VHVK E Newsletter December 2021
Dec 2021
Volume V Issue 6
VHVK Law Bulletin
In this sixth and final issue of VHVK Law Bulletin for 2021, we are pleased to present your information the following legal developments:
- Letter of Intent is not a binding contract except in limited circumstances (Supreme Court)
- Home-buyer-creditors denied interim protection against project promoter when Insolvency Resolution Plan is pending approval by National Company Law Tribunal (Supreme Court)
- Securities & Exchange Board of India (SEBI) fine-tunes rules on listed companies’ schemes of arrangement
- Courts can grant interim relief even after appointment of arbitrators (Supreme Court)
- Resolution applicants cannot revisit insolvency resolution plans approved by creditors (Supreme Court)
- Mere directorship not adequate to sustain criminal proceedings involving companies (Supreme Court)
No binding contract arises from Letter of Intent, generally
Examining the wording of the Letter of Intent (LoI) and related materials including parties’ conduct, the Supreme Court concluded in South-Eastern Coalfields v S Kumar Associates1 penalty could not be levied under the terms that was meant to govern the contract required for the work. Parties had not executed any contract after the LoI was issued to the contractor, but the contractor had commenced work with mutual consent, on the basis of the LoI.
In the tender South-Eastern Coalfields (SEC) floated for excavation work at a mining site, the respondent S Kumar Associates (SKA) was awarded LoI and it began work. In under three weeks, before the formal contract could be executed between the parties, SKA suspended work because of equipment breakdown and sought time to procure new equipment. Due to ongoing delay, SEC appointed a new contractor at a higher cost and demanded from SKA the additional cost it would incur. This was among the terms that had been published with the notice inviting the tender. In defence, SKA argued the terms would only apply if a contract had been executed. In the absence of the contract, no penalty could be levied. In accepting the plea, the Supreme Court held that SKA would, however, forfeit the security deposit for its failure to perform the work.
The ruling affirms the limited scope of Letters of Intent. They do not, in general, create binding obligations for parties. This is, of course, subject to relevant factors and the entire context, which would include any other documents exchanged between the parties and their conduct over time.
Home buyers fail in effort to seek interim protection against project promoter
In Anjali Rathi v Today Homes & Infrastructure P Ltd,2 a group of home buyers that had obtained creditors’ approval for the Insolvency Resolution Plan (IRP) were unsuccessful in seeking interim protection against the project promoter’s personal properties that were included in the Resolution Plan. The Supreme Court ruled interim attachment could not be granted prior to approval of the Resolution Plan by the National Company Law Tribunal (NCLT), which is a requirement under the Insolvency & Bankruptcy Code (IBC).
Faced with abandonment of project by the promoter, a group of home buyers that had made sizable payments for purchase of homes successfully put together a Resolution Plan for the insolvent real estate company and procured creditors’ approval for the plan. As the next step, IBC requires NCLT approval of resolution plans passed by the creditors of corporate debtors. The resolution plan in Anjali Rathi involved application of the personal properties of the project promoter who was a director of the corporate debtor. When the resolution plan was pending for NCLT approval, the home buyers sought interim protection through attachment of the director’s personal properties. This was meant to secure their interests and ensure effective implementation of the resolution plan.
The Supreme Court declined interim protection to the home buyers. It cited the approval by NCLT, which was pending, as an impediment. In denying protection to home buyers with this formal reasoning, the court did not consider to the possibility of complications arising in implementing the Resolution Plan, when approved by NCLT. The reasoning in Anjali Rathi is at odds with the spirit of the Supreme Court’s recent ruling in P Mohanraj v Shah Bros Ispat.3 In Mohanraj, the court refused to halt prosecution of directors for cheque dishonour even though the corporate debtor enjoyed statutory moratorium.
Greater transparency and more safeguards in companies’ schemes of arrangements
To strengthen investor protection in the implementation of schemes of arrangement adopted by listed companies, Securities & Exchange Board of India (SEBI) has in place additional rules that supplement the general regime under the Companies Act, 2013 (Chapter XV) that applies to all companies, including unlisted. SEBI rules are included in the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 and its Master Circular.4 In November 2021, SEBI introduced new rules on schemes of arrangement.5
The new rules for listed companies include the following.
- File affirmation with the stock exchanges that no material event impacting valuation of shares occurred between filing the scheme documents with exchanges and the valuation date. This supplements the timeframes applicable under Rule 37 of the Listing Rules – namely, director approval to schemes within 7 days of valuation report and submission of documents to stock exchanges within 15 days from directors’ approval.
