Author name: CBCL

Regulating the Generic Drugs Market: Eliminating the difference between Branded and Unbranded Generics

Leave a Comment / Competition Law /

[By Mansi Subramaniam & Sanigdh Budhia]  The authors are students at the Gujarat National Law University.  Introduction The Indian Pharmaceutical Industry has been transformed greatly in the past few years with the incoming of various companies and brands. It is one of the largest markets in the world, both in terms of volume and value. One of the unique features of the Indian Pharmaceutical Industry is the existence of ‘Branded Generics’. Generics are low-cost, functionally undifferentiated products with identical active components to the patented drugs whereas ‘Branded Generics’ are generic medications sold under a brand name. Branded Generics enjoy an edge over Unbranded Generics even though the chemical composition of both of them are the same because of their brand value, as well as certain anti-competitive practices. This creates a unique problem for the Indian Regulatory Authority for fair competition in the market, i.e., the Competition Commission of India (“CCI”). The latest study of the CCI on the Indian Pharmaceutical Industry highlights the existence of this problem in India and gives recommendations for the same. This article analyses the said problem and gives recommendations to ensure fair competition in the market in the presence of Branded Generics. Branded Generics Market Quandary India is the biggest supplier of generics globally. India’s pharmaceutical business is dominated by generics, which account for 97 per cent of the country’s drug consumption in terms of value. Around 10 per cent of these medications are unbranded generics. Branded Generics account for the rest of 87 per cent of all the drugs prescribed. Even though unbranded generics and branded generics are homogenous in nature, there is a significant price differentiation between the two. The price difference between them ranges from 1 to 200 per cent, making Branded Generics very expensive for the population at large. The companies selling Branded Generics increase their market share by selling in large volumes and by adopting certain uncompetitive practices. Since these branded generics are priced higher, they earn a huge profit, resulting in them becoming a market leader in the pharmaceutical sector. These market leaders often determine the prices in the market. Causes of high-priced Generic Drugs The prevalence of branded generics is one of the main causes of highly-priced generic drugs. Branded generic drugs are priced higher owing to the high trade margins maintained by the drug manufacturers. Higher trade margins are offered to traders by these companies to prioritize or only stock their drugs in trade and retail stores over other manufacturers. The general public perception that branded generic drugs are of higher quality in comparison to unbranded generics, is a major reason why the former is preferred, despite the latter being a cheaper option. The CCI study reveals that the market is usually dominated by the highest-priced brand. However, these findings are contradictory to an ideal competitive market. Ironically, studies have even shown that there exists no difference in quality and efficacy between branded and unbranded generics drugs. The demand for branded generics is further spurred by arrangements between drug companies and hospitals/medical practitioners. Patients are prescribed specific branded drugs, despite the availability of lower-cost options. Private hospitals often have a compulsory tying of consumables (patients are mandated to purchase drugs from the hospital itself), thus leading them to purchase specific brands irrespective of the cost. This issue is further exacerbated by information asymmetry in the market and the fact that consumers are generally unaware of lower-priced options. Proposed Recommendations The CCI in its study has recommended that in order to assuage the concerns about the quality of drugs in the minds of people, the quality of drugs should be maintained at a pre-determined standard. It has recommended the implementation of existing quality standards and periodic and scientific testing of drugs. When all the drugs are obligated to satisfy the same specifications and regulations, it is entirely incorrect to presume that a more expensive brand is of higher quality than a less expensive brand or unbranded generics. Even branded generics can fail the quality test if companies do not comply with existing standards. Thus, Branded Generics cannot justify their higher prices based on quality perceptions. Reducing Doctor- Pharmaceutical company nexus In order to ensure fair competition among all types of generics in the market, the doctor-pharma company nexus should be restrained. The government should mandate the Uniform Code for Pharmaceutical Marketing Practices (UCPMP) and actively implement it. The UCPMP is India’s version of the US’ Physicians Payment of Sunshine Act (Sunshine Act). Sunshine Act has resulted in fines of millions of dollars for some pharmaceutical corporations. However, in India, the implementation of UCPMP remains voluntary till date. The UCPMP restricts pharmaceutical companies from giving any kind of financial or pecuniary benefits to doctors and their family members, wholesalers, retailers, etc. The pharmaceutical companies often employ such incentivization tactics to persuade doctors to prescribe their high-priced brands over others (and in some cases, doctors have asked for incentives in exchange for prescriptions). Implementing UCPMP mandatorily will curb such practices. The Essential Commodities (Control of Unethical Practices in the Marketing of Drugs) Order, 2017 (“CUPMD Order”) was released by the government in 2018 and was proposed to be passed as a law under the Essential Commodities Act, 1955. The order noted that doctors are often lured to recommend a particular drug in exchange for incentives. This order outlawed such transactions and proposed the creation of a new authority known as the Ethics Compliance Officer, who would be in charge of investigating any alleged violation of the CUPMD Order. This order needs to be converted into a law and implemented effectively. In 2017, the government proposed to bring in a law ensuring that doctors prescribegeneric drugs only. The Medical Council of India has already recommended the same. However, this law was never enacted. The government should actively take steps to enact and implement the said law in order to ensure that doctors do not favour one company over another. Price Control Mechanism for Generic Medicines The Government needs to revisit

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The Widening Ambit of Moratorium Under the IBC

