VHVK E Newsletter August 2022
Aug 2022
Volume VI Issue 4
VHVK Law Bulletin
In this fourth issue of VHVK Law Bulletin for 2022, it is our pleasure to report on the following recent developments in law, with focus on business law issues:
- Time limit of 2 months for filing insurance claims violates Indian Contract Act, 1872 (Supreme Court of India)
- Corporate debtors can raise pre-existing disputes even after 10 days of receiving creditors’ demand notice (National Company Law Appellate Tribunal)
- Competition Commission’s order against Amazon for non-disclosure of business plans in Future Group investment affirmed (National Company Law Appellate Tribunal)
- Mortgagor can redeem property until sale certificate issued to auction buyer under SARFAESI Act (Punjab & Haryana High Court)
- Transactions involving personal relationships outside Commercial Courts’ jurisdiction (Calcutta High Court)
- Insolvency petition not maintainable when creditor has no direct contractual relationship with respondent (National Company Law Tribunal Bengaluru)
Insurers cannot stipulate short time limits for submitting claims
The Supreme Court ruled against the timeframe of 2 months permitted in an insurance contract for filing claims under the contract. In The Oriental Insurance Company Limited v Sanjesh,1 the court held that the time limit is in violation of the ban under the Indian Contract Act, 1872 (section 28) on curtailing legal remedies and exercising contractual rights.
Indian Contract Act, 1872 (section 28) recognizes unequal bargaining strengths of parties that enter into contracts and the possibility that a stronger party may attempt to limit or undermine the other party’s rights and remedies. The ban is wide in scope. It protects not only parties’ right to bring legal proceedings but also safeguards exercise of contractual rights by parties.
Per the contract in Oriental Insurance v Sanjesh, policy holders had to file claims within 1 month from the date when the claim arose. This time limit could be extended by another month. The insurer would not be liable for claims filed beyond the time limit. Under the Limitation Act, 1963 parties to a contract have 3 years to seek remedy for breach of contract. Guided by the principle of the Limitation Act and the prohibition under the Contract Act on curtailment of legal rights, the Supreme Court ruled the shorter time limit specified in the insurance contract invalid.
Pre-existing disputes with creditors can be raised beyond 10 days of receiving notice
In Brand Realty Services Ltd v Sir John Bakeries India Pvt Ltd,2 National Company Law Appellate Tribunal (NCLAT) permitted a corporate debtor to raise a pre-existing dispute beyond the timeframe of 10 days specified in the Insolvency & Bankruptcy Code, 2016 (IBC) (sections 8 &9) to reply to demand notices. The short time of 10 days did not preclude a debtor from raising a dispute that had arisen before the creditor issued the demand notice.
To promote efficiency in adjudication, IBC provides timeframes for each stage of proceedings. When a debtor receives a demand notice, it must pay the creditor within 10 days unless it raises any pre-existing dispute with the creditor. In Brand Realty Services, the notice was delivered to the debtor on 4 May 2019 and the reply was issued on 21 May 2019 – 21 days from the receipt of notice. The reply stated the debtor’s dispute regarding the payment. The creditor launched insolvency action against the debtor and argued the debtor could not raise the dispute in the proceeding because the debtor had not done so within the statutory timeframe of 10 days from the receipt of demand notice.
Rejecting the creditor’s plea, NCLAT held the 10 days timeframe only enabled creditors to bring insolvency actions; it did not preclude debtors from raising disputes that had arisen earlier. As such, the short delay in pointing out the dispute did not matter; the debtor could rely on the dispute in defending the creditor’s claim.
Penalty on Amazon and suspension of approval for Future Group investment upheld
Amazon, the e-commerce behemoth, failed in the National Company Law Tribunal (NCLAT) to overturn the Competition Commission of India (CCI) order on its investments in the Future Group. In Amazon v CCI,3 NCLAT affirmed CCI’s finding that Amazon had not disclosed material information in seeking approval for its investment in the Future Group and also upheld the penalty of ₹ 202 crores CCI imposed on Amazon.
In 2019, Amazon entered into an agreement with the Future Group that owned and operated “Big Bazaar” and other leading brands of retails stores across India. The investment required approval under the Competition Act, 2002 (section 6) because of the volume of investment and the market share held by the parties. After inquiries, CCI granted approval in November 2019. In its application, Amazon presented the investment as mostly passive and stressed the expected gains from the investment. However, Amazon’s internal communications revealed it planned to use the investment in Future Group as an instrument get a “foot in the door” in Indian retail market and leverage its business in India in the future. These “strategic” aims were withheld from CCI; this was in breach of the extensive disclosures required for approvals under the Competition Act. The strategic plans were also not disclosed in reply to queries CCI raised in processing Amazon’s application.
