Author name: CBCL

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

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[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 As a result, the IBC repealed two Victorian legislation – i.e. the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 (“Extant Laws”).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

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[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

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[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

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[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?

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[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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Fortifying Non-Taxability Of Gain/Loss Entirely Due To Foreign Exchange Fluctuations

Leave a Comment / Taxation Law /

[By Aishwarya Mehta & Kaustubh Bajpayee] The authors are students at the Maharashtra National Law University, Nagpur.  INTRODUCTION Over and Over again, income tax officials find it difficult to ascertain whether a specific receipt is capital in nature and thus exempted from tax liability, or is a revenue receipt and thus, taxable. This imbroglio can be imputed to the fact that the Income Tax Act, 1961 does not lay down any explanation of the expressions “capital receipt” and “revenue receipt”. Hence, in cases where the monetary transaction does not fit appropriately into any provision of the Income Tax Act, 1961, there is a difference of opinion between the income tax officials and the taxpayers every time. On one side, the tax authorities try to expand the sphere of capital gains specified under Section 45 of the IT Act, 1961 by incorporating several transactions under its grab. Adversely, on the other side, the taxpayers assert that the transaction should pertain to capital accounts and thus are non-taxable. Lately, in the case of Aditya Balkrishna Shroff v ITO, the Mumbai bench of the Income Tax Appellate Tribunal (“ITAT”) expatiated on the tax implications of gains solely due to foreign exchange fluctuations on repayment of personal loans. The crucial points from the order are mentioned below. FACTS In the course of the audit assessment, the Assessing Officer (AO) observed that according to the Annual  Information Return (AIR) and capital account of the Assessee (“Aditya Shroff”), he received Rs. 1,12,35,236. When the assessing officer scrutinized this entry further, the assessee elucidated that he had furnished an interest-free personal loan of USD 2,00,000 (INR90,30,758) to his cousin in Singapore when the foreign exchange rate was 1 USD=INR 45.14. The Assessee also explained that the remittance was made under the Liberalized Remittance Scheme (LRS) provided by the Reserve Bank of India in 2004. The cousin paid back the amount of USD 2,00,000 (INR 1,12,35,326) on May 24, 2012, when the foreign exchange rate was 1 USD=INR 56.18. The assessee explained that due to fluctuation in the foreign exchange rate, the amount received on repayment of the personal loan was more than the amount originally advanced and hence, the receipt is non-taxable. The assessing officer observed that the variance of this transaction was of an income nature and thus taxable. Further, the AO instituted penalty proceedings against him for not disclosing the correct income. The assessee filed an appeal against this order. The appeal filed by the Assessee before the Commissioner of Income Tax was set aside and the order of the AO was approved on the pretext that only a rupee loan is admissible under the regulations of the Foreign Exchange Management Act (“FEMA”). Thus, the gain received by the assessee should be considered as income from other sources. Discontented with the decision, the assessee filed an appeal with the ITAT. ISSUE Whether the gain received on a personal loan solely due to foreign exchange fluctuation is a capital receipt or included in the nature of income? DECISION The ITAT recognized the appeal and held that the gains received on personal loans solely due to foreign exchange fluctuation are to be considered a capital receipt on the following grounds:- The authorities can’t modify the nature of receipt by expanding the scope of the expression- “income”, which is taxable as per Section 2(24) of the IT Act, 1961. As per Section 2(24)(vi) of the IT Act, 1961, it is coherent that only such capital gains are taxable as specified under Section 45. Hence, all other capital receipts falling outside the scope of this section are non-taxable. It is indubitable that the repayment of interest-free personal loans is capital in nature. This perspective of authorities can be considered as putting the cart before the horse- as the subordinate authorities determined the head of income under which the transaction should be taxed, without ascertaining the nature of the same. The transaction was purely personal in nature and the gain on the personal loan was solely due to the foreign exchange fluctuation. Even if FEMA sanctions the loan in Indian rupees only, it is not the responsibility of income tax officials to identify whether the loan was permitted in concurrence with the provisions of FEMA. However, non-conformity under FEMA is inconsequential to the analysis under Income Tax Act. CRITICAL ANALYSIS This order illuminates that any gains on repayment of interest-free personal loans solely due to the forex fluctuation cannot be considered taxable income in the hands of the recipient. Nevertheless, the ITAT could have referred to the case of Sutlej Cotton Mills Ltd v. Commissioner of Income Tax, West Bengal, where the supreme court laid down a test regarding tax liability of gain/loss solely due to foreign exchange fluctuation. The Supreme court held that:- “any gain/loss attributable to appreciation/ depreciation in value of the foreign currency would be trading profit or loss if the foreign currency is held by the on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature”. The ITAT applied the same test in the case of  Havells India Limited v ACIT, where the taxpayer received foreign exchange gain on redemption of shares in the foreign subsidiary. The bench held that the gain on exchange was just an outcome of repatriation of the consideration received in Euro, to INR. Hence, the forex gain cannot be considered a fraction of the consideration received on redemption of shares. CONCLUSION The judgement of the ITAT, Mumbai came when the economic fallout from the pandemic continued to cause hardship for a few fragments of the society. During COVID-19, a number of rich individuals imparted financial assistance to their NRI folks who were outrageously distressed. This decision has fortified that all the receipts in the capital sector are taxable only when they are specified in

