A Masterclass on the journey of a civil case as it passes through various stages of litigation process.
Category: Corporate Law
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A great conversation with Beyond Law CLC team and young lawyers/law students from P&H, and across the country on issues relating to White Collar Crime (WCC) defence.
The conversation ranged from : What really is ‘White Collar Crime’? and the criminology behind it, to a brief overview of principles of corporate criminal liability and salient features of legislations such as Prevention of Money Laundering Act (PMLA), Prevention of Corruption Act (POCA), Fugitive Economic Offenders Act (FEO), Benami Act, Insolvency and Bankruptcy Code (IBC), Companies Act, etc.
The conversation ended with a brief discussion on the things that young defence counsels defending such cases should keep in mind, and the way forward for WCC and a few suggestions for legal reform…..
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This is a guest post by the very talented Siddhant Bajaj[1]. First published on Livelaw at : https://www.livelaw.in/news-updates/can-an-arbitral-tribunal-pierce-the-corporate-veil-159015
The concept of legal personality is a classic innovation of the law, it is perhaps the most relevant example of legal fiction. From the mid 19th century, the jurisprudence surrounding companies as legal entities has taken quantum leaps. The year 1844 introduced the world to the idea of incorporation of companies by registration.[2] Eleven years later, the doctrine of limited liability of companies was codified[3]; and, in 1897, the landmark judgement of Saloman v. Saloman[4] gave us the ‘veil of incorporation’, an epoch in the development of corporate law.
Simply put, the ‘veil of incorporation’ or the ‘corporate veil’, means that there is a fictional veil between a company and its shareholders, members and directors. This veil of incorporation brings with it separate legal personality of the company, in other words, the law deems a company to be a ‘juristic/legal person’. Legal personality, grants a company leeway to do what could traditionally, only be done by a natural person.[5]
The greatest benefit of the corporate veil and separate legal personality of companies is the legal insulation it affords to those running the company. Being safely behind the veil of incorporation, the shareholders, members and directors of a company are usually not proceeded against in the first instance, with actions being brought against the company in its name, unless exigent circumstances exist to necessitate the lifting of the corporate veil. It is settled that courts may lift or pierce the corporate veil when circumstances so warrant, what is less settled is, whether the same can be done by an arbitral tribunal.
So, can an arbitral tribunal pierce the corporate veil?’. Given the prevailing state of judicial precedent, the answer is yes, and no. Confusing as it is, this is the situation that has been created by two recent judgements, coming from coordinate benches of the Delhi High Court (the “DHC”)[6] which answered this question contrary to one another. This Article will examine the divergent views expressed in these judgements and analyse briefly the reasoning on which these judgements rest.
A Final List Of Non-Arbitrable Disputes: Do We Have One?
It is appropriate for this discussion to begin with the seminal precedent on the arbitrability of disputes, viz. Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Ors.[7] (“Booz Allen”). In Booz Allen, the Supreme Court of India (the “SC”) was concerned with the scope of Section 8 of the Arbitration and Conciliation Act, 1996 (the “Act”) and was dealing with a mortgage suit. While laying down the scope of Section 8 of the Act, the Court observed that while considering an application under Section 8 of the Act a court or judicial authority had to decide inter-alia “whether the reliefs sought in the suit are those that can be adjudicated and granted in an arbitration”[8] In explaining this question, the Court laid down the law on arbitrability of disputes.
The SC laid down that arbitral tribunals are private fora, distinct from courts and tribunals which are public fora, established by the laws of the country. The Court held that every civil or commercial dispute which is capable of being decided by a court is also capable of being decided by arbitration unless the arbitral tribunal is barred from doing so expressly or by necessary implication. The Court laid down that an express bar would arise if certain disputes are placed beyond the remit of arbitration by statute as matters of public policy.[9]
Commenting on the exclusion of matters by necessary implication from the ambit of arbitration, the Court laid down the famous right in rem v. right in personam test. The Court articulated this test in the following words –
“38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to sub-ordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”[10]
In para 36 of its judgement, the Court also laid down the following –
“36. The well recognized examples of non-arbitrable disputes are : (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters;(v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction.”[11]
The above-quoted para does not exclude piercing of the corporate veil from the purview of arbitration, however, as is evident from the words “…well recognized examples of non-arbitrable disputes…” the Court did not lay down an exhaustive list of non-arbitrable disputes in this case. The list provided in para 36 was meant, only to be illustrative. It is appropriate at this stage to consider another judgement where the SC has laid down a list of non-arbitrable disputes.
The SC, in the case of A. Ayyasamy v. A Paramasivam and Ors.[12] (“Ayyasamy”) was dealing with the arbitrability of cases involving allegations of fraud, in doing so, the Court reiterated that certain disputes cannot be adjudicated upon in arbitrations. In para 14 of the judgement, the Court observed as follows –
“14. ……As pointed out above, the Act does not make any provision excluding any category of disputes treating them as non-arbitrable. Notwithstanding the above, the Courts have held that certain kinds of disputes may not be capable of adjudication through the means of arbitration. The Courts have held that certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, cannot be referred to arbitration. Following categories of disputes are generally treated as non-arbitrable:
- patent, trademarks and copyright;
- anti-trust/competition laws;
- insolvency/winding up;
- bribery/corruption;
- fraud;
- criminal matters.[13]
From the emboldened portion of the above-quoted text, it is again clear that the Court regarded the disputes mentioned therein to be ‘generally’ non-arbitrable. This list is thus, illustrative, just like the one in Booz Allen. Further, in para 35 of Ayyasamy, the Court has recognised that Booz Allen “…set down certain examples of non-arbitrable disputes…”[14].The Court also acknowledged that more categories of disputes could be added to the list laid down in Booz Allen when it observed that “…in Vimal Kishor Shah v. Jayesh Dinesh Shah[15], this Court added a seventh category of cases to the six non-arbitrable categories set out in Booz Allen, namely disputes related to trusts, trustees and beneficiaries arising out of a trust deed and the Trust Act.”
A conspectus of the observations made in Booz Allen and Ayyasamy, would reveal that the jurisprudence on what is and what is not arbitrable is still evolving and that additions to the categories of disputes held to be non-arbitrable in these judgements may well be made. I have not yet come across any judgement which claims to have laid down with finality, a comprehensive list of non-arbitrable disputes.
Having said that, it is now apposite to examine the DHC’s view on whether an arbitral tribunal can pierce the corporate veil, beginning with the decisions which hold that an arbitral tribunal cannot pierce the corporate veil.
Balmer Lawrie and Company Ltd. v. Saraswathi Chemicals Proprietors Saraswathi Leather Chemicals (P) Ltd.[16](“Balmer Lawrie”)
The case of Balmer Lawrie seems to be the first in a line of judgements that expressly state that an arbitral tribunal cannot lift the corporate veil.[17] In this case, the DHC was confronted with a situation wherein the Decree holder (“DH”) in whose favour the arbitral award had been passed, was seeking inter-alia to implead the directors of the Judgement Debtor (“JD”) against whom the award had been passed in execution proceedings under Section 36 of the Act.
The DH had alleged that the JD was essentially a concern of its directors, it was also alleged that the directors had siphoned off the funds of the JD and must, therefore, be held accountable to satisfy the requirements of the award. It was argued that the JD’s description varied in various documents and for this reason also, it was necessary to lift the corporate façade and hold the persons behind it accountable for the conduct of the JD.
The Court held that an arbitral tribunal’s jurisdiction rests on the agreement between the parties and cannot proceed against non-signatories to the arbitration agreement. The Court also held that an arbitral award made against non-signatories would be “wholly without jurisdiction and unenforceable”.[18]
The Court recognised the exceptions to this rule, which allow courts to compel non-signatories to an arbitration agreement to arbitrate provided that such non-signatories are either claiming through signatory(ies) or had a clear intention to be bound by the arbitration agreement. For this, the DHC relied on the SC’s landmark decision in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc & Others.[19] The DHC laid down that a court can lift the corporate veil, however, the same can be done only in extraordinary circumstances and by following the due adjudicatory process. The Court held that in cases where the corporate façade is used to perpetrate fraud the corporate veil may be lifted by courts. Thus, it was laid down in unequivocal terms that only a court can lift the corporate veil and the same cannot be done in an arbitration.
Finding none of the arguments for the lifting of the corporate veil to be satisfactory, the DHC held that no occasion arose for it to do so. The Court held that the directors and their family conducting the affairs of the JD was no ground for lifting of the corporate veil.
Sudhir Gopi v. Indira Gandhi National Open University[20] (“Sudhir Gopi”)
In this case, the Petitioner was the chairman and managing director of Universal Empire Institute of Technology (UIET). UIET and Indira Gandhi National Open University (“IGNOU”/Respondent”) had agreed to collaborate on a distance education project in Dubai, to which end they had entered into an agreement, which was subsequently renewed by another agreement. Disputes arose between the parties and the arbitration clause in the agreement between them was invoked.
In the course of the arbitral proceedings, the Tribunal directed UEIT to file a statement, inter-alia clarifying the nature and character of UIET and whether the signatory (the Petitioner) of the reply (filed by UIET against the claims submitted by IGNOU) was authorised to represent UIET.
UIET clarified that it was a Limited Liability Company and that ninety-nine per cent of its shares were held by the Petitioner. It was disclosed that the Petitioner was the managing director of UIET and that his wife was also a director thereof. It was further conveyed that the Petitioner was representing UIET not in his personal capacity, but in the capacity of UIET’s managing director. Along with this, the Petitioner and UIET, both contended before the Tribunal that the statement of claims filed by IGNOU was bad for misjoinder of parties as the Petitioner was not a party to the agreement or the arbitration clause between UIET and IGNOU.
The Tribunal rendered its award against UIET and the Petitioner, holding them jointly and severally liable to pay the sums awarded in favour of IGNOU. The Petitioner challenged this award under Section 34 of the Act. The controversy before the Court was whether the impugned award, insofar as it made the Petitioner jointly and severally liable along with UIET was maintainable.
IGNOU contended that since the Petitioner had filed counterclaims jointly with UIET, his consent to be bound by the arbitration agreement must be inferred. The Court found no merit in this argument and held that since the Petitioner had clarified before the Tribunal that he had filed the counter claims on behalf of UIET and not in his personal capacity. Moreover, both, the Petitioner and UIET had resisted the claims of IGNOU on the ground of misjoinder of the Petitioner as a party to the arbitration proceedings. In para 15 of the judgement, the Court held the following –
“15. The jurisdiction of the arbitrator is circumscribed by the agreement between the parties and it is obvious that such limited jurisdiction cannot be used to bring within its ambit, persons that are outside the circle of consent. The arbitral tribunal, being a creature of limited jurisdiction, has no power to extend the scope of the arbitral proceedings to include persons who have not consented to arbitrate. Thus, an arbitrator would not have the power to pierce the corporate veil so as to bind other parties who have not agreed to arbitrate.”
The Court held that there may be cases where courts may compel non-signatory parties to arbitrate on grounds of implied consent and/or where reasons exist to disregard the corporate personality. Implied consent to arbitrate must be inferred from the conduct and intention of the parties. As far as reasons to disregard the corporate personality are concerned, the Court held that there must be an abuse of the corporate form i.e. “where a corporate form is used to perpetuate a fraud, to circumvent a statute or for other misdeeds”. It was held that in such situations courts are empowered to disregard the corporate veil and hold the alter egos of the company liable for its obligations.[21]
The DHC, in this case, laid down that courts undoubtedly have the power to pierce the corporate façade but an arbitral tribunal, being a creation of and bound by the arbitration agreement could not do so. [22] The DHC, inter-alia relied on a judgement of a single judge of the Bombay High Court in Oil and Natural Gas Corporation Ltd. v. Jindal Drilling and Industries Limited[23] and Balmer Lawrie to support its view.
The DHC also relied on the judgement in Indowind Energy Limited v. Wescare (India) Limited[24] (“Indowind ”) wherein the following was held – “each company is a separate and distinct legal entity and the mere fact that two companies have common shareholders or common Board of Directors, will not make the two companies a single entity. Nor will existence of common shareholders or Directors lead to an inference that one company will be bound by the acts of the other.”
It may be argued that Indowind precedes the landmark judgement delivered by the SC in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purifications Inc.[25] (“Chloro Controls”) which enhanced the scope of joinder of non-signatories to arbitration proceedings, thus, rendering the decision in Indowind moot(if not invalid). However, it is my considered view that the scope of Chloro Controls is not as wide as is generally construed to be. The debate surrounding the true import of Chloro Controls is complex and beyond the purview of this Article, therefore, I would not delve into it. However, for a better understanding of Chloro Controls, a reading of the DHC’s judgement in M/S STCI Finance Limited vs M/S Sukhmani Technologies Pvt. Ltd. & Ors.[26] is strongly recommended.
The DHC in Sudhir Gopi observed that the sole reason for the Tribunal to have held the Petitioner to be a party seemed to be that he held ninety-nine per cent of the shares of UIET and that he exercised absolute control over its operations. The Court disagreed with this view and held the following “…The fact that an individual or a few individuals hold controlling interest in a company and are in-charge of running its business does not ipso jure render them personally bound by all agreements entered into by the company.”[27]
The Court held that in the absence of fraud committed by UIET, the Tribunal’s act of piercing the corporate veil fell foul of the law settled in the nineteenth century. The primary reason for the Court’s decision to hold that the corporate veil cannot be pierced by an arbitral tribunal seems to be the following – “…Businesses are organised on the fundamental premise that a company is an independent juristic entity notwithstanding that its shareholders and directors exercise the ultimate control on the affairs of the company. In law, the corporate personality cannot be disregarded….”[28]
The Court further held that the corporate veil could be pierced only in exceptional cases. The Court relied on the judgement in Insurance Corporation of India v. Escorts Ltd[29] to hold that the veil may be pierced only when the statute so requires or in cases of fraud or where a taxing statute or a beneficent statute is sought to be circumvented. The Court relied on various other judgements[30] to buttress the argument that “An abuse of corporate form is the bare minimum pre-condition that must be met before the corporate entity can be disregarded to impose the obligations of such entity on its shareholders/directors.”[31]
The Court finally, also stated that the decision of an arbitral tribunal to pierce the corporate veil is averse to the fundamental policy of Indian law which recognises companies to be independent juristic persons.[32] The decision in Sudhir Gopi was followed by the High Court of Bombay in NOD Bearings Pvt. Ltd. v. Bhairav bearing Corporation[33].Para 10 of this judgement neatly summarises the law on the lifting of the corporate veil by an arbitral tribunal in the following words–
“10… In doing this, the arbitrator appears to have lifted the corporate veil and tried to find out who the parties really were. This, I am afraid, is not permissible to an arbitral forum. It may be appropriate in a given case for a court of plenary jurisdiction to lift the corporate veil and find out the true perpetrator of the act and hold him responsible for its consequences. Even in such a case, lifting of a veil can only occur in certain specified circumstances, particularly, where a question of fraud is involved and it is necessary to ascertain who the real perpetrator of the fraud was. Other cases where corporate veil has been lifted on judicial grounds have been to detect the enemy character of a company in times of war, to find out the substance of a transaction involving tax evasion or economic offences or other improper conduct or improper purpose. An arbitral forum, on the other hand, is bound by the contract of the parties, which creates it and the terms of submission through which the reference is made to it. Third parties, who are not parties to the contract, the arbitration agreement being a part of such contract, cannot be either arraigned to a cause or made liable for the same. In Sudhir Gopi Vs. Indira Gandhi National Open University7, Delhi High Court has held that an arbitral tribunal has no power to lift the corporate veil. Only a court has a power to lift the corporate veil of a company if a strong case is made out. The mere fact that a party is an alter ego of another would not predicate an agreement to refer the disputes to arbitration by that party under an arbitration agreement of the other. Corporate veil cannot by that reason alone be lifted so as to make a party, who was not party to an arbitration agreement, a party to the reference.”
Coming now to the decisions which have decided the law on piercing of the corporate veil contrary to the judgements discussed so far.
