SUPREME COURT REITERATES THAT CONSENT DECREES VITIATED BY FRAUD, MISREPRESENTATION, OR MISTAKE DO NOT BIND PARTIES

The Two Judge Bench of the Hon’ble #SupremeCourt of India comprising of Justices Mohan M. Shantanagoudar and Vineet Saran passed a Judgment dated 17.02.2021 in the case of Compack Enterprises India (P) Ltd. v. Beant Singh Special Leave Petition (Civil) Nos. 2224-2225 of 2021 (Arising out of SLP(C) Diary No. 38441 of 2019) and reiterated that a #Consent Decree will operate as an #estoppel in cases where the #compromise has been vitiated by #Fraud, #Misrepresentation or #Mistake.

In the present case, Beant Singh (hereinafter Respondent) had filed a suit for possession and mesne profits against Compack Enterprises India (P) Ltd. (hereinafter Petitioner) with respect to the ground floor of the property bearing No. B­60, Ground Floor, G.T. Karnal Road, Industrial Area, Delhi­110033, admeasuring 608 sq. yards (or, 5,472 sq. ft.)(hereinafter ‘suit property’).

The Respondent had executed a license agreement dated 1.11.2000 for a period of 30 months in respect of a portion of the suit property in favour of M/s Compack Enterprises (the Petitioner’s predecessor) in   consideration   for   a   monthly   license fee of Rs. 28,000/­ (hereinafter ‘2000 Agreement’). On 1.04.2003, Compack Enterprises merged with Compack Enterprises India (P) Ltd. Thereafter, the license agreement was renewed on 1.07.2003 for another 30 months in consideration for a monthly license fee of Rs. 30,800/-, (hereinafter ‘2003 Agreement’) and again on 1.04.2006 in consideration for a monthly license fee of Rs. 33,900/- (hereinafter ‘2006 Agreement’), which expired on 30.09.2008. However, even after the expiry of the 2006 Agreement the Petitioner continued to occupy the suit property.

As a consequence, the Respondent filed a Suit against the Petitioner on 13.02.2009 for recovering the possession of the suit property and and mesne profits thereon from 1.10.2008 till the vacation of the suit property. The Ld. Additional District Judge, Rohini (‘Trial Court’) vide Order dated 23.09.2017, held that the Respondent is entitled to license fee Rs. 37,290/­ per month. Furthermore, the Court ordered that for the period of unlawful possession the Petitioner shall pay mesne profits Rs.60,000/­ per month with 10% increase on the 1st  April of each alternate year, till the suit property is handed over to Respondent.

Aggrieved, by the said Order on mesne profits, both the Petitioner and the Respondent filed cross Appeals before the Hon’ble High Court of Delhi (the High Court). The High Court vide Order dated 14.02.2019 passed a Consent Decree and directed the Petitioner to pay to the Respondent by way of mesne profits,  an enhanced sum of Rs.1,00,000/- per month with a 10% increase after every 12 months till the date the Petitioner hands over actual possession of the suit property

The Petitioner, aggrieved by the said Order, filed a Review Petition, which was dismissed by the High court vide Order dated 25.07.2019.

Consequently, a Special Leave Petition was filed in the Hon’ble Supreme Court impugning the Judgments dated 14.02.2019 and 25.07.2019.

After taking into consideration the arguments advanced by the parties to the dispute, the Apex Court held that the Consent Decrees create an estoppel against the parties. This is done in order to put an end to further litigation between the parties and the terms of a Consent Decree can be modified, substituted or modulated only with the consent of all the parties thereto. However, the Court observed as follows:

 “19. However, this formulation is far from absolute and does not apply as a blanket rule in all cases. This Court, in Byram Pestonji Gariwala v.Union Bank of India &ors., (1992) 1 SCC 31, has held that a Consent Decrees would not serve as an estoppel, where the   compromise   was   vitiated   by   fraud,   misrepresentation,   or mistake. Further, this Court in the exercise of its inherent powers may also unilaterally rectify a Consent Decrees suffering from clerical or arithmetical errors, so as to make it conform with the terms of the compromise.”

While disposing of the Appeal, the Bench held that the High Court was correct in upholding the terms of the Consent Decrees directing Petitioner to hand over possession of the entire suit property. On the issue of mesne profits, the Apex Court held that “… the inconsistency in the underlined extract of the Consent Decrees is an error apparent on the face of the record. Hence we find that this is a fit case to exercise inherent the jurisdiction to correct the terms of the Consent Decrees, to bring it in conformity with the intended compromise.”

