ORDER XXI OF CPC & OBSTACLES IN EXECUTION PROCEEDINGS

 

ORDER XXI of CPC & Obstacles in execution PROCEEDINGS

In the very anvil, it may be apt to refer to observation of Supreme Court in a matter reported as Satyawati v. Rajinder Singh, (2013) 9 SCC 491. While quoting the Privy Council‘s judgment of 1872, the Supreme Court has observed that “difficulties of a litigant in India begin when he has obtained a decree‟ and the position has not improved and the decree-holders still face the same problems. The Supreme Court further observed that if there is an unreasonable delay in execution of a decree, the decree-holder would be unable to enjoy the fruits of his success and the entire effort of successful litigant would be in vain.

The aforesaid observation is not only succinct, but displays the travail and trauma of a successful litigant. After adjudication of suit the other aspect is enforcement of the judgment/decree or order. In case, the judgment/decree/order is not complied with, the successful plaintiff/petitioner/ applicant shall have to prefer execution petition for seeking enforcement of judgment/decree/ award/ order etc. The observation of supreme court in the backdrop of malaise and/or ordeal of successful petitioner could therefore be understood. Ironically, after having succeeded the full dress trial process, when the successful petitioner seeks to reap the fruit of its efforts, the ordeal begins and dilatory tactics and efforts of frustrating decree by the judgment debtor begin. The stumbling block is faced and numerous objections are raised by the judgment debtor with a view to frustrate the judgment/decree and the decree holder is left with a paper decree. The courts, therefore, have onerous duty cast on it to enforce its own judgment/decree. The Executing Court is mandated to ensure that a proper affidavit of assets by the judgment-debtor is filed and it should not be reduced to a mere ritual or formality.

Yet another dimension to the execution of judgment/decree is defence of judgment debtor as regards their insolvency or inability to pay, right or wrong and the courts has to come to the bottom of the case. The Executing courts are empowered to ascertain the assets and income of the judgment-debtor to determine, whether the judgment-debtor has the means to satisfy the money decree. The law mandates a comprehensive format of affidavit of assets, income, expenditure and liabilities to be filed by the judgment-debtor at the very inception of execution proceedings with a view to know the financial means of judgment-debtor.

                 PROVISIONS IN CODE OF CIVIL PROCEDURE

The Order XXI of the Code of Civil Procedure lays down the procedure for the execution of the decree. Order XXI Rule 1(b) of the Code of Civil Procedure enables the judgment-debtor to directly pay the decretal amount to the decree-holder. Order XXI Rule 1(a) of the Code of Civil Procedure gives an option to the judgment-debtor to deposit the decretal/award amount with the Executing Court and give the notice of deposit to the decree-holder under Order XXI Rule 1(2) of the Code of Civil Procedure.

There are Form 16A of Appendix E under Order XXI Rule 41(2) of the Code of Civil Procedure to ascertain all the assets, income, expenditure and liabilities of the judgment-debtor. However, this may not be exhaustive.

The stage of execution arises, only, when, the judgment-debtor does not satisfy the decree/award. The decree-holder is thus, often compelled to initiate the execution proceedings. If the decree-holder is aware of the assets of the judgment debtor, the Executing Court can attach the assets of judgment debtor in the very beginning of the execution proceedings and the attached properties could be sold in realization of decree. However, if the decree-holder is not aware about the assets and income of the judgment-debtor, the Executing Court is required to direct the judgment-debtor to disclose its assets in Form 16A of Appendix E under Order XXI Rule 41(2) of the Code of Civil Procedure. It may however be noted that Form 16A of Appendix E under Order XXI Rule 41(2) of the Code of Civil Procedure may not be exhaustive in itself in ascertaining all the assets and income of the judgment-debtor. This causes delay. The Delhi High Court after perusing have assimilated the best Practices adopted by the developed countries while laying down the guidelines for expeditious execution proceedings.

                 ROLE OF EXECUTING COURT

The Executing Court is empowered to restrain the judgment-debtor from transferring, alienating or disposing of or otherwise parting with the possession of any assets to the tune of the decretal/award amount except in the ordinary course of business. The Executing Court may also restrain the judgment-debtor from discharging any financial liability, other than the statutory liabilities without the permission of the Executing Court. The Executing Court may adopt the aforesaid measure in the very initial stage itself.

If the judgment-debtor fails to appear before the Court upon service of notice, the Executing Court may secure his presence by issuing bailable warrants and and/or non-bailable warrants as per law. In case of delay in filing the prescribed aforesaid within the stipulated time, the Executing Court is empowered to send the judgment debtor to civil prison for the term not exceeding three months under Order XXI Rule 41(3) of the Code of Civil Procedure. In such an event, though, the decree-holder is required to deposit the subsistence allowance with the Executing Court for detention of the judgment-debtor. Once, the subsistence amount is deposited, the Executing Court shall issue non-bailable warrants against the judgment-debtor for his detention.

