Author name: CBCL

Enforcement of Dissenting Arbitral Awards: Ensuring Due Process in Search of Efficiency

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[By Muskan Arora] The author is a third year student of West Bengal National University of Juridical Sciences, Kolkata. On 8 May 2019, the Supreme Court (“SC” or “the Court”) rendered a decision in Ssangyong v. NHAI (“SsangYong”). In the instant case, the parties entered into a contract to build a highway in Madhya Pradesh. The dispute arose out of the application of a price-escalation clause, which NHAI altered subsequent to execution of the contract. The dispute was referred to arbitration, which resulted in a majority award with a dissent. The SC decision rendered in SsangYong sought to set aside the award passed by the Delhi High Court. The validity of the award was upheld by the Delhi High Court and the matter was appealed to the Supreme Court. While disposing the case, the Supreme Court set aside the majority award passed by Delhi High Court and as a consequence, held that “the disputes that were decided by the majority award would have to be referred afresh to another arbitration”. Further, the Court noted “in order to do complete justice between the parties, invoking our power under Article 142 of the Constitution […] we uphold the minority award.” Through this blog, the author will evaluate first, the applicability of Article 142 of the Constitution of India in the present case. Second, the blog will discuss the legal significance of a dissenting opinion in arbitration. It hypothesizes that contrary to the Court’s view, a dissenting opinion does not have the legal effect of an award and considers its implications on the present decision. Nonetheless, the blog provisionally considers that in such a circumstance, the Court may be justified in upholding its pragmatic finding. Application of Article 142 of the Constitution of India to SsangYong   In arbitration cases, parochial judicial review and oversight becomes relevant only when an individual approaches the Court for either setting aside the judgment on grounds mentioned under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”) or for enforcement of an arbitration award or agreement. The task is tempered with readily available jurisprudence preventing the traditional judicial setup from encroaching into the domain of arbitration. In the SsangYong case, the Court has traversed one step beyond and has exercised its powers under Article 142 of the Constitution to enforce a minority award, which in itself is problematic. This presents a theoretical debate on the scope of the laws that apply upon a party’s choice of lex arbitri. A party’s choice of seat as India, results in Indian courts having supervisory jurisdiction. But does that mean that the entirety of the Indian legal regime would be applicable? Can there be a distinction made on the basis of laws applicable to purely domestic arbitrations and international arbitrations seated in India? Further, can the scope of Article 142 be extended to a point wherein it overrides the provisions of another statute, in this case, Section 34 of the Act? The nexus between Article 142 and Section 34 can be examined by understanding the scope of these two individually. A reading of Section 34 makes it clear that the judiciary’s power is restricted to either setting aside the award or declining to do so. The Supreme Court has cleared this position in McDermott International v. Burn Standard Company wherein it held that, “The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired”. Despite this prevailing position, in the SsangYong judgment the Supreme Court has overstepped its jurisdiction by substituting the majority opinion with its own judgment. In doing so the Court used its plenary powers under Article 142 of the Constitution. The jurisprudence of Article 142 bolsters the tenets of doing complete justice by giving SC power to pass such decree or make such order as is necessary. By using Article 142 to override the provisions of another statute, the Court is setting an example that confers upon it an unreasonable power to decide a case by omitting to examine the legal standards of other statutes. The literature discussing the propriety of Article 142 has intentionally left it a little unclear to allow the courts to do “complete justice”. Given that this faded understanding is capable of bestowing arbitrary powers in the hands of the court, any use of it must be balanced against the consequences of its improper use. The intention of the drafters in having such a provision in the first place would be vastly diminished, if not altogether eviscerated, were courts to use this power at their whims and fancies. The Supreme Court has also supported this understanding in Supreme Court Bar Association v. Union of India wherein it was held that due consideration has to be accorded to statutory provisions while applying Article 142. Even though it is a settled principle that cases under Article 142 do not hold any precedential value, nonetheless the ratio decided is not obscured somewhere behind the four corners of the judgement. Thereby, it not just extends the ambit of Article 142 to an unreasonable extent but also serves as a persuasive non-binding juridical standard despite Article 142’s nature of defying stare decisis. The propriety of dissenting opinions and the correctness of SsangYong In international commercial arbitration, dissenting or minority opinions are considered a legal vacuum. They have neither jurisprudential value in formulating arbitral decisional law nor hold any precedential value. This practice has been both constant and uniform. Despite this widespread understanding of dissenting opinion, Supreme Court in the Ssangyong judgement has upheld the minority opinion. The Supreme Court in the case of Common Cause v. Union of India has eloquently and succinctly articulated the position on dissenting opinions in India. It held: “the view taken by the minority cannot be cited as the law laid down by the Constitution Bench nor can it be followed in the face of the opinion of the majority to the contrary”. In light of a contrary

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Can Insolvency Proceedings Be Initiated Against Public Sector Undertaking/Government Companies?

