BSA<\/strong>\u201d) was signed on 17.04.2021 wherein the Respondent No. 1 agreed to acquire the Corporate Debtor and provide financial support including raw material funding and funding working capital requirements.<\/p>\nIn May 2021, the Corporate Debtor sought further financial assistance from Respondent No. 1 leading to the Promoters pledging their shares and providing guarantees.<\/p>\n
Subsequently, Due to financial distress, the Corporate Debtor failed to repay the outstanding amount to Respondent No. 1 resulting in the termination of agreements.<\/p>\n
Thereafter, the Respondent No. 1 filed an application under Section 7 of the Insolvency and Bankruptcy Code (\u201cI&B Code\u201d<\/strong>) leading to the initiation of the Corporate Insolvency Resolution Process (\u201cCIRP<\/strong>\u201d) of the Corporate Debtor.<\/p>\nThe Director-Shareholder of the Corporate Debtor (\u201cAppellant<\/strong>\u201d) contested this decision before the National Company Law Appellate Tribunal (\u201cNCLAT<\/strong>\u201d) arguing that the debt was operational rather than financial in nature, as no direct financial assistance was provided to the Corporate Debtor.<\/p>\nIssue:<\/strong><\/span><\/p>\nWhether payment of Raw Material made by third party at the instructions of Corporate Debtor or financial assistance towards Working Capital of the Corporate Debtor is Financial Debt under the I&B Code?<\/p>\n
Findings of the Hon\u2019ble NCLAT:<\/strong><\/span><\/p>\n\n- Financial debt means debt along with interest, if any, which is disbursed. Hence, it is not mandatory for the Corporate Debtor to pay interest to bring it within the ambit of financial debt. It is important to consider the existence of time value of money, which can take various forms beyond interest.<\/li>\n
- Disbursal of funds is required but the definition does not use the expression that disbursal should be made to the Corporate Debtor only.<\/li>\n<\/ol>\n
\n- Raw materials should be considered as a part of working capital and hence, any financial assistance provided for working capital should be considered as financial debt instead of operational debt.<\/li>\n<\/ul>\n
Conclusion:<\/strong><\/span><\/p>\nThe recent judgment has brought clarity on the interpretation of financial debt under the I&B Code. The NCLAT has held that funds provided by a third party for essential operational needs are “financial debt” under the I&B Code.<\/p>\n
Litigation Brief<\/em><\/strong><\/span><\/h3>\nCourt or Tribunal cannot rewrite the terms of an agreement<\/strong><\/span><\/h4>\nCase<\/u><\/strong>: <\/strong>Venkataraman Krishnamurthy Vs Lodha Crown BuildmartPrivate Ltd. (2024 SCC OnLine SC 182)<\/p>\nForum<\/u><\/strong>: <\/strong>Supreme Court of India<\/p>\nFactual Background<\/u><\/strong><\/span><\/p>\n\n- In this concerned case Appellant, Venkataraman Krishnamurthy intended to purchase a 4BHK apartment in a building constructed by the Respondent Company named Lodha Crown Building Private Limited. They executed an agreement to sell on 29.11.2013, with a sale consideration of \u20b97,55,50,956\/-(Rupees Seven Crore Fifty-Five Lakhs Fifty Thousand Nine Hundred Fifty-Six Only). The payment schedule included four sets of ‘Application Money’ and the balance amount was to be paid on initiation of fit-outs.<\/li>\n<\/ul>\n
\n- The Appellant approached the National Consumer Disputes Redressal Commission (\u201cNCDRC<\/strong>\u201d) alleging that the Respondent Company failed to deliver possession of the apartment for fit-outs either by 30.06.2016 or with the grace period of one year that is 30.06.2017. Thus, the Appellant approached to terminate the agreement and further sought a refund of the amount paid with interest and compensation for harassment.<\/li>\n<\/ul>\n
\n- The NCDRC decreed the suit and directed the Respondent Company to deliver possession within three months, arrange a joint inspection, and pay delay compensation at 6% p.a along with the litigation costs. NCDRC re-wrote the terms of the agreement wherein instead of termination of the contract, the Respondent was granted extra time to deliver the possession.<\/li>\n<\/ul>\n
\n- The NCDRC ordered the Respondent Company to arrange a joint inspection of the unit within 15 days, any defects to be fixed within 30 days, and notify the Appellant when the unit is ready for possession. No maintenance fees will be charged until the possession is given, and taxes are to be paid as per the government rates.<\/li>\n<\/ul>\n
\n- Dissatisfied with the order of NCDRC, the Appellant filed an appeal to the Hon\u2019ble Supreme Court seeking his right to terminate the agreement and claim an unconditional refund of the total amount paid by them with interest\u00a0of\u00a012%\u00a0thereon.<\/li>\n<\/ul>\n
Issues raised<\/u><\/strong>: <\/strong><\/span><\/p>\nCan the Court or Tribunal amend the terms of the contract at its own will?<\/p>\n
Observation<\/u><\/strong>:<\/strong><\/span><\/p>\nThe Hon\u2019ble Supreme Court observed that once parties agree to a written contract, the terms of that agreement become binding on both parties. If the agreement outlines consequences for breaching conditions, those consequences must be followed and can be legally enforced if challenged.<\/p>\n
