Author name: CBCL

Vidarbha v. Axis Bank: A Case of Reinventing the Wheel?

Contemporary Issues /

[ By Paridhi Gaur] The author is a student at the University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University. Introduction The enactment of the Insolvency and Bankruptcy Code (hereinafter, “IBC”) was a paradigm shift in resolving debt-ridden companies expediently and without compromising on the value maximization of assets. Remarkably, it put the creditors on a pedestal by giving them decision-making powers in the Corporate Insolvency Resolution Process (hereinafter, “CIRP”). Financial creditors and operational creditors are empowered to initiate CIRP against corporate debtors under Sections 7 and 9 of the IBC, respectively. In Innoventive Industries Ltd. vs. ICICI Bank (hereinafter, “Innoventive”), the apex court had laid down that the NCLT must admit these applications if they are defect-free and upon satisfying itself on the following two grounds: whether there is an existing debt which is due, and whether the corporate debtor has defaulted in making a payment towards such debt. However, through its recent ruling in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. (hereinafter, “Vidarbha”), the Court has diluted this twin test. The NCLT now has the discretion to reject an application by a financial creditor to initiate CIRP, despite the existence of debt, by accounting for certain factors like the financial health and viability of a company. Contrastingly, an application of the operational creditor in a similar situation is mandatorily to be accepted, unless there is a pre-existing dispute between the parties about the debt. In this article, the author seeks to analyse if the apex court was right in unsettling a settled law or if the same is an attempt to reinvent the wheel. Factual Matrix Vidarbha Industries Power Limited (hereinafter, “VIPL”) is a power generating company and its business is under the regulatory control of the Maharashtra Electricity Regulatory Commission (hereinafter, “MERC”). MERC determines the tariff chargeable by electricity generating companies. As a result of certain developments between 2003-2013, a dispute arose between VIPL and MERC on the amount of the final tariff. The Appellate Tribunal for Electricity (APTEL) decided in favor of VIPL, who claims that a sum of Rs. 1,730 crores is realizable by it in terms of this order. However, MERC appealed this decision before the Supreme Court and the same is pending. As of date, the apex court has not granted a stay on the APTEL order. In 2021, Axis Bank Private Limited, a financial creditor of Vidarbha, filed an application for commencing insolvency against VIPL and claimed that Rs. 553 crores are owed to it. VIPL sought a stay on these proceedings on the ground that the appeal by MERC is pending before the SC. They argued that since the receivable due to them exceeds the claim amount, initiating CIRP is not necessary. The NCLT found no merit in this submission and reasoned that pending decisions are extraneous matters and therefore, cannot have any bearing on an application under Sections 7 or 9 of the IBC. The NCLAT, in appeal, upheld the decision of the NCLT. Aggrieved, Vidarbha approached the SC. Decision of the Supreme Court VIPL roped in the rule of literal interpretation to assert that Section 7(5)(a) of the IBC is discretionary because the legislature has used the word “may” instead of “shall” while giving the NCLT the power to admit an application. It was pointed out that if the legislature meant to impose a compulsion, the word “shall” would have been used, like in the parallel provision of Section 9(5)(a).  Therefore, the NCLT may reject an application, despite there being a debt, to meet the ends of justice. VIPL’s fleshed-out submissions before the apex court compelled a judicial interpretation of the legislative intent through the terminologies used. The Court agreed that the legislature, by making the active choice of using “may” in Section 7(5)(a) and “shall” in Section 9(5)(a), sought to provide different levels of discretion to the NCLT under the two otherwise similar provisions. As such, an application by the operational creditor under Section 9 is mandatorily required to be admitted, if- The application is complete in all respects; The application complies with the requisites of the IBC; there is no payment of unpaid operational debt; notices of payment or invoices have been delivered to the corporate debtor; no notice of dispute has been received by the operational creditor. On the other hand, the existence of debt (and default in payment thereof) only gives financial creditors the right to file an application. Under Section 7(5)(a), it is up to the NCLT to decide whether to admit it or not. To crystallize the contours of this discretion, a test of expediency has been stipulated. It requires the NCLT to adjudge the feasibility of initiating a CIRP by accounting for the overall financial health and viability of a company and applying its mind to other relevant circumstances. While the Court refrained from chalking out what these “relevant circumstances” entail, it justified the need for this change in status quo on the premise that the question of insolvency only arises if the corporate debtor is under financial duress. Analysis The twin test used as a touchstone for initiating insolvency was, in a way, the creditors’ paradise since it provided them a hassle-free path to recover their dues. However, the test was extremely rigid in its ambit and side-lined the corporate debtors’ interests. Even in a situation wherein the corporate debtor is solvent, but unable to meet its liabilities for the time being due to genuine extraneous factors (for example, a favorable arbitral award being under challenge), it would be compelled to sound its death knell by undergoing CIRP. In this regard, the ruling in Vidarbha will prove to be a game-changer if properly implemented. It can help prevent futile insolvency proceedings by providing the corporate debtors with a fair say in the process. Besides, the financial creditors are not prevented from filing a subsequent application under Section 7 if their dues remain unpaid. This way, the IBC’s objectives of reviving the corporate debtor and protecting the interests of

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Law and Economics Analysis of the Combination regime under the Competition Act, 2002

