India’s changing litigation landscape - Litigation Committee newsletter article, April 2020

Back to Litigation Committee publications

Gautam Bhatikar

Legasis Partners, Mumbai

gautam.b@legasispartners.com

Litigation in India has undergone a huge setbacks due to its over-burdened legal system, shortages of judges, indefinite hold ups in case disposal, and issues with the enforcement of foreign awards/decrees, etc. All these issues fairly fit the phrase, ‘justice delayed is justice denied’.

The last decade or so, however, has experienced major improvements due to the introduction of several reforms aimed at ensuring a speedier dispensation of justice. These reforms were very much demanded by India’s expanding economy and high value commercial disputes. A number of measures, such as the 2016 Insolvency and Bankruptcy Code, the 2015 Arbitration Amendment Act, and the introduction of Commercial Courts, among others, were promulgated so as to facilitate a more business-friendly environment for global investors.

The Insolvency and Bankruptcy Code, 2016

The Code was enacted to consolidate and amend pre-existing laws, providing a single piece of legislation to deal with the reorganisation and resolution of corporate persons, partnership firms and individuals in a timely way. The booming phase of the economy in the early 2000s resulted in disproportionate bank lending which had a heavy impact during the global financial crisis, leading to an increase in non-performing assets. Prior to the Code coming into force, the process for insolvency resolution was disorganised with several pieces of parallel legislation dealing with similar legal issues. The introduction of the Code brings about a paradigm shift in the insolvency resolution process from the ‘debtor in possession’ to a ‘creditor in control’model. Furthermore, India’s Supreme Court provided a agreed interpretation of the 2016 Real Estate (Regulation and Development) Act, along with the Code by upholding the constitutional validity of the Insolvency and Bankruptcy (Second Amendment) Act 2018 which classified home-buyers as financial creditors so as to facilitate initiation of insolvency proceedings by them under section 7 of the Code. This thereby increases the scope of the Code and revives faith of commercial stakeholders with its strong framework for a timely resolution.

According to the Code, the Adjudicating Authority is required to act in a timely manner from the admission date of application by the Tribunal. The Code has further ensured the early detection of insolvency by providing that the corporate insolvency process can be initiated on a minimum default of Indian Rupees INR 100,000 (approx. US$1,350), therefore encompassing a wide spectrum of debtors. Additionally, the judiciary has played a crucial role in streamlining the Code by providing interpretations and clarifications where necessary and upholding the object of the Code to its broadest extent. For example, in the case of Mobilox Innovations Private Ltd v Kirusa Software Private Ltd,[1] the Supreme Court interpreted the meaning of the word ‘dispute’ with regards to the initiation of the corporate insolvency resolution process in such a manner so as to accommodate and protect the creditors’ interests, while interpreting section 8 of the 2016 Insolvency and Bankruptcy Code. Section 8 provides that a demand notice must be served on the corporate debtor before filing an application for initiation of corporate insolvency resolution process and the corporate debtor must inform the operational creditor about the payment of debt or ‘dispute’ if any, within ten days of receiving notice. The Supreme Court held that the definition of ‘dispute’ is inclusive and it must not be restricted only to pending suits and arbitrations.

In another landmark decision, the National Company Law Appellate Tribunal (NCLAT) held that a corporate insolvency resolution process under sections 7 and 9 of the Code can be initiated against a corporate debtor even if the name of the corporate debtor has been struck off the Registrar of Companies register and further clarified that the insolvency process needs to be filed within 20 years of the name being struck off.[2] Recently, when parallel insolvency proceedings were initiated against Jet Airways in India and Netherlands,[3] the NCLAT took an extremely liberal view and recognised the Dutch trustee by allowing its attendance at the Committee of Creditors’ meetings in India.

The directions of the Gujarat High Court in the petition filed by Essar Steel India Ltd,[4] upholding the insolvency proceedings initiated by the RBI against 12 entities indicates that there is a better chance of recovery in the current dispute resolution regime.

