Author name: CBCL

Ascertaining The Meaning Of “Dispute” And “Existence of Dispute” Under The Insolvency And Bankruptcy Code, 2016

Insolvency Law /

Ascertaining The Meaning Of “Dispute” And “Existence of Dispute” Under The Insolvency And Bankruptcy Code, 2016. [Ashish Jain] The author is a third-year student of National Law Institute University, Bhopal. Introduction The Insolvency and Bankruptcy Code, 2016 (“Code“) has been enacted with the objective of bringing efficiency in the insolvency and liquidation process in the country. However, there have arisen disagreements relating to the true meaning and purpose of the various provisions of the Code. One such concern has been raised with respect to interpretation of the terms “dispute” and “dispute in existence” used in the Code. Both the Mumbai and the Delhi benches of the National Company Law Tribunal (“NCLT”) in their various recent judgments have provided different interpretations to the said terms. Relevant Provisions of the Code Section 5(6) of the Code, which provides the meaning of “dispute,” says that the term includes a suit or arbitration proceeding relating to- (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty.[i] Section 8 then provides that the corporate debtor is required to bring notice, within ten days of receipt of demand notice from an operational creditor, of any “existence of dispute” in relation to such debt.[ii] Further, section 9 provides for initiation of corporate insolvency resolution process and states that the adjudicating authority may reject the application for initiation of such process if, before the expiry of the notice period of ten days, the operational creditor has received a notice of dispute from the corporate debtor.[iii] Thus, interpretation of the expression “dispute in existence” becomes significant as it remains the only defence available with the corporate debtor to avoid the insolvency proceedings.[iv] In cases where the debt is not disputed by the corporate debtor (and therefore the tribunal can initiate the insolvency proceedings) or where a suit or arbitration proceeding is already pending (and therefore the tribunal may reject the application), it is easier for the adjudicating authority to take a call. However, problem arises when a dispute regarding such debt has been raised by the corporate debtor within the ten days of delivery of demand notice and no suit or arbitration proceedings are pending in relation to such debt.[v] The question arises whether this would amount to an existing dispute within the meaning of the Code. Conflicting Judicial Interpretations On the one hand, the NCLT Mumbai bench has taken recourse to strict interpretation and held that a debt would be considered disputed only if a suit or an arbitration proceeding exists before the delivery of notice by the operation creditor regarding the debt. It can be argued that this may lead to injustice in matters where there is a genuine dispute in respect of the debt but no suit has been filed. The NCLT Mumbai bench in Essar Projects India Limited v. MCL Global Street Private Limited,[vi] while deciding over an application filed by an operational creditor, held that since the dispute raised by the corporate debtor in its reply to the demand notice was not raised before any court of law or arbitration tribunal, it cannot be said to come within the purview of existing dispute under the Code. Therefore, the Tribunal while allowing the application for initiation of insolvency resolution proceedings held that a simple denial of claims by the corporate debtor without any pending suit or arbitration proceeding would not amount to “existence of dispute” under section 8(2) of the Code. The Tribunal in DF Deutsche Forfait AG & Anr v. Uttam Galva Steel Limited[vii] while further affirming its interpretation observed that the term “dispute” cannot be held to mean mere assertion or denial as it would frustrate the objective of the Code and deny the remedy available to the operational debtor. Further, the Tribunal while deliberating over the meaning of the word “includes” in the definition of dispute under section 5(6), considering the context of the surrounding provisions, observed that the word “includes” must be read as “means”. Therefore, pendency of suit or arbitration proceeding before delivery of demand notice is necessary to take defence of section 9(5)(ii)(d). On the other hand, applying the golden rule of interpretation, the Delhi Principal Bench of NCLT has held that, in order to claim “existence of dispute,” it is enough that the corporate debtor has questioned the default of debt in the reply to notice within the ten-day period. Therefore, an application filed by an operational creditor is liable to be rejected by the tribunal if the corporate debtor claims that a dispute exists regarding such debt and there is no mandatory requirement that a suit or arbitration must be pending. The application in such case will only be allowed if such claim of dispute can be refuted on the basis of evidence provided in the application. The problem with such wide interpretation will be that the corporate debtor may raise a dispute even though no genuine dispute is present and this may lead to rejection of the application filed by the operational creditor. The NCLT Delhi bench while deciding over the application filed for initiation of insolvency resolution process under section 9 in One Coast Plaster v. Ambience Private Limited[viii] and in Philips India Limited v. Goodwill Hospital and Research Centre Limited[ix] interpreted the term “dispute.” In both the cases, the Tribunal observed that since the corporate debtor had disputed the debt in its reply to demand notice, the applications were liable to be rejected. The Tribunal further held that since the word “includes” comes before the word “dispute” in section 5(6), the definition of dispute is inclusive and not exhaustive and, therefore, it must be given a wider interpretation and should not be restricted to mean pending suit or arbitration proceeding alone. The Tribunal also observed that there is “adequate room for the NCLT to ascertain the existence of a dispute” under section 8 of the Code. The NCLAT Decision Recently, the National Company Law Appellate Tribunal (“NCLAT”) had the occasion to deliberate over the true interpretation of the

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Derivative Action Suits in Corporate Litigation in India