Likewise, the agreement specified a deadline of June 30, 2017, for delivering possession of the apartment for fit-outs, with a grace period of one year. The Respondent Company failed to meet this deadline. The clause defining the “date of the offer of possession” was distinct from the “date of delivery of possession for fit-outs”, and consequences for delay were mentioned in the agreement. The Appellants had the right to choose whether to continue or to terminate the agreement within ninety days after the grace period. The NCDRC overstepped by applying its standards rather than adhering to the agreement terms, and it was not within its authority to alter the terms or impose subjective criteria.<\/p>\n
The Court further referred to a case titled General Assurance Society Ltd. vs. Chandumull Jain<\/strong>, (AIR 1966 SC 1964) reiterating that when interpreting documents related to an insurance contract, they must only look at what the parties wrote in the contract itself. They can’t invent new terms or conditions. They must stick to what the parties agreed upon, even if they think it could be improved.<\/p>\nSimilarly, in GMR Warora Energy Ltd. vs. Central Electricity Regulation Commission (<\/strong>2023 SCC OnLine SC 464), <\/strong>it was observed that Courts have to respect the words and terms agreed upon in contracts and can’t change them unless both parties agree to it.<\/p>\nDecision<\/u><\/strong>:<\/strong><\/span><\/p>\n\n- The Apex Court emphasized adherence to contractual terms, citing precedents that Courts cannot rewrite contracts and must enforce agreed-upon terms.<\/li>\n
- The Appellant terminated the Agreement upon expiry of the grace period as provided, disputing Respondent Company\u2019s attempt to alter terms unilaterally.<\/li>\n
- The Court upheld the contractual interest rate on the refund, rejecting the request of the Respondent Company for a lower rate.<\/li>\n
- The Apex Court overturned the order of NCDRC, directing the Respondent Company to refund the deposited amount with 12% p.a. interest in twelve monthly installments. The first installment is due on April 5th, 2024, followed by payments on the fifth of each month until fully repaid.<\/li>\n<\/ul>\n
Delhi High Court Nullifies Unilateral Appointment of Arbitrator in Contract’s General Conditions.<\/strong><\/span><\/h4>\nIn the case of Chabbras Associates versus M\/s HSCC (India) Ltd & Anr (ARB.P. 1352\/2023),<\/em><\/strong> the Delhi High Court, presided over by Justice Dinesh Kumar Sharma, dismissed the argument put forth by the Respondent that the unilateral appointment of an arbitrator in accordance with the contract could not be contested, emphasizing that such an appointment, as outlined in Clause 25 of the General Conditions of Contract (GCC), was inherently unlawful.<\/p>\n\n- The dispute arose when the Petitioner sought the appointment of a sole arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, to settle issues stemming from the premature termination of a work order provided by Respondent no.1. This work order involved construction work for the Director’s Residence and Residential Quarters for NIAB, with the arbitration clause detailed in Clause 25 of the GCC.<\/li>\n
- Initially, the Petitioner approached the Delhi High Court seeking the appointment of an arbitrator, but was instructed to first exhaust dispute resolution mechanisms outlined in the work agreement\/GCC. Subsequently, the Petitioner pursued resolution from Respondent No.2, the appealing authority, who dismissed the claims on June 14, 2023. Having exhausted all available remedies, the Petitioner formally requested the appointment of a fair, neutral, and unbiased arbitrator in accordance with Clause 25 of the GCC.<\/li>\n
- The main contention arose from Respondent No.2’s unilateral appointment of a Sole Arbitrator without the Petitioner’s consent, which the Petitioner argued violated principles of neutrality, independence, and impartiality.<\/li>\n
- In response, the Respondent contended that the appointment of the arbitrator was in line with the arbitration agreement, and since the Petitioner did not contest the mandate, the petition should be dismissed.<\/li>\n
- The High Court observed that allowing only one party to have the exclusive right to appoint an arbitrator, as per the arbitration agreement, was fundamentally flawed and contrary to legislative intent. Citing the Supreme Court decision in Perkins Eastman Architect DPC and Anr. vs. HSCC (India) Ltd.: (2020) 20 SCC 760<\/em><\/strong>, the High Court ruled that such unilateral appointments were invalid. It declared Clause 25 of the GCC, which allowed unilateral appointments, as vitiated. Rejecting the Respondent’s argument that the appointment was aligned with the contract and that challenging the arbitrator’s mandate was the only recourse, the High Court asserted that the unilateral appointment, as per Clause 25 of the GCC, was legally flawed.<\/li>\n
- Consequently, the High Court observed that the unilateral appointment of Arbitrator is non-est and unstainable and accordingly, directed that the arbitrator’s mandate would cease to operate.<\/li>\n<\/ul>\n
DIRECTORS OF A COMPANY CANNOT BE MADE PARTY TO THE ARBITRATION PROCEEDINGS OF THE COMPANY.<\/strong><\/span>\u00a0<\/strong><\/h4>\nIN THE MATTER OF:<\/strong> Vingro Developers Pvt. Ltd. Vs. Nitya Shree Developers Pvt. Ltd. and Ors. (pronounced by the Hon\u2019ble High Court of Delhi on 24.01.2024 in Arb. P. 667\/2023)<\/p>\n