Subjectivity or Objectivity? Supreme Court on Implied Terms in Commercial Contracts

This post seeks to critically analyze the recent case of Nabha Power Limited (“NPL”) v. Punjab State Power Corporation Limited&Another (“PSPCL”)[1] with respect to remedying ambiguous terms in commercial contracts. This case is of vital importance as the Court comprehensively analysed Indian and International jurisprudence regarding implying terms in commercial contracts and upheld a 5-pronged test to douse such ambiguities and breathe life into contracts. It will henceforth serve as a beacon of guidance to interpreting all commercial contracts.

Ambiguity in contracts arises when the terms are susceptible to more than one interpretation. Since a contract is primarily the creation of the will of parties, backed by legislation and subject to certain limitations, it has often plagued Courts to dissect these contractual terms drafted by the parties where it is capable of being understood in several ways. There are two guiding theories adopted by Courts during the interpretation of vague contractual terms: The objective theory and the subjective theory. 

Simply put, the objective theory eschews taking into account the intention of the parties whilst decoding the ambiguous terms and instead relies solely on the plain or literal meaning of the terms. It can be summarized as “Contracting parties must be made to know that it is their written words that constitute their contract, not their intentions that they try to express in the words. They, not the court, have chosen the words; and they, not the court, have made the contract. Its legal operation must be in accordance with the meaning that the words convey to the court, not the meaning that they intend to convey.”[2]

On the other hand, the subjective theory extols using the intention of the parties as a guiding factor to decipher contractual terms. It is centered around the concept of consensus ad idem, or the meeting of minds, without which there is no contract formation.[3] Under this rule, the Courts heavily rely on parol evidence or pre-negotiation deliberations of the parties while determining the intention of the parties.

Keeping the above in mind, the factual matrix of the NPL case can be summarized as follows: The Punjab State Electricity Board (“PSEB”) called for a competitive bid in order to select a developer for a power station in Punjab. M/s. L&T Power Development Ltd. (“L&T”) secured the contract pursuant to the bid and subsequently acquired 100 per cent shareholding in NPL. NPL then entered into a 25-year Power Purchase Agreement (“Agreement”) with PSPCL – the successor entity of PSEB under which NPL was to supply coal to PSPCL. Disputes arose with regard to the interpretation of the Formula Clause in Clause 1.2.3 of the Agreement which reads as follows:

FCOALis the weighted average actual cost to the Seller of purchasing, transporting and unloading the coal most recently supplied to and at the Project before the beginning of month “m”.

It was the contention of the appellant that the term “cost” included the cost of washing, transportation and handling, as well as crushing the coal. This was pursuant to a pre-bid clarification, where the respondents stated that the successful bidder was to “arrange” for the washing of the coal. The appellant argued that the costs included all charges borne by them till transportation at the project site. They invoked the principle of reddendo singular singulisto refer to the actual cost of transporting the coal to the project and the actual cost of unloading at the project site.

On the other hand, the respondents contended that the term “washing” was not expressly mentioned in the contract and if the parties intended for it to be included in the costs, there would have been a separate stipulation of the same. They also pleaded that until the claims fell under the three heads of the contract, i.e., purchase, transport and unloading, the same cannot be included in the costs of discharge.

In a tussle between whether the actual cost or purchase cost of the coal was to be charged, the defendants contended that the washing of the coal was not part of the purchase cost and could have been done in a washery or by outsourcing to a third party. It was not to include any expenditure paid by the plaintiff other than the purchase price paid to SECL, which was to supply coal from the Korba/Rajgarh field.

The crux of the issue before the Court was whether the cost of washing the coal could be implied into the contract while determining final costs to be paid to the appellant. The Court analyzed several cases[4]on the concept of implied terms and upheld the 5-pronged test before terms are read into contracts:

(1) It must be reasonable and equitable to imply terms;

(2) It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) It must be so obvious that “it goes without saying”;

(4) It must be capable of clear expression;

(5) It must not contradict any express term of the contract.

The Court concluded that the pre-bid clarification made it abundantly clear that the appellant had to “arrange” for the washing of coal, but did not imply that the appellant alone was to be charged for the washing of coal. While dealing specifically with the principle of ‘business efficacy’, it was held that the contractual terms were to be interpreted in a manner as would be normally understood in the business sense, or in other words, an objective standard of the same.

