Author name: CBCL

Amazon Sellers v. CCI: Examining the Applicability of Res Judicata to Orders Passed by CCI

Competition Law /

[By Sourav Paul]  The author is a student at the National University of Juridical Sciences.  Introduction On June 11, 2021, the Karnataka High Court (‘HC’) dismissed the writ petitions filed by Flipkart Internet Pvt. Ltd. (‘Flipkart’) and Amazon Sellers Services Pvt. Ltd. (‘Amazon’), challenging the Competition Commission of India’s (‘CCI’) order issued under Section 26 (1) of the Competition Act, 2002 (‘Act’). This case dealt with the principle of res judicata and its applicability to the decisions of the CCI to a considerable extent. The doctrine of res judicata is a universal principle of law that a judicial decision given by a competent court must not be re-litigated provided the decision of the said court is final. The statutory law of res judicata is codified in Section 11 of the Code of Civil Procedure, 1908. The issue of applicability of this doctrine becomes all the more relevant now since the government intends to introduce the Draft Competition (Amendment) Bill, 2020(‘Bill’) based on the report released by the Competition Law Review Committee. The Bill proposes to include sub-section 2A under Section 26 of the Act, thereby incorporating the doctrine of res judicata in Indian competition law jurisprudence. Therefore, this article intends to examine the applicability of the doctrine of res judicata to the decisions of the CCI in light of the recent Karnataka HC’s judgment. The article also argues that the doctrine cannot be applied due to the unique character of the CCI and its functions. Analysing the Karnataka High Court’s Judgment In January 2020, the CCI passed an order under Section 26(1) of the Act directing the Director-General to investigate the allegations levelled by Delhi VyaparMahasangh (‘DVM’). The DVM alleged that these e-commerce platforms were involved in deep discounting, preferential listing, and other unfair trade practices. Flipkart, while relying on the order passed by CCI in All India Online Vendors Association v. Flipkart & Ors., (‘AIOVA case’) argued that since CCI did not initiate an investigation against them, as a result, the information filed by the DVMmust be treated in a similar manner. In the AIOVA case, AIOVA informed the CCI that Flipkart is abusing its dominant position in the relevant market, thereby violating Section 4 of the Act. The CCI found no contravention of the Act and held that “looking at the present market construct and structure of online marketplace platforms market in India, it does not appear that anyone player in the market is commanding any dominant position at this stage of evolution of market”. The HC observed that the doctrine of res judicata does not apply to orders passed by the CCI since the objective of the Act is to ensure free and fair competition in the market. While relying on Cadila Healthcare Ltd. v. CCI (‘Cadila Healthcare’), the HC opined that the “CCI or expert body should ordinarily not be crippled in their efforts by application of technical rules of procedure”. In Cadila Healthcare, the Delhi High Court (‘DHC’) held that the settlement or disposal of an individual case might not be determinative of the matter which pertains to anti-competitive conduct of an entity also because it affects the wider public, just as a crime does. Furthermore, the DHC observed that barring the CCI from taking cognisance of the same information against the same entity is similar to quashing FIRs filed by different consumers when a service provider’s malpractice is exposed by one complaint. Therefore, in essence, the DHC did not favour the applicability of the doctrine of res judicata to orders passed by the CCI since specific complaints cannot be determinative of the behaviour of an enterprise in the market as it impacts other aspects of the competition law, which may not be mentioned in such complaints. Non-Applicability of Res Judicata due to the Unique Character of CCI The test of a judicial tribunal as laid down in Copper v. Wilson presupposes the presence of a dispute between the parties. This test has been followed by the Supreme Court in a number of decisions. It is argued that the CCI’s functions do not include resolving ‘disputes’ between the parties. The informant is not even a party to the dispute but a mere source of information to the CCI, on the basis of which an enquiry is initiated. The CCI’s function is primarily investigatory in nature under Sections 3 and 4 of the Act. It also has the power to take punitive actions against any entity if found contravening any provision of the Act. The Cooper test also requires the parties to the dispute to present their case. However, as stated in the CCI v. Steel Authority of India &Anr. case, the informant is not entitled to a hearing if the CCI chooses not to go ahead with the enquiry. Furthermore, matters related to compensation are left for the Appellate Tribunal to determine under Section 53N of the Act. Therefore, it is clear that CCI is not a dispute settlement body in light of these arguments. Furthermore, the DHC in the case of Mahindra Electricity Mobility v. CCI ruled that the CCI is in part an administrative body and in part a quasi-judicial body, and therefore, it cannot be deemed to be a tribunal exclusively discharging judicial functions. The court also relied on the Raghavan Committee Report to determine the actual nature of the CCI. In Dwarka Prasad Sheokaran Das v. CIT, it was noted that the principle of res judicata is applicable to suits when there are two parties appearing before a court for resolution of their disputes. In Messrs Kamlapat Moti Lal v. CIT, it was held that since income-tax authorities are not courts and therefore, their decisions cannot operate as res judicata.In Smt. Ujjam Bai v. State of Uttar Pradesh, the court opined that the principle applies to administrative tribunals since they discharge judicial duties to a considerable extent. Therefore, in essence, the doctrine of res judicata applies only to bodies that discharge substantial judicial duties. Since the author has already established

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SEBI’s Reforms related to Promoters – A Step in The Right Direction?

