My publication on "Corporate Insolvency Laws in India" on Manupatra. Letters of appreciation by Hon'ble Justice Mr. Sunil Ambwani, a sitting judge of the Allahabad High Court and Durgarao Vanayam, a practising lawyer in the Madras High Court. Copies of the letters are enclosed:

---------- Forwarded message ----------
From: Sunil Ambwani; sunilambwani@yahoo.com;
Date: Sun, Aug 27, 2006 at 9:45 PM
Subject: your article on insolvancy laws. manupatra articles
To: rohanbagai@gmail.com

Dear Rohan, i read your article on insolvancy laws . it is a a very good attempt. i appreciate your concerns.you have a clear idea of the subject . keep up with your efforts. congratulations, sunil ambwani justice sunil ambwani company judge alahabad high court

---

---------- Forwarded message ----------
From: vanayam durgarao <vdrao_law2005@yahoo.com>
Date: Sat, Mar 11, 2006 at 8:11 AM
Subject: appreciation
To: rohanbagai@gmail.com

Hi,

How are you. This is Durga Rao, Advocate, practising in Madras High Court and specialized in company matters. I have seen your article on corporate insolvency published in manupatra.

I have worked on all aspects of company law, be it amalgamation, investigation, oppression and mismanagement, winding up etc., I had a privilage of looking into the various provisions of company law.

I am impressed with your analytical approach in dealing with the most controversial subject ever in the companies act. Your analysis of delay before BIFR and before High Court in other matters like settlement or amalgamation exposes the concern of various experts in the field. As rightly highlighted by you, the new NCLT also be burdened with the enormous litigation as usual.

One principle is underlying in your entire analysis that the presiding officers must excercise great amount of skill and care while dealing with the matters of revival and rehabilitation.

I personally, believe that the problem lies in the way our judges or presiding officers deal with the matters especially corporate matters where the stakes are sky high. I think, after abolishing BIFR and after establishing Tribunal wherein the procedure is simplified, I dont think that now the procedure can be blamed for the long pending litigation especially in amalgamation matters.

I express my happiness and say thanks to you for presenting such a meritorious work on a controvertial aspect of corporate law.

Yours Sinceely,

V.DURGA RAO

ADVOCATE

MADRAS HIGH COURT

NO.14, RAMA RAO RAOD,

BEHIND NAGESWARA PARK,

MYLAPORE,

CHENNAI.

Ph.98840 83496

There is a reference to my article entitled "Fake Harry Potter books restrained by Delhi High Court" which was published in the 'World Trademark Report' on November 15, 2007 on the following website.

These remarks can be accessed at:

http://www.the-leaky-cauldron.org/2007/11/15/j-k-rowling-updates-with-new-rubbish-bin-entry/comments/5

__________________________________________________________________

Speaking of India and certain entities violating Jo’s/WBs copyrights, apparently Jo/WB have won an injunction against a City Publication for infringing Deathly Hallows.

The link requires a sign up, but here it is: http://www.worldtrademarkreport.com/login.aspx?ReturnUrl=%2fArticle%2fDefault.aspx%3fr%3d6907

The story is below:

November 15 2007 – India, Anand And Anand Advocates

Fake Harry Potter books restrained by Delhi High Court

In Rowling v City Publication (CS (OS) 1785/2007, October 1 2007), the High Court of Delhi has granted an interim injunction restraining City Publication, a Bangalore-based publishing firm, as well as its agents, distributors and retailers from reproducing, adapting, printing, distributing and selling works of the Harry Potter series infringing the copyright in the covers of the UK and US editions and trademark registrations of Warner Bros Entertainment Inc.

City Publication used the cover art, title and characters of the book Harry Potter and the Deathly Hallows, but portrayed a different plot, thereby ignoring the IP rights of JK Rowling (the author of the Harry Potter series), Bloomsbury Publishing (the publisher of the book) and Warner Bros (the producer of the Harry Potter films).

The court established that:

• Bloomsbury Publishing had copyright in respect of the covers and literary content of the book; and

• Warner Bros had trademark rights in the name of the characters.

The court examined the infringing material and concluded that:

• the front cover had been plagiarized;

• the back cover was an unauthorized reproduction of the US edition of the book; and

• City Publication had unlawfully used the names of the main characters of the book and adapted the literary content.

The order of the court took into account the fact that the infringement of the plaintiffs’ copyright and trademarks also violated the moral rights of the author. This case represents another example of how the Delhi High Court will penalize pirates which try to circumvent IP laws and counterfeit the Harry Potter books.

Rohan Bagai, Anand And Anand Advocates, New Delhi

My publication on "Corporate Insolvency laws in India" was used as a reference by Georgina King in May 2007 in his following article:

www.interlaw.org/newsite/Pubs/Docs/IndiasSickIndustrialCoLegislation.King.Hunt.pdf

------------------------------------------------------------------------------------------------
India’s Sick Industrial Companies legislation – impact on arbitration awards

Georgina King, Lawyer T +61 2 9391 3228 F +61 2 9391 3099 E gking@hunthunt.com.au W www.hunthunt.com.au

Introduction

Two decisions handed down during 2006 by India’s highest court establish that, where applicable to an Indian company, the nation’s controversial Sick Industrial Companies legislation will prevent enforcement of domestic and possibly foreign arbitral awards against that company.

The Sick Industrial Companies (Special Provisions) Act 1985 (SICA) is designed to assist with revival and rehabilitation of financially ‘sick’ Indian companies by affording them various forms of assistance and protection, including a moratorium on all forms of legal action against a ‘sick’ company.

Extreme controversy surrounds the legislation due to its widely reported operational defects and easy misuse by companies seeking to avoid payment of debts. While the Supreme Court of India’s decisions about the SICA relate to arbitral awards made in India, there is a significant possibility that the same approach will be taken to enforcement of foreign arbitral awards in India. In light of the nature of the SIC legislation and its use by Indian companies, the SICA is a significant factor to keep in mind when assessing the risks involved in any transaction or arrangement being entered into with an Indian company.