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[By Shantanu Lakhotia] The author is a student of Jindal Global Law School, Sonipat. Introduction Recently, a judgement delivered by a 3-judge bench of the Supreme Court of India has been hailed by the legal fraternity as it cleared a mischief revived by the Parliament in the realm of arbitration law. In the matter of Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors.[i](“HCC case”), the Supreme Court struck down Section 87 of the Arbitration and Conciliation Act (“A&C Act”). The said provision was inserted by the Parliament vide the Arbitration and Conciliation Amendment Act of 2019 provided for an automatic stay of arbitral award under Section 36 of the A&C Act once an appeal was filed under Section 34 of the A&C Act. This in turn was bound to lead to delays in enforcement of the arbitral awards, which had been a longstanding complaint of businesses with the A&C Act. It took the Parliament 19 years to cure this mischief of ‘delayed justice’ vide the Arbitration and Conciliation Amendment Act of 2015. However, in addition to laying down the law in the dominion of arbitration, the judgement has provided a clarification to the position of law in the realm of insolvency law that seems to have been overshadowed.  The Supreme Court in HCC case had resolved the controversy as to whether Public Sector Undertaking/Government of Companies (“PSU/Govt. companies”) are amenable to the Insolvency and Bankruptcy Code, 2016 (“the Code”). The controversy in regard to this had already been expressly adjudicated upon by the National Company Law Tribunal (“NCLT”) as well as the National Company Law Appellate Tribunal (“NCLAT”), wherein both the tribunals along with the Supreme Court had answered the question in the affirmative. Astonishingly, the High Court of Bombay has decided to embark on a quest to find an answer to the controversial question as to the jurisdiction of NCLT and NCLAT to declare PSU/Govt. companies as insolvent, neglecting the fact that the answer has already been answered by the Supreme Court of India in affirmative in the matter of HCC. The present article explains the position of the Supreme Court in the matter and will provide a comment about the correctness of the same. The article will further comment upon the jurisdiction of the High Court of Bombay to re-adjudicate a question of law, already been decided by the Supreme Court of India. Judgement of the Supreme Court In the matter of HCC case, the Supreme Court had to decide on a Constitutional challenge made to the Code as being arbitrary and discriminatory, due to the fact that even though the Petitioner company can be proceeded against by their creditors (which can include statutory bodies or PSU’s) under the Code the Petitioner cannot move against their debtors like National Highway Authority of India (“NHAI”), National Thermal Power Corporation Ltd., IRCON International Ltd.,  National Hydropower Corporation Ltd. which are statutory bodies or PSU’s. Hence, the essential question to be decided was whether Corporate Insolvency Resolution Proceedings (“CIRP”) can be initiated against a PSU/Govt. Company? The Supreme Court while agreeing with argument put forth by the Solicitor General of India, held that even though the, definition of ‘government company’ is provided in Section 2(45) of the Companies Act, 2013 (“Company Act”), the definition of ‘government company’ would be subsumed in the definition of ‘company’ as provided in Section 2(20) of Company Act, and hence insolvency proceedings against Government company can be initiated by virtue of it being covered under the ambit of Section 3(7) of the Code. However, the Supreme Court had further gone on to hold that statutory bodies, like the NHAI which “functions as an extended limb of the Central Government and performs governmental functions” cannot be taken over by a resolution professional or by any other corporate body and neither can such Authority be wound-up under the Code. Therefore proceedings against NHAI under the Code are not possible. The Court in addition to the above-mentioned points had provided certain other reasons for dismissing the constitutional challenge made to the Code, however, for the purpose of this article the same has not been delved into, as it is not related to the topic of the article. Analysis of Supreme Court’s judgment  The apparent overshadowing of the clarification considering the position of law in terms of initiating insolvency proceedings against government companies is clear from the fact, that even though the Supreme Court has laid the law in the matter and thus binding on all Courts of India by virtue of Article 141 of the Constitution of India, the Bombay High Court, in the matter of Hindustan Antibiotics Ltd & Anr. v. Union of India & Ors.[ii], has taken up the task of clearing the insolvency law-based controversy again, based on the reasoning that in the Hindustan Construction Company Ltd. case, “pertinently therein, the issue of constitutional validity of Section 87 of Arbitration and Conciliation Act, 1996 was considered and decided”[iii]. At this point of time, it must be noted that the Supreme Court has provided the answer in the affirmative as to whether CIRP can be initiated against PSU/Govt. Companies and that the Bombay High Court should not embark on the quest of an already discovered position of law. The NCLT Bombay Bench in the matter of Lark Chemicals Pvt. Ltd. v. Goa Antibiotics & Pharmaceuticals Ltd.[iv], the NCLAT in the matter of West Bengal Essential Commodities Supply Corporation Ltd. v. Bank of Maharashtra[v] as well as the Supreme Court, from a theoretical viewpoint of law were right at holding that CIRP can be initiated against PSU/Govt. Companies as under Section 3(7) of the Code, the only exception provided for ‘corporate’ person is that for financial service provides. Furthermore, it is pertinent to note that the Companies Act, 2013 in Section 462 provides for classes of companies that are exempt from the provisions of the Company Act in public interest, and the Government has through various notifications used this provision for relaxation of norms

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Singapore Mediation Convention: A New Era for the Indian Mediation Landscape