Suchitra Upadhyay

Associate

The Indian Lawyer & Allied Services

DELHI HIGH COURT REITERATES APPLICATION OF PRINCIPLES OF NATURAL JUSTICE BEFORE CANCELLATION OF AVIATION PERMITS

The #DelhiHighCourt has in a recent case of M/s AR Airways Pvt Ltd vs Union of India and Others passed a Judgment dated 15-02-2021 and discussed the #Principles of #NaturalJustice to be applied before cancellation of #AirOperatorPermits.

In this case, the Petitioner, AR Airways Ltd, has filed a Writ Petition before the Delhi High Court and challenged a Show Cause Notice dated 30-07-2020 issued by the Respondent, whereby, the #MinistryofCivilAviation denied the renewal of Security Clearance of the Petitioner Company and also cancelled the Airport Entry Permits to the Petitioner’s Employees. The Respondent passed the following Impugned Orders in relation to the Petitioner, without citing any reasons for the same:

i) The Respondent cancelled the Petitioner’s Aerodrome Entry Permit (AEP), vide Order dated 04-09-2020.

ii) The Respondent further cancelled the Petitioner’s Temporary Aerodrome Entry Permit (TAEP), vide Order dated 04-09-2020.

iii) That security clearance is a pre-requisite for grant, renewal and continued validity of Air Operator Permit (AOP). As the Petitioner’s Security Clearance was cancelled, hence, its AOP was also cancelled by the Respondent, vide Order dated 07-09-2020.

The Delhi High Court made the following observations in this case:

1- That as per various precedents and judgements of the Supreme Court and High Courts, it is well established that at the stage of the show-cause, the person proceeded against must be informed about the charges and allegations levied against him and must be given a reasonable opportunity for answering such objections. These Principles of Natural Justice have to applied in such cases, otherwise, the entire proceedings initiated by the show-cause notice gets vitiated by unfairness.

2- In the present case, the Respondent failed to inform the reasons for denial of renewal of Security Clearance and cancellation Air Operator Permit in any of the Impugned Orders or the Show Cause Notice, hence, the Petitioner could not submit effective reply to the Show Cause Notice.

3- That the Respondent disclosed the reasons for cancellation of Air Operator Permit only before the Court, that is, the Beneficial Owner of the Petitioner Company, Shri Ashok Kumar Chaturvedi was convicted of various offences under the Indian Penal Code 1860 and the Prevention of Corruption Act 1988. As per the Ministry of Home Guidelines “Conviction in the Court of law in the cases of charge sheet filed for the Prevention of Corruption Act” qualifies as criteria for denial of security clearance to a company. Hence, the Respondent’s plea was that the cancellation of the Petitioner’s Permit was justified in view of the corrupt practices carried out by the Key Managerial Personnel of the Petitioner Company.

4- However, the absence of disclosure of specific reasons for cancellation of Air Operator Permit, renders the Show Cause Notice and the Impugned Orders perfunctory in nature and violative of Principles of Natural Justice, and thus void ab initio.

Thus, the Delhi High Court set aside the Show Cause Notice and the Impugned Orders passed by the Respondent in relation to the Petitioner Company and allowed the Respondent to proceed against the Petitioner in accordance with law.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer

SUPREME COURT DIRECTS TELANGANA STATE GOVERNMENT TO REFUND PROJECT COSTS TO UNITECH LIMITED

The #SupremeCourt has recently passed a Judgment dated 17-02-2021 in Unitech Limited and Others vs Telangana State Industrial Infrastructure, whereby, the Apex Court decided upon issues of #refund of #project related #costs from the #StateGovernment of Telangana and Andhra Pradesh.

In this case, the Appellant No. 1, Unitech Limited (#Unitech), had entered into a Development Agreement dated 19-08-2008 (Agreement) with the Andhra Pradesh Industrial Infrastructure Corporation Ltd. (APIIC) to develop, design and construct an Integrated Township Project / Multi Services Aerospace Park (Project) in a 350 Acres of Land in Nadergul Village, Saroornagar Mandal, Ranga Reddy District (Land). For this Project, Unitech paid around Rs 165 Crores, which comprises of Rs 140 Crores towards the Cost of Land, Rs 20 Crores towards Earnest Money Deposit (EMD) and Rs 5 Crores towards Project Development Expenses.

