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Confused Jurisprudence on Derivative Actions in India

Leave a Comment / Company Law, Contemporary Issues / CBCL

[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

Leave a Comment / Competition Law, Contemporary Issues / CBCL

[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

Leave a Comment / Contemporary Issues, Insolvency Law / CBCL

[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

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

Leave a Comment / Competition Law, Contemporary Issues / CBCL

[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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Deal value threshold for combinations

Leave a Comment / Competition Law, Guest Posts / CBCL

[By Viplav Agrawal] The author is an Associate at AP & Partners. Introduction to the combination thresholds Competition law governs the combination which has the potential to hamper the competition in a relevant market. The combination, as per the Competition Act, 2002 (“the Act”), is referred to as the acquisition of one or more enterprises or merger or amalgamation of enterprises. The combinations taking place are subject to certain thresholds prescribed under the Act. It means that if the combinations taking place are beyond the thresholds, the entities involved will have to take approval from the Competition Commission of India (“CCI”) by way of giving notice. If the entities do not take approval from the CCI, they are subsequently subject to competition law proceedings and penalties. The thresholds are of two types, turnover and asset. These thresholds are in place to categorize certain companies which can have possible appreciable adverse effects on the market on combinations. The Act also provided for the de minimis exemption, wherein a transaction is exempt from the notification requirement under the Act if the target company has assets less than Rs. 350 core or a turnover of less than Rs. 1000 crore. Earlier it was till 28 March 2022 but with a recent notification dated 16 March 2022 by MCA, the exemption is extended till 28 March 2027. On account of multiple mergers and acquisitions happening between the tech companies, an enforcement gap from CCI has arisen despite the thresholds above in place. As the internet became a medium to transact and reduced the requirement of assets, the companies are becoming dominant in the market without heavy investments in the assets and focusing on data collection. Due to the presence of non-price factors in the entity i.e., data and other similar factors, there were certain combinations that did not require the approval of CCI as they were not crossing the threshold. Yet, they had potential adverse effects on the market. On the consideration of such mergers, competition authorities are likely to bring deal value threshold for the combinations. Some countries have given a clear intention to address the potential adverse effects emerging from evolving tech-driven business models. Based on the prospective change that Indian legislators may bring, the author highlights the incidents where the deal value could have been considered for scrutiny by CCI. The author also highlights the Indian legislator’s inclination to consider the deal-value threshold and how two foreign countries have applied the deal value in their competition laws. Lastly, the author analyses the deal value threshold and makes few suggestions for the policy formation. The incident leading to the consideration of the deal-value threshold WhatsApp/Facebook merger was the spark of the controversy when the existing threshold failed to look at the combination from the competition law lens. WhatsApp’s turnover was less than the asset/turnover thresholds under the Indian Competition Law. At the time of the merger, the thresholds were Rs. 750 crores in assets or Rs. 2,250 crores in turnover. The following concerns were found even though it did not match the threshold: Reduction in competitive constraint. Since both Facebook and WhatsApp were heavy competitors in terms of instant messaging apps, their merger led to reduction in the competitive constraints in the market Increase user base. As both the apps had a large user base of consumers, it could significantly harm consumer interests. Higher entry barrier to market. By 2014, WhatsApp had already created high entry barriers for its competitor in the Indian mobile-messaging market. It was giving tough competition to mobile apps like Line and Hike as they had lesser active users in the market. Thus, the combination of Facebook and WhatsApp makes the barriers to enter into the market even higher as both of them are unpaid mobile-messaging apps. The other deals significant deals which escaped CCI scrutiny are Zomato’s acquisition of Uber Eats in 2020, Flipkart’s acquisition of Jabong.com through its subsidiary Myntra in 2016, and Ola Cab’s acquisition of TaxiForSure in 2015. These deals were significant because the entities involved were tech aggregators with dominance in the e-commerce sector where the deal value was of at least USD 70 million or more than at least Rs. 550 crores. This could be an important deal for CCI to scrutinize as the entities acquired were innovative tech aggregators which were already giving competition to the acquirers in the online food ordering, online shopping, and app-based cab services. Findings of competition law review committee The combination thresholds involve only assets and turnover under section 5 of the Act. After consulting with various experts, the Competition Law Review Committee (“CLC”) which was set up by the Government of India in 2018, made wide-ranging sets of recommendations with the objective of aligning India’s antitrust enforcement regime with the new age of the market. A recommendation on the merger threshold was allowing the Government to introduce alternate mergers and acquisitions thresholds, such as ‘deal value thresholds’. The above recommendation is reflected in the Competition (Amendment) Bill, 2020 which proposes to allow the central government to introduce other criteria for merger threshold, such as deal value, market share or other criteria to be notified. The government, thus, by way of notification can set a particular deal value as the threshold under Section 5 of the Act. Some of the countries have already set the deal value in their threshold limit for the combinations to notify the competition authorities. Countries applying the deal-value threshold The countries that have applied the deal-value threshold in their competition laws are Austria and Germany. Austria in its competition law prescribes the following threshold for the deal value: Transaction value exceeds EUR 200 million Combined aggregate turnover exceeds EUR 300 million worldwide and EUR 15 million in Austria Target company as significant domestic activities Germany, on the other hand, prescribes the following thresholds: Transaction value exceeds EUR 400 million Combined aggregate turnover exceeds EUR 500 million worldwide and EUR 25 million in Germany. As a result, the entities acquired at a high

