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Author: Chitrangada Singh

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Validity of the ‘Group of Companies’ Doctrine in the Jurisprudence of Indian Arbitration

Introduction:

The ‘Group of Companies’ doctrine provides that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates, if the circumstances are such that they demonstrate the mutual intention of the parties to bind both signatories and non-signatories. This doctrine has been questioned purportedly on the ground that it interferes with the established legal principles such as party autonomy, privity of contract, and separate legal personality.

In the recent case of ‘Cox and Kings Ltd. Vs. SAP India Pvt. Ltd. and Ors.’a reference was made to thelarger bench of the Hon’ble Supreme Court, to clarify the issues regarding the interpretation of the phrase “claiming through or under” appearing in sections 8, 35 and 45 of the Arbitration & Conciliation Act, 1996 (“Act”).

Relevant Provisions of the Act:

Section 2(1)(h) of the Act defines a “party” to mean “a party to an arbitration agreement“. An “arbitration agreement” is defined under section 2(1)(b) to mean “an agreement referred to in Section 7“. Section 7 lays down the essential elements of a valid and binding arbitration agreement, as an agreement by the parties to submit to arbitration all or certain disputes which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not. Section 7(5) further stipulates that the reference in a contract to a document containing an arbitration Clause constitutes an arbitration agreement if two conditions are satisfied, i) that the contract is in writing; and ii) that the reference is such as to make the arbitration clause part of the contract.

Generally, a party to an arbitration agreement is determined on the basis of persons or entities who are signatories to the arbitration agreement or the underlying contract containing the arbitration agreement. However, over the past two decades the law on joinder of non-signatory parties has evolved substantially. This evolution can roughly be classified into two stages: Before Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. and After Chloro Controls (P) Ltd. v. Severn Trent Water Purification Inc.

Pre Chloro Controls Era:

Some of the significant decisions of this era were given in the cases of Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, Sumitomo Corporation v. CDC Financial Services (Mauritius) Ltd., and Indowind Energy Ltd. v. Wescare (I) Ltd.

In the pre Chloro Controls era, the Hon’ble Supreme Court construed “parties” by limiting it only to the signatories to the arbitration agreement and this position was characterized by three underlying precepts:

  • arbitration could be invoked at the instance of a signatory to the arbitration agreement only in respect to disputes with another signatory party;
  • the court would adopt a strict interpretation of the provisions of the Arbitration Act, particularly the unamended Section 8 which only allowed reference of “parties” to an arbitration agreement; and
  • there was an emphasis on formal consent of the parties, thereby excluding any scope for implied consent of the non-signatories to be bound by an arbitration agreement.

This position of law underwent a significant change when the Bench of three Judges of the Hon’ble Supreme Court in Chloro Controls (supra) allowed joinder of non-signatory parties to the arbitration agreement on the basis of the ‘Group of Companies’ doctrine.

The Chloro Controls Case:

In Chloro Controls (supra) the Supreme Court was called upon to determine an arbitral reference in case of multi-party agreements where performance of the ancillary agreements was substantially dependent upon effective execution of the principal agreement. In that case, a foreign entity and an Indian entity incorporated a joint venture company to market and distribute chlorination equipment. With respect to the joint venture, the related companies of both the Indian and foreign entity were also involved. Consequently, the parties concluded several ancillary agreements such as a Shareholders’ Agreement which contained an arbitration clause. All the contracting parties were not signatories to all the agreements, including the Shareholders’ Agreement. When disputes arose between the parties, the foreign entities sought to terminate the joint venture. The primary issue that came up for consideration before the Apex Court pertained to the ambit and scope of Section 45 of the Act. The Court framed the issue in the following terms:

“Whether in a case where multiple agreements are signed between different parties and where some contain an arbitration Clause and others do not and further the parties are not identically common in proceedings before the court (in a suit) and the arbitration agreement, a reference of disputes as a whole or in part can be made to the Arbitral Tribunal, more particularly, where the parties to an action are claiming under or through a party to the arbitration agreement.”

In view of the language of Section 45 of the Act, the Court held that the expression “any person” reflects a legislative intent of enlarging the scope beyond “parties” who are signatories to the arbitration agreement to include non-signatories. However, the court noted that such non-signatory parties are required to claim “through or under the signatory party.” Thus, the Supreme Court accepted that arbitration is possible between a signatory to an arbitration agreement and a third party or non-signatory claiming through a party.