However, allotment of Land was subject to the outcome of a litigation pending before the then High Court of Andhra Pradesh in the matter of Pratap Karan v Govt. of Andhra Pradesh. Hence, Unitech deferred commencement of work on the Land, until APIIC handed over possession of the Land encumbrance-free. Thereafter, the High Court of Andhra Pradesh passed a Judgment dated 19-12-2011 in the said matter and held that the Government of Andhra Pradesh did not have title to the Land.

Meanwhile, the State of Andhra Pradesh was re-organized into the successor States of Andhra Pradesh and Telangana with effect from 02-06-2014 under the provisions of the Andhra Pradesh Reorganization Act, 2014 (the #Reorganization Act). As a result, Unitech requested both APIIC and the newly-formed Telangana State Industrial Infrastructure Corporation Ltd (TSIIC), a successor of APIIC, for refund of all amounts received in relation to the Land together with interest and damages for the loss suffered by them, including the cost of borrowing capital from banks, expenses for planning and designing, opportunity costs and other costs for development.

But as APIIC and TSIIC did not refund the amounts, Unitech filed a Writ Petition before the Supreme Court, which directed Unitech to approach the High Court. Hence, Unitech filed a Writ Petition before the High Court of Telangana seeking a refund of Rs 165 Crores along with interest at the SBI Prime Lending Rate (SBI- PLR) from September 2007, i.e. the date from when Unitech started making payments. The said Petition was allowed by the Hon’ble High Court, vide Judgment dated 23-10-2018.

Aggrieved, TSIIC and State of Telangana filed an Appeal before the Division Bench of the High Court. The Division Bench passed a Judgment dated 01-04-2019 and upheld the Order of the Single Bench regarding liability of TSIIC to refund Rs. 165 Crores to Unitech. However, the Division Bench modified the Order to the extent that interest would be paid at SBI-PLR rate from 14-10-2015, i.e. the date on which Unitech had first sought for refund of all amounts, instead of September 2007, when Unitech had started making payments, as Unitech was then aware of the pending litigation.

Aggrieved by the Order of the Division Bench of the High Court, Unitech, TSIIC and State of Telangana filed Special Leave Petitions before the Supreme Court.

The Apex Court made the following observations in this case regarding maintainability of Writ Petition and liability of the State Government to refund the amounts to Unitech:

1- That although there is an Arbitration Clause stipulated in the Agreement, a Writ Petition under Article 226 of the Constitution of India is maintainable for asserting rights arising out of contractual obligations against the State, or its instrumentalities. This is because if the state instrumentality violates its constitutional mandate under Article 14 to act fairly and reasonably, relief under the plenary powers of the Article 226 of the Constitution would lie.

2- That APIIC and TSIIC, being State Instrumentalities, are duty bound to act fairly under Article 14. They cannot seek exemption from the public law duty to act fairly in their business dealings with private parties in the domain of contracts.

3- Further, as APIIC and State Government of Andhra Pradesh failed to obtain title to the Project Land, hence, the entire basis on which the Agreement was founded stood nullified. Without having title to the Land, they could not have conveyed full title to the Developer, Unitech.

4- Hence, the failure of title entitles Unitech to claim a full refund of the amounts along with compensatory payment, as stipulated in the Agreement.

5- Further, as per the terms of the Agreement, the existence of political force majeure event (i.e. reorganization of the States of AP And Telangana) and the default on the part of APIIC/TSIIC (i.e. to convey the Land encumbrance-free), would entitle Unitech to claim compensatory payment, “from the date on which the first payment of project price” is made.

Hence, the Supreme Court directed the TSIIC/APIIC to pay the Appellant, Unitech Rs.165 Crores along with interest at SBI-PLR rates commencing from the respective dates of payment.

Further, the Apex Court held that, as per the terms of the Reorganization Act, TSIIC may pursue legal remedies in relation to apportionment or adjustment of the refunded amounts with APIIC and State of Andhra Pradesh.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer

SUPREME COURT DECIDED UPON APPEALABLE ORDERS UNDER THE ARBITRATION ACT 1996

The #SupremeCourt has in a recent case of Chintels India Ltd vs Bhayana Builders Pvt Ltd passed a Judgment dated 11-02-2021 on whether an #order refusing to #condone the #delay in filing an #Application under Section 34 of the #Arbitration and Conciliation Act 1996 (the Act) is an #appealable order under Section 37 (1) (c) of the Act?

