Author name: CBCL

Dilemma with Avoidance Proceedings Post Corporate Insolvency Resolution Process

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Mayank Bansal & Dev Bansal] The authors are students at the Dr B.R Ambedkar National Law University, Sonepat. Introduction For a successful insolvency regime, the prevention of fraudulent transactions made by the management of the corporate debtor in the hands of certain preferred creditors is crucial to uphold justice. Since these transactions are made prior to the initiation of the Corporate Insolvency Resolution Process (“CIRP”), they reduce the availability of funds for bona fide creditors and other stakeholders to get their dues equitably in the insolvency process. These are called “preferential” or “avoidable” transactions, and The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides for their reversal. Though IBC empowers the Resolution Professional (“RP”) to initiate proceedings against such transfers before the National Company Law Tribunal (“NCLT”), it is silent on their completion period, and more importantly on a situation where the NCLT is not able to adjudicate on these transactions till the completion of CIRP. Recently, the High Court of Delhi (“H.C.”) in Venus Recruiters Private Limited v. Union of India while facing this issue ruled that avoidance proceedings must be adjudicated before or at the time of approval of the resolution plan, i.e., before the completion of CIRP and not after it, on account of limited jurisdiction of NCLT, finite nature of RP, and that no one seemed to be the beneficiary of the recovery.  This article seeks to highlight plausible pathways the HC could have followed in response to the encountered issues and assert that preferential transactions can continue beyond CIRP, for which the NCLT is the appropriate authority and RP should only continue with the proceedings. A distribution mechanism for the subsequent recovery has been propounded, and lastly, the question of litigation cost has also been dealt with. Current Conundrum With Proceedings Avoiding Preferential Transactions The H.C. in the above case quashed the avoidance proceedings post the approval of the resolution plan. This seems absolutely against the principles of justice since the lapse of time shouldn’t be an obstacle in undoing the unjust; the basic essence of such avoidances. As stated in the ICSI’s Statement of Best Practices, the avoidance proceedings aim to restore the unjust amount from the defrauding directors, promoters, and creditors, whereas CIRP relates to the resolution of the corporate debtor, and thus the two should be treated separately. Moreover, the Report of the Insolvency Law Committee (“ILC”) suggested that there shall be no prescriptive timelines for the completion of these proceedings, and they may continue beyond the period of CIRP. These proceedings may involve assessing multiple impugned transactions within the clawback period that may take longer than CIRP, and hence, these proceedings should have been allowed to pursue beyond CIRP. NCLT Should Continue The Adjudication The H.C. held that the NCLT can only adjudicate the avoidance transactions before or at the time of approval of the plan. However, as ILC suggested NCLT for deciding upon other related facets (such as the distribution of the recovery in such cases) even post CIRP, it is apparent that it may also adjudicate these transactions. Besides this, Rule 11 of the NCLT Rules, 2016 empowers the NCLT with “inherent powers” to pass orders as it may deem fit in given facts and circumstances to ensure equity and justice. Although Section 63 of the code bars a civil court to adjudicate any issue for which the NCLT is empowered, the stated judgment concluded in leaving the party to their civil remedies outside the IBC. Transferring jurisdiction to a civil court is blatantly against the provision and spirit of the code. Role Of Resolution Professional On the locus standi of the RP, the court strictly applied the principle laid down in Committee Of Creditors Of Essar and held that the role of RP is finite in nature and he can’t continue as “former RP” after the completion of the plan. However, ILC scrutinizing various alternatives suggested that the RP shall continue with the existing practice and remain the appropriate authority to carry on with the preferential transaction. IBC is a newly enacted code and numerous amendments are undertaken in pursuance of the committees’ recommendations and judicial decisions. Therefore, following the ILC’s recommendations, RP should have continued the proceedings. Distribution Of Recovery The H.C. was of the view that post plan’s approval by the Adjudicating Authority, proceeds from preferential transactions would thereafter neither go to the creditors nor the resolution applicant. However, this seems to be in stark contrast to the ILC’s recommendations on the distribution of the avoidance recovery suggesting the adoption of a flexible approach for the same and to leave to the prudence of the adjudicating authority whom to render the benefits, while explicitly mentioning the creditors and the successful resolution applicant among the beneficiaries and even suggesting a distribution mechanism for the former. At present, there are no concrete provisions on the distribution of such recoveries but recommended to be pursued based on facts and circumstances of the case. Inspired by the U.S. bankruptcy laws, below is an analysis of situations per the ILC’s recommendations. Creditors as Beneficiary The key aim of avoiding these transactions is to avoid unjust enrichment of certain creditors over others, which in effect means that creditors’ welfare is paramount in such situations. The bankruptcy laws of countries like the U.S. also advocate creditors’ benefit, either direct or indirect. While dealing with Section 550 of the U.S. bankruptcy code stating such recoveries to be for the “benefit of the estate”, the Court of Appeals has observed this phrase to articulate the creditors as beneficiary and that they must be ‘meaningfully and measurably benefitted’. In In re Centennial Industries, Inc., the Court of Appeals permitted the debtor to pursue avoidance actions even when the reorganization plan provided for the fixed payments to unsecured creditors over five years, stating that any such recovery will be additional security for the plan’s fulfilment and increase the likelihood of the creditors receiving their future payments.  Hence, the creditors could have been identified by the HC

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Refund Of Advance Is Not Operational Debt – The General Proposition & The Anomaly

