Author name: CBCL

Whether Non-Member Director can Approach NCLT for Acts of Oppression and Mismanagement

Leave a Comment / Company Law /

[By Amarpal Singh & Abhishek Attri] The authors are students at UPES Dehradun. INTRODUCTION A person can be appointed as an additional or alternate director in the company without being a member (“non-member director”) as per Section 161 of the Companies Act, 2013 (“Companies Act”). Further Section 169 of the Companies Act provides the procedure for the removal of directors. In case the non-member director is illegally removed from the company, traditionally, the remedy available to him would have been to approach the civil court.  Au contraire, after the establishment of the National Company Law Tribunal (“NCLT”), it has been conferred with exclusive jurisdiction over all company matters under Section 430 of the Companies Act. Further, the jurisdiction of the civil courts has been barred. In a situation where an application is made by a member under Section 241, provided the requirements stated in Section 244 of the Companies Act must be satisfied, the NCLT has the power to regulate the affairs of the company under Section 242 of the Companies Act.  In case, a non-member director is illegally removed from the company, he cannot approach the NCLT under Section 241 considering he is not a member of the company. In addition, he will be rendered remediless since the jurisdiction of the civil court is barred under Section 430. The above question of law is pending before the Supreme Court of India (“Supreme Court”) in the case of Manish Kumar v. Topworth Urja & Metals Limited. The courts have expressed divergent views on the aforementioned proposition which has led to certain confusion. This article aims to provide an analysis of the above proposition of law.  Facts Two persons were appointed as additional directors of Topworth Urja & Metals Limited. Manish Kumar (“Appellant”) alleged that the appointment of additional directors was done in contravention of provisions of the Companies Act, 2013, and the Article of Association of the company. He alleged that the appointment was done without his knowledge and by passing a resolution at the purported board meeting. Subsequently, the appointment was ratified by passing a special resolution in the Annual General Meeting. The Appellant aggrieved by the irregularities had filed a suit before the civil court seeking the appointment of directors as illegal and void ab initio. The civil court denied the relief claimed by the Appellant along with a direction to approach NCLT in view of Section 430 of the Companies Act.  The Appellant instead of approaching the NCLT had filed an appeal before the Bombay High Court (“HC”). He contended that he cannot approach the NCLT for seeking relief under Section 241 of the Companies Act as the right rightfully available to the member as per Section 242 of the Companies Act. The Appellant did not fall under the definition of the member as prescribed by Section 2(55) of the Companies Act, 2013. Therefore, the following issue arose before the HC.  Issue Whether a non-member director can approach the civil court for seeking relief against the oppressive acts of the company?  Decision The Bombay HC relied on the decision of the Madras HC in the case of Chiranjeevi Rathnam v. Ramesh and held that the word “any member” used in Section 241 of the Companies Act, 2013 should not be interpreted in a confined way as it may lead to abuse in regards to the process of law. Any person who is interested in the management of the company should not be restricted to approach the NCLT because of the words employed in Section 241 i.e., “any member”. Under Section 242, the NCLT is expected to exercise its power upon an application preferred by any member of the company.  It was further held by the Bombay HC that Section 430 of the Companies Act has to be read along with Section 241. Section 430 bars the jurisdiction of civil courts in respect of any matter which the NCLT or the National Company Law Appellate Tribunal (“NCLAT”) is empowered to determine by or under the Companies Act. The word “any matter” used in Section 430 is of the widest amplitude and includes all company matters. Therefore, the HC dismissed the appeal.  ANALYSIS In the case of Jithendra Parlapalli v. Wirecard India (P) Ltd., the same question arose before the NCLT Chennai bench i.e., whether a non-member director can file a petition for oppression and mismanagement. The applicant relied on the decision of Madras HC in the case of Chiranjeevi Rantham v. Ramesh and contended that the word “any member used in Section 241 of the Companies Act should not be read in a confined way. The NCLT distinguished the case of Chiranjeevi by giving detailed reasoning and held that in the case of Chiranjeevi the judgment was passed by the Madras HC by taking into consideration the facts and circumstances of that particular case. Further, it was held that the case of Chiranjeevi included intermingled issues of a member director adopting a non-member director. Consequently, it was held by the NCLT that a non-member director cannot file an application for oppression and mismanagement as the legislature in its wisdom has granted the right to file an application alleging acts of oppression and mismanagement only to the “members” of the company. If non-member directors are allowed to file an application alleging acts of oppression and mismanagement the intention of the legislature will be defeated and it would lead to torrent of litigation. Therefore, due to the divergent views of the courts, the position of law is still not clear leading to confusion. Illegal removal/ appointment of a director is an act of oppression and mismanagement The NCLAT in the case of Vijaya Hospital C. Kity & Resorts & Ors v. Sibi C.K & Ors.,  held that appointment of a Chairman and Managing Director without holding a board meeting is in non-compliance with the provisions of the Companies Act. Therefore, it amounts to an act of oppression. Similarly, in the present case, the appointment of additional directors was done in

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Significance of Prior Contract under Operational Debt: The Recent Conundrum

