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Thursday, October 26, 2023

On the usefulness of Parliamentary law in achieving fiscal responsibility

by Pratik Datta, Radhika Pandey, Ila Patnaik and Ajay Shah.

Economists in India have long pondered the design of a fiscal rule. It is felt that once that ideal rule is embedded into the FRBM Act, we would solve the long-standing excesses of Indian public finance.

Pratik Datta, Radhika Pandey, Ila Patnaik and I looked under the hood, at the legal mechanisms through which such a Parliamentary law works. In a recent paper, Understanding deviations from the fiscal responsibility law in India, we argue that the difficulty lies not in economics but in the Indian constitutional arrangement. Because the budget is enacted through a `money bill', it can readily contain clauses that amend the FRBM Act. We argue that the problem with the FRBM Act lies not in the economic thinking but in the notion that Parliamentary law can constraint leviathan.

On the subject of public finance, the following design elements are embedded in the Constitution:

  1. The executive cannot raise money (tax or borrow) or spend money without the authority of the Parliament.
  2. The power to raise money (tax or borrow) or spend money belongs exclusively to the Lok Sabha. The philosophy of checks and balances associated with the presence of the Rajya Sabha, so eloquently described by Suyash Rai in 2016, is absent when it comes to money bills.
  3. The Parliament cannot authorize expenditure except on demand by the Executive.
  4. The Parliament cannot authorize taxation except on recommendation by the Executive.
  5. The Lok Sabha has the power to assent to, reject or reduce but not to increase the amount of any demand made by the Executive under Article 113(2). The Parliament can neither suggest any new expenditure nor propose an increase in demand over and above what the government suggests in the Demand for Grants.

Normative public finance in India needs to grapple with this design of the Constitution. The power of the executive, embedded in this design, should be seen as part of the larger problem of the Indian administrative state. A generation of public finance economists in India have tried to solve the chronic deficits of the union government through Parliamentary law. We suggest that this is not a fruitful line of inquiry.

Reducing challenges to arbitration awards: lessons from court data

by Madhav Goel, Akshay Jaitly, Renuka Sane and Anjali Sharma.

Contracts form the bedrock of economic activity in the formal economy. As an economy grows, so does its reliance on contracts. Delays and friction in contract enforcement erode trust in contracts and inhibit the pace of economic growth. In India, contract enforcement generally falls in the jurisdiction of the civil court system, which, according to the National Judicial Data Grid, has more than 11 million pending cases and takes, on an average, more than three years to dispose of a case. One of the solutions to an increasingly overburdened court system in India has been to move certain types of matters to a different judicial forum, either a specialised court or tribunal or by using an alternate dispute resolution (ADR) mechanism. Arbitration is one such alternative mechanism, the framework for which is provided by the Arbitration and Conciliation Act, 1996 (A and C Act).

Contract enforcement by private persons against the state in India brings its own set of problems. Increasingly, government contracts provide for dispute resolution by arbitration. However, anecdotal evidence suggests that the state consistently challenges adverse arbitration awards. In this article, we use Delhi High Court data on challenges to arbitration awards for matters in which the National Highways Authority of India (NHAI) was a party. We analyse the grounds on which these awards were challenged and the manner in which the court dealt with these challenges.

Our main finding is that both the NHAI and the private parties challenge adverse arbitration awards, most often on the merits, even though the A and C Act specifically prohibits this. We also find that the court generally does not interfere with arbitral awards, which is in line with the legislative intent. However, this does not deter such challenges. This may be for a variety of reasons, such as the relatively low cost of litigation vis-a-vis the award value or the incentives of decision makers within the state.

Our analysis adds to the intersection of two growing bodies of recent work in India on the subject. The first that studies government contracting, both from a public administration lens and from the lens of how the government impacts ease of doing business and business outcomes (Chitgupi and Thomas (2023), Burman and Manivannan (2022), Mehta and Thomas (2022), Manivannan and Zaveri (2021), Shah (2021), Roy and Sharma (2020)). The second studies the functioning of courts and the manner in which they deal with a variety of matters (Manivannan et. al. (2021), Damle et. al. (2021), Sharma and Zaveri (2020), Gulati and Sane (2021), Bhatia et. al. (2019)).

The organisation of this article is as follows. We first provide an overview of the legislative and judicial framework to challenge an arbitral award, i.e., Sections 34 and 37 of the A and C Act. We then describe our data set and our methodology for analysis. This is followed by our findings and some recommendations on the way forward.

