VHVK E Newsletter April 2022
Apr 2022
Volume VI Issue 2
VHVK Law Bulletin
It is our pleasure to bring to you this second issue of VHVK Law Bulletin for 2022. The current issue covers the following:
- Sale of share of joint property by brother to his own family held a sham (Supreme Court)
- RBI administrator invites Expressions of Interest for purchase of Reliance Capital Ltd
- Stricter rules for e-commerce facing ire from trade
- Judicial reticence in interfering with bank guarantees reaffirmed (Bombay High Court)
- SEBI permits stock exchanges to begin trade in Electronic Gold Receipts (EGR)
- Karnataka High Court clarifies jurisdiction for appeals against international commercial arbitral awards
Sale of joint share of property through Power of Attorney, a sham
Considering the overall context, the Supreme Court ruled that sale of a brother’s share in joint property by another brother through a Power of Attorney (PoA) was invalid. In coming to this conclusion in Kewal Krishan v Rajesh Kumar & Others,1 the court relied on the apparent lack of consideration for the sale deed executed by the PoA holder in favour of his own family – wife and sons.
Adjudicating the family feud over a property jointly owned by two brothers, the Supreme Court found in favour of the brother that granted PoA. The sale deeds executed in favour of the PoA holder’s wife and sons were held to be a nullity. The court noted the lack of affirmation of payment of consideration, nor any promise to make the payment in the future. The court also noted the wife and sons that acquired the property through the PoA held by their husband/father had no source of income and lacked resources to pay the consideration.
As such, the court ruled there was no “sale” per the definition in the Transfer of Property Act, 1882 (section 54), which required payment of consideration. The Supreme Court also overruled a technical objection about delay in amendment of pleadings to seek declaration of nullity of the sale deeds. The court held the pleadings as originally framed were adequate for the purpose. This represents welcome continuity with the nascent judicial trend to be less formalistic in dispute adjudication and sidestep technical deficiencies.
Reliance Capital Ltd goes on the market
In an important development, the administrator appointed by the Reserve Bank of India (RBI) for Reliance Capital Ltd called for submission of Expression of Interest (EoI) by interested purchasers for Reliance Capital Ltd.2 The last date for submission was 11 Mar 2022.
Reliance Capital Ltd, founded by late Dhirubhai Ambani in 1986, came under the control of his younger son Anil Ambani in the years following the death of the founder and sensational dispute among the two siblings – Anil and Mukesh Ambani. Reliance Capital that had liabilities of over ₹ 81,700 crores at end of 2021 was placed under an administrator by RBI in November 2021. In early December 2021, formal insolvency resolution proceedings began before the National Company Law Tribunal, Mumbai bench.3
The deadline for submitting EoIs – 11 Mar 2022 – recently passed. There is no formal communication yet from the RBI administrator on offers received in response to the invitation. Information will likely be available soon. It remains to be seen how the complex transaction will evolve over the coming months and how the interests of different stakeholders are handled in the process.
More stringent e-commerce rule proposals meet with opposition
In June 2021, Government of India published proposals to amend E-Commerce Rules.4 The amendments seek to tighten rules for e-commerce enterprises through new restrictions, such as ban on sale of related parties’ products and prohibiting flash sales with deep discounts that only benefit selective groups of sellers. Major amendment proposals are summarized below.
- Ban on sale of related parties’ products: E-commerce entities such as Amazon and Flipkart that sell third party products on their portals must not sell the products of related entities on the portals.
- Flash sales benefiting selective sellers prohibited: Flash sales that limit participation opportunity to a select group of sellers will be taboo.
- Registration requirement expanded: Overseas entities that “intend to operate in India” must also register with the designated government agency. This rule can cover manufacturers/traders outside India that sell products through e-commerce portals in the country.
- Prominent display of country of origin: E-commerce portals must prominently show products’ country of origin at different stages through a sale transaction. This is apparently meant to constantly remind buyers about the overseas origin of products.
- Fallback liability: E-commerce entities would be liable for any product-related failures on the part of sellers of the products. This elevates e-commerce entities from mere intermediaries to active sellers and makes them responsible for product and quality issues.
- More disclosures for cross-selling: For offering related products to buyers, greater disclosures about the sellers of the related products must be provided in the display of such products.
