IBBI/IP/013/2018 deal with the fees of IPs.

While the sections and regulations lay down what costs amount to the CIRP Cost and how such costs including an IP’s fees are to be dealt with, the circulars mainly provide that an IP shall render services for a fee that is a “reasonable reflection” of his work, raise bills/invoices in his name towards such fees, and have such fees paid to his bank account. However, none of the provisions or the circulars provide for a specific parameter to determine the IP’s fees. The fixation of the fees of the IPs, therefore, is a duty cast upon the Applicant and the CoC and that of the AA upon their failure. In the absence of a specific parameter and proper definition of “reasonable reflection”, the AA is often faced with cases involving fee disputes between IP and Applicant and IP and the CoC. The AA had been issuing various directives to the Board, directing it to fix the fees of the IP and to consider issuing guidelines or preparing a reasonable fee structure.

The IBBI has dealt with the AA’s references with respect to the fixation of IP’s fees on a case-to-case basis up until now. However, to avoid unnecessary disputes between the parties leading to litigation and to save the time of the parties as well as the AA from it, on 9th June 2022, the IBBI issued a discussion paper addressing the issue of fees payable to the IPs acting as IRPs and RPs. The paper proposes amendments to regulations 34A and the insertion of regulations 34B and Schedule II in the CIRP Regulations, specifying a model fee structure for the IPs. The fee structure proposes not only to resolve the issue with respect to the fixation of fees but also encourages IPs to facilitate timely resolution of a Corporate Debtor keeping in mind the maximisation of its value through the introduction of performance linked incentive fees, while very aptly mentioning in the discussion paper that “Maximisation of value does not mean maximum recovery from the assets during the process of liquidation. It is a concept that helps CD to get a fair valuation in return.”

Fixed Fee Structure

The proposed regulation 34A provides that the Applicant, the AA and the CoC shall fix the IP’s fee that shall be payable to him from the date of his appointment till the submission of the Resolution Plan before the AA after approval of the CoC, in accordance to the following minimum fee: –

 

Quantum of Claims Admitted

 

Minimum Fee Per Month

(Rs. Lakh)

(i)     

<= Rs. 50 crores

1.50

(ii)   

> Rs.50 crore < = Rs.100 crores

2.00

(iii)           

 > Rs.100 crore < = Rs.500 crores

2.50

(iv)  

> Rs.500 crore < = Rs.1,000 crores

3.00

(v)    

> Rs.1,000 crore < = Rs.2,500 crores

3.50

(vi)  

> Rs.2,500 crore < = Rs.10,000 crores

5.00

(vii)          

> Rs.10,000 crores

7.50

The regulation also enables the CoC to ratify an amount higher than the amount envisaged in the aforesaid table. It further provides that the CoC may also decide the fee for the interregnum period between the submission of the Resolution Plan before the CoC and its approval by the CoC.

 

Performance Linked Fee

Since time is the essence of the Code, the IPs must adhere to the timelines and facilitate a time-bound process as envisaged under the Code read with regulations made thereunder. Keeping in mind the timely resolution of a Corporate Debtor and maximization of its value, in addition to the aforesaid, the amendment further proposes that an IP may also be paid a performance linked fee to ensure timely completion of the CIRP in the following manner: –

 

Timelines

Fee as % of actual realizable value

(i)     

<= 180 days

1.00

(ii)   

> 180 days < = 270 days

0.75

(iii)           

 > 270 days < = 330 days

0.50

(iv)  

 > 330 days

0.00

The amendment further provides that the aforesaid performance linked fee shall form a part of the CIRP Cost and the same shall in no case exceed Rs.5 crore. However, the discussion paper states that the said performance linked fee is only of indicative nature, and that the CoC may devise any other incentive structure, or it may decide not to give such incentive at all. 

Escrow account mechanism

According to the IBBI, in addition to determining fees, the applicant or the CoC, is also responsible for ensuring that any amounts payable to IP are paid. As a result, an escrow account system has been proposed to ensure the timely payment of the fee to the IP.

At the first CoC meeting, IP must provide an estimate of the fixed fee and expenditure on hiring other professionals, support services, and so on, and the CoC will either contribute to an escrow account or secure interim financing for the estimated fees and expenses for the first six months. It, therefore, proposes the following additions to the CIRP Regulations through the insertion of regulation 34B.

Immediately upon his appointment as an IRP, an IP shall open an escrow account in the name of the Corporate Debtor in respect of his fee and the fee for the RP. Within 72 hours following the submission of the statement by the IP, the applicant or the CoC, as the case may be, shall deposit in the escrow account, or arrange for interim finance for deposit in the escrow account, amount fixed under regulation 34A. The IRP or the RP may withdraw money from the escrow account to cover his fee, and they must disclose the withdrawals to the CoC in the statement prepared under regulation 34A. The balance in the escrow account, if any, will be released upon approval of a resolution plan under section 31 or the passing of an order for Corporate Debtor’s liquidation under section 33.

The IBBI has invited comments from the public on the aforesaid amendment and the last date for submission of the same is June 30, 2022. Once approved, the new regulations would resolve the long pending issue with respect to the fee payable to the IP and with it, it would also decrease the number of litigations arising out of the said issue, thereby, further cutting down on the unnecessary and avoidable time consumption in the CIRP process. The performance linked fee would further encourage the IPs to work towards the maximization of value of the Corporate Debtor, reduce the amount of time consumed in the process, and keep the IPs motivated towards work.

Conclusion

Apart from decreasing the number of litigations related to IP fees, thereby reducing time consumed in the CIRP and keeping the IPs motivated towards maximisation of value of Corporate Debtor’s assets in a time bound manner, the proposed amendments would resolve several other issues.

Be it any profession, it becomes difficult to balance the efficiency, quality of work and professionalism when the remuneration of the professional involved is not decided upon or still being negotiated upon, due to which the beneficiary of the work being or proposed to be performed suffers. There have been several instances where during the CoC meetings the CoC and the IP either hard-negotiate upon the IP’s fees or the expense incurred by the IP, due to which the Corporate Debtors suffer. The proposed fixed fee structure that provides for a minimum amount to be paid as fees to the IP, if enforced, would leave no room for such hard-negotiations. By guaranteeing a minimum fixed amount to be paid to the IP based on the quantum of claims admitted, the proposed regulation ensures that the IPs as well as the CoC waste no time in fee-bargaining, thus creating more room for conducting the CIRP in a time bound manner.

Further, the proposed fixed fee structure based on the quantum of claims admitted by the IP would also ensure that the fees being paid to him are equitable and commensurate with the amount of work done by him. The professionals who were reluctant to agree to take up the baton of CIRP of the Corporate Debtors that had Creditors with a history of haggling with the IPs for their fees would also pitch to take up the CIRP of such Corporate Debtors, thereby, providing a better opportunity of resolution to such Corporate Debtors.