An overview of Sections 34 and 37 of the A and C Act

The design of the A and C Act allows for a two-stage sequential challenge to outcomes of arbitration proceedings, first under Section 34 and then under Section 37 of the Act. Section 34 provides 5 procedural and jurisdictional grounds, along with 3 additional grounds to set aside an arbitral award. These are:

  • Procedural and Jurisdiction:
    • The party was under some incapacity while entering into the arbitration agreement;
    • The arbitration agreement was not valid under the law to which the parties have subjected it;
    • The party making the application was not given proper notice of appointment of arbitrator or of arbitral proceedings, or was otherwise unable to present its case;
    • The arbitral award dealt with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contained decisions on matters beyond the scope of the submission to arbitration; or
    • The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or the A and C Act, as the case may be.
  • Additional Grounds:
    • The subject matter of the dispute was not capable of settlement by arbitration;
    • The award is in conflict with the public policy of India, i.e., award is affected by fraud or corruption, or is against the fundamental policy of Indian law, or is in conflict with the most basic notions of morality or justice; or
    • The award is vitiated by patent illegality appearing on the face of the award.

It is useful to note that Section 34 proceedings are not appeals (Delhi Airport Metro Express (P) Ltd. v. DMRC (2022)), and the grounds for challenge are limited by the A and C Act itself (Union of India v. Annavaram Concrete Pvt. Ltd. (2021)). Under the scheme of Section 34, an arbitral award cannot be set aside on merits, that is, on the grounds of erroneous application of law or by re-appreciation of evidence (MMTC Limited v. Vendanta Limited (2019); PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin (2021)). Therefore, unless an arbitral award is set aside under the grounds laid down in Section 34, it is ready for execution as a civil court decree against the award debtor. Section 37 of the A and C Act, on the other hand, is an avenue of appeal against an order under Section 34 of the Act. Accordingly, proceedings under Section 37 are governed by the Code of Civil Procedure, 1908 (CPC) and are in the form of an appeal. However, through consistent judicial pronouncements, the grounds for appeal under Section 37 have been restricted, even as compared to the grounds under Section 34 (Mahanagar Telephone Nigam Limited vs. Applied Electronics Ltd. (2014)).

While the A and C Act is, to a large extent, modeled on the UNCITRAL Model Law on International Commercial Arbitration, 1985, it deviates from the Model Law in two important ways. First, it introduces an additional ground to challenge an arbitral award: patent illegality appearing on the face of the award. Second, it provides for a two-stage appeal process, where Section 37(1)(c) of the Act allows an appeal against an order under Section 34 setting aside or refusing to set aside the arbitral award. These two deviations from the Model Law have implications for the efficacy of the arbitration framework in India. The ground of patent illegality introduces ambiguity and discretion in the otherwise procedural nature of the process of challenging awards. The two-stage appeal process adds to this ambiguity and discretion, and introduces delays in the enforcement of the award. Section 36 of the A and C Act, under which an award is enforced as a decree, adds to these challenges. Section 36(2) specifically gives the court the power to stay the enforceability of an award. Section 36(3) specifies the conditions under which the court may grant such a stay.

Data and methodology

For our analysis, we collected judgments from Delhi High Court for the years 2018 and 2019 pertaining to matters where the NHAI is a party. Our choice of Delhi High Court is due to its importance as a court for arbitration matters, as well as because NHAI matters are likely to be brought before it.

Our choice of the years 2018 and 2019 is driven by three factors. First, the arbitration framework has undergone significant legislative change since 2015 and more recent data reflects the current framework. Second, the period from 2020-2022 was marked by disruptions in the judicial system due to the COVID-19 pandemic, and therefore, may not represent the ordinary course of dispute resolution. Finally, the choice of 2018 and 2019 allows for the possibility of extending our analysis to studying the entire life-cycle of such litigation all the way to the Supreme Court.

We focus on the NHAI because of its status as an autonomous, specialised statutory body that has been tasked with development, maintenance and management of India's national highways. NHAI is also one of the largest contracting bodies within government, accounting for nearly 10 percent of the total union government expenditure on public procurement (Sharma and Thomas (2021), Chitgupi, Gorsi and Thomas, (2022)).

We find 96 judgments in Delhi High Court where NHAI is a party. Of these, 82 pertain to matters under Sections 34 and 37 of the A and C Act (details can be found by clicking here) From these 82 judgments, we collect the following details:

  1. The nature and quantum of claims filed before the arbitral tribunal;
  2. The party that won the arbitration;
  3. The time taken between filing the petition under Section 34 or 37 of the A and C Act to the final judgment;
  4. The nature of disputes and grounds for the petition under Section 34 or 37; and
  5. Which party won, and the quantification of the claims that were upheld/set aside by the Court.

Findings

Our main finding is in regards to the win-loss record for a challenge to an arbitral award under Sections 34 and 37 of the A and C Act, i.e., the likelihood of success in challenging the arbitral award (Table 1).

