Business Laws


| Updated on: Oct 31, 2021
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No ex-parte award

The High Court of Bombay has observed that even if an arbitral tribunal felt that an urgent order needed to be passed, in order to protect the interests of the disputants, then due procedure should be followed.

In a recent judgment in Godrej Properties Ltd Vs Goldbricks Infrastructure Pvt Ltd , the High Court held that an ex-parte ad-interim order could not be passed by an arbitral tribunal without providing sufficient notice. Procedural fairness would not permit the tribunal to pass an ex-parte ad-interim order without having heard the disputants. The Court concluded that it would be unknown to law and quite peculiar for an arbitral tribunal to pass an ex-parte ad-interim order without even hearing the party making the application, much less the party contesting the same.

Writing in Mondaq, Vasanth Rajasekaran, a lawyer with the law firm, Phoenix Legal, observers that “it is a well-recognised principle under global arbitration jurisprudence that an arbitrator is a creature of the contract and is required to operate within the four walls of the contract. The procedure of conducting the arbitration is governed by the underlying contract and the laws applicable to it. The arbitrator must follow the due procedure and, at all times, recognise his responsibility towards the arbitrating parties. Any conduct that hints of partiality towards or against a party goes to the root of the matter and may potentially render the decision(s) of the arbitrator invalid”.

Still a company

If a NBFC is stripped of its license as a NBFC, can it still acquire properties, such as under the SARFAESI Act? The Kerala High Court says ‘yes’. Justice Bechu Kurian Thomas has ruled that a NBFC (in this case, Sree Sankara Funds Pvt Ltd) may have lost its registration as a NBFC, but it is still entitled to buy, own and hold properties because it still has a legal existence as a company.

“Cancellation of registration as a NBFC, midway during the securitisation proceedings, will not result in the entity losing the opportunity to continue the proceedings under the SARFAESI Act to recover amounts due to it. I am fortified in my conclusion by virtue of the fact that due to the cancellation of certification of registration (CoR), the petitioner is refrained only from acting as an NBFC, any further, for the purpose of collecting deposits from the public,” Justice Thomas said. “When the petitioner’s existence as a company is not in dispute, it is entitled to acquire properties and continue its legal existence. Merely because the CoR to function as a NBFC is cancelled, that will not deprive the petitioner of its legal character as a company. Petitioner’s existence as a legal entity capable of holding properties remains unscathed, in spite of the cancellation of its registration as a NBFC.”

Trust’s income

A Trust receives donations. Should the donations be treated as ‘income’ of the Trust? In the Jeypore Evangelical Lutheran Church Vs ITO , the Income Tax Appellate Tribunal, Cuttack Bench, said that the donations are not income.

The church’s balance sheet showed ₹2.09 crore in a special fund. The assessing officer (AO) asked the church to explain as to why the special fund formed through donations should not be treated as revenue receipt. The secretary of the Trust produced a list of donors and the amounts of donation. The AO found that an amount of ₹44.91 lakh was donated for a specific purpose, but the rest was not, so he added ₹1.64 crore to the total income of the church.

Aggrieved, the church went to the Central Income Tax Tribunal who passed an order, ex-parte, confirming the AO’s assessment. Then the matter came to the ITAT, Cuttack. Judge Chandra Mohan Garg noted that the donations “being capital receipts, there is no necessity of routing through income and expenditure account, as claimed by the AO” and therefore were “not includible in the income of the Trust.”

MSME’s rights upheld

In the case Gujarat State Disaster Management Authority Vs Aska Equipments Ltd , the Supreme Court, has directed the Authority to deposit 75 per cent of an awarded amount, as prescribed under Section 19 of the MSME Act, 2006.

The Authority was not happy with the equipment supplied by Aska and a dispute arose. The ‘Facilitation Council’ passed an order in favour of Aska and directed the authority to deposit ₹10.50 crore. The Authority refused, and took the matter to first to the Additional District Judge (Commercial), Dehradun and, having lost there too, to the High Court, which too ruled against the Authority.

The issue reached the Supreme Court. Justices MR Shah and AS Bopanna said, “Considering the language used in Section 19 of the MSME Act, 2006 and the object and purpose of providing deposit of 75 per cent of the awarded amount as a pre-deposit while preferring the application/appeal for setting aside the award, it has to be held that the requirement of deposit of 75 per cent of the awarded amount as a pre-deposit is mandatory. Therefore, as such, both the High Court as well as the learned Additional District Judge (Commercial), Dehradun were justified in directing the Appellant to deposit 75 per cent of the awarded amount as a pre-deposit.”

Discretion to fix interest

Does an arbitrator have the power to fix the rate of interest for a due amount? ‘Yes’, said the Supreme Court, in its verdict in Punjab State Civil Supplies Corporation Vs Ganapati Rice Mills . The arbitrator indeed has substantial discretion in awarding interest under Section 31(7)(c) of the Arbitration and Conciliation Act, 1996. The rate of interest – 18 per cent – on a sum payable by Ganapati Rice Mills to the Punjab State Civil Supplies Corporation was reduced to 12 per cent by a District Judge, which was accepted by the Corporation. Later, the High Court reduced it to 9 per cent. “We do not think that the High Court was justified and correct in reducing the rate of interest to 9 per cent per annum,” Justices Sanjiv Khanna and Bela MTrivedi, of the Supreme Court, said.

The Supreme Court noted that Section 31 (7) of the Arbitration Act, 1996 grants substantial discretion to the arbitrator in awarding interest. “On fact, the appellants (Punjab State Civil Supplies) have referred to certain clauses of the agreement, to contend that interest at 21 per cent, per annum could be awarded. We need not examine this aspect, as the appellants had accepted the decision of the District Judge reducing the rate of interest to 12 per cent per annum,” the apex court said, restoring the interest rate to 12 per cent.

Published on October 31, 2021

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