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Devansh Rathi] The author is a student at the Dr Ram Manohar Lohiya National Law University, Lucknow Introduction – Since the advent of the Insolvency and Bankruptcy Code of 2016 (“the Code”), the adjudicating and the appellate authority has relied upon and confined itself to the bare text of the Code to interpret the legislature’s intent to disentangle the numerous issues that have arisen. One peculiar concern that has surfaced was whether seeking a refund of an advance given to a corporate debtor would tantamount to an ‘operational debt’ as under Section 5(21) of the Code? The Adjudicating Authorities, in various instances, have answered the same in negative. The issue first arose in SHRM Biotechnologies Pvt. Ltd. v. VAB commercial Pvt. Ltd., where the NCLT held that since the appellant, which invoked section 9 of the Code, was not rendering any goods or services to the debtor, he would not be called an operational creditor. The bench also perused section 5(21) of the Code and carved out three important elements – (i) debt arising out of provision of goods; or (ii) services; or (iii) out of employment. Since the appellant was not falling within the ambit of any of these elements, the bench dismissed the application. Even the NCLT Mumbai in TATA Chemicals Ltd. v. Raj Process Equipments and Systems Pvt. Ltd., while rejecting the application held that the petitioner has not provided any goods/services to the debtor and his claim cannot be called an operational debt. Hence, the Adjudicating Authorities have adhered to the four corners of the definition as inscribed in the Code. However, the NCLAT in Overseas Infrastructure Alliance (India) Pvt. Ltd. v. Kay Bovet engineering Ltd. (“Kay Bovet”) has taken a different approach when perusing the same issue which happens to be the crux of this writing. The author doesn’t aim to criticize the judgement but to highlight the discrepancy and offer a viable reason of the Appellate Authority behind such a discrepancy. The Tripartite Agreement in Kay Bovet – A tripartite agreement was signed between the employer, the contractor (operational creditor/appellant), and the sub-contractor (corporate debtor/respondent). As per the agreement, the Respondent was engaged in designing, engineering, supplying, installing, testing, etc. of factory plant for the employer while Appellant was responsible for all activities pertaining to engineering, procurement and construction as EPC contractor and had to handover the project to the employer upon its completion. In an essence, the contractor was rendering services to the employer while the sub-contractor was rendering the services both to the employer and the contractor, with an objective to fulfil the needs of the employer. In pursuance of the same, the contractor advanced 10% of the contract value to the sub-contractor. However, due to some reason, the tripartite agreement was terminated and the contractor sought a refund of the amount advanced. The bench while looking through the terms of the agreement ruled that the agreement provided for the rendering of services and supply of goods and the contractor’s claim was in such respect. Hence, the contractor’s advance payment to the sub-contractor would make him an operational creditor. The bench also refuted the respondent’s claim of a pre-existing dispute which was sub-judice before the Hon’ble High Court. Analysis – An operational creditor is someone who supplies a good or renders a service, just like a financial creditor who is granting a financial loan. Even the person who is availing the financial loan won’t be a financial creditor even if due to the terms of the contract, further amounts are to be disbursed as the person who is taking the loan is not doing so for the time value of money or interest. The essential ingredient for an operational creditor is that the debt due to them has to have arisen because they have either given goods or rendered some services. Therefore, in ordinary circumstances, a refund of advanced money would not be an operational debt as the buyer is not owed any amount because he has not supplied any goods or services but the debt is actually due, as for some reason the contract could not be concluded. However, the NCLAT in Kay Bovet has taken a different stand but it suffers from certain discrepancies. Here, the sub-contractor was rendering services to the employer and the contractor; however, the contractor was not rendering any services to the sub-contractor but only to the employer. In light of the same, if we examine section 5(21) which says – “a claim in respect of the provision of goods and services….” The term ‘in respect of’ should here mean only pertaining to that particular provision of goods or rendering of services to that party and not to any other third person. But as per the facts, the contractor was not providing any goods or services to the sub-contractor. Here the claim of the contractor was pertaining to the provision of goods and services but those goods and services were rendered by the contractor to the employer and not to the sub-contractor. The stance taken by the NCLAT would have been appropriate if the contractor would have been rendering the services or providing goods to the sub-contractor. The facts of the case are silent on the same as the judgement doesn’t state anything explicitly. To buttress the decision taken by the NCLAT one would have to rely on the implicit logic that the contractor and subcontractor were rendering a service to each other to ultimately fulfil the needs of the employer. The Contractor advanced money to the subcontractor but the Contractor may also have been providing materials, services, etc. The judgment doesn’t reproduce the agreement. Sometimes, in the case of subcontracting, the contract may have provisions such as that certain material to be used for construction will be provided by the main contractor to the subcontractor. In such case, the NCLAT may have felt that the contractor was also to provide goods and services to the subcontractor. Since we don’t have access to the contract

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Capturing Data Privacy through the Lens of Competition Law

