Author name: CBCL

The Whatsapp Case: Implications Of Behavioural Economics In Competition Law

Leave a Comment / Competition Law /

[By Akanksha Agrahari & Arjun Nayyar] The authors are students at the NALSAR University of Law, Hyderabad.  Introduction WhatsApp was heavily featured in the news recently when the Competition Commission of India took suo moto cognizance of the updated privacy policy and terms of service for its users. Due to its extremely large user base, as well as the network effects associated with it, the Commission held that users were left with no other option but to accept the updated conditions. Hence, Whatsapp’s actions were found to be in prima facie abuse of its dominant position, a view which was upheld by the Delhi High Court. It raises certain concerns regarding the dominant position held by companies by virtue of their ability to manipulate consumer behaviour. This isn’t a unique instance wherein WhatsApp was called into question for its ability to influence the market and its users. Previously, WhatsApp was fined 3 million Euros by the Italian Competition Authority for abusing its dominance. This post analyses various concepts of behavioural economics using which competitors can obtain a dominant position and influence their user base. Understanding Behavioral Economics The CCI has on many instances discussed factors that compound a firm’s dominance in the market and lead to an abuse of its dominant position. The order in the WhatsApp case follows an extensive analysis of network effects and how they have led to the app reaching a position where it is difficult for the users to switch to any substitutes. Such companies use certain tactics and human tendencies to build a user base and subsequently abuse it. This dependence of the consumers on one platform may lead to a denial of market access to competitors. Network Effects of Scale and Tipping The larger the consumer base of a platform, the more inclined a consumer would be to use it. Network effects relate to an increase in the desirability of a platform due to an increase in the number of users. The CCI has looked at network effects in the past to understand whether or not a competitor holds a dominant position, and subsequently, to determine whether this position has been abused. This concept is amplified in the relevant market of over-the-top (OTT) messaging apps, benefitting WhatsApp the most with 70 million users in the country, or a market share of 95%. Such a large user base allows WhatsApp to function mostly independently of market forces, due to the lack of feasible substitutes and the hesitation of users to switch. As the updated terms of use and privacy policy of WhatsApp does not allow for the user to opt-out, any individual who disagrees is left with the sole option of uninstalling the app. However, due to the nature of OTT messaging apps, it is not sufficient for users to simply delete WhatsApp and switch to other competing apps. It is also necessary to ensure that other users make the switch as well, to make the alternative a viable substitute. This creates a barrier to the efficient substitutability of the application, preventing the users from refusing to conform to the updated conditions and the alleged breach of their privacy. Such a barrier to entry is anti-competitive practice and is said to have an appreciable adverse effect on competition under Section 19(3) of the Competition Act. The EU has dealt with network effects as a reason for dominance on various occasions. In the Booking.com case, it was remarked that network effects may cause markets to tip towards a particular competitor. It was further stated that once a particular threshold is crossed, these network effects might lead to a major barrier to entry for competitors. This ties into the aspect of “tipping”, whereby the market tips in favour of a leading firm due to an increased market share. On reaching such a tipping point, firms can rely on their large user base to consolidate even more users. Large players are protected from competition and market forces due to their dominance and subsequent barriers to entry, allowing them to make decisions and impose policies that would otherwise cause a loss in business if the market was competitive.[i] The EU also extensively discusses the concept of tipping. It states that cases dealing with anti-competitive practices must be brought to the commission’s notice before companies can abuse such a dominant position. Consumer Inertia Consumers tend to opt for the default option or the option that is readily available. This aspect is abused by dominant firms by virtue of the ‘inertia’ of consumers.[ii]  Having used a platform for a considerable amount of time, consumers lack any incentive to switch to another option. Moreover, the habit formation of using a particular app over a period of time puts the average consumer in a state of inertia. Google reportedly pays USD 1 billion to Apple to be the default search engine on the iPhone. This illustrates the importance of default options and the inertia generated for them to the firms. Consumer inertia is also known as the status quo bias. The concept was extensively discussed in the EU in the Google Android Case, and has also been held by the CCI to be sufficient grounds to raise a prima facie case of abuse of dominance. It entails that those individuals who already have access to a particular platform or application on their mobile devices would have no incentive to switch to competing apps on the market. This concept is witnessed to an even greater extent in the WhatsApp case, as not only do the users already have the application on their smartphones; they also utilize it on a daily basis. It would be highly inconvenient for consumers to switch to another app if they disagree with the updated privacy policy and would be much more likely to accept the conditions despite having their differences. This is coupled with the network effects discussed earlier, as the status quo bias would only amplify when multiple users have to switch in order for any

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Innovators Growth Platform: NASDAQ of India

Leave a Comment / Capital Markets and Securities Law, Company Law, Contemporary Issues /

