CBCL, Author at NLIU CBCL - Page 64 of 101

Interplay Of Schemes Of Arrangement And IBC: A Case Study

[By Sourav Jena & Shivani Pattnaik] The authors are students at the National Law University, Odisha. The insertion of Section 29A in the Insolvency and Bankruptcy Code, 2016 (“IBC”) has been a turning point in the Corporate Insolvency Resolution Process (“CIRP”). Prior to its existence, any individual who submitted a resolution plan could qualify as a resolution applicant. However, this technicality served as a ‘back-door entry’ for individuals who contributed to the default of the corporate debtor to reclaim key managerial control by outbidding other financial institutes. Therefore, Section 29A serves as a ‘restrictive provision’ by narrowing the scope of eligibility of a resolution applicant. In pursuance of securing the interests of the corporate debtor, the Supreme Court of India (“SC”) in the recent judgment of Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. and Anr. has held that individuals disqualified under Section 29A of IBC would also stand to be disqualified under Section 230 of the Companies Act, 2013(“the Act”). Consequently, individuals shall not make any compromise /arrangement with creditors and members as provided under Section 230 of the Act if they fail to qualify as resolution applicants. The article seeks to present the facts of the case, and findings of the Court along with a critical analysis of the status quo of corporate insolvency in light of the judgement. Background The background of the case spans two separate civil appeals and a writ petition. Facts of Civil Appeal No. 9664 of 2019 On 07.04.2017, corporate applicant ‘Gujarat NRE Coke Limited’ (“GNCL”) filed an application to initiate the CIRP. One of its promoters namely, Mr. Arun Kumar Jagatramka sought to present a resolution plan before the Committee of Creditors (“CoC”). Meanwhile, Section 29A was inserted into the IBC wherein Section 29A(g) prohibits a promoter of the corporate debtor to be eligible as a resolution applicant. As a consequence, Mr. Jagatramka failed to qualify, thereby, prompting the National Company Law Tribunal (“NCLT”) to initiate the liquidation of GNCL in the absence of any other resolution plan. Whilst Mr. Jagatramka challenged the NCLT order before the National Company Law Appellate Tribunal (“NCLAT”), he proceeded to present a scheme of compromise and arrangement to which the NCLT directed for a meeting to be conducted to approve the same. However, an operational creditor viz. Jindal Steel and Power Ltd. (“JSPL”) appealed to the NCLAT against the NCLT order. It was held that as a promoter of the corporate debtor, Mr. Jagatramka was ineligible to become a resolution applicant, thereby, relinquishing the power to propose a scheme of compromise and arrangement for creditors and members. Facts of Civil Appeal No. 2719 of 2020 On 05.04.2018, the NCLT directed the CIRP of Su-Kam Power Systems Ltd. (“Su-Kam”). Mr. Kunwer Sachdev, one of the promoters, submitted a resolution plan on 15.11.2018. However, with the amendment of the IBC, he became ineligible to qualify as a resolution applicant. Hence, Su-Kam was directed to be liquidated. On the appeal against the appointment of the liquidator, NCLAT not only upheld the decision but also directed the liquidator to invite applications for compromise and arrangement with creditors. Mr. Kunwer, having applied to submit a scheme, was again found ineligible to do so, thereby, giving rise to a slew of appeals. Writ Petition Civil No. 269 of 2020 Regulation 2B delineates compromise and arrangement under Section 230 of the Act was challenged to be ultra vires the IBC as it was inserted by an amendment notification dated 25.07.2019 under the IBBI (Liquidation Process) Regulation, 2016. Issues and Contentions The question of law SC dealt with was whether an ineligible resolution applicant could submit a scheme for compromise during liquidation. The promoters put forth that the ineligibility under Section 29A was applicable only during resolution. This resolution was distinct from proposing a scheme of compromise under Section 230 of the Act, which connotes ‘settlement mechanism.’ Furthermore, Regulation 2B of the Liquidation Regulation was put under the scanner for being violative of Articles 14, 19, and 21 of the Indian Constitution alleging that it sought to draw a parallel between ineligibility under Section 29A of the IBC to the distinct provision of Section 230 under the Companies Act. However, the Respondents drew attention to the inherent objective of Section 29A which was to keep individuals, responsible for default of the corporate debtor, away from gaining control of the corporate debtor’s assets. Therefore, the Respondents argued that the resolution process under Section 29A and the liquidation process were shown to be inconsistent by the promoters in order to utilize the loophole. Findings of the Court The SC reasoned that liquidation proceedings under the IBC and the proposal of the scheme of compromise under Section 230 lay on the same spectrum. While referring to the Swiss Ribbon v. UOI case, the SC mulled over the intent behind introducing Section 29A and concluded that Section 29A would pervade Section 35(1)(f) of the IBC during the liquidation process. Furthermore, it was observed that courts should be open to interpreting Section 29A in light of Section 230 of the Act in a manner that does not defeat the purpose of their statutory linkage. In addition, while analyzing the utility of both the Sections, the SC opined that the legislative intent behind Section 230 of the Act is to “ensure revival and continuation of the corporate debtor by protecting it from liquidation.” Moreover, the restrictions under Section 35(1)(f) of IBC acts as an extension to that protection and therefore, shall be applicable. While referring to the Meghal Homes case, the SC contemplated questions raised upon Regulation 2B and stated that the raison d’etre behind the resolution process cannot be distinct from the liquidation process and the same was clear in the regulatory provisions. Therefore, the SC upheld that persons ineligible under Section 29A would also be ineligible to propose a scheme of compromise under Section 230. Critical Analysis The recent judgment of Arun Kumar Jagatramka has partly addressed the issue of the scheme of arrangement in the

Interplay Of Schemes Of Arrangement And IBC: A Case Study Read More »