- Submit declaration to stock exchanges about any defaults with regard to listed debt securities of companies as well other entities included in schemes of arrangement
- File No Objection Certificate (NOC) to scheme of arrangement from lending banks, financial institutions and debenture trustees
- Timeframes for consolidation and sale of any fractional shares arising from schemes and transmission of sale proceeds to entitled shareholders
- Submission of report to stock exchange on sale of fractional shares and transmission of proceeds
The new rules aim to further strengthen investor protection. Obviously, the rules mean more compliance for listed companies, and call for greater vigilance and diligence from corporate employees and professional advisors that deal with regulatory compliance.
Courts’ jurisdiction to grant interim relief not ousted by appointment of arbitrator
Courts can grant interim relief to parties in deserving cases even if arbitration is in progress between the parties. This position, clearly stated in the Arbitration & Conciliation Act, 1996 (section 9), was applied by the Supreme Court in Arcelor Mittal Nippon Steel Ltd v Essar Bulk Terminal Ltd.6 In affirming grant of interim relief, the court took into account the factual context and the conduct of parties.
In the matter of interim relief for parties subject to arbitration agreement, the Arbitration & Conciliation Act grants dual jurisdiction, to courts (section 9) as well as arbitrators (section 17). Amendments made to the Arbitration Act in 2015 limit court jurisdiction to cases where the alternative remedy for relief (with arbitrators) is “not efficacious.” With this qualification, the amendment restricts – but does not exclude – courts’ jurisdiction to grant interim relief.
In Arcelor Mittal, the Supreme Court upheld grant of interim relief by courts and in doing so, it underlined the scope of courts’ jurisdiction. The Supreme Court noted the application for interim relief was filed even before arbitrators had been appointed and there was no culpable conduct that could disentitle parties from relief. The Supreme Court’s approach can facilitate court intervention in appropriate cases, in the current regime of dual jurisdiction for interim relief to parties subject to arbitration.
Insolvency resolution applicants bound by creditor-approved plans
Insolvency resolution plans approved by creditors are binding on all stakeholders. Affirming this position in Ebix Singapore P Ltd v Committee of Creditors of Educomp Solutions Ltd,7 the Supreme Court held that resolution applicants cannot resile from plans supported by creditors and pending second-level approval from National Company Law Tribunal (NCLT).
Ebix Singapore and connected cases raised the questions whether resolution applicants can walk away from insolvency resolution plans that had been approved by creditors or seek revision of terms by NCLT. The Supreme Court answered both questions in the negative. It held that providing options to applicants to withdraw from approved plans/seek revision of terms would not be in accord with the spirit and aims of the Insolvency & Bankruptcy Code, 2016 (IBC) and the timelines it prescribes for distressed debtors’ rehabilitation.
The court ruled withdrawal of proceedings can only be with 90 percent vote from creditors, as provided in the IBC (section 12A). It is possible to interpret the Supreme Court’s ruling in Ebix that NCLT’s approval is a formal procedure, more or less. In granting approval, NCLT must take resolution plans as approved by creditors and cannot make/permit any changes to plans. Any changes would require creditors’ approval as provided in IBC.
Directors cannot be routinely subject to criminal proceedings involving companies
In Ravindranatha Bajpe v Mangalore Special Economic Zone Ltd,8 the Supreme Court affirmed, once again, the established position that mere directorship is not adequate to sustain criminal proceedings against company directors when no specific implicating materials are produced against them. This aims to check the known tendency to initiate criminal proceedings against directors to put them under pressure. The Supreme Court reiterated the principle of caution in dealing with such efforts.
In Ravindranath Bajpe, the offences alleged by a property owner all related to his property – criminal trespass, intimidation, and mischief. The accused individuals were directors/executives of the companies that were jointly building underground pipelines. The jurisdictional magistrate in Mangalore had issued summons to all the accused persons based on a sworn statement from the complainant. The Supreme Court noted the bland allegations that had been leveled against the individuals arraigned as accused and the complainant’s failure to state specifically how they were involved in the alleged acts of demolition of a compound wall on his property and felling of trees. Holding the allegations inadequate to initiate/sustain criminal proceedings, the court upheld the discharge orders that had been granted to the accused individuals.
The ruling in Ravindranatha Bajpe underscores, once again, that initiation of criminal proceedings against company executives and directors must not be treated lightly. Concrete material both about the offences of which complaint is made and implicating the individuals accused of committing the offences are essential to sustain criminal prosecution.
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Best Wishes to You All from VHVK Law for a Great New Year 2022!
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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.