Can an interim arbitral award deciding an issue of limitation be set aside by the Court?

The bench of Justice R. F. Nariman and Justice Navin Sinha, vide their judgement dated 23.01.2018 in the matter of M/s Indian Farmers Fertilizer Co-operative Limited v M/s Bhadra Products, thrown light on two questions, (a) whether an award delivered by an Arbitrator, which decides the issue of limitation, can be said to be an interim award, and (b) whether such interim award can then be set aside under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”)?

The Apex Court has held that an award on a limited issue of limitation is an interim award and therefore amenable to challenge under Section 34 of the Arbitration and Conciliation Act, 1996.

M/s Bhadra Products submitted its bid to a tender enquiry floated by M/s Indian Farmers Fertilizers Co-operative Limited for the supply of defoamers. A letter of intent was issued to M/s Bhadra Products for the supply of 800 metric tonnes of defoamers. M/s Bhadra Products supplied to promised goods to M/s Indian Farmers Fertilizers Co-operative Limited, but allegedly M/s Indian Farmers Fertilizers Co-operative Limited failed to make payments against the same and thereafter M/s Bhadra Products invoked the arbitration clause and a Sole Arbitrator was appointed. The Sole Arbitrator decided to adjudicate on the issue of limitation first and it ruled that the claims of M/s Bhadra Products were not time-barred.

Subsequently M/s Indian Farmers Fertilizers Co-operative Limited challenged the interim award under Section 34 of the Act. The District Judge dismissed the Section 34 petition on the grounds that the ruling was not an interim award. The ruling of the District Court was appealed before the Hon’ble High Court, which upheld the reasoning of the District Judge and consequently dismissed the appeal.

M/s Indian Farmers Fertilizers Co-operative Limited once again challenged the judgment of the Hon’ble High Court before the Hon’ble Supreme Court where the judgment of the Hon’ble High Court was overturned.

The Supreme Court has answered two issues being whether an award delivered by an Arbitrator, which decides the issue of limitation, can be said to be an interim award and whether such interim award can then be set aside under Section 34 of the Act?

M/s Indian Farmers Fertilizers Co-operative Limited contended that the ruling of the Sole Arbitrator on the issue of limitation was an interim award as it finally decided the issues between the parties. Since the nature of the award was that of a final award the same could be challenged under Section 34 of the Act.

Whereas M/s Bhadra Products contended that the decision on the limitation does not finally decide the issues between the parties and merely decides the question of jurisdiction, hence until a final award is passed on all the issues, the interim ruling on limitation cannot be treated as an interim award and hence the same cannot be challenged under Section 34 of the Act.

After the conclusions of the parties arguments, the Supreme Court has noted that the Act does not define ‘intemin award’ but an interpretation of Section 31(6) of the Act provides that an arbitral tribunal could pass one or more interim awards prior to a final award. It further held that that as long as the award finally decides an issue between the parties, it was an interim award that was binding on the parties. On the basis of these observations the Court held that the ruling of the Sole Arbitrator decided an issue, in finality, between the parties hence the ruling of the Sole Arbitrator was an interim award. Further the Supreme Court has also held that an award on the question of limitation does not relate to the arbitral tribunal’s own jurisdiction and therefore cannot follow the drill of Section 16 of the Act.

The Supreme Court has further recognized that interim awards can delay the arbitral proceedings and lead to an increased cost of arbitration and hence has urged the legislature to amend Section 34 of the act to the effect that the Section shall consolidate all the interim awards with the final award so as to save time and cost.

Neelkanth Township & Construction Pvt. Ltd versus Urban Infrastructure Trustees Ltd..: NCLAT answers simple yet important questions

The judgment was pursuant to an appeal filed by the Corporate Debtor (Neelkanth Township & Construction Pvt. Ltd.) against the order of the National Company Law Tribunal, Mumbai Bench (“NCLT”) directing the commencement of insolvency proceedings against the Financial Creditor.

The NCLAT has cleared the answer to several grounds, predominantly dealt with the following:

  1. Is a petition for initiation of Corporate Insolvency Resolution process barred by time i.e. does the Limitation Act, 1963, apply to the initiation of Corporate Insolvency Resolution process?
  2. Is a Debenture Holder a Financial Creditor?
  3. Incomplete application in terms of Section 7(3)(a) of Insolvency and Bankruptcy Code

National Company Law Appellate Tribunal (“NCLAT”) in Company Appeal (AT) (Insolvency) No. 44 of 2017 (Appeal) dealing with the applicability of Limitation Act, 1963 (Limitation Act) has observed that Limitation Act does not apply to proceedings under Insolvency and Bankruptcy Code.

The Financial Creditor assailed the impugned order of the NCLT on several grounds, amongst which one of the grounds was that Insolvency Application was a time barred debt and hence cannot be enforced by filing an application for Corporate Insolvency Resolution Process. The Financial Creditor contended that the claim of Corporate Debtor are completely time barred as the Debenture Certificates were due for redemption as far back as in the years 2011, 2012 and 2013 respectively; consequently, the application filed in the year 2017 is hopelessly time barred.