The Arbitrability Of Antitrust Related Issues And The Competition Act, 2002

[By Aniket Panchal & Mehar Kaur Arora] The authors are students at the Gujarat National Law University. Introduction: setting the tone The arbitrability of competition law disputes has always been a hot potato. In this regard, arbitrability can be defined as ‘the ability of a dispute to constitute the subject matter of the arbitration.[i] That said, there is no denying the fact that the Competition Law and Arbitration lie at two opposite poles since arbitration is a consensual mode of private dispute resolution, unlike the competition law which seeks to set the seal on fair competition in the market and promote public interest as a whole. Although it may seem that both the subjects are diametrically opposite to each other, greater heights could be reached if a middle ground is struck by the Competition Law regime in India. With the lack of alternative to the Competition Act 2002 (hereinafter, “the Act”) rather than approaching the domestic courts and the limited powers vested in the Competition Commission of India (hereinafter, “CCI”), there is a pressing need for the door to be opened towards arbitration of certain anti-competitive conducts by dominant entities. In this article, the authors will venture into this not-so-explored terrain. In doing so, the authors will also make a mention of other countries with robust competition law regimes such as the United States and the European Union and their approach towards the same. A sneak peek into the approach adopted by the United States and European Union Last year, in the United States, arbitration was employed over a competition law dispute. In a historic win, the US Department of Justice Antitrust Division (hereinafter, “DOJ”) got a favourable order over a product market definition in a matter involving the merger of Aluminum firms, namely Aleris and Novelis. While Aleris and Novelis contended that the relevant product market should be broader so as to include sheet ABS (hereinafter, “ABS”) as well, the DOJ maintained that the relevant product market should be restricted only to aluminium ABS. In this case, it was alleged that the acquisition, if effectuated, would combine two out of four North American producers of aluminium ABS which would lead to sky-scraping concentration (as much as 60%) of total production capacity in the hands of Novelis. After a ten-day-long arbitration, the arbitrator issued a ruling in favour of the US Antitrust Division and found that aluminium ABS constitutes a relevant product market. Interestingly, it is also the first time the antitrust division used its authority to resolve a competition law related matter under the Administrative Dispute Resolution Act (1996). In fact, the Department of Justice marvelled at this development as a “flexible and efficient” arbitration mechanism. In this case, the proposed acquisition of Aleris by Novelis was challenged by the DOJ. Following this ruling, realizing the potential of arbitration in effectively resolving competition law disputes, Attorney General Delharim marvelled “this first-of-its-kind arbitration proved to be an effective procedure for the streamlined adjudication of a dispositive issue in a merger challenge. As demonstrated in this case, arbitration has the potential to be a powerful dispute resolution tool in the right circumstances …”. As for the European Union, there is a ballooning consensus on the full arbitrability of competition law disputes arising out of Article 101 and 102 of the Treaty on the Functioning of the European Union (hereinafter, “TFEU”). However, all the competition law matters which are made arbitrable, are subject to judicial review. While the arbitrability of these disputes arising out of these articles may not require much deliberation, there is a divided opinion on the issues arising out of other provisions such as Articles 106-108 as well as a matter arising under secondary legislation (For instance, the EU Merger Control Regulation).[ii] With regards to the approach adopted by the European Union, it is observable that the position of the United States is somewhat different than that of the EU. This is primarily attributable to the relationship between European Courts or Tribunals and European Competition Law for merger enforcement. To contextualize the same, in the United States a tribunal is always involved in the enforcement of Antitrust, whereas in the EU the competition commission can neither refer antitrust cases to enforcement bodies nor an arbitral tribunal. In a way, the inability of referring antitrust cases to an arbitral tribunal is in line with the objectives of the EU which is entirely opposed to referring cases to enforcement bodies. Is India averse to the confluence of arbitration and competition law? The Indian jurisprudence has taken shape miles away from the approaches adopted by these countries having robust competition law regimes. For starters, the Act that governs India’s competitive landscape has an overriding effect on the other statutes (Section 60), thereby imposing a bar on the jurisdiction of the civil court for adjudication of disputes that are to be dealt with by the CCI (Section 61). Therefore, an alternative mechanism for adjudication of competition disputes has not been prescribed under the Act. In India, the arbitrability of competition law disputes was addressed in the case of Union of India v. Competition Commission of India for the first time in 2012. The Ministry of Railways (Opposite Party) argument was that the mere existence of an arbitration agreement between the parties precludes the CCI from interfering, rendering the case non-maintainable. However, rejecting this argument, the Delhi High Court categorically stated that all disputes brought before the CCI were distinct from contractual duties dealt with by an arbitral tribunal, and the Act, 2002 supersedes all other legislation. It is so since the arbitration tribunals may tend to overlook the nitty-gritty involved in the process of adjudication of disputes of abuse of dominance since it lacks the expertise, mandate and ability to conduct an investigation. Concretizing the ratio, the Bombay High Court, in the case of Central warehousing corporation v. Frontpint Automotive Pvt. Ltd observed that Section 5 of the Arbitration and Conciliation Act is not to be read in isolation of Section 2(3) of

The Arbitrability Of Antitrust Related Issues And The Competition Act, 2002 Read More »