Leave a Comment / Insolvency Law /

[By Gayathri Balasubramanian] The author is a student at the Christ (Deemed to be) University, Bangalore. Introduction: The concept of moratorium is one of the Insolvency and Bankruptcy Code’s (the Code) most fundamental aspects. It is provided for under section 14 of the Code and is considered as a crucial concept which effectively brings to halt any simultaneous proceedings brought against the corporate debtor during the corporate insolvency resolution process. This is done in order to prevent any further legal and financial hurdles to the distressed corporate debtor and to ensure its survival during the insolvency proceedings. Since the enactment of the Insolvency and Bankruptcy Code in 2016, the courts have expanded the scope of the provision by bringing different types of legal proceedings under the ambit of the provision. Several such notable judgments and the implications on the scope of the provision will be dealt with in this article to analyse whether they have a positive or negative impact on the corporate insolvency resolution process. Judicial interpretation of the scope of Section 14: Section 14 can be understood as a vast shield that protects the corporate debtor during the Corporate Insolvency Resolution Process from further legal and financial hurdles. Its because of this broad ambit of the provision that the Courts have time and again decided on the ambit of the provision to ensure that moratorium does not unduly favour the corporate debtor. In the landmark judgment of P. Mohanraj V. Shah Bros. Ispat (P) Ltd., the court addressed a crucial legal conundrum i.e., whether the declaration of moratorium would extend to institution of criminal proceedings against the corporate debtor under section 138 of the Negotiable Instruments Act, 1881. The court began with addressing the issue by laying out the nature of the broad scope of the provision. Given that the terms provided under the provisions are to be interpreted in a broad manner, it was held that the term “proceedings” under section 14 would indeed include a section 138 proceeding under the Negotiable Instruments Act, 1881. It further added that drawing a technical difference between a civil suit and a section 138 proceeding would prove futile since the impact of both on the corporate debtor during the resolution process remain the same. It however pointed out that this protection would not extend to the personal liability of natural persons who are liable under the Negotiable Instruments Act, 1881. Although the judgment would be a step in the right direction, in the event the persons-in-charge or directors of the corporate debtor are directed to deposit money in the form of interim compensation, it would give rise to a new legal conundrum and result in more legal battles. The court followed the aforementioned ratio in Shah’s case in the case of Anjali Rathi V. Today Homes & Infrastructure Private Limited, where it reiterated that moratorium under section 14 does not extend to promoters of the corporate debtor. This principle of extending the protection to the corporate debtor yet at the same time not absolving the personal liability of natural persons lies at the core of the rule of separate corporate personality, and balances the interests of the corporate debtor as well as the party seeking relief under the Negotiable Instruments Act, 1881. Based on the same principle, the court in Alpha and Omega Diagnostics (India)Ltd. V Asset Reconstruction Company of India held that the personal property of the promoters given as bank security would not fall within the purview of section 14, thus drawing a clear line between the corporate debtor and its promoters. The same was reiterated in the case of Schweitzer Systemtek India Pvt. Ltd v. Phoenix ARC Pvt. Ltd. & Ors., where the applicability of section 14 was not extended to the property of the personal guarantor. On the contrary, the court gave a different ruling in State Bank of India v. V Ramakrishnan and Veesons Energy Limited, where it held that the moratorium under section 14 would not just apply for the corporate debtor, but also on the personal guarantor. The court based this rule on the reasoning that the personal guarantor being involved in the resolution process and bound by the order of the court, would also be included under the ambit of section 14. This judgment re-created the ambiguity regarding the liability of the personal guarantor. However, on appeal, the Supreme Court set aside the NCLAT order and reiterated the principle of co-extensiveness of the liability of the personal guarantor and the corporate debtor. These minor inconsistencies are rather inevitable, given the extensively broad scope of section 14; Although, a bare reading and a strict interpretation of the provision would clearly indicate that the moratorium applies only in the context of any proceedings of the corporate debtor and no other body/person. Perhaps, these judicial interpretations were required given that the Code was in its nascent stage and still is, constantly evolving and such judicial reiterations give more clarity to the stakeholders. Moratorium vis-à-vis Writ Jurisdiction and Arbitral Proceedings: In Canara Bank vs. Deccan Chronicle Holdings Limited, it was laid down that the power of the Hon’ble Supreme Court under Articles 32 and 136 of the Constitution of India, as well as the power of the Hon’ble High Courts under Articles 226 and 227 of the Constitution of India, shall be unaffected by the moratorium. Rightly so, this decision emphasised the supremacy of constitutional provision over the Code. However, it was laid down by the Hon’ble NCLAT that a suit for recovery filed against a corporate debtor before the the High Courts having original jurisdiction would be barred by section 14. As regards arbitral proceedings, it is fairly settled that arbitral proceedings, including a petition under section 34 of the Arbitration and Conciliation Act, 1996 would be hit by section 14. Even a section 37 petition is barred upon declaration of moratorium, as was laid down in the case of Alchemist Asset Reconstruction Co. Ltd. V. Hotel Gaudavan P. Ltd.Interestingly, a peculiar question on

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Section 29A(h) of IBC : SC Resolves Conundrum.