In this case, the Appellant had filed an Application under Section 34 of the Act before the Delhi High Court seeking setting aside of an Arbitral Award dated 03-05-2019 and also seeking condonation of delay in filing the said Application.  But the High Court dismissed the Application for Condonation of Delay and consequently dismissed the Section 34 Application itself, vide Judgment dated 04-06-2020. Aggrieved, the Appellant filed an Appeal before the Apex Court.

Issue: Whether Delhi High Court’s Order refusing to condone the delay in filing Section 34 Application is an appealable order under Section 37 (1) (c) of the Act?

The relevant provisions of the Act are reproduced below:

Section 34: Application for setting aside arbitral award

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

Section 37: Appealable orders

(1) Notwithstanding anything contained in any other law for the time being in force, an appeal shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—

(c) setting aside or refusing to set aside an arbitral award under section 34

The Supreme Court made the following observations:

1- That the High Court has not dealt the Section 34 Application on merits before dismissing the Application being barred by time.

2- That there is only a limited right of appeal given under Section 37 of the Act.

3- But an order refusing to condone the delay in filing Section 34 application has the effect of refusing to set aside the arbitral award. Hence, such an order is appealable under Section 37 (1) (c) of the Act.

Therefore, the Apex Court held that the Appeal under Section 37 (1) (c) of the Act is maintainable against the Order refusing to condone the delay in filing the Application under Section 34 of the Act and thus, remitted the matter to the High Court Division Bench to decide whether the High Court Single Bench Order is correct or not.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer

SUPREME COURT HOLDS THAT BAR ON DEFAULT PROVISIONS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016 APPLIES RETROSPECTIVELY

An Ordinance was promulgated by the President of India on 05.06.2020 by which Section 10A was inserted into the Insolvency and Bankruptcy Code, 2016 (“#IBC”). Section 10A of the IBC suspends the proceedings against initiation of Corporate #Insolvency Resolution Process (“#CIRP”) for default arising on or after 25.03.2020 for a period of six months or such further period, not exceeding one year from such date as may be notified (“Ordinance”). This bar however was extended for a further period till March, 2021.

Explanation appended to the #Section10A of the IBC clearly states that the said provision shall apply to any default committed under Section 7, 9 and 10 of the IBC on or after 25.03.2020.

Recently, a Bench of Supreme Court of India in the case of Ramesh Kymal versus M/s Siemens Gamesa Renewable Power Pvt Ltd [Civil Appeal No. 4050/2020], vide its Judgment dated 09.02.2021 reiterated and held that the Ordinance dated 05.06.2020 is applicable with retrospective effects thereby no proceedings shall be entertained against any default committed on or after 25.03.2020 as enumerated in Section 10A of the IBC.

The issue before the Supreme Court was whether Section 10A of the IBC would apply, where the Application under Section 9 of the IBC was filed before 05.06.2020, when Section 10A was inserted in view of a default which has committed after 25.03.2020?

Facts: The brief facts pertaining to the case involves the Appellant, who issued a Demand Notice to the Respondents on 30.04.2020 in which the specified date of default was 30.04.2020 with respect to his operational dues. Subsequently, the Appellant filed an Application under Section 9 of the IBC before the National Company Law Appellate Tribunal (“NCLT”), on 11.05.2020. During the pendency of the Application, an Ordinance dated 05.06.2020 was passed and Section 10A was inserted in IBC.

In this view, the NCLT, vide its Order dated 09.07.2020 dismissed the Application as not maintainable. The said Order and the validity of this Section 10A of the IBC was challenged before the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT, vide its Order dated 19.10.2020 affirmed the NCLT Order dated 09.07.2020, whereby it was held that the Application under Section 9 of the IBC filed by the Appellant was not maintainable in view of Section 10A of the IBC, which was inserted with retrospective effect, vide Ordinance dated 05.06.2020.

The Appellant then filed an Appeal against NCLAT Judgment and Order dated 19.10.2020 before the Supreme Court on the ground that the Application under Section 9 of the IBC was filed before the Ordinance dated 05.06.2020 was came into existence and as such was not applicable. The Appeal was also filed on the ground that the Application is filed in respect of default which has occurred after 25.03.2020.