The CIRPs under the Code are plagued with slow progress with most of the cases extending beyond the 180 days period and several cases crossing the 330 days’ period. The proposed provision with respect to the performance linked fee would encourage the IPs to endeavour and finish the entire CIRP within a time bound period by providing an additional maximum performance-based remuneration to them for the completion of the entire CIRP within 180 days as compared to no additional remuneration for the completion of the CIRP after the expiration of 330 days.

The amendment proposed with respect to the escrow account would resolve the issue where the CoC of the Corporate Debtors do not contribute to the running CIRP cost due to various reasons, thus slowing down, and in some cases halting, the entire resolution process. The said inclusion of regulation 34B would ensure that the IPs actually get their fees and that they have the finances to conduct the CIRP at all times. This would drastically reduce the number of litigation with respect to the payment of IP’s fees before AA and save the time wasted in pursuing such litigation.

The proposed amendments have certain drawbacks too. The fixed fee structure provides for the determination of the minimum fees based on the quantum of claims admitted. The duty to admit or reject the claim is that of the IP which, in some cases, might be affected inasmuch as some of the IPs may be encouraged to admit a larger number of claims.

Insofar as the provision relating to the performance linked fee is concerned, the same is otiose inasmuch as it provides that the performance linked fee is indicative in nature, and that the CoC may devise any other incentive structure, or it may decide not to give such incentive at all. By giving the CoC the authority to devise other incentive structures or to not give any incentive at all, the said provision would only be a toothless tiger, for in most of the cases the CoC will try to bring down such amount substantially if not completely wriggle out of paying it.

Further in addition to the aforesaid performance linked fee, to maximise the value of the assets of the Corporate Debtor, the IBBI may consider providing for value linked fee in cases where the IPs bring about resolution under which the realisable value of the Corporate Debtor is appreciably higher than the liquidation value of the Corporate Debtor. A percentage of the difference between the realisable value and the liquidation value may be paid to such IPs. This would ensure the value maximisation of a Corporate Debtor to its core.

Image Credits: Photo by FIN on Unsplash

By guaranteeing a minimum fixed amount to be paid to the IP based on the quantum of claims admitted, the proposed regulation ensures that the IPs as well as the CoC waste no time in fee-bargaining, thus creating more room for conducting the CIRP in a time bound manner.

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Property Rights of Daughter in India: Post-Supreme Court Ruling, 2022

In January 2022, the Apex Court, through its decision in Arunachala Gounder (dead) v. Ponnuswamy’s[1] held that the self-acquired property of a Hindu male dying intestate would devolve by inheritance and not by succession. Further, the daughter shall be entitled to inherit such property, as well as property obtained through the partition of a coparcenary or family property.  It was also observed that, in case a woman dies intestate, then the ancestral property devolved on her from her father would be bestowed upon her father’s heirs and the property devolved on her from her husband’s side would be assigned to her husband’s heir in case she dies issueless.

The Court observed that “The basic aim of the legislature in enacting Section 15(2) is to ensure that the inherited property of a female Hindu dying issueless and intestate, goes back to the source.”

The judgment establishes a scheme of succession that is in alignment with the “rule of proximity and the entitlement of the sole surviving daughter” to her father’s separate properties, even as far back as before the enactment of the 1956 Act.

Prior to this deliberation, the Supreme Court on August 11, 2020, also expanded on a Hindu woman’s right to be a joint legal heir and inherit ancestral property on terms equal to male heirs in the case of Vineeta Sharma vs. Rakesh Sharma & Ors.

Different benches of the Supreme Court and various High Courts have taken conflicting views on the issue in the past.

  1. In Prakash vs. Phulavati (2015), the Supreme Court held that Section 6 is not retrospective in operation and the benefit of the 2005 amendment could be granted only to “living daughters of living coparceners” as on September 9th, 2005 (the date when the amendment came into force).
  2. In February 2018, the Court ruled that, contrary to the 2015 ruling, the share of a father who died in 2001 will also pass to his daughters as coparceners during the partition of the property as per the 2005 law.
  3. Then in Danamma @Suman Surpur vs. Amar (April 2018), the Court reiterated the position taken in 2015.

         These clashing views by benches of equal strength led to a reference to a three-Judge Bench in the case. The three-judge bench of Justices Arun Mishra, S. Abdul Nazeer and M. R. Shah passed the verdict in a reference that was made in appeals raising the issue of whether the amendment to the Act granting equal rights to daughters to inherit ancestral property would have retrospective effect. What this means is that whether with the passing of the Hindu Succession (Amendment) Act, 2005, a daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son, or if she can be denied her share on the ground that she was born prior to the enactment of the Act on September 9, 2005, and therefore cannot be treated as a coparcener.

The verdict makes it clear that the amendment to the Hindu Succession Act, 1956 granting equal rights to daughters to inherit ancestral property would be retrospective. The daughters cannot be deprived of their right to equality conferred upon them by Section 6. Daughters, like sons, have an equal birth right to inherit joint Hindu family property. Since the right to coparcenary of a daughter is by birth, it is not necessary that the father should be alive on September 9, 2005. The Court has thus overruled an earlier 2015 decision.

         The Court also stated that the statutory fiction of partition created by the proviso to Section 6 of the Hindu Succession Act, 1956 as originally enacted, did not bring about the actual partition or disruption of the coparcenary. An unregistered partition, or oral partition, without any contemporaneous public document, cannot be accepted as the statutorily recognised mode of partition. However, in exceptional cases, where the plea of oral partition is supported by public documents and the partition is finally evinced in the same manner as it had been affected by a decree of a court, it may be accepted. 

         The Court has clearly settled the issue on the effective date of the 2005 amendment, by laying no relevance on the date of birth of the daughter or alternatively, the date of death of the father, whether prior to the 2005 amendment or post. So long as the daughter is alive post 2005, she has an equal right as a son in the coparcenary property. Therefore, it is irrelevant whether her father was alive or not or whether she was married or not on the cutoff date of September 9, 2005.

         If a daughter is born before September 9, 2005, she would become a coparcener, in her own right, in the same manner as sons. i.e., with the same rights and liabilities, provided there had been no parting/partition/devolution before December 20, 2004. As long as the property remained coparcenary property and was not partitioned as of the date, a daughter can now claim an interest in the same.    

