A Legal Problem Arising out of a Transaction were in an
Agreement for Sale of Landed Properties comes into Existence
between two parties and a third party Unaware of/without notice of such sale Agreement Purchase the Property which was Enforceable

(By P.B. Menon, Advocate, Palakkad)

In that connection first of all let us consider as to what all legal aspects arise out of this situation and let us see what are the provisions of law that are available in the different statutes.

1. Under Section 19 of the Specific Relief Act a bonafide purchaser for value in good faith pays money is protected having purchased the property unaware of such earlier agreement.

2. Under section 40 of the TP act a purchaser purchasing property being aware of such a agreement is not protected as such agreement holder can enforce the  sale agreement.

3. Under Indian Trust Act Section 91 purchaser being aware of such agreement must hold the property for the benefit of such agreement holder.

Let me try to put the matter in the form of illustrations.

1(a) A enters into sale agreement with B and C being unaware of or without notice of the same purchases the property during the existence of such sale agreement  in force.

1(b). A enters into an agreement  of sale with B.B files a suit for specific performance obtain a decree followed by a sale deed executed by the court on behalf of the judgement debtor and C purchases that property without  notice of the sale agreement from B in good faith after paying consideration.

2. A enters into an agreement of sale with B to purchase a property of B and within the stipulated time purchase the property as well and C without notice of the  earlier agreement purchase in good faith the said property from B before the purchase of A from B.

If you analyse the transaction under the above illustration the 1(a)  The  sale agreement holder is obliged  to fight with C a bonafide purchaser for value in good faith.

 ie.,  A is only a sale agreement holder as against” C”  a title holder naturally. Section 19 of the specific relief act comes into play  to decide as to C is a bonafide purchasr for value.

In the transaction under Section 1(b) and illustration 2 the fight is between two title holders ie A having purchased the property from B ,and C having purchased the property from B much earlier to A’s purchase from B.

 In such circumstances we cannot apply the theory of first purchaser will get title. Hence what is the solution. Section 19 of Specific relief act cannot  be applied because the stage at which such question arise for consideration is when A is only a “sale agreement holder. The other two provision also will not come to help the parties. In such circumstances the solution according to me is that be the real culprit “B ‘ should be made liable to help Aor C by the following method ie to uphold the sale  in favour of one or the other  anddirect B to pay the entire sale consideration received  from  both parties to the other party with interest.

Can we say that a bona fide purchaser for value who purchase property without notice of earlier agreement of sale, should always be protected as an innocent purchaser for value.True in the interest of justice it may be proper, but under what law could court give protection to such purchase. As far as our statutes are concerned this aspect of the matter is not dealt with in anyone of the statutes.

Any how the readers of this article may enlighten me if there is any other solution from what I have opined above.

Can the Court Refuse to Mark A (Relevant and Admissible)
Document, For (i) There is No Formal Proof or (ii) it is
A Photocopy?

(By Saji Koduvath, Advocate, Kottayam)

Abstract

Documents Marked Without Objection as to its MODE OF PROOF – Effect

The law prevails in India is the following –

•If a document is marked without objection as to its mode of proof,  it is not open to the other side to object its admissibility afterwards.

Following leading decisions predicate the legal basis in this matter as under:

Court Fees for Complaints on Bounced Cheques – Legality

(By K.M. Sudhees Babu, Advocate, Adoor)
E-mail : kmsudheesbabu@gmail.com   Mob. 9495835962, 9074071872

The Government of Kerala has recently amended the Kerala Court Fees and Suits Valuation Act for the valuation and imposition of exorbitant court fees on the complaints for the offence under Section 138 of the Negotiable Instruments Act based on the amount of the dishonoured cheque involved in the complaint. Until the recent said amendment valuation for court fees was confined to civil cases, i.e., to suits, alone.

After the amendment complaints, appeals and revisions on S.138 of the N.I. Act are scheduled in a special category as Article 21 of Schedule II of the Court Fees Act. Now the fee for filing a complaint (Clause (a)) ranges from Two Hundred and Fifty to Ten Thousand based on the value of the cheque involved. For appeal (Cl.(b)) and revision (Cl.(c)) it ranges from rupees Five Hundred to One Thousand. Before this amendment the proper fees was only a paltry sum of rupees ten for all complaints on non-cognizable offences (Sch. II Art- II(f)),and no special category was provided for any particular offence. The same was for appeals and revisions.