The powers under Sections 30 and 151 and Order XXI Rule 41 of the Code of Civil Procedure read with Sections 106 and 165 of the Indian Evidence Act could be used and in case of High Court, even power under Article 227 of the Constitution of India could be used.

Affidavit of assets and income of the judgment- debtor;  Affidavit of assets and income of a proprietorship firm / partnership firm / HUF / company / trust as a judgment-debtor; and affidavit of expenditure of the judgment debtor are contemplated for realization of debt. The aforesaid affidavits are to be very comprehensive and are useful to determine whether the judgment-debtor has the means to satisfy the decree/award and the judgment debtor is required to disclose in the affidavits, his occupation and income from all sources in the last five years; particulars of immovable properties in his name as well as joint names; financial assets including all bank accounts, DEMAT accounts, safety deposit lockers; investments including FDRs, stocks, shares, insurance policies, loans, foreign investments; movable assets including motor vehicles, mobiles, computer, laptop, electronic gadgets, gold, silver and diamond jewellery etc.; intangible assets; garnishee(s)/trade receivables; corporate/business interests; disposal and parting away of properties; properties acquired by the family members, inheritance. A salaried judgment-debtor has to disclose the particulars of his employment including salary, D.A., commissions, incentives, bonus, perks, perquisites and other benefits, Income Tax, pension and retirement benefits etc. A self-employed judgment-debtor has to disclose the nature of business/profession, share in business/profession, net worth of the business, number of employees, amount of regular monthly withdrawals, Income Tax, net income, annual turnover/gross receipts, gross profits etc. The judgment-debtor is also required to disclose the income from other sources, namely, agricultural income, rent, interest on bank deposits and investments, dividends, profit on sale of movable/immovable assets, mutual funds, annuities etc. The judgment-debtor is also required to disclose whether he has ever been arrested or kept in detention; whether any Court has issued bailable/non-bailable warrants against him; whether he has ever been released on bail/anticipatory bail; whether he has ever been prosecuted and/or convicted; whether he has ever been declared as proclaimed offender/proclaimed person; particulars of all pending litigations, decided/disposed off litigations as well as unsatisfied decrees/awards. The judgment-debtor is further required to disclose his standard of living and lifestyle, namely, credit/debit cards, membership of clubs and other associations, loyalty programmes, social media accounts, domestic helps and their wages, mode of travel in city and outside city, category of hotels for stay, category of hospitals for medical treatment, frequency of foreign travel, frequent flyer cards, brand of mobile, wrist watch, pen, expenditure ordinarily incurred on family functions, festivals and marriage of family members, etc.

Arrest and Detention of the Judgment-Debtor

The Order XXI Rule 37 contains provision for show cause notice to the judgment-debtor against detention in the civil prison; Order XXI Rule 38 contains the provision relating to warrants of arrest to the judgment-debtor; Section 57 and Order XXI Rule 39 contains the provisions relating to subsistence allowance for the judgment-debtor and Order XXI Rule 40 contains the provision relating to proceedings on appearance of the judgment-debtor. Sections 51(c), 55 to 59 and Order XXI Rules 37 to 40 of the Code of Civil Procedure prescribe the procedure to be followed for detention of the judgment-debtor in the civil prison.

Section 60 gives the list of properties which are liable to attachment and sale whereas the Proviso to Sub-Section (1) of Section 60 gives the list of properties which are exempted from attachment or sale. Section 60 of the Code of Civil Procedure is reproduced hereunder: ―

Section 60 - Property liable to attachment and sale in execution of decree.

(1) The following property is liable to attachment and sale in execution of a decree, namely, lands, houses or other buildings, goods, money, bank-notes, cheques, bills of exchange, hundis, promissory notes, Government securities, bonds or other securities for money, debts, shares in a corporation and save as hereinafter mentioned, all other saleable property, movable or immovable, belonging to the judgment-debtor, or over which, or the profits of which, he has a disposing power which he may exercise for his own benefit, whether the same be held in the name of the judgment-debtor or by another person in trust for him or on his behalf: Provided that the following particulars shall not be liable to such attachment or sale, namely:—

(a) the necessary wearing-apparel, cooking vessels, beds and bedding of the judgment-debtor, his wife and children, and such personal ornaments as, in accordance with religious usage, cannot be parted with by any woman;

(b) tools of artisans, and, where the judgment-debtor is an agriculturist, his implements of husbandry and such cattle and seed-grain as may, in the opinion of the Court, be necessary to enable him to earn his livelihood as such, and such portion of agricultural produce or of any class of agricultural produce as may have been declared to be free from liability under the provisions of the next following section;

(c) houses and other buildings (with the materials and the sites thereof and the land immediately appurtenant thereto necessary for their enjoyment) belonging to an agriculturist or a labourer or a domestic servant and occupied by him;

(d) books of account;

(e) a mere right to sue for damages;

(f) any right of personal service;

(g) stipends and gratuities allowed to pensioners of the Government or of a local authority or of any other employer, or payable out of any service family pension fund notified in the Official Gazette by the Central Government or the State Government in this behalf, and political pensions;

(h) the wages of labourers and domestic servants, whether payable in money or in kind;

(i) salary to the extent of the first one thousand rupees and two-thirds of the remainder in execution of any decree other than a decree for maintenance.

