VHVK E Newsletter April 2021

Curtailed redemption rights for mortgaged properties affirmed

The Supreme Court affirmed the curtailment of owners’ rights to redeem properties seized under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) (section 13). In Celir LLP v Bafna Motors P Ltd, ₁ the court relied on the new regime effective 2016 which extinguishes owners’ right to redeem seized properties on publication of auction notice for the properties.

The SARFAESI Act, enacted in 2002, aims to speed up recovery of loans provided by banks and financial institutions. Lenders are empowered to take possession of mortgaged properties and bring them to auction sale for recovery of dues. SARFAESI Act also provides some flexibility for borrowers to redeem properties even after seizure until sale was complete in favour of buyers. This position prevailed until the 2016 amendment.

SARFAESI (Amendment) Act, 2016 restricted owners’ right of redemption to the publication of auction notice for seized properties. Applying the amended rule, the Supreme Court in Celir LLP rejected the property owners’ plea for redemption and affirmed the right of the auction purchaser to obtain valid title to the property.

Mediation Act, 2023 comes into effect

On 14 September 2023, the government notified the Mediation Act, 2023. With this development, pre-litigation mediation is now mandatory for all disputes, except for non-commercial disputes involving governments. A vital step to promote dispute resolution through non-formal, non-adversarial, alternative channels, the nascent Mediation Act reflects the traditional method followed in India.

Salient features of the Mediation Act are outlined below.

• Compulsory pre-litigation mediation is applicable to all individuals resident in India and companies and other bodies corporate, either incorporated or doing business in India.
• Mediation is equally applicable to commercial disputes involving government at various levels – central, state and local.
• Parties are free to choose mediator(s) and the procedure for mediation, including online proceedings.
• No prescribed or special qualifications are applicable to mediators.
• Mediation proceedings must conclude within 120 days, subject to further extension(s) of 60 days maximum.
• The technical rules of the Indian Evidence Act, 1872 and the Code of Civil Procedure, 1908 do not apply to mediation.
• Mediation agreements are enforceable in the same manner as court decrees.

The rules governing mediation aim to check the known problems with adversarial, procedure-and-technicality driven dispute resolution systems India inherited from colonial British rule. Indeed, the limitations of conventional dispute resolution systems are increasingly realized in Canada and the United States as well; efforts are underway to transition to more efficient, non-adversarial systems.

No mandatory rule for pre-deposit of fine in cheque dishonour appeals

There is no automatic or mandatory condition for pre-deposit of 20 percent of the fine/compensation amount in appeals against conviction for the offence of cheque dishonour. Clarifying this in Jamboo Bhandari v MP State Industrial Development Corp, ₂ the Supreme Court ruled appellate courts can impose the condition only when it is appropriate to do so.

In Jamboo Bhandari, the appellants were convicted for cheque dishonour under the Negotiable Instruments Act, 1881 (NI Act) (section 138). Under section 148 of the NI Act, persons appealing against conviction can be required to pre-deposit 20 percent of the fine/compensation amount determined by the trial court. In with the appeal filed by the drawers of the cheque, the appellate court suspended their conviction subject to deposit of 20 percent of the fine amount. In doing so, the appellate court interpreted the rule on pre-deposit under section 148 as mandatory.

Allowing the appeal filed against the ruling of the appellate court and affirmed by the High Court of Madhya Pradesh, the Supreme Court clarified the pre-deposit rule is not automatic or compulsory. It is an issue for appellate courts to determine in individual cases as appropriate.

New agreement extinguishes arbitration provided in the old version

When parties to a contract resolve disputes through a Memorandum of Understanding and effectively repeal the contract, the provision for arbitration in the original agreement is extinguished. With this ruling in B L Kashyap & Sons v Mist Avenue P Ltd, ₃ the Delhi High Court refused to interfere with the decision of the arbitrator.

B L Kashyap involved a construction contract and disputes between the parties. They entered into a Memorandum of Understanding (MoU) that outlined revised terms and also stated the parties’ intention to enter into a new contract. Alleging the client breached the MoU terms, the contractor initiated arbitration against the client. On reviewing the terms of the MoU between the parties, the arbitrator ruled the arbitration clause in the agreement did not survive with the execution of the MoU. In particular, the arbitrator relied on the stated intention to cancel the original agreement and the reference in the MoU to legal remedies generally, without specifically mentioning arbitration.

Rejecting the challenge the contractor brought to the arbitrator’s ruling, the Delhi High Court observed courts’ jurisdiction under section 34 of the Arbitration and Conciliation Act, 1996 is limited. On reviewing case-law on novation (when parties to a contract revise the terms), the court concluded there was no patent illegality in the arbitrator’s ruling. The decision is instructive on the care to be exercised in revising the terms of existing contracts and documenting new terms of business relationships.

Insolvency & Bankruptcy Code overrides Electricity Act

Arrears for electricity charges due from corporate debtors in liquidation are equally governed by the order of priorities specified in the Insolvency & Bankruptcy Code, 2016 (IBC) (section 53). IBC overrides the recovery procedure provided in the Electricity Act, 2003 (sections 42, 45 and 56) and the Uttar Pradesh Electricity Supply Code, 2005 (Clauses 4.3 and 6.15). With this ruling in Paschimanchal Vidyut Vitran Nigam Ltd v Raman Ispat P Ltd, ₄ the Supreme Court affirmed IBC’s supremacy in insolvency proceedings.

Paschimanchal Vidyut Vitran Nigam, a government-owned electricity vendor, attempted to sidestep IBC and directly recover electricity arrears from Raman Ispat, a corporate debtor in liquidation. The power vendor attempted to use the mechanism provided in the Electricity Act and Uttar Pradesh Electricity Code, to recover from the assets of the debtor in liquidation.

Rejecting the effort of the power vendor, the Supreme Court held IBC prevails over other legislation, including special legislation such as the Electricity Act. The ruling affirms the broad and sweeping effect of the overriding provision in IBC (section 238). This can promote orderly liquidation of debtors in a single consolidated proceeding and obviate parallel proceedings that carry the risks of confusion and delays.

Technical issues of change in business form not material in recovery suits

In Stove Kraft P Ltd v Pradeep Stainless Steel India P Ltd, ₅ the Karnataka High Court rejected an appeal against the judgment and decree granted in favour of Pradeep Stainless Steel to recover unpaid sale consideration from Stove Kraft. Relying on Stove Kraft’s admission of liability in its balance sheet, the court paid little attention to the technical defence it raised regarding change in the business form of Pradeep Stainless Steel – from a partnership firm to a private company after the sale transaction.

In resisting the summary suit filed for recovery of sale amount, Stove Kraft argued it had purchased the materials from the partnership firm of Pradeep Stainless Steel; as such, the new private company lacked privity of contract with Stove Kraft. Pradeep Stainless Steel P Ltd failed to prove it was the successor of the partnership firm and had acquired the firm’s assets and liabilities.

Rejecting the argument, the trial court decreed the suit in favour of Pradeep Stainless Steel P Ltd relying on the admission of liability by Stove Kraft in its balance sheet. The Karnataka High Court affirmed the ruling and rejected the appeal preferred buy Stove Kraft. The rulings underscore courts’ increasing readiness to disregard technical defences raised in the effort to defeat/delay legitimate claims.