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Associate in the Dispute Resolution Team at the Mumbai office of Cyril Amarchand Mangaldas. Samhita has two years’ of experience in dispute resolution, having moved to the practice area after working in the spheres of employment law and the financial regulatory practice. Samhita focusses on arbitration matters (both domestic and international) as well as litigation emanating from contractual / corporate commercial disputes. She can be reached at samhita.mehra@cyrilshroff.com

Avitel v. HSBC: Finality on the Question of Arbitrability when Allegations of Fraud are Raised By Indranil Deshmukh, Vineet Unnikrishnan and Samhita Mehra The Supreme Court in the case of Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited (“Avitel Case”) has recently engaged with the question of whether allegations of fraud can be adjudicated in arbitration, or whether they require adjudication before a court. In its judgment, the Court has laid down clear tests to determine when a dispute involving allegation of fraud is arbitrable, and when it would require adjudication before a court. Material Facts In this case, a Share Subscription Agreement (“SSA”) dated April 21, 2011, was entered into between Avitel and HSBC, by way of which HSBC invested USD 60 million in Avitel to acquire 7.80% of its shareholding. The SSA contained a clause providing for arbitration at the Singapore International Arbitration Centre in case of a dispute. An accompany Shareholders’ Agreement (“SHA”) dated May 6, 2011, was also executed, which contained an identical arbitration clause. Thereafter, a dispute arose between the parties. HSBC alleged that the promoters of Avitel, namely, the Jain Family, had induced HSBC to invest in Avitel by making a representation that Avitel was on the verge of finalising a lucrative contract with the British Broadcasting Corporation. HSBC alleged that there was no such contract, and that around USD 51 million from the USD 60 million investment had in fact been siphoned away to other companies owned or controlled by the Jain Family. Arbitral proceedings were initiated, and a final award was passed in favour of HSBC inter alia holding the above allegations to be true (“Award”). The matter reached the Supreme Court in the context of a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”), filed by HSBC seeking orders of deposit of the full claim amount of USD 60 million to protect the subject matter of the Award, pending enforcement of the same. Issues and Discussion The Supreme Court was asked to consider whether HSBC had a prima facie case for enforcement of the Award in India. Challenging the enforcement of the Award, it was contended on behalf of Avitel that since the allegations of fraud have been made in arbitral proceedings involving serious criminal offences, such as forgery and impersonation, such a dispute is not arbitrable then under Indian law and the award unenforceable, as a consequence. On behalf of HSBC, it was contended that non-arbitrability would be triggered only in cases where serious allegations of fraud would vitiate the arbitration agreement and not in other cases. After taking stock of the jurisprudence on this point thus far, the Court held that “serious allegations of fraud”, leading to non-arbitrability would arise only if either of following two tests were satisfied, and not otherwise. 1. Where the Court finds that the arbitration agreement itself cannot be said to exist being vitiated by fraud; or 2. Where allegations are made against the State or its instrumentalities, relating to arbitrary, fraudulent, or mala fide conduct, giving rise to question of public law as opposed to questions limited to the contractual relationship between the parties. This means that all other cases involving “serious allegations of fraud” i.e. cases that do not meet the above two tests laid down by the Supreme Court, would be arbitrable. Applying the aforesaid test to the facts before it, the Court found that the issues raised and answered in the Award were the subject matter of civil as opposed to criminal proceedings. The fact that a separate criminal proceeding was sought to be initiated by HSBC is of no consequence whatsoever. It was held that the impersonation, false representations and siphoning of funds found to have been committed were all inter parties and had no “public flavour” so as to be non-arbitrable on account of allegations of fraud. As such, the Supreme Court inter alia upheld the orders of deposit of the full claim amount of USD 60 million to be kept aside for the purposes of enforcement of the Award in India. Way Forward The Supreme Court’s judgment in the Avitel Case lends clarity to courts and arbitral tribunals, which should aid in weeding out incessant and creative submissions to “wriggle out” out of arbitration agreements. The two grounds forming exceptions to arbitrability of matters involving serious allegations of fraud as crystallised by the Supreme Court are clearly identifiable and easily discernable. Therefore, the judgment in the Avitel Case is likely to save precious judicial time that may otherwise have been spent in deliberating on the question of arbitrability of a dispute involving allegations of fraud.  

The Supreme Court in the case of Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited[1] (“Avitel Case”) has recently engaged with the question of whether allegations of fraud can be adjudicated  in arbitration, or whether they require adjudication before a court. In its judgment, the Court has laid down clear tests to determine when a dispute involving allegation of fraud is arbitrable, and when it would require adjudication before a court.
Continue Reading Avitel v. HSBC – Finality on the Question of Arbitrability when Allegations of Fraud are Raised SMM

Section 34 of the Arbitration and Conciliation Act, 1996 (Act) sets out the grounds on which arbitral awards passed in domestic arbitrations and international commercial arbitrations seated in India can be set aside.  As regards foreign awards (i.e. arbitral awards passed in foreign seated arbitrations), whilst the same cannot be challenged in India, the enforcement of the same in India can be validly objected to by the award debtor on grounds that are set out in Section 48 of the Act. The grounds for setting aside arbitral awards passed in domestic arbitrations and international commercial arbitrations seated in India under Section 34 of the Act and the grounds for refusing enforcement of foreign awards in India under Section 48 of the Act are substantially identical. One such ground is if the arbitral award is found to be contrary to the “public policy of India”.