In appropriate cases, the Executing Court may issue any of the following directions:-

(i)          Issue notice and direct the Garnishee(s) to deposit in Court the amount due to the judgment-debtor as per law;

(ii)        (ii) Permit the decree-holder to inspect all the assets and the records of the judgment-debtor in the presence of the Local Commissioner to be appointed by the Court;

(iii)      Direct the auditor of the judgment-debtor company to submit a report with respect to the affairs of the judgment-debtor company;

(iv)      Permit the decree holder to serve interrogatories on the auditors of the judgment debtor;

(v)        Permit the decree-holder to inspect the records of the judgment-debtor with the Income Tax and the other authorities to verify the disclosures made by the judgment-debtor;

(vi)       Appoint a receiver in respect of the attached properties of the judgment debtor; and

(vii)     In extreme cases, appoint a Chartered Accountant as a Local Commissioner to inspect all the records of the judgment-debtor and submit a report to the Court with respect to the affairs of the judgment-debtor.

 

FALSE AFFIDAVIT BY JUDGMENT D$EBTOR: EFFECT

If the judgment-debtor makes a false claim/statement in his/her affidavit, the decree-holder is at liberty to invoke Section 340 Cr.P.C for prosecution of the judgment-debtor under Section 209 of IPC. If a false claim is made before a Court, in the first instance, the court may issue a show cause notice to the judgment-debtor as to why a complaint be not made under Section 340 Cr.P.C. for having made a false claim under Section 209 of the Indian Penal Code? The court may proceed to make a complaint under Section 340 Cr.P.C. The Court need not order a preliminary inquiry, however, in case of strong suspicion, , the Court may order a preliminary inquiry and can direct the State agency to investigate and file a report along with such other evidence that they are able to gather. Once it prima facie appears that an offence under Section 209 IPC has been made out, the court can make a complaint under Section 340 Cr.P.C. (Ref: Sanjeev Kumar Mittal v. State, 174 (2010) DLT 214). The reference may be have to H.S. Bedi v. National Highway Authority of India, 2016 (227) DLT 129 for principles relating to Section 209 IPC.

             Probing of judgment debtor by executing court

The Executing Court may also examine the judgment-debtor under Section 165 of the Indian Evidence Act to elicit the truth. The principles relating to it are illustrated in Ved Parkash Kharbanda v. Vimal Bindal, (2013) 198 DLT 555.

In Mohanlal Shamji Soni v. Union of India, 1991 Supp (1) SCC 271, the Supreme Court observed that the presiding officer of a Court should not simply sit as a mere umpire at a contest between two parties and declare at the end of the combat who has won and who has lost. The presiding officer has a legal duty of his own, independent of the parties, to take an active role in the proceedings in finding the truth and administering justice.

In Chandra Shashi v. Anil Kumar Verma, (1995) 1 SCC 421, the Supreme Court observed that to enable the Courts to ward off unjustified interference in their working, those who indulge in immoral acts like perjury, pre-variation and motivated falsehoods have to be appropriately dealt with, without which it would not be possible for any Court to administer justice in the true sense and to the satisfaction of those who approach it with the hope that truth would ultimately prevail. People would have faith in Courts when they would find that truth alone triumphs in Courts.

In Zahira Habibullah Sheikh v. State of Gujarat, (2006) 3 SCC 374, the Supreme Court observed that right from the inception of the judicial system it has been accepted that discovery, vindication and establishment of truth are the main purposes underlying existence of Courts of justice.

In Himanshu Singh Sabharwal v. State of Madhya Pradesh, (2008) 3 SCC 602, the Supreme Court held that the trial should be a search for the truth and not about over technicalities.

In Maria Margarida Sequeria Fernandes v. Erasmo Jack de Sequeria, (2012) 5 SCC 370, the Supreme Court again highlighted the significance of truth and observed that the truth should be the guiding star in the entire legal process and it is the duty of the Judge to discover the truth to do complete justice. The Supreme Court further stressed that the Judge has to play an active role to discover the truth and he should explore all avenues open to him in order to discover the truth.

