Author name: CBCL

Ascertaining the Nature of Cheques in Time Barred Debts

Leave a Comment / Contract Law / CBCL

[By Mayank Jain] The author is a student of Jindal Global Law School. Introduction The Indian Judiciary has time and again faced the problem of ascertaining whether the issuance of a cheque for the repayment of time-barred debt is valid or not. The Limitation Act of 1963 puts a bar of 3 years. This means that if a cheque for repayment was issued on 01.01.2011 and the money was borrowed on 01.01.2005, the same amount would not be ‘legally enforceable debt’ and resultantly, the recovery of the said amount would be barred by the law of limitation. The article aims to address the question of whether a default u/s 138 of the Negotiable Instruments Act 1881 would apply to cheques issued with the intent of paying off time-barred debts. Unorderly Application in Indian Judicial Dicta The Courts have adopted extremely divergent and contradictory approaches while dealing with this issue. S. 138 the Negotiable Instruments Act 1881 provides that when a cheque has been drawn by a person in favour of another, and the same is returned by the bank on grounds of (i) insufficient balance or (ii) when the amount exceeds the limit set by the bank in pursuance of an agreement with the person drawing the cheque, such person is guilty of an offence. In Girdhari Lal Rathi v. P.T.V. Ramanujachari and Ashwini Satish Bhat v. Jeevan Divakar, the Courts held that when the cheque is issued for a time-barred debt, then in the event of the dishonour of cheque in such instances, a claim u/s 138 of the Negotiable Instruments Act 1881 cannot be made. This is so because the provision is only attracted when the impugned debt is ‘legally enforceable’ in character. A similar judicial opinion was upheld in Chander Mohan Mehta v. William Rosario Fernandes, wherein the Bombay High Court, by relying on Narender V. Kanekar v. Bardez Taluka Co-op Housing Mortgage, concluded that since, in a time-barred debt, the loan recoverable is not of sound legal nature, the penalty u/s 138 of the Negotiable Instruments Act 1881 is inapplicable. However, in Dinesh B. Chokisi v. Rahul Vasudeo Bhat, the Court overruled all previous precedents and came up with a decision that is regarded as a piece of legal talent. In paragraph 9, it was noted that S. 25(3) of the Indian Contract Act 1872 lays down that a promise in writing to pay off a debt that is time-barred amounts to an agreement that is to be deemed as a valid contract. The Court here categorically stated that in the event of a time-barred debt, the issuance of the cheque after the elapse of the limitation period amounts to the requirement of promise as postulated in S. 25(3) of the Indian Contract Act 1872. This judgement, despite being pronounced by a lower court, was able to decode the cryptic law in the area and fill the lacuna in legal interpretation that was created by the Apex Court in A.V. Murthy v. B.S. Nagabasavanna. In this judgement, it was noted that in cases of time-barred debt, provisions of S. 25(3) can be attracted provided there is subsequent acceptance/acknowledgement of the existing liability. However, what this Supreme Court judgement failed to establish is whether the mere issuance of a cheque in itself amounts to a promise in writing, a prerequisite enlisted u/s 25(3). To further decode this gap, reliance can be placed on National Insurance Co. Ltd. v. Seema Malhotra, in which where the Division Bench noted that a cheque is a bill of exchange, and the latter is an instrument in writing, directing one individual to provide a certain sum of money to another. Based on this interpretation, Courts have gone ahead and interpreted a cheque to be a form of written promise capable of sufficing S. 25(3). Until now, the Apex Court has failed to provide an unequivocal definition of the nature of a cheque. Recently, in Kotak Mahindra Bank Ltd. v. Kew Precision Parts Pvt. Ltd., the Supreme Court further strengthening the lacuna of law held that u/s 25(3), a debtor can enter into an agreement with the creditor to pay off the time-barred debt, however, there must exist some form of a written acknowledgement of the same. The judgement failed to address the issue of whether a cheque is equivalent to any such acknowledgement. Considering the existence of ambiguity with respect to the nature of a cheque, the state High Courts have adopted their own standards to remove this vagueness of the law. The Kerala High Court in Ramakrishnan v. Parthasaradhy, opined that if a cheque is dishonoured on the grounds of insufficiency of funds, the accused person will not be entitled to take the defence of time-barred debt when the cheque was signed. Hence, such an accused will not be excused from the rigours of S. 138 of the Negotiable Instruments Act 1881. The Court rejected all contravening precedents and granted validity to a cheque constituting a written promise made u/s 25(3) of the Indian Contract Act 1872 despite the demise of the limitation period. The dicta of the Kerala High Court were also noted in paragraph 7 of Vijay Ganesh Gondhlekar v. Indranil Jairaj Damale, wherein the Court observed that once a fresh promise is made u/s 25(3) of the Indian Contract Act 1872, then a fresh period of limitation of 3 years begins from the date of issuance of the cheque. Consequently, the liability that would arise is of a ‘legally enforceable debt’. Vikas Bahl in Sultan Singh v. Tej Partap[i] gave a decision largely in favour of the complainant based on precedents of other state High Courts and cardinal principles of equity, justice, and good conscience. It was noted that when an individual consciously issues a cheque for a time-barred debt, then, upon committing an offence u/s 138 of the Negotiable Instruments Act 1881, they cannot claim the relief of frustration of limitation period as that would – (i) be prejudicial and cause injustice to the complainant and

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The Operational Debt Conundrum: Examining Interest and Contractual Disputes from ‘Section 9’ Perspective