[By Shubham Kumar Singh] The author is a student at Amity Law School Delhi. INTRODUCTION India boasts the third largest startup ecosystem in the world, with more than 50,000 startups, out of which more than 9,000 are technology-led startups. (i) India is also a host to more than 800 venture funds and 2,751 angel investors. (ii) In this thriving startup ecosystem, many unicorns like Flipkart, Zomato, Paytm, and its likes are planning for public listing in the near future, but their favourite destination, unfortunately, is not India but outside India. (iii) Given this thriving startup ecosystem, the Securities and Exchange Board of India (SEBI) decided to relax the terms of listing and to provide a different platform for these startups called Innovators Growth Platform (IGP). Experts of the industry have called it a step in making Nasdaq of India. They see a huge potential in IGP as it was there in NASDAQ back in the 1970s. WHAT IS NASDAQ? National Association of Securities Dealer Automated Quotation (Nasdaq) is a US-based global platform to trade securities in a completely computerized manner. In 1971, the National Association of Securities Dealers (NASD) was created to allow investors to buy and sell securities electronically. It was the first of its kind platform in the world for electronically trading securities. It provides a cutting-edge platform for high-tech and startup companies. Therefore almost all big tech giants like Facebook, Google, Apple, Amazon chose Nasdaq in their initial years. Nasdaq exchange boasts 3,800 companies that hold $11 trillion market capitalization, making it a large portion of the global equity market. (iv) INNOVATORS GROWTH PLATFORM (IGP) In the view of the emerging startup ecosystem in India, in 2015, SEBI established a new segment for listing companies besides the main board listing procedure named Institutional Trading platform (ITP). It was to attract startups listing, but it could not generate any result. Therefore in 2018, SEBI reviewed and modified the ITP and launched the modified version with a new name, Innovators Growth Platform (IGP). SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018 to change the framework of ITP. Even after the modification, IGP failed to garner much interest among the startup community, and still, there are no companies listed on it. (v) SEBI EASES RULES TO ATTRACT STARTUPS LISTING  Even after a complete revamp of ITP and the launch of IGP, startups were rather flying abroad to more attractive destinations like Nasdaq instead of IGP. To make IGP more attractive and competent to listing platforms like Nasdaq, SEBI decided to ease its various rules of listing. On 25th March 2021, SEBI, via its press release (PR no. 15/2021), disclosed the changed rules in the listing policy of the IGP.(vi) SEBI, to make the IGP platform more accessible to the startups, made the following changes to the listing norms via an amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: 1) Listing Eligibility Reduced to One Year In the mainboard listing procedure, the Company that wanted to be listed needed to show a three-year record of operations, profits, assets, net worth, etc.  Whereas under the IGP, the Eligible Investors of the Company were only required to hold 25% of the pre-issue paid-up capital for two years. Now it has been reduced to only one year. This will make a listing in India more lucrative than it was before. 2) Open Offer Requirement Increased to 25% Under the takeover code (The Substantial Acquisition of Shares and Takeover Regulations, 2011), no acquirer can acquire 25% or more shares/voting rights in a listed company without making a public announcement of an open offer. This requirement is to give an option to the existing shareholders to either exit their investment planning. Therefore SEBI has increased this cap to 49% for companies to be listed on IGP. This will give extra room for Startups to raise capital without the burden of an open offer as it is a costly and time-taking affair. Merger and Acquisition is one of the significant concerns of startups in India. Stringent post listing norms force these startups to shift their operation outside India. This amendment would simplify mergers and acquisitions for startups giving them enough flexibility to raise capital post listing. 3) Relaxed Mandatory Disclosures In the case of mainboard listed companies, whenever an acquirer acquires five per cent or more of the shares/voting rights in a target company it has to make some mandatory disclosures as per the takeover code. Furthermore, mandatory disclosure requirements have to be observed whenever there is a change of positive two per cent or a negative two per cent. (vii)These caps are not suitable for startups because their issue size is not that large as that of mainboard companies. Promoters of startups require more flexibility in these disclosure requirements as it is a costly and time taking affair. For the startup companies to be listed on IGP, the new norm has increased the threshold from five per cent to ten per cent and thereafter, fluctuations of 5% are the new threshold rather than the earlier 2 %. 4) Delisting Procedure  Eased a) Approval On the mainboard, a company wishing to delist is required to have a two-thirds majority of the shareholders, but for the startups listed on IGP, the approval needed for delisting must be approved by only a majority of minority shareholders. b) Acquisition Cap On the mainboard, a company considering delisting needs to acquire 90% of the shareholding or voting rights in the company. A startup listed on the IGP only needs to acquire 75% of the total shareholdings or voting rights before considering delisting. c) Price A company wishing to delist from the mainboard needs to calculate the price of the shares through the reverse book building process. Whereas for a company listed on the IGP, the acquirer can quote a price with due justification. 5) Migration Requirements Down to 50% Earlier for a company listed on IGP wishing to migrate to the main

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Pre-Package To Rescue Micro, Small And Medium Enterprises: A Step Towards Attaining The SDG 8 Objective?

