Author name: CBCL

Corporate Governance in India and the Suitability of Legal Transplants

Leave a Comment / Company Law /

[By Shuchi Agrawal]  The author is a student at the Jindal Global Law School. Corporate governance refers to the mechanisms which are used to regulate and govern a corporation. The model of corporate governance adopted, determines the scope of powers that are wielded by different actors, in order to facilitate the smooth functioning of a company. The U.S. and U.K. follow an outsider model of corporate governance, which is based on the separation of control and ownership, as the shareholders have limited interest in the management of the company. Meanwhile, India follows the insider model, which is characterized by the presence of cohesive groups of ‘insiders’ who have a long term affiliation with the company. Usually, the controlling shareholders are a business family or the State. The presence of such controlling shareholders helps concentrate ownership and may lead to greater benefit for the dominant shareholder at the expense of the minority shareholders. Thus, this may result in an agency conflict between the controlling shareholders and the minority shareholders. However, despite the differences between the shareholding patterns in India and, the U.S. and U.K., legal transplants have been heavily employed in formulating the corporate governance policies in India. This has been done without considering the historic, cultural and economic differences between the concerned jurisdictions and has resulted in the establishment of a regime that is severely ill-equipped to prevent unethical or fraudulent activity within corporations, in India. Considerations while Introducing Legal Transplants ‘Legal transplants’ are legal models and regulations which are exported from an alien jurisdiction into a receiving one. Due to the historic imbalance of power between nations, legal transplants are often adopted by developing countries, from more developed nations. This allows developing countries to import legal wisdom from developed jurisdictions, which may have a rich historic background for a particular legal framework. However, it has been suggested that emerging markets should not copy codes implemented in mature markets. Moreover, there is a lack of universal consensus regarding the effectiveness of legal transplants. Nonetheless, in the context of corporate governance in India, legal transplants have not been very effective, as is evidenced by the fact that government companies were discovered to be major violators of Clause 49 of the Listing Agreement, which details the guidelines regarding corporate governance that listed companies in India must comply with. Additionally, the theory of path dependence states that an outcome is structured in specific ways based on the historical context and the prevalent socio-economic conditions. Consequently, differences in models of corporate governance, as well as historical and social background, play a role in the effectiveness of a legal transplant. Markets have always operated in relation with communities and social organizations, such as families and religion and governments and never in a vacuum. Thus, legal rules which have been shaped by particular political, historical and cultural elements cannot be transplanted in another jurisdiction, unless similar conditions prevail in the other State as well. Recently, there has been a marked shift from the transplant model to an entirely autochthonous model in the field of corporate governance in India. From the perspective of legal reform, it has been suggested that rules which can be enforced with the existing enforcement structure must be preferred over the creation of ideal rules which require the development of new structures for their implementation. The inefficiency of India’s Transplanted Model Further, the Satyam scam of 2009, worked to showcase the gaps that were present in the effective implementation of the legal transplants. The Satyam scam was one of India’s biggest corporate governance and financial accounting scandals. In this matter, the ambiguity regarding the duties of the independent directors and the promoters especially highlighted the failure of the corporate governance model. Moreover, it has been claimed that multiple measures borrowed from other jurisdictions, primarily the U.S. and U.K., have failed to improve corporate governance in India. For instance, S. 166 of The Companies Act, 2013, gives directors overarching discretionary powers, which may be utilized to further their own interest with little accountability. In addition to this, it was found that “more than 3,000 people who were on the boards of various companies on January 1, 2006, were re-designated as independent directors” in order to comply with the requirements under Clause 49 of the Listing Agreement. This defeats the very reasoning behind these reforms and demonstrates the ineffectiveness of legal transplants. Additionally, the transplanted corporate governance model is not perfect in its functioning even in its countries of origin, such as the U.S. and U.K. Some problems associated with the transplanted model include the dispersed nature of shareholding, combined with a lack of oversight, excessive interference by managers in determining their own remuneration, and the lack of a division between the roles of the CEO and Chairperson. Contrastingly, Indian laws have a comprehensive system with respect to these concerns. Controlling shareholders in India do play a role in the management of the company, and the management’s remuneration is limited by legal provisions and is subject to the shareholders’ approval. Additionally, despite the lack of a mandatory provision requiring a separation of the roles of the CEO and the Chairperson, Indian companies tend to follow the separation. However, in the context of Anglo-Saxon corporate governance models, it has been stated that strong managers and relatively unprotected minority shareholders have been at the centre of corporate governance failures. This was evidenced in the case of Parmalat, where the controlling shareholders had illegally used corporate resources at the expense of minority shareholders. Moreover, the CEO and chairperson positions were held by the same person despite the codes of practice recommending a separation. Further, on analyzing some corporate governance failures such as Enron, WorldCom, Satyam and Xerox, it was found that they had certain common features, including incompetence of management, the inefficiency of internal audit, and non-compliance with internal regulations. Conclusion While it has been acknowledged that there is no one successful model of corporate governance, several prescriptive ruleshave been laid down on the basis of research. A

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Desideratum Of A Lawyer When A Dawn Raid Strikes!