The next issue before the Court was then to determine whether there was any legal relationship between the signatory and the non-signatory for the latter to ‘claim through or under’ the former. The court noted that the ‘Group of Companies’ doctrine has been developed by courts and tribunals in the international context to bind a non-signatory affiliate or sister concern within the same corporate group as the signatory party, to an arbitration agreement provided there was a mutual intention of all the parties. The Court emphasized that the “intention of the parties” is the underlying principle for the application of the Group of Companies doctrine. The court thus held that a non-signatory could be subjected to arbitration ‘without their prior consent’ in ‘exceptional cases’ on the basis of four determinative factors:

  • A direct relationship to the party which is a signatory to the arbitration agreement;
  • A direct commonality of the subject-matter and the agreement between the parties being a composite transaction;
  • The transaction being of a composite nature where performance of the mother agreement may not be feasible without the aid, execution, and performance of supplementary or ancillary agreements for achieving the common object and collectively have a bearing on the dispute; and
  • A composite reference of such parties will serve the ends of justice.

The case of Chloro Controls (supra) was dealing with a situation where the success of the joint venture agreement was dependent upon the fulfilment of all the ancillary agreements. In this context, the Supreme Court observed that all the ancillary agreements were relatable to the parent agreement and the ancillary agreements were intrinsically linked with each other, to the extent that they could not be severed. This in the view of the court indicated the intention of the parties to refer all disputes arising out of the parent agreement and ancillary agreements to the arbitral tribunal. The phrase ‘legal relationship’ was explained as being part of the same corporate group, the interests of the non-signatory companies were not averse to the interest of the principal company and the joint venture company.

Post Chloro Controls Era:

In 2016, the legislature amended Section 8 of the Act to bring it in line with Section 45 of the Arbitration Act. The amended Section 8(1) provided that “a party to an arbitration agreement or any person claiming through or under him” could seek a reference to arbitration. However, the legislature did not bring about any change in the language of Section 2(1)(h) or Section 7 of the Act. Since the Chloro Controls (supra) and the amendment to Section 8, subsequent decisions of the Supreme Court have referred to the ‘Group of Companies’ doctrine to join non-signatory persons or entities to arbitration agreements.

The decision in Cheran Properties Ltd. v. Kasturi and Sons Ltd. held that the ‘Group of Companies’ doctrine is applied to bind a non-signatory party upon a construction of the arbitration agreement, circumstances which exist at the time of entering into the contract, and the performance of the underlying contract. Nevertheless, it must be noted that Cheran Properties (supra) did not apply the ‘Group of Companies’ doctrine to make the non-signatory a party to the arbitration agreement. Rather, this Court made the arbitral award binding on a non- signatory under Section 35[1] on the ground that it was claiming under a party which was a signatory to the arbitration agreement.

Over time, the Supreme Court identified certain additional factors for the invocation of the ‘Group of Companies’ doctrine. In Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India, it was held that the non-signatory party, even though a constituent part of the corporate group, did not have any causal connection with the process of negotiations preceding the agreement or the execution thereof, whatsoever. Thus, the participation of the non-signatory party in the negotiation and performance of the underlying contract was held to be the key determinant of the intention of the parties to be bound by an arbitration agreement.

In Mahanagar Telephone Nigam Ltd. v. Canara Bank, the Supreme Court emphasized that the Group of Companies doctrine could be invoked on the basis of the principle of “single economic unit“. The Court noted that the doctrine could also be invoked “in cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality.”

The last in the series of decisions dealing with the Group of Companies doctrine is a three-Judge Bench decision of this Court in Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. The Court held that in addition to the cumulative factors laid down in Chloro Controls (supra), the performance of the contract was also an essential factor to be considered by the courts and tribunals to bind a non-signatory to the arbitration agreement. In this case the Court refined and clarified the cumulative factors that the courts and tribunals should consider in deciding whether a company within a ‘Group of Companies’ is bound by the arbitration agreement:

  • The mutual intent of the parties;
  • The relationship of a non-signatory to a party which is a signatory to the agreement;
  • The commonality of the subject-matter;
  • The composite nature of the transactions; and
  • The performance of the contract.