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Success Fees in a CIRP not chargeable – Or is it?

Leave a Comment / Insolvency Law /

[By Divyanshi Srivastava]  The author is a law graduate of Guru Gobind Singh Indraprastha University. The Insolvency and Bankruptcy Code, 2016 (“IBC”/ “Code”) was enacted to fix an ailing system. Due to the multiple contrary and complex legal arrangements, a simple, coherent, and effective framework was the need of the hour, and the IBC is a denouement of the same. However, despite its exhaustive nature, the journey of the Code, since its birth has been a bittersweet symphony, traversing numerous challenges. While the Code is a specialized and dynamic piece of legislation, given its young age, the jurisprudence around it is still inchoate. In this respect, where Section 5(13) of the IBC provides that “insolvency resolution process costs” would include any fees payable to resolution professional (“RP”) and any costs incurred by the RP in running the business of the Corporate Debtor (“CD”). The section is silent about the success fee. Further, the Code also does not have any provision stipulating that RPs can charge a success fee. In this respect, when in a recent case of Jayesh N. Sanghrajka, erstwhile R.P. of Ariisto Developers Pvt. Ltd. v. Monitoring Agency nominated by Committee of Creditors of Ariisto Developers Pvt. Ltd., the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) was presented with an issue surrounding success fees charged by RP and whether the same formed part of the commercial wisdom of the Committee of Creditors (“CoC”), the NCLAT categorically held otherwise. And further laid down that success fee which is more in the nature of the contingency and speculative cannot be charged by the RP. Conspectus of the Case The judgment emanated from an appeal filed by the RP (“Appellant”) of Ariisto Developers Pvt. Ltd. (“Corporate Debtor”) against the observation of the National Company Law Tribunal (“NCLT”/ “Adjudicating Authority”). Since in the matter, the Respondent was the Monitoring Committee – a formal party – and the issues were primarily legal in nature, the Appellate Tribunal appointed an Amicus Curiae, as the response of the Respondent was not necessary. In the impugned order, the Adjudicating Authority had approved the resolution plan submitted by Prestige Estates Projects Ltd. for the CD but disallowed the success fees amounting to Rs. 3 Crores charged by the RP as unreasonable. Aggrieved by the same, the Appellant filed an appeal and contended that the approval of the success fees by the CoC was a commercial decision of the CoC, and hence, could not have been interfered with. The Appellant, as ammunition to its argument, referred to an IBBI Circular, dated 12/06/2018 and relied upon Regulation 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 stating that the CoC has to fix the expenses which will be incurred by the RP and such expenses include the fee for the RP. The Amicus Curiae per contra, referred to Section 208(2) of the Code and submitted that the Insolvency Professional is required to abide by the code of conduct stipulated in the said section and therefore, has to take reasonable care and diligence while performing his duties. The Amicus Curiae also referred to the said circular and submitted that as per the provisions, it is clear that the remuneration charged by the RP need to be “a reasonable reflection of the work undertaken”. Moreover, the Amicus Curiae contended that reliance upon the said IBBI Circular by the Appellant was misplaced as the same did not provide, prescribe, recommend, promote, endorse or sanctify payment of success fees. The Amicus Curiae even argued that a perusal of the provisions surrounding the subject makes it clear that RPs have to perform their duties objectively. The Appellate Tribunal, at the outset, iterated that the Code or Regulations thereunder have not provided for any fee on a speculative basis and the term “success fee” itself is contradictory to the fundamental principle that insolvency professionals shall render their services for a fee which is a “reasonable reflection of their work.” The NCLAT also noted that irrespective of the stage at which the success fee is claimed, charging such a fee would only have an adverse impact on the insolvency resolution process, as RPs are required to perform their duties under the Code independently and disinterested. Further, the Appellate Tribunal, agreeing with the submission of the Amicus Curiae that a Circular cannot be equated with the Rules and Regulations framed under the provisions of the Code, noted that even the Circular dated 12/06/2018 does not make success fee or contingency fee payable and an indirect reference to the same cannot be understood to mean that success fee is legally chargeable or payable. Furthermore, the NCLAT also approved the Amicus Curiae’s reliance on the decision in Alok Kaushik v. Bhuvaneshwari Ramanathan &Ors., wherein it was held that the NCLAT has the power to determine the fee and expenses payable to a professional; and finally held that success fee in the instant matter could not be charged and “even if it is to be said that it is chargeable, we find that in the present matter, the manner in which, it was last minute pushed at the time of approval of the Resolution Plan and the quantum are both improper and incorrect.” Analysis The said decision of the Appellate Tribunal that success fee which is contingent and speculative is not chargeable, is not only pertinent but also in harmony with the Bar Council of India Rules, 1975. For as per Rule 21of Chapter II of Part VI of the said Rules, advocates are barred from stipulating fees which is contingent on the result of the litigation. Moreover, the Hon’ble Supreme Court in the case of V.C. Rangadurai v. D. Gopalan has held that the relationship between a lawyer and their client is fiduciary in nature, and therefore, lawyers have to act in the best interest of their clients. At the same time, the relationship between the RP and CoC is fiduciary in nature is rather apparent and therefore, incontrovertible; and since the RP has to manage

