Author name: CBCL

Revisiting the Failing Firm Defence in Light of Airline Mergers.

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

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The Great Wall of “FDI”

Company Law /

[By Unnati Sinha] The author is a student at the Narsee Monjee Institute of Management Studies (NMIMS). Introduction The Consolidated Foreign Direct Investment Policy (Hereinafter as “FDI Policy”) underwent a significant revision as of April 18, 2020, according to Press Note 3 of 2020 (Hereinafter as “PN 3”) published by the Department for Promotion of Industry and Internal Trade (Hereinafter as “DPIIT”). In the past year, there has been a lot of investor interest in the controversial topic of the release of Press Note 3 of 2020. In light of the recent outbreak of the Covid-19 and escalating geopolitical tensions with China, the Indian government has announced that any investment or purchase by a company headquartered in a nation that shares a land border with India, or if the “beneficial owner” of the investment is located in a country that shares a land border with India, would require prior clearance. Even though the wording used was generic in nature and did not specifically mention any particular jurisdiction, the Press Note’s purpose and “target” seemed to be obvious. It was believed to be in response to the People’s Bank of China gradually increasing its stake in HDFC, India’s biggest non-banking mortgage provider, to over 1% via on-market acquisitions. The Press Note also served as the first in a line of actions taken against Chinese investments and investors, which was followed by the banning of several Chinese apps because they were involved in activities “prejudicial to the sovereignty and integrity of India, defence of India, security of the state and public order.” The publication of the Press Note has immense impact on blocking Chinese investment, its primary goal.Some of the most important investments, in addition to Chinese investors, include investors from Hong Kong and Taiwan, who also seemed to get trapped. It was also unclear how the phrase “beneficial owner” should be construed, which further causes more ambiguities. Consequently, authorized dealer banks in India—who serve as the custodians for foreign investment inflows and outflows—adopted their own viewpoints or variations of present rules, which were not ideal for their needs. In the light of the changes in the FDI policy and Press Note 3, the article discusses how India has created a barrier for Chinese investments in India. The “Beneficial Owner” controversy The current uncertainty over the definition of “beneficial ownership” under PN 3 has sparked discussion on the requirements for determining a beneficial owner. Regarding the threshold amounts of investment needed to determine whether an application for FDI needs government approval, multiple opinions seem to prevail at the moment. According to the first viewpoint, a beneficial owner is individual or any entity that owns at least 10% of a company’s stock. This opinion is based on the requirements of the Companies (Significant Beneficial Owners) Rules 2018 when combined with the Companies Act of 2013. The concept of “significant beneficial owner” has been adopted from those provisions. The requirements included in India’s anti-money laundering