Supreme Court Decision:

The Supreme Court while considering the aforesaid issue observed that the date of 25.03.2020 has consciously been provided by the legislature in the recitals to the Ordinance and Section 10A, since it coincides with the date on which the National Lockdown was declared in India due to the Pandemic.

The Supreme Court also pointed out that the expression “shall ever be filed” in the Proviso to the Section 10A of the IBC is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25.03.2020.

It further said that the Explanation to the Section 10A of the IBC removed the doubts by clarifying that this Provision shall not apply to any default committed before 25.03.2020. It is also important to mention that the substantive part of Section 10A is to be construed harmoniously with the first Proviso and the Explanation.

The Supreme Court said that “the correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated. It must be noted, however, that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it.”

The Judgment also stated that the date of the initiation of the CIRP is the date on which a financial creditor, operational creditor or corporate applicant makes an application to the adjudicating authority for initiating the process. On the other hand, the insolvency commencement date is the date of the admission of the application. The Supreme Court said that the contention of the Appellant that the Application has been filed before the Ordinance was promulgated is unacceptable. Therefore, the Supreme Court upheld the NCLAT Judgment and Order dated 19.10.2020.

Lakshmi Vishwakarma

Senior Legal Associate

The India Lawyer & Allied Services

LOK SABHA PASSES ARBITRATION AND CONCILIATION (AMENDMENT) BILL, 2021

The Lok Sabha has passed the #Arbitration and Conciliation (Amendment) Bill, 2021 (the Bill). The Bill which was introduced in the #LokSabha on February 4, 2021 by Law Minister Ravi Shankar Prasad seeks to #amend the Arbitration and Conciliation Act, 1996 (the Act).

The Statement of Objects annexed to the Bill reads as:

“In order to address the issue of corrupt practices in securing contracts or arbitral awards, a need was felt to ensure that all the stakeholder parties get an opportunity to seek unconditional stay of enforcement of arbitral awards, where the underlying arbitration agreement or contract or making of the arbitral award is induced by fraud or corruption.

Also to promote India as a hub of international commercial arbitration by attracting eminent arbitrators to the country, it was also felt necessary to omit the Eighth Schedule of the Act. In the light of above circumstances, it has become necessary further to amend the Arbitration and Conciliation Act, 1996.”

The Salient features of the Bill are as follows:

1- Stay on Awards in case of Fraud or Corruption

Under the Arbitration and Conciliation Act, 1996, Section 34 contemplates that a party may file an Application before the Court for setting aside of an arbitral award. The Bill states that even during the pendency of the setting aside application, a stay may be granted on the arbitral award by the Court, if it is prima facie satisfied that the relevant Arbitration Agreement or making of the award was induced or effected by fraud or corruption. Such a stay may be granted unconditionally pending disposal of the challenge under Section 34 to the award.

2- Qualifications of Arbitrators

Schedule VIII to the Act stipulates certain qualifications, experience, and accreditation norms in relation to Arbitrators. These requirements are that an Arbitrator must be:

  • an advocate under the Advocates Act, 1961 with 10 years of experience, or
  • an officer of the Indian Legal Service, among others.

The Bill seeks to omit Schedule VIII that states the qualifications, experience and norms for accreditation of Arbitrators shall be specified by Regulations.

3- The Bill repeals The Arbitration and Conciliation (Amendment) Ordinance, 2020.

For further information, please click the link below:

http://egazette.nic.in/WriteReadData/2021/224958.pdf

Suchitra Upadhyay

Associate

The Indian Lawyer & Allied Services

SUPREME COURT HOLDS MONEY LAUNDERING HAS TO BE RECORDED UNDER THE PREVENTION OF MONEY LAUNDERING ACT, 2002

The Three Judge Bench of the Hon’ble #SupremeCourt of India comprising of Justices S.A. Bobde, A.S.Bopanna and V. Ramasubramanian passed a Judgment dated 03.02.2021 in the case of OPTO Circuit India Ltd. v. Axis Bank & Ors. {CRIMINAL APPEAL NO.102 OF 2021 (Arising out of SLP (Criminal) No.4171 of 2020)} and held that before directing the freezing of #BankAccounts under the Prevention of Money Laundering Act, 2002 (the Act), 2002, a belief of commission of act of #moneylaundering has to be recorded.