Leave a Comment / Insolvency Law / CBCL

[By Pooja Shukla & Mohammad Atik Saiyed] The authors are students of Gujarat National Law University. Introduction In our structure, Law is like a game of billiards with a bunch of statutes, precedents, and other dynamic legal authorities clustered together, necessitating harmony amongst associated topics for the ends of justice. On the same matrix, the Insolvency and Bankruptcy Code 2016 (“IBC”) is to be read alongside several other statutes such as, inter alia, the Taxation, SARFAESI, Arbitration, Prevention of Money Laundering Act, and Indian Contracts Act on a variety of situations and shifting timeframes. The primary goal of these established laws is to deliver justice; thus, they should be read and understood accordingly. However, while reading two statutes concurrently, questions about which one will take precedence and whether the disagreement would be resolved in accordance with the act or not occur quite often. Established with the vision of streamlining and consolidating the insolvency framework, the IBC is currently wending toward clearer jurisprudence, and, therefore, the Courts are encountering diverse legal issues. This article will address one such legal dilemma revolving around the Indian Contracts Act and the Insolvency and Bankruptcy Code. Operational debt and operational creditors are the key concepts to consider while addressing section 9 of the Insolvency and Bankruptcy Code (hereinafter “IBC”). The word “debt” needs to be understood differently in light of the changing times and situations, even though it has been explicitly defined. It has been defined into the following categories: “Debt” as described in Section 3(11) of the IBC,2016 means “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” “Operational Debt” as described in Section 5(21) of the IBC, 2016 means “a claim in respect of the provisions of goods or services, including employment or a debt in respect of the [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.” “Operational Creditor” as described in Section 5 (20) of the IBC,2016 means “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.” On that foundation, the present blog will primarily deal with two law propositions. Firstly, what contractual defaults will be covered under section 9 IBC? Secondly, can an application under section 9 IBC be made solely based on interest? Reflecting fundamentals of CIRP by operational creditor The Insolvency Code constructs the foundation of the issue by providing under section 9 for the initiation of CIRP by operational creditor. In alignment, the basic principles to look at before filing an application under section 9 are: a) Whether there is an ‘operational debt’ as defined exceeding Rs. 1 Crore?[1] b) Does documentary evidence furnished with the application show that the debt described above is due and payable and has not yet been paid? c) Whether there is an existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before receipt of demand notice of the unpaid operational debt concerning such dispute? The application would need to be rejected if any of the aforementioned requirements were not met. It is a settled principle, as per section 9(5)(ii)(d) of the IBC, that if the claim is disputed, then it cannot proceed further. However, in the case of M/S. Innoventive Industries Ltd. Vs. ICICI Bank & Anr. the Court observed, “a claim means a right to payment even if it is disputed. The Code gets triggered the moment the default of Rs.1 Lakh or more occurs” and thus, the Corporate Debtor cannot always take this as a defense. Beginning with the legal dilemmas at hand, it is a settled principle that to claim financial damages, it must first be assessed by a decree or order of a court by an adjudicating authority. It should not be wholly arbitrary and baseless when determined u/s 73 of the Contracts act. This principle is applicable to claim all unliquidated damages and was given in the case of Union of India vs. Raman Iron Foundry, and was reiterated by a recent judgment of Tata Chemicals ltd. Vs. Raj Process Equipments and Systems Private Limited (NCLT bench, Mumbai) and sole reliance on this was placed in the case of J. Kumar Infra projects ltd. Vs. Kanta Rubber Pvt ltd (NCLT, Hyderabad Bench). Contractual disputes Progressing to the first conundrum dealing with contractual defaults and its effect from the IBC perspective, in the recent judgment of XYKno Capital Services Pvt. Ltd. v Rattan India Power Ltd.(NCLAT), the Tribunal made it evident that the dispute about contractual issues related to quality and efficiency of the services are not to be resolved in the proceedings of section 9 IBC, and thus, the Bench, in this case, dismissed the appeal filed by the operational creditors. However, there are some dimensions to the central question, which are addressed hereinbelow. Breach of Warranty In the question of breach of a warranty in the contract of sale or purchase of goods and services as given in sections 12 and 13 of the Sale of Goods Act, NCLT as well as NCLAT recently allowed a section 9 application made on a breach of warranty, wherein, the central proposition was whether a dispute existed before the Demand notice issued u/s 8 or not. Although, the Supreme Court rejected the application on the ground of ‘pre-existing’ dispute and did not analyze the aspect of breach of warranty, impliedly including the same under operational debt. The Court finally cleared the position of law, stating that the IBC’s pre-existing dispute standard is not equivalent to the “preponderance of probability” principle. Thus, we can understand that the amount involved in the breach of warranty is also an operational debt. Is the advance made for the contract an operational debt? Not only in the written contracts but also the advance offered in oral contracts amounts to

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Dichotomy between IBC and PMLA: Provisional Attachment after Initiation of CIRP

