In this blogpost, Bhavneet Vohra, Student, Vivekananda Institute of Professional Studies, Delhi, writes about what is society, the procedure to register a society and the benefits of registering a society for an NGO.

What is a society?

Society in simple terms is a not- for- profit organization that is usually set up to do some good to the society and not for some personal interests. Any funds or profits that are earned by the society during a period of time should be strictly used for the purposes of the society only, which is for the purpose the society was setup. These funds or profits should not be distributed between the members of the society, as doing so will dissolve the sole purpose of setting up the not-for-profit organization.

A not-for- profit organization can be registered in any of the 3 ways which are as follows

1. As a trust
2. As a society
3. As a non-profit company (Section 8 of the Companies Act, 2013)

Under Indian law, society is constituted for any literary, scientific and charitable purpose or for any other purpose which is already described in the Society Registration Act 1860. Some of the purposes for which the societies can be formed are as follows:

1. For the promotion in the creative field or science, literature and fine arts.
2. To spread instructions, rules and specific knowledge like in the political field
3. For charitable purposes, military relief, or orphanages
4. To set up libraries for reading purposes for the general public, or to set up museums and galleries for keeping paintings of various talented to provide them a platform to exhibit their talent.
5. To set up community halls for various events for the public like weddings and processions.

(Section 20 of the Society Registration Act, 1870 includes all these purposes for the incorporation of the society)

According to the act in a society there must be a minimum of seven members, and there is no restriction on the maximum number of members a society can have.

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What does an Incorporated Society refer to

An incorporated society is basically in simple terms is a group or organization that has been registered under the Society Registration Act, 1860 which provides it authority to run all its affairs legally. In a society like the company the members of the society are not personally liable for society’s debts, contracts and obligations. There are a large number of organizations that have got itself registered and have become incorporated societies.

Benefits of registering as a society

Usually, the incorporation of society is not so essential, but it is usually recommended that to maintain a separate legal existence it is better to get itself registered or incorporated as it provides many benefits and advantages to the society and moreover it allows the society to maintain an individual existence.

There are many benefits that are offered by the government to the not for profit ventures which are as follows:

One of an essential benefit that is offered to the not for profit ventures is tax benefits

Non-profit ventures are eligible for income tax benefits if they are set up for the charitable purposes and satisfy all the requirements of the Income Tax Act.

Some of the more benefits are:

1. An incorporated society can lease, rent, buy and sell property, borrow money and enter contracts in its own name.  No member of the society can have personal rights or interests in any of the assets of the society.
2. An incorporated society will continue as a separate entity even though its membership changes.

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Since we can clearly infer from the above facts that incorporation of society has many benefits and provides many advantages to the society or any other non-profit venture.

So to enjoy all these benefits all societies usually believe in getting themselves registered under the Society Registration Act, 1860 and to carry out all its operations legally.

We have seen above that what the benefits for the setting up a society are and what advantages are offered when it gets incorporated. But for this, we also need to know that how the non-profit ventures like societies and trusts generate funds and how does it pay for it costs.

1. By generating revenues from its operations
2. By raising funds through donations.

For setting up an organization, be it a profit venture or non-profit venture in every case we need to file some documents and do some paperwork to make it legally enforceable and have some proof of its legal existence.

What are the documents that are required for setting up the society

Though for setting up a non-profit venture we don’t have to file many documents and we don’t have to undergo many formalities, but still there are some important documents that are needed to be filed to maintain its individual existence which are as follows:

1. Memorandum of association and rules and regulations
2. Consent letters of all the members of the managing committee
3. Authority letter duly signed by all the members of the managing committee
4. An affidavit sworn by the president or secretary of the society on non-judicial stamp paper of Rs.20-/, together with a court fee stamp
5. A declaration by the members of the managing committee that the funds of the society will be used only for the purpose of furthering the aims and objects of the society

These documents need to be certified by at least 3 members of the governing body and should be filled along with MOA..

• Proof of identity and address of governing body members
• Address of the registered office and consent
• NOC of the owner of the registered office premises
• A fee of rupees 50 is required to be paid

Some points that are to be kept in mind before the registration of the society which are as follows

1. First, we would have to see that whether there any separate society registration act separately and specifically for our own state.

For example like if I want to start a society in Delhi then I would have to look whether there is any separate procedure or act for the registration of society in Delhi.