Leave a Comment / Competition Law, Contemporary Issues /

[By Taniya and Abhinav Singh Chauhan] The authors are students at the National Law University, Odisha. Amidst the informational age, companies, irrespective of their domains, have an eye on data and are investing significantly to get a hold of it. Therefore, data becomes an essential and scarce resource. Companies like Google and Facebook have a significant edge over their competitors due to their capacity to gather and process large amounts of data, enabling them to provide better facilities. The amount of innovation that a company can offer is directly proportional to the amount of data a company accumulates, as data empowers the company to analyse the consumer behaviour. Nevertheless, the more data a company possesses, the greater is the possibility of its abuse. It not only raises privacy concerns for the user but also antitrust concerns regarding the behaviour of such companies. It involves not just the data gathered by the companies but also the data gained by the companies during the merger and acquisition process of other companies. Thus it becomes imperative to ascertain how data can be regulated to mitigate any antitrust concerns regarding the considerable data accumulation by digital companies. Need for data regulation Data privacy concerns have always been there during data accumulation and transfer by large companies, but efforts have rarely been made to identify the anti-competitive consequences. New technologies and big data analytics have transformed the way data is processed and used. A company that collects data for a particular purpose may use the same data for some other purpose with the company’s changing needs. Thus, the future application of data cannot be decided when the consent of consumers for processing their data. The Indian Competition Act was enacted for the country’s economic development by preserving competition in the market and protecting the interests of consumers at the same time. The current antitrust regime concerns, in particular, predatory pricing, market denial, anti-competitive agreements, and other forms of abuse of dominant status that limit competition by driving away other firms. In digital business models, the primary goal is to expand the user base and encash the network effects that become a potential income source. Owing to the proliferation of data accumulation activities, large companies expand their customer base and earn income by leveraging that database to redirect ads to targeted groups of people, popularly called targeted advertising. Eventually, gaining a dominant position in the relevant market and keeping track of the industrial trend. This network control gives rise to anti-competitive practices like self-preferencing and other abusive practices. In one of its decisions, Germany’s competition regulation authority, Bundeskartellamt, prohibited the collection and processing of user data because Facebook was in a dominant position and could extensively manipulate user consent. It accredited the value to user consent for excluding them from Facebook services and its practice of gathering and combining data from different sources. Nevertheless, the decision prohibiting the data merger was based on the user’s privacy concerns, and neglected the antitrust regulations. Most data-driven companies remain non-profitable during the initial years of their operation, as they are focused on increasing the user base to exploit the network effects thereon. India’s overall legal system scrutinises mergers based on assets and turnover of companies involved or created. This system fails to include data-driven companies, even if they significantly impact the competition in the relevant market. Jurisdictions like Brazil and Ireland have exercised their residuary powers to scrutinise mergers falling below the threshold limits; however, the competition act does not provide any such residuary powers to CCI. The regulatory authorities in jurisdictions like Germany and Austria have tried to address the concerns raised by data accumulation through mergers and accusations by introducing deal value thresholds (DVT). DVTs empower authorities to assess data-driven companies’ mergers in which the monetary consideration surpasses the prescribed threshold limit. In India, the Competition Amendment Bill 2020 proposes to amend §5 of the act to enable the government to specify DVTs for mergers. Nevertheless, DVTs are a novel approach, and their effectiveness is yet to be determined. The introduction of DVTs in India must take a pragmatic approach to ascertain thresholds limit and nexus criteria to avoid unnecessary burden for the CCI and red-tapism for the parties. Though DVTs bring data-driven companies under the regulatory authorities for their probable anti-competitive practices, the data protection and privacy concerns remain as it is. How much data shall be regulated Companies like WhatsApp and Facebook do not charge their users monetary fees for their services; instead, they charge them in the form of their data. The imposition of stringent restrictions on the collection and processing of users’ data would limit the revenue of such companies. Moreover, it will also impede the creation of new services due to the unavailability of user data. While it can be claimed that data security and regulatory systems would benefit the consumers by preventing exploitation, but it can also reduce the competitive regime, as the innovation is mainly based on data. Potential competitors will first need to collect and analyse the data, which will increase the cost and required resources and ultimately dissuade new players from entering the market. Even if new players enter the market, they will not be able to compete with the already established players, since the new entrants with higher costs either have to offer services at a higher price or sustain losses. Since present laws are insufficient to seal the rift between the individual’s privacy and the anti-competitive behaviour of the firm, the same can be resolved on a case to case basis assessing the needs and demands of the economy and competition. For example, the concept of open banking allows third-party to access banking and other financial data of customers, for promoting new players to provide better services, eventually instilling competition in the field. Thus, privacy may have to part away to ensure healthy competition and consumer welfare. In India, the fundamental right to privacy is not absolute and can be restricted for greater social good.

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The Dichotomy Between Competition Law and IPR