Leave a Comment / Insolvency Law / CBCL

[By Masad Khan & Ameya Sharma] The authors are students of NALSAR University of Law, Hyderabad. INTRODUCTION In the case of Ashok Kumar Sarawagi v. Enforcement of Directorate, the National Company Law Appellate Tribunal, New Delhi (“NCLAT/ Appellate Authority ”) upheld the decision of National Company Law Tribunal (“NCLT/ Adjudicating Authority”) declaring that it is not empowered to deal with the matters falling under Prevention of Money Laundering Act, 2022 (“PMLA”) and rejected Mr. Sarawagi’s prayer of staying impugned provisional attachment order against the corporate debtor under PMLA after the initiation of Corporate Insolvency Resolution Process (“CIRP”). In this article, the authors have argued that the aforesaid decisions are bad in the eyes of the law and the Adjudicating Authority should have stayed the provisional attachment order issued against the corporate debtor. BRIEF BACKGROUND OF THE CASE The CIRP was commenced on 20 November 2019 in respect of Kohinoor Steel Private Limited, or the Corporate Debtor, and Mr. Ashok Kumar Sarawagi was appointed as its Resolution Professional. On 31 December 2021, after two years of initiation of CIRP, a provisional attachment order against the property of corporate debtor was issued by the Enforcement Directorate (“ED”) under Section 5 of the PMLA. The impugned order was challenged by the resolution professional under Section 14 and Section 238 of the Insolvency and Bankruptcy Code (“IBC”). The NCLT placed reliance on the NCLAT’s judgement in Varrsana Ispat Limited Vs. Deputy Director of Enforcement wherein it held that provisions under the PMLA relate to ‘proceeds of crime’ and Section 14 of the IBC is not applicable to such proceedings. Also, in its order, the NCLT holds that it is bound by the full bench judgement of the NCLAT in the case of Kiran Shah v. Enforcement Directorate. MISPLACED RELIANCE ON VARRSANA AND KIRAN SHAH Both, the NCLAT and the NCLT, placed consequential reliance on the Varrsana and the Kiran Shah judgements and held that they were bound by the precedents. In both these cases, the property was attached by ED much prior to initiation of CIRP. However, in the instant case, the provisional attachment order was issued after nearly two years of the initiation of CIRP. It signifies that the facts of the present case are manifestly different from the facts in the aforementioned cases. The Supreme Court, in several judgements, has held that ‘a decision is precedent on its own facts’[i] and even a close similarity between one case and another is not enough to consider it as precedent because a single significant detail may alter the entire aspect.[ii] Hence, the Varrsana and the Kiran Shah judgements cannot be considered as precedent in the present case and the reliance placed by the Adjudicating Authority on them is heavily misplaced. INCONSISTENCY WITH THE ESTABLISHED LAW While relying heavily on the cases mentioned above, the Adjudicating Authority as well as the Appellate Authority may have missed certain judgements that are acutely similar in their factual scenarios to the present case. Importantly, the NCLAT held in the case of Directorate of Enforcement v. Manoj Kumar Agarwal that there cannot be any attachment of a corporate debtor’s property or assets under the PMLA during the continuation of CIRP. In this case, the Appellate Authority has categorically laid down the law with respect to the impugned controversy and it should have been followed by the NCLT and the NCLAT alike. In JSW Steel Ltd vs. Mahender Kumar Khandelwal, a judgement delivered by NCLAT, herein the tribunal upheld ED’s decision to attach after the approval of the resolution plan. However, the outcome of this judgement would have been entirely different had it not been for the restrictions of prospective legislation. The amendment to Section 32, which inserted Section 32A, of the IBC was brought in during the pendency of this case, and hence could not be retrospectively applied. Notwithstanding this limitation, it is clear that the tribunal would have favoured the corporation, i.e., an injunction against the attachment order under PMLA would have been duly issued as per orders. The present case was brought after Section 32A of the IBC came into effect, hence, its application renders the impugned order of the NCLT inconsistent with the IBC. Arguably, the Supreme Court’s judgement in Ghanashyam Mishra & Sons (P.) Ltd. V. Edelweiss Asset Reconstruction Co. Ltd. is highly relevant in the present context. This case gave primal importance to the fulfilment of the objectives of the IBC and declared the binding nature of a resolution plan once it was approved. It unequivocally expresses the binding nature of the approved CIRP on the Central as well as State Governments and any local authority. It is also essential to bring to the fore that Section 238 of the IBC categorically provides that it shall prevail in case of inconsistency between two laws, as has been cited in the aforementioned judgment. The verdicts delivered in the aforementioned cases clearly lean in favour of putting on hold the attachment orders during CIRP in the long-standing dispute between IBC and PMLA. It is further pertinent to acknowledge that the factual matrices of the above precedents corroborate well with the present case. These cases find equal relevance in the context of the present controversy at hand. While JSW Steel is based on similar facts, the Ghanashyam Mishra judgement deals with the high value of trust placed by the Supreme Court on the IBC in the realm of corporate legislation and resolution. Hence, these judgements should have been followed consistently by the tribunals in the present case. ILL-EFFECTS OF THE RULING The NCLAT decision, in the present case, has jeopardised the legitimate interests of the corporate debtor’s creditors, including its workers and employees, without having any of their fault. They would not have the chance or remedy to recover any debts owed to the corporate debtor. The CIRP procedures would become ineffective due to the impugned attachment order since no one would be interested in purchasing the corporate debtor’s attached property or assets. The liquidation procedure that

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Tax Implications for Digital Economy: An analysis of India and UK Taxonomies