Leave a Comment / Competition Law /

[By Alay Ninad Raje]  The author is a student at the Institute of Law, Nirma University.  Introduction The heat of Dawn Raid was recently faced by Beer Companies who were held responsible for violating the provisions of the Competition Act, 2002 (“the Act”) by forming and operating an all-India cartel, by the Competition Commission of India (“CCI”) vide an order dated 24.09.2021.This order relied upon pieces of evidence uncovered by the Director General (“DG”), through a Dawn Raid (“DR”) conducted on 10.08.2018 at the offices. A DR can be described as an unexpected search and seizure operation conducted by the investigation arm of antitrust watchdogs, on the premises of accused enterprises for collecting evidence in an antitrust probe. This brings the concept of DRs back to light, and here the author seeks to analyse the concerns arising from DRs, and the party’s/enterprise’s right to counsel during the DRs. Understanding DG’s powers vis-à-vis Dawn Raids The DG is empowered through Section 41(3) of the Act, r/w Section 220 of the Companies Act, 2013 (“CA”)for conducting a DR and; (i) search through documents and digital data;(ii) use reasonable force to access office premises, domestic premises, and different modes of transportation for the firm’s personnel; (ii) seize required materials; (iii) seal any business premises, books or records for the period; (iv) keep in its custody such documents and digital data so seized until the conclusion of the investigation, if necessary; and (v) depose concerned personnel under oath. The DG can exercise these powers after obtaining a search warrant from Chief Metropolitan Magistrate, New Delhi, if there exist ‘reasons to believe’ that evidence pertaining to the violation of the Act are likely to be destroyed, mutilated, falsified or hidden. For instance, one of the alleged entities of a cartel, files a leniency application before the CCI. This leniency application provides information regarding the existence of evidence indicating cartelization, and that the other alleged entity(s) are inclined at disposing or burning down these evidences. In such a case, the CCI can ask the DG to conduct a DR. Here, the phrase ‘reasons to believe’ has not been categorically defined, and the width of its scope has not been measured. However, it can be understood as a certainty based on prima-facie evidence arrived at through non-arbitrary measures and application of mind. Hence, given the ambiguity and wideness of scope, the DG has the ability to misuse its above-given powers. Can Dawn Raids be Misused? The intrusive and invasive nature of DG’s power with regards to DRs, makes it necessary for analysing circumstances wherein the DG could misuse the power to unduly harm the interests of enterprises. Seizure of materials ultra-vires the scope of the DR search warrant: For instance, a Firm manufactures two different types of food products, which are not considered easily substitutable by consumers, but the CCI wrongly delineates the relevant market such that both the products are considered as a part of one market. Therefore, since the delineated market is now of a broad nature, the DG during the DR will not only collect evidence and material regarding Product-1 but also of Product-2 which could be utterly unnecessary and amount to undue seizure, and breach of business privacy. Or the Firm manufactures two distinct types of stainless-steel products, Grade-1 and Grade-2, the investigation pertains to one of them, but the DG during the DR collects material pertaining to both of them. A similar situation was observed in the European Union (“EU”), wherein the General Court recognized this concern as substantial. In that case, instead of delineating the market of ‘high-voltage underwater electric cables’, it delineated the market of electric cables and hence during the DR, collected materials pertaining to all electric cables. Use of collected evidence in different investigations: The evidence collected during a DR for one investigation, could be misused in another investigation which relates to the same enterprise but different anti-competitive activity. For example, in an investigation over a Motor-Vehicle Manufacturing Company, allegations have been raised over its anti-competitive practise in the market of ‘sale of spare-parts’, subsequently, in a different case the same Company is alleged to participate in a cartel in the market of ‘sale of car’s ball bearing and axle’. Now, while conducting a DR concerning investigation in the latter case, the DG gathers and makes copies of evidence pertaining to the Company’s anti-competitive conduct in the market of ‘sale of spare-parts’. Even though these are two separate investigations, the DG leveraged its position in the DR and conducted search and seizure of materials for the former. This issue was raised during a case in the EU, where while conducting a Dawn Raid for the investigation of ‘discriminatory rebate scheme’, the officials collected materials concerning the same Company’s anti-competitive practises in the market of ‘rail transport’. Conflict regarding legally privileged documents: Any confidential communication between an enterprise and its legal counsel is protected, and not subject to disclosure. However, in absence of any rules/ guidelines for deciding what documents and data would be considered as legally privileged, during the DR deciding the same rests upon the discretion of the DG. This could be troublesome because the raided firm would not be able to stop the DG from incorrectly deciding upon this matter and seize even legally privileged documents. Absence of Right against self-incrimination: Article 20(3) of the Constitution of India (“CoI”) protects against self-incriminating testimonial compulsion. But while the European jurisprudence offers a right against self-incriminating testimonies during the DR, the same is not provided in India. This is because, Article 20(3) of CoI only applies to criminal prosecutions, whereas the proceedings under Section 41(3) of the Act are civil in nature. Thus, during the DR, the officials can depose the employee(s) of the firm under oath, and ask questions regarding the seized materials, that might incriminate either the firm or the employee(s) itself. The author is of opinion that these issues raise a concerning eye over the powers of DG during a DR. Further, it is

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Interest Or Interest-Free: Section 5(8) IBC Conundrum