Leave a Comment / Competition Law, Contemporary Issues /

[By Nipun Kumar] The author is a student at the ILS Law College, Pune. Competition law and Intellectual Property Rights (hereinafter “IPR”) are two policies that have a common objective of ‘consumer welfare’ and ‘efficient allocation of resources’. Modern understanding of these two disciplines is that both the laws work in conformity to each other in order to ‘bring new and better technologies, products, and services to the consumers at lower prices’. However, a conflict appears to arise between the two policies given their contradictory methods of achieving the common objective. IPR grants a degree of exclusivity by limiting access, whereas competition policy seeks to promote competition and facilitate access to the market. The Raghvan Committee in its report on competition law had opined that there exists a dichotomy between IPR and competition policy where the former ‘endangers competition while the latter engenders competition’. Owing to the fact that intellectual property rights confer exclusive rights upon their owners on one hand, whereas competition law strives at keeping the markets open on the other, it is easy to assume that there is an inherent tension between these two areas of law and policy.[i] This conflict, sometimes, takes a toll on healthy competition in the market which eventually defeats the objective of either of the laws. This article discusses the various instances of conflict between the two policies and how IPR is used as a shield to stifle competition in the market. Intellectual property owners provide licenses to generic manufacturers in the market so that they can exploit the intellectual property and pay a royalty to the license providers. This licensing can be misused in various ways by the intellectual property owners, which has the potential to restrict competition in the market. Some of them are discussed below: Territorial Exclusivity Some patents require such high level of investment that it becomes significantly risky for a licensee establishment to use the patent for business unless the licensee is given immunity from any competition arising out of the use of that patent. To overcome such competition, the licensor grants an exclusive right to manufacture and sell goods in a particular territory and agrees to avoid granting similar rights to another in that territory.[ii] Such licenses make sure that there is only one entity in a territory authorised to use the patent, thereby providing such entity with a territorial exclusivity. These licenses have the potential to raise competition concerns because these are aimed at eliminating competition by restricting the use of patents by other firms, which prima facie qualifies as an anti-competitive act. In the case of Nungesser v. Commission (Maize Seeds case), the Court of Justice of the European Union (hereinafter “the Court”) has given a robust interpretation of territorial exclusivity where it identified two types of exclusive licenses: ‘open exclusive license’ and ‘exclusive license’. In an open exclusive license, the exclusivity of the license relates solely to the contractual relationship between the owner of the right and the licensee, where the licensor agrees neither to license anyone else in the licensee’s territory nor to compete there itself. An exclusive license, on the contrary, aims at providing the licensee with absolute territorial protection so that all competition from the third parties, such as parallel importers and licenses for other territories, is eliminated. The Court concluded that the grant of an open exclusive license, that is to say, a license which does not affect the position of third parties as mentioned above is not anti-competitive. As regards the exclusive licensing, the Court reiterated its stance in Consten and Grundig v. Commission and held that absolute territorial protection granted to the licensee in order to enable parallel imports to be controlled and prevented results in the artificial maintenance of separate national markets, stands in contravention with the competition policy. The Maize Seeds case laid down that territorial exclusivity may not always be anti-competitive and it depends on whether the license is having any detrimental effect on competition in the market. After the case of Nungesser, the Court has adopted a somewhat liberal view regarding territorial exclusivity by holding that such licenses are not anti-competitive. In Coditel v. CinéVog Films, the Court has even stressed on the importance of the territorial exclusivity where it acknowledged that in certain cases the licensee may need absolute territorial protection. In Pronuptia de Paris v. Schillgalis, the Court held that where the licensee’s business name or symbol of the franchise is not well known, the grant of exclusive territorial protection may not infringe the competition policy. It can be concluded that territorial exclusivity may tend to raise competition issues in a market which has to be decided on factual points in a case; the only test is whether the license, by effect or by object, causes an appreciable adverse effect on the competition. Technology Pools The European Commission’s (hereinafter “the commission”) Technology Transfer Guidelines defines technology pools as arrangements whereby two or more parties assemble a package of technology which is licensed not only to contributors to the pool but also to third parties. Technology pools may be both pro-competitive as well as anti-competitive. Such pools are beneficial to competition because they allow for a one-stop licensing for the technologies required in the market, which reduces the transaction cost significantly whereas they may be detrimental to the competition when they establish a de facto industry standard which tends to reduce innovation by foreclosing alternative technologies from entering the market. The commission has determined the effects of pools in the case of substitute and complementary technologies. In the markets where the technologies pooled are substitutes, the royalties paid will be higher which may amount to price-fixing between the competitors. This makes pools of substitute technologies restrictive of competition, given that price-fixing is prima facie anti-competitive. In the case of complementary technologies, pooling amounts to lower royalties, and therefore, such pools are not restrictive of competition. The competition is affected in case of complementary technology pools when the licensee is forced to

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Invoking Multiple Guarantees of the Corporate Debtor Before Maturity of CIRP