framework serve as the foundation for the opposing perspective on beneficial ownership. This opinion is based on a provision in the Prevention of Money Laundering (Maintenance of Records) Rules 2005, which defines a “beneficial owner” as a person with either a controlling ownership interest—more than 25% ownership of the entity—or the ability to exercise control over the entity’s management or policy decisions. It may be contended that because Foreign Exchange Management (Hereinafter as “FEM”) rules do not specify a threshold for defining beneficial ownership, a nominal or minor beneficial ownership held by an individual who resides in or is a citizen of a country that borders India could possibly lead to the entire body of funds being prohibited from investment in India under the automatic route. While the government has made it clear that in the realm of public procurement, beneficial ownership is to be understood in accordance with the Prevention of Money Laundering Act, 2002 (Hereinafter as “PMLA”), clarification regarding Press Note 3 is still expected. It is expected that the majority of the pooled investment vehicles have stakeholders, such as limited partners, managers, or donors located in China, notably in Hong Kong, given the commercial prominence of China in general and of locations like Hong Kong in particular. China has recently played a significant role in India’s private equity industry by supporting a number of famous businesses and unicorns. The China ingredient Evidently, the goal of the policy is to avoid a bigger Chinese presence in important Indian industries. There has been at least 26 billion dollars’ worth of Chinese investment in India. When HDFC notified stock markets that the People’s Bank of China had grown its investment in HDFC from 0.8% to 1.01% in mid-April, the warning bells went off in India. As it aggressively sought information on foreign portfolio investments from Asian nations, the Securities and Exchange Board of India (Hereinafter as “SEBI”) subsequently shifted its attention to the quantity of Chinese investments in Indian enterprises. These specifics involve whether Chinese investors control the funds and if investors from these nations have any kind of controlling stake. Chinese state-owned enterprises have large reserves and deep coffers, which raise fears that they may purchase crucial companies whose values have degraded in their own countries. The COVID-19 pandemic has paralyzed the economies of most of the countries, yet the Chinese economy has demonstrated resiliency. Even before the crisis, governments were becoming concerned about global supply networks’ over-reliance on China. The COVID-19 pandemic has raised concerns about the over-reliance on China for global supply networks, including India’s. India and some other nations bought Chinese rapid test kits due to a shortage. However, these kits proved to be unstable. India reportedly canceled the purchase of these kits. A prospective Indian-CFIUS? National security issues are now more prevalent than ever, affecting practically every aspect of life. For any foreign investment, some jurisdictions have a particular screening mechanism that examines the transaction from the perspective of national security. One such interagency organization that examines foreign investments in the US to see if they pose a danger