Capital Markets and Securities Law /

[By Aman Jha & Anurag Shah]  Aman Jha is a student at the National Law University, Delhi and Anurag Shah is a student at the School of Law, Christ (Deemed to be University).  The Securities and Exchange Board of India (“SEBI“), in its board meeting dated 6th of August 2021, resolved multiple changes in the regulatory framework of the capital market in India. Two of the most notable include the reduction in the minimum lock-in period that has to be observed by a promoter following an initial public offering (“IPO“) and approving the principle of ‘Person in Control’ which would replace the concept of promoters in India. These changes have been resolved in pursuance of a consultation paper rolled out in May 2021, which proposed changes related to the promoter regime in India. This article analyzes these changes and the effect they would have on the capital market of India while also drawing analysis from different jurisdictions. Reduction in mandatory promoter lock-in: At present, Regulation 16 of the SEBI (Issue of Capital and Disclosure Requirements), 2018 (” ICDR“) provides that there should be a minimum promoter’s contribution of 20%, which should be locked in for 3 (three) years. The lock-in period starts from the date of commencement of commercial production or the date of allotment of the IPO, whichever is later. Further, ICDR also prescribes that a promoter holding more than the minimum requirement of 20% should have his excess holding subject to lock-in for one year starting from the date of allotment. The rationale behind such a lock-in system can be attributed to the regulatory regime before the globalization era in India. Setting up companies before the globalization reforms required special permissions. The pre-condition for such permission was a minimum equity contribution by the founder until the money taken from the lender was paid off. This was done to ensure that the founders had their skin in the game during incorporating companies and raising money. This skin-in-the-game concept was retained even in post-globalization India in the form of mandatory promoter lock-in. However, this requirement to have promoter’s skin in the game started becoming a hindrance for the capital markets since it also made going public difficult for the promoters. In the pre-globalization era, funds were raised to finance a project or for a Greenfield project which would be a new start, and thereby there was a lack of surety of the company’s performance. Having the promoter’s skin in the game would provide surety for the lenders in such a scenario. It would act as an incentive for the promoter to ensure the performance of the company. In today’s competitive start-up ecosystem, where companies going public are matured businesses and have gone through several series of funding, the promoters already have had their skin in the game. Therefore, a further lock-in would only make going public burdensome for the promoters. In a bid to solve this issue, the SEBI decided to reduce the mandatory lock-in period for the promoter’s contribution from 3 (three) years to 18 (eighteen) months. Further, the board also resolved to reduce the lock-in for pre-IPO shareholders who were not promoters from 1 (one) year to 6 (six) months. The transition from the concept of promoters to Person in Control: Having understood the rationale behind promoters and mandatory lock-in, it becomes imperative to know why SEBI has resolved an in-principle shift from the concept of a promoter to Person in Control (“PIC“). The primary reason for this shift can be attributed to the change in the investment landscape in India. The Indian start-up market now is one of the most attractive investment markets, with multiple businesses raising huge capital from investors all across the globe. Unlike the pre-globalization era when companies raised money from family, friends, or lenders, the start-ups now focus on institutional investors such as private equity funds. This shift has also changed the dynamics in the board room of companies. Traditionally promoters used to have significant control over businesses even after listing. However, many institutional investors have considerable control over the board in today’s landscape through their representative directors. The latter is not considered promoters as a result of the definition provided under Indian law. As a result of the aforementioned, situations arise wherein persons who do not have any controlling rights or are minority shareholders are still classified as promoters. This would have a two-faceted effect. Firstly, the responsibility and liability would be placed on the wrong party who does not control the decisions. Secondly, by virtue of being considered a promoter, the person may have disproportionate influence over the board. Therefore, the shift from promoter to PIC would ensure that the regulatory regime identifies the correct person and places responsibilities and liabilities on a person who has significant control over the board. The prime benefit of this shift would be the improved and better quality of corporate governance in the Indian regulatory regime. Removing the concept of promoters would ensure that the shareholders can place trust in the board, which would constitute of PICs and independent directors to keep a check on the board. This would change the Indian regulatory regime from a promoter-based system to a professionally managed company system. Keeping up with international standards: The changes resolved by SEBI have been received positively by the stakeholders. These changes showcase how the regulator is trying to undertake progressive steps to ensure that the regulatory system is at par with international practices even in the post-pandemic economy. The concept of promoter has been unique to India as most of the other capital market regulators do not have a system of promoters, and they focus on control. A shift from a system of promoters to PIC would bring the Indian regulatory regime at par with different jurisdictions. However, at present, SEBI has retained the idea of promoter lock-in and just halved the period. International practices concerning post-IPO lock-in have been to allow the market forces to decide the lock-in period. Most of the

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Draft E-commerce (Amendment) Rules: Unsettling CCI’s Regulatory Mandate