                              CONCLUSION

The Executing Courts are conferred with powers of very wide amplitude and the wherewithal is accorded to the courts to deal with the delinquent judgment debtors, who takes all steps with a view to frustrate the decree holder from reaping the fruit of its success obtained after full dress trial. It is consistently held by the Supreme Court that efforts should be made to ensure that decree in the hand of decree holder shall not be a mere paper decree. This is essential for re-imposing and reinforcing the trust of common people in the courts of law and its prowess and ability in getting enforced the orders passed by it. The courts are equipped with comprehensive powers under Order XXI and rules framed thereunder, besides courts may also invoke the power in sync with evolving laws. It is no doubt true that the judgment debtors, firstly tires the claimant/plaintiff by exhausting his efforts in contesting the suit or a lis, and the tyranny of the decree holder does not abate then, since, another round of efforts in execution proceedings shall await him. The mere plea of judgment debtor  “no means to pay”  should be stringently probed and in case of wrong and mala fide assertion of “no means” exemplary punitive measure within short time frame shall be the need of the hour so as to deter the delinquent judgment debtor.

                                       -------

                              Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com

 

TERMINATION OF MANDATE OF ARBITRATOR & SECTION 42-A ARBITRATION & CONCILIATION ACT

 

termination of mandate of arbitrator & SECTION 42-A ARBITRATION & CONCILIATION ACT

 

The arbitration is an important alternate mode of redressal of disputes between parties. The Arbitrator is a creature of the agreement and party by private agreement may decide to get the dispute adjudicated through arbitration. The arbitrator, once enters into reference, unless opts to recuse himself or otherwise acts on application u/s 16 of the Arbitration & Conciliation Act 1996 (as amended and upto date) and in short referred to hereinafter as “Act” or “said Act” decides that it has no jurisdiction, shall publish award. This is mandate of law. Of course, the exception is also carved out i.e the mandate of Arbitration can be terminated by the courts if the same falls within Section 14 of the said Act and as per the circumstances enumerated under section 12 & 13 and in Seventh Schedule. In such an event substitute Arbitrator may have to be appointed u/s 15 (2) of the Act. As narrated, the circumstances under which the mandate of arbitrator can be terminated are illustrated and now it is amplified as per Seventh Schedule of Arbitration & Conciliation Act and also in case the arbitrator is de jure incapable of acting as an arbitrator, the mandate of the Arbitrator can be terminated. The Arbitration & Conciliation act 1996 (As amended and up to date) has also highlighted that the declaration u/s 12 of the Act shall have to be given by the Arbitrator as regards his independence and impartiality and challenge procedure are contained therein.

The Arbitration & Conciliation (Amendment) Act 2019) contains a specific provision  i.e Section 42 A of the Arbitration & Conciliation Act, 1996 that stipulates termination of mandate of arbitrator stands inserted w.e.f 30.08.2019. That will be dealt with little later.

                 SECTION 12 of ARBITRATION & CONCILIATION ACT

The provision was amended and certain provisions were inserted in statute book w.e.f 30.08.2019. A bare perusal of terms of Sections 12 of the Act shall display the details as regards requisites of the independence and impartiality of arbitrator a sine qua non. Section 12 (2), for instance, requires disclosure by an arbitrator, of any event or circumstance which is mandatorily to be shared with the parties – in case, such circumstances arise after the appointment of Arbitrator, then Section 12 (3) stipulates the further course. It lays out the grounds of challenge to an arbitrator if “justifiable doubts” exist in relation to his “independence or impartiality”. Similarly, going one step forward, Section 12 (4)  restricts challenge by parties  after appointment of an arbitrator, but, only for reasons which he becomes aware after appointment is made.

Section 12 (5) of the act was made part of the Act w.e.f. 23.10.2016; The said provision begins with a non-obstante clause overriding any “prior agreement to the contrary” and stipulates that any person with any kind of relationship set out in the Seventh Schedule (which outlines & specific heads and types of relationships - professional, familiar or associational) that will render one ineligible for appointment as arbitrator. The proviso to Section 12 (5) however makes a provision to enable the parties to waive the ineligibility conditions under Section 12 (5) (read with Seventh Schedule) by express agreement in writing.

In this regard it may be relevant to refer to the judgment reported as Chennai Metro Rail Ltd vs. Transtonnelstroy Afcons JV 2023 SCC OnLine SC 1370 the Supreme Court has held as under:

28. At this stage it would be crucial to notice that the court made a differentiation. It stated, firstly, that a disclosure in writing about circumstances likely to give justifiable doubts is to be made, at the stage of appointment, and then stated that the disclosure can be challenged under Section 12 (1) to 12 (4) read with Section 13. The court however underlined that in the next category where the person became ineligible to be appointed as arbitrator, there was no need for a challenge to be laid before the arbitrator. In such circumstances outlined in Section 12 (5)  , the party aggrieved could directly approach the court under Section 14(1) (a). It was further underlined that in all cases under Section 12 (5), there is no challenge procedure to be availed of and that if the arbitrator continues at such, the ground of being unable to perform his function since he falls in any of the categories enumerated in the Seventh Schedule, the party concern may apply to the court.