The wording after amendment in Article 21(a) of the Court Fees Act is interesting. (Complaint filed under Section 138 of the Negotiable Instruments Act, 1881 (Central Act 26 of 1881). It is worth mentioning that Section 138 is a penal provision and not a procedural section. Procedural provision is Section 142. So the correct wording is ‘complaint for the offence under Section 138 of the Negotiable instruments Act 1881’.

The first question is whether imposing court fee on the amount of the cheque involved in the complaint is valuation or not? Valuation means the estimation of a thing’s worth or the determination of the value of a thing. Here the value, which is the amount on the cheque is estimated or determined to fix court fees. So it is nothing but valuation.

We can see that valuation for court fees is done for Suits alone and not for complaints. That too for two purposes only, one for jurisdiction and the other for relief claimed. It is clear from Order VII, Rule 1, sub-rule (i) of the Code of Civil Procedure. It is as follows:- ‘1 particulars to be contained in plaint - The plaint shall contain the following particulars:- (i) a statement of the value of the subject matter of the suit for the purpose of jurisdiction and of court fees, so far as the case admits’. It is also clear from the forms of plaints in Appendix A of CPC. No such provision is seen in any criminal law. In criminal proceedings jurisdiction is purely on the basis of procedural laws and not on the value of the subject matter involved. In a criminal proceeding nobody can claim a specific relief as there is no such provision except in maintenance petitions under Section 144 of Bharathiya Nagarik Suraksha Sanhita and under various provisions of the Domestic Violence Act.

Nobody can request the Court either to punish a person or to give a particular punishment as suggested by the complainant or to claim a definite sum as compensation. Such things are squarely on the satisfaction and discretion of the Court. It is discernible from the definition of the word complaint in BNSS – complaint means any allegation made orally or in writing to a Magistrate, with a view to his taking action under this Sanhita, that some person whether known or unknown has committed an offence, but does not include a Police report. The only business of the complainant is to bring to the attention of the Magistrate that an offence has been committed. Taking proper action is the duty of the Magistrate. There is no option to claim any particular relief. The action shall be as per the provisions of BNSS and the nature of punishment and compensation are purely in the discretion of the Court.

In proceedings under the Domestic Violence Act various reliefs which are personal in nature can be claimed by the complainant, but no special court fee is required for the same. In maintenance petitions under Section 144 of the BNSS for claiming personal reliefs no additional court fee is required than that in other petitions. It is mainly to avoid the payment of court fees that those provisions are made part of the criminal law, though the reliefs provided are civil in nature. In Suits all except the indigent persons are bound to pay court fees.

As already stated above in criminal cases awarding compensation is purely in the direction of the court. There is no option to claim a definite sum as a relief and the criminal court is not bound to assign any reason for not allowing compensation as there is no mandate to allow compensation. To avail the same relief with certainty, the only option is to file a suit in a competent Civil Court on the same cause of action, paying proper court fees. So a complaint is compelled to pay court fees twice to claim compensation in a cheque case. But in other offences like hurt, theft, robbery, extortion, cheating, damage to property, defamation etc., the de facto complainant is needed to pay court fees only once even if a suit for compensation if filed in a Civil Court.

In fact in Section 138 of the NI Act there is no mandate requiring the Court to award compensation. ‘Section 138 - Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of the account for the discharge, in whole or in part, of any debt or other liability is returned by the bank unpaid either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provision of this Act be punished with imprisonment which may extend to two years or with fine which may extend to twice the amount of the cheque or with both. There is no mandate to award compensation. For compensation the general provision under Section 395 of BNSS alone is applicable. So to claim the cheque amount the complainant has to file a civil case along with the complaint, just like in other offences where compensation can be claimed.

Another important aspect is that the present amendment by the State is Constitu-tionally unsustainable. It is an encroachment to a matter in the Union List. Banking (45), Bills of Exchange, Cheques, Promissary Notes and other like Instruments (46), Rates of stamp duty in respect of bills of exchange, Cheques, Promissory notes….(91)  are matters enumerated in List I (Union List) in the Seventh Schedule of the Constitution of India. The terms cheques and banking do not confine to mere issuance of a cheque. All transactions from the despatch of the cheque book to the account holder by the bank, to the receipt of the amount in the cheque by the holder of the cheque come within the ambit of cheque and banking. Hence the State has no power to make any law affecting a transaction through cheque.

The statement of objects and reasons in the amendment Act of 1988 for inserting a new chapter involving Section 138 in the N.I. Act is as under :-

‘XI. to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties by making the drawer liable for penalties in cases of bouncing of cheques due to insufficiency of funds in the accounts or for the reason that it exceeds the arrangements made by the drawer, with adequate safeguard to prevent harassment of honest drawers.

