Friday, February 28, 2014

CSR Provisions Soon to be Effective

The provisions of the Companies Act, 2013 and the rules thereon pertaining to corporate social responsibility (CSR) have been notified yesterday. They will take effect from April 1, 2014. A copy of the rules as notified is available here.

As for the specific CSR activities, Schedule VII of the Companies Act containing the list of permitted activities has been amended.

While we will have occasion to discuss some of the details in due course, it appears that the rules are fairly prescriptive as to the nature of CSR activities that companies can carry out. Moreover, it has been explicitly stated that political funding by corporates it outside the purview of CSR, and understandably so. Some of the other issues discussed previously continue in the new version as well, including the fact that employee benefits will not be encompassed within CSR.

April 1 this year would mark a new era in corporate law and governance in India with companies being required to comply with the quasi-mandatory obligations regarding CSR, an approach that is fairly unique in the global context.

Thursday, February 27, 2014

Ten Monsters in the Companies Act, 2013 – Part 3

[The following post, which is the third in a three-part series, is contributed by Vinod Kothari of Vinod Kothari & Co. The author can be contacted at vinod@vinodkothari.com

This follows Parts 1 and 2]

7.         Casual approach to special majority rule

Let us realise that Companies Act was drafted decades ago in England by luminaries. These people, who lived corporate laws in every breath of theirs, had a well-devised distinction between matters that require ordinary majority, and matters that require special majority. Strategic issues where minorities need to be protected would need a special resolution; but general operational issues have to move on with ordinary majority.

The new Act casually crosses the borderline between ordinary and special resolutions. For example, even something as ordinary and operational as extension of bank borrowing limits needs a special resolution. The difficulties in obtaining such a resolution is already adversely affecting the corporate sector – most banks are asking companies to produce a special resolution for extension of their borrowing limits in terms of the new sec 180 of the Act. Most companies do not have such a special resolution right now. Convening a members’ meeting is not an easy thing for companies – large companies with few lakhs of shareholders may spend crores of rupees – merely to renew or extend the power to borrow money in ordinary course of business from banks.

8.         Corporate litigation will increase manifold

The new Act contains several provisions where litigation enthusiasts, corporate blackmailers or pressure-mongers will find it easy to take companies into corporate litigation. While it may be easy for the plaintiffs to make an apparent case against companies, companies will have to spend a good fortune in defending their case, with expensive corporate counsel.

There are at least 3 such matters which corporate litigation will rise manifold. First is the power granted to the NCLT to relax the minimum shareholding requirement for filing minority protection sections – called oppression and mismanagement. The new section gives an unbridled power to NCLT to relax the minimum shareholding requirement, which is currently 10% of the share capital. Technically, therefore, even a shareholder holding 1 share may bring a case of oppression – however bad the case may be, the NCLT will have to give an opportunity of hearing to the applicant and the company – whereby the company will have to spend a lot on defending. There is no check on frivolous litigation here.

Second is the very vague, very widely worded provision of section 221 on freezing of assets of the company. While the placing of the section, as also the predecessor section in the 1956 Act, suggest that the section is to be used only in case of adverse findings in an investigation, the wording of the section is so wide that any creditor with just Rs 1 lac of debt due from the company, and in fact, even a stranger, may file an application to NCLT claiming that there is a movement of funds or assets occurring in the company, and that the NCLT must pass freeze orders. This is an open invitation for litigation, which may seek to stop important business decisions such as foreign investments, creation of security interests, acquisitions, etc.

Lastly, shareholders’ associations will make good use of class action suits. In the USA, class action suits are meant to recover damages. In India, class action suits are injunctive – that is, to stop the company from doing certain things. This is where the real problem lies- there may be orders of injunction based on an ongoing class action suit. Currently, the CLB imposes such injunctions in case of corporate rivalries, but imagine an injunction imposed based on an ongoing class action suit with 100 shareholders (who may actually be a group of professional blackmailers, holding 1 share each) on important business decisions – this will affect corporate functioning to a great extent.