Finality on the issue in Cox and Kings:

In view of the above decisions and discussions in respect thereto, the Hon’ble Supreme Court arrived at the following conclusions in Cox and Kings (supra):

  • The definition of “parties” under Section 2(1)(h) read with Section 7 of the Act includes both the signatory as well as non-signatory parties;
  • Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement;
  • The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties;
  • Under the Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement;
  • The underlying basis for the application of the ‘Group of Companies’ doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non- signatory party to the arbitration agreement;
  • The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the Group of Companies doctrine;
  • The Group of Companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act;
  • To apply the Group of Companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). Resultantly, the principle of single economic unit cannot be the sole basis for invoking the Group of Companies doctrine;
  • The persons “claiming through or under” can only assert a right in a derivative capacity;
  • The approach in Chloro Controls (supra) to the extent that it traced the Group of Companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law;
  • The Group of Companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements;
  • At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and
  • In the course of this judgment, any authoritative determination given by this Court pertaining to the Group of Companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

[1] Finality of arbitral awards. – Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively.

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Law Commission Proposes Bill Codifying the Law Relating to Trade Secrets

TRIPS & Intellectual Property:

The treaty that internationally governs intellectual property laws is commonly referred to as the ‘TRIPS Agreement’, formally known as the Trade-Related Aspects of Intellectual Property Rights Agreement[1]. TRIPS is comprehensive multi-lateral agreement that lays down the minimum protection requirement of intellectual properties globally. TRIPS identifies seven categories of intellectual property rights viz.

  • copyright and related rights;
  • trademarks;
  • geographical indication;
  • industrial design;
  • patent;
  • layout design (topography) of integrated circuits; and
  • undisclosed information.

Undisclosed Information or Trade Secrets:

Unlike previous international instruments like the Paris Convention for Protection of Industrial Property, the TRIPS Agreement is the first international instrument that recognizes ‘undisclosed information or trade secrets’ as an intellectual property.

Under the TRIPS Agreement, undisclosed information is included in the ambit of intellectual properties to ensure effective protection against anti-competitive practices and unfair commercial use of any protected information. However, the protection accorded to undisclosed information under TRIPS is unlike the traditional intellectual properties. Article 39 of TRIPS defines undisclosed information as any information that:

  • “is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
  • has commercial value because it is secret; and
  • has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”

Additionally, the protection accorded to the undisclosed information is not constrained by a specific duration but is rather considered to be in perpetuity. Any individual or legal entity has the capacity to be the proprietor of undisclosed information and is entitled to rights of “…preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices.”

Undisclosed Test Data & Disclosure for Public Good:

Paragraph 3 of Article 39 of the TRIPS Agreement pertaining to undisclosed test data puts an obligation on the countries that mandate organizations to submit undisclosed test data for the approval of new agricultural or pharmaceutical products. It states that such countries shall ensure the protection of the undisclosed test data from unfair commercial exploitation. Para 3 of this Article further lays down an exception, it states that disclosure of undisclosed test data shall not be considered misappropriation of trade secrets in cases where such disclosure is for the public good.

A reading of Article 39 showcases that concept of “disclosure for public good” does not arise in protection granted to undisclosed information unless such undisclosed information is a test data which utilizes new chemical entities in the pharmaceutical or agricultural industry. In contrast to traditional intellectual properties addressed within the TRIPS framework, undisclosed information does not entail a trade-off between grant of exclusive rights for a limited period and public disclosure.

Protection of Trade Secrets Globally:

In line with the minimum requirement laid down in TRIPS, globally, trade secrets are protected either through specific legislations like in Germany, China, South Korea, etc, or through equity or under common law. Pursuant to the TRIPS and discussions between member states, India, as a country, has always taken a strong stance against inclusion of trade secret under the ambit of intellectual property rights[2]. In India, trade secrets are protected by a spectrum of laws and common law practices including the Indian Contract Act, 1872; Specific Relief Act, 1963; Indian Penal Code, 1870 and the Information Technology Act, 2000.  

289th Law Commission Report & The Protection of Trade Secrets Bill, 2024

Recently, the 22nd Law Commission headed by Justice Ritu Raj Awasthi dealt with the concept of trade secrets and its implications in the current knowledge-based economy of countries. The Law Commission of India in its 289th Report dated March 05, 2024, recommended that a special law should be devised to ensure protection of trade secrets in India.