Leave a Comment / Insolvency Law /

[By Vaishnavi Patel & Himangini Mishra]  The authors are students at the Gujarat National Law University, Gandhinagar.  Introduction On 18th January 2022, the Supreme Court in its landmark judgment, Bank of Baroda and Anr. v. MBL infrastructures Limited clarified the scope of ineligibility of a personal guarantor as a Resolution Applicant (“RA”) under section 29A(h) of the Insolvency and Bankruptcy Code, 2016 (“Code”) . The court held that guarantee invoked by a creditor will operate in rem in relation to all the similarly placed Creditors.  Section 29A of the Code enumerates ineligibility criteria to prohibit RA to participate in a Corporate Insolvency Resolution Process (“CIRP”). Sub-section (h) of section 29A of the Code provides for disqualification of a guarantor who has executed a guarantee in favour of a creditor. The provision has been fraught with lacunas in terms of its scope, and needs clarification. In this article, the authors will discuss the jurisprudence surrounding Section 29A of the Code and critically analyze the recent Supreme Court decision. The authors will then discuss the implications of the judgment on a guarantor’s liability under the Code. Factual background RBL Bank and a few of the financial creditors invoked the guarantee of the personal guarantor and issued a notice under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002. Subsequently, RBL Bank filed a petition under section 7 of the Code to initiate CIRP against MBL Infrastructures Limited. Thereafter, the Resolution Professional received two resolution plans, one of which was submitted by the personal guarantor. The resolution plan was submitted prior to the insertion of section 29A of the Code. However, before the Committee of Creditors (“CoC”) could take any decision on the resolution plan submitted by the personal guarantor, section 29A of the Code was introduced. In view of this development, the personal guarantor filed an application in NCLT for an order to the effect that it does not attract any disqualification under sub-section (c) and (h) of 29A of the Code. NCLT also held that as per section 29A (h) of the Code, RA will not be disqualified for merely extending personal guarantee, if such guarantee has not been invoked. It also went on to note that such disqualification will not be attracted even when certain creditors have invoked the guarantee extended by RA. CoC, thus, voted on the resolution plan of RA. However, the plan did not receive the requisite votes. Thereafter, RA filed an application under section 60 of the Code for directing the dissenting creditors to support the resolution plan. Consequently, the resolution plan was approved by CoC. Meanwhile, another amendment to section 29A(h) of the Code took effect in 2018 (supra), looming disqualification on RA. However, NCLT held that the issue in relation to section 29A(h) of the Code has already been concluded. It, thereby, directed that the resolution plan approved by CoC shall come into effect. This order was then challenged in the Supreme Court. Ever-evolving jurisprudence on section 29A Dynamic nature of the Code makes the committee reports and judicial opinions indispensable in furthering our understanding of the Code. The Insolvency Law Committee Report in 2018 while discussing Section 29A (h) of the Code questioned if the intent behind the provision was to disqualify a guarantor only where the guarantee had been invoked or if the provision sought to disqualify the guarantor even when the guarantee had not been invoked. Therefore, the ambiguities inherent in the interpretation of the provision were required to be clarified. It was observed that the provision could not have intended to disqualify a guarantor merely for issuing an “enforceable” guarantee. Accordingly, the committee recommended that the word “enforceable” ought to be removed from clause (h) and the phrase “and such guarantee has been invoked by the creditor and remains unpaid in full or part by the guarantor” should be added to the said clause. The committee, rightfully, recognised the discriminatory nature of sub-section (h). Accordingly, the said recommendations were implemented by way of an amendment in 2018. The courts have emphasised on adopting a purposive interpretation of the Code. In order to define the scope of the section, the Apex Court in Arcelormittal India Private Limited v. Satish Kumar Gupta considered the meaning of the terms “control” and “management”. Pursuantly, the court held that the intention behind the inclusion of section 29A of the Code was to prevent a backdoor entry of those in control or management who drove the corporate debtor to the doors of insolvency in the first place. The section gained another dimension in Arun Kumar Jagatramka v. Jindal Steel And Power Ltd. which laid down that a person ineligible to be RA under the Code was also ineligible from entering a compromise under the provisions of the Companies Act, 2013. Thus, section 29A of the Code was interpreted as a critical link in assuring that the Code’s objectives were not thwarted by permitting “ineligible persons” to return in a new form of RA, including but not limited to those in management. In RBL Bank Ltd. v. MBL Infrastructures Ltd., NCLT bench of Kolkata specifically looked into meaning and significance of sub-section (h) of section 29A of the Code. Guarantors who may be regarded to be excluded from sub-section (h) of section 29A of the Code only include those who have antecedents possibly jeopardizing the reliability of the processes under the Code. Thus, the sub-section doesn’t exclude the entire class of guarantors. Further, following in the footsteps of the insolvency committee, the tribunal observed that the word “enforceable” in the section should be aligned with the objectives of the Code. The phrase should not be understood in its ordinary or literal sense. As law couldn’t be allowed to operate in vacuum and penalise the guarantors who weren’t provided a chance to make good of the dues by invocation of guarantee. Another decision of NCLT in Punjab National Bank v. Concord Hospitality (P.) Ltd. is pertinent to be discussed on this aspect.

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Term Sheet: To Be (Binding) Or Not To Be?