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[By Darshana Paltanwale and Manasvini Vyas] The authors are fourth year students of Symbiosis Law School, Pune and National Law University, Odisha respectively. Introduction Over the years, mediation has garnered recognition and preference in India, as the Indian legislature and courts have been inclined towards the development of Alternative Dispute Resolution (“ADR”) mechanism in the country, in line with the international standards. It also stems from the fact that commercial entities actively opt for procedures like mediation over litigation.[i] Although mediation as a form of alternate dispute resolution is commonly used in India when settling family and civil law cases, active measures are being taken by different organs of the Government to promote mediation as a means of dispute resolution. In furtherance of same, Indian Institute of Arbitration and Mediation signed an MOU with Singapore International Mediation Centre in 2015 to promote international commercial mediation in the country. Later, in 2018, the Indian Parliament amended the Commercial Courts Act, 2015 and mandated that the parties must resort to mediation before filing a suit before a Commercial Court. But in spite of the affirmative actions, growth of international commercial mediation has been impeded because of certain maladies. To illustrate, lack of a proper legislation and adequate state machinery for enforcement of a settlement agreement, inconsistency with respect to definitions of terms like conciliation and mediation, etc. pose a challenge in the advancement of mediation process. In light of these issues, the signing of the Singapore Mediation Convention, 2019 (“the Convention”) comes as a welcome change. This landmark move is believed to trigger an array of changes and developments with respect to the growth of commercial mediation in India. The issues that this step aims to solve shall be critically analysed through this article. Inconsistency with respect to the terms ‘mediation’ and ‘conciliation’ While defining the term ‘mediation’, the Convention disregards any difference that exists between ‘mediation’ and ‘conciliation’ by virtue of their nomenclature. In the same vein, several jurisdictions allow the terms ‘mediation’ and ‘conciliation’ to be used interchangeably. However, the same does not hold true for India, as there exists uncertainty with respect to whether the two terms are synonymous. A plain reading of Section 89 of Code of Civil Procedure, 1908 (“CPC”) and Section 30 of the Arbitration and Conciliation Act, 1996 (“the Act”), suggests that mediation and conciliation are prescribed as two separate modes of settlement of disputes. By contrast, on several occasions, the Supreme Court of India has opined otherwise. In the case of M/S. Afcons Infra. Ltd. & Anr. v. Cherian Varkey Construction Co. (P) Ltd. & Ors., the Court expressed that mediation is a synonym of the term conciliation. Several leading commentators on the ADR regime in India, such as Justice Indu Malhotra, also hold the same view.[ii] It is suggested that the use of the term ‘conciliation’ in the Act covers both mediation and conciliation[iii] because if there exists any difference between the two processes, the same is due to the difference in degree of intervention of the facilitator, which is not in fact a difference in principle.[iv] This lack of certainty regarding the relationship between the two terms has been rectified by the Convention as it explicitly defines the term ‘mediation’ in Article 3 of its text.[v] It simply defines mediation as any process aimed at resolving disputes through amicable settlement, aided by a third party, irrespective of the terminology used to refer to this process. This will act as a guide for the promulgation of the legislation in India and thus will aid in stimulating certainty with respect to the scope of the two methods. Enforcement of settlement agreements Another stumbling block that impedes the growth of international commercial mediation in the country is the lack of recognition and enforceability of international mediation settlement agreements. A mediation conducted under the aegis of the court is governed by the CPC, and the settlement agreement as an outcome of this mediation is enforced in the form of a decree of the court. In addition to this, a settlement agreement that forms a part of a foreign arbitral award, shall be enforced as a consent award under Part II of the Act. Article 1(3) of the Convention precludes its application to mediations concluded either under the aegis of a court or within arbitral proceedings, wherein the parties agree to resort to mediation instead of arbitration. Hence, these settlement agreements will remain to be enforced as consent decrees and consent awards respectively, and shall be outside the ambit of the Convention. Further, settlement agreements resulting from private mediations are enforced as contracts in India.[vi] Thus, parties must initiate court proceedings to incorporate the settlement terms as part of a judgement so that the settlement agreement gets the sanction of law. The inherent problem with this approach is that it forces the parties to resort to courts to obtain a judgement after they have sat through a long mediation process, hence causing delay and inconvenience in the dispute resolution procedure. Moreover, the validity of such an agreement could only be challenged on the basis of the general principles of Indian Contract Law and not on the basis of the substance of the dispute. Furthermore, the settlement agreements concluded through private conciliation are governed by Part III of the Act. Owing to Section 73 of the Act, if a conciliator identifies ‘elements of settlement’ acceptable to the parties, a settlement agreement can be chalked out after taking into account the observations of the parties. This settlement agreement must mandatorily be signed by the parties and authenticated by the conciliator in order to accord its finality, and attribute a binding effect to it. By virtue of Section 74 of the Act, this agreement is deemed to have the status and effect of an arbitral award on agreed terms issued during the course of arbitration proceedings. While it is true that this legal fiction saves the parties from the trouble of initiating fresh court proceedings for enforcement, at the same

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Resolution of Financial Institutions under IBC Regime: What Next?