Table 1: Outcome of Section 34 and 37 Challenges

Categories 2018 2019 Total

Petitioner won 4 4 8
Petitoner lost 44 30 74

Total 48 34 82

Source: Delhi High Court judgments

We find that in 74 of the 82 cases (90.2%) involving NHAI, the court refused to interfere with the arbitral award, irrespective of whether the party challenging the award was the NHAI or the private party. This suggests two things. First, the Delhi High Court's action of ordinarily not setting aside the arbitral award is in line with the legislative intent of Sections 34 and 37 of the A and C Act. Second, despite the court not interfering with the award, parties continue to mount such challenges. This is especially so for NHAI, which is the petitioner in 67 out of the 82 matters.

When we look at the grounds under which awards are being challenged in court (Table 2), we observe that the bulk of the challenges, 77 out of 82 (93.9%), are under Section 34(2A), which is unlike the provisions of the UNCITRAL Model Law, and is an Indian innovation that allows the award to be reviewed on the basis of the substantive merits of the case. Patent illegality is a subjective formulation whose treatment may change from case to case and from court to court.

Table 2: Nature of Section 34 challenges

Provision 2018 2019 Total

S. 34(1) 2 1 3
S. 34(2) - - -
S. 34(2A) 45 32 77
S. 34(3) 1 1 2

Source: Delhi High Court judgments

The findings from Tables 1 and 2 together indicate that award debtors routinely challenge arbitral awards on substantive merits, even though the courts routinely turn down such challenges.

We also find that, on average, it takes the court 805 days (2.2 years) to dispose of a Section 34 challenge and 208 days (0.6 years) to dispose of a Section 37 challenge. A matter in which both Section 34 and 37 challenges are brought will be in court for about 3 years after the award has been made by the arbitral tribunal.

In 36 of the 82 matters, we get data for the size of the claim. The total value of claims, across these 36 cases, is Rs. 17.5 billion and the average per case claim value is Rs. 485 million. While these may not be significant for an entity of NHAI's scale, for private parties dealing with NHAI, these may be consequential. And so may be the additional time of three years and the cost of litigation to secure these claims.

Some simple calculations also give us a sense of what these challenges with minimal chance of success mean for the government. At an interest rate of 8% per annum (MCLR during 2018 and 2019 was in this range), compounded annually, after the three year litigation challenging the arbitral award, the government will have to bear an additional interest cost of Rs. 4.5 billion on these awards. This does not take into account the cost and time consumed by the litigation.

Why do parties challenge arbitral awards?

There may be two main reasons why parties continue to appeal even though the chances of the award being overturned are low:

  • Low costs: for large value awards, the cost of the litigation challenging the arbitral award is lower than the expected benefit to the award debtor even at low probability of the award being overturned (Mehta and Thomas (2022) supra). Additionally, for the government, the economic considerations around litigation costs may not be as relevant as for private litigants. Empanelled lawyers for the government and its agencies are often remunerated far less than lawyers representing private parties. Further, incentives of the bureaucracy are often such that they do not accept adverse outcomes in contractual disputes and litigate till the last available forum, regardless of cost.

  • Delaying the enforcement: parties may resort to challenging the award to delay enforcement. Filing a petition under Section 34 of the A and C Act often forces the award holder to delay an execution petition under Section 36 of the Act. This could be because of the uncertainty regarding the outcome of the challenge, and due to potentially wasteful litigation costs, should the award be stayed or overturned. Anecdotal evidence shows that the executing court is often cognizant of the filing of a petition under Section 34 while taking substantive decisions under Section 36 of the Act. The executing court typically awaits the outcome of proceedings under Section 34 or 37 before taking any coercive action against the award debtor. Therefore, it is likely that much of the litigation under Sections 34 and 37 is a means of delaying enforcement of the award, and not because the litigants expect to succeed.

Legislative solutions

Disincentivising litigants from challenging arbitral awards on merits, especially if the litigant is the government, is important to ensure that the A and C Act remains relevant as an alternate dispute resolution mechanism. This can be achieved through two levers. First, that courts take up Section 34 challenges only in cases where there is a high likelihood of the challenge succeeding. Second, the cost of challenging the award either under Section 34 or Section 37 are high enough to alter the economic incentives of the award debtor. To this effect, we suggest three legislative solutions:

  1. Amending Sections 34 and 37 of the A and C Act to introduce a prima facie test of satisfaction: As the law stands currently, the courts must hear petitions under Sections 34 or Section 37 and decide them on merits, irrespective of the grounds of challenge and the chances of success. This takes up significant resources. Introducing a prima facie test of satisfaction will enable the Court to dismiss the petition at the pre-notice stage itself, unless the petitioner is able to satisfy the court that it has a good case on merits. This will be similar to the procedure adopted by the Supreme Court while hearing fresh special leave petitions under Article 136 of the Constitution of India. The decision of the court to entertain a petition under Section 34 or Section 37, based on a prima facie view of the merits, has cost advantages to the litigants as well as the court. Dismissal at the pre-notice stage means that the litigants do not bear the cost of a full appeal and the court also spends less time and resources in deciding the petition on merits (Shavell (2010)). Further, deciding the merits at the pre-notice stage may also reduce time and costs during the full appeal as part of the assessment of the merit will already have been done by the court.

