CBCL, Author at NLIU CBCL

[By Akshat Shukla and Tanvi Agrawal] The authors are students at the National Law Institute University, Bhopal. I. Funding Winter: Meaning and Overview Funding Winter is a phrase used to describe the phenomena of a downturn in the investor’s confidence in the start-ups leading to a more strategic and curtailed approach towards funding. It often leads to investors avoiding firms without a set path chalked out for profitability. This, in turn, prompts a need to correct the value of the start-up. Further, one of the prominent effects of funding winter is that it requires business owners to reset their priorities in terms of profit maximization. Funding winter is not a new concept but a cyclical effect that happens due to multiple factors which impact the free flow of investments in the market. These factors may either be generically applicable to the entire market such as geopolitical unrests in countries, monetary policies, financial irregularities etc. or may be centric to the relevant sectors. By the way of this article, the authors seek to address the reasons for the funding winter that has descended in the Indian market, its effects and the possible way out for the start-ups to withstand the funding crunch in the coming months. II. Reasons for the Downturn in Investor Confidence There are several reasons for funding winter as aforementioned. A. The Generic Factors Geopolitical situations such as the Russia – Ukraine conflict and other acts of hostilities lead to the stipulation of a slow market by the investors. The world is interconnected in more than one aspect. The reliance of countries on one another further augments in the context of development and sustenance of international trade, flow of investments and exchange of services, etc. For this very reason, the occurrence or non-occurrence of any significant geopolitical event in one part of the world has crucial ramifications on the other. For instance, the standard indices in Indian, South Korean, Japanese and several other Asian markets were disrupted as a direct consequence of the announcement of the military operation by Russia on Ukraine. Financial irregularities and unscrupulous practices by nascent companies shake investor confidence. The classic case of this would be when the closing date of Sequoia Capital’s $2.8 billion India and Southeast Asia (SEA) Fund was delayed as a result of suspected financial irregularities and corporate governance failures at some of its portfolio companies. Monetary policies of the Government and regulators also determine the level of investment inflow of the investors. For instance, the repo rate has been increased by 40 basis points in the latest meeting of the RBI, as it wanted to tighten the policies and curb the relaxations given during the COVID-19 times. It also suggested increments in the Cash Reserve Ratios (CRR) and Statutory Liquidity Ratios (SLR) so as to prevent the banks from lending to the start-ups. B. The Sectoral Factors The product efficiency and viability in the market have a significant impact on the trust of the investors. For instance, the electric vehicles market in India may suffer from a funding crunch owing to the recent explosions that happened in the e-scooters. Some sectors are in demand due to a particular event or cause and in case of a dynamic shift from that phase, the particular sector may face a funding winter. An example of this is the loss suffered by Softbank due to the tech sell-off that occurred after the shift from a virtual to a physical setting. These instances make investors cautious about investing heavily in a particular sector. The funding winter for some sectors may happen because of the different effects of the policies on that sector. For example, deflation may be a cause for funding winter as inflation may be helpful for mid-cap firms in the hospitality or other B2C sectors as these firms have the dominance to pass over the burden of increased pricing to their customers. In the shorter term, there can be an impact on the balance sheets of such firms but in the longer run, these firms benefit as the increased prices do not tend to go down even when prices of raw materials and primary commodities stabilise. Hindustan Lever, Asian Paints and Pidilite are some companies that have established how inflation proved to be helpful for them in maintaining margins. Such factors affect not only the expectations but also the decision of the investors altogether in choosing how and where to employ their funds. Thus, they play a significant role in determining investor confidence and investment growth prospects. III. Effects of the Funding Winter With the funding winter in place, the start-ups resort to measures which help them save their working capital as the expectations of funding from the investors are minimal. The advertisement expenses, capital expenditure and expansion plans are put to a halt in order to increase the sustainability of the firm. Only the expenditure essential to the survival of the firm is undertaken and all possible steps are put in place to ensure unnecessary expenses. Lastly, the end goal remains to maximize profit harnessing which keeps the firm steady even without the investment inflow. For instance, the statement of the CEO of Unacademy, Gaurav Munjal, highlighted the need to focus on profitability along with the need to work under restricted resource supply. He urged his employees to, “learn to work under constraints and focus on profitability at all costs.” From the perspective of the investor, the funding winter does not mean a complete stoppage of investments by the investors. It infers that the investors become less interested in projects that have certain risk elements even though the same would have been pursued in a normal situation by the investor. IV. The Start-up Market and Need for Regulations Funding winter can have several effects on the economic enterprises and the economy but it essentially disrupts the start-up market. In the context of developmental reforms in India, it is necessary to have a framework which would help start-ups to overcome such downturns