Leave a Comment / Insolvency Law /

[By Soumya Sinha & Bhabesh Satapathy] The authors are students at the National Law University, Odisha. INTRODUCTION The birth of the Insolvency and Bankruptcy Code, 2016 (“IBC”) in India has not only alleviated the pain of Financial Creditor (“FC”) but also Operational Creditor (“OC”). By various judgments and amendments the scope of operational debt defined under section 5(21) of the IBC has been augmented. In many recent rulings, various authorities and courts have talked about the scope of advance payment for the goods and services under the umbrella of the operational debt. The recent National Company Law Appellate Tribunal’s (“NCLAT”) decision in Chipsan Aviation  Limited v. Punj Llyod Aviation Limited has created a debate concerning the significance and necessity of a prior contract on the basis of which an operational debt is considered u/s 5(21) of the IBC. NCLAT through its ruling held that advance payment for goods and services without a prior valid contract can still be considered as an operational debt under IBC. This stance has sparked more confusion regarding the prerequisites of an operational debt under IBC. In this article, the authors seek to critically analyze the Chipsan Aviation case and argue on the necessity of a valid contract to transfer goods or services in an operational debt under IBC. BACKGROUND                               The appellant, Chipsan Aviation Private Limited (“Operational Creditor”) had advanced an amount of Rs. 60 Lakhs to the respondent, Punj Lloyd Aviation Limited, the Corporate Debtor (“CD”) for aviation related services. However, the services were not rendered by the CD. In addition, the advance payment made by the appellant was also not refunded. But an advanced payment was reflected in the respondent’s balance sheet as a current liability. The circumstances led to an issuance of demand notice under Section 8 of the IBC and filing of a petition under Section 9 of IBC, seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the CD over the default. The plea by the appellant was rejected by NCLT Delhi. It was held that advance payment would not come under the ambit of operational debt. However, establishment of operational debt would be dependent on the contract. The stance taken by NCLT was appealed by the OC before the NCLAT. The NCLAT had given its decision in favor of the appellant allowing advance payments to be termed as operational debt u/s 5(21) of the IBC. Further, it was held that even in the absence of any contract between the OC and CD, the advance payment would still constitute operational debt. It had put reliance on the Supreme Court’s judgment in the case of Construction Consortium Ltd v. Hitro Energy Solutions Pvt. Ltd, where it was held that Section 5(21) of IBC needs to be interpreted in a broad manner covering all aspects of advance payment. UNDERSTANDING OPERATIONAL DEBT U/S 5(21) Section 5(21) of the IBC expound operational debt as “A claim in respect of the provisions of goods or services”. Moreover, the word claim has been defined under the Section 3(6) as either “a right to payment or a right to remedy for breach of contract”. Here, if Section 5(21) is read with Section 3(6) then it is deduced that operational debt requires a claim for the payment of goods or services which implicitly has a nexus with a valid contract for the providing the same. This stance has been reaffirmed in the case of Mr. Harrish Khurana v. M/S One World Realtech Private and Construction Consortium Ltd v. Hitro Energy Solutions Ltd where it was held that “An operational debt should include only those debts which are arising from a contract in relation to the supply of goods or services from the corporate debtor”. Thus, the essentials of an operational debt are that there must be a debt in respect to which a claim arise which should be either for the remedy for breach of an underlying contract between OC and CD for providing goods or services, or for the payment of the goods or services which have already been supplied under a valid contract. CONTRACT NOT ESTABLISHED – DOES NOT GIVE RISE TO OPERATIONAL DEBT UNDER THE IBC The foremost requirement for a debt to be termed as operational debt is the existence of a valid contract. This has been elucidated in numerous judgments, the most notable of which is Tejas Industries v. Gujarat Machinery (P.) Ltd in which the court emphasized upon the relationship of the operational creditor and corporate debtor. In this case it was established that for a claim to be considered as operational debt, the existence of a formal contract between OC and OD is a prerequisite.  Further, in the case of Ms. Rohita v. All That Hype Media (P.) Ltd. the NCLT while rejecting the CIRP petition ruled that there should be a valid and enforceable contract between the parties under the operational debt. Under the  Indian Contract Law, 1872, the essentials of a valid contract are outlined. A valid contract requires the establishment of an offer by one party and acceptance by the other. The term ‘offer’ is defined in Section 2(a)  as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person”. Further, under Section 2(b), “when an assent is granted to the offer and the same is conveyed to the offeror, it is termed to be accepted”. However, in the present case the Draft Agreement was forwarded by the OC to the CD, which the CD never signed. It can be concluded that no acceptance of the offer was made. Thus, no valid contract was formed in the present case. Further, in order to prove an operational debt in a CIRP, the OC is provided with an option between an invoice demanding payment of goods supplied to the CD or a contract for supply of goods or services as per Regulation 7(2)(b)(i) and (ii)  of the CIRP Regulations 2016 .  Moreover,

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K. Paramasivam v. The Karur Vysya Bank- Are Corporate Guarantors equivalent to Corporate Debtors

