VHVK E Newsletter April 2021
Apr 2021
Volume V Issue 2
VHVK Law Bulletin
Welcome to the second issue of VHVK Law Bulletin for 2021, which features the following:
- Effect of arbitration clause in unstamped agreement referred to larger bench (Supreme Court)
- Protection for new managements of corporate debtors and thresholds for homebuyers to initiate bankruptcy action against promoters and builders upheld (Supreme Court)
- New rule in the making for more frequent financial reporting by unlisted companies (Government of India, Ministry of Corporate Affairs)
- Unpaid rent is not operational debt under Insolvency & Bankruptcy Code (National Company Law Appellate Tribunal)
- Data gathering and services for geographic mapping (geospatial data) liberalised (Government of India, Department of Science & Technology)
- For breach of contract by real estate developers, apartment buyers can receive higher amount of damages than stipulated in contracts (Supreme Court)
Arbitration clause in unstamped agreements, validity still open
In NN Global Mercantile Pvt Ltd v Indo Unique Flame Ltd,1 the clause on arbitration for disputes was included in a sub-contract that was unstamped. A plea was raised that arbitration was invalid because it was provided in an unstamped agreement. Differing with the ruling in Vidya Drolia v Durga Trading Corporation2 that arbitration cannot be invoked in the situation, a 3-judge bench of the Supreme Court of India referred the issue to a larger bench.
In N N Global v Indo Unique, the 3-judge Bench took the view that arbitration clauses in agreements represent distinctive/independent agreements in themselves, and arbitration agreements do not attract stamp duty. Therefore, arbitration clauses in unstamped agreements would be valid and binding. In any case, defect due to non-payment of stamp duty can be cured by paying the requisite duty and fine. As such, arbitration provision in an unstamped contract would still be valid and enforceable.
A difficulty was another 3-judge bench of the Supreme Court held very recently (in December 2020) in Vidya Drolia that arbitration clauses are parts of the contracts in which they were included. They are not independent contracts. Disagreeing with the ruling in Vidya Drolia (2020), the bench in N N Global (2021) referred the matter to a 5-judge bench. The outcome remains to be seen.
An option in dealing with the current uncertainty on arbitration provisions in unstamped contracts is to pay the appropriate amount of duty and fine, before invoking the arbitration remedy. This can obviate technical challenges to arbitration because of the non-payment of stamp duty.
IBC protections for new managements and eligibility thresholds for homebuyers valid
In Manish Kumar v Union of India,3 the Supreme Court upheld the validity of some amendments made to the Insolvency & Bankruptcy Code, 2016 (IBC) under the IBC Amendment Act, 2020. The court rejected the challenge brought by real estate purchasers to the minimum threshold required for initiating insolvency proceedings in real estate projects and protection from criminal prosecution for new managements of corporate debtors. Rejecting the argument that the amendments violated constitutional rights of real estate purchasers, the court affirmed their validity.
- IBC Amendment Act, 2020 introduced a requirement in the IBC Code (section 7) that allottees in real estate projects can initiate insolvency resolution proceedings against project companies only if either 100 allottees or 10 percent of the total number of allottees join to bring the action. Referring to the sharp increase in the volume of cases filed by individual allottees, the court upheld the new rule treating it “reasonable, minimal and proportionate.” With this development, real estate buyers that are unable to launch collective action under IBC must seek remedy under consumer protection and/or real estate laws.
- Another safeguard introduced for corporate debtors is immunity from criminal prosecution when there is a change of management in an insolvency resolution proceeding. Section 32A introduced by the IBC Amendment Act, 2020 protects new managements from prosecution for offences committed before their time. The Supreme Court held this to be a reasonable safeguard, consistent with the ameliorative goals of IBC – to speedily resolve insolvency and facilitate business turnaround.
Companies Act amended to permit more frequent financial reporting by unlisted companies
Presently, unlisted companies must prepare yearly financial statements, and submit them to shareholders and also file with the Registrar of Companies. Companies Act, 2013, as amended in 2020 introduced a new provision (section 129A) that empowers government to place specific classes of unlisted companies under more rigorous disclosure obligations. The provision was brought into effect in January 2021.4 It allows the government to require “periodic” financial reporting by specified unlisted companies.
“Periodic” is not defined in the new rule. Probably, the plan is to require specified unlisted companies to prepare and submit quarterly financial reports similar to listed companies, or half-yearly reports. Specified companies must not only prepare more frequent financial statements, also get them reviewed/audited and file with the Registrar of Companies. The number of private companies in the country runs into lakhs, and an important question is what types of private companies will be targeted for additional disclosure.