The Court also held that washed coal was a sine qua non to determine the quality of coal at the project site and thus inclusive of all costs till that point as no other coal but washed coal could be used in the project. It was further held that the Formula Clause contains only three elements – transportation, handling and storage and only those terms incidental to them could form part of the formula. While analyzing this penta-principled test, the Court also held that the express terms of the contract would take precedence in the event there is a contradiction with the plausible implied terms. Interestingly, the Court also paid necessary heed to the presumed intention of the parties and retained that as a peripheral test holding that the implication of terms by Courts should not be contrary to the presumed intent of the parties.

On a juxtaposition between subjective and objective theories of dealing with ambiguities, it can be observed that the Court, when faced with the task of implying terms into the contract based on the above mentioned test, is more likely to tilt towards an objective stance of the same rather than a complete intention-based guide. This means that literal or plain meaning rule is given more weightage to determine the implication of terms in the contract, rather than parol evidence and other manifest intentions of the parties.

Accordingly the term “Coal” was held by necessary implication to mean “washed coal” as only such coal would bolster the efficiency of the business operations as a lay businessman would understand. However, the Court took a middle stance and combined both theories, holding that although objectivity is the primary element to formulate implied terms, such terms should not be contrary to the presumed intentions of parties.

While implication of terms in commercial contracts does merit the objective theory, the Courts must tread carefully to not distort or substitute the business acumen of experts who have drafted the contract. This is where subjective theory of dealing with ambiguities must be given due weightage to reassure negotiating parties that their terms and conditions would be upheld by the Court. Thus, the Court in this case struck a reasonable balance between the two theories, giving cardinal importance to objective interpretation but using the subjective theory of presumed intention of parties as a guard to which contrary terms cannot be presumed.

[1] Civil Appeal No.179 of 2017

[2]Arthur L. Corbin, The Interpretation of Words and the Parol Evidence Rule, Cornell Law Quarterly, 1965, 50:161.

[3]Peter M. Tiersma, A Message in a Bottle: Text, Autonomy, and Statutory Interpretation, Tulane Law Review, 76:2, 431-82.

[4]Liverpool City Council v. Irwin, (1976) Q.B. 319, Attorney General of Belize &ors. v. Belize Telecom Ltd. & An, (2009) 1 WLR 1988, Satya Jain (Dead) Through LRs. And Ors. v. Anis Ahmed Rushdie (Dead) Through LRs. And Ors, (2013) 8 SCC 131.


ABOUT THE AUTHOR

Manjari Rammohan

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Manjari Rammohan is a fourth-year student at School of Law, Christ University, Bangalore. She has an avid interest in corporate law which has been stimulated through her past corporate law internships across the country. She finds legal research and writing extremely interesting and likes to keep abreast of all the developments in the fields of corporate and commercial law. She is additionally a foodie and plays tennis in her free time.

 

Why hiring a real estate attorney when buying a property is important?

It has been a decade, however, the horrors of the financial crisis are still fresh in everyone’s mind. After the Great Recession disrupted the housing market, there has been only a slight increase in the number of renters to owners. According to the American Community Survey data, a huge shift of homeowners to renters was noticed in 50 major US cities. The shift could be attributed to the fear people still have since the cities that witnessed larger spikes in foreclosure exhibited larger increase in the percentage of renters.

Buying a house is one of the most important decisions that you are going to take in your life because your lifetime savings are involved in it, and even if you are getting it on a mortgage you have to alter your lifestyle and save up to make the payments. Hence, you should be very careful during the purchasing process and it is better to get professional help. Usually, people prefer a real estate agent rather than a real estate lawyer probably because lawyers cannot get the perfect deal. However, the role of real estate lawyer is as crucial as an agent’s because agents do not have the expertise to tackle any legal issues that might crop up during the process.

Although you are not bound legally, here is why you should still consider hiring a real estate lawyer when purchasing a property:

1.    They are well-trained

While a real estate agent may help you in some parts of the process, a lawyer will get you through the most crucial part.

In the beginning of the process, a lawyer will help you negotiate the deal. Even though the seller’s lawyer does most of the drafting, your lawyer can review the terms and conditions and adjust them if necessary. Since experienced lawyers go through a number of contracts every day, they can easily anticipate and spot roadblocks that may become an issue at a later stage.

Buying commercial property is riskier and complex than purchasing a house. The search especially is tedious. Once a buyer decides to go through with one property, there is opportunity cost involved. In case the party backs out or the deal-breaking detail pops up, all the effort and money go down the drain. In such situations, lawyers safeguard you against any losses.