Leave a Comment / Insolvency Law /

[By Yasha Goyal and Shreya Ahuja] The authors are students at the Institute of Law, Nirma University. Introduction The Sustainable Development Goal 8 (“the SDG 8”)  “is to promote sustained, inclusive, and sustainable economic growth, full and productive environment, and decent work for all”.[i] The target is to achieve these goals by 2030.[ii] The Covid-19 pandemic that hit the world in 2020 has not only affected healthcare but the economy all over the world has collapsed. The businesses are striving to survive and the failure of business results in the unemployment of a large number of people. The poverty and the income disparity between and within the nations are escalating. Income inequality is soaring and the pandemic has turned into a golden opportunity for the ultra-rich to make fortune. The wealth of billionaires in India increased by 35% during the lockdown and by 90% since 2009.[iii] Whereas, the Micro, Small & Medium Enterprises (“MSMEs”) who play a crucial in the economic growth of the country are hard hit by the pandemic, since 2020 more than 75% of SMEs are incurring revenue losses equivalent to or more than 50%, struggling to continue with their operations.[iv] These reports depict that the target of SDG 8 has become even more distant with the advent of this pandemic. Remarked as the ‘Inequality virus’ by Oxfam International[v], this pandemic calls for action from the government to make laws and policies to protect the people to get grips with the declining economic conditions. There is legislation in place for businesses going in distress like the Insolvency & Bankruptcy Code, 2016 (“ the IBC”). Although, the impact of the pandemic requires reform especially to support the small business. Need of IBC to achieve SDG8 The centre of the SDG 8 is the economic growth that results in the employment of all. To attain the targets of SDG 8 the government of India has formulated policies like Skill India, Mahatma Gandhi National Rural Employment Guarantee Act (“MGNREGA”), Make in India, Start-up India.[vi] To attain economic growth it is of paramount importance that the business of the country prospers. Every business in its lifetime passes through a stage of distress, hence it is important to have a policy in place that rescues the business in distress. If the business winds up it is detrimental to the employees working for it, other businesses connected to it, and the overall economy of the country. Since a prospering business contributes towards Gross Domestic Products, increase in exports and the overall economic growth by running constantly. It is imperative to safeguard MSMEs drowning into winding up. It is in this respect,  the IBC was formulated to rescue the Corporate Debtors (“CD”) in distress and protect the business. Considering the current pandemic wherein the businesses are struggling to survive and are on the verge of winding up the pre-packs emerge as a fruitful process to achieve the SDG8 goals. As these MSMEs are turning into CDs with the loss in revenue hence it is imperative to provide corporate rescue since they employ 120 million[vii] people contributing a share of 30% towards the GDP[viii]. Introduction of pre-packs under the Indian Insolvency regime Pre-pack is a mechanism globally accepted and implemented. Paving a way for resolution of distressed debts by providing a framework of settlement between CD and stakeholders with a formal abdication of law as per the IBC. The prevalent mechanism to constitute a pre-pack is a negotiation between the debtor and buyer before entering in the appointment of a Resolution Professional, who further assists in the passing of a resolution plan. Unlike other nations pre-pack in India is not only about the out-of-court arrangement but is powered by the laws under the IBC till the extent of the existing NCLT supervised resolution process.[ix] However, under CIRP it was a credit in control model with RP in possession. Under pre-packs to retain flexibility with the MSME, the debtor in possession model is allowed. Wherein, the debtor shall remain in possession of the enterprise and continue to run it until the resolution takes place instead of handling the operation to RP as soon as the admission of insolvency proceedings under CIRP. The option under PIRP provides its inclusive set of laws under section 54C-P of the Code providing a basic structure of the IBC and checks against any forthcoming abuse. The mechanism provides the creditor also an option to choose to proceed by way of CIRP. Further, 66% of approval by creditors is necessary for the resolution process.[x] The duration of the entire proceeding has to be done within a period of 90 + 30 days from the initiation as opposed to the CIRP process granting 330 days from initiation. [xi] The advantage of pre-packs over the existing formal regime of insolvency is that the pre-packs would cause the minimum disruption to the business of the debtor as the CD continues with the existing management unlike in the CRIP proceedings where the management is shifted to the Resolution professional. Further, this is time and cost-efficient as the pre-pack enables the faster resolution that is within 120 days as prescribed in the Ordinance and non-requirement of IP to manage affairs save the cost inclusive of a fee. Moreover, this alternative has the potential to reduce the burden on the courts and tribunals. The advantages of the pre-pack arrangement that rescues the business would help to attain SDG 8 that is stable economic growth and retain the employment of the people. Relevance of Pre Packs The insolvency regime is indeed evolving with multiple amendments coming its way until 2021. The BLRC believes pre-pack is the next step for India towards its natural evolution and need of the hour amongst the pandemic. The creditors were provided rescue under the Insolvency framework of the IBC. However, under the current formal regime of CIRP, the RA is required to rescue a failing company through a resolution plan. In a time when every company is reeling from stress, the possibility of

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Enforcement of Security Interest during Liquidation: Plight of Joint Charge Holders

Leave a Comment / Capital Markets and Securities Law, Company Law, Insolvency Law /

[By Samyak Jain] The author is a student at NMIMS School of Law, Mumbai. Waterfall mechanism under Insolvency and Bankruptcy Code (IBC or the code) prioritizes secured creditors over other stakeholders when secured creditors don’t enforce the security separately. This acts as an incentive for a lot of them to relinquish their security interest to liquidation estate. However, a situation of deadlock is created when joint charge holders over security are not able to reach a consensus about its treatment during liquidation. Tribunals have been meaning to resolve this based on the type of charge creditors hold over the security. Debtors create interest or lien over their assets to secure repayment of the loan. This leads to the creation of a charge and it is governed as per the contract, the debtors and creditors have entered into. Contracts may allow the creation of further charge over the same security following the procedure prescribed in the contract. The further charge created may be a charge pari passu to the first charge or may hold a different ranking. Creditors often enter into contracts that allow the creation of further charges only on their consent or on the issuance of a No Objection Certificate (NOC). The distinction between both types of charge lies in the priority given to them. Charge on a pari passu basis keeps all the creditors on equal footing, whereas a charge of different ranking gives the highest priority to the first charge holder.[i] Liquidation proceedings pose a challenge for liquidators when joint charge holders are not able to collectively decide about the treatment of their security. Disagreement can exist among charge holders on whether to relinquish their security interest to liquidation estate and enjoy a higher priority in the waterfall mechanism during repayment or separately enforce the security outside the liquidation pool. Tribunals have studied cases of disagreement in both types of charge and have taken diametrically opposite stands. First Charge Holders’ Right Right of first charge holders came to the forefront in the case of JM Financial Asset Reconstruction Company Ltd. v. Finquest Financial Solutions Pvt. Ltd.[ii] (JM Financial case). When Reid & Taylor were undergoing liquidation proceedings, Finquest filed an application u/s 52 of the code seeking leave to sell off the secured asset as they contended exclusive first charge over it. Other secured creditors objected to the contention and claimed a pari passu charge on the asset. Being joint charge holders they demanded relinquishment of security to liquidation estate. They put forth the argument that IBC treats all secured creditors the same and does not distinguish on nature of the charge or on the ranking of respective charge. And therefore, first charge holders are not entitled to special rights. NCLAT perused section 52 of the code to resolve the issue. They emphasized over the process that after setting off the realized amount against the debts due, excess proceeds from the ‘first enforcement’ of security is to be deposited with the liquidator. The wording of the provision allows only single enforcement of the security as per interpretation. Sub-section (4) of the provision[iii] gives power to ‘a secured creditor’ to enforce the security interest through any legal mechanism applicable to it. Based on the reasoning above, NCLAT held that only one secured creditor can enforce security interest to realize its debt and observed that “If one or more ‘Secured Creditors’ have not relinquished the ‘security interest’ and opt to realize their ‘security interest’ against the same very asset, the Liquidator will act in terms of Section 52(3) and find out as to who has the 1st charge”[iv]. NCLAT recognized the right of only first charge holders to enforce the security. An excess amount after recovering the debt of the first charge holder would be required to be deposited in the liquidator’s account. Tribunal denied rights to other secured creditors in case a first charge holder exists. Despite having security to protect their debt, they are treated no different than an unsecured creditor. Also, the decision throws up a challenging question about the treatment of other secured creditors in the waterfall mechanism. What position would other secured creditors enjoy in the waterfall mechanism during distribution is unaddressed by the tribunal. In my opinion, NCLAT has erred in interpreting the provision. It failed to consider the intent of the legislature of prioritizing a secured debt. The statute accords special treatment to secured creditors for obvious reasons that they have security to enforce their debt. If this judgment’s literal interpretation of a provision is enforced, secured creditors other than exclusive charge holders will find their secured debt futile in the IBC regime. Majority Rule among Joint Charge Holders While the above ruling takes away the rights of secured creditors to some extent, NCLAT Delhi has seemingly taken a balanced stand in the issue of pari passu charge in the Mr. Srikanth Dwarkanath vs. Bharat Heavy Electricals Limited[v] (Dwarkanath Case). On the passing of a liquidation order against the corporate debtor, the liquidator filed an application owing to the inability to form the liquidation estate. A liquidator could not commence the liquidation process on account of the deadlock created among secured creditors with respect to relinquishment of security interest. Multiple creditors held charge over the secured asset. Among all, 74% of the secured creditors allowed the secured asset to be a part of liquidation estate. But the liquidator still couldn’t attach the property in his pool on account of refusal from Bharat Heavy Electricals to relinquish the security. Bharat Electricals claimed itself as a superior charge holder. They demanded enforcement of security placing reliance on JM Financial case. However, the court held that the facts of the present case are different from JM Financial owing to the absence of a superior charge over security. With the presence of a charge of equal ranking, NCLAT found it apt to refer to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI act) to end the deadlock. It specifically