Leave a Comment / Insolvency Law /

[By Keerthana Rakesh] The author is a student at the Gujarat National Law University, Gandhinagar. Introduction Section 7 of the Insolvency and Bankruptcy Code (“IBC”) came under discussion due to the confusion that arose as to whether the proceedings can be initiated against the Corporate Guarantor under the Corporate Insolvency Resolution Process (“CIRP”). The apex Court in K. Paramasivam v. The Karur Vysya Bank Ltd. & Anr., has attempted to provide clarity on the same. Section 7(1) of IBC states that: “(1) A financial creditor either by itself or jointly with other financial creditors may apply for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.” The appeal came before the Supreme Court challenging the decision of the National Company Law Appellate Tribunal (“NCLAT), whereby the tribunal admitted the application under Section 7 of IBC filed by the Financial creditor, Karur Vysya Bank Ltd. against Maharaja Theme Parks and Resorts Private Limited (“Maharaja Theme Parks and Resorts”). The ground for appeal was that Maharaja Theme Parks and Resorts is neither a Corporate Debtor according to Section 3(8) of IBC nor a Corporate Guarantor as per Section 5(5A) of IBC. They are excluded from the ambit of Section 7 of IBC since the borrowers were not Corporate Debtors. Through this post, the author seeks to analyze the above case law and to see whether the Supreme Court’s judgement aligns with the object behind IBC, which is to relieve distressed corporate entities and provide a means of recovery to creditors. Factual Background Maharaja Theme Parks and Resorts is a Company registered under the Companies Act, of 1956. The financial creditor, Karur Vysya Bank Ltd., had extended credit facilities to three entities: Sri Maharaja Refineries, Sri Maharaja Industries, and Sri Maharaja Enterprises. Maharaja Theme Parks and Resorts became the guarantor of the loans availed by the entities. The borrowers failed to repay their debts to the financial creditor, resulting in the Financial Creditor applying Section 7 of IBC before the National Company Law Tribunal (“NCLT”), Chennai, to initiate the CIRP proceedings against Maharaja Theme Parks and Resorts. The application was filed on the ground that Maharaja Theme Parks and Resorts, being the guarantor of the borrowers is liable to repay the debt. Maharaja Theme Parks and Resorts objected to the contention of the Financial Creditor and argued that they do not fall within the purview of the Corporate Debtor as defined in Section 3(8) of IBC. Maharaja Theme Parks and Resorts also contended that they are not Corporate Guarantors according to Section 5(5A) of IBC since the borrowers are not Corporate Debtors. However, the adjudicating authority admitted the application under Section 7 of IBC and initiated the CIRP proceedings against Maharaja Theme Parks and Resorts. They challenged the order of the NCLT and appealed before the NCLAT. The NCLAT upheld the position of the NCLT and dismissed the appeal. Aggrieved by the decision of NCLAT, Maharaja Theme Parks and Resorts filed an appeal before the Supreme Court under Section 62 of IBC against the order issued by the NCLT and NCLAT. Issue The issue which came before the Court was whether the liability of the Corporate guarantor is co-extensive with that of the Principal Borrower i.e., whether Maharaja Theme Parks and Resorts is a corporate guarantor as mentioned under Section 5(5A) of IBC and is responsible for the payment of debts to the Financial Creditor. Ruling and Analysis The court upheld the findings of NCLT and NCLAT and found no grounds to interfere with their decision to admit the application filed by the Financial Creditor and that Maharaja Theme Parks and Resorts is a Corporate Guarantor as per Section 5(5A) of IBC. While addressing the issue, the apex Court delved into the aspects of Corporate Debtor and Corporate Guarantor as defined in the IBC and took a liberal approach towards Section 7 of the IBC. The Court mainly relied on its decision in the case of Laxmi Pant Surana v. Union Bank of India and Another (“Laxmi Pant Surana”) and emphasized that the financial creditor has the cause of action to proceed against the principal borrower as well as the guarantor in equal measure in the cases of default. The bench referred to Section 5(8)(i) of IBC which stated that the claim of the financial creditor also includes the liability of the person who gave the guarantee to the corporate debtor. The intention of this legislation was perceived by the apex court whereby the corporate guarantor is equally held liable as the corporate debtor for the failure of due payment to the financial creditor. It also looked into the contractual nature of the transaction and highlighted that the liability of the guarantor is coextensive as per Section 128 of the Contract Act. A broad approach was adopted by the Court where they extended the meaning of Corporate Debtor provided under Section 3(8) of the Act to include the Corporate Guarantor. This includes “corporate person” as defined under Section 3(7) of the Code. They further held that the principal borrower can be a Corporate or non-corporate entity, thus, giving a greater scope of relief to the financial creditor and preventing the Corporate guarantor or debtor to escape from its financial obligations. Referring to the Laxmi Pant Surana judgement, the Court held that a financial creditor can directly apply to Section 7 of IBC for the initiation of CIRP proceedings against a corporate guarantor without previously suing the principal borrower. It can be inferred from the present case that the corporate guarantor steps into the shoes of the principal borrower regardless of whether the borrower is a corporate entity or not. The Court held that the purpose of Section 7 is not to provide a remedy for financial creditors but to reorganise and provide insolvency resolution to the corporate debtor who is not in a position to repay the debt. However, the author contends that along with providing a resolution process for the corporate debtor,

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THE JET AIRWAYS JUDGMENT AND NEW RAY OF HOPE FOR WORKMEN AND EMPLOYEES