GMR Energy Ltd. v. Doosan Power Systems India Pvt. Ltd. [34] (“Doosan”)
In this matter, the Appellant (“GMR Energy”) had filed a suit against the Respondent (“Doosan India”) seeking a permanent injunction restraining Doosan India and its representatives, agents, etc. from proceeding against GMR in the Singapore International Arbitration Centre (“SIAC”), in an arbitration between Doosan India and companies related to GMR Energy.
The factual background of the case is that for the purpose of building a thermal power plant Doosan India had entered into –
- Three agreements with GMR Chhattisgarh Energy Limited (“GCEL”), together the “EPC Agreements“;
- a corporate guarantee with GCEL and GMR Infrastructure Ltd (“GIL”); and,
- two subsequent Memoranda of Understanding (the “MOUs“) with GCEL’s parent company, GMR Energy.
Doosan India’s agreements with GCEL and GIL provided for disputes to be resolved by arbitration before the SIAC. The MOUs with GMR Energy did not make an express reference to arbitration. Disputes arose between the parties and Doosan India sent a notice of arbitration under the SIAC Rules to GIL, GCEL and GMR Energy. It is because of this that GMR Energy approached the DHC with a plea to injunct Doosan India from proceeding against it before the SIAC. The only issue relevant to this Article that the DHC dealt with in this case, was whether the Tribunal had the power to pierce the corporate veil.
In par 74 of its judgement, the Court has relied on the Singapore High Court’s Judgement in Aloe Vera of America, Inc. v. Asianic Food(s) Pte. Ltd.[35], in para 72 of which, the Singapore High Court has held “Whether a person is the alter ego of a company is an issue which does not have a public interest element”
Further, in para 75 of the judgement delivered in Doosan, the DHC has highlighted the distinction made by Chloro Controls between formal validity of an arbitration agreement and the nature of parties to the agreement. Here the Court has quoted para 106 of Chloro Controls which says the following –
“106. The question of formal validity of the arbitration agreement is independent of the nature of parties to the agreement, which is a matter that belongs to the merits and is not subject to substantive assessment. Once it is determined that a valid arbitration agreement exists, it is a different step to establish which parties are bound by it. …”
The Court noted that the issue of alter ego did not find mention in the list of non-arbitrable disputes as specified in Ayyasamy. Following this, it was noted (basis Chloro Controls) that the question of the nature of parties to the agreement is distinct from the question of formal validity of the agreement and since the question of nature of parties to the agreement is a question on merits, it must be decided by the arbitral tribunal and not by a court. To hold that matters on merits must not be decided by a court and must remain within the remit of the arbitral tribunal the Court relied on the judgement of National Insurance Co. ltd. v. Boghara Polyfab[36] (“Polyfab”).
It seems that the DHC in Doosan has delinked the issue of alter-ego from issues which have a public interest element, relying on a foreign judgement. It has also observed that while a court must decide issues of formal validity of an arbitration agreement, the question of nature of parties (issues of joinder) must be decided only by an arbitral tribunal, being merit-based issues. The Court has relied on the judgement in Polyfab to support its reasoning, that issues on merits must be left to the arbitral tribunal to decide. To further validate its views, the Court also held that Ayyasamy does not lay down as non-arbitrable, the issue of lifting of the corporate veil.
Before moving on to the analysis of these judgements, for completeness, it is important to note that a division bench of the Gujarat High Court, in I.M.C. Ltd. v. Board of Trustees of Deendayal Port Trust and Ors[37]. (“I.M.C. Limited”) has concurred with the view expressed in Doosan (though it does not rely on Doosan). The reasoning of the Court in I.M.C. Ltd. is primarily founded on a detailed analysis of Ayyasamy and the fact that there is nothing in the law that prevents an arbitrator from piercing the corporate veil. The crux of the Court’s reasoning, in this case, seems to be summarized in para 31 of its judgement which states inter-alia the following –
“31. …There is nothing in law which prohibits an Arbitral Tribunal from lifting the corporate veil on the basis of doctrine of alter ego. The Arbitral Tribunal has a right to take up all disputes which a Court can undertake, except certain disputes generally treated as non-arbitrable, viz. (i) patent, trade marks and copyright, (ii) anti-trust/ competition laws, (iii) insolvency/ winding up, (iv) bribery/ corruption, (v) fraud, (vi) criminal matters. The Arbitration and Conciliation Act, 1996, does not make any provision excluding any category of disputes treating them as non-arbitratble but the Courts have held that certain kinds of disputes may not be capable of adjudication through means of arbitration. This issue is elaborately considered by the Hon’ble Supreme Court in the case of A. Ayyasamy v. A. Paramasivam And Others reported in (2016)10 SCC 386…”
The Gujarat High Court concluded that an arbitral tribunal has the jurisdiction to lift the corporate veil and the necessity for doing so, would depend on the facts of each case.[38]
Analysis
It would be appropriate to begin the analysis of the aforementioned judgements with Doosan. While the judgement rendered in Doosan bases its conclusion on arbitral tribunals being empowered to lift the corporate veil on various landmarks, the reasoning employed by the Judgement in reaching this conclusion is fragile for the following reasons –
- The Judgement delivered in Doosan seems to have relied on a Judgement of the Singapore High Court to further the view that lifting of the corporate veil is not a matter of public policy. This is problematic for two reasons – (a) a judgement by a foreign court cannot possibly lay down the law on what will and will not be a part of Indian public policy (fundamental policy of Indian law), this being the prerogative of India’s legislature and its courts; and, (b) in relying on the foreign judgement mentioned above, the Judgement in Doosan has gone against Sudhir Gopi, a judgement rendered by a coordinate bench which clearly holds the concept of separate legal personality to be a part of the fundamental policy of Indian law. In my view the Judgement in Doosan could not have delivered a view so drastically averse to the one expressed in Sudhir Gopi, without declaring it to be per incuriam, which was not done.[39] Moreover, Doosan provides no explanation as to how and why the concept of separate corporate identity is not a part of India’s public policy.
- The Judgement in Doosan has assumed that lifting of corporate veil is not beyond the purview of arbitration because the Judgement delivered in Ayyasamy does not mention it to be a non-arbitrable subject matter. Doosanhas unfortunately, failed to take stalk of the fact that neither Ayyasamy nor Booz Allen, lay down exhaustive lists of non-arbitrable disputes. Doosan has also failed to appreciate that Ayyasamy acknowledged that disputes may be added to the illustrative lists of non-arbitrable disputes presented in these judgements.[40] The same reasoning error is apparent in I.M.C. Ltd.
- Doosan could not have over-ruled Sudhir Gopi (both judgements having been rendered by benches of co-equal strength), therefore, while it held that questions pertaining to joinder of parties would be issues on merits of the matter, falling within the purview of arbitration, it could not have held that piercing of the corporate veil would fall within the same purview. In other words, Doosan did not take into account that simply because an arbitral tribunal has the power to join non-signatories to arbitral proceedings, that does not automatically confer on it the power to pierce the corporate veil. A reading of Balmer Lawrie and Sudhir Gopi on the one hand and Doosan on the other would reveal that joinder of non-signatories can thus be done but not where it involves piercing the corporate veil.
- Doosan neither addresses nor negates by implication the core reasoning based on which Balmer Lawrie, Sudhir Gopi and N.O.D. Bearings have held the lifting of the corporate veil to be beyond the remit of arbitral tribunals. This reasoning will be discussed in the analysis of these judgements. The Court in I.M.C. Ltd. has faltered at the same front.
For the above mentioned-reasons, I am of the opinion that the judgement in Doosan and I.M.C. Ltd., cannot be the final word in addressing the question of whether an arbitral tribunal can pierce the corporate veil.
Moving now to the judgements delivered in Balmer Lawrie, Sudhir Gopi and N.O.D Bearings. Since the reasoning employed by these three judgements in holding the power of lifting the corporate veil to be beyond the remit of arbitration is near identical, I will analyse them collectively.
While it is clear that an arbitral tribunal may transcend the arbitration agreement and implead non-signatories as parties to the arbitration in certain cases, it must not be forgotten that the DHC and the Bombay High Court, while delivering the judgements in Balmer Lawrie, Sudhir Gopi and N.O.D Bearings were aware of this fact. It is not the joinder of third parties that the DHC has held to be beyond the purview of arbitration, it is the piercing of the corporate veil based on the doctrine of alter ego that the DHC has sought to move outside of said purview.
In my opinion, the reasoning given by the aforementioned judgements rests on the fact that the veil of incorporation is a fundamental tenet of corporate law and is well settled. The reasoning of these judgements, which seek to prevent the lifting of the corporate façade by arbitral tribunals is also based on the fact that there is a legitimate expectation associated to the strength of the corporate veil. Businesses are organised on the fundamental premise that a company is an independent juristic entity. There exists an expectation that the veil of incorporation must be strong enough to insulate the promoters, shareholders, directors and member of companies, except in situations where lifting of the veil is dictated by a statute, or where there is an abuse of the corporate form. In order to meet this expectation, it must be ensured that the corporate veil is not made so weak, that an arbitral tribunal that derives its powers from a private contract is able to blast through it.
Groups of companies are structured to hedge and mitigate risks for those running the companies, thus, in nearly all cases, parties would seek piercing of the corporate veil, for, doing so would enable them to mount bigger claims against their counter-parties. This is problematic because it allows claimant parties to break free from the confines of their contracts and go after entities that they initially did not intend to bind by their contract/s.
Thus, the power to pierce the corporate veil must be sparingly exercised, or else it’s sanctity will gradually erode and that would have a deleterious impact on development and growth in the commercial sector. It is, therefore, advisable that the power to pierce the veil of incorporation rest with public fora, i.e. the courts and be exercised judiciously, by the judiciary.
Conclusion
As mentioned in the introduction, on the question that this Article deals with, the situation in India is rather confusing as of now. Sudhir Gopi and Doosan are both judgements delivered by single judge benches of the DHC, and neither has been over-ruled. Thus, within the territorial jurisdiction of the DHC, there is no clarity on whether or not an arbitral tribunal can pierce the corporate veil. In any event, the precedential value of Doosan is on a precarious footing since it is averse to a judgement of a coordinate bench without declaring it per incuriam or sub silentio.
As regards the rest of the country, it is settled law that the decision of one High Court is not binding on the others[41](Though the same cannot be said for when a High Court rules on the vires of central legislation[42]). Therefore, the decision of the Gujarat High Court in I.M.C. Ltd, despite being rendered by a division bench (while expressly disagreeing with single bench judgements of the DHC) will not bind any other High Court (though it will have persuasive value). Similarly, the decision of the Bombay High Court in N.O.D. Bearings will not bind any other High Court, even though it has been delivered post Doosan.
As is clear, there is yet no clarity on whether an arbitral tribunal can pierce the corporate veil. In the words of Hon’ble Mr. Justice D.Y. Chandrachud, ‘…nothing is as destructive of legitimate commercial expectations than a state of unsettled legal precept’[43]. While this state of unsettled legal precept subsists, one can only hope that the SC would step in to clear the air on how strong the corporate veil really is.
Siddhant Bajaj
[1] Siddhant Bajaj is an associate advocate at L&L Partners Law Offices. The views of the Author are personal.
[2] By way of the Joint Stock Companies Act, 1844 (7 & 8 Vict. c.110), prior to which incorporation of a company could only be effected by royal charter or private act (laws applicable only to a particular individual, or a group of individuals or a corporate entity or multiple such entities)
[3] By way of the Limited Liability Act, 1855 (18 & 19 Vict c 133)
[4] Saloman v. Saloman [1] (1897) AC 22
[5] For instance, a company may contract in its own name, acquire and hold property in its own name, as well as sue and be sued in its own name. A company has perpetual succession, which means that its life is not dependant on its shareholders and that it survives changes to its membership, until it is finally dissolved by liquidation.
[6] As well as other conflicting judgements on the subject from other High Courts
[7] Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Ors. (2011) 5 SCC 532
[8] Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Ors. (2011) 5 SCC 532, ¶ 19
[9] Ibid, ¶ 35
[10] Ibid, ¶38
[11] Ibid, ¶ 36
[12] Ayyasamy v. A Paramasivam and Ors, 2016 SCC OnLine SC 1110
[13] Ibid, ¶ 14
[14] Ibid, ¶ 35
[15] Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788.
[16] Balmer Lawrie and Company Ltd. v. Saraswathi Chemicals Proprietors Saraswathi Leather Chemicals (P) Ltd, 239 (2017) DLT 217
[17] Though a catena of judgements prior to Balmer Lawrie could be interpreted to mean the same.
[18] Supra N. 16, ¶ 13
[19] Chloro Controls India Private Limited v. Severn Trent Water Purification Inc & Others, (2013) 1 SCC 641
[20] Sudhir Gopi v. Indira Gandhi National Open University, 2017 SCC OnLine Del 8345
[21] Ibid, ¶ 16 and 17
[22] Ibid, ¶ 20
[23] Oil and Natural Gas Corporation Ltd. v. Jindal Drilling and Industries Limited, 2015 SCC OnLine Bom 1707
[24] Indowind Energy Limited v. Wescare (India) Limited, (2010) 5 SCC 306
[25] Supra N. 19
[26] M/S STCI Finance Limited vs M/S Sukhmani Technologies Pvt. Ltd. & Ors. [(2016) SCC OnLine Del 6650, ¶ 29-31
[27] Supra N. 20, ¶ 34
[28] Ibid, ¶ 36
[29] Insurance Corporation of India v. Escorts Ltd, (1986) 1 SCC 264
[30] Delhi Development Authority v. Skiper Construction Company (P) Ltd. and another, (1996) 4 SCC 622; Juggi Lal Kamlapat v. Commissioner of Income Tax, U.P., AIR 1969 SC 932; In Re: Sir Dinshaw Maneckjee Petit Bart: AIR 1927 Bombay 37.
[31] Supra N. 20, ¶ 40
[32] Ibid, ¶ 41
[33] NOD Bearings Pvt. Ltd. v. Bhairav bearing Corporation, 2019 SCC OnLine Bom 366
[34] GMR Energy Limited v. Doosan Power Systems India Pvt. Ltd. 2017 SCC OnLine Del 11625
[35] Aloe Vera of America, Inc. v. Asianic Food(s) Pte. Ltd. 2006 SGHC 78
[36] National Insurance Co. ltd. v. Boghara Polyfab (P) Ltd. (2009) 1 SCC 267 ¶ 22
[37] I.M.C. Ltd. v. Board of Trustees of Deendayal ort Trust and Ors (2019) 3GLR 1798
[38] Ibid, ¶ 34
[39] The Court in Doosan did not declare the judgement delivered in Sudhir Gopi to be per incuriam, even though the same was argued before the bench.
[40] For greater clarity, refer to the section titled – “A Final List Of Non-Arbitrable Disputes: Do We Have One?”
[41] See, Neon Laboratories Limited v Medical Technologies Limited, (2016) 2 SCC 672, ¶
7 – ‘We may reiterate that every High Court must give due deference to the enunciation of law made by another High Court even though it is free to charter a divergent direction”: and, Commissioner of Income Tax v. Thane Electricity Supply Limited, 1993 SCC OnLine Bom 59, ¶ 11.
[42] See Kusum Ingots & Alloys Ltd. v. Union of India, (2004) 6 SCC 254, Para 22
[43] Supra N. 12, ¶ 31.
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In the previous part (click here), we gave you a general background to the Insolvency and Bankruptcy Code, 2016 (IBC) and tried unpacking some specific concepts crucial to its functioning. We introduced you to the central actors of the IBC regime: Adjudicating Authority (AA), Committee of Creditors (CoC) and financial creditors, including the latest addition to the group—homebuyers. Additionally, we briefly analysed some of the more advanced concepts such as ‘cross-border insolvency’, ‘group insolvency’ and ‘timely resolution’—topics that the IBC (and the country) is still warming up to. We also explained how Courts have interpreted ‘default’ and ‘dispute’, which are important events which can trigger or stall a corporate insolvency resolution process (CIRP).
In the second part, we take a closer look at the IBC’s most fundamental features (terms starting with alphabets I-P).