Leave a Comment / Insolvency Law /

[By Sushant Kumar and Vanshaj Dhiman] The authors are students at the Dr. Ram Manohar Lohiya National Law University, Lucknow. The contract of guarantee is an essential part of the restructuring process of the corporate debtor. It is a settled position in contract law that the guarantor’s liability arises as soon as the borrower defaults in making payment of the debt. However, the advent of the Insolvency and Bankruptcy Code, 2016 [hereinafter ‘IBC’ or ‘Code’] and some judicial pronouncements of National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) have given rise to a catch-22 situation before the creditors. In this article, an attempt has been made to understand the law governing guarantees of a corporate debtor in the current insolvency regime. The confusion has arisen due to conflicting judicial pronouncements on the issue of maintainability of simultaneous insolvency proceedings in respect of the same debt and certain lacunae in the legislative framework of the Code. Let us first understand the basic principle of a guarantee-contract. A contract of guarantee is entered into between the creditor, the principal debtor, and the guarantor. Here, the guarantor may be a body corporate or a natural person. It is said that the guarantors and corporate debtor sail in the same boat, and therefore, the very objective of securing the guarantee would be defeated if the creditor is forced to first exhaust its remedy against the principal debtor before proceeding against the guarantor. This right of the creditor is the hallmark of a guarantee-contract. It is a trite legal position that the guarantor’s liability is co-extensive with that of the principal debtor. Guarantor’s Liability Before the Maturity of Corporate Insolvency Resolution Process Before we delve into the discussion, it is important to note that the Committee of Creditors (“CoC”) drives the insolvency resolution process (“IRP”). Therefore, the guarantor(s) cannot be allowed to dictate the terms and manner of the proceedings under the Code or seek deferment of the proceeding initiated against them. Though the relationship between the corporate debtor and the guarantor originates from the same transaction, both are separate and independent entities. Since the guarantor’s liability is distinct and separate from that of the corporate debtor, the creditor can proceed against the guarantor and the corporate debtor simultaneously or alternatively. Section 14(3)(b) of the IBC guides this aspect. It states that the moratorium will not apply to the surety in a contract of guarantee. In other words, only the estate of the corporate debtor will be protected by moratorium under Section 14 of the Code, and this benefit shall not extend to the assets of the surety. Further, Sections 60(2) and 60(3) of the IBC reflect the Parliament’s intention to allow concurrent insolvency proceedings against the corporate debtor as well as the personal guarantor. The Parliament, intentionally, has made the personal guarantor to the corporate debtor equally liable to reduce the number of non-performing assets (NPA) for the speedy resolution of outstanding debt and make the promoters liable for their flawed decisions.  Besides, the Code does not prohibit the creditors from proving double proof of the same debt against two separate estates (also known as double-dipping). That means the creditor is entitled to prove its claim against both the principal debtor and the guarantor(s) but cannot claim more than the total debt. The NCLT, in ICICI Bank Ltd v CA Ritu Rastogi, permitted simultaneous initiation of IRPs against both the principal borrower and the guarantor. In State Bank of India v V Ramakrishnan, the Supreme Court clarified that the moratorium does not extend to the surety’s assets thereby accepting the proposition that the IBC does not bar the filing of two insolvency proceedings simultaneously. However, the ratio of the NCLAT, in Vishnu Kumar Agarwal v Piramal Enterprises Ltd, seems to circumvent these decisions by holding that for the same debt, a claim cannot be filed, and proceedings maintained, by the same financial creditor in two separate IRPs simultaneously. Arguably, the proceedings against the guarantors should not be initiated unless the corporate debtor’s liability is not crystallized in the resolution plan itself or until the CIRP has not been completed. However, the CIRP is not a recovery proceeding, but a means to resolve and restructure the corporate debtor’s debt. Having an independent and co-extensive liability, the guarantor cannot claim immunity in the garb of CIRP being underway because his liability is to pay off the entire outstanding debt subject to the guarantee contract. Mostly, the promoters/directors of a corporate debtor furnish a personal guarantee for the sanctioning of a loan to the corporate debtor. If the proceedings against such personal guarantors are stayed during a CIRP, they may file frivolous applications with ulterior motives merely to escape from their liabilities until the CIRP is not completed. Besides, the IBC aims to protect the rights of the creditors and not to reward such personal guarantors by whose decisions the corporate debtor became insolvent in the first place. A Hypothetical Scenario to Understand the Law To better understand how the invocation of guarantee(s) before the CIRP of the corporate debtor matures should play out, let us take an example [hereinafter ‘the example’]. Say, the corporate debtor is CD, corporate guarantor to the corporate debtor is Gc, personal guarantor to the corporate debtor is Gp and that there exist four creditors of the corporate debtor, namely C1, C2, C3, and C4. C1 has the corporate guarantee, C2 has the personal guarantee, C3 has both the corporate and the personal guarantee for the same debt from the same guarantors as C1 and C2, respectively, and C4 has no guarantees. C1 invoked the CIRP against CD. However, before the CIRP could be completed, C3 invoked both its guarantees but the guarantors (both Gc and Gp) defaulted on their respective guarantees. Consequently, C3 filed an application against Gc under Part II of the Code and Gp under Part III of the Code before the same NCLT overlooking the CIRP process due to the amended Section 60

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IBC & Guarantee Contracts: NCLAT Rules on Simultaneous Applications

Leave a Comment / Insolvency Law /

[By Shubham Nahata] The author is a student at the Hidayatullah National Law University. Introduction Post the enactment of the Insolvency and Bankruptcy Code, 2016(“Code”), the credit recovery mechanism in India has witnessed substantial growth in terms of improved resolution opportunities for ailing entities. However, there still exist certain anomalies in its jurisprudential framework which need correction either in the form of affirmative action by the legislature or purposive interpretation by the Judiciary. One such irregularity was addressed by the National Company Law Appellate Tribunal (NCLAT), in its recent judgment of State Bank of India v. Athena Energy Pvt. Ltd. The NCLAT while dealing with an appeal filed by a Financial Creditor against the Corporate Guarantor, settled the law relating to the simultaneous application for the same debt against the Principal Borrower and the Corporate Guarantor under the Code. This post discusses the law laid down by the NCLAT with reference to its previous judgment in Piramal’s Case and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. Facts of the Case The State Bank of India (Financial Creditor) filed an insolvency application under Section 7 of the Code against Athena Energy Ventures Pvt. Ltd. (Corporate Guarantor) for a secured loan to Athena Chhattisgarh Power Ltd. (Principal Borrower), a joint venture company promoted by the Corporate Guarantor. The application against the Principal Borrower was admitted by the NCLT bench of Hyderabad. However, the application filed by the Financial Creditor against the Corporate Guarantor was rejected by the Adjudicating Authority following the dicta laid down in the case of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd. In the Piramal Enterprises case, an application was filed by the financial creditor against two corporate guarantors for the same set of debt and default. The NCLAT while dealing with this issue held that under the scheme of the Code there exists no bar to the filing of simultaneous applications against the corporate debtor and the guarantor. However, the Tribunal deviated from the scheme of the Code and held, that once a Section 7 application is admitted against the corporate debtor then it places a bar on admission of the same application against the guarantor on the same set of debt and default. Similarly, a Section 7 application cannot be filed jointly against two corporate debtors on the ground of joint liability unless they are a joint venture company. Hence, while dealing with an application filed by two Corporate Guarantors, the NCLAT denied simultaneous insolvency proceedings on the same set of debt and default. In the present case, the NCLT relying on the dicta as laid down by the NCLAT ruled, that as the companies were not joint ventures (because of different MoA) they shall not be covered under the exception clause as given under the ratio of Piramal’s judgment. The decision of the NCLT was thus challenged by the Financial Creditor relying on the law laid down by the Supreme Court in State Bank of India v. Ramakrishna & Ors. and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. It was also brought to the notice of the Appellate Tribunal that the judgment in Piramal’s case was stayed by the Apex Court in a subsequent appeal. Judgment and Analysis Financial debt under Section 5(8) of the Code has been defined as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money”. It also includes guarantee and counter indemnity obligations as provided under Section 5(8)(h) and (i) of the Code. Under Section 60(2) of the Code, when an insolvency resolution or liquidation process of the Corporate Debtor is pending before the NCLT then an application against a Corporate Guarantor or Personal Guarantor can also be filed before the NCLT. Similarly, when an insolvency resolution or liquidation process of a Corporate Guarantor or a Personal Guarantor is pending before the Court or the Tribunal then the same shall be transferred to the Adjudicating Authority dealing with the resolution or liquidation of the Corporate Debtor. Hence, under the scheme of the Code, an application for insolvency resolution of the Corporate Guarantor can be initiated even when an application has been accepted for the resolution of the Corporate Debtor. The Insolvency Law Committee Report of 2020, also discussed the conundrum surrounding simultaneous proceedings under the Code. The Committee suggested in its report that in case of different applications against the Corporate Debtor and the Guarantor under the Code, the amount of recovery can be revised based on the quantum of Creditor’s recovery in any one of the proceedings. The Committee referred to the NCLAT judgment in Edelweiss Asset Reconstruction Co. v. Sachet Infrastructure Ltd. & Ors., wherein simultaneous applications were allowed against the principal borrower and corporate guarantors under the Code. The Tribunal also referred to the Supreme Court judgment in State Bank of India v. Ramakrishna & Ors., wherein it was held that simultaneous applications can be filed as, under the contract of guarantee the liability of the surety is co-extensive. The Court emphasized that once a resolution plan is approved for the corporate debtor, the same becomes binding on the guarantor and it cannot escape liability under Section 133 of the Indian Contracts Act. Contracts of guarantee are usually governed by the principles as enshrined under Chapter VII of the Indian Contracts Act, 1872. One of the primary principles governing guarantee is that the liability of the surety is “joint and several” and “co-extensive with that of the principal borrower”. In Bank of Bihar v. Damodar Prasad &Anr., the Supreme Court has emphasized that joint and several liability is the key feature of the contract of guarantee. The fact that a creditor has proceeded against the corporate debtor doesn’t preclude him from an alternative remedy against the surety. However, the creditor is also not entitled to recover more than what is due and the amount of claim is adjusted based on the result of one of the proceedings. Conclusion Covenants in the nature