Leave a Comment / Insolvency Law /

[By Varuni Agarwal]  The author is a student at the National Law University, Odisha.  INTRODUCTION Section 7 of the Insolvency Bankruptcy Code (“IBC”) empowers a financial creditor to initiate a Corporate Insolvency Resolution Process against the Corporate Debtor on account of default. As per Section 5(7) of IBC, a financial creditor means a creditor against whom the Corporate Debtor owes a financial debt. Section 5(8), defining financial debt, has a principal term stating “a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes”, and sub-clauses (a) to (i) stating some credit situations. In July 2021, in the case of Orator Marketing v. Samtex Desinz (“Orator judgment”), the Supreme Court discussed the legal issue of whether a secured creditor, giving an interest-free loan, would qualify as a financial creditor. The article critically analyzes the core findings of the Court and its contradiction with the established judicial precedents. UNDERSTANDING THE JUDGEMENT M/sSameer Sales Pvt. Ltd. advanced a term loan of Rs. 1.60 crores to M/s Samtex Desinz Pvt. Ltd., the Corporate Debtor, without any interest for a period of two years from the date of execution of the Loan agreement to meet its working capital requirement. The creditor went on to initiate the Corporate Insolvency Resolution process through Section 7 of IBC. The NCLT and NCLAT held that the creditor is not a financial creditor.  However, the Hon’ble Apex Court held that Hon’ble NCLAT and NCLT have misconstrued the definition of ‘Financial Debt’ and have read it in isolation and analyzed the definition of ‘Financial Debt’. CRITICAL ANALYSIS OF THE JUDGEMENT FLAWED ANALYSIS OF TIME VALUE OF MONEY The bench has based its decision on 2 findings. Firstly, while interpreting the terms ‘means and included’, it determined that Section 5(8) of IBC has 2 separate categories that are qualified to be called ‘financial debt’. The first one is ‘disbursed against consideration of time value of money, and the second includes those situations that are mentioned in sub-clauses (a) to (i) of the sub-section. Secondly,it had particularly covered the case-at-hand as a transaction under Section 5(8)(f), due to the transaction having “commercial effect of borrowing”, and interpreting the meaning of the phrase. With respect to the first finding, the bench does not seem to have followed the 2020 Supreme Court judgment inAnuj Jainvs. Axis Bank Limited (“Anuj Jain judgment”). The Anuj Jain judgment had categorically held and clarified that “any of the transactions stated in the said sub-clauses (a) to (i) of Section 5(8) would be falling within the ambit of ‘financial debt’ only if it carries the essential elements stated in the principal Clause or at least has the features which could be traced to such essential elements in the principal clause”. This means that while the nature of the transaction may be of any kind, including those as mentioned in sub-section (a) to (i), the same must have an element of the time value of money, mentioned in the principal part of the sub-section. Thus, this deviation from the settled principle of law seems uncalled for. While establishing the first finding, the Court went on to classify the present case as having “commercial effect of borrowing”. It relied on the fact that the loan was taken for fulfilling CD’s working capital requirements, thus having a commercial effect. However, the Court in Pioneer Urban Land and Infrastructure Limited v. Union of India construed the meaning of ‘commercial’ as transactions having profit as their main aim. Further, Explanation 1 of Section 5(8) classifies the real estate projects as having “commercial effect of borrowing” on the pretext that the real estate developer profits on the sale of the apartment, and the flat/apartment purchasers profits by the sale of the apartment. The essence of the argument is that in the case of a loan, the ‘commercial interest’ would exist only when the creditor receives something in return that puts them in a beneficial position than before. Examining the present case, the creditor neither had a security interest over the Corporate Debtor’s property nor was receiving any interest. Thus, the creditor was essentially not receiving any additional amount which would have financially put them in a beneficial position than before giving the loan. On the contrary, without having a provision of the time value of money and mandating payment of interest of the repayment, the lender is essentially being put at an adverse level than before, due to general depreciation in the value of money during that loan period. Hence, the “commercial effect of borrowing” clearly did not exist in this case, and reading the provision independent of the principal condition of “disbursed against consideration of time value of money”is a wrong construction. CONTRADICTING FEBRUARY 2021 JUDGMENT ON SIMILAR LEGAL ISSUE On February 3, 2021, the Supreme Court pronounced its judgment in Phoenix Arc Ltd. v. KetulBhai (“Phoenix judgment”), explicitly holding that the secured creditor, having given a loan without interest, will not fall under the definition of financial creditor under Section 5(8). With the Court holding that interest-free loans will also qualify as financial debt, the Orator judgment seems to go in total contradiction of the Phoenix judgment. Interestingly, having been pronounced prior to, and discussing the similar legal issue as, the Orator judgment, the Court had not referred and discussed the Phoenix judgment in the present case, let alone follow the same. Further, the creditors in the Phoenix judgment specifically argued that their case falls under Section 5(8)(b) dealing with credit facility, independent of the concept of time value of money. However, the Court rejected the submission, holding that the loan must have an essence of the principal terms, in order to be qualified as “financial debt”, whereas, the Orator judgment specifically opposed this position. Consequently, since the Phoenix judgment is not even explicitly overruled, this gives in confusion as to what the position of the law stands for Section 5(8) of IBC. CAN WORKING CAPITAL BE USED AS A LOOPHOLE? Working

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The Conundrum Of Taxing IPR: The Achilles Heel Of Taxation Regime In India