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MORATORIUM UNDER IBC AND CHAPTER XVII OF NIA: A PROLONGED TUSSLE

Leave a Comment / Insolvency Law /

[By Nimisha Sharma and Uddhav Tiwari] The authors are students at the National Law Institute University, Bhopal. INTRODUCTION Moratorium under Insolvency and Bankruptcy Code, 2016 (“IBC”) has been subjected to multiple legislative amendments and judicial enhancements.  Recently, the Hon’ble Supreme Court (“SC”) in P. Mohanraj & Others v. M/s. Shah Brothers Ispat Pvt. Ltd.[i] solved the conundrum about the applicability of moratorium under §14 of IBC to proceedings under §138/141 of Negotiable Instruments Act, 1881 (“NIA”). FACTUAL BACKGROUND The respondent filed two criminal complaints against the corporate debtor (“CD”) and its three directors (appellants) under §138 read with §141 of NIA. Meanwhile, an application under §9 of IBC was allowed by the Adjudicating Authority (“AA”), which resulted in the initiation of the Corporate Insolvency Resolution Process (“CIRP”) and imposition of moratorium upon the CD. The AA stayed further proceedings under the pending criminal complaints. The National Company Law Appellate Tribunal (“NCLAT”) reversed the order of AA and held that §138 of NIA, being a criminal law provision, cannot be held to be a proceeding within the meaning of §14 of IBC. The sole issue that arose in this matter was whether the initiation or continuation of a proceeding under §138/141 of NIA would be covered by the moratorium provision. OBSERVATIONS AND REASONING The analysis given by the court can be summarised under the following heads: Interpretation of Section 14 – Noticeably, the expression “or” occurs twice in the first part of §14(1)(a) – first, between the expressions “institution of suits” and “continuation of pending suits” and second, between the expressions “continuation of pending suits” and “proceedings against the corporate debtor…”. The usage of the word “or” before the word “proceedings” by the legislature makes its intention clear regarding the treatment of “institution of suits or continuation of pending suits” and “proceedings against the corporate debtor” as distinct categories. The word “proceedings” under §14(1)(a) is ‘all-inclusive’ on account of the usage of expressions such as “any judgment, decree or order” and “any court of law, tribunal, arbitration panel, or other authority”. The proceeding under §138 of NIA, being criminal in nature and conducted as per the mandate under §6 of CrPC, is a ‘proceeding’ in a court of law regarding transactions inclusive of debts owed by CD. [ii] The object sought to be achieved by §14 of the IBC is to see that there is no depletion of CD’s assets during the CIRP so that it can be kept running as a going concern during this time, thus maximizing value for all stakeholders.[iii] The same has been reiterated in Swiss Ribbons (P) Ltd. v. Union of India.[iv] Considering this objective, a ‘proceeding’ under §138 of NIA would adversely affect the assets of CD, because the defaulter would have to compensate for the ‘institution, continuation or execution of a decree in a civil suit for recovery of debt or any other liability. Thereby, making the protection granted to CD under §14(1)(a) and (b) futile and affecting the object of §14 which enables the CD to rehabilitate itself as a going concern. Application of the Noscitur A Sociis Rule of Interpretation and ejusdem generis – The Noscitur A Sociis and ejusdem generis, being rules as to the construction of statutes, cannot be applied to restrain the ambit of expressions if they are specifically designed to provide a wide sense. Importantly, in the event where a residuary phrase is used as a catch-all expression to subsume within it the reasonable comprehension of the provision, regard has to be sort to its object and setting. These rules should be used cautiously and should not color an otherwise wide expression, which trammels and frustrate the object of a statutory provision. The objective of Section 14 – Section 14 and other moratorium provisions in IBC – When the language of §81, 85, 96, and 101 of IBC are juxtaposed against the language of §14, it is conspicuous that the scope of §14 is wider. The protection of moratorium through §85 of IBC is only in respect of ‘debts’, whereas the moratorium in §14 is in respect of ‘transactions’, being provided by §14(3)(a). The word “transaction” is a broader concept than “debt”, and inclusive of it. With the exclusion of the word “legal” as a prefix to “proceedings” in §14(1)(a) as used in the moratorium provisions qua individuals and firms, the intention of the legislature is quite clear. §138 is a legal proceeding “in respect of” a debt. “In respect of” is a phrase that is wide and includes anything done directly or indirectly.[v]Thereby, attracting application of §138 of NIA in a legal proceeding regarding any debt and allowing any indirect legal proceeding relating to debt. Also, the moratorium under §14 provides protection to the CD against the transactions mentioned in clauses (a) to (d), inclusive of transactions relating to debts, as are contained in §81, 85, 96, and 101. The interplay between Section 14 and 32A of IBC – Referring to the recent judgment of SC in Manish Kumar v. Union of India[vi] and the ILC Report of February 2020,[vii] the court observed that §32A and 14(1)(a) are independent of each other. §32A primarily aims at extinguishment of criminal liability of the CD, from the date of approval of resolution plan by the AA, in order to give a fresh start to the CD. Declaration of moratorium under §14 just casts a shadow on the proceedings that have already been initiated, which could be resuscitated once the moratorium period comes to an end. It was further observed that the expression “proceedings” under §32A(1) refers to criminal proceedings filed through a First Information Report or complaint filed by investigating authority and not to complaints filed by private persons. If the quasi-criminal proceedings such as those under §138/141 of NIA are initiated against CD, they would defeat the object of imposition of the moratorium and the object of §32A, barring all criminal proceedings against the CD. Nature of proceedings under Section 138/141 of NIA – The court observed