Company Law /

Derivative Action Suits in Corporate Litigation in India. [Virali Nagda] The author is a fourth-year student of NALSAR University of Law. A derivative action, also called the shareholder derivative suit, comes from two causes of action, actually: it is an action to compel the corporation to sue and it is also an action brought forth by the shareholder on behalf of the corporation for redressal against harm to the corporation.[1] Such an action allows the shareholders monitoring and redressal of any harm caused to the corporation by the management within, in a case where it is unlikely that the management itself would take measures to redress the harm caused. Thus, the action is ‘derivative’ in nature when it is brought by a shareholder on behalf of the corporation for harm suffered by all the shareholders in common. This happens when the defendant is someone close to the management, like a director or corporate officer or the controller. If the suit is successful, the proceeds are forwarded not to the shareholder who brought the suit but to the corporation on behalf of which the cause of action was established. If the American literature on this subject is to be believed, then the historical foundations of the derivative suit lay in the corporate purpose. This debate over the purpose raged in the first half of the 20th century with the proliferation of major conglomerates as public corporation where investors could buy stock in the corporation on the public stock exchange but had close to no control or active role in the management of the corporation.[2] Even before the early 20th century when most corporations were privately owned by the small groups of shareholders who managed the corporations,[3] there was a judicial struggle to understand the corporate purpose when shareholders sought to challenge the directors running the management of the corporations. This American literature roots different from the Indian base of derivative action, which comes not from a principled provision of the company law rules and legislation in the country but simply from the willingness of the courts here to rely on principles from the English common law. The provision that the law has provided with is redressal against oppression and mismanagement of the company where the Companies Act, 2013, has allowed for a provision of class action suits[4] to be filed by shareholders against directors or other officers of the company in cases of mismanagement. In the event of this section being now notified, this paper is an attempt to look at literature around derivative suits in India and the supplement of class action suits to understand where the interpretation and applicability of derivative suits in India stands at, presently. Historical and Normative Foundation of Derivative Suits Commentators have often claimed that the United States had imported the principle of shareholder derivative action from England.[5] The representative litigation in early cases of the English Court of Chancery showed semblance to the class action suits of today.[6] This was developed gradually from the communal harms within the thriving feudal societies of the 12th-15th century England. The American Revolution gave way from the precedent method of England for matters of corporate litigation to permitted exception to the necessary parties’ rule, a form of representative party law suits quite different from the contours of the actions in England.[7] The classification began when for the first fifty years post-independence the United States permitted shareholders to bring suits on behalf of themselves and all other shareholders,[8] but then near the later part of 1940, courts began to often describe such lawsuits as those being brought on behalf of the corporation itself. The seminal case on shareholder derivative action is the English case of Foss v. Harbottle,[9] where the court had to consider the question of whether it was acceptable to depart from the rule of corporation suing in its own name and character as against that in the name of someone whom law appointed as its representative. Relying on the words of its predecessor Wallworth v. Holt[10] which allowed the consensus of all shareholders of a joint stock company to be represented by its shareholder in a suit against mismanagement, the court in Foss recognized the involvement of a true corporation and consequently recognized the right of its shareholders to bring a lawsuit to court on behalf of all the shareholders in some situations. The US courts in bringing this interpretation, understood homogeneity of interests of persons involved in a corporation or an organisation as with the interest of the corporation or organisation itself and thus allowed the shareholder’s cause of action to be derivative to the corporation’s interest in the cause of action.[11] Clear recognition to the shareholders’ derivative suits came when American courts restricted shareholders to filing suits only in circumstances where corporation was incapable of seeking redressal.[12] Percy v. Millaudon[13] was the first case decided in the Louisiana Supreme Court which appears to have accepted derivative action suit. The English cases that percolated in the following of the class action of the Chancery court slowly allowed the exception rule to allow corporation representation for the interest of the shareholders. Derivative Suit as an Exception to the Principle of Corporate Law  The voting rules in company law ensure that the shareholders who won the largest stake in the corporation are allowed the greatest impact on the venture policy, simply because these shareholders will gain most from the good performance and lost most from the bad performance of the venture giving them the largest incentive to maximize welfare interests of the corporation.[14] The minority share-holders then have no power to act on behalf of the venture or limit the will of the majority. This relative lack of power for the latter does not otherwise disadvantage them since the benefit of this decision-making mechanism is accrued to the minority as well. In this fundamental principle of corporate law, the derivative suit is a striking exception as shareholders with the tiniest of investment in the corporation can also bring the derivative suit on behalf of the corporation.[15] The litigation costs of such suit are then accrued by the corporation itself. This then

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Jio: An Illusion in the Telecom Industry