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Canara Bank and Gayatri Projects: Breaking the shackles of perennial delays.

Insolvency Law /

[By Nishant Kumar] The author is a student at the Hidayatullah National Law University, Chhattisgarh. Introduction: In the year 2016 Insolvency and Bankruptcy Code (Hereinafter referred to as IBC) was promulgated as the principal legislation to tackle the surging corporate debts and for the timely resolution of corporate insolvencies. The code replaced several legislations including the Industrial Companies Act 1985 with an aim to facilitate a more timebound and efficient method of debt restructuring. However, there have been several instances when the IBC has failed to meet the expectations. Recently, Canara Bank became the second bank to file an insolvency plea against the Gayatri Projects. The first petition was filed by Bank of Baroda in February which is still awaiting the approval of National Company Law Tribunal (Hereinafter referred to as NCLT). According to Section 7(4) of the IBC, the Adjudicating Authority is obligated to give a decision over the insolvency application within 14 days. However, in the instant case the application has been pending before NCLT for months consequently jeopardising the assets of debtor. In this article, in light of recent developments in dispute between Canara Bank and Gayatri Projects, I attempt to highlight the delays in the resolution procedure and its implications on the stakeholders involved. Issue: Canara Bank filed an insolvency petition against the Gayatri Projects for a default of Rs 1,520.75 crore. This insolvency petition is second in row after the initial petition filed by the leading lender Bank of Baroda. It is alleged that the debtor i.e., Gayatri Projects owes almost rupees 6000 crores to its lenders. After a failed structuring plan against the debtor in 2015, lenders had declared the loans as Non-Performing Asset (NPA).  The first petition was initiated by Bank of Baroda in February which has still not received approval from the NCLT. Consequently, the failure to start the resolution process has forced the lenders to sell the pledged shares of the debtor company further deteriorating its condition. Such inordinate delay in the application process destabilizes the complete process. Furthermore, according to a study by Insolvency and Bankruptcy Board of India (IBBI), admission of applications for CIRP takes much longer than the time prescribed in the code. It is to be noted that the delay in application process is just the tip of the iceberg, the study by IBBI highlights several unreasonable delays in almost every stage of the resolution process. These inexplicable delays have serious ramifications on both creditors and debtors. Moreover, it also hampers the ease of doing business in the country. Legal Analysis of the Problem: Under Section 7 of the IBC a financial creditor or a group of financial creditors can initiate the Corporate Insolvency Resolution Process (Hereinafter referred to as CIRP) against the debtor. Section 7(4) of the code further says that the adjudicating authority (AA) has to take the decision on such applications within 14 days. In case of any delay the AA should give a written explanation for such delay. Section 12 of the IBC provides time limit for completion of the resolution process. Supreme Court in Arcelor Mittal Pvt. Ltd. v Satish Kumar Gupta has clearly specified that the entire timings prescribed by the Section should be mandatorily followed. Any delay in the process can affect the interest of both debtors and the creditors involved. In Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta, the Supreme Court held that the resolution plan should be completed within 330 days including the time taken in litigation except in certain exceptional cases. The Supreme Court in several rulings time and again has attempted to limit the delays in the process in order to maintain the sanctity of the code. In a very interesting case of Sharad Sanghi v Vandana Garg NCLT refused to consider the resolution plan approved by the Committee of Creditors after a lot of negotiations because 270 days had lapsed since the initiation of resolution process. The intention of the appellant authority was to curb these unexpectable delays. Further in the landmark case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Ltd Supreme Court conclusively held that a resolution plan once approved by Committee of Creditor cannot be withdrawn or modified or altered in anyway. This ruling by the apex court is a positive step in the direction to establish an efficient insolvency regime. However, in the recent ruling of Supreme Court in Vidarbha industries limited v. Axis Bank Supreme Court has complicated the application process by the creditors under Section 7 of IBC. Two objective conditions that have been mentioned in the code for admission of resolution application the first condition being the existence of debt and second being the evidence of default by the debtor. The Supreme Court in the above ruling has empowered the AA to reject the application even if the conditions mentioned in the act have been met. The test has now become subjective and susceptible to several conflicts. Supreme Court has put yet another impediment in the path of speedy restructuring of debt. Inordinate Delays: In this competitive corporate environment insolvency regime plays a significant role. Any delay in resolution of insolvency can prove detrimental for parties involved. An efficient insolvency regime facilitates a healthy credit culture in the economy. It minimises bad loans and non-performing assets in the market. Furthermore, it helps the creditors in getting beneficial returns on their loans and also aid debtors by maximising their assets. However, India has been witnessing surging delays in insolvency resolution. Time and again the duration prescribed by the IBC is breached. According to IBBI reports 73% of insolvency cases breached the 270 days’ timeline prescribed the IBC. There can be many reasons that can be attributed to delays in insolvency resolution procedure. The reasons range from inefficient system to unfilled vacancy in the NCLT. It has been reported that manpower shortage in the NCLT is proving to be a significant hindrance in timely resolution of the insolvency. IBBI in its