         Putting the last nail on male primacy in the division of Hindu ancestral property, the Supreme Court cleared the legal cobwebs to declare that daughters will have inheritance rights equal to those of sons from the properties of fathers, grandfathers and great-grandfathers right from the codification of the law in 1956. The Bench held that daughters will have equal coparcenary rights in Hindu Undivided Family properties irrespective of whether the father was alive or not on September 9, 2005, asserting that this right under Section 6 of the Hindu Succession Act, 1956 is acquired by birth. Daughters can claim the benefit in the case of Intestate Succession and not Testamentary Succession. However, daughters, while claiming coparcenary rights, would not be able to question the disposal or alienation of ancestral properties by the existing coparceners prior to December 20, 2004.

         The provisions contained in the substituted Section 6 of The Hindu Succession Act, 1956 confer status of coparcener on the daughter born before or after amendment in the same manner as son with same rights and liabilities. The court was dealing with an interpretation of Section 6 after it was amended in 2005. The amendment granted equal rights to daughters in ancestral property. The rights can be claimed by the daughter born earlier with effect from September 9, 2005. The judgement widened the rights of daughters. The retrospective application of section 6 was analysed and ruled that the daughters would get the rights from 1956, when the law came into force. However, it would not reopen alienation of the ancestral property earlier through existing coparceners. Only a coparcener has the right to demand the partition of property. A share in a property is adulated by birth or death in a family.

A daughter, living or dead, as on the date of the amendment, shall be entitled to a share in her father’s property. It means that even if the daughter was not alive on the date of the amendment, her children could claim her rightful portion.

The court recognised that just like sons, the amendment also extended the status of the coparcener to a daughter, allowing her to enjoy the same rights as a son. Daughters possess the right of inheritance from birth, so it does not matter whether she is married or not, she will be entitled to an equal share.

While the prospective statute operates from the date of its enactment, conferring new rights, the retrospective statute operates backwards and takes away the impairment of the vested rights acquired under existing laws prior to its coming into force. This amendment operates in the future but by virtue of its retrospective effect, it confers rights on daughters from the time of their birth, even if the birth took place prior to the amendment.

The Court held that coparcenary was the birth right of daughters and it would be discordant to restrict it with the condition that the father must be alive. The goal of gender justice embodied in the Constitution is effectuated and the fundamental right to equality under the Indian Constitution has been upheld in the truest sense and translated into ground reality by substituting the provisions of Section 6 by the 2005 Amendment Act.


Impact


Daughters will now be treated at par with sons of coparceners and granted equal coparcenary rights in their father’s property upon birth itself. Daughters shall remain coparcener throughout life, irrespective of whether their father is alive or not. Hence, even their marital status will not affect the rights conferred to them by way of amendment, and hence they shall continue to be part of their father’s HUF post marriage. The door of alienation of their share of property will be opened for daughters without any ambiguity. Daughters can now seek partition of their father’s coparcenary property, claiming their equal share the same as their siblings and other coparceners and they cannot be denied on the basis of an oral family settlement. Upon acquiring a share in a coparcenary property, a female coparcener can bequeath her HUF share under her Will to any beneficiary she chooses and to the exclusion of others.

The law applies to ancestral property and to intestate succession in personal property where succession happens as per law and not through a Will. Suppose a Hindu makes a Will or makes a disposition of property in favour of the son according to The Hindu Succession Act, 1956 and not the daughter, then the daughter will not be able to question the Will and not claim the benefit of the Supreme Court Judgment. But if a Hindu dies intestate without making any disposition of property, then the daughters have the right to claim an equal right of inheritance.

The daughters, while claiming coparcenary rights, would not be able to question the disposal or alienation of ancestral properties by the existing coparceners prior to December 20, 2004. If a daughter is unable to reap any benefit from an ancestral property and enforce her right, and another male co-owner is reaping the benefits, she can enforce her rights by filing a suit following a 2005 amendment supported by a Supreme Court judgement on equal right of inheritance for daughters. Daughters can, however, claim partition of the property prior to the Amendment Act. Apportionment of benefit in the property will be accessible to the daughters distinctly along the other coparceners.

The judgements are landmarks and help in the forward march of women’s rights and the law. Traditionally, Indian business families prefer sons as successors, and daughters are not included in the business as successors. Thus, the latest rulings will have a wider impact on various family settlements and asset divisions, especially in family business. Though the judgments envisage rectifying one of the discriminatory social practices, it would require no less than a behavioural change in the mindset of Indian society to fulfil the goal of gender parity.

References:

[1] https://www.livelaw.in/pdf_upload/arunachala-gounder-dead-vs-ponnusamy-a-2022-livelaw-sc-71-407962.pdf

 

Image Credits:

Photo by Rahul: https://www.pexels.com/photo/silhouette-of-people-climbing-stairs-1009900/

If a daughter is born before September 9, 2005, she would become a coparcener, in her own right, in the same manner as sons. i.e., with the same rights and liabilities, provided there had been no parting/partition/devolution before December 20, 2004. As long as the property remained coparcenary property and was not partitioned as of the date, a daughter can now claim an interest in the same.    

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Inter-Se Priority Among Secured Creditors in Liquidation - A Judicial Dichotomy  

The Insolvency and Bankruptcy Code, 2016 (“IBC”/”Code”) came into force on 28th May, 2016 with the primary objective of consolidating and amending the laws of reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner to maximise the value of their assets. The Code has been evolving over the last six years, with changing scenarios and adapting to practical circumstances along the way. As a result, the Code has undergone amendments from time to time. The provisions in the Code have also been interpreted and clarified by judicial pronouncements of the Hon’ble NCLTs, the Hon’ble NCLAT and the Hon’ble Supreme Court of India. The law relating to the Code is still emerging and there are a number of issues which are still required to be addressed with unambiguous certainty. One such issue is the distribution of proceeds in liquidation from the sale of assets under Section 53 of the Code to the secured creditors vis-à-vis the validity of inter se priority among secured creditors in respect of their security interests (charges) during liquidation.

What is the meaning of “Charge” and “Inter se Priority”?

Section 3(4) of the Code defines the term “charge” as an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage.

Several charges can be created in respect of a particular asset. This can be done by way of creating a pari passu charge over the asset where all the charge holders are placed on an equal footing or by way of the creation of a first charge and a subservient charge wherein the first charge holder can satisfy its debts in entirety prior to the subservient charge holders. This principle is embodied in Section 48 of the Transfer of Property Act, 1882. However, under Section 52 of the Code, a secured creditor has two options to realise its debts from secured assets held by it relating to a corporate debtor in liquidation:

Although the Code does not specifically indicate the validity of inter-se-priority of charges at the time of distribution in accordance with the waterfall mechanism provided under Section 53, the issue has been deliberated and decided upon by the Hon’ble NCLTs, Hon’ble NCLAT and Hon’ble Supreme Court of India in recent times, through judicial interpretation.

Pre-IBC Regime: Legal Position under the Companies Act, 1956

Under the earlier Companies Act, 1956, Sections 529 and 529A governed the ranking of creditors’ claims and the distribution of sale proceeds by the Official Liquidator in respect of a corporate debtor in liquidation.