Competition Law /

[By Manas Agrawal and Ritu Bhatia] The authors are students at the National Law School of India University, Bengaluru. Introductory Remarks The Competition Commission of India (‘CCI’) has time and again failed to harness the economic benefits of the regulatory landscape of mergers and acquisitions embodied in the Competition Act, 2002(‘the Act’). To prove this, we have used a test suite of Facebook-Jio. Through Facebook-Jio, the thesis of this paper is that ‘The duality of the fidelity towards the text of the statute and the implementation of some suggestions is required for achieving the goal of prevention of adverse effect on competition in cases of combination.’ On 24 June 2020, the CCI approved the Investment Agreement and the Master Services Agreement between enterprises related to Facebook and Jio (‘the order’).[1] This approval serves as a focal point to understand the intersection of three aspects, first, the goals of the Indian competition regime, second, the procedural requisites of combinations, and third, the substantive effects of the combination. This is the backdrop against which this article is set. Structurally, the article is divided into two parts. The article in the first part positively analyses the crystal-ball gazing procedure mentioned in sections 5 and 6 of the Act and the substantive grounds of ascertaining appreciable adverse effects on competition (‘AAEC’) mentioned under section 20 of the Act.[2] The article in the second part normatively analyses the existing – asset turnover dichotomy mentioned in section 5 and the meaning of ‘asset’ mentioned in explanation (c) to section 5. Unscrambling the egg problem: Ex-ante regulatory procedure Daniel A. Crane proposed two models of law enforcement for the antitrust landscape, regulatory (ex ante) and crime-tort (post facto).[3]India follows a hybrid system, which is crime-tort in sections 3 and 4 and regulatory in sections 5 and 6.[4] Both exclusive legal positivism (‘ELP’) and law and economics justify the regulatory nature of merger control. Firstly, section 6(2) of the Act has the requirement of pre-combination notification.[5] Hence legal validity of the ex-ante procedure is established through the source-based thesis. Secondly, both section 18 of the Act and the Preamble state that (a) promoting the interests of the consumers and (b) ensuring freedom of trade is the duty of the CCI and the goal of the Act respectively.[6]A combination of (a) and (b) proves that Blaire’s and Sokol’s conceptualization of total welfare is applicable here.[7] Here, total welfare is the summation of consumer welfare and producer welfare.[8] The rationale behind ex-ante control is to prevent unscrambling the egg problem. This is because once a combination is done, the transaction costs of undoing it are very high. Hence, consumer welfare should necessitate that ex- ante approval is required to protect against consumer harm due to AAEC. Furthermore, CCI has never passed an order under section 31(2) of the Act disallowing the combination.[9] Moreover, CCI has used its power under section 31(3) only in 2.6 percent of cases.[10]Therefore, there are insignificant/negligible transaction costs from the perspective of a producer and hence, Coase’s theorem will conclude that there is Pareto optimality.[11] Thus, ex-ante approval is conducive to producer welfare. Till now, it is established that if the CCI does not employ ELP (regulatory model) in its order, then according to law and economics, there will be insufficient outcomes. This underpinning of the importance of statutes using law and economics, better known as the Meld Model was proposed by Mr. Rahul Singh.[12] The next step is the application of this Meld Model approach to Facebook-Jio. In this vein, this paper argues that the order is erroneous in two respects. The percentage of acquisition of shares by Jhaadhu was 9.99 percent.[13] Hence, the correct approach would have been to assess whether the acquisition could have been exempted under Regulation 4 read with Item 1 of Schedule I of the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011. One might argue that proviso (B) to Item I is only applicable if the requirement of defenestration[14] (not a member of the board of directors and no intention to participate) is met. According to paragraph 6 of the order, Jaadhu has the entitlement to appoint a director on the Board of the target enterprise and hence exemption should not be granted.[15] However, the outcome should not precede the analysis and hence we are using an outcome agnostic approach to flag the error. This error can be understood by the prevention-elimination dichotomy and Meld Model. The Preamble of the Act mentions ‘prevention’ of certain activities whereas section 18 of the Act mentions ‘elimination’. The difference between the two is the extent of intrusiveness. Hence, to resolve the deadlock, we will be employing Singh’s three-fold lexical priority test.[16] The first step is to take the text of the statute seriously. Here, Section 18 starts with subject to the provisions of this Act.[17] The subsections of sections 29 and 31 of the Act are bombarded by sunset clauses for each stage of the procedure.[18] Furthermore, section 6(2A) implicitly places a ceiling period of 210 days on the CCI to give an order. These provisions prove that the intention of the Parliament is to strike a balance between the costs of enforcement and protection of competition. This is precisely why the CCI has first, the option of both modification and rejection present in section 31[19] and second, section 20(4) (n) mentions cost-benefit analysis as a factor for assessing AAEC.[20] For instance, when the costs of enforcement due to rejection exceed the benefits of protecting competition, then the CCI should not order annulment.  The second step is to follow Fuller’s advice of not restricting the assignment of meaning to a single word of the statute. This combined with the principle of noscitur socii means that the single word ‘eliminate’ should not be interpreted in isolation but according to the context in which it is used.[21] When one reads the whole paragraph of section 18, it will be evident that the Act mandates the CCI has to balance

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Decoding Uncertainties in Treatment of Foreign Taxes Ineligible for Relief