Competition Law, Contemporary Issues /

[By Sanchit Khandelwal & Amritesh Anand]  The authors are students at the NALSAR University of Law, Hyderabad.  E-commerce platforms and offline retailers and sellers on the e-commerce platforms have been at loggerheads for quite some time now. Various trade unions and industry groups have not shied away from utilising all available platforms, be it through legal battles or through electoral lobbying, to further their demand of tightening the strings on the market operation of ever bourgeoning e-commerce platforms. In response, the Government of India has recently been widening its regulatory oversight on the market practices of these platforms. The proposed amendments to the Consumer Protection (E-commerce) Rules, 2020 (hereinafter referred as “Draft Amendments”) by the Department of Consumer Affairs hints towards the State’s next attempt at tightening the noose on e-commerce platforms and absorb demands of groups voicing the interests of offline retailers and sellers on these platforms. The Draft Amendments, through the introduction of newer concepts and a stricter framework, seek to usher in transparency in the e-commerce platforms and further bolster the regulatory regime to curb the perceived unfair trade practices by ensuring that domestic manufacturers and suppliers get fair and equal treatment on e-commerce platforms. However, several provisions under the Rules proposed have a noticeable overlap with the settled domain of the Competition Commission of India (hereinafter referred to as “CCI”). This overreach is mirrored both in the form of explicit reiterations of sufficiently established antitrust concepts and imposition of restrictions that exclusively fall within the Competition law realm and are pending investigation before the CCI. The authors in this article argue that this attempt to over-reach the precincts of COPRA through over-lapping provisions of law would result in legislative ambiguity, which would then lead to unintended consequences in the form of forum shopping, enforcement failures, administrative inefficiency, enforcement overlaps and regulatory arbitrage. Rules sliding in the regulatory mandate of the CCI Abuse of dominance Rule 5(17) of the Draft Amendments proscribes an e-commerce entity from abusing its dominant position. For such assessment, the factors already laid down under the Competition Act are to be considered. This proposition is at best, redundant, and at worst, counterproductive. The Competition paradigm already provides a comprehensive framework to tackle issues stemming from abuse of dominance (u/s 4), which have been enshrined keeping in mind the CCI’s expertise in investigating complex market structures and unique challenges posed by violating entities. Although currently, the exact scope and intent behind the inclusion of this proposition remain unclear, the Draft Amendments do aim to lay down a complete code for regulating the e-commerce industry, thus engendering the possibility of misuse at the hands of the very entities that the amendments seemingly intend to target. Authorities under COPRA are ill-equipped to tackle instances of abuse of dominance since they lack sufficient know-how. These authorities have been designed keeping in mind the ultimate objective of COPRA i.e. protection of consumer interests, and not to get muddled with regulating anti-competitive behaviour. Moreover, since the Rule is a verbatim repetition of the concept as it exists under the Competition law framework and does not add the law to any extent, it serves no value addition to the current jurisprudence but only causes legislative ambiguity. However, the apparent jurisdictional overlap does provide e-commerce giants with the opportunity to engage in forum shopping and regulatory arbitrage in order to either circumvent or deliberately protract investigations and defeat the purpose of such proceedings. Businesses with deep pockets would have the capacity to leverage such intersections by filing multiple legal proceedings and delaying enforcement of orders, while newer and upcoming entities would be the ones to bear the brunt of such practices, as any delay in enforcement would be tantamount to extended persistence of the alleged anti-competitive behaviour. In light of the dynamic nature of markets and the need for swift correction, the ill-effects of such practices become even more pronounced. Even though Section 19(2) of the COPRA provides for referring a matter to another regulator after a preliminary inquiry is conducted, the concomitant extension of the investigation timeframe might diminish the efficacy of the ultimate order with regards to remedying the anticompetitive conduct. Since the Competition Act is sector agnostic, the law dealing with abuse of dominance is constant for all sectors. Ergo, no valid rationale exists for the inclusion of this proposition in the draft amendments. Ex-ante vs. Ex-post facto “The ultimate goal of competition policy is to enhance consumer well-being. Competition policy towards the supply side of the market aims to ensure that consumers have adequate and affordable choices.”  Pursuant to this objective, the Competition framework in India employs a ‘rule of reason’ approach while examining alleged anti-competitive practices, wherein the assessment is undertaken on a case by case basis. This assessment takes into account anti-competitive effects emanating from the conduct under scrutiny on the one hand, and pro-competitive justifications of the restraints which enhance consumer welfare under Section 19(3)(d) of the Competition Act, on the other. The ensuing assessment aims to do a balancing act between the anti-competitive and pro-competitive effects, and the entity under scrutiny can be exonerated if the latter outweighs the former. This assessment mechanism is widely regarded as furthering the consumer’s best interest and has become a fundamental cornerstone of modern antitrust jurisprudence. In contradistinction, some of the proposed restrictions on the activities of e-commerce entities in the draft amendments have the effect of imposing ex-ante prohibitions, premised on the unfounded assumption that such activities result in consumer harm. Furthermore, no scope for rebuttal of such prohibitions has been provided. Rule 5(16) prohibits e-commerce entities from organizing ‘flash sales’. Flash sales for such purposes have been defined under Section 3(1)(e) of the COPRA as offering products at “significantly reduced prices, high discounts or any other such promotions or attractive offers for a predetermined period of time with an intent to draw large numbers to consumers”. The accompanying proviso restricts the application to instances of selling which involve “fraudulently intercepting the ordinary course of

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Auditors’ Risk v. Reward – Analysis in Light of Recent Amendments