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A Framework of Selective Distribution Agreement in India- A Clarion Call

Leave a Comment / Competition Law /

[By Vridhi Kashyap & Tanisha Mishra] The authors are students at the National Law University and Judicial Academy, Assam.  Introduction Selective Distribution Agreement (SDA) is one of the facets of vertical agreements. It allows the company to select retailers based on some pre-determined criteria, upon the fulfilment of which the outlet becomes the authorised distributor of the company. This arrangement allows the company to maintain sanctity in its distribution channel, as non-authorised dealers are not allowed to deal with the company’s product. It is an attractive mode of distribution because it allows the company to protect its brand image and intellectual property by selecting only a few authorised outlets. The outlets represent the company and are unique in appearance and mode of conducting business. SDA also prevents free riding and favours retailers by creating incentives for them. SDA, which is based on exclusivity, may seem anti-competitive, however, it is legal under EU regulations. The famous Metro v. Commission decision established three requirements that must be met before a company can legally have an SDA. The conditions are threefold: first, the firm must deal with a product that necessitates a special distribution agreement; second, the qualitative criteria must apply to all potential retailers without any discrimination; and third, any restriction imposed in view of having a restricted circle must not go further than it is objectively necessary.  The firms that usually fulfil these criteria are the tech know-how companies that require skilled personnel in the outlets, branded companies, especially those dealing with luxury products or cosmetics, and newspapers, which have a short life span and need careful distribution. In the Indian context, Competition Act, 2002 (Act) doesn’t take note of SDA, however, under 3(4)(b) and 3(4)(c) of the Act, exclusive distribution and supply agreements can be anti-competitive if they cause Adverse Appreciable Effect on Competition (AAEC). While the Act is absolutely right in incorporating that, recently there have been many companies, which fall under the category luxury and tech know-how businesses who feel the need to indulge in SDA, and the Act fails to address these concerns. This article argues that laws on SDA must be formulated in India because of the lack of uniformity and stability in the precedents. Tracing the Precedents: An Analysis The deliberation on SDA was initiated and highlighted in Ashish Ahuja v. Snapdeal and Anr.  (Snapdeal case)  which emerged in 2014, where Ashish Ahuja, the informant, moved the court under Section 19(1)(a), and alleged that Snapdeal and SanDisk Corporation had colluded to restrain the informant from selling SanDisk products on the e-commerce platform of Snapdeal. SanDisk further required the informant to be its authorised dealer and to procure materials from its authorised distributors in India, to be able to deal with its products. The Competition Commission of India (CCI) held that SanDisk wasn’t abusing its position in the market by having authorised distributors, as it could do so in order to protect the sanctity of its distribution channel. By this