The NCLAT held that that in the absence of any provision in IBC, the Limitation Act, 1963 would not be applicable to initiation of Corporate Insolvency Resolution Process. The NCLAT further observed:

“…….There is nothing on the record that Limitation Act, 2013 is applicable to Insolvency and Bankruptcy Code. Learned Counsel for the appellant also failed to lay hand on any of the provision of Insolvency and Bankruptcy Code to suggest that the Law of Limitation Act, 1963 is applicable. The Insolvency and Bankruptcy Code, 2016 is not an Act for recovery of money claim, it related to initiation of Corporate Insolvency Resolution Process. If there is a debt which includes interest and there is default of debt and having continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted.”

From the above it can be inferred that the NCLAT has treated the cause of action of non-payment of debt including interest as a continuous cause of action, thereby holding that no limitation period could expire hence the Law of Limitation would not apply to the Insolvency Application.

The second contention of the Financial Creditor was that Urban Infrastructure Trustees Ltd. is not a Financial Creditor as defined in Section 8(7) of the Insolvency and Bankruptcy Code; the Financial Creditor contended that “no financial debt” is owed to the Corporate Debtor. It was argued by the Corporate Debtor that the Debenture Certificates forming basis of claim for the alleged Financial Creditor do not fall with the definition of ‘financial debt’ as envisaged in Section 5(8)(c) of the Insolvency and Bankruptcy Code. It was further argued that since the Debenture Certificates issued were either carrying zero interest and/or one percent interest and the same were not disbursed against the consideration for time value of money as provided in Section 5(8)(c) of the Insolvency and Bankruptcy Code. Lastly it was also argued that the Debentures were merely an investment and hence do not come within the meaning of ‘financial debt’

However, the NCLAT held that section 5(8)(c) makes it clear that a debenture comes within the meaning of financial debt. Thus, in the present case, the amounts owed on maturity of debentures would be a financial debt. The NCLAT after discussing the definitions observed:

“28.   Clause (c) of sub-section (8) of Section 5 deals with any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.”

Lastly Section 7(3)(a) provides, “(3) The financial creditor shall, along with the application furnish—(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;”

The Insolvency & Bankruptcy Code and the Insolvency & Bankruptcy Board of India has not specified any other record or evidence of default which may be furnished. Further, as there was no record of default recorded with the information utility, it was contended that the application filed was incomplete. However, the NCLAT rejected the argument, holding that a procedural requirement could not frustrate the substantive provision of law. Failure of the Board to frame regulations could not be lead to inability of the adjudicating authority from dealing with application for initiation of insolvency resolution process.

The NCLAT also referred to the Rule 41 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 whereby a Financial Creditor is required to make an application in accordance with prescribed form – 1. Part V of the said form prescribes the particulars that need to be provided as part of the application. The NCLAT ruled that in absence any regulation framed by the Board, the evidence of default, records and documents prescribed under Part V of the Form – 1 will be sufficient to determine default of debt under Section 7 of the IBC. Regulation 8 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 was also relied upon to substantiate the documents and records the Financial Creditor could rely upon to prove a claim.

The current law of Insolvency and Bankruptcy has changed the position of law from the previous stands of the Courts in line of the laws laid under Companies Act, 1956 including the winding up proceedings. The prayer for winding up was previously considered only if the unpaid debt could be legally recovered in law, and the if the unpaid debt was hit by the bar of Limitation Act, 1963 then such winding up petition was not maintainable, though now the position is changed.

The present judgment of the NCLAT has clearly changed the scope of initiation of Insolvency Proceedings and has settled that any debt even if hit by the bars of limitation can be used to initiate Insolvency Proceedings against the Corporate Debtor.

The present judgment of the NCLAT was challenged in the Supreme Court though; the Apex Court dismissed the Civil Appeal keeping the question of law viz. whether the Limitation Act would apply to this proceeding, open.

The Citizenship (Amendment) Bill, 2016: An amendment in furtherance to the election promises of the ruling party

Since the inception of the Constitution, citizenship and immigration laws have been a delicate subject in India. Whenever influx of immigrants and refugees, owing to domestic instability in the neighboring countries increases, a need for revising the citizenship law arises. Dr. B. R. Ambedkar once commented on citizenship laws, “Except one other article in the draft constitution, I do not think that any other article has given the drafting committee such a headache as this particular article. I do not know how many drafts were prepared and how many were destroyed as being inadequate to cover all the cases which it was thought necessary and desirable to cover.”

The Citizenship (Amendment) Bill, 2016 (hereinafter referred to as “Bill”) was introduced by Minister of Home Affairs, Mr. Rajnath Singh on 19th July, 2016 in the Lok Sabha. The objective of the bill is to make amendments to the existing Citizenship Act, 1955 (hereinafter referred to as “Act”). The Citizenship Act, 1955 outlines different modes of acquiring Indian Citizenship, such as, by birth, by descent, by registration, by naturalization and by incorporation of territory. In furtherance it also specifies the conditions and restrictions for attaining Indian citizenship, termination of Indian citizenship and deprivation of Indian Citizenship. The Act has been amended five times since its enactment.