This bill was proposed by the Law Commission with an intent of protecting trade secrets against misappropriation, to encourage innovation and competition. The bill draws upon Article 39 of the TRIPS Agreement and lays down a definition of trade secrets consistent with the definition outlined in TRIPS. A trade secrets holder is defined as a natural or legal person having lawful control on a trade secret. Further, a trade secrets holder under the proposed bill has the right to license the trade secret. The significant difference between the minimal requirement laid down in TRIPS and the proposed bill is that the proposed bill tries to bring trade secrets under the traditional concept of intellectual property.

Section 5 of the proposed bill lays down certain acts which do not amount to misappropriation of trade secrets. This includes disclosure of trade secret “in good faith to protect public interest”. Further, Section 6 lays down provisions for compulsory licensing, and grants the Central Government the right to mandate the holder of a trade secret to issue a compulsory license for its utilization by third parties or the Government.

Analysis of the Bill:

The proposed bill fails to address the potential ramifications of compulsory licensing of trade secrets on competitive markets within the knowledge economy. Further, identifying the scenarios warranting such compulsory licensing in case of trade secrets shall be challenging. Additionally, the bill includes a provision for instances where disclosure is deemed necessary for the “public good“. However, such a provision fails to differentiate between “undisclosed information” and “undisclosed test data“, since trade secrets in general business parlance typically involve proprietary commercial information which is unrelated to public welfare.

Taking into consideration the need for fair competition in a knowledge-based economy, the bill is a welcome change showcasing an effort to codify the trade secret law in India. It is noted that there is a necessity for a sui generis legislation governing trade secrets to acknowledge the commercial significance of safeguarding such proprietary information. Despite the gaps in the proposed bill, it stands out as the inaugural proposal codifying recourses in case of trade secret misappropriation. The bill encompasses provisions for confidentiality proceedings and, if enacted, will serve as an additional remedy for trade secret holders in India.

[1] TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights (April 15, 1994).

[2] Law Commission of India, Trade Secrets and Economic Espionage, Report No. 289 (March 05, 2024), accessed at, https://lawcommissionofindia.nic.in/report_twentysecond/.                                        

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FSSAI Issues Advisory dated February 21, 2024, for Time-Bound Processing of Applications for Licenses Marked for Inspections

The Food Safety and Standards Authority of India (“FSSAI”) issued directions for Risk Based Inspections vide order number RCD-02001/9/2021-Regulatory-FSSAI dated May 2, 2022[1]. Basis these directions issued by the FSSAI, Pre – License inspections are mandated only for the following categories of Manufacturer/Processor:

  • Milk & Milk products
  • Meat & Meat products
  • Fish & Fish products
  • Fortified Rice Kernels (FRKs)
  • Slaughter Houses

For the remaining categories of food business, license may be granted based on the submission of required mandatory documents without requiring pre-licensing inspection.

However, it has been observed that the Designated officers (“DOs”) are frequently marking licensing applications for pre – licensing inspection in non-mandatory cases resulting in delay in processing of applications and hence the grant of license. Furthermore, in some of the applications of non – mandatory cases which are marked for inspection, it is observed that inspection is not initiated even after 15 days of marking inspection.

Taking into cognizance the above scenario, FSSAI has released an advisory to all the DOs that:

  • No pre-license inspections shall be conducted in cases other than mandated categories as stated above.
  • In the cases where DOs believe that it is necessary to conduct inspection in non-mandatory categories, the DO shall record the reason in writing with clear justification.
  • Moreover, once an application is marked for inspection in the non-mandatory categories, inspection should be done within 15 days itself, failing which, the DO shall recall the application back to Document Scrutiny Stage in Food Safety Compliance System and grant the license.
  • In case, where the DO still believes that inspection is necessarily to be conducted prior to the grant of the license, the DO may reassign the inspection to another FSO or to himself/herself for immediately conducting the inspection without any further delay.

[1] https://fssai.gov.in/upload/advisories/2022/05/626fad52101b0Order_RBIS_02_05_2022.pdf

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Liability of E-commerce Platforms to Comply with Consumer Protection (E-Commerce) Rules, 2020 – Abhi Traders v. Fashnear Technologies Private Limited & Ors.

