Civil courts to rule on legality of derivatives

The Supreme Court of India recently cleared the way for civil courts to settle disputes pertaining to foreign currency derivative transactions, after analysing the provisions of powers afforded to the Debt Recovery Tribunal (DRT) under the DRT Act. The cases in question involved two disputes – between Axis Bank and Rajshree Sugars & Chemicals, and between Axis Bank and HSBC against Nahar Industrial Enterprises – over payments due to the banks for foreign currency derivatives transactions. The Supreme Court set aside a Punjab and Haryana High Court judgment that had transferred Ludhiana-based exporter Nahar’s plea on derivatives, pending before a Ludhiana civil court, to the DRT in Mumbai. The court also rejected HSBC’s plea against Nahar and Axis Bank’s two petitions (one against Nahar, the other against Rajshree) seeking transfer of the cases to the DRT in Mumbai.

The suits and countersuits involved the breach of International Swaps and Derivatives Association (ISDA) agreements offered by banks to exporters and others. Nahar filed a civil suit in Ludhiana seeking a permanent injunction for repudiation of the ISDA agreement. The high court allowed the application, transferring the civil suit to the DRT. The legality of the order passed by the high court was then challenged before the Supreme Court. Meanwhile, Axis Bank filed an application before the DRT in Mumbai seeking the transfer of the civil suit to the DRT.

The question addressed by the Supreme Court was whether the high court or Supreme Court has the power to transfer a suit from a civil court to the DRT, keeping in mind that (a) the effect of a transfer from a civil court to the DRT is to oust the jurisdiction of the civil court, which cannot be done without express statutory provisions; (b) proceedings before the DRT are unique and totally different from the procedure in a civil court; (c) the power of transfer under the Civil Procedure Code (sections 22, 23, 24 and 25) applies only in cases where the transfer is from one court to another, wheras the DRT is not a court; and (d) the power to transfer under the DRT Act is restricted to cases filed by banks that were pending on the date when the act came into force, and to those cases in which DRT has jurisdiction.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in, lbhasin@vsnl.com or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.