Leave a Comment / Guest Posts /

Swarnendu Chatterjee and Anwesha Pal. [The authors are Advocate-On-Record, Supreme Court of India and PhD Scholar and Teaching Assistant at the West Bengal National University of Juridical Sciences, Kolkata (WBNUJS) respectively.]   Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”), since its enforcement in December 2016, has been somewhat successful in the resolution of bad debts/loans of the erring debtors and has tightened the noose on erring companies as well as fly by night companies. The legislative intent of the Code, was to simplify and fast-track the resolution process of the loans/credit facilities which were taken by the defaulting companies. The defaulting companies/corporate debtors in the pre-IBC era had an opportunity to drag the process under The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFEASI ACT 2002) and it was quite a time taking process which was resulting in increase of bad loans/Non-Performing Assets (NPA). .” The creditors/financial institutions after the enactment of the Code, used the legal recourse of filing application under Section 7 of the Code before the National Company Law Tribunals (NCLTs). The creditors generally adopt the route under the Code, as it is time-bound and the object of the Code, being resolution by keeping the corporate debtor as a going-concern. The concept “Going-Concern” means that after admission of the application by the NCLTs, the Resolution Professional appointed by the NCLTs in the capacity of the administrator performs duties as specified under the Code and makes every endeavour to keep the business/functions of the corporate debtor running as usual and ensure that the workmen and the employees do not lose their employment. Resolution as a going-concern as mentioned in Regulation 38 of the IBBI (CIRP) Regulations, 2016 and as per the law laid down by Hon’ble Supreme Court in Committee of Creditors, Essar Steel limited vs. Satish Kumar Gupta[1] (hereinafter referred to as “Essar Judgment”) envisages that every endeavour should be made that the workmen and employees do not lose their respective employments. The Supreme Court in the Essar Judgment, however, did not specify the quantum of payment including the statutory dues of workmen/employees in cases of resolution and left it to the commercial wisdom of the Committee of Creditors. However, even if the Successful Resolution Applicant does not want to retain all employees and workmen, then as per Regulation 38 (as referred above) all the dues of the workmen/employees and other operational creditors shall have to be paid upfront. The question which arose in the Jet Airways matter[2] related to whether non-payment of statutory dues like Provident Fund and Gratuity (even if the provision was made and was actually never deposited) by the Successful Resolution Applicant would have amounted to breach of Section 30(2)(b) and (e) of the Code? The law as laid down by the Hon’ble Supreme Court in the Essar Judgment[3] had clearly laid down that every resolution plan has to conform to the mandate under Section 30(2) especially sub-sections (b) and (e) which, in other words shall mean that it has conform to the statutory provisions in force as on date and as applicable. The argument of the respondents regarding the effect of overriding /non-obstante clause under Sec. 238 of the Code was also scrutinized and answered by the Bench. The Hon’ble NCLAT in the judgment of Jet Airways made it amply clear, which the authors in this article/paper shall discuss in detail, is that, non-payment of statutory dues like provident fund and gratuity and subsequent non-inclusion in the resolution plan shall result in infringement of Section 30(2) (e) of the Code.  Further, the Hon’ble NCLAT held that, the welfare legislations which provided for the payment of  provident fund and gratuity does not run counter to the Code and therefore the non-obstante clause; i.e. Section 238 of the Code, shall have no bearing on the payment of provident fund and gratuity . The authors shall delve into the detailed analysis of how the Hon’ble NCLAT, within the limited parameters of judicial scrutiny of a resolution plan under Section 31 of the Code, proved that the role of the judiciary in passage of a resolution plan is not a mere rubber-stamp or a post office job. Instead the NCLAT shall minutely scrutinize the plan as to whether the laws of the land including the social welfare legislations do not run counter to Section 238 of the Code. The judgment has resulted in a new interpretation of Section 30(2)(e) of the Code, which is important for the Resolution Professionals and the Resolution Applicants to comply with in the future.The Jet Airways case being the first case of resolution of giant airline company, the judgment renders clarity as to how a resolution plan should conform to the mandate of Section 30(2) (e) of the Code, in addition to Section 30(2)(b) of the Code and also whether the ratio of the Essar Steel Judgment is proving to be a boon to the resolution applicants. The arguments which were raised by the Respondents (Successful Resolution Applicant / Jalan-Kalrock, Committee of Creditors and the Resolution Professional) were that in a case of resolution, the statutory dues of provident fund and gratuity get covered within the term “workmen dues” as mentioned in Explanation II of Section 53(1)(b) of the Code. Section 326 of the Companies Act, 2013 defines the term “workmen dues”. This definition includes gratuity and provident fund. Therefore, the fulcrum of the argument was that the gratuity dues and provident fund dues shall be covered within the term “workmen dues” and be restricted to twenty-four months only as mentioned in Section 53 of the Code. The respondents drew such an interpretation as Section 36(a)(4) (iii) of the Code which refers to a situation of liquidation and mentions the word “fund” along with the terms – gratuity and provident fund. The word “dues” are not a part of Sec. 36 of the Code, hence cannot be referred in cases of resolution. The Hon’ble NCLAT rejected the aforesaid argument of the