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Validity of Recovery Actions against Guarantor Post Assignment of Debt

Leave a Comment / Guest Posts, Insolvency Law / CBCL

[By Arjun Makuny] The author is an Insolvency and restructuring lawyer. Introduction The rights of creditors have been severely weakened due to a recent order of the Debts Recovery Tribunal at Ahmedabad (DRT) in State Bank of India v. Prashant Ruia.[i] The DRT ruled that a creditor cannot sue the guarantor if the principal debt is assigned by the creditor for consideration. Further, it was also held that a creditor cannot choose to reserve its rights against the guarantor during the assignment of the principal debt. In this background, the author argues on the validity of creditors’ recovery actions vis-à-vis guarantors notwithstanding any waiver of rights as against the principal borrower. The author believes that any hindrance to such a course of action of creditors has the potential to cause huge ramifications in contemporary business transactions. Facts in brief The consortium of lenders led by the State Bank of India had filed an Original Application under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993 before the DRT against Mr. Prashant S. Ruia and other guarantors for recovery of sums due to the consortium. During the pendency of the Original Application, the principal borrower (Essar Steel India Limited) was admitted into Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016. Subsequently, the resolution plan proposed by ArcelorMittal India Private Limited (ArcelorMittal) was approved by the National Company Law Tribunal, Ahmedabad, and thereafter by the Supreme Court. Accordingly, the principal borrower was acquired by ArcelorMittal. The resolution plan provided that all debts payable by the principal borrower shall be assigned to a third-party assignee and the creditors would receive consideration for such assignment of debt. However, the resolution plan explicitly provided that the guarantees that have been created in respect of the debt would not be assigned and would continue to be retained by the creditors. Prashant S. Ruia filed an Interim Application to dismiss the Original Application as against him on the ground that no debt as defined under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993 exists in law due to the assignment of debt. Decision Upon examining the terms of the resolution plan and the assignment deed, the DRT observed that the assignment of debt had discharged the principal debtor of its repayment obligations and the net result of such an assignment is that the debt is totally extinguished leaving nothing to be recovered from the guarantors. The DRT proceeded on the line of thought that if the creditors have nothing to recover from the principal borrower, the guarantors stand discharged of their obligations despite the clause in the Assignment Deed that specifically provides that the guarantees have been retained and not assigned. The DRT also placed emphasis on the clause in the resolution plan which stated that the payments made to the creditors as consideration for the assignment of debt will be a full and final settlement of the entire outstanding dues. In view thereof, the DRT proceeded to conclude that the debt due from the principal borrower stood discharged. The DRT held that a subsisting underlying “debt” due from the principal borrower is a precondition for creditors to proceed against the guarantors and since in the present facts and circumstances, there is no subsisting underlying debt due from the principal borrower, the creditors are precluded to invoke the guarantees in respect of the assigned debt. The need for reconsideration Pollock & Mulla’s book has recognized the right of a creditor to proceed against the guarantor, even in situations where the principal debtor stood discharged, if the creditor has reserved its rights to proceed against the guarantor in such situations: “Sometimes agreements described as guarantee may contain clauses which preserve the liability of the guarantor, even where the principal debtor has either never been liable (viz. contract is ultra vires the company as the principal debtor is a minor), or has ceased to be liable to the creditor.”[ii] The question of enforcing remedies against the guarantor notwithstanding a waiver of rights as against the principal borrower is not something that has come up for judicial consideration for the first time. Indian Courts have previously recognized that, if the creditor, while giving up its claim against the principal debtor, expressly reserves his remedies against the surety, or generally his securities and remedies against the persons other than the principal debtor, the surety is not discharged, irrespective of whether the creditor has done so with or without his consent or knowledge.[iii] Pertinently, Indian Courts have also recognized the legal validity of an agreement that provides for the release of a principal debtor, while simultaneously reserving the creditor’s rights of recourse against the surety: “Where the principal has entered into a deed of arrangement containing a release, subject to the reservation of the creditor’s rights of recourse against the surety, the latter has no right to raise objection.”[iv] The principle in English law that discharge of principal debtor will not affect the right of suit against sureties where there is a reservation to proceed against them, is applicable in India, and it is consistent with the terms of the scheme of the Indian Contract Act, 1872.[v] The rationale behind this principle is that a nominal release of the debtor, subject to a reservation of securities, is not a release destroying the debt, but operates only as a covenant not to sue the principal-debtor, who remains, however, liable to indemnify the surety. The surety’s right to indemnity against the principal debtor is a necessary result of such a reservation.[vi] It has to be understood that if a creditor agrees to discharge a principal debtor, it would be a breach of

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Interplay of Corporate Competitors and the Alternative Investment Fund Market