Leave a Comment / Company Law /

[By Aditi Sheth] The author is a student at the National Law School of India University. This paper argues that courts must not overrule the explicit intention of parties on the binding value of their term sheet by finding intention in the performance/non-performance of the conditions precedent (“CPs”) clause. It borrows from law and economics jurisprudence to support this claim. Introduction Commercially sophisticated parties enter into term sheets that set out the material terms of the deal before entering into definitive agreements. Term sheets allow them to reach consensus on material terms and reach deal certainty before spending time and resources on due diligence and definitive agreements. Despite this key advantage, some lawyers advise against entering into term sheets because of the risk of uncertainty surrounding their binding value. Courts may find “non-binding” term sheets to be binding and vice versa. In India, the lack of a well-developed jurisprudence has increased this risk. This paper clarifies the muddles surrounding the binding value of term sheets in the context of performance of CPs detailed in the term sheet. Understanding conditions precedent CPs are conditions that must be fulfilled before closing the transaction. Parties may choose to specify these conditions in either their term sheet or their definitive agreements. For instance, the IVCA model term sheet recommends listing CPs directly in the definitive agreements. However, some parties may choose to place CPs that are material to the deal in their term sheet to ensure there is no mismatch of expectations between the parties. The binding value of a term sheet should not be affected if parties were to place CPs in the term sheet instead of definitive agreements. This is because placing CPs in a term sheet does not impact the timeline according to which parties have to perform the CPs. Parties may perform CPs any time before the closing of the transaction, even after the signing of definitive agreements. In other words, parties are free to wait for the performance of CPs till definitive agreements are signed since the only significance of placing CPs in the term sheet is of signalling materiality. However, Indian jurisprudence has viewed it differently. Tribunals have found a term sheet labelled “non-binding” to be binding due to the performance of several CPs (Zostel v. Oyo) and a term sheet labelled “binding” to be non-binding due to the presence of several CPs (GAIL v. Sravanthi). This paper argues against this jurisprudence by using the only two relevant and publicly available cases as test-suites. Zostel v Oyo – “non-binding” term sheet found binding Oyo and Zostel entered into an acquisition term sheet according to which the acquisition was conditional upon performing CPs detailed in the term sheet itself. The dispute arose when Oyo abandoned the acquisition process before the parties executed definitive agreements. Before the arbitral tribunal, Zostel sought specific performance of Oyo’s obligations under the term sheet, while Oyo claimed that the term sheet was non-binding and thus, had no obligation to pursue the transaction. Pertinently, the preamble of the term sheet explicitly stated that it was non-binding. Instead of deferring to the parties’ explicit choice, the Tribunal examined the clause on closing, which mentioned several CPs to determine whether the parties intended the term sheet to be binding. Merely because these conditions were necessary for closing the transaction, the Tribunal held that closing was the “natural and only consequence of compliance of these conditions”. Moreover, the Tribunal explicitly noted that “execution of definitive documents was not independent of the term sheet”, effectively collapsing the distinction between the two. Furthermore, the Tribunal claimed that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements and that without definitive agreements, Zostel had no incentive to comply with the CPs mentioned in the term sheet.  Critical analysis The Tribunal erred on three accounts. First, it failed to realise that despite the performance of CPs, parties do not need to close a deal. They are free to walk away even after the performance of all CPs if there is no consensus on other terms considering the parties intended the term sheet to be non-binding. This understanding is also manifested in clause 7 of the term sheet, which stated that “subject to the conditions set forth in this Term Sheet, the parties shall mutually agree, execute” the definitive agreements. Thus, this term sheet was a mere agreement to agree to a binding contract.  Second, the Tribunal’s claim that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements is patently erroneous. It is customary for parties to conduct due diligence after signing the term sheet and before signing the definitive agreements. The very purpose of conducting due diligence is rendered fruitless if parties have already bound themselves to a deal. This does not change despite them being competitors because all the information provided for due diligence is subjected to strict confidentiality and non-disclosure agreements. Third, it is also not true that without definitive agreements, Zostel had no incentive to comply with the CPs. Contrarily, Zostel may have complied with the CPs to signal its interest and seriousness in the deal to Oyo and consequently, push the deal forward. GAIL v. Sravanthi – “binding” term sheet found non-binding In GAIL v. Sravanthi the parties signed a term sheet for supply of natural gas but failed to later convert the term sheet into a more detailed Gas Sale Agreement. The Electricity Appellate Tribunal had to determine whether the term sheet was binding and could form the basis of restrictive trade practises on part of GAIL. While the court of first instance found that the term sheet was binding, the Appellate Tribunal disagreed with this finding, merely because the term sheet provided that none of the “rights or obligations set out in this Agreement [the term sheet] shall become effective until the date known as CP ‘Satisfaction Date’”. In the Tribunal’s understanding, since the obligations stemming from the term sheet were subject to

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Tata to Air India and Back: Analysing the Disinvestment Process