Leave a Comment / Taxation Law /

[By Brahm Sareen]  The author is a student at the University school of law and legal studies, GGSIPU.  Introduction: Recently, the multinational corporations (hereinafter referred to as “MNCs”) operating under the franchise agreement in India started facing scrutiny by the taxman over the royalty income which is a part of their intangible assets. These MNCs operate in India by allowing the Indian companies to operate their subsidiaries in their global brand name. With the growth in the transfer of these intangible assets, the states naturally started taxing these transactions making them a part of the broader economy[1]. However, in the past, these transactions had sparked controversy over the taxability of intellectual property rights (hereinafter referred to as “IPR”) in India. The conundrum of whether to categorize intangible assets as sale of goods or services along with defining the nature of the agreement remains unresolved. A recently similar question of law was dealt with by the Hon’ble High Court of Punjab and Haryana in a writ petition filed by Subway systems in India against the tax authoritie. In this case, Subway alleged that the Indian Taxman, without issuing an advance ruling notification, issued various summonses over the non-payment of taxes on their intangible assets and royalty. The question remains the same, as to whether MNCs be taxed on their intangible assets under the right to use, or the transaction be treated as a transfer of right to use or “deemed sales”? Therefore, delving into the aspects of the current IP taxation regime in India is important as the Indian taxation regime deals with these transactions differently. IPR tax regime in India: Before the advent of GST reforms in the taxation regime of India, there lies a long-drawn debate on the assignment and licensing of intangible property. However, a well-defined jurisprudential aspect in the IPR taxation regime still lacks as irregularities and discrepancies were all left on the judiciary to decide. In this sense, it is important to define an intangible property to further categorize it and identify the nature of the agreement and the transaction involved. According to section 2(11)(b) of the Income-tax Act, 1961, intangible assets include “know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature” excluding goodwill of a business. Delving into the question of whether these assets are goods or services, the CGST Act, 2017 shall be referred. According to section 2(52) of the CGST Act, 2017, goods include all types of moveable property other than money and securities. Going by this definition it is safe to assume that the supply of any moveable property is a supply of goods. In Tata Consultancy services vs. the State of Andhra Pradesh, the Hon’ble Supreme Court held that intangible assets can be called goods if they are capable of being abstracted, consumed, used, transferred, delivered, stored, or possessed. While on the other hand according to C.B.E &C Circular No.80/10/2004-S.T dated 17.09.2004, temporary transfer of IPRs will be termed as intellectual property services while the permanent transfer of such rights cannot be termed as service. This is because the holder of the intellectual property will no longer hold it in his/her possession and therefore, it will be dealt as sales of the intellectual property. This position of law is also defined by Section 66E(c) of the Finance Act, 1994 which states that temporary transfer or enjoyment or permission to use an IP is a part of services excluding permanent transfers of such property. Accordingly, if the intellectual property is dealt as goods then the transfer of such goods will be deemed sales according to article 366(29A) of the Indian constitution. The position of law, therefore, before the application of GST in India was based on the interpretation of the nature of the transaction, however current regime too has failed to give a conclusive end to the problem of taxability. Licensing v. Assignment Much of the debate on the rates of tax to be imposed on MNCs boil down to the nature of the transaction involved. Particularly, the argument lies in the categorization of such transactions. It is not the first time that this question of law is argued. For one reason, it can be sufficiently derived that the jurisprudence before GST had enough debate on the same. One such example is Commissioner of Sales Tax v. Duke and Sons Pvt. Ltd. While this case enumerates the difference between licensing and assignment, the same is ridiculed the moment it distinguishes the transfer of a trademark from the assignment of the same further stating that “permission in writing as required by law may be enough” to suffice transfer of a trademark. The whole jurisprudence behind the concept of “deemed sales” was reduced to permission in writing in this one single sentence. Further, the proposition in its judgment which distinguished assignment and transfer of right to use were against the settled position of law. Something to which an attempt was made by the court to reverse the same in BSNL vs. Union of India which had set out a clear test of exclusivity to identify the nature of the transaction. The BSNL judgment though has been rendered irrelevant with the advent of GST as tax is concurrent now, still laid down the exclusivity test that can be still applied. The Duke judgment as a whole gave a clear description of what the difference between assignment and licensing. It was held that the assignment of a trademark would mean the proprietor would be divested from his right to use the trademark whereas the same would not be the case in-licensing of a trademark. A license per se is an assurance to the licensee that the owner or the proprietor of the asset won’t initiate any legal proceedings against him if he uses the same. On the other hand, the assignment of an asset would simply mean the right over the asset being transferred to the assignee either wholly or partially. Where section 19 of the Copyright Act,

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Lessons From The Franklin Templeton Debacle

Leave a Comment / Capital Markets and Securities Law /

[By Neha Koppu] The author is a student at the Symbiosis Law School, Hyderabad.  The COVID-19 pandemic has cast a shadow upon the Indian economy.  The financial sector was in turmoil after the imposition of the first lockdown back in March 2020. The mutual fund industry was no exception to this crisis. There was a negative return on equity-oriented mutual funds of around 25% to the investors in March 2020. The outbreak of COVID-19 led to a decrease in the net asset value of several mutual fund schemes resulting in a decline in income levels of the investors. One of the biggest AMCs, Franklin Templeton Mutual Fund (‘FTMF’) announced the winding up of six mutual funds due to the hit of the COVID-19 pandemic as the debt markets turned volatile and illiquid. This move surprised and disappointed the investors. The Indian mutual fund industry is now recovering from the horrors of the second wave of COVID-19. The present article aims to critically analyse the curious case of FTMF in light of the Supreme Court ruling and the corollary measures undertaken by the Securities Exchange Board of India (‘SEBI’). BACKGROUND In April 2020, the trustee of FTMF decided to wind up six of their debt schemes viz. (i) Franklin India Ultra Short Bond Fund; (ii) Franklin India Low Duration Fund; (iii) Franklin India Short Term Income Plan; (iv) Franklin India Income Opportunities Fund; (v) Franklin India Credit Risk Fund; and (vi) Franklin India Dynamic Accrual Fund. The decision to wind up came due to the illiquid market because of the COVID-19 pandemic. Due to the reduced liquidity in the market, most of the investors were looking to redeem their mutual funds, thereby reducing the value of the funds. Moreover, all credit risk funds earn high interest as the borrowers also pay high-interest charges in order to compensate for their low credit rating, making these schemes riskier than other debt schemes. A forensic audit carried out by Choksi and Choksi revealed that around 2 billion dollars were withdrawn from the six debt schemes of FTMF just a few weeks before the winding-up announcement, terming these activities “unusual”. Several petitions were filed in the High Courts of India by the aggrieved unitholders. The Supreme Court directed the Karnataka High Court to provide a decision in the instant case regarding the requirement of consent of the unitholders for closure of the mutual fund schemes. After a careful analysis of the SEBI (Mutual Fund) Regulations, 1996 (‘Mutual Fund Regulations’) the Karnataka High Court,[i] held that the consent of the unitholders is required to be obtained before winding up the mutual fund schemes. At the outset, the Court adopted a purposive interpretation of all the regulations akin to the winding up of mutual funds and held that the consent of the unitholders is sine qua non to the winding-up procedure. Thus, the Court stayed the process of winding up until the vote of the unitholders is taken. RULING OF THE SUPREME COURT Franklin Templeton approached the Supreme Court of India[ii] against the judgment passed by the Karnataka High Court. One of the main issues dealt with by the Supreme Court was whether the consent of the unitholders is a prerequisite for winding up mutual funds. The challenge before the Court was that the unitholders do not fall under the purview of Regulation 39(2) (a) and 39(2)(c) of the Mutual Fund Regulations, when SEBI and the trustees decide to shut a scheme. The trustee’s contention was as per Regulation 39(2(b), only when the unitholders want to wind up a scheme, a resolution of 75% majority is mandated. While interpreting these Regulations, the Court adopted a harmonious interpretation. In most cases, the courts adopt a three-pronged approach while interpreting statutes, (i) the words are interpreted as per its grammatical meaning in the literal sense, (ii) the context of the words are understood as to whether it is logical and workable, or (iii) applying interpretative tools to understand the provision. Firstly, the Court interpreted the term “consent” under Regulation 18(15)(c) to mean ‘consent of a majority of the unitholders.’ The term ‘consent’ as per the Black’s Law Dictionary means “a voluntary yielding to what another proposes or desires; agreement, approval, or permission regarding some act or purpose, esp. given voluntarily by a competent person; legally effective assent.”[iii] The Court observed that the underlying principle of Regulation 18(15)(c) was to provide the unitholders with information, cause and reason of winding up schemes by giving them an opportunity to accept/reject the proposal. Secondly, the Court analysed Regulation 39 to 42 read with Regulation 18(15)(c) at length, in terms of the responsibility of trustees to seek the consent of the unitholders. In general, the term ‘shall’ must be understood as a command. The expression ‘when the majority of the trustees decide to wind up’ under Regulation 18(15)(c) explicitly refers to Regulation 39(2)(a) as it is the only Regulation, that vests the trustees with the right to close a scheme. Thus, the consent of the unitholders is required to be sought before the trustees decide for a scheme to be wound up as per the interpretation of Regulation 39(2) read with Regulation 18(15)(c) of the Mutual Fund Regulations. This consent shall be sought only after the publication of the notice which discloses the reasons for winding up of the schemes. AFTERMATH The Franklin Templeton Trustees Services Pvt. Ltd. & Anr. v. Amruta Garg & Ors. has set a precedent in the mutual fund industry by emphasising the importance of seeking consent from the unitholders before winding up the schemes for any reason whatsoever. The Supreme Court of India made it abundantly clear that a combined reading of the regulations under the Mutual Fund Regulations is needed which promulgates that the consent of the unitholders is, therefore, necessary before winding up of mutual fund schemes. Pursuant to the FTMF debacle, to protect the interests of the unitholders of the mutual funds’ schemes, SEBI rolled out a circular which mandates all the Key Employees to invest