2.    Buying foreclosed property

Often a tempting opportunity crops up in the market in terms of foreclosed property. A foreclosed property is one that belongs to a bank because the homeowner ran off or voluntarily gave up the property due to the inability of making payments on time. This phenomenon was quite common during the financial crisis when a lot of people just abandoned their houses. While foreclosure spells bad news for the seller, it is a golden opportunity for buyers, especially investors since it is available at cheaper rates.

Buying foreclosed property, however, can be tricky because they might have hidden extra costs in the form of repairs or outstanding tax payments that nullifies the saving that you get on the purchase price. In case you are buying the property before foreclosure, your attorney will help you identify these costs beforehand.

The other way is to acquire it during the auction, which is perhaps the riskiest way because you don’t get a chance to analyze the property for any damages or liens. In this case, you can ask your lawyer to search for the title or any possibilities that the former owner might acquire it back.

3.    Title search

A title represents the rights an owner has on the property such as living, selling and leasing. A title deed transfers the rights from the seller to the buyer.

Title search is done to determine the rightful owner of the property. It also highlights any hidden lines that might be against the property. In case you pay with cash and do not conduct any search, you would not get to know of any issues until you try to sell the property.  Title searches are open for public and you can do that yourself. However, if you are not thorough with it, you might end up risking your deal.

Lawyers can help you conduct title searches and pinpoint any possible issues that include mortgage payments, divorce decrees, and recorded wills. An attorney can also help you with the title insurance. Unlike typical that is based on future events, title insurance protects you from unknown events, frauds or defects that already exist.

4.    Rebates

If you are a first-time property buyer, then you are entitled to property tax rebate that will offset your land transfer tax. To be eligible for this rebate, you must not have owned a home before. If you have a spouse, then the same rule applies to them as well. Also, you must start living in it within a specified time period. Usually, people are not aware of their rights. If you hire an attorney, you more likely to be informed about the rebates and a lawyer will also help you with all the necessary paperwork.

Real estate frauds and scams are common and hence you need to take all the precautions before entering a deal and risking huge investments. Hiring an attorney is probably a wise decision. However, lawyer selection should also be done carefully. The first thing you should ask a potential lawyer should be about relevant experience. The next thing you should inquire about is the fee that they charge. Lawyers either charge a flat fee or on an hourly basis. In most cases, the fees covers a few hours with the lawyer presence during the deal closing and paperwork hours.

Hiring a lawyer would add to your cost of buying a home, but it will give you a valuable thing in return, i.e. peace of mind. Also, it would save you from incurring any potential huge losses. Its just a matter of tradeoff, but as it is said one should not be penny wise and pound foolish.


ABOUT THE AUTHOR

Alycia Gordan

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Alycia Gordan is a freelance writer who loves to read and write articles on healthcare technology, fitness and lifestyle. She is a tech junkie and divides her time between travel and writing. You can find her on Twitter: @meetalycia.

The Insolvency and Bankruptcy Code, 2016: A Blessing for Outstanding Trade Creditors

The Insolvency and Bankruptcy Code, 2016 (IBC) has helped the operational creditors i.e. outstanding trade creditors to recover their dues. The definition of Operational Creditors also includes employees within its ambit.

A rough estimate of the total cases filed in National Company Law Tribunal (NCLT) across the country shows that 70% or more of them have been filed by Operational Creditors to recover their dues.

If the corporate debtor does not make payment of the dues within a period of 10 days from the date of delivery of demand notice in Form 3 or a copy of an invoice attached with a notice in Form 4 demanding payment under sub-section (1) of section 8 of IBC or brings to the notice of operational creditor existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute, the operational creditor can file his application with NCLT within the jurisdiction of the registered office of the corporate debtor (“Adjudicating Authority”). The Adjudicating Authority, upon admission of such application of insolvency order for a moratorium for a period of 180 days with a onetime extension of 90 days.

Once the order for moratorium is passed, the Interim Resolution Professional (IRP) takes over the control of the corporate debtor and the management of affairs of the corporate debtor vests with the IRP. All the powers of the board of directors or the partners of the corporate debtor, as the case may be, stand suspended and are exercised by the IRP.

The IRP then collates all the claims received against the corporate debtor and after determining the financial position of the corporate debtor, constitute a Committee of Creditors (CoC) which includes both secured and trade creditors and is duty bound to work under the guidance and control of the CoC.

The next step here is the resolution of the corporate debtor under Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI Regulations”) and if the revival/resolution plan doesn’t work out for CoC, liquidation of the corporate debtor is the ultimate weapon in the hands of CoC.