Leave a Comment / Taxation Law / CBCL

[By Syed Alwaz Asif] The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow. Introduction The post-pandemic world has changed rapidly. Digital platforms, which were a privilege for a few, have become necessary to upgrade workers’ skills[i]. It has provided an opportunity for workers to ensure flexibility in the work that they seek to do. It has become a significant source of employment. As a result, governments are constructing digital infrastructure to give their employees newer digital capabilities. Numerous social groups, including women, people with disabilities, and younger generations, who do not frequently participate in the conventional labour market, have access to income-generating opportunities. They also gave marginalized groups in conventional labour markets, such as refugees and migratory labourers, options to explore. Along with the benefits, these platforms have opened up a pandora’s box of challenges for the regulators. Long-standing taxation economies utilized in employment and tax law are under increasing pressure, which is why the law needs to adapt. The labour market is divided into specified categories due to legal control in these sectors, and rights and duties are associated with each category. The tests used to determine which group a person fits under are murky and too simple to evade lawful taxation for digital platforms. The relationship between the various groups under tax and labour law is particularly unclear. These developments have significantly impacted the taxation aspect for this category of workers. This category of independent contractors is, therefore, exempt from laws governing the minimum pay, working hours, terminations, and, to some extent, employment discrimination. Thus, by structuring one’s workforce as a group of micro-entrepreneurs, one can cut indirect expenses for employers while still abiding by labour laws. Similar economic activity can be classified into several legal forms underneath the current tax and employment law systems, creating substantial financial and regulatory incentives to choose one legal form over another. The taxation regulation provides several incentives to treat persons providing services to the engager’s business as self-employed contractors, which can help engagers avoid regulatory obligations and costs. The tax structure gives the person providing the services additional incentives to incorporate. Being recognized as a ‘gig worker‘ or offering services through a firm will allow the employee to improve his current take-home income. Under Indian Tax Laws, any income gained from an individual’s intellectual abilities is considered earnings from a profession under section 2 clause 24 of the Income Tax Act, 1961. Even if the income from digital works is less than Rs. 2,50,000, no direct tax is charged for this bracket. The income from gig work is subject to taxation under section 28 of the Income Tax Act, 1961 under the heading ‘Profits and Gains from Business or Profession’[ii]. Independent contractors are eligible in law to claim various tax deductions such as rental expenses, repair expenditures, and Depreciation for technological assets used for work and travel expenses. A GST registration is required for independent contractors with a revenue of more than 20 lakhs and who provide services outside of their state. The amount of GST an independent contractor, must pay varies according to their services. He is accountable for 18% GST if there is no rate mentioned. In UK taxonomies, tax disadvantage to an employee compared to a self-employed worker is more prominent[iii]. Under specific assumptions, employees and their employers pay about 70% more tax on such a sum than an equivalent owner-manager of a business and 35% more than an identical self-employed person. Significant incentives are created due to organizing activity in ways except through contract terms. Because of these disparities in tax rates, the tendency to work independently or via a personal digital services firm is detrimental to overall tax receipts[iv]. The rise of individuals working for their businesses and the consequent rise in the new form of working have tax-linked implications. Employees’ income across major jurisdictions is taxed more than self-employed. This is because employees are subject to social security insurance funds in India as well as the UK, but there is no such kind of regulation for self-employed. Many analysts justify the tax deduction that self-employed people receive on the pretext that they do not have active social security benefits. Differential tax treatment means individuals in similar places may have grossly different tax burdens. This lacks equity and fairness and creates economic inefficiency in the tax systems. A vital component of any competent regulatory taxation system is neutrality. Since similar activities are treated equally in a neutral system, people have no incentive to switch from highly taxed or regulated activities to those that are not. As shown above, the tax rates that apply to the same productive work vary greatly depending on whether someone provided their work through formal employment or self-employment. Complexities Involved The workers who are employed in Gig work have many sources of income. It creates practical complexities in filing the tax form. This leads to many individuals either skipping tax payments by mistake or failing to take benefit of tax rebates that come with their work mode. It exposes many workers to potential tax enquiry by the respective department. To buttress this, the workers have to take help from lawyers and accountants, which increases the costs that these workers have to pay to accomplish this task. The demanding challenges are not just limited to those who pay taxes but also to Income tax authorities as far as compliance is concerned. Existing Tax infrastructure needed to be designed keeping the burgeoning Gig Economy in mind. The Income Tax authorities across multiple jurisdictions face communications issues. They had to contact just one employer or platform for tax regulation. They must contact multiple independent contractors to inform them about their tax obligations. They may also have to inform them whether they are underreporting or not reporting their tax obligations. The state of applying different tax brackets to employees and self-employed provides explicit opportunities for tax evasion and avoidance. This puts a strain on Tax-collecting authority, leading to inefficient tax-collection systems. For Tax avoidance, individuals leverage the more significant

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Delving into Unsettled Dispute of Cross-charging Within Organisation – It’s Time for Decision