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Conclusion of a Corporate Saga: The Tata-Mistry Dispute

Leave a Comment / Company Law /

[By Mansi Avashia] The author is a student at the Gujarat National Law University. Introduction The Tata-Mistry dispute has been one of the most controversial and hostile battles in the corporate sector of India. On March 26, 2021, the Supreme Court brought an end to this longstanding feud by setting aside the 2019 National Company Law Appellate Tribunal [“NCLAT”] order which had restored Cyrus Mistry as the Chairman of the Tata group. In this post, the author analyzes the Supreme Court judgment in detail and highlights why this decision is an important precedent in Indian jurisprudence. Facts Tata Sons was established as a private company in 1913. Over the years, the Shapoorji Pallonji group acquired 18.37% of the total share capital of Tata Sons. In December 2012, Cyrus Mistry was appointed as Executive Chairman of Tata Sons for five years.[i] Cyrus Mistry was ousted by a board resolution passed in October 2016and was removed as a director from Tata’s group companies, i.e., Tata Consultancy Services, Tata Teleservices, and Tata Industries Limited.[ii] Two companies of the Shapoorji Pallonji group, namely, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, approached the National Company Law Tribunal [“NCLT”], Mumbai alleging oppression, mismanagement, and unfair prejudice by Tata Sons. NCLT dismissed the petitions of Shapoorji Pallonji group companies and hence the matter was appealed before NCLAT.[iii] The NCLAT reversed the decision of the NCLT and found the removal of Cyrus Mistry illegal. The NCLAT also restricted Ratan Tata and the nominees of Tata Trusts from making any decisions that needed majority approval in an AGM or of the board of directors. .[iv] Tata Sons approached the Supreme Court to decide the matter. Issue The questions considered by the Supreme Court were: Whether the company’s affairs were conducted in a prejudicial and oppressive manner and whether the facts justified the winding up of the company on just and equitable grounds? Whether the reliefs granted by the NCLAT particularly with respect to the reinstatement of Cyrus Mistry, were in consonance with the power available under Section 242(2) of the Companies Act, 2013 [“the Act”]? Whether the NCLAT had the power to mute Article 75 from the Articles of Association [“AoA”] of Tata Sons? Whether the affirmative voting rights granted by the AoA were oppressive and prejudicial in nature? Whether the re-conversion of Tata Sons from a public to a private company required approval under the provisions of the 1956 Act and the Act? Findings Oppression and Mismanagement The NCLT in its decision had provided reasoning for all the allegations of oppression and mismanagement including Air Asia dealings, Nano project failure, dealings with Siva Group Company, which were not addressed by the NCLAT in its order. These findings were not appealed by Cyrus Mistry. Hence, the Apex Court considered the NCLT’s decision as final and did not make any determination on these matters. Invocation of just and equitable clause Section 242 requires the Tribunal to decide whether it was just and equitable for the company to be wound up due to oppression and mismanagement. The Court held that the grounds would be fulfilled when there was a mutual breakdown of confidence in a company that operates as a quasi-partnership.[v] In the present case, there was no quasi partnership since Shapoorji Pallonji had acquired shares decades after Tata’s inception. Moreover, some disagreements among the management were not sufficient to invoke the clause. The Court also pointed out that the NCLAT should have considered the feasibility to wind up a company with charitable trusts as its shareholders. Reinstatement of Cyrus Mistry by the NCLAT At the outset, the Court pointed that Cyrus Mistry’s behaviour of leaking confidential emails to the press and sensitive information to the tax authorities was largely responsible for the loss of confidence among the Board of Directors and his subsequent removal. With respect to the reinstatement in the NCLAT order, the Supreme Court’s observation on this finding was three-fold. First, that Section 242 did not provide for the power to reinstate persons in a case of oppression and mismanagement. Second, Cyrus Mistry had not sought reinstatement as a relief in his prayer before the Court. Third, Cyrus Mistry’s tenure had expired as it was for a period of 5 years, from 2012-2017. Thus, the NCLAT had gone beyond its powers by appointing Cyrus Mistry as the Chairman ‘for the rest of his tenure’. Further, the Court also noted that if the removal of Cyrus Mistry was illegal as found by the NCLAT, it was still an effective dismissal and could raise a claim for damages. Further, a contract of personal services could not be enforced by Courts. Thus, the NCLAT finding was found to be incorrect. Abuse of AoA Article 75 Article 75 conferred power on the Company to require any holder of ordinary shares to transfer his shares. This was rendered ineffective by the NCLAT in its order and its use was restrained on the basis of ‘likelihood of misuse’. The Court observed that Section 241 and 242 only provides for past and present prejudicial conduct and not for a future possibility of misuse. [vi]The Article had been a part of the AoA for a long time and Cyrus Mistry was himself involved in amending it. There were no instances of invocation or misuse of Article 75 by Tata Sons. Thus, the NCLAT’s decision was found to be unsustainable. Affirmative Voting Rights Article 121 of the AoA provided that all the matters which required the consent of the majority of directors had to be approved by the nominee directors appointed by the Tata Trusts. Cyrus Mistry wanted these rights to be restricted to certain matters and also be extended to the nominee directors of the Shapoorji Pallonji group. He also contested that these the presence of these rights impeded the nominee directors to make unbiased decisions in the best interests of the Tata companies. The Court held that  affirmative voting rights were commonly found in AoAs of companies all over the world