Leave a Comment / Contemporary Issues /

[By Medha Nagpal & Anushka Agarwal]  The authors are students at the Jindal Global Law School.  The quest to privatize Air India has come to an end with its takeover by Talace Private Limited, a wholly owned subsidiary of Tata Sons (“Talace”) after years of unsuccessful attempts. The third and final attempt to disinvest the national carrier airline was completed with the sale of 100% equity shares of Air India and Air India Express in addition to a 50% stake in Air India and Singapore airport terminal services (“AISATS”) on January 27, 2022. Out of the total debt of INR 61,560 crore attached to the loss-making airline, Talace will take over the amount of INR 15,300 crore while the rest will be allocated to Air India Assets Holding Ltd. (“AIAHL”), a special purpose vehicle created as per the disinvestment plan. This article aims to briefly discuss the umpteen number of unsuccessful efforts made by the government while analysing potential implications of this acquisition by Talace on the aviation industry, as well as taxpayers, amongst other stakeholders. Background The first effort to sell stakes in the airline began in 2001 when the NDA led cabinet aimed to sell 60% of its shares due to losses driven by competing low-cost carriers and poor hospitality. This attempt, however, was not a success and had to be withdrawn within two years. As per the 2013 report by the Centre for Aviation, the airline suffered from “low productivity, high costs, poor staff morale, significant unresolved human resource issues and an unviable business model” making it more pertinent than ever, to privatize. The second initiative to divest that took place in the year 2017-18 also failed due to the government’s proposal to retain a minority stake of 26%, while at the same time requiring the acquirer to take charge of a larger portion of the carrier’s debts. This combination of partial control and high debts did not bode well with the prospective bidders looking to make substantial changes in the working of the airline while towards profitability in a highly competitive market. The latest attempt which involves Talace has been predicted to be a successful one for various reasons, one of which being that the government has completely parted away with the control in the airline and has given the acquirer the flexibility to decide the level of debt they wish to take along with the airline. Understanding the nuances and impact of the disinvestment process With the successful completion of the disinvestment, the new owners will have to adhere to the new directions provided on Foreign Direct Investment, according to which, the stake of foreign investments (including that of foreign airlines) in Air India has been capped at 49%, via direct or indirect means. However, Non-Resident Indians who are Indian Nationals are allowed foreign investments under automatic route up to 100% stake as opposed to the 49% earlier. This exception was carved out to make the disinvestment process more attractive than its previous attempts. A press note by the Department for Promotion of Industry and Internal Trade has categorically stated that the “substantial ownership and effective control of M/s Air India Ltd. shall continue to be vested in Indian Nationals as stipulated in Aircraft Rules, 1937” which is to mean that while foreign investments are welcome, however, the airline can never be subsumed into a foreign entity. It can be argued that the handover of the loss-making airline to the Tatas who have prior airline management experience is a step in the right direction. At the end of March 2021, Air India’s accumulated losses stood at INR 83,916 crores, an amount which could have been invested in welfare and other economy boosting activities. With the prompt sale of the airline to Talace, further bleeding of taxpayer’s money is being prevented by the government which had been spending INR 20 crore daily to keep it afloat. The takeover, in its essence, highlights the faith reposed by the government in the private sector in addition to furthering the disinvestment goals highlighted in the 2021 budget. Disinvestment of the national carrier had become necessary due to the rate of return on the employed capital was running in negative numbers for years now. Further, in 2020-21, the nation’s widening fiscal deficit standing at 9.5% of the Gross Domestic Product can be financed by disinvestment of such public sector undertakings. In terms of benefits to the Tata Group, the transaction can add value to the company by providing lucrative flying routes which are not accessible to most competitors. It provides them with a push to be a substantial player as the airline offers its bilateral flying rights, hangars and trained personnel allowing the Tatas to undertake operations immediately. The merger of Air Asia with Air India Express would increase their market share to 27% which makes it the second largest in the domestic sector after Indigo which holds a market share of 52%. However, as one may assume scrutiny from the Competition Commission of India (“CCI”), the anti-monopoly watchdog has approved the acquisition. The CCI seems to have given approval as this acquisition does not have an appreciable adverse effect on competition. Furthermore, CCI usually adopts the point of origin/point of destination approach, similarly done in the Jet- Etihad acquisition, to examine airline mergers. In such instances, every combination of point of origin and point of destination is seen as a separate relevant market for the customer. If the CCI were to find competition concerns, it can impose a set of remedies. Though providing formidable benefits, the road ahead for the Tatas is fraught with challenges with many trying to quash this acquisition. Recently, a Public Interest Litigation (“PIL”) was filed by Member of Parliament, namely, Subramanian Swamy, seeking to quash the Air India disinvestment process on the grounds that the bidding process was “arbitrary, corrupt, against public interest and rigged in favor of Tata Group”. Swamy’s contention stated that there existed only one bidder since the second bidder consisted

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The Road Not Taken: Solving The Bad Loan Crisis Through Reverse Piercing

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[By Anushka Juneja] The author is a student at the Gujarat National Law University.  The Indian economy has long been sitting on a ticking time bomb which is the mountain of bad loans held by its banks. The rapidly increasing non-performing assets pose a systematic risk to the banking system which consequently affects the economy as a whole. Several steps including the enforcement of the Insolvency And Bankruptcy Code, setting up of bad banks, amendments to the Banking Regulation Act 1949, have been taken to tackle this chronic crisis. It is believed that these steps need to be supplemented with the application of the doctrine namely reverse piercing of the corporate veil. The doctrine would enable the creditor to utilise the assets of the debtor’s corporation to discharge the liabilities of the individual defaulter. The broad aim of this article is to propose adoption of the doctrine as a solution to the plaguing bad loan problem. To that end, I will discuss the judicial approach undertaken in India and foreign jurisdictions. Further, the adoption of the doctrine for debt resolution in India would cause disruption in the priority of claims matrix which can be resolved as I would explain later in the article.  GROWING INCLINATION TOWARDS THE DOCTRINE IN INDIA The equitable doctrine of Reverse piercing is antithetical to the traditional doctrine of corporate veil piercing. Unlike the latter, where a shareholder is held liable for the default of the corporation, in the former, the liability of the shareholder is imposed upon the corporation. In India, a divergence of opinion has been observed by the judicial fora on the application of the doctrine. Initially the courts were reluctant in their approach, the appellate tribunal in NEPC India Ltd. v. SEBI termed the doctrine to be inconceivable and outlandish. However, with changing economic realities and commercial growth, a judicial inclination can be observed. In Punjab and Sind Bank v. Skippers Builders (P) Ltd. ,the “reverse piercing” jargon was not explicitly used, however, the facts of the case clearly point towards its application. The doctrine has been applied to fix criminal liability in numerous cases. It was held in Iridium India Telecom Ltd. v Motorola Incorporation and Others that guilty intent of a person should be attributed to the corporation in case it is found that they are the alter-ego of the corporation. Further, in Aneeta Hada v. Godfather Travels, the court confirmed that the criminal act of an individual can be attributed to his company. JUDICIAL STANCE OUTSIDE INDIA Globally, the doctrine is not yet well recognised, however, the nature of remedy that it offers has often compelled the courts to consider its applicability in appropriate situations. The High Court of Singapore in Koh Kim Teck v. Credit Suisse Ag held that the doctrine demands full consideration and cannot be dismissed straight away. Numerous courts worldwide have allowed the application of the doctrine in debt recovery cases. The Supreme court of Colorado, in the case of Re Phillips, held the claims of an outsider against the corporation for the default of the debtor to be legit. Under Pennsylvanian law, even an allegation of fraud or misconduct against the debtor-shareholders is not imperative for the sustainment of a reverse piercing claim. Analogously, in various tax recovery cases like Towe Antique Ford Foundation v. IRS, Zahra Spiritual Trust v. United States, Shades Ridge Holding Co. v. United States, the tax recovery agency was treated as the creditor, their claims were placed over the other creditor-stakeholders and outside reverse piercing claim was allowed for the satisfaction of the dues. ADOPTION OF THE DOCTRINE IN THE INDIAN JURISPRUDENCE FOR DEBT RESOLUTION Application of the doctrine in debt related cases would amount to giving more powers in the hands of the creditors. This is in consonance to what the legislature intended while enforcing the insolvency and bankruptcy code. However, it is quite understandable that this application would give rise to a clash of priority of claims between the corporation’s existing creditors and the ones having reverse piercing claims against it. In Alfred Booth v. Jeremiah Bunce, the controllers of an insolvent corporation transferred their assets to a new company to defraud the creditors of the former corporation. When a clash of priority of claims arose between the creditors of the former cooperation and the existing creditors, the court observed: “though the new corporation was a valid legal entity for its own creditors, the principle of qui prior est tempore, potiore est jure would enable the old creditors to make their claims against the new corporation, owing to the fact that the controllers of the corporation were same and that the transfers were fraudulent.” As has been noted above and considering the principle of “qui prior est tempore, potiore est jure” meaning “he who is earlier in time is stronger in law”, it is hence contended that the reverse piercing claims of the creditors ought to be placed either at the top in the hierarchy list which has been specified in Section 53 or 178 of the code or should at least be considered at par with the claims of the other highest ranked creditors and distribution of assets should hence be done accordingly. Further, in light of the principles of equity, justice and good conscience, the Adjudicating Authority might help in resolving the conflict. The application of judicial mind would warrant a rational decision rather than a mechanical one. CONCLUSION Undeniably, the courts are yet irresolute to adopt the doctrine. This is perhaps because of their tendency to adhere to the ancient principle of a separate legal entity. However, this approach needs to be altered because corporate veil is often used as a façade to escape liability and commit fraudulent acts. Several changes were made to the Companies Act in line with the Insolvency and Bankruptcy Code. The substantial shift made from the current priority of claims under the Act was solely done to promote the interests of the creditors. Empowering the creditors through the application