I – Information Memorandum (IM)
The IM is one of the four important documents in an insolvency process along with the evaluation matrix, request for resolution plans and the resolution plan (RP) itself.
Put simply, the IM is nothing but a document spelling out the details of the corporate debtor (CD) to assist the resolution applicant (RA) in preparing the RP. Section 5(10) of the IBC defines an IM as a memorandum prepared by a resolution professional and then directs the reader to Section 29 which spells out, with greater granularity, what ‘relevant information’ an IM should contain.
Photo by Andrea Piacquadio on Pexels.com This information is intended to provide an all-around picture of the CD and to help stakeholders make informed decisions w.r.t the future of the CD; broadly, it includes information relating to CD’s financial position and disputes by or against it. Insolvency and Bankruptcy Board of India (IBBI) is empowered to lay down what exactly constitutes ‘relevant information.’ The IBBI has done so in Regulation 36 of the IBBI (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (IBBI Regulations, 2016) where it has added on to the constituents provided in Section 29. These include : the audited financial statements, the list of creditors and the amounts claimed by them, assets and liabilities of the CD, details of guarantees given for the debts of the CD, the number of workers and employees and liabilities towards them, amongst a host of other things.
J – Judicial Review of the decision of the Committee of Creditors
This is a topic worthy of an entire article dedicated to it, but space constraints permit us to only summarize it here. The saga began with the ruling of the National Company Law Appellate Tribunal (NCLAT) in Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited[2] which, as we have already highlighted in the previous part of the article, drove coach and horses through the concept of autonomy and commercial wisdom of the CoC in deciding the distribution of proceeds under the RP. Something that was to be left to the CoC was appropriated by the NCLAT. This was problematic since it adversely affected the interests of the most important creditors to the company—secured financial creditors. Secured creditors, for the uninitiated, lend capital to companies at low interest rates because the presence of a security mitigates their risk in the event of a default in repayment. Since the banks’ interests are protected, they are motivated to extend credit to companies. This entire system helps maintain a continuous supply of credit for companies, facilitates greater economic activity, and avoids a chilling effect on lending. In the insolvency resolution process also, it is the CoC, which is composed of financial creditors, that has the capacity and judgement to assess the viability of a Resolution Plan (“RP”). In doing so, the CoC may decide to approve a RP which enables increased recovery by the secured financial creditors, in comparison to other unsecured and operational creditors. As we have noted before, this is only fair since it is only the financial creditors who are willing to take haircuts on their loans and place their claims in a long-term context of the company’s revival, something which operational creditors may not be able to do.
Photo by Christina Morillo on Pexels.com It is in this context that the Supreme Court’s judgment in Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta[3] (Essar Steel) becomes an important precedent. The Supreme Court has rightly held that AAs/ NCLATs cannot make a judicial determination of a commercial decision – which is entirely within the remit of the CoC, composed of financial creditors who are better suited to judge the feasibility and viability of an RP. The decision draws heavily from another decision of the Supreme Court in K. Sashidhar v. Indian Overseas Bank[4]where it was held that the commercial wisdom of the CoC was nonjusticiable.
However, judicial review has not been completely ruled out. The AAs/NCLATs have to still ensure that the decision of the CoC reflects a plan to maximise the value of assets and takes into account the interest of all stakeholders, which includes the operational creditors. In providing a narrow scope of scrutiny, the Supreme Court has, therefore, struck a balance. This is important because any company cannot survive merely off financial creditors; it needs a constant supply of goods and services from operational creditors. A complete disregard of their interests can never be in the long-term interests of the company because this may have the effect of handicapping a newly revived company who may rendered a pariah and left with no operational creditors to provide goods and services to it.
Even the 2019 amendment to Section 30 of the IBC, which we have discussed in the previous part, has taken a balanced view by stipulating that the RP has to provide a minimum pay-out to the operational creditors and that the CoC can take into account the hierarchy between creditors in deciding the manner of distribution from an RP. However, a vaguely worded explanation has also been introduced to Section 30 which states that: [f]or the removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.
Before the judgment of the Supreme Court in Essar Steel, there were two possible interpretations of this explanation which rendered it ambiguous. One interpretation was that if the RP provided for the minimum pay-out to the operational creditors, it would be deemed to be a fair and equitable distribution and thereby, eliminate any possibility of judicially review of the ‘fairness’ of the distribution. If it was truly in the character of a deeming provision, that would mean that the Parliament had omitted to insert the words ‘deemed to be.’ Another view was that the explanation had cast a duty on the AAs/NCLATs to determine the ‘fairness’ of the distribution to operational creditors and, thus, opened up the floodgates for litigation on the fairness of distribution. However, the latter view brought the IBC back to square-one and defeated the intent of the amendment which is to limit judicial review of distribution under RPs. In Essar Steel, the Supreme Court seems to have endorsed the first interpretation; it clarified that Explanation 1 has been inserted to preclude the AA/NCLAT’s from entering into the merits of the decision of the CoC, once the RP ensures the minimum pay out to operational creditors. This means that the scope of judicial review of the CoC’s decision is circumscribed by the IBC and can no longer be tested on untrammeled subjective notions of just and fair.
A recent decision of the Supreme Court has thrown further light on the issue of commercial wisdom and the limits of judicial review. In Maharasthra Seamless Limited vs. Padmanabhan Venkatesh,[5] the Supreme Court approved a RP where the bid amount was lower than the liquidation value (notional value of assets if the CD was to be liquidated; more on this later). While the NCLAT had ordered the RA to increase the upfront payment to match the liquidation value, the Supreme Court felt that the NCLAT had overstepped its boundaries of judicial review in doing so. It observed that NCLAT’s decision was based on an equitable perception and, was an improper attempt to substitute its own decision for the CoC’s commercial wisdom.
This judgment may come under fire for promoting an unquestionable use of commercial wisdom to defeat any objections against palpably unfair RPs, such as the one in this case, one may argue. However, a close reading of the judgment belies this perception. The Supreme Court itself acknowledged the fact that an RP which provides an amount lesser than the liquidation value appeared inequitable, but also noted that the RA planned to infuse more funds once it began running the company. In other words, the RA’s decision to invest in a staggered manner rather than make a significant upfront payment was based on what the CoC and the RA itself considered to be commercially viable. The judgment reinforces the view that the seemingly impenetrable wall of commercial wisdom is not to enable downright arbitrary RPs to pass muster but is intended to avoid excessive intereference in what are otherwise commercially viable decisions.
K – Kreative Destruction
Yes, creatively spelled. This is at the heart of IBC. The term ‘creative destruction’ was first devised by the economist, Joseph Schumpeter in 1942, in his work titled ‘Capitalism, Socialism, and Democracy.’ He explained it in the following words: “. . . the same process of industrial mutation . . . that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.” To Schumpeter, the process of constant evolution in the kind of technology, products and services people use, undergirds economic growth and productivity. At its heart, creative destruction requires challenging the status quo and introducing reformative ideas and processes to destroy the existing ones, for the better.
Closer to home, we have our very own proponent of creative destruction in the form of Lord Shiva (also known as Lord of Destruction), who destroys and creates the world anew in a more perfect form.
Photo by Elina Sazonova on Pexels.com The idea of breaking up old structures to give way to new ones is central to the insolvency process under the IBC. The CIRP involves the removal of the existing management of a CD debtor which is followed by a process aimed at revitalizing it through a RP and to enable it to continue as a going concern. RPs are typically aimed at turning the CD around by infusing fresh capital and helping it chart a new path, all of which is done by a different management, with a better vision than the earlier one. The IBC leaves almost no scope for the earlier management to bid for the CD or regain control of it (something that we will touch upon in the next part). This ensures that a completely new management takes over the CD, uninfluenced by the previous way of functioning and keen to introduce its own ideas. In doing all of this, the IBC paves the path to resolution from destruction for the CD and ends up making use, in its own way, of the theory of ‘creative destruction.’
L – Limitation Act and IBC
As a law which is still plagued by many instances of conflict with other laws, the IBC’s conflict with the Limitation Act, 1963 (Limitation Act) stands resolved by a legislative amendment and reaffirmed by a judgment of the Supreme Court. Like other puzzling questions of law which arise in the implementation of IBC, the question of applicability and the need for judicial and legislative intervention arose from existing jurisprudence which considered the Limitation Act to not apply to claims under the IBC.[6] This reasoning had proceeded on the premise that the IBC is a self-contained code which excluded the application of the Limitation Act. This, however, did not mean that stale claims from even 30 years ago could be admitted since the NCLAT had left it to the AAs to determine limitation on a case-to-case basis, without imposing the requirement to take guidance from the Limitation Act.
Even before any appeals could be made to the Supreme Court, the Parliament added Section 238A to the IBC to apply the Limitation Act to proceedings and appeals under the IBC. The only question, therefore, which fell before the Supreme Court in B.K. Educational Services Private Limited v. Parag Gupta and Associates[7] was whether the Limitation Act would apply retrospectively to applications made on and from the commencement of the IBC on 01.12.2016 till 06.06.2018, the day on which the amendment came into effect.
Photo by Bich Tran on Pexels.com The Court answered this in the affirmative and held that the definition of ‘due and payable’ under Section 3(12) of the IBC covered only those debts which were not time-barred. This was itself drawn from another ruling of the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank[8] which had held that a debt would not be a due debt if it is not payable in law or in fact. A time-barred debt was not a due debt since it was interdicted by the law of limitation. Not holding so, according to the Supreme Court, would allow anyone, even with a time-barred claim from 1990, to trigger a CIRP even where it is not required and may cause liquidation leading to ‘corporate death.’
Also, L – Liquidation Value
Regulation 2(k) of the IBBI Regulations, 2016 defines ‘liquidation value’ as the estimated realizable value of the assets of the CD, if the CD were to be liquidated on the insolvency commencement date. This has to be determined by two registered valuers who have to appointed by the resolution professional within seven days of his appointment. But what exactly is the purpose of determining the liquidation value at a stage when the CD is commencing its journey to recovery, something which is fundamentally opposed to the idea of liquidation.
The answer to this lies in an understanding of the classification of creditors into financial and operational creditors. As we have highlighted in the previous part, the financial creditors in the CoC have wide-ranging powers to take important decisions for the CD like the approval of a RP and deciding the manner of distribution under the plan. Given that operational creditors have no voting rights in the CoC, there is a possibility that the financial creditors may completely disregard their interests. In order to prevent this from happening, the law guarantees the payment of atleast the liquidation value to such operational creditors so that their claims are not completely ignored under a RP. The payment of liquidation value is also guaranteed to ‘dissenting financial creditors’ who do not vote in favour of the RP. This was a result of the first set of amendments to the IBC in 2019, pursuant to which Section 30(2)(b) of the IBC was amended to provide for this payment. In fact, dissenting financial creditors were initially entitled to the payment of liquidation value under Regulation 38 of the IBBI Regulations, 2016, but the provision was struck down by the NCLAT as being ultra vires of the IBC.[9] This necessitated the re-introduction of this provision.
In fact, the first set of amendments in 2019 has amended Section 30(2)(b) to further benefit the operational creditors by mandating the payment of the resolution value, if it is higher than the liquidation value. This is the amount that the operational creditors are entitled to receive if the bid amount is distributed in accordance with the order of priority under Section 53 of the IBC. In simple terms, the amendment has pegged the value of the minimum pay-out in relation to the amount given in RP, rather than the liquidation value, since the former is likely to generate a higher pay out for the operational creditors. However, a persistent difficulty continues to plague both liquidation value and the amount given in the RP: the amount to be paid under the RP will have to be a significant amount for it to be distributed to the operational creditors in the order of priority under Section 53 of the IBC. This is because they are at a lower priority than other categories of persons under the provision and the amount is likely to be exhausted by the time their claims can be satisfied.
A reading of the IBBI Regulations, 2016 reveals another term which accompanies liquidation value : fair value. This is the estimated realizable value of the assets of the CD if they were to be exchanged on the insolvency commencement date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing and with knowledge, prudence, and without compulsion. Note that the italicized terms radically change the circumstances of the hypothetical transactions from the ones that would have to be taken in determining the liquidation value. The determination of fair value is expected to yield a higher valuation than liquidation value, because the former proceeds on the assumption that the CD will continue as a going concern and not be liquidated. The determination of fair value became a requirement only from 2018, when it was added by way of an amendment to the IBBI Regulations, 2016. This change was prompted by low bids being submitted by RA’s, which took liquidation value to be the base for their bids, ignoring the fact that the assets had to be valued in the context of revival and not liquidation.
M – Moratorium
Akin to a ‘closed door’ which does not provide any access to the assets of the CD, the moratorium under Section 14 of the IBC is imposed to keep the CD’s assets together so that the interests of all stakeholders can be addressed, and piecemeal recoveries through multiple proceedings do not minimize the value of the CD. A seemingly uncontroversial provision has, however, run into trouble in its implementation when it comes to imposing a moratorium on legal proceedings, in the form of suits and arbitrations, by or against the CD.
Although Section 14(1)(a) makes it amply clear that the moratorium applies to all proceedings against the CD, the Supreme Court’s ruling in Alchemist Asset Reconstruction Company Ltd. v. M/s. Hotel Gaudavan Pvt. Ltd.[10] seems to have applied the moratorium to even proceedings by the CD even in absence of an express statutory prohibition in Section 14. In spite of a moratorium on proceedings against the CD, one ruling of the NCLAT in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd.[11] and two rulings of the Delhi High Court in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.[12] and SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd.[13] have allowed proceedings which are against the CD, arguably, in disregard to the statutory prohibition.
In order to overcome the statutory hurdle, these rulings have adopted, what we call, the Impact on Assets theory where all proceedings against the CD are allowed unless they endanger, diminish, dissipate or adversely impact the CD’s assets.[14] This logic interdicts only recovery actions against a CD and allows any other kind of proceedings such as a Section 34 application under the Arbitration and Conciliation Act, 1996 (this was allowed in Power Grid by the Delhi High Court) or even the continuation of an arbitration against the CD till the execution stage. This is because the latter two proceedings do not impact the assets of the CD and accordingly do not hit the moratorium. Supporting this march towards the creative interpretation of law, the NCLAT in Jharkhand Bijli Vitran Nigam Ltd. allowed the continuation of arbitration proceedings against the CD because the adjudication of the CD’s claim depended on the determination of other claims against it. The NCLAT reasoned that if the CD was found liable to pay an amount, the counter-claimant could not recover during the moratorium, thus protecting the CD’s assets. Presently, these rulings which have creatively interpreted Section 14(1)(a) are good law. This is also because the question of their incompatibility with the Supreme Court’s ruling in Alchemist remains unclear due to the language of the SC’s order. This issue, therefore, remains ripe for the Supreme Court’s intervention.
In the interlude between Part I of this article and the current Part, the “proposed suspension of the IBC” has crystallised as law through the IBC (Amendment) Ordinance, 2020, promulgated on June 5, 2020. The Ordinance has notably added Section 10A, which has suspended insolvency filings for defaults arising on and after March 25, 2020 for six months (this period is extendable for up to one year). This may impair the utility of the moratorium in keeping the CD’s assets together. This is because Section 14 of the IBC comes into play only when an application is filed under the IBC, and not otherwise. Therefore, the suspension of filings under IBC has now made it easier to peel off the protective layer over the CD’s assets, both by the CD in transferring its assets and by others in instituting legal proceedings, enforcing security interests or recovering any property occupied by the CD.
N – Non-Obstante clause
The non-obstante clause, as it is understood in its legal sense, seeks to provide an overriding effect to the provision in which it is contained over other inconsistent provisions. The non-obstante clause which gives the IBC an overriding effect is contained in Section 238. The interpretation of Section 238 and the interaction between IBC and other statutes has been the subject of many judgments.[15] Here, we explain two instances which still await resolution.
