Author name: CBCL

Applicability of the Penalty Doctrine to Primary Obligations – an Indian Perspective

Contract Law /

[By Tvishi Pant and Alefiyah Shipchandler] Tvishi is a student at ILS Law College, Pune and Alefiyah is an associate at Keystone Partners, Mumbai. Introduction Contract law allows parties to stipulate a certain sum payable upon breach of a contract. Section 74 (“S. 74”) of the Indian Contract Act, 1872 (the “Act”) provides for the payment of liquidated damages by a defaulting party upon breach of contract. Although the law surrounding the parameters of S. 74 is largely settled, there remain slight uncertainties in the scope of its applicability to scenarios where there has been no breach of contract. Background – The Penalty Doctrine The ‘penalty doctrine’ has its origin in equity. Broadly stated, it suggests that a clause providing for payment of a sum of money upon breach of contract may be unenforceable if it goes so far beyond the measure of compensation that it appears to be a penalty. The basic understanding of this doctrine has its roots in the case of Dunlop Pneumatic. This judgment laid down that if a particular sum is payable upon the breach of a contract, it would be regarded as a penalty if it “exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach”. The penalty doctrine, thus, resulted in the formulation of a fundamental distinction between a ‘penalty’ and a ‘genuine and reasonable pre-estimate of damages’. Where an amount is named in a contract as liquidated damages, the party complaining of a breach will be entitled to receive a liquidated amount of reasonable compensation,      provided it is a genuine pre-estimate of damages. In other cases, only reasonable compensation will become payable which will not exceed the liquidated amount so stated. The Supreme Court of India has time and again interpreted S. 74 of the Act in line with the aforementioned formulation of the penalty doctrine, and hence has allowed liquidated sums to be taken into consideration as the measure of reasonable compensation, where it is not in the nature of a penalty. Application of S. 74 in Non- Breaches A pertinent question which has time and again arisen, and largely remains unanswered, is whether such relief against unreasonable penalty clauses will be available to parties even where the event triggering the penalty is not a breach of contract. Contractual clauses contemplating both scenarios, by way of illustration, are as under: Clause A – Occurrence of a breach “We agree to pay for ABC Ltd. a sum of Rs. 100/-. for each and every product, good or item sold or offered in breach of this agreement, as and by way of liquidated damages and not as a penalty.” Clause B – Occurrence of an event other than a breach “If you request a withdrawal or payment from your account which would overdraw your account, XYZ Bank may allow the withdrawal or payment to be made on the condition that  Rs. 50,000/- may be charged for XYZ Bank agreeing to honor the transaction which resulted in the overdrawn amount. This amount will be debited to your account.” As is evident from the heading of S. 74, it is certainly attracted to Clause A, which contemplates a breach. It is, thus, necessary to assess the viability of extending its scope to deal with events other than breaches as well, such as Clause B. Application of the Doctrine in Foreign Jurisdictions Australia Up until 2015, Australian Courts had held that the penalty doctrine was limited to stipulations that were triggered on breaches of contract. However, in 2015, the  Andrews case marked a significant departure from this law. The Court reasoned that historically, the “conditions” that triggered payment of a sum were not always breaches of existing contractual obligations. It was essentially held that the penalty doctrine was not limited in application to stipulations involving breaches of contract and that the event that triggered payment need not be restricted to a breach, in order to assess its position under the penalty doctrine. This judgment was affirmed by the Australian High Court in 2016, in Paciocco. It is arguable that such an approach opens doors to an uncontrollably wide jurisdiction over contractual freedom and autonomy, by which simple matters of commercial prudence (or even lack thereof) fall within the purview of judicial inspection. United Kingdom The position in the United Kingdom has largely remained unchanged. One of the first few cases dealing with this question was Export Credits, where it was held that it has never been for the Court to relieve a party from the consequences of what may prove to be an onerous or commercially imprudent bargain. In 2015, the Supreme Court’s judgment in Cavendish made a very important distinction between ‘primary obligations’ and ‘secondary/ accessory obligations’ for the purposes of determining whether the penalty doctrine applied where there has been no breach of contract. The Court held that, “The penalty rule regulates only the remedies available for breach of a party’s primary obligations, not the primary obligations themselves.”[i] While the Court did not categorically lay down the difference between such ‘primary’ and ‘secondary’ obligations, it appears to have proceeded on the assumption that a ‘primary’ obligation is one which is fundamental to the performance of a contract, and that the breach of such ‘primary’ obligation will give rise to a ‘secondary’ obligation to pay a certain amount to the innocent party as and by way of relief. The Court thus held that, “This means that in some cases the application of the penalty rule may depend on how the relevant obligation is framed in the instrument, i.e., whether it is mentioned as a conditional primary obligation or a secondary obligation providing a contractual alternative to damages at law. Thus, where a contract contains an obligation on one party to perform an act, and also provides that, if he does not perform it, he will pay the other party a specified sum of money, the obligation to pay the specified sum is a secondary obligation