  2. Amending of Sections 34 and 37 of the A and C Act to introduce a mandatory pre-deposit of fees proportionate to the arbitral award for the admission of petitions to set aside arbitral awards: As pointed out earlier, the economic incentives are stacked in favour of a challenge to the award. One way of counteracting this would be to increase the cost of a challenge. This can be achieved by adopting a mandatory pre-deposit of a proportion of the award value with the court before a challenge can be instituted. Such a pre-deposits can be tiered, with a higher proportion being required under Section 37 as compared to Section 34.

  3. Another way of achieving this outcome will be to amend Section 82 of the Act to introduce a clarification that empowers the courts to frame rules to introduce barriers to unmeritorious challenges. These could include, as suggested above, a prima facie test or a mandatory pre-deposit of a proportion of the award value under challenge. This method leaves the discretion of framing such rules, and the substance of these rules with each High Court which could take into account local conditions while framing them. Further, the desired objective will be achieved without hard coding too much detail in the statute itself, which might make it inflexible and require more amendments going forward.

    In October, 2021, the General Financial Rules, 2017 (GFR), the procurement rules for union government and its agencies, were amended to introduce Rule 227A which requires government departments challenging arbitral awards to pay 75% of the award value into an escrow account, to be used sequentially for the settlement of lender's dues, project completion and then as payment to the contractor. However, the impact of this change is in respect of of government challenges to arbitral awards. Our analysis shows that even private parties routinely challenge arbitral awards, and hence an amendment to the A and C Act introducing a pre-deposit may be desirable.

  4. Amending Section 37(1)(c) to remove the second challenge avenue for the award debtor: Section 37(1)(c) of the A and C Act permits an appeal of the order of the court either setting aside or refusing to set aside an arbitral award under Section 34. This affords the award debtor a second avenue to continue litigation and stave off enforcement of the award. Our analysis shows that while courts generally uphold the award even during this challenge, both time and resources of the court and the litigants are consumed. Further, even at this stage courts may adjudicate the matter on merits, despite this already having been done at the award stage and at the Section 34 stage. Further, as mentioned earlier, no analogous provision to Section 37(1)(c) exists even in the Model Law as well as the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

    One possibility is to completely remove Section 37(1)(c) from the A and C Act and align the framework for challenging an arbitral award with the Model Law. Alternatively, Section 37(1)(c) could be amended to remove the appeal available to the award debtor, but retain the appeal available to the award holder. This will protect against frivolous appeals by the award debtor, while providing adequate remedy in matters where an award has been erroneously overturned under Section 34.

Conclusion

In India, delays of the court system have increasingly led both government and private parties to opt for ADR mechanisms such as arbitration to resolve contractual disputes. However, for arbitration to be used effectively, it is important that challenges to the outcome of arbitration are limited to the procedural and jurisdictional grounds laid down in the A and C Act. Our analysis shows that this may not be so, and that both government and private parties routinely challenge arbitral awards on merits. Challenges to arbitration awards appear to have become a way of delaying enforcement. The Delhi High Court has been sanguine in the manner of its dealing with these challenges, most often refusing to interfere with the arbitration outcome. However, this does not seem to have deterred challenges, especially from government agencies.

One way of disincentivising such challenges is to amend the A and C Act to remove the legislative loopholes. These include: (i) introducing a prima facie test of the merits of the challenge, (ii) seeking a pre-deposit of a part of the award value before allowing a challenge, and (iii) removing the second challenge permitted under the Act. These changes could go a long way in curbing the litigious behaviour of parties to delay enforcement of high value awards.

Contract enforcement is hard when there exists an imbalance of power and resources between the parties to a contract or where the incentives of one of the parties are not driven entirely by commercial considerations, as in the case of government contracting with private parties. Creating legislative boundaries against strategic actions by parties, whether government or private, is one way of dealing with this challenge. There are other ways, that seek to change the behaviour of government departments and agencies, through measures such as a National Litigation Policy or the government procurement rules.

References

Aneesha Chitgupi and Susan Thomas, Learning by doing for public procurement, XKDR Working Paper No. 22 (2023).