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On The NCLAT’s Veritable War Against Inter-Se Priorities

Leave a Comment / Contemporary Issues, Insolvency Law / CBCL

[By Kartik Kalra] The author is a student at the National Law School of India University, Bangalore. The principle of inter-se priority has its roots in equity, having as its core purpose the prevention of the jeopardization of the first charge-holder’s security interests.[1] When multiple persons hold a security over the same indivisible unit of property who then also opt for its liquidation, the order in which the receipt of such liquidation occurs is navigated by inter-se priority. The security-holder who has an earlier security interest is preferred first, and those whose security interest develops later are preferred subsequently. This principle is present u/s 48 of the Transfer of Property Act, 1882 (“TP Act”),[2] and the Court has gone to the degree of pedestalizing it as an aspect of the constitutional right to property in ICICI Bank v. SIDCO Leathers.[3] This principle is applicable to secured creditors, given the subjection of subsequent interests in immovable property to those created priorly.[4] The Insolvency and Bankruptcy Code, 2016 (“IB Code”) is an integral component of India’s financial regime and a domain where the operation (and obliteration) of inter-se priorities can be vividly observed. The IB Code aims at the effective resolution or liquidation of Corporate Persons (“CP”),[5] with the mandate for the former conferred upon the Committee of Creditors (“CoC”).[6] In circumstances of a failure of the Corporate Insolvency Resolution Process (“CIRP”) due to statutorily stipulated reasons,[7] the Adjudicating Authority (“AA”) may order the CP’s liquidation.[8] Section 53 of the IB Code presents a waterfall mechanism to be followed in the distribution of the proceeds of such liquidation,[9] whose competing interpretations lie at the core of this piece. This piece argues that the abandonment of inter-se priorities in the distribution of liquidation proceeds u/s 53 of the IB Code is akin to a veritable war waged by the National Company Law Appellate Tribunal (“NCLAT”) against inter-se priorities, characterized by no fidelity to the law, past precedent, policy considerations or legislative intent. In order to make this argument, I first discuss the present infrastructure of the insolvency regime that necessitates the application of inter-se priority, followed by an evaluation of doctrinal developments concerning inter-se priority in the Companies Act and the IB Code. I then propose that the recent decision in Anil Anchalia is per incuriam, for it ignores long-standing precedent while applying unrelated precedent for incorrect propositions. I conclude that a continued application of inter-se priorities to the waterfall mechanism u/s 53 of the IB Code is the correct position of the law. Inter-se Priorities and the Text of the IB Code The framework of the IB Code is such that liquidation is undertaken due to a failure to reach an effective resolution.[10] At the stage of resolution, the Resolution Professional invites applicants to submit Resolution Plans (“Plans”) to discharge the CP’s debts through mechanisms other than its liquidation.