Author name: CBCL

[By Chetna Alagh] The author is a student of UPES, Dehradun.   The process of schemes of arrangement, which falls under the purview of the Companies Act, 2013, has a significant role to play in the dynamic world of corporate complexities. These arrangements provide businesses with a methodical way to restructure their operational and financial situations. A company is legally allowed to restructure its financial debts using a scheme of arrangement if it can reach an agreement with all its stakeholders, including creditors, debtors, and holders of debentures. Once the proposed plan gets approved, it becomes enforceable against all parties. Section 230 of the Companies Act, when read in consonance with Regulation 2-B of the Insolvency and Bankruptcy Board of India’s (IBBI hereinafter) Liquidation Process Regulations 2016, establishes guidelines for the approval of time period in relation to “Schemes of Compromise or Arrangement”. Regulation 2B specifically addresses the time period for the scheme of arrangement when the company is in liquidation. It specifies that the proposed scheme of compromise or arrangement shall be completed within 90 days of the order of Liquidation. The persons who are not eligible under the Insolvency and Bankruptcy Code of India, 2016 (IBC, 2016 hereinafter) to submit the Resolution Plan shall not be a party to such compromise or arrangement. A significant question that arises with regard to schemes of arrangements or compromise is the fundamental character of the 90-day period required by Regulation 2B i.e., whether or not this period is directory or mandatory in nature. In the case of Arun Kumar Jagatramka vs. Jindal Steel & Power Ltd., the apex court talked about the interplay between the IBC, 2016, and Section 230 of the Companies Act, 2013. The court stated that the IBC and Section 230 must be construed in harmony. It was determined that suggested compromise or arrangement solutions should follow the IBC’s guiding principles, particularly in situations when companies are in liquidation. This was held keeping in view with the objective of safeguarding businesses against poor management and going into liquidation. The court ruled that Section 230 and the IBC are inextricably linked when addressing firms that are in liquidation, rejecting the claim that Section 230 stands alone and has no relationship to the IBC. In the case of Bharat Sharma Resolution Applicant vs. Reshma Mittal RP & Anr the National Company Law Tribunal (NCLT) order was the subject of the case’s appeal. The main question was whether the appellant, an MSME, should have been permitted to propose a compromise/arrangement scheme under Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, and whether the rejected Resolution Plan of the appellant should have been taken into consideration. The Liquidator argued that liquidation was the best option given the failure of the plan. It was held that the 90-day window under Regulation 2B was flexible and that the appellant should be permitted to submit a compromise/arrangement scheme within a month as per Section 230 of the Companies Act. Even though the 90-day window had passed, the appellant was allowed to submit a scheme of arrangement within one month, the tribunal did not view the 90-day window as an inflexible requirement, but rather as a directory provision. Further, in the case of Kshitiz Gupta (Liquidator in the matter of Abhishek Corporation Ltd.) Vs. Asset Reconstruction Company (India) Limited and Ors, the tribunal was asked to rule on how the Companies Act of 2013’s Sections 230 to 232 should be applied when a corporate debtor is being liquidated under IBC, 2016. The issue was whether the liquidator should try to save the business by reaching a scheme of arrangement with the creditors in accordance with Sections 230-232, and if that failed, move forward with the asset sale. It was held that the liquidator should prioritize trying to revive the company using the procedures outlined in Sections 230-232 of the Companies Act, 2013, and that these proceedings could take longer than the usual 90 days and emphasized that asset sales should only be pursued in cases where Sections 230–232 revival efforts have failed. This interpretation permitted a more adaptable strategy, acknowledging that the precise timetable for revival efforts and legal actions could change depending on the situation. The decision emphasized that when considering the revival and arrangement processes under the Companies Act, 2013, adherence to the strict 90-day period was not required. In the context of an ongoing liquidation processing the case of Small Industrial Development Bank of India and Ors vs. Delicious Cocoo Water Pvt. Ltd. and Ors, the tribunal was asked to decide whether to accept or not a Scheme of Arrangement pursuant to Section 230 of the Companies Act, 