Competition Law /

Jio: An Illusion in the Telecom Industry. [Rajat Sharma and Harsh Salgia] The authors are third-year students of National Law University, Jodhpur. Competition and Antitrust laws in various jurisdictions aim at safeguarding long-term consumer interests from overt and disguised predatory tactics of market actors. These laws regulate, monitor and assess competitive practices between and among firms. They affect major industries and business houses in India among others and every firm tries to be on its toes to not indulge in practices deemed to be anti-competitive. Predatory pricing is one such practice, and this article is an attempt to unfold the concept in the context of the latest Jio turmoil in the telecom market. Predatory pricing is the practice of pricing the goods or services at such a low level that other firms cannot compete and are forced to leave the market.[1] The explanation (b) to Section 4 of The Competition Act, 2002 defines it as follows: …’predatory price’ means the sale of good or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reducing competition or eliminate the competitors. Sunil Mittal-owned Airtel had alleged at the CCI that Jio’s pricing strategy amounts to “zero pricing” and Jio is indulging in predatory pricing in contravention to S.4(2)(a)(ii.) and S.4(e) of the Competition Act, 2002. Competitors are forced to lower their prices as a result of actions of one particular firm which acts in a disruptive way and sells its products below average cost level or indulges in zero pricing strategies. It is a prudent business strategy on behalf of a dominant undertaking (who tend to have deep pockets) to engage in loss making activities for a short period of time which will ensure the exit of the competitors.[2] The prerequisite to establishing practice of predatory pricing is to affirm use or misuse of dominant position. Ambani’s Gift to the Nation: Jio RCom  Jio launched its services in September, 2016 as a fresh entrant in the market which already had several established players. Its USP since the beginning was the extremely attractive feature of zero price for 4G data services and free calling services. Such sustained discounting practices are bound to raise warning signals to various telecom service providers due to the tendency of a single player to dominate the telecom market. Although Jio was a new entrant not too long ago, but due to its pricing strategies and customer plans, it has acquired significant share in what could be called, a surprisingly short amount of time. In terms of broadband subscriber base and data traffic, it holds 85% of the market share. Although, on the contrary, it is also true that in the broader telecom services market, Jio’s share is lesser than that of Airtel’s currently. Jio has also acquired significant amount of electromagnetic spectrum in the 1,800 megahertz (MHz) and 800 MHz bands during the last two rounds of spectrum auctions. But the company is essentially competing with the incumbent firms only within the market of 4G products and services. Eventually, all of this analysis boiled down to one question, namely, whether the relevant market in Jio’s case is market for 4G data and broadband services or is a broader cellular services market. Analysis of the Relevant Market: Whether 4G is a Relevant Product Market in Itself? When the behaviour of an undertaking in dominant position is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market.[3] Before establishing the fact that any establishment has undertaken the practice of predatory pricing, it has to be established that such a firm was in a dominant position and abused the same. Jio holds the largest share of spectrum in the 2300 MHz category and the 800 MHz category and further its subscriber base of 72.4 million as on 31st December, 2016 is the highest in the mobile-broadband user base.[4] In fact, the market for 4G services is quite different from the traditional market for 2G or even 3G services. This can be said due to the presence of features like high-speed downloads, elevated voice excellence, advanced infrastructure requirement and the specific need for subscribers to have 4G compatible mobile instruments. There are cases decided by the CCI itself which suggest that services for 4G can be taken as a separate relevant product market itself other than the broad spectrum of services which include 2G, 3G and voice-calling services.[5] The CCI, however, noted, considering Airtel’s Annual Report, that it would be inappropriate to distinguish wireless telecommunication services on the basis of technologies used to provide such services. It is not sure whether the Annual Report of Airtel is a very strong basis for the determination of differences between 3G and 4G LTE services. Also, the CCI did not dwell upon the fact that Jio is offering their calling services through the 4G-enabled LTE technology and is not providing services in the 3G sector. Therefore, it is not understood how Jio’s services fall in the broad relevant market of wireless telecommunication services and not only within the 4G LTE services product market. Jio: Market Disruptor or Dominant Entity? A dominant position exists where the undertaking concerned is in a position of economic strength which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, its customers and, ultimately, consumers; in order to establish that a dominant position exists, the Commission does not need to demonstrate that an undertaking’s competitors will be foreclosed from the market, even in the longer term.[6] Jio started

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Time To Revisit Legislations? An Analysis Of The Tata Docomo Case