The Plaintiff, a clothing retailer under the brand name “IBRANA,” filed an interim application before the Delhi High Court against Defendant No. 1, Fashnear Technologies Private Limited, an operator of the e-commerce platform “meesho.com” and Defendants No. 2 to 10 who are clothing retailers for copyright infringement and passing off.

The Plaintiff alleged that the Defendants No. 1 to 9 and an unknown party being Defendant No. 10, were improperly using its copyrighted images to list/showcase their own products under the goodwill of the Plaintiff’s products on the platform Meesho (“Platform”) which led to a significant drop in Plaintiff’s sale of original/actual products on the Platform. Further, the Plaintiff contended that the Defendant No. 1 failed to disclose the seller details while listing its product on their Platform which is a requirement under Rule 5(3)(a) of the Consumer Protection (E-Commerce) Rules, 2020 (“Rules”). The Court noted that the said requirement under the Rules aimed to protect the buyers of an e-commerce platform by allowing them to take an informed decision.

The Court ruled in favour of the Plaintiff by granting an ex-parte ad interim injunction and passed an order issuing the following directions:

  • prohibiting Defendants No. 2 to 9 from using Plaintiff’s copyrighted images or similar designs for listing Defendants’ products and from duplicating Plaintiff’s designs;
  • Defendant No. 1 to disclose seller details including addresses, contact information, sales, GST details and payments made to sellers as per the Rules;
  • Plaintiff to provide a list of infringing URLs to the Defendant No. 1’s counsel within seven (7) working days for the Defendant No. 1 to take down such URLs.
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Stamp Duty Reduction for Mining Deeds in Goa

The Government of Goa via a notification dated March 02, 2024, has promulgated “The Indian Stamp (Goa Amendment) Ordinance, 2024” amending section 3A, sub-section (1) of the Indian Stamp Act, 1899 which has reduced the stamp duty on mining lease deeds by 60%. Currently, the stamp duty on mining lease deeds is calculated by multiplying the Environmental Clearance Quantity by 15 (Fifteen) times and then the sum total is further multiplied by the period of lease. Now, under the new ordinance, the stamp duty will be arrived by multiplying the Environmental Clearance Quantity by 6 (Six) times and then further multiplying the sum total by the period of lease.

The goal of the government’s mining lease deed reduction program is expected to strengthen Goa’s reputation as a favorable location for mining operations, supporting the creation of jobs, income, and social development. Going forward, stakeholders expect additional policy interventions and initiatives aimed at tapping into the complete potential of the mining industry, promoting inclusive growth, and boosting Goa’s economic vitality both regionally and nationally.

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MEITY Advisory for Intermediaries on Use of Artificial Intelligence Models

Among the first attempts to regulate the artificial intelligence landscape of India, the Ministry of Electronic and Information Technology (MeitY) published an advisory on March 1, 2024, notifying intermediaries/platforms under the Information Technology Act, 2000 and Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“Intermediary Rules”) on the use of Artificial Intelligence model(s)/LLM/Generative AI, software(s) or algorithm(s) (collectively “Models”) by the intermediaries on or through its computer resource. The key provisions are produced hereafter.

  • The intermediaries to ensure that the use of Models does not permit the users to host, display, upload, modify, publish, transmit, store, update or share any unlawful content as outlined in the Information Technology Act and Rules thereunder.
  • Intermediaries to seek explicit permission from the Indian Government prior to usage and deployment of under-testing and unreliable Models. Where such under-tested and unreliable Models are used, such Model has to be: (a) appropriately labelled to ensure that the users are aware of the inherent fallibility and unreliability of such model; and (b) a “consent pop-up” mechanism has to be used which would explicitly inform users about the possible and inherent fallibility or unreliability of the output generated.
  • Intermediaries providing software and/or other computer resource which facilitates synthetic creation, modification, or generation of information and may be used for generation of misinformation or deepfake content are advised to embed a permanent unique metadata or identifiers into such created content. These identifiers shall assist in tracing back to the intermediary, the user of the software and/or resources and/or first originator of such misinformation or deepfake.
  • All intermediaries shall ensure that their computer resource do not permit any bias or discrimination or threaten the integrity of the electoral process including via the use of the Models.
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Courts Cannot Rewrite or Create a New Contract and Have to Simply Rely on The Terms and Conditions of The Agreement as Agreed Between the Parties

This was observed by the Hon’ble Supreme Court while deciding an Appeal filed against an order of the National Consumer Dispute Redressal Commission (“NCDRC”) rejecting the Appellant/ Buyer’s Application seeking termination of the Agreement and refund of the consideration.