In the present case, Axis Bank (hereinafter Respondent No. 4) had initiated proceedings against OPTO Circuit India Ltd. (hereinafter Appellant) under the provisions of the PMLA. The Central Bureau of Investigation (CBI) initiated an action for the alleged predicate offence. In order to track the money trail in relation to the offence and to prevent the layering of the same, the Enforcement Directorate initiated proceedings under the Act.

Through the communication dated 15.05.2020, the Deputy Director, Directorate of Enforcement instructed the Anti Money­Laundering Officer (AML) of Respondents No.1 to 3 Banks, that the accounts maintained by the Appellant Company be ‘debit freezed/stop operations’ until further orders, with immediate effect.

Aggrieved, the Appellant filed a Writ Petition (W.P. WP No. 8031 of 2020) before the High Court of Karnataka (the High Court) seeking the quashing of communication dated 15.05.2020 which was issued for debit freezing the accounts of the Appellant maintained with the Respondent Banks. Further, the Appellant made a prayer that a direction shall be given to the Respondents to defreeze the accounts.

The High Court vide Order dated 13.08.2020 disposed of the Writ Petitions filed by the Appellant Company upheld the Orders passed by the Deputy Director, Directorate of Enforcement.

The Appellant Company filed a Special Leave Petition in the Hon’ble Supreme Court of India impugning the Order dated 13.08.2020. The Appellant Company contended that due to the freezing of accounts, it is unable to make statutory payments to the Competent Authorities under various enactments and the payment of salary due to the employees is also prevented.

After taking into consideration the arguments advanced by the Parties to the dispute the Apex Court observed that the Act mandates that before freezing of a bank account, it is obligatory for the Authority to record the belief of commission of the act of money laundering in accordance with the procedure prescribed under Section 17 of the Act. Furthermore, the Bench observed that the objective of the Act is to safeguard the rights of the persons who would be proceeded against and to ensure the fairness in the procedure. It stated as follows:

“11. The scheme of the PMLA is well intended.  While it seeks   to   achieve   the   object   of   preventing   money laundering   and   bring   to   book   the   offenders,   it   also safeguards   the   rights   of   the   persons   who   would   be proceeded against under the Act by ensuring fairness in procedure.   Hence   a   procedure,   including   timeline   is provided so as to ensure that power is exercised for the purpose to which the officer is vested with such power and the Adjudicating Authority is also kept in the loop.”

The Supreme Court noted thatin the present case, the Communication dated 15.05.2020 only states that the Officer is investigating the case, it does not even refer to the belief of the Authorised Officer. No material evidence was placed on record or before the Adjudicating Authority to prove the compliance of the procedure contemplated under Section 17 of the Act, in particular the recording of belief of commission of the act of money laundering.

In this regard, the Court made the following observation:

“11…It certainly is not the requirement that the communication addressed to the Bank itself should contain all the details. But what is necessary is an order in the file recording the belief as provided   under   Section   17(1)   of   PMLA   before   the communication is issued and thereafter the requirement of Section 17(2) of PMLA after the freezing is made is complied.   There is no other material placed before the Court to indicate compliance of Section 17 of PMLA, more particularly recording the belief of commission of the act of   money   laundering   and   placing   it   before   the Adjudicating   Authority   or   for   filing   application   after securing the freezing of the account to be made.  In that view, the freezing or the continuation thereof is without due compliance of the legal requirement and, therefore, not sustainable.”   

Partly allowing the Appeal, the Apex Court passed a direction to defreeze the accounts of the Appellant Company.

Suchitra Upadhyay

Associate

The Indian Lawyer & Allied Services

SUPREME COURT HOLDS COLLUSIVE AND SHAM TRANSACTIONS WITH CORPORATE DEBTOR NOT CONSIDERED AS FINANCIAL DEBT

The Three Judge Bench of the #SupremeCourt has in a recent case of Phoenix Arc Private Limited vs Spade Financial Services Limited & Ors. passed a Judgment dated 01-02-2021 and held that firstly, as the Respondents are not #financialcreditors and secondly, as the Respondents are related parties of the #CorporateDebtor, they must be excluded from the #CommitteeofCreditors.