The Arbitration and Conciliation Act, 1996

A well-developed alternate dispute resolution (ADR) mechanism is a must for any country that wishes to attract and retain foreign investment. The Arbitration and Conciliation Act, 1996 (the Act) was enacted to set out provisions for international as well as local commercial arbitration. In addition to general provisions relating to arbitration, the Act also provides for the enforcement of foreign awards, conciliation and supplementary provisions. In an effort to promote arbitration as a preferred mode of dispute resolution, the Arbitration and Conciliation (Amendment) Act, 2015 (Amendment Act, 2015) was enacted. This was a most welcome response to the challenge of both domestic and foreign arbitral awards. Prior to this amendment, an arbitral award could be challenged merely by filing an arbitration petition which would put an automatic stay on the arbitral award’s enforcement. The 2015 Act now clarifies that mere filing of the arbitration petition would no longer stay the enforcement of an award. The judgment debtor will now have to make a separate application for stay of the arbitral award. In cases of awards involving money payments, the courts have seldom directed the judgment debtors to deposit money/security before hearing the petition challenging the enforcement of award. This will ensure that arbitral awards are enforced smoothly and keep trivial or distressing challenges at bay.

The Amendment Act, 2015 also sets out requirements for arbitrators to ensure the timely completion of arbitral proceedings. It provides arbitral proceedings should be completed within a one-year period which may be further extended by six months. If the arbitration proceedings do not conclude within this timescale, the arbitrators’ mandate will cease, unless an extension is sought by the parties showing cause, which will be at the discretion of the courts.

For international commercial arbitrations, the Amendment Act, 2015 has defined ‘court’ to mean only High Court of relevant jurisdiction. Prior to the Amendment Act, 2015 the precedent set in Bharat Aluminium Company Ltd v Kaiser Aluminium excluded the applicability of Part I (namely interim measures by the court, court’s assistance in taking evidence) of the Act to foreign seated arbitrations. The Amendment Act has made some provisions of Part I applicable to foreign seated arbitrations pursuant to which foreign parties can apply for interim relief against Indian parties or to safeguard assets based in India. The Amendment Act has transformed India’s arbitration environment by bringing about significant changes pertaining to international commercial arbitration, the time bound conclusion of arbitrations, appointment of arbitrators and grounds to challenge an appointment, thereby minimising judicial interference as against the earlier Act.

The Arbitration and Conciliation (Amendment) Act, 2019 (Amendment Act 2019) was intended to institutionalise the ADR mechanism, and make India an arbitration-friendly jurisdiction. The Amendment Act, 2019 has a major focus on the constitution of the Arbitration Council of India, stricter timelines, improved procedures, and the provision of protection to the Arbitrators. India’s courts are implementing a pro-arbitration approach by encouraging parties to adopt arbitrations or in some cases mediation, to resolve disputes.

Commercial Courts Act, 2015

The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 replaced the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015. It provides for the constitution of Commercial Courts, Commercial Divisions and Commercial Appellate Divisions for the adjudication of disputes pertaining to high-value commercial transactions. One of the important facets of the Act is the adherence to strict timelines which it prescribes. The Supreme Court has observed in Rameshwari Devi v Nirmala Devi that the trial court must finalise a timeline with respect to the pleadings and filings and all the parties involved must abide by such timelines.[5] The Act provides comprehensive procedures pertaining to discovery, disclosure, admission and denial of documents, verification of pleadings etc, so as streamline the process and provide clarity to the parties involved.

Enforcement of foreign decrees

Regarding the enforcement of foreign decrees in India, countries belonging to the list of reciprocating territories have a greater advantage as opposed to other jurisdictions. The United Kingdom, Aden, Fiji, Republic of Singapore, Federation of Malaya, Trinidad and Tobago, New Zealand, the Cook Islands (including Niue) and the Trust Territories of Western Samoa, Hong Kong, Papua and New Guinea, Bangladesh and United Arab Emirates (UAE) are the countries that have been notified as reciprocating territories under the Code of Civil Procedure, 1908. In January 2020, the UAE has been notified in the official gazette as a ‘reciprocating territory’. This means that decrees passed by a ‘superior court’ of UAE can be directly executed in India by filing a certified copy of the decree before an Indian court of appropriate jurisdiction. The Indian court will treat this decree as if passed by itself. Whereas, when enforcing a foreign judgment/decree from a non-reciprocating countries, a fresh suit in an Indian court with appropriate jurisdiction has to be instituted.

The recent developments in the Indian legal system, particularly in the procedural framework of litigation have brought about a positive transformation. The judiciary in tandem with the legislature continue to make procedural amendments with significant efforts to overcome delays and reduce the backlog of cases in India’s courts. For India, as a leading global economy, these legal and procedural reforms will have a positive impact on economic growth within a democratic framework.

Back to Litigation Committee publications