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[By Lakshmi Babu] The author is a corporate lawyer and currently pursuing LLM from Institute for Law and Finance, Frankfurt. Introduction India is witnessing an economic and consumption slowdown. The liquidity crunch in India’s shadow bank industry has slowly started to affect other sectors as well.[i] The defaults pertaining to IL&FS and the crisis faced by Punjab and Maharashtra Cooperative Bank (“PMC“) suggest the need for a more comprehensive resolution mechanism for financial institutions. The Insolvency and Bankruptcy Code, 2016 (“IBC“), generally deals with the insolvency and resolution of corporate entities, other than those providing financial services[ii]. It is a well-known fact that financial institutions handle public money and functions on the basis of the public trust and confidence placed on them. Even the slightest of distrust in their solvency has the ability to impute negative externalities which can affect the economy as a whole. The inter-connectedness of financial institutions and the inherent systemic risk therein, makes the process all the more prone to financial shocks.[iii] It is due to such considerations that financial institutions have to be treated differently from corporate debtors during insolvency and resolution process. The Government of India introduced the Financial Resolution and Deposit Insurance Bill (“FRDI Bill“) in 2017 which aimed to establish a resolution regime for banks, insurance companies and other financial institutions. However, the FRDI Bill was withdrawn within a year due to public outcry regarding a proposed bail-in clause, as a result of which there is a regulatory void in this regard. In the wake of increasing defaults in the financial sector, including that of IL&FS, DHFL and PMC, many experts believe that it is crucial to revive the FRDI Bill without delay.[iv] The regulation and protection afforded by a resolution legislation is essential to tackle the current financial slowdown that has impaired the Indian economy. In order to frame a healthy financial resolution framework, it is important to look at the standards set by the Financial Stability Board (“FSB“). Key Attributes by the Financial Stability Board FSB was established by the G20 to monitor and draft recommendations about global financial systems. The FSB issued a set of rules called the “Key Attributes of Effective Resolution Regime for Financial Institutions” (“Key Attributes“) in 2011. The core principles were adopted by the G20 in 2014 in order to reduce taxpayer support for solvency following the Global Financial Crisis (“GFC“). As a member of G20, India is committed to implement the Key Attributes into its domestic law. The Key Attributes have specified several factors to be included in such a framework, including: Co-operation with other jurisdictions so that resolution of global groups is eased;[v] Right to enforce temporary stay of early contractual termination rights by the appropriate authority and the enforcement of set-off, netting and collateralisation;[vi] Bail-in clause: A bail-in should be implemented, which respect the order of hierarchy of claims and shall convert all or part of unsecured and uninsured claims into equity (or other instruments of ownership);[vii] Creation of a temporary bridge institution wherein selected assets, liabilities and rights of a failed institution are transferred without the consent of shareholders and creditors;[viii] and Inclusion of branches of foreign firms in the resolution process.[ix] Rules for Financial Service Providers On 15 November 2019, the Ministry of Corporate Affairs (“MCA“) notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules“) under section 227 of IBC. The FSP Rules prescribe a more exhaustive process of administration and liquidation of financial service providers as opposed to the already existing framework for corporate debtors. By a subsequent notification on 18 November, 2019, MCA clarified that FSP Rules shall be applicable to systemically important Non-Banking Finance Companies (“NBFC“) having an asset size of Rs. 500 crore or more including housing finance companies (“Approved NBFCs“).[x] The FSP Rules prescribe the Reserve Bank of India[xi] as the appropriate regulator for all the Approved NBFCs. It is clear that the FSP Rules shall deal with the resolution and liquidation of notified FSPs and this is applicable, pending a full-fledged insolvency framework for all financial institutions including banks. FRDI Bill and the proposed bail-in clause The Government of India made a laudable effort when it introduced the FRDI Bill in 2017. The Bill was aimed to provide a sound resolution framework for financial institutions, including banks, insurance companies, payment systems, SIFIs, mutual and pension funds, Indian branches of foreign financial institutions among other financial institutions. SIFIs are those financial institutions whose failure would have a significant effect on the economy as a whole owing to its size, complexity and inter-connectedness with other financial institutions.[xii] The Bill aimed to divide financial institutions on the basis of risk, into categories such as low, moderate, material, imminent and critical, based on capital adequacy and other factors. The financial institutions in the material and imminent categories have to submit a restoration plan/resolution plan and would be subjected to subsequent periodic monitoring by the appropriate resolution authority.[xiii] The FRDI Bill was withdrawn due to the inclusion of a proposed bail-in provision. Bail-in is a method to restructure debts of a financial institution. Under a bail-in clause, the appropriate authority will have the power to either cancel the debts owed to creditors or convert such debts into instruments of ownership like equity. This provision is generally invoked where it is necessary that a troubled financial institution continue functioning and a bail-in provision can be used by itself or as a part of a proposed merger or acquisition[xiv]. The public outcry was a result of the fear of using the bail-in provision at the expense of deposit holders. Presently, deposit-holders are subjected to a maximum deposit insurance coverage of Rs. 1 lakh by the Deposit Insurance and Credit Guarantee Corporation of India, which the FRDI Bill intends to repeal. The FRDI Bill has not revised the deposit insurance cover, which was last amended in 1993[xv]. It is pertinent to note that the deposit insurance coverage in

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Transferability of Winding-Up Proceedings to NCLT After Passing Of Winding-Up Order: Upholding the Objectives of IBC