Company Law /

[By Ria Chaudhary & Aayush Akar]  Ria Chaudhary is a student at National Law University, Jodhpur and Aayush Akar is a student at National Law University, Odisha.  Introduction  In commonly accepted usage, auditing of books of accounts is taken to mean the verification and assessment of a company’s books and financial statements by an impartial, independent and qualified auditing professional. . It is undertaken with the primary objective of ensuring that the books of the company and transactions entered into, are in accordance with relevant regulatory frameworks as well as to form an opinion about the truth and fairness of the state of affairs reflected by these financial statements and accounts. This is done to appraise and enhance the trust of stakeholders of the organization. Need for Regulation of Auditing – The Existing Legal Framework Presentation of precise and true financial condition in the books of accounts is critical to the credence of the company and the soundness of investors’ investment decisions. As a result, it is but a necessity that preparation and audit of the financial statements maintained by the management of the company be governed by law, with legal consequences to follow for non-compliance. The Companies Act, 2013 (‘the Act’), Chapter X (S. 138 to 148) read with Companies (Audit and Auditors) Rules, 2014 (‘Audit Rules’) as well as Companies (Accounts) Rules, 2014  (‘Accounts Rules’) form part of the basic framework under which the process of auditing is regulated on aspects like appointment, remuneration, removal, powers and duties, qualifications, etc. Recent Amendments & Their Implications – An Analysis Through recent notifications in March 2021, the MCA has amended this regulatory framework, which has, at the most rudimentary level, significantly enhanced the ambit of statutory disclosure and reporting responsibilities to be complied by auditors. In furtherance of this, the following is an analysis of the Companies (Audit and Auditors) Amendment Rules, 2021 read with Companies (Accounts) Amendment Rules, 2021. Rule 11 of the Audit Rules enlist certain circumstances other than those specifically provided, that are necessary to be included in the auditor’s report. While sub-rule 11(d), relating to the company’s disclosure of specific banknotes held by it during a specified period after demonetization in 2016, has been omitted, new sub-rules have been inserted:- Rule 11(e) – It requires the Auditor’s report to contain a statement regarding whether the management has made a representation that except for those transactions mentioned in the books – pertaining to transactions which the company has entered into for an ultimate beneficiary whose identity is sought to be kept hidden, by routing of the transaction through an intermediary – the company is neither acting as nor has employed, such an intermediary entity for channelization of funds to a beneficiary identified by the company. Such lending or financing transactions, that is, where outgoing or incoming loans, advances, or investments are anticipated to be relayed through an intermediary acting on the company’s directives of channelizing financial resources are not prohibited under law. However, the MCA has enacted this amendment to maintain transparency through adequate disclosure of the ultimate real beneficiary in the books, so as to keep a check on the financing of illicit activities like terrorism, illegal trade, etc. which have a high incidence of occurring through this route. It is also pertinent to note that this amendment not only places a duty of representation upon the management but also a double verification duty upon auditors to evaluate this representation through auditing procedures and substantiate whether no material misrepresentation has been made by the directors in relation to the abovementioned transactions. In the case of the contrary, auditors may be held liable/penalized. Rule 11(f) – It requires the Auditor’s report to contain comments regarding payment or declaration of dividend by the company as to whether compliance with S. 123 of the Act has been observed. Rule 11(g) – It implies that the Auditor’s report shall contain the auditor’s observation and opinion on whether the company has, with respect to, financial years beginning from 1st April 2022 maintained its books of accounts using such accounting software which has the facility of recording the audit trail (i.e. log of every change made in the books) and whether the same has been used for all transactions recorded in the software throughout the year. Secondly, it is also required to be taken into consideration that whether the audit trail has not been tampered with and finally that it has been preserved by the company in accordance with statutory requirements to retain such records. In addition to this requirement under Rule 11(g), another pertinent change has been made by insertion of a proviso to Rule 3(1) of the Accounts Rules. It holds significance for companies that use accounting software to maintain electronic records of their books of accounts (which practically almost every company does), in as much as that such company, commencing from the financial year beginning April 1, 2021, ‘shall only’ use such accounting software that has the facility of recording audit trail and edit log of every transaction/change made in the books, along with the date of such change. It further states that it must be ensured that such edit trail facility cannot be disabled. The compulsory requirement to have an audit trail has been introduced because it is a technique to prevent book falsification, fabrication or manipulation and subsequent overwriting in the same. Any individual inspecting the books of accounts may readily follow what modifications have been made to the accounts, by verifying with the audit trail and seek an explanation from the company for any discrepancies/reasons for such change. Several additional and corresponding modifications have also been made in the entries under,  Schedule III of the Act which establishes the framework for compiling of books of accounts (e.g., manner of maintaining income statements, cash flow statements, balance sheet, etc.), making it a crucial amendment for the auditors as well. Examining the Conundrum Surrounding the Amendments vis-à-vis the Role of an Auditors in a Company While these amendments may appear to be mere additions requiring a

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Keeping it Time Bound: Resolution Plans under IBC