In this case, one of the Respondents, Spade Financial Services Limited, filed its Claim in the capacity of financial creditor before the Interim Resolution Professional (IRP) with respect to the Corporate Insolvency Resolution Process (CIRP) initiated against the Corporate Debtor, AKME Projects Limited (Corporate Debtor). Whereas, the other Respondent, AAA Landmark Private Limited filed its Claim as a creditor, other than a financial creditor or operational creditor before the IRP with respect to the CIRP initiated against the Corporate Debtor. But when the IRP rejected both the claims, the Respondents approached the National Company Law Tribunal (NCLT), New Delhi Bench. The NCLT allowed both the Respondents to submit their claims as financial creditors with a direction to the IRP to consider their claims.

Meanwhile, a Committee of Creditors (CoC) was constituted on 22-05-2018. The Appellant, Phoenix Arc Private Limited, being a Financial Creditor and a member of the CoC, filed an Application in the NCLT seeking exclusion of the Respondents from the CoC on the ground that they are related parties of the Corporate Debtor. The NCLT passed an Order dated 19-07-2019, whereby, it was held that the Respondents are not financial creditors. Further, the Respondents are held to be related parties of the Corporate Debtor, as the Respondents were involved in making financial arrangements and debt settlements for the Corporate Debtor. Also, the Corporate Debtor used to act in accordance with the instructions and directions of Mr. Arun Anand, the Director of the Respondents-Companies. Hence, the Respondents should be excluded from the CoC.

Aggrieved by the NCLT Order dated 19-07-2019, the Respondents herein filed an Appeal before the National Company Law Appellate Tribunal (NCLAT). The NCLAT passed a Judgment dated 27-01-2020 and held that although the Respondents are financial creditors of the Corporate Debtor, but as they are the related parties of the Corporate Debtor, they should be excluded from the CoC.

Thereafter, the Appellant filed an Appeal before the Supreme Court and challenged the NCLAT Judgment dated 27-01-2020 to the extent that it says that the Respondents are the financial creditors of the Corporate Debtor.

The Apex Court made the following observations in this case:

1) That as per Section 5 (7) of the Insolvency and Bankruptcy Code 2016 (the Code) “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. Further, Section 5 (8) of the Code stipulates that the essential ingredient of a “financial debt” is disbursal against consideration for the time value of money.

2) That in genuine cases, money advanced as a debt should be in receipt of the borrower. The borrower has the obligation to return the money or its equivalent for a time value of money. However, in case of a transaction which is sham or collusive, the parties would have entered into the transaction with a different or an ulterior motive. At times, companies enter into such transactions to defraud genuine creditors.

3) The Code provides that such avoidable transactions should be identified, and unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors.

4) In this case, the Supreme Court held that the Respondents had not charged any interest towards the alleged debt advanced to the Corporate Debtor. Further, there is no mention about period of repayment of debt in any document, hence, there is absence of consideration for time value of money, which is the essential ingredient of a financial debt.

5) That as the said transaction is an eye-wash and collusive, therefore, the commercial arrangement between the Respondents and the Corporate Debtor would not constitute a financial debt. Hence, they cannot be deemed to be financial creditors of the Corporate Debtor.

6) That further, in this case, Mr Arun Anand, the Director of the Respondents-Companies has also held multiple positions in the Corporate Debtor. The Board of Directors of the Corporate Debtor are accustomed to acting upon the instructions of Mr. Arun Anand. Further, the Respondents-Companies and the Corporate Debtor have been involved in various commercial arrangements with each other and the families of the owners of the said Companies have also been constantly associated with each other. Hence, the Respondents are held to be related parties of the Corporate Debtor.

7) That as per the first Proviso to Section 21 (2) of the Code, a financial creditor who is a related party of the corporate debtor shall not have the right of representation, participation or voting in the CoC. The said provision is reproduced below:

21. Committee of creditors

(2) The committee of creditors shall comprise all financial creditors of the corporate debtor:

Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors

8) Hence, the Respondents, being related parties of the Corporate Debtor, have to be excluded from the CoC, as otherwise, if the Respondents are allowed to be a part of the CoC, they would be influenced by the Board of the Corporate Debtor, which would ultimately affect the other independent financial creditors.

Thus, the Apex Court held that due to the collusive nature of the transactions, the Respondents cannot be held as financial creditors and further, as the Respondents are related parties of the Corporate Debtor, they must be excluded from CoC. Thus, the Supreme Court upheld the NCLAT Judgment to the extent that it excluded the Respondents from the CoC, in accordance with first Proviso to Section 21 (2) of the Code.

Harini Daliparthy
Senior Legal Associate
The Indian Lawyer