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Funding Winter in the Startup Market: The Effects and Regulatory Reforms

Contemporary Issues, Mergers & Acquisitions /

[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

Contemporary Issues, Insolvency Law /

[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

Competition Law, Contemporary Issues /

[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

Contemporary Issues /

[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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Whether Resolution Professional has Adjudicatory Power in the CIRP Process?

Insolvency Law /

[By Vinay Sachdev] The author is a student at the Unitedworld School of Law, Karnavati University. Background  In the Corporate Insolvency Resolution Process (“CIRP”) initiated under the Insolvency & Bankruptcy Code 2016, the claim is the most important factor to be taken in the Resolution Plan for the Corporate Debtor. The provisions of the Code strive to protect the interest of creditors of a company that is under CIRP while completing the insolvency resolution process in a time-bound manner. The duties of an Interim Resolution Professional (“IRP”) and a Resolution Professional (RP) have been laid down in Sections 18 and 25 of the Code. According to, Section 18,  the duties of an IRP include, inter alia, receiving and collating “all claims submitted by creditors to him, after the public announcement made by him”. In the same manner, an IRP under section 25(2)(e) has to maintain an updated list of all the claims of the creditors. Additionally, Regulation 13 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulations, 2016 (IRPCP Regulations) provides for verification of the claims and maintenance of a list of creditors by an IRP or RP, as the case may be. It is to be noted that neither Section 18 nor Section 25 of the Code expressly imposes a duty upon the IRP/RP to verify, admit or reject claims. The duty to verify the claims by the IRP or RP has been provided under Regulation 13 of the CIRP Regulations. Adjudicatory Power of RP/ IRP Apart from these sections and rules related to the powers and duties of the IRP and RP help sum up the mandate of an RP or IRP including receiving, collating, and verifying the claims received by him during CIRP. Moreover, as often observed in practice, on verification, an IRP either accepts or rejects the claims of the creditors. Due to this, in a number of cases that have come before the Tribunal, an issue pertaining to the power of the IRP/RP has arisen. In the case of Grasim Industries Limited and Edelweiss Asset Reconstruction Company Limited Vs. Tecpro Systems Limited, the  NCLT, Principal Bench, New Delhi has observed that “a perusal of Regulation 13 of the CIRP Regulation, which makes it clear that IRP is under a statutory duty to verify each and every claim and maintain the list of creditors containing their names and amount claimed by them and the amount of their claim admitted.” In the said case the IRP had rejected the claim given by the applicant as the claim amount was the subject matter of the arbitration before the Arbitral Tribunal and thus the Tribunal upheld the decision taken by the IRP. Further, in the combined appeal filed before the Appellate Tribunal in the matter of M/s. Prasad Gempex vs. Star Agro Marine Exports Pvt. Ltd. & Ors. and SREI Infrastructure Finance Ltd. vs. Kannan Tiruvengandam, the issue arises for consideration is whether the ‘RP’ has the power to adjudicate the claim of creditors of the company. In the landmark case of Swiss Ribbons Pvt. Ltd. v. Union of India, clarifies the above issue. The Supreme Court conclusively stated that the RP has no adjudicatory powers under the Code. To establish the judgment, the bench compared the powers and duties of an RP to a liquidator and stated that a liquidator has the power to determine the valuation of claims under section 40 of the Code and that such determination is “quasi-judicial in nature”.  After establishing this, the Court stated that an RP, unlike a liquidator, cannot act without the approval of the committee of creditors (COC), and can be replaced by, COC. IRP merely acts as “a facilitator in the CIRP whose administrative functions are overseen by the COC and by the NCLT”. However, the court completely missed the point that COC approval is required only in certain matters that are mentioned under section 28 of the IBC. IRP doesn’t need approval when verifying a claim or making a “precise estimate of the amount of the claim” of imprecise claims under the CIRP Regulations. These functions, referred to as administrative because they are overseen by the Committee of Creditors and Tribunal, unavoidably require the use of discretion (during investigation, inquiries, and verification of claims) by the IRP. The other important argument on which the Court relied was that an RP can be replaced by COC. The fact that an RP will be replaced by the COC is only if the COC would have an interest when an RP or IRP accepts and verifies the claims. It would go against the interest of the Committee when an RP accepts more claims or increases the existing claims. Therefore, the contention that the COC has oversight over RP does not help in maintaining a check on whether it accepts or rejects genuine claims of the creditors. Power of NCLT to adjudicate claims The Hon’ble NCLAT in the case of M/s. Prasad Gempex noted that with respect to the claims, an application or suit can be initiated against the Corporate Debtor, in terms of provisions of Section 60 of the Code. The relevant portion of Section 60 is cited below: (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of— (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code. From the above provision, it is evident that notwithstanding the order passed under Section 31 of the IBC, it is open to a person to initiate a suit or an application against the Corporate

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‘Rainbow Papers’- A Jolt to the IBC