The legal position vis-à-vis inter-se-priority of charges in the pre-IBC regime was discussed at length by the Hon’ble Supreme Court of India in the case of ICICI Bank vs Sidco Leathers Ltd. [Appeal (Civil) 2332 of 2006, decided on April 28, 2006]. In the said case, the Hon’ble Apex Court, while interpreting Sections 529 and 529A of the Companies Act, 1956, observed that even though workmen’s dues and secured creditors’ debts are treated pari passu, this does not negate inter se priorities between secured creditors. The Hon’ble Court stated that since the Companies Act of 1956 is a special statute which contains no provisions regarding inter se priority among secured creditors, the specific provisions set forth in the Transfer of Property Act, 1882 shall prevail. The Hon’ble Court further held that if Parliament, while amending the provisions of the Companies Act, 1956, intended to take away secured creditors’ entitlement to property, it would have stated so expressly. The Hon’ble Court, while deciding the issue, observed the following:

“Section 529A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read therein to things, which the Parliament did not comprehend. The subject of mortgage, apart from having been dealt with under the common law, is governed by the provisions of the Transfer of Property Act. It is also governed by the terms of the contract.”

Merely because section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated.”

From the aforesaid, it is evident that the Hon’ble Apex Court upheld the validity of the Transfer of Property Act, 1882, which is a general law, over the provisions of the Companies Act, 1956, which is a special law and which did not recognise the concept of inter-se priority of charges.

 

Post-IBC Regime: Legal Position under the Code and the Report of the Insolvency Law Committee 2018

 

Report of the Insolvency Law Committee dated March 26, 2018

In the Report of the Insolvency Law Committee (ILC) dated March 26, 2018, it was noted that inter-creditor agreements should be respected. The ILC relied on the judgement of the Hon’ble Supreme Court in the case of ICICI Bank vs. Sidco Leathers Ltd. and came to the conclusion that the principles that emerged from the said case are also applicable to the issue under section 53 of the Code. The ILC in its report stated that Section 53(1)(b) of the Code only kept the workmen and secured creditors, on an equal pedestal and no observations were made on the inter-se priority agreements between the secured creditors and the same would therefore remain valid. The Report further clarified that the provision of Section 53(2) would come into effect only in cases where any contractual arrangement interferes with the pari passu arrangement between the workmen and secured creditors which means that contracts entered into between secured creditors would continue to remain valid.

 

Judicial Interpretation in recent times

Section 53 of the Code lays down the waterfall mechanism with respect to payment of debts to the creditors of the corporate debtor. The workmen’s dues and the debts of secured creditors rank pari passu under Section 53. However, the Code does not expressly provide for the preservation of inter-se-priorities between secured creditors at the time of distribution of sale proceeds realised by the liquidator by the sale of assets. The issue is to be understood and interpreted in the light of recent judicial decisions. Some of the recent judgments which have dealt with the issue are:

 

Technology Development Board vs Mr. Anil Goel & Ors. [I.A No. 514 of 2019 in CP(IB) No. 04 of 2017 decided on 27th February, 2020 by the Hon’ble NCLT, Ahmedabad]

In the instant case, the liquidator had distributed proceeds from the sale of assets to the first charge holders, in priority to the applicant who was a second charge holder without considering the claim of the applicant as a secured creditor that such distribution ought to have been made prorate among all secured creditors. It is pertinent to mention here that all the secured creditors had relinquished their security interests in the common pool of the liquidation estate. The Applicant was one of the secured financial creditors of the Corporate Debtor having a 14.54% voting share in the CoC of the Corporate Debtor.

Aggrieved by such distribution which recognised inter-se-priority among secured creditors, the Applicant moved the Hon’ble NCLT, Ahmedabad Bench.

The issue to be determined:

The primary issue that was to be decided by the Hon’ble NCLT was that once a secured creditor has not realised his security under Section 52 of the Code, and has relinquished the security to the liquidation estate, whether there remains no classification inter se i.e., by joining liquidation, all the secured creditors are ranked equal (pari passu), irrespective of the fact that they have inter-se-priority in security charge.

Observations of the Hon’ble NCLT

The Hon’ble NCLT while deciding the aforesaid issue held:

  • It is a settled position that when a charge is created on a property in respect of which there is already a charge, it cannot be said that the creation of the second charge on the property should have been objected to by the first charge holder as an existing and registered charge is deemed to be a public notice.
  • Emphasis was placed on Section 53(2) of the Code, which provides that any contractual arrangements between recipients under sub-section(1) with equal ranking, shall be disregarded by the liquidator if it disrupts the order of priority under that sub-section. In other words, if there are security interests of equal ranking, and the parties have entered into a contract in which one is supposed to be paid in priority to the other, such a contract will not be honoured in liquidation.
  • The whole stance in liquidation proceedings is to ensure parity and proportionality. However, the idea of proportionality is only as far as claims of similar ranking are concerned.

Decision:

The Hon’ble NCLT, relying on the judgement of the Hon’ble Supreme Court of India passed in ICICI Bank vs. Sidco Leathers Ltd., held that inter se priorities among creditors remain valid and prevail in the distribution of assets in liquidation.

 

Technology Development Board vs Mr. Anil Goel & Ors. [Company Appeal (AT) (Insolvency) No.731 of 2020 decided on 5th April, 2021 by the Hon’ble NCLAT, Principal Bench, New Delhi]

The issue to be determined:

Aggrieved by the aforesaid order dated 27th February 2020 passed by the Hon’ble NCLT, Ahmedabad, an appeal was preferred by the Applicant before the Hon’ble NCLAT wherein the issue raised for consideration was whether there could be no sub-classification among the secured creditors in the distribution mechanism adopted in a Resolution Plan of the Corporate Debtor as according to priority to the first charge holder would leave nothing to satisfy the claim of the Appellant who too is a secured creditor.