The present amendment of the Court Fees Act is really a harassment to the holders of the cheque. It dissuades people from accepting cheque in settlement of liabilities as it creates unnecessary burden to the holder of the cheque if the cheque is bounced. When the purpose of the Amendment Act of 1988 was to deter people and thereby discourage them from not honouring the commitment by way of payment through cheque and thus to enhance the acceptability of the cheque the present amendment dissuades people from accepting cheque in business transactions.

By the insertion of Article 21 in Court fee Act what done is not an imposition of an exorbitant court fees for complaints for the offence under Section 138 of the N.I. Act. But it is the taxing of a transaction through cheque. What is the difference between a fee and a tax? A fee is a payment for service rendered. But a tax is compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for service rendered (Commissioner H.R.E. V.L.T. Swamiar (1954 KLT OnLine 1002 (SC) = AIR 1954 SC 282 (Jagannath v. State of Orissa (AIR 1954 SC 400), Corparation of Calcutta v. Liberty Cinema (1965 KLT OnLine 1309 (SC) = AIR 1965 SC 1107). Here no benefit is provided to the complainant. No service is rendered to the complainant at State’s expense. The amount collected in the name of fees is used in the common benefit of the State. In fact the only purpose of Article 21 in Schedule II is to collect money for the State Exchequer.

As already stated according to the Kerala Court Fees Act Court fees need be paid only for complaints in non-cognizable offences, that is rupees ten. The end result is the same in all complaints. Hence the State has no power to differentiate a complaint on a cheque from other complaints and extract an exorbitant amount calling it as court fee when no service is rendered by the State. Besides the State has no power to provide anything special to the cheque when the matter is in the Union List. So the amount collected here in the name of court fees is nothing but a tax in disguise. After all the amount collected is an exorbitant amount which cannot be considered as a fee but only as a tax.

Naming a tax as a fee will not change its character. What is collected here in the name of fees is nothing but a tax on a matter in the Union List. Article 265 of the Constitution of India reads – No tax shall be levied or collected except by authority of law. Here State of Kerala has no authority to levy tax on a transaction involving cheque in the name of court fee. So no more amount shall be collected in this way and the amount already collected shall be returned to the parties.

The said Article 21 of the Court Fees Act is opposed to equality guaranteed by Article 14 of the Constitution of India. Article 14 - The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India, Equality means that equals shall not be treated unequally and unequals shall not be treated equally. So the rich and poor shall not be treated equally, When an exorbitant court fee is imposed, even if legally, there should be a mechanism for the poor and downtrodden to redress their genuine grievances like those in Order XXXIII (Suits by Indigent Persons) and Order XLIV (Appeals by Indigent Persons) of the Code of Civil Procedure. A recent decision by the Supreme Court in Alifia Hussen Bhai Keshariya v. Siddiq Ismail Sindhi (2024(4) KLT 176(SC) = 2024 KLT OnLine 1592 (SC) =  AIR 2024 SC 3176) is as follows – II. The intent of Orders XXXIII and XLIV is unmistakable. They exemplify the cherished principle that lack of monetary capability does not preclude a person from knocking on the doors of the court to seek vindication of his rights. Such a cherished principle is not exemplified in the above said amendment. To incorporate such a provision in the Criminal Law BNSS should be amended. But Criminal procedure (2) is in the Concurrent List (List III) of the Constitution of India. Without such a provision this amendment is unsustainable.

Now we should think for a moment why there is no such provision in any Criminal Procedure. Because nobody except we people ever thought of imposing exorbitant court fees in criminal cases , whether based on the value of the subject matter involved or not. That is why the Act is named Kerala Court Fees and Suits Valuation Act and not as Kerala Court Fees and Suits and Complaints Valuation Act.

It is true that the offence under Section 138 of the N.I. Act is different from other natural Crimes like hurt, murder theft, extortion cheating damage to property defamation etc. It is a civil liability made punishable by law. But the end result is the same in all, to punish the guilty. Punishment under Section 138 of the N.I. Act is for general good, that is to enhance the acceptability of the cheque. There is no provision for any special relief in the form of compensation other the general provision under Section 395 of BNSS. If exorbitant court fees can be imposed on a complaint on a cheque the same can be done in the case of complaints involving other offences because the power to award compensation is the same in almost all the offences.