2013. The main issue was whether the submission deadline outlined in Regulation 2B (1) of the IBBI (Liquidation Process) Regulations, 2016, was mandatory or merely directory in nature. It was held that the timeline can be extended if it serves the scheme’s purpose as there was no specific timeline prescribed in the IBC, 2016 itself for submitting such a scheme. The tribunal’s decision emphasized the IBC’s goals of maximizing the value of a corporate debtor’s assets and favouring resolution over liquidation. As a result, the tribunal ordered the liquidator to present the proposed plan as soon as possible for the creditors’ consideration, maintaining the status quo with regard to the corporate debtor’s assets until the creditors decided regarding the plan’s viability. However, in the case of Mr. Harish Sharma vs. C&C Constructions Ltd. & Ors, the appellant sought an extension of the timeline for a scheme of compromise. It was held that the appellant had not met the requirements to request an extension of the deadline for submitting a compromise and arrangement plan, i.e., a formulated and ready plan was not demonstrated by the appellant, and their proposed plan was not approved by at least 75% of the secured creditors. Furthermore, no proof of the scheme’s readiness had been provided by the end of the process’s prescribed 90-day period. Therefore, it was concluded

[By Rishabh Shivani] The author is a student of National Law School of India University, Bengaluru.   Introduction Bank guarantees are special contracts where a bank guarantees performance by one party in a separate, underlying contract and agrees to furnish payment unconditionally on the demand of the beneficiary. However, egregious fraud and special equities are two exceptions based on which injunctions restraining the  encashment of a guarantee can be granted. While egregious fraud  necessitates fraud by the beneficiary in the underlying contract, special equities conventionally demand exceptional circumstances leading to irretrievable injustice or financial harm to the party claiming the injunction, if such injunction is not granted. Irretrievable injustice has, therefore, been considered a necessary consequence of establishing special equities. In Standard Chartered Bank v Heavy Engineering Corporation Ltd (“Standard Chartered”), the Supreme Court deviated from this rule and recognised special equities as a distinct circumstance from irretrievable injustice, thereby increasing the number of exceptions from two to three. However, the scope of special equities is still unclear, with no single principle laid down to determine when special equities can be claimed. In this piece, I attempt to clarify the meaning of “special equities” after the Standard Chartered ruling and lay down a test of prima facie breach now being used by Courts to establish special equities. Firstly, I provide a brief evolution of the law on special equities, and the changes brought by Standard Chartered. I then look at cases post-Standard Chartered and argue that the single guiding principle for Courts to establish special equities now is when no prima facie breach is attributable to the party claiming the injunction. I conclude by arguing that this changed meaning of special equities was much needed and does not affect the unconditional nature of bank guarantees. Evolution of Special Equities as a Ground for Injunctions The phrase “special equities” neither originates from English common law nor is statutorily defined. It is merely a product of judicial creation and was mentioned for the first time in Texmaco Ltd v State Bank of India, where the Calcutta High Court recognised “special equities” as a second exception where injunctions could be awarded. However, the Court did not elaborate upon what it meant by special equities. It was only after the ruling in Itek Corporation v First National Bank of Boston that there was some clarity. Here, a US District Court held that injunctions may be granted when the encashment would cause irretrievable injustice, such that the party would not be able to reimburse itself later. This dictum has been uniformly applied by Indian Courts. For example, in UP Cooperation Federation v Singh Consultants, the Supreme Court held that parties claiming injunctions will have to prove special equities, the consequence of which is irretrievable injustice, to successfully claim injunctions. In subsequent cases such as UP State Sugar Corporation v Sumac International and Svenska Handelsbanken v Indian Charge Chrome Ltd, courts have focused only on the irretrievability of damages for establishing special equities. Hence, special equities were established only in cases of irretrievable injustice, not otherwise. In fact, in Indu Projects v Union of India, the Delhi High Court went to the lengths of holding that special equities are interchangeably