 

9.         Breaching the borderline between civil wrongs and criminal offences

The law seems to have breached the borderline between civil wrongs and criminal offences. This is actually not new – as the amendments that have been passed to the law from year 2000 onwards have really caused the blurring to happen. One prominent example is the failure to pay interest on debentures or redeem them. Unlike fixed deposits, where small investors’ money is involved, debentures may actually be, and commonly are, institutional debt. Several companies rely on debentures as a part of their treasury model. Now, the failure to pay interest or redeem debentures is something which is surely dependent on the finances of the company. There may be systemic risk that may affect the company; there may be a cyclical problem, or simply the company may not have the money to pay interest on debentures, or to redeem them when they are due. Not having money to pay one’s debts is a civil wrong – it is not a crime. However, strangely, the law imposes an imprisonment of up to 3 years for not meeting obligations on debentures, whether on account of interest or principal. Conversely, there is nothing similar in case of loans, whereas debentures are practically nothing but securitised loans.

10.       Death-knell for the Bond market

The bond market will be killed by enthusiastic and reckless rules framed under sections 73 pertaining to deposits, and section 71 (3) pertaining to secured debentures.

We have already mentioned above that OCDs have completely been killed by the enthusiastic rule-making that happened in the wake of Sahara’s misuse.

There is yet another strange, and apparently mindless, set of rules that have come under sec 71 (3) pertaining to secured debentures. This rule says that if the company issues secured debentures, the debentures must be secured on “specific” property of the company. A charge on specific property means a fixed charge – which would mean current assets do not qualify for the purpose of securing debentures. In case of several bond issuers such as NBFCs, there are no assets other than current assets to secure the debentures – hence, it would be impossible for NBFCs to issue secured debentures.

One needs to understand that the major issuers of bonds in India are financial entities - be it banks or NBFCs. In either case, the provisions of sec 71 (3) are mandatory in nature, and do not have any exemption in case of banks or NBFCs. One also needs to understand that the only bonds that can be issued in India are secured bonds, as unsecured bonds hit public deposit rules. Thus, a combination of the two rules would mean  - bonds cannot be anything but secured, and secured bonds have to be secured on “specific assets”, which means NBFCs will never be able to issue these bonds. This would virtually mean a death-knell to the bond market.

There is yet another way in which the MCA seems to be working exactly at cross purpose with SEBI. The latter is trying to promote bond market in the country by making it possible for companies to list privately-placed fixed income securities. Privately-placed bonds are listed by private limited companies too, but the moment a private limited company lists its bonds, it becomes a “listed company” under the 2013 Act, thereby invoking several of the corporate governance norms which are patently unsuitable for private companies. SEBI has carefully drafted the debt listing agreement not to impose too much of corporate governance burden on companies that seek to list their debt securities – however, this distinction has not been taken care of in defining “listed companies” in the 2013 Act. In essence, listing of privately placed bonds by unlisted companies will be discouraged by the new Act.

Conclusion

Law is not a gift of omnipotence, or a product of providence that we have to take as given. We give ourselves the law. The Indian corporate sector was running fine enough for nearly 6 decades with the 1956 Act. If at all we needed a new law, we needed it for bettering the working of companies, not battering them with regulations which compromise on essential business freedom. Today, we sit in an environment where geographical borders have become unprohibitive – international investors may simply opt out of entering India, and several Indian businesses may think of relocating themselves elsewhere. Corporate regulation has to be pragmatic; it cannot serve its own need, or the needs of some shaky mentality inspired by a “no-mistake-henceforth” attitude. It is still time to resolve some issues by rulemaking and some by amending the law, but it would be really a colossal mistake if we allow the law and the rules to be implemented the way they right now are.