Continue Reading Supreme Court’s judgment in Vijay Karia v. Prysmian Cavi e Sistemi S.r.l.: Impact on challenges to awards passed in International Commercial Arbitrations conducted in India

Summary Judgment under the Commercial Courts Act, 2015 – An Underutilized Tool in Contractual Disputes

The Commercial Courts Act: A game of catch-up 

The Commercial Courts Act, 2015 (“Act”) introduced a slew of measures intended to streamline procedures relating to commercial litigation as part of the Ease of doing Business in India initiative. The changes brought about were made on the recommendation of the Law Commission of India to bring Indian commercial litigation on par with international standards. Among the measures introduced to improve efficiency and reduce delays was a mechanism for summary judgment of claims pertaining to commercial disputes.
Continue Reading Summary Judgment under the Commercial Courts Act, 2015 – An Underutilized Tool in Contractual Disputes

Put option Holders - Financial Creditors under the IBC – Part 2

In our previous post, we discussed the La-Fin Judgments passed by the NCLAT (Pushpa Shah v. IL&FS Financial Services Limited[1]) and NCLT[2], which had held that a put option holder may be treated as a ‘financial creditor’ under the Insolvency & Bankruptcy Code, 2016 (IBC). A three-judge bench of the Supreme Court set aside the La-Fin Judgments in Jignesh Shah vs Union of India[3] primarily on the technical grounds of limitation without expressing a view on whether the NCLT and NCLAT were correct in treating a put option holder as a financial creditor.

This was followed by the landmark decision of Pioneer Urban and Infrastructure Limited vs Union of India (Pioneer Judgment)[4] in which the Supreme Court interpreted the provisions of Section 5(8)(f) of the IBC in a manner similar to that done in the La-Fin Judgments, stating that the provision would subsume within it “amounts raised under transactions which are not necessarily loan transactions, so long as they have the commercial effect of a borrowing” and “done with profit as the main aim.”
Continue Reading Put option Holders: Financial Creditors under the IBC? – Part 2

Takeover regulations Companies Act

Background 

The Central Government recently notified Sections 230(11) and 230(12) of the Companies Act, 2013 (“Act”), which deal with takeover offers in unlisted companies. Section 230 of the Act provides for arrangements between a company and its creditors or members or any class of them, specifying the procedure to be followed to make such a compromise or arrangement. The newly-notified Section 230(11) states that in the case of unlisted companies any compromise or arrangement may include a takeover offer made in the prescribed manner, while Section 230(12) permits a party aggrieved by the takeover offer to make an application, bringing its grievance before the National Company Law Tribunal (“NCLT”). The Ministry of Corporate Affairs has also amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“CAA Rules”) and the NCLT Rules, 2016, corresponding to the above provisions. Sub-rules 5 and 6 have been added to Rule 3 of the CAA Rules, and Rule 80A has been inserted in the NCLT Rules, detailing the manner in which the applications may be made under Sections 230(11) and 230(12), respectively. However, these rules are not applicable to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer made in pursuance of any statutory or regulatory requirement.
Continue Reading Takeover Rules for Unlisted Companies: Minority Squeeze Outs Under Section 230(11) of the Companies Act, 2013

Good Faith Negotiations and Mediation 

It has become increasingly common for parties to adopt multi-tiered dispute resolution clauses in agreements. A typical multi-tiered dispute-resolution clause requires parties to first attempt to resolve a dispute amicably – for instance, by engaging in friendly discussions, submitting to mediation or undertaking good faith negotiations – before the commencement of arbitration proceedings. There has been much ado about the enforceability of such clauses and whether they should be considered void due to vagueness: how does one engage in “friendly discussions”, and what exactly are “good faith negotiations”, when a presumably acrimonious dispute has already arisen between parties?

Despite this ambiguity, courts have increasingly found tiered dispute-resolution clauses to be enforceable. In fact, with a view to combat rising pendency in courts, these principles have been extended to the initiation of litigation as well. The Commercial Courts Act, 2015 (CCA) was amended last year to state that any suit that does not contemplate urgent interim relief cannot be instituted without the plaintiff having exhausted the remedy of pre-institution mediation and settlement.[1] A similar model is also followed in a number of other countries, including the UK, Italy, Greece and Turkey, where it has been successful in encouraging dispute resolution through mediation.[2]
Continue Reading Good Faith Negotiations and Mediation: A Missed Opportunity So Far

Put-option Holders - Financial Creditors Under the IBC

In its recent judgment in the case of Jignesh Shah v. Union of India[1] (Jignesh Shah), a three-judge bench of the Supreme Court set aside the NCLAT judgment in the case of Pushpa Shah v. IL&FS Financial Services Limited[2] (NCLAT Judgment) along with the original judgment of the NCLT[3] (NCLT Judgment and, together, La-Fin Judgments). The NCLT Judgment and the NCLAT Judgment had rejected the corporate debtor’s objection in relation to the claim being time barred and initiated corporate insolvency resolution process on the basis that a put option holder may be treated as a “financial creditor” under the Insolvency & Bankruptcy Code, 2016 (IBC).
Continue Reading Put-option Holders: Financial Creditors Under the IBC?