Leave a Comment / Taxation Law / CBCL

[By Ujjawal Badani & Tejas Geetey] The authors are students of the National Law University Odisha. INTRODUCTION Business Corporations often operate through multiple locations in the form of Head Office (HO) and Branch Offices (BO). Division of Offices into HO and BOs has not been defined either under the GST law or the allied laws, however, generally, it means the principal office of a business corporation, established for policymaking and governance. HO as the primary body has multiple functions including accounting, finance, and management services which are performed for the governance of other branch offices. For instance, strategy-making and communications are generally conducted at HO and then applied to its BOs which function across the states. Under the GST, each branch office of the same organisation is regarded as a “distinct person” and is required to obtain GST registration and also to comply with procedural requirements for each respective state. Further, if there is any supply of goods and services between two distinct persons, then such has to be invoiced as per GST. This concept is referred as cross-charging. The question raised by coming of the cross-charging under GST is that whether services by HO to its BOs/other units can be regarded as ‘supply’ under the GST? Further, another important subset arising from this is the cost of allocation of services provided by the employees of HO to it branch offices. In this piece, the authors have tried to analyse the above issues in respect of conflicting views surrounding cross-charging. SERVICES WITHIN ORGANIZATION To determine whether the activity performed by HO is supply, it needs to qualify as supply u/s 7 of the CGST Act, which is an inclusive definition (including activities such as transfer and barter) for a consideration when made for furtherance of business. The definition of supply alludes to Schedule I of the CGST Act, wherein activities are considered as supply also in cases if they are with no consideration. The respective office/branch of the same organization is regarded as a distinct person for GST registration. It is very clear that stock transfer of goods between distinct person is chargeable to tax. However, the issue which lies is “whether activities carried out by HO for other units would be construed as supply and leviable to GST or not”. The AAAR of Karnataka in ruling of M/s Columbia Asia Hospitals Private Ltd shed some light on similar issue which was filed by the applicant to know “whether the activities performed by the employees at the corporate office in the course of employment such as accounting, other administrative and IT system maintenance for the units located in the other states shall be treated as supply or not?” The ruling was passed on the finding that employees employed at HO are providing services at HO. Thus, there is employer-employee relationship only at HO and not BO. Based on Schedule I of the CGST Act, it was determined that such transaction, even if there is no consideration involved, is chargeable to GST. However, the Karnataka High Court has granted stay on the AAAR’s order. There is a lot of ambiguity revolving around this issue. The decision of Karnataka High Court is much awaited, and only suitable clarity could beat the heat. Recently, this issue was also dealt in case of M/s Tupperware India Private Limited (‘applicant’). In case of applicant, the HO provides various business support services to its other units. The authorities in this matter as well passed adverse ruling and concluded that GST is chargeable on services supplied by HO to its other units/offices by way of performing activities as it benefits another distinct person. SERVICES PROVIDED BY EMPLOYEES OF HO TO BO Now coming to the second part of this piece. Schedule III of the CGST Act clearly mentions that “services by an employee to the employer in course of employment” shall not be considered as supply and therefore tax cannot be levied on the same[i]. Though the act clearly excludes the services of employees from taxation, the same interpretation is not considered by the Courts. In the case of Columbia Asia, the Authority held that employees providing their services in other branch offices were not considered as a part of employer-employee relations. The Appellate Authority had ruled that the employer-employee relation mentioned in Schedule III has to be restricted under the GST Act. As distinct persons can be taxed, therefore, the relationship mentioned in the Schedule has to be restricted to one office. Therefore, the service of employees shall be considered as supply. But, the CGST Act provides that tax invoices will be charged on “distinct persons”, i.e., in this case, the HOs and BOs which and, therefore, it cannot cover an employer within its ambit. Further, there are problems present in the valuation of such supplies as it is done without any consideration. It will be difficult to determine at what cost the services given by employees are allocated to the other offices.[ii] ~Current Stance Though the decision in the advance ruling is only applicable to the particular parties to the dispute, the same did not happen in relation to the disputed matter of employees’ services. The advance ruling in the case of Columbia Asia gave chance to the other states to start following the lead. In the recent advance ruling of Cummins India, the issue dealt was whether the input tax credit (ITC) received by the HOs for providing common input supplies to other BOs will be considered as supply under the CGST Act? The Authority held that transactions performed by the HOs for the other BOs will be considered as supply. Further, the salary of employees of the HO should also be allocated and charged. The above ruling stretched the conflict further by considering input-service distribution (allocation of ITC on input services) and cross-charging under one ambit. Moreover, it is contended that the transaction that happened in the above case cannot be taxed as it is a “pass-through mechanism” and therefore not a

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Whether Consultants like Doctors can be issued ESOPs

Leave a Comment / Company Law / CBCL

[By Arham Anwar & Suvanwesh Das] The authors are students of the National Law University, Jodhpur and the National Law University, Odisha. Introduction We have always seen doctor’s job as a noble profession but with changing times new questions of law have evolved and new dynamics have been added to supposedly simple concepts. This article seeks to address the issue of whether consultants like doctors can be issued ESOPs under provisions of Companies Act, 2013. This question is especially pertinent because after the COVID-19 pandemic the world has seen rapid emergence of companies providing health care and pathological services. Thus, new complexities have arisen as to whether doctors employed by these companies can be treated as an “employee” .Also if they come under the ambit of employees then can they be given all the benefits that employees of any company are eligible to. The article will first discuss the legal provisions pertaining to ESOPs and the definition of employee(s) under different legislations andthen relevant case laws will also be taken into consideration as to whether doctors can come under the ambit of employee(s) and finally conclude with our findings. Legal Provisions Pertaining to ESOPs Employees Stock option is defined under Section 2(37) of the Companies Act, 2013 as an “option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price”. Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 talks about of issue of employee stock options-“A company, other than a listed company, which is not required to comply with Securities and Exchange Board of India Employee Stock Option Scheme Guidelines shall not offer shares to its employees under a scheme of employees’ stock option (hereinafter referred to as “Employees Stock Option Scheme”), unless it complies with the following requirements, namely:-(1) the issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution. Explanation: For the purposes of clause (b) of sub-section (1) of section 62 and this rule ‘‘Employee’’ Means a permanent employee of the company who has been working in India or outside India; or a director of the company, whether a whole-time director or not but excluding an independent director; or an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include- an employee who is a promoter or a person belonging to the promoter group; or a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company” As per section 62(1) (b) of the Companies Act, an unlisted private limited company can issue further shares to employees under the scheme of Employees Stock Option (“ESOPs”), pursuant to a special resolution. If we look at Rule 12 of (Share and Debentures) Rules 2014 it clearly says that ESOPs can only be issued to an employee and Rule 12(1) goes on to define who can be called an employee. A plain reading of Rule 12 (1)(c) of the same talks about entities which are not to be counted as an employee and after reading all these provisions we can very well conclude that doctors can come under the ambit of employee under Rule 12 of (Share and Debentures) Rules 2014. If we read Rule 1(4) of the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, it specifies that it can be applied to any company whose equity shares are listed on a recognised stock exchange in India ,further Rule 2(i) of the same defines the term “employee “.AlsoRule 4 makes any employee eligible to participate in the schemes of the company as determined by the compensation committee. Here also no bar regarding inclusion of doctors can be observed. In addition to that, SEBI suggested that definition of “employee” should be changed to include non-permanent employees provided that they are designated as employees by their employers and are exclusively working with such company or its group company including subsidiary or its associate company or its holding company in ESOPs benefits as was reflected in SEBI FAQs. It is also important to note that present regulations such as The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 relating to Professional Conduct of Registered Medical Practitioners don’t contain any explicit restrictions that prevent doctor(s) from being engaged as an employee(s). On top of that Union Ministry of Health and Family Welfare launched ICMR/DHR Policy on Biomedical Innovation & Entrepreneurship for Medical Professionals, Scientists and Technologists at Medical, Dental, Para-Medical Institutes/Colleges. According to the policy, medical experts and doctors will be encouraged to explore entrepreneurial endeavours by building start-up firms, accepting adjunct positions in Companies as Non-Executive Directors or Scientific Advisors, or by joining them as Scientific Advisors. The doctors will also be allowed to work alone or through companies on inter-institutional and industry projects, licence technologies to corporations for commercialization, and generate income for their own support as well as the benefit of society. The medical professionals will also be allowed to take a break to translate and commercialise their innovations through the establishment of their start-up companies with the medical institute’s approval in which they may be working. The goal of this policy is to support entrepreneurship growth and the development of Make-in-India products while also promoting interdisciplinary collaboration, innovation, technological development, and skill development. As we look at catena of judgements given by different High Courts, position pertaining to status of doctors as an employee will be clarified. Case Laws In the case of Commissioner of Income Tax (TDS), Pune vs. Grant Medical Foundation, the issue of law which arose was

