Dispute Resolution — India
History will remember 2016 as a major milestone. This was a year of major upheavals and changes: some good and some not so good. Time will be the ultimate judge of these changes.
Despite there being a majority Government in power at the Centre, the political and hence, the Executive and Legislative fields are facing a volatile situation. In this background, the third arm on which our Constitution rests, i.e., the Judiciary, has once again risen to the task and plugged the various gaps through landmark judgments and proactive orders.
Let’s begin with “demonetisation”, which is perhaps one of the most significant steps taken in the history of independent India. It has far reaching effects on the entire nation and has engaged the country in a debate like never before.
Demonetisation, which saw complete withdrawal of currency notes of INR 500 and 1000 and introduction of currency notes of INR 2000 and 500 (new), was introduced as a Money Bill in the form of Taxation Laws (Second Amendment) Bill 2016, on November 29, 2016 in the Lok Sabha. This law primarily intends to impose penalties on anyone who is caught illegally converting money. The said amendment also introduced a scheme named “Pradhan Mantri Garib Kalyan Yojna” to use illegal money, commonly referred to as “black money”, which has now been deposited into banks, for the betterment of the downtrodden and the rural class.
In other fields of law too including constitutional law, commercial law and arbitration law there have been major developments. The Indian judicial system has once again shown vitality when it comes to progressive society through its judgments. One must also not forget the contribution of our law makers, the Legislature, which has been successful in passing new legislation in the year 2016.
Changes in Commercial Law
Indian commercial law has undergone a number of major changes, which will change the way of doing business and commercial activities in the coming years. Some of these developments are as follows:
• Insolvency and Bankruptcy Code, 2016 (the “Code”) "FOOTNOTE ONE" was brought into effect in 2016 to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.
• The Code has introduced certain innovative concepts like Insolvency Resolution Process, establishment of Insolvency and Bankruptcy Board of India (“IBBI”) and Insolvency and Bankruptcy Fund (IBF). Needless to say the Code will override all existing laws relating to bankruptcy and insolvency. The salient features of the Code are as follows:
(i) The Code marks a fundamental change in approach to the resolution of creditor-debtor disputes. It has changed the earlier regime of a “Debtor-in-possession” to that of a “Creditor-in-possession”. This fundamental shift has been hailed as a blessing for secured creditors.
(ii) Under the earlier regime, the High Court / NCLT had to decide whether or not a company should be wound up. However, under the new regime, if the restructuring fails to be implemented as prescribed under the Code it would lead to automatic liquidation of the debtor (except in case of individuals).
(iii) Section 2(10) of the Code whereby the definition of “creditor” has been broadened to include financial creditor, secured and unsecured creditor, operational creditor and a decree holder. Any one or more of these creditors, according to Section 6 of the Code, can initiate the corporate insolvency proceedings once there is a default by the corporate debtor.
(iv) The new Insolvency Resolution Process (IRP) in place ensures that the resolution process is completed within a time bound period of 180 days as opposed to the four years or more taken earlier. There are two options available to the stakeholders under the Act. They can, within the maximum time period of 180 days, which can be extended once for 90 days, resolve the issue through a resolution plan (accepted by 75% of the financial creditors), which if approved by the Adjudicating Authority, would be binding on all stakeholders.
(v) In case the debtor is liquidated, the sale proceeds of its assets have to be distributed amongst the creditors in the defined order of priority also referred to as the waterfall mechanism.
(vi) The Code has introduced the concept of “Insolvency Professionals”. The Code mandates that the resolution process of insolvency will be conducted only by a licensed insolvency professional.
• The High Court of Delhi vide its judgment dated January 27, 2016 in the matter of Rajeev Saumitra v. Neetu Singh & Ors "FOOTNOTE TWO" opened the way for derivative suits for shareholders, a concept prevalent in the West. It allows majority shareholders to bring action against the directors of a company for the latter’s malafide actions. Derivative suits, which have hitherto been unknown to the Indian judicial system, have sparked a debate in academic circles about derivative suits and their place in the Companies Act, 2013.
• Companies Amendment Bill, 2016 was introduced in the Lok Sabha on March 16, 2016, which is the result of discussions and deliberations of the Company Law Committee. Certain amendments have been proposed in the Companies Act, 2013 through this Bill. One of the most controversial of the changes is a proposal to omit the provision which prohibits insider trading in securities.
• NCLT (National Company Law Tribunal) & NCLAT (National Company Law Appellate Tribunal) were constituted "FOOTNOTE THREE" according to the mandate of Companies Act 2013, in June 2016. NCLT is a single, consolidated forum which will deal with all company related disputes, abolishing Company Law Board and Board of Industrial and Financial Reconstruction (BIFR). There are 11 (eleven) Benches of NCLT throughout India giving it a much wider reach to adjudicate company related disputes. Its Principal Bench is at New Delhi.