Leave a Comment / Insolvency Law /

[By Aditya Suresh] The author is a third year student of National Law University, Jodhpur. Introduction The Insolvency and Bankruptcy Code[i] (“IBC”) intends to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate firms. This Code replaced the erstwhile Part VII of the Companies Act, 1956 (“1956 Act”), under which Sections 433(e) and 434 authorized the High Court to adjudicate upon winding-up petitions brought before it by creditors on account of a company’s inability to pay its debts.[ii] However, under Section 434(1)(c) of the Companies Act, 2013 (“2013 Act”) read with the amendments brought in after the passing of the IBC [such as the modification to the earlier Section 271(1)(a) of the Companies Act, 2013, pending proceedings before the High Courts pertaining to winding-up petitions as a result of inability to pay debts, are to be transferred to the National Company Law Tribunal (“NCLT”).[iii] The problem however, arises as a result of the first proviso to Section 434(1)(c), which provides that only proceedings which are “at a stage as may be prescribed by the Central Government” may be transferred to the NCLT.[iv] While Parliament passed the Companies (Transfer of Pending Proceedings) Rules in 2016 (“Transfer Rules”), these Rules did not adequately address the question of the stage after which proceedings may not be transferred.[v] Rule 5(1) provided that petitions under Section 433(e) of the 1956 Act where notice had not been served upon the respondent company, were to be transferred to the NCLT. This was extended by the Supreme Court in Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.[vi](“Forech”), wherein the Court expounded upon the need to have all pending winding-up proceedings before High Courts transferred to the NCLT. In this case, the Court noted that on a conjoint reading of Section 434 of the 2013 Act, the Transfer Rules and the IBC, the legislature intended to have all proceedings transferred to the NCLT in order to further the objectives of the IBC, which were to “resuscitate the corporate debtors who are in the red”.[vii] The Court further observed that keeping this objective in mind, even petitions wherein notice had been served and the matter was lis pendens before the High Court, could be transferred to the NCLT upon an application for the same having been made by the creditors. Thus, this decision opened a Pandora’s Box of litigation wherein litigants applied for initiation of the CIRP process under the IBC and a transfer of proceedings to the NCLT. This is because corporate creditors wanted to opt for the contemporized rules under the IBC, which looks at resuscitation as the primary option through the appointment of the Resolution Professional, and the submission of resolution plans which would aim at revival of the company. While expansively dealing with transferability of cases in light of the IBC, the Court in Forech missed answering the important question which has been continually left unaddressed: at what stage in the insolvency process if at all, does such a transfer petition become untransferable? While the Delhi High Court in Tata Capital Financial Services v. Shree Shyam Pulp and Board Mills[viii] addressed this point, the Court here only ruled that the power to transfer is discretionary, and that it is incumbent upon the courts to decide whether transfer is viable at that particular stage in the winding-up process. However, another recent decision of the Delhi High Court provides more clarity on the Indian position regarding transfers after a winding-up order has been passed by the High Court and an Official Liquidator (“OL”) appointed. This next section analyses this decision of the Court. The decision in Action Ispat In Action Ispat and Power Pvt. Ltd. v. Shyam Metallics and Energy Ltd.,[ix] a division bench of the Delhi High Court decided in favour of allowing a transfer of insolvency proceedings to the NCLT even after a winding-up order had been passed by the High Court and an OL had been appointed under Section 448 of the 1956 Act. In this case, wherein the creditors sought transfer of the insolvency petition, the Court delved into an analysis of Section 434 of the 2013 Act, Rule 5(1) of the Transfer Rules as well as the IBC. On a conjoint reading of the aforesaid provisions, the Court found that the power of the Company Court to transfer proceedings to the NCLT is discretionary, and not limited to cases covered by Rule 5(1). Additionally, the Court found that the scope of proceedings under the High Court vis-à-vis that of the NCLT had to be looked into, and their relative benefits analysed. There was a difference in approach taken by the NCLT as opposed to an OL appointed by the Court. The NCLT, at all stages of the proceedings, looks at revival of the company as a primary option failing which the assets are liquidated. As opposed to that, the OL looks to satisfy creditors in a solely monetary sense, by liquidating the assets and letting each creditor have a proportional share. Relying on the judgment in Sudarshan Chits v. Sukumaran Pillai,[x] the Court herein found that winding-up orders were not irrevocable and that even after the winding-up order is passed, the petition could be transferred. Thus, the Court found that looking into the objectives of the IBC and that of the insolvency resolution process as mentioned in Forech, the will of the creditors in transferring the petition has to be upheld, unless there are compelling and irrevocable circumstances justifying a departure from such a transfer. Analysing the Decision of the Court: Objectives of the Insolvency Process Given the expansive analysis given by the Delhi High Court on the objectives of the IBC and the larger purpose of the insolvency resolution process, this decision merits some discussion. The author believes that the Delhi High Court rightly distinguished between the NCLT and the OL with respect to the functions and powers exercised. Section 457 of the Companies Act, 1956, which dealt with the powers of the OL, primarily allowed him

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The Culpability of Telecom Sector Crisis?

Leave a Comment / Contemporary Issues /

[By Arpit Saini] The author is a third year student of National Law University, Jodhpur and can be reached at arpitsaini07.as@gmail.com The Crisis Vodafone Idea Ltd. and Bharti Airtel have sustained their position as top-ranked mobile service providers in the Telecom Industry for several years. Within the last 14 years in the industry, as many as 10 players have either closed down their business or have undergone insolvency proceedings but these two operators stood their ground against all adverse situations, noticeable from their reaction to the revolutionary introduction of Reliance Jio, increased price competition and decreasing tariffs on calls and data usage. However, the Supreme Court (“SC”) decision on 24th October 2019 concerning the definition of Adjusted Gross Revenue gave a crippling blow to these operators. Consequent to the decision, Vodafone and Airtel are supposed to pay Rs. 28,309 Cr. and Rs. 21,682 Cr. respectively to the Department of Telecommunications (“DoT”). These operators, now, face a threat of possible bankruptcy which will leave Reliance Jio as the only major private player in the market. The companies seek a remedy in the form of review petition to the SC.[i] However; the decision to file a review is only ‘evasive’. SC has made the decision after a long-standing dispute of 16 years and has manifestly pinpointed the reckless attitude of these operators which lead them to this situation. The disputed definition of AGR In the telecom sector, DoT issues a license to the operator in consideration of certain license fees and spectrum usage charges. Upon liberalization of the industry in 1994, DoT determined a fixed amount of money as consideration. The operators often defaulted in their payments since the fixed amount was highly burdensome. As a result, they made a representation to the Government of India (“GoI”) for a relief in the amount. GoI addressed the issue and formulated a new National Telecom Policy in 1999. The policy gave the operators an option to shift from the fixed license fee to a revenue-sharing model. Through the model, GoI became a partner of the operators and would share every operator’s gross revenues. It entered into a Draft License Agreement (“Agreement”) with the operators wherein it was to receive a certain percentage from the head of Adjusted Gross Revenues (“AGR”). Clause 18.2 of the Agreement specified that an annual license fee had to be paid as a percentage of AGR. However, DoT’s determination of quantum of fees caused several issues before long. The department included within the definition of the term “AGR” various other elements of income which did not accrue from operations under the license such as dividend, interest, discounts on calls, profits on sale of fixed assets, revenues from other activities separately licensed, etc. Conflictingly, operators opined that the definition only included revenue from operations related to telecom services. Thus, the Association of Basic Telecom Operators (known as Cellular Operators Association of India) and the respective operators filed a petition before the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”) in 2003 asserting that DoT was supposed to follow the recommendations of Telecom Regulatory Authority of India (“TRAI”). TRAI had up till now only made recommendations concerning the terms and conditions under which new operators were to be given a license. Subsequently TDSAT, in 2006, referred to the Indian Telegraph Act, 1885 and ordered that the Government can take a percentage of the share of gross revenue of only those operations for which the license was given. Simultaneously, it urged the TRAI to specifically make recommendations on the definition of AGR and clarify which heads are to be included under it. DoT made an appeal against this order to SC, which dismissed the appeal stating that contentions must first be raised before the TDSAT. When raised before TDSAT, it observed that the matter was already decided upon and cannot be heard again. Eventually in 2011, SC clarified that TDSAT can look into the merits of the claim if appeal is made by the DoT (the licensee) to decide upon the terms and conditions of the agreement. Now, the DoT contended before the TDSAT that the Agreement was put in place before any recommendations were made by TRAI and, therefore, only the terms and conditions of the Agreement should be considered for the definition. Thus, it wanted to give effect to Clause 19 of the Agreement which specifically defined AGR. Meanwhile, TRAI sent its ‘Recommendations on Definition of Revenue Base (AGR) for the Reckoning of Licence Fee and Spectrum Usage Charges’. The Tribunal now had to decide upon the definition having regard to the operators’ claims, TRAI’s recommendations and DoT’s contentions. On April 23, 2015, TDSAT set aside DoT’s demands and decided in favour of the operators keeping in mind the recommendations by TRAI. DoT was resultantly directed to reconsider the license fees. DoT, however, moved the Supreme Court against the TDSAT order. Now, recently on 24th October 2019, the SC ruled in favour of the DoT and ordered the telecom sector operators to pay Rs. 92,641 Cr. for the disputed amount along with the penalty for default and interest on that penalty.[ii] The question which now arises is –‘Who is to be blamed for this crisis faced by the telecom operators?’ The operators have always criticized the telecom sector as unviable and unsustainable. According to their claim, the unsupportive regulatory environment of the sector is beneficial for anybody but the operators. Frankly, however, the operators have only themselves to blame for the present fiasco. Analysing ignorance on part of telecom operators The telecom operators were always legally responsible to follow the terms of the revenue-sharing model as part of their performance under the Agreement with the GoI. The Agreement derived the power to grant license from the proviso to sub-section (1) of Section 4 of the Telegraph Act and was in the nature of a contract between the GoI and these operators. DoT had drawn up the terms and conditions of the agreement after detailed deliberations and consultations with the stakeholders. It