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Need for Wimbledon-like Debentures in India

Leave a Comment / Company Law / CBCL

[By Saaransh Shukla & Isabel John] The authors are the students of the Narsee Monjee Institute of Management Studies. INTRODUCTION As we all know, share capital is the main source of finance for companies. Since companies may need additional amounts of money periodically, they cannot issue shares every time. However, they can raise money from the public. Around the world, companies, organizations, corporations and other entities raise money from different sources for the purpose of financing. As we all know, share capital is the primary source of funding for businesses. Since businesses may require additional funds on a regular basis, they cannot issue shares every time. They can, however, raise funds from the general public. Companies, organisations, businesses, and other entities all over the world raise funds from various sources in order to finance their operations. In this article, one such means of raising capital, i.e., ‘Wimbledon Debentures’ is considered. With the elucidation of the concept of the Wimbledon Debentures, the proposition is further assessed in relation to the Indian debt market. The paper explores if the Wimbledon Debenture model could be inculcated in the different industries in India, whether such debt financing would be useful and the issues that may occur in its practical application. WHAT ARE WIMBLEDON DEBENTURES? It’s Not A Bond, Not A Stock, Not A Ticket – It’s A “Wimbledon Debenture” The word ‘debenture’ has been derived from the Latin word ‘debere’ which means to borrow. The debenture is a written instrument acknowledging a debt under the common seal of the company. The money raised from the public is a loan that is further divided into units of small denominations. Each unit is called a ‘debenture’ and the holder of such units is called a Debenture holder. Even though the cash raised by debentures turn into a part of the organization’s capital structure, it doesn’t get to be share capital. Therefore, debentures are a widely recognized type of long haul credit that can be taken out by a company. These credits are regularly repayable on a date and pay a fixed rate of interest. Generally, debentures are issued for starting new projects, expansion of the company, refurbishments or improvements of the company, mergers, acquisitions, etc. Swen Lorenz, the author of the blog ‘Undervalued Shares’ claimed that the Wimbledon Debenture is a very quirky security and rightfully so. The Wimbledon Debentures are unsecured but still if we see the last trading price of one debenture was 110,600£, that is huge for an unsecured debt. The Wimbledon Debentures have played a significant role in the history of Wimbledon. The money raised from issuing these Debentures funds the improvements in and around the Wimbledon Grounds solely for the benefit of the esteemed guests. By the purchase of each Debenture, the holder is provided with a premium seat on Centre Court or No.1 Court for the Championships for a period of five years. With the increasing popularity of the sport and the ever-burgeoning public demand, the AELTC raised funds via debentures to purchase and expand their grounds. Presently, the Championships from 2021-2025 are covered under the current series of the Centre Court Wimbledon Debentures. Usually, subscribing to an issue of debentures or bonds requires coughing up a cash investment. But with Wimbledon Debentures, one can pay the cash in phases throughout the duration of the debentures and there is no interest rate payment. Technically speaking, the debentures are zero-coupon debt security that comes with the dividend in the form of ‘tickets’. Then the debenture holders receive access to the best sought-after seats for five years with no additional payment, access to exclusive restaurants and bars, car parking, transferable tickets, etc. As a holder, the daily tickets can either be sold privately or can be transferred to anyone at any price. In April 2018, the Centre Court Wimbledon Debentures (2016-2020) were trading at over £100,000 each. The Wimbledon Debentures model is slightly distinct from the usual debt financing carried out by companies. In comparison to the way debentures are normally issued, the Wimbledon Debentures pay no interest over the life of the security, instead, they are entirely in the form of tickets. As per the prevailing laws, the Debentures are also exempt from the Capital Gains Tax.[1] Looking at the success rate of this form of raising funds, it will be interesting to see if some other companies or corporations engage in debt financing similar to the Wimbledon Debentures model. WIMBLEDON DEBENTURES MODEL – INDIAN PERSPECTIVE According to the Companies Act (2013), the term debenture is defined under Section 2(30). Generally, debentures are issued for starting new projects, expansion of the company, refurbishments or improvements of the company, mergers, acquisitions, etc. Firstly, the Wimbledon Debentures fall within the definition of Qualifying Corporate Bonds (QCBs). In layman terms QCBs are exempted from capital gain taxes. In many countries including India, bonds and debentures are used interchangeably but they have certain differences. Bonds are issued generally by government agencies/large corporations but debentures are issued by companies. Bonds are backed by assets and are thus, secured, unlike debentures which may or may not be backed by assets (secured or unsecured). In debentures, the rates of interest are generally higher when compared to bonds. Additionally, the risk factor is lower for bonds and during repayments, bondholders are given priority over debenture holders. It is pertinent to note that the Wimbledon Debentures are unsecured, but people still purchase them. In the Indian market, the Securities and Exchange Board of India (“SEBI”) has made the process of buying and selling secured debentures difficult for the potential holders. Thus, it is assumed that companies may shift to issuing unsecured debentures in the market and making the technical process easier. Under the provisions of the Companies Act (2013) of India, the power to issue debentures can be exercised on behalf of the Company with a meeting of the Board as per Section 179 (3). Section 71 is related to the issuance of debentures along with the penalties for