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Case Comment: “In the Matter of v. For the None, NCLT CP. No-80/ALD/2017”

Leave a Comment / Company Law /

[By Tanish Arora] The author is a student at West Bengal National University of Juridical Sciences, Kolkata. Introduction The case is centred around the conversion of a Public Limited Company to a Private Limited Company and has been filed before the National Company Law Tribunal, Allahabad under Section 14(1) of the Companies Act, 2013.[1] The court has considered the question of what prerequisites must be present for such a company to convert to a private limited company and analyses the presence of such elements in the given case.[2] The court also concerns itself with the question of retrospective applicability of the altered articles to transfer of shared effected by the shareholder prior to the resolution amending the article.[3] This case comment provides an analysis of the court’s reasoning in this judgement and is divided into three parts. The first part provides brief facts and general background of the case. The second part provides an analysis of the reasoning of the court. The final part provides a concluding opinion of the writer. General Background The company was listed with Delhi and Bombay Stock Exchange when it was focused on manufacturing and distribution of edible oil during 2012, however, it later transferred this business and manufacturing undertaking and bought back all its shares from public shareholders. Following this, it became an unlisted public company after getting delisted from the stock exchange in 2013. Its offices also shifted to Noida. As required under Article 14 of the Companies Act, 2013, the Company filed a petition before the NCLT to seek its approval for the conversion from a public limited company to a private limited company. As per the Article, the Tribunal can grant such permission as it deems fit.[4]  Such application can be filed as per Rule 68 of the NCLT Rules, 2016,[5] for a conversion of a public company into a private company in the prescribed format and the manner accompanied by documents/information and requisite filing.[6] According to the explanatory statement attached with the EOGM the Company and its shareholders agreed to change its nature to private limited so as to improve its functioning under the Act, in addition to being more law compliant.[7] Key Analysis of the Court In order to decide the case on its merit the Tribunal called for a report from the Registrar of Companies (ROC) which stated the main objective of the company to be “Trading in commodities and holding an investment in the Group companies.”[8]; the company has been regular in filing its statutory return,[9] it has not violated Sections 383A/203 of the Companies Act,[10] and there is no pending proceeding against it under Sections 235/210 to 251/277 of the Act.[11]The court took note of the fact that no serious objection from the offices of the RD(NR) or ROC existed against the conversion and it will not be detrimental to Public Interest at large.[12] The Tribunal while giving its approval relied on: Section 18 r/w Section 13 of the Companies Act.[13] Subject to the approval of the Central Government. Members’ approval is obtained through a General Meeting of the Company, by way of a Special Resolution. The court also ordered the Company to adopt a new set of Articles of Association as applicable to the Private Company. Ramaiya’s commentary stated that a Public Company must be granted permission to convert to a Private Company if it is in its best interests and the shareholders agree to the same and if such a conversion is sought so that the company can function more efficiently and not merely to avoid restrictions imposed on public companies.[14] The court also relied on a judgement of the Kerala High Court stating that the “power is conferred on the company under the Act to alter the article by special resolution”[15] With regards to the retrospective applicability of the amended article the court opined in the negative. In the present case, the court stated that the shareholders will be subject to the altered articles and placed reliance on the reasoning of the Pepe’s case of 1893,[16] that when the articles are altered the shareholder has the option of withdrawing his shared but if he does not do so and continues to hold the shares he is agreeing to be bound by the altered articles. The Pape’s case held this in terms of a person’s position in the society which has the right to alter its rules and the person being in a contract with the society shall remain subject to the rules when duly altered.[17] Concluding Opinion While section 14 of the Companies Act, 2013 merely mentions that the conversion of a Public Company to a Private Company shall be granted by the Tribunal as it may deem fit. The court, in this case, has actually gone to the lengths of defining what criteria a company needs to fulfil for the Tribunal to permit its conversion to a Private Limited Company by taking into consideration various factors as pointed out in the analysis part of this case comment. The court has recognised the company’s autonomy in terms of making decisions about its operations by emphasising the need for member approval via Special Resolution at the Company’s General Meeting. By citing A Ramaiya, it has also identified the importance of such permission being granted to facilitate better company functioning rather than simply to avoid restrictions placed on public companies. The Court has also talked about the applicability of the Alteration of Articles in this case. The importance of altering articles is considered so important that a company by no manner can deprive itself of the power to alter its articles.[18] In the present case, the court has clarified the applicability of altered articles as well. The judgement also points out that the conversion of a Public Company to a Private Company must be such that it is not oppressive to the minority members by placing reliance Madhurabhami case.[19] Conversion of such a nature is regarded as illegal.[20] The judgement is highlighting and places