judgement, the CCI upheld SDA and the liberty of a company to select whom it deals with. However, in Shamsher Kataria v. Honda Siels Cars India Ltd. and Ors., (Kataria judgment) CCI held that the spare-parts market was a relevant market, and it observed that companies like Honda Siel cars, Volksvagen and twelve other car manufacturers, supplied spare parts to their authorised dealers only, while restricting and hindering the businesses of non-authorised repairers in the open market. It was found that the Original Equipment Manufacturers (OEMs) had charged exorbitant prices for spare parts and also restricted the access to such spare parts, resulting in denial of market access to the independent repairers. Therefore, CCI held the manufacturers were liable under Section 3 and 4 of the Act and imposed fines accordingly. While the conclusion is laudable and precise, CCI failed to discuss the SDA provisions which it upheld in the Snapdeal case. In a similar case in the EU, the Friedrich Grohe Armaturenfabrik GmbH & Co. (Grohe), a manufacturer of plumbing fixtures, formulated rules for its authorised dealers regarding their dos and don’ts. One of the criteria was to restrict its authorised distributors from the resale of the products in the open market, in defence of which they argued that their products were semi-finished and needed technical and professional assistance in installation, which the authorised dealers were capable of. The commission examined the case along the lines of SDA and nonetheless held such practices to be anti-competitive. Therefore, adopting SDA doesn’t mean the company can indulge in anti-competitive arrangements and such a narrative in the Indian context through the Kataria judgment would have further strengthened the position and relevance of SDA in the Indian laws. In the case of Tamil Nadu Consumer Products Distribution Association v. Vivo Communications Technology Company and Ors., the informant, which was an association to protect distributors from exploitation, alleged that Vivo had imposed unfair conditions on its distributors, in contravention of Section 3 and 4 of the Act. One of the conditions was that the distributors weren’t allowed to select their retailers, and it was under the company’s control to choose its retailers. The CCI rejected the complaint, claiming that the informant had not provided any concrete evidence to support this argument. However, the CCI should have had upheld that Vivo had the right to select its distributors and its retailers, as the commission had concluded in the Snapdeal case. By doing that, another precedent could have been added in favour of SDA. Position of Online Sales The manufacturer who is legally allowed to adopt SDA can impose some anti-competitive restrictions as per the EU’s guidelines on vertical agreements. One of the highly debated restrictions is the usage of online platforms.Usually, manufacturers restrict their dealers from selling accessories online, claiming the lack of control they have over online sales and delivery. Moreover, they believe that online sales do not meet the standards provided by them, through their brick and mortars, which thus impacts the brand image. Imposing such a restriction

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Dealing with Cross-Border Insolvencies: An Analysis of the Jet Airways saga