Pavithra Manivannan, Susan Thomas, and Bhargavi Zaveri-Shah, Helping litigants make informed choices in resolving debt disputes, The Leap Blog (2023).

Anirudh Burman and Pavithra Manivannan, Delays in government contracting: A tale of two metros, The Leap Blog (2022).

Aneesha Chitgupi, Abhishek Gorsi, and Susan Thomas, Learning by doing and public procurement in India, The Leap Blog (2022).

Charmi Mehta and Susan Thomas, Identifying roadblocks in highway contracting: lessons from NHAI litigation, The Leap Blog (2022).

Pavithra Manivannan and Bhargavi Zaveri, How large is the payment delays problem in Indian public procurement?, The Leap Blog (2021).

Ajay Shah, The bottleneck of government contracting, Business Standard (2021).

Anjali Sharma and Susan Thomas, The footprint of union government procurement in India, XKDR Working Paper No. 10 (2021).

Devendra Damle, Karan Gulati, Anjali Sharma, and Bhargavi Zaveri-Shah, Litigation in public contracts: some estimates from court data, The Leap Blog (2021).

Karan Gulati and Renuka Sane, Grievance Redress by Courts in Consumer Finance Disputes, The Leap Blog (2021).

Anjali Sharma and Bhargavi Zaveri, Judicial triage in the lockdown: evidence from India's largest commercial tribunal, The Leap Blog (2020).

Shubho Roy and Anjali Sharma, What ails public procurement: an analysis of tender modifications in the pre-award process, The Leap Blog (2020).

Surbhi Bhatia, Manish Singh, and Bhargavi Zaveri, Time to resolve insolvencies in India, The Leap Blog (2019).

Steven M. Shavell, On the Design of the Appeals Process: The Optimal Use of Discretionary Review versus Direct Appeal, 39 J. Legal Stud. 63 (2010).

Delhi Airport Metro Express (P) Ltd. v. DMRC, (2022) 1 SCC 131.

Union of India v. Annavaram Concrete Pvt. Ltd., (2021) SCC OnLine Del 4211.

MMTC Limited v. Vendanta Limited, (2019) 4 SCC 163.

PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin, (2021) SCC OnLine SC 508.

Mahanagar Telephone Nigam Limited vs. Applied Electronics Ltd., AIR (2014) Delhi 182.


Madhav Goel, Renuka Sane and Anjali Sharma are with the TrustBridge Rule of Law Foundation. Akshay Jaitly is the co-founder of TrustBridge Rule of Foundation and Partner, Trilegal. We thank Karan Gulati, Ajay Shah and two anonymous referees for their inputs and comments.

Improving judgment enforcement: Let judgment creditors file insolvency resolution applications

by Karan Gulati and Anjali Sharma.

Judgments form the basis of a sound legal system. However, the mere issuance of judgments, without ensuring their prompt enforcement, takes away the incentive to turn to the courts. It also reduces trust in contracts and property rights, the bedrock of economic activity. This discourages investment, curbs entrepreneurial enthusiasm, and impedes national development (World Bank 2003; Chemin 2007; Rao 2020). Beyond economic consequences, a delay or failure in enforcing judgments diminishes public confidence in the judiciary (Salzman and Ramsey 2013).

In India, enforcing monetary judgments is particularly challenging, as evidenced by its low ranking on the World Bank’s ‘Enforcing Contracts’ indicator and data from the National Judicial Data Grid (NJDG). To ensure and expedite the enforcement of such awards, we propose that judgment creditors – holders of a judgment by a court or tribunal – should be allowed to initiate insolvency resolution proceedings against judgment debtors. Due to the severe consequences under the Insolvency and Bankruptcy Code (IBC), such proceedings will deter non-compliant debtors from evading their obligations.

The problem

Enforcing judgments with monetary components is an especially difficult problem. In 2020, India ranked 163rd out of 190 countries on the World Bank’s Doing Business indicator for ‘Enforcing Contracts’. This metric measures the time and cost of enforcing a standard contract in a civil court. In India, once a dispute is initiated, it takes 1,445 days till enforcement, costing 31% of the claim value. In addition to the time already spent securing a judgment, enforcement takes 305 days. As per the NJDG, while approximately 4.5 lakh new execution petitions are instituted each year, only 3.9 lakh are disposed. Even then, less than 15% result in an award or decree.

This poor track record on court-led enforcement also dilutes alternate dispute resolution mechanisms, which operate in the shadow of the law. When parties understand that enforcing settlement agreements is likely to be prolonged, often with poor outcomes, their incentives change. Consequently, such mechanisms are used not to resolve disputes but to avoid payments and cause delays. In fact, poor performance on contract enforcement may be why Indian and international businesses often include international arbitration clauses in contracts when dealing with cross-border transactions.