Contemporary Issues, Insolvency Law /

[By Soham Chakraborty & Aaryan Wasnik]  The authors are students at the NALSAR University of Law, Hyderabad.  The 32nd Report by the Standing Committee on Finance submitted to the Parliament, has made many pertinent observations and recommendations with respect to the functioning of the Insolvency and Bankruptcy Code, 2016 (hereinafter “Code”). In the Section titled “Performance Review of the NCLT System,” the Standing Committee pointed out various reasons for delays in the resolution of insolvencies. In one such observation, the Standing Committee found that many times, prospective resolution applicants wait for the details of the highest bid to become public and only then come forward with better bids, often at the cost of adhering to the timelines provided for the submission of resolution plans. Following this observation, it made a recommendation that the Code should be amended so that no post hoc bids are allowed during the resolution process. This article first looks at the provisions under the Code which provide for a time-bound process with respect to submission of resolution plans and at judgments that have laid down authoritative points of law. Following this, the article engages with the observations made by the report of the Standing Committee and tries to offer some suggestions of its own. Sanctity of a Time-Bound Process under the Code Time-Bound Approval of a Resolution Plan: Provisions & Case Laws Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter “CIRP Regulations”) provides a model timeline for the corporate insolvency resolution process. According to the table provided in the regulation, the timeline for submission of the Committee of Creditors (hereinafter COC) approved resolution plan to the Adjudicating Authority is within 165 days from the commencement of CIRP. Resolution plans which are submitted to the Resolution Professional ( hereinafter RP) and which fulfil the requirements under Section 30(2) are required to be placed by the RP before the CoC for consideration. The CoC upon consideration of the resolution plans can further negotiate with the resolution applicants for better bids and can also authorize the RP to extend the deadline for submission of resolution plans in order to allow new resolution applicants to submit their resolution plans. Despite the entire process being a time-bound process, adherence to the deadlines has not been very strictly enforced under the Code. In the matter of RICOH India Limited, the RP on the authorization of the CoC had accepted two resolution plans after the expiry of the deadline for submission. Finally, the resolution plan of the consortium of Kalpraj Dharamshi & Rekha Jhunjhunwala, which was submitted after the deadline, was approved by the CoC. The NCLT allowing the actions of the RP held that the most attractive resolution plan was selected only after all the resolution applicants were granted the due opportunity by the CoC. The CoC had exercised its commercial wisdom judicially in this case and hence it did not warrant any interference by the Adjudicating Authority. Upon appeal the NCLAT, New Delhi held that the “alleged act of the Resolution Professional in accepting the Resolution Plan after the expiry of the deadline for submission of Resolution Plan is arbitrary, illegal and against the principle of natural justice and cannot be treated as an act within the commercial wisdom of the CoC.” It directed the CoC to consider the resolution plans submitted within the deadline and take a decision within 10 days from the date of the order. On further appeal, the Supreme Court held in Kalpraj Dharamshi v. Kotak Investment Advisors Limited (hereinafter “Kalpraj Dharamshi”), that the actions of the RP in accepting the resolution plans after the expiry of the deadline had the stamp of approval of the CoC. Following this observation, it went on to hold that “…that in view of the paramount importance given to the decision of CoC, which is to be taken on the basis of ‘commercial wisdom’, NCLAT was not correct in law in interfering with the commercial decision taken by CoC…”. In other words, the Supreme Court found that the decision of the CoC to accept resolution plans submitted beyond the deadline was an exercise of its commercial wisdom. After the Supreme Court judgment in the Kalpraj Dharamshi case, the NCLAT, New Delhi was faced with a similar fact scenario in Dwarkadhish Sakhar Karkhana Limited v. Pankaj Joshi. In this case, the CoC had in its 7th meeting refused to allow the resolution applicant from filing its expression of interest (hereinafter “EoI”) and resolution plan after the deadline. Following a change in the RP, the CoC in its 9th meeting decided to revisit its decision taken in the 7th meeting and allowed the resolution applicant to file its resolution plan. The NCLAT finding that the RP had misguided the CoC by suppressing material facts declined to hold that the decision of the CoC to revisit its decision taken in the 9th meeting was in the exercise of its commercial wisdom. Further, the NCLAT, differentiating this case with the decision of the Supreme Court in the Kalpraj Dharamshi, held that the actions of the RP in the latter had the required authorization of the CoC while in the present case, the RP had acted without any authorization from the CoC in allowing the resolution applicant to submit its EoI after the deadline. Striking a Balance: Time-Bound Resolution v. Value Maximisation From the case laws cited above, it is clear that the action of the RP, with the approval of the CoC, to accept resolution plans beyond the deadline for submission cannot be questioned in a Court of law as it falls within the ambit of the commercial wisdom of the Court. Considering the objective of Code of value maximization the CoC should be provided with the discretion to consider plans which are much better in comparison to existing resolution plans. However, extending the deadline of the Code indefinitely in order to consider newly submitted resolution plans, in the hope that they would provide

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Enforcement Period v. Claim Period: A Debate Settled by Delhi High Court

Contemporary Issues, Contract Law /

[By Ashutosh Kumar & Shambhavi Shani]  The authors are students at the Hidayatullah National Law University.  An inextricable knot between the limitation period and Exception 3 of Section 28 of the Indian Contract Act has time and again, been subjected to judicial and legislative scrutiny and is yet again in limelight after Justice Jayant Nath of Delhi High Court in the case of Larsen & Toubro Limited &Anr. V. Punjab National Bank and Anr., clarified that Exception 3 to Section 28 doesn’t deal with the “Claim Period” but with the “Enforcement Period” which was grossly misinterpreted by banks. Section 28 dictates that any contract which restricts any party from enforcing his rights under the contract or limits the period during which such recourse can be adopted is void to that extent. Exception 3 saves banks and financial institutions from getting hit by Section 28 for including a clause providing for “Enforcement Period” after which, if any suit is filed for the enforcement of guarantee will fall flat. Such enforcement period may be less than the limitation period as laid down in the Limitation Act but should not be less than one year. In this article, the authors analyze the detrimental effects of wrongful interpretation by banks, which violates rights of the principal debtors (PD) under Article 19(1)(g) of the Indian Constitution and the impacts following the course correction by the Court. BACKGROUND Under the contract of Bank Guarantee (BG), the beneficiary has the right to make the guarantor bank compensate for the default made by the PD by invoking the guarantee within the lifetime of BG i.e. the “Validity Period”. In cases of performance guarantees, it takes time to assess the performance of the PD and hence a “Claim Period” is negotiated between the PD and the creditor which provides for a grace period in addition to the validity period. Once such guarantee is invoked and if the bank dishonours the claim, the beneficiary has the right to bring an action before the relevant court/tribunal to enforce his right within the “Limitation Period/Enforcement Period” which is, by default, 3 years in case of private entities and 30 years in case of government entities. But, the 2013 Amendment to Section 28 inserted Exception 3 which shortened the minimum limitation period to one year instead of three or thirty years as the case may be. This one-year enforcement period was confused with the claim period by the Respondent, Bank Punjab National Bank (PNB) which issued a circular dated 18/08/2018 addressed to the Petitioner Larsen & Toubro (L&T) stating that a claim period of less than a year shall be void and the period will get increased to 3 years by default under the Limitation Act, 1963. Indian Banks Association (IBA) through a communication dated 05/12/2018 addressed to all the banks, fortified the above interpretation dictating that if any bank issues a BG with a claim period of less than one year, such BG will not get the benefit under Exception 3 of Section 28. Owing to this, L&T had to pay commission charges and maintain collateral security for an extended period which would have been shorter under the contract between PD and creditor. L&T contended that such an extended period affected their business as they could not enter into new contracts and hence infringed their fundamental right to do business under Article19(1)(g). OBSERVATIONS BY THE COURT The Court struck down the Circular issued by PNB to L&T and agreed with the contentions of L&T and held that PNB erroneously interpreted the minimum one year “Enforcement Period” under Exception 3 to be a one year mandatory “Claim Period”. It further observed that the one year clause under Exception 3 “deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal.” While adjudicating the matter, the Court thoroughly delved into the historical perspective to ascertain the legislative intent behind the enactment of such exception and it further dealt with the theory of relinquishment of right and remedy to conclude that such provision was grossly misused by the banks. The rationale behind the Verdict has been discussed below: Historical Perspectives Before 1997, the principle followed by the courts was that the rights and remedies accrued under a contract may be relinquished but only remedy cannot be relinquished. This was based on the reasoning that for a remedy to exist there must be rights which implied that once the rights are relinquished; the remedy would be automatically relinquished. The Law Commission observed the potential of misuse of such principle and stated in its 97th Law Commission Report that such a distinction between relinquishment of right and remedy was utopian but in practice, might lead to the misuse by parties in a dominant position who may create a law of prescription of their own by limiting the period of relinquishment of rights and in turn remedy. This resulted in the 1997 Amendment which included Clause (b) and the first two Exceptions to Section 28 which automatically increased the enforcement period to 3 or 30 years depending on the nature of the entity. Post such amendment, an expert committee headed by Sh.T.R.Andhyarujina was constituted which in its report cited the concerns of the banks who had to carry obligations, maintain liabilities and hold securities for 30 years affecting the issuance of fresh guarantees. According to the report, “this will pre-empt the available capital to meet the capital adequacy requirement and will also overstretch the exposure to the customers beyond acceptable levels.” This lead to the Amendment of 2013 which included Exception 3 to Section 28. Misinterpretation by PNB Much reliance was placed on a 2016 verdict of Union of India &Anr. v. Indusind Bank &Anr. by the Counsels appearing for PNB but the Court held that the ratio of the verdict was actually against the cause of PNB. Herein, two clauses were in question, which limited the period within which a claim may be raised by the creditor/beneficiary before the guarantor bank.