(Concluded)

-  Vinod Kothari

Wednesday, February 26, 2014

Ten Monsters in the Companies Act, 2013 – Part 2

[The following post, which is the second in a three-part series, is contributed by Vinod Kothari of Vinod Kothari & Co. The author can be contacted at vinod@vinodkothari.com

The first part in the series is available here]

3.         Intruding into privacy of private, unlisted companies

While we have made the point about above about sweeping regulation applicable to all private companies, we may specifically make a few more points about regulations sought to be applied, which are highly inappropriate in case of private companies. One such provision is the restriction on related party contracts. Once again, given the nature of private companies, it is a fairly acceptable practice that private companies should be allowed to enter into contracts with their related parties. The law imposes the “majority of the minority” rule for such contracts, which is an exceptional shareholder consent rule applicable to very large companies such as those listed on NYSE. The law makes the fundamental mistake of importing corporate governance norms evolved for a handful of NYSE-listed and LSE-listed entities, and imposing them on the 8 lakh odd tiny companies in India.

There are several provisions which may require a private company to have independent directors. For example, if a private company reports profits of Rs 5 crores or more, it becomes subject to the requirement of corporate social responsibility (CSR) spending, and to frame and monitor a CSR policy, the company must have a CSR committee, which must have an independent director. The presence of an independent director on the board of a private company, which may actually be a family concern, is really a very strange imposition.

4.         Reactive law-making – killing instruments to tackle exceptions

This is quite often noted in mob psychology – for example, if a bus kills a passer-by, the mob catches hold of any bus, and sets it on fire. But to see this reactive law-making in such a serious field affecting capital markets is quite undesirable. It is a known fact that several provisions of the Act were inspired by some of the recent corporate scandals – Sahara’s use of the private placement device is one example, Satyam obviously shaped the anti-auditor stance of the Act, and later incidents such as Sharadha were responsible for the rules pertaining to deposits.

While reactive law-making occurs in lot of countries, but an enthused approach where an instrument is completely killed merely because this instrument was misused in one particular case, depicts a purely myopic and callous view. The best example of this the virtual bar on issue of optionally convertible debentures (OCDs), merely because Sahara misused the instrument. World-over, OCDs are well accepted and respected as an interesting hybrid between equity and debt, and a way to encourage fixed income investments by providing them a kicker in form of the equity conversion option. In the past, in India too, lots of companies have successfully used OCDs to reduce the cost of debt. However, since Sahara indulged a blatant misuse of the instrument, and since the Supreme Court sent inquisitives to the regulators about this hybrid instrument, the result seems to have been a pledge taken by the regulators – never allow this culprit to see the face of the corporate world again! The RBI was the first to act – it virtually barred OCDs for NBFCs in June 2013. The draft deposit rules of the MCA do the same thing – OCDs are now denied the exemption from deposit rules, which makes them practically impossible.

It does not seem as if the lawmakers ever thought – if misuse is the only reason why OCDs should become extinct, then what about hundreds of companies that came with public issue of equity shares, collected money and vanished? Does that mean, equity shares should be abolished?

5.         Aggressive prosecution regime will lead to distorporation

It is common knowledge that there are several provisions of the law that have very aggressive prosecution provisions. There are penalties, fines, imprisonments galore. There are 18 sections that refer to the dreaded section 447 that provides for frauds. If a fraud is established, the culprit cannot escape a minimum 6-month sentence, but on the higher side, he may spend good 10 years! If one thought a fraud must be something very very serious, and therefore, this sort of a penal provision must be appropriate, hold that  - even filing of a wrong return with the Registrar of Companies is a fraud! Borrowing money from a bank or an NBFC, by either deliberately or recklessly misleading them, is also a fraud. Note that a fraud is a non-compoundable, non-bailable, cognizable offence. All this means, one, that the public officer does not need a warrant of arrest for taking someone in custody, and there is no bail without hearing the public prosecutor, and there is no composition, that is, paying of money in lieu of prosecution at all.