Pre-Packaged Insolvency: A Maiden Affair to Rescue the MSME

Contemporary Issues, Insolvency Law / CBCL

[By Neil Kothari and Nidhi Agarwal] Neil is a student at Government Law College, Mumbai and Nidhi is a student at Rizvi Law College, Mumbai. INTRODUCTION On 04th April 2021, an ordinance[i] was passed by the Government whereby a separate chapter, Chapter IIIA, was inserted in the Insolvency and Bankruptcy Code 2016 (“The Code”) dealing with pre-packaged insolvency resolution process. Due to the outbreak of the Covid-19 pandemic, India faced huge economic challenges, and various corporations and individuals were on the brink of insolvency. As a result, an Ordinance was introduced for insolvency resolution of Micro, Small and Medium Enterprises (“MSME”) in a value maximising and cost-effective manner, by the Government. The Code recognizes this as an “out-of-court” mechanism, wherein the stakeholders benefit from the amalgamation of informal workouts with the legal validity of formal insolvency proceedings. Moreover, appropriate safeguards are also provided for all stakeholders. This process involves a ‘debtor-in-possession with creditor-in-control’ model, whereby the assets of the company would still be under the management of the debtor with the approval taken of the creditors. This scheme further envisions a shorter timeframe for completing the proceedings. PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS Ever since the introduction of the “Pre-Packaged Insolvency Resolution Process” (“PPIRP”), MSMEs found it difficult to undertake restructuring under the standard Corporate Insolvency Resolution Process (“CIRP”). Since promoters ran these companies, it was impossible for them to resurrect under the current insolvency resolution mechanism whereby the current administration of the company would be removed, and the promoters would not be allowed to participate. Therefore, the latest amendment prescribes a scheme where the Corporate Debtor (“CD”) would be entitled to negotiate with the creditors to stay in business and keep the operations as a going concern. Any corporate debtor classified as MSME would be qualified to initiate a pre-pack process under Section 29A of the Code if the default on its loans is a minimum of Rs.10 lakhs. Such a process requires certain conditions to be fulfilled, To convene a meeting of unrelated financial creditors and seek approval for the appointment of an insolvency professional. A majority vote of 66% of its unrelated financial creditors is required to seek approval for initiation of the process. Also, the members of the corporate debtor are needed to pass a special resolution to approve the initiation of the process.[ii] When all the pre-commencement requirements are fulfilled, the applicant of the corporate debtor may apply to the Adjudicatory Authority (“AA”), filled with the period stated in the abovementioned declaration. In addition to the application, a report of the appointment of an insolvency professional has to be attached, along with a declaration regarding the antecedent transaction under Chapter III or VI of Part II of the Code. The AA is obligated to approve the application if it is complete within fourteen days from the date of filing of the application. When such an application is admitted, the AA declares a moratorium under section 14(1)& (3) of the Code officially appoints the insolvency professional and issues a public notice to the creditors, information utilities, etc. According to the law, the pre-pack process is stipulated to be completed within 120 days from the date of admission. The first 90 days are required to seek approval of the resolution plan from the committee of creditors (“CoC”) and the remaining 30 days for the adjudication by the AA. The insolvency professional under the Code within 90 days can apply for termination of this process if CoC fails to ratify any resolution plan. INTERNATIONAL PERSPECTIVE The concept of PPIRP was brought into India after its successful demonstration and application globally. United States has two types of PPIRP process; one requires creditors’ approval, and the other one can be initiated solely by the CD. Furthermore, the district courts themselves are responsible for acting as a bankruptcy court where the matter shall be referred to judges dealing specifically with bankruptcy cases. In the United Kingdom, a very popular notion known as ‘Phoenixing’ is used, where the promoters of the insolvent company are allowed to bid for the insolvent business without carrying over its debts. The Government, however, has taken some recommendations from the Graham Committee[iii] to improve the transparency of the PPIRP. CHALLENGES AHEAD The Pre-Packaged Insolvency Resolution Process had been introduced with benefits arising right from less time taken to complete the proceedings, and low transaction cost being incurred to a continuation of corporate debtor’s business proceedings., etc. However, it still has to face certain challenges during its implementation Approval of the plan by the Committee of Creditors (CoC) The Base Resolution plan proposed by CD needs to be presented to the CoC first. The plan has to be approved by 66% of financial creditors by value. Even though Sec29A allows the CD to apply for PPIRP with the exception of clauses (c) & (h)[iv], but if the financial situation of the CD is stressed or if the account of CD is Non-performing Assets, the creditors will be reluctant to approve the proposed plan. Additionally, unsecured creditors might not be much benefitted from PPIRP as the restructuring plan will favour secured creditors better. Therefore, the resolution plan proposed by the corporate debtor before the committee of creditors will only delay the process of PPIRP to put the entity back on track. However, with at least 66% vote of CoC, the creditors can transfer the management of the CD to the IP, i.e., from Debtor in Possession Model to Creditor in Possession Model. The IP will then submit an application to the Adjudicating Authority for approval of the application. Initiation of CIRP by Operational Creditors If the OC’s are not content with the Base Resolution Plan or have to reconcile in terms like payment delay, reduced interest rate, etc., they may apply for Section 9. In that case, if the PPIRP is not submitted within the framework of 14 days after filing of CIRP by OC, then the CIRP application shall be given preference over the PPIRP application. This will only

Pre-Packaged Insolvency: A Maiden Affair to Rescue the MSME Read More »