[11] If the stage of resolution fails due to statutorily stipulated conditions,[12] the AA is entitled to order the CP’s liquidation.[13] In distributing the proceeds of such liquidation, the question of priority arises. Section 53 mandates the priority to be followed in the distribution of proceeds and holds that the dues owed to workmen and the debts owed to a secured creditor shall be pari passu.[14] For a secured creditor, the options of recovery are two: either enforce the security interest on their own u/s 52(1)(b)[15] or relinquish the same and let the Liquidator realize the proceeds and obtain it via their priority u/s 53.[16] Only when the secured creditor elects the latter option, do they qualify as ranking pari passu the workmen u/s 53(1)(b)(ii).[17] When the secured creditor refuses to relinquish their security interest u/s 52(1)(b) and is unable to enforce their interest themselves, they rank below those who relinquished.[18] The question of inter-se priorities arises when there are multiple creditors with security interests over the same units of property who desire its liquidation and the receipt of its proceeds. Does the IB Code have space for inter-se priority among secured creditors, where the interests of subsequent creditors become subordinated to prior ones? The IB Code does not expressly call for any such priority u/s 53(1)(b)(ii) while also containing non-obstante clauses u/ss. 238 and 53(1).[19] It considers the distribution of proceeds obtained via liquidation to “rank equally between and among” the classes mentioned u/s 53,[20] and it can be argued that there shall be no differential priority among creditors of a single class. This might be interpreted to mean a pro-rata distribution of proceeds within each class, with no necessity of the satisfaction of debts owed to secured creditors with prior interests. On the other hand, it may also be interpreted to mean that the IB Code’s omission in expressly abandoning inter-se priority means that it continues to operate via the TP Act. These competing interpretations of the IB Code, along with the presence of Section 48 of the TP Act, mean that a definite answer to the question of inter-se priorities is unavailable in statute. Pre-IB Code Judicial Treatment of Priority Given such competing interpretations, there has been conflicting doctrine on the availability of priority in supposedly priority-neutral laws. Consider Section 529A of the Companies Act, 1956, which ranked workmen’s dues, and the debts owed to secured creditors pari passu in a manner analogous to the waterfall mechanism u/s 53 of the IB Code.[21] The Supreme Court offered an interpretation to the same in Allahabad Bank v Canara Bank,[22] where it held that inter-se priorities must be respected by the Liquidator in the distribution of proceeds unless specific subordination agreements create alternate priorities. The interpretation of Allahabad Bank came before the Supreme Court in ICICI Bank. In this case, the Punjab National Bank (“PNB”) had a subsequent interest in the debtor’s property but still demanded a pro-rata distribution of proceeds from liquidation, dissenting against the inter-se priority-based distribution undertaken by the Liquidator in favour of other banks.[23] PNB relied on the absence of a specific clause establishing inter-se priorities u/s