Clearly, the new reporting obligations will be onerous and expensive for the classes of private companies that will be covered by the rule. Hopefully, there will be a meaningful consultative process in specifying the classes and a clear explanation of the need for additional disclosures. In the absence of adequate justification, the new rule will likely invite legal challenge in courts.
Unpaid rent is not operational debt, NCLAT reiterates
Property owners whose rent is in arrears are not operational creditors, and they cannot initiate insolvency resolution proceedings against corporate debtors under the Insolvency & Bankruptcy Code (IBC section 9). National Company Law Appellate Tribunal (NCLAT) reaffirmed this position in Promila Taneja v Surendri Design Private Limited.5 Under IBC two types of creditors – financial (mainly, lenders) and operational (mainly, sellers of goods and services) – can initiate proceedings for insolvency resolution of corporate debtors. In determining whether unpaid property owners would be operational creditors when rent is in arrears, NCLAT ruled rent arrears are not operational debt and property owners cannot bring insolvency resolution proceedings for default by corporate debtors. To clarify, property owners have not claimed they are covered by the other class – namely, financial creditors.
In Promila Taneja v Surendri Design (2020), NCLAT followed the earlier ruling in Ravindranath Reddy v Kishan6 that property owners with unpaid rent are not operational debtors. Additionally in Promila Taneja, there was also evidence of serious dispute between the parties about the continuance of the lease. At any rate, the position applied by NCLAT effectively shuts out property owners with unpaid rent from seeking relief under IBC. This cannot be termed an outcome consistent with the goals of IBC. It remains to be seen whether the matter is carried in further appeal to the Supreme Court.
Rules liberalised for geographic mapping data collection & services
To encourage and strengthen private sector initiatives in geographic mapping activities, the government recently issued guidelines that relax many existing restrictions.7 Major changes, summarized below, include abolition of pre-approval and relaxation of the rule on “restricted areas” that were earlier prohibited for mapping.
- The Guidelines enable mapping activities by Indian entities. Permitted activities include collection, generation, preparation, dissemination, storage, publication, updating and/or digitization of geospatial data and maps.
- Indian entities are defined to include Indian citizens, government entities, registered societies, statutory bodies, Indian companies or LLP owned/controlled by resident Indian citizens.
- Mapping activities will no longer require prior approval. Instead, eligible Indian entities must comply with a self-certification procedure to ensure they function within the parameters of the new Guidelines.
- In the earlier regime, “restricted areas” (mainly, defence establishments) were off limits to private mapping. The concept of “restricted areas” is now dropped. Instead, the Guidelines adopt the test of “sensitive attributes”, which is again mostly about military facilities. Sensitive attributes cannot be shown on maps. Sensitive attributes are defined as data associated with location such as latitude, longitude and elevation/depth of a point or its co-ordinates, and any other data which may give additional meaning to such data.
- An inter-ministerial committee will be established with representatives from relevant departments. It will be responsible to govern and promote the Geospatial Data sector and adjudicate any disputes that arise from the identification of Sensitive Attributes.
Easier access to satellite imaging and online mapping facilities, led by Google maps, are now realities. This development, to some extent, makes the opening up of mapping activities to the private sector inevitable. The move also blends with the shift in emphasis in India in the recent decades, generally away from the government and the public sector to the private sector. The new regime has the potential to spawn significant private initiatives in geospatial data collection and dissemination.
Property buyers not limited to contracted amount of damages for breach by builders
In a decision that strengthens buyers in real estate projects, the Supreme Court ruled they can be awarded damages higher than the amount of liquidated damages specified in contracts with builders. In a batch of cases filed by apartment buyers in Bangalore, the court delivered this verdict in Arifur Rahman Khan v DLF Southern Homes.
A group of apartment buyers in a project in Bangalore suburbs filed a complaint in the National Consumer Forum about delays in delivery of possession and breach of representations regarding the amenities to be provided in the project. The Apartment Buyers Agreement, a standard document prepared by the builder, provided for payment of liquidated damages by the builder @ ₹ 5 per square foot of built area per month, for delay in delivery of possession. National Consumer Forum upheld the liquidated damages clause included in the agreement and dismissed the complaint of the property purchasers.
Reversing the National Forum’s decision, the Supreme Court noted the standard contract was unilateral and did not reflect a fair bargain. Stressing the philosophy of consumer protection laws, the court ruled that higher damages can be awarded to consumers in appropriate cases. With this reasoning, the court awarded damages of 6 percent per annum for the delay in delivery of possession, to be paid within one month and further damages if payment was not made in time. The Supreme Court decided the Arifur Rahman case under the old Consumer Protection Act, 1986. The ruling sets the tone for the implementation of the new Consumer Protection Act, 2019, which further strengthens consumers and represents an improvement over the 1986 Act in safeguarding consumer interests.
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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.