Equilibrizing Discriminatory Effects Of GMTR On Developing Nations Through METR

Taxation Law / CBCL

[By Sanskriti Srimali and Dushyant Sharma] The authors are students at Institute of Law, Nirma University. “Never let a serious crisis go to waste.” –Rahm Emanuel The economic jitters induced by the pandemic are still reeling around the globe. Post pandemic economic recovery has taken the centre stage at a global level. Undoubtedly, governments, around the world, have to be the front-runners to revive the global economy. However, looking at the figures of global debt which now stands at a record $281 trillion, the task of revamping the global economy would not be a cakewalk. The authorities have to search for new avenues to generate revenue or start scrutinizing existing ones to deliver sustainable public finances. Governments throughout the world generate revenue by collecting taxes via corporations as well as individuals therefore tax rates of each jurisdiction play an important role and can be a game-changer in the coming times. Tax avoidance and evasion have been part and parcel of every country. Multinational firms detest paying their fair share of taxation. They’ll do everything they can to take advantage of loopholes and reduce their tax liability. Since the 1990s, the world has seen an explosion of profit shifting to tax havens. Many companies have established offices in countries with low or no tax rates, such as the Cayman Islands, Bermuda, and Bahamas which are also known as tax havens as they provide a 0% tax rate to increase FDI and employment. Countries compete with each other to get the attention of big well-established companies by lowering the tax rate. To put an end to this race to the bottom, the US government came up with a bold proposal: a global minimum tax rate of 21% which was revised to 15%, keeping the idea unchanged. Before going into the details concerning its implementation and how it would fill the empty coffers of the government around the world, it is imperative to understand the origin and proposition of the idea of having a global minimum corporate tax. Each country has the power to decide its tax rate without taking into consideration the interest of others. This notion began to change with the advent of globalization and further through digitization which knows no territorial boundaries. However, the response of the countries was far too slow when compared with the rampant growth of the digital economy. As a result of this, a large chunk of profits earned by MNEs remained untaxed for a good amount of time. The emptied coffers of the governments after the 2008 global financial crisis, forced the G20 and OECD countries to reform the international tax system. In pursuance to it, OECD proposed an action plan to address ‘Base Erosion and Profit Shifting’, containing 15 actions that were approved by G20 nations in Russia in 2013. At the same summit, the OECD recognised that the developing countries have been more hit by the tax abuse of multinationals. However, the plan of actions failed to yield results owing to the lack of coordinated efforts, unilateral actions by the member countries among others. So the OECD came up with BEPS 2.0 blueprint in November 2020. The blueprint emphasised two pillars to overhaul the international tax system which is as follows : Pillar 1 – The proposal aims to introduce a formulaic element to apportion some of MNE’s profit to the jurisdiction where the sales occurred. The scheme mandates the filing of self-assessment by the MNEs. After filing, the home country would engage in calculations and allocations. To effectuate such a proposition, several existing tax treaties would have to be amended. This proposal gives the major bargaining power to a bunch of developed nations which are home to most of the MNEs. Also, in lieu of the meagre tax revenue, the proposal wants the recipient countries to roll back their unilateral action like- Equalization Levy (EQL) in the case of India. Given such roadblocks, a global consensus would be hard to achieve let alone the implementation. Pillar 2– This pillar intends to lay down a certain set of rules to impose a minimum tax rate of 15% on all companies irrespective of where they are headquartered or where they work. So suppose if a company is headquartered in a country that imposes a tax rate of 10% which falls below the proposed rate of 15% then the other country from which the parent company operates would come and take the rest i.e. 5%. This would not only disincentivize the MNE to shift their operations to low tax jurisdictions but will also encourage the low tax jurisdictions to increase their tax rate to the minimum global standard. But is this as good news as it sounds? Unfortunately not! This proposal is plagued by two difficulties first lies in implementation and the other, the major concern, is the distribution of the tax collected among the participating countries. Under the OECD proposal, the G7 countries which account for 10% of the world’s population would gain more than 60% of the additional revenues. The imposition of the Income Inclusion Rule (IIR), which allows the ultimate parent country of the MNEs to impose a top-up tax to achieve minimum effective rate would override other provisions in the blueprint, like UTPR and STTR. They have only been included so that the IIR might not sound unfair to the source country. The use of IIR as the main norm, clearly signifies that a major chunk of the pie would go to MNEs ultimate parent country. The most favourable option that could act as a breakthrough in the current hiatus is the Minimum Effective Tax Rate which is also being endorsed by the World Economic Forum, Tax Justice Network and UN FACTI panel recommendation. This proposal is the modification of GMTR and dispenses with the idea of giving priority to home countries of MNEs over source countries where real activities occur. This proposal works on the following pillars which are described below : Transparency: Under this, the MNEs have to

Equilibrizing Discriminatory Effects Of GMTR On Developing Nations Through METR Read More »

Global Minimum Corporate Tax – What Will it Mean for India?