There are several sections that have fines running to crores. Violation of the process-ridden private placement provision, which was obviously inspired by Sahara, attracts a penalty of Rs 2 crores.

There is a trend internationally – distorporation, that is, corporates opting to un-incorporate themselves, and opt for non-corporate status. This trend has been noted in the USA already[1]. In India too, given the rigorous regime of fines and prosecutions, corporates may be forced to search for easier alternatives – LLPs or even partnership firms.

6.         Perfunctory filing requirements

The new law has mounted loads of new filing requirements on companies. Particularly disturbing is the new pack of filing requirements in sec 117 by linking it with all the resolutions of the board of directors passed in terms of sec. 179 (3). It is notable that in the past, there was absolutely no filing of board resolutions. In fact, board proceedings were always understood to be sole domain of the directors – even the shareholders of the company, let alone members of the public, could not access board proceedings. Now, the law requires 22 additional items of board resolutions to be filed in terms of sec 179 (3) read with sec 117. Many of these are periodic – they occur several times in a year. Thereby, there is a massive perfunctory burden on companies to file matters with the Registry offices.

It is nobody’s case that as none of these were filed in the past, there was some gaping hole in the scheme of regulation of companies.

Filing is not merely an operational burden – it can culminate into very pernicious penal consequences. For example, if a matter that requires filing is not filed within 300 days, it leads to a mandatory prosecution, with a minimum fine. Being charged with a fine is like carrying a criminal record on one’s profile – which will force companies and officers to opt for compounding, and compounding will mean coughing up of sizeable money. There is also a provision that repetitive offences cannot be compounded. In essence, these perfunctory filing requirements may mean huge compliance burden on companies, the benefits of which are difficult to perceive.

(To be continued here)

- Vinod Kothari

Tuesday, February 25, 2014

Ten Monsters in the Companies Act, 2013 – Part 1

[The following post, which is the first in a three-part series, is contributed by Vinod Kothari of Vinod Kothari & Co. The author can be contacted at vinod@vinodkothari.com]

The significance of the corporate sector to the economy does not need any emphasis, and the Companies Act is surely the core legislation that affects the corporate sector. It is not that the Companies Act was hastily passed – it has gone through two rounds of Parliamentary committees, besides, of course, being in the public domain for nearly 4 years before it was passed. Yet, it is painful to see that glaring issues have remained in the Act  - issues which really have ruinous impact on the corporate sector and capital markets. India is already abysmally low in terms of the ease of doing business, and this enactment will push it down further.

The problems with drafting ineptitude is that once it is done, those responsible for the legislation start defending what is quite apparently a drafting error[1]. Errors are, after all, human, and it is a shared error since the Act has been in public domain for quite a long time. Therefore, there is no need for those responsible for the law to try and construct elegant arguments to defend what are blatant errors. On the contrary, let us call a spade a spade, and think of moving an amendment.
It is not an effective remedy to try and iron out some of the lapses in law by rule-making. Rules are subordinate law; in addition, rules are in the domain of the executive. If the past experience is any indication, it is always that rule-making has come with several conditions, which complicates the matter further.

While there are some areas which are pure lapses in law-making but will have serious implications if left the way they are, there are other very serious issues which require policy decisions. For example, is bond market something that can be left to the discretion of the Ministry of Corporate Affairs (MCA)? Surely the perspective of the Ministry of Finance and that of the MCA are totally different in the matter. The MCA is approaching the issue from an anti-abuse or investor protection viewpoint, with which the MCA seems to be completely obliterating the bond market. Also, it is an issue of essential policy framework for this law as to whether the exemptions to private companies, which is germane to the whole basis of regulatory framework, could be left to the power of exemption.

This post highlights 10 areas where the implications of the law, if left uncorrected, can be seriously harmful.

1.         Regulation by rule, liberty by exception

 

The Act enacts an all-encompassing regulatory principle by including all companies into the tight regulatory provisions of the law, with the promise that the government has a power to exempt such companies as it deems fit, and that the government will be willing to exercise such power to exempt as and when the government feels appropriate.