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Accountability of the COC: Formulating a Standard Code of Conduct

Leave a Comment / Insolvency Law / CBCL

[By Shraiya Jain & Palak Jhalani] The authors are students at the Institute of Law, Nirma University Background . . CoC as a transient assorted body, consisting of financial creditors is deemed to be the apex body to decide on the matters pertaining to the course of CIRP. Although the RP acts as a key managerial and administrative authority over the business affairs of the CD, however, in reality, it is the CoC who decide on the matters of core functioning of the Corporate Debtor. The CoC is not only entrusted with all the critical decision-making powers in the CIRP under the Code but is also responsible for the conduct of the CD’s business and assessing its viability to determine a way the distress could be resolved.[i] In its legislative guide on insolvency law, UNCITRAL noted that the expansion of committee authority promotes greater accountability in the insolvency system. It states that the CoC should legitimately exercise its authority and not abuse it.[ii] A process for the removal or replacement of any representative or member of the CoC in cases of negligence, incompetence, conflict of interest, or fraud was also advised by the guide for the states to adopt. Many nations have a thorough set of rules to keep an eye on and control the behaviour of different insolvency regime participants. For instance, in UK, to streamline the conduct of insolvency personnel, there is a delegated ‘Statement of Insolvency Practice 15 (SIP)’, which outlines basic set of guidelines for practitioners to follow. It serves as a beacon for the stakeholders and restores their confidence in the dispute settlement procedure.[iii] While the IBBI has proposed a set of guidelines to regulate the conduct of the CoC, the article envisages the need for such a code. In the latter part of the article, the authors have critically evaluated the proposed set of IBBI guidelines, highlighting the major impediments to successful application of the same. Need for a code of conduct The burden of revival of the company falls upon the CoC based on the role that it performs. To exercise such an exclusive function, it enjoys an upper hand in determining a way to resolve the distress through the application of commercial wisdom in the financial matters of the CD. Such commercial wisdom of the CoC is always prioritized by the judicial authorities as well to uphold the creditor-in-control regime provided under the Code. However, exercising such great power comes with great responsibilities. Despite a circular issued by the IBBI to elect competent and authorized personnel by the creditors,[iv] numerous questions have been raised against the conduct of CoC. In some cases, the members of the CoC are neither adequately empowered to take decisions on their own nor acquainted with their role. This causes delay and allows depletion of value,[v] which itself goes against the code’s objectives, i.e., timely resolution and maximization of value. In other instances, the tribunals have observed missteps by the CoC such as undertaking adjudication beyond their powers and violating the laws and procedures. [vi] Discussions & Deliberations IBBI propounded the necessity for the institutional financial creditors to take necessary steps ensuring their respective representatives to act in an efficient and timely manner while discharging their functions. .[vii] The urgency of a professional code of conduct for the CoC, which regulates their decisions due to their importance in the efficacy of the code, has also been reflected in the 32nd report of the Standing committee on finance to the Parliament.[viii] . Identifying unregulated work environment of CoC, a discussion paper[ix] followed by a proposed set of guidelines were introduced by IBBI. Again, in the year 2022, the committee recommended IBBI to come up with a standard code of conduct for CoC, for which it proposed to amend Section 196[x] of the Code as required. . The Committee also examined the possibility of the MCA consulting with relevant financial sector authorities like SEBI and RBI to develop a suitable enforcement mechanism for the code of conduct.[xi] The Draft Guidelines and its Objections Regardless of explicitly mentioned provisions under the Code directing CoC to work in an efficient manner, the proposed set of code of conduct acts as an icing on the cake. It provides for disclosures, maintaining objectivity in the decision making process, cooperation with other insolvency professionals, neutrality, ensure timeliness, etc. in addition to the basic principles of transparency and accountability in their manner of functioning. The creditor-in-control regime provided by the Code also vests certain duties of public trust and care with such creditors constituting members of the CoC. The implementation of a code of conduct for regulation of CoC imposes challenges to these duties. Conflict with the commercial wisdom of CoC The Apex court highlighted the limited role of the Adjudicating Authority (AA) in approving a resolution plan after it was approved by the CoC, thus, favoring their authority concerning financial decisions over and above anything else.[xii] Such was the case in another landmark judgment whereby the commercial wisdom of the CoC was upheld.[xiii] Given the fact that CoC has supremacy over commercial wisdom, it would be contradictory in nature if due to a formal and cautious decision-making approach such commercial wisdom is questioned before the AA. The practical consequences of subjecting it to judicial review would only result in increased challenges to the resolution plan by different stakeholders. Inconsistency in regulation As stakeholders from different backgrounds constitute CoC, they are regulated by their respective authorities. A different code of conduct for each of them would be tantamount to discrimination concerning discharging their functions. However, prescribing a set of guidelines applicable to all types of stakeholders irrespective of their nature would result in conflict between these different regulatory authorities and thus, inconsistency in regulation would prevail affecting the entire credit culture of the entity. Increased litigation Moreover, one of the objectives of the Code is the timely resolution of insolvency proceedings for realizing the maximum value of the assets. Judicial scrutiny at various stages of decision-making