29. It is, therefore, evident that the rules for disqualification or ineligibility are fairly clear. The ineligibility which attaches to the appointment is the first category: it is contained in Section 12 91) read with the explanation and the Fifth Schedule to the Act. As recounted earlier this schedule has 34 items. In the event any of these circumstances exist, the appointment of the arbitrator is barred. The second category is where the arbitrator to start with is eligible but after appointment incurs any, or becomes subject, to any of the conditions, as enumerated in the Fifth Schedule. In that event, it is open to the party to claim that there could be justifiable doubts about his independence or impartiality. The remedy even then, would be that the party has to seek recourse and apply to the arbitrator in the first stance by virtue of Section 13(2). The wording of Section 13 (2) clarifies that a party who intends to challenge the arbitrator, after becoming aware of certain circumstances which lead to justifiable doubts, that party has to within 15 days [of becoming aware] approach the tribunal and seek a ruling. In the event the party is not successful under Section 13 (4), the tribunal is duty bound to continue with the proceedings. When the award is made, it can be subjected to challenge under Section 34, by operation of Section 13 (5). Clearly, then the substantive grounds and the procedure applicable in relation to situations where justifiable reasons exist or arise, for questioning the eligibility of a tribunal to decide the reference are enumerated in Section 12 and 13 .

                 SECTION 13 OF ARBITRATION & CONCILIATION ACT

Turning forward to Section 13 , to begin with Section 13 (1) of the Act deals with the challenge procedure which enables parties to agree on a procedure to challenge the arbitrator, whereas Section 13 (2) stipulates that if there is no agreement, the party who intends to challenge the arbitrator has to, within 15 days after becoming aware of the tribunal’s constitution or within fifteen days after becoming aware of any circumstances referred to in Section 12 (3) apply in writing to the reasons for challenge to a tribunal. It may be noted that Section 12 (3), prescribes the grounds of challenge to existence of circumstances, giving rise to justifiable doubts about tribunal’s independence or impartiality and Section 13(2) provides that if the arbitrator does not withdraw or the other party does not, in the absence of the other party agreeing according to the challenge; the tribunal shall have to decide upon it. If the challenge is unsuccessful, then by virtue of Section 13(4), the tribunal would continue with the proceedings and publish award. Section 13(5) states that any party can challenge the arbitrator’s decision, after the award is published under Section 34 of the Act.  Significantly, Section 13(6) keeps open the issue of fee to be payable to the arbitrator in the event, the award is set aside on the ground under Section 13(5).

SECTION 14 & 15 OF ARBITRATION & CONCILIATION ACT

Section 14 deals with the contingency of failure or impossibility of the arbitrator or tribunal to act and stipulates that the mandate of an arbitrator shall terminate and he shall be substituted by another “if he becomes de jure or de facto unable to perform its functions or for other reasons fails to act without undue delay or withdraws from his office or parties agrees to the termination of his mandate”. By Section 14(2) if a controversy remains, concerning the grounds referred to in Section 14(1), the Court may be approached by the parties to decide upon the issue of termination on mandate.

It is held by Supreme Court in HRD Corporation (Marcus Oil and Chemical Division) vs. Gail (India) Limited (Formerly Gas Authority of India Ltd.), 2017 SCCOnline SC 1024 that:

13. After the 2016 Amendment Act, a dichotomy is made by the Act between persons who become “ineligible” to be appointed as arbitrators, and persons about whom justifiable doubts exist as to their independence or impartiality. Since ineligibility goes to the root of the appointment, Section 12 (5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes “ineligible” to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14 (1)(a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as “ineligible”. In order to determine whether an arbitrator is de jure unable to perform his functions, it is not necessary to go to the Arbitral Tribunal under Section 13. Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed under Section 14 (2)  to the Court to decide on the termination of his/her mandate on this  ground. As opposed to this, in a challenge where grounds stated in the Fifth Schedule are disclosed, which give rise to justifiable doubts as to the arbitrator’s independence or impartiality, such doubts as to independence or impartiality have to be determined as a matter of fact in the facts of the particular challenge by the Arbitral Tribunal under Section 13. If a challenge is not successful, and the Arbitral Tribunal decides that there are no justifiable doubts as to the independence or impartiality of the arbitrator/arbitrators, the Tribunal must then continue the arbitral proceedings under Section 13(4) and make an award. It is only after such award is made, that the party challenging the arbitrator’s appointment on grounds contained in the Fifth Schedule may make an application for setting aside the arbitral award in accordance with Section 34 on the aforesaid grounds. It is clear, therefore, that any challenge contained in the Fifth Schedule against the appointment cannot be gone into at this stage, but will be gone into only after the Arbitral Tribunal has given an award. Therefore, we express no opinion on items contained in the Fifth Schedule under which the appellant may challenge the appointment of either arbitrator. They will be free to do so only after an award is rendered by the Tribunal”.