Here lies a fundamental issue – where there is no reason to regulate in the first place, it is not appropriate to state that the Act will by default apply to all companies, and companies that deserve to be liberated will be let off the hook by way of exemption. This is almost like taking the entire corporate sector as hostage, with a promise to take deserving companies or classes of companies out by executive action. The power to exempt companies was there in the 1956 Act also – but that was never a reason all these 6 decades of implementation of the law to regulate by rule, and exempt by choice. After all, the fundamental rule on which humanity works is – regulation is an exception, liberty is the rule. Admittedly, corporates are the product of regulation – so they cannot demand fundamental liberty that individuals can; however, regulation is not a self-serving need. It is warranted for a reason – there seems to be no good reason to support the “negative listing” approach of the regulatory framework, whereby all companies are prima facie regulated, with a power to exempt exceptionally.

If everyone thought, when the draft Bills were being discussed from 2008 to 2012, that the power to exempt will be logically and liberally exercised, such expectations have already been belied. The sections that were enforced on 12th Sept 2013 have cast rigorous restrictions on private companies, which are totally out of place. For example, if a private company, admittedly a private affair, gives loans to its own directors, who could be complaining of prejudice? After all, the shareholding and management in case of private companies is the same – so the owners are lending to themselves, and there is no reason for regulation to worry.

Likewise, on the issue of financial transactions (loans and guarantees) between holding and subsidiary companies, it is grossly illogical to take a position that a subsidiary company cannot piggyback on its holding company’s support. After all, if a toddler does not get support from its own parents, where else will the support come from? It is a settled way of doing business world-over that holding companies provide loans and guarantees to subsidiaries. In fact, in case of overseas direct investment, the Reserve Bank of India (RBI) specifically requires that loans be given only to subsidiaries and none else. Having lost all practicality, section 185 was enforced without any exemption in case of financial transactions between holding and subsidiary companies. Here too, the government might have easily used its powers under the Act to exempt transactions between holding and subsidiary companies from the sweep of the law; however, after nearly 5 months of the enforcement of sec 185, a half-hearted “clarification” was issued by the MCA on 14th Feb 2014 to state that guarantees between holding and wholly-owned subsidiaries will be exempted from sec 185. There were several riders in this so-called clarification – first, it is only a temporal relief, since the clarification says so clearly. Second, the relief is only for guarantees and not for loans. Third, the relief is only for wholly-owned subsidiaries, and not for any subsidiary. On the contrary, if the MCA was using the power to exempt as the justification before the Parliamentary committee for the otherwise-rigorous scheme of the law, there was no reason why the power of exemption was not used, rather than the half-hearted clarification, apparently arising out of a so-called “harmonious interpretation” of sec. 372A of the 1956 Act and sec 185 of the 2013 Act.

In essence, it is quite clear that to obtain any exemption from the government is a near impossibility. In light of this experience, the sweeping scheme of regulation is most unreasonable, and particularly in cases like the public-private company distinction and the holding-subsidiary company exemption, it defies all rationale as to why should there be regulation in the first place.

2.         FDI investors in for a shock

This is quite an unintended implication of the law, but if it is not corrected soon, it will lead to a major setback for the already weakened flow of foreign direct investment (FDI) into the country. By a combined reading of sec. 2 (71) and section 2 (87) of the new Act, a private company which is subsidiary of a foreign body corporate will be deemed to be a public company, and the law will be applicable to it as if it were a public company. There was a protection against such an unhappy situation in terms of sec. 4 (7) of the 1956 Act, but in their bid to shorten the definition of a subsidiary into a clause from a full-fledged section, the regulators have deleted sec. 4 (7). The completely shocking implication of this is that every private company, which is subsidiary of a foreign company, is a deemed public company.

