CASE IN POINTVOL. III VII DECEMBER 2016

2

Foreword

It gives me immense pleasure to present to you the sixteenth issue of Case in Point, a quarterly update on the recent legal developments in the field of Dispute Resolution.

In the present issue we have discussed the law on demonetization.

Among the recent case laws, in this issue we have examined the decisions of the Supreme Court in the case of (i) IDBI Trusteeship Services Limited v. Hubtown Limited, wherein the Court has laid down guidelines to be followed by courts whilst deciding on whether or not a leave to defend a summary suit ought to be granted; (ii) A. Ayyasamy v. A.Paramasivam & Ors., wherein the Court held that mere allegations of fraud do not make a dispute non-arbitrable; and(iii) Vimal Kishore Shah v. Jayesh Dinesh Shah, wherein the Court held that disputes arising out of Trust Deeds and Indian Trusts Act, 1882 were non-arbitrable.

We have also analysed the decision of the Delhi High Court in the case of (i) Raffles Design International India Pvt Ltd. v. Educomp Professional Education Ltd., wherein the High Court held that provisions of the Arbitration and Conciliation (Amendment) Act, 2015 are applicable to all arbitration related court proceedings instituted after the Amendment Act came into force, even if the related arbitration was commenced prior to the Amendment Act; and(ii) McDonalds India Private Limited v. Vikram Bakshi and Ors., wherein the High Court set aside its earlier order which had granted an anti-arbitration injunction as an ad interim relief in a case where the parties had contractually agreed to arbitrate under the London Court of International Arbitration Rules.

The issue is concluded by a section on other legal updates in the field of dispute resolution.

Feedback and suggestions from our readers would be appreciated.

Please feel free to send your comments to caseinpoint@cyrilshroff.com.

Regards,Cyril ShroffManaging Partnercyril.shroff@cyrilshroff.com

1. Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02

2. The Law on Demonetization . . . . . . . . . . . . . . 03

3. IDBI Trusteeship Services Limited v.Hubtown Limited . . . . . . . . . . . . . . . . . . . . . . 06

4. A. Ayyasamy v. A.Paramasivam & Ors. . . . . . 09

5. Vimal Kishore Shah v. Jayesh Dinesh Shah . . 10

6. Raffles Design International India Pvt Ltd. v. Educomp Professional Education Ltd. . . . . . . 12

7. McDonalds India Private Limited v. Vikram Bakshi and Ors . . . . . . . . . . . . . . . . . . 15

8. Legal Updates . . . . . . . . . . . . . . . . . . . . . . . . . 17

3

With effect from November 9, 2016, the Government of India (“the Government”) vide notification no. 2652 dated November 8, 2016 (“Notication”) withdrew the legal tender status of five hundred and one thousand rupees banknotes of the existing Mahatma Gandhi Series (“Demonetised notes”). Since then and till date, there has been a heated debate on whether the demonetisation has been a wise move, is it in the interest of the Country, will it achieve its objective, or would the move prove to be counter-productive. None of those questions are the subject matter of this Article. In this Article we set out the legal regime of demonetisation and highlight cases challenging the Government 's decision on demonetisation and rulings made thereon.

Reserve Bank of India Act, 1934 (“RBI Act”), under which the Reserve Bank of India (“RBI”) is established, empowers the RBI to issue bank notes

1and imposes an obligation upon it to exchange notes. The RBI has been conferred with the responsibility of regulating the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and also generally to operate the currency and credit system of the country. In a nutshell the RBI has two main functions namely, the issue function and the

2banking function.

Section 22 of the RBI Act, confers the RBI with powers to issue bank notes. Section 24 deals with the issue of demonetisation of bank notes. Section 24(2) s t a t e s t ha t t he Gove rnmen t may, on t he recommendation of the Central Board, direct the discontinuance of issue of bank notes of such denominational value as it may specify in this behalf. Section 26 deals with the issue of 'legal tender

character of notes'. Section 26(2) of the RBI Act, states that on recommendation of the Central Board of the RBI, the Government may by notification in the Official Gazette, declare with effect from a date specified in the notification, any series of bank notes of any denomination to cease to be legal tender. Section 39 imposes an obligation on the RBI to supply different form of currency. Thus making it clear that the RBI is the sole note issuing authority and that it has the obligation to exchange those notes, except when it

3is relieved of that obligation.

The current measure of demonetisation is not unprecedented. Bank notes have been demonetised twice in the past, first in 1946 and the second time in 1978. Before we deal with the route adopted by the present Government, let us first briefly take a look at the route adopted by the Government with regard to the issue of demonetisation in the past.

In 1946, the legal tender of the then circulated Rs. 1,000 and Rs. 10,000 banknotes were withdrawn. This was undertaken by promulgating the High Denomination Bank Notes (Demonetisation) Ordinance, 1946 by exercising powers under Section 72 of the Government of India Act, 1935. To overcome the argument that the aforestated Ordinance was temporary in nature, it appears that in 1956, the RBI Act was amended and Section 26A was inserted and thereby bank notes of the denominational value of Rs. 500, Rs. 1000 or Rs. 10,000 issued before January 13, 1946, were declared not to be legal tender.

In 1978 also, the Government promulgated the High Denomination Bank Notes (Demonetisation) Ordinance of 1978 which was later replaced by the High Denomination Bank Notes (Demonetisation)

1 Somi Horam Tongkhul Naga v. Union of India & Ors., AIR 1980 Gau 40 2 Somi Horam (Supra)3 Somi Horam (Supra)

THE LAW ON DEMONETISATION

4

Similarly, petitions challenging the constitutional validity and the legality of the Notification have also been challenged before the Supreme Court of India. In one such petition, though the Supreme Court initially refused to interfere with the Government's decision to demonetise bank notes and simply sought an affidavit as to what urgent extra measures could be taken to put an end to the severe inconvenience people faced, it has now agreed to hear those petitions on the challenge to the constitutional validity of the decision of the Government (i.e. the Notification). However, no substantial orders have been passed.