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A BRIEF ANALYSIS OF TRANSPARENCY REGULATIONS (SECTION II) UNDER THE INVESTMENT FACILITATION DRAFT 2022

Leave a Comment / Trade Law / CBCL

[By Sanket Das & Shrey Srivastav] The authors are students at National Law University Odisha. Introduction Successful investment facilitation strategies are built on a solid foundation of transparency and information. By transparency, it is meant that the investors should have knowledge about the pertinent laws which influence their investment decisions. [1] Further, investors should also be apprised of the administrative procedures of the nation they are going to invest in. [2] The survey found transparency and information to be “very significant” in their role as an investor. The vast majority of respondents ranked “very significant” the publication of relevant laws and regulations influencing foreign direct investment, such as those provided on an Institute for Portfolio Alternatives (IPA) website[3]. The people who took the survey analysed that investment application timelines and expenses must be made public[4]. According to information on investment facilitation measures at the country level, the majority of the 86 countries included in the Investment Facilitation Draft have implemented measures relating to the disclosure (publication of laws and regulations), accessibility of measures , the lack of fees for information access, and specifics on authorisation processes & payments[5]. Transparency as a component under Investment Facilitation Draft Transparency and information are fundamental to easing the process of making investments. In order to make an informed investment decision, investors need access to knowledge about administrative procedures, laws and other issues that could affect their enterprise. Transparency of investment incentives Members must be transparent about the laws, regulations, policies, and processes that control investment incentives. Information on all investment incentives must be published regularly (preferably in English) and made publicly available without prejudice. Investment incentives facilitate Investments in a nation and induces to increased stability and reduced possibility of rent-seeking. Small and medium-sized enterprises (SMEs) who may have fewer resources for internationalisation and fewer resources to find information will find this material particularly useful. Incentives inventories are being published online by many economies to attract investment. Providing incentives for people to work toward Sustainable Development Goals (SDGs) can be quite helpful. Dispute between International Investment Agreement (IIA) & Investment Facilitation for Development Agreement (IFD) Each dispute settlement mechanism used to implement an IFD Agreement and an IIA is distinctive. Given the likelihood of an IFD Agreement being a multilateral or plurilateral agreement under WTO, the disputes under these agreements shall be subject to the exclusive and compulsory jurisdiction of WTO as mentioned under the Dispute Settlement Understanding[6]. The consensus among nations on a certain issue may be indicated by how frequently it appears in IIAs. However, Investor-State Arbitration (ISA) is permitted in many IIAs. It is now the most common route to an Investor-State Dispute Settlement (ISDS). About one thousand ISA lawsuits have been filed with the International Centre for Settlement of Investment Disputes (ICSID) so far. Given the similarities between an IFD Agreement and an IIA, a state regulatory measure on investment facilitation might fall under both purviews. Thus, parties alleging different treaties could file the same matter to ISA dispute settlement, WTO dispute settlement, or both. As things stand, a number of possibilities exist[7]. Dispute scenarios For instance, a relief claim is filed with ISA under the IIA and the IFD Agreement. In this hypothetical, we explore if and how an ISA tribunal may handle a challenge brought before the WTO. The well-known instance which best demonstrates this is of Philip Morris Asia vs. Australia.[8] Tobacco Plain Packaging Act was passed in Australia in 2011 to reduce tobacco use for public health reasons. Several lawsuits were filed against Australia after the Act was passed. The investor argued that Australia should uphold its commitments under the Australia-Hong Kong BIT Model and the Paris Convention for the Protection of Industrial Property, the Agreement on TRIPS, and the Agreement on Technical Barriers to Trade (TBT). WTO accords include both TRIPS and the TBT pact. Australia first argued that to import obligations owed by Australia to other states under other treaties the BIT’s umbrella clause could not be used and then argued that the BIT’s dispute settlement provision cannot assert “roving jurisdiction” that would allow a BIT tribunal to start making a broad series of determinations that could conflict with the determinations of the agreed dispute settlement bodies under the nominated multilateral treaty. This is especially true when those organisations have sole authority. Transparency, simplifying & expediting of administration procedures There should be a push to streamline and speed up the application and approval processes for investment projects at all levels of government. Members should also think about instituting silent consent administrative processes to make investments easier. Where the competent authority fails to act within the time period needed under its laws and regulations, authorization is automatically granted to investors under the idea of “silent consent”, unless investors have been advised otherwise.[9] Investments with little risk can be approved with minimal scrutiny, while those with higher risk require more time and attention from the administration. Section II: Transparency of Investment Measures of Investment Facilitation Draft 2022. Publication and availability of measures and information In order to make investors, interested parties, and other members become familiar with any relevant general application measures linked to matters falling within its scope, each member is required to disclose or make it readily accessible. The member state is obligated to publish any international agreements to which it is a party.[10] However, this provision can be waived in the case of an emergency situation. Once a member publishes the text of a law or regulations, there should be a reasonable amount of time before investors to comply.[11] The member shall make every effort to announce in advance the aim and objective of a new legislation or regulation or amendments that are relevant with the legal framework for adopting measures.[12] The Member shall maintain electronically accessible information for investors.[13] Information relevant to investing in its domain includes the laws and regulations pertaining to FDI[14], details regarding which sectors are open, limited, or prohibited, and any other such data[15]. The information on how to start a company and get it registered, as well as how to

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