Observations of the Hon’ble NCLAT

The Hon’ble NCLT while deciding the issue took note of Sections 52 and 53 of the Code and held:

  • Section 52(2) of the Code stipulates that a secured creditor, in the event it chooses to realise its security interest, shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised. The liquidator’s duty is to verify such security interest and permit the secured creditor to realise only such security interest, the existence of which is proved in the prescribed manner. It is abundantly clear that there is a direct link between the realisation of a security interest and the asset subject to such security interest to be realised.
  • Section 53 deals with distribution of assets by providing that the proceeds from the sale of the liquidation assets shall be distributed in the order of priority laid down in the section. The provision engrafted in Section 53 has an overriding effect over all other laws in force.
  • The essential difference between the two provisions i.e Sections 52 and 53, lies with regard to the realisation of interest. While Section 52 provides an option to the secured creditor to either relinquish its security interest or realise the same, Section 53 is confined to the mode of distribution of proceeds from the sale of the liquidation assets.
  • Whether the secured creditor holds the first charge or the second charge is material only if the secured creditor elects to realise its security interest.
  • A secured creditor who once relinquishes its security interest ranks higher in the waterfall mechanism provided under Section 53 as compared to a secured creditor who enforces its security interest but fails to realise its claim in full and ranks lower in Section 53 for the unpaid part of the claim.
  • Section 52 incorporating the doctrine of election, read in juxtaposition with Section 53 providing for distribution of assets, treats a secured creditor relinquishing its security interest to the liquidation estate differently from a secured creditor who opts to realise its security interest, so far as any amount remains unpaid following enforcement of security interest to a secured creditor is concerned by relegating it to a position low in priority.
  • The non-obstante clause contained in Section 53 makes it clear that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force.
  • A first charge holder will have priority in realising its security interest provided it elects to realise and not relinquish the same. However, once a secured creditor opts to relinquish its security interest, the distribution would be in accordance with the Section 53(1)(b)(ii) wherein all secured creditors have relinquished their security interest.

Decision

It was held by the Hon’ble NCLAT that the view taken by the Adjudicating Authority on the basis of the judgement passed by the Hon’ble Apex Court in ICICI Bank vs. Sidco Leathers Ltd. and ignoring the mandate of Section 53, which has an overriding effect and was enacted subsequent to the aforesaid judgment, is erroneous and cannot be supported. The Hon’ble NCLAT therefore held that the order of the Adjudicating Authority holding that the inter-se priorities amongst the secured creditors will remain valid and prevail in the distribution of assets in liquidation cannot be sustained and the liquidator was directed to treat the secured creditors relinquishing the security interest as one class ranking equally for distribution of assets under Section 53(1)(b)(ii) of the Code and distribute the proceeds in accordance therewith.

 

Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021]

The aforesaid order passed by the Hon’ble NCLAT has been further challenged before the Hon’ble Supreme Court of India. The appeal is currently pending adjudication, but the Apex Court has stayed the operation of the impugned order dated 5th April passed by the Hon’ble NCLAT, by order dated 29th June, 2021 . The appeal has been last heard on April 29, 2022, wherein an order has been passed to list the matter after eight weeks. It would be interesting to see whether the Apex Court upholds the order of the Hon’ble NCLAT and disregards the inter se priority among creditors at the time of distribution of sale proceeds under Section 53 of the Code or upholds the validity of the same.

 

Oriental Bank of Commerce (now Punjab National Bank) vs Anil Anchalia & Anr. [Comp. App. (AT)(Ins) No. 547 of 2022 decided on 26th May, 2022 by the Hon’ble NCLAT]

  • In the instant case, the appellant, who was the first and exclusive charge holder with respect to the assets of the corporate debtor, had relinquished its security interest in the liquidation estate. The liquidator, however, distributed the sale proceeds on a pro rata basis under Section 53 of the Code. Being aggrieved by the said distribution, the Appellant filed an application [IA (IBC)/101(KB)2022] before the Hon’ble NCLT, Kolkata, which was rejected by an order dated March 4, 2022. Aggrieved by the same, the appellant preferred an appeal before the Hon’ble NCLAT.
  • One of the contentions raised by the Appellant in the instant case was that the order of the Hon’ble NCLAT in the case of Technology Development Board vs. Mr. Anil Goel & Ors. that secured creditors after having relinquished their security interest could not claim any amount realised from secured assets once they elected for relinquishment of security interest, and that they would be governed by the waterfall mechanism under Section 53 has been stayed by the Hon’ble Supreme Court of India and therefore the Appellant is entitled to receive the entire amount realised from its secured assets.
  • The Hon’ble NCLAT rejected the aforesaid contention and observed that in the light of the judgement passed by the Hon’ble Supreme Court in “India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. [2021 SC OnLine SC 409] and “Indian Bank vs. Charu Desai, Erstwhile Resolution Professional & Chairman of Monitoring Committee of GB Global Ltd. & Anr.[CA(AT)No. 644 of 2021] the issue is no more res integra. In the aforesaid two cases, a similar contention was raised by the Appellants that the dissenting financial creditors are entitled to receive payment as per their secured interest, wherein it was decided that “when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled”.
  • Since the issue is no more res integra and has been decided in the case of India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. by the Hon’ble Apex Court by its judgment dated 13.05.2021, the instant appeal was also dismissed.

 

Conclusion

 

Section 52 of the Code gives each secured creditor the option of relinquishing their right to the liquidation estate or realising their security interest on its own, subject to the Code’s requirements.

It can be possibly interpreted that once the secured creditor has relinquished its security interest in the liquidation estate, such a secured creditor exercises its option in favour of losing its priority rights over assets charged to it and joins the liquidation pool wherein the secured creditor is paid from the proceeds of the liquidation estate in accordance with Section 53 of the Code. The Code has provided the option to a secured creditor to enforce its first and exclusive charge by taking recourse to Section 52, whereby in the event it is unable to realise its entire dues, it would be ranked lower under Section 53 for realisation of the balance amount. A secured creditor cannot enjoy the fruits of both the provisions under Sections 52 and 53 of the Code at the same time. Once the secured creditor relinquishes its security interest to the common pool of the liquidation estate, it will be treated at par with all other creditors.

It can also be argued that the NCLAT has ignored the legislative intent clarified in the Insolvency Law Committee Report which after considering the decision of the Hon’ble Supreme Court in ICICI Bank vs Sidco Leathers Ltd. applied its principles to the issue under Section 53 of the Code and recommended that inter-se-priority among creditors was not disturbed by Section 53. Section 53 does not deal with inter-se-rights amongst creditors. It merely deals with the distribution of proceeds arising from the sale of assets to various stakeholders. The non-obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter-se-priorities amongst creditors/mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter-se-priorities between mortgagees have been dealt with in that Act. Therefore, there may not be any justification for excluding the applicability of the provisions of the Transfer of Property Act, 1882 relating to mortgages for payment of dues to creditors under Section 53. The absurd result of not providing inter-se-priority to creditors at the time of distribution of sale proceeds under Section 53 would be that every secured creditor holding the first charge on assets would encourage liquidation and realise its dues by selling assets itself by opting to not relinquish the assets to the liquidation pool under Section 52. The chance of selling the corporate debtor as a going concern would then absolutely be eradicated, which would be contrary to the object and spirit of the Code.

It is expected that the Supreme Court will finally rest the issue while deciding the appeal in the case of Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021 which is scheduled to appear for a hearing later this month.