Leave a Comment / Capital Markets and Securities Law, Competition Law / CBCL

[By Pritika Negi and Delphina Shinglai] The authors are students at the Gujarat National Law University. Alternative Investment Funds (hereinafter AIFs) have shifted the traditional market functioning from indirect to direct, active to passive, and from public to private[i]. The availability and accessibility of alternative investment assets make it a viable option attracting investors. Significant development in securities markets has aided in the explosive growth of private markets. More capital has been raised in these private markets than in public markets each year for over a decade.[ii] Furthermore, the growing demand of investors beyond traditional equity and asset class has created a market offering excess to cater to a plethora of interests. The new economy supported by the inflow of cash has established a market with corporate competitors targeting higher returns. AIF helps the economy grow by making investments in failing businesses, start-ups, and leveraged buy-outs. Corporate competitors in the AIF market persist when the general market downsizes bringing in the profits of passive AIFs commodities at a time when commodities in the general market soar high. Corporate Competition in the AIFs Market India has huge AIF management platforms; One such management platform is Avendus Capital, which, in itself, takes ownership of thirty percent of the market share.[iii] It was achieved by focusing on private equity strategy, alternate strategies and aims at long-term strategy.[iv]The diversification of investment portfolios has been key to AIFs gaining prominence.[v] With different strategies and ideas for portfolio management, another key player in the Indian AIF Market is BlackSoil Capital. The platform in this private market has the responsibility of managing alternative credit platforms for government-regulated bodies, namely, RBI registered NBFC and SBI registered AIFs. These platforms along with some others were able to stand at length with corporate players in the general market because of their policies, transparency, and accountability. Such transparency must not be provided to just the investors under section 9 of SEBI (Alternative Investment Funds) Regulations, 2012, but also to SEBI in order to receive a certificate under section 7 of SEBI (Alternative Investment Funds) Regulations, 2012. Hence, owing to their management skill which goes in hand with laws regulating AIF, today these platforms are listed as the new evolving capitals. This competition arising from different methods of corporate governance helps prevent monopolizing and destabilizing of the market. A key for corporate competitors to survive is knowledge of risk management, product expertise, consistency in investment performance, and availability of tailor-made solutions. The lack of risk-taking by corporate competitors has left a large number of AIFs out of the options to invest. For instance, out of the availability of over 700 AIFs in the market, investors find only a few margins of 30-40 AIFs[vi]. The potential of the margined AIFs to prosper when some corporate entity invests in it becomes undervalued. This valuation of undervalued alternative assets brings corporate competitors a high margin along with high risk and high profit-making opportunities. Moreover, with digital assets (explorative trends that are not explicitly considered as a standard asset class in AIFs) gaining popularity in the current market, the scope for competition has widened. Further, cryptocurrencies have also entered the trend, gaining prominence in the new investment market. Cryptocurrency showed the top performing asset class of 2020-21. Investors can invest in cryptocurrency themselves without the need of a third-party intermediary or by investing in companies that benefit from Blockchain and crypto asset uptake. The world market is exploring the realm of digital currency assets. A 2021 BIS survey of several central banks found that 86% were actively researching the potential for Central Bank Digital Currency (CDBC), 60% were experimenting with the technology and 14% were deploying pilot projects.[vii] India will join a few other countries after the launch of the official CBDC. The RBI is exploring the impact to implement the CBDC; conversely, it would require a distinct legal framework to regulate the same. Today, through web-based stock stimulators, an investor can practice trade strategies by investing the free $100,000 in the AIF market provided through the stimulator, lessening the undertaken risk probability. Hence, it could be understood that not just the competition is rising, but also new strategies are being developed to ensure risk minimization. Such online trial platforms are a great start for competitors who are till date planning to invest in this market and get their game strong. Protection from Unfair Competition AIF platforms are private and due to volatility are highly liquid and risk-averse. Further, these are unregulated funds therefore in cases of poor portfolio management services, the probability of loss increases. To top it up with, the 2022 amendment to the AIF Regulations, 2012 now gives haven to investment committee members from any viable obligation regarding their investment decisions;[viii] Inflicting the majority burden of loss on investors and making the competition risk-free for the corporate firms acting in the capacity of agent. Irrespective of the risk involved, the competition is simply increasing. A study by Mckinsey & Company concluded that a presumed decline in hedge funds would not just have a direct impact on investment but also on the competition. [ix] In order to safeguard social morale in this economic tussle, even though highly unregulated, SEBI has mandated norms to protect the basic rights of investors through SEBI (Alternative Investment Funds) Regulations, 2012[x] and SEBI Complaint Redress System. Also, even though SEBI can at no point intervene in the AIF market, nonetheless, under section 35 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 SEBI can intervene in cases of default. Further, the establishment of the Indian Association of Alternative Investment Funds (IAAIF) ensured the promotion and protection of the AIF industry and its investors. Abiding by these regulations is a statutory duty; otherwise, consequences will have to be faced as was witnessed in the “Adjudicating order in respect of HBJ Capital Services Pvt. Ltd.”[xi] where non-compliance was leveled by order of repayment of investor fees in addition to the promised fees. In case of failure, the corporate veil

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Author name: CBCL