In fact various criminal laws with stringent penal provisions are weapons in the hands of the State to protect the person and property of the innocent from criminals  and other miscreants .It is the duty and responsibility of the State to protect the person and property of every individual. The main purpose of criminal law is to deter public from resorting to any crime. So demanding remuneration from its tax paying aggrieved complainant citizens for performing the inevitable duty and responsibility of the State is a highly objectionable act on the part of a Democrat Welfare State.

Even in civil cases imposing exorbitant court fees is unjust and unethical. Each and every person is bound to pay hefty sums as tax in each and every transaction involving property. So imposing exorbitant court fee for claiming a relief with respect to a wrong committed against the very same property or against the very same tax payer is unfair court fees shall not be allowed to become a double tax. It shall be reasonable.

In the interest of justice it is fair on the part of the State of Kerala to repeal Article 21 of Schedule II of the Kerala Court Fees and Suits Valuation Act and return the amount already collected.

It is the duty and responsibility of a vigilant Centre to see that no State invade in to a matter in the Union List either covertly or overtly and defeat the noble purposes enshrined in a Central Statute.

In this case if Kerala State is unrelenting it is for the Centre to remedy the malady immediately or else this may spread to other States and to other offences in our country to the detriment of the entire human folk. Then the under privileged will not be able to approach a Criminal Court with a complaint.

Forfeiture of Gratuity for Offences Involving Moral
Turpitude under the Payment of Gratuity Act,1972:
De Lege Lata v. De Lege Feranda

(By Sridhar Rajagopalan, Chief Legal Officer &
Head, Corporate Affairs, Automotive Robotics India (Pvt.) Ltd., Chennai)

E-mail : sri_raja62@yahoo.com     Mob. 9940049221

Section 4(6)(b)(ii) of the Payment of Gratuity Act (hereinafter referred to as “Gratuity Act” makes it clear when the gratuity could be forfeited. The said Clause reads as under:

“if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment”. 

Recently, the Delhi High Court in the matter of Punjab National Bank v. Niraj Gupta & Anr. (2024 SCC OnLine Del.4763)  (hereinafter referred to as “PNB case”) anchoring on the ratio laid down in the matter of  Union Bank of India v. CG Ajay Babu (2018 (3) KLT OnLine 3058 (SC) = (2018) 9 SCC 529), (hereinafter referred to as UBI case) has held that an employee’s gratuity could be forfeited for an offence involving moral turpitude only if there isa  criminal conviction by a court of competent jurisdiction.

The brief facts of PNB case:

• The Respondent who was the DGM of the Punjab National Bank was sent to United Kingdom as the MD and CFO of the Punjab National Bank International Ltd. in the year 2015. There was an allegation of sexual harassment against him by his colleague in the UK.Ergo, he was asked to return back to India and the Internal Committee (“IC”)constituted under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (hereinafter referred to as the “PoSH law”) by the PNB, has conducted the investigation.  He was found guilty of the sexual harassment by the IC. Based on its finding, the Respondent was dismissed from his employment.

• He was also served with a show cause notice for forfeiture of gratuity for his act amounting to moral turpitude in accordance with Section 4 of the Gratuity Act. The Respondent’s reply was not accepted by the PNB, and his gratuity was eventually forfeited by the bank on account of his offence involving moral turpitude.

• Aggrieved by this, the Respondent approached the Controlling Authority of Gratuity, which directed the Bank to pay the Employee his full gratuity along with interest. The Bank appealed before the Appellate Authority for Gratuity, but the decision again went in favour of the Respondent.

• Aggrieved by the said order, the PNB preferred a Writ Petition before the Hon’ble Delhi High Court.

• Submissions by the Parties: The Bank submitted that the impugned Order was bad in law, as the allegations of sexual harassment against the Employee were proved during the investigation by the IC, and since the same amounts to an act involving moral turpitude, the forfeiture of gratuity could not be held to be unjustified.

• The Respondent submitted that mere dismissal of an employee by a departmental inquiry would not by itself constitute an offence involving moral turpitude, but rather for an employer to forfeit gratuity under Section 4(6)(b)(ii) of the Gratuity Act, the dismissed employee should have been convicted for a misconduct involving moral turpitude, punishable by law for the time being in force.