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Strategies for Corporate Recovery through M&A during COVID-19

Leave a Comment / Mergers & Acquisitions /

[By Nandini Shenai] The author is a student at the NMIMS School of Law, Mumbai. Countries around the world are imposing strict restrictions and social distancing norms as the Covid-19 outbreak worsens and the number of positive reports and casualties continues to rise. The catastrophe has transformed into a financial downturn plummeting the financial sector into an unprecedented recession, as the wheels of economic development come to a stop. The economic standstill in India comes as a consequence of the same. Changes in the market landscape, valuation problems, and a shortage of financial backing as a result of banks’ restricted lending and corresponding reallocation of excess funds are some of the primary factors of strategic planning. With regard to current negotiations, corporations must choose between bringing deals to a halt or accelerating the process. M&A transactions already in the planning phase or on the verge of being implemented would most probably be postponed until the economic downturn passes. Potential buyers are more likely to drop out of market bid systems. Multinational companies and Private Equity funds are expected to save capital in this volatile environment and move their focus to ventures that are domestic to their respective countries, which could have an impact on cross-border trade. Interpreting mergers and acquisitions in light of the existing conditions and circumstances would provide clarification when facing complexities.  Companies are resorting to a variety of unconventional corporate strategies, including emerging innovation technology acquisitions, risk mitigation, divestiture of secondary resources, collaborations with competitors, funding beyond venture capitals, diversified alliances with experts, and strategic associations with governments, in addition to rigid M&A. These incredibly turbulent times have given rise to a rare set of possibilities.   While some of the M&A transactions were due to companies restarting deals that had been placed on hold given the financial slump caused by the various national lockdowns, a large majority of it also demonstrated companies’ endeavors to undergo transformations and succeed in the post-pandemic setting. Transactions in the COVID Era: Various schemes and tax relaxations that were put forth by the Central Government in the 2020 budget including the inflow of cash that comes from sovereign wealth funds and the implementation of eased policies by the SEBI and the MCA have proved to act as a boost needed for M&A transactions in the times of the pandemic. Highlighted below are certain factors that may change the way M&A deals have traditionally been followed in India: Scope for investment: M&A deals completed during this span of time will need to account for the constraints imposed by the current situation and the strategy to decision-making will have to be rectified to meet the current challenges. Nevertheless, the downturn can provide some prospects for investors, who can take advantage of lower stock prices in the immediate future to gain a greater profit on investments once normalcy returns. Due Diligence:  A focused emphasis would be provided on clauses of contracts like indemnity clause, termination clause, risk of insolvency, ability to repay debts, medical insurance and benefits for employees, and regulatory compliance. Due to the evolution of the virtual corporate world in times of the pandemic, a stricter data protection and data privacy regime would be followed by companies. Pertaining to cross-country data transfers, stronger enforcement of international data protection rules like the GDPR needs to be done. Digitization of Regulatory Practices: Although the SEBI and the RBI have allowed stakeholders to file petitions digitally, the CCI allowed them to submit a tandem of applications digitally in March 2020, as well as pre-filing consulting via virtual conferencing in connection to, among other things, combinations that are in the ambit of the green channel path. Regulatory Interference: Opening up the possibility of delays in receiving clearance from statutory bodies, shareholders may opt for systems that do not have many regulatory configurations. As a result, a share purchase could be preferable to a downturn transaction under a corporate transfer arrangement. Indemnity: Potential buyers will need to determine the risks posed by the financial meltdown caused by Covid-19 to pursue detailed indemnity. Not only will the owners use information and subjectivity qualifiers to properly establish these indemnities, but they will also consider revealing any clear details pertinent to the Covid-19 situation in the form of a documented declaration.  Strategies for Corporate Recovery: The role of M&A will be reshaped in a post-Covid-19 setting as companies struggle to hold their standing in the market, accelerate the recovery process, and brace themselves to survive through a mix of offensive and defensive M&A strategies. Owing to the current pandemic, companies are resorting to either of the two processes of corporate revival. Defensive M&A: Defensive M&A strategies are the ones that are used to safeguard the functioning of the company. These strategies basically cater to hostile takeovers and are used to salvage the value of companies and safeguard markets to maintain competitive parity. To save capital from loss-making segments and maintain a stable primary sector, financially troubled businesses need to take drastic measures, such as the sale of assets that are distressed. The sale of distressed assets in crisis situations necessitates the quickest possible process to increase profits. Some defensive strategies that are could be followed by companies are mentioned below: Divestments: Due to the current economic strain, secondary assets that are and widely desirable after and do are not usually set for sale can be divested. In this type of situation, those who sell such assets must be fully cognizant that the number of prospective purchasers will be limited, and they must be mindful of how to handle asset fire-sales. Investor Activism: At the time of downturns, vigorously seeking value creation initiatives is critical to long-term success, as is knowing what investor activists or competitive bidders would seek. This may include rethinking shareholder returns, capital allocation, and trade finance, among other things. End-to-End M&A: Companies can aggressively reduce expenses and open up cash flow by taking pivotal steps to consolidate recent acquisitions. Private equity firms, institutional investors, distressed venture capitalists, and large corporations with solid investment portfolios are all in a hurry to act quickly and pursue potentially “predatory” M&A approaches.      