Image Credits: Photo by Dennis Maliepaard on Unsplash

Section 53 does not deal with inter – se – rights amongst creditors. It merely deals with the distribution of proceeds arising out of sale of assets to various stakeholders. The non – obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter – se – priorities amongst creditors / mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter – se – priorities between mortgagees has been dealt with in that Act.

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Claims Settlement Proceedings Under MSME Act 2006

In the month of February, the Government of India released the Draft National Micro Small Medium Enterprises (MSME) Policy, to promote competitiveness, technology up-gradation, infrastructure, cluster development, dedicated credit, procurement of products & financial assistance to MSME. The Policy was issued with the objective of fostering a conducive business ecosystem to enable ease of doing business for MSMEs and to develop appropriate dispute resolution mechanisms. One of the key observations made in the policy was that the dispute resolution mechanism for the sector was not ‘industry-friendly.’

 

The Micro, Small, and Medium Enterprises (MSME) Development Act was notified in 2006 to address different issues affecting MSMEs, inter alia, the coverage and investment ceiling of the sector. The MSME Act seeks to facilitate the development of these enterprises and also enhance their competitiveness. It provides the legal framework for recognition of the concept of “enterprise”, which comprises both manufacturing and service entities. It defines medium enterprises for the first time and seeks to integrate the three tiers of these enterprises, namely, Micro, Small and Medium. It empowers the Central Government to undertake programmes and issue guidelines and instructions to develop and enhance the competitiveness of MSMEs.

Definitions of Micro, Small & Medium Enterprises

In India, the enterprises are classified broadly into two categories: (i) Manufacturing and (ii) Services. These categories of enterprises have been further classified into Micro, Small and Medium enterprises under Section 7 of the MSME Act as follows:

Enterprise Category

Investment in Plant & Machinery

Not Exceeding

Annual Turnover

Not Exceeding

Micro

INR 1 Crore

INR 5 Crore

Small

INR 10 Crore

INR 50 Crore

Medium

INR 50 Crore

INR 250 Crore

 

Registration of MSME/Memorandum of MSME

Any micro, small and medium enterprise, before starting an enterprise, may file a Udyog Aadhaar Memorandum (the “UAM” or “Memorandum”) in Form-I. The UAM may be filed online on the website of the Ministry of Micro, Small and Medium Enterprises, Government of India at http://udyogaadhaar.gov.in in order to instantly get a unique Udyog Aadhaar Number (UAN); or a hard copy of the duly filled Form I, shall be submitted to the concerned District Industries Centre (DIC) or to the Office of the Micro, Small and Medium Enterprise-Development Institute (MSME-DI) under the Development Commissioner, MSME. Consequent thereto, a Udyog Aadhaar Registration Certificate in Form II will be generated and mailed to the email address of the enterprise as provided in the UAM. 

The existing MSMEs have to file the Memorandum within One Hundred and Twenty (120) days from the commencement of the Act. UAM/MEMORANDUM is a one-page online registration system for MSMEs based on self – certification. This is a path-breaking step to promote ease-of-doing-business for MSMEs in India as the UAM replaces the filing of Entrepreneurs’ Memorandum (EM part-I & II).

While examining the purpose and intent of the MSME Act, the Andhra Pradesh High Court vide common order in P. Nos. 27670, 27673, 27691, 27693, 27826, 27829, 28010, 28034 of 2021 and 4721, 6249 and 7616 of 2022 observed inter alia, an ‘Enterprise’ is one by whatever name called, which is engaged in the manufacture or production of goods in any manner pertaining to any industry specified in the first schedule of Act 65 of 1951 or engaged in providing or rendering of any services.

Additionally, a supplier, as per the definition of the Act, should be engaged in selling goods “produced by micro or small enterprises and rendering services that are provided by such enterprises.” Here, the emphasis has also been placed on services required for the purpose of selling etc. goods produced by micro or small enterprises. “The conjunction ‘and’ used in section 2(n) (iii) makes it clear that the services that are rendered are services related to the goods that are produced by micro and small enterprises. The legislature used the conjunction and therefore, in the opinion of this Court, the services which are rendered are those pertaining to the goods manufactured and produced by the enterprises.”

The High Court firmly observed that the services that are referred to under the said Act cannot be treated as every service that is rendered. The services referred to must have a direct connection with the manufacture and production of goods.  

Provisions Dealing with Claim Settlement Proceedings Under MSME Act

 

Sections 15-24 of the Micro, Small and Medium Enterprises Development (MSME) Act, 2006 deal with the issues relating to the Delayed Payments to Micro and Small Enterprises (MSEs) by the Buyers to the MSE supplier. As per Section 15 of the MSME Act, the Buyer shall make payment to the Supplier as per their commercial understanding. However, the same shall not exceed forty-five (45) days from the day of acceptance or deemed acceptance of goods and services. Further, under Section 16 of the MSME Act, delayed payment to Supplier units, attracts compound interest with monthly interests at three times the bank rate notified by the Reserve Bank. In the event of any dispute with regard to any amount due, the procedure stipulated in Section 18 has to be followed, which is enumerated hereunder. Any case/reference under Section 18 of the MSME Act has to be decided in ninety (90) days.  Further, in case, the Buyer decides to challenge the award or decree passed, then as per Section 19 of the MSME Act, the Buyer has to deposit 75% of the amount in terms of the decree, award or order of the court, as the case may be.

MSME Samadhaan is a Portal created by the Office of DC(MSME), Ministry of Micro, Small and Medium Enterprises (MSME), where Micro and Small Enterprises (MSEs) can file their applications online regarding delayed payments. The portal gives information about individual CPSEs/Central Ministries, State Governments, etc. and other Buyers regarding the payments pending with them in respect of the MSEs. The said portal also facilitates MSEs to file their delayed payments related complaints online. These will be viewed by MSEFC Council for their actions. These will also be visible to Concerned Central Ministries, Departments, CPSEs, State governments, etc. for pro-active actions. The portal was established with a vision to facilitate the monitoring of delayed payments in an efficient manner as disputes over delayed payments were a primary concern amongst the Sellers across the sector. The information on this portal is made available in the public domain to exert moral pressure on the defaulting parties. The MSMEs can also access the portal and monitor their cases.

The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of Delayed Payment to Micro and Small Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments (Section 20 and 21).

What are the Prerequisites for Making a Claim before MSEFC?

 

To file a complaint with the MSEFC, the concerned enterprise must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration prior to the dispute or contract with the Supplier. Secondly, the MSME should have a valid and strong claim against the Buyer. A well-founded claim comprises a written purchase agreement and a valid invoice post-UAM or Udyam registration. Additionally, it is also crucial that the statutory duration (45 days) from the date of acceptance or deemed acceptance of the goods/service, within which the payment should have been made, stands lapsed.