2. If there is no separate Act, then law applicable to the whole center will be followed that is the Society Registration Act.
3. We should investigate about the special rules that are applied by the state for the non-profit venture as they will also have to be followed.

Since we have covered all the relevant details and all the basic concepts of the non-profit ventures which are further categorized into societies, trusts or section 8 companies, we now need to look into that what steps we have to undergo and what procedure do we have to follow for the incorporation of the society.

What are the steps and procedure for the registration of a society

The procedure to incorporate a society can be described as follows:

Any seven or more persons associated for any scientific, literary or charitable purposes can apply for registration of society. No limit on a maximum number of persons is prescribed under the Society Registration Act.

Registration of society is undertaken by a basic document of Memorandum of understanding and Articles of Association with the specified rules and regulations. Such document consists of Name, occupation and address of all members and with the rights, power, duties and responsibilities of each member of the governing body.

The Memorandum of Association must mention the following items:

• Name of the society
• Address of the registered officer
• Name, addresses, designations, and occupations of the members of the society.
• Objective of the society

1. Societies are registered by the association of at least 7 members. Each designated person will be elected by-election for 3 years at once or as specified by the society document.
2. The objects and rules of the society are formed as per the Societies Act, and one shall contact the society of registrar to have more details towards the creation of bye-law (Memorandum of understanding and articles of association). Also, one can ask the Auditor, chartered Accountant, Lawyers, Attorney to help in the bye-law creation.
3. No stamp paper is required for society registration. The governing body manages the society.
4. As per the Societies Act, the Governing body meeting and Annual general meeting should be conducted. Even a foreigner can be a member of a society in India.
5. The purpose and object of the society shall be literary, scientific or charitable purpose.
6. After registration of society, one shall apply for pan card if required. each year the accounts have to be  submited to the Registrar of societies.
7. Willfully providing false information or return or refusing or neglecting to send audited income and expenditure statement and information are offenses which can lead to fines or penalties.
8. It should be noted that name of our society should not be kept identical to any other society’s name according to the Society Registration Act.

Sources

http://lawsikho.com/

Society Registration Act

http://www.ngosindia.com

In this blogpost, Aishwarya Wagle, Student, Government Law College, Mumbai, writes about the benefits of outsourcing and the procedure  to be followed to make an investment in a JV/ WOS abroad.

Introduction

With the advent of globalization, a rising number of Indian companies are leaning towards outsourcing their work to other countries.  Outsourcing work, as an idea is not a novice, it has been there for a while but has been gaining popularity for various reasons over this last decade. Companies previously outsourced work to cut costs. But today other than cutting costs, it is also about reaping the benefits of strategic outsourcing such as reducing overhead, flexible staffing, increasing efficiency, and accessing skilled expertise.

Benefits of outsourcing

The one of the biggest benefits of outsourcing is that it will help your company gain a competitive edge in the market. Not only you provide your customer with best of services, but also increases your productivity while managing your in-house resources intelligently.  It also allows you more financial flexibility when there is uncertainty in demand. Offshore outsourcing has the benefit of running your business in a full-fledged manner even during off season and holiday months.

One of the major growth drivers of the Philippine economy today are the call centers which form a major portion of the business process outsourcing (BPO). Multinational corporations and companies run the majority of the call centers in the Philippines. Lately, however, even the local investors have started participating in the outsourcing boom.

To begin with, there are certain regulations prescribed by the Reserve Bank of India which need to be followed.

Indian parties cannot engage in real estate foreign investments, which do not include construction or development activities of towns etc. Since a BPO is not considered an illegal activity in the host country, the Indian company can invest in the outsourcing business. A BPO is not included in the Foreign Exchange Management (Current Account Transactions) Rules, 2000 so there should be no issue on that end either.

Investment by persons in India does not need any approval under the following cases:

• Liberalized Remittance Scheme (LRS) by individuals up to USD 250,000 per annum
• General permission for funds held in foreign currency accounts
• Under Automatic Approval route not exceeding 400% of company’s net worth.

We fall under the third category, where an Indian party does not need prior approval from the Reserve Bank of India for making an overseas direct investment in a wholly-owned subsidiary or a joint venture (WOS/JV) abroad. The Indian Party should approach an Authorized Dealer Category – I Bank for effecting remittances towards such investment.

Under subsection 2(k) of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004, an Indian Party includes ‘a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank: –

Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the ‘Indian party.”