Reportedly there is significant resistance to the proposed rule changes, both from within the government and from large e-commerce entities.5 For instance, ban on sale of related parties’ products on can affect Tatas in selling their group companies’ products on a Tata-owned portal. Obviously, the new rules aim to strengthen protections for small traders, in particular conventional “brick-and-mortar” stores, and shield them from the impact of the novel methods e-commerce giants often adopt to promote sales. It remains to be seen whether and how these changes will find implementation.
No interference with bank guarantees except on very limited grounds
In SKS Power Generation v Canara Bank, Bombay High Court reaffirmed courts’ reluctance to interfere with payments under unconditional bank guarantees.6 Canara Bank furnished guarantees on behalf of Cethar group to SKS Power that had entered into a power plant construction agreement with Cethar. Upon initiation of proceedings under the Insolvency & Bankruptcy Code, 2016 (IBC) against Cethar, the bank attempted to withhold payment demanded under the guarantees.
Under a contract secured by Cethar group to build a power plant in Chattisgarh, it arranged guarantees from Canara Bank totaling ₹ 1.21 crores in favour of SKS Power. The bank extended the validity period of the guarantees at Cethar’s request. Thereafter, unrelated to the construction contract, Cethar was placed under insolvency resolution in the National Company Law Tribunal, Chennai. With this development, Canara Bank denied payment when SKS Power invoked the bank guarantees.
Granting SKS Power’s summary commercial suit, Bombay High Court ordered payment by Canara Bank. In doing so, the court reiterated the settled position that payments under unconditional bank guarantees cannot be stopped in the absence of exceptional reasons, mainly fraud. Commencement of insolvency proceedings against the bank’s customer on whose behalf guarantees are furnished and potential impact on recovery of money by the bank were not reasons to interfere with payments due under unconditional guarantees.
Trade in Electronic Gold Receipts (EGR) can begin
In January 2022, Securities and Exchange Board of India (SEBI) enabled trade in Electronic Gold Receipts (EGR) based on physical deposits of gold. Earlier in September 2021, SEBI approved the Gold Exchange and SEBI (Vault Managers) Regulations, 2021 and in December, Government of India notified EGR as “securities” under the Securities Contracts (Regulation) Act, 1956.7
In the August 2021 issue of VHVK Law Newsletter, we covered SEBI’s plan to facilitate trade in digital instruments that represent physical stocks of gold. Digital instruments, termed Electronic Gold Receipts (EGR), would be backed by physical gold reserves held in vaults that are governed by regulation. EGR purchasers will have the option to redeem their instruments in gold.
To remind, the significance of EGR trade is it provides liquidity for the large quantities of gold many families in India hold. The EGR trade system can transition gold from a sterile asset into a liquid asset, traded in electronic form. This offers holders the ability to convert gold into cash through EGR trade on regulated markets.
Jurisdiction for appeals against awards in international commercial arbitration
In ITI Ltd v Alphion Corporation,8 the Karnataka High Court ruled appeals against awards in international commercial arbitration will be considered by a single judge in the court’s Commercial Division. The ruling resolves apparent confusion on the issue from the combined effect of the rules in the Arbitration & Conciliation Act, 1996 and the Commercial Courts Act, 2015.
The position arising from the ruling of the Karnataka High Court is summarized below.
- Single judge in the Commercial Division of the High Court will consider appeals filed under the Arbitration & Conciliation Act, 1996 against arbitral awards in international commercial disputes.
- All such appeals will be considered by the single judge in the first instance, regardless of the value of the subject matter (pecuniary jurisdiction). The bifurcation applicable under the Commercial Courts Act, 2015 and the rule that cases involving more than Rs 15 lakhs must be considered by a bench of two judges is not valid for appeals under the Arbitration & Conciliation Act, 1996 against awards in international commercial arbitration proceedings.
- Second appeals against the orders of a single judge in the Commercial Division in appeals against arbitral awards in international commercial arbitration disputes will be considered by the Commercial Division Appellate Bench comprising two judges.
- Similarly, appeals against the orders of a single judge in other applications under the Arbitration & Conciliation Act, 1996 – for interim orders (section 9) or to set aside arbitral awards (section 34) will be considered by the Appellate Bench of the Commercial Division.
The ruling of the Karnataka High Court clarifies the ambiguity on the appropriate forum to file appeals against awards in international commercial arbitration, from the combined application of the forum rules in Arbitration & Conciliation Act and the Commercial Courts Act, and the related question about second appeals.
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VHVK Law Bulletin is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.