At present, enforcement of civil judgments is governed by the Code of Civil Procedure 1908 (CPC). To ensure enforcement, a court can attach a judgment debtor’s (a person against whom a judgment capable of execution has been passed) assets, imprison them, or appoint an individual to manage their property. Once attached, the debtor cannot dispose of or transfer the property. If they fail to fulfil the judgment claim, the attached property can be auctioned off. While the CPC comprises intricate and complex procedures, which may be necessary to deal with the myriad of matters adjudicated by the civil court system (for example, specific performance, partition trusts, inheritance rights, etc.), there are no provisions to determine the true value of the debtor’s assets or reverse undervalued or preferential transactions. This allows assets to be unduly siphoned off. Due to the non-specificity of provisions regarding monetary awards, judgment debtors can also exploit procedural gaps and employ dilatory tactics to delay or frustrate the enforcement of such awards.

A proposed solution

The IBC already recognises judgment creditors as ‘creditors’ (Section 3 (10)) with legitimate ‘claims’ (Section 3 (6)) against a debtor. However, because they have not been explicitly recognised as financial or operational creditors, they cannot initiate insolvency resolution proceedings. Instead, they must wait for a financial or operational creditor or the corporate debtor to set the ball rolling on insolvency proceedings and, even then, only file their claims during the process without any participatory rights. This inability to initiate insolvency takes away a potent lever to ensure compliance with judgments.

We propose that judgment creditors be allowed to initiate insolvency resolution proceedings under the IBC. Such a move will pose a significant threat to non-compliant debtors. This is because the IBC creates two significant deterrents against wilful non-payment of claims: (i) the displacement of the promoter when the insolvency resolution proceedings commence, and (ii) a possibility of liquidation of the company if the resolution fails. Given these grave consequences, the judgment debtor’s incentive will be to voluntarily fulfil the judgment claim. This change should be prospective, allowing all creditors to adjust to evolving dynamics.

In fact, when allowed, admission of an insolvency application filed by a judgment creditor should be made simpler than one filed by other creditors. This is because the IBC requires that four factors be considered before admitting an insolvency resolution application: (i) whether there is a claim of a certain threshold, (ii) whether it is undisputed, (iii) whether it has become time-barred, and (iv) whether it has come to the correct bench of the tribunal. In the case of judgment claims, the first three are validated by a court or a tribunal; hence, there are no ambiguities that may delay the admission proceedings.

This is not a novel solution. Judgment creditors can initiate insolvency proceedings in both the United Kingdom and the United States of America.

  • United Kingdom: Judgment creditors have specific rights to push a debtor into administration or winding up (analogous to insolvency resolution and liquidation proceedings in India, respectively). Under paragraph 11 of schedule B1, read with Section 123, of the Insolvency Act 1986, a creditor may file an administration application if an order of any court in their favour is returned unsatisfied. Under Section 122, a creditor can file a winding-up application on the same grounds. When it comes to individuals, the process is slightly different. Section 267 of the Insolvency Act allows a creditor to present a bankruptcy petition if the individual owes a judgment debt of £5,000 or more.
  • United States of America: Judgment creditors possess distinct rights to push a debtor into involuntary bankruptcy proceedings. Under 11 USC § 303 of the US Bankruptcy Code, upon satisfying the prerequisites, creditors can file an involuntary bankruptcy petition against a debtor. If the court determines the involuntary petition is valid, it will issue an “order for relief,” initiating the bankruptcy process. For individual debtors, this often translates to a Chapter 7 liquidation or a Chapter 13 repayment plan.

To enable this in India, the IBC must be amended to recognise judgment creditors of a monetary award as financial creditors holding financial debt under Sections 5 (7) and 5 (8), respectively. This is because the award includes interest, penalties, or costs, and aligns with the time-value-of-money considerations intrinsic to financial debts. As loans accrue interest over time, judgment awards accumulate interest until settled, mirroring the financial obligations of the judgment debtor. Once a court has passed a monetary award, the claim is rooted in the judgment award, not the original transaction. Hence, even when the underlying dispute is related to the provision of goods or services, the judgment award should be understood to represent a financial debt. This view has been endorsed by the Supreme Court of India and should be legislatively incorporated. The Court, in Kotak Mahindra Bank Limited v A Balakrishnan (2022 INSC 630), has noted that:

Taking into consideration the object and purpose of the IBC, the legislature could never have intended to keep a debt, which is crystallised in the form of a decree, outside the ambit of clause (8) of Section 5 [financial debt] of the IBC.

Classifying judgment creditors as financial creditors during the insolvency process would also ensure that they have an influential participatory role, commensurate with the significance of court-sanctioned monetary awards.