In fact, IBC has gone ahead and stipulated in Regulation 38 of the IBBI Regulations that the resolution plan shall identify specific sources of funds that will be used to pay the liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall, in any event, be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority. Through this regulation, the IBC legislation has given preference for recovery of the outstanding dues of the corporate debtor payable to the business community at large or the employees, as the case may be, ahead of the financial creditors which hitherto were never thought of in our earlier legislations relating to recovery of money.

Further, Rule 5 (3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, requires the Operational Creditor to file a copy of demand notice or invoice demanding payment served under this rule to be filed with an information utility, which at present is one, i.e. National E-Governance Services Limited (NESL) having its administrative office at Bengaluru and registered and corporate office at Mumbai. A copy of the demand notice or invoice demanding payment has to be submitted online with NESL at its website www.nesl.co.in. NESL does not acknowledge any hard copies of such demand notice or invoice demanding payment submitted with it.

A few public sector banks viz. State Bank of India, Oriental Bank of Commerce, Punjab National Bank and Union Bank of India have also signed information utility pacts with NESL.

The Information Utility serves the needs of the banking system by providing data to Insolvency Professionals/Adjudicating Authority/ Insolvency Bank Board of India about the borrowings/defaults committed by the corporate debtor.

Though, submission of a copy of demand notice or invoice demanding payment by an operational creditor to NESL is optional as per Rule 5 (3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, it is advisable to submit this information to NESL due to the very objective behind constitution of NESL is to collect and collate data of defaults committed by the Corporate Debtor and provide it to the Financial Creditors as and when they require. The Financial Creditors may then use this data of defaults committed by the Corporate Debtor to gauge the creditworthiness of the Corporate Debtor.

Once this information is submitted with NESL, the corporate debtor may find it very difficult to smoothly run his business until and unless he settles his dues with the operational creditor or submits his reply of existence of dispute or pendency of suit or arbitration proceeding to the corporate debtor and conveys such settlement of dues or existence of dispute, as the case may be, in writing to the said Information Utility.

There have been instances wherein the debtors who were unwilling to pay even the principal amount of the outstanding trade creditors, upon receipt of the demand notice under IBC, has paid the principal amount along with the overdue interest.

The credible threat of loss of control of the corporate debtor and subsequent steps mentioned above, itself, act as a major deterrent to the promoters of the corporate debtor. The admission of insolvency application with the Adjudicating Authority may also result in the deterioration of credit ratings of the borrowings and depict an unsatisfactory picture about the financial soundness of the corporate debtor amongst the investors, its prospective customers and to the public at large.

Thus, this legal recourse made available to outstanding trade creditors has come as a real blessing to the operational creditors to recover their dues in a time bound and cost effective manner which otherwise was not possible for the operational creditor under any of the previous laws.


ABOUT THE AUTHOR

CS Nilesh Javker

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CS Nilesh Javker is Assistant General Manager – Legal in the Legal Department of Welspun Group at its corporate office in Mumbai and working with Welspun Group since April 2010. He has interests in studying and research of various commercial laws such as Companies Act, 2013, Securities Laws, Insolvency and Bankruptcy Code, 2016, The Foreign Exchange Management Act, 1999, The Competition Act, 2002, The Arbitration and Conciliation Act, 1996. He has also worked extensively in company secretarial matters of both listed and unlisted companies, banking and finance documentation, contracts, tenders, agreements, civil litigations and corporate transactions such as mergers, demergers and acquisitions.

The Biggest Contribution of Legal Issues to Humanity

In the words of the legendary physicist, Albert Einstein “The strength of the Constitution lies entirely in the determination of each citizen to defend it”. It is us, the mere human souls of this world, that need to be the sole proprietor of every law binding constitution and its legitimacy. Though the government bodies are elected and run for redeeming the nation of its chaotic grievances, the judicial system is the neural network that maintains the livelihood of any living territory. Albeit the world’s partition on the evolutionary dogma of the origin of life, the unanimity for honoring the judicial system remains engraved in everyone’s mind and soul.

  • Social Stigmas

India has been honored with its due respect since the early 90s when the nation welcomed the digital technology era under the heartfelt guidance of Late Rajeev Gandhi. Since then the country has witnessed an eye-popping statistics drop in various societal discriminations as well. India was rendered with the orthodox mindset of the cases like untouchability, caste-ism, gender differentiation, purging of minorities, & child marriage since before the time of independence.

