VHVK E Newsletter February 2021

Arbitration clause fails when the contract is superseded by a new one

When a contract providing for arbitration is superseded by a new agreement among the parties, the arbitration clause in the old agreement would no longer survive. The Delhi High Court gave this ruling in Sanjiv Prakash v Seema Kukreja,₁ a case involving family members.

Members of a family holding shares in a company entered into a Memorandum of Understanding (MoU) in 1996 to govern their shareholding relationship. The MoU provided for arbitration for dispute resolution. Sometime later, the family members entered into a Shareholders Agreement (SHA) when an external investor joined the company and the SHA included the investor. The SHA explicitly superseded prior agreements among the parties and its terms were duly included in the company’s Articles of Association.

The question before the Delhi High Court was whether the earlier MoU, in particular the arbitration clause it had, survived after the SHA was concluded. Specifically, whether the MoU continued among the family members. Interpreting the documents, the court noted the family members were also parties to the SHA and ruled that the SHA superseded all prior agreements including the MoU. As such, arbitration remedy provided in the MoU was no longer available to family members that were parties to the MoU.

The ruling in Sanjiv Prakash underscores the importance of crafting appropriate provisions in contracts – in this case, supersession of earlier agreements – and the perils of repeating “boilerplate” clauses without due regard for the context in individual situations.

Delay/laches not applicable when suit for specific performance is not barred by limitation

In Ferrodous Estates Private Limited v Gopirathnam,₂ the Supreme Court enforced specific performance of a contract for sale of immovable property filed om 1981, within the limitation period. Lengthy delays caused by subsequent events did not amount to delay or laches, and did not affect the plaintiff’s remedy.

An agreement for sale of immovable property concluded in June 1980 was the subject of litigation. The putative buyer sued in February 1981 for specific performance of the contract. The seller had failed to apply for the exemption required under the Tamil Nadu Urban Land (Ceiling and Regulation) Act, 1978 (ULCA) which was then in force, and setup the lack of ULCA exemption as the defence for not completing the sale of the property under the agreement.

Litigation continued through the 1990s and ULCA came to be repealed in 1999. The putative buyer under the agreement continued with the suit for specific performance. Pointing out the original failure of the seller to apply for UCLA exemption after concluding the agreement in 1980, the Supreme Court upheld the suit for specific performance the putative buyer filed in 1981. The court relied on the fact that the suit was filed within the limitation period.

With the Supreme Court’s affirmation, litigation that spanned almost 4 decades ended with the buyer prevailing. In an important sense, the outcome vindicates the sustained efforts the buyer made in the face of flagrant breach of contract by the seller in an environment of rising property values.

Corporate debtor’s ex-management fails to stall progress of insolvency resolution

National Company Law Appellate Tribunal (NCLAT), in Sandeep Sharma v Sunil Kumar Jain,₃ rejected the efforts of the former management of a corporate debtor to wind back insolvency resolution proceedings. Characterizing the actions as delay tactics, the Appellate Tribunal ruled against the former management observing it had an opportunity to oppose the resolution plan, if necessary or appropriate, when the plan is considered by the National Company Law Tribunal for sanction.

The Insolvency & Bankruptcy Code, 2016 (IBC) requires insolvency resolution professionals to provide information to former managements of debtor companies on resolution proceedings. The rule is designed to offer managements an opportunity to make a meaningful contribution if they choose to do so. In the Sandeep Sharma case, the Appellate Tribunal noted this had been done. However, the debtor’s former management sought more information including minutes and video recording of creditors’ meetings. The Insolvency Resolution Professional termed this an effort to delay and/or stall creditors’ approval of the resolution plan and rejected the request. The former management challenged the decision in the Company Law Tribunal, and lost.

Affirming the Company Law Tribunal’s order and noting that the former management will have a chance when the Resolution Plan is taken up for regulatory sanction after approval by creditors, the Appellate Tribunal rejected the appeal. The ruling is aligned with the spirit of the new law that aims to avoid delays and speed up insolvency resolution for stressed debtors.

No “slump sale” for capital gains tax purposes when business unit not sold for cash

The Madras High Court held that when a business unit is transferred in exchange for shares issued by the transferee, the transaction will not be a “slump sale” for the purpose of capital gains tax. In delivering this ruling in Areva T&D India Ltd v CIT,₄ the court also considered that the business unit had been transferred under a scheme of arrangement approved by the Calcutta High Court.