Company Law /

Time To Revisit Legislations? An Analysis Of The Tata Docomo Case. [Priya Gupta] The author is a third year student of Gujarat National Law University. On the 28th of April, 2017, an important arbitration dispute was settled by the Delhi High Court in the case of NTT Docomo Inc. v. Tata Sons Limited,[1] wherein the court upheld the sanctity of a private contract in a foreign-seated arbitration by denying the Reserve Bank of India the right to intervene. A currently unsettled concern was raised by RBI in the enforcement of an arbitral award between NTT Docomo Inc. (‘Docomo’) and Tata Sons Ltd. (‘Tata’) whereby it contended that the award was against public policy of India as foreigners in matters of equity investments cannot add clauses that assure them a return below the sovereign yield. Facts of the Case Docomo and Tata entered into a Shareholder Agreement on the 25th of March, 2009, clause 5.7 of which stated that if Tata failed to satisfy certain ‘Second Key Performance Indicators’ stipulated in the agreement, it would be obligated to find a buyer or buyers for Docomo’s shares at the Sale Price i.e., the higher of (a) the fair value of those shares as of 31st March 2014, or (b) 50% of the price at which Docomo purchased its shares. Tata breached the agreement and so was called upon by Docomo to find a buyer or buyers for acquisition of sale shares. Another option later deemed unacceptable to Docomo was that Tata would acquire shares at the fair market price of INR 23.44 (USD 0.36). Finally, the dispute between the two parties was referred for arbitration when Tata failed to honor its obligations due to RBI’s objection before the London Court of International Arbitration. Arbitral Award and its Enforcement The tribunal rejected the contentions of Tata including which was the claim that an award of damages would result in contravention of the laws of India, especially the FEMA regulations. It stated that as Tata was under a strict obligation to perform, a special permission from RBI was not required. The methods of performance were deemed to be covered by other general permissions. It noted that- “Tata is liable for its failure to perform obligations which were the subject of general permissions under FEMA 20. The FEMA Regulations do not therefore excuse Tata from liability. The Tribunal expresses no view, however, on the question whether or not special permission of RBI is required before Tata can perform its obligation to pay Docomo damages in satisfaction of this Award.” On the other issue of non-acceptance of Tata’s offer to buy the shares at fair market price, the tribunal said that Docomo acted in good faith by insisting on performance as it had the reasonableness to not accept the amount on the offer. Therefore, the tribunal ruled out in favor of Docomo by making Tata liable for an amount of US$ 1,172,137,717 payable within 21 days. The real problem arose when Docomo sought to enforce the award in India. RBI filed an intervening petition where its counsel contended that the agreement was in violation of regulation 9 of the FEMA 20 which provided that the transfer should be at a price determined on internationally accepted pricing methodology. Further, the settlement was also in violation of section 6(3) of FEMA as valuation, transfer and issue of shares had to be conducted on the basis of the RBI guidelines which were not followed in the present case and hence the award was contrary to the public policy of India. Judgment of the Delhi High Court The Court first took up the question as to whether an intervention petition by the RBI could be entertained and, if yes, on what grounds. To answer this, it referred to section 2(h) of the Arbitration and Conciliation Act, 1996, which defines ‘party’ to mean a party to an arbitration agreement. Sections 48 and 34 work on the same lines by making sure that only a party to an arbitration agreement could file an application for setting aside the arbitral award. Since RBI was not a party to the agreement under section 48(1), its application was liable to be set aside. On the issue of violation of provisions of FEMA, it was stated that the agreement between Docomo and Tata was based on contractual promise which could always have been performed using general permissions of RBI under FEMA 20. It was held that the promise was valid and enforceable because sub-regulation 9(2) (i) of FEMA 20 permitted a transfer of shares from one non-resident to another non-resident at any price. Moreover, the issue at hand dealt with damages for breach and not for purchase or sale of shares overseas which is why a special permission would not be required. Therefore, the contentions of RBI were set aside and the court ordered for the enforcement of the arbitral award. Analysis It has generally been a recurring tendency of Indian courts to intervene in enforcement of awards by drawing approaches contradictory to the intent of the Act. This has been one of the major reasons for India for not being able to place itself on the global map of arbitration. The Delhi High Court has shown a pro arbitration approach in the current case by appreciating the negative impact on the goodwill of the country if a foreign award is not recognized. The award is said to be positive step as it reduces the ability of Indian companies to violate agreements with foreign entities and provides a wider interpretation to what can and can’t be opposite to public policy. However appreciable the approach of the court may be, the one issue that cannot be ignored here relates to the pending rules on capital account transactions with respect to debt instruments. Traditionally, the government does not have any prescribed limits as to equity investments from foreigners but have capped debt investments since over-indebted countries often see a run on their currency.[2] Since then, an investor putting a percentage on his investments when

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The Competitive Dynamics: Analysing The CCI Decision In The Reliance Jio Case

Competition Law /

The Competitive Dynamics: Analysing The CCI Decision In The Reliance Jio Case. [Praharsh Johorey] The author is a fifth year student of National Law Institute University, Bhopal. On the 16th of June 2017, the Competition Commission of India in C. Shanmugam v. Reliance Jio Infocomm Limited  held in response to information filed by Bharti Airtel (“Airtel”) that Reliance Jio Infocomm Limited (“Jio”) was not in abuse of its dominant position in the telecom sector, dealt with under section 4 of the Competition Act, 2002 (“the Act”). It was argued by Airtel that Jio’s extra-ordinary investments in the sector were indicative of the dominant position that it enjoyed, which it abused through predatory pricing – offering its data and telephony services at a minimum discount of 90% relative to its competitors. However, the Commission’s analysis did not extend beyond declaring that Jio could not be considered as being in a dominant position in the market – in that the ‘presence of entrenched players with sustained business presence and financial strength’ did not raise competition concerns. In this essay, my primary aim is to assess the concept of ‘dominant position’ under Indian Competition Law through a critique of the Commission’s decision in respect of Jio – and what it could come to mean for an increasingly disrupted telecom sector in India. A Dominant Position Under section 4 of the Act, the term ‘dominant position’ has been defined to mean ‘a position of strength, enjoyed by an enterprise, in the relevant market, in India, which would enable it to: operate independently of competitive forces prevailing in the market; or affect its competitors or consumers in the relevant market in its favour. The Competition Commission notes that while dominant position is traditionally defined in terms of market share of the enterprise in question, section 19(4) of the Act lists a number of factors are mandatorily required to be considered, such as the size and resources of the enterprise, the economic power of the enterprise, the source of dominant position and the dependence of consumers upon the enterprise. Thus, to effectively gauge whether Jio does in fact enjoy a dominant position in the Telecom sector, the market share it enjoys need only form part of the Commission’s overall consideration. To support its assertion that Jio does in fact enjoy dominance, Airtel pointed to two key factors – the unprecedented investment (nearly ₹1,50,000 crore) made by Jio’s parent company reflecting its lasting economic power, and the ‘welcome offers’ (free unlimited services for specific durations) which through ‘predatory pricing’ served as the source of its increasingly dominant position in the market. The resultant impact, Airtel argues, disproportionately affected Jio’s competitors, forcing them to reduce their tariffs to remain competitive – causing them to enter a negative spiral of loss-making and dwindling business feasibility. Let us examine the Commission’s response to both these contentions individually. First, in respect of Jio’s economic power, it noted: “As may be seen, the market is characterised by the presence of several players ranging from established foreign telecom operators to prominent domestic business houses like TATA. Many of these players are comparable in terms of economic resources, technical capabilities and access to capital.” This does not sufficiently counter the contention that Jio’s parent company, Reliance Industries has, and will continue to, inject significant sums of money at an unprecedented rate into a sector that has resulted in vast and rapid movements away from established market entities into Jio. The very presence of established industries such as the Tatas, for example, does not necessarily exclude the possibility of new entrants in the market exercising lasting and disruptive economic power. More pertinent however, is the argument concerning Jio’s ‘predatory pricing’. The term predatory pricing is defined under section 4 of the Act, being the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. Jio’s introductory offer – free and unlimited data, voice calling and roaming amongst other telecommunication services – was and continues to be unprecedented in the Indian telecom sector. The Commission’s answer to this contention is particularly crucial: “The Commission notes that providing free services cannot by itself raise competition concerns unless the same is offered by a dominant enterprise and shown to be tainted with an anti-competitive objective of excluding competition/ competitors, which does not seem to be the case in the instant matter as the relevant market is characterised by the presence of entrenched players with sustained business presence and financial strength.” For those following this line of argument closely, its circular nature is made quickly apparent.  For any pricing to be considered predatory, it must be tainted with an ‘anti-competitive objective’. However, the Commission rejects the notion that Jio is guilty of such objective, on the ground that the Telecom sector is characterised by the presence of ‘entrenched players’ – implying therefore that only in a market that is underdeveloped or lacking participation can anti-competitive objectives be manifested. It is also established that providing a bundle of telecommunication services free of cost for a period of nine months clearly falls within the literal meaning of selling ‘below the cost’. Even after such welcome offers ended, it is estimated that Jio offered its high-quality services at nearly 90% discount, to which the Commission responded: “In a competitive market scenario…it would not be anti- competitive for an entrant to incentivise customers towards its own services by giving attractive offers and schemes. Such short-term business strategy of an entrant to penetrate the market and establish its identity cannot be considered to be anti-competitive in nature and as such cannot be a subject matter of investigation under the Act.” It is important here to note that all participants in the telecom sector operate through offering various incentives to customers – the legality of such offers is not in question. Instead, the question is whether the telecom sector could