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The Widening Ambit of Moratorium Under the IBC

Leave a Comment / Insolvency Law /

[By Gayathri Balasubramanian] The author is a student at the Christ (Deemed to be) University, Bangalore. Introduction: The concept of the moratorium is one of the Insolvency and Bankruptcy Code’s (the Code) most fundamental aspects. It is provided for under section 14 of the Code and is considered as a crucial concept that effectively brings to halt any simultaneous proceedings brought against the corporate debtor during the corporate insolvency resolution process. This is done in order to prevent any further legal and financial hurdles to the distressed corporate debtor and to ensure its survival during the insolvency proceedings. Since the enactment of the Insolvency and Bankruptcy Code in 2016, the courts have expanded the scope of the provision by bringing different types of legal proceedings under the ambit of the provision. Several such notable judgments and the implications on the scope of the provision will be dealt with in this article to analyse whether they have a positive or negative impact on the corporate insolvency resolution process. Judicial interpretation of the scope of Section 14: Section 14 can be understood as a vast shield that protects the corporate debtor during the Corporate Insolvency Resolution Process from further legal and financial hurdles. It’s because of this broad ambit of the provision that the Courts have time and again decided on the ambit of the provision to ensure that moratorium does not unduly favour the corporate debtor. In the landmark judgment of P. Mohanraj V. Shah Bros. Ispat (P) Ltd., the court addressed a crucial legal conundrum i.e., whether the declaration of the moratorium would extend to the institution of criminal proceedings against the corporate debtor under section 138 of the Negotiable Instruments Act, 1881. The court began with addressing the issue by laying out the nature of the broad scope of the provision. Given that the terms provided under the provisions are to be interpreted in a broad manner, it was held that the term “proceedings” under section 14 would indeed include a section 138 proceeding under the Negotiable Instruments Act, 1881. It further added that drawing a technical difference between a civil suit and a section 138 proceeding would prove futile since the impact of both on the corporate debtor during the resolution process remain the same. It however pointed out that this protection would not extend to the personal liability of natural persons who are liable under the Negotiable Instruments Act, 1881. Although the judgment would be a step in the right direction, in the event the persons-in-charge or directors of the corporate debtor are directed to deposit money in the form of interim compensation, it would give rise to a new legal conundrum and result in more legal battles. The court followed the aforementioned ratio in Shah’s case in the case of Anjali Rathi V. Today Homes & Infrastructure Private Limited, where it reiterated that moratorium under section 14 does not extend to promoters of the corporate debtor. This principle of extending the protection to the corporate debtor yet at the same time not absolving the personal liability of natural persons lies at the core of the rule of separate corporate personality, and balances the interests of the corporate debtor as well as the party seeking relief under the Negotiable Instruments Act, 1881. Based on the same principle, the court in Alpha and Omega Diagnostics (India)Ltd. V Asset Reconstruction Company of India held that the personal property of the promoters given as bank security would not fall within the purview of section 14, thus drawing a clear line between the corporate debtor and its promoters. The same was reiterated in the case of Schweitzer Systemtek India Pvt. Ltd v. Phoenix ARC Pvt. Ltd. & Ors., where the applicability of section 14 was not extended to the property of the personal guarantor. On the contrary, the court gave a different ruling in State Bank of India v. V Ramakrishnan and Veesons Energy Limited, where it held that the moratorium under section 14 would not just apply for the corporate debtor, but also on the personal guarantor. The court based this rule on the reasoning that the personal guarantor being involved in the resolution process and bound by the order of the court, would also be included under the ambit of section 14. This judgment re-created the ambiguity regarding the liability of the personal guarantor. However, on appeal, the Supreme Court set aside the NCLAT order and reiterated the principle of co-extensiveness of the liability of the personal guarantor and the corporate debtor. These minor inconsistencies are rather inevitable, given the extensively broad scope of section 14; Although, a bare reading and a strict interpretation of the provision would clearly indicate that the moratorium applies only in the context of any proceedings of the corporate debtor and no other body/person. Perhaps, these judicial interpretations were required given that the Code was in its nascent stage and still is, constantly evolving and such judicial reiterations give more clarity to the stakeholders Moratorium vis-à-vis Writ Jurisdiction and Arbitral Proceedings: In Canara Bank vs. Deccan Chronicle Holdings Limited, it was laid down that the power of the Hon’ble Supreme Court under Articles 32 and 136 of the Constitution of India, as well as the power of the Hon’ble High Courts under Articles 226 and 227 of the Constitution of India, shall be unaffected by the moratorium. Rightly so, this decision emphasised the supremacy of constitutional provision over the Code. However, it was laid down by the Hon’ble NCLAT that a suit for recovery filed against a corporate debtor before the the High Courts having original jurisdiction would be barred by section 14. As regards arbitral proceedings, it is fairly settled that arbitral proceedings, including a petition under section 34 of the Arbitration and Conciliation Act, 1996 would be hit by section 14. Even a section 37 petition is barred upon declaration of the moratorium, as was laid down in the case of Alchemist Asset Reconstruction Co. Ltd. V. Hotel Gaudavan P. Ltd.Interestingly,