The Delhi High Court has held that the phraseology employed in Section 4(6)(b)(ii) of the Gratuity Act i.e., “constitutes an offence involving moral turpitude” suggests that the legislature has deliberately used a language of certainty in the provision and a mere possibility of the employee having committed an act constituting an offence involving moral turpitude is not sufficient to attract the aforementioned provision. The Delhi HC has relied upon a judgment of the Hon’ble Apex Court in the matter of Union Bank of India v. C.G. Ajay Babu (vide supra) wherein the Hon’ble Supreme Court has held that for forfeiture of gratuity, the act/conduct involving moral turpitude is not for the employer to decide.Strictly speaking, it must be decided within the realm of the criminal law and by a court of competent jurisdiction. Further, the Hon’ble Supreme Court has also held that it is not the conduct of a person involving moral turpitude that is required for forfeiture of gratuity rather the said conduct/act should constitute an ‘offence’ involving moral turpitude. The Hon’ble SC also highlighted the definition of ‘offence’ as contained in the General Clauses Act, 1897 whereby, to constitute an offence, the act should be made punishable under the law which comes under the ambit of criminal law.

For the sake of understanding the ratio of the decision in UBI case, it will be prudent to go through the facts, the reasoning and the factors responsible for the above judgement.  The important portions of the judgment are reproduced below:

1) The charges levelled against the employee concerned were as follows:

a) Failure to take all steps to ensure and protect the interest of the bank.

b) Failure to discharge his duties with utmost devotion, diligence, honesty and integrity.

2) There is a bipartite settlement prevailing in the UBI a clause of which reads as under:

“12.2: There will be no forfeiture of gratuity for dismissal on account of misconduct except in cases where such misconduct causes financial loss to the bank and in that case to that extent only.”

3) Hon’ble Supreme Court’s reasoning: “An offence involving moral turpitude”: To be an “offence” the act should be made punishable under the law. The Hon’ble Supreme Court has relied on the General Clauses Act, 1897 (hereinafter referred to as “the GC Act”) wherein the term “offence” is defined as to mean any act or omission made punishable by any law for the time being in force. That is absolutely within the realm of the criminal law. It is not for the bank to decide whether an offence has been committed. It is for the court. Apart from the disciplinary proceedings initiated by the Appellant Bank, the bank has not set the criminal law in motion either by registering an FIR or by filing a criminal complaint so as to establish that the misconduct leading to dismissal is an offence involving moral turpitude. Under sub-section (6)(b)(ii) of an Act, forfeiture of gratuity is permissible only if the termination of an employee is for any misconduct which constitutes an offence involving moral turpitude and convicted accordingly by a court of competent jurisdiction.

The Hon’ble Supreme Court has held that the Respondent was entitled to gratuity as there was no financial loss to the bank. In addition to that as per the bipartite settlement forfeiture of gratuity is permissible only in case the misconduct leading to dismissal has caused financial loss to the bank and only to that extent.

Against this backdrop, this write-up is an attempt to scan through the judgements carefully to do the analysis appositely to determine the way forward. In this effort, I beg to differ from the judgment of the Delhi High Court (vide supra) for the following reasons.

1) The Hon’ble Supreme Court ‘s decision in UBI case was anchored on two important aspects.

a) The employee’s failure to discharge his duties with utmost devotion, diligence, honesty and integrity and thereby failed to protect the interest of the bank.

b) In view of the specific clause in the bipartite settlement between the parties which prohibits forfeiture of gratuity if there is no financial loss to the bank.

2) The facts of the PNB case are antithetical to that of UBI’s. This is a case of sexual harassment. Under the POSH Law, the aggrieved woman has the right to choose one of the two options. She can either file a written complaint to the IC or can submit a complaint to the Police to initiate the criminal proceedings. Against these two legal options, if the aggrieved woman submits a written complaint to the IC, the IC, being the exclusive investigative mechanism provided by the statute itself, has the power to conduct a thorough enquiry to ascertain the truth. Based on the recommendations of the IC, the employer will have to impose the punishment. If the employer takes a decision to impose the punishment of termination of the services of the Respondent, per the decision of the Delhi High Court, for the forfeiture of his gratuity, the employer has to initiate separate criminal proceedings against the dismissed employee who has been punished for an offence involving moral turpitude, is unnecessary replication and as such uncalled for.

3) Here comes the contradistinction

A) The Hon’ble SC and the Delhi HC have dealt with two different scenarios. The Hon’ble Supreme Court has dealt with the facts which revolve around the failure to discharge the duties with diligence and integrity by the employee. However, the Delhi High Court dealt with sexual harassment. This aspect is fully governed by the POSH law. In accordance with this law, the aggrieved woman has two legal options i.e., to give a complaint to the IC or to the Police. If she chooses to give a complaint to the IC, and the complaint is proved, the IC can provide a recommendation to the employer, based on the enormity of the issue, to terminate his services. Against this scenario, the natural corollary would/should be forfeiture of gratuity.In other words, under Section 4(6)(b)(ii), forfeiture of gratuity is automatic in the event of dismissal as a punishment for sexual harassment.  This logical approach should be recognized as unique to proven sexual harassment cases under the POSH Law.