Brief background of the case,

As per the terms of the contract, in case the Respondent fails to obtain the Occupation Certificate before the expiry period, the Appellant would have an option of election to terminate the contract and claim full refund of consideration paid.

However, NCDRC while rejecting the Appellant’s right to terminate the contract seeking refund of consideration observed that, “there was some delay in handling over the possession of the apartment by the Respondent company but it was not ‘unreasonable’, whereby the Appellants could cancel the Agreement and seek a refund.” In doing so, the NCDRC gave new interpretation of the contract entered between the Appellants and Respondents/ Seller for the purchase of an apartment.

Issue for Consideration

Whether the NCDRC can rewrite the terms and conditions of the covenants binding on the parties or make a new contract based on its interpretation?

Supreme Court’s Observation

The Hon’ble Supreme Court ruled that the Appellant/ Buyer’s action of terminating the Agreement on the date, as stipulated therein, cannot be deemed defective if the Respondent fails to furnish the ‘Occupation Certificate’ before the period expires.

The Supreme Court while setting aside the impugned order passed by the NCDRC observed that disregarding the legally enforceable covenants in the Agreement and using its own logic and reasoning to determine the parties’ and, more specifically, the Appellants, best course of action going forward, the NCDRC overreached its authority and jurisdiction.

CASE DETAILS: Venkataraman Krishnamurthy & Anr v. Lodha Crown Buildmart Pvt. Ltd.,[1]

[1] Civil Appeal No. 971 of 2023

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Demand Notice Sent to Cheque Drawer Via Email/WhatsApp is Valid: Allahabad High Court

The Hon’ble Allahabad High Court in the matter of Rajendra v. State of U.P. & Anr. whereby an application u/s 482 Cr.P.C. was filed seeking quashing of proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), held that a demand notice sent to the drawer of a cheque through ‘Email or WhatsApp‘ under Section 138 of NI Act for the dishonour of a cheque, is a valid notice and the same shall be deemed to be dispatched and served on the same date if it fulfils the requirement of Section 13 of the Information Technology Act, 2000 (“IT Act”).

Section 13 of the IT Act stipulates that once an electronic notice is entered into a computer resource beyond the sender’s control, it is considered dispatched. Similarly, when the electronic notice enters the designated computer resource or the recipient’s computer resources, it is deemed to be served. Further, Section 12 of the IT Act also provides the procedure for acknowledgement of receipt of notice in electronic form.

The Hon’ble Court reached the above conclusion by interpreting proviso (b) of Section 138 of the NI Act, that while this provision requires notice in writing, it doesn’t specify any particular mode for sending the same. Even upon considering Section 94 of the NI Act, it could not be inferred that notice must exclusively be sent by post.

In this backdrop, referring to Section 4 of the IT Act which recognises electronic records, the Court concluded that Section 138 NI Act Notice will also include ‘Email or WhatsApp’ if the same remains available for subsequent reference. In this regard, the Court also referred to Section 65(B) of the Indian Evidence Act, 1972 which accepts the admissibility of electronic records.

In the same case, the Hon’ble Court also laid down that there is no legal requirement to mention the date of service of notice upon the drawer of the cheque in the Complaint itself, if the notice was sent through registered post, then presumption under Section 27 of the General Clauses Act, that notice would have been served within ten (10) days from the date of its dispatch, shall apply. Though it is always open for the drawer of the cheque to take the plea during trial that the notice was never served upon him.

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NCLT cannot reject approval of Resolution Plan submitted by Successful Resolution Applicant being an ex-promoter, by rejecting the validity of the MSME registration obtained by Corporate Debtor post initiation of CIRP: NCLAT New Delhi

The Hon’ble NCLAT Delhi in the matter of Ramesh Shah in consortium with Masitia Capital Services Pvt. Ltd. v. Central Bank of India & Ors. vide its order dated February 29, 2024, allowed two Appeals preferred by the Resolution Applicant and the Resolution Professional, wherein the issues that arose for consideration were as follows:

  • Whether the Resolution Applicant being an ex-promoter of the Corporate Debtor is eligible to submit a Resolution Plan when the Corporate Debtor has acquired a change in its status to that of an MSME after initiation of the CIRP proceedings?
  • Whether the Adjudicating Authority can raise concerns over the plausibility of the reports which had validated the MSME entitlement of the Corporate Debtor, by going under the computation exercise conducted by the Corporate Debtor and thereby reject the MSME status of the Corporate Debtor?