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Shivam Bhattacharya & Naman Jain]  The authors are students at the Gujarat National Law University.  The recent order of the Mumbai Bench of the NCLT approving the resolution plan for the revival of Jet Airways has marked the end of one of the earliest cases of cross-border insolvency determined under the Insolvency and Bankruptcy Code, 2016 (hereinafter “Code”). The final determination by the Court has in addition to providing insights into the working of the Code, also laid bare some of its limitations for resolving cross-border insolvency disputes. In pursuance of this, the authors intend to examine the entire case in light of the recent judgment by presenting the facts, orders and judgments passed. This article will also analyze the limitations of the Code in this regard and elaborate on how adopting some of the provisions of the UNCITRAL Model Law could help in dealing with similar insolvency disputes. Background The present case begins with the initiation of ‘corporate insolvency proceedings’ against Jet Airways and concludes with the final approval of the resolution plan for its revival by the NCLT. It spans three different Court orders over a period of two years. Company Petition No. 2205 (IB)/MB/2019 in NCLT, Mumbai Bench Three petitions were filed against Jet Airways, the Corporate Debtor in this case, for the initiation of Corporate Insolvency Resolution Process (CIRP) against it for the huge outstanding debt is owed. During the first hearing, the NCLT Bench was apprised of the fact that insolvency proceedings against Jet Airways had already begun a month prior in theDistrict Court of Netherlands. The Bench in this regard opined that conducting concurrent proceedings in the same matter would cause delay and vitiate the proceedings in the case. The reasoning put forth was that the two sections, Section 234 and 235 in the CODE for recognizing the orders of a foreign jurisdiction, mandate the requirement of the Indian Government to have reciprocal arrangements with the foreign country. However, the Court noted that in the instant case there were no reciprocal arrangements were made with the Dutch authorities. Furthermore, the Bench also took into consideration that the registered office of ‘Jet Airways’ and their primary assets were located in India, and therefore the NCLT had the requisite jurisdiction in the instant matter. The Bench via its order dated 20th June 2019set aside the proceedings of the Dutch Court and declared it as a nullity. The initiation of the corporate insolvency resolution process in India against Jet Airways was accepted by the NCLT. Company Appeal (AT) (Insolvency) No. 707 of 2019 in NCLAT, Delhi The order passed by the NCLT bench on the aspect of non-recognition of the Dutch proceedings was challenged before the NCLAT by the Dutch Trustee. The NCLAT considered the appeal and directed the ‘Resolution Professional’(hereinafter “RP”), appointed on behalf of Jet Airways, to consider the feasibility of having a joint ‘corporate insolvency resolution process in coordination with the Dutch Trustee.  The RP along with the Dutch trustee reached an agreement for facilitating the resolution process through a ‘Proposed Cooperation’model. Both the parties reached a final agreement on the proposed model and submitted it to the NCLAT for approval. The NCLAT accepted the model via its order dated 26th September. The Bench also allowed the Dutch Court Administration to attend the meetings of Jet Airways. Interlocutory Application No. 2081 of 2020 in NCLT, Mumbai Bench An application for the final approval of the ‘Resolution Plan’ was filed before the Mumbai Bench of the NCLT. The Bench via its order dated 22nd June 2021accepted the ‘Resolution plan’ on a majority of the points, and gave a time period of 90 days to the consortium for taking the necessary regulatory approvals and permissions from the DGCA. The Bench ordered the formation of a Monitoring Committee for overseeing the entire process. Though the final determination by the Benchmarked the end of India’s first cross-border insolvency case settled under the Code, however, it raised some key concerns regarding the inadequacy of insolvency provisions in the Code. Analysis and Suggestions With transnational business increasing at a rapid pace and big corporations setting up offices in multiple jurisdictions, this decision by the NCLT assumes much significance. The final order passed has revealed several lacunae present in the Code for dealing with insolvency cases involving foreign creditors or debtors. A major point of contention was the ‘non-recognition of the proceedings which took place in the Dutch Court by the NCLT in its earlier order. The subsequent confusion and delay caused, led to the increasing chorus for including uniform provisions within the ambit of the Code, for dealing with cross-jurisdictional insolvency cases. In pursuance of this, it can be inferred that a major drawback of the provisions within the Code for resolving cross-border disputes is that it mandates the formation of separate and individual bilateral agreements with other countries for enforcing the provisions of the Code. Such a type of arrangement would in addition to requiring a lot of time and negotiations also increase the probability of conflicting claims being made from both sides in connection with the judicial proceedings undertaken by their respective Courts. In light of the aforementioned discussion, the authors are of the opinion that adopting the provisions of the UNCITRAL Model Law would be integral for reducing instances of conflict between the insolvency laws of two or more different jurisdictions. The Model Law provides for three essential and inherent provisions which aim at placing both the national and the foreign creditors or debtors on an equal pedestal. Firstly, the principle of recognition in the Model Law provides for the recognition of the Court proceedings in a foreign jurisdiction, which ensures that no unnecessary time is lost and the dispute is resolved in an effective manner. It also allows proceedings to be conducted in a parallel and concurrent manner.  Secondly, the ‘principle of access’ allows the foreign creditors and debtors to attend the Court proceedings taking place in a different jurisdiction. In essence this principle aids in bringing

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