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THE CONUNDRUM OF RECALLING AN ARBITRAL TRIBUNAL POST-TERMINATION

Leave a Comment / Arbitration Law /

[By Arjit Mishra] The author is a student at the Hidayatullah National Law University, Raipur. INTRODUCTION On 12th October 2022, the Delhi HC in Vag Educational Services v. Aakash Educational Services opined that an arbitral tribunal cannot recall the proceedings if its mandate has been terminated under S. 32 of the Arbitration & Conciliation Act, 1996 (hereinafter ‘The Act’). However, it is to be noted that in various judgements the Supreme Court has held that if an arbitral proceeding is terminated under S. 25 of the Act, the terminated proceedings can be recalled. In this blog, I’d provide the existing jurisprudence regarding the possibility of recalling an arbitral proceeding and the flaws present in the same. VAG EDUCATIONAL SERVICES V. AAKASH EDUCATIONAL SERVICES: WEIGHING PRECEDENT OVER RATIONALE In this case, on 21st Sept 2019, the arbitral tribunal terminated its mandate as the respondent, as claimant, withdrew from the arbitral proceeding. However, an affidavit was filed by the respondent-claimant asserting that the Counsel had unintentionally withdrawn from the arbitral proceedings, as her instructions, from her Senior Counsel, were to withdraw another arbitral proceeding pending before the same arbitral tribunal. This affidavit was duly accepted by the tribunal and in its order dated 18th January 2020, it restored the arbitral proceedings. The impugned order was challenged before the Delhi HC under Article 227 of the Indian Constitution. With regards to the maintainability of the petition, the respondent, while placing reliance on SBP & Co. v. Patel Engineering Ltd. and Anr. & Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam, asserted that the Court cannot adjudicate on an interlocutory order passed by the arbitral tribunal. The Court negatived this contention by opining that the current case’s circumstances are unique from those in the respondent’s cited cases. In the current case, the Court must decide whether an arbitral tribunal that has declared the arbitration proceedings to be discontinued may later consider a request to rescind that order and restore the arbitration. Withrespect to the question that whether an arbitral proceeding can be recalled post-termination, the Court remarked that a tribunal’s mandate is considered as terminated if the claimant withdraws its claimant. under S. 32(3) of the Act, 1996. This provision is only subject to S. 33 and S. 34(4). When a party asks an arbitral tribunal to fix a specific category of errors or when the parties ask the arbitral tribunal to interpret a particular clause or section of the award that it has delivered, Section 33 is applicable. According to Section 34(4), the arbitral tribunal has the authority to eliminate any grounds that the court that hears a challenge to the arbitral decision under Section 34 might use to overturn the award it has issued. Notably, neither the exigency mentioned under S. 33 nor the condition provided under S. 34 applied to the present case. Hence, the arbitral tribunal became functus officio and didn’t have any power to pass any kind of order after the termination of its mandate. POWER TO RECALL PROCEEDINGS UNDER S. 25: ‘JUDICIALLY’ CREATED DISTINCTION WITH S. 32 It was observed above that if an arbitral tribunal’s mandate is terminated under S. 32 of the Act, 1996, no order of recalling the proceedings could be passed. Interestingly, this position of law doesn’t apply to the termination of an arbitral proceeding under S. 25 of the Act, 1996. In compliance with section 25 of the Act, the arbitrator has the authority to end an arbitration if the claimant fails to submit his statement of claim in conformity with S. 23(1) without demonstrating good cause. The Supreme Court noted in the case of SREI Infrastructure Finance Limited v. Tuff Drilling Private Limited that the situation described in Section 32 of the Act will only occur if the proceeding is not terminated under Section 25(a) of the Act and continues to be adjudicated. Since Section 25 of the Arbitration Act does not include the phrase “mandate of the arbitral tribunal shall terminate” it must be interpreted in the context of Section 32 of the Arbitration Act. Therefore, an order to recall the arbitration proceedings may be issued if the claimant can provide adequate justification. The SC later heard an appeal against a termination order given in accordance with Section 32 of the Act in Sai Babu v. M/S Clariya Steels Private Limited. The Supreme Court decided that no recall request would be encased in cases provided by Section 32(3) of the Arbitration Act due to the difference crafted in the SREI case between both the mandate terminating under Section 32 and the proceedings that came to an end under Section 25 of the Arbitration Act. FUNDAMENTAL FLAWS PRESENT IN THE JURISPRUDENCE The Arbitration Act, of 1996 provides the arbitral tribunal certain exemplary powers to allow it to carry out its functions smoothly and with minimum court intervention. However, the striking difference drawn between termination orders passed under S. 25 & S. 32 of the Act poses a roadblock to allowing the arbitral tribunal to decide on its conduct, particularly regarding its ‘mandate’. It is observed that the Courts have had an unwarranted rigid approach by not allowing recall of an arbitral proceeding if its mandate is terminated under S. 32 of the Act. The stated ‘rigid’ approach prevents the arbitral tribunal to recall its proceeding if there exist genuine and satisfactory reasons for doing the same. Even in the Vag Educational case, the Court ignored the bonafide mistake made by the Counsel of signing the wrong withdrawal sheet and proceeded to hold, in consonance with precedents, that the arbitral tribunal proceeding can’t be recalled. It also caused unjustified harm to the party because of its Counsel’s unintentional mistake. Furthermore, Section 32(2)(c) of the Act provides that if the arbitral tribunal believes that the continuation of proceedings has become unnecessary and impossible, it can terminate its proceeding.. This provision construed with the ‘rigid’ approach upheld by courts makes the tribunal’s power rampant as it will have no sort of accountability for the reasons it provides for

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The Sony-Zee Affair: A Market Opportunity or a Competitive Disadvantage?

Leave a Comment / Competition Law /

[By Samay Jain] The author is a student at Institute of Law, Nirma University. INTRODUCTION The merger of Zee and Sony was approved by the Competition Commission of India (CCI), subject to certain terms and conditions. These terms and conditions were levied to stop the merger, which would be operating more than 90 channels across the country, from misusing its dominating position in the market. In India, the Hindi language category draws the most viewership, and according to its pilot study, the merged company would have 45% of that market, with rival Walt Disney – Star coming in as a close second. The CCI stated in its initial study that due to its powerful negotiation strategy and access to unmatched resources, it could have the ability to raise the cost of advertising and channel subscriptions. After considering the company’s legal and financial arguments, Zee reported that the CCI approved the amalgamation of Zee and Sony. Some suitable remedies were also proposed to be provided by Zee in conformity with the regulators’ requirements.[i] In view of this, this article analyses the reasons behind the grant of approval for the proposed merger between Zee and Sony. The article further tries to allay possible concerns of the merger abusing its dominant market position. BACKGROUND For two businesses that rely on creating such leisure plots for their livelihood, the chain of events that culminated in the merger seems largely acceptable. Sony first tried to get in touch with Mr. Goenka in November 2020, but he declined. A few months later, KPMG (Klynveld Peat Marwick Goerdeler) approached him on behalf of Sony and provided an updated figure, which is when things got going. By August 2021, he had already joined the conflict. [ii] However, Invesco, which owns an 18% stake in Zee, lambasted the company for poor corporate governance and submitted a request for the nomination of 6 independent non-executive directors to the Board of Directors of Zee as well as the dismissal of Mr. Goenka as the CEO. Zee resisted the EGM’s attempt to be called, claiming that the intended Requisition was against Indian law.[iii] The proposed merger saw another twist when the Bombay High Court decided in Invesco’s favor, upholding Invesco’s request for an EGM (Extraordinary General Meeting)as being legally valid but reversing a previous single-judge Judgment. Following this ruling, Invesco decided to revoke the requisition notice that it had issued calling for Punit Goenka, MD, and CEO of Zee, to be removed from the Board.[iv] CONDITIONS IMPOSED BY CCI FOR THE MERGER TO TAKE PLACE: The prospective buyer should be unrelated to or independent of the resultant firm and its subsidiaries. The suggested buyers cannot be Star India Private Limited or Viacom18 Media Private Limited. The buyer must not have been an employee or director in the past or present. To sustain and expand the different channels as a successful enterprise and a vigorous rival to the resulting entity in the pertinent market, the buyer must possess the required funds, the necessary knowledge, and the motivation to do so. The divestiture should not put the CCI’s order at risk of being implemented late or with immediate concerns about competition. To buy and run the networks, the buyer should obtain the necessary regulating body permissions. DETERMINING THE DOMINANT MARKET POSITION Disney + Hotstar, which also has Star Sports in its possession, is well ahead of other OTT platforms in terms of market share and subscriptions. Disney + Hotstar is placed at the 1st position with 41% share, followed by Eros Now with 24% share, Amazon Prime Video (9%), Netflix (7%), ZEE5, and ALT Balaji (4% share each), and SonyLIV (3%).[v] In terms of subscribers as well, Disney + Hotstar is in the lead with 14 crore subscribers, followed by Amazon Prime Video with 6 crore subscribers, Netflix (4 crore subscribers), ZEE5 (3.7 crore subscribers), and SonyLIV (2.5 crore subscribers).[vi] Others have the highest market share of TV broadcasters with 35.7 % share, followed by Star + Disney with 18.6 % share, Zee (18.4 % share), Sun (10.4 % share), Viacom (8.6 % share), and Sony (8.3 % share).[vii] As per TRAI press release dated 17th Feb 2017, the Telecom market was led by Airtel holding a market share of 23.5% followed by Vodafone (18.1%), Idea (16.9%), BSNL (8.6%), Aircel (8%), RCOM (7.6%) and Jio (6.4%). Thus, having regard to a subscriber base, resources & economic power, it cannot be said that Jio enjoys a dominant position in the market and hence, its offers are only in nature of promotion rather than being predatory.[viii] Similarly, the merger of Zee and Sony despite being the 2nd largest conglomerate will not have the highest market share as it is held by Disney + Hotstar who have Star Sports as well. As of this year’s first quarter, the Broadcast Audience Research Council (BARC) India’s weekly networks’ combined viewing share has been progressively declining. According to BARC viewership data obtained from subscribers, in the Hindi General Entertainment Channel (GEC) genre, the two businesses’ combined share has declined from 49% in FY19 to 43% in FY21 and 41% in FY22. The percentage has decreased to 36% so far, this fiscal year (year to date FY23).[ix] Corresponding to this, the shares for FY22 and the first half of FY23 in the Hindi cinema genre are 38% and 33%, respectively. During the first half of FY23, the proportions in the Bengali GEC, as well as Marathi GEC categories, plummeted to 38% and 27%, respectively.[x] From the data presented above, it can be deduced that the merger of Zee5 and Sony will never be in a dominating market position since it lags behind Disney + Hotstar in the OTT market and Star + Disney and Other Broadcasters in the TV Broadcaster market. To further allay this fear of anti-competitive measures like being in a dominant position and abusing it, Sony and Zee voluntarily agreed to sell three Hindi channels – Big Magic, Zee Action, and Zee Classic. This would further contradict CCI’s