Taxation Law /

[By Anshika Agarwal] The author is a student at the Vivekananda Institute of Professional Studies, GGSIPU, New Delhi. Introduction In keeping up with the global trends, India has always been consolidating its financial position in international markets. With a stable tax framework and an attractive Foreign Direct Investment regime, India has enhanced its ease of doing business, thereby, attracting cross-border transactions and investors. Today, India stands as a potential hub of global investments and has attracted a high inflow of Foreign Direct Investments in recent years. With more and more investors venturing into India, the smooth flow of transactional activities has become a matter of concern. This trend has led to the problem of double taxation. Double taxation refers to a situation where the income of the company is subjected to dual taxation based on its place of residence and source of income. To resolve this impediment, Indian taxation laws provide for the provision of credits to its residents. The said credit can be granted to an Indian resident assessee irrespective of whether there exists a DTAA between his resident country and the specified country. This credit can be granted in respect of countries where there exists a Double Tax Avoidance Agreement (hereinafter, “the DTAA”) between India and the specified country or territory, and also in cases where no such agreement is negotiated by the Indian government. The credit also known as Foreign Tax Credit (hereinafter, “the FTC”) becomes available when a foreign tax is paid in respect of an income already taxable in India. The said credit is used for setting off the tax payable under the Income Tax Act, 1961 (hereinafter, “the Act”). The process remains smooth and follows an ordinary credit method. However, complexities crop up when the tax payable under the Act is less than the foreign tax paid. In such a scenario, the allowability of the unclaimed and unutilized foreign tax as a business expenditure becomes a vexed question. The article aims to decode the uncertainties in the treatment of such a tax in the light of some recent rulings pronounced by different Courts/ Tribunals. Applicable legal provisions To analyze the above question, it becomes pertinent to look into the applicable legal provisions. As propounded by Rule 128, Income Tax Rules, 1962 (hereinafter, “the Rules”), a credit termed as FTC will be allowed to a resident assessee in respect of any amount paid by him as foreign tax in earning the income which is also taxable under the Act. For this purpose, the foreign tax would mean a tax covered under the DTAA as entered into by India with any other country, and in cases where no such agreement exists, the tax payable under the law in force of that country. This allowance shall be made in the form of a deduction or relief in the year in which such tax is paid. The relief to be granted would be the lower of the two amounts: the tax payable under the Act and the foreign tax paid. Where the latter exceeds the former, the former amount becomes eligible for credit under Section 90/ 91 of the Act while the balance amount becomes ineligible for the said relief. The treatment of these unclaimed and unutilized relief forms becomes the underlying crux of disputes. With this, Section 37 comes into the picture as well. Section 37 provides that, when an expenditure is incurred wholly and exclusively for the purposes of business or profession then such expenditure can be allowed as a deduction under the head “Profits and Gains of Business or Profession” (hereinafter “PGBP”). Further, such expenditure should neither be of personal nature nor should it be of capital character. An expenditure that qualifies the said conditions would be allowed under this Section. On the other hand, Section 40 a(ii) of the Act disallows the deduction of the amount paid as tax on the income earned under PGBP. Further, the Explanation to the said Section inserted vide Finance Act 2006, includes the amount of foreign tax eligible for relief under Section 90/ 91 as the case may be, under the expression “tax” used in the Section. Issue The issue that now captivates our attention is the uncertainty in the manner of treatment of the unclaimed foreign tax, as to whether such a tax that remains ineligible under Section 90/ 91 can be allowed as business expenditure under Section 37(1) of the Act? Whether the scope of the term “tax” used in Section 40 a(ii) extends to disallow this unclaimed amount of “foreign tax”? Judicial Approach Employed  The impugned issue has time and again, been addressed by various courts and Tribunals. Divergent approaches have been employed to settle it. The recent trends as observed in these rulings are as follows: Reliance Infrastructure Ltd. V CIT-Mumbai The Bombay High Court, in the present case, while deciding upon the above issue, ruled in the favor of the taxpayers. The judgment clarified the scope of Section 40 (a)(ii), explicating the extent of the word “tax” used here. It was observed that the preceding words “in this Act” used in Section 2(43) narrow down the ambit of “tax” to tax payable under the Act, thereby precluding the foreign tax paid. This, in turn, streamlines the scope of Section 40(a)(ii), thereby, limiting it to the tax payable under the Income Tax Act, 1961. In regards to the foreign tax paid, Explanation 1 to the said Section specifically includes the amount eligible for double tax relief under the purview of Section 40(a)(ii). The legislative intent underlying the Explanation was to nullify the dual claims of benefit of credit and of deduction as expenditure, arising on the amount eligible under Section 90/ 91. Hence, in the light of the said Explanation, the Court held that the part of foreign tax that remains unclaimed would not be hit by the provisions of Section 40 (a)(ii). Thus, such an amount, being expenditure incurred to arrive at the global income which is already taxable in India, would become allowable

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Debunking the applicability of NCLT Rules on pronouncement of orders