The SICA process

A company* obtains registration under the SICA by presenting audited accounts which show that it has, at the end of the most recent financial year, accumulated losses equal to or exceeding its entire net worth*. Alternatively, the company Board of Directors can apply for registration if, even before company accounts are finalised, it has sufficient reason to believe that the company has become a sick industrial company.

Once a company is registered, the Board for Industrial and Financial Reconstruction (BIFR), a quasi-judicial body, begins investigating whether the company is in fact ‘sick’ and if it is ‘sick’, whether it should be wound up or a scheme for revival and rehabilitation of the company should be put in place. Decision-making is also undertaken by the banks and financial institutions required to assist with any proposed rehabilitation scheme.

The SICA prohibits commencement, operation and enforcement of all proceedings and actions taken against a registered company from the time the company is registered under SICA up to completion of the various decision-making processes and any subsequent rehabilitation scheme, unless such action is taken with the BIFR’s consent.

Issues with operation and misuse

At first glance, the process under SICA does not appear significantly different to the voluntary administration process under the Australian Corporations Act (2001).

Under the Corporations Act voluntary administration process, if company directors decide a company is, or is likely to become, insolvent they appoint an administrator to investigate and report to creditors regarding the company’s circumstances and the different options open to them. Until creditors make their decision regarding the company’s future, the Corporations Act places an automatic moratorium on actions and proceedings against the company.

However, the Corporations Act places strict limits on the time by which creditors must make their decision about the company’s future and thereby end the automatic moratorium. Generally that decision must be made at a meeting of creditors convened within 21 days of the administrator’s appointment

It has been reported that the BIFR’s investigation and decision-making process takes anywhere from two to four years and that decision-making by the banks adds further delay.
Throughout this time, unless a debtor is able to obtain consent from the BIFR, it can take no action or measure of enforcement against the company.

The delay not only means that a conceived rehabilitation plan has often lost its viability by the time of implementation, but also makes registration under the SICA an attractive option for companies seeking to avoid proceedings being taken or threatened against them.

This is sometimes done by manipulation of company accounts to reflect erosion of net worth and even if a company’s application for registration under SICA is eventually rejected, the moratorium on proceedings against the company may be extended by filing a fresh application under SICA for the next financial year.

In the Morgan Securities case discussed below, Justice Balasubramanyan observed:
“occasions are not infrequent when not so scrupulous debtors approach B.I.F.R. to stall the proceedings and to keep their creditors at bay. The delay before the B.I.F.R. is sought to be taken advantage of.”

In 2003 India’s Parliament moved to introduce some level of reform by passing the Sick Industrial Companies (Special Provisions) Repeal Act (2003). However, the date for commencement of the Repeal Act is still yet to be notified and accordingly the SICA continues to set the current regime.


Effect of SICA on enforcement of arbitral awards made in India

One of the key principles of the UNCITRAL Model Law on International Commercial Arbitration, on which India’s Arbitration and Conciliation Act (1996) (Arbitration Act) is based, is minimisation of judicial interference in arbitral processes. To this end, section 5 of the Arbitration Act states:

“Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.” The Arbitration Act limits the grounds (Grounds) for judicial intervention into a domestic arbitral award to: incapacity of parties, non-existence or invalidity of the relevant arbitration agreement, lack of jurisdiction on the part of the arbitral decision-maker, lack of due process, the subject-matter of the dispute not being arbitrable under Indian law or the arbitral award being in conflict with the public policy of India.

Unless a Ground is found to apply to an arbitral award, that award is final and binding on the parties. However, in each of the two decisions discussed below, the Supreme Court of India concluded that proceedings and orders under the SICA overrode domestic arbitral awards to which the Arbitration Act applied. In accordance with that view the Court allowed Indian companies deemed to be ‘sick’ to avoid or at least delay enforcement of domestic arbitral awards.

The decisions raise the question of whether Indian courts will reach the same conclusion regarding enforcement of foreign arbitral awards against ‘sick’ companies.


The cases

Case 1
Jay Engineering Works Ltd. –v– Industry Facilitation Council & Anor
[JT 2006 (12) SC 171] (14 September 2006)

The Facts
In 1994, the appellant company made a reference to the BIFR under SICA. The appellant was declared ‘sick’ and a rehabilitation scheme was framed by the BIFR.
From 1996 to 2000, the second respondent supplied products to the appellant.
In 2001 the rehabilitation scheme framed by the BIFR was declared to have failed and the Industrial Development Bank of India was appointed as an operating agency of the appellant. In 2003 a fresh report was submitted by the operating agency and accepted by the BIFR who then sanctioned a fresh rehabilitation scheme.

The second respondent was classified under Indian law as a Small Scale Industrial Unit and to recover payments the appellant owed to it for the products, the second respondent initiated arbitration proceedings under India’s Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act (1993).

The first respondent, the Industry Facilitation Council, made an award in favour of the second respondent. The appellant had contended before the Council that it was a ‘sick’ company and was entitled to protection under the SICA. The Council, however, held that the BIFR’s declaration that the appellant Company was ‘sick’ did not bind the Council in any way. The arbitral award was executed by the second respondent.

An appeal to the High Court against execution of the arbitral award was dismissed and the matter was then appealed to the Supreme Court.

Hunt & Hunt | India’s Sick Industrial Companies legislation – May 2007 | Page 2

Supreme Court The Supreme Court upheld the appeal. The Court concluded that the Facilitation Council’s arbitration award was an award made under the provisions of the Arbitration Act and held that all such awards are subject to the wide-reaching protection the SICA provides for companies against all forms of legal action. In considering the nature of the SIC legislation, the Court noted that it was enacted in the interest of the public.