B) Impact on the organization: Monetary Impact:

In 2016, the Madras High Court directed Chennai-based company to pay ` 1.68 crore as damages on account of sexual harassment to an aggrieved woman.

Damage to the Reputation of the organization:

Sexual harassment complaints will harm the reputation of the company and create a hostile work environment. In an instance where a female employee complaint of sexual harassment, it would turn out to be an unfriendly and unsafe workplace for employees already working. Moreover, it would become utterly difficult for hiring new people to trust such a workplace and eventually lead to the workplace having a bad reputation.

The above said repercussions would impact ONLY the organization, monetarily and also give a hit on its reputation despite being POSH compliant.

C) Circumstances in which gratuity can be legally considered as “an entitlement” are listed out under Section 4(1) of the Gratuity Act which reads as under:

“(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,--

(a)  on his superannuation, or

(b)  on his retirement or resignation, or

(c)  on his death or disablement due to accident or disease.”

However, for forfeiting the gratuity amount of the dismissed employee, Section 4(6) (b)(ii)
clearly stipulates that if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

The phraseology employed in the above clause has two parts. Those are as under:

a) Employee should have been terminated for an act which constitutes an offence involving moral turpitude.

b) The said offence has been committed by him in the course of employment.

Sexual harassment is an offence involving moral turpitude. As such, it does not require a confirmation or acknowledgement in the criminal proceedings. Moreover, when the provision clearly says that the commission of the said offence was done in the course of his employment as a conditionality for forfeiture of gratuity, and that it is the organization’s responsibility to pay the amount from its coffers and that the objective of the payment of gratuity is nothing but a token of appreciation and gratitude for the services rendered, it is for the employer to determine whether the gratuity is payable or not in the event of a proven act of sexual harassment which is an offence involving moral turpitude.

D) The Hon’ble Supreme Court has referred to the General Clauses Act, 1897 which defines the term “Offence” as follows”.

Section 3(38): “offence” shall mean any act or omission made punishable by any law for the time being in force. The word “any law” used here clearly says that this can be made applicable to all the relevant laws. POSH Law is a self-contained code with a view to protect the women from sexual harassment at workplaces and as such sexual harassment obligatorily should be considered as an offence involving moral turpitude. It may be noted that Sections 75 to 79 of the Bharatiya Nyaya Sanhita, 2023 (came in to force from
July 2024), are in para materia with the provisions of the POSH Law. 

E) Assuming that if, for the forfeiture of gratuity, going by the decision of the Delhi High Court in the PNB case, if criminal proceedings are initiated, the said proceeding, with a view to ascertain whether the Respondent has indulged in sexual harassment or not, will have to do the enquiry de novo which is nothing but duplication. Assuming that if the commission of the said offence is not proved before the criminal court, contrary to the established judicial dicta, there is a possibility of the Respondent seeking reinstatement with back wages as the acquittal in the criminal Court goes to the root of the accusation against the Respondent and as such it will have adverse impact on the decision of the IC.

Summation:

The High Court and all other courts in the country were no doubt ordained to follow and apply the law declared by the Supreme Court, but that does not absolve them of the obligation and responsibility to find out the ratio of the decision and ascertain the law, if any, so declared from a careful reading of the decision concerned and only thereafter proceed to apply it appropriately, to the cases before them. (Delhi Administration (Now NCT of Delhi) v. Manohar Lal (2003 (1) KLT 653 (SC) = (2002) 7 SCC 222).

The Law is always in the process to continue to be the law in the making. This process should not be allowed to be impacted by the technicalities of the rules of interpretation. Keeping in view of the facts of the case in hand, binding nature or otherwise of the ratio of the cases should be ascertained in the first instance to ensure substantive justice.

Uncertainty Surrounding Dissenting Creditors with
Security Interests

(Co-authored by Sanil Jose, Advocate, High Court of Kerala &
Jose S.Jose, 4th year LL.B. Student, NUALS, Kochi)

e-mail : saniljose08@gmail.com             Ph.: 9446323338

Does the 2019 amendment to Section 30(2)(b) of the Insolvency and Bankruptcy Code, 2016 (IBC) entitle dissenting financial creditors to receive at least the minimum value of their security interest? This question was examined by the Supreme Court of India in the case of DBS Bank Limited Singapore v. Ruchi Soya Industries Limited& Anr.₁  (DBS judgment).