Contemporary Issues, Insolvency Law /

[By Utkarsh Pandit and Samridhi Shrimali] The authors are students at the Institute of Law Nirma University, Ahmedabad. Introduction The key intent of the existence of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘IBC’) is the resolution of companies in distress. The Code prescribes specific timelines for an efficient and swift resolution. However, these timelines are not always met due to delays from both, the bar and the bench. One such cause of delay on the part of the bench is the reservation of order and delayed pronouncement.  Rule 150 of the National Company Law Tribunal Rules, 2016 (hereinafter referred to as the NCLT Rules, 2016) provides for the pronouncement of orders. This rule provides for a limited time frame of 30 days to pronounce the order which has been reserved. There still exist procedural inconsistencies when it comes to the implementation of such rules. Resultantly, these issues acknowledged as mere irregularities have given them a flavor tantamount to being insignificant. This article analyzes the dichotomous stance of the courts/Tribunals on the delay in pronouncement of orders and if such delays can be a ground to challenge an order. By definition, pronouncement means to utter formally, officially, or solemnly, to declare or affirm, as pronounce a judgment or order.[i] In other words, pronouncement means to officially communicate the order to the parties after the hearing is concluded. It becomes pertinent to comprehend the trends of the tribunals/courts as the harbinger of rampant delay in pronouncements poses a threat to the ‘speedy trial’ essence of insolvency forums. These trends encounter impediments in the smooth procedural conduction of such NCLT rules, as well as the jurisdiction of the courts/tribunals while hearing petitions/appeals challenging orders on the ground of delayed pronouncement. Kamal K. Singh v. Union of India In this case, the Bombay High Court quashed the order of NCLT Mumbai, as it violated Rule 150 to 152 of the NCLT Rules, 2016. While analyzing the ambit of the pronouncement of the order, the Court observed that mere making known or communicating the order as per section 7(7) of IBC, is not tantamount to pronouncement. It also observed that NCLT being a statutory tribunal is bound by the procedural rules or else the non-adherence would defeat the principles of natural justice and fairness. Thus, it was held that the pronouncement of order is imperative under Rule 150 of the NCLT Rules, 2016. Notably, it was further held that after the conclusion of the arguments, when the pronouncement of the order has to be done, both the parties are to be notified in advance. Though the Bombay High Court did not delve into the issue of adherence to the timeline under Rule 150(1) of the NCLT Rules, it has definitely laid down a way for the aggrieved parties to exercise the jurisdiction of the High Courts in case an order is passed in violation of the procedural rules, specifically the NCLT Rules, 2016. Rajratan Babulal Agarwal v. Solartex Pvt. Ltd. & Ors. The NCLAT PB dismissed an appeal that prayed for setting aside of an impugned order of NCLT Ahmedabad, where inter alia the pronouncement of the impugned order was done six months post the conclusion of the final arguments. The appellants argued that the delayed pronouncement of the order was a direct violation of Rules 150 and 152 of the NCLT Rules, 2016. The appellants further relied on Anil Rai V. State of Bihar, where the Supreme Court laid down the guidelines for pronouncement of judgments and emphasized that for civil matters, the judgment ought to be pronounced within two months post the conclusion of the arguments. The appellants also brought non-adherence to Rule 89 of the NCLT Rules, 2016 to the NCLAT’s notice, wherein the publication of the cause list is to be published one day in advance. In the present case, the publication was done on the same day when the judgment was pronounced. Intriguingly, NCLAT while dismissing the appeal held that “It is true that in the present case, the parties have submitted written submissions on 06.01.2020, however, the impugned order was pronounced on 28.05.2020 i.e. after about five months from the conclusion of arguments which is against the aforesaid rule as well as guidelines laid down by the Hon’ble Supreme Court.  We are of the view that only on this count the impugned order cannot be set aside which is otherwise flawless.” For the violation of Rule 89 of the NCLT Rule, 2016, the NCLAT held that “even if the cause list was published on the same day, the same would be considered as an irregularity but not an illegality.” Thus, the Appellate Authority held that even if the orders are not in coherence with these rules, the same could take a back seat if the order otherwise does not have any other inconsistencies. It is reasonable to infer from the abovementioned case that the defect on account of pronouncement of orders would not impute sufficient ground to set aside such orders. Shaji Purushothman v. Union of India The Madras High Court, in a writ petition filed against the order passed by the NCLT Chennai Bench, observed the nature of NCLT Rules. Placing reliance on Balwant Singh and Others v. Anand Kumar Sharma and Others, Sharif-ud-Din v. Abdul Gani Lone, Bhavnagar University v. Palitana Sugar Mill (P) Ltd. and Others, and Pesara Pushpamala Reddy v. G.Veeraswamy and Others, the Madras High Court laid down a test and stipulated that if the law does not provide the consequences of non-compliance of the rule, then it should be deemed to be directory in nature. On the other hand, if the law provides for the consequences of non-compliance, then it should be deemed to be mandatory. While analyzing the nature of the NCLT Rules, 2016, and Rules 150 and 153 particularly, the High Court held that as the rules do not indicate any consequences on the account of non-adherence to the timelines, therefore, they can be considered as directory

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Confused Jurisprudence on Derivative Actions in India