What makes it even more alarming is that since sec 2 (87) of the new Act has been notified on 12th Sept 2013, section 4 (7) has ceased to be effective from that date, and therefore, the deeming fiction has already taken effect. Literally, this will mean from 12th Sept 2013, all Indian companies which are subsidiaries of foreign companies, have become deemed public companies. Notably, the compliances under the old Act, in case of public companies, are far more intensive than in case of a private company. One trite regulation is the control on managerial remuneration – thus, the Indian subsidiary of a foreign company cannot pay what it wishes to its Indian CEO – it must remunerate only in accordance with the scales set in Schedule XIII.

Most companies in India which receive FDI are private companies. They might be having huge turnover, but they are constitutionally private, as they are held almost entirely by their foreign parents. IBM India is an example – it is a private company.

For variety of reasons, international investors have lately been shunning India. If they run the risk of sleep-walking into the regulations applicable to public companies, it will really be  a shocker for them, and obviously, India as a country could not have a worse time if FDI investors turn their back.

(To be continued in Parts 2 and 3)

- Vinod Kothari




[1] One prominent example is the definition of “subsidiary company” in sec. 2 (87) where the intended reference to “total voting power” was wrongly worded as “total share capital”, thereby making preference shares, which are non-voting shares, as the basis of subsidiarisation. Apparently, attempts were made to justify this error, but the error is quite evident from the use of the words “exercises or controls”, which obviously cannot relate to share capital, as share capital cannot be “exercised”.

Wednesday, February 19, 2014

Consolidating Secondary Market Disclosures

(This post has been authored by, and is uploaded on behalf of, Professor Umakanth)

As we have previously observed on this Blog, there is a considerable divergence between the requirements of disclosure in the primary markets and those in the secondary markets. While SEBI has progressively expanded the requirements of primary market disclosures through the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the ICDR Regulations), the disclosure norms are far less onerous once a company is listed on the stock exchange. While episodic disclosures are required to be made by companies upon the occurrence of material events that affect the price of their securities and periodic disclosures are to be made such as the announcement of quarterly results and decisions at board meetings, these requirements are considerably lighter than those prescribed for primary market transactions. Moreover, the regulations and liability regime for misstatements in secondary market disclosures are far from clear.

Due to this disparity, there have been calls for the introduction of an integrated disclosure regime in India through standardizing and streamlining the corporate disclosures by integrating initial disclosures made under a primary market offering document with continuous disclosure requirements thereafter. Although SEBI has considered this issue based on the recommendations of a Sub-Committee appointed by it for the purpose, much progress had not been made towards the integration of the primary and secondary market disclosures in India. The latest step towards improving the enforcement of secondary market disclosures is by empowering the stock exchanges to take action against errant issuers. The impact of this measure is yet to be known, as it is a fairly recent one.

In this background, it is heartening to note SEBI latest discussion paper issued yesterday that requires companies listed on the stock exchanges to provide an annual information memorandum where all secondary market disclosures are to be available in a single source on a consolidated basis. This will overcome the current fragmented and episodic reporting that is witnessed in the markets. The discussion paper contains details about the rationale for the annual information memorandum and also an analysis of the experience in other countries, particularly the US.

Currently, the proposal is only in the form of a discussion paper, with comments due by March 9, 2014. It is hoped that these measures will be operationalized soon so as to bridge the gap between primary market and secondary market disclosures, which has been long overdue in the Indian context. 

Tuesday, February 18, 2014

Enercon v. Enercon: Indian Supreme Court on arbitration/conflict of laws


The Supreme Court of India in Enercon (India) v.Enercon GmBH (Civil Appeals 2086 & 2087 of 2014; judgment dated February 14, 2014) has decided several important questions pertaining to the law of arbitration and private international law. To summarize, the Court has held:

i.                     An arbitration agreement cannot be avoided on the basis that there is no concluded contract between the parties. A reference to arbitration can only be avoided (in the context of international commercial arbitration) if the arbitration agreement is ‘null and void, inoperative or incapable of being performed’. An averment that the underlying contract containing the arbitration clause is not a concluded contract does not, in the view of the Court, fall within the scope of these phrases. The Court held, “The submission is that the matter cannot be referred to arbitration as the IPLA, containing the arbitration clause/agreement, is not a concluded contract. This, in our opinion, would not fall within the parameters of an agreement being “null and void, inoperative or incapable of being performed.” In such circumstances, in the absence of a “fundamental legal impediment”, whether the underlying contract is a concluded contract or not is required to be left to the arbitral tribunal. It is important to note that these observations were in the context of a purported agreement where, there was a specific arbitration clause which was expressly stated to be legally binding. In these circumstances, the Court held that the “intention to arbitrate has continued without waiver…
ii.                   In determining whether an arbitration clause is unworkable or incapable of being performed, “the court ought to adopt the attitude of a reasonable business person, having business common sense as well as being equipped with the knowledge that may be peculiar to the business venture. The arbitration clause cannot be construed with a purely legalistic mindset, as if one is construing a provision in a statute.” The Court strongly agreed with Lord Diplock’s statement in Salen Rederiema [1988] 1 AC 191: “If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense…” The clause that ‘each party shall appoint an arbitrator… making it in all three arbitrators’ was not unworkable; and the Court could supply the omission by a process of implication. The Court held, “the missing line that ‘the two Arbitrators appointed by the parties shall appoint the third Arbitrator’ can be read into the arbitration clause… The court would be well within its rights to set right an obvious omission.
iii.                  The mention in the arbitration clause that London was the ‘venue’ of the arbitration could not lead to the inference that London was to be the seat. This was so in particular because although London was termed as the ‘venue’, the law governing the substantive contract, the law governing the arbitration agreement and the law governing the conduct of the arbitration were chosen to be Indian law; and the closest and most real connection was with India. “Given the connection to India of the entire dispute between the parties, it is difficult to accept that parties have agreed that the seat would be London and that venue is only a misnomer. The parties having chosen the Indian Arbitration Act, 1996 as the law governing the substantive contract, the agreement to arbitrate and the performance of the agreement and the law governing the conduct of the arbitration; it would, therefore, in our opinion, be vexatious and oppressive if Enercon GMBH is permitted to compel EIL to litigate in England…
iv.                 The Court notes, in its analysis of what the seat is, “it would be rare for the law of the arbitration agreement to be different from the law of the seat of arbitration.” While the Court’s observations were in the context of determining the seat, it may be of relevance in analyzing the issue of whether the law governing the arbitration agreement is to be presumptively considered as the law of the seat or as the proper law of the underlying contract. The Court expressly cites C v. D [2007] EWCA Civ 1282 for this proposition; and also examines the decision of the English High Court in Sulamerica – unfortunately, the decision of the Court of Appeal in Sulamerica [2012] EWCA Civ 638 was not considered by the Court; nor was the judgment in Arsanovia [2013] 2 All ER 1. The English High Court has more recently summarized the position in Habas Sinai [2013] EWHC 4071 (Comm).
v.                   Once the seat was in India, Indian Courts would have exclusive supervisory jurisdiction; English Courts cannot have concurrent jurisdiction. An anti-suit injunction was therefore granted restraining the Respondents from continuing English proceedings.
vi.                 Having “supplied the omission” in the arbitration clause by implying that the two party-appointed arbitrators were to then nominate the third arbitrator, the Court decided against relegating the parties to this procedure. Instead, the Court itself appointed the presiding arbitrator. “In the normal circumstances, we would have directed the parties to approach the two learned arbitrators… to appoint the third arbitrator who shall also act as the presiding arbitrator. However, keeping in view the peculiar facts and circumstances of this case and the inordinate delay which has been caused due to the extremely convoluted and complicated proceedings indulged in by the parties, we deem it appropriate to take it upon ourselves to name the third arbitrator.

We shall discuss the judgment and its implications in future posts.