used with irretrievable injustice and are not larger in scope than the latter. Special equities were, therefore, practically ignored by Indian courts as an independent ground for awarding injunctions. However, this position was entirely changed in Standard Chartered. Here, the Supreme Court deviated from its rulings and held that injunctions can be granted when there is fraud, irretrievable injustice and special equities. It recognised special equities as a distinct circumstance from irretrievable injustice and hence, as a third exception. Establishing Special Equities Post Standard Chartered While Standard Chartered has transformed special equities by recognising it as a third exception, the extent of such transformation is, solely by the judgement, unclear as the Court did not define what it meant by special equities and how it was different from irretrievable injustice. Hence, it must be understood by analysing relevant case law post-Standard Chartered’s ruling. Standard Chartered was first applied by the Delhi High Court in Halliburton Offshore Services Inc Limited v Vedanta Limited and Others (“Halliburton”). Here, the imposition of the COVID-19 lockdown made it impossible for Halliburton to perform the contract. Consequently, Vedanta claimed breach and sought to encash the bank guarantees, and in response, Halliburton approached the Court seeking an injunction. Now, as per the pre-Standard Chartered position, the injunction would not have been granted as the damages were not irretrievable. However, the Court here recognised the distinction created in Standard Chartered and held that as Halliburton was willing to perform the contract but was genuinely disabled from doing so due to the lockdown, the encashment of bank guarantees would have caused unfair prejudice to it, and hence there were special equities in its favour. The injunction was, therefore, granted on the ground of special equities. However, the mere existence of COVID-19 is not sufficient to establish special equities. In Shaarc Projects Limited v Indian Oil Corporation (“Shaarc”), there were bank guarantees furnished by Shaarc in favour of Indian Oil. When several breaches were flagged by Indian Oil, Shaarc sought an injunction against the invocation of the bank guarantee, claiming that the performance became burdensome due to COVID-19. The Court rejected this plea holding that the increased burden does not make out a case of special equities. Why did the Court hold differently in these cases, given that both were marred by COVID-19? The differentiating factor was the existence of a prima facie breach. In Halliburton, the breach allegations were unfounded because Halliburton was genuinely disabled from performing the contract due to COVID-19. However, in Shaarc, the pandemic – did not disable Shaarc from performing the contract. The breach allegations were reasonable and well-founded. This prima facie breach principle has also been used in cases where there are arbitral awards in favour of the claimant. In Technimont Pvt Ltd v ONGC Petro Additions, the Delhi High Court

[By Tanya Verma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   Introduction In Digital Lending (DL) context, individuals can conveniently secure loans through online platforms. These platforms, typically accessible as applications or websites, are managed by entities known as Loan Service Providers (LSPs). The digital lending process necessitates borrowers to furnish requisite documentation and request specific financial solutions, including Buy Now Pay Later loans (BNPL), Small Medium Enterprise (SME) loans, Personal loans, Trade loans, and more. These LSPs, duly authorized by Financial Institutions (FIs), evaluate the financial history of applicants along with the submitted documents. Upon thorough assessment, loans are digitally approved through the platform. Following the guidelines established by the Reserve Bank of India (RBI) for Digital Lending, Financial Institutions (FIs) are designated as Regulated Entities (RE). These REs primarily extend loans to entities deemed to have low risk, thereby safeguarding the return of invested funds. However, there are instances where borrowers cannot fulfill their loan obligations, resulting in potential losses for the REs. To mitigate this scenario, LSPs offer a guarantee to REs through an agreement referred to as a Default Loss Guarantee (DLG). The DLG agreement ensures loan protection up to a specified limit. Yet, before August 2022, LSPs introduced a synthetic securitization process involving transferring credit risk for digitally provided loans using credit derivatives or guarantees while retaining the loan portfolio on their own balance sheet. This process included a 100% risk guarantee. In response, the RBI prohibited this approach due to its adverse impact on bank balance sheets and implications