Taxation Law / CBCL

[By Prerna Mayea and Harshal Sareen] The authors are students at the Institute of Law, Nirma University. Many events have been witnessed recently, such as the G7 nation’s approval and the United States’ proposal for Global Minimum Corporate Tax Rate [“GMCTR”] which shows that a global movement towards a comprehensive overhaul of the global tax system has gained traction. In a study by the Tax Justice Network, countries lose $475 billion to tax havens and $245 billion owing to corporate tax avoidance. Due to the upheaval caused by the Covid-19 pandemic, the economies of some countries are on the brink of depression. The countries across the globe have suffered a loss of $79.69 billion. The US has therefore proposed a worldwide minimum tax rate of 15%. Introduction GMCTR implies a global minimum tax rate that corporations across the world must pay, regardless of the country they are based. This initiative can be considered as a global response to ensure that tax is paid by the corporations where they operate since multinational corporations often tend to show reluctance while paying taxes on their earned profits. In order to do so, corporations exploit the loopholes in the taxation laws and opt for a worldwide practice known as Base Erosion and Profit Shifting (BEPS), where large corporations incorporate themselves in lower-tax countries like the Cayman Islands and Ireland (tax havens) to avoid high tax in the countries where they operate. As a consequence, it deprives a country of its revenue from taxes. Consequently, the taxation regime needed to be revised in light of such problems. Therefore, to counter this tax avoidance and reinvigorate the battered economy GMCTR has gained attention recently. This can be a much-awaited decision since it would fix up the loopholes pertaining to cross-border taxations and restore economic stability to a pandemic-ravaged world. Therefore, with the prospect of introducing GMCTR it is imperative to analyse its impact upon the Indian Taxation system. In this post, the authors seek to discuss the opportunities as well as the issues that India might face with the introduction of GMCTR. Indian Taxation Scenario Before delving into the implementation of GMCTR, it is important to take note of the present taxation scenario in the country. Like other developing and developed nations, India is also not immune to the tax losses arising on account of companies exploiting the loopholes in the taxation laws. Tax losses in India have been estimated at over $10 million. This problem was also realized by the Indian government and it took bold steps to curb the problem of tax evasion. In 2016, the government introduced an equalization levy to tax the income of multinational e-commerce companies engaging in regular transactions with companies in India, irrespective of their place of permanent establishment. It also implemented the General Anti-Avoidance Rule (GAAR) in 2017 to keep a check on transactions aimed at avoiding tax. India has also proactively engaged with several countries in the Double Taxation Avoidance Agreement (DTAA), provided under Section 90 of the Income Tax Act 1961, with a focus to provide relief on dual incidence of taxation on the same declared asset in two different nations. Relief from double taxation has also been provided to non-resident Indians on income accrued through foreign retirement benefits accounts in the federal budget 2021. Implementation of the GMCTR can be seen as a positive step to further reduce any tax evasions in the country. It will also provide India a strong footing in the G20 summit scheduled in July 2021, to renegotiate its DTAA which has not been signed by several countries for years. Impact on Foreign Direct Investment Various multinational corporations invest in different countries which leads to the generation of employment opportunities and efficient utilization of national resources. In order to attract these businesses, a country uses its sovereign power to regulate corporate taxes in order to attract global corporations. Therefore, in September 2019, India had reformed the corporate tax rates by slashing it down to 22% (for existing companies not seeking exemption) and 25% (for existing companies not receiving exemptions), and 15% for newly incorporated companies. This was done to give a boost to the crippling economy and attract new investments in the country. Further, the corporate tax was also much lower in other countries like 25% in Vietnam, 17% in Singapore and 25% in China. By reducing its rate, India was also now in a position to give competitive position to attract foreign investors. The move yielded positive results and India witnessed the highest inflow of Foreign Direct Investment (FDI) in the financial year 2020-21, amounting to $81.72 billion. On a positive note, India’s tax rate for domestic companies was fixed at 22% (plus 10% surcharge and 4% cess) by the insertion of Section 115 BAA, Income Tax Act, 1961, thus being higher than the global minimum corporate tax rate, India can continue to attract FDI. Further, it has been argued that apart from lower tax rates, India also provides a conducive environment for foreign investments due to good quality of labour at competitive rates, several relaxations and incentives, vast growing internal market and private sector as well as technological and innovation capabilities. Therefore, it can continue to attract FDI without any significant adverse impact. However, it is feared that with the introduction of a GMCTR, investment opportunities for developing and under-developed countries will be eroded to a great extent. With severe economic disparities around the globe, the introduction of GMCTR will mean that countries that choose to offer low corporate tax rates will lose their competitive edge against giant global economies. Implementation Challenges Since every coin has two sides, the introduction of GMCTR along with the opportunities also poses several challenges. It is very likely that GMCTR would pose several implementation challenges in India. The foremost challenge is getting the majority of nations on board. Further, with the implementation of GMCTR, if the government revenues are impacted negatively, it will create a barrier in providing necessary social services and

Global Minimum Corporate Tax – What Will it Mean for India? Read More »

Priority in Enforcement of Security Interest by a Secured Creditor

Contemporary Issues, Insolvency Law / CBCL

[By Arya Mittal & Naman Keswani] The authors are students at the Hidayatullah National Law University. Recently, the Hon’ble Supreme Court of India gave its judgement in the case of India Resurgence Arc Private Limited v. M/s Amit Metaliks Limited & Anr. wherein it held that a dissenting secured financial creditor cannot claim a priority over other creditors based on the security interest held by it. The legal provision in question was Section 30(4) of the Insolvency and Bankruptcy Code, 2016 [“the Code”] which was amended in 2019. The current post seeks to analyse the case in light of the provisions of the Code with regards to the priority of the share of a secured creditor. Facts of the Case India Resurgence Arc Private Limited (“India Resurgence Arc”) is the assignee of rights, title, and interest of Religare Finvest Limited, a secured creditor of the corporate debtor VSP Udyog Private Limited. The resolution plan for the corporate debtor was approved by 95.35% of the creditors, with India Resurgence Arc holding its dissenting opinion. It was of the view that it only received one-sixth of the amount of security interest held by it and it would be more beneficial if the corporate debtor was liquidated since, in that case, it could have enforced its security. The resolution plan was approved by the National Company Law Tribunal, Kolkata and it held the resolution plan to be compliant with all legal requirements provided in the Code. However, India Resurgence Arc appealed to the National Company Law Appellate Tribunal (“NCLAT”) under Section 61(3) of the Code, contending that the approved plan contravened the provisions of the Code but the Appellate Authority dismissed the appeal. Hence, an appeal was preferred before the Supreme Court under Section 62 of the Code. Critical Analysis Priority-based on Security Interest The main contention of India Resurgence Arc was based on the amendment to sub-section 4 of Section 30 of the Code which provided to consider, “the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor”. India Resurgence Arc failed to consider that the provision uses the word ‘may’ which leaves it to the discretion and commercial wisdom of the Committee of Creditors (CoC) to consider if such priority should be given to any of the financial creditors. Thus, in the event of not being given any priority, a financial creditor cannot challenge it as a contravention of the law. To substantiate further, the resolution plan approved by CoC is valid in the eyes of law if requirements of Section 30 of the Code are fulfilled. The Supreme Court has also agreed with the same in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors. (“Essar Steel”) wherein it observed that the amendment “only amplified the considerations for CoC” and was not meant to give any undue advantage to any one of the similarly situated class of creditors. Furthermore, the contention of the India Resurgence Arc for enforcement of entire security interest in its favour was also negated. The Court referred to Essar Steel, wherein it clarified that the amendment has been beneficial for operational and unsecured financial creditors who were now entitled to receive a minimum amount since prior to the amendment, the dissenting operational and unsecured financial creditors could be crammed down by the secured financial creditors. However, post-amendment, this is not possible since their interest is now secured. As regards the secured financial creditors, the proposition remains the same and a higher amount could contend only if it is not fair and equitable to such creditor. Therefore, a creditor can only claim a minimum amount that should be paid to it and cannot contend for a higher amount based on the security interest held by it. Addressing the contention of India Resurgence Arc to liquidate the corporate debtor, the Court referred to the judgement of Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors. wherein the Supreme Court has held that a financial creditor can enforce the security interest but only to the extent which is receivable by it. The Court also clarified that enforcement to such an extent would satisfy its debts and would not contravene any of the provisions of the Code. It held that it was never intended by the legislature that a creditor having a security interest, be entitled to enforce the entire security interest but rather a proportionate part receivable by it. If any creditor is allowed to do the former, it will lead to inequality and be unjust to other secured creditors. Requirements of Law India Resurgence Arc preferred an appeal under Section 61(3) of the Code on the ground that “the approved resolution plan was in contravention of provisions of the Code”. It contended that the plan was not fair and equitable since it allowed for payment of nearly just one-sixth of the amount of the total security interest held by it. Explanation 1 to Section 30(2) of the Code states that the distribution should be fair and equitable to the creditors. The Court was of the view that the contention had no substance since all the secured creditors within that class had been provided with the same proportionate percentage share as India Resurgence Arc. Since it was provided with the same proportionate share as other creditors, it cannot raise an issue of unfair and inequitable treatment. If such an approach (as India Resurgence Arc) is adopted, then the creditors will be motivated to liquidate the company, as the appellant in the present case, which would defeat the objective of the Code. The same was also held in Essar Steel. In Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court very well emphasised that the objective of the Code is to revive the corporate debtor and