Some of arguments advanced against demonetisation is that the Notification was in excess of the powers given to the Government under Section 26(2) of the RBI Act, as the provision empowers the Government to declare that “any series of bank notes of any denomination shall cease to be legal tender”, the meaning of the words “any series” can only refer to the series number on the denomination of a bank note and not “all” bank notes. The petitions also raise arguments to the effect that demonetisation can only be implemented through the legislation and not by Notification. The Petitioners have also sought for the recommendations of the Central Board of Directors of the RBI to be made public. It has also been contended that demonetization is violative of the right to freedom of trade and business, a right guaranteed under Article 19(1)(g) of the Constitution of India.

It appears that the Government has defended its actions stating that the Notification is a mere 'declaration' providing that currency notes of a certain denomination shall cease to be legal tender. As per the Government such declaration can be made simply by way of a Gazetted notification. The Government has distinguished between 'demonetisation' and 'currency being declared as not legal tender'. While the former would make keeping of a currency note which is not a legal tender illegal, the latter would not. By adopting this route of demonetisation, the Government has bought some time for the public to adapt to the changes. The Government intends to follow the Notification with an amendment to the RBI Act in order to give demonetisation its legal form.

Act, 1978 (“Act”) and thereby demonetised bank notes of the denominational value of Rs. 500,Rs. 1000 or Rs. 10,000 ( though notes of denominational value of Rs. 1000 & 10,000 were demonetised in 1946, they were reintroduced in 1954). The Act overwrote the provisions of Section 26 of the RBI Act, by virtue of which the Government was empowered to demonetise bank notes without the recommendation of the Central Board of Directors of the Reserve Bank of India. However, in the year 2000, currency notes of Rs. 1,000 were reintroduced while Rs. 5,000 and Rs. 10,000 currency notes have never seen light of the day after the second demonetization in 1978. More recently, in 2014, the RBI demonetised all banknotes printed before 2005.

I n 2 0 1 6 , t h e G o v e r n m e n t , a c t e d o n t h e recommendations of the Central Board of Directors of the Reserve Bank of India and departed from the traditional route of the legislation and withdrew the legal tender status of five hundred and one thousand rupees denominations of bank notes in exercise of the powers under Section 26(2) of the Act. It appears that the reason for the Government adopting the non-legislative and non-amendment route is to ensure confidentiality of the decision so that its objective i.e. countering corruption, black money and financing of terrorism through counterfeit currency is not defeated by leak of information.

The present action of demonetisation, like in the past, has been challenged in various courts across the country. In the challenges made to the Ordinances in

4the past have been dismissed by the Courts.

One of the first petitions which challenged the present action of demonetisation was a petition by M. Seeni Ahmed who sought directions from the Madras High Court to direct the Government to reverse its decision of demonetisation on the grounds of it being violative of right to life as guaranteed under Article 21 of the Constitution of India. The Court while dismissing this petition, has upheld the constitutional validity of the Notification and has observed that demonetisation was a policy decision and that “it was good for the

5country”.

4 B. Ram Lal v. State, AIR 1954 All 758; Hansraj Moolji v. The State of Bombay, AIR 1957 SC 497; Somi Horam (Supra); Sridhar Achari & Ors. v. Emperor, AIR 1948 All 182 5 M.Seeni Ahmed v. The Union of India & Ors., W.P.(MD) No. 21634 of 2016 and W.M.P.(MD) Nos. 15454 to 15456 of 2016 decided on November 10, 2016.

5

On November 17, 2016 the Government requested the Supreme Court to bar the High Courts from entertaining public interest litigations pertaining to demonetisation and grant a stay on all such proceedings pending before the High Courts across the country. The Government took the plea that since the Supreme Court was already examining the issues and passing orders, the high courts and lower courts be restrained from hearing matters pertaining to the

6 Live Law, Restrain HCs From Hearing Demonetisation PILs: Centre To SC; Decision Tomorrow, (November 17, 2016) available at: http://www.livelaw.in/restrain-hcs-hearing-demonetisation-pils-centre-sc-decision-tomorrow/7 Live Law, [Breaking] Demonetisation: SC Refuses To Stay Proceedings In HCs But Issues Notice To All PIL Petitioners On Transfer Plea, (November 23, 2016) available at http://www.livelaw.in/breaking-demonetisation-sc-refuses-stay-proceedings-hc-issues-notice-pil-petitioners-transfer-plea/

Notification to prevent unnecessary confusion and 6chaos. The Supreme Court, however, refused to stay,

observing that “there may some individuals seeking some immediate reliefs we cannot shut them out

7suddenly.”

Considering the plethora of issues surrounding the current measure of demonetisation, the resolution of the issue will have to await a pronouncement from the Supreme Court.

6

The Supreme Court has in its recent decision in IDBI Trusteeship Services Ltd. v. Hubtown Limited reviewed the law in relation to unconditional leave to defend in the case of summary suits. The judgement also brings to light some important aspects of layered transactions entered into by foreign investors and how courts view such transactions as a whole.

The Dispute

The transaction involved Nederlandse Financierings – Maatschappiji Voor Ontwikkelingslanden N.V. (“FMO”), a Dutch Development Bank which in 2009 and 2010 invested INR 418 crores in the form of 10% equity shares of the total shareholding and 3 compulsorily convertible debentures (“CCDs”) of Ind i an Company, Vinca Deve lope r s Pv t . Ltd.(“Vinca”). Vinca was further required to invest the sums invested in the CCDs into its wholly owned subsidiaries, Amazia Developers Pvt. Ltd. (“Amazia”) and Rubix Trading Pvt. Ltd. (“Rubix”) in the form of Optionally Convertible Debentures (“OPCD’s”). Upon conversion of FMO’s CCDs, FMO would become a 99% shareholder of Vinca.

