VHVK E Newsletter June 2022
Jun 2022
Volume VI Issue 3
VHVK Law Bulletin
We are pleased to bring to you this third issue of VHVK Law Bulletin for 2022. The current issue covers the following:
- Dishonour of cheques issued as “security” for payment obligations subject to criminal liability when payment obligation subsists (Supreme Court)
- Persons under investigation entitled to cross-examine witnesses SEBI relies on (SEBI Appellate Tribunal)
- Writ petition against government agency to question contractual decisions rejected, litigant referred to arbitration (Supreme Court)
- Competition Commission orders investigation of Zomato and Swiggy, in response to complaint from National Restaurants Association of India
- Employees of corporate debtor must actively work during insolvency resolution to qualify for top priority in disbursement of liquidation assets (Supreme Court)
- Government of Karnataka directed to make a decision on application for approval of diploma in nursing courses (Karnataka High Court)
Criminal prosecution for dishonour of cheques issued for “security” purposes can proceed
The Supreme Court confirmed criminal prosecution is maintainable for dishonour of cheques issued as “security” for payment obligations. In doing so in Sunil Todi vs State of Gujarat,1 the Supreme Court noted the drawer owed money to the payee, which deposited the cheque for collecting the balance due to it.
Under a contract for supply of uninterrupted power, the customer issued a cheque to the supplier with the endorsement the cheque is “to be deposited after confirmation only for security purpose.” Ongoing payments for power supply were to be made under a Letter of Credit (LC) to be arranged by the customer. The customer failed to arrange an appropriate LC as required by the supplier and it terminated the power supply contract after a few months. To collect the amounts due for the power supplied until termination, the supplier deposited the cheque for payment. The cheque was returned by the customer’s bank with the endorsement “payment stopped.”
Challenging the criminal prosecution commenced by the supplier for cheque dishonour, the customer argued it had only issued the cheque for “security” purposes; as such, there can be no offence under the Negotiable Instruments Act, 1881 for dishonour of the cheque. The Supreme Court rejected the argument, noting the customer owed money for the power sold by the supplier. The ruling in Sunil Todi v Gujarat reaffirms that when payment is due and cheques issued by persons owing money are dishonoured, courts are unlikely to be influenced by finely worded clauses that aim to restrict remedy.
Right of persons under SEBI investigation to cross-examine witnesses affirmed
In Rana Kapoor v Securities & Exchange Board of India (SEBI),2 the SEBI Appellate Tribunal held a person under investigation is entitled to cross-examine witnesses SEBI relies on in the investigation proceedings. The ruling, which underscores the quasi-judicial character of SEBI investigations, protects persons under investigation and can assure a fair adjudication.
In Rana Kapoor, the case involving the controversial Yes Bank Ltd and its former Managing Director & CEO Rana Kapoor, SEBI Appellate Tribunal considered the procedural propriety of SEBI investigation of alleged irregularities in the sale of Yes Bank bonds to investors. The Show Cause Notice (SNC) issued by SEBI relied mainly on the statements of witnesses and their emails. Despite requests, SEBI denied Rana Kapoor an opportunity to cross examine the witnesses. This was challenged in SEBI Appellate Tribunal. In allowing Rana Kapoor’s plea to cross examine the witnesses, SEBI Appellate Tribunal followed the recent ruling of the Supreme Court in SEBI v Takano.3 In Takano, the Supreme Court ruled that persons under investigation are entitled to cross examine witnesses and this right is available even during investigation before a final decision is made by SEBI in the matter under investigation.
Writ challenge to contract termination by government agency rejected
Termination of a project contract and encashment of bank guarantee by Gujarat Housing Board were questioned in a writ petition by a company that had secured the contract. Reversing the Gujarat High Court decision, the Supreme Court in Gujarat Housing Board v Vandemataram Projects Pvt Ltd,4 ruled these issues cannot be the subject of a writ petition and referred the parties to arbitration.
Issues such as termination of contracts and encashment of bank guarantees involve factual aspects that require detailed investigation. In their writ jurisdiction, High Courts generally adopt a summary procedure that may not be appropriate for contractual disputes, especially when a contract provides for arbitration. This is not to overlook several cases where litigants have been successful in filing writ petitions in High Courts to question government decisions in contractual matters.5 Given the mixed trend, it is necessary to be mindful of the factual issues involved and the ruling in Gujarat Housing Board underscores the risks in filing writ petitions in High Courts to seek redress in contractual disputes.