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High Courts determining the scope of Section 138 of Negotiable Instruments Act, 1881

Leave a Comment / Banking Law /

[By Kapil Devnani]  The author is a student at the Hidayatullah National Law University, Raipur.  Section 138 of the Negotiable Instrument Act, 1881 (hereinafter “NI Act”) is a penal provision that allows the payee to institute a suit against the payer in case the cheque drawn by him got dishonoured. Recently, in the month of January 2022, three important judgements of different High Courts regarding this provision came. The first one is Parvaiz Ahmad Bhat & Anr. v. Fida Mohamamd Ayoub, given by the Jammu and Kashmir and Ladakh High Court; the second one is Rajeswary v. State of Kerala, given by the Kerala High Court; and the last one if Kodam Danalakshmi v. State of Kerala, given by the Telangana High Court. This blog is an attempt to comprehend the scope of Section 138 through these decisions. Parvaiz Ahmad Bhat & Anr. V. Fida Mohamamd Ayoub (Dishonour of cheque due to incomplete signature will be considered as an offence under Section 138) Facts of the Case In this case, the Petitioners challenged the complaint that was filed by the Respondent against them under Section 138 of the NI Act read with Section 420 of the IPC. The complaint was still pending before the CJM, however, by an order dated August 27th, 2020 the learned Magistrate issued the process against the Petitioners, to which the Petitioners responded and filed the petition before the Jammu and Kashmir and Ladakh High Court. The issue in this case was that the Petitioner’s cheque was dishonoured due to an incomplete signature on the cheque, and the High Court needed to decide whether or not this constituted an offence under Section 138 of the NI Act. The Petitioner argued that the Respondent’s complaint is not maintainable because the cheque got dishonoured due to incomplete signature and not because of insufficient funds. They relied on the case of Vinod Tanna v. Zaheer Siddqui,  (hereinafter “Vinod Tanna’s case”) in which it was held that the dishonour of cheque just because of incomplete signature will not attract Section 138 of the NI Act. Analysing the Judgement A mere reading of Section 138 is sufficient to conclude that this provision is attracted in two situations. First, when the individual drawing the check has insufficient funds in his or her bank account and second, if the amount to be paid is greater than the amount arranged to be paid from that account. However, there have been instances where the dishonour of the cheque was the result of some other reasons, but the judiciary allowed the application of Section 138. The Supreme Court in NEPC Micon Limited v. Magma Leasing Limited, held that Section 138 should not be interpreted strictly and for giving this verdict it relied on the cases of Kanwar Singh v. Delhi Administration and Swantraj and Others v. State of Maharashtra, in which it was held that the narrow interpretation of this provision will defeat the legislative purpose for which it was enacted. Walking on the lines of these judgments, the Supreme Court in M.M.T.C. Ltd. v. M/S Medchl Chemicals held that in case a cheque is dishonoured because of the instruction to stop payment, then Section 138 would be attracted. The only protection available with the petitioner in this case was the verdict of Vinod Tanna’s case, however, this verdict of the Supreme Court came up for consideration in Laxmi Dyechem v. State of Gujarat. In this case, the SC did not follow the ratio laid down in the case of Vinod Tanna and the reason was that the case of Vinod Tanna was based on the verdict of Electronics Trade & Technology Development Corpn. Ltd. v. Indian Technologists and Engineers Ltd, however, the same was overruled by the case of Modi Cements Ltd v. Kuchil Kumar Nandi. In Laxmi Dyechem, the Supreme Court held that in case the cheque is dishonoured due to incomplete signature or wrong signature, Section 138 will be attracted. Both the judgments of Vinod Tanna and Laxmi Dyechem were given by the bench of equal strength. However, Laxmi Dyechem’s case is the latest one and based on that the SC in the present case gave the decision in the favour of the Respondent and held that in case a cheque has been dishonoured just because of incomplete signature, then in that scenario Section 138 would be attracted.  Rajeswary v. State of Kerala (The Case of Cheque Bounce under Section 138 could be closed in case the fine is paid directly to the Complainant) Facts of the Case In this case, the accused was convicted by the trial Court under Section 138 of the NI Act for simple imprisonment for a period of 1 year and further to pay a fine of Rs.7,17,000/- and in case of default, additional imprisonment for further 3 months. Later on, the Kerala High Court modified the imprisonment of 1 year awarded by the Trial Court as a sentence to pay a fine of Rs.7,17,000/-. Following that, the convict paid the plaintiff the fine of Rs.7,17,000/-, which was acknowledged by the plaintiff himself when he issued a receipt of the transaction. Thereafter, the convict presented that receipt before the Trial Court and requested to close the case. However, the Court rejected this petition, stating that the convict was required by the Court’s Order to deposit the amount of fine in the Court, but he instead paid the fine directly to the plaintiff, so the Court could not accept the receipt of the payment and the case would continue. Aggrieved by this, the convict preferred an appeal before the Kerala HC. Analysing the Judgement The question before the HC was to determine whether the case of cheque bounce be closed in case the convict pays the fine directly to the plaintiff. To determine this, the Court relied on the judgment of Beena v. Balakrishnan, (hereinafter“Beena’s case”) in which it was held that if the person receiving the fine directly from the convict (in this case, the petitioner) files