Company Law, Contemporary Issues /

[By Harsh Tomar] The author is a student at the National Law School of India University (NLSIU), Bengaluru. In this piece, through the analysis of the case of ICP Investments (Mauritius) Ltd v Uppal Housing Pvt Ltd. (hereinafter “ICP Investments”), the author will highlight the common misconceptions around the jurisprudence on ‘derivative action’ in India. It will be argued that the reasoning in ICP Investments is one such manifestation of the lack of clarity. The author will point out the flaws in the reasoning adopted by the Court. Further, it will be argued that derivative action is not subsumed under any other remedy in the Companies Act. Therefore, the author will further argue for a clear and separate statutorily-recognized remedy of derivative action to be adopted under the Companies Act,2013. The Court in ICP Investments was of the opinion that after the enactment of the Companies Act, 2013 (“Act”) the derivative action as a separate remedy is no longer envisaged in India. This was mainly due to two grounds- 1) Derivative action as a separate form of remedy was not codified in the Act and 2) Such remedy is subsumed under the remedy provided under Sec. 241 of the Act. Section 241 and Derivative action Section 241(1) provides for remedy in cases of oppression, mismanagement, and prejudice. The Court in ICP Investments was quite confident in stating that derivative action in India is implicitly recognized under Section 241 of the Act. It is respectfully submitted that this case is a classic example of the failure of courts to understand the distinction between corporate wrongs and personal wrongs. Personal wrongs are wrongs suffered by individual shareholders and this can be remedied through oppression, mismanagement, and prejudiced actions. However, corporate wrongs are wrongs suffered by the company and it is the company only that can seek a remedy. Such wrongs can be remedied through derivative actions. Under the Companies Act, 1956 oppression and mismanagement were two separate remedies available. Oppression could be invoked when the affairs of the company were conducted in a manner that they were oppressive to any shareholder or caused prejudice to the public interest. Clearly, this was a remedy to address a personal wrong. While the mismanagement remedy could be invoked when due to a change in the company’s management, it was believed that the affairs of the company would be conducted in a manner that would be prejudicial either to the public interest or to the interests of the company. Despite the fact that this remedy can also be applied when the company suffered prejudice, there is no jurisprudence that suggests that this was used as a derivative action. The Companies Act, 2013 brought certain changes to this. It consolidated the oppression and mismanagement remedies and at the same time introduced an additional remedy called prejudice within a single provision i.e., Section 241. It is important to note that prejudice can be invoked when prejudice is caused not only to shareholders but also to the company. Hence, this may tempt one to jump to the conclusion that this is in fact statutory recognition of derivative action. This was the exact situation in the ICP Investments case.  At present, there doesn’t seem to have any clear court pronouncement on this, however, it is submitted that the provision should only be invoked when the prejudice caused to the company is coupled with evidence of personal wrongs. Otherwise in all corporate wrongs Section, 241 of the Companies Act 2013 can be invoked which is clearly not what the legislature would have intended. Such interpretation is also supported by some judgments from Singapore where a distinction between a purely private wrong and a private wrong which also comprises some corporate wrong was made.[i] Additionally, just because there is a possibility to grant a remedy to a company in a direct action under Section 241,[ii] it will not change the character of action from a direct to a derivative action. It is important to not conflate direct and corporate claims, which is what the court in fact did. This is because firstly, in a direct claim there are no substantive filters required.[iii] However, under the common law derivative claim, which is recognized in India, there are many criteria that the court may consider before admitting such a claim. First, the plaintiff has to establish that there is fraud on minority. Second, the shareholder must come with clean hands and hence is required to take leave of the court before proceeding with the derivative action. And third, since the action is on behalf of the company, the court will also consider whether proceeding with the action is in fact in the interest of the company. There are no such criteria provided under Sections 241-244 of the Act which further substantiates the argument that derivative action is not subsumed in them. Secondly, the remedy sought and the benefit of the action under both the claims is drastically different. The two remedies are different in nature and serve completely different needs. Section 245 and Derivative action Although the Delhi HC in the ICP Investments case for some unstated reasons did not allude to Section 245, people still tend to confuse it with derivative actions. This is mainly due to certain similarities between the two remedies.[iv] However, it is submitted that class action suits recognized under Section 245 are different from the idea of shareholder derivative action. Section 245 is an enabling provision that allows a few shareholders to seek remedy on behalf of all the other shareholders whose right has been infringed i.e., they form a ‘class’ among themselves. It is also quite relevant to note that under Section 245, the shareholder(s) can seek remedy against the company. This is very different from the conceptual understanding of derivative actions where the remedy is sought on behalf of the company. Also, in a derivative claim, a single shareholder can bring a claim to court. He is not mandated by law to collate his claim with similarly suited

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SBI Cartel Case: Assessing the Liability of the Company for Independent Actions of the Director

Competition Law, Contemporary Issues /

[By Harshit Upadhyay and Sangita Sharma] The authors are students at the Gujarat National Law University, Gandhinagar. A cartel facilitator is an undertaking that ensures the proper functioning and operation of the cartel by providing logistical support to the cartel. The facilitator does not need to have any commercial interest in the relevant market in which the cartel operates. Recently, in the Re: Alleged anti-competitive conduct by various bidders in supply and installation of signages at specified locations of State Bank of India across India (‘SBI Cartel’) case, the Competition Commission of India (‘CCI’) held a company liable for the independent actions of its director for facilitating a bid-rigging cartel. This article argues that the CCI erred in holding the company liable for the independent actions of the director when it could have punished the director individually for his actions under Section 27 of the Competition Act, 2002 (‘the Act’). Moreover, there is a need for greater clarity with regard to the position of the facilitators under the Act, and the same can be resolved with the help of incorporating the principles developed in the European Competition jurisdiction. SBI Cartel Case In March 2018, SBI floated tenders for the supply and installation of signages at its branches, ATMs, and offices for specified metro centers of various circles of SBI across India, which was ultimately carried out on a ‘reverse e-auction’ basis among the eligible bidders. Five companies qualified for the technical and financial bids and were shortlisted for the final bidding. These five companies wanted to distribute the locations amongst themselves. In order to facilitate the same, the companies sought the assistance of Naresh Kumar Desarji (‘Naresh’), Managing Director (‘MD’) of Macromedia Digital Imaging Pvt. Ltd. (‘MMDI’). It is relevant to note here that MMDI is neither horizontally nor vertically aligned to the same market as the other five players. Further, Naresh maintained personal relationships with the MDs of some of these companies. Based on the price inputs and geographical preferences he received from the companies, Naresh laid out how the bidding should be done and who shall bid how much for which location in an email marked to the companies. The companies followed the email and bid accordingly. The CCI took suo-moto cognizance of the anti-competitive conduct of the parties and held all the six parties (including MMDI) involved in the bid-rigging liable. CCI Decision The CCI held MMDI liable for the acts of Naresh in facilitating anti-competitive conduct, stating that under Section 3 of the Act, every person involved in manipulating the bidding process could be held liable. The CCI imposed a penalty of 51 Lakhs on MMDI. Further, it also held Naresh liable under Section 48 of the Act. Analysis On holding a Company liable for the Independent Actions of a Director The CCI, in this case, held MMDI liable even though MMDI was never part of any bid-rigging agreement directly or indirectly, and the actions of Naresh had nothing to do with the day-to-day management or even with the business of the company. This position is contrary to established principles. A company is a distinct legal entity, and a company cannot act beyond the scope of its Memorandum of Association or Articles of Association. A company can carry out the objectives mentioned in its Memorandum of Association or Articles of Association, including anything incidental or conducive to it, although it must be connected to those objectives. Further, the relationship between the directors and the company is analogous to that of agent-principal. An act not within the scope of the agent’s express or implied authority (falls outside the power or apparent scope of his authority and such acts) cannot bind or be attributed to the principal. The authority of directors is specified in the Memorandum of Association or Articles of Association and beyond which it cannot travel. In MRF Ltd. v. Manohar Parrikar, the court held that the actions of the director, which are ultra vires the same, cannot bind the company. In the immediate case, the CCI holding MMDI liable does not provide anything to establish that Naresh was acting within his authority and, therefore, could bind the company. Further, the tender was entirely unconnected to the business of MMDI as it was not engaged in the production of the goods involved in the tender and was in no manner incidental or conducive to the day-to-day functioning of Naresh as MD. The CCI erred in penalizing MMDI under Section 27 of the Act since it requires the company to be ‘involved in such agreement.’ The CCI held Naresh liable under Section 48, which requires the company to be held liable before punishing the individual in charge of and responsible for the company. However, the CCI has the requisite authority to penalize Naresh for his independent actions under Section 27 and Section 3 because of the term ‘person’ in these provisions. Further, Section 27 does not require holding the company liable before punishing the individuals. Unclear Position of Facilitators under the existing Competition Law regime Defining Facilitators The CCI held the ‘facilitator’ liable. But, it failed to define a ‘facilitator’ properly. The jurisprudence surrounding this has yet not evolved under the Indian Competition law. However, the competition authorities in European Union have more evolved principles to deal with cartel facilitators vis-a-vis their Indian counterparts. The General Court in AC Treuhand (later upheld by the top EU court) laid down the following legal test to determine the liability of facilitators: “The Commission must prove that [facilitator] intended, through its own conduct, to contribute to the common objectives pursued by the participants as a whole and that it was aware of the substantive conduct planned or implemented by other undertakings in pursuance of those objectives, or that it could reasonably have foreseen that conduct and that it was ready to accept the attendant risk.” This is a twin test, which requires it to be established that the perpetrator objectively contributed to the implementation of infringing conduct and that the perpetrator intended