Priority in Enforcement of Security Interest by a Secured Creditor Read More »

Crystallisation of limitation period on Competition cases

Competition Law / CBCL

[By Avik Sarkar] The author is a student at K.L.E. Society’s Law College, Bengaluru. The Competition Commission of India has time and proved through its revolutionary judgements that they are the real guardian for consumers and small market players by saving them from harrowingly oppressive policies of the big market players. And on this occasion in the case Neha Gupta v Tata Motors the commission has demystified the limitation aspect with regards to filing complaints before the competition commission of India. The question of applicability of limitation period with regards to competition matters has always been a contentious one Introduction The Competition Act, 2002 is prevalently known to maintain equipoise in the market with a target to protect consumers at the macro level and protect small and medium businesses from the abuse of dominant position and anti-competitive practices by the large enterprises. It has a standardized gambit using which it keeps the dominant players in the market in check. As this act is still in the embryonic stage of its development, we generally see many judgements devolved regarding competition matters. And with each judgement, it is demystifying various conundrums pertaining to contentious questions of the act. In a recent case in the matter of Neha Gupta v. Tata Motors, the Competition Commission (hereinafter referred to as CCI) of India demystified its standpoint regarding the applicability of the limitation period in competition matters. The CCI had held that it doesn’t impose any limitation period for filing any complaint. This piece holistically analyses the same. Factual matrix The informant Neha Gupta was the owner of the business Varanasi Auto Sales Pvt Ltd (hereinafter referred to as VASPL) which was an authorised dealer of Tata Motors. It was mainly dealers of commercial vehicles, spare parts, etc. The dealership agreement between the two was signed in the year 2011 and had ended in the year 2017. Neha Gupta had filed a complaint against Tata Motors accusing them of having imposed unfair terms in their dealership deed thereby amounting to an abuse of dominant position (Section 4 of Competition Act, 2002). And simultaneously, Tata Motors had also indulged in a tie-in arrangement with their financial institution name Tata Capital and Tata Motor Finance. This was done in order to maintain their market share which amounted to indulging in anti-competitive practices (Section 3 of Competition Act, 2002). In broad terms, the clauses imposed by Tata Motors were subverting the position of the dealers. A similar allegation was levelled against Tata Motors by another dealer named M/s Kanchan Motors (the dealership agreement signed between the two was in the year 2016 and ended in 2021). Against all the allegations by its dealers, Tata Motors had raised several issues one of them being delay on the part of the informant in bringing up the matter to the commission. Analysis In rem issue Pertaining to the concern of delay in the present matter CCI stated that under Competition Act,2002 there is no limitation period to file a complaint. It can be said that the investigation conducted by CCI are in-rem in nature and are not in-personam disputes. There might be situations when a lis might prima facie come across as an in-personam dispute, but the issue raised might be contentious in nature and may contribute to future market distortions. And in such situations, it becomes important to make the public aware of the market distortions. Merely because the informant doesn’t suffer any direct losses or is not personally aggrieved will not vitiate the in-rem nature of the information. Therefore, any person can file information under the Competition Act, 2002 with regards to abuse of dominant position and anti-competitive practices. The same was held in the case of In Re: XYZ and Indian Oil Corporation which stated that authority orders are in rem and not in-personam. Anti-trust authorities deal with market situations that are dynamic in nature and are evolving with time. With innovations happening all around the globe the anti-trust authorities have to keep themselves updated and armour themselves with each and every available weapon to tackle unforeseen and unprecedented situations. Therefore, it would be grossly erroneous to apply a limitation period while attempting to tackle such unforeseen situations. And as per the Act, the CCI is empowered to carry out inquisitional functions in public interests. Therefore, application principles of the limitation period in inquiry-based institutions would be grossly iniquitous. The above dictum of the commission has brought the Indian perspective in parity with the European antitrust law which imposes no limitation on the investigation by the commission. This dictum will surely give a lot of relief to the authority in terms of carrying out an investigation with not much intervention and can thereby deliver a diligent and biased free report on any issue. Locus Standi demystification The proceedings before the commission are inquisitional and in-rem in nature therefore the locus standi is not a sine qua non for filing information. The issue relating to the locus of the informant under the Act was further clarified in the case of Samir Agrawal v. Competition Commission of India where it was stated that “when the CCI performs inquisitorial, as opposed to adjudicatory functions, the doors of approaching the CCI and the appellate authority, i.e., the NCLAT, must be kept wide open in the public interest, so as to subserve the high public purpose of the Act..”.Thus, questioning the locus of the informant is totally infructuous On the contrary, it should not be mistaken that the absence of a limitation period may lead to any kind of frivolous information’s being filed. Therefore, CCI shall diligently examine reasons for delayed filings and based on the same it accepts or reject complaints. Any kind of impropriety will lead to the dismissal of the complaint and lead to the imposition of penalties envisaged under section 45 of the Act. But, the process of examining the propriety of information shall vary from situation to situation. This process helps in eliminating frivolous complaints and wastage of public resources and be prevented. The main aim is to detest market players from practices that can have an appreciable adverse effect on

