INTRODUCTION
Recently, Department of Expenditure, Ministry of Finance, Government of India has released an Office Memorandum[1] (“Office Memorandum”) mandating insertion of Rule 227A in the General Financial Rules, 2017 (“GFR Rules 2017”).
Rule 227A stipulates payment of 75% of the arbitral award amount including interest (as then accrued under the arbitral award) where the arbitral award is challenged by a central government ministry or department, against a bank guarantee to be furnished by the award holder.
BACKDROP TO OFFICE MEMORANDUM
The National Institution for Transforming India (“Niti Aayog”) a Government of India department[2] in August 2016, had proposed various measures to the Cabinet Committee on Economic Affairs (“CCEA”) to improve the condition of the construction sector, including the issues of liquidity faced by companies in the construction sector due to pending disputes with government departments. The CCEA is chaired by Prime Minister of India, Narendra Modi.
The CCEA had approved[3] the proposals mooted by Niti Aayog. Amongst the proposals approved by the CCEA, was the proposal to pay 75% of the arbitral award amount to the award holder by the government entity which challenged the arbitral award. This amount of 75% was to be paid against submission of bank guarantee by the award holder. Further under the approved proposal, government entity was broadly defined to include all public sector undertakings of the Government of India, autonomous organisations of the Government of India, special purpose vehicles where 50% or more of the paid-up share capital is held by the Government of India, and all departments of Government of India.
FORMALISATION OF OFFICE MEMORANDUM – INSERTION OF RULE 227A
To formalise the approval of the above proposal, Niti Aayog asked the Department of Expenditure, Ministry of Finance, Government of India to incorporate the approved proposal in the GFR Rules 2017, which it did by incorporating Rule 227A.
Rule 227A, apart from providing for release of 75% of the arbitral award amount against a bank guarantee of 75% of the award amount, also provides that payment of the award amount by the award debtor (i.e. department or ministry of Government of India) will be made in the designated escrow account with a stipulation that the proceeds of the award amount will be used (a) first for payment to lenders; (b) then for completion of the project (assumably, for the project which has led to the dispute) and (c) lastly for completion of the remaining projects of the concerned ministry or department, as mutually decided. Rule 227A also provides that if additional amount is lying in the escrow account after payment of lenders and completion of the projects, it can be used by the award holder / contractor, with prior approval of the lead banker and the concerned ministry or department. Rule 227A also allows for payment of retention money against submission of bank guarantee if the contractual provisions support the same.
WHAT ARE GFR RULES 2017? ARE THEY BINDING?
The GFR Rules 2017 are the rules and orders that are required to be followed when the Government of India deals with matters concerning public finances. The GFR Rules 2017 primarily ensure that transparency and objectiveness is maintained in the course of expending public money for administrative and infrastructure purposes. Similar financial rules have also been framed by the States while exercising powers under Constitution of India[4].
The rules are specifically treated as executive instructions of the Government of India and are to be observed by all central government ministries, departments, organisations under the Government of India[5], it would be safe to contend that the Rules have statutory and binding force. As far as autonomous bodies of the concerned department / organisation are concerned, the Rules are binding except to the extent the bye laws of the said autonomous bodies provide for separate financial rules, which have been approved by the Government of India.
In one instance, the Hon’ble Delhi High Court (“Delhi High Court”) in the case of Nex Traders[6] held the General Financial Rules, 2005[7] to be applicable even where the contract was entered into prior to coming into force of the General Financial Rules, 2005. The Delhi High Court opined that even if the General Financial Rules, 2005 were not codified, the adherence to the general principles contained in the Rules must be maintained with the view to keep transparency in the undertaking of financial transactions by the State and its instrumentalities.
Given that GFR Rules 2017 would be treated as binding on central government departments and organisations, a party holding an arbitral award could contend that it is necessary for the concerning organisation / authority to release the award amount as provided in the Notification in lieu of bank guarantee being submitted by the award holder.
ALTERNATIVE TO DEPOSIT OF MONEY IN EXECUTION OF ARBITRAL AWARDS
Normally, where a decree for payment of money is challenged, it is unlikely to be stayed as there is always an option for restitution which is available if the challenge is successful. Moreover, even when discretion to stay is exercised, it should be exercised judiciously by imposing suitable conditions[8]. Since a pending challenge to arbitral award would not automatically stay its enforcement[9], the award debtor often agrees to deposit the award amount or a portion of it, as a pre-condition to the stay of the arbitral award.
Going forward, where the award debtor is a government department / ministry / autonomous body on whom Rule 227A is binding, it could be contended that there should be no requirement to deposit the arbitral award amount whilst seeking a stay on the arbitral award.
OBSERVATIONS
The fact that the Government of India has officially introduced and formalised Rule 227A as part of its policy, seems to clearly suggest that the Government of India is keen to take a business centric approach and rather than curbing cash flows of the industry in litigation, it is keen to revive ailing sectors at a faster pace to reach its target of a USD 5 trillion economy.
- Jaideep Singh Khattar, Partner and Bhakti Joshi, Trainee
- The firm can be reached at connect@thefortcircle.com
|DISCLAIMER|
The information shared in this article is purely for information and is not intended to be a substitute for professional legal advice.
[1] Office Memorandum No. F.1/9/2021-PPD dated 29 October 2021
[2] Rule 2 read with First Schedule of Government of India (Allocation of Business) Rules 1961
[3] Press Information Bureau (pib.gov.in)
[4] See Article 166(3) of Constitution of India
[5] Preface to General Financial Rules, 2017 read with Rule 1 of the General Financial Rules, 2017
[6] Nex Traders (India) Private Limited vs. Ministry of Commerce and Industry and Ors. – Writ Petition (C) No. 6574 of 2007 decided on 2 April 2009
[7] General Financial Rules 2017 replaced General Financial Rules 2005
[8] Sihor Nagar Palika Bureau vs. Bhabhlubhai Virabhai & Co. (2005) 4 SCC 1; Malwa Strip Pvt. Ltd. v. Jyoti Ltd (2009) 2 SCC 426
[9] Section 36 of Arbitration and Conciliation Act, 1996