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The Insolvency & Bankruptcy Code v/s SICA: A Comparative Analysis

Insolvency Law /

The Insolvency & Bankruptcy Code v/s SICA: A Comparative Analysis. [Charu Singh] The author is a fifth year student of Ram Manohar Lohiya National Law University, Lucknow. Introduction The Sick Industrial Companies (Special Provisions) Act, 1985 [“SICA”] was passed by the Parliament with the objective of “securing the timely detection of sick and potentially sick companies and speedy determination by a Board of experts.”[1] Thereafter, the Act was repealed by way of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, which came into effect on December 1, 2016 and resulted in the dissolution of the Board for Industrial & Financial Reconstruction[2] [“BIFR”]. BIFR’s main responsibility was determination of sickness of industrial companies and to prescription of measures for revival of such companies. However, on December 1, 2016, the President gave his assent to the Insolvency and Bankruptcy Code, 2016 [the “Code”] with the view of “maximization of value of assets and to promote entrepreneurship, availability of credit and balance the interest of all stakeholders[3].” The Code essentially replaces the mechanism for revival of sick companies, amongst other persons, as was provided under SICA. Now, we shall look into the essential differences between the procedural and substantive law contemplated under SICA and the Code. Process of Rehabilitation (1) Sick Industrial Companies (Special Provisions) Act SICA provided for a multi-stage process for revival of sick companies. The first step involved reference of the sick company to the BIFR by the Board of Directors of the Company itself or the Central Government, Reserve Bank of India, State Government, Public Financial Institution, State level institution or a Scheduled Bank. BFIR, consequently, made an enquiry into the sick company within sixty days of such reference. BIFR then had two options, one, passing an order giving time to company to escape insolvency; second, passing an order for preparation of scheme for revival. If BIFR passed an order for preparation of draft scheme for revival, the draft was prepared generally in a span of ninety days choosing from an array of options available under SICA – financial reconstruction, amalgamation, sale or lease of the undertaking, etc. This draft scheme was then published by BIFR in the daily newspapers inviting suggestions for changes or modifications. Upon considering the suggestions, the scheme was then finalized by BIFR. (2) The Insolvency & Bankruptcy Code The Code provides for an integrated “corporate insolvency resolution process.” Upon default, any financial creditor, an operational creditor or the corporate debtor itself may initiate an insolvency resolution process by making an application to the National Company Law Tribunal [“NCLT”]. Upon satisfaction of the existence of a default and non-payment of dues by the defaulter, the NCLT may admit the application. The corporate insolvency resolution process is to be completed within one hundred and eighty days, which can be further extended to two hundred and seventy days only. The NCLT, thereafter, shall declare a moratorium, call for claims and appoint an insolvency professional who shall take over the company. A credit committee of all creditors shall be constituted, wherein each creditor votes. If 75% of the creditors approve the ‘resolution plan’, the plan will be implemented for the functioning of the Company. In case the creditors do not approve a plan, the Company goes into liquidation. There is a waterfall mechanism in place based on order of priority for distribution of assets on liquidation. Key Differences Time The Code provides for a time-bound resolution process. References of sick companies under SICA take around one or two years to get admitted for further investigation. While the Code is still new, there is a barrage of cases from BIFR, Debt Recovery Tribunal and the Companies Act, 1956 that will now fall under the ambit of NCLT. This may lead to delay in completion of the insolvency process within the prescribed limit of one hundred and eighty days. On this point, the National Company Law Appellate Tribunal [“NCLAT”], recently, ruled that the time limits prescribed under sections 7, 9 and 10 of the Code are merely directory and not mandatory, but however, the one hundred-eighty day timeline, extendable to two hundred and seventy days, is mandatory[4]. The ruling, thus, provides a gist of the Tribunal’s view of the objectives of the Code. Trigger Point SICA is only triggered when there is a loss of fifty per cent of a company’s worth. Therefore, it’s already too late, because half of the company’s worth is already eroded by the time BIFR decides to revive or liquidate it. However, the trigger, ironically, for liquidating a sick company is only a default of five hundred rupees. Conversely, the trigger point under the Code is one lakh rupees which can be increased up to one crore rupees, by way of notification of the government. Practice The BIFR and High Courts are reluctant in liquidating a sick company due to fear of loss of jobs, labour unrest, etc[5].  SICA was also misused by the debtor company to protect itself from creditors’ claims. This is not a possibility anymore, since the resolution plan so voted by the credit committee, ensures the creditors’ control over the functioning of the company. The corporate debtor cannot circumvent the process to keep themselves safe in the presence of an insolvency professional and a resolution plan. Distribution of assets The Code provides for a waterfall mechanism for the distribution of assets on the liquidation of a sick company. This provides for a stronger corporate governance mechanism, wherein creditors’ rights are enhanced. The priority starts from securing the rights of secured creditors and workmen to payment of equity, which by its very nature is high risk-return. SICA, however, did not prescribe for a waterfall mechanism. The distribution was based on the provisions of the Companies Act, 1956. Conclusion The Code has revolutionized the process of insolvency resolution in India. While the revival of sick companies was governed by SICA in the past, now it falls under the ambit of the Code. The objective of the Legislature behind passing the Code was