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The Switch of Seats between State and Corporates

Company Law /

[By Umang Agarwal & Anchal Bhatheja]  The authors are students at the National Law School of India University, Bangalore.  There has been an undesirable but convenient switch of roles of the government and corporates, which is reflected quite starkly in section 396 of the companies act 1956 (‘CA1956’) (which has now been replaced by section 237of companies Act 2013 (CA13) On one hand, this provision empowers the government to take decisions regarding the restructuring of the companies in terms of being able to order an amalgamation in “public interest” which is a right that should technically vest with the board of directors (‘BOD’) and the shareholders of the company in the interest of corporate autonomy. On the other hand, it mandates the companies to amalgamate in the public interest, when the state directs them to do so, even when the preamble vests responsibility furthering social justice and public interest with the state. In this article, we aim to discuss the effect of this switch of roles. It is submitted that section 396 of CA56 and 237 of CA13 assail the very fundamental tenets of corporate law in various ways. The macro-economic Challenge: Richard Posner suggests that the wealth of the society maximizes when the resources vest in the hands of those who value them the most. Here, value alludes to both willingness and the ability to pay. However, sections 396 CA56 and 237 CA13 are counter-intuitive when viewed from a wealth maximization perspective. S Balasubramanian, former chairperson of the Company Law Board suggests that the government often invokes section 396 of CA56 to salvage a company in distress. Even the 2016 amalgamation between FTIL and NSEL, which was eventually struck down by the SC in 63 Moons Technologies v UOI, was to salvage NSEL which was an electronic platform for buying and selling of goods and had run into losses and defaulted on payments to its 13000 investors amounting to nearly Rs. 5600 crores. The central government “jugaad” to resolve the problem was to amalgamate unhealthy NSEL with its healthy parent company FTIL so that the assets of the latter could be used to salvage the losses of the former. Herein the idea was to revive a company, which might have the willingness to recover but not the ability to do so. This transfer of wealth would have eventually led to a net loss as two companies would have become unhealthy. But such outcomes are not desirable from an economic standpoint. The motive of every business is to make profits. But every business has the inevitable downside of failing. If the online platform, NSEL was unable to avoid fraudulent transactions and ran into debt due to its mismanagement or inefficiency or in other words lost its “ability” to stay functional, it would be in the interest of wealth maximization to subject it to a resolution process or just dissolve it as per the IBC instead of affixing its liability on a healthy company. The approach adopted by the central government is economically unsustainable. For instance, over 280 companies have been declared insolvent amidst the pandemic in India. If one were to replicate the FTIL-NSEL approach of merging an unhealthy company with a healthy one to save the former from dying down, for all these 280 companies, this would result in a net of 560 unhealthy companies and would render alternatives provided under the IBC useless. The micro-economics challenge: Further, the wording of section 396 CA56 and section 237 CA13 indicates a concern for “public interest”. However, as Milton Friedman puts it, the purpose of a business is only to increase its profits. In essence, the purpose of a corporate is to further the shareholders’ interest and nothing more than that. Corporates are business vehicles for profit maximization and re-structuring them to secure public interest is contradictory to the purpose of a corporate. The preamble of the Constitution puts the onus of being “socialist” and “welfarist” on the state and not on private entities. It is better to restrict the role of corporates in ensuring shareholders’ wealth maximization, instead of making them work towards “public interest”. In this regard, it is pertinent to note that section 396 CA1956 and section 237 CA13 change the value of the shares and quite often to the detriment of the shareholders, especially when the amalgamation happens between a healthy and an unhealthy company. In such scenarios, the shareholders of the healthy company lose out as the value of the shares diminishes due to the increased liabilities of the company. The financial value of shares is a great concern for the shareholders, as it decides the prospects of selling shares to get profits as well as the dividends, they eventually get on the shares they own. Therefore, the provision is economically unsustainable. The Jurisprudential Challenge: Furthermore, since the only purpose of a corporate is to further the shareholder’s interest, CA13 provides for a regime to ensure the efficacy of this idea. Towards this end, various provisions of CA13 like section 232 and 233 envisage the role of BOD in proposing a resolution for amalgamation. At a principal level, these provisions allude to the idea of liberalism where the BOD which is elected by the shareholders gets to decide the fate of the corporate and its formal structure. Sections 396 CA56 and 237 CA13 further a more paternalistic approach, wherein the state gets to decide what is best for the companies and the society at large. In 63 Moons Technologies v UOI, the two companies were parent and subsidiary companies respectively. If they felt the need to amalgamate, CA13 gave them full autonomy to do so. And since the fundamental assumption of law and economics is that individuals and firms are rational and act in their best interest, they could have taken a decision regarding amalgamation on the basis of their own incentives and interests. Thus, there was no need for the intervention of the state to determine the companies’ best interests. Conclusion: Considering the foregoing