Insolvency Law /

[By Shalin Ghosh] The author is a student at the Maharashtra National Law University (MNLU), Mumbai. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) has been a watershed reform for the Indian economy, being one of the most comprehensive laws governing insolvency and credit recovery matters in the country. The interplay between tax law and IBC has increasingly been gaining traction, throwing up questions that have a great bearing on the future of India’s insolvency regime. A pertinent example is a critical issue that has, over the years, emerged up for consideration before various tribunals and the Supreme Court (“SC”) regarding the classification of tax authorities as secured or unsecured creditors. A recent decision of the SC in State Tax Officer v. Rainbow Papers Limited (“Rainbow Papers”) has significantly upended the evolved legal position on the issue by declaring tax authorities to be ‘secured creditors’ under the IBC, adding that they have a statutory first charge over the property of the corporate debtor. This article analyses the judgment, pointing out the inconsistencies in the SC’s rationale while discussing the scheme of the relevant provisions and the evolved jurisprudence on the matter. Facts The corporate debtor, Rainbow Papers Limited (“respondent”) went insolvent in July 2016 and was burdened with an outstanding tax liability amounting to nearly Rs 47 crore under the Gujarat Value Added Tax Act, 2003 (“GVAT”). Consequently, the State Government’s tax department (“appellant”) filed claims to recover the pending tax dues. However, the concerned Resolution Professional (“RP”) waived off the entire quantum demanded by the appellant contending that the sales tax office is considered to be an ‘operational creditor’ under the IBC and therefore, would not enjoy a first charge over the corporate debtor’s property. The National Company Law Tribunal (“NCLT”) ruled in the respondent’s favour, validating the contentions of the RP. Upon appeal, the National Company Law Appellate Tribunal (“NCLAT”) reaffirmed the NCLT’s decision, rejecting the appellant’s claims of enjoying a first charge over the respondent’s assets reasoning that Section 48 of the GVAT, which provides for a first charge on an individual’s property with respect to any outstanding claims will not prevail over Section 53 of the IBC. Eventually, as the matter reached the SC, a different conclusion followed, with the Court holding that the appellant’s claim is within the ambit of ‘security interest’, making it a ‘secured creditor’ under the IBC. Resultantly, the Court ruled that the appellants would have a first charge over the respondent’s property, reiterating that Section 48 of the GVAT is not inconsistent with Section 53 of the IBC. Analysis Tax dues as secured debt? The legislative scheme and construct of the IBC seem to imply that any outstanding dues payable to the government should not be classified as secured debt. Section 5(21) defines ‘operational debt’ as “a claim in respect of the provision 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.” The list of items included in the aforementioned definition seems to suggest that outstanding dues like pending tax liabilities fall squarely within the scope of ‘operational debt’. The Court in its landmark Swiss Ribbons judgment clearly enunciated the difference between financial debts and operational debts under the IBC, noting that only the former enjoys a ‘secured’ status as opposed to the latter, which is unsecured. There is another point that merits comment. In the present case, the SC observed that merely because Section 48 of the GVAT creates a statutory first charge on an individual’s property, the appellant’s claims fall within the scope of ‘security interest’ under Section 3 (31). Therefore, the appellant, by extension, becomes a ‘secured creditor’ as defined under Section 3 (30). The Court, agreeing with the appellant’s argument, ruled that the term ‘secured creditor’ is not narrow or restrictive and can be interpreted expansively to include all types of security interests within its meaning. This observation is erroneous on a few grounds. Under the IBC, having a ‘security interest’ is a pre-requisite for being a ’secured creditor’. Section 3 (31) defines ‘security interest’ to mean “a title, right, claim or interest to property created as a result of a transaction which secures payment of performance of an obligation.” This clause appears to assume the existence of a contract between two parties, and not a particular legal provision, to give rise to a ‘security interest’. Furthermore, any transaction that leads to the creation of a security interest must be consensual and voluntary and not vitiated by coercion or force, for it to be considered valid. In this light, it is difficult to consider that the non-voluntary and coercive act of tax authorities attaching assets like property leads to the creation of a ‘security interest’ under Section 3 (31) of the IBC. Deviates from established precedents Courts across the country have, in the past, adjudicated on the priority of secured creditors, albeit in the context of claims made under the Customs Act, Income Tax Act, and so on. Recently the SC, in Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs, ruled that IBC will prevail over the Customs Act. Incidentally, even the Customs Act contains a provision that gives rise to a statutory first charge to the customs officials over the corporate debtor’s assets. In another case, PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited, the Court categorically observed that under the scheme of the IBC, income tax dues cannot be accorded a higher priority than secured creditors. A similar conclusion was also reached in a recent decision of the Rajasthan High Court where the court refused to accord a greater priority to government dues over those payable to secured creditors. Incidentally, even in the aforementioned case, the state tax department contended that it enjoys a statutory first charge on the property of the entity undergoing liquidation on the basis of a specific

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