Case 2
Morgan Securities and Credit Pvt. Ltd. –v– Modi Rubber Ltd case No.: CA 2572 / 2006, Supreme Court of India (14 December 2006)

Facts
The appellant, Morgan Securities and Credit Pvt Ltd (Lender), gave an advance to the respondent company, Modi Rubber Ltd (Borrower) by way of an Inter Corporate Deposit.
The Borrower defaulted on repayment and the Lender commenced arbitration proceedings in accordance with the arbitration clause in the loan agreement. The arbitrator ordered the Borrower to repay the loan with interest and ordered that until the loan was repaid the Borrower was restrained from transferring or alienating its assets. The Lender also filed a successful application for winding up of the Borrower with the Allahabad High Court.

In addition to the arbitrator’s order of restraint, the High Court and the Appellate Authority of Industrial and Financial Reconstruction had passed orders restraining the Borrower from dealing with or in any way encumbering its assets without permission.

The Borrower made a reference to the BIFR under the SICA and also appealed to the Division Bench of the Allahabad High Court against the winding up order.

The High Court set aside the winding up order and directed that the winding up proceedings be kept in abeyance until the reference under SICA had been dealt with.

The Borrower then filed an application under the SICA seeking permission to dispose of shares it held. The BIFR dismissed the application holding that in view of the various orders restraining the Borrower from disposing of its assets, it could not agree to the Borrower proceeding with sale of the shares.

The Borrower appealed to the Delhi High Court questioning the legality of the BIFR’s decision.
The Delhi High Court granted the orders sought by the Borrower and the Borrower sold the shares and deposited the sale proceeds with the BIFR.

The Lender appealed to the Supreme Court arguing that the Arbitration Act and its restriction of judicial interference with arbitral awards, overrides the SICA. Supreme Court The Court held that the provisions of the SICA override section 5 of the Arbitration Act on the basis that the application of section 5 is limited to judicial intervention and the effect of the SICA is not to intervene in an arbitral award but to merely suspend operation of it.

The Court also contended that the SICA has been enacted to achieve a higher goal and larger public interest than that of the Arbitration Act.

The SICA and foreign arbitral awards In dealing with the issue of SICA and judicial intervention into domestic arbitral awards the above judgments do not specifically address the issue of whether the SICA will override enforcement of a foreign arbitral award.

In line with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, section 48 of the Arbitration Act limits the grounds on which a court may refuse to enforce a foreign arbitral award to the same grounds as those listed earlier in this article in relation to judicial intervention.

However, by analogy with the Court’s reasoning in Morgan Securities a question arises as to whether a court would find that allowing the SICA to prevail over a foreign arbitral award constitutes a ‘refusal to enforce’ the award or merely amounts to a decision to delay enforcement. While logically it is difficult to not characterise any move to disallow enforcement as a refusal to enforce, the above decisions provide some indication of what approach the courts may take.

Alternatively, the courts may accept that they are refusing to enforce a foreign arbitral award but find that they are entitled to do so because allowing the SICA to be overridden by an award would be contrary to the public policy of India. This will depend on the meaning and scope the courts attribute to the public policy exception.

In Renusagar Power Co. Ltd –v– General Electric Co. (1994) AIR 860 the Indian Supreme Court took a relatively restrictive approach. The Court held that to attract the bar of public policy, enforcement of a foreign arbitral award must be contrary to a) fundamental policy of Indian law, b) the interests of India or c) justice and morality. The court expressly stated that mere violation of the law of India would not provide sufficient justification for a refusal to enforce. Conversely, in Oil and Natural Gas Corporation –v– SAW Pipes (2003) 5 SCC 075, a case involving an arbitral award made in India, the Supreme Court held the concept of public policy should be interpreted broadly to include all matters which concern public good and public interest. The Court held that, in addition to the grounds outlined in Renusagar, an award will be contrary to public policy if it is “patently illegal” or is so unfair or unreasonable that it “shocks the conscience” of the Court.

In light of the comments made in the Morgan Securities and Jay Engineering judgments regarding the public interest nature of the SICA it certainly seems possible that Indian courts will invoke the public policy exception where enforcement of a foreign arbitral award would contravene protective measures granted under the SICA.

Hunt & Hunt | India’s Sick Industrial Companies legislation – May 2007 | Page 3


Conclusion

In its present form, India’s Sick Industrial Companies legislation is a significant factor for parties from any country to consider when entering into agreements and arrangements with Indian companies to which the SICA might apply. While this article has focused on the impact of the legislative regime on parties relying on arbitration awards, clearly the regime can affect any form of legal action taken by a party to recover amounts owing to it.

Accordingly, it is important to take into account both the inherent risk presented by the SIC legislation and the nature and extent of information obtained about a company, prior to entering into any agreement or arrangement.
*
The SICA only applies to companies which have been registered for not less than 5 years and which employ 50 of more people.

*
Net worth has been defined as the sum total of the paid up capital and free reserves.


Secondary resources for this article:
‘Financing Firms in India’, co-written by several authors and published at:
http://knowledge.wharton.upenn.edu/ papers/1326.pdf

‘Corporate Insolvency Laws in India’, written by Rohan Bagai and published at:: http://www.legalservicesindia.com/ articles/corin.htm

‘Proposals for Reforms - The Indian Position’, presented by Mr. Sumant Batra at the Second Forum for Asian Insolvency Reform and published at: http://72.14.253.104/search?q=cache: IOiMNC8bF1IJ:www.oecd.org/ dataoecd/42/10/2490751.pdf+india+sick +industrial+companies+regime&hl=en&c t=clnk&cd=6&gl=au

‘NPA ordinance – Empowering the financial sector’, written by S.D. Naik and published on the internet edition of Hindu Business Line, 7 August 2002: http://www.blonnet.com/2002/08/07/ stories/2002080700050800.htm

‘What Next for Indian Arbitration?’, by Aloke Ray and Dipen Sabharwal, White
& Case, and published at: http://www.whitecase.com/files/
Publication/cfee45a1-1484-4233­9a98-21226c148e18/Presentation/
PublicationAttachment/9ab9418b-755a­4639-9f75-03a96723d26a/What_Next_
for_Indian_Arbitration_Article2.pdf

‘The New Insolvency Regime: J.J. Irani Expert Committee Report with Special Emphasis on Reconstruction & Winding-up’, by Rupinder Singh Suri and
published at:
http://72.14.235.104/search?q=cache:
bLP23XBcu3YJ:www.insolindia.com/
newInsolvencyRegime.pdf+india+sick+in
dustrial+companies+reform&hl=en&ct=cl
nk&cd=36&gl=au



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Hunt & Hunt | India’s Sick Industrial Companies legislation – May 2007 | Page 4

AN ARBITRATOR…A JUDGE IN HIS OWN CASE

Under the Indian Law of Arbitration

The Arbitration & Conciliation Act, 1996 is an Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto.