The issue of untouchability and caste-ism was so pronounced and the practicing results were so inhumane that the Father of the Nation-Mahatma Gandhi- came up with the term Harijan for the socially oppressed class which plainly translated to ‘God’s fellow’. Despite the life-consuming efforts, this stereotypical thinking prevailed amongst the countrymen and it was only in 1955 that the Untouchability Offenses Act was passed for safeguarding the civil rights of the socially oppressed class of India.

Battling the social stigma on somewhat the same ground, the Indian transgender community managed to acquire their deserving status in the society following the 2014 Supreme Court verdict of identifying the kinnar or hijra as the third gender section of India.

  • Marriage & Family

The legitimacy regarding marriage and family growth has remained yet another challenge for the nation and the country is still recovering from the regularly reported marital/family mishaps. Starting from the legal marriage age to the domestic violence cases, the judicial system has been acting beyond its enabled capacities & resources to ensure a healthy and prosperous marital/individual life to the Indians.

Following the illegitimate child marriage practices and subsequent exploitation of the underage children led the government and many activists to speak up for this evil ceremony. Following the marriage acts of 1955, the judiciaries of India specified the legal marriage for the bride and the groom to prevent the violation of child rights.

In addition, to rid the society of other marriage and family mishaps, various laws and acts subdued under the Indian Penal Code liberalized a quarter of women’s right with the Protection of Women from Domestic Violence Act 2005. The year of 2017 witnessed a historical reform where the legalization of the Triple Talaq Bill helped a huge chunk of the Muslim minority population to exhale a sigh of relief.

  • Child Protection Rights

Preventing the naïve mind and soul of the children to shape their life into a better future, the Child Labor Act of 1986 brought a ray of hope for millions of exploited souls across the nation. The bill was aimed at providing a better living platform to the underage section of the society, preventing them from various inhumane treatments and wiping out the child labor practice completely. Following the age limit constraints of the act, the bill was amended in the year 2016 as the Child and Adolescent Labor Act to safeguard the rights of individuals ranging from 14-18 years.

The POCSO (Protection of Children from Sexual Abuse Offence) Act 2012 was formulated in order to address the issue of child abuse and sexual exploitation with strict action course. The past decade has witnessed numerous inhuman acts of child molestation and murder cases following which the judicial system has worked breathlessly under the IPC & POCSO Acts to bring the sexual predators under the law enforcement custody and serve them with the deserved punishment.

  • International Relations

The international relations law is probably the most evolving law to be acted upon on a daily basis. Be it the trade affairs or the citizenship provident or even the medical treatment cases, international relations play an omnipotent role for each nation with their latent yet pronounced economic influence. No country can run a solo business in this era of globalization and prosper with at the same time. North Korea- potential in scientific advancements and cultural heritage could have had one of the most prosperous growth rates in the world. But the solidarity and the ignorance of the nation’s governing bodies have made the major economic forums of the world to cut its ties bringing the citizen’s life almost to a standstill.

Thankfully India is blessed with some of the most efficient trade and international relation laws in its constitution for the nation to maintain pleasant work-relationship with its peers. The GATT (General Agreement on Tariff and Trade, 1947) & the World Trade Organization trade arrangement are the major two players of the international trade market in India.

Be it the BC timeline or the AD running period, history has witnessed the very law establishment and its practice outcomes from ancient Romanians to the modern AI creators. Whether it is the Babylonian laws or the Draconian constitution, the legal system has been evolving as per the needs and priorities of the nation with the whole and sole aim of serving justice. Although the validity and moral code of conduct of the ancient constitutional laws are debatable, it is established beyond the shadow of a doubt that the existence of legal system has been reigning since the beginning of the times. From nature to nurture, every element of this world follows a centralized system.


ABOUT THE AUTHOR

Crystal J. Pace

Happy businesswoman with colleagues in the background

Crystal J. Pace is a Professional legal writer worked with many companies. She is currently associated with West Coast Trial Lawyers, Car Injury Law Firms. She loves to share her views regarding law.

Personal Guarantee and the issue of Moratorium under Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘Code’) was enacted with the aim of consolidating multiple legislations dealing with insolvency and bankruptcy and ensuring time-bound adjudication on the subject. Since the enactment of the Code, courts have made important rulings on a plethora of issues under the Code. Recently, a conflict of opinion has surfaced between the NCLT and the Allahabad High Court on the applicability of moratorium under section 14 of the Code vis-a-vis personal guarantee given by the guarantors of the corporate debtor.