Slump sales, meaning sale of entire business units including assets, liabilities and running operations as “going concern” are subject to capital gains tax under the Income Tax Act, 1961 (section 50-B). The values recorded in the balance sheet are adopted for determining the cost of acquisition. The excess of sale consideration over the net worth of the business (assets minus liabilities) is treated as capital gains from the slump sale and is subject to tax.

In Areva T&D, no cash consideration was paid for the transfer of business unit. The transaction was structured as a scheme of arrangement and the unit was merged with another company under sanction from the Calcutta High Court. The transferor received shares from the merging company for the unit that was sold/transferred. Holding that cash consideration is essential for slump sales, the Madras High Court ruled that the transfer of business unit in Areva did not qualify as one.

Transferring business units for non-cash consideration can be useful from the tax perspective. But it remains to be seen whether the government will (a) appeal against the ruling of the Madras High Court or (b) amend the Income Tax Act, to bring non-cash transactions also within the tax net.

Some changes proposed in the Industrial Relations Code, 2020

As reported in our previous newsletter (Dec 2020), the Parliament enacted the Industrial Relations Code, 2020 (IR Code), to replace several industrial and employment-related legislation currently in force. The laws to be repealed include the Industrial Disputes Act, 1947 and the Trade Unions Act, 1926. The new IR Code, which is yet to be implemented, seeks to update and modernize the law in these critical areas. Some important changes to be made under the IR Code are summarized below.

• “Worker” definition expanded to include persons employed in supervisory category and earning up to Rs 18,000 per month (section 2(zr).
• The concept of “industrial dispute” is widened to include disputes of individual workers (section 2(q)).
• “Strike” also has a more expansive meaning. It will cover casual leave taken by 50% or more workers on the same day(s) (section 2(zk)).
• Strikes by workers and lockouts by employers both require 14 days’ notice (section 62).
• Inquiries/investigations against workers must normally be completed within 90 days (section 38).
• New “worker re-skilling fund” to be established with contribution from employers that retrench workers (section 83).
• Trade union having more than 51 percent of the workers of an industrial establishment are recognized as the sole negotiating union (section 14).
• If no trade union qualifies as sole negotiating union, a “negotiating council” will be formed with representatives of unions that have at least 20 percent of the workers as members (section 14).
• Fine amounts for violations are significantly increased. For failure to obtain prior permission for layoffs and retrenchments, fine can range between Rs 1,00,000 and 10,00,000 for the first breach and thereafter, between Rs 5,00,000 and 20,00,000 and/or imprisonment up to 6 months (section 86). For violations of the IR Code not specifically provided, penalty may be up to Rs 1,00,000 (section 86).

Karnataka High Court grants bail for cyber offence (identity theft)

In Aluka Sandra Orewa v Karnataka,₅ the High Court of Karnataka granted bail to a foreign student accused of stealing money from Automatic Teller Machines (ATM) and is charged with committing tech-related offences (identity theft and personation), which are punishable under the Information Technology Act, 2008 (IT Act).

The police had collected evidence that the accused Orewa attached a “skimmer” device to ATM and this enabled tracing the login info for ATM users. With the info, Orewa was able to withdraw cash from ATM by fraudulently using the identity of bank account holders that had funds in their accounts. These actions are offences under the IT Act – identity theft (section 66C) and cheating by personation by using computer resource (section 66D). The police seized the skimmer from Orewa and also her passport. The High Court granted conditional bail to Orewa. The conditions include weekly reporting to the jurisdictional police station and non-interference with witnesses.

Tech-related offences are the new and clearly more serious genre. It is a positive that the police have acquired the expertise needed to identify and track culprits involved in such sophisticated crimes.

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1. Arbitration Petition 4/2020, decided on 22 Oct 2020

2. Civil appeal 13516 of 2015, decided on 12 Oct 2020

3. Company Appeal (AT) (Insolvency) 989 of 2020, decided on 23 Nov 2020

4. Tax Case Appeal 673 of 2018, decided on 8 Sep 2020

5. Criminal Petition 6286 of 2020, decided on 30 Nov 2020