Ever since the Arbitration & Conciliation Act, 1996 came into force on 22.8.1996, demands have been voiced requesting amendments in various spheres of the law of arbitration. It was considered by the Law Commission in 1998, that it would not be appropriate to take up amendments of the Act of 1996 in haste and that it would be desirable to wait and see how the courts would grapple with the situations that might arise.

Five years after the enactment of the legislation, the Commission felt that it was appropriate to review its working by obtaining representations and views from the various concerned quarters and propose the requisite amendments to the Act by way of the 176th Report on Arbitration & Conciliation Amendment Bill, 2001.

There were deviating views expressed with respect to the stage at which jurisdictional issues should be decided. It was also pointed out that where the arbitrator rejects objections relating to jurisdiction or rejects pleas of bias, by way of interim decision, no immediate right of appeal is provided and parties have to go ahead with the arbitration proceedings till the award is made. Therefore it of paramount importance to point out certain ambiguities or flaws in the provisions of the present 1996 Act on account of which divergent views were expressed.

Challenge procedure under scrutiny

Conventionally under the 1996 Act, where there are circumstances, which give rise to justifiable doubts as the independence or impartiality of the arbitrator or where he lacks the qualifications, agreed to by the parties, the office of the arbitrator might be challenged.[2] In case, there is a disagreement as to the procedure of challenge, the party intending the challenge sends a written statement of the reasons for the challenge to the arbitral tribunal, within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances as referred above.[3]

Here, the arbitral tribunal assumes the role of an adjudicatory authority to decide on the challenge, unless the challenged arbitrator himself withdraws from the office or the other party agrees to the challenge.

An appraisal of the clauses of Section 13 of the 1996 Act makes it clear that in cases where the arbitral tribunal consists of one sole arbitrator and only one of the parties have challenged his appointment and the other has not agreed with the challenge, the arbitrator becomes ‘a judge in his own cause’ and decides his own fate. This is rather unfortunate and contrary to the accepted principle of natural justice ‘nemo judex in causa sua’ i.e. no man shall be a judge in his own cause.

In such a situation if the sole arbitrator decides to withdraw, no problem would arise but in case he decides otherwise and rejects the challenge, then he would continue the arbitral proceedings and make the award, which would be binding on the parties including the one who had objected to his appointment. This blatant violation of principle of natural justice creates a rather dysphoric situation, which the framers of the 1996 Act should have been mindful off. In such a state the only remedy available to the aggrieved party is to make an application to the court to set aside the arbitrator’s award.

Oppugn the procedure

The significant question that comes up is ‘whether the decision of the arbitrator rejecting the plea of bias and lack of qualifications should be decided as preliminary issues with a right of appeal or whether they can be challenged only after the award?

Before responding to the above question it would be pertinent to mention that although Section 13 sub-section (5) contemplates an application to set aside the award in accordance with Section 34, no such right to question the award on these grounds has been included in Section 34. Moreover, the phraseology used in Section 34, i.e. “an arbitral award may be set aside by the court only if”, suggests that recourse to court for setting aside the award can be had by a party on ‘an exclusive list of limited grounds’.

Therefore, to clear the air regarding this ambiguity, the Law Commission in its 176^th Report, (Arbitration Amendment Bill, 2001) has proposed an amendment to Section 34(2) to clarify the existing position by adding Explanation II:

“In sub-section (2), the ‘Explanation’ shall be numbered as ‘Explanation I’ and after Explanation I so renumbered, the following Explanation shall be inserted namely: -

Explanation. -II For the removal of doubts, it is hereby declared that while seeking to set aside an award under sub-section (1), the applicant may include the pleas questioning the decision of the arbitral tribunal rejecting –

i. A challenge made under sub-section (2) of Section 13;

ii. The plea made under sub-section (2) or sub-section (3) of Section 16.”

Another noteworthy question is ‘whether it is desirable to provide for an immediate appeal to the Court under Section 37 of the Act against the decision of the arbitral tribunal rejecting the plea of bias or disqualification?’

The UNICTRAL Model Law on International Commercial Arbitration[4] (hereinafter referred to as the ‘Model Law’) in Article 13 provides for an immediate appeal against an interlocutory order of the arbitral tribunal rejecting a plea of bias or disqualification within 30 days, while the said remedy has been omitted in the 1996 Act in Section 13 as well as in sub-section (2) of Section 37.

Regarding this issue, distant views have emerged when discussed among jurists and legal luminaries, one view stating that it would be waste of money and time if there is no immediate appeal and if ultimately the award is set aside under Section 34. The other view, equally vehement, was that any immediate court interference would be abused by filing frivolous objections against the award. Hence, the first view is supported by the fact that there is a similar provision in the Model law.

The Model Law that provides for an immediate appeal under Article 13 (4) also elucidates that pending appeal arbitral proceedings ‘may’ go on. On the other hand, the 1996 Act uses the word ‘shall’ that makes it obligatory for the arbitral tribunal to continue with the proceedings and make an award.