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A Conspectus on Vicarious Liability Of Non-Executive Directors

Leave a Comment / Company Law /

[By Aayush Akar and Aarushi Prabhakar] The authors are students at the National Law University, Odisha. The directors of a company hold a fiduciary role and are required to conduct the operation of the company in a way that is desirable to the interests of the company. Non-executive or independent directors are not responsible for day-to-day businesses and are generally active in the strategy and decision-making practices. The provisions on vicarious liability have a standardized language, provided that the person is liable if at the time of the commission of the crime he/she was accountable for the affairs of the company. However, these provisions do not differentiate between “Managing Directors (MDs) and Executive Directors (EDs) and Non-Executive Directors (NEDs) and Independent Directors (IDs)”. As a result, law enforcement agencies/trial courts were sometimes perceived to keep the whole Board accountable for all legal violations of the company. This piece of writing throws light on whether the non-executive directors be held liable for the day-to-day affairs of the company or not. Fundamental Principle  Supreme Court observed in the case of  “N Rangachari v. Bharat Sanchar Nigam Ltd”,  that unless explicitly laid out in the legislation, there would be no vicarious liability. If the provision of any statute gives rise to a criminal obligation, then the essentials set down for vicarious liability must be strictly complied with. The essentials to be fulfilled for a person to be vicariously liable of which the company is primarily accused is that he or she was involved in the incriminating act and he or she knows what is attributable to him or her to be made responsible for the incrimination. In other words, it is not appropriate to rope in an individual who has nothing to do with the issue. A company is a legal entity and all its activities and operations are the outcome of the acts of other individuals. Thus, the officers of the company responsible for the affairs of the company are made personally liable for the acts of the company. Each and every person, as well as the company accountable for the affairs of the company at the time offence, was committed is made liable. However, these essentials provide an escape route for people who are successful in proving that the crime was performed without their involvement or that they have exerted all due diligence to avoid the commission of the crime. It was observed in the case of “Gunmala Sales Pvt. Ltd v. Anu Mehta & Ors” that the directors shall not be held liable since they don’t have an active role in the day to day affairs of the company and it is essential to look upon the role of the director while deciding the liability of the director. Immunity Provided to Non-Executive Directors Section 149(12) of the Companies Act, 2013 provides immunity to non-executive directors and independent directors. But, this immunity is not available for offences under any other law and only for the offences under the Act. However, Section 149(12) of the Act doesn’t always provide a safe harbour to the non-executive directors as a director can be held liable when an offence has occurred with his consent, knowledge, and where he did not act in a diligent way.  Poonam Garg, who is an appellant in the case of “Poonam Garg v. SEBI”, was a promoter in the category of NED and Promoter, Managing director and compliance officer of the company was her husband. Securities Appellate tribunal held that Poonam Garg cannot take immunity for the breach committed by her husband ( MD, promoter and Compliance officer of the Company) by giving an excuse of ignorance about the PIT regulations. Therefore, Poonam Garg (NED of the company), was held liable for the day to day affairs of the company. The Ministry of Corporate Affairs, in March 2020, issued a circular to the Registrar of Companies directing them to not initiate civil or criminal proceedings against independent directors and non-executive directors until sufficient evidence is there against them. Non-executive directors / Independent directors are not responsible for keeping a check on the day to day affairs of the company. Accordingly, no liability can be claimed upon a non-executive director for non-performance of certain activities like minutes of meetings, filing of updates on statutory registers for such tasks that are beyond the scope of NED/ID A full-time director or KMP should be held liable for the breach of any company law since they are accountable for the day-to-day affairs of the company. Furthermore, it was directed that standard operating procedures provided by the MCA have to be followed for initiating proceedings against officials who have violated the law of the company. Vicarious Liability of NED’s for Dishonour of Cheque More often than not, the question of NED/ID’S liability for the dishonour of cheque has come under scrutiny in numerous cases before various courts of India. It was held in the case of “Sunita Palta v. M/s Kit Marketing Private Limited” that the non-executive directors are exempted from Section 138 of the Negotiable Instrument Act which attracts criminal liability for the dishonour of cheque. Vicarious liability was discussed in terms of Section 141 of the Negotiable Instrument Act by the court. It was held that an individual should be held accountable for the affairs of the company at the time crime was committed for being criminally liable under Section 141 of the Act. Each and every person associated with the company shall not fall within the scope of this Section. Henceforth, a director cannot be held liable under the provision if, at the time of the offence, he was not accountable for the affairs of the company. On the contrary, a person can be held liable even though he/she doesn’t hold any office or designation provided he/she was accountable for the affairs of the company at the time offence was committed Need for a Reform In the day-to-day business of the company, the NEDs do not continuously pay much attention and play an