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The Bankruptcy Code & Sections 270-272 of The Companies Act, 2013- An Analysis

Company Law, Insolvency Law /

The Bankruptcy Code & Sections 270-272 of The Companies Act, 2013- An Analysis. [Shreya Choudhary] The author is a third year law student from ILS Law College Pune. The Insolvency and Bankruptcy Code, 2016 (hereinafter the “Code“) envisages an effective time-bound insolvency resolution process, aiming to maximize the returns for its stakeholders, namely, corporate debtors, individuals and unlimited partnerships. The commencement of the new regime has affected certain provisions of the Companies Act, 2013, including the winding up process envisaged therein. It, therefore, becomes significant to analyse the Code having regard to the said provisions. Overview of the Code The Code lays down a two-step process for corporate debtors- insolvency resolution process and liquidation. First, an application has to be made to the adjudicating authority by the creditor or the debtor. This process is to be supervised by the resolution professional with the help of a creditors’ committee, and they have 180 days from the date of admission of the application to facilitate a resolution plan to either restructure or liquidate the debtor. The adjudicating authority orders a moratorium for this period. The resolution plan needs the approval of 75% of the financial creditors by voting share and the approval of the adjudicating authority to be binding on all creditors. If the debtor’s situation cannot be resolved within the time allowed or the creditors reject the resolution plan or the 75% majority of the creditor’s committee resolves to liquidate the corporate debtor at any time during the process, the debtor is placed into liquidation and the resolution professional becomes the liquidator who realizes and distributes the assets in the new order of priority. To meet its objective of time bound resolution of defaults, seamless implementation of liquidation/bankruptcy and maximization of asset value, the Code envisages a new institutional set-up comprising of- (1) the Insolvency and Bankruptcy Board of India (IBBI) to regulate the insolvency process, (2) the insolvency resolution professional to ensure efficient management and working of the bankruptcy process, (3) the informational utilities (IUs) to act as a depository of financial information to avoid asymmetry in the resolution process. (4) the National Company Law Tribunal (NCLT) to act as the adjudicating authority for corporate insolvency and liquidation. Changes Introduced in Sections 270, 271 & 272 of the Companies Act, 2013 and in the Code The Code has brought about certain changes in sections 270, 271 and 272 of the Companies Act, 2013. Through a notification issued under the Code, section 270, which provided for the different modes of winding up, has been substituted so as to include only winding up by the tribunal. Likewise, section 271, which elucidates the circumstances in which a company may be wound up by the tribunal, no longer covers the situation where a company is unable to pay its debts, for the said situation is now dealt with by the Code. Similar changes have been made to section 272, so as to remove “any creditor or creditors, including any contingent or prospective creditor or creditors” from the list of persons who may present a petition to the tribunal for winding up. The provision for winding up on the ground of inability to pay debts now falls under the ambit of Section 7 to 9 of the Code. Further, creditors have the right to initiate resolution of insolvency proceeding on failure of which a liquidation application may be filed. Analysis (1) Voluntary liquidation Voluntary winding up has been incorporated in the Insolvency and Bankruptcy Code, 2016 under the provisions of Section 59. A corporate person who has not committed any default can initiate the voluntary liquidation process before the NCLT. The winding up process shall commence on the date on which a special resolution is passed by the members/partners of the corporate person to liquidate the corporate person and to appoint an insolvency professional to act as the liquidator. This remedy to initiate winding up proceedings against financially solvent companies that had defaulted in payment of debts was not available under the Companies Act, 2013. However, this is possible under the Code. With respect to proceedings pending before the High Court relating to voluntary winding up, an inference can be drawn from the case of West Hills Realty Private Ltd. and Ors. v. Neelkamal Realtors Tower Private Limited[1] that only the petitions which are at a pre-admission stage and have not been served on the respondent will be transferred to the tribunal; others shall be dealt with by the High Courts. Further, it is clear from the decision in Ashok Commercial Enterprises v. Parekh Aluminex Ltd.[2] that NCLT has jurisdiction over winding up proceedings even on account of inability to pay debts where such petition is served to a respondent after 15th December, 2016 and the High Court will continue to have jurisdiction over those winding up petitions which were served before 15th December, 2016. (2) Winding up on inability to pay debts As indicated earlier, section 271(1)(a) of the Companies Act, 2013 has been omitted by section 255 of the Code and the same is now dealt with in accordance with sections 7-9 of the Code. These sections deal with the initiation of corporate insolvency resolution process. On occurrence of a default, an application has to be made to the Tribunal by a creditor (financial and operational). An insolvency professional is appointed. Upon failure, there is liquidation of the corporate person is relation to whom application was made. The scope of default under the Code is also wide as compared to the situation of inability to pay debts which was provided under the Companies Act, 2013. Section 3(12) of the Code defines ‘default’ as non-payment of debt, when whole, any part or an installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. ‘Inability to pay debts’, as interpreted by the Andhra Pradesh High Court in the case of Reliance Infocomm Ltd. v. Sheetal Refineries Pvt Ltd.[3] , means a situation where a company is commercially insolvent, that is, the existing and provable assets would be insufficient to