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The Case for Conflict of Interest Norms for Appointment of Independent Directors

Leave a Comment / CBCL - LSPR Series, Kaizen /

[By Prannv Dhawan] This Blog is part of a series of posts as a collaboration titled “KAIZEN” between the Centre for Business and Commercial Laws (CBCL), NLIU Bhopal and Law School Policy Review (LSPR). To view this blog on LSPR, please click here. Prannv Dhawan is a third-year student of National Law School of India University, Bengaluru. He is the founding editor of the Law School Policy Review. The debate on corporate governance reforms in Indian context invariably focus on questions of concentration of unchecked economic power in the hands of controlling shareholders and promoters. Hence, the institution of independent directors has been time and again heralded as a panacea for all that ails the institutional landscape of corporate governance. The independent directors are considered to play the role of ‘trustees’ who safeguard the core interests and values of the corporations like accountability, managerial efficiency and protection of minority shareholders against unscrupulous impulses of dominant promotors who are more likely to ignore concerns like wealth expropriation and entrenchment. Notwithstanding the debate about institutional independence of independent directors in predominantly promotor-controlled board structures and appointment processes, the promise behind this trusteeship position merits vibrant debate in light of a significant contemporary event. The appointment of former Chief Vigilance Commissioner and Chairperson of Central Board of Direct Taxes, KV Chowdhury as a non-executive additional director in the Reliance Industries Limited Board  in October last year raised eyebrows in various quarters. The relevance of these concerns becomes even more pronounced when considered in the light of the fact that Reliance Industries Limited (RIL) has been facing investigation in black money and round-tripping of funds related matter from the Income Tax authorities since 2011 while KV Chowdhury has been at the helm of investigation in various capacities since August 2010. These investigations involved allegations of holding over ₹ 2100 crores in foreign banks through an illegal network of international subsidiaries and off-shoots of the RIL. In the context of public outcry against ‘black money’ stashed abroad, the Supreme Court had mandated the setting up of a Special Investigation Team in which KV Chowdhury served as an advisor. Even his tenure as the chief anti-corruption watchdog (the CVC), was mired in controversy involving allegations by accountability activists as well as erstwhile CBI Chief regarding the Rafale aircraft procurement investigation that would have had implications on the business interest of Anil Ambani led Reliance Defence. This controversial post-retirement appointment of the chief of the independent, statutory apex vigilance institution to the board of the largest private sector corporation in India should raise concerns for not just the independence and impartiality of the vigilance institution but also the character of Indian corporate sector in particular and private capitalist institutions in general. This is because the apprehension of conflict of interest by a reasonable person is very clear from the various aforementioned facts. The test of apparent bias that stands on two legs of impact public confidence as well as conclusion of a fair minded and informed observer about the possibility of compromise has been an important consideration for decision making in public law. Considering the incorporation of these principles from common law  {AWG Group Ltd v. Morrison [2006] 1 WLR 1163; R v. Bow Street Metr} in Indian legal system Ranjit Thakur v, Union of India (1987) 4 SCC 611, their violation should be considered seriously. This is important because this corporate appointment decision does not only impact corporate governance but has serious implications on the independence, impartiality, efficacy and public confidence of an important statutory institution like the CVC. The administration and decision-making over a high-profile investigation that could have made minority shareholders and general public vulnerable to economic losses and liability makes KV Chowdhury’s appointment suspect, especially as it was proposed and actualised by the board controlled by RIL Chairman and Managing Director. Instead of acting as a check on unethical practices and illicit activities operating in a surreptitious manner through managerial functionaries, the appointment of this particular independent director sends a very negative moral message about the principles that govern the operations of India’s most powerful corporation. It is no wonder that the public outcry against this appointment seriously questions the business ethics of the corporation, as well as the moral conscience of the appointee. Hence, this sets a bad precedent for both an important government functionary who is supposed to comply with highest standards of probity and impartiality as well as the post of independent directors who should be a trustee of company’s ethics. It reveals the structural constraints for the position of independent directors who are supposed to be gatekeepers of corporate governance. It is important to note that in the promotor-controller corporate structure, where the appointments of independent directors are essentially based on the decisions of controlling shareholders and there exists a lacunae in ensuring effective say of non-controlling in appointment and removal process. A 2014 Organization of Economic Cooperation and Development study on Improving Corporate Governance in India highlights the undue influence of controlling shareholders in the appointment and removal of independent directors, proposing that taking cue from Israel and Italy, “controlling shareholders not be allowed to vote in the election of independent directors so as to ensure the latters’ independence”. So, even as the lacunae with regard to the interests of minority shareholders have been deliberated in the academic and policy discourse, the peculiar lack of disqualification criteria based on the principles of conflict of interest is unfortunate. It is notable that the section 164 of the Companies Act 2013 mentions the disqualification criteria for appointment of directors and it does not disqualify individuals who have a conflict of interest. The section 150 (4) provides for the government to notify rules, regulations and procedures of appointment of independent director from a databank. On the 1st of December, the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 came into force and even they do not mention this in the qualification criteria. Even though these rules provide for proper application process along with