In respect of the OPCDs, two Debenture Subscription and Debenture Trust cum Mortgage Deeds (“Debenture Trust Deeds”) were executed on December 1, 2009. IDBI Trusteeship Services Ltd. (“IDBI”) was appointed as a Debenture Trustee in the Vinca- Amazia and Vinca-Rubix transaction to safeguard Vinca’s interests by way of these Debenture Trust Deeds. Note that CAM acted for IDBI in the litigation. FMO was not a part of this transaction and was not party to the Debenture Trust Deeds. However, IDBI was to act as per instructions of FMO’s Nominee

Directors on Vinca’s board. IDBI also entered into a Deed of Corporate Guarantee (“Corporate Guarantee”) in respect of honouring these OPCD’s with Vinca’s parent company, Hubtown Limited (“Hubtown”).

In 2011, Amazia and Rubix began to default in respect of their liability in relation to OPCDs under the respective Debenture Trust Deeds. IDBI issued notices of default to Amazia and Rubix in May 2012 and redemption notices calling upon Amazia and Rubix to redeem all the OPCDs at par value in June 2012. IDBI also invoked the Corporate Guarantee given by Hubtown in August, 2012. Upon failure of Hubtown to honour the guarantee, IDBI filed a summary suit against Hubtown in the Bombay High Court for the sum due under the Corporate Guarantee requesting a summons for judgment.

Note that Order 37 of the Code of Civil Procedure, 1908 (“CPC”) pertains to summary procedure for a defined class of suits, e.g. suits upon bills of exchange, promissory note, guarantee etc. Under the mechanism defined under this order, a plaintiff may apply for her suit to be decided summarily. If the Court is satisfied that the defendant has no defence, or the defences raised are patently frivolous, the Court is entitled to pass judgment and decree forthwith, without any trial. Unlike other suits, in such cases the defendant is required to seek leave of the court in order to defend the suit. In order for such leave to be granted the Court will look at whether prima facie a good defence has been made out.

In order for the summary suit to convert into a regular suit with leave to defend, Hubtown, the defendant in the summary suit argued that it had a good defence to the suit since the aforesaid transaction structure was

1 Civil appeal No. 10860 of 2016, Supreme Court

Note on IDBI Trusteeship 1Services Ltd v. Hubtown Ltd.

7

violative of the Foreign Direct Investment (“FDI”) Policy/Foreign Exchange Management Act (“FEMA”) guidelines and the Corporate Guarantee being an integral part of this illegal structure could not be enforceable in law. The Bombay High Court by way of its order dated May 8, 2015 ruled in favour of the defendant, granting Hubtown unconditional leave to defend this suit.

IDBI appealed against this decision before the Supreme Court. In its judgment of November 15, 2016, the Supreme Court set aside this order of the Bombay High Court. The apex court decided that leave to defend the suit would be granted to Hubtown only if it agreed to deposit in the Bombay High Court the principal sum invested by FMO, or gave security for the said amount within a period of three months from the date of the order. This decision also analyses the circumstances in which leave to defend will be granted by a court and when such leave can be unconditional.

Decision of the Bombay High Court

The Bombay High Court was of the prima facie view that FMO’s routing of its FDI of INR 418 crores to Amazia and Rubix through its parent Vinca (which according to the Court was merely a holding company established not for use of FMO’s FDI by Vinca but to be invested in OPCDs of Rubix and Amazia with a “fixed return”) was a colourable device and was structured to enable FMO to secure repayment of the principle sum invested at a rate of return of 14.5% per annum thereon, contrary to the FDI policy and the statutory FEMA Regulations. This was a way to circumvent the law. Since the transaction was considered i l legal and prohibi ted by law, consequently the Corporate Guarantee issued by Vinca being part of the said structure was also unenforceable (although the guarantee may have ostensibly been in favour of Vinca). The Corporate Guarantee, in the Court’s estimation was given to ensure that FMO received its FDI back with interest through Vinca. The court thus concluded that the Defendant had raised triable issues which required the adjudication of further evidence at the time of final

disposal. On this basis the Court granted Hubtown unconditional leave to defend.

Decision of the Supreme Court

In appeal, the Supreme Court set aside the order of the Bombay High Court finding that the payment under the Corporate Guarantee is to the debenture trustee i.e. IDBI, an Indian Company, for and on behalf of Vinca, another Indian Company and that there was no violation of the FDI Policy/FEMA Regulations, given that all entities involved were Indian parties. The Supreme Court thus concluded that the defendant had not raised a substantial defence to the claim made in the suit. Even if a triable issue may be said to have been raised on the application of the FEMA Regulations, nevertheless, there is substantial doubt as to the Defendant’s good faith and the genuineness of such a triable issue.

Violation of the FDI Policy/FEMA

Per the Reserve Bank of India (“RBI”) Circular No. 86 of January 9, 2014 a non-resident investor cannot be guaranteed any assured exit price at the time of making his investment/agreement and has to exit at the price prevailing at the time of exit, subject to lock-in period requirement, as applicable. Thus foreign investors are not permitted to enter into transaction which provide them ‘assured returns’. Further, the FDI Policy (incorporated into the FEMA guidelines) only permits FDI in townships, construction of houses etc by way of equity or compulsorily convertible instruments in Indian companies. The primary contention on the basis of which the defendants requested leave to defend was that the entire transaction when looked into as a whole, was colourable with the object of enabling FMO to secure a fixed return of its FDI investments. Since the Corporate Guarantee was an integral part of this alleged illegal structure, the same could not be enforced.

The Bombay High Court had relied on the judgment of the Supreme Court in Vodafone International

2Holdings BV v. UOI to judge the ‘entire transaction as

2 (2012) 70 Com Cases 369

a whole’ and not ‘adopt a dissecting approach’ (in the context of the argument that the Corporate Guarantee being treated as a separate transaction). The Bombay High Court took the prima facie view that the a complex structure had been devised in order to ensure that FMO received its FDI amount along with a fixed rate of return, which was illegal and prohibited by law and consequently the bank guarantee issued by Vinca being part of the structure was unenforceable. The Supreme Court disagreed with this finding. It examined the two transactions distinctly to hold prima facie that neither were in violation of Indian laws. The Supreme Court held that since the investment of FMO in Vinca was for the purchase of shares and CCDs, the transaction by itself was not violative of the FEMA regulations. The payment under the Corporate Guarantee which was being enforced by way of this suit was between two Indian companies and hence also not violative of the FEMA regulations. Though upon conversion of its CCDs, FMO would become a 99% shareholder of Vinca, this would not affect the legality of the transaction. Further, the Supreme Court went ahead to say that at the stage that FMO wishes to repatriate its funds, it would have to obtain the permission of RBI, and then RBI may deny such repatriation at that stage.

