Author name: CBCL

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

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

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

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

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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The “Forum Conundrum” in the Insolvency and Bankruptcy Code, 2016

Insolvency Law /

[By Soumyodeep Halder]  The author is a student at Government Law College, Mumbai.  The Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”) was envisioned as a means to rescue businesses from financial distress. The Code sought to consolidate the extant legal framework into a single piece of legislation. As a result, the IBC repealed two Victorian legislation – i.e. the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 (“Extant Laws”). The Central Government also amended 11 other ancillary legislation to streamline the insolvency and liquidation procedure stipulated under the Code. Ever since the Code was notified, it has undergone periodic amendments to be in sync with the changing business requirements. However, few of these amendments and modifications have been done with myopic vision resulting in excruciating delay and uncertainty. Over the course of this paper, the author shall elucidate (i) the historic development of jurisprudence with respect to proceedings against personal guarantors under this Code, (ii) the legislature’s ineptitude in crystallizing the legal framework for proceeding against personal guarantors and (iii) the incidental apathy with respect to the appropriate forum. The IBC became effective from December 2016 with certain provisions of it being notified from August 2016. Thereafter, the government established various benches of the National Company Law Tribunal (“NCLT”) across the country. The Code is structured in 5 parts. Part I and II inter alia deal with an introduction, corporate insolvency resolution process[i] (“CIRP”) and liquidation of corporate debtors[ii]. These parts were made operative at the outset. Over the course of the years, the parties involved realized that there were teething issues that were creating bottlenecks in a smooth resolution process. The predominant issue here was the inability of financial creditors to pursue effective action against the promoters of the corporate debtors. Section 60 of the Code states that the NCLT shall be the adjudicating authority for CIRP. There were instances when financial creditors attempted to bring in promoter assets into the asset pool for the purpose of enforcing promoter guarantees. An argument was put forth that the NCLT, under section 60 of IBC could only adjudicate matters related to the corporate debtors and not individuals. Therefore, they did not have the requisite jurisdiction to hear cases against promoters (individuals). Numerous cases of promoters ring-fencing their assets and being unaffected by the CIRP came to light[iii]. Financial creditors had to mount multiple litigations in various courts of law in order to enforce promoter guarantees[iv]. This resulted in higher costs, prolonged and multiplicity of proceedings and erosion of asset value. The genesis of this issue could be traced to the fact that Part III of the Code which dealt with “Insolvency and Bankruptcy for Individuals and Partnership Firms” was not notified. Therefore, to combat this issue, the Central Government amended (“2018 Amendment”) section 60 of the Code to introduce adjudication of personal guarantors before the NCLT[v]. Pursuant to the 2018 Amendment, section 60 (2) now reads, “Without prejudice to sub-section (1) …….. an application relating to the insolvency resolution or 1[liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before such National Company Law Tribunal.” Therefore, proceedings against personal guarantors which were originally governed under Part III of the Code and adjudicated by the Debt Recovery Tribunal (“DRT”) pursuant to section 179 of the Code, were now before the NCLT. The 2018 Amendment may have given the impression of solving a simple forum issue but in reality, it further muddled the existing provisions of the Code. Post the amendment, financial creditors began making promoters (who had provided personal guarantees) party to the insolvency proceedings to optimize their recoveries. However, unlike the procedure established for insolvency of corporate debtors, no procedure was established for the insolvency of those promoters who were parties to these proceedings before the NCLT. Detailed procedure for insolvency of individuals stipulated from section 78 to 187 was provided for in Part III of the Code. However, Part III was not notified. Therefore, NCLTs across the country struggled to deal with adjudication of personal guarantors due to the inadequacy of the legal framework. To ease the burden on the NCLT and clarify the procedure of adjudication of personal guarantors, the Central Government notified Part III of the Code[vi] (“Impugned Notification”) in so far as it dealt with personal guarantors to corporate debtors. The Impugned Notification which may have been legislated with the best of intentions, stirred the hornet’s nest. It resulted in a plethora of legal questions. The most pertinent of them are: Previously, insolvency against personal guarantors would be initiated under the Extant Laws. By notifying section 243 of the Code (which would repeal the Extant Laws), the Central Government has created two self-contradictory legal regimes. A guarantor whose liability under section 128 of the Indian Contracts Act, 1872 is co-extensive with the principal debtor. Hence, under CIRP, when the resolution plan is accepted, the corporate debtor is discharged of its liability and by extension, the surety (i.e. the guarantor) too is discharged[vii]. However, by the effect of this Impugned Notification, the financial creditors can now continue to proceed against the guarantors after the corporate debtor is discharged of its liability pursuant to the resolution plan. Before Part III of the Code was notified, cases against personal guarantors were adjudicated before the NCLT under section 60 (2) of the Code pursuant to the 2018 Amendment. The Impugned Notification was brought in to aid NCLT with the procedure of adjudication of personal guarantors as provided in Part III. However, under section 179 of Part III of the Code, adjudicating authority against individuals rests with the DRT. Therefore, parties in an insolvency proceeding did not know which forum to approach for proceedings against personal guarantors. Due to such inconsistent law making by the Executive, matters had to be finally decided by the Supreme Court (“Court”) in the Lalit Kumar Jain vs. Union of India & Ors[viii]. This judgement was one of the landmark insolvency cases since