• The Enforcement of Security Interest and Recovery of Debt Laws & Miscellaneous Provision (Amendment Bill) 2016 "FOOTNOTE FOUR" was passed by both the Houses of the Parliament. The said Bill led to amendment of: (i) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), (ii) Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI), (iii) Indian Stamp Act, 1899 and (iv) Depositories Act, 1996.
Arbitration and Dispute Resolution
• An important development in this field was rendered in the judgment of the Supreme Court of India in Centrotrade Minerals & Metals Inc. v. Hindustan Copper Inc "FOOTNOTE FIVE", Civil Appeal No. 2562 of 2006 decided on 15.12.2016, whereby the Court has upheld two-tier arbitrations. A two-tier arbitration generally contains an appellate stage in the dispute resolution process, more like a review of the arbitral award. It, however, needs to be specifically provided in the arbitration agreement. Two-tier arbitrations are an upcoming phenomenon in the world of arbitration, and with a strong precedent from the Supreme Court, India has opened doors for this form of arbitration.
• The arbitration and judicial community also seemed divided in 2016 on the interpretation of the recent amendments of 2015 in the Arbitration and Conciliation Act 1996. However, each amendment in any law brings with itself its own set of problems especially regarding its interpretation and applicability. One of the major issues before the Indian courts is prospective or retrospective applicability of the Amendment. There is a difference of opinion amongst High Courts "FOOTNOTE SIX", which now is pending adjudication before the Supreme Court.
Real Estate Law
The real estate and infrastructure sector is one of the booming sectors in India, and the regulation regarding the same also occupies a specialised field.
• The Real Estate (Regulation and Development) Act 2016 "FOOTNOTE SEVEN" has been introduced to ensure greater regulation of this sector as it has an effect not only on corporates but also on the common man. It is quite clear from the Statement of Objects and Reasons and the Preamble, that the Act has created the Real Estate Regulatory Authority (the “Authority”), with the aim to regularise as well as promote the sector. Its primary aim is also to protect interests of consumers by ensuring that allotment of real estate sector plots, apartments, land etc. is done in a transparent manner by the regulator.
• It mandates the estate developer to open an escrow account for each project and 70% of the money collected through bookings from customers needs to be deposited in such an account.
• The consumers who have disputes regarding real estate will have speedier judgments and remedies as per the new 2016 Act, by imposing a time limit for tribunals and courts to resolve issues/disputes.
• Introduction of Benami Transactions (Prohibition) Amendment Act 2016 "FOOTNOTE EIGHT" has been one of the most talked about laws. It also shows the tightening grip of the government over those involved in shady and illegal property transactions. In simple terms, a “benami” transaction is when someone buys a property in someone else’s name (e.g. wife, brother etc.) in order to hide his/her source and record of income. The law defines “benami” more technically under Section 2(9) of the 2016 Act. It states that a property is benami when it is bought as a result of consideration being paid by someone else and property is held in the name of another person; or when the property transaction is conducted in a fictitious manner; or when the name of the person providing consideration is fictitious or not traceable; or any transaction of property where the owner himself has no knowledge of the same, or denies the property to have been bought by him. This new law sets an entire mechanism in place by way of which benami transactions can be inquired into and investigated. Punishment for those involved in any prohibited transaction under the Act has been increased to 7 (seven) years. Properties which are under a benami name will be confiscated by the Government, with no compensation.
• 2016 saw constitution of a 9-judge Bench reviewing the question of entry tax and its constitutional validity in Jindal Steels v. State of Haryana Civil Appeal No. 3453 of 2002 and other connected matters (as decided on 11th November, 2016). The said judgment, running into 800 plus pages, has reviewed the earlier law and held that only such taxes as are discriminatory in nature are prohibited by Article 304(a) (Restriction on trade, commerce and intercourse among States) of the Constitution of India and levy of a non-discriminatory tax cannot per se constitute infraction of Article 301 (Freedom of trade, commerce and intercourse) of the Constitution of India.
• This judgment, however important it might be, will not have any effect on the future as the Goods and Service Tax Act is expected to be implemented in the near future. Goods and Services Tax is envisaged as a value added tax (VAT) comprising a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by the Central and state governments including but not limited to entry tax. Therefore, the law as declared by the aforementioned 9-judge Bench will apply only to the past period.
As aforesaid, 2016 has been an exciting year for the Indian legal system. The Indian judiciary has set a higher benchmark for the legal fraternity. Legislation passed in 2016 also gives us an insight into the implementation of government policies to develop our nation. However, time will judge the impact of these judgments, amendments and policies.
1. As notified on 11th May, 2016
2.  198 Comp Cas 359 (Delhi)
3. Constituted with effect from 1st June, 2016
4. As notified on 25th November, 2016
5. AIR 2017 SC 185
6. Madras High Court in Delphi TVS Diesel Systems Ltd v. Union of India (24.11.2015) had sought clarifications from Central Government on the issues of applicability of the 2015 Amendment, being either prospective or retrospective.
7. As notified on 1st May, 2016
8. As notified on 1st November, 2016