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SEBI Relaxes Overseas Investment Guidelines for AlFs: A Sluggish Step Forward.

Leave a Comment / Capital Markets and Securities Law /

[By Anirudh Vats]   The author is a student at the Rajiv Gandhi National University of Law, Patiala. I. Introduction The Securities and Exchange Board of India (“SEBI”), in a pertinent towards the development of the Alternative Investment Fund (“AIF”) regime in India, relaxed the stringent restrictions pertaining to overseas investments made by Indian AIFs, vide SEBI Circular dated 17 August 2022[1] (“SEBI 2022 Circular”). This development comes as a partial relief to investors in the AIF industry who have been long demanding a more flexible and transparent route to overseas investments without tedious regulation and red-tapism. However, the circular does not go far enough in transforming the regulatory framework so as to accommodate the rapidly growing AIF industry. This circular comes as a welcome but sluggish step forward in the right direction, with much scope for further relaxations. II. The Evolved Regime         i.) ‘Indian Connection’ Requirement In accordance with SEBI Circular dated August 09, 2007[2] read with SEBI Circular dated October 01, 2015[3] regulating overseas investments, Indian AIFs investing in foreign portfolio entities were required to ensure that such entities have an Indian connection; they may operate a front office overseas but must have functioning back office operations in India. With the introduction of the SEBI 2022 circular, this requirement has been done away with. While the erstwhile requirement was introduced to expand the local market, it placed an unjust obligation on investors by forcing them to limit the ambit of their overseas portfolio and discourage diversification. This caused the investment managers to have limited choices in the available avenues within his/her area of expertise which could potentially fetch lucrative returns for investors. Moreover, the requirement seemed redundant in light of the restriction requiring AIFs to invest 25% of their investible fund in overseas entities, while the overwhelming majority of the fund is mandatorily allocated for Indian companies. Therefore, such an arbitrary requirement merely functioned as an embargo on the agility of the investment manager to procure sufficient returns for investors and diversify into more dynamic and flexible overseas investment strategies.         ii.) Jurisdiction Specific Requirements In addition to the ‘Indian Connection’ requirement being removed, the SEBI 2022 Circular also prescribes jurisdiction specific guidelines prescribing the permitted jurisdictions which could attract investments from Indian AIFs. AIFs are restricted to investing only in portfolio entities overseas which are incorporated in countries where the securities market regulator is either: a signatory under Appendix A of the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (such as Luxembourg, Malaysia, and Netherlands); or a signatory to the bilateral Memorandum of Understanding (MOU) with SEBI (such as USA, Mauritius, Singapore, and Indonesia). Moreover, the SEBI 2022 Circular also prohibits investments into the overseas companies in countries which have been identified in the public statement of Financial Action Task Force (FATF) as either having strategic anti-money laundering or lack of effort in combating terror financing. However, certain jurisdictions fall in both the permitted and prohibited categories mentioned above (such as the UAE) and, hence, it is unclear whether overseas investments into these countries would be permitted under the new regime or not.         iii.) Permission for Reinvestment of Principal Amount from Liquidation or Disinvestment The SEBI 2022 Circular has permitted AIFs to reinvest the principal amount of the proceeds procured from the liquidation of overseas investments, without the requirement of a prior approval from SEBI for allocation of investing limits. However, this would be subject to the fund documents providing for such a flexible model of investment. This is a welcome change as it relaxes the tedious process for AIFs which employ a dynamic mode of overseas investment wherein investments can be repurposed to new portfolio entities according to the strategy of the investment manager. This is a significant step forward by SEBI to liberalize the overseas investment regime and provide the AIF industry the support it needs to continue its trajectory of rapid growth in India.         iv.,) Additional Compliances The SEBI 2022 Circular also prescribes certain additional compliances for AIFs. These are, inter alia: – AIFs are mandated to furnish an application to SEBI for allocation of limit for overseas investments in the prescribed format. AIFs are required by SEBI to provide the modalities of sale or disinvestment of the overseas investments to SEBI in accordance with the prescribed format within a period of 3 working days of the disinvestment or sale. Such compliances will ensure that SEBI can effectively monitor and update the allocated limits for overseas investments and ensure the overall limit is not exceeded. Moreover, these compliances will provide SEBI with valuable data that will assist in analysing market trends and updating the law in the future. III. Unaddressed Issues pertaining to Overseas Investments         i.) No enhancement of the USD 1.5 billion overseas investment cap Despite the AIF market size expanding exponentially in the past few years, this circular maintains the status quo regarding the USD 1.5 Billion overall limit for overseas investments by AIFs, despite calls for increasing the limit by investors. However, SEBI 2022 Circular falls short of increasing the aforesaid limit despite purporting to be an exhaustive overhaul of the overseas investments regime under AIFs. The possible rationale behind not increasing the overall limit is possibly to protect the foreign exchange reserves of India in the face of a resurgent US dollar and the fall in the value of the INR. While this concern is valid, periodic review of the overall limit is crucial to ensure that the regulatory regime is in line with the rapidly growing industry, and incremental increase will not have any drastic effects on the foreign exchange reserves. Moreover, if this limit is viewed as a function of the overall industry size of AIFs, it is clear that the 1.5 billion cap is a miniscule percentage of the total industry size. In the status quo, there exists a huge lag between the expanding