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Implementation of Bill C-18 Framework in India

Leave a Comment / Competition Law, Contemporary Issues / CBCL

[By Ashutosh Chandra] The author is a student at the Jindal Global Law School. Introduction: Recently the Canadian Parliament introduced the Bill C-18. The law aims to bring about fairness in the Canadian digital news ecosystem and make sure that the system can support itself. This is done by regulating commercial interactions between digital intermediaries and news outlets. If the bill is implemented, digital intermediaries will be forced to pay a certain amount for ‘making available’ news content produced by outlets on their platforms. When the law is analyzed in the context of India, there is a pending case before the Competition Commission of India (“CCI”) against Google concerning its position of dominance in the news market by the Indian Newspapers Society (“INS”). It is contended that creators of news broadcasted in the digital space are not being provided fair value for their efforts and it is Google, the entity controlling the ad-tech value chain due to its dominant position. Noting the pending case and the Canadian law, the paper would try to understand what the law enacted by the Canadian Parliament would reap if a similar law were enacted in the Indian legislation. Additionally, the paper would also analyze if there were mechanisms that the CCI can use to frame guidelines for the operation of such law. Bill C-18 and other similar laws – purpose and impact: As per Section 2(a) of the Bill, news content or any portion of it is made available when it is reproduced. Even if access to the same is facilitated by “any means”, then the news content is made available. And if this is done in the space of a digital intermediary, then the intermediary must provide compensation to the producer of the news. Again, the purpose behind this is to increase “fairness” in the Canadian digital news market. However, at the stage of the pronouncement of the bill, it is unclear how this will be achieved. Even though “fairness” is proposed, it is firstly contended that compensation to the producer would not automatically guarantee fairness. If anything, the paper argues the same would lead to unfairness between the producers through the depletion of opportunities for the new news business and a decrease in net neutrality. Quantum for Payments It is to be noted that the quantum of payment to the news producers is very low. The intermediary does not even need to publish the news on its platform to provide compensation. Merely, providing access through the method of hyperlinking would do. The “any means” part of the bill ensures the same. Going by the consideration of the provision, intermediaries would need to remove complete access to not pay. Before the implementation of the bill, the news producers produced and posted news through their handles on platforms operated by intermediaries. If the same is considered, the parliament’s purpose of payment for news content with consent serves no purpose. In any case, these news outlets provide their consent for their items to be hyperlinked on intermediary platforms like Facebook, as also denoted through the privacy policy of Facebook. Basis for Compensation Further, the blanket of compensation can be interpreted to extend toward all news producers as per the section. It has no qualitative or quantitative basis on which it is decided whether a news producer is to be paid or not. While there may be contracts that the intermediaries and news outlets enter, the problematic portion is that there are no supervising guidelines for the formation of these contracts. The only requirement is that compensation must be necessarily paid. In such a case, the intermediaries may be forced to use their metrics and then decide the compensation amount as a general practice, provided that the intermediary decides to contract with multiple business outlets. This would open another set of problems – which includes the intermediaries to news outlets that do not generate revenue or serve no purpose, and only enter contractual relationships with news outlets. This would then lead to the elimination of those discarded outlets from mainstream social media. Therefore, the proposed bill is silent on these implications of the provisions and would thin out the competition in news in the online sector. Standard of Journalism The other implication is the standard of journalism. Due to compensation being provided regardless of the quality of news published, a news operator may not be motivated to provide high-quality content. This would result in an overall depletion standard of journalism in online news media. Since online platforms are paramount for news outlets in this age and day, it only follows that newer outlets would not be able to find their footing in the industry, as the intermediaries are not motivated to pay everyone and use everyone’s sources. Therefore, there is a clear detriment to competition. Advertising of News Platforms Then there is the question of digital advertising on operators’ platforms. The model suggested would bring about an end to digital advertising on news, as now the operators will have to pay businesses instead for the news produced, as opposed to them taking money from news businesses to spread reach. This model is structured in such a manner that it would lead to a loss of profits for digital intermediaries. Even so, the news intermediaries have other sources for digital advertising. The model is not going to financially cripple the digital intermediaries, even though it may affect them negatively. However, the larger problem also appears harmful to upcoming and less-known news platforms. Now, news outlets may not partake in the process of digital advertising, as now the intermediaries will have to pay for news. And digital intermediaries cannot be expected to advertise for a news business without getting compensation for it. Therefore, the source for them to grow their business through digital advertising and make people aware of the network no longer works for them. Position in India: In the case pending with the CCI, the relief asked is for a just payment system for news creators on

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Determining the Applicable Law: Case of Non-Signatory to Arbitration Agreement