Competition law investigation launched against Zomato, Swiggy
Acting on a complaint filed by the National Restaurants Association of India (NRAI), the Competition Commission launched an investigation of the business practices of leading online food delivery companies, Zomato and Swiggy.6 According to the complaint, the two companies together hold 95 percent market share and they abuse their market dominance by engaging in several anti-competitive practices that are in breach of the Competition Act, 2002 (section 3).
The anti-competitive practices NRAI alleges against Zomato and Swiggy are mainly the following.
- Compulsory bundling of food delivery services with listing on Zomato and Swiggy websites
- Concealment of the identity of food purchasers despite liability of restaurants to the purchasers to whom the food is sold
- Inclusion of affiliated brands on online restaurant lists and according preferential treatment to affiliated brands vis-à-vis other restaurants
- Arbitrary and one-sided termination provisions in contracts
- Insistence on exclusive listing with Zomato/Swiggy
- Preventing restaurants from offering lower prices for sales on other channels
- Imposing deep discounts and excessive commission terms on restaurants
The investigation launched by the Competition Commission is, clearly, an important development; it can have serious consequences for the market power of tech companies such as Zomato and Swiggy and their hold on small enterprises that rely on the tech platforms for business in the e-commerce age. It remains to be seen how the issues are resolved as the investigation progresses.
Employees must have actively worked during insolvency resolution for top priority in payment
To qualify for top priority in disbursement of dues, employees of a corporate debtor in liquidation must have actively worked during the period the debtor was under insolvency resolution. Mere employment status is not adequate for inclusion in the top tier under the Insolvency & Bankruptcy Code, 2016 (section 5(13)). This was the Supreme Court ruling in Sunil Kumar Jain v Sundaresh Bhatt.7
When a corporate debtor is put into liquidation following the failure of the insolvency resolution, the Insolvency & Bankruptcy Code (IBC) prioritizes disbursements from the liquidation assets. In the order of ranking, top priority is given to insolvency resolution costs and liquidation costs. Insolvency resolution costs include operating expenses a corporate debtor incurs during the resolution process (IBC section 5(13)). The inclusion of running costs in the top bracket aims to facilitate continued operations when a debtor undergoes insolvency resolution and check business disruption.
The question in Sunil Kumar Jain v Sundaresh Bhatt was whether the wages of the litigating employees of the corporate debtor (ABG Shipyard Ltd) qualify as running costs and qualify for first priority. Affirming the National Company Law Appellate Tribunal’s decision, the Supreme Court held that only the wages of workers that actively worked during insolvency resolution qualify for the top bracket. They will be in the first tier for disbursement from the liquidation assets. The wages of other workers would be covered by the second priority (IBC section 53).
The Supreme Court decision is consistent with the obvious legislative intention of IBC – to assure business continuity by according top priority to running costs incurred during insolvency resolution. Employees that do not contribute to business operations during this phase would come second in the priority order, for disbursement from liquidation assets (IBC section 53).
Karnataka government directed to decide on nursing schools’ application
Allowing a writ petition from nursing schools, the High Court of Karnataka in J P I Dass School of Nursing v State of Karnataka8 issued directions to the state government to decide on the applications submitted for approval of Diploma in General Nursing & Midwifery courses. A batch of nursing schools from across the state approached the High Court seeking directions on their applications that had been submitted in 2019. The government had not taken any action on the applications citing intervening developments.
With the introduction of the National Health Policy 2017, there was a move to upgrade nursing education and training from a diploma course to a 3-year bachelors’ degree. With this development, the government of Karnataka did not take any action on the applications received in 2019 for approval of the Diploma in General Nursing & Midwifery course. In 2020, the plan to enhance nursing education to a bachelors’ degree was put on hold, pending further examination of the complexities involved in the transition – mainly, availability of infrastructure to effect immediate change. The decision to suspend the switch to bachelors’ degree eliminated the impediment to grant of approval for the diploma course. Despite the change in policy, the state government failed to take act on the applications the nursing schools had submitted in 2019.
Considering the policy adopted in 2020 not to disturb the diploma courses in nursing for the present, the High Court directed Karnataka government to decide on the nursing schools’ applications for approval within 8 weeks. The case underscores the reality that, quite often, inaction by officials forces the public to approach courts to goad the government into action.
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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.