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Cross-Examination in Commercial Arbitration in India: Creating ‘Courtrooms of Choice’

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[Our next Guest Post has been authored by Mr. Ajar Rab, Partner, Rab & Rab Associates LLP, Dehradun, India. The author is a leading lawyer practising in the field of arbitration law including international commercial arbitration. He is also actively involved in academia, acting as a visiting faculty at various universities. He can be reached at ajar@rabs.in] Introduction It is no secret that arbitration in India has not received the same kind of success as it has in international jurisdictions. One of the reasons is the reliance on the Code of Civil Procedure, 1908 (“CPC”) and the reluctance of the arbitrators in India to disassociate arbitration from courtroom procedures and evidence rules, despite the express provision to the contrary contained in Section 19 of the Arbitration and Conciliation Act, 1996 (“Act”) . Such reliance is based on several judgments which clearly affirm that in the absence of procedure provided under the Act, the basic principles of the CPC will continue to apply [i]. This leads to the creation of a ‘courtroom of choice’ where parties get the luxury of choosing their arbitrators, seat, and venue of arbitration but continue to adopt courtroom litigation techniques, procedures and strategies. In this context, it is necessary to look back on why arbitration as a mechanism of dispute resolution gained prominence. Arbitration permitted parties to avoid court procedures and evidence rules in favour of the application of the commercial understanding of the parties [ii], i.e., the tribunal was expected to understand the ‘benefit of the bargain’ and ‘expectations of parties’ in a particular commercial transaction and decide the dispute in consonance with the same. The intent was to further commerce and also reduce reliance on national law with respect to procedure and rules of evidence. However, despite the embargo in Section 19 of the Act, the arbitration practice in India has mostly been to conduct a court trial in an arbitration proceeding. A natural corollary of this practice is the adoption of the common law methodology of cross-examination where a counsel is supposed to have a question and answer session with a witness to reduce to the extent possible, the adverse impact of the witnesses’ testimony [iii] or what is referred to as ‘affidavit-in-chief’ [iv]. Thus, the purpose is to either demonstrate that the witnesses’ testimony is not safe to rely on because the witness is not credible or that what the witness has said in the testimony is not to be believed [v]. This practice, especially in the movies, is glorified in criminal trials where the eye witness testimony is crucial for both the prosecution and the defense. However, commercial disputes are usually document-driven, with cross-examination often adding little, except to confirm facts already stated in the pleadings [vi]. Some lawyers prefer to have a cross-examination for the strategic advantage of highlighting certain documents to the arbitral tribunal or to explain certain complicated facts. However, the practice in domestic arbitrations in India, by and large, is to have cross-examination irrespective of such intent and just as a matter of routine, causing unnecessary delay and expense. The issue is further compounded by a few judgments which hold such an exercise essential to a just and fair award [vii] without paying its due regard to the rationale for opting arbitration as a dispute resolution mechanism, i.e., as an alternative to court adjudication with a view to secure effective, efficient, speedy dispute resolution based on the commercial understanding of the parties instead of a rigorous application of court procedures and rules. Therefore, the scope of cross-examination by arbitral tribunals in India needs to adopt a more confined approach, akin to international practice. Having two or three days reserved for each witness and permitting cross-examination pointlessly to restate information already proved by documents in the pleadings should be curtailed. There is little sense in having each document marked as exhibits, presented and explained by the testimony of the live witness [viii] unless the execution of certain documents is clearly denied. Even in such instances, the denial would be contained in the pleadings itself and the said fact will only be confirmed in the cross-examination. In the event the purpose is to elicit new information [ix], cross-examination may be required, but it may be pertinent to point out that the cross-examination is usually permitted only to the extent of contradicting the direct testimony of the witness or to facts in the knowledge of the witness [x] and hence, the scope of eliciting new information may again be limited. While it is true that questions of knowledge and negligence can be better illustrated by means of cross-examination, unfortunately, the scope and ambit of cross-examinations are not confined to such questions alone by the tribunals. Counsels are often given the leeway and liberty of time on account of not risking a future challenge to the award as the practice followed has been akin to that of a court, and hence presumably just and fair. In international arbitration, several authors [xi] caution against cross-examining a witness unless the direct testimony of that witness is damaging to the outcome of the case [xii]. Unfortunately, however, the practice of cross-examination is inevitably followed by most arbitral tribunals in India, without giving adequate consideration to the nature of the dispute and whether any fruitful purpose will be served by cross-examining the witnesses. For example, in disputes with Public Sector Undertakings, usually, the private party will file a claim for delay in handover of site, drawings, approval of extra work, escalation, etc. all these will be supported by voluminous documents marked as exhibits, and in such cases, the purpose of cross-examination may be limited to confirmation of facts already contained in the exhibits. Moreover, tribunals often tend to ignore that while in civil law jurisdictions, where prenegotiation discussions are also admissible to demonstrate good faith, witness testimony may be more relevant [xiii], in common law jurisdictions such as India where parole evidence is the norm, the relevance of cross-examination may be more circumspect. For