There are certain criteria to be fulfilled to invest directly under the Automatic Route

• The Indian Company can invest up to its prescribed net worth in a WOS abroad (as per last audited balance sheet) for any bonafide activity as permitted by the law of the host country. As the BPO is becoming a major industry in the Philippines, we will be permitted to invest in a subsidiary/JV in that field. In case, the financial commitment rise above USD 1 billion, prior approval of the RBI will be required.
• We have to make sure that our FMCG company is not on Reserve Banks caution list or its list of defaulters to the banking system published and circulated by the Credit Information Bureau of India Ltd. (CIBIL)/RBI or any other credit information company which has been approved by the Reserve Bank. Also, we need to make sure that the company is not under investigation by the directorate of enforcement or any investigative agency or regulatory authority.
• The Company has to route all transactions relating to the investment in the JV/WOS through only one branch of an authorised dealer bank which will be designated by the company itself. All transactions and communications in reference to the investment made will be reported only through this designated branch of an authorised dealer bank. In case, at a later stage, the company wants to change the Authorised Dealer, it will have to be done by means of an application in the form of a letter addressed to the Reserve Bank after obtaining a No Objection Certificate from the existing authorised

Procedure to be followed to make investment in a JV/ WOS abroad

The company has to follow a specific procedure to make an investment in a JV/WOS abroad. The company is required to fill up form ODI with the support of the documents mentioned therein, i.e., a certified copy of the Board Resolution, Statutory Auditors Certificate, and valuation report and approach the Authorised Dealer to make the remittance/investment. Share valuation in case of partial/full acquisition of an existing foreign company where the investment is more than USD five million, has to be done by a Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an investment or Merchant Banker outside India registered with the regulatory authority of Philippines. In other cases where the investment is less than USD 5 million, the valuation can be done by a Chartered Accountant or a Certified Public Accountant.

The ODI form is available on the RBI website as an annexure to the Master Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad’ dated July 1,2014. Authorized Dealers Category – I banks have to file Part I (Sections A to D), II and III of form ODI on-line in the Overseas Direct Investment Application with the Reserve Bank for allotment of UIN, reporting of subsequent remittances, filing of APRs, etc. AD Category –I banks would continue to receive the ODI forms in physical form from the Indian Company.

Per se there is no need for a prior registration with the RBI to make direct investments under the automatic route. A Unique Identification Number (UIN) is instantaneously generated after the online report of the first remittance in form ODI. The UIN allotment by the RBI does not constitute of an approval stamp given by the RBI for the investment made in the JV/WOS. When the RBI issues a UIN, it only signifies the taking on record of the investment for maintaining the database. The onus of complying with RBI and FEMA regulations rests with the Company.

Conclusion

These are more or less the requirements and criteria to be followed in India with regards to Reserve Bank and FEMA regulations. However, there are various other equally important aspects to be considered while setting up a BPO in the host country. Details like research based on equipment that you need to set up a call centre. From computers to dialing equipment etc. and technical know-how is very important. Even in the Philippines, you need to find the right call centre to depend on. Since they sub-manage your work and are very service oriented, you have to heavily depend on them to get your outsourced work done in a smooth manner. You have to make sure that your work in the host country needs to be well managed and relayed by the agents. For this, you need to express your wants and elaborate the terms of the processing to the people who will be in control in the Philippines.

Sources Referred to :

• https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=2126
• https://www.rbi.org.in/Scripts/FAQView.aspx?Id=32
• http://www.indialegalhelp.com/files/guide-business-abroad.pdf

In this blogpost, Ayush Jain, Student, Jindal Global Law School, Haryana, writes about what is bilateral investment treaties, its role and importance

What are Bilateral Investment Treaties

Bilateral Investment Treaties (or, BITs) are agreements between two countries which protect the investments made by investors from each state in the territory of the other. The basic purpose of a BIT could be said to reduce political risk by laying down certain protections as we can see from Article 6 of the United States Model BIT. Instead of listing down what generally these protections would consist of since this article is about how a BIT would impact my decision to do business in a specific country, hence, I would directly go on to list down the basic things which I would be looking for in a BIT. If a BIT can ensure security from political risks, rationality, fair and equitable treatment, access to international arbitration, transparency and non-discrimination, then that would act in favor of carrying out business in that particular state.