Previously, the Supreme Court addressed this issue in the case of India Resurgence ARC Private Limited v. Amit Metaliks Limited & Anr.₂(India Resurgence judgment). In that case, the Court concluded that a dissenting financial creditor with a security interest is not entitled to receive the value of that security interest. It noted that such creditors do not have a right over other financial creditors to receive an amount exceeding what is proposed to the same class of creditors under the resolution plan approved by the Committee of Creditors (CoC).

However, a coordinate bench of the same court in the DBS judgment took a completely different and contrasting view. Therefore, the question has been referred to a larger bench. This article analyses both the DBS and India Resurgence judgments. It looks into how coordinate benches of the same court arrived at different views on the same issue. It also examines the statutory provisions and other Supreme Court judgments that have contributed to the current state of uncertainty over this question.

The Legislative Framework

A CoC, as per Section 21(2) of the IBC, comprises all financial creditors of the corporate debtor. This means that operational creditors are not part of the CoC and are, therefore, unrepresented during the Corporate Insolvency Resolution Process (CIRP).

To understand the origin of the issue in the DBS judgment, we need to consider
Section 30(2)(b) of the IBC and Regulation 38(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Section 30(2)(b) requires two conditions that a resolution plan must satisfy before a resolution professional submits it to the CoC for approval. The plan must ensure a payment mechanism whereby operational creditors receive an amount not less than what they would receive under Section 53(1) in the event of liquidation of the corporate debtor. After the 2019 amendment, this requirement was extended to include financial creditors who did not vote in favour of the resolution plan, ensuring they receive no less than what they would in liquidation. Furthermore,
Regulation 38(1) of the CIRP Regulations mandates that creditors who did not vote in favour of the resolution plan should be prioritised in payment over those who did.

These provisions collectively indicate that the legislation aims to ensure both operationaland dissenting financial creditors are paid at least the minimum amount they would be entitled to in the event of liquidation of the corporate debtor.

Commercial Wisdom of CoC

The commercial wisdom of the Committee of Creditors (CoC) has been a subject of discussion in various Supreme Court cases. InEssar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta₃  (Essar Steel judgment), the Court, while upholding the constitutional validity of amendments made to Section 30(2), clarified that the approval of a resolution plan ultimately depends on the commercial wisdom of the CoC. The Court emphasised that such decisions should be subjected to only limited judicial intervention. This stance was reaffirmed in Vallal RCK v. Siva Industries & Holdings Ltd.₄  where the Court reiterated that the commercial wisdom of the CoC must be respected. Judicial intervention is warranted only if the CoC’s decision is found to be capricious, arbitrary, irrational, or outside the scope of the statutes or rules.

The Rights of Dissenting Financial Creditors through judicial precedents over the years

After the 2019 amendment to Section 30(2)(b), which granted dissenting financial creditors the right to receive at least the minimum amount they would receive in the event of liquidation, various Supreme Court judgments have examined this right. The key unresolved question is whether these dissenting financial creditors can receive the minimum value of their security interest.

One significant case that addressed the rights of dissenting financial creditors is Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd.₅  (Jaypee judgment). In this case, the Supreme Court held that dissenting financial creditors must be paid in cash and cannot be forced to accept equity or securities. The Court further clarified that such payment should only be to the extent of the value “receivable by him” or what he is entitled to receive according to the resolution plan approved by the CoC. If the dissenting financial creditor is a secured creditor, this payment could also be satisfied by allowing them to enforce their security interest to the extent of the value “receivable by him” and the order of priority available to them under Section 53(1).

Subsequently, the Supreme Court, in the India Resurgence judgment, addressed this question in detail. The Court referred to theEssar Steel and Jaypee judgments to conclude that a dissenting secured creditor is only entitled to a sum proportionate to what is provided to the same class of secured creditors with reference to their respective admitted claims. The Court emphasised that unless the resolution plan fails to accord fair and equitable treatment to a class of creditors, the commercial wisdom of the CoC cannot be intervened by the Court.

The Court found that the proportionate distribution of payment to secured creditors with respect to their claims was fair and equitable. Consequently, the argument that a dissenting secured creditor should be paid a higher amount, up to the value of their security interest, was dismissed. The Court reasoned that the aim of the IBC is to achieve insolvency resolution by reviving and maximising the assets of the corporate debtor. Paying a higher amount to dissenting secured creditors would encourage more creditors to opt for dissent, leading to more liquidations, which is contrary to the purpose envisaged by the Code.

