Rule-based Reasoning vs Analogical Reasoning [Part II of III]

The brief facts in NN Global relate to a work order incorporating within its terms and conditions an Arbitration Clause. A Bank Guarantee (“BG”) was also furnished. On invocation of the BG, a suit was preferred, which was opposed under Section 8 of the Arbitration Act, citing the existence of an Arbitration clause. The Commercial Court rejected the Section 8 application while accepting the contention that Arbitration Agreement became unenforceable as the work order was unstamped. Against this judgment, a writ petition was preferred before the Bombay High Court, which held that it was the admitted position that there was an arbitration agreement between the parties, and therefore the application under Section 8 was maintainable. This then went in appeal before the Supreme Court.

In the first round of litigation before the Supreme Court, a three Judges' bench of the Supreme Court while allowing the enforcement of an arbitration agreement in an unstamped agreement (subject to regularisation of the defect) also referred the case to a five Judges’ Constitution Bench. The legal proposition to be decided on was whether the non-payment of stamp duty would render the arbitration agreement contained in such an unstamped instrument non-existent, unenforceable or invalid pending payment of stamp duty?

With a 3:2 verdict, it was held that an unstamped or insufficiently stamped agreement might contain an Arbitration Clause. But if it is not stamped, it cannot be said to be a contract which is enforceable in law. Therefore, because of Section 25 of the Stamp Act, such an agreement can't be acted upon. The only way out is to carry out the impounding and payment of the requisite duty and necessary certification under Section 42 of the Stamp Act.

A Service Provider Agreement dated August 17, 2018 (“Agreement”) happened to be printed initially on an unstamped paper to which later stamp paper was added albeit unsigned by the Corporate Debtor (“CD”). Under this Agreement, a monthly office fee was payable for three years, having three years lock-in period. The CD terminated the Agreement after one year. The Operational Creditor (“OC”) issued a demand notice for the remaining two years of lock-in payment, and an application under Section 9 was preferred. The Adjudicating Authority held that the amount claimed by the OC for the remaining lock-in period is not an operational debt as the Agreement was not a registered agreement nor a duly stamped document. An appeal was preferred before NCLAT.

The NCLAT held that when an agreement was admittedly executed between the parties, signed by both the parties and acted upon, the mere fact that it is not on stamp paper shall have no adverse consequence on the claim of the OC. Thereby, NCLAT set aside the NCLT order and directed admission of the Petition. 

The 5 Judges’ Bench in NN Global held that an instrument, which is exigible to stamp duty, if not stamped cannot be said to be a contract which is enforceable in law unless the procedure for impounding and payment of the requisite stamp duty is followed, and thus an arbitration clause within such contract will also be enforceable till such time the stamp duty is paid.

Whereas, in the Smartworks Judgement, which came after almost one month of the NN Global judgment, the NCLAT observed that arguments about whether or not the agreement was compulsorily registerable and the agreement having been executed on Rs. 100 stamp paper was inconsequential, the Agreement has been acted upon and the CD has entered into possession of the premises in pursuance of the Agreement. 

Now the moot question is, what should be the correct application of Law? While it is easy to conclude that NCLAT's judgment is per incuriam as it failed to take note of 5 Judges' Supreme Court decision in NN Global, there may be a different view. What is more important is the fact that, on the one hand, there is stricto sensu application of a law regardless of any other consideration. On the other hand, facts are considered without going into specific technical aspects/ noncompliance to further the special statute's aim and objectives, i.e., the IBC in this case. 

So which is the correct approach?

This dichotomy requires dialogue and discussion on adopting the following principles referred to and represented by the minority view in N. N. Global (5 Judges’ Bench), which may hold the key to this question: 

• The Law should consider substance over form. 

• The Kompetenz principle that an arbitral tribunal has the jurisdiction to investigate and rule on its jurisdiction can also extend to impounding the document and recovering stamp duty (and penalty) if required. 

• The paramount important consideration should be to avoid delays in timely adjudication. 

• The objective of modern-day statutes, especially the special ones like the IBC, is to avoid procedural complexity and delay in litigation. 

In Asset Reconstruction Company (India) Limited vs. Raigarh Properties Private Limited, the CD made a technical plea that date of default is not mentioned in the form.  NCLAT, while relying upon the principle of substance over form, held that in case of overwhelming evidence against the CD on merits, therefore above technical objections cannot prevail over merits.    

The NCLT Kolkata, in Prasun Sengupta case, again took a similar view that while applying the doctrine of substance over form the technical objections concerning the format of Power of Attorney cannot be allowed.  The NCLT observed that such objections would have the effect of defeating the intent and purposes of economic legislation like IBC 2016 whose objectives are to promote entrepreneurship and economic growth while balancing the interest of all stakeholders.  

Even the Supreme Court has repeatedly, including in 1959 in Associated Hotels of India Ltd, held that to ascertain whether a document creates a licence or lease, the document's substance must be preferred to the form.

The above background makes it imperative that a set of rules or guidelines be made clarifying when and how statues can be applied liberally and purposefully in case of technical objections.  These could serve as the guiding principles in dealing with all special statutes and summary proceedings.

In the last part of this Series, we will examine how in the past the Supreme Court has taken a conscious view in their observations that the application of elaborate procedures like Civil Procedure Code (“CPC”) is not possible under the IBC or other modern day special statutes. For e.g., as Applications before NCLT are filed in a prescribed form, therefore, Courts should not put such Applications to similar tests and standards to which a Plaint is tested under the CPC.

Can the doctrine of ‘substance over form’, which remains the norm, be applied to technical matters in a meaningful manner to facilitate the administration of justice?

Kapil Dev Sapra is the Founder & Managing Partner of Kapil Sapra & Associates. Vikas Dutta heads litigation practice in the Firm.