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Direct Cross-border Listing of Indian Companies: An Analysis of the Companies (Amendment) Act, 2020

Leave a Comment / Capital Markets and Securities Law /

[By Akshat Dangayach] The author is a student at the National Law School of India University, Bangalore. In September of this year, the Government of India notified the Companies (Amendment) Act, 2020 in the official gazette. The move, which has been welcomed by corporations across the spectrum, comes in consonance with the recent series of reforms in response to the growing economic inconsistency in the country, especially in light of the COVID-19 pandemic’s devastating impact on commerce and industry. The amendment has introduced several key changes in the company law regime of the country with the aim of improving the ease of doing business and relaxing regulatory restrictions to a significant extent. This paper focuses on the amendment made to Section 23 of the Companies Act, 2013. The amended Section 23, by way of the addition of Sections 23(3) and 23(4), permits a certain class of public companies incorporated in India to issue a particular class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions. The move is sure to provide impetus to Indian start-ups and established corporates alike to raise capital through foreign investors. In the larger scheme of things, the initiative will also provide the necessary infrastructure for the integration of the Indian corporate landscape with the global capital market. In the context of this development, this piece seeks to argue that despite the various benefits of the development allowing the direct listing of Indian corporations in foreign jurisdictions, there are still a series of challenges in the Indian corporate regulatory framework which need to be adequately tackled before Indian companies are effectively able to reap the intended benefits of the policy advancements. Benefits of access to global capital markets for companies Before delving into a detailed analysis of the newly added provisions, it is pertinent to briefly contextualize the discussion by developing an understanding of the multiple routes available to corporations for raising capital through cross-border listing. There are primarily two ways in which companies can generate capital from overseas listing, besides opting for an Initial Public Offering in a foreign market: direct listing and indirect listing. A direct listing is when a corporation converts its existing ownership into stock and subsequently offers equity directly to the general public via a stock exchange. On the other hand, an indirect listing is executed through depository receipts (DR). Under this mechanism, the corporation is required to issue its securities to depository intermediaries (traditionally banks) and underwriters incorporated in a foreign jurisdiction which, in turn, issue DRs to investors in their jurisdiction. Prior to the latest amendment, the Indian regulatory framework only allowed for such indirect listing predominantly in the form of listing of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). In addition to this, corporations were also permitted to issue debt securities in the form of foreign currency convertible bonds and foreign currency exchangeable bonds on stock exchanges. While certain companies (such as Wipro and Infosys) do employ these mechanisms, there exist several hurdles that companies have to go through in order to take this route. In fact, due to allegations of malpractice and market manipulation, SEBI banned around 20 companies from using DRs to raise capital in the year 2017. Further, such actions are often under strict scrutiny from the regulators, given the lack of transparency involved in the indirect listing process.. Such regulatory restrictions, coupled with the overhead costs in the form of charges levied by underwriters and financial institutions, dramatically disincentivised Indian corporations from taking this route. On the other hand, direct listing provides regulators and corporations with a more transparent mechanism for transactions and an easier method of tracking said transactions, thereby streamlining the process of inviting foreign investment. In light of these concerns, SEBI constituted a high-level expert committee in 2018 to formulate a report and suggest policy changes to pave the way for cross-border direct listing of equity shares of companies incorporated in India. The 2020 amendment to Section 23 of the Companies Act comes in response to the report submitted by this committee which firmly advocated direct listing. The Road Ahead: Institutional Challenges and Hurdles However, despite the obvious benefits of the introduction of the new regime for Indian corporations, there are still a number of institutional inconsistencies and hurdles that must be resolved in order for companies looking to get directly listed abroad to realise the actual potential of these benefits. Primarily, the Indian regulatory and legal framework needs to be considerably overhauled to assist the cross-border functioning of corporations. For starters, under the present state of affairs, companies will have to comply with the laws and regulations of two distinct jurisdictions. For instance, companies seeking to list abroad will have to comply with the regulatory requirements of beneficial ownership and disclosure of the foreign stock exchange. Similarly, the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 impose strict requirements on how Indian companies may hold foreign currency. This will inevitably translate into drastically increased compliance costs, especially given that SEBI might also impose certain additional requirements as it has an extra-territorial jurisdiction as per the ruling in SEBI v. PAN Asia Advisors Ltd. and Anr. While this particular issue is ostensibly quite intuitive in nature, it merits some attention and might even require SEBI to substantially modify its own regulations to bring them in line with that of major foreign jurisdictions or even to relax some of its requirements for companies seeking to list abroad. Additionally, the Reserve Bank of India’s (“RBI”) Liberalised Remittance Scheme places restrictions on investments made by Indian residents on assets abroad. If these restrictions are not reconsidered, it would severely limit Indian investors from investing in Indian companies and put them at a considerable disadvantage relative to foreign investors. Further, the RBI must also address concerns regarding how equity shares that are rupee-denominated will be marketable in stock exchanges that are premised on other currencies. So far, the RBI has not released any guidelines in this regard.