There are several countries that have adopted the Model Law providing immediate appeal against an order rejecting a plea of bias and have also used the word ‘may’ in relation to continuance of proceedings by the arbitral tribunal[5]. The UN Commission in its Report (1985) on the adoption of the Model Law observed that ‘the prevailing view, however, was to retain the system adopted in Article 13 of the Model Law since it would strike an apparent balance between the need for preventing obstruction or dilatory tactics and the desire of avoiding waste of time and money.’[6]

Mr. Aron Broches, Kluwer[7] has no doubt said:

“At the Working Group’s fourth session, a resolution was adopted which, on one hand, permitted immediate recourse to the Court, with the attendant risk that such recourse may be used a delaying tactic and on the other hand, permitted (but did not oblige) the arbitral tribunal to continue the arbitral proceedings. This enables the tribunal either to limit the adverse effects on an unjustified challenge for dilatory purposes by continuing the proceedings, or to suspend the proceedings where it considers that the interest of the parties is best served by getting the challenge question out of the way rather than letting them run the risk of waste of time and money on an award which may ultimately be set aside under Article 34.”

Adverting to the procedure followed in United States where immediate Court intervention is rejected in matters where the plea of bias is raised, Redfern and Hunter in Law and Practice of International Arbitration,[8] state that there the procedure is unsatisfactory as parties are not allowed to challenge the decision till the award is made. They opine:

“This means that a party with a valid objection to the composition of the tribunal would have to make an objection ‘on the record’ and then wait until the end of the case before challenging the award (with the attendant waste of time and money if the challenge is successful).”[9]

In this context, they have suggested as follows:

“Usually the appropriate course for an arbitral tribunal is to issue an interim award on jurisdiction, if asked to do so. This enables the parties to know where they stand at an early stage; and it will save them spending time and money on arbitral proceedings that prove to be invalid.”[10]

While the argument in favour of providing an immediate appeal under Section 37 against an order of the tribunal refusing a plea of bias or disqualification is strong and it will be rather unfortunate if one has to question the rejection of the plea only after the award is passed, but on the other hand, if an immediate appeal is provided, the party who wants to delay the arbitral proceedings will, in almost every case, file an objection at the commencement and then, file an appeal under Section 37 (2). There is indeed a lot of scope for abuse.

Moreover, it is pertinent to point out that supervision by the Court in the case of international arbitrations should be kept at the minimum as in the Model Law but that so far as domestic arbitration is concerned, supervision could be more intense having regard to the lack of qualifications and also experience of arbitrators in India who are not necessarily judges or lawyers.

Redfern and Hunter observed as follows:

“Amongst states which have a developed arbitration law, it is generally recognised that more freedom may be allowed in an international arbitration that is commonly allowed in a domestic arbitration. The reason is evident. Domestic arbitration usually takes place between the citizens or residents of the same state, as an alternative to proceedings before the courts of law of that state…it is natural that a state should wish (and even need) to exercise firmer control over such arbitration, involving its own citizens or residents than it would wish (or need) to exercise in relation to international arbitration which may only take place within the state’s territory because of geographical convenience.”[11]

It is therefore, necessary to provide additional supervision by the Court by way of appeal in case of domestic arbitration but at the same time limiting the supervision of international arbitral awards to the minimum. It is permissible to have firmer control on domestic arbitration awards, as pointed out in the above passage.

Conclusion

The provisions of Section 13 have to be brought in conformity with the Model Law, which maintains a reasonable balance between speedy disposal of arbitral proceedings and immediate decision on issues of bias and disqualification, so that time and money could be saved. The arbitrators are to be given discretion to go ahead with the arbitration proceedings pending appeal so that they will have control as to the manner in which the appellant is conducting his case in the appeal preferred by him against the order rejecting the pleas of bias or disqualification.

Perhaps a solution to the problem regarding the adjudication by a sole arbitrator deciding his case could be addressing the challenge to an independent panel, body or board following the pattern of the American Arbitration Association (AAA). Moreover, in case of an institutional arbitration where the arbitrator has been appointed by a permanent arbitral institution, the objections as to appointment of arbitrator should be referred to such institution.

---

[1] Rohan Bagai is a law student at Amity Law School, New Delhi.

[2] Section 12 sub-section (3)

[3] Section 13 sub-section (2)

[4] Adopted by the United Nations Commission on International Trade Law on 21^st June, 1985.

[5] See Sec.1037 (3), German Arbitration Act, 1998, Sec. 13 (2) of Schedule to the Australian Act, Art. 13 (3), Canadian Act, 1985, Art. 13 (3) of the Schedule to the Ireland Act, 1998, Art. 1393 of the first schedule of the New Zealand Act, 1999.

[6] UN Commission Report on the adoption of the Model Law (1985)

[7]Commentary on UNCITRAL Model law, (1990)

[8] Redfern and Hunter, Law and Practice of International Arbitration, 2^nd Edition.

[9] Ibid, para 4.65 referring to Florsynth Inc. v. Rickhote, 750 F.2d. 171 (1984); Hunt v. Mobil Oil Corp., 583 F. Suppl. 1092 (1984); Morelite Construction Corp. v. New York City District Carpenters Benefit Funds, 748 F. 2d. 79 (1984)

[10] Ibid, para 5.42

[11] Ibid, pg. 14, 15

CORPORATE INSOLVENCY LAWS IN INDIA

With the globalisation of economy, the issues relating to corporate insolvency have assumed greater significance and a need has been felt for long for bringing about reforms in this branch of law. Moreover, with the Indian economy having been opened up for investment by foreign creditors and, internationally, the Indian corporate also making investments in companies outside, the realm of cross-border insolvency law has multiplied colossally.

In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B. Balakrishna Eradi,[2] a superannuated Judge of Supreme Court of India for remodeling the existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field.