for the risk management commitments made by LSPs. This piece attempts to shed light on the broader implications of the same, starting with that of lenders, then loan service providers, and lastly for borrowers, which eventually turn out to be on the brighter side. Before that, a look at the major terms of the guidelines: The LSP providing DLG must be a company incorporated under the Companies Act, 2013. DLG agreements must be legally enforceable contracts between the RE and DLG provider. The DLG arrangement should not exceed 5% of the loan portfolio. The DLG arrangement’s tenor should match the longest tenor of the loan portfolio. DLG can be accepted as cash deposits, fixed deposits, or bank guarantees. REs can invoke DLG within 120 days of overdue. LSPs must publish information about DLG portfolios and amounts on their websites. REs are responsible for identifying loan assets as Non-Performing Assets (NPAs). REs need a board-approved policy before entering any DLG arrangement, covering selection criteria, guarantee scope, monitoring processes, and fees. DLG arrangements are governed by RBI’s Digital Lending Guidelines and other relevant regulations for customer protection and grievance redressal. Implications For brevity of expression, I shall analyze the implications in three parts. First, I shall deal with the implications on lenders, second, for loan service providers, and lastly, for borrowers. For Lenders: We see three major implications for the lenders. First, the RBI’s 5% cap on DLG addresses the issue of high guarantee rates, preventing banks from writing off loans through synthetic securitization. In simpler terms, in a synthetic securitization, a bank buys credit protection on a portfolio of loans from an investor, thereby implying that when a loan in the portfolio defaults, the investor reimburses the bank for the losses incurred on loans in that portfolio up to a maximum, which is the amount invested. This suggests that the RBI’s decision to limit the DLG to 5% of the loan portfolio is a strategic move to curb the practice of offering excessively high guarantee rates by LSPs. By imposing this cap, the RBI aims to prevent banks from taking advantage of synthetic securitization, a process where credit risk is transferred through derivatives or guarantees. The implication is that the RBI seeks to ensure a more controlled and realistic financial environment by discouraging risky lending practices that could lead to potential loan write-offs. Second, it can be seen that the DLG contracts offer security, allowing lenders to enforce terms and impose penalties on breaching LSPs. This highlights the contractual security provided by DLG agreements. Lenders can use these agreements to establish clear terms and conditions with LSPs. In case of any breaches, lenders have the authority to enforce penalties as per the agreement terms. This creates a framework that encourages LSPs to adhere to their commitments, ensuring higher accountability and reducing the risk of non-compliance or misconduct. Thirdly, REs must still identify NPAs for asset classification, excluding guaranteed amounts from LSPs. This point emphasizes that while Digital Lending Guarantee (DLG) agreements provide assurance for loan repayment, it’s still the responsibility of the Regulated Entities (REs) to identify Non-Performing Assets (NPAs) for proper asset classification. The guaranteed amounts from LSPs are excluded from this classification process, indicating that the guarantees do not affect the overall assessment of the financial health of the loans. This separation maintains asset quality and risk assessment transparency, regardless of the guarantees provided. Adding onto the above, it can be seen that board-approved policies and auditor-certified disclosures enhance credit standards and reliability. Here, the focus is on robust credit underwriting standards and transparency in the DLG arrangement process. The requirement for board-approved policies ensures that the entire DLG process adheres to specific criteria, from selecting providers to monitoring and review mechanisms. Auditor-certified disclosures add another layer of reliability by ensuring that the financial information provided by the DLG provider is accurate and trustworthy. This enhancement in credit standards and transparency improves the overall credibility and effectiveness of the DLG arrangements. For Loan Service Providers The situation of LSPs is not the same too, for they can no longer offer exorbitant DLG rates, affecting their risk exposure and credit management. This highlights a significant change for LSPs resulting from implementing the RBI’s DLG guidelines. The guidelines impose a maximum cap on the rates at which DLG arrangements can be offered by LSPs. This cap effectively curtails the ability of LSPs to provide excessively high guarantee rates to