Role of BIT

BIT is mostly known to attract Foreign Direct Investments (FDI), however, disputable the statistics may be over how successful or unsuccessful has the process been, one thing that cannot be disputed is the motive behind drafting a BIT. Any BIT is designed keeping in mind the need to look into the concerns of the investors with respect to the political gimmicks and legal tangles. The question that might arise is why is there such emphasis given in the presence and framework of a Bilateral Investment Treaty. This could be settled by understanding the law of business. Business being a decision-making process involving financial transactions, there needs to be proper planning and math done behind the amount which one plans to invest, and the return on investment depends on the economic scenario. None of these can happen in the absence of proper risk management. Hence, the role of Bilateral Investment Treaties become a major factor when one thinks of investing in a foreign land. Pakistan and Germany were the first to enter into a Bilateral Investment Treaty in the year 1959 itself. Today there are around 3000 such treaties already. Hence, we understand the pace at which the importance of BIT is growing. Every investor demands these are basic necessities without which the risk factor is too big for anyone to proceed with.

Importance of BIT

Even though BITs are generally of standard form, but still there can be really important differences between two BITs. Hence, the framework becomes of great importance. In fact, we do not even need to look far ahead in order to understand this. India is a good example. As we might be aware, India is undergoing a draft model of Bilateral Investment Treaty as it wishes to promote FDI and our Prime Minister wishes to implement the Make in India scheme. Now the problem over here is that the draft that has come to light earlier is not one which would in any way attract FDI instead one which might scare the investors further. When I say that yes I would prefer investing in a country with a BIT, I do not mean any and every BIT but one which helps serve the purpose of it being made in the first place. The major criticism of India’s model of BIT is that it is not good enough to ensure investors’ confidence instead it portrays India to be more protective and conservative in nature. The importance of BIT came back into light in 2013 when Ethiad only made investments in Jet Airways after India and UAE entered into a bilateral investment treaty. This was, according to me, a very decent demand raised by the UAE investor before entering the Indian market, especially considering how stable India’s political scenario remains and how fast and corruption free are legal systems are. India had to carry the burden of cancellation of the 2G licenses and introduction of retrospective tax laws in 2012, claims of which continued to increase with White Industries (an Australian investor) successfully raised a claim against India for such actions of theirs. It rightly argued that by entertaining Coal india’s application to dismiss the allocations of the year 2002, it contravened the New York Convention and hence India had failed to act in accordance with certain legit expectations that White Industries had as an investor.

When I, as an investor, would not want to enter a market with such history and unhealthy business environment, it is only fair on our part to first bring about a fresh draft of the BIT which would remain true to the spirit of it being created and ensure investors are confident of India being a safe investment hub. If we see the US BIT, the investors are being provided with six major benefits which ensure that they feel safe and secure of their investment made in the US. The same include National Treatment and Most-Favored nation treatment, expropriation and compensation, transfers, performance requirements, dispute settlement and senior management and boards of directors. These act as such great investment incentives that would probably make me invest in the US even if I was not even considering doing so. Such needs to be the standards being set by India if they wish to ensure the success of Make In India scheme of our Prime Mister Shri Narendra Modi.

I cannot more emphasize on the importance of a Bilateral Investment Treaty which fits the purpose it is meant to serve. If I want to make an investment in another country, the fact that I am not well aware of their politics, law and order situation, dispute redress mechanism it is a Bilateral Investment Treaty that can give me assurance and clarity over what I am entering into.  If I may now list down what BIT usually contains, as without that it might remain incomplete, I would probably have the following:

(a) promotion of favourable conditions for investors;
(b) fair and equitable treatment of investors;
(c) national treatment standards, ensuring that investors of a contracting party receive treatment no less favourable than that accorded by the host country to the investments of its own investors;
(d) most favoured nation treatment, requiring the host state to treat foreign investments no less favourably than investments from any other third state;
(e) protection against expropriation and nationalisation; and
(f) the requirement to permit the free transfer of funds.

However, I still would say, these are not the a, b, c, d’s to be followed while drafting a BIT. Till the time the core principles are being served, that is a good enough, in fact, what is required.

Conclusion

BIT is the most appropriate tool used to promote FDI by seeking investors’ confidence. Free Trade Agreements (FTAs) even though is similar to BIT, but only eliminate discrimination and hence it can never act as a substitute for BIT. As an investor, BIT provides me protection while I invest in a foreign land. Hence, BIT definitely helps promote FDI, in providing an effective international arbitration for dispute settlement, and ensuring investor protection while both the investor and the country the investment is coming into benefits. I personally would feel much comforted and secure to invest in a country with a BIT than in one without it as in that case I would have to depend on that country’s legal system where I have put in my investment which we never know is free from political pressures and corruption or not. BIT would also remove the problems of change in political hands during the business being carried out and hence give stability to the investment and the environment there. To conclude I would say that BIT has the power to get the economy growing, improve the employment scenario and raise the standard of living of the people if used effectively and in the true spirit.