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The Conundrum of ‘Interest’ as a part of Debt under IBC: The Dust Settles

Contemporary Issues, Insolvency Law /

[By Neelabh Niket and Sanchita Makhija] The authors are students at the Hidayatullah National Law University. Introduction Recently, the National Company Law Appellate Tribunal (‘NCLAT’) in the case of Mr. Prashat Agarwal, Member of Suspended Board of Bombay Rayon Fashions Ltd. Vs. Vikash Parasrampuria (hereinafter referred to as the ‘Bombay Rayon case’) held that under Section 4 of the Insolvency & Bankruptcy Code (‘IBC’), an operational creditor can club the ‘interest’ with the principal amount to arrive at the threshold limit of Rs. 1 Crore, which is the default limit for filing of applications under Part II of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘IBC’), provided that the interest was perspicuously stipulated in an invoice or an agreement. In doing so, the three-judge bench effectively overruled the law laid down by the National Company Law Tribunal (‘NCLT’) Delhi in CBRE South Asia Private Limited v. United Concept and Solutions Private Limited (hereinafter referred to as the ‘CBRE case’), which had provided a ruling contrary to the Bombay Rayon case by holding that the principal and interest cannot be clubbed together to reach the Rs. 1 crore threshold limit. In this article, the authors seek to analyze the recent judgment of the Bombay Rayon case and its possible implications on similar cases pertaining to the treatment of ‘interest’ as debt. Factual Matrix The Appellant, Bombay Rayons Fashions Limited (hereinafter referred to as the ‘Corporate Debtor’) was supplied goods by the Respondent, ‘Vikash Parasrampuria’, the sole proprietor of the firm ‘Chiranjilal Yarns Trading’ (hereinafter referred to as the ‘Operational Creditor’). For the said supply, the Operational Creditor had raised nine invoices, out of which the Corporate Debtor did not make the payment for five invoices. The remaining principal amount was Rs. 97,87,220 and a condition for payment of 18% interest was made in all the invoices. The Operational Creditor, ergo, filed a Section 9 Application, which was admitted by the NCLT, and the Corporate Insolvency Resolution Process (‘CIRP’), was initiated. Aggrieved by the said order, an appeal was filed in the NCLAT by the Corporate Debtor. Ruling and Analysis The NCLAT analyzed the definition of the term ‘debt’ and subsequently the term ‘claim’ and stated that if interest has been unambiguously stipulated in an invoice or agreement, then it will fall under the ambit of the ‘right to payment,’ which has been anchored in the definition of ‘claim’ under Section 3(6) of the IBC. In doing so, the NCLAT also distinguished the judgment of NCLT Mumbai in Steel India vs. Theme Developers Pvt. Ltd.( ‘Steel India Case’)’ by stating that, unlike the Steel India case, the interest was stipulated in the invoices in the case in hand. Furthermore, the NCLAT sought the support of the case of Pavan Enterprises v. Gammon India and overruled the CBRE judgment into the bargain. In the CBRE judgment, the court, after due analysis of the definitions of the terms ‘debt’ and ‘claim,’ had held that since the definition of claim is common for both Operational and Financial Debts, the definition of both the terms shall be considered to understand the legislature’s intention. After analyzing the definitions of the said terms, the Adjudicating Authority (‘AA’) arrived at the conclusion that Operational Debt does not include interest as the definition of Operational Debt does not explicitly incorporate the term ‘interest’; unlike Financial Debt which clearly specifies the term ‘interest’. It should be noted that the Court in the CBRE case had failed to understand that the connotation of the term ‘interest’ is distinguishable in the case of an Operational Debt and a Financial Debt. The term ‘interest’ is explicitly mentioned in the definition clause of Financial Debt as it is an inherent component of the same. This interest clause as disbursed against the consideration for the time value of money makes the debt a ‘Financial Debt’. (It is another case, however, that the Supreme Court (‘SC’) has rendered this interest redundant for Financial Creditors in the case of Orator Marketing.). Per contra, ‘interest’ in the case of Operational Debt, is not something which is fundamental to the nature of the debt. It can be claimed to be a part of the debt, only if it is contractual in nature and has been clearly stipulated. Thus, ‘interest’ may or may not exist depending upon the clauses enshrined in a contract. The AA had erroneously deemed equivalent the connotation of the term ‘interest’ under both the definitions by placing them on the same pedestal, whilst in reality, they are very distinct. The term ‘interest,’ as has been mentioned in the definition clause of Financial Debt, is almost synonymous with the debt availed, while ‘interest’ in the case of an Operational Debt is a creature of a Contract that arises from a right of payment. The consideration in the case of Operational Debt is ‘the goods or services that are either sold or availed of from the operational creditor’ and there is no time value of money involved in the case of Operational Debt, as was held in the landmark case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India. Therefore, unlike Financial Debt, the concept of ‘time value of money’ is not prevalent in the cases of Operational Debt. As interest is a token of representation of the ‘time value of money’, the same is not indispensable for Operational Debt, thereby rationalizing the omission of the term from the definition of Operational Debt. Implications If the CBRE judgment is strictly followed, then a part of the debt, which has been mutually agreed as interest cannot be levied and collected without a hitch, as it would require an additional case in the Debt Recovery Tribunal, rendering the clause redundant under IBC. For instance, the Real Estate industry which comprises various Lease & License agreements feeds extravagantly on the interest rates, and these amounts usually run in crores. Given that the NCLAT has recently categorized Lease & License debt as ‘Operational Debt’, the landowners would