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Insolvency or Arbitration: A Fight Between Special Statutes

Leave a Comment / Arbitration Law, Insolvency Law /

[By Injila Khan and Utkarsh Mishra] Injila is a student at the Institute of Law, Nirma University, Ahmedabad and Utkarsh is a student at Symbiosis Law School, Noida. The Insolvency and Bankruptcy Code 2016 was enacted to structure and amend laws relating to the reorganization of financial assets and insolvency resolutions relating to corporate persons. Part II of the code deals with Insolvency Resolution and Liquidation for Corporate Persons and accordingly financial creditors, operational creditors, and corporate debtors can initiate Corporate Insolvency Resolution Process.[i]On the other hand, the Arbitration and Conciliation Act, 1996 governs the procedure related to both domestic as well as international arbitration along with their relevant enforcement. However, recently, there has been an ample number of cases where a financial dispute between parties often overlooked arbitration and lead to the process of insolvency of the company that owned the money in the first place. This leads to the failure of the concept of an alternative dispute resolution mechanism as a whole. Moreover, insolvency proceedings create numerous problems for the company who might not be out of funds but simply disputes the existence or quantification of a financial obligation created on the basis of a contractual arrangement. This further leads to insolvency being used as a pressure tactic to strong-arm the debtor organization into unfair payments. Ascertainment of the Term “Debt” under IBC Section 7(5) of IBC states that to initiate Insolvency Proceedings by the Financial Creditor there has to be a judicial determination by the Adjudicating Authority (AA) as to whether there was a ‘default’ by the Financial Debtor. As soon as the AA is satisfied that default has occurred it should accept the application for initiation of CIRP. This was effectively reiterated by the NCLT in the case of Innoventive Industries Limited v. ICICI Bank[ii]which states that claim of default by the financial creditor must be followed by ascertainment of existence of default by the AA. Thus, to start insolvency, the only criteria is debt. Wider Interpretation of the term “financial debt” Sec. 3(12) of IBC defines ‘default’ as non-payment of debt either totally or in part. In the case of SGM Webtech Pvt Ltd. v. Boulevard Projects Pvt Ltd[iii]it was held by the AA that even Fully Converted Debentures (FCCD) are unequivocally treated as a Financial Debt under Sec. 5(8) of IBC and for this reason, FCCDs were considered as financial debt. Also, Sec. 5(8) of IBC mandates debt to be disbursed against the consideration for the time value of money and since interest on debentures increases, therefore, it subscribes to the concept of the time value of money. Therefore, non-payment of any outstanding FCDs will qualify as non-payment of a debt and will be counted as a Default. Thus, debt obligations created by Financial securities are also being considered as financial debt and hence, a chance to invoke insolvency. Arbitration and Section 7 of IBC Disputes falling under Section 7 of the IBC belong to the class of litigations which are deemed non-arbitral.[iv]Therefore even if the agreements entered into by the parties contained an arbitration clause, they hold no relevance as soon as the dispute falls under Section 7 of the Code and there is any debt owed, in part or whole. The Supreme Courtin the case of Booz Allen & Hamilton v. SBI Home Finance Ltd[v]held that “generally and traditionally all disputes relating to ‘rights in personam’ are considered to be amenable to arbitration and all disputes relating to ‘rights in rem’ are required to be adjudicated by courts and tribunals”.Since the applications filed under Sec. 7 of IBC are matters relating to ‘right in rem’,[vi]therefore they are inherently incapable of being arbitrated. The Courts took a similar view in the case of Haryana Telecom v. Sterile Industries[vii]where an application under Sec. 8 of  Arbitration and Conciliation Act was not allowed in oppression and management cases under the Companies Act because it was a matter relating to ‘right in rem’. Therefore, it is sufficiently clear that the non-arbitrability of the class of disputes falling under section 7 of IBC makes the application liable to be rejected. Furthermore, in the Booz Allen case[viii], it was specifically listed by the SC that “if the subject matter of a suit involved Insolvency and Winding up matters, then such cases were non-arbitral in totality.” Therefore, any dispute that falls out of the private fora of the two parties and causes a breach even unintentionally shall make arbitration impossible as it classifies as a matter related to right in rem. The current stand of the case-law-based jurisprudence is sufficient to point towards an unstructured and unclear way of classifying a matter into the class of “right in rem” as there is no interpretation of the terms conclusively. The floodgates for divertive tactics in order to prevent arbitration comes from the fact that litigation is generally favourable to the party whose strategy is to prolong the dispute and the courts and tribunals having a huge backlog facilitates the same (A. Ayyasamy v. A. Paramasivam)[ix]. In the Booz Allen case[x], the court opened the floodgates to interpretational litigation when they stated that the subordinate rights related to personam that have arisen from a right in rem can be arbitrated. This comment over the flexibility of the right in rem vis a vis right in personam bifurcation has caused a lot of litigation since the court has to conduct a case-to-case evaluation of the dispute in question. Different interpretations by different High Courts and Supreme Court judges having to distinguish cases has made the questioning of the arbitrability of a dispute a favourable strategy to prevent payment of dues or as a pressure tactic against companies. Furthermore, the application of cases that interpreted the Arbitration Act 1940 such as Natraj Studios (P) Ltd. v. Navrang Studios[xi] has created further ambiguity since the 1996 A & C Act has a remarkable difference from the preceding statute and thus, precedents being used that have adjudicated the 1940 Act has also created huge jurisprudential inconsistencies. Furthermore, IBC and the Arbitration Act are