Allowing judgment creditors the power to initiate insolvency proceedings will generate strong monitoring and compliance effects in the pre-insolvency world. Other financial creditors of the debtor will factor current and potential adverse judgment claims into their credit decisions. This, in turn, will generate strong incentives to avoid adverse judgments and to comply with judgment claims when they arise. Conversely, businesses would be compelled to take a proactive stance in settling disputes, knowing the ramifications are not just reputational but could also threaten their solvency and control over the enterprise. It will signal to the market that judgments are not just moral proclamations but actionable financial commitments.

An illustration

To better understand how this will play out, let us consider an arbitration proceeding between X Co and Y Co concerning a contract violation, where the arbitrator awards Rs. 2,00,00,000 to Y. X will likely challenge such the award under Section 34 of the Arbitration and Conciliation Act 1996 (Arbitration Act). Since the grounds for challenge under Section 34 are procedural, courts generally uphold arbitral awards.

Traditionally, Y would have been forced to then rely on the procedure set out under the CPC. However, as mentioned, enforcement under the CPC is notorious for delays. The award would remain stuck in court procedures, and Y may face a cash crunch. The money they rightfully won, tied up in legal battles, would not be accessible for business needs, growth, or reinvestment. At the same time, X would remain operational, benefiting from the liquidity that it has withheld (Gulati and Roy 2020).

However, things may be different if Y is allowed to initiate an insolvency resolution proceeding. Although X may prefer an appeal under Section 37 of the Arbitration Act, the confirmation of the award under Section 34 will convert it into a claim under the IBC (a right to payment reduced to judgment). The initiation of the insolvency proceeding will immediately shift the dynamics. Under IBC, X’s promoters could be displaced, and there may be a potential change in the company’s ownership. Thus, it will attempt to clear the dues and settle its dispute with Y. In essence, the IBC will be the much-needed lifeline for Y, ensuring it doesn’t remain stuck in the quagmire of the CPC and can promptly access its rightful claim.

Concerns

One potential concern regarding the proposal might be the risk of overburdening the insolvency resolution process and, consequently, the NCLT. While the IBC recognises that time is of the essence, it is already struggling with capacity challenges and mounting delays. Overloading this system could create an environment reminiscent of the current civil court enforcement mechanism, fraught with delays and backlogs. This would counteract the benefits and efficiencies the proposed change aims to introduce.

However, this concern does not acknowledge the strong deterrents to frivolous insolvency proceedings built into the IBC. Judgment debtors will need to comply with the minimum default value requirement of Rs. 1,00,00,000. Further, the filing of the insolvency application is understood to aid negotiations between the filing creditor and debtor, often resulting in a settlement between parties outside the purview of the NCLT. As per the Insolvency and Bankruptcy Board of India, 28% of the insolvency resolution matters are settled or withdrawn. These figures do not account for the negotiations in the shadow due to the mere threat of an insolvency application being filed. Thus, the actual strain on the NCLT might be lower than anticipated. 

Similarly, there may be concerns about whether insolvency proceedings can take away the judgment creditor’s right to prefer an appeal against the underlying judgment. These concerns can be alleviated by deferring to good design principles. One way of doing this is to only allow judgment creditors to initiate insolvency proceedings when the judgment debtor has exhausted all statutory remedies (e.g., an appeal under Section 37 of the Arbitration Act by X in our example). As an alternative, it may be recognised that even under the IBC, there is a 14-day period within which an admission application is to be decided. The judgment debtor may file a statutorily permitted appeal against the underlying judgment within this period. In practice, the time between filing an insolvency application and its admission is far more than 14 days. This gives the judgment debtor ample opportunity to prefer statutorily permitted appeals. In such cases, the judgment claim will be viewed as disputed until the appeal is decided, resulting in non-admission of insolvency proceedings. The path to be taken between the two alternatives is a procedural policy decision independent of the merits of the core proposal of allowing judgment creditors to initiate insolvency proceedings.

Conclusion

The efficacy of a legal system not only lies in the issuance of judgments and their timely enforcement. For India, where enforcing monetary judgments remains a daunting challenge, it is pivotal to usher in mechanisms that effectively bridge this gap. Allowing creditors to initiate insolvency resolution applications presents a powerful tool that can drastically transform the landscape of judgment enforcement.

Not only will this proposal push judgment debtors to be more compliant, but it will also signify a broader shift in the perception of judgments. Such reforms, emphasising actionable financial commitments, will help restore public faith in the judiciary, boost investment, and stimulate economic growth. By embracing this change, India can pave the way for a more robust and efficient legal system, thus fostering a climate of trust, accountability, and development.

References

Doing Business: 2020, The World Bank, 2020.