The first one relates to the conflict with the Securities and Exchange Board of India Act, 1992 (SEBI Act) which is presently pending before the Supreme Court in SEBI v. Rohit Sehgal. The case has arisen from an illegal Collective Investment Scheme floated by HBN Dairies Pvt. Ltd., which was being run in non-compliance with the SEBI Act. In view of this, SEBI ordered the attachment of properties of the company in 2017. Apart from the SEBI taking action, even the investors who had grown impatient with the recovery process, approached the NCLT as financial creditors to initiate the CIRP of the company. The NCLT accepted the application and declared a moratorium under Section 14 of the IBC. Armed with the NCLT order, the RP approached the SEBI for de-attachment of properties which refused to budge, citing the primacy of the SEBI Act. Things ultimately wound up at the NCLT which ordered de-attachment of the property by reason of the overriding effect of IBC over the SEBI Act, which was subsequently affirmed by the NCLAT. This decision has been appealed by SEBI in the Supreme Court which has stayed the order of the NCLT directing SEBI to hand over the title deeds to the RP and ordered SEBI to not create any encumbrance on these properties.
The second unresolved conflict (we say this with the caveat that it remains unresolved from the standpoint of a judicial decision) is between the IBC and the Prevention of Money Laundering Act, 2002 (PMLA). Since the PMLA empowers the Enforcement Directorate (ED) to provisionally attach properties which are the proceeds of crime, it becomes a problem for a RA who has bid on the basis of those assets, with the hope of using them once it takes over the CD. Given the contentious nature of this issue, it was not long before it found its way at the centre of disputes before the Courts. Two decisions of the NCLT, Mumbai and Delhi High Court, at variance with another, hold the ground on this. While the NCLT, Mumbai in SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited[16] has held that the IBC prevails over PMLA in view of Section 238 of the IBC and, therefore, no attachment under PMLA can be allowed in derogation of the moratorium. The Delhi High Court, on the other hand, in The Deputy Director Directorate of Enforcement Delhi v. Axis Bank[17] has taken a different (and a more nuanced) view. It has held that there is no inconsistency between the PMLA and the IBC since both have distinct purposes, text and context which militates against the application of Section 238. In fact, with this judgment, the Delhi High Court has cleared a major misconception surrounding the application of a non-obstante clause. This is because a view seemed to have developed that Section 238 kicks-in each and every time another legislation had to be applied along with IBC and completely barred the application of a co-existent legislation. However, a cardinal principle of interpreting a non-obstante clause is that it only applies in case of an inconsistency with another legislation and this even finds a mention in the provision itself. This is what the Delhi High Court has considered in its judgment while ruling that the laws operate in different spheres.
Coming back to the caveat we had inserted before we began discussing this; the issue of an inconsistency between IBC and PMLA stands resolved, more or less, under the Insolvency and Bankruptcy Code (Amendment) Act, 2020. The Act has added Section 32A to the IBC which provides the CD complete immunity from prosecution for any offence committed prior to the CIRP, once the RP is approved. This amendment will certainly affect attempts to attach properties by the ED under legislations like the PMLA and has impliedly given the IBC an overriding effect over the PMLA, in that sense. However, the NCLAT’s decision, based on the new Section 32A, to disallow the ED from attaching the assets of Bhushan Steel and Power Limited (CD) for which JSW Steel had bid (RA), has been appealed to the Supreme Court. This means that the IBC-PMLA conundrum, inspite of the legislative amendment, is here to stay, atleast till the Supreme Court endorses the NCLAT’s view on this. More on this – in the next part.
O – Operational Creditor
Section 5(20) of the IBC defines an operational creditor as a creditor to whom an operational debt is owed and Section 5(21) of the IBC defines an operational debt as a claim in respect of the provisions of goods or services including employment or debt in respect of the payment of dues, including Government dues. Operational creditors, who are mostly unsecured creditors, as a class, are best understood in juxtaposition with financial creditors who are mostly secured creditors. While financial creditors lend capital on a loan basis which often involves large amounts of money, operational creditors make claims in respect of dues which arise by virtue of the goods and services they have supplied to the CD. For e.g. a wholesale vendor of spare parts who supplies these goods to a car manufacturer is owed the payment of this amount or a lessor who rents out a space to the CD is owed the rent amount; both of these are operational creditors.[18]
The IBC also reflects these differences between the two types of creditors, by allowing only the financial creditors to be in the CoC and to vote on RP’s. Operational creditors are not entitled to vote in the decisions of the CoC but are allowed to attend its meetings, if their aggregate dues are not less than ten percent of the debt. The reason for this exclusion, as clarified in Swiss Ribbons Pvt. Ltd. v. Union of India[19] and later in the Essar Steel decision and in Pioneer Urban Land and Infrastructure Limited v. Union of India,[20] is because the financial creditors are, by their very nature as lenders, well-equipped to assess the commercial viability of the CD and the RP for it, something operational creditors cannot do.
The fact that the operational creditors do not have voting rights in the CoC does not mean the financial creditors can ride roughshod over their interests. As we have noted earlier, the IBC requires that the RP approved by the CoC must provide for higher of the two amounts specified in Section 30(2)(b) of the IBC. This protection has been affirmed by the Supreme Court in the Essar Steel judgment, where it has held that the AA must review the RP to assess whether it has taken the interests of operational creditors into account.
One grouse that operational creditors have always put forth is about the unfair treatment they receive in a CIRP. RPs typically, negotiated by the financial creditors in the CoC, are not geared towards safeguarding the interests of operational creditors. Even the minimum statutory payment of liquidation value (after the 2019 amendment, this is to be considered along with the resolution value provided in Section 30(2)(b)) is often negligible for reasons we have noted above. In fact, this was acknowledged by the Insolvency Law Committee in its 2018 report, which also discussed replacing liquidation value with fair value or resolution value, both of which were eventually discarded for being unsuitable. It also dismissed claims of unfair treatment for lack of empirical evidence.[21]
Meanwhile, attempts by the NCLAT to level the field between financial and operational creditors were thwarted by both the legislature (through the amendment to the IBC in 2019) and the Supreme Court (through the Essar Steel decision). But both the seemingly unpleasant changes contain elements which work to the benefit of the operational creditors. While the Legislature has added the payment of resolution value to the minimum pay out of liquidation value in Section 30(2)(b), the Supreme Court in Essar Steel has tempered the CoC’s commercial wisdom to the condition that it takes into account the interest of all stakeholders, including operational creditors. Even the Insolvency Law Committee’s latest report released in February, 2020 comes as a ray of hope for operational creditors.[22] Noting the need for a fair and just CIRP, the Committee has proposed to confer voting rights on the operational creditors, so that they too have the opportunity to air their grievances against a RP. But the Committee is reluctant about implementing this reform quickly. This is for two reasons: first, the lack of technical and financial capacity in operational creditors to assess the commercial viability of the CD and, second, the impact a larger CoC will have on the efficiency of decision-making. The Committee has, therefore, conditioned the proposal with the need to address these two concerns. The Committee’s proposal has a long way to go before it is reflected in the IBC, but it is still one of the most significant triumphs for the operational creditors since 2016.
With atleast one promising potential change to look forward to, operational creditors have to weather another storm: one brought about by the recently added Section 10A. As noted earlier, Section 10A suspends filings under the IBC by all the three major stakeholders in a CIRP- financial creditors, operational creditors and the CD itself. But it is likely to have a disproportionate impact on the operational creditors. This is because the suspension coincides with the six-month moratorium on repayment of loans being granted by banks, which means that there are no chances of a default occurring, in absence of any obligation to pay on the CD. The financial creditors, therefore, have no reason to file applications under the IBC, atleast during the suspended period. However, operational creditors are perpetually precluded from invoking the IBC for non-payment of amounts due to them. The use of the word perpetually stems from the proviso to Section 10A which bars an insolvency application for a default, in the suspension period, forever. The proviso reads as: . . . Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period. The said period is currently to be counted for six months from March 25th, 2020. With banks expecting repayments (and therefore possible defaults) only after the loan moratorium is lifted, which is likely to coincide with the lapse of Section 10A, it is the operational creditors that stand to bear the major brunt of this. Since the amendment was always intended to benefit the Micro, Small and Medium Enterprises (MSMEs), who are mostly operational creditors, the potential detriment that they may suffer has turned the amendment into a double-edged sword.
However, as alternatives to the IBC, the operational creditors still have two options:
(i) They can either approach the civil court for recovery of their dues or they can initiate arbitration if there is a contractual stipulation to that effect; and(ii) Operational Creditors can also, by virtue of being considered MSMEs, seek protection under the MSME Development Act, 2006. It entitles the operational creditor to receive compound interest if the buyer fails to make the payment and also provides for dispute resolution by the Micro and Small Enterprise Facilitation Council.
P – Preferential Transactions
Normally, a completed transaction between parties is left undisturbed and considered valid, unless it is objected-to by any of the parties to the transaction. However, the IBC empowers the resolution professional and the liquidator to scrutinise certain types of transactions which were entered into in the run-up to an insolvency. Generally referred to as ‘vulnerable transactions,’ they are subjected to an ex-post facto examination by reason of the circumstances under which they are concluded. Preferential transactions are one type of vulnerable transactions, apart from fraudulent (this has been covered in the previous part), undervalued and extortionate transactions, both of which will be discussed in the next part.
Photo by Andrea Piacquadio on Pexels.com As the title itself suggests, preferential transactions are those transactions which are entered into by the CD to give preference to a particular creditor or a surety or guarantor, often to the detriment of other creditors or alike individuals. These transactions are usually entered into in the run-up to an insolvency and with a view to benefit a particular creditor at the cost of other creditors. Such transactions have the effect of disturbing the parri passu distribution intended under Section 53 on liquidation and also reduce the value of the CD to a prospective RA.
Section 43 of the Code explains in detail when a transaction will be deemed to be a preferential transaction by highlighting two situations: (i) when such transaction is for the benefit of a creditor, surety or guarantor for the satisfaction of a debt owed to such person and (ii) when the aforesaid transaction changes the pecking order given inSection 53 in a way that the beneficiary is put in a more beneficial position than it would have been in the event of a distribution being made in accordance with Section 53. To illustrate, for e.g. Company ‘A’ is going to go under insolvency pursuant to which all its assets will become part of a common pool which can be used to satisfy the claims of all creditors, in the event of liquidation. But just before this happens, Company ‘A’ transfers a substantial amount of property in favour of its holding company ‘B’ which is also a creditor of the company. This transfer has the effect of reducing the amount of assets which can be used to satisfy the claims of other creditors and is a transaction which gives an undue preference to Company ‘B’. It further puts Company B in an advantageous position than it would have been under Section 53 as an unsecured creditor.
The provision empowers the liquidator or RP to review any transactions undertaken by the CD in the ‘look back period’ which is a period of two years preceding the date of insolvency for transactions entered into with a related party and a period of one year for transactions with persons other than a related party. Section 44 empowers the AA to pass a variety of orders to restore the position of the CD, it would have been in had the transactions not been entered into. Not all transactions, however, in the ‘look-back’ period are hit by the prohibition: transactions which are made in the ordinary course of business or financial affairs of the CD or the transferee are excluded from avoidance. Similarly, are transactions which create a security interest which secures new value to the CD and transactions which are registered with an information utility on or before thirty days after the CD receives possession of such property.
A recent decision of the Supreme Court in Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd. v Axis Bank Limited[23] has further clarified several aspects related to preferential transactions. The Court was reviewing whether mortgages by a subsidiary company, Jaypee Infratech Limited (CD) in favour of the lenders of its holding company, Jayprakash Associates Limited, could be set aside as preferential transactions. In coming to its conclusion that the transactions were indeed preferential, the Court has described both the conceptual and statutory underpinnings of preferential transactions, in great detail. It has laid down the following interpretative rules for section 43:
- So long as both the requirements of Section 43(2) along with the relevant look back period are fulfilled, the transaction will be deemed to be a preferential transaction, irrespective of whether it was, and whether it was intended or anticipated to be;
- The look back period can be reckoned from before the commencement of the IBC i.e. even preferential transactions undertaken before 2016 can be scrutinised and doing so will be not be considered a retrospective application of the law.
- The word ‘or’ appearing in Section 43(3)(a), which contains the ordinary course of business exception, has to be read as ‘and’. This rule was necessitated by an argument that in order to be excluded from the purview of Section 43, transactions had to be made in the ordinary course of business or financial affairs of only one of the two parties, the CD or the transferee. This would have shifted the focus from the affairs of the CD and saved it of justifying its unusual transactions, so long as they could be justified from the viewpoint of the transferee’s business affairs. Mindful of the disastrous implications of the argument, the Court has held that a transaction has to fulfil the exclusionary requirements of Section 43(3) from both the CD’s and the transferee’s perspectives.
To be continued…..
[1] Authored by Bharat Chugh, Partner, L&L Partners, Law Offices and Mr. Advaya Hari Singh, 4th-year B.A., LL.B student at National Law University, Nagpur. The views of the authors are personal.
[2](2019) SCC OnLine NCLAT 388.
[3](2019) SCC OnLine SC 1478.
[4](2019) SCC OnLine SC 257.
[5](2020) SCC OnLine SC 67.
[6]Neelkanth Township & Construction Pvt. Ltd. vs. Urban Infrastructure Trustees Limited, Company Appeal (AT) (Insolvency) No. 44 of 2017 (11.8.2017); Speculum Plast Pvt. Ltd. vs. PTC Technologies Pvt. Ltd.,(2017) SCC OnLine NCLAT 319.
[7](2018) SCC OnLine SC 1921.
[8](2018) 1 SCC 407.
[9]Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd., (2018) SCC OnLine NCLAT 1034.
[10](2018) 16 SCC 94.
[11](2018) SCC OnLine NCLAT 891.
[12](2017) SCC OnLine Del 12189.
[13](2019) SCC OnLine Del 9339.
[14]This was first used in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd (2017) by the Delhi High Court.
[15]Duncans Industries Limited. v. A. J. Agrochem, (2019) 9 SCC 725 [IBC and The Tea Act, 1953]; Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd, (2019) SCC OnLine SC 87 [IBC and The Companies Act, 2013]; Jaipur Metals & Electrical Employees Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227 [IBC and The Companies Act, 2013]; K. Kishan v. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 662 [IBC and The Arbitration and Conciliation Act, 1996]; Pr. Commissioner of Income Tax v. Monnet Ispat And Energy Ltd., (2018) 18 SCC 786 [IBC and The Income Tax Act, 1961]; Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd, (2018) 2 SCC 674 [IBC and The Advocates Act, 1961]; Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 [IBC and The Maharashtra Relief Undertakings (Special Provisions) Act, 1958].
[16]M.A 1280/2018 in C.P. 405/ 2018 (12.02.2019).
[17](2019) SCC OnLine Del 7854.
[18]https://ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf.
[19](2019) 4 SCC 17.
[20](2019) 8 SCC 416.
[21]https://ibbi.gov.in/uploads/resources/ILRReport2603_03042018.pdf.
[22]https://ibbi.gov.in/uploads/resources/c6cb71c9f69f66858830630da08e45b4.pdf
[23](2020) SCC OnLine SC 237.
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Spoiler alert here: the title of this article is misleading. This is, by no means, a complete alpha to omega of the Insolvency and Bankruptcy Code (IBC) and we will merely be skimming at its surface. We call it the ‘A to Z of IBC’ because what we have done here is – arrange the most fundamental principles of IBC law alphabetically, like a dictionary of sorts.
Given the raised threshold to initiate insolvency and the proposed suspension of provisions which empower creditors and the corporate debtor (CD) to do so, it is likely that IBC is going to be on hiatus with no new insolvency resolutions to facilitate and with the pending ones on the back-burner. This gives us the perfect opportunity to take a step back to the basics and analyse the IBC as it was, as it is and as it is likely to be. In trying to do so much in a short series, we are mindful that we will be attracting the wrath of IBC enthusiasts who would complain that we are totally missing nuance and that our analysis is too basic, reductive and simplistic and it does not have enough academic rigor; we’d equally be trashed by those just starting out with IBC of being too convoluted.
Totally mindful of this risk, we march on—trying to unravel the IBC and bring about some method to all this madness, with so much happening with IBC, all the time, and on multiple fronts— legislative, National Company Law Tribunal’s (NCLT) and the Courts.