Leave a Comment / Contemporary Issues / CBCL

[By Tanish Gupta and Shubham Gandhi] The authors are students at the National Law University, Jabalpur. In an intriguing case of Lifestyle Equities CV v Hornby Streets (MCR) Ltd., the English Court of Appeal, in addition to other issues, was called upon to decide the applicable law in determining the binding effect of the arbitration agreement on a non-signatory, arising out of a trademark assignment, viz. the law governing the arbitration agreement or the law governing the assignment of the trademark. While the majority ruled in favour of the former, Snowden LJ, in his dissent, found the latter to be the applicable law since the contractual consensus of the parties to the agreement does not answer the issue raised. In this article, the authors aim to elucidate the controversy, the cogent dissent of Snowden LJ, and the inadequate analysis provided in the majority opinion. Facts of the Case The present suit has been instituted against the alleged infringement of the registered trademark by Santa Barbara Polo & Racquet Club (“Respondent”). Lifestyle Equities C.V. (“First Appellant”) and Lifestyle Licensing B.V. (“Second Appellant”) is the registered proprietor and licensee, respectively, of the concerned trademarks, which include the figurative mark – the “Beverly Hills Logo” and a wordmark – “Beverly Hills Polo Club” in the UK and the EU. The above-stated trademarks were originally owned by a California-based company, BHPC Marketing Inc. After many assignments in 2007 and 2008, the concerned trademarks were ultimately assigned to the first appellant in 2009. The respondent owns and uses the “Santa Barbara Logo,” similar to the appellants. Given the similarity between the two logos, a dispute arose between the original owner and the respondent in 1997, and to resolve the same, both parties entered into a co-existence agreement. The agreement, in its Clause 7, provided for an arbitration clause and laid out the Californian law as the governing law: “Any controversy, dispute or claim with regard to, arising out of, or relating to this Agreement, including but not limited to its scope or meaning, breach, or the existence of a curable breach, shall be resolved by arbitration in Los Angeles, California, in accordance with the rules of the American Arbitration Association. Any judgment upon an arbitration award may be entered in any court having jurisdiction over the parties.” In 2015, the first appellant obtained a consent letter from the respondent to register the concerned trademarks in Mexico. The Reasoning of Lower Court The Appellants, earlier reached the courts of the United Kingdom and the European Union, praying for relief for infringement of their trademarks by the respondents. The arguments advanced by the appellants in support of their claim were that they were not parties to the 1997 Agreement, that they were not aware of its existence at the time of undertaking assignments of trademarks, and that they were not bound by the arbitration agreement by virtue of Article 27(1) of Regulation 2017/1001 on the EU Trade Mark, and Section 25(3)(a) of the Trade Marks Act 1994. The provisions state that until the agreement is registered, it would remain “ineffective as against a person acquiring a conflicting interest in or under the registered trademark in ignorance of it.” On the other hand, the respondent presented an application for a stay and referred the matter to arbitration, pursuant to Section 9 of the Arbitration Act, 1996. The respondent, while relying on Californian law and the doctrine of equitable estoppel in regard to the 1997 Agreement to obtain the consent letter in 2015, contended that the 1997 Agreement bound the appellants as assignees of the trademarks. In light of the arguments of both parties, Hacon J, who delivered the Lower Court’s judgment, decided to stay the claim and reasoned that under English law, the appellants had become parties to the 1997 agreement by virtue of having dealt with the respondent in 2015. Alternatively, with the application of the governing law, i.e., the Californian law, the parties were bound by the 1997 agreement as it was a burden attached to the trademark assignment and thus passed with it. Lastly, the doctrine of equitable estoppel precluded the appellants from disputing the binding effect of the 1997 Agreement on them. The Judgment of the Court of Appeal The three-judge Bench, though while granting a stay, disapproved of the reasoning of Hacon J. with regard to the first issue. The Bench affirmed that since neither party had argued on the matter of the appellants being parties to the 1997 Agreement under English law, the Judge should not have decided on the same. On the issue of equitable estoppel, the Bench agreed that reliance on the doctrine was misplaced since the appellants did not rely on the 1997 agreement but rather on the consent letter, and their conduct was not “inextricably intertwined with the obligations imposed by” the 1997 Agreement. The second issue pertained to whether the parties were bound by the 1997 Agreement on account of the applicability of Californian law. It is at this point that the Bench had divergent opinions. Though the Bench agreed that the issue was not of ‘interpretation’ of the arbitration agreement, the majority characterized the issue of whether a non-signatory is bound by the arbitration agreement “as an aspect of the scope of the agreement.” Referring to Kabab-Ji SAL v Kout Food Group (“Kabab-Ji”), wherein the U.S Supreme Court held that the governing law of arbitration agreement also governs the question of who are parties to the agreement, the majority opined that the logical corollary would be that the question of who is bound by the arbitration agreement is governed by the governing law as well. The Compelling Dissent of Snowden LJ Snowden LJ’s dissent is premised on the distinction between the issues, namely, who is a party to an arbitration agreement and who is bound by it. The questions pertaining to ‘interpretation’ and ‘scope’, which deal with matters covered under the arbitration agreement, are to be resolved based on consensus between the parties to the agreement. The parties’

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