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Fishing For Landowner’s Rights In JDA: An IBC Perspective

Leave a Comment / Insolvency Law, Uncategorized /

[By Divyansh Ganjoo & Ayush Singh]  Ayush is an associate at L & L Partners & Divyansh is a student at USLLS, GGSIPU.  A Joint Land Development Agreement (“JDA”) is quite typical in Real Estate Development/Redevelopment transactions between the Developers and the Landowners. At times, a tripartite agreement may also exist in which the State Development Authority or a lending bank/Non-Banking Financial Company (“NBFC”) may be made another party. One might ask the question, what if Corporate Insolvency Resolution Process (“CIRP”) is initiated against the Developer of the said project. Would the JDA property in question be included within the purview of the moratorium under Section 14 of Insolvency and Bankruptcy Code, 2016 (“IBC”)? If yes, then what rights would accrue to Landowners under IBC when that happens? The Supreme Court and the National Company Law Tribunals (“NCLTs”)/ National Company Law Appellate Tribunals (“NCLATs”) have attempted to answer these questions, which the authors delve into through this article to search for landowner’s rights in a JDA. Recovery of a JDA property by the owner during IBC proceedings. Can the owner terminate the rights created in favour of the Developer wherein IBC proceedings have already been initiated against the Developer and such Developer is in possession of the concerned JDA property? This question was placed before the Supreme Court in the year 2020 before Justice Rohinton Fali Nariman, in the case Rajendra K. Bhutta v State of Maharashtra.  In the aforesaid case, the Corporate Debtor defaulted on a loan entered into and executed between it and the Union Bank of India for a sum of Rs. 200 Crores. An application was filed by the Financial Creditor (Union Bank of India) under Section 7, and a moratorium was declared accordingly under Section14. The issue that arose more specifically was – whether, in light of a moratorium under IBC, it was permissible to recover JDA property by the Landowner by the virtue of a termination notice where such property is “occupied by” the Corporate Debtor (Developer). The relevance of “Possession” and “Occupation” of the property in the course of IBC proceedings was further discussed at length. The Apex Court at first went through the JDA and established that the said JDA granted to the Developer (i.e. the Corporate Debtor) the right to enter upon the land, demolish the existing structures, construct and erect new structures, and allot new tenements. Thereby, the Corporate Debtor was in “possession” of the requisitioned land parcel. The apex court declared it unnecessary to read into any interests if they are being created through the concerned JDA. Further, it stated that it can be understood from a bare reading of Section 14(1)(d) of the Code that it does not dwell upon any of the assets, legal rights or beneficial interest in such assets of the corporate debtor. The court further held that what is referred to therein (Section 14) was “recovery of any physical property.” Furthermore, the bench stated that the expression “occupied by” would mean, or be synonymous with, being in “actual physical possession”. This is principally because the expression “possession” would connote possession being either constructive or actual and which, in turn, would include legal possession, even when factually there is no physical possession. The same question has been posited before the courts/tribunals in numerous matters, and the judiciary has always followed a strict interpretation of the IBC to prohibit the termination of development rights granted to the corporate debtor to develop the immovable property. In Vijaykumar V Ayer v. Union of India, the NCLT held that Section 14(1)(d) of the IBC provides for an express bar on the rights of third parties to terminate licenses or contracts where such rights have been granted to the Corporate Debtor with respect to immovable property. Do the rights accruing to JDA Landowners through their respective statutes supersede the moratorium under Section 14 of IBC? Another question that was presented before the Court in the same case was the existing clash between Maharashtra Housing and Area Development Act, 1976 (“MHADA”) and the Insolvency Code. The Court, without any qualms, held that a plain reading of Section 238 of the Insolvency Code made it quite clear that the Code must prevail. The single bench was of the view that when a moratorium is spoken of by Section 14 of the Code, the idea is to alleviate corporate sickness, so that the CIRP may proceed unhindered by any of the obstacles that would otherwise be caused. A statutory status quo is pronounced under Section 14 the moment a petition under Section 7 of the code that is dealt with by Section 14 is admitted. The statutory freeze that is thus made is limited by Section 31 (3) of the Code from the date of admission of an Insolvency petition up to the date that the adjudicating authority either allows a resolution plan to come into effect or states that the Corporate Debtor must go into liquidation. For this temporary period, at least, all the prerequisites referred to under Section 14 must be strictly observed so that the Corporate Debtor may finally be put back on its feet albeit as per CIRP prescribed under IBC. . Accordingly, the provisions of IBC are to supersede all the other acts. Can JDA Landowners be considered Operational Creditors? Before answering this question, there’s another issue that needs to be addressed. What recourse do JDA Landowners have under the preview of IBC? Landowners might find themselves tangled in this web under two possible scenarios; either by themselves trying to initiate CIRP or by submitting their claims to the Resolution Professional (“RP”) once the Resolution Proceedings have begun against someone else’s petition under Section 7 or Section 9 of IBC. Either way, what would be the status of their claim? Would it be an operational debt? This question was answered by the NCLT in 2019, in the case of S. M. Builders and Developers vs Ramee Constructions Private Limited. There existed a JDA wherein the Petitioner (Landowner) granted