SEBI Relaxes Overseas Investment Guidelines for AlFs: A Sluggish Step Forward. Read More »

Analysing the limit of ‘Discretion’ in a situation of ‘Default’ under the IBC.

Leave a Comment / Insolvency Law /

[By Yash Sameer Joshi] The author is a student at the National Law University, Jodhpur. I. Introduction  The Insolvency and Bankruptcy Code, 2016 [“IBC”] has oft been described as a consolidating and amending Act enacted to ensure the viability of company assets in the case of corporate insolvency. The IBC provides for the initiation of the Corporate Insolvency Resolution Process [“CIRP”] in case of such insolvency, and the initiation of this process has traditionally been ‘default based’ (meaning of the term default can be found in Section 3(12) of the IBC) in the context of the IBC. What this means is that only when there is an actual non-payment of a pending debt by the corporate debtor can the CIRP process be initiated. This view has been upheld by both the National Company Law Appellate Tribunal [“NCLAT”] in the decision of Innoventive Industries v. ICICI Bank and is supported by the definition of ‘insolvent’ as is given in Section 2(8) of the Indian Sale of Goods Act, 1930. Due to this ‘default’ threshold, whose amount was increased to Rupees 1 crore through the recent amendments, the position that has always been interpreted was that the mere existence of said ‘default’ would compel the adjudicating authority to accept the application filed for the initiation of the CIRP. The High Court of Kerala in the Cyriac Case has gone as far as saying that “The litmus test on the anvil of which, the adjudicating authority will scrutinise the matter, is only the existence of the default, as defined in Section 4 of the Code”. The reasoning of the Court was in consonance with the Swiss Ribbons Judgement, in which it was held that “no other extraneous” matters should be considered while contemplating a decision under Section 7 (financial creditors) or Section 9 (operational creditors) of the IBC.  Recently, however, the Supreme Court in Vidarbha Industries Power v. Axis Bank [“Vidarbha”] brought in the element of discretion while deciding an application for the CIRP with respect to Section 7(5)(a), even in the case of a default. The word ‘may’ in the Section was given a literal interpretation, and the revival of the company was put on a higher pedestal than liquidation. The aspect of the presence of this discretion has already been explored and established, and in light of this, the main purpose of today’s article will be to analyse the extent to which this discretion can/should be used. Further, this article will also dwell on the conundrum of whether a discretion-based model vitiates the need for there being a ‘default’ as a condition for filing an application for the initiation of the CIRP. II. The extent of discretion: Construed Broadly or Narrowly  The fact that Vidarbha has brought in a degree of discretion is undisputed, but to what limit should the adjudicating authority exercise this? The Court in Vidarbha gave a very broad outline saying that discretion could not be used “arbitrarily or capriciously”. The Supreme Court tried to bring about some clarity by giving an example:  “For example, when admission is opposed on the ground of the existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is a good reason not to do so.”  However, this did little to the fog, considering that the example was almost parallel to the facts present in the instantaneous case. The doubt that is bound to arise is that apart from the existence of an award that is in favour of the corporate debtor that exceeds the debt amount, when can discretion be used. According to the author, this can be interpreted in two ways: A) Broad Construction What this approach would entail is that the adjudicating authority or NCLT would use its jurisdiction widely by looking at the overall financial health of the company in question. This would entail roughly following what is known as the ‘balance sheet’ test of determining insolvency, which takes into account external aspects like examining the balance of total assets and liabilities or any outside phenomenon that prevented the payment of debts that was not the fault of the debtor. As was rightly analysed by a working paper published by the Indian Institute of Management Ahmedabad, while the dominant position in India has been the ‘default’ based approach post-IBC, there have been instances where the Court has brought in the balance sheet test to an extent. This test has been successfully implemented to varying degrees in Jurisdictions such as the United States and the United Kingdom. At a preliminary glance, it seems as if Vidarbha is aiming to bring in the balance sheet test, with the adjudicating authority expected to look at the situation as a whole and apply what it seems right in a manner that is not ‘capricious’. However, we cannot overlook the fact that the Court in this case relied more on ‘rules of interpretation’ by referring to cases such as Hiralal and Premchand. The main purpose for which the IBC was brought in was to solve the insolvency of a company, and the main purpose of the CIRP is to keep the company as a ‘going concern’, as was also elucidated in the Tata Consultancy Services Case. Therefore, its timely imitation may many a time be a boon rather than a bane in consonance with this ‘purpose’. B) Narrow Construction The second approach that can be taken is to look at the reasoning of the Court in Vidarbha in a more pragmatic manner. As we have already seen, both the facts in the said case and the example given by the Supreme Court indicated a pending decree, which on resolution in the favour of the debtor would allow it to repay its debts. In pursuance of this, what the author