Through this column, which is the first in a three-part series, we will try to give a brief overview of the primary features and actors in the IBC game and a sneak peek into the new and latest in IBC and the challenges that lie ahead. Since we all love lists, we walk you through these concepts alphabetically. But before we dive deep, here are a few words in the nature of a general preface to this path-breaking piece of legislation called the IBC:
Preface
The Indian Economy over the past few decades, to borrow the expression of Arvind Subramanium (the former Chief Economic Advisor), has journeyed “from socialism with limited entry to capitalism without exit.” Over the last few decades, governments have not exactly rolled out red carpets for the setting up of new businesses and industry, and an exit from the Chakravyuha of corporate existence was also ridden with a massive amount of red tape. The legal regime governing winding up prior to the IBC, was, to put it brusquely, as sick as the companies it sought to cure.
The IBC sets out to change all of that. It endeavours to make exit easy and to preserve maximum value for all the stakeholders involved in the winding up of a company. Despite inheriting some very very sick zombie firms from the earlier legal regime, IBC, in a very short span, has shown great results. Debtor’s paradise is now lost, as Justice Nariman beautifully puts it, and decisions in relation to a company under insolvency are taken by expert Resolution Professionals (RP) and Committee of Creditors (CoC), whose primacy has been established recently by way of amendments and progressive judicial decision making.
The shift from ‘debtors in possession’ to ‘creditors in possession’ helps safeguard and preserve a company’s value and prevents mismanagement and asset dissipation, both of which have been endemic in the Indian scenario, especially as a company goes into the twilight zone. We have also witnessed great interest in revival of insolvent companies, and liquidation is gradually being seen, and rightly so, as the very last resort. All in all, the law proves that destruction can be creative and for the larger good. With this general philosophy of this law in mind, let’s get cracking on the specifics:
A – Adjudicating Authority (AA)
This refers to the NCLTs which have replaced Company Law Boards, as the principal adjudication forum for all matters corporate. An NCLT, as the AA, admits and sets the ball rolling on a Corporate Insolvency Resolution Process (CIRP) by appointment of an Interim Resolution Professional and announcing a moratorium, which, for those who arrived late, is an embargo against institution of any suits/proceedings against the CD undergoing a CIRP.
An AA also reviews and approves the decisions taken by the CoC in relation to the revival of the company, acceptance of resolution plans, etc. Currently, there are 16 NCLTs operating as AAs and two National Company Law Appellate Tribunals (NCLAT), one at New Delhi and the other one recently constituted at Chennai. The newly-constituted NCLAT at Chennai will hear appeals from NCLTs which have jurisdiction over Karnataka, Tamil Nadu, Kerala, Andhra Pradesh, Telangana, Lakshadweep and Puducherry. The New Delhi Bench will continue to hear appeals from NCLTs of other remaining jurisdictions. Further appeals from the NCLATs lie to the Supreme Court, provided they involve a question of law.
Generally, on the working of the AAs, as someone wise said, IBC has in a lot of ways been a victim of its own success, due to which NCLTs are extremely overburdened and almost bursting at the seams; we certainly need more of them. In this context, the constitution of a new NCLAT bench at Chennai should go a long way in helping ease the burden on the docket of the NCLAT at New Delhi and further the IBC’s objective of speedy recovery.
Photo by Colin Lloyd on Pexels.com B – Bankruptcy
Simply speaking, insolvency is a financial state of being—one that is reached when one is unable to pay off his/her debts on time. Following this is bankruptcy, which, on the other hand, refers to the legal process that serves the purpose of resolving the issue of insolvency. IBC deals with both.
C – Committee of Creditors
The most significant change brought about by the IBC and its central philosophy, is the shift from ‘debtors in possession’ to ‘creditors in control’ in relation to an insolvent company. In other words, when a company defaults on its debt, control of the company shifts from the erstwhile management (who have led the company to where it is) to a CoC. This is for good reason, as creditors have the maximum amount of skin in the game and are the most vital stakeholders in the process. A CoC, therefore, is the primary decision maker of the fate of the company.
Amongst the many functions of CoC, the primary are:
- Approving the appointment of a RP;
- Approving a Resolution Plan (more on resolution plans a little later);
- Approving interim finance for the company, to ensure that its basic needs are met during the process of insolvency and the functioning of the company does not come to a grinding halt.
The question of primacy of CoC’s decisions has been a source of great controversy. This controversy is the most heated in situations where the CoC decides to approve one resolution plan over the other, and especially when it caters to various creditors and stakeholders of the company. Under the scheme of IBC, it is essentially left to the wisdom of the CoC to decide as to which plan best serves the interests of the company. Though it is also correct that eventually it is the AA/NCLT which finally “approves” or “rejects” a resolution plan. This apparent dichotomy has led to a fight for primacy between CoC and NCLT and great controversy on the extent to which the AA/NCLT can second guess the CoC’s decision; a decision which is essentially commercial in nature and not a legal one. We grapple with this question later in the article.
C – Cross Border Insolvency
Picture this, ‘X’ company goes into insolvency with assets spread across the world and pending claims from various lenders. On the company becoming unable to pay off its debts, lenders in country ‘A’ initiate an insolvency process where the Court appoints an administrator to deal with the company’s assets. Simultaneously, lenders of the company in country ‘B’, let’s say India, also initiate an insolvency process where the Court kickstarts the CIRP and appoints an Interim Resolution Professional to begin the process.
This kind of situation gives rise to many questions, none of which are too easy to answer:
- Can these two insolvency processes proceed simultaneously?
- Which administrator/RP is to take the lead, constitute the CoC and take control of the assets of the CD?
- Which law will govern the distribution of the proceeds of a resolution plan?
- Is there a way to consolidate these proceedings for an effective and complete resolution?
The IBC, prima facie, does not address these questions comprehensively but instead seeks to promote an ad-hoc framework of cross-border insolvency through Sections 234 and 235, possibly to retain flexibility and since there’s no one size fits all approach possible in such circumstances. These provisions envisage a system to be created through bilateral agreements with foreign countries and provides for an option of sending letters of request to foreign courts for information on the CD’s assets which are located abroad.
The problem with the current position is that it involves lengthy negotiations with individual countries to conclude treaties/agreements which will, more often than not, have different terms and procedures. This position is far from ideal and renders cross-border insolvency processes- agreement-dependent, which comes at the cost of consistency and certainty. It was precisely this position that prompted the Insolvency Law Committee in 2018 to recommend the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, 1997 as a separate part in the IBC.[2] Adoption of the Model Law will enable India to align its insolvency laws with the internationally accepted standards.
Photo by Pixabay on Pexels.com Presently, the Government is still considering amendments to the IBC to provide for cross-border insolvency but this gap in the law has not prevented the NCLAT from allowing a cross-border insolvency process for Jet Airways. In an order given in September, 2019, the NCLAT approved a ‘Cross Border Insolvency Protocol’ entered into between the Dutch Administrator of the company and its RP in India.[3] The Protocol aims to promote a coordinated insolvency process for Jet Airways by enabling coordination, communication, information sharing between the CoC, RP and the Dutch Administrator. This makes Jet Airways the first Indian company to undergo a cross-border insolvency treatment. In another decision, NCLT, Mumbai has allowed the inclusion of Videocon’s foreign assets and properties in its CIRP in India, also illustrating the fact that the lack of a legal framework on cross-border insolvency is not deterring the Tribunals from endorsing its principles.[4]
With everyone still celebrating this progressive decision by the NCLAT, a decision of the US Bankruptcy Court for the Delaware District has provided another shot in the arm for the cross-border insolvency regime for Indian companies. On November 4, 2019, a Delaware Court recognised the insolvency case of SBI v. SEL Manufacturing Company Limited as ‘foreign main proceeding.’ As per the UNCITRAL Model Law, on which the US insolvency law is modeled, a ‘foreign main proceeding’ is a proceeding which takes place in the centre of main interest of the debtor which is the place of registration or primary operations of the debtor.
The recognition will result in an automatic stay of any proceedings against the CD in US and bar any transfer of its assets. It will also empower the RP to undertake discovery into the CD’s assets and to manage its estate, including the sale of any assets. This decision, coupled with the recommendations of the Insolvency Law Committee, should prompt the Government of India to move swiftly in introducing a cross-border insolvency legislative framework.
However, it appears that the Government is not rushing into a legal framework without adequately studying the issues involved. In January this year, the Ministry of Corporate Affairs constituted a new committee to study and analyse the recommendations of the Insolvency Law Committee and submit a report within three months. And in February, it expanded the terms of reference for the Committee to include the study of the UNCITRAL Model Law for Enterprise Group Insolvency and to make recommendations for the IBC. Hopefully, such thorough exercises will yield a robust legal framework which is able to cater to all situations which arise in a cross-border insolvency process.
D – Default
A ‘default’ with respect to a debt owed by the CD is a trigger for the initiation of CIRP. The IBC defines ‘default’ in rather uncontroversial terms as : the non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the corporate debtor. The IBC does, however, distinguish between the ‘default’ in respect of the debt owed to financial creditors and operational creditors. The Supreme Court analysed this distinction in Innoventive Industries Limited v. ICICI Bank[5] (Innoventive Industries) based on Section 7 (initiation of CIRP by financial creditor) and Section 8 (initiation of CIRP by operational creditor) of the IBC. The Court noted that scope of determining a default of a financial debt is limited to the records of the information utility and evidence supplied by the financial creditor. The fact that such a debt is disputed by the CD is inconsequential as long as the debt is due and payable, meaning that it is not interdicted by a law or is payable at a future debt. The CD would be entitled to object to the claim of non-payment on these grounds at the stage of inquiry into the occurrence of ‘default’ under Section 7(5). With the definition of ‘default’ as the only guide for the AA, it has no option but to admit the application filed by a financial creditor if it comes to the conclusion that the debt is due and payable.
In contrast to this, the CD had considerable leeway in disputing the debt owed to an operational creditor, who does not have the luxury of applying directly to the AA without giving notice of the unpaid debt to CD. The CD is then given ten days, from the receipt of such notice, to claim the existence of a dispute on the payment of the debt with the operational creditor. For instance, a defect in and rejection of goods and consequent lack of liability to pay may be a good dispute. The existence of a dispute with respect to a debt can, therefore, prevent the initiation of CIRP.
The reason for allowing the CD to dispute only operational debts is two-fold: first, the debts owed to operational creditors are usually small amounts and a CIRP cannot be allowed to be initiated for paltry amounts, especially when there is room for negotiation with the creditor with regard to the payment of the debt and the capacity of the company to continue as a going concern is not under serious question; second, the chances of raising a dispute with regard to a debt owed to financial creditors is significantly lesser because such debts are generally well-documented and relatively more unimpeachable, especially when registered in information utilities. This leaves very little scope for the CD to dispute its liability and for the AA, which has to only ascertain whether the debt is due and payable.
Photo by Pixabay on Pexels.com D – Dispute
The language of the provisions and the Supreme Court’s decision in Innoventive Industries clarifies the distinction between the position of financial and operational creditors and also underlines the fact that the CD may claim the existence of a dispute in respect of an operational debt and avoid a company going under CIRP.
But the question that arises is—what qualifies as a dispute?
Section 8(2)(a) allowed the CD to bring to the notice of the operational creditor – the existence of a dispute and record of the pendency of the suit or arbitration proceedings filed before the invoice was raised by the operational creditor. This could be used to avoid the company going into insolvency. The use of the word ‘and’ ostensibly appeared to suggest that pendency of a suit or arbitration proceeding with respect to a debt was the only indicia of existence of a dispute, and it was only in cases of pendency of a suit or other arbitration proceeding that a CIRP could be avoided. This was problematic for many reasons. This meant that any non-payment (which may be for good reason) and perceived default rendered an entity at the risk of being taken to CIRP. It is only in those cases where a CD was either already defending the demand in a court/arbitration or where it had proactively initiated litigation/arbitration to contest a possible future demand, that it could avoid the CIRP by bringing forth the existence of that suit/arbitration proceeding as evidence of existence of a dispute. This was absurd as it left a CD with no option but to initiate litigation/arbitration against all those who may have an interest in initiating the CIRP against it. Not having done this, the CD had practically no defence and risked being thrown into the CIRP oblivion.
Fortunately, the Supreme Court has cleared the airs on this issue in Mobilox Innovations Private Limited v. Kirusa Software Private Limited,[6] where it has held that the pendency of suit/proceeding is not the only evidence of existence of a valid dispute; in other words, a demand can be considered disputed even without there being a suit/proceeding already pending in a Court or Tribunal. The Court has achieved this by reading the word ‘and’ as ‘or’ in Section 8(2)(a), in line with the objective of the IBC to discourage a full-fledged CIRP based on insignificant amounts owed to operational creditors. In order to avoid the risk of opening the floodgates for blanket denials of liability by the CD, the Supreme Court has given the AA some discretion in ascertaining that the dispute is not a spurious, hypothetical, or illusory dispute, crafted merely with a view to wriggle out of liability. In doing so, the Supreme Court has implicitly imported the ‘bona fide’ standard which appeared in the definition of ‘dispute’ in the earlier Insolvency and Bankruptcy Bill, 2015. The decision allows the CD to claim the existence of a dispute on the notice of payment by the operational creditor, even if it has not actively pursued it before the CIRP, so long as it is able to satisfy the AA of the genuineness of the dispute.
E – Endless Delay, A Persistent Issue?
Photo by Andrea Piacquadio on Pexels.com Timely Resolution and preservation of value in underlying assets is one of the main objectives of IBC. It has always been projected as a law which promotes the timely completion of the insolvency process, well in line with its other objective of maximizing the assets’ value. This desire is also reflected in the provisions of the IBC which originally envisaged the completion of the insolvency process within 180 plus 90 days in Section 12. In practice, however, the insolvency regime is still plagued by endless delay in completion of CIRPs. Many attribute this to the delay which occurs at the adjudication stage, where litigation in most cases causes the CIRP to extend beyond the time limit. This undesirable state of affairs is what prompted the Supreme Court to exclude the time taken in litigation from computing the 270 days limit in ArcelorMittal India Private Limited v. Satish Kumar Gupta.[7]
Worried that the ruling would only exacerbate the situation of delays, the Government, acting with great alacrity, amended the IBC in 2019 to provide for an upper limit of 330 days for completion of the CIRP but clarified that this limit would be inclusive of both the time taken in legal proceedings and any extensions granted by the Adjudication Authorities. The failure to complete the CIRP within this time limit would attract liquidation which was clearly an unfeasible option for all stakeholders involved in the CIRP.
In laying down a non-derogable time limit, the Government was clearly motivated by the desire to preserve the value of assets which naturally depletes if the CIRP goes on indefinitely. But it possibly disregarded the fact that non-compliance with the deadline, even inadvertently, would push the CD towards liquidation which has an equally devastating effect on the CD. This effectively made the remedy worse than the ailment and led to a challenge to the validity of the provision before the Supreme Court in Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta[8] (Essar Steel).
The central argument against the provision was premised on the well-known maxim :actus curiae neminem gravabit— an act of Court shall prejudice no one. Since the time limit brooked no exception for situations where the delay was occasioned by the NCLT/NCLAT’s inability to complete the CIRP without any fault of the litigant, it was considered to be a violation of Article 14 (right against non-arbitrary treatment) and Article 19(1)(g) (right to carry on business). However, instead of striking down the provision in its entirety, the Court chose to strike down only the word ‘mandatorily’ and to read it down as ‘ordinarily.’ This was done to balance both the need for speedy disposal along with the need to promote resolution of the CD in cases where the delay was not attributable to it.
The effect of this judgment is that, ordinarily, a CIRP should be concluded within the 330 days limit. But if any extension has to be granted by the AA, it can only be granted where it is shown that a short period is left for completion of the CIRP and that the time taken in legal proceedings is attributable to the pendency of the action before and/or inefficiency of NCLT/NCLAT itself. While the judgment has the merit of introducing some flexibility in what would otherwise have become an unfair provision in practice, two issues still remain unaddressed: One, the Court has not devoted any discussion to the standard that has to be satisfied in convincing the NCLT/NCLAT that they themselves have occasioned the delay. Second, it has provided little guidance on any limit to the extensions that can be granted beyond the 330 days limit. In absence of any limit, the ruling may end up aiding exactly what the 2019 amendment had set out to tackle.