The peculiar facts of the case are such that the Corporate Debtor had been issued an MSME Certificate by the competent authority on the basis of an online application filed by an employee of the Corporate Debtor on the instructions of the Resolution Professional. Since the MSME Registration Certificate was obtained prior to the date of submission of the resolution plan, the Resolution Applicant (ex-promoter) filed a Resolution Plan seeking benefits of Section 240A of the IBC.

The said resolution plan was approved by the CoC with 77.56% vote share. The RP filed an Interlocutory Application for approval of the said resolution plan, which was dismissed by the Adjudicating Authority thereby rejecting the proposal for approval of the resolution plan. Also, the Central Bank of India, as a dissenting Financial Creditor, filed an Interlocutory Application seeking stay of the approval of the resolution plan before the Adjudicating Authority and challenged the eligibility of the ex-promotor as a Successful Resolution Applicant (“SRA”). The Adjudicating Authority allowed the Application of the dissenting Financial Creditor and held the SRA to be ineligible under Section 29A read with Section 240A of the IBC to submit a resolution plan. Hence, the two appeals were filed before the NCLAT.

The law as laid down by the Hon’ble Supreme Court in the matter of Hari Babu Thota in Civil Appeal No. 4422 of 2023 [(2024) 242 Comp Cas 1], was discussed “that not having MSME status at the time of commencement of the CIRP proceedings does not disqualify the ex-promoter from being a Resolution Applicant under Section 29A of the IBC as long as this status is attained well before the submission of the resolution plan”. However, the aforesaid ratio was questioned by the Respondent on the ground that the facts were distinguishable, as unlike in the present facts of the case, there was no dispute regarding the calculation, basis which MSME registration was obtained.

In view of the aforesaid facts and circumstances, the Hon’ble NCLAT observed and held that,

  • The MSME registration can only be revoked by the competent authority and the Adjudicating Authority cannot claim this jurisdiction upon itself to modify/revise/revoke or interfere in any manner with the MSME registration granted by the competent authority.
  • The RP was not required to seek permission of the CoC under Section 28(h) of IBC since the CoC was all along kept apprised by the RP regarding MSME registration and the CoC had therefore clearly found the Corporate Debtor to be eligible for MSME status and the SRA to submit a resolution plan.
  • RP who is running the business of the Corporate Debtor is best suited to take the decision for applying for MSME registration of the Corporate Debtor as long as it is not detrimental to the continued business operations of the Corporate Debtor.
  • The SRA is eligible to submit a resolution plan for the Corporate Debtor now being an MSME.
  • The Adjudicating Authority was thus directed to proceed to pass a fresh order in the Application filed by the RP seeking approval of the resolution plan along with necessary directions.
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Gujarat Labour Department Notifies Exemptions to IT-Enabled Services and Financial Services under Gujarat Shops and Establishments Act, 2019

Gujarat Labour Department issued a notification dated February 5, 2024, pertaining to the Gujarat Shops and Establishments (Regulation of Employment and Condition of Services) Act, 2019. It declares that establishments engaged in IT-enabled services and financial services shall be exempted from the following sections for a period of 2 (two) years from the date of notification in the Official Gazette:

Section 12: Restricts the employment of any worker at any shop or establishment for a duration exceeding 9 (nine) hours in any single day or 48 (forty-eight) hours within a week. Furthermore, no worker shall be compelled to engage in continuous work for a period exceeding 5 (five) hours without a break of no less than 30 (thirty) minutes.

Section 14: The spread-over duration of a worker in any shop or establishment shall not surpass 10 (ten) and a half hour in any given day. However, in instances where a worker is assigned intermittent or urgent tasks, the spread-over period may extend to 12 (twelve) hours, subject to the prior approval of the Inspector. Further, working hours or weekly holiday(s) may be relaxed in cases of urgent work upon obtaining prior authorization from the Inspector.