 

The Supreme Court while giving purposive interpretation of Section 15 (2) of the Act has held as under in a matter reported as  Shailesh Dhairyawan vs. Mohan Balkrishna Lulla- (2016) 3 SCC 619:

“Once we keep in mind the aforesaid fundamental aspects of the arbitration, the irresistible conclusion would be that whenever parties agree for mediation, and even name a specific arbitrator with no specific provision for appointment of another arbitrator on the recusal/withdrawal of the said arbitrator, the said omission is made up by Section 15(2) of the Act and unless arbitration agreement between the parties provides a categorical prohibition or debarment in resolving a question or dispute or difference between the parties by a substitute arbitrator in case of death or the named arbitrator or non-availability of the said arbitrator, Courts have the power to appoint substitute arbitrator, which power is given by Section 15(2) of the Act as this provision is to be given liberal interpretation so as to apply to all possible circumstances under which the mandate of the earlier arbitrator may be terminated”.

The aforesaid discussion clearly reflected that mandate of arbitrator could be terminated if the aforesaid circumstances as encapsulated in Section 12, 13 and 14 ( as amend4ed and up to date) are duly met and there are categorical judicial precedents in this regard. However, another circumstances are now added by virtue of the amendment in 2019 Act and Section 42-A is now added in the Act.

                  SECTION 42-A of Arbitration & Conciliation Act

The Section 42-A of the Arbitration & Conciliation Act 1996) after it is provided for w.e.f 30.08.2019 by virtue of the amendment Act, reads as under:

 

“42A. Confidentiality of information.-- Notwithstanding anything contained by any other law for the time being in force, the arbitrator, the arbitral institution and the parties to the arbitration agreement shall maintain confidentially of all arbitral proceedings except award where its disclosure is necessary for the purpose of implementation and enforcement of award.”

 

Recently, the hon’ble Delhi High Court in O.M.P. (T) (COMM.) 112/2023 and in a matter captioned as KAMLADITYYA CONSTRUCTION PVT LTD Versus UNION OF INDIA has dealt with the issue of confidentiality as included in section 42-A of Arbitration & Conciliation Act while terminating the mandate of arbitrator. A petition under Section 14(1)(2) and 15(2) read with the Seventh Schedule of the Arbitration & Conciliation Act, 1996 was preferred, thereby termination of the mandate of the Arbitrator was prayed for and appointment of a substituted Arbitrator was sought. It was claimed that the learned Arbitrator openly and pre-maturely revealed the Award with respect to several claims of the petitioner to the respondent. It was therefore prayed that the ld Arbitrator had flouted the provisions of confidentiality under Section 42 A of the Arbitration & Conciliation Act, 1996. It is also alleged by the petitioner that the ld Arbitrator was requesting the respondent to appoint him in more arbitrations. The ld counsel for the respondent however denied any such allegations.

The hon’ble High Court has observed as under:

 

9. A perusal of the section shows that strictest of confidentiality is required to be maintained with regard to arbitration proceedings and the Award. The Arbitrator is exercising an important function of adjudicating the dispute between the parties and cannot reveal the Award to either of the parties, even while dictating it to the staff of DIAC. The report of DIAC seems to suggest that the arbitral award was visible to the respondent on the hearing of 12.09.2023. The affidavit of the counsel for the petitioner also is supporting the above stance.

 

Consequently, the mandate of the ld Arbitrator was terminated and a new Arbitrator was appointed in his place and it was ordered that the proceedings shall continue from the stage of final arguments in terms of section 29 A (6) of the Arbitration & Conciliation Act.

Section 42-A was inserted acting upon the recommendations of Justice Sri krishna Committee as it was felt that confidentiality of the arbitral proceedings shall have to be secured. The maintaining confidentiality of arbitral proceedings and failure to observe that by an arbitrator has now become a ground as per Section 42-A of the Act and the mandate of Arbitrator could be terminated on that count as well.

 

 

The experts have expressed reservation as regards desirability of insertion of Section 42-A in the Act and perceive it as stumbling block to the process of arbitration. According to many the provision Section 42-A of the Act shall act as inbuilt prohibition to arbitral process and that is contrary to the object of arbitration as speedy and alternate mode of process of redressal. Moreover, when the arbitrator suffers from any incapacity of disability so as to render him unsuitable or if the continuing with proceedings is akin to impossibility, in that event, the arbitrator shall be rendered de jure incapable and the courts are empowered to terminate the mandate of arbitrator. Of course, death of arbitrator or resignation shall any way result into termination of arbitral proceedings. In the above backdrop, it is felt that there was no need of providing for section 42-A in the statute book. However, the fact remains that section 42-A of the Act is there in the statute book and Delhi High Court has also acted on it in KAMLADITYYA CONSTRUCTION  (supra) while invoking the said clause and terminating the mandate of arbitrator.