Analysing the limit of ‘Discretion’ in a situation of ‘Default’ under the IBC. Read More »

Revisiting the Failing Firm Defence in Light of Airline Mergers.

Leave a Comment / Competition Law /

[By Tanvi Shetty] The author is a student at the O.P. Jindal Global University   Despite the Centre allowing for 100% FDI (i.e., A foreign carrier can invest up to 49% in an Indian firm)[1] and easing of pre-requisites for a carrier to operate on international routes[2], the airline industry is often in a slump given its dependency on the fuel prices and labour-intensive operations. Most Indian carriers fail to break even and many airlines such as Jet Airways have shut shop. With the onset of the pandemic and the general sag in the airline industry, firms have sought to combinations to increase efficiencies and break even. The Competition Commission of India (“CCI”) is likely to review such mergers in order to analyse the potential Appreciable Adverse Effects on Competition (“AAEC”) and a strong defence at the perusal of such airlines is the “failing firm defence”. The defence enunciates that in the absence of a merger, the assets of the failing firm would entirely exit the market thereby affecting market competition adversely. The failing firm defence was revisited in context of Covid-19 and the conversation opened up in different jurisdictions. Various anti-trust regulators acknowledged how mergers and consolidations may ensue in the market given the depleting state of economies globally. While the CCI issued an advisory note to businesses, there was no mention of facilitation of mergers. The note was limited to s.3(3) of the Act focusing on arrangement that would increase market efficiencies considering Covid-19[3]. Nevertheless, the Act under s.20(4)(k)[4] recognises it as a defence and the matter is often reviewed closely and linked to insolvency proceedings (IBC proceedings)[5]. On a global stage , the ‘failing firm’ defence has been used restrictively. In the EU, the commission’s rulings on the Aegean/Olympic II[6]shed light on how a previously declined acquisition of airline was approved amidst the plummet of the Greek Economy. In the present case, the two airlines had applied before the European Commission for sanctioning of their merger amidst the global financial crisis of 2008. They were refused on grounds of lack of sufficient evidence being provided to the commission to meet the requirements of a failing firm. The burden of proof was that the deterioration in market competition was not a direct result of the merger and even in the absence of the merger, the competitive structure was likely to deteriorate[7]. Stemming from this there are three criterions that the commission looked at in their assessment: 1) Failing the consummation of this merger, the firm would be incapable of existing; 2) It is the least anti-competitive measure available; 3) In the absence of the merger, the assets of the firm would exit the market[8]. Premised on these three defining factors, the assessment of the commission focused on the failing state of Greek economy which had made it non-viable for firms to break-even. They analysed if the parent group, Marfin Investment Group, and its subsidiaries could sustain the losses of Olympic Airlines . Furthermore they assessed if there were any other potential buyers who were willing to acquire assets of the airlines or the firm in general. Subsequent to such assessment, the ‘failing firm’ defence was upheld, and the transaction was allowed in 2013 by the commission.  In the recent acquisition of Asiana by Korean Air, however, the Korean Fair-Trade Commission (“KTFC”) did not accept the failing firm defence, despite the depleting financial health of the carrier and the prevailing pandemic. The idea was that the firm should be non-viable, meaning the company is one that is insolvent or expected to become so soon due to the serious deterioration of its financial structure[9]. This approach once again recapitulates the intersection between insolvency and anti-trust regulations as merely being in a “weak” financial state would not be alone effective. Considering the same, airline carriers looking to merge or be acquired must have to ensure that their perusal of the “failing firm” defence is substantially backed. A mere argument that the pandemic has affected the operations of a carrier alone may not be sufficient as the pandemic is a “temporary” economic occurrence[10] and economies have begun to heal in the aftermath of it. Nevertheless, various reports[11] portray how the airline industry may take a while to recover and carriers can broach the argument that the firm would not be able to sustain long enough to reap the benefits of the market recovery. It would be ideal for carriers approaching the commission to adopt an industry specific approach, wherein rather than arguing that their position is “weaker” with regards to other competitors, the inability of the firm to recover post the pandemic would have to be established. It would be ideal to show how there is an inability to make good on the debt in the long run and if the entity is being held by a company, further research supporting the poor financial state of the holding company must also be placed before the commission. In consonance with the Aegean/Olympic II order, the carriers can provide financial evidence to establish and fulfil the three criterions as has been adopted by the EU. However, a policy conundrum pops-up when it comes to whether thresholds for the failing firm defence are to be lowered or not. While the debate on the same is ongoing, this post argues how the aftermath of Covid-19 combined with the pre-existing state of the airline industry calls for the Indian regulator to reconsider the thresholds that have been set for the “failing firm defence”.. Airlines are capital extensive industries that often fail to break even and there runs a risk in suggesting a lowering of thresholds as the same may be the cause of various carriers consolidating and using the defence to their own benefit. What needs to be noticed here is that in crisis such as the pandemic and ongoing recession, the policymakers at the centre have two choices : 1) They can either increase state aid for financially unstable firms and redirect the tax-payers money

Revisiting the Failing Firm Defence in Light of Airline Mergers. Read More »

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