F – Financial Creditor
One of the most important stakeholders in the CIRP are the ‘Financial Creditors.’ This is because they hold the key to unlocking a new life for the CD. This influential status stems from the primacy that the IBC gives to them as the voting members of the CoC and in priority of their claims. Given that it is only the financial creditors who are capable of assessing the viability of the company and who can place it in a long-term context of revival, the IBC accords them this status. Since the financial creditors have lent capital, on which the company’s existence substantially depends, they have a major say in determining its future course of action. As members of the CoC, they wield significant influence in decisions such as approval of the resolution plan ( it is only when 66% of the CoC has approved a resolution plan, can it move forward to the AA for approval), modification of the capital structure, creation of security interests and undertaking related party transactions.
Photo by Pixabay on Pexels.com However, in 2019, a ruling of the NCLAT in Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited[9] had threatened this coveted position of financial creditors when it treated the operational and financial creditors at par by holding that the CoC had no role in deciding the distribution of claims from resolution plans and had to only decide the feasibility of bids. This ruling had the effect of diluting the cardinal principle of preference to secured creditors and implied that there was no difference between secured and unsecured creditors in distribution of proceeds from the resolution plan.
This immediately prompted legislative intervention in the form of an amendment in 2019 itself, which restored the primacy of secured financial creditors by enabling the CoC to take into account the order of priority given in Section 53 and the value of a security interest of a secured creditor in the distribution of proceeds, in approving the resolution plan. Further, in order to prevent any disadvantage to operational creditors, the Parliament amended Section 30(2)(b) to state that the resolution plan had to provide the higher of the liquidation value or resolution value to them.
This position was also affirmed by the Supreme Court decision in Essar Steel where it held that it was only the CoC, composed entirely of financial creditors, that could decide the feasibility and viability of resolution plans. This is premised on the reasoning that financial creditors, who are willing to take haircuts on their loans and place their claims in a long-term context of the company’s revival, are better placed than operational creditors to take commercially-sound decisions. However, this commercial wisdom of the CoC is not immune from judicial review and the AA has to still ensure that the decision of the CoC reflects a plan to keep the CD alive as a going concern, maximise the value of its assets and take into account the interest of all stakeholders, even the operational creditors. But as long as a CoCs decision in accepting one resolution plan over the other is motivated by the objective of maximising the value of the company and interests of operational creditors with due regard to its capacity and needs to continue as a going concern, the AA would have its hands off and cannot second guess the commercial decisions taken by the CoC.
In the backdrop of Covid-19, financial creditors face yet another challenge in recovering their dues and one which is unlikely to be solved in the Courts. The Ministry of Finance has recently announced that it plans to suspend fresh insolvency filings under the IBC for a year and exclude Covid-19 related debt from the definition of ‘default.’ With the minimum threshold to initiate an insolvency already raised from one lakh rupees to one crore rupees, these measures indicate the Government’s intention of prioritising the continuity of businesses over resolution under IBC, in already damp market conditions. The combined effect of this on financial creditors would be adverse, to say the least, considering that the measures foreclose the opportunity to seek resolution under the IBC for a significantly long time. Additionally, this may very well serve as an escape route for undeserving debtors who may have had an impending default, even before Covid-19, which has now been given protection from recovery. Some see the proposed suspension of the IBC as a positive measure since the CoC would unlikely to have received any bids for the CD, given the serious financial pressure that companies are under. It is also being considered as a blessing in disguise for strengthening alternatives such as pre-pack insolvencies. While discussions on the need for a pre-pack insolvency regime have predated Covid-19, it is likely to gain more prominence after the suspension ends and there is an upsurge in the number of insolvencies.
Also, F- Fraudulent Transactions
“Three businessmen go for dinner, where each tries to prove his financial worth by offering to pay the bill. One of them says that he should pay as his company had a great financial quarter. Another one says that he has recently got a huge amount as inheritance from a rich aunt that he never knew he had, therefore, being cash rich, he should pay. And the last one, who also happens to be a promoter of a company, replies, tongue-in-cheek, that he should pay since his company is going under insolvency next week!”
Photo by Pixabay on Pexels.com With an insolvency on the horizon, unscrupulous promoters sometimes acting in the capacity of directors of the CD may seek to misappropriate assets to the detriment of other creditors. The IBC recognises this possible mischief and seeks to regulate/curb the carrying-on of business which is done with an intent to defraud the creditors of the CD or for any fraudulent purpose. Under Section 66 of the IBC, the RP is empowered to apply to the AA in case it finds the occurrence of any fraudulent transactions. On the application, the AA may direct any persons who were knowingly parties to such transactions to make contributions to the assets of the CD and claw back those monies. The provision goes a step further in enabling the AA to direct the director or the partner of the CD to make contributions to its assets. But to what extent can the RP uncover such antecedent actions of the directors /partners?
Section 66(2)(a) of the IBC spells out what is usually called the ‘Twilight Period,’ which is : the period before the insolvency commencement date, when the directors knew or ought to have known that there is no reasonable prospect of avoiding the commencement of the insolvency process for the CD. The directors/partners are required to exercise due diligence in carrying on the business in the twilight period in order to minimize any potential loss to the creditors. Any failure to do so or any negligent or reckless conduct attracts the application of the provision. It can be argued that the provision imposes additional duties on the directors to ensure that the creditors’ interests are protected now that the company has entered the zone of a possible insolvency.
The reason for this protection is clear—once the company is on the verge of insolvency, it has to cater to the interests of its creditors, who will only benefit if there are enough assets for a prospective resolution applicant to bid for it or are enough for satisfying their claims in case of liquidation. Thus, transactions selling assets at an undervalue or prioritizing the interests of one creditor over the other are some of the transactions which the provision seeks to regulate.
Apart from civil liability under Section 66, fraudulent transactions may also invite criminal liability under Section 69 of the IBC. Like Section 66, where the directors may escape liability by showing that they exercised due diligence in minimizing loss to creditors, Section 69 also allows the officer to show that he had no intent to defraud the creditors at the time of commission of the acts. However, unlike Section 66, the provision has a look-back period of five years before the insolvency commencement date which allows the officer to escape liability for any acts done before this period. On the contrary, the twilight period in Section 66 is not expressed in numerically certain terms and relies on the ‘subjective’ knowledge of a potential CIRP, that a director or partner may have had in the build-up to the CIRP. There is, therefore, little room for disputing the liability to contribute to the assets of the CD under the provision. Many of these fraudulent transactions come up in forensic investigations commissioned by RPs.
G – Group Insolvency
Aristotle once famously said that the whole is more than the sum of its parts. This cannot be more relevant than in the case of group companies where, more often than not, the entire group as a single economic entity is more valuable than the individual companies which make it. A question which arises here is whether this logic can be stretched to apply to the insolvency of companies which make up the group. Theoretically, it can. Group insolvency, as it is called, can be understood as a consolidated insolvency process for related companies which are part of a larger group. Practically, however, the IBC does not address this.
Seen from a jurisprudential standpoint, group insolvency seeks to balance two important imperatives: on one hand, the separate legal personality of even those companies which are closely inter-connected in a group, and on the other hand, recognizing that in spite of this distinct personality, a consolidated insolvency process is advantageous for all stakeholders.
Even though there is no legal framework supporting group insolvency, this has not prevented NCLT benches and the NCLAT from engaging with this issue.[10] In fact, these decisions formed the backdrop to the Report of the Working Group on Insolvency[11] which was released in September, 2019. A breakdown of group insolvency into ‘Procedural Co-ordination’ and ‘Substantive Consolidation’ by the Working Group has guided both its explanation and recommendations. ‘Procedural Co-ordination’ mechanisms aim to coordinate the different insolvency processes of various group companies, without actually disturbing the division of assets and substantive claims of creditors of each of the group companies. This mechanism reduces costs and time associated with different insolvency processes.
In going a step further than mere coordination, ‘Substantive Consolidation’ aims to consolidate the assets and liabilities of group companies so that they can be treated as a single economic unit for the insolvency process. This typically targets those corporate groups where separate personality of group companies is used to escape liability and where the assets and operations of the group companies are otherwise inseparable.
Notwithstanding its benefits, the introduction of a framework for ‘Substantive Consolidation’ may ruffle feathers in the market because it disregards the separate legal personalities of the group companies and combines their asset as part of a single insolvency, sidelining creditor expectations in the process. The Working Group has taken note of this and has therefore recommended a phased implementation of the recommendations with ‘Procedural Co-ordination’ and provisions dealing with perverse behaviour of group companies to be considered in the first phase and ‘Substantive Consolidation’ and Cross-Border Group Insolvency in the second phase. This is a good step especially when the general cross-border insolvency framework is still at a nascent stage. Since the recent amendment to the IBC in 2020 has not dealt with group insolvency at all, it will be interesting to see how the Parliament implements these suggestions in the future.
H – Homebuyers
Home buyers constitute the major source of finance for builders in housing projects. Much of the financial needs of builders are met by the booking amounts/payments made by the homebuyers. With this being the position, homebuyers clearly had an interest in the insolvency process of companies engaged in construction of housing projects. But the IBC posed an initial hurdle: whether such buyers qualified as ‘Operational’ or ‘Financial’ creditors and if they constituted a separate class of creditors, what was the extent of their rights under the IBC. There were judicial attempts to enable homebuyers to stake a claim in the insolvency process.[12] This was also sanctified by an amendment in 2018 which conferred upon them the status of ‘financial creditors’ and treated the amount raised by them as a ‘financial debt.’
Photo by Louis on Pexels.com Objections against the inclusion of homebuyers as financial creditors were quick to be made; there was no clarity on when a ‘default’ occurred; it was also argued that they could not be treated equally with secured financial creditors. Additionally, real estate developers who were clearly distressed by the amendments challenged them as violative of the Constitution. Fortunately for the homebuyers, the Supreme Court in Pioneer Urban Land and Infrastructure Limited v. Union of India[13] (Pioneer) rejected the challenge and upheld the amendments allowing them to occupy a place in the CoC and to be part of the decision-making process concerning the company’s future.
However, this amendment had an unintended and unseen consequence: it now effectively empowered even a single homebuyer to initiate CIRP and bring an entire project to a grinding halt. This turned the IBC to a mechanism to redress individual grievances which it was never meant to do, especially when such a mechanism already existed under the Real Estate (Regulation and Development) Act, 2016 (RERA).
In light of the above, the Parliament has recently amended the IBC and introduced a minimum numerical threshold of not less than 100 allottees or 10% of the total number of allottees, whichever is less, of a real estate project to initiate insolvency. This move, many homebuyers feel, sets them back and poses an insurmountable burden to look for the requisite number of homebuyers to initiate insolvency. Real estate developers, on the other hand, feel that the amendment will ensure that only bona fide applications are filed and that they are not driven to insolvency only on the basis of individual grievances.
Homebuyers are pulling out all the stops in trying to wish the amendment away. In January this year, they approached the Supreme Court which ordered the AAs to maintain status quo with respect to applications filed before the amendment, till the constitutional validity of the law was decided. They could not, however, register a success before the Standing Committee on Finance which did not recommend dropping the clause from the Bill, despite the dissenting views of three members.[14] All eyes are now on the Supreme Court which is going to adjudicate the constitutional challenge this year and has rich jurisprudence from earlier to borrow upon in deciding the validity of the amendment.
Divided opinions aside, the amendment reinforces the view that the IBC is not meant to redress individual grievances, a remedy for which already exists under RERA. Prescribing a minimum threshold does not in any way dilute the original intent of the IBC which is to provide them a place in the CoC when the real estate company goes under insolvency. Notwithstanding what actually happens in practice, the IBC was never intended to be used as a coercive tool to compel a company to deliver on its promises or to repay the amount taken. There are other remedies for this. As Justice Nariman puts it in the Pioneer verdict, it is only when a homebuyer has completely lost faith in the ability of the current management to complete the project and wants it to be completed by a different developer, should he invoke the remedies under IBC. Seen in this context, a company cannot be thrust into insolvency just because a single homebuyer feels that it should be managed by somebody else. Such a radical decision should be the result of at least a minimum consensus among the homebuyers, especially when the insolvency route also involves the risk of liquidation of the CD . This is precisely what the latest amendment echoes.
To be continued….
Part II now out at : https://bharatchugh.wordpress.com/2020/06/08/a-to-z-of-the-insolvency-and-bankruptcy-code-a-beginners-guide-part-ii/
Also available at : https://www.livelaw.in/columns/a-to-z-of-the-insolvency-and-bankruptcy-code-a-beginners-guide-157569
Bharat Chugh, Partner, L&L Partners, Law Offices &
Mr. Advaya Hari Singh, 4th year B.A., LL.B student at National Law University, Nagpur.
[1]Authored by Bharat Chugh, Partner, L&L Partners, Law Offices and Mr. Advaya Hari Singh, 4th year B.A., LL.B student at National Law University, Nagpur.
[2]https://ibbi.gov.in/uploads/resources/Report_on_Cross%20Border_Insolvency.pdf.
[3]Jet Airways (India) Ltd. v. State Bank of India, (2019) SCC OnLine NCLAT 385.
[4]State Bank of India v. Videocon Industries Limited, MA 2385-2019 in C.P.(IB)-02- MB-2018 (12.02.2020).
[5](2018) 1 SCC 407.
[6](2018) 1 SCC 353.
[7](2019) 2 SCC 1.
[8](2019) SCC OnLine SC 1478.
[9](2019) SCC OnLine NCLAT 388.
[10]Venugopal Dhoot v. State Bank of India, CA- 1022(PB)/2018 (24.10.2018); State Bank of India v. Videocon Industries Ltd., M.A 1306/ 2018 in CP No. 02/2018 (08.08.2019); Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd., Company Appeal (AT) (Insolvency) Nos. 377 to 385 of 2019 (20.09.2019); Lavasa Corporation Limited, C.P. 1765/IB/NCLT/MB/2018 (26.02.2020).
[11]https://www.ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf
[12]Nikhil Mehta v. AMR Infrastructure, (2017) SCC OnLine NCLAT 859.
[13](2019) 8 SCC 416.
[14]https://ibbi.gov.in/uploads/resources/20ef77b3a1200f12ad19cee1c2c3dba9.pdf.
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The Art of Cross Examination in Commercial Arbitration[1]
“The best questions in a cross examination are – the questions never asked ”
We’ve all grown up watching Perry Mason style cross examinations where, under the testing fires of a psychologically exhausting interrogation, the witness finally gives up his defence, throws his hands up in despair, and concedes having killed his girlfriend and having hidden the blood stained knife under the big oak tree in his backyard. As a cross-examiner in a commercial arbitration, there is a good chance that you’ll never have the pleasure of making this happen; having the witness cry on the stand, or having blood on the floor (no pun intended!) by the time you’re done with a witness. But that doesn’t stop us from trying, does it? Most of us keep trying and following cross examination strategies that are more suited to a Criminal Sessions court, than a document intensive Commercial Arbitration.
A good cross examination requires deep engagement with the following questions, amongst others:
- Who should be examined as a witness, and for what fact?
- Drafting a witness deposition.
- How to prepare for cross-examination?
- How to structure questions?
- Are loaded questions permissible?
- What are leading questions?
- How to prove a document through a witness?
- When to seek a ‘documents-only’ arbitration, and skip oral evidence altogether?
- How to confront a witness with a previous statement?
- Is confrontation with documents (as opposed to previous statements) permissible?
- The need and importance of suggestions in commercial arbitrations (or lack thereof)?
- Tackling peculiar witnesses such as an enterprising witness, or a witness suffering from selective (and self-serving) amnesia;
- Importance of timely objections, as the cross-examining counsel, and as counsel for the witness;
- Whether to re-examine, or not (putting humpty dumpty back together again!)
These are good questions, but have no easy answers. But since we never stop trying, this column is an attempt to share a few thoughts on these issues and the first principles of cross-examination. So, without further ado, let’s start at the start:
- Does the Indian Evidence Act (“IEA”) apply to Arbitrations?
“Relevancy by law, or logic?”