The new Bill seeks to make drastic changes in the citizenship and immigration norms of the land by relaxing the requirements for attaining Indian citizenship. The key change that the Bill seeks to amend is the definition of ‘illegal immigrant’. The Act prohibits illegal migrants from acquiring Indian citizenship. It defined an illegal migrant as a foreigner; (i) who enters India without a valid passport or travel documents, or (ii) stays beyond the permitted time. The Citizenship Act, 1955 prohibits illegal migrants from acquiring Indian citizenship, though the Bill amends the Act to provide that the following minority groups will not be treated as illegal migrants: Hindus, Sikhs, Bhuddhists, Jains, Parsis and Christians from Afghanistan, Bangladesh and Pakistan. However, to get this benefit, they must be exempted from the following: (i) the provisions of Passport (Entry into India) Act, 1920, an act that mandates foreigners to carry passports; (ii) the application of the provisions of the Foreigners Act, 1946, an act which regulated the entry and departure of foreigners in India.

The Act provides for a person to apply for citizenship by naturalization if he/she meets certain qualifications. One of these is that the person must have resided in India or served the central government for a certain period of time: (i) for the 12 months immediately preceding the application for citizenship, and (ii) for 11 of the 14 years preceding the 12 months period. Now, the Bill seeks to reduce the requirement of 11 years to acquire “citizenship by naturalization” to only 6 years of ordinary residence for the abovementioned exempted illegal migrants/minorities.

At present the Act provides that the central government may cancel registration of Overseas Citizen of India on various grounds, including; (i) if the Overseas Citizen of India has registered through fraud, or (ii) if within five years of registration, the Overseas Citizen of India was sentenced to imprisonment for two years or more. The Bill adds one more ground for cancelling registration, that is, if the Overseas Citizen of India has violated any law in the country (India). The widening of ground for cancelling registration of Overseas Citizen of India will include violation of any law in the country, but clarity must be sought on whether minor violations such as over-speeding etc. should result in cancellation of registration.

The ruling party in its election manifesto during 2014 had promised to grant citizenship to Hindus from Muslim majority countries. The idea was to welcome persecuted Hindus from around the world to seek refuge in India which is a natural home for such Hindu minorities. In furtherance to their election manifesto the ruling party putting upon themselves the responsibility of these Hindu minorities has introduced the Bill to accommodate them in India. But the government by proposing the amendment has invariably violated the un-codified refugee policy of the nation and equality that Article 14 of the Constitution of India provides for. The basic primary policy of the un-codified refugee policy of the nation was that the refugees would return back to their homeland once normalcy prevailed in their homeland. Further Article 14 guarantees equality to all persons, citizens and foreigners. It only permits laws to differentiate between groups of people if the rationale for doing so serves a reasonable purpose. The Statement of Objects and Reasons of the Bill does not explain the rationale behind differentiating between illegal migrants on the basis of the religion they belong to.

Speaking about the Bill it is pertinent that the Assam Accord of 1985 be mentioned herein. The Assam Accord of 1985 was the second significant attempt to cloak religion with citizenship laws. The massive wave of immigrants from Bangladesh had altered the demographic structure of Assam, leading to staggering growth of the Muslim population. Unchecked immigration and a dwindling Hindu population caused resentment amongst native Assamese and thus the Assam Accord of 1985 clearly states that illegal migrants heading in from Bangladesh after March 25, 1971, would be deported. Now the Bill contradicts the Assam Accord and thus has given birth to political unrest and turbulence in the State.

India has been regularly making efforts towards illegal minorities. India does not have any provision awarding refugee status to migrants. Currently, there is no specific law governing the Government’s stance for dealing with the refugees. Moreover, India is not a signatory to the 1951 UN convention of the status of refugees and the 1976 Protocol for to the status of refugees. However, under the provisions in the Act, the government under certain set of instructions can grant Long Term Visa to migrants. Now with the proposed amendment would tweak this Act to broaden its perspective in providing the above mentioned minorities not just Long Term Visa but also qualifying them from citizenship. Similarly the Supreme Court in Committee for C.R. of C.A.P. v. State of Arunachal Pradesh directed the Government of India and Arunachal Pradesh to grant citizenship to eligible persons from these communities and to protect their life and liberty and further prohibited discrimination against Chakmas and Hajongs (ethnic group) of Bangladesh

The Citizenship (Amendment) Bill, 2016 when passed would definitely be of immense benefit to the minorities, who fled from Pakistan, Afghanistan and, Bangladesh, however the Bill should not only look at specific minorities but must look at victimized minorities of all denominations who have or will make India their home, and thus accordingly the Bill shall be upholding the essence of Article 14 and the principle of Secularism enshrined in the Constitution of India. There is much a slip between the cup and the lip, the Bill has only been introduced in the Lok Sabha and has a long arduous journey before it is amended, passed and enacted. Before concluding, a seed of thought for the reader is what if Pakistan initiated offering, Indian Muslims, citizenship on the ground that they are a persecuted minority?

SpicyIP

Advocate

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