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Zee-Invesco Corporate Battle: A fresh case of Shareholder Activism in India

Company Law /

[By Mehek Wadhwani & Rishi Raj]  The authors are students at MNLU Aurangabad.  Introduction The globally revered tenet of good corporate governance combined with the incessantly increasing importance of Shareholders’ rights has ignited ‘Shareholder activism’ as a primary phenomenon in several developed markets such as the United States of America (“USA), the United Kingdom (“UK”), etc. This activism in the Asian markets is faced with cultural resistance and is subdued compared to its counterparts. In India, Shareholder Activism is primarily facilitated by the Companies Act, 2013, and the Securities and Exchange Board of India (“SEBI”) regulations, which provide various rights and remedies for the Shareholders. The developments brought with the aim to bring the Indian corporate sector at par with the global standards, have strengthened the corporate governance standards, and the shareholders’ rights and remedies. This ultimately supports the rapid growth of shareholder activism in India. A recent instance of this activism can be seen in the corporate battle between Zee Entertainment Ltd. (“Zee”) and the US-based Invesco Developing Markets Fund (“Invesco”) that witnessed an interesting development, as Justice G.S. Patel of the Bombay High Court granted a temporary injunction in favour of the Indian television network, Zee. The authors attempt to briefly describe the essential facts of the Controversy, delineate the crucial observations made by the High Court, and comment on the significance of the Order in accordance with our outlined theme, i.e., ‘resistance to shareholder activism, especially in Asia.’ Synopsis of the Zee-Invesco corporate tussle On 11th September 2021, Invesco holding 17.88% of Zee’s equity, requisitioned a meeting invoking Section 100(2) of the Companies Act, 2013 (“Act”). This section 100 of the Act is the “heart of the controversy” and it envisages the Shareholders’ right to requisition an Extraordinary General Meeting (“EGM”).  The shareholders holding the qualifying equity of at least 10% can requisition the EGM. Thereafter, the Board ‘shall’ within 21 days of receipt of the Notice, proceed to call the meeting within the specified time, i.e., 45 days from the date of requisition notice. In the instance of failure of the Board to call the meeting within 21 days, the requisitionist shareholders ‘may’ call and hold the meeting themselves. It is apparent that the requisition notice (“Notice”) is the subject matter of the controversy under consideration. The matters listed in the Notice inter alia provided for the removal of Mr. Punit Goenka, the Managing Director of the Zee, and the replacement of the members of the board with six independent directors, subject to the approval of the Ministry of Information and Broadcasting (“MIB”). The refusal of the Board to call the requisitioned meeting resulted in the initiation of proceedings by Invesco on 29th September 2021, before the National Company Law Tribunal (NCLT) under Sections 98 (1) and 100 of the Act. Thereafter, the Board met on 1st October 2021 to consider the nature of matters listed within the notice. Deeming the matters to be ‘invalid’, the Board expressed its inability to convene the meeting to Invesco. Accordingly, Zee brought a civil suit against Invesco seeking an injunction against the said meeting on the ground that the requisitioned meeting is illegal since the matters which were set out in the notice were violative of various regulatory frameworks. Issues addressed The interim application before the Bombay High Court considered Zee’s prayer for an injunction against Invesco, to prevent the operation of the Notice. The counsel for Zee sought to get a declaration against the notice, deeming it to be ‘illegal, ultra vires, invalid, bad in law and incapable of implementation’, to legally justify its inaction on the notice. Invesco argued against the grant of an injunction by invoking the principles of ‘corporate governance’ and ‘indoor management, seeking to implement the shareholders’ rights to call an EGM under section 100. It was contended that the word ‘valid’ under the mentioned provision required satisfaction of the qualifying criterion, upon which the Board ‘shall’ call the meeting. The counsel argued that Invesco having satisfied the criterion stipulated within the section, the shareholders’ right could not be curtailed by the Board by prematurely declaring the proposed resolutions as invalid. On considering the rival submissions and declaring that the Courts’ jurisdiction is not ousted in such instances, the court negated all the contentions raised and granted an injunction in favour of Zee. The Order restrained Invesco from taking any action in furtherance of the Requisition notice. Further, the present order didn’t curtail or abridge the shareholders’ right to call a requisition meeting but suggested the manner of requisitioning meeting that it must be legally compliant. It was unequivocally observed that the shareholders did not enjoy a greater immunity than the Board to propose infructuous or infirm resolutions. Comments  The material elements of the controversy outlined in the above discussion give us the appropriate foundation to comment on two significant aspects. First, to conclude on the correctness of the Order.. Second, to comment on the significance of this order in light of the broader theme of ‘resistance to shareholder activism’ in India. In the given case, Invesco prima facie attempts to place six independent directors of their choice on the Board by proposing the resolution to remove Zee’s Managing Director. This was to ensure adherence to the 12 members Board requirement envisaged under the Articles of Association of Zee. The authors find this to be in contravention of the Companies Act, 2013. The proposed appointment of the independent directors directly by the shareholders doesn’t find favour with the statutory framework for appointment of independent directors under s. 150 of the Act. Further, the non-compliance with s. 203 of the Act is a valid point raised by Zee, considering that the resolution to remove the MD without replacement, makes the directors and the key managerial persons open to liabilities and penalties. The authors find that the resolutions proposed by the Invesco activist shareholders raise several red flags in terms of statutory and regulatory compliance with the Indian corporate laws. Thus, on this account, the decision of