While examining the requisites to invoke the jurisdiction of the Facilitation Council, the Hon’ble High Court of Andhra Pradesh vide Common Order in P.Nos.27670, 27673, 27691, 27693, 27826, 27829, 28010, 28034 of 2021 and 4721, 6249 and 7616 of 2022 – held inter alia, “this Court has to hold that unless the ‘memorandum’ is filed under section 8 of Act 27 of 2006 and the contract is a pure and simple supply contract, a party cannot move the facilitation council nor can the council entertain and decide any dispute. 

The Hon’ble Court relied on the observations made by the Hon’ble Supreme Court in the case of Silpi Industries, which stated that, “………………. In our view, to seek the benefit of provisions under MSME Act, the seller should have registered under the provisions of the Act, as on the date of entering into the contract. In any event, for the supplies pursuant to the contract made before the registration of the unit under provisions of the MSME Act, no benefit can be sought by such entity, as contemplated under MSME Act. ………………… The appellant cannot become micro or small enterprise or supplier, to claim the benefits within the meaning of MSME Act 2006, by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services. If any registration is obtained, same will be prospective and applies for supply of goods and services subsequent to registration but cannot operate retrospectively. Any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party not intended by legislation.”

Hence, to adjure the provisions of the MSME Act, 2006 and to move to the facilitation council for grievance redressal, an Entrepreneurs Memorandum as envisaged under Section 8 has to be filed by the Micro, Small and Medium Enterprise before the authorities specified by the Central Government.

What is the Process for Filing a Complaint through the Samadhaan Portal?

 

As per Section 18 of the MSME Act, in the case of delay in payment beyond 45 days from the day of acceptance or deemed acceptance, MSEs Suppliers may approach the Micro and Small Enterprises Facilitation Council (MSEFC) constituted under the Act in all State/UTs.

At present, the MSME Samadhaan portal enables Micro and Small Enterprises (MSEs) to file their applications online regarding delayed payments. Application in the prescribed form under the provisions of the MSME Act can be filed online on the Samadhaan Portal, which can be accessed at https://MSME.gov.in/. The Applicant shall furnish all the details as specified in the Act in the Application. The application process mandates intensive scrutiny of relevant documents such as the purchase agreements, invoices, notices served, etc. Hence, it is important to attach all the required documents along with the Application in the prescribed form. The application, once filed, is forwarded automatically online to the concerned Micro and Small Enterprise Facilitation Council (MSEFC) established by the State/UTs as per the provisions of the MSME Act 2006. After 15 days of online filing of the case, it is registered by the MSEFC concerned and action on the applications regarding delayed payment is taken by the concerned MSEFC only.

Following acceptance of the application in the prescribed form, the relevant MSEFC sends a notice to the buyer demanding immediate payment of the due amount within a specified time frame. If no payment is initiated by the Buyer within the stipulated time mentioned in the notice, the MSME can proceed with the filing of an application for the default in payment by annexing the requisite documents on the portal as per provisions of the Act.

Once a reference application for a dispute under Section 17 (Recovery of delayed payments) has been made under Section 18 of the MSME Act, the Council shall either conduct conciliation in the matter by itself or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre. It is imperative to note that, for conducting such conciliation, the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of the 1996 Act.

Furthermore, if conciliation is unsuccessful and the parties are unable to reach an agreement, the Council shall either take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration, and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration was conducted in accordance with an arbitration agreement referred to in the arbitration agreement.

In the case of Jharkhand Urja Vikas Nigam Limited Vs State of Rajasthan & Ors. [Civil Appeal No. 2899 of 2021] the Hon’ble Supreme Court observed that the conciliation and arbitration proceedings under the MSME Act cannot be clubbed if the appellant did not submit a response during the conciliation stage. As per the legislative mandate, the Council is under the obligation to initiate an arbitration procedure if the conciliation procedure fails.

While observing fundamental differences between the two processes, the Apex Court in this case held that; “In conciliation, the conciliator assists the parties to arrive at an amicable settlement, in an impartial and independent manner. In arbitration, the Arbitral Tribunal/ arbitrator adjudicates the disputes between the parties. The claim has to be proved before the arbitrator, if necessary, by adducing evidence, even though the rules of the Civil Procedure Code or the Indian Evidence Act may not apply. Unless otherwise agreed, oral hearings are to be held.

Further, while placing reliance on Section 18(3) of the MSME Act, it was also maintained that, “The said Section itself makes it clear that when arbitration is initiated all the provisions of the Arbitration and Conciliation Act, 1996 will apply, as if arbitration were in pursuance of an arbitration agreement referred to under sub-section (1) of Section 7 of the said Act”

According to Section 18 of the MSME Act 2006, the arbitrator has to adjudicate upon the dispute and conclude the proceedings within the statutory period of ninety days from making such reference. 

Pre-deposit of Award Amount

 

The provisions of section 19 state, “No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court.”

Hence, in case the Buyer goes for an appeal against the award/decree, they have to deposit 75% of the award amount. The requirement was held to be mandatory in nature by the Supreme Court in the case of Gujarat State Disaster Management Authority Vs. Aska Equipments Limited (2022) 1 SCC 61

The Apex Court observed that “On a plain/fair reading of Section 19 of the MSME Act, 2006, reproduced hereinabove, at the time/before entertaining the application for setting aside the award made under Section 34 of the Arbitration & Conciliation Act, the applicant/appellant has to deposit 75% of the amount in terms of the award as a pre-deposit. The requirement of a deposit of 75% of the amount in terms of the award as a pre-deposit is mandatory. However, at the same time, considering the hardship which may be projected before the appellate court, if the appellate court is satisfied that there shall be undue hardship caused to the appellant/applicant to deposit 75% of the awarded amount as a pre-deposit at a time, the court may allow the pre-deposit to be made in instalments.”

Further, the Delhi High Court in AVR Enterprises vs Union of India observed that “Section 19 of the MSME Act would apply only to proceedings initiated under section 18 of the MSME Act and would not apply to an award published by an arbitrator appointed by the parties otherwise than in accordance with section 18 of the MSME Act.”

Under Section 20, the MSME Act states that the respective State Governments are duty-bound to establish Micro and Small Enterprises Facilitation Councils while also laying down their jurisdictions. These Councils shall have the jurisdiction to adjudicate upon disputes that are between the Suppliers (within their jurisdiction as specified by the State Government) and Buyers from anywhere in India.

As per the provisions of Section 21, the Council shall consist of a minimum of three and a maximum of five members. The members of the Council must be appointed from amongst the following categories:

  • Chairman: Director of Industries or any other officer not below the rank of such Director, who is having administrative control of small-scale industries.
  • Member: One or more office-bearers or representatives of Associations of micro and small industries.
  • Member: One or more representatives from Banks and financial institutions, who are lending to micro, small or medium enterprises.
  • Member: One or more persons having special knowledge in the field of industry, finance, law, trade, or commerce.