The DBS Judgment - A Change in Perspective

The DBS judgment significantly altered the Court’s perspective. The Judges in this case disagreed with the decision of the coordinate bench in the India Resurgence judgment. They opined that Section 30(2)(b)(ii) by law provides assurance to dissenting creditors that they will receive in monetary terms the amount they would have received in liquidation proceedings. This rule also applies to operational creditors. It ensures that dissenting creditors receive payment equivalent to the value of their security interest.

While the Court emphasised the importance of maximising the value of the corporate debtor’s assets and preventing liquidation, it also stressed on the need to protect the rights of operational creditors and dissenting financial creditors as specified by law. The Court argued that if dissenting financial creditors were only entitled to the amount receivable under the resolution plan, it would defeat the very purpose of the amendment. Thus, the Court held that dissenting financial creditors are entitled to a minimum value in monetary terms equivalent to the value of their security interest, marking a new perspective compared to previous judgments.

Is the reasoning in DBS judgment sound?

Before we dive into the legal details, it is important to look from the viewpoint of secured creditors. Why do they secure an interest in a debtor’s assets? A secured creditor seeks security in a debtor’s assets primarily to safeguard their loans. If the debtor fails to repay the loan, secured creditors can recover their money by enforcing their security interest. The Insolvency and Bankruptcy Code (IBC) recognizes this right under Section 52, allowing secured creditors to recover their security during liquidation.

The 2019 amendment to Section 30(2)(b) was meant to protect dissenting financial creditors and give them an advantage over other creditors. If this advantage isn’t provided even after the amendment, it would be unfair. The purpose behind the amendment is reasonable and justified.

When a company becomes insolvent, a resolution plan is required to revive it. If this plan does not offer secured creditors at least the minimum value of their security, it forces them to relinquish their security interest for a lesser payment. This takes away their right to choose between relinquishing or enforcing their security, which is crucial since they likely entered the agreement with that choice in mind. Therefore, if the resolution plan doesn’t provide for this minimum payment, secured creditors should be allowed to disagree without losing the ability to enforce their security interest. The 2019 amendment in Section 30(2)(b) addresses this by ensuring that dissenting secured creditors receive the amount they would have gotten during liquidation, guaranteeing them the minimum value of their security interest. The DBS judgment rightly upholds the spirit of the amendment.

Conclusion

It has been a roller coaster of a ride for the dissenting financial creditors. The 2019 amendment to Section 30(2) of IBC initially granted them significant rights. However, these rights were effectively rendered meaningless by various Supreme Court judgments that prioritized the commercial wisdom of the CoC and the supreme purpose of the IBC over the rights of operational and dissenting financial creditors. It wasn’t until the DBS judgment in 2024 that a shift in perspective occurred, aligning more closely with the legislature’s intent behind the 2019 amendment. Although this provides some relief to dissenting financial creditors with a security interest, the issue remains unresolved. Both the DBS and India Resurgence judgments were delivered by coordinate benches of the same court, and therefore, the matter has been referred to a larger bench. It remains to be seen whether the larger bench will uphold this judgment. Until then, the judgement in India Resurgence will prevail and be binding on the courts.

It is important to note that, as of December 2023, banks and financial institutions have recovered only 32% of the total admitted claims through the IBC process. This low recovery rate highlights the need for courts to step in and ensure that this number improves. One way the courts could help is by upholding the DBS judgement which advocated the payment of the full debt owed to dissenting financial creditors by ensuring they receive at least the minimum value of their security interests.

Foot Notes

1.  DBS Bank Ltd. v. Ruchi Soya Industries Ltd. (2024 KLT OnLine 1257 (SC) = (2024) 3 SCC 752

2. India Resurgence ARC (P) Ltd. v. Amit Metaliks Ltd. (2021 (3) KLT OnLine 1114 (SC) =
    (2021) 19 SCC 672.

3.    Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta (2019 (4) KLT OnLine 3201) =
(2020) 8 SCC 531.

4.  Vallal RCK v. Siva Industries & Holdings Ltd. (2022 (3) KLT OnLine 1157 (SC) = (2022) 9 SCC 803.

5. Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd. (2021 (2) KLT
SN 41 (C.No. 37) SC = 2021 (2) KLT OnLine 1024 (SC) = (2022) 1 SCC 401.