                                           --------

                                           Anil K Khaware

                                           Founder & Senior Associate

Societylawandjustice.com

 

 

PRE-EXISTING DISPUTES, FRAUD: WHTHER NCLT HAS JURISIDCTION UNDER IBC 2016?

 

PRE-EXISTING DISPUTES, FRAUD: WHTHER NCLT has jurisidction under IBC 2016?

The Kolkata bench of NCLT in a recent judgment i.e in  Company Petition (IB) No. 154/KB/2022 in a matter captioned as Abdul Hannan Vs  M/s. Jai Jute and Industries Limited has deliberated upon the effect of pre-existing dispute in preferring Insolvency petition u/s 9 of Insolvency & Bankruptcy Code 2016 and also if the allegation of fraud or forgery could be deliberated and decided by the NCLT.  It is pertinent to mention that whether the Insolvency Petition is preferred by Financial Creditor (FC) u/s 7 of Insolvency & Bankruptcy Code (In short IBC 2016) or u/s 9 of the IBC 2016 preferred by Operational Creditor (OC), disputed claim are not required to be considered in the aforesaid petitions. The NCLT Kolkata in Abdul Hannan (Supra) case has revisited the judicial precedents and adjudicated the issues as framed hereunder effectually. Moreover, whether the Tribunal shall be competent to deal with the allegation of fraud or forgery has also been dealt with. In the backdrop of given facts, the issues that fell for determination:

(i) Whether a Police Complaint can be considered as preexisting dispute.

(ii) Whether the issue relating to forgery and fabrication can be decided in a summary proceeding under I&B Code.

Before delving further it may be apt to peruse the terms of Section 9 of the IBC 2016, more particularly, sub-clauses (1) to (3). The same is as under:

(1)  After the expiry of the period of Ten (10) days from the date of delivery of the notice or invoice demanding payment under sub-Section (1) of Section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a Corporate Insolvency resolution Process (CIRP).

(2)  The application under sub-section (1) be field in such form and manner and accompanies with such fee as may be prescribed.

(3)   The operational creditor shall, along with the application shall furnish-  

(a)         A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

(b)         An affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

(c)          A copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available.

The perusal of the aforesaid shall itself reveal the emphasis to the effect that there is no pre-existing dispute and the corporate debtor shall have to be notified and it is to be further specified that no notice of dispute from the corporate dispute was received. Therefore, the emphasis on no dispute is the basic limb for preferring application under section 9 of the Insolvency & Bankruptcy Code (IBC) 2016. Thus, if any disputes existed, from the bare terms of section 8 & 9 of IBC, the application by the Operational Creditor may not pass muster. The law elucidated has reinforced this.

                                           LAW

The NCLT, Kolkata had relied upon various judgments of NCLAT before adjudicating the aforesaid issues.

1.   Hon’ble NCLAT in Sherbahadur D. Yadav Vs. M/s. Rohan Dyes and Intermediates Ltd. in Company Appeal (AT) (Ins) No. 472 of 2021 reported in (2022) ibclaw.in 78 NCLAT wherein the Hon’ble NCLAT, held that:

“8. When the allegations against each other are serious allegations including allegations of offence against each other, we are not convinced by the Appellant that police complaint do not evidence any dispute between the parties. It is to be noted that all the aforesaid complaints are much before initiation of proceedings u/s 9 by the Appellant. The Adjudicating Authority has not committed any error in relying of the facts and materials on record to come to the conclusion that there was pre-existing dispute between the parties.’

“9. We are of the view that IBC proceedings are not for the purposes of adjudicating such dispute between the parties and are not the recovery proceedings to recover the unpaid amount by the official creditor whose claim is disputed by the ‘Corporate Debtor’.’

2.   Hon’ble NCLAT in Mr. Anil J. Nemaavarkar vs. M/s. Kumar Builders Mumbai Realty Pvt. Ltd. in Company Appeal (AT) (Insolvency) No. 330 of 2022 reported in (2022) ibclaw.in 270 NCLAT that:

“5. We are not convinced with the submissions of the Learned Counsel for the Appellant that there was no dispute raised before the Demand Notice under Section 8 was issued by the Appellant. Appellant himself has filed large number of complaints including Police Complaint and Complaint before the Labour Authority regarding his claim and making other serious allegations against the Corporate Debtor. We are of the view that Insolvency and Bankruptcy Code is not for resolving such dispute, the remedy of the Appellant with regard to his services benefits if any, lies elsewhere and Adjudicating Authority has rightly rejected the Application noticing the ‘pre-existing dispute’ between the parties.’

“The Appeal is dismissed.”