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The Fugitive Economic Offenders Bill, 2017: The Mallya-Chidambaram Effect

Contemporary Issues /

The Fugitive Economic Offenders Bill, 2017: The Mallya-Chidambaram Effect. [Param Pandya, Tarika Jain, Margi Pandya] In the wake of the rising non-performing assets crisis, the Indian legal system seems to be grappling with major challenges than before. While turnaround of debt remains a problem, wilful default of debt adds to this menace. As banks and the government are dead beat trying to prosecute Mr. Vijay Mallya for wilful default of loans and Mr. Karti Chidambaram on money laundering charges, they continue to evade law by residing out of India. The Fugitive Economic Offenders Bill, 2017 (the “Bill”) seems to be a knee-jerk reaction which attempts to remedy such regulatory fiascos. The Bill was put in public domain on May 19, 2017 for comments.   Background To state that the existing legal framework to deal with high value multi-jurisdictional economic offences is inadequate would be an understatement. The RBI Master Circular on Wilful Defaulters (July 01, 2015) provides for barring a wilful defaulter from (a) raising any loans from banks, financial institutions and non-banking companies; and (b) floating a new venture. The other remedies available to banks and financial institutions are contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debt due to Banks and Financial Institutions Act, 1993 which are time consuming since they involve prolonged litigation. Moreover, even though the Insolvency and Bankruptcy Code, 2016  aims to provide for a speedy bankruptcy process, the National Company Law Appellate Tribunal  by holding that the timelines prescribed in Sections 7, 9 and 10 of the Code are directory in nature[1] has reduced its effectiveness to an extent. Further, liquidation/ bankruptcy process is not a sufficient deterrent in case of high value economic offences. The provisions of civil law in India do not address the issue of high value multi-jurisdictional fugitive economic offenders whereas the process prescribed under the Code of Criminal Procedure, 1973 is time consuming and hence inefficient. The Explanatory Note appended to the Bill states that fleeing of economic offenders leads to several “deleterious” consequences such as (a) hampering investigation in criminal matters; (b) wasting the precious time of the court; (c) undermining the rule of law; and (d) cases which involve non-payment of bank loans cause strain on the banking system. The Bill aims to deter fugitive economic offenders by providing for confiscation of all properties of a wilful defaulter prior to conviction. Key Features (1) Definition of Fugitive Economic Offenders The Bill defines a “Fugitive Economic Offender” as any individual against whom a warrant for arrest in relation to a scheduled offence[2] has been issued by any court in India who (a) leaves or has left India so as to avoid criminal prosecution; or (b) refuses to return to India to face criminal prosecution. Further, in order to ensure that the courts are not overburdened with such cases, only such cases where the total value involved is INR 100 crores or more shall be within the purview of the Bill. This is a higher threshold and must be reduced. (2) Applicability The provisions of the Bill shall apply to any individual who is, or becomes, a Fugitive Economic Offender on or after the date of coming into force of this law. It may be argued that the Bill (when becomes law) will be an ex post facto law i.e. it will impose penalties retroactively.[3] It may appear that such a provision shall the violate Article 20(1) of the Constitution of India. In case this line of argument is upheld by the court, by application of doctrine of severability, the remainder of the Bill may survive as good law which means that those individuals who fall within the definition of a “Fugitive Economic Offender” on the date of enactment of the Bill may be excluded from penalties under the Bill. [4]   (3) Process The Director[5] or any authorised officer shall make an application to the Special Court[6] for declaring an individual as a Fugitive Economic Offender. The Director or any authorised officer may pass an order attaching the properties as described in the application. Such attachment shall be valid for a period of 180 days from the date of the order. The Special Court shall serve notice and call upon the said individual to present himself before the Special Court within a stipulated time period. The Special Court may terminate such proceedings if the said individual appears in person within the specified time. However, the prescribed time may be provided by the Special Court if the individual seeks to be represented by a counsel. If the Special Court concludes that the individual is a Fugitive Economic Offender, the Special Court is required to record the reasons in writing. (4) Penalty Upon an individual being declared as a Fugitive Economic Offender, the Special Court shall pass an order confiscating all the properties which are enlisted in the application or as determined by the Special Court. From the date of such order, all rights and title in respect to such confiscated property shall vest with the Central Government, free from all encumbrances. Further, a Fugitive Economic Offender may, at the discretion of the court, be disentitled to file or defend a civil claim. If such Fugitive Economic Offender is a promoter or a key managerial personnel or a majority shareholder of a company, such company may also be disentitled to file or defend a civil claim. (5) Non-conviction-based Asset Confiscation Under the Prevention of Money Laundering Act, 2002 (“PMLA”), confiscation of the assets of the offender can only be resorted post conviction which is not an expeditious remedy. Hence, to address this, the Bill adopts a non-conviction based asset confiscation (“NCBAC”) approach as envisaged in the United Nation’s Convention against Corruption (2003), which was ratified by India in 2011. The NCBAC approach is based on the principle that “crime does not pay” i.e. those who commit unlawful activity should not be allowed to profit from their crimes.