Crystallisation of limitation period on Competition cases Read More »

The Case of “Amateur” Baseball Federation of India: Analysis Through Competition Lens

Competition Law, Contemporary Issues, Sports Law / CBCL

[By Pranav Tomar & Umang Chaturvedi] The authors are students at the Rajiv Gandhi National University of Law, Patiala. Introduction The commercialization of sports has strongly affected the landscape of sports federations in India. Now, these associations/federations act not only as regulators of domestic sports or facilitators to sportspersons but also add value to business houses. Recent trends prove that these Government-recognized federations are frequently found in conflict while fulfilling their duties due to the unparalleled power that they possess as entities. Hence, a check on such powers is of utmost importance, which can only be ensured through the law of the land. In consideration of such checks and balances, provisions of the Competition Act, 2002 (‘Act’) prove to be helpful in India. Recently, the Competition Commission of India (‘Commission’) in an information filed by the Confederation of Professional Baseball Softball Clubs (‘CPBSC’) held the Amateur Baseball Federation of India (‘ABFI’) in contravention of Section 4 of the Act (abuse of dominant position). In this piece, the authors analyse the acts of ABFI through the lens of precedents and the Indian competition law regime and will attempt to provide solutions to sports-related competition law violations. Facts of the Amateur Baseball Federation’s case CPBSC was a not-for-profit organization that worked for the development of baseball and softball privately, whereas ABFI was a National Sports Federation affiliated to the Sports Ministry that acted as the national regulator of baseball. ABFI was also affiliated with international baseball regulators and was officially entrusted with the duty of promoting the sport through various means. The matter stems from the act of CPBSC where it intended to organize an intra-club national Championship in February 2021 to provide a platform to young players. However, ABFI through its regulatory powers issued a letter dated 7th January 2021 that prohibited State affiliates from acknowledging private bodies and further threatened the interested players with disciplinary action if they participate in any unrecognized league. In fright, the registered clubs revoked their participation from the Championship which caused losses to organizers, i.e. CPBSC. Simultaneously, ABFI scheduled its flagship National Championship amidst the second wave of pandemic in late March 2021 and notified through a communication dated 1st March 2021. Eventually, the aforementioned communication turned out to be malafide considering that it was released after CPBSC finalized the dates of its private Championship and ABFI deliberately scheduled it on similar dates only to cause hindrance to CPBSC. ABFIs Championship was an event of utmost importance to all players as it gave them a chance to be considered for representing India in future. Hence, such acts caused chaos amongst the players and state bodies which forced them to choose ABFIs league only by not participating in another opportunity which was offered by CPBSC. ABFI case vis-à-vis precedents To tackle abuse of dominant position information, the foremost question the Commission faces is whether the organization is an enterprise? The commercial role of sports organizations forces them to comply with the definition of “enterprise” as provided under Section 2(h) of the Act. It was noted in Surinder Singh Barmi v. BCCI (‘Barmi’) that the definition of an enterprise is “wide enough to include any economic activity by an entity”. However, in ABFI’s case, the Commission went a step ahead and noted that even a non-commercial economic activity shall be subjected to the scrutiny of the Act. To do so, it used the “functional approach”, which has been relied upon in various Indian cases but primarily finds its mention in MOTOE v. Elliniko Dimosio. The approach suggests that every function shall be assessed separately as a federation may act as an enterprise when it is carrying one activity and not when carrying any other. In MOTOE, the Grand Chamber of the European Court of Justice stated that the economic activity having any connection with a sports-related act i.e. essential function does not restrict such entity from being scrutinized as an enterprise that in Indian parlance is defined under Section 2(h) of the Act. Further, the procedural set-up of the Act suggests that when the Commission adjudicates upon abuse of dominant position, a three-fold process is followed – Delineation of the relevant market in which enterprise exists Section 2(s) of the Act defines the “relevant market” for appropriate adjudication and determining the scope of the investigation. The relevant geographic market from Barmi to ABFI has always remained the same, in essence, India. It is the delineation of the product market that was presented through different approaches – (i) Consumer & multitude relationship approach (which states that federations have multiple functions to discharge with regards to other enterprises and consumers) in Dhanraj Pillay & Others v. M/s Hockey India (‘Pillay’); and (ii) the principle of substitutability (of sport & of services provided by one governing body) in Ministry of Youth Affairs and Sports v. Athletics Federation of India (‘AFI’). Based on the above-mentioned principles, the relevant market in ABFIs case was delineated as “market for organization of baseball leagues/events/ tournaments in India” because (i) no other sport can replace baseball; and (ii) no other regulatory body provides the necessary services. Establishing the dominance of enterprise within its relevant market The term “pyramid structure” finds utmost importance when determining the dominance of a sports organization. It refers to the organizational structure of sports entities which is modelled to fulfil governance loopholes. For instance, the Basketball Federation of India is the regulator and facilitator of basketball in India and has been recognized by another bigger regulator at the international level i.e. Fédération Internationale de Basketball. The same stands true with BCCI and ICC in the context of cricket. The pyramid structure has been noted in various cases in India like Barmi and Pillay. Although the pyramid is a monopolistic structure in itself, it ensures uniformity of sports globally. However, such structure makes these organizations the de facto authority coupled with factors like unilateral decisions, malafide bans on respective athletes, disapproval to local leagues, etc. further establishing their dominance before the