Recommendations of the Committee

The Committee recommended that:

• The jurisdiction, power and authority relating to winding up of companies should be vested in a National Company Law Tribunal which should be vested with the functions and power with regard to rehabilitation and revival of sick industrial companies, a mandate presently entrusted with BIFR under SICA.
• The 1956 Act should be suitably amended to take the power away from High Court and the transfer of the pending winding up proceedings to the Tribunal.
• The adoption of the international trend in law relating to corporate bankruptcy, namely, sell the assets first as quickly as possible, and relegate to a later stage the adjudication of claims and distribution of proceeds.
• An in depth assessment of the office of Official Liquidators, in view of inadequate and incompetent manpower and absence of latest office equipments and technologies.
• A liquidation Committee consisting of creditors of the company on the lines of Section 141 of the Insolvency Act, 1986 of UK[3] be set up to assist the Liquidator.
• The repeal of SICA and recommended the ameliorative, revival and reconstructionist procedures obtaining under it to be reintegrated in a suitably amended form in the structure of the 1956 Act except that there is no stand still provision like Section 22 of SICA.
• Part VII of the Companies Act, 1956 should incorporate a new substantive provision to adopt the UNCITRAL Model Law[4] as approved by the United Nations and the Model Law itself may be incorporated as a Schedule to the Companies Act, 1956, which shall apply to all cases of Cross-Border insolvency.
• Adopt the necessary principles enunciated under the heading "Legal Framework", "Orderly and Effective Insolvency Procedures – Key issues", [5] to bring the provisions of the Companies Act, 1956 in line with international practices.

The Committee completed its work and submitted its report to the Central Government in the year 2000.In August 2001, the Companies (Amendment) Bill, 2001 and the Sick Industrial Companies (Special Provisions) Repeal Bill, 2001 were introduced in the Parliament of India.

The Bills, if passed in their present form will bring the curtains down on the Sick Industrial Companies (Special Provisions) Act, 1985 and will restructure the Companies Act, 1956 in a big way leading to the new regime of tackling corporate rescue and insolvency procedures in India with a view to creating confidence in the minds of investors, creditors, labour and shareholders.

Scheme of Insolvency Laws

The stream of insolvency laws can be segregated chiefly under two heads: Personal Insolvency, which deals with individuals and partnership firms governed by Provisional Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908 and Corporate Insolvency, whose consequence is winding up of the company under the Companies Act, 1956.

In the process of liberalization, deregulation and adopting market economy, India is experiencing a massive growth of retail loans to individuals, housing loans and credit card users. On account of phenomenal rise in retail lending it will be necessary in the near future to give a re-look at the personal insolvency laws to ensure that any insolvency proceedings against individuals are also expeditiously decided.

However, the basic tenets of corporate insolvency can be classified as: restoring the debtor company to profitable trading where it is practicable; to maximize the return to creditors as a whole where the company itself cannot be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights; and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book; placement of the assets of the company under external control; substitution of collective action for individual pursuits; avoidance of certain transactions and fraudulent conveyances, dissolution and winding up etc.

In context of corporate laws, the word “insolvency” has neither been used nor defined. However, Section 433 (e) covers a company, which is “unable to pay its debts”, and thus constitutes a ground for winding up of the company. Inability to pay its debts would be a case where, a company's entire capital is lost in heavy losses and no accounts are prepared and filed and no business is done for one year. In such circumstances, the Registrar of Companies makes out a case of inability to pay debts. These debts however, would only include debts, incurred after the legal incorporation of the Company. Inability to pay debts has even been amplified in Section 434 wherein, a creditor with a due of Rs. 500 [6] or more serves a demand by registered post and the company neglects to pay, secure or compound the same in 3 weeks, in cases where the execution of a decree returned unsatisfied and also where the Court is otherwise satisfied that the company is unable to pay its debts.

Sick Industrial Companies

A sick industrial company means an industrial company (being a company registered for not less than five years and employing fifty or above workmen), which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.[7] Net worth has been defined as the sum total of the paid up capital and free reserves.[8]

Sick Industrial Companies Act requires that when an industrial company has become a sick industrial company, the Board of Directors of the said company shall, within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which a company has become a sick industrial company, make a reference to the Board for Industrial and Financial Reconstruction for determination of the measures which shall be adopted with respect to the company. However, if the Board of Directors has sufficient reasons even before finalisation of accounts to form an opinion that the company has become a sick industrial company, it shall, within sixty days after it has formed such an opinion, make a reference to the BIFR.[9]

Moreover, SICA is basically and predominantly remedial and ameliorative in so far as it empowers the quasi judicial body, Board for Industrial and Financial Reconstruction to make appropriate measures for revival and rehabilitation of potentially viable sick industrial companies and for liquidation of non-viable companies. But, where the BIFR comes to the conclusion that it is not possible to revive the company and that it is just and equitable that the company should be wound up, it shall record and forward its opinion to the concerned High Court, on the basis of which the Court, may order winding up of the company and may proceed and cause to proceed with the winding up of the sick industrial company in accordance with the provisions of the Companies Act, 1956.[10]

If a corporate debtor is in difficulty it is likely that he would approach the senior lenders for some rehabilitation, waiver of compound or penal interest, funding of the interest dues on a zero coupon rate or at concessional terms. It would prepare a scheme of arrangement or rehabilitation plan with the assistance of experts or an advisor, which it would submit, to the senior lenders.

RBI has police guidelines for revival of sick industrial companies and the role to be played by lead institutions or Operating Agencies appointed by the SICA for reviving industries declared to be sick under SICA. When a lender appoints an outside expert, the Court of the Board for Industrial & Financial Reconstruction (BIFR) would normally have to intervene to render help to such expert or advisor to collect information on an unrestricted basis. Depending upon the extent of the industrial sickness and the accumulated arrears or losses, it is likely that the records of the company would be in disarray. In such circumstances reconstruction of accounts on the basis of actual transactions is laborious and difficult to achieve. Large accounting firms render costly services and lenders are wary of appointing high cost expensive services in a rehabilitation scheme. Usually the lenders, if they are public financial institutions rely upon their own in-house expertise and staffing to ferret information.