The issue of assured return in FDI has been a contentious issue and has also recently come up in the Tata-Docomo dispute.

As stated above, the applicable provision is Order 37, Rule 3 of the CPC. Rule 3 lays down the parameters of when leave to defend can be granted as also the general procedure in summary suits. Prior to its amendment in 1976, Rule 3 of Order 37 was a brief one and did not provide such parameters in detail. Rule 3, as amended, lays down a more detailed

procedure in summary suits (including timelines) and when leave to defend unconditionally can be granted. In the case of Mechelec Engineers v. Basic Equipment

3Corporation (“Mechelec”), which is a pre amendment case, the Supreme Court had held, that if a defendant has a defence which is practically “sham” or “moonshine” then the court may only allow defence to proceed if the amount claimed is secured in court, thereby granting conditional leave to defend. On the other hand another pre amendment decision of

4Milkhiram (India) (P) Ltd. v. Chamanlal Bros (“Milkhiram”) held that if the Defendant raises a defence that is “plausible but improbable”, the trial judge may impose conditions including furnishing of security. Hubtown argued that the (comparatively liberal) standard laid down by Mechelec of conditions being imposed only on defence being a “sham” would be applicable. Since Hubtown’s defence was not such, the Bombay High Court was correct in granting it unconditional leave to defend. IDBI on the other and argued that the appropriate standard is that laid down by Milkhiram.

Agreeing with IDBI, the Supreme Court (Justice Nariman) agreed that the correct standard was that as laid down in Milkhiram, i.e. that Hubtown’s defence was plausible but improbable since the transaction was between Indian parties and FEMA restrictions would not apply. On this basis, the Supreme Court was of the view that the Plaintiff needed to be protected and unconditional leave to defend could not be granted. The Court set aside the Bombay High Court decision and the leave to defend was granted with the condition that the Defendant would have to deposit the principal sum of INR 418 crores invested by FMO or provide security of an equal amount.

3 (1976) 4 SCC 6874 AIR 1965 SC 1698

8

9

1 AIR 2016 SC 46752 (2010) 1 SCC 723 (2014) 6 SCC 677

A. Ayyasamy v. A.Paramasivam & Ors

The Supreme Court in the case of A. Ayyasamy v. 1A.Paramasivam & Ors. , holds that mere

allegations of fraud do not exclude arbitrability of

disputes.

Facts:

The Parties to the case were carrying on a partnership

business. The partnership deed contained an

arbitration clause for resolving disputes arising

therefrom. Notwithstanding the same, upon disputes

arising between the Parties, the Respondents filed a

civil suit for relief. The Petitioner objected to the

maintainability of the Suit by taking out an

application under Section 8 of the Arbitration and

Conciliation Act, 1996 (“Act”). The Respondents

opposed the Section 8 Application on the grounds that

since allegations of fraud were attributed to the

Petitioner, the matter was not arbitrable. In support

of its submissions, the Respondents relied

upon the judgment of the Supreme Court in2N. Radhakrishnan v. Maestro Engineers and Ors.

(“N. Radhakrishnan”) case. The Petitioner

countered the Respondents case by contending that

the decision in N. Radhakrishnan's was held to be per

incuriam in Swiss Timing Limited v. Organising 3Committee, common wealth games 2010 (“Swiss

Timing”) case. The trial court did not agree with the

Petitioner's contention and dismissed the Section 8

Application. The High Court upheld the trial court's

order when challenged before it. Being aggrieved the

Petitioner appealed to the Supreme Court.

Decision:

The Supreme Court observed that the Act does not

make any category of dispute non-arbitrable.

However, courts have held that certain categories of

disputes are non-arbitrable and fraud is once such

category. After referring to various decisions of the thSupreme Court and also the 246 Law Commission's

Report, the Supreme Court held that mere allegation

of fraud simplicitor may not be a ground to nullify the

effect of an arbitration agreement between the parties.

It is only in those cases where a court finds that there

are serious allegations of fraud which make a virtual

case of criminal offence or where the allegations of

fraud are so complicated that it becomes absolutely

essential that such complex issues can be decided only

by a civil court after appreciation of the voluminous

evidence, the court can sidetrack the arbitration

agreement and proceed with the suit on merits.

The Supreme Court also held that the decision in

Swiss Timing cannot be said to overrule the

proposition of law laid down in N. Radhakrishnan's

case as the decision in Swiss Timing was decision

under Section 11 of the Act and a decision under

Section 11 of the Act cannot be said to be exercise of a

judicial power and hence does not have a precedential

value.

Analysis:

In our view the above decision is one more pro-

arbitration pronouncement. The decision will not

enable parties to an arbitration agreement escape

arbitration by simply alleging fraud.

10

1 AIR 2016 SC 3889, decided on August 17, 20162 (2011)5 SCC 5323 AI 1965 Calcutta 628

The Supreme Court in the case of Vimal Kishore 1Shah v. Jayesh Dinesh Shah has identied a

seventh category of non-arbitrable disputes i.e. disputes arising out of Trust Deeds and Indian Trusts Act, 1882. The Court held that that such disputes should be added to the list of “well-recognised examples of non-arbitrable disputes” which were identied by the Court's earlier decision in Booz Allen & Hamilton Inc. v. SBI

2 Home Finance Ltd. (“Booz Allen”).

Facts:

An appeal was filed by one set of beneficiaries under a Trust Deed against an order of the Bombay High Court whereby the Court appointed a sole arbitrator to arbitrate the disputes between the two sets of beneficiaries. The Trust Deed (Clause 20) contained an arbitration clause for resolving disputes arising therefrom under the Arbitration and Conciliation Act, 1940. Certain disputes arose between the beneficiaries of the trust and one set of the beneficiaries (“Respondents”) filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) for the appointment of an arbitrator. The set of beneficiaries (“Appellants”) contested the application arguing inter alia that since the beneficiaries were not signatories to the trust deed, there was no enforceable arbitration agreement between them. However, the Bombay High Court allowed the application stating that the beneficiaries were parties to the trust deed and hence had a right to take recourse to the Court for the appointment of an arbitrator. The appeal was filed against this order

invoking the arbitration clause under Clause 20 of the trust deed.

Issue

The basic issue which arose in the appeal was whether a clause in a Trust Deed, which provides for resolving the disputes arising between the beneficiaries of the Trust through arbitration, can constitute an 'arbitration agreement' and whether the application filed by the Respondents for the appointment of an arbitrator could be held as maintainable?

Decision

The Appellants made two submissions primarily,(a) that since the beneficiaries had not signed the trust deed, they could not be held to be parties to the trust deed and (b) that any dispute relating to the affairs and management of the trust including the disputes inter se trustees and beneficiaries could not be decided by an arbitrator under the Act.

The Supreme Court allowed the appeal holding that (a) the Trust Deed which provided for settlement of disputes/differences arising between the beneficiaries of the Trust, does not constitute an arbitration agreement inter se beneficiaries within the meaning of Section 7 of the Act and (b) even if there did exist an arbitration agreement, the dispute specified was not capable of being referred to private arbitration for adjudication on merits. The Supreme Court relied on the decision of the Calcutta High Court in Bijoy

3Bahhav Kundu v. Tapeti Tanjan Kundu wherein a Division Bench had examined the issue of whether

Vimal Kishore Shah v. Jayesh Dinesh Shah

11

trustees could be said to be parties to an arbitration agreement. The Division Bench had concluded that that there was no valid arbitration agreement between the trustees since they had not entered into a written agreement to oust the jurisdiction of the courts. The Court felt that this decision applies squarely to the facts of the present case and in the absence of specific written consent to the arbitration agreement, the beneficiaries could not be considered to be parties to the arbitration agreement.

The Apex Court also referred to its own decision in Booz Allen to determine whether such disputes were capable of being settled through a private forum. The judges discussed the scheme of the Indian Trusts Act, 1882 and concluded that there existed an implied bar on any recourse to a remedy under the Act since the Indian Trusts Act 1882 is a complete code and provided sufficient remedy for deciding disputes in relation to trust deed, trustees and beneficiaries. The Supreme Court accordingly concluded that the disputes in relation to trust, trustees and beneficiaries arising out of a trust deed and the Indian Trusts Act, 1882 are not capable of being decided by the arbitrator

even if there exists an arbitration agreement between the parties.

Analysis

By way of this landmark judgment, the Supreme Court has clearly created another category of disputes which cannot be decided by arbitration. This will now be the seventh category in addition to the six categories of disputes which were already declared non-arbitrable by the decision of the Supreme Court in Booz Allen, namely (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters;( iv ) inso lvency and winding up mat te rs ;(v) testamentary matters (grant of probate, letters of administration and succession certificate); and(vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction.

12

In the case of Raffles Design International India Pvt 1Ltd. v. Educomp Professional Education Ltd., the

Delhi High Court, while allowing a Section 9 petition in a Singapore seated arbitration held that provisions of the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”) are applicable to all arbitration related court proceedings instituted after the Amendment Act came into force, even if the related arbitration was commenced prior to the Amendment Act.

Facts :

Raffles Design International India Pvt. Ltd. (“Rafes/ Petitioners”) and Educomp Professional Education Ltd. (“Educomp/ Respondents”) entered into a Share Purchase Agreement dated March 12, 2015 (“SPA”), whereby it was agreed that shares of Educomp in Educomp Raffles Higher Education Ltd., a JV entity, would be acquired by the Petitioners.

In terms of Clause 15 of the SPA, the parties had agreed to resolve their disputes through arbitration seated in Singapore, with the governing law as Singapore law and arbitration was to be conducted in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (“SIAC”).

Certain disputes arose between the parties. The Petitioners invoked the arbitration clause and initiated arbitration in Singapore and also made a request for appointment of an Emergency Arbitrator under the SIAC Rules. Meanwhile, the Respondents, vide notice dated September 29, 2015, terminated the SPA, alleging that the Petitioners were in repudiatory breach of the SPA.

Pursuant to Petitioners' Emergency application, the Emergency Arbitrator passed an Interim Emergency Award dated October 6, 2015, granting certain interim reliefs to the Petitioners, which was subsequently confirmed by the Arbitral Tribunal. Due to subsequent contravention of the Emergency Award by the Respondents, the Petitioners filed an application seeking interim measures of protection before the Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996 (“the Act”). The reliefs sought in the Section 9 petition were similar to what had been granted under the Emergency Award. The maintainability of this petition was challenged by the Respondents.

Issue :

The questions which arose for consideration before the Single Bench of the Delhi High Court, regarding maintainability were:

(I) Whether the provisions of the Amendment Act were applicable to the present Section 9 petition?

(ii) If the answer to the above is in the affirmative, whether Section 9 of the Act is applicable by virtue of the proviso introduced in Section 2(2)

2of the Act by Section 2 (II) of the Amendment Act?

Arguments :

Before the Delhi High Court, Educomp contended that the present petition is liable to be dismissed as the parties by choosing Singapore as the seat, have

Raffles Design InternationalIndia Pvt Ltd. v. Educomp

Professional Education Ltd

1 Notice of Motion No. 886 of 2013 in Suit No. 331 of 2013, decided on 12.04.2016.2 Section 2(2) of the Act reads as under: “Section 2(2) : This Part shall apply where place of arbitration is in India : Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of

arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act.”

impliedly excluded the applicability of Section 9 of the Act to the present petition and as the SPA was entered into after the judgment delivered in the case of Bharat Aluminium Company v. Kaiser Aluminium

3Technical Services Educomp also argued that by 4virtue of Section 26 of the Amendment Act , the

provisions of the Amendment Act are inapplicable to the present proceedings as arbitral proceedings had commenced prior to the date of commencement of the Amendment Act.

On the other hand, Raffles contended that the purpose for which Section 2(2) was amended was to confer jurisdiction to Indian Courts in respect of Section 9 and 27 of the Act, even if the seat of arbitration is outside India and that expression “subject to an agreement to the contrary”, as appearing in Section 2(2) of the Amended Act is something more than mere choice of law and seat of arbitration. By parties having choosen SIAC Rules for arbitration, it does not in any manner indicate that they have impliedly excluded Part I. The Petitioners also contended that the expression “to arbitral proceedings” appearing in Section 26 of the Act does not apply to proceedings before a Court and that therefore the Amendment Act is applicable to the present petition.

Decision :

In light of the arguments made and case laws referred to by the parties, the Court while holding that provisions of the Amendment Act would be applicable to all arbitration related proceedings commenced after October 23, 2015, even if related arbitration is instituted prior to October 23, 2015, arrived at the following conclusions:

1. Section 26 of the Amendment Act is divided into two parts. The first part is couched in negative as the opening words of Section 26 of the Amendment Act expressly state that the Amendment Act shall not apply to arbitral proceedings commenced in accordance with Section 21 of the Act, before commencement of the Amendment Act (i.e. October 23, 2015), unless the parties agree otherwise. The second

part which is couched in affirmative, which provides that the Amendment Act would apply in relation to arbitral proceedings commenced on or after the date of commencement of the Amendment Act.

2. These two limbs of Section 26 of the Amendment Act are not exhaustive as the first part refers to proceedings commenced in accordance with Section 21 of the Act (i.e. arbitral proceedings in India), prior to October 23, 2015. Therefore Section 26 of the A m e n d m e n t A c t i s s i l e n t r e g a r d i n g applicability of the Amendment Act to arbitral proceedings commenced before October 23, 2015 to which Part I of the Act does not apply.

3. Relying upon the decision of the Apex Court in the case of Thyssen Stahlunion Gmbh v. Steel

5Authority of India, the Court held that the use of the expression 'in relation to' indicates that the legislature intended the second limb of the Section 26 of the Amendment Act, which has much wider sweep covering all proceedings which are connected to arbitral proceedings, whether commenced under Part I or otherwise- including court proceedings. Therefore,the provisions of the Amendment Act applyto Cour t proceedings ins t i tu ted pos t commencement of the Amendment Act.

4. The very purpose of amending Section 2(2) of the Act was to enable a party to approach Courts in India for interim relief in respect of arbitral proceedings held or to be held outside India. The Court after noting the same allowed the present petition and made it clear that choice of foreign law or a foreign seat or foreign institutional rules does not amount to implied exclusion of Section 9 of the Act.

5. The Court also clarified that a party is not precluded from seeking interim measures from a Court merely because it obtained similar order from an arbitral tribunal. The Court held that the Court while examining a similar relief under Section 9 of the Act would be unfettered by findings or view of the Arbitral Tribunal.

3 (2012) 9 SCC 5524 Section 26 of the Amendment Act reads as under: “26. Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but

this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.”5 (1999) 9 SCC 334

13

Adopting a pro – arbitration stance, the Delhi High Court allowed the present petition holding that provisions of the Amendment Act are applicable to all arbitration related court proceedings instituted after the Amendment Act came into force, even if the related arbitration was commenced prior to the Amendment Act.

Analysis :

This decision of the Delhi High Court clarifies that in respect of foreign seated arbitrations, there is no implied bar in respect of all arbitration related court proceedings including under section 9 instituted after the Amendment Act came into force, even if the related arbitration was commenced before the Amendment Act.

This judgment helps to plug in the existing lacuna in as much as in a foreign seated arbitration, an emergency award is unenforceable in India. Therefore, in such cases, the only recourse available to the parties is filing an application under Section 9 of the Act for seeking interim measures of protection in India.

14

15

A division bench of the Delhi High Court in the case of McDonalds India Private Limited (“MIPL”) v.

1 Vikram Bakshi and Ors. has set aside its own single judge bench order whereby it grated ad interim relief in the form of an anti-arbitration injunction in a case where the parties had contractually agreed to arbitrate under the London Court of International Arbitration (“LCIA”) Rules.

Facts:

MIPL, Mr. Vikram Bakshi and a company incorporated by Mr. Vikram Bakshi (“Respondents”) had entered into a Joint Venture Agreement (“JVA”). Under the JVA, unresolved disputes were to be referred to arbitration administered by the LCIA. The Respondents filed a company petition before the Company Law Board (“CLB”) alleging oppression and mismanagement against the MIPL and sought re-instatement of Mr. Vikram Bakshi as Managing Director. The CLB passed an order directing the parties to maintain status quo with respect to their shareholding, board pattern and right of call option.

MIPL then terminated the JVA and instituted arbitration proceedings in LCIA. MIPL also filed an application to refer the parties to arbitration in light of the provisions of the JVA before the CLB. This application was eventually withdrawn. The Respondents applied to the CLB to stay the arbitration proceedings but were denied. The Respondents therefore preferred an application for a temporary injunction to the Delhi High Court, praying in particular for an ad interim injunction against the arbitration proceedings initiated under the LCIA Rules.

The Delhi High Court allowed this application and granted an anti-arbitration injunction citing the following reasons: (i) the arbitration agreement was inoperative or incapable of performance on account of the fact that a CLB petition was pending and a status quo order has been obtained from the CLB; (ii) there would be an overlap in the disputes between the CLB petition and the arbitration proceedings; (iii) the dispute sought to be raised in the LCIA arbitration suffered from forum non-conveniens.

An appeal was filed against this order of the Delhi High Court restraining the MIPL from pursuing arbitration proceedings until the disposal of the suit or until the status quo order of the Company Law Board was vacated. In appeal, the Delhi High Court set aside the order of the single bench thereby revoking the anti-arbitration injunction.

Division Bench's decision:

The Division Bench at the very outset clarified that the single judge bench had erred in its observations on the principle of forum-non-conevniens. The Division Bench held that the principle did not apply to the facts before it because of the following factors: (i) there was no competing court which would be more convenient, a court and an arbitral tribunal were the two available forums, (ii) the subject matter of dispute before the court was different from that before the arbitral tribunal and (iii) the forum of arbitration consciously chosen by the parties as an alternative forum of dispute resolution could not be regarded as an inconvenient forum.

While highlighting the distinction between an anti-suit injunction and an anti-arbitration injunction, the

McDonalds India Private Limited v. Vikram Bakshi

and Ors

16

court observed that the exceptional cases in which arbitrations could be injuncted would be those circumstances in which the very issue was whether or not the parties had consented to the arbitration or the issue of a forged arbitration agreement was at hand. The court for this reason distinguished the decision of Modi Entertainment Network and Another v. W.S.G

1Cricket Pte Limited and Essel Sports Pvt. Ltd. v. 2Board of Control for Cricket in India which pertained

to anti-suit injunctions and placed reliance on the decision of the Albon NA Carriage Co. v. Naza Motor

3Training SDN BHD and Excalibur Venture LLC v. 4Texas Keystone Inc & Others wherein the English

courts had opined on the specific issue of anti-arbitration injunctions.

The court also noted the distinction between the CLB proceedings and the arbitration proceedings which had been omitted by the single judge: the CLB proceedings were initiated for alleged oppression and mismanagement while the arbitration proceedings were initiated upon termination of the JVA and the rights under it. The subject matter of both these proceedings were clearly different, and thus it could

not be said that the pendency of the proceeding before the CLB would render the performance of the arbitration clause inoperative. Relying on the judgment of the Supreme Court in World Sport Group (Mauritius) Limited v. MSM Satellite (Singapore) Pte.

5Ltd the court held that the mere existence of multiple

proceedings was not sufficient to render an arbitration clause inoperative or incapable of being performed.

Finally, the Respondents had also argued that the withdrawal of MIPL’s application before the CLB to refer the parties to arbitration amounted to a waiver of arbitration clause. The court disagreed with this submission pointing out that though the application to refer the parties to arbitration may have been withdrawn, the MIPL had in fact invoked the arbitration proceeding itself; hence it could not possibly amount to a waiver of its rights.

The Delhi High Court's order is in line with the Supreme Court's recent pro-arbitration practice and indicative of the path that the courts should adopt to prevent the unnecessary interference in arbitrations.

1 2003 (1) Arb. LR 533 (SC)2 ILR (2011) V Delhi 5853 2008 (1) Lloyds Law Reports 14 2011 EWHC 1624 (Comm)5 2014 (11) SCC 639

17

Legal Updates

1. Repeal of SICA: As per the notification of the Ministry of Finance dated November 25, 2016 the provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 have come into force from December 1, 2016. This Act repeals the Sick Industrial Companies (Special Provisions) Act, 1985 and dissolves the B o a r d f o r I n d u s t r i a l a n d F i n a n c i a l Reconstruction (“BIFR”) and Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”). The Government has also notified Sections 252 and 255 of the Insolvency and Bankruptcy Code, 2016 which provide that upon dissolution of BIFR and AAIFR, the references pending before these authorities shall stand abated and proceedings can be filed afresh before the National Company Law Tribunal within 180 days from the commencement of these sections.

2. Notication of provisions of the Insolvency Code: the Government by notification has notified certain provisions of the Insolvency and Bankruptcy Code, 2016, which has come into effect from December 1, 2016. These provisions include: Section 196 (giving powers and functions of the Insolvency and Bankruptcy Board of India), Section 197 (constitution of advisory committee, executive committee or other committee of the Board), Section 244 (transitional provisions before constitution of the Board or designation of the financial sector regulator), Sections 246-248, 250-251, 253-

255 (providing for amendment of the Central Excise Act, 1944, the Income- tax Act, 1961, the Customs Act, 1962, the Finance Act, 1994, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Payment and Settlement Systems Act, 2007, the Limited Liability Partnership Act, 2008 and the Companies Act, 2013), Section 252 (bringing the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 into force), Sections 199-207, 208(1) (c) and(e), 208(2), 217-219 (governing Insolvency Professional Agencies), and Sections 4-32 and 60-77 (governing the Insolvency Resolution And Liquidation Process for Corporate Persons).

3. Notication of provisions of the Companies Act, 2013: the Ministry of Corporate Affairs has notified certain sections of the Companies Act, 2013 which has come into effect from December 15, 2016. These provisions include:

§ Section 2(23) - Definition of Company Liquidator

§ Section 7(7)(c) & (d)- Powers of Tribunal against company incorporated by furnishing false information – removal of name of company from register or order winding up of company

§ Section 8(9) - Distribution of remaining assets of Section 8 company after winding up or dissolution

18

§ Section 48 - Variation of shareholders' rights

§ Section 66 - Reduction of share capital

§ Section 226 - Voluntary winding up of company, etc., not to stop investigation proceedings

§ Section 230 [except sub-section (11) and (12)], 231-233, 235-240: concerning merger and amalgamation of companies

§ Sections 270 to 288 and Sections 290 to 303C hapter XX on Winding Up

§ Sections 375 to 378 - Winding Up Of Unregistered Companies

4. The Companies (Transfer of Pending Proceedings) Rules, 2016: the Ministry of Corporate Affairs has notified the Companies (Transfer of Pending Proceedings) Rules, 2016 with effect from December 15, 2016. These Rules provide that:

a. All proceedings under the Act, including proceedings relating to arbitration, c o m p r o m i s e , a r r a n g e m e n t s a n d reconstruction, other than proceedings relating to winding up on the date of coming into force of these rules shall stand transferred to the benches of the Tribunal exercising respective territorial jur i sd ic t ion . However, a l l those proceedings which are reserved for orders for allowing or otherwise of such proceedings shall not be transferred.

b. All applications and petitions relating to voluntary winding up of companies pending before a High Court on the date of commencement of these Rules, shall continue with and dealt with by the High Court.

c. All petitions relating to winding up on the ground of inability to pay its debts pending before a High Court, and where the petition has not been served on the respondent, shall be transferred to the bench of the Tribunal exercising territorial jurisdiction and such petitions

shall be treated as applications under sections 7, 8 or 9 of the Insolvency and Bankruptcy Code, 2016 (Code).

d. All cases where opinion has been forwarded by Board for Industrial and Financial Reconstruction (BIFR), for winding up of a company to a High Court and where no appeal is pending, the proceedings for winding up initiated under the Act, pursuant to Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall continue to be dealt with by such High Court.

e. All petitions filed under clauses (a) and (f) of Section 433 of the Companies Act, 1956 (on the grounds other than inability to pay debts) pending before a High Court and where the petition has not been served on the respondent shall be transferred to the bench of the Tribunal exercising territorial jurisdiction and such petitions shall be treated as petitions under the provisions of the Companies Act, 2013.

f. Pursuant to the transfer of cases as per these Rules, the relevant records shall also be transferred by the respective High Courts to the National Company Law Tribunal Benches having jurisdiction. No fee shall be payable in respect of any proceedings transferred to the Tribunal in accordance with these rules.

5. Amendment to Code of Criminal Procedure: The Code of Criminal Procedure, 1973 was amended in its application to Maharashtra by way of the Code of Criminal Procedure (Maharashtra Amendment) Act, 2015 with effect from August 30, 2016. Section 156(3) and 190 of the Code empower the Magistrate to take cognizance of a case and order a police investigation upon an application by the complainant. The amendment places a restriction on this power of the Magistrate to order an investigation against public servants. It provides that no Magistrate shall order an investigation under these sections against a person who is or was a public servant, in respect

19

of the acts done by such public servant in the discharge of his official duties, except with the previous sanction under section 197. The sanctioning authority must communicate its decision within a period of 90 days from the date of the receipt of the proposal, upon failure of which, the sanction shall be deemed to have been granted.

6. OKU Tech Private Limited v. Sangeet Agarwal 1and Ors. : In this case, the Delhi High Court has

emphasized the importance of the legislative intent in providing strict timelines under the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (“Act”) for filing of Written Submissions. The Court has held that unlike the earlier position in the Code of Civil Procedure, 1908, the Commercial Courts cannot grant extension of time (beyond the 120 days provided for in the Act from the date of service of summons) for filing of a Written Statement.

7. M u m b a i C e n t re f o r I n t e r n a t i o n a l Arbitration (MCIA): India's first international institution for arbitration - MCIA - was inaugurated on October 8, 2016 in Mumbai. The establishment of MCIA is an attempt to make India a hub for arbitration in Asia and replace Singapore and Hong Kong as the preferred destination for arbitrations involving Indian parties. The MCIA has put in place the infrastructure required for conducting arbitral proceedings and also released the first edition of the MCIA Rules, 2016. The Rules, inter alia, provide for the following:

a. Costs of arbitration: The case filing fees is fixed at INR 40,000/- (roughly USD 600); the administration fee constitutes of a fixed component (ranging from INR 50,000-78,50,000) and a variable component (ranging from 0-4.37% of the value of the dispute); the arbitrator's fee also constitutes of a fixed component ( r a n g i n g f r o m I N R 1 , 0 0 , 0 0 0 -1,06,50,000) and a variable component

(ranging from 0-3.75% of the value of the dispute); in case of an application for emergency interim relief: a fixed administration fee of INR 80,000 and Emergency Arbitrator's fee (min. INR 3,00,000, max. 20% of the fee payable to a sole arbitrator calculated as per the schedule of fees) shall be charged.

One of the benefits of choosing MCIA is that the administration costs and arbitrators' fee are very competitively priced compared to those charged by institutions such as SIAC and LCIA.

b. Expedited procedure: If the anticipated amount in dispute is INR 10 crore or more or if the parties agree in writing, the parties may apply for the expedited formation of the arbitral tribunal as well as shortened time period for decidingthe dispute (6 month period – whichi s e x t e n d a b l e i n e x c e p t i o n a l circumstances).

c. Emergency Arbitrator: If the tribunal has not been constituted, in cases of exceptional urgency, the parties may apply to the Registrar in writing for grant of emergency interim relief.

d. Consol idat ion : The Rules a l low consolidation of two or more arbitrations pending under the MCIA Rules, if (i) the parties agree to such consolidation, or (ii) all the claims in the arbitration are made under the same arbitration agreement.

8. Appointment and transfer of judges:

Justice Nishita Nirmal Mhatre was appointed as the Acting Chief Justice of the Calcutta High Court with effect from December 1, 2016 upon retirement of Shri Justice Girish Chandra Gupta, Chief Justice, Calcutta High Court.

Hon'ble Shri Justice Jagdish Singh Khehar, Judge, Supreme Court of India, was appointed as the Executive Chairman of the National Legal Services Authority, with effect from November 19, 2016.

1 Before the High Court of Delhi, CS (OS) 3390/2015, decided on August 11, 2016

DISCLAIMER:

This newsletter has been sent to you for information purposes only and is intended merely to highlight issues. The information and/or observations contained in this newsletter do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice.

The views expressed in this newsletter do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas and should you have any queries in relation to any of the issues set out herein or on other areas of law, please feel free to contact us on caseinpoint@cyrilshroff.com or write to following coordinates:

Cyril Shroff Managing Partner

cyril.shroff@cyrilshroff.com

20

Peninsula Chambers, Peninsula Corporate Park, GK Marg, Lower Parel, Mumbai - 400 013, IndiaTel.: +91 22 2496 4455 Fax:+91 - 22 2496 3666

Other offices: New Delhi, Bangalore, Hyderabad, Chennai and Ahmedabad

Shaneen Parikh Partner

shaneen.parikh@cyrilshroff.com

CONTRIBUTORS TO THIS CIP ARE:

1. Shaneen Parikh

2. Nooruddin Dhilla

3. Shalaka Patil

4. Jeet Shroff

5. Namita Shetty

6. Mohit Advani

7. Preena Salgia

8. Shruti Raina