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CCI’s Expedited Approach to tackle violations in the E-Commerce Industry: In the light of the Investigation against Amazon & Flipkart

Competition Law /

[By Devashish Srivastava]  The author is a student at the National Law University, Odisha. Introduction The E-commerce industry has been on a drastic rise over the last decade, generating revenue of billions of dollars in India every year. Similar to the revenue, the e-commerce industry brings in a plethora of regulatory and compliance complexities. Owing to the business model of the e-commerce industry, multiple sector-specific laws and regulations are applicable, which results in the involvement of different regulatory and adjudicatory authorities. This often gives rise to jurisdictional issues between different sectoral regulators and statutory overlaps. Anti-trust and competition regulators, more often than not have to deal with the complexities of the e-commerce industry.  Given the reliance of consumers on the e-commerce industry, the e-commerce entities have established themselves firmly in the retail market and command a substantial market power. It wasn’t long after that this market power started detrimentally affecting the competitors in the retail business, giving rise to anti-competitive agreements and an abuse of the market power by the e-commerce entities. The Competition Commission of India (CCI), has been dealing with violations of competition law by the e-commerce entities for the past few years but failed to take any substantial action against them. The reason behind this is often claimed to be the fact that certain commercial laws like the Competition law in India are not as developed as their global counterparts and are lacking in experience and certain expertise. However, there seems to be a shift in India’s approach towards the e-commerce entities and their blatant disregard for the laws and compliances in place. CCI’s ongoing investigation against Amazon and Flipkart is a clear indicator of this adamant approach, wherein, the backing and support from the judicial setup of the country are also visible. CCI’s Probe into Allegations against Amazon and Flipkart Background of the Case In January last year, the CCI passed an order[i] initiating an investigation into the allegation brought against Flipkart Internet Services Pvt. Ltd. (Flipkart) and Amazon Seller Services Pvt. Ltd. (Amazon). These allegations were brought up in a piece of information filed before the CCI by Delhi Vyapar Mahasangh (DVM), an organisation that comprises traders from numerous Micro, Small and Medium Enterprises (MSMEs), relying on the trade of smartphones and their accessories. The allegations brought forward included predatory pricing, exclusive partnerships with smartphone brands, preferential treatment towards certain specific sellers which included the sale of their private label brands and deep discounts. The information also alleged that both Amazon and Flipkart are guilty of cross-subsidising across their platforms in order to maintain the pricing of some products below cost. The CCI was of the opinion that the evidence (screenshots of messages offering certain smartphones only on the OP’s platforms and emails stating preferential agreements with certain sellers) produced before it by the informant were sufficient enough to merit an investigation. Aggrieved by this order, Amazon filed a writ petition before the Karnataka High Court. Amazon pleaded before the court that the CCI’s order directing an investigation was passed without there being any prima facie evidence which is a prerequisite to initiating an investigation under section 26(1) of the Competition Act, 2002 (Act). It was further argued that Amazon is already under an investigation by the Enforcement Directorate for alleged violation of FDI norms under the Foreign Exchange Management Act, 1999 and CCI cannot conduct a parallel investigation. This argument was supported by the Supreme Court’s judgment in CCI vs. Bharti Airtel & Ors. in which the ED’s investigation was a result of multiple petitions filed by the Confederation of All India Traders (CAIT) before the Delhi High Court and the Rajasthan High Court. DVM (informant) being an affiliate of CAIT was said to have filed the information before the CCI out of malice and ill intention as Amazon was already under investigation by a specialized regulatory authority and a collateral investigation by CCI was unfair. The High Court stated that the CCI, in an information filed by All India Online Vendors Association (AIOVA) against Flipkart, invited Amazon for comments, but failed to do so in the present case and passed the order without allowing Amazon to be heard. Relying on the aforementioned arguments and reasoning, Karnataka High Court sided with Amazon and granted an interim stay on CCI directed DG’s investigation. Following this decision, Flipkart also filed a petition before the Karnataka High Court for a stay on the DG’s investigation which was accepted and subsequently an order staying the investigation was passed. In October of last year, the CCI approached the Supreme Court against Karnataka High Court’s order staying CCI’s investigation against Amazon and Flipkart. The Supreme Court directed the matter back to be heard by the Karnataka High Court. In January, earlier this year, Karnataka High Court listed Flipkart’s petition to be heard alongside Amazon’s petition jointly, where CCI, DVM and CAIT were made respondents. Over the course of the first half of this year, Karnataka High Court heard the arguments put forth by all the parties involved, before finally dismissing both Amazon and Flipkart’s petition allowing for CCI to go ahead with its investigation in June, 2021. Firstly, on the point of an order passed under section 26(1) of the act. Taking into account the judgement passed by the Supreme Court in Competition Commission of India v Bharti Airtel Ltd. and Ors.[ii] (Bharti Airtel case) and Competition Commission of India v. Steel Authority of India Ltd.[iii] (SAIL case), Karnataka High Court stated that such orders by CCI are administrative directions to its investigation wing under the DG and nowhere in the provision it is required for issuance of a notice to any party involved before initiating an investigation. Secondly, the court looked into the information filed by DVM along with the evidence produced which were sufficient enough to warrant a prima facie investigation. The court said that the CCI analysed the allegations in the information under separate heads in detail and applied its mind before passing the investigation order.