Under the provisions of Companies Act, 1956,[11] several measures have been prescribed for revival of a company. Even in the case of non-scheduled industries, not governed by Schedule I of the Industries (Development and Regulation) Act, 1951 and consequently, under the SICA; the provisions of Section 391 & 394 of the Companies Act for proposing a scheme of rehabilitation and reconstruction is normally recoursed.

Institutional Machinery

High Court is the Court of proper jurisdiction for handling winding up proceedings and power sought to be transferred to the NCLT with the onset of reforms by way of a proposed Bill. The official liquidator is the liquidator in compulsory winding up. Where a winding up order has been made or where a Provisional Liquidator has been appointed, the Liquidator shall take into his custody or under his control all the property, effects and actionable claims to which the company is or appears to be entitled. All the property and effects of the company shall be deemed to be in the custody of the Court as from the date of the order for the winding up of the company.[12] The Creditor’s Committee on inspection may be appointed .In relation to corporate insolvency, the official liquidator as an officer of the Court or the Court receiver as an officer of the Court are dealing with insolvency related procedures.

Pursuit of Individual Claims

In the sphere of insolvency laws in India, where all the suits are stayed on making of the winding up order, parties may pursue individual claims in certain circumstances.

§ Winding up procedure implies all personal rights be converted into right to prove debt in winding up.

§ Under section 446, stay on all suits and the winding up Court to decide all suits by or against the company.

§ A secured creditor may enforce security interest without a suit and therefore, real rights of secured creditors are protected.

§ Criminal proceedings or proceedings against directors or officers are not stayed.

§ Income tax proceedings will continue against the liquidator.

The Stacking Order of Priorities

The debts due as workmen’s dues and the claims of the secured creditors sacrificed to workmen have an overriding preferential claim or priority to all debts.[13] The debts payable shall be paid in full unless the assets are insufficient to meet them in which case they shall abate in equal proportions.

In the dying stages of winding up proceedings, there is stacking of priorities running from the secured creditors from out of their assets securing their claims, subject to the pari passu claims of the workmen, further, the costs and expenses of winding up under Section 530 (6), then, the preferential creditors under Section 530 (1), the floating charge holders and the unsecured creditors.

There are other statutory preferential payments for taxes, revenues and cesses, wages or salary for past due prior to winding up or for period not exceeding 4 months when there is a continuing employment for the beneficial winding up and for provident fund, pension and other claims.[14]

Rules of insolvency for valuation of annuities and contingent liabilities as are prescribed by the Provincial Insolvency Act and the Presidency Town Insolvency Act continue to apply.

Also, any transfer of property, delivery of goods, payment, execution or other act relating to the property made, taken or done by or against the company within 6 months prior to commencement of winding up be deemed a fraudulent preference.[15]

Compromises & Arrangements

Apart from the lengthy and time consuming winding up procedure, all the companies liable to be wound up under the Companies Act may resort to the alternative of compromise or arrangement. The Court may make orders to enforce these remedies[16] and where a meeting of creditors or class of creditors or members or any class of members is called upon, certain disclosures shall be made. The orders passed by the Courts include transfer of property to another company and to facilitate amalgamation, merger and demergers. Even reduction of capital to the extent that the capital is lost, or capital is in surplus is permitted.

An Analysis

The institution of BIFR has hardly satisfied the call for revival and rehabilitation of sick industrial undertakings and SICA has proved to be a complete failure. The lenders i.e. the banks and financial institutions, find SICA to be the biggest obstacle on their road map to recovery of dues. The existing legal framework of corporate insolvency faces several follies, which may be rectified once the proposed amendments are notified in the Official Gazette.

Procedural delays

There are inherent defects both, procedural and legal in proceedings before BIFR. The BIFR takes nearly one year to determine whether a company is sick. Thereafter, it takes around one year to formulate revival strategy. Consideration of the same also takes substantial time since banks and financial institutions have their own hierarchy in decision making, leading to avoidable delays. The decisions by the banks are also neither transparent, nor subject to judicial review. By the time decisions are taken and communicated, the plan, which had been conceived, has lost its viability resulting in failure of revival schemes even after sanction.

Lack of timely commencement of proceedings

Under the existing law, a company can approach the BIFR for adopting steps for its revival, on erosion of its entire net worth. The erosion of entire net worth is too late a stage to attempt restructuring as by the time the net worth is eroded the company is too sick to be revived and has lost its resilience to restructure and revive itself.

Poor enforcement mechanism

The mechanism for its implementation is so poor that violations take place fearlessly leaving no fear for law. The misuse of the said forum in making an entry by manipulating must be curbed by strict penal consequences for such misuse, which should be demonstrably used to ensure that no entity attempts to misuse these provisions. However, this aspect and solution to this problem has to be found out in the proposed legislation.

Misuse of protection against recovery proceedings

Under SICA, an automatic stay operates against all kind of recovery and distress proceedings against all creditors once the reference filed by the company is registered. This is the principal drawback of the existing legislation as this has led to BIFR becoming a haven for defaulting companies. Erring debtors have misused SICA to seek protection and moratorium from recovery proceedings. The companies are able to enter easily into the reference, sometimes by manipulating their accounts to reflect net worth erosion and are then able to attract immunity against the recovery action by the creditors and this benefit is then attempted to be perpetuated. Registration of reference is dependent upon the erosion of net worth and this can be achieved by accounting manipulations. The provisions for suspension of legal proceedings are misused and perpetuated.

This problem arises due to the fact that unscrupulous promoters enter into the process of rehabilitation by manipulating sickness; take undue benefits arising out of delay in decision making of BIFR. If the reference is rejected, a fresh reference is filed with respect to accounts for the next year and the cycle goes on endlessly. There is no fear of reprisal or punitive action against the companies indulging in this malpractice.

Lack of extra territorial jurisdiction

Indian insolvency laws do not have any extra-territorial jurisdiction, nor do they recognize the jurisdiction of foreign courts in respect of branches of foreign banks operating in India. Therefore, if a foreign company is taken into liquidation outside India, its Indian business will be treated as a separate matter and will not be automatically affected unless an application is filed before an insolvency Court for winding up of its branches in India.