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A Critical and Comparative Analysis of India’s Proposed SPAC Listing Regime by IFSCA: Balancing the Rights of Founders along with Protection to Investors

Leave a Comment / Company Law /

 [By Aastha Bhandari]  The author is a student at the O.P Jindal Global University. Introduction This article intends to address that while India is joining the race to becoming an attractive destination for the listing of Special Purpose Acquisition Companies (hereinafter referred to as “SPACs”) through the proposed International Financial Services Centres Authorities (Issuance and Listing of Securities) Regulations of 2021 (hereinafter referred to as “IFSCA Regulations”), Indian regulators and legislators must consider the local peculiarities of Indian corporate culture. It is in this context that the article argues that there is a need for balancing between the two factors which are essential to the success of SPACs in India. Firstly, there must be facilitation of ease of doing business by providing entrepreneurs with this alternative way of capital raising. However, it is extremely important to consider the passivity of retail investors in India and the issues emulating from the same. As such, there must be provisions for investor protection in the SPAC listing rules, especially from the perspective of retail investors due to the issues concerning corporate governance in India. Thus, hereinafter is an attempt to undertake a comparative analysis of the functioning of SPACs in India with four foreign jurisdictions (hereinafter referred to as “said jurisdictions”), namely, United States of America (hereinafter referred to as “U.S”), Malaysia, Singapore and the United Kingdom. (hereinafter referred to as “U.K”) Through this analysis, the author seeks to determine whether the proposed IFSCA Regulations meet the bar for providing rights to founders along with ample investor protection and whether there are any good practices from said jurisdictions that may be implemented in India to better achieve the smooth operation of SPACs. Comparative Analysis of Four Jurisdictions: As per Regulation 68 of the IFSCA, it has the authority to approve the listing of an SPAC on the IFSC as per its own discretion. The Regulation provides the terminology of “on a case-by-case basis.” There are no explicit restraints on this power of the IFSCA which in turn may have an impact on the ease of doing business if the decisions are arbitrary or motivated by personal and political considerations. This may lead to situations where the SPAC in question has fulfilled all the statutory requirements including, but not limited to, those of filing of the offer document and initial disclosures made therein, minimum size and minimum subscription however it may still not be allowed to be listed on account of this power. As such, this Regulation requires an amendment by at least mandating that the IFSCA must record the reasons for disapproving the listing of an SPAC and publish it in the public domain. The legislative intent of this particular Regulation is unclear as none of the said jurisdictions provides for such a condition. Regulation 71 provides for the initial disclosures to be made in the offer document of the SPAC. This is an extremely important document as it enables the investors to make an informed decision related to their investment in the company. Thus, there must be enough disclosure requirements to provide investors, especially retail investors, protection through the way of easy access to information about the company. Some of the significant disclosure requirements as per the Regulation include the disclosure of risk factors, basis of issue price, tax implications, previous acquisition experience of sponsors, target business sector or geographical area of the SPAC if any, valuation methods intended to be used for business acquisition, remuneration and benefits to the sponsors, outstanding litigations and the limitation on the exercise of conversion rights for shareholders who vote against the proposed business combination if any. However, this article argues that this may be insufficient as the IFSCA has provided extremely broad parameters in the current proposed Regulations. This Regulation must be amended or supplemented by rules to ensure that the SPAC sponsors and directors are held accountable for their actions. This argument finds its root in the Disclosure Guidance issued by the Division of Corporate Finance of the U.S SEC on December 22, 2020. The Guidance asked SPACs to disclose significant considerations in their offer document, such as potential conflicts of interest between the sponsors, directors and shareholders in terms of their economic interests; how the outstanding litigations or other conflicts may affect the ability of the sponsors to make a decision about the final business combination; and description of the financial incentives of the SPAC sponsors and how they may be different from those of shareholders. Also, it is crucial to not only disclose previous experience in the acquisition of the sponsor but also how the prior outcome of the presented and completed business combination has taken place. The aforementioned illustrates how detailed and descriptive the disclosures in India must be made too. As per Regulation 72, the issue size of the SPAC must not be less than USD 50 million. Prima facie, this numerical value is much lower in comparison to the said jurisdictions. This can evidently be illustrated through the following table: (hereinafter referred to as “TABLE 1.1”) Jurisdiction Issue Size U.S Not specified U.K 100 Million Euros Malaysia RM 150 Million Singapore Not specified but requirement of minimum market capitalization of 150 million dollars. TABLE 1.1 However, according to Ashwin Bishnoi, who is a partner at Khaitan & Co, the value of USD 50 million is a delicate balancing act. This is because if the issue size for the SPAC had been made too small, then it would not have been possible to attract large and long-term investors. On the other hand, had the size been made too large, then Indian start-ups and SMEs would not have been eligible to participate in the business combination. Considering the local peculiarities of India, this seems to be the right decision. 4. Regulations 81 to 89 provide several provisions relating to investor protection. However, it is important to consider whether these are sufficient to protect retail investors alongside institutional investors. As per Regulation 81(1),  90 percent of the proceeds from IPO are to