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FTC vs Facebook and its Potential Impact on Facebook’s Indian Dominance

Leave a Comment / Competition Law /

[Giri Aravind] The author is a student at the National University of Advanced Legal Studies. Introduction On December 9th, the Federal Trade Commission, (FTC) as well as dozens of states in the US, sued Facebook alleging that the company was involved in anti-competitive conduct by illegally maintaining its social network monopoly. The suit focuses on two major aspects – anticompetitive acquisitions and anticompetitive platform conduct. The federal regulator is seeking a permanent injunction in the federal court that could potentially break up Facebook. The statement by the FTC’s Bureau of Competition Director had stated that the actions of the company deny consumers the benefits of competition. He added that the aim of the suit was to roll back Facebook’s anticompetitive conduct and so that innovation and free competition can thrive. How does Facebook operate? To get a better idea of how Facebook established its presence and continues to dominate the industry, one must look at how the company stops an emerging competitor in this sector. Facebook usually resort to one of the three methods – buy the competitor, or deny access to its data, or copy and apply. The former simply involves spending billions to purchase any company that might be a threat to their dominance. The acquisition of Instagram in 2012 for $1 billion, and WhatsApp in 2014 for $19 billion, are two big examples of the aforementioned in the last decade. Although investors were quite skeptical about the latter as WhatsApp was a mere messaging app that provided no ads and costs less than a dollar a year, Facebook had effectively neutralized the prospect that these companies might enter the personal social networking market and threaten their share. When buying a company doesn’t work, Facebook simply denies access to users’ data on third-party software applications. When users sign up on a new website, Facebook often gives the option of following their Facebook friends — a feature enabled through Facebook’s application program interface (API). However, Facebook has made key APIs available to third-party apps only on the condition that they refrain from providing the same core functions that Facebook offers. When Twitter launched Vine in 2013, Facebook locked out their social API functions, reportedly at the direction of Mark Zuckerberg himself. And when buying out a company or denying access to user data doesn’t work, Facebook simply copy and apply new features into their existing social networking applications. In 2013, when Snapchat turned down a $3 billion offer from Facebook, they introduced a host of new features including face filters and stories in Instagram, turning them into a potential Snapchat-killer. Similarly, allowing users to upload short videos on Instagram eventually led to the end of Vine. Big Tech and Antitrust Law The suit against Facebook isn’t going to the final legal action the FTC or the Department of Justice (DOJ) will be made against the big tech giants. Since 2019, Amazon, Apple, Google, and Facebook have been the target of various governmental authorities who are investigating whether these four companies have used their size and wealth to quash competition and expand their dominance. Amazon has been accused of favouring its own products by taking advantage of data it collects from sellers to develop its offerings. Apple has been alleged to have exploited its control over the app store by excluding rivals and charging app developers high fees, while Google’s monopoly over the online search and marketing industry has been questioned. Although these investigations had only led to Congressional hearings and committee reports, the suit against Facebook marks the beginning of a major action taken by FTC against the Big Tech in recent years. Previously, The United States v. Microsoft Corporation, 253 F.3d 34 (D.C. Cir. 2001), was the most prominent case against a major tech company. Microsoft was sued by the DOJ and a coalition of 20 state attorney generals for violating federal antitrust law. Microsoft was the most dominant software firm in the 1990s, but they hadn’t initially ventured to the internet browser market. But in 1995, Microsoft released their own free browser, the Internet Explorer, and the next year they bundled it with the Windows 95 operating system. Within a year, they gained a 10% market share and there were allegations that Microsoft had made it increasingly hard for users to use other web browsers. Microsoft lost the case against the government and the court ordered a breakup of Microsoft as its remedy. But Microsoft appealed and by June 2001, a federal appeals court decided to reverse the order. By November, Microsoft and DOJ had reached a settlement. Interestingly in 2014, Novell, another American software company lost its antitrust case against Microsoft when the US Supreme Court declined to hear an appeal by the company. Novell had originally filed the case in 2004 alleging that Microsoft had deliberately withheld Windows technical information in order to prevent any competition in the applications market. This was brought out to light vide a 1994 memo from Bill Gates, who directed that the company should withhold namespace extension APIs in their operating system from its competitors in order to gain market advantage for Microsoft Word. However, the Court held that a monopolist company had no duty to cooperate with its competitors, and Microsoft’s act did not constitute antitrust behaviour. Thus, the two cases involving Microsoft are really in great tension with each other. The earlier US v. Microsoft had held that a firm with market power does have a duty to deal fairly and non-competitively with those who used their platform, while the court took a contrasting view in the Novell case. The decision in the suit against Facebook would depend on which of the two cases the ruling judges give credence to. Facebook’s dominance in the Indian Marketplace The sheer volume of users and the untapped market potential have made South Asia a favourite marketplace for most of the Big Tech companies. This region, especially India, has seen a surge in usage of in smartphone use and Internet access and

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