The internal emails revealed Amazon’s strategic plans to use Future Group investment to gain dominance in Indian retail sector and preclude competition. With this revelation, CCI suspended its approval order and also levied penalty of ₹ 202 crores, on the ground Amazon failed to make proper disclosures in its application for Competition Act approval. Agreeing with CCI, NCLAT dismissed Amazon’s appeals against the suspension of approval and the penalty. It is unclear how CCI obtained Amazon’s internal email communications. In any case, the Amazon case illustrates the dynamics of investment by giant companies and underscores the complexities in regulating overseas investments.
Mortgagor’s redemption right continues until issue of sale certificate to auction purchaser
An owner of mortgaged property is entitled to redeem the mortgage and recover the property any time before a sale certificate is issued to an auction buyer. With this ruling in Pal Alloys & Metal v Allahabad Bank,4 the Punjab & Haryana High Court affirmed that owners’ rights continue despite the completion of auction sale of properties under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
In Pal Alloys & Metals, the directors of a private company mortgaged their residential property in favour of the bank, to secure their company’s borrowings from the bank. Upon default by the borrower company, the bank commenced action against the directors’ residential property under the SARFAESI Act and the property was sold to a buyer in an auction. Subsequently, the property owners made a settlement with the bank and tendered the funds before the sale certificate was issued to the auction buyer. However, the bank refused to accept the payment citing delay. The bank relied on SARFAESI Act (section 13, as amended in 2016) and argued the owner’s right to redeem the property was extinguished when auction sale of the property was completed.
Rejecting the argument, the Punjab & Haryana High Court ruled SARFASEI Act only deprived owners of any right to further deal with mortgaged properties when the auction was complete; it did not interfere with owners’ rights to redeem their properties when the sale certificate had not been issued to the buyer. The redemption right subsisted until the sale certificate was issued to the buyer and title transfer was complete. This ruling offers a welcome reprieve small-and-medium business owners who, in general, mortgage their homes to banks for business borrowing.
No commercial dispute in transactions influenced by personal relationships
In Ladymoon Towers P Ltd v Mahendra Investment Advisors P Ltd,5 the Calcutta High Court held that transactions in which parties’ personal relationship parties was instrumental would not be “commercial” in character. Consequently, disputes relating to such transactions cannot be brought to Commercial Courts. This eliminates the stricter procedural rules and shorter time limits that apply to commercial cases.
To ensure speedy resolution of business disputes, commercial Courts established under the Commercial Courts Act, 2015 operate under streamlined procedure, in particular shorter timeframes. Commercial Courts are a part of the ongoing project to make laws business friendly and aid economic growth. In Ladymoon Towers P Ltd, a feature in the loan transaction was the personal relationship between the directors of the two companies. The transaction was, however, commercial in other respects; the loan carried interest and was repayable on a set date. The transaction was also properly documented.
When the borrower defaulted in repayment, the lender brought a recovery action in the Commercial Division of the Calcutta High Court. Arguing the loan had its origin in personal relationship between the directors of the lender and the borrower, a technical objection was raised that the transaction did not give rise to a “commercial dispute” under the Commercial Courts Act, 2015 (section 2(1)(c)).
The Calcutta High Court upheld the objection, and also referred to similar interpretations of “commercial disputes” by the Delhi, Bombay and Madras High Courts, for determining the jurisdiction of commercial courts. The narrow approach leading High Courts across India have adopted in defining “commercial disputes,” arguably, undermines the efficacy of the Commercial Courts Act. Some familiarity between parties and even personal relationships are common in business transactions, more so in a country like India where family-owned companies are a major part of the economy. The restrictive interpretation can be an instrument for persons in default to frustrate/delay remedy for the victims of breach. It remains to be seen if the issue reaches the Supreme Court and/or an amendment is made to the Commercial Courts Act to deal with the prevailing situation.
Debtor’s direct contractual relationship essential to bring insolvency proceeding
Debtors that lack direct contractual relationship with a company cannot bring proceedings under the Insolvency & Bankruptcy Code (IBC). On this basis, National Company Law Tribunal Bengaluru (NCLT) in Sterling & Wilson P Ltd v Embassy Energy P Ltd6 rejected the effort of a subcontractor in a solar energy project that had not received payment for the project work.
Embassy Energy engaged IL&FS Solar Power Ltd to build a 100 MW solar power plant and in turn, IL&FS employed several subcontractors for executing the project. The subcontractors included Sterling & Wilson that was owed almost ₹ 100 crores for the work it completed. With the IL&FS group in bankruptcy protection and a moratorium operating in favour of IL&FS Solar Power, an effort was made by Sterling & Wilson to recover its dues directly from Embassy Energy, the client for which the solar plant had been built. Sterling & Wilson pointed out the power plant became operational and Embassy Energy was earning revenue from the plant.
However, NCLT upheld Embassy’s defence that Embassy had no direct relationship with Sterling & Wilson and it was not liable to make payment to Sterling & Wilson despite the default by IL&FS Solar Power. The ruling stresses the importance of subcontractors securing their interests when operating in complex structures with the involvement of layers of entities. This would require delicate balancing with the reality of competitive markets and challenges in prevailing over rivals.
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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.