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Corporate Social Responsibility: Choice or Coercion

Leave a Comment / Company Law, Contemporary Issues /

[By Anchal Bhatheja and Chaaru Gupta] Anchal is a student at the National Law School of India University, Bangalore and Chaaru is a student at the National Law University Jodhpur. Section 135 of the Companies Act 2013 (the “Act”) in India provides for mandatory Corporate Social Responsibility (CSR) by corporations. Prior to 31.07.2019, the provision required corporations to merely ‘comply or explain’, that is, if a company did not spend the earmarked CSR expenditure, it had to disclose the reasons in its board report. However, the 2019 Amendment to the Act turned Section 135 into a ‘comply or suffer’ provision. It went a step ahead and provided for a fine, ranging from 5,000 to 25 lakh or imprisonment for 3 years or both. The provisions pertaining to imprisonment had to be removed due to the backlash from companies. Nevertheless, mandatory CSR continues to remain intact. Interestingly, on 22nd March 2021, the Union Minister of State for Finance and Corporate Affairs in India, while responding during the question hour in the Lok Sabha, said that the policies of the central government were not being implemented using the (CSR) funds that come from the companies.. Article 12 of the Constitution of India provides that governance is the State’s responsibility which makes the validity of the question doubtful. In this article the authors aim to discuss the viability of making CSR mandatory in the Indian context, from the perspective of promoting innovation and growth of businesses as well as social justice. There are overwhelming rationales, rooted in law and economics, to shift from CSR to other ideas namely Corporate legal Responsibility (1), Corporate Social Incentives (2), Individual Social Responsibility (3), and Governmental Social Responsibility (4). This is because the burden of social justice cannot be put on the corporates and should be on the government. And if at all it is to be done by a non-governmental entity, it should be individuals who undertake it voluntarily and not out of compulsion. CLR- Corporate Legal Responsibility Milton Friedman argues that the only social responsibility of corporates is to maximize their profits while playing by the rules of the game. They should be made to comply with regulatory laws like the Environmental Protection Act, 1986, The Air (Prevention and Control of Pollution) Act, 1981, Tax laws, etc. while carrying out their businesses, rather than having to mandatorily comply with CSR requirements. Presently, the law is reflective of a paradox. For instance, on one hand, India loses10.3 Billion Dollars or 75,000 Crore Rupees due to tax evasion by corporates on an annual basis. On the other hand, the CSR regulations mandate these corporates to contribute towards Prime Minister’s Relief Fund, Rural Development Projects, skill development projects, and other such government initiatives under Schedule VII of the Act. The paradox in the data suggests the State invests its limited administrative resources in making the businesses run legally before it makes them run ethically. Furthermore, better legal enforcement will lead to more voluntary compliance and would, consequently, increase investor confidence. This would also reduce disputes and litigation in the realm of company law, which presently puts a burden on state resources as well as hampers the growth of businesses. CSI- Corporate Social Incentive Mandatory philanthropy is an oxymoron. Mandating donations defeats the very purpose of philanthropy or CSR. Furthermore, coercing the corporates to engage in CSR will hamper innovation and corporates will allocate funds just out of fear of penalty. This was in fact witnessed when a lot of corporates invested in the construction of the statue of the popular Indian Leader Sardar Vallabhbhai Patel, dubbed the Statue of Unity, to stay in the good books of the government. It is better to positively incentivize corporates to take initiative on their own accord in the sector they are working, instead of coercing them to work in areas that they do not deal in. This will lead to more efficient outcomes as they would have expertise in those specific areas. Further, from a business perspective – it will also help them in improving their image and market base. For example, incentivizing a software company to build accessible software for the differently-abled is more logical and economical than forcing them to build toilets in a nearby village. Therefore, towards this end, the state can offer benefits like preferential clearances and tax abates to the corporates that act upon corporate social incentives in charity, instead of penalizing them for not being “charitable”. ISL -Individual Social Responsibility If CSR is not mandatory, the individual shareholders’ earnings will increase as the expenditure of the company decreases. This encourages the shareholders to engage in charity on an individual level, for a cause that aligns with their idea of social responsibility. Even if elimination of the expenditure of the company which goes into CSR investments does not lead to an increase in the income of an individual, they will be naturally more inclined to engage in charitable activities as compared to a situation where they know that their company is already investing enough of its resources in CSR and there is no need for them to engage in charity on a personal basis. Further, the decisions regarding the areas in which a company will invest, to fulfill its CSR requirements are taken by the Board of Directors (BoD) on the recommendations of the CSR committee which comprises two directors and one independent director. However, it does not mean that the opinion of the BoD necessarily aligns with the opinion of the shareholders. If the law omits the requirement of this coerced social responsibility on the corporates, the shareholders on their personal level will be able to have a free dialogue with their ideas of what social justice means to them and will be able to decide the areas they would want to engage with as philanthropists. Thus, the resultant satisfaction of the transaction will be much higher for the individuals. In fact, EdelGive Hurun India Philanthropy List 2020 suggests that individual philanthropy has just been

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