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The Desideratum of Synergizing Competition Law with Consumer Protection: ACCC v. Kogan

Competition Law, Contemporary Issues /

[By Naman Katyal] The author is a student at Gujarat National Law University. In an interesting decision, the Federal Court of Australia in Australian Competition and Consumer Commission v. Kogan Australia Pty Ltd (17 July 2020) has ruled that the act of inflating product prices prior to a sales promotion constituted misleading and deceptive conduct. This ruling comes against the backdrop of the Australian Competition and Consumer Commission’s (‘The ACCC’) finding that Kogan Australia Pvt. Ltd. (‘Kogan’), an Australian e-retailer was engaged in making false representations about a discount promotion in 2018. Consequently, the ACCC instituted proceedings against Kogan in the Federal Court for misleading consumers in contravention of the Australian Consumer Law, Schedule 2 to the Competition and Consumer Act, 2010. In this article, the author provides an analytical account of the aforementioned judgment. Further, the author argues that unfair trade practices such as the one discussed above, not only violate consumer rights but also have an adverse bearing on the competition in the market. Additionally, it is argued that the absence of a unified consumer and competition law regulator in India, which practice is a departure from the established practice of incorporating a unified regulator followed in other major jurisdictions, does little good for consumer welfare, the endmost goal of both, competition law and consumer law. Factual Matrix Kogan, the respondent, carried out an online sales promotion in 2018, offering a 10% discount on prices of listed products for consumers who entered a previously advertised promotion code at checkout. However, 621 of the 78,111 listed products (‘affected products’) saw a price increase a day prior to the commencement of the sale, in many cases by at least 10%, and a subsequent price decrease two days after the end of the sale, in many cases by at least 10%. This practice according to the ACCC constituted a violation of sections 18(1) and 29(1)(i) of the Australian Consumer Law, Schedule 2 to the Competition and Consumer Act, 2010 which proscribe the adoption of misleading or deceptive trade practices. To reason its submissions, the ACCC relied on the representations made by Kogan in the course of advertising the sale. According to the ACCC, the representations conveyed that a consumer who purchased an affected product using the advertised code during the sale period would receive a 10% discount on the price at which that product was previously offered or would be offered for sale in the future. However, contrary to the representation, a consumer who purchased an affected product using the advertised code did not receive a 10% discount off the price at which that product was available for sale for a reasonable time before and after the promotion. On the other side, Kogan’s defense predominantly rested on lamenting the “reasonable period” approach adopted by the ACCC. Per this approach, the ACCC fixed a two-week time period before and after the sales promotion for comparing the prices of the affected products to gauge the extent of variation in product prices. This approach according to Kogan was arbitrary and unsupported by evidence. Further, Kogan maintained that by representing that a consumer who applies the advertised code would receive a 10% discount off the listed prices, it conveyed that the 10% discount would be applicable to the current advertised price of the product and not a price which was previously offered. The Decision The context in which Kogan made the promotional statements was the foundational issue addressed by the Federal Court. The genesis of this issue was a result of Kogan’s contention that the offered discount ought to be considered on the price available at checkout and not a price that was offered prior to or after the sales promotion. According to the court, the promotional statements relied upon by Kogan to advertise the promotion made the ordinary and reasonable member of the relevant consumer class to conclude that the current advertised price was the price at which the product had been available for sale before the promotion. Consequently, any discount made available would be over and above the price at which the product had been available for sale before the promotion. Further, the court also observed that the promotion was time-specific and therefore, it was evident that the consumers would have understood that there was a limited opportunity to obtain the reduced price and the prices would not decrease during a reasonable period after the end of the sale. On Kogan’s contentions concerning the ACCC’s definition of “reasonable period”, the court ruled that the two-week time period before and after the sales promotion adopted by the ACCC was reasonable and well-reasoned. The court also noted that the object behind delineating a fixed period was only to capture the expectations of reasonable consumers that a reduction in prices be a genuine reduction, from the price at which products were available for sale before the promotion. Finally, on the question, whether the representations made by Kogan were false or misleading, the court rejected Kogan’s defence that ACCC’s case was based on a “de minimis product set” and it ought to be rejected since the affected products constituted a mere 0.8% of the 78,111 products on the Kogan website. The court observed that the fact there may have been a genuine discount obtained by a large number of the target audience consumers did not gainsay that the representations were false or misleading. Analysis The Competition Commission of India (‘CCI’) although has been vested with the duty to protect the interests of the consumers along with eliminating practices having an appreciable adverse effect on competition (‘AAEC’) under section 18 of the Competition Act but the focus of the commission has largely been on the latter. Two justifications look plausible behind the embracement of this policy path. Firstly, the term “protect the interests of the consumers” can be subjected to wide interpretations to even include consumer law issues having a nugatory effect on competition in the market. A more proactive approach concerning consumer law violations could open flood