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The Oppression & Mismanagement Clause: Exploring The Need For Revision Under The Indian Law

Company Law /

[By Rishi Raj & Mehek Wadhwani]  The authors are students at MNLU, Aurangabad.  Introduction The ideal of corporate democracy envisages that a company governs its affairs based on majority voting, with the shareholders voting to decide on the course of action. Under these circumstances, the intervention of law may be required to address the possibility of the majority decision departing from the standards of fair dealing or conducting the company’s affairs in a manner contrary to the public interest or oppressive to any of its members. The Indian law acknowledges this possibility. Consequently, the minority shareholders have the statutory right to bring any action against the majority shareholders to prevent the majority from oppressing and mismanaging the company. As an integral part of corporate governance, these special provisions are contained in Part XVI of the Companies Act, 2013 (hereinafter referred to as the Act). In particular, Section 241 of the Act contains the provision for the prevention of oppression and mismanagement, whereas Section 242 of the Act grants tribunals the power to make an order for the smooth management of the company, and this power can be exercised if the oppressed member (shareholders) fulfils certain conditions. We seek to analyse how the construct of the clause under Section 242 of the Act places an undue burden through the just and equitable standard to substantiate the issue raised in the Tata Consultancy Service Ltd. v. Cyrus Investments Pvt. Ltd. and Ors. Further, we propose certain changes that may be considered while reforming the law. Invoking the oppression & mismanagement remedy: An undue burden on the shareholder The inefficiencies and perils of winding up a company have long been recognized under the company law jurisprudence, leading to the introduction of remedies such as the oppression and mismanagement clause under Section 241 of the Act. The prudent realization that such winding-up would not help the aggrieved minority shareholders led to the inclusion of this clause under the English Companies Act, 1948. Thereafter, the common law countries, including India, adopted the remedy with certain changes. 2.1. Oppression, Prejudice, and Mismanagement (Substantive elements)  ‘Oppression’ is said to be caused when the company’s conduct is opposed to the public interest as well as the principles of fair dealing, including the imposition of new and risky objects by the majority shareholders in an autocratic way. Further, the oppressed shareholder is under a persistent burden to prove the oppressive act, which makes redressal under Section 241  wrongful, harsh, and burdensome. The scope of ‘oppression’ was outlined in  V.S. Krishnan v. Westfort Hi-tech Hospital Ltd., and adopted verbatim in several judgments that followed under the Act. Accordingly, ‘oppression’ entails the absence of probity, good conduct, or an act that is mala fide or for a collateral purpose.  Further, while making winding-up orders, the court may follow rational principles to decide if the conduct is unjust, inequitable or unfair.  Ultimately, this is a question of fact, and accordingly, we have seen several unique positions taken by the courts. Adding to the jurisprudence on the scope of ‘oppression’, in a very recent judgment of Tata Consultancy (Supra) wherein the Apex Court held that the mere removal of a person from the post of Executive Chairman cannot be termed as oppressive and cannot trigger the provisions of Section 242 of the Act. Any single act of oppression cannot enable a Company Law Board (CLB) to intervene; rather,  “the oppression must be the commutative results of continuous acts,” and there must be no scope of debate in the facts of the case. We believe that the existence of undue burden on the aggrieved shareholder owing to their obligation to establish the substantive elements discussed above, along with the conditional limb discussed below, severely restricts the remedy that the law seeks to provide. In the next section, we reflect on this aspect to substantiate our argument that lawmakers must reform the clause in a well-balanced manner to avoid deadlocks. 2.2. Just & Equitable Clause (Conditional Limb) The remedy that the shareholder seeks, requires more than establishing the substantive elements. Section 242 of the Act, which is the conditional limb of this remedy, places a heavy burden on the oppressed members to satisfy the following two conditions: firstly, the affairs of the company must have been conducted in a manner that is prejudicial or oppressive to the members of the company, or prejudicial to the public interests; secondly, even if the winding-up order would unfairly prejudice some members, it would be fair to wind up the company if it is justifiable under the ‘just and equitable clause. In Ebrahimi v. Westbourne Galleries Ltd., the Court ordered the winding up of a company, as the majority was guilty of abuse of power. However, the House of Lords, while reversing the decision, applied the test of (i) bona fide use of power in the interest of the company and (ii) whether a reasonable man could think that the removal was done in the interest of the company. Further, under the “just and equitable” clause, the winding-up order may be made if there is an entire “functional deadlock” or an irretrievable breakdown of “trust and confidence”  raised in the management of the company. For a better understanding of the term ‘just and equitable clause, the Scottish Court of Session in Baird v. Lee observed that the shareholders invest their money on certain conditions which are mentioned in the Memorandum of Association of the company, including that the business shall be conducted in accordance with the principles of commercial administration that assures commercial probity and efficiency. It is noteworthy that only if these conditions are intentionally violated that it would be justifiable to wind up the company. Further, as opined by the Apex court while considering whether to admit an application, the interests of the company’s shareholders as a whole have to be kept in mind. This, however, means that the tribunal can make an order to bring an end to the oppression or prejudice complained of,  only if

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