Judging the judiciary: Understanding public confidence in Latin American courts, Ryan Salzman and Adam Ramsey, 2013, Latin American Politics and Society, Volume 55, Issue 1, pp 73-95.

India’s low interest rate regime in litigation, Karan Gulati and Shubho Roy, 11 March 2020, Leap Blog.

Institutional Factors of Credit Allocation: Examining the Role of Judicial Capacity and Bankruptcy Reforms, Manaswini Rao, 2020, JusticeHub.

The Impact of the Judiciary on Economic Activity: Evidence from India, Matthieu Chemin, 2007, Cahier de recherche / Working Paper.

World Development Report 2004: Making Services Work for Poor People, The World Bank, 2003.


The authors are a research fellow and the research director at the TrustBridge Rule of Law Foundation. We are thankful to Madhav Goel and Renuka Sane for their insightful comments. Views are personal.

Wednesday, October 11, 2023

Announcements

Position for researchers in the field of Legal Systems Reform

At present, we are looking for candidates for the profile of Research Associate (Legal) and Research Associate (Quant.) to participate in an ongoing research program in the field of legal system reform.

Our work in this field includes:

More information can be found on: https://xkdr.org/field/legal-system

As a research associate, you will work on project deliverables under the supervision of a project lead. You will be expected to conduct field research in courts, implement defined research tasks, work on written documents, reports and articles and interface with external collaborators and stakeholders.

The requirements for the role of a research associate (Legal) are:

  • An undergraduate degree in Law such as B.A.L.L.B (Hons.)/ B.B.A.L.L.B. (Hons.) or graduate degree in Law such as L.L.B.
  • Minimum one complete year of work experience, preferably in a research intensive organisation.
  • Familiarity with procedural laws and practice rules in litigation and ability to understand court documents.

The requirements for the role of research associate (Quant.) are:

  • An academic background in the fields of Data Science, Economics, Engineering, Management and/ or Public Policy.
  • Minimum one complete year of work experience, preferably in a research intensive organisation.

Candidates must possess high quality research skills, basic Excel skills, coding skills and a functional understanding of any one programming language. In keeping with the current work environment at the organisation, a working knowledge of LaTeX and Linux are preferred.

You must be comfortable with working in an interdisciplinary research environment consisting of people from varying backgrounds such as economics, law, public policy and data science. You should be curious and passionate about research and willing to work on outputs independently as well as in teams.

The remuneration offered will be commensurate with your skill and experience and will be comparable with what is found in other research institutions. Interested candidates must email their resume to careers@xkdr.org with the subject line: Application for "Research Position, Legal System Reform"

Monday, October 09, 2023

Announcements

Conference: Investments for a Sustainable Tamil Nadu: Reforms and Strategies for the Power Sector

Organised by XKDR Forum and TrustBridge.

Given the vast magnitudes of investment required in the energy transition, and given the limitations of Indian public finance, the main path to energy transition investment lies in private investment. Only domestic and foreign private sectors have the scale of resourcing required to terminate contracts with coal-fired plants and build a new world of renewables and storage. This process faces limitations which are collectively bucketed as 'investability'. One of the most important states in India from the perspective of energy transition is Tamil Nadu. It was one of the first states in India to have achieved almost universal electrification and was also at the forefront of the transition to renewables — both wind and solar — in the country.

In this conference, we present a review of the electricity sector in Tamil Nadu - through a collection of facts and evidence about the sector and the state that can form the basis of policy proposals to improve investability for transition finance.

Program Agenda:

Panel 1 (2:00 - 3:00 PM): Electricity's Role in Tamil Nadu's Development Strategy

Presenter: Ajay Shah, XKDR Forum

Panelists: Vikram Kapur IAS (Govt of Tamil Nadu), S Narayan IAS (Retd; Government of India), and Karthik Muralidharan (CEGIS)


Panel 2 (3:00 - 4:00 PM): The Impact of KUSUM-C in Addressing the Political Economy of Distribution

Presenter: Renuka Sane, Trustbridge

Panelists: Anas Rahman (International Institute for Sustainable Development) and Martin Scherfler (Auroville Consulting)


Panel 3 (4:30 - 5:30 PM): Improving Regulation in the Power Sector

Presenter: Akshay Jaitly, Trustbridge

Panelists: Hansika Dhankhar (Shakti Sustainable Energy Foundation) and Ann Josey (Prayas Energy Group)


Date: 13th October 2023,
Time: 2:00 - 6:00 PM,
Venue: Dvara Trust (Kerala Meeting Room), 10th Floor-Phase 1, IIT-Madras Research Park, Kanagam Village, Tharamani, Chennai-600113.

The event is in-person and you can register here!