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RBI’s Foreign Exchange Management Regulations, 2021: A torchbearer for FEMA, 1999

Uncategorized /

[By Sanskriti Shrivastava]  The author is a student at UPES, Dehradun.  Introduction The Reserve Bank of India (hereinafter referred to as “RBI”) has lately issued new draft rules on 9th August 2021, namely, Draft Foreign Exchange Management (Non-debt Instruments- Overseas Investment) Rules, 2021 (hereinafter referred to as “Non-debt Instruments Rules”) and Draft Foreign Exchange Management (Overseas Investment) Regulations, 2021 (hereinafter referred as “Overseas Investment Regulations”)[i]. These regulations are an attempt to regulate the overseas investment market and to facilitate foreign investments. Consequently,  they have been revised with an underlying view to foster ease of doing business. The present article is an analysis of both these drafts. The article first provides an overview of the improvements/changes the non-debt Instrument Regulation and Overseas Investment Regulations try to make (1), which is followed by a critical analysis of the proposed drafts (2). (1) Overview of the RBI Drafts: Before critically analysing the two drafts proposed by RBI, it is pertinent to understand the issues this draft seeks to address, one by one. (1.1) Non-debt Instrument Regulations- The Non-debt Instrument Rules and the Overseas Investment Regulations are put forth to liberalize the existing framework concerning overseas investment and acquisition of (immovable) property by a resident of India when such property is situated outside India. The current regulations on the subject include the following two regulations, i.e., The Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, and Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015. The Non-debt Instruments Rules have put forth certain restrictions on overseas investments. In pursuance of them, a person who is a resident of India is prohibited from making Overseas Direct Investment in an entity belonging outside India that is engaged in the business of any of the following- Real estate, or Gambling (whatsoever form it may be), or Offers financial products which are linked to Indian Rupee (an exception has been made for products offered through Indian Financial System Code) Additionally, special restrictions have been posed over overseas investment in a foreign entity, when such entity is located in jurisdictions or countries outside the Financial Action Task Force (Financial Action Task Force stands for a list of binding standards which prevent misuse of the virtual assets concerning terrorist financing and money laundering) and the International Organization of Securities Commissions (This body is a global standard setter concerning matters of securities). (1.2.) Overseas Investment Regulations- Pursuant to this draft, an entity incorporated in India is allowed to lend or invest in any debt instrument which may be issued by any entity incorporated outside India, provided that, such loan or investment (whatever the case may be) is backed by clear agreement in that regard specifying the rate of interest, which must be charged on an arm’s length basis. Critical Analysis upon the two drafts: 2.1 The Draft Rules attempt to clarify the concepts present in the existing legislature: The existing legislation on the subject failed to define pertinent concepts and authorities which were significant in the application of the legislation. The definitions were either absent, (like, oversees direct investments) or were open-ended (like authorized dealer branches).[ii]. This can be substantiated as- Previously, the “authorized dealer” includes an Authorized Dealer Category-I Bank as defined under Section 10 of the Foreign Exchange Management Act. The draft rules now clarify that t only the domestic branches of a such are included within its meaning[iii]. Meaning thereby, branches of authorized deals in IFSC are unqualified to be included within its ambit. The new draft rules have made an attempt to define “control” which has far-reaching implications since it would wider the ambit of the applicability of these regulations.[iv]. The definition provides that “control” may exist where the entity or a person or a people acting in concert holds either control management, or controls policy decision, or holds the right to appoint the majority directors. The rules also define “overseas direct investment” and lists certain types of investments that may be included within its ambit. As per the definition, overseas direct investment is said to include an investment made by way of acquisition of certain equity capital in a foreign entity which is not listed, or, where an entity or person subscribes to the memorandum of association of such entity, or where an Indian resident has acquired control in such foreign entity by way of his investment within it[v]. Doing away with the existing ambiguities with respect to the definition of “disinvestment”, the draft rules provide a much more inclusive definition and also includes transfer by way of liquidation[vi]. This inclusion will wider the interpretation of the extant ODI Regulations. Regarding rules on Prohibitions and restrictions on Investment: The present rules provide for a comprehensive prohibitory clause. It includes both prohibitions on the transfer of foreign security by an Indian resident and a general clause for outbound investments, except when it is specifically allowed by law[vii]. The application of these rules provides that a foreign entity must change its structure within 6 months to come in compliance with the new definition. Where the Indian residents are concerned, overseas investments (i.e. purchase and sale of Foreign Asset)which are made through Resident Foreign Currency account will be only be accepted within the limit prescribed under the Liberalised Remittance Scheme. Meaning thereby, all other conditions stipulated in the FEMA 120 will apply to the Indian Residents except the Liberalized Remittance Scheme (the scheme allows the residents to freely remit up to USD 2,50,000 per year for any transaction permissible by the RBI). The restriction with respect to entities involved in the real estate business has remained intact in the new draft rules. The restriction with respect to entities involved in the business of gambling and the entities which offer financial products linked to the Indian Rupee is newly introduced in the new draft rules[viii]. The draft rules provide for a more elaborative extant general permission clause for making an overseas investment: The clause was not very elaborative in the existing legislature.

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Limitation for Appeal under Section 61 IBC: The Dust Settled