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Competition Policy and Exchange of Information: An Analysis

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[By Yashvardhan Singh] The author is a second year student of National Law University, Odisha and can be reached at singhyashvardhan9532@gmail.com. Introduction Exchange of information between competitors has been a cause of concern for competition regulators in various jurisdictions. The flow of ‘commercially sensitive information’ such as pricing strategies, future prices of products etc. which may lead to ‘elimination of uncertainty from the market’ has been held to be anti-competitive regulators in multiple jurisdictions like India and the European Union (“the EU”). This article attempts to analyze the approach of competition regulators in India and international jurisdictions, with respect to anti-competitive exchange of information. Further, it aims to study the recent observations of the competition authorities and contemplates methods which the Indian competition regulator can adopt to create an effective competition policy in the domain of exchange of information. Understanding Exchange of Information Information exchange is a feature that pervades any competitive market. Competitors exchange commercially viable information on various platforms such as associations, consortiums and while entering into agreements. On one hand, the effect of such exchange has been found to be advantageous for the market as it solves problems like information asymmetries, provides a stable framework for competitors to develop practices and also leads to accrual of benefits to consumers as the market functions in an informed manner. On the other hand, such an exchange of information may facilitate collusive practices as the market players are better equipped with the strategies of their fellow competitors. For instance, the exchange of commercially sensitive information like data pertaining to sales and production, future market strategies, profit ratio etc., can aid the competitors to control the practices in market. The exchange of such information allows the competitors to reach a ‘focal point’ for coordination. Firms might use the available platforms to remove strategic uncertainty from the market and can use the exchanged information as ‘signals’ to facilitate anti-competitive practices. For example, a firm can make regular public announcements of its future prices on its website or in the trade press just a few weeks before implementing such prices. Such public exchange of information can facilitate other market players to observe these prices and align their pricing strategies accordingly. This form of activity had raised concerns in the EU in the past specifically in the liner shipping industry. Therefore, it is pertinent that the competition policy of any jurisdiction in this complex area should be carefully balanced keeping in mind the pro-competitive and the anti-competitive effects of information exchange. The Indian Approach Section 3(3) of the Competition Act, 2002 (“the Act”) deals with the exchange of information between enterprises, persons or association of enterprises. This Section restricts itself to competitors engaged in similar or identical trade of goods or provisions of services. The Act itself nowhere defines what constitutes ‘exchange of information’. The cornerstone against which the anti-competitive exchange of information between firms is analyzed is that of ‘appreciable adverse effect on competition’ (“AAEC”).[i] AAEC refers to those economic factors which are indicative of a negative effect on the market. The approach of the Competition Commission of India (“the Commission”) regarding exchange of information can be traced through its decisional practice. The most recent case in this regard is In re: Alleged Cartelization in Flashlights Market in India (“Flashlight case”). In this case, the Commission analyzed information exchange between four manufactures of battery-operated flashlights through a common platform, namely, the Association of Indian Dry Cell Manufacturers and other electronic mediums. The competitors exchanged commercially sensitive information like data relating to their production and sales, information related to increase in prices, wholesale prices, margins, discount schemes etc. The Commission concluded that though the evidence reflected exchange of commercially sensitive information among the four players, there was hardly any evidence to show that the data thus exchanged resulted in an effective determination of prices among the competitors. Hence, the Commission held that exchange of commercially sensitive information can be regarded as a plus factor to indicate anti-competitive behavior of the firms. However, it also held that mere exchange of information cannot be regarded as a conclusive evidence to deduce concerted action unless the competitors have acted on the exchanged information. This case was a significant departure from the earlier stance of the Commission on concerted practice and information exchange. In Builders Association of India v. Cement Manufacturers Association and Ors. the Commission held that ‘mere exchange’ of commercially sensitive information can be treated as an anti-competitive practice under Section 3 of the Act. Further, the National Company Law Appellate Tribunal in Ambuja Cements Limited & Ors v. CCI observed that exchange of strategic information can be regarded as a concerted practice aimed at reducing uncertainty from the market. This matter is currently sub judice before the Supreme Court of India. A clear distinction is observed between the above cases on exchange of price information. Firstly, the Flashlight case diluted the stance of the Commission towards cartel regime in India; and secondly, a notable feature of the current trend is that the Commission delineated the existence of a cartel and its actual effect on the market i.e. whether the cartel acted upon the exchanged information. The European Approach Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) governs information exchanges between the competitors in the EU and also assess concerted practices.[ii] In the EU, concertation is understood as a form of coordination which though, has not reached the stage of an agreement, but, still is inherently anti-competitive in nature. The laws in the EU have developed in a manner where three components have been identified to conclusively establish concerted practices. They are: concertation; subsequent conduct of the competitors; and a cause and effect relationship between the two. ‘Concertation’ is understood as a form of coordination between the competitors in which without even reaching the stage of an agreement, all the players substitute the practical cooperation among them for the risks of competition. This coordination then culminates into active conduct of

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