Moratorium is an authorization provided to the debtors to postpone payment of debt. According to section 14 of the Code, it is a period during which institution or continuation of suits, execution of any decree or order, or alienation or transfer of the assets of the corporate debtor is prohibited.

Recently, in the case of Sanjeev Shriya v. State Bank of India[1], the Allahabad High Court ruled on this issue. In the concerned case, the directors of the company (corporate debtor) were guarantors against the loan taken by the company from the State Bank of India. After the declaration of the company as ‘sick’ by the Board for Industrial & Financial Reconstruction, SBI approached the Debt Recovery Tribunal (‘DRT’) for the recovery of the due amount. Following this, the company approached the National Company Law Tribunal (‘NCLT’) under section 10 of the Code for the initiation of corporate insolvency resolution process. The NCLT admitted its application and declared moratorium against the Company. Consequently, the directors approached the DRT for the stay of recovery proceedings. The DRT by its order granted stay on proceedings against the corporate debtor but not against the guarantors (petitioners). This order was, therefore, challenged by the petitioners in the High Court on the ground of a lack of jurisdiction of the DRT.

The issue, in this case, was whether the declaration of moratorium under section 14 of the Code vis-a-vis the Company bars proceedings against guarantors under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

After analyzing the arguments of both sides, the High Court ruled that since the proceedings are in a fluid stage and the liability of both guarantor and the corporate debtor has not yet crystallized, parallel proceedings in different jurisdictions must be discouraged in order to avoid complexity. The Court considered proceedings in the DRT to be without jurisdiction as once the proceedings have commenced under the Code and moratorium is applicable, the proceedings against the guarantors is per se bad.

This decision of the High Court in Sanjeev Shriya stands in stark contrast to the earlier decisions of NCLTs. One such decision was taken in Alpha and Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India Ltd[2] wherein, personal property of the promoters was given as security against the loan taken by the Corporate Debtor. The issue was whether moratorium under the Code would be applicable on the property of the promoters or not. The Tribunal placed reliance on section 14(1)(c) of the Code, which states that the adjudicating authority shall declare moratorium for prohibiting “any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.” It held that the use of the word “its” is of significance in that sub-section. It took recourse to a strict interpretation of the statute and ruled that the corporate debtor has applied for “its” own insolvency resolution proceedings and the assets would only include the assets of the corporate debtor and not of any third-party including the promoters.

Another such decision was taken by the NCLT (Delhi) in the case of Schweitzer Systemtek India Pvt. Ltd. v. Pheonix ARC Pvt. Ltd[3] and was later upheld by the National Company Law Appellate Tribunal (‘NCLAT’). As in the above-mentioned case, the issue here too was whether personal property given as security to the creditor bank would fall within the scope of moratorium or not. The tribunal ruled that recognized canons of interpretation must be used in the present case as the language of the Act is so simple that no other form of interpretation is necessary. The tribunals followed the reasoning of Asset Reconstruction Company Case and held that the use of the word “its” in section 10 relates to the property of the Corporate Debtor. The section talks about books of accounts of the corporate debtor and under no circumstance can such use of the word “its” be expanded to bring within its scope property or books of accounts of the guarantor or any third party.

While the opinion of the legal authorities is divided on the issue, it appears that the purposive approach taken by the Allahabad High Court holds good. The decision was taken while keeping in mind the object and motive behind the enactment of the Code. If the property of the guarantor is excluded from the scope of moratorium, then it could potentially affect the financial position of the corporate debtor once the creditor satisfies its debts out of the property of the guarantor. Moreover, it will cause complexity in the corporate insolvency resolution process and consequent resolution plan that the Committee of Creditors (“COC”) may formulate under the Code. In order to avoid this uncertainty, it seems pragmatic to not conduct proceedings in two distinct forums simultaneously. It, thus, becomes imperative that the ambiguity around this legal issue is settled by the appropriate authority conclusively.

[1]2017(9)ADJ 723.

[2]Company Appeal (AT) (Insolvency) No. 116 of 2017.

[3][2017]140 CLA 128.


ABOUT THE AUTHOR

Amrit Singh

Amrit Singh

Amrit Singh is a fourth-year student of the West Bengal National University of Juridical Sciences. He is deeply interested in Corporate law and likes to follow the developments in the area closely.

Megha Tiwari

Megha Tiwari

Megha Tiwari is a fourth-year student of the West Bengal National University of Juridical Sciences. She is going to become a corporate lawyer and likes to write about the subject in her free time.