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Taxing Regime on Online Gaming in India – a Gordian Knot

Taxation Law /

[By Aditya Maheshwari and Vedman Lokesh] The authors are students at the Gujarat National Law University, Gandhinagar. Introduction  In India, the quantum of indirect taxes to be imposed on sectors like lottery, casinos, betting and online gaming have always been a matter of contention, and the same issue has become a tough nut to crack in the Goods and Services Tax (“GST”) era. The major issues are (I) whether online gaming is, to all intents and purposes, a game of ‘skill’ or simply gambling; and (II)  what will be the eventual valuation of these services, consequently impacting the total amount of GST that is to be paid. In this article, we will discuss the complexities mentioned in the issues above and the appropriate course of action for the Union to take keeping in mind current international standards on this issue. The distinction between ‘Game of Skill’ and ‘Game of Chance’ – Indian and Global Perspective Before getting into the nitty-gritty of the distinction above, we must first understand the background of this issue. ‘Game of Skill’ means a game that would require the players to apply their knowledge, know-how, and training in the game. A ‘Game of Chance’ on the other hand would rely more on luck and happenstance and players would virtually be gambling for their success. Coming to online gaming, the most popular model of charging a fee in online gaming is the rake fee model (in this model, the gaming platform charges a fee for running the game in general), the other model being the freemium model (herein the game is free of cost but the elements of the game itself like improving character’s traits, increasing total health, and other value additions are charged.) The conundrum is surrounded by the GST rate to be applied where gambling is subject to a 28% rate while online games when considered a game of skill will be subjected to an 18% rate. Indian perspective The demarcation between a game of ‘skill’ and a game of ‘chance’ was first made in the landmark case of K.R. Lakshmanan v. State of Tamil Nadu where the Hon’ble SC remarked that competitions where a substantial degree of skill is involved, are not gambling even if there is an element of the chance present. In the prominent case of Gurdeep Singh Sachar v. Union of India, the Bombay HC observed that Dream11, a fantasy gaming platform “assigned pre-programmed virtual points to teams/players based on the performance of real-life sports personalities in real sporting events”. However, since the online gamer’s chances are not always contingent on the chances of the teams at the real sports event, these fantasy games could not be called gambling and are games of “skill” that should be subjected to a GST rate of 18%. The same point was reiterated in the case of Varun Gumber v. Union Territory of Chandigarh where it was held that fantasy sports rely on the use of superior knowledge of the games and their players in order to succeed at it. This requires prudent use of judgment and intuition making it a game of skill, not a chance. Global perspective At an international level, with the assistance of various judicial pronouncements, the courts have observed that with some caveats, fantasy sports games are more games of skill than chance alone. In the landmark case of Humphrey v. Viacom, the court held that online fantasy games should be considered a game of skill rather than a game of chance based on the reasoning that the chance of winning in such games is based on the participant’s skill in selecting the team. Moreover, in the case of The people of the State of New York v. DraftsKings, Inc., the Court reiterated the Humphrey judgment by laying down the principle that: “it is overwhelmingly unlikely that the performance of any exceptionally performing client could be due to chance.” Thus, at a global level, factors such as the performance of skilled players in comparison to unskilled players within a set period of games and the effect of sports players on the result are key in order to decide if the game is of skill or chance. Current Legal Regime and its challenges As of now, based on the current industry sources, the Group of Ministers (GoM) looks set to approve a rate of 28% GST on the total gross amount paid by the player. A formal report by the Finance Minister, N. Sitharaman is expected soon based on the panel report of the govt. in May 2021.  The contention made by the industry leaders is that the GST should be charged only on the 10%-15% of service fee that the gaming platform charges and not the entire 100% amount which includes the prize pool created for the distribution of prize money. The % change in GST liability between the two is quite significant and the union has its task cut out for them in terms of ensuring appropriate valuation of services is done. HC Judgements like the Gurdeep Singh case (supra) have made it clear that the prize pool is an actionable claim and since these activities do not amount to gambling, “the activity or transaction pertaining to such actionable claim can neither be considered as supply of goods nor supply of services as per Entry 6 of Schedule III of CGST Act and should be exempted from GST.” At the same time, it could be argued that GST could be charged on the service fee as well as the prize pool by emphasizing Rule 31A of the CGST Rules. If the 28% tax rate is applied, it would be an aggressive move considering the global tax rate on online gaming is between 15-18 percent and the online gaming operators will have to cough up almost 10 times the quantum of tax they are currently paying the government. A move like this will have an enormous negative impact on the industry as well have a direct impact on the consumers who will

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CCI’s investigation into BookMyShow – Another Call for Tighter Ex-Ante Regulations?