The recommendations of the Eradi Committee have been translated into the Companies (Amendment) Bill, 2001 and the Sick Industrial Companies (Special Provisions) Repeal Bill, 2001 to mend these defects in the existing laws and the end result being tribunalization of justice. The Companies (Amendment) Bill, 2001 proposes amendment of Article 323B of the Constitution of India and provisions of Part VII of the Companies Act, 1956 for setting up of a National Company Law Tribunal (NCLT) and its Appellate Tribunal. The Bill proposes repeal of SICA and abolition of Company Law Board.

Though tribunalisation of justice is now a recognised trend, the India’s experiences with Tribunals have nothing to boast about. They have largely failed to serve the purpose with which they are set up. NCLT would be burdened with workload of enormous magnitude and in the process would be likely to lose focus on revival and rehabilitation of sick entities. Lastly, the misuse of the said forum in making an entry by manipulating/feigning sickness must be curbed by strict penal consequences for such misuse, which should be demonstrably used to ensure that no entity attempts to misuse these provisions. However, this aspect and solution to this problem has to be found out in the proposed legislation.

At present the Government is considering the adoption of UNCITRAL Model Law on Cross-Border Insolvency to meet the demands of globalisation of economy and to deal with international insolvency. This will radically change the orientation of Indian law and make it suitable for dealing with the challenges arising from globalisation and increasing integration of Indian economy with the world economy.

“The increasing incidence of cross-border insolvencies reflects the continuing global expansion of trade and investment. However, national insolvency laws have by and large not kept pace with the trend, and they are often ill equipped to deal with cases of a cross-border nature. This frequently results in inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses, are not conducive to fair and efficient administration of cross-border insolvencies, impede the protection of the assets of the insolvent debtor against dissipation, and hinder maximisation of the value of those assets.”[17]

While drafting the substantive and procedural rules of bankruptcy, international standards for both national and cross-border insolvency should be taken into consideration which, based on Indian situation, should be suitably incorporated.

Conclusion

In the process of deregulation and liberalization, number of restrictions on undertaking industrial activities has been withdrawn and relaxed. There is a need to take the process of liberalization a step further and recognize that so long as a company is acting in the interest of shareholders and otherwise observing the law of the land it should have the freedom to manage its affairs, merge, amalgamate, restructure and reorganize or otherwise plan its affairs as it considers best in the interest of the stakeholders. Interference by the Government or court or any tribunal should only be in the event of any detriment to the shareholders or under the Competition Act to prevent monopolies or restrictive trade practices. While undertaking reforms in the Insolvency Laws there is a need to change the focus from strict regulation of the activities of companies to granting freedom to the industry in conducting its business activities and lay down norms for protection of interest of stakeholders.

REFERENCES

Articles, Notes and Treatises:

§ Batra, Sumant (2002). An Overview of the New Indian Insolvency Bill

§ Johnson, Towards International Standards on Insolvency, the Catalytic Role of the World Bank

§ Press Information Bureau, Government of India, Latest Releases, Justice Eradi Committee on Law Relating to Insolvency of Companies http://pib.nic.in/archieve/lreleng/lyr2001/rmar2001/r15032001.html

§ Stewart, UNCITRAL Model Law and Cross-Border Insolvency, conference on 'Legal Aspects of Cross-Border Insolvency

§ TCA Anant & Jaivir Singh, Regulation: A Constitutional Paradigm, Draft prepared for Law and Regulation Conference in JNU, November 2002.

§ Tomasic, Roman & Little, Peter (1997), Insolvency Law and Practice in Asia

§ ‘Guide to enactment of the UNCITRAL Model Law on cross-border insolvency’, A/CN9/442 (December 1997), at para 13.

Forums, Reports and Declarations

• Forum on Asian Insolvency Reform, 2004 – Insolvency system and risk management in Asia.
• International Monetary Fund (Policy Development and Review and Legal Departments), (1999): Orderly and effective insolvency procedures: key issues.
• Justice V.B. Balakrishna Eradi Committee Report, Committee constituted on 22^nd October 1999.
• The Second Forum for Asian Insolvency Reform (FAIR), 2002 – Proposal for Reforms.

Statutes, Draft Bills & Legislations

• Companies (Amendment) Bill, 2001
• Companies Act, 1956
• Constitution of India
• Insolvency Act, 1986 of UK
• Presidency Towns Insolvency Act, 1908
• Provisional Insolvency Act, 1920
• Sick Industrial (Special Provisions) Act, 1985
• Sick Industrial Companies (Special Provisions) Repeal Bill, 2001
• UNCITRAL Model Law on Cross-Border Insolvency, adopted by the United Nations Commission on International Trade Law at its 30^th Session in Vienna, Austria in May 1997.

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[2] Committee constituted on 22.10.99 and submitted its report to the Hon’ble Prime Minister on 31.08.2000.

[3] Liquidation Committee (England and Wales)

[4] UNCITRAL Model Law on Cross-Border Insolvency, adopted by the United Nations Commission on International Trade Law at its 30^th Session in Vienna, Austria in May 1997.

[5] International Monetary Fund (Policy Development and Review and Legal Departments), (1999), published on pg. 9

[6] “Substituted by Rs. 100000”, Companies (Second Amendment), 2002

[7] Section 3 (1) (o) of SICA

[8] Section 3 (1) (ga) of SICA

[9] Section 15 (1) of SICA

[10] Section 20 of SICA

[11] Section 18 of SICA

[12] Section 456 of Companies Act, 1956

[13] Section 529 of Companies Act, 1956

[14] Section 530 of Companies Act, 1956

[15] Section 531 of Companies Act, 1956

[16] Section 391 of Companies Act, 1956

[17] Guide to enactment of the UNCITRAL Model Law on cross-border insolvency, A/CN9/442 (December1997), at para 13.