Much like any legal dilemma abstracted to a principle, there is a short and a long answer to this one. The short answer is a ‘No’. Section 1 of IEA provides that it does not apply to arbitrations. Section 19 of the Arbitration and Conciliation Act, 1996 (“Act”) frees an Arbitral Tribunal (“Tribunal”) from the shackles of the notoriously slow Code of Civil Procedure (“CPC”) and the IEA. However, in the absence of a specific rule/provision guiding an issue, the Tribunal is not prohibited from drawing inspiration from the CPC or IEA, and that is what happens, especially with a tribunal comprising judges who have a practiced affiliation to the CPC and IEA.
A Tribunal, therefore, is not bound by the strict rules of admissibility laid down in IEA. A Tribunal can, for instance, look into an output of an electronic record, even without the strictest compliance of Section 65B of the IEA (dealing with conditions that are required to be satisfied before output of an electronic record is received into evidence), if it is otherwise sure of its creditworthiness.
Having said that, this is not to mean that the cautions of IEA can be thrown to the wind in Arbitrations. Precedent shows that courts have drawn a distinction between a mere provision in the IEA, and a fundamental principle of evidence law. For instance, a Tribunal may not be bound by the strict language of Section 23 of the IEA (which deals with exclusion of privileged/no-prejudice communications from evidence, on satisfaction of certain considerations) but the broad underlying principle of ‘privileged communication’ may still be held to apply. In Bharat Heavy Electricals Limited vs. Aarti Steel Ltd. (Steel & Power)[2], the Court held that although the Tribunal is not bound by the provisions of the IEA, the issue to be examined was whether the ‘substratal rational’ of Section 23 of the Evidence Act had been disregarded by the Tribunal.
Therefore, to sum up, IEA is a guide, and not a master. With that elephant in the room having been addressed, let us proceed to examine:
- Choice and number of witnesses – The ‘What’, ‘Who’ and ‘How’ of proving your case.
“Evidence is to be weighed, and not counted”
Any fact can be proved either through oral or documentary evidence. Broadly, the following persons can be made witnesses:
- An individual who has personal knowledge of facts and events pertaining to the case can testify as to things they have personally observed, sensed or witnessed. These witnesses depose on facts (as opposed to opinions);
- Expert witnesses, who give their (informed) opinions on specific niche areas, which require subject matter/domain knowledge.
Very few commercial arbitration have an oral evidence component, and are largely driven and provable through documents. And wherever a fact is reduced into writing (or required by law to be reduced into writing) the same is provable only through the document alone and oral evidence stands excluded. The best evidence rule further tells us that a document has to be proved through its author, executing or, in some cases, the attesting witnesses.
But before that, the first question that needs to be asked is ‘What’ are the facts that are required to be proved in order to succeed in a case. Discerning the ‘Facts in Issue’, therefore, is the first and the most important task, followed by an analysis of ‘Relevant Facts’. Picture ‘Facts in issue’ as the core facts without proof of which you can’t succeed. All ‘Facts in issue’ are relevant facts, however, all relevant facts are not ‘Facts in issue’. Think of them as concentric circles. A Relevant Fact, in the sense that it is used in evidence law, is a surrounding fact (and not the core fact itself) that helps you prove or disprove a ‘fact in issue’. For instance, in a case for damages on account of breach of contract, the facts in issue would be:
* Existence of a contractual obligation;
* Breach of obligation;
* Consequent damages.
Facts in issue, therefore, are the core constituents of the litigated claim, right or liability; facts which the party MUST absolutely prove in order to make out a case. Relevant facts, on the other hand, are certain surrounding facts that help the Tribunal understand the case better. For instance, to prove the fact in issue of ‘existence of a contractual obligation’, the party may rely on surrounding factors, which raise an inference of an existing contractual obligation. This may include : correspondence in the run-up to the contract, subsequent conduct of the parties, which shows assumption of responsibilities, et al.
The next enquiry is to examine as to whether the opposite party has admitted/denied the above. In case there is an admission on any of the above, whether in pleadings or otherwise, the same may act as waiver of proof and the party may be dispensed with the need of formally proving those facts. For instance, if the contract is proved, or receipt of a particularly damning email is admitted, no evidence needs to be led on that count. However, for instance, if a contract is denied, the existence of a contract can be proved through correspondence/letters/emails from which it appears that the parties took themselves to be a bound by a contract by their conduct.
With respect to the ‘Who’ part of leading evidence, in a case where oral evidence is needed, the executants and witnesses of a contractual obligation can be called into the witness box to prove the existence of a contract, and its breach.
Imagine a well-crafted witness deposition as a wall made of bricks of facts-in-issue, held together by the sinew of relevant facts, and the task of a cross examining counsel is to break holes into that wall.
How many witnesses?
“Two many witnesses spoil the broth, or is it?”
The jury is still out on whether multiple witnesses should be introduced to prove a single fact, or not. Traditional wisdom says that it is suicidal to do so. Too many witnesses on a single fact may be like sitting ducks for a shrewd cross-examining counsel, who may be able to punch holes in their testimony by exposing contradictions inter se witnesses; this is for the simple reason that no two people would have the same perception or recollection of an event.
This is also known as the Rashomon effect.( The effect is named after Akira Kurosawa’s legendary 1950 film ‘Rashomon’, in which a murder is described in four mutually contradictory ways by its four witnesses). Although it may also be argued that having multiple witnesses on the stand to prove a single fact may allow a witness coming subsequently to fill-in the lacunae left in the testimony of the earlier witness, however, the disadvantages of such a course of action somewhat outweigh the perceived advantages. All in all, if you’re the cross examining counsel, multiple witnesses constitute an opportunity as well as a challenge.
- Proving a case through Authorized Representative (“AR”)
In most contractual cases involving companies, no single individual has personal knowledge of the entire set of facts; in such cases, the company files and pursues its case through its AR. However, many a times, the power to institute a case and the power to depose are confused. It needs to be kept in mind that the power to depose or be a witness of a fact can never be outsourced. The witness has to be the person who perceived the fact/event sought to be proved. ARs also, while deposing, should clearly set out what facts they testify on the basis of personal knowledge, and which facts are based on documents, else they run the risk of their testimony being eschewed from consideration on the ground of ‘hearsay’. It is important to discern the facts which the AR has no personal knowledge of, and to arrange for better proof of those facts through the direct source, whether through ex-employees, or otherwise. The witness who heard, saw, or otherwise perceived that fact ought to be brought to the witness box. Many a cases have been lost on best evidence in a case not being brought forth, and the Tribunal drawing an adverse inference against the party not getting the real McCoy.
- Rule of Best Evidence –
“The good, bad and the best (evidence)…”
This goes to the ‘Who’ question of leading evidence. The rule of ‘best evidence’ equally applies to Arbitration. This rule commands the parties to bring the best evidence possible in every case. This includes, but is not limited to, the rule of exclusion of oral evidence by documentary evidence, or the rule of conclusivity of documentary evidence, as laid down in Sections 91-92 of IEA. These provisions mandate that when parties have put down their engagement in the form of a written contract, the document, being the sole repository of the rights, obligations and intent of the parties cannot be departed from, and oral evidence to prove, modify, add or depart from that document cannot be allowed, unless exceptional reasons exist[3]. This principle is mostly reinforced by a contractual stipulation called the ‘Entire Agreement’ clause. This oft forgotten rule greatly minimizes the role of oral evidence in a document intensive commercial matter. Also to be remembered is that: it is the agency of the court to interpret a contract based on the objective intent of the parties; what a witness subjectively feels or thinks is the intent is quite immaterial, of course, unless the document itself is ambiguous, which opens the document to contrary interpretations, and oral evidence assumes some significance.
- Documents only Arbitration
“Men often lie, and so do documents”
Since most arbitration are document-centric, it is a good time saving exercise for the parties to agree on a ‘documents only’ arbitration wherein the Tribunal decides the case on the basis of documents and no oral evidence is led. For instance, if both the parties accept the execution of the contract, but place different interpretations on it, the Tribunal may dispense with evidence of either party, and hold that it is the obligation of Tribunal to interpret the contract and decide the case on the basis of its reading of the contract. However, a ‘documents-only’ arbitration may not be suitable for all sorts of disputes. For instance, multi-party arbitrations or complex cases, such as those arising from some niche industry, may require detailed technical evidence, and are not really suitable for this form of arbitration. Also, many written contracts, even though extremely sophisticated in their design and level of detail, may still leave out room for implied terms being read into the contract, which may give some window for oral evidence to be brought forth. As an illustration, an ostensibly absolute and unqualified right of ‘drag-along’ granted to the majority shareholder/investor, may still be qualified by the implied obligation to act in good faith, and an implied obligation not to bring about a situation in which rights of the minority are undermined and the value of the company is eroded. In those situations, the Tribunal may be inclined to hold evidentiary hearings and not decide the matter solely on the basis of ‘documents-only’.
As regards the institution framework of Documents-only arbitrations, the ICC, the International Centre for Dispute Resolution (ICDR), the Hong Kong International Arbitration Centre (HKIAC), the Singapore International Arbitration Centre (SIAC) and the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) all have amended their rules to include fast track arbitration. The scope for application of expedited procedures may either be elective or automatic. Under the ICC’s Expedited Procedure Provisions, it is at the arbitrator’s discretion, after consulting with the parties, to conduct ‘documents only’ arbitration. In addition, there will be no terms of reference and the arbitrator may limit the number, length and scope of written submissions and written witness evidence. In the ICDR, if no party’s claim or counterclaim exceeds US$100,000, the dispute shall be resolved by written submissions only, unless the arbitrator determines that an oral hearing is necessary. The HKIAC Rules provide for default ‘documents only’ arbitration, unless the HKIAC decides that it is appropriate to hold one or more hearings. In the SIAC, the arbitral tribunal will hold a hearing to examine witnesses and to hear legal arguments, although the parties can agree that the dispute should be decided on a ‘documents only’ basis. Under the SCC Rules for Expedited Arbitrations, a hearing shall only be held if requested by a party and if deemed necessary by the arbitrator.[4]
Therefore, no straightjacket formula can be followed to decide whether or not to opt for expedited procedures/ ‘documents only’ arbitrations and this call needs to be taken after carefully weighing the facts and circumstances of a case.
- Drafting an affidavit in lieu of examination in chief/witness statement/deposition.
‘Less is more’
Ideally, the witness’ story should be told in his own words, and the lawyers’ work should be invisible. Many a witnesses have been destroyed to shreds on the witness stand, because of a shoddy ‘cut copy paste’ job by the Counsel, who lifts the statement of claim, adds a dash of rejoinder, and voila!…there is your affidavit in evidence. This not only exposes the witness to embarrassing questions in the cross-examination, but also shows poor legal craftsmanship. When the witness stands in the box, clueless about a certain animal called ‘constructive res judicata’ which appears at Para 6 of his affidavit, it is the counsel who prepared the affidavit who is in the ‘box’. These errors should be avoided; only things that the witness has personal knowledge of should be included in the witness deposition, and largely it should be crafted from the perspective of the witness herself. It can be said of a good witness statement that: ‘it is the witness who carries the tune, while the good advocate acts merely as sound engineer.’[5]
The counsel needs to carefully sift disputed/admitted facts and lead evidence only on the disputed facts; lead evidence only on those facts the burden of proving which lies on him. The witness statement must not be too complicated or lengthy; for if it is too lengthy, it leads to an even lengthier and meandering cross-examination. Also, wherever departure is made from this rule, the same should be conspicuously mentioned; this helps preserve the credibility of a witness, who does not pretend to have first-hand knowledge of all the facts[6]. This also protects the witness from being taken on a roving and fishing enquiry and ring-fences the scope of cross-examination to a certain extent.
- Whether to cross-examine a particular witness or not?
It is perfectly okay not to cross-examine a witness, if the witness’ testimony, even if allowed to go unchallenged, does not materially harm one’s case. Do this thought experiment : take the witness testimony, take each fact therein to be proved, if that doesn’t materially hamper your case, don’t cross-examine. Please remember, as many cases are lost on cross-examination, as won.
- Broad approach of cross-examination.
Witness that has some relevant connection to the matter can depose as fact witness. Start by thinking what facts you need to prove to make your case. Assess which of those facts the witnesses for the opposing side are likely to know about and might admit. Always be prepared to produce a contrary email, document, minutes of meetings, or something or the other. If you do not have the confrontation material, don’t hazard the question, the witness will answer in the negative and end up having the last word, and that ultimate question and answer would look pretty bad on the transcript when the judge reads it. There is nothing worse than your own cross-examination transcript being used against you. Thus, if you need to prove, for example, that the parties agreed to a specific shipment schedule, see if you can get someone from the other side of the case to admit that, and be armed with any documents/previous statements/correspondence where such an admission is made or indicated. Please remember that, with the voluminous documentary evidence of a modern international arbitration, the information function of witness questioning might be reduced to putting the documents in context, as well as providing a ‘flesh and blood’ embodiment of the participants in correspondence, negotiations and meetings, and assisting the tribunal to understand the role of personalities in the dynamics of a dispute.[7]
- How to frame questions.
“Leading them, to the edge of the cliff, and beyond..”
Leading questions- In common law systems that rely on testimony by witnesses, a leading question or suggestive interrogation is a question that suggests the particular answer or contains the information the examiner is looking to have confirmed. A Leading question, as per S.143 of the IEA, is any question suggesting the answer, which the person putting it wishes or expects to receive.
Examples of leading questions are:
- Is not your name John Adams?
- Do you reside at 1, Park Street?
- You are into the business of betting, aren’t you?
- You wear glasses, right?
- You can’t see objects in the distance clearly without your glasses, right?
- It was raining that night, wasn’t it?
However, a question such as “When did you Murder A, B?” is an assumed/loaded question and may not be allowed, though questions such as this are sometimes very effective way of obtaining admissions. For instance, in an action relating to breach of contract by an employee, one may confront the employee denying the receipt of an email with a document (otherwise denied at the admission and denial stage), and ask him “What was the reason for not escalating this damning email to the management?” Now this question is framed to assume the receipt of the email; though traditionally looked-at as unacceptable, but such questions may allow the cross examining counsel to somehow get the witness to admit to an email or a document, which he may otherwise be tutored to deny, if asked about in a straight forward manner. By framing the question correctly, the cross examiner can shift the focus from receipt of the email, to the sufficiency of reasons for non-escalation of this issue; if the witness falls into this trap, the witness would quickly become self-justificatory and start ascribing reasons for non-escalation of the email to the board of directors, but in the process – end up conceding the receipt of this email, which is all that one would normally require in such circumstances.
- Impeachment of credit and the art of confrontation with documents/previous statements.
To impeach the credit of a witness is to call into question her veracity by means of evidence adduced for that purpose, or the adducing of proof that a witness is otherwise unworthy of belief. Some of the common techniques of impeachment of witnesses are:
- observation (perception);
- memory;
- narration;
- bias, interest or corruption;
- prior conviction;
- prior bad acts (bad character);
- prior inconsistent statements (self- contradiction);
- specific error (contradiction);
- reputation for veracity.[8]
Confrontation with prior inconsistent statements is one of the most effective ways of discrediting a witness. This is also a legal requirement as some cases suggest that a witness ought to be given an opportunity to explain away a discrepancy and any contradiction not put to a party in cross examination cannot be used against that party.[9] This principle underlying section 145 of the IEA is known as the ‘Brown v. Dunn’ rule under the Common Law System.[10]
Though the legality of confrontation with previous statements is expressly made clear by Section 145 IEA, previous statements are not the only things that a witness can be confronted with, during cross examination. Contrary to popular misconception, a witness can be confronted with other documents also, as long as they have a connection with his testimony or throw it under grave challenge. For instance, an architect opining on the structure of a building can be confronted with another architect’s report relating to the same premises. Confrontation of such nature almost always leads to an objection from the opposite side, which can easily be overcome by placing reliance on Surinder Kumar Bajaj vs Sheela Rani Pasricha[11] where the High Court of Delhi has specifically recognized the legality of such a course of action.