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Private International Law: Bombay HC Delineates its Scope in International Tax Matters

Uncategorized /

[By Kajal Singh and Nikunj Maheshwar] The authors are students at Institute of Law, Nirma University. Introduction In the backdrop of divergent national laws and broadly worded treaties, Private International Law (PIL) helps in deciding the choice of law, jurisdiction and enforcement of judgements between the sovereign states.[i] While the application of PIL in matters concerning family and property have attained some certainty, the world at large remains divided on its application in matters concerning tax and revenue.[ii] Axiomatically, because tax laws vary in accordance with disparate interests of countries and wherein domestic courts are vested with exclusive jurisdiction to decide matters pertaining to them. Recently, the Bombay High Court (HC) in the case of Aberdeen Asia Pacific Including Japan Equity Fund v. Deputy Commissioner of Income Tax[iii] (Aberdeen) was to decide the applicability of PIL to an international tax matter. The HC opined that in absence of any deeming fiction in the Indian Income Tax Act, 1961 (the ITA) the principles of PIL will apply in determining the status of the foreign entity and its liability under the ITA. The authors in the subsequent discussion will analyse the judgement and highlight its significance in the realm of international tax matters. Facts of the Case In 2010, Aberdeen Delaware Business Trust (Trust), which had been incorporated in accordance with laws of Delaware, USA converted into Aberdeen Institutional Commingled Funds LLC (AICFL), a limited liability company (LLC). As a sequitur, all its sub-trusts also converted into sub-funds or series of AICFL. The Delaware laws provided that any trust may be converted into an LLC and on such conversion, only the legal status of the entity will change. Further, for all other purposes, it will be treated as the erstwhile trust. Post reorganization, the sub-funds decided to carry forward the losses which were incurred by the sub-trusts prior to the conversion. Pertinently, the ITA provides for carry forward of losses subject to certain conditions in cases wherein the company undergoes a change in its legal form. However, the ITA has no specific provision which speaks of the taxability of a trust converted into an LLC. Subsequently, seeking clarification on whether the sub-funds created post-conversion can carry forward the losses incurred by sub-trusts, AICFL filed an application before the Authority of Advance Ruling (AAR). The AAR observed that the sub-funds will not be allowed to carry forward the losses. Pursuant to the AAR’s ruling, AICFL appealed before the HC. The HC rejected the petition on technical grounds but on the substantive issue held that the reorganization (para 21) of the trust shall be dealt in accordance with the laws of Delaware. Despite this observation of the HC, the tax department, under section 148 of the ITA, initiated reassessment proceeding against the sub-funds. Consequently, the sub-funds challenged these proceedings before the HC. Arguments and the Judgment Revenue authorities argued that AICFL was never an assessee in India and the erstwhile trust has ceased to exist. Unlike in Delaware, an entity’s change in its legal form will lead to the formation of a new entity in India. Accordingly, the new entity so formed will be allotted a different PAN number. Thus, losses incurred by the sub-trusts cannot be allowed to be carried forward in the name of a new entity. Additionally, under section 70 of ITA, only an assessee who has previously filed an income tax return in India is allowed to carry forward its losses. Essentially, AICFL is a new entity formed and has never filed an income tax return in India and thus, in accordance with section 70 is disallowed to carry forward the losses. Per contra, the petitioners argued that in absence of any deeming fiction in Indian law which speaks of the taxability of such a conversion, the same should be determined in accordance with the principle of lex domicilii, i.e. the law of the country or place where the trust was incorporated. Thus, since the trust was incorporated, in accordance with the laws of