Insolvency Law /

[By Aayush Mishra] The author is a student at the Himachal Pradesh National Law University, Shimla.  Introduction Recently, on the 22nd of October 2021, the Supreme Court in the case of V. Nagarajan v. SKS Ispat and Power Limited shed light on the period of limitation to file an appeal against an Order under Section 61 of the Insolvency and Bankruptcy Code of 2016 (IBC, hereinafter). The Court held that the period of limitation shall begin to function as soon as the Order is pronounced and the same shall not have any bearing upon the date on which the said Order is uploaded. Consequently, if any party has failed to file an application to secure a copy of such Order, they shall not be allowed a respite of extension in the period of limitation on the ground of delay in uploading of such Order. In the forthcoming article, the author discusses the uncertainty regarding the limitation period that used to surround the IBC. Thereafter, the confusion concerning the applicability of the Companies Act in place of IBC for the production of a certified copy of the Order is dealt with. A distinction has been made between the circumstances in which the certified copy has to be made available to the appellant in contrast to when the appellant himself is required to apply for the same. Lastly, these uncertainties and distinctions have been succinctly analyzed with the help of relevant precedents and statutory provisions. Confusion Around Beginning of Limitation Period The appeal in the present matter emerged from the impugned order of the National Company Law Appellate Tribunal (NCLAT, hereinafter), as the same had dismissed the plea of the appellant for being barred by limitation. The appellant had filed a miscellaneous application pertaining to a liquidation proceeding before the National Company Law Tribunal (NCLT, hereinafter), seeking interim relief against the invocation of a bank guarantee against the corporate debtor by one of the respondents. However, based on its understanding that performance guarantees do not form a part of ‘Security Interest’ as per Section 3(31) of the IBC, the NCLT refused to grant an injunction in favour of the appellant in its Order dated 31st December 2019. While the appellant had agreed to his presence before the NCLT during the pronouncement of this Order, he highlighted that the copy of this Order had been uploaded only on March 12, 2020. Subsequent to this, the appellant pointed towards the COVID-19 nationwide lockdown, due to which the appeal before the NCLAT could be filed only on June 8, 2020. It is also due to this reason that the appellant had filed for an exemption from filing a certified copy of the Order because the same never got issued. Nevertheless, the NCLAT resorted to Section 61(2) of the IBC which allows a limitation period of 30 days, extendable by 15 days, and held that appeal under Section 61 was barred by this limitation period. Herein, this limitation period expired on February 14, 2020 (45 days over NCLT Order). In addition, while acknowledging the absence of a certified copy of the impugned Order in the appeal as mandated by Rule 22(2) of NCLAT Rules, the Tribunal further observed that the appellant had failed to provide any evidence that the certified copy was never issued to him. Overlap in Interpretation of Companies Act and IBC Provisions The major point of cause that the appellant raised was the imposition of nationwide lockdown as a result of the pandemic. Due to the lockdown, the NCLT had halted the clock of limitation with effect from March 15, 2020. Based on this rationale, the appellant claimed that the appeal had been de jure filed within three days of the release of Order, which was on March 12, 2020. Furthermore, the appellant highlighted Rule 14 of the NCLAT Rules that grants a waiver from adherence to any other rules under special circumstances. In addition to this, the appellant presented his interpretation of Section 420(3) of the Companies Act 2013, read with Rule 50 of NCLT Rules, and expressed that a certified copy of the Order is to be sent to concerned parties. In this light, he sought reliance on Sagufa Ahmed v. Upper Assam Plywood Products Private Limited, wherein the Supreme Court had held that the limitation period would start only and exactly from the date on which a copy of the Order is ‘made accessible’ to the aggrieved party. It is also to be necessarily noted that the appellants had placed reliance on Section 12 of the Limitation Act 1963 and claimed that a certified copy is to be made accessible to the aggrieved party and the same has been statutorily mandated. Also, since the Sagufa Ahmad ruling was predominantly under the umbrella of the Companies Act, the appellant had also relied on the case of B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, wherein the court had expressed that all proceedings under Chapter XXVII of Companies Act shall apply to that of the IBC. ‘made available’ – A Key Phrase The Respondents submitted that the IBC by no means directs or implies that the limitation period shall start from the date on which the certified copy of Order has been ‘made available to the aggrieved party. Aggrieved parties cannot possibly be expected to wait indefinitely for the copy of the Order to be provided to them. In any circumstance, it is expected out of a responsible party to make a timely application for the certified copy of the Court Order. Furthermore, the respondents stressed upon appellant’s presence during the pronouncement of the Order and precisely referred to the court observation in Pr. Director-General of Income Tax v. Spartek Ceramics India Ltd., wherein it was held that the period of limitation begins from the date on which the contesting party has attained ‘knowledge’ of Order when pronounced. Highlighting that the IBC is a special statute and time is an intrinsic essence in it, the respondents further relied upon the

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Would Reliance Limited’s Largest Ever Rights Issue Amount to a Public Offer?