Coming back to cases where a witness is confronted with a previous statement, If the witness disowns the previous inconsistent statement as having been made under mistake, recorded incorrectly, or given under wrong legal advice (as such witnesses are wont to do); in such cases, the cross-examining counsel should ask the witness whether he ever disowned the previous statement, or applied for its rectification or correction, or filed any complaint against the wrong legal advice given. If the answer to these questions is in the negative, the cross-examining counsel successfully drives home the point that the witness is unworthy of credit and has adopted vacillating, self-serving and mutually inconsistent stands at different times, and is now trying to cover up the lacunae in her case.
11. “I Object….” Dealing with objections during cross-examination.
Objections during cross-examination are usually to preserve one’s record for appeal and to ensure that hearsay, inadmissible, irrelevant and prejudicial evidence is not allowed to be tendered in a case. Objections relating to mode of proof, for instance, objections relating to secondary evidence (photocopies) being led in evidence, when the original is clearly available, must be taken at the very first instance; otherwise, they are taken to have been waived and cannot be taken up at the final arguments or appellate stage, for the first time leading to loss of an important challenge.[12] Recently, the Supreme Court has categorized the objections relating to non-compliance of Section 65B of the IEA (dealing with admissibility of electronic evidence), as objections relating to ‘mode of proof’ which is capable of being waived, if not taken promptly[13]. Such objections therefore ought to be taken at the first opportunity and soon after the witness has adopted his witness deposition, that is to say, soon after the examination in chief.
These are the common objections raised by the cross-examining counsel vis-à-vis parts of testimony and documents sought to be tendered in evidence by witness in his examination in chief (or direct examination). However, objections are not the sole privilege of a cross-examining counsel. The tenor and line of questioning by a cross examining counsel may be objected-to by the counsel for the witness on the following grounds, amongst others:
- General or unspecific questions: such questions call for lengthy answers and may possibly lead to uncontrolled and unresponsive testimony from the witness.
- Unintelligible Questions: Misleading, vague, ambiguous questions that do not call for or permit a specific answer.
- Duplicitous Questions
- Argumentative questions: Questions that call for arguments in place of answers from the witness must be objected to.
- Erroneous questions: A question that contains misstatement or distortion of evidence or is an incorrect repetition of the witness evidence must be immediately objected to.
- Speculative question: Such questions call for witness’ personal knowledge or opinion.[14]
- Tackling the enterprising – Volunteering Witness:
We know by now – Cross-examination is all about asking tightly knit leading questions and giving little room to the witness to wriggle away or spin a narrative; leading questions, as we’ve seen above, are questions which admit of no other answer except a simple ‘yes’ or ‘no’; however, there are some questions which do not admit of a mere ‘yes’ or ‘no’ answer and require explanation. A classic example is: “Have you stopped beating your wife?”; now is a question that can’t be answered in a yes or no. Because if a witness says yes, he accepts that he was beating his wife earlier, and if he says no, he still is. These are the kind of questions, where the witness is perfectly entitled to refuse to answer in a simple ‘yes’ or ‘no’ and volunteer information and say – “I don’t have a wife” or “I have never beaten her”, therefore, neither ‘yes’ nor ‘no’. However, this is just one of the very rare situations where the witness should be allowed to volunteer information and travel beyond the negative or the affirmative. The general rule, therefore, remains that the witness ought to answer in a yes or no, and should not be allowed to volunteer information. A witness may not foist into his answer, in any examination, statements not in answer to questions put to him. This is called ‘Volunteering evidence’, and the counsel of the opposite party should be on his guard to check its introduction by raising emphatic objections. Though in practice it is extremely hard to convince the Tribunal to do this, but the Tribunal is fully empowered to strike out answers which are not responsive to the questions or which introduce opinion, when the same is not sought.
Some witnesses go overboard with their responses and end up harming your case. For example:
Q: You recognized the driver in the car, didn’t you?
A: Yes.
Q: It was Frank Jones, wasn’t it?
A: Yes. “He was weaving and looked drunk.”[15]
In such a scenario, the ideal step would be to appeal to the Tribunal to instruct the witness to stick to the answer to the question asked. Therefore, where the witness is unresponsive and the answer is inadmissible, one must object and move to strike. However, in case of an admissible response, appealing might expose your weakness to the tribunal and to the opposite counsel, giving her a chance to milk your weakness, which stands exposed.
From a defender’s perspective, a volunteering witness may unsettle an otherwise potentially successful case, and this is not an uncommon disaster during an examination. This is where witness preparation assumes importance. The first and foremost step must be to educate the witness about the dangers of volunteering information. The witness must be made aware of the purpose of cross-examination, which is fact-finding opportunity for the opposite counsel. The witness must also be educated about strategies that maybe employed by the opposite counsel in eliciting answers from the witness. During your witness’ examination, interrupting the witness must be avoided in order to keep the trust and the confidence of the witness intact. However, if the witness is going absolutely astray, then interjecting can save you from a potentially prejudicial testimony.
- Effect of giving up a witness who was in the list of witnesses filed earlier:
A witness deposition, or in other words, an affidavit of a witness is evidence as soon as it is affirmed and hence, cannot be allowed to be ‘withdrawn’. Where an evidence affidavit is filed and the witness or deponent, though otherwise available, is not made available for cross-examination, the opposite party will be entitled to submit that an adverse inference be drawn against such a witness or the party who fails to produce that witness for cross- examination; and, further, should that evidence (the witness deposition) contain any admissions, the same may be used by the other party. Needless to state, where the evidence is against the party entitled to cross-examination but which has gone untested for want of production of the witness, such evidence will be liable to be ignored.[16] Some times such a decision (of dropping witnesses from the array of witnesses) is taken from a strategic stand-point, for instance, to protect a weak witness from damaging cross examination, or prevent needless duplication of evidence, or for cost and time efficiency; however, the benefits sought to be achieved from such an action should always be carefully balanced against the potential adverse inference.
- Cross examination by co-respondents:
If there is an adverse interest inter-se respondents, in the sense that the case set up by the co-respondent is that he/she disputes the other co-respondent. In such a case, the co-respondent whose interest is adverse gets the right to cross-examine the co-respondent’s witness. Where a co-respondent has made certain admissions that would be sufficient proof in order to fix liability on the other respondents, such other respondents can claim a right to question/cross examine such testimony, lest the admissions be used by the tribunal to make a decision/award against them.[17]
15. ‘To suggest, or not to suggest?’ The importance of suggestions.
The practice of giving suggestions in cross-examination to witnesses primarily belongs to the realm of criminal trials where there are no pleadings and the defence is built up by giving such suggestions. However, unfortunately, the said practice of criminal trials has crept into the civil trials. The purport of cross-examination is to challenge the testimony and / or to falsify the witness or his credit worthiness and not to give suggestions to the effect that each and every deposition in examination-in-chief is false. In Sher Mohammad vs Mohan Magotra[18], the High Court of Delhi observed that in a civil trial based on pleadings, there is no need for such suggestions to be given.
16. Re-Examination “Putting Humpty Dumpty back together again….”
Re-direct or re-examination allows the counsel to respond to the cross-examination. Therefore, re-examination can be used to allow the witness to throw light on the points explored during the cross-examination or to clarify any doubt or inconsistencies. If examination in chief is the erection of the wall, and cross-examination – breaking holes into it, re-examination is the final act of repair. Though clarificatory re-examination is permissible, it is well settled that lacunae in evidence led cannot be allowed to be filled up under the guise of re-examination. Re-examination is only to clarify matters, which if allowed to stand, would be misleading.[19]
For instance, if in examination in chief, ‘A’ testifies that she saw ‘B’ shoot and kill ‘X’. On cross, ‘A’ admits that she wasn’t wearing her glasses at the time of the shooting. Now this statement, if allowed to stand, may be extremely damaging to the credibility of the witness, if the accident happened at a distance, and the witness is proved to be myopic. In such a case, in order to ensure that the court is not misled, on re-examination, the Counsel should ask the witness as to whether A was wearing contact lenses instead. Here re-examination fulfills the important function of setting the record straight. To further illustrate, in an arbitration against an automobile company accused of having manufactured a faulty model, which led to loss of life and property, the claimant may ask the company’s witness: “Were your Cars compliant to AAC standards used to measure the chances of cars skidding off the road?” and the witness answers, “No.” Now, as it happens, let’s assume – AAC standard is an old standard which has been thoroughly debunked, and now the prevailing industry standard is modern – AAD standard, however, merely because the witness did not volunteer that information (which he should have), the matter may not be allowed to end there, as the answer, as it stands, may mislead the Tribunal into believing that the car is non-compliant and no standards were complied-with. In such a situation, it is important for the counsel to re-examine the witness and ask specific questions that bring to the fore the factum of compliance with the more advanced and superior AAD standard, with a view to provide the Tribunal with the full picture, and allow it to make a more informed decision.
Having said all of the above, it is important to understand that the scope for re-examination is mostly limited to the materials covered under the cross. Depending upon the leniency of the arbitrator, the counsel may or may not be allowed to introduce altogether new material during re-examination. Also, some amount of leading is necessary to bring the focus of the arbitrator on the area that the counsel wants the witness to explain or rebut.[20] For instance, where doubts have been raised about the expert based on the number of years of experience, questions may be put during re-direct (re-examination in IEA parlance) to re-establish the expert’s credit worthiness, such as, “Mr. X, you mentioned during the cross-examination that you have only 5 years of post qualification experience. Is it correct, that during the last 2 years, you have given expert testimony in over 30 contractual disputes?” By answering in the affirmative to such a question, the expert witness would re-establish credibility of her report which was somewhat shaken by the cross-examining counsel by raising an inference of relative inexperience of the witness.
17. Whether to cross-examine post a re-examination?
If on re-direct (or re-examination), a witness produces wholly new and harmful testimony, the counsel must insist on cross-examining such witness. However, the request for cross-examination must not be made unless the questions can alleviate the new harmful testimony, if not remedy it in toto. Another way of going about it is by seeking to reserve right to deal with the additional harmful testimony in submissions. The same may receive favour from the Tribunal insofar as it concludes the examination of the witness.
18. How to cross-examine witnesses with selective amnesia? “Blessed are the forgetful for they get the better even of their blunders.”
A forgetful witness is one of the most frequently encountered category of difficult witnesses. Efforts should be made to elicit yes or no responses as much as possible. The Counsel must be ready with materials such as earlier depositions, documents, etc. to jog the memory of the witness. For instance:
Q: Mr. Contractor, when did the site engineer first inform you about cracks in the foundation?
A: I don’t really remember.
Q: Didn’t the site engineer raise this concern in the daily progress report dated January 23, 2011, forming a part of the documents filed along with your counter-claim?
A: I guess he did.
In case such materials are not available to be put to the witness in order to refresh her memory, the counsel must ask questions on related topics to refresh the witness’ recollection. If the counsel expects that the witness, in order to evade answering questions with respect to a particular period, may claim amnesia, it may be a good strategy to anticipate such an feigned amnesia and start the cross examination with asking witnesses information on questions which are ostensibly self-serving (but cause little damage); the witness, in his keenness to build the case, would depose, in clear and precise terms, facts and incidents dating years back. Having established that the witness has no problems of memory and recollection, it would now be tougher for the witness to claim ignorance as to other facts (which are damaging to his case), which date back to the same time period.
19. Whether or not to prepare in advance?
Although writing-out questions may be a part of preparation for a cross examination, however, simply reading them out to the witness rather than engaging in a responsive question and answer interaction is not effective. The best way to go about this would be to prepare an outline of the cross-examination, so as to remind you of the points that you intend to enunciate during the examination. After preparing an outline, referencing the same would enable one to be prepared to refresh the recollection of a forgetful witness, or impeach or contradict the witness who gives evasive, unexpected or false answers.[21] A broad outline gives the Counsel the necessary flexibility to think on her feet and change strategies quickly, should the witness throw a few surprises. Another way of preparing would be to think in terms of the transcript. Transcript is king. Such an approach would require the counsel to focus on the admissions to be secured and answers to be elicited from the witness. However, one must, almost at all times, avoid asking what are known as the “Journalist” questions, i.e., the ‘how’ and ‘why’ kind of questions, that may give the witness the opportunity to say more than what may be a reasonable answer and to spin a narrative (in favour of the party they are aligned with).
20. Strategizing the flow of cross-examination – parting thoughts:
The next question that arises is whether it is a good strategy to ask questions para-wise on the basis of affidavit in evidence of the witness, or should cross-examination be conducted thematically. The answer to this may be – a bit of both. Broadly, it is best if the cross-examination is issue/theme wise. For instance, if you have a case that deals with aspects of misrepresentation (pre-contract) as well as post execution breach of contract, it would make for easier reading of the Tribunal to maintain this distinction. Having said this, there is, of course, no formula, which can be ritualistically adopted. A lot of thinking on one’s feet goes into a cross examination and the counsel should constantly invent and reinvent his strategy, if he sees the witness is able to anticipate questions and answer them guardedly. An (ostensibly) unrelated question can throw the witness off balance, and disturb the rhythm. Every witness has an Achilles heel; some of the well-heeled, have more than one; in such cases, throwing in a mean one every now and then keeps the witness nervous and doesn’t allow him to settle into a comfortable rhythm. These maneuvers are a paper by itself, but fortunately need no more training in books than in the behavior and psychology of men and women. University of life, as they say, is the best school for cross-examination.
[1] Authored by Bharat Chugh, Partner – L&L Partners
Abhilasha Vij, Senior Associate, L&L Partners Law Offices. Pursuing post- grad in law from Stanford.
[2] 2017 SCC OnLine Del 7483.
[3] Bengal Jute Mill Co. Ltd. vs. Lalchand Dugar, reported as AIR 1963 Cal 405.
[4] Javier Tarjuelo, ‘Fast Track Procedures: A New Trend in Institutional Arbitration’, Dispute Resolution International Vol. 11 No.2 October 2017.
[5] P. Bienvenu, M. J. Valasek, ‘Witness Statements and Expert Reports’, in: D. Bish- op, E. G. Kehoe (eds.), ‘The Art of Advocacy in International Arbitration’, Second Edition, Juris (2010), Chapter 10.
[6] M. Hwang SC and A. Chin, ‘The Role of Witness Statements in International Commercial Arbitration’, in: A. van den Berg (ed.), Montreal: ICCA Congress Series 2006, Volume 13, p.658.
[7] Michael E. Schneider, ‘Twenty–four Theses about Witness Testimony in International Arbitration and Cross–Examination Unbound’ in M. WIRTH, C. RAMÍREZ and J. KNOLL ASA Special Series No 35, ‘The Search for ‘Truth’ in Arbitration: Is finding the Truth What Dispute Resolution is About? ‘,(Juris, 2011) Chapter 5, p. 63 (Thesis 2).
[8] Peter Callaghan SC, Barrister at law, ‘Dealing With Objections To Evidence’, ACLN – Issue #67 at Page 31.
[9] Ali Mahommad v. Yusuf, AIR 1962 Ori 111
[10] Browne v. Dunn, decided on November 28, 1893 by the Court of Appeal, England.
[11] 2009 SCC Online Del 3855
[12] .V.E Venkatachala Gounder v. Arulmigu Viswesaraswami & V.P Temple and Another, 2003 (8) SCC 752
[13] Sonu @ Amar v. State of Haryana, (2017) 8 SCC 570.
[14] Glissan and Tilmouth, ‘Advocacy in Practice’, http://www.austlii.edu.au/au/journals/AUConstrLawNlr/1999/51.pdf
[15] Example courtesy : http://www.thejuryrules.com/2012/11/16/how-to-deal-with-an-admissible-blurt-out/
[16] Banganga Co-Op Housing Society v. Mrs. Vasanti Gajanan Neurkar, (2015) 5 Bom CR 813.
[17] Sohan Lal v. Gulab Chand, AIR 1966 Raj 229.
[18] 2013 SCC OnLine Del 2530.
[19] Rammi v. State of M.P., (1999) 8 SCC 649.
[20] John W. Cooley and Steven Lubet, ‘Arbitration Advocacy’, at page 142.
[21] John W. Cooley and Steven Lubet, ‘Arbitration Advocacy’, at page 149.