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Adjudicating Contractual Disputes under IBC makes no Jurisdictional Sense

Leave a Comment / Insolvency Law /

[By Yash Sinha]  The author is an Advocate based out of Delhi.  The Insolvency and Bankruptcy Code, 2016 (‘IBC’) contains a residuary jurisdiction clause under Sec. 60(5)(c). The Supreme Court has attempted to put in words the inferable scope of the same twice in 2021: once in Gujarat Urja Vikas v. Amit Gupta(‘Amit Gupta’), followed by the very recent judgment in the case of TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited(‘TATA’). More interestingly, these judgments deal with the boundaries of IBC’s residuary jurisdiction to adjudicate contractual disputes. This article attempts to confirm the validity of these judgments by viewing their rationale through a completely different prism: the limited territorial jurisdiction conferred by the IBC upon the NCLT. The author proposes that Sec. 60(5)(c) dissuades the inclusion of contractual disputes within its purview due to this singular reason. Consequently, given the differences in valid yet separate territorial jurisdictions for contractual and insolvency disputes, the judgment in TATA rightly reads Sec. 60(5)(c) as extremely restrictive. Section I of this article summarises the holdings and the underlying premises of the Supreme Court (‘the Court’) in Amit Gupta and TATA. Therein, the singular focus will be the scope of the residuary jurisdiction clause qua contractual disputes determined by both the decisions. Section II argues and confirms that contractual disputes are best left outside of the NCLT’s ambit, given the jurisdictional scheme of the IBC. It argues that any contrary interpretation leads to disturbing the territorial jurisdiction of the IBC. Therefore, any extra-territorial jurisdiction to the NCLT through Sec. 60(5)(c) is demonstrated as barred by both jurisprudence and rules of interpretation. Supreme Court’s phased analyses A.    The restriction is seeded: Amit Gupta Amit Gupta witnessed one of the contracting parties failing to service its debt to a certain financier, the third party to the contract. Furthermore, the same party failed to discharge its other performative obligations to the second party. The second party claimed this to be a default for the purposes of Sec. 10 of the IBC. The third-party financier intervened by way of an application under the residuary jurisdiction clause. It prayed for an injunction to preclude any termination of the agreement, which was granted by the NCLT.  Consequently, the Supreme Court was approached and posed with determining the validity of the NCLT’s admission of the application filed under Sec. 60(5)(c). The Court upheld the final order of the NCLT, thereby, holding in favour of the financier by advancing two reasons. Firstly, the Court stated that contractual termination was not covered by Sec. 14. That is, the moratorium clause of the IBC does not put a hold on such disputes being raised in spite of an IBC proceeding already underway. This was inferred as denoting the probable application of Sec. 60(5)(c). Secondly, Sec. 238 was read by the Court as re-asserting the IBC as lex specialis, which overrides general legislation. These two factors were collectively taken to interpret the phrase “questions of law or fact arising from or in relation to the insolvency resolution proceedings” occurring in Sec. 60(5)(c), liberally. However, this was disclaimed as a holding specific to the facts of Amit Gupta. Regardless, it was categorically stated that irrespective of the facts of any case in the future, NCLT, while exercising its jurisdiction under IBC, cannot adjudicate upon disputes which are completely unrelated to the insolvency proceedings. Succinctly put, the termination of the contract may have had some implication on the financier’s rights as a creditor. This alone justified the utilisation of the residuary jurisdiction clause. It is this holding that has come to be affirmed verbatim in TATA. However, this time the Court detailed the underlying premise for its position. B.Better exposition of the restriction: TATA To begin with, TATA saw one contracting party attempting to terminate an agreement for the other’s lapses. The lapse pertained to executing an agreed-upon construction within the stipulated time. The party in breach, however, was undergoing insolvency resolution proceedings from before. Notably, the contract in question was entered into before the initiation of the insolvency proceedings. The contract being a source of future income, the breaching party challenged the attempted termination so that its insolvency resolution was not adversely affected. Failing this, it claimed that the termination would have a direct and adverse impact on the latter. Consequently, it approached the NCLT under the residuary jurisdiction clause challenging the same as well as sought an ad-interim stay. The NCLT and NCLAT having upheld the application, the Court was again asked to verify if Amit Gupta applied. The Court answered the question in the negative and held the corporate debtor’s application to be lacking in the jurisdiction. While the principles of Amit Gupta were re-iterated, the Court went a step further to delineate the boundaries of the residuary jurisdiction clause. It stated that the clause does not cure the patent lack of jurisdiction of IBC courts. This infirmity exists when the subject of such applications is wholly unrelated to the insolvency proceedings. The notices alleging lapses, which preceded the termination notice, had no bearing upon the insolvency proceedings which were underway. Succinctly put, a contracting party may be a corporate debtor to some unrelated insolvency proceedings. However, the Court states, this contractual relationship per se ought not to guarantee the interference of the IBC. Territorial jurisdiction as a bar on an entertaining contractual dispute There exists no categorical assertion by the Court on one aspect of Sec. 60(5)(c): its extra-territorial application. That is, whether it can be applied to override Sec. 60(1) of the IBC to allow any contractual party to initiate/join insolvency proceedings when no registered offices of the corporate debtor exist. The territorial jurisdiction for a court of law in case of a contractual dispute is governed by principles laid down in the case of A.B.C. Laminart Private Limited v. A. P Agencies, Salem read with those in Bhagwandas Goverdhandas Kedia v. M/S. Girdharilal Parshottamdas. Summed up collectively, these precedents state that the place of

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