In this blogpost, Aishwarya Wagle, Student, Government Law College, Mumbai, writes about what is an extraordinary general meeting, instances under which EGM is conducted, conditions for requisition of EGM and steps to be followed to convene an EGM.

Under the Companies Act 2013, a meeting of the members other than an Annual General Meeting is termed as an Extra Ordinary General Meeting (EGM). To summon such a meeting is the privilege of the Board of Directors. However, S.100 makes provisions with respect to an EGM being held other where sub-section 4 of Section 100 of the Act binds the Board of Directors to call an EGM after receiving required requisition from members. The ingredients of a valid requisition and the power of requisitionists have also been stated in subsections 2, 3, 4, 5 and 6 of S. 100 of the Act respectively.

Instances when EGM is conducted

An extraordinary general meeting may be convened by the directors if some business of special importance requires approval from members and it cannot wait till the next annual general meeting. The Act itself provides instances where EGM will have to be convened by the Board to transact businesses which cannot wait till next AGM:

(i) The first auditor of a company,other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company. In the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor [Section 139(6)]

(ii)  In the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days from the date of registration of the company. In case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days. In the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting [Section 139(7)]

(iii)  Any casual vacancy in the office of an auditor shall in the case of a company other than a company whose accounts are subject to be audited by an auditor appointed by the Comptroller and Auditor- General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommen– dation of the Board and he shall hold the office till the conclusion of the next annual general meeting [Section 139(8)].

Shareholders of the company have a right to requisition a meeting if they have completed the prescribed procedural and numerical requirements. The board is also legally bound to call an EGM if it receives a valid requisition for its members. If it does receive a valid requisitioning from the members with specific regard to any matter, it should affirmatively call for  an EGM to be held within  21 days of such receipt and should proceed to conduct the meeting within 45 days of receipt of such requisition. Neither are the reason for the resolution passed needed to be disclosed nor are the resolutions subject to judicial review. The Supreme Court has held in Life Insurance Corporation of India v. Escorts Ltd.[1] that when the state or an instrumentality of the state purchases shares of a company, it assumes the role of an ordinary shareholder, and there is no reason why the State as a shareholder is required to give reasons when it seeks change of management by a resolution like any other shareholder. The requisition to call an EGM must set out the agenda for the meeting and no other business than the agenda can be transacted in such a meeting (Ball v. Metal Industries Ltd.)[2] The Bombay High Court in Cricket Club of India v. Madhav Apte[3]that the refusal of the directors to hold an EGM when it has been validly requisitioned cannot be justified on the ground that the resolution passed at such a meeting would be contrary to the provisions of the Companies Act. However, the refusal of the directors to hold an EGM does not amount to an offence under the Companies Act, 2013. The only remedy available to the requisitionists is to call the meeting themselves and recover their expenses from the company.[4]

Conditions for requisition of an EGM

There are certain requirements to be fulfilled to requisition an EGM. In Queens Kurries& Loans Pvt. Ltd v Sheena Jose[5] it was held that in order to requisition a meeting, the requisitionists must hold not less than one-tenth of the paid-up capital of the company on the date of the deposition of the requisition. Under S.100 of the Act, in spite of the words ‘Such number of members of the company’ has been used in the plural, the requirements of the said section would be satisfied even if one member holding the requisite number of shares makes the requisition as it has been held in S. Vardarajan v Venkateswara Solvent Extraction Pvt. Ltd.[6]

In the case of a Company not having Share Capital, not less than one-tenth of the voting strength of the company should sign the proposal for the EGM. The requisitionists have to make the proposition for the EGM at least 21 days before the proposed date of the meeting by sending a notice by electronic mode (as permitted under the New Act) or in writing. The notice should specify the time and place of the proposed meeting and shall also mention the agenda. The meeting should be held at the Registered Office or the same city in which the registered office is situated and on a working day. The proposed resolution will be a Special Resolution, and all the requisitionists should sign the notice. The notice will be sent to all the members whose name is present in the Register of Members. It should also be noted that no further dividend can be declared at the EGM  once it has already been declared at the Annual General Meeting.