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From Blurred Line to Bright Line: Concept of Control under the Takeover Law

Capital Markets and Securities Law /

From Blurred Line to Bright Line: Concept of Control under the Takeover Law. [Deeksha Malik] The author is a Fifth Year B.A. LL.B. (Hons.) student at NLIU, Bhopal The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter “Takeover Code”) prescribes a threshold limit of 25% of shares or voting rights in the target company which, when triggered, would require the acquirer of such shares or voting rights to make an open offer by way of a public announcement.[1] Irrespective of such acquisition, an acquirer is also obligated to make such an offer when he acquires control over the target company.[2] Regulation 2(1)(e) of the Takeover Code provides an inclusive definition of “control”, taking within its ambit the right to appoint majority of directors to the Board of the target company or to control the management or policy decisions of the said company by a person acting individually or in concert with other persons, either directly or indirectly, including by virtue of their shareholding, management rights, shareholder agreements, voting agreements or in any other manner. The definition expressly excludes exercise of control by a director or other officer of the target company merely by virtue of his holding such position. At this juncture, it is pertinent to note that the Bhagwati Committee, the recommendation of which formed the basis on which the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 were framed, suggested that though it is difficult to lay down a precise definition of “control” on account of the numerous different ways in which it could be exercised over a company, it is necessary to provide a broad inclusive definition which would “serve to indicate the circumstances when compliance with the provisions of the Regulations would be necessitated, even where there has been no acquisition of shares, so that SEBI would not be on an unchartered sea in investigating whether there has been change in control.”[3] It is against this backdrop that SEBI on March 14, 2016 came out with a discussion paper seeking comments from the public over the issue of the concept of control under the takeover law.[4] Various Approaches to Determination of Acquisition of Control Essentially, there are both objective and subjective tests to determine acquisition of control. The quantitative approach focuses on numerical thresholds in order to ascertain whether or not there has been an acquisition of control over the target. Many jurisdictions, including the European Union[1], Hong Kong[2], Italy[3] and Austria[4] opt for this approach on account of the relative efficiency and consistency in its application; such standards also significantly reduce the need for litigation. However, there appears to be considerable variation as regards the fixation of the shareholding percentage threshold for voting rights which would trigger the mandatory offer rule (ranging from 20% to 50% voting rights).[1] Much depends on the shareholding pattern that generally prevails in a particular jurisdiction; if shareholding is dispersed in that it is spread over a large number of shareholders, the trigger limit should be kept low, and vice-versa.[2] Objective standard has its own share of disadvantages. Being ‘mechanical’ in its application, it increases the possibility of sophisticated avoidance attempts. Let us take example of an acquirer ‘A’ in India, the takeover law of which provides for a trigger limit of 25% voting rights. ‘A’ acquires 24.5% of the voting rights in a company, thereby doing away with the requirement of an open offer and the economic cost it entails. If there is no other shareholder that exercises similar voting rights, one may reasonably draw the inference that A has a de facto control over the company. Similarly, there could be various kinds of agreements enabling a ‘stealthy’ acquisition of voting rights, and a takeover regulation providing for only an objective standard would not be able to catch hold of such an acquirer. On the other hand, some countries adopt the subjective route, enabling courts and regulators to check any kind of de facto control over the target. In countries such as Canada, France and Spain, an entity is deemed to be having control over another company if it is has the right to exercise majority of the voting rights at the general meeting of the company or has the ability to control the composition of a majority of the board members of the company.[3] Likewise, countries such as Brazil, China and Indonesia define control in terms of the ability to exercise influence over the company’s policies or its shareholder meetings.[4] Therefore, we find that a de facto concept of control essentially encompasses various modes through which an acquirer may gain control. Some of these modes could be the right of an acquirer to appoint or remove majority of the board of directors, ability to directly or indirectly determine the management or policy of the company[5], and the like. The process envisages fact-specific determination, making the law highly uncertain and unpredictable. In fact, many jurisdictions which previously had subjective definitions of control switched to objective definitions.[6] Indeed, such standards fail to take into account many situations where, as a protective measure, financial investors or borrowers seek certain rights in the company without any intention to seek control. The Combined Approach in India India follows both quantitative and qualitative approaches to determination of acquisition of control, providing a numerical threshold of 25% while at the same time giving a subjective definition under regulation 2(1)(e). As a result, the jurisprudence developed over time shows inconsistency among judicial decisions and multiple opinions as regards the scope of control. In 2001, the Securities Appellate Tribunal (SAT) held the acquirer in question to be in control over the target as it had veto rights on major decisions on structural and strategic changes.[7] More recently, in 2010, SAT significantly changed its stance in the much-talked-about case of Subhkam Ventures (I) Pvt. Ltd. v. SEBI[8]. In this case, Subhkam acquired more than 15% in the target company and made a public announcement in term of Regulation 10

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