From Sarfaesi Act to service tax rule, here are the key court orders

A weekly selection of key court orders

Curbs on pawnbrokers valid
 
The business of money lending and pawnbroking are usurious in nature and the government may impose onerous conditions to restrict or even discourage people from entering such businesses, the Supreme Court has stated in its judgment in the case, State of Karnataka vs Karnataka Pawn Brokers Association. It noted that the courts have frowned upon this trade all along. There is nothing arbitrary or unreasonable if the government imposes conditions to discourage people going to these traders, and they would be in public interest. The court made these observations while upholding a provision in the state Pawn Brokers Act and setting aside the High Court judgment, which held that the restrictions on the trade were unconstitutional. According to the provision, the pawnbrokers (as well as money lenders) have to get a licence from the state authorities to conduct the trade. They have to deposit a sum to start the business. This deposit would not carry interest. This rule was challenged by the pawnbrokers. The Supreme Court stated that though the condition may be onerous, it would be reasonable keeping in view the nature of the trade.

 
Creditors must follow Sarfaesi procedure
 

The Supreme Court last week set aside the judgment of the Bombay High Court and ruled that a secured creditor is bound to consider the representation of the debtor before taking over the mortgaged properties of a debtor under the Securitisation (‘Sarfaesi’) Act. The Supreme Court stated that this procedure is mandatory under Section 13 of the Act. The dispute, in this case, was between Blue Coast Hotels Ltd of Goa, the debtor, Industrial Financial Corporation of India, the lender, and ITC Ltd, the auction purchaser. The debtor company defaulted in repayment of the loan. Therefore, notices were published and the property was auctioned. The debtor, meanwhile, invoked Section 13A of the Act that provides for it to make representations which the creditor must consider. The High Court held that this opportunity was not given to the debtor. However, the Supreme Court noted that in this case, the creditor had given the debtor several opportunities and time to repay the debt. But as they did not respond positively, the creditor has fulfilled the mandatory requirement and the auction in favour of ITC was valid.

 
Arbitration not on oral consent 
 
Oral consent given by counsel for the parties in a court for reference of disputes to arbitration without the written instruction of the parties is not valid.  The Civil Procedure Code does not allow such a step in a pending proceeding, the Supreme Court stated in its judgment, Kerala State Electricity Board vs KurienKalathil. “Since referring the parties to arbitration has serious consequences of taking them away from the stream of civil courts and subject them to the rigour of arbitration proceedings, in the absence of an arbitration agreement the court can refer them to arbitration only with the written consent of the parties either by way of joint memo or joint application; more so when the government or a statutory body like the electricity board is involved,” the judgment explained.

 
Once there is such a written agreement, the matter may be referred by the court, according to the Civil Procedure Code, for arbitration and then the provisions of the Arbitration and Conciliation Act will apply. In this case, the Kerala High Court appointed an arbitrator on the oral consent of the parties when disputes arose over the labour escalation clause in a contract to build a small dam.  The Supreme Court set aside the appointment of the arbitrator and his award.
 
Service tax rule set aside
 
The Supreme Court has dismissed the appeals of the central government against the judgment of the Delhi High Court, which had quashed a provision in the Service Tax Rules. A large number of service providing companies had moved the High Court stating that while rendering their services they were also getting reimbursement in respect of certain activities undertaken by them.

 
These reimbursements should not be included to arrive at the ‘gross value’ charged from their clients, they argued. According to Rule 5 of the Service Tax Rules, the value of the reimbursable activities is also to be included as part of the services provided by the firms. They moved the High Court which held that the rule was ultra vires. This was upheld by the Supreme Court in a large batch of cases, titled Union of India vs Intercontinental Consultants & Technocrats Ltd. Those who moved the High Court include those functioning in consultancy engineering services, share transfer agency services, custom house agencies, site formation clearances, excavation and earth moving and demolition services.

 
Builder to pay compensation
 
When there is no timeline for delivery of flats by the builder, a three-year deadline is reasonable, the Supreme Court said. It further stated that the compensation for breach of the contractual term should be counted from the date of breach, though the court may fix an appropriate date as the rule is flexible. These observations were made by the court in the judgment, Fortune Infrastructure vs Trevor D’Lima. In this case, the builder in Mumbai failed to keep the promise leading to a complaint before the National Consumer Commission. It ordered the builder to refund the payment of Rs 18,700,000 for the flat and pay Rs 36,546,000  as compensation. The court reduced it to Rs 22,720,000 but added Rs 2,000,000  for the promised parking lot.

 
ICICI Bank to pay for staff fraud
 
The National Consumer Commission last week stated that the funds of the Mumbai District Central Coop Bank, invested with ICICI Bank, Vadodara, were syphoned off by the ICICI bank staff in connivance with some outsiders. It caused loss to the coop bank. Therefore, the ICICI Bank was held vicariously liable for the acts of misconduct committed by its managers. The syphoning of the funds constituted gross deficiency in the services rendered by the bank. The ICICI Bank was ordered to refund the entire amount deposited, Rs 100 million, along with a suitable compensation in the form of interest. The commission rejected the argument of ICICI that the coop bank was not a ‘consumer’ as it was a commercial organisation. The commission explained that deployment of the excess funds with the bank, which became available for a short-term, could not be said to be the primary objective of the coop bank; it was only an activity incidental to its primary functions. It was not indulging in commercial activity.