Inter alia, there have been changes in the Companies Act 2013 vis-à-vis the Companies Act, 1956. The section corresponding to Section 100 of the New Act corresponds to Section 169 and Regulation 48(1) of Table A of Schedule 1 of the 1956 Act. The provisions of Reg. 48(1) are now contained in S.100 sub-section 1.

Steps to be followed to convene an EGM

The following steps are to be followed in order to convene an EGM. Firstly, a board meeting should be convened after notice has been sent to all the directors to discuss inter alia the proposed resolutions to be passed at the EGM and to fix the time, date and venue for the same.

The next step should be to dispatch notices in writing or in electronic mode (now permitted under the New Act) giving at least 21 days notice. Subsections 4 and 5 of Section 101 deal with the details of sending such notice. The nature of concern of such meeting and any other information regarding the scope and implications of the decisions taken in this meeting should also be mentioned in the aforesaid notice.

Section 103 relates to the requisite quorum of the companies. The New Act Provides that in case of an adjourned meeting or of a change of day, time or place of meeting under clause (a), the company shall give not less than three days notice to the members either individually or by publishing an advertisement in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated. As provided by Section 104, all the members personally present at the meeting should elect a chairman among themselves by a show of hands. The poll should be in accordance with the Act.

Section 105 provides for the appointment of proxies. It states that a person who is appointed as a proxy should act on behalf of such members or a number of members (not exceeding 50). The New Act provides that the Central Government can a class or classes of companies that shall not be allowed to appoint another person as a proxy.

The next step is to vote. Voting is permitted by a show of hands unless a poll is demanded. The New Act provides for voting to be done through electronic means. It is to be ensured that the resolutions passed and the minutes should be prepared and signed within 30 days of the conclusion of the meeting. Once this is done the appropriate form needs to be filed with the Registrar of Companies.

[1][1986] 59 Comp. Cas. 548 (SC)

[2] 1957 SLT 124

[3][1975] 75 Comp.Cas. 574 (Bom.)

[4]Anantha R. Hegde v Capt. T. S. Khosla; [1996] 3 Co. Law Journal 333

[5][1993] 76 Comp.Cas. 821 (Ker.)

[6] [1994]  80 Comp. Cas. 693 (Mad.)

In this blog post, Shivam Anand,  Student, DSNLU, Vishakhapatnam, writes about the role of the judiciary with respect to  the arbitration agreement.

Scope of the Article

This article deals with the scenario where the question with respect to an arbitration agreement is raised. Special emphasis has been laid upon the case analysis of A.P.Tourism Development Corporation Limited v. Pampa Hotels Limited[1] and Konkan Railways Corporation Limited v. Rani Construction Private Limited[2]

Introduction

With the long pending cases in the courts in India and the fact that litigation comes at a cost of the lengthy time period and a huge amount of money, “Alternative Dispute Resolution” came as a silver lining for the homo sapiens. Though it’s on the verge of development and needs a lot of time to get into the nerves of Indian system yet with the pace of Indian judicial system, it’s surely has a scope in future.

Arbitration

In simple words “Arbitration” is one of the alternative dispute resolution systems where the two parties elect a neutral party to make a decision on behalf of them. In India, it’s being regulated by the provisions of Arbitration and Conciliation Act 1996.  Under Section 2 of the act “Arbitration” has been defined as any “Arbitration whether or not administered by permanent arbitral institution”. The arbitral tribunal which makes the arbitration decision may consist of a sole arbitrator or a panel of arbitrators.

Arbitration agreement

Under Section 7 of the Arbitration and Conciliation Act arbitration agreement is defined as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”[3] Thus, in recent times, many corporate bodies emphasize on an arbitration agreement along with the contractual agreement when they enter into business with some other entity which helps them to settle any sort of dispute which may arise between them related to their business transaction. Both the company entering into a business transaction through contractual agreement should have a legal existence. Now we have a scenario where there is an arbitration agreement entered into by two companies A and B, one of which is not incorporated at the time of the signing of the arbitration agreement (say B). But subsequently, B got incorporated within a year. The dispute arises, and A invokes the provisions of the arbitration agreement and notifies the B to opt for arbitration to settle their dispute. After the prescribed time period of 30 days to choose an arbitrator by the B, it fails to choose one, so A approaches the Hon’ble court to intervene and choose one arbitrator. A contends that the arbitration agreement is invalid as B wasn’t incorporated at the time of the signing of the arbitration agreement, so it has no legal validity. According to powers provided under the Act to the court in appointing an arbitrator, it has no liability to entertain contentious issues and its only obligation is to choose an arbitrator. This may be understood from the decision of the in Konkan Railways Corporation Limited v. Rani Construction Private Limited, where it observed that the Chief Justice or his designate does not perform the adjudicatory function under Section 11 of the Arbitration and Conciliation Act, 1996. Observing so, it held thus:

Section 11 did not require the Chief Justice or his designate to perform any adjudicatory function. All that the Chief Justice or his designate was required to do was to nominate an Arbitrator if a party to an arbitration agreement had failed to do so within the specified time after a requestan ex facie basis; no element of adjudication came into it.[4]

Thus with respect to the above-mentioned case, in case either of the party on the basis of an arbitration agreement moves to the court for the appointment of an arbitrator in case the other party fails to choose one within the prescribed period of time then the issue of the validity of the arbitration agreement if raised is of no concern to the court and it’s the only obligation is to choose an arbitrator. In the very same judgment, the apex Court further held as follows:

As we see it, the only function of the Chief Justice or his designate under Section 11 is to fill the gap left by a party to the arbitration agreement or by the two arbitrators appointed by the parties and nominate an Arbitrator. This is to enable the Arbitral Tribunal to be expeditiously constituted and the arbitration proceedings to commence. The function has been left to the Chief Justice or his designate advisedly, with a view .[5]

Thus in one of the landmark cases of A.P.Tourism Development Corporation Limited v. Pampa Hotels Limited the Supreme Court gave its verdict with respect to the question of “Whether the court has adjudicating power with respect to the validity of the arbitration agreement or has to appoint an arbitration as according to the request made by the party and put the ball in the court of the appointed arbitrator to look into the jurisdictional manner. With respect to the Section 16 of The Arbitration and Conciliation Act, 1996 the arbitral tribunal has the authority to look into the jurisdictional aspect and the scope of the authority of the tribunal. But in this case, one of the important aspects was that the validity of the arbitration agreement was in question as one of the parties did not have the legal existence at the time of the signing of the agreement. Already in Konkan Railways case, the court restricted the administrative role of the Chief Justice/Designate to appointing an arbitrator as per the agreed procedure when the parties reach out to the court, leaving all contentious issues including whether there was any arbitration agreement or not to be decided by the arbitrator. Hon’ble Supreme Court while making its decision said that

“Under Section 34(2) of the Companies Act, 1956 provides that from the time of the incorporation of the company as specified in the certificate of the incorporation, members who have subscribed to the memorandum of the company and other members are competent in exercising all the functions of an incorporated company. With reference to Section 149 of the companies act any contract that has been entered into before the date of which company as entitled can’t be any managing director of the company too. The scenario would have been completely different in case the agreement was entered into by the promoters of the company as such contract is secured by the Section 15(h) of the Specific Relief Act 1963 which reads as “when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation of the company: Provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract

Conclusion

Thus citing the judgment made in the case of S.B.P & Co. v. Patel Engineering Ltd.& Anr. [6]

The court made a “Prospective Overruling” (with respect to the fact that any judgment which is made prior to this would be disturbed putting a burden on the judicial system) that under Section 11 of the Arbitration and Conciliation Act 1996 Chief Justice/Designate will not have only administrative function but also judicial function. In the case of any contentious issue over the validity of the arbitration agreement with respect to which a party has reached out to the Hon’ble court, the same will have to be decided by the Chief Justice/ Designate subsequent to which the court will use its administrative function to choose an arbitrator. Thus, the court ruled that the judgment of the S.B.P case will be followed, the exception being that any appointment made before 26.10.2005 will be valid and in such circumstance the arbitrator will look into the question of the validity of the arbitration agreement. But after 26.10.2005 such adjudicating power lies in the hand of the Chief Justice/Designate. When one of the party after the prescribed period of 30 days fails to choose an arbitration after being notified by the other party to do the same and approaches the court and the question is raised over the validity of the arbitration agreement, then the same will be first decided upon by the court before appointing an arbitrator.

[1]2005 (4) Suppl. SCR 688

[2]AIR  2000(8) SCC 159

[3] Section 7 of Arbitration and Conciliation Act,1996

[4] http://indiankanoon.org/doc/51972963/

[5] Ibid. 2

[6] AIR 2005 (8) SCC 618]