Company Law /

[By Raghav Sengupta]  The author is a student at Jindal Global Law School.  Introduction In June 2020, an unprecedented series of events was triggered by Reliance Industries Ltd (hereinafter “RIL”) that conducted India’s largest ever rights issue for the subscription of shareholders.[i] The industry giant finalised a Rs. 53,124 crore ($ 7 billion) rights issue that was condensed into 3-stage deferred payment offer. This rights issue was in furtherance of RIL’s objective of raising public funds to eliminate any pending debts and create a zero net debt for the current fiscal year.[ii] RIL rolled out this unprecedented rights issue offering one share for every fifteen shares held, to existing shareholders, at a cost of Rs. 1,257 per share (1:15 rights issue).[iii] By way of such rights issue, RIL and similar companies created a right in favour of their existing shareholders to purchase new shares at a cost that is significantly lower than the present market trading price.[iv] In the current scenario, it can reasonably be inferred that RIL conducted this process with the prerogative of reducing overall debt, in addition to remunerating pre-existing shareholders for their investments, while significantly bolstering the belief of their promoters. However, being the largest ever rights issue and the first of its kind, RIL’s initiative raises a few queries regarding the manner in which the Company raised funds. Public offerings are traditionally pursued by companies in order to raise capital, for their various transactions, by offering a stake (share) in their company in return for a pre-determined price. These public issues are enumerated in Section 23 of the Companies Act 2013 (hereinafter “The Act”) which prescribes the various procedures that a company has to undertake in order to issue securities to the general public.[v] To provide context for the proposed discussion, it is pertinent to understand that Section 23(a) of the Act[vi] deals with public offers through a prospectus, whereas Section 23(c)[vii] is based on the issuance of securities by way of a rights issue for listed companies. A company usually makes public offerings by way of (1) initial public offerings or (2) further public offerings.[viii] RIL had previously made a public offering and established a strong financial foothold in the economy.[ix] Considering the large number of shareholders that this rights issue brought into the loop, it would not be irrational for some to contend that this mechanism could come under the purview of a public offer. Through this piece, the author shall assess whether RIL’ largest ever rights issue, owing to its sheer magnitude, could be categorically placed within the ambit of a public offer. Analysing RIL’s legal conundrum As per Section 62(1) of the Act, rights issues are synonymously prescribed in numerous sections with no clear-cut definition explaining its meaning. As per the SEBI Regulations 2009[x], the term ‘rights issue’ is usually used to denote transactions pertaining to listed companies. Regulation 2(1)(zg) specifically describes a ‘rights issue’ as an ‘offer of certain securities’ by a company that has been listed by the stock market.[xi] These shares (securities) are then offered to pre-existing shareholders, at a discounted rate, for various purposes which can revolve around raising capital for the issuing company. In the case of RIL, the Company carried out the largest ever rights issue offered only to their existing shareholders, thereby vesting them with the ‘pre-emptive’ right to play a vital role in the issue. RIL’s existing shareholders were vested with the authority to subscribe to the proposal in whole or even partially. Further, they were permitted to rescind the shareholdings that had been offered to anyone who was not a pre-existing investor and  had previously taken part in RIL’s public offering processes.[xii] Rights issues are often conducted    by organizations to exercisetheir legal powers or simply comply with statutory requirements by determining the appropriate number of investors.[xiii] Whereas, public offerings are initiated to acquire capital for a variety of goals including as diversification, funding working capital requirements, investing in commodities, and debt restructuring.[xiv] The means of raising the requisite capital, via the rights issue, enables the company to secure funding. While in the case of a public offer, a company like RIL would have had to bring in several functionaries such as intermediaries and their respective costs into the fray. Therefore, RIL’s method of raising funds, by way of rights issue, was an efficient and cost-effective mechanism. RIL’s rights issue also carried the ‘right to renunciation in favour of third parties’ which is stipulated in Section 26(2) (a)of the Act.[xv] It is undisputed that an offer notification shall also comprise of a right to renounce one’s shares. This essentially means that RIL’s right to subscribe to shares could be allocated to a third party, who need not have a previous investment in the Company. So far, it is clear that rights issues are usually given to existing shareholders of a certain organization, by selling them these shares at a cost which is lower than that of the market price.[xvi] . There is a strong possibility that such a shareholder exists who might not wish to accept the rights issue being offered by RIL. In order to curtail the possibility of facing such issues while raising capital, companies like RIL offer their shareholders the ‘right to renunciate’ shares. A rights issue or a public offer: What is an ‘offer to the public’? Another point of differentiation in determining whether what RIL actually implemented was a rights issue or a public offer can be ascertained from the intention of the Company’s directors at the time of issuing an offer/prospectus/notification depending on the circumstance. The key component to understand here is that the Company had carried out this project by satisfactorily identifying the target persons concerned with raising capital. Here, they clearly identified the investors by stating that the issue would be open exclusively to pre-existing shareholders and would not be open to new prospective stakeholders. In addition to this, they had granted the ‘right to renunciation’ to prevent the participation of completely new investors for the company, and raise capital by

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