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Withdrawal of Resolution Plans under the IBC: An Alternative Perspective

Leave a Comment / Insolvency Law /

[By Ankit Sharma]  The author is a student at the Jindal Global Law School, Sonipat. Introduction The withdrawal of resolution plans under The Insolvency and Bankruptcy Code 2016 (“Code”), had always been a contentious issue, with the NCLTs and NCLAT taking conflicting positions in the past. In the recent case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited (“Ebix Singapore”), the Supreme Court settled the conundrum and held that if a resolution plan had been approved by the Committee of Creditors (“CoC”), then modifying or withdrawing it would not be permissible. While a time-bound insolvency process is certainly an objective of the Code, to disregard certain circumstances which may warrant a successful resolution applicant to backtrack from his commitment, would not be prudent. This article seeks to analyse the Supreme Court’s judgement, in view of the precedents set and contends that the legislature must provide for certain exceptions wherein the withdrawal of a resolution plan may be permitted. Background Interestingly, no provision in the Code explicitly permits the withdrawal or modification of the resolution plan. Yet in Panama Petrochem Ltd. v. Aryavart Chemicals Private Limited (“Panama Petrochem”), the NCLT remarked that although such withdrawals must not be encouraged, they may be accepted due to the “totality of the circumstances.” In the case, the same included another resolution plan being approved by the CoC and the backing out of the resolution applicant’s joint investor, who had agreed to invest in the corporate debtor. Further, in Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP (“Metalyst Forging”), the NCLAT noted that the resolution applicant had been provided with misleading information about the production capacity and the feasibility of the corporate debtor, when the plan was approved by the CoC. It was observed that the Code did not offer the NCLT any means to compel the specific performance of a resolution plan by an unwilling resolution applicant. Since the resolution professional was required to present the true and updated information, the plan itself contravened Section 30(2)(e) of the Code. Accordingly, the resolution plan was allowed to be withdrawn. In Suraksha Asset Reconstruction Ltd. v. Shailen Shah(“Suraksha Asset”), the NCLT held that if a resolution plan was not approved by the Adjudicating Authority within a reasonable period, then the resolution applicant could withdraw the resolution plan under Section 60(5)(c) of the Code. This would have balanced the interests of all the stakeholders and mitigated their difficulties. However, the judgement was soon overturned in Committee of Creditors of Wind World (India) Ltd. v. Suraksha Asset Reconstruction Ltd., in view of the Ebix Singapore case. Notably, contrasting views had been taken by the tribunals as well. In Kundan Care Products Ltd. v. Amit Gupta, the NCLAT opined that the Code did not have any provision that could enable a successful resolution applicant to take a “U-turn” and thwart the entire exercise of the CIRP. The move could have devastating consequences, as the CIRP period may be nearing its end, which could push the corporate debtor into liquidation. In the case of Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd, the NCLAT noted that the resolution plan, once approved by the CoC, cannot be withdrawn. Further, the Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh, stated that the NCLT cannot withdraw a CoC approved resolution plan and can only assess it under Section 31(1) of the Code. The Ebix Singapore Case The Apex Court was hearing a batch of three appeals, wherein the resolution plans submitted to the NCLT in three different Corporate Insolvency Resolution Processes (“CIRP”), were sought to be withdrawn. On a careful analysis, it was held that when the CoC approves a resolution plan, it cannot be modified or withdrawn by the successful resolution applicant, even though it may be pending for approval before the Adjudicating Authority. In its verdict, the court delved into several aspects of the Code. With regards to the purpose of the insolvency law, the Supreme Court observed that it could not create a substantive or procedural remedy that the Statute had not specified, for it would not only be encroaching upon the legislature’s domain but also harming the delicate co-ordination under the Code. On the aspect of the nature of resolution plans, the Supreme Court held that it was not the same as traditional contracts. This was on the grounds that the Code governed to a great extent, the insolvency process, the mode, and effect of approval, and the fact that it could bind such parties who had not consented to it. Since the resolution plans were brought into existence by the framework provided under the Code and were not described as contracts therein, they also did not qualify as statutory contracts. With respect to the withdrawal of resolution plans, the Supreme Court noted that the Code only provided for the withdrawal of applications to initiate the CIRP under Section 7, 9 and 10 of the Code, through its Section 12A. As such, the lack of any exit route for a successful resolution applicant under the Code indicated that the same should not be permitted. Further, the language of Section 31(1) of the Code could not be interpreted to signify that a resolution plan can be withdrawn or modified prior to its approval by the NCLT. The Court held that by submitting a resolution plan, a resolution applicant is assumed to have gone through the information memorandum and understood the financial risks. A withdrawal or modification of the resolution plan cannot happen later, as it would disrupt the timeline for the insolvency process under the Code and represent a remedy, which the legislature had not provided for. Consequently, resolution plans with clauses for re-negotiations or walk-away rights cannot be implemented. Even the residuary power under Section 60(5)(c) of the Code cannot be utilised for withdrawing or modifying a CoC approved resolution plan. Analysis The Parliament’s Standing Committee on Finance in its recent report observed that 71%

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