The Case of “Amateur” Baseball Federation of India: Analysis Through Competition Lens Read More »

The ‘Reit’ Measures To ‘Invit’ Better Regulatory Practices: Key Take-Aways For India

Capital Markets and Securities Law / CBCL

[By Shaivi Nihal Shah & Palash Moolchandani] The authors are students at the National Law University Odisha. Introduction Infrastructure Investment Funds (“InvITs”) and Real Estate Investment Trusts (“REITs”), collectively referred to as ‘business trusts’, have recently witnessed increased popularity in the country. Over the past few months, Indigrid, an Indian InvIT (“I-InvIT”), put out a Rs. 1284 crore – rights issue and Brookfield India, an Indian REIT (“I-REIT”), listed a Rs. 3800 crore – public issue, showcasing the growing traction of business trusts. Some of the reasons investors find such trusts attractive are the tax benefits offered and the mandatory requirement to pay out 90% of distributable cash flows on a semi-annual basis. Recently, the government has made significant efforts to promote these trusts and make them more accessible to retail investors. For instance, in 2019, the Security and Exchange Board of India (“SEBI”) notified certain amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and the SEBI (Real Estate Investment Trusts) Regulations, 2014 whereby a number of positive changes to the existing regime were introduced. In February 2021, the Finance Minister of India, Ms Nirmala Sitharaman, while releasing the Budget 2021-22, announced that business trusts would be exempted from Tax Deducted at Source, and advance tax payments would only be needed to be made when the amount of dividend income was announced. Notably, business trusts were also permitted to raise debt funds from foreign portfolio investors to reduce the liquidity crunch. However, despite the impetus given to business trusts by the government, India is still in a fairly nascent position as only 15 InvITs and 4 REITs are registered with the SEBI. This article attempts to analyse the regulatory framework of more mature business trust regimes and determine the key takeaways that India can replicate. Structure of Business Trusts In essence, business trusts can be considered to be collective investment schemes formulated as trusts. They are multi-tiered and comprise sponsors, trustees, investment managers and project managers. Certain requirements have been laid down by the SEBI to determine the eligibility of individuals and entities to qualify for these positions. The factors for eligibility are based on assets owned, net-worth and the relevant work experience. In terms of tiers, the sponsor acts as the anchor and creator of the trust. The sponsor then appoints the trustee, who is expected to oversee the work of the project manager and the investment manager. The investment manager typically supervises, manages and makes decisions regarding the investments and divestments of these trusts, and guarantees their activities. The duties of the project manager are to manage the assets of the trust and ensure that the projects undertaken by it are concluded in a timely manner. Deconstructing the Best Practices from Other Jurisdictions: Key Takeaways for India I. Investment in foreign assets All mature business trust regulatory jurisdictions do not restrict investments in foreign assets. Jurisdictions like Singapore have benefitted greatly from this and have experienced exponential growth in the last decade. In fact, its last 10 REIT IPOs have 100% of their assets outside Singapore while 80% of all the REITs in the country have investments in foreign assets. This is a clear indication of its transformation into an international hub for REIT listings. I-REITs/I-InvITs should also be allowed to invest in offshore assets as this would help them diversify their portfolio and explore different avenues of generating income. Further, the recent addition of institutional investors like mutual funds and insurance intermediaries as ‘strategic investors’ will ensure less shortage of funds for investments in foreign assets. This would also lead to higher investments from foreign and non-resident holders, as was observed in the case of Singapore. However, introducing such a provision should come with a caveat. Permitting investments in foreign assets can take attention away from Indian projects, contravening the very objective of introducing business trusts in India- to revive the cash strapped real estate and infrastructure sectors. Therefore, it is suggested that there should be a maximum limit on investment in foreign assets. II. Minimum Subscription Size SEBI has recently amended the minimum allotment and trading lot requirements for publicly issued business trusts. The minimum subscription for I-InvITs has now been reduced to 1 lakh from 10 lakhs and for I-REITs to 50,000 from 1 Lakh. However, in order to attract a larger base of retail investors, there is a need to further dilute the amount under this threshold or completely do away with it. The SEBI should take a cue from advanced jurisdictions like the United States (“US”), Australia, the United Kingdom, Germany, etc., who do not follow the principle of minimum subscription threshold. III. Internally Managed v. Externally Managed The question of whether business trusts should be managed internally or externally has always been proffered to regulators around the world. The US-REIT market, which is the largest in the world, predominantly follows an internal management system, whereas in the Asia Pacific region, apart from Australia, REITs are mostly externally managed. The latter has historically faced challenges regarding fee structures and conflicts of interest between the external management and the unitholders of the REIT. Thus, while an external manager offers better expertise, resources, personnel and influence than an internal manager, it is extremely difficult to align the interests of the manager with that of unitholders. To counter these challenges, countries have adopted strong corporate governance requirements to ensure better market discipline and accountability of business trust managers to the unitholders. For instance, the Monetary Authority of Singapore’s (“MAS”) Licensing Guidelines require licensed management companies registered on the Singapore Exchange to mandatorily conform to the country’s Code of Corporate Governance. In India, in order to prevent any unscrupulous activities by trust managers, a minimum of 50% of the managing company’s governing board must be independent directors who are not directors on the board of another business trust. However, the regulations do not envisage the responsibilities and explicit liabilities of independent directors of such companies. In this regard, a cue can be

The ‘Reit’ Measures To ‘Invit’ Better Regulatory Practices: Key Take-Aways For India Read More »

Author name: CBCL