 

Overriding Effect of Claim Settlement Proceedings Under MSME Act over Arbitration and other Applicable Laws

 

It is relevant to note that as per Section 24, the provisions of sections 15 to 23 of the MSME Act have an overriding effect over the provisions of the Arbitration Act and the said section has undergone intensive judicial scrutiny.

In the case of Principal Chief Engineer M/s. Manibhai and Bros (Sleeper) [Diary 16845/2017], the Hon’ble Supreme Court upheld the judgement of the Gujarat High Court in the matter of interpretation of Section 18. The Gujarat High Court opined that since the MSME Act is special legislation, it has an overriding effect and the parties governed by it are bound to follow the mechanism provided under Section 18 of the Act.

Similarly, in M/s. Porwal Sales M/s. Flame Control Industries [Arbitration Petition No. 77 of 2017], the Bombay High Court held that Section 18 (1) should be read with sub-section (4). Section 18 is only attracted when the jurisdiction of the Council is invoked by a party for an amount due under Section 17. The jurisdiction clause of Section 18(4) does not create a bar on the appointment of an arbitrator under Section 11 of the Arbitration Act. Further, since under Section 18(1) the word “may” has been used, it is not mandatory for the Supplier or Buyer to initiate proceedings under Section 18. However, the Court also opined that if a reference has already been made to the Council in a case, the application for the appointment of an arbitrator should not be maintainable.

The Delhi High Court in the case of AVR Enterprises vs Union of India [CM APPL. 27219/2018], observed inter alia that if the arbitration proceedings are initiated by the parties as per the arbitration agreement and no proceedings have been initiated per Section 18, then the statutory provisions of the MSME Act shall not come into force.

Further, with respect to the contention of whether the Facilitation Council can act as both Arbitrator and Conciliator under Section 18; the High Court of Bombay in the case of Gujarat State Petronet Ltd MSEFC [WRIT PETITION NO.5459 OF 2015] opined that by virtue of sub-sections (2) and (3) of Section 18, Section 80 of the Arbitration Act (which bars a conciliator from acting as an arbitrator in the same dispute), it is applicable to the proceedings initiated under Section 18. Hence, on a harmonious interpretation of both these provisions, the Council cannot act as both and may refer the matter to any centre or institution that provides alternate dispute resolution services. 

However, in the case of Best Towers Private Limited v. Reliance Communications Limited [C.W.J.C. No. 8086 of 2018], the Patna High Court was of the view that the overriding effect extended to Section 18(3) with respect to Section 24 of the Act, which clearly overrides any bar under Section 80 of the Arbitration Act. 

The Legislature clearly intended that the Council be able to act as an arbitrator and conciliator. Differing from the observations of the Court in the abovementioned case, in the case of M/S Cummins Technologies India Private Limited v. Micro and Small Enterprises Facilitation Council [C No. 7785 of 2020], the Allahabad High Court was of the opinion that the bar under Section 80 is subject to the existence of a contrary agreement between the parties, therefore it is not absolute in nature. 

Further, given the jurisdiction of the Council under Section 18(4) and its overriding effect under Section 24, the Court held that the Council can act as both. The Court also observed that the object behind introducing such a prohibition was to eliminate incidences of personal bias in the Arbitral Tribunal. However, since the Council is a statutory body, comprising of three to five members, the incidents of such bias or prejudice are absent, ergo, eliminating the requirement of the bar under Section 80 of the Arbitration Act.

Taking a similar view, the Madras High Court in the case of Ved Prakash vs. P Ponram [Original Side Appeal No.231 of 2019] held that the Council is not barred from proceeding to arbitration under Section 18(3) after conducting conciliation under Section 18(2). It must, however, ensure that the same member, who served as the conciliator in the previous conciliation proceeding does not serve as an arbitrator unless the relevant parties agree otherwise.        

Applicability of the Limitation Act to Disputes/Claim Settlement Proceedings Under the MSME Act 2006

 

The deliberation of the applicability of the Limitation Act on the proceedings under Section 18 of the MSME Act has always been a grey area. However, the Hon’ble Supreme Court of India in the recent case of Silpi Industries and Ors. Vs. Kerala State Road Transport Corporation and Ors. 2021(224) AIC 18 has afforded clarity to the discussion. The Court noted that if the dispute arises under Section 17 of the MSME Act, a reference shall be made to the Council. The parties will then be referred to conciliation by the Council. If the Conciliation process fails, the Council shall refer the case for arbitration (either administered by itself or by any institution or centre deemed fit by the Council) per the provisions of Section 18 of the MSME. 

Further, while keeping reliance on the case of Andhra Pradesh Power Coordination Committee & Ors. v. Lanco Kondapalli Power Ltd. & Ors., (2016) 3 SCC 468, the Supreme Court held that Section 43 of the Limitation Act clearly applies to arbitrations and that the provisions of the 1996 Act similarly apply to arbitrations initiated under the MSME Act as if an agreement between the parties under Section 7(1) of the 1996 Act exists. In light of the same, it was unequivocally held that the provisions of the Limitation Act apply to arbitration proceedings initiated under Section 18 of the MSME Act.

Structured Dispute Resolution Process

 

Filing complaints on the MSME Samadhaan Portal requires mandated document verification, such as work orders, agreements, invoices, etc. However, a significant number of MSMEs fail to keep a record of these requisite documents. Further, as of December 2021, only 20% of all applications filed have either been disposed of or mutually settled with Buyers, while nearly 39% of applications are yet to be addressed by the relevant authorities. Another 27% of total applications are currently under consideration[1]. This indicates that a significant number of cases have to wait for admission and then get approval to proceed further.

Conclusion

 

The observations made in the Draft National MSME Policy with respect to the inadequacy relating to the current dispute resolution mechanism catering to the needs of the MSME industry are hence confirmed by the statistics highlighted above. Hence, it has suggested a move towards establishing more facilitation councils, preferably at district levels to fast-track and aid the existing structure. Other relevant steps to establish a ‘vibrant ecosystem for the rapid growth of the MSME sector have also been envisaged to be undertaken in the near future, a development both necessary and noteworthy.

To file a complaint with the MSEFC, the concerned enterprise must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration prior to the dispute or contract with the Supplier. Secondly, the MSME should have a valid and strong claim against the Buyer. A well-founded claim comprises of a written purchase agreement and a valid invoice post-UAM or Udyam registration. Additionally, it is also crucial that the statutory duration (45 days) from the date of acceptance or deemed acceptance of the goods/service, within which the payment should have been made, stands lapsed.

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