Competition Law, Contemporary Issues /

[By Ankita Raghunath] The author is a student at the Gujarat National Law University, Gandhinagar. Recently, an inquiry has been directed to BookMyShow under section 26(1) of the Competition Act, 2002 (referred to as “Act”) on the grounds that BookMyShow has entered into anti-competitive agreements with multiplexes and theatres under the provisions of section 3 read with section 4 of the Act which deals with abuse of dominant position. Background of the CCI Order According to Showtyme, the informant in the present case, theatres are unwilling to associate with other online movie ticketing portals due to monetary incentives being provided to them by BookMyShow on zero interest. This is despite the fact that Showtyme charges significantly lower convenience fees in comparison to BookMyShow. Moreover, BookMyShow has engaged in refusal to deal by signing exclusive contracts with these theatres that act as barriers for any new competitors to enter the market. Considering BookMyShow’s dominant position in the market, these agreements effectively allow it to control the market and dictate unfair terms with the business users. BookMyShow, in reply, stated that no monetary incentives were provided to the business. Instead, it was claimed that BookMyShow offers security deposits to adjust ticket prices and revenue share of the theatres. BookMyShow also denied that they have any significant market share and asserted that exclusive agreements are a necessity as BookMyShow is a relatively new entrant to the market. The CCI rejected BookMyShow’s arguments and found that there is a prima facie case of abuse of dominance under section 4 by BookMyShow in its agreements with business users. The Commission found that the terms of the agreements between BookMyShow and the theatres prima facie have the potential to deny market access to competitors as well as potential entrants which can make it anti-competitive under Section 19 (3) of the Competition Act, 2002. The Commission is of the view that the exclusive agreements offered by BookMyShow can restrict the freedom of theatres and multiplexes to contract with competitors of BookMyShow.This limits the consumers’ choices as well. On establishing the existence of a prima facie case, the CCI directed the DG to commence an investigation under Section 26(1) of the Act. Analysis of the case BookMyShow’s capability to induce businesses’ to enter into exclusive contracts with them and adhere to unfair contractual terms, in itself, shows the position of dominance that is enjoyed by the enterprise in the market. This is the main area of concern in the present case. In the e-commerce industry, exclusive contracts can either be agreements where a product is sold exclusively on a single platform or only a single brand is listed in a particular product category. They can drive up the cost of competitors in acquiring business users on their platforms. The CCI in its market study on e-commerce, however, emphasizes that exclusive agreements can generate efficiencies and improve inter-brand competition. Hence, they must be studied on a case-by-case basis. Especially in e-commerce, the number of users already connected to a platform positively affects the value of a network connection for a user. This is otherwise known as network effects. Hence, businesses tend to become dependent on platforms with a large user base like BookMyShow as they significantly widen their access to the market and their potential for growth. The platform, hence, has a higher bargaining power which allows it to set unfair contract terms for businesses and unilaterally revise contract terms. The Commission takes notice of such unfair contracts under section 4 of the Act if the contracting party is a dominant enterprise in the relevant market. In the BookMyShow’s case, there is a need to analyze it from multiple perspectives. Competitors such as the informant have no option of even getting businesses to consider their platform in light of the exclusive agreements. Despite the unreasonable terms in the agreement, from the businesses’ perspective, terminating their exclusive contracts with BookMyShow would cost them more. Notwithstanding the considerable additional cost paid to terminate the contract, they will also not receive the same level of visibility on any other platform. Finally, BookMyShow imposes significantly high convenience fees on their customers, who are also limited in their options. CCI’s Recent Trends in relation to e-commerce The CCI, in connection with P2B contracts in its market study on e-commerce in India, mentions how exclusive contracts in e-commerce raise alarm when they are used to foreclose competition to rivals or impede entry. The market study, however, does not impose any regulations and only makes recommendations. It is left up to the platforms to decide what must be the basic contract terms, penalties imposed for breach, conflict resolution process, etc. The existing jurisprudence in relation to P2B contracts in e-commerce is also lacking. Recently, a few cases involving major e-commerce players have been looked into by the CCI. In January 2020, CCI ordered an investigation into Amazon and Flipkart for preferential listing and deep discounting as well as exclusive agreements. This can affect small sellers on these websites who struggle to gain visibility as well as offline retailers who cannot access the product from anywhere, but the platform. The DG is currently in the process of investigating whether these practices are exclusionary and constitute an AAEC in the market. Following that, in 2021, the CCI touched on the issue of unfair P2B contract terms. The CCI ordered interim relief in favour of two hotel chains that were delisted on MakeMyTrip (MMT) pursuant to an agreement between OYO and MMT. CCI held that there are limits to contractual freedom if it leads to anti-competitive outcomes. Moreover, the hotel chains did not breach any contractual obligations to merit delisting. The CCI found that the agreement between OYO and MMT was exclusionary and created barriers to entry in the market. As recently as 2022, the CCI explored exclusive agreements in conjunction with platform neutrality in the case of Swiggy-Zomato. In addition to low commissions and minimum business guarantees, Zomato offers exclusivity to restaurant partners. The CCI decided it was

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