The overwhelming view therefore is that the Police Complaint, prior to the issuance of the statutory notice of demand under Section 8 of the I&B Code, prosecuting a dispute regarding the supply of inferior goods and/or service shall be  a “pre-existing dispute” and application under section 9 of IBC 2016 shall not be maintainable. It is consistently held that the Tribunals under IBC 2016 is not a recovery court for adjudication of disputes and only the admitted liability shall fall within the domain of the Tribunal and adjudication of disputes shall be the domain of civil courts.

Issue of fraud and its adjudication by NCLT

 

The second issue framed in the above reference relates to fraud and whether NCLT shall be competent to adjudicate about it.

1.   That in a matter captioned as Radha Exports (India) Pvt. Limited vs. K.P. Jayaram reported at MANU/SC/0646/2020: (2020) 10 SCC 538, wherein the Hon’ble Apex Court held that:

“16. Allegations of forgery and fraud are not decided in proceedings Under Sections 433 and 434 of the Companies Act 1956 for winding up of a company. Such disputes necessarily have to be adjudicated in a regular suit, on the basis of evidence, including forensic examination reports.’

2.   That in Jaginder Singh Lather v. AU Small Finance Bank Ltd. reported at 2018 SCC OnLine NCLAT 706, the Hon’ble NCLAT held that:

“3. In the present appeal this Appellate Tribunal cannot decide issue such as whether the document produced by a party is forged and fabricated or not, though it is always open to aggrieved person to file an application under Section 65 of the I & B Code with such allegation.”

3.   That in Shelendra Kumar Sharma v. DSC Ltd., reported in 2019 SCC OnLine NCLAT 1274, it is laid down that:

“5. In view of such infirmity, we observe that the application was filed by the Appellant with an intent to receive the dues from the Corporate Debtor and not with intention for resolution or liquidation, therefore, we hold that the Adjudicating Authority rightly rejected the prayer of the Appellant. So far as the question as to whether the documents are forged or not is concerned, it cannot be determined by the Adjudicating Authority (National Company Law Tribunal) or this Appellate Tribunal and therefore, the Adjudicating Authority rightly not deliberated on such issue.”

4.    That in Satori Global Limited v. Shailja Krishna reported at 2023 SCC OnLine NCLAT 249, the Hon’ble NCLAT has further held that:

“15. We are conscious of the fact that the ‘Gift Deed’ was not challenged which is of significance more so when the ‘title of Shares’ is relevant to decide the issue of the maintainability. At the cost of repetition, any dispute with respect to issues relating to ‘fraud’, ‘manipulation’, and ‘coercion’, and false statements cannot be decided in a summary jurisdiction. The contentions of the Learned Counsel for the Respondent that there is ‘over writing on the certificates’, signatures were taken on blank forms, there is mala fide suppression of some documents all require examination of evidence and hence cannot be decided by the NCLT in a summary fashion.”

5.    That the NCLT, New Delhi Bench in the case of Shri T.R. Arya v. Dilawari Motors Pvt. Ltd. reported in (2024) ibclaw.in 44 NCLT has held that:

“32. We are therefore of the considered view that the judgment passed by Hon’ble NCLAT in M/s. Satori Global Case (supra) will apply to the present case. This Tribunal is not empowered to adjudicate the issues relating to serious allegations of fraud and forgery.”

 

Therefore, it emanates from the aforesaid discussion that in a summary proceeding under the I&B Code, the dispute relating to forgery and fabrication of document cannot be adjudicated by the Adjudicating Authority. To examine an application under Section 9 of the I&B Code, the Adjudicating Authority requires to determine whether there is an “operational debt” exceeding the threshold limit as prescribed, whether the documentary evidence furnished with the application substantiating the debt is due and payable and whether there is existence of a dispute between the parties before the receipt of the demand notice of the unpaid operational debt in relation to such dispute. The same is deliberated in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited reported in (2018) 1 SCC 353. The Mobilox (Supra) clearly provides that the expression “and” occurring in section 8(2)(a) may be read as “or” in order to further the object of the statute and/ or to avoid an anomalous situation. It thus follows that, once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority, if it finds that there is a record of dispute , must reject the application under Section 9(5)(2)(d), more so,  if notice of dispute has been received by the operational creditor or there is a record of dispute. So long as a dispute truly exists in fact and is not otherwise spurious, or illusory, the Adjudicating Authority has to reject the application. Needless to say that a “dispute” is said to exist, so long as there is a real dispute that would fall within the inclusive definition contained in Section 5(6) of the Code. It shall also be worthwhile to refer to a Supreme Court judgment reported as Transmission Corporation of Andhra Pradesh Limited Vs. Equipment Conductors and Cables Limited 2018 ibclaw.in 33 SC. The Supreme Court has held that the IBC is not intended to substitute a recovery forum & whenever there is existence of real disputes, the IBC provisions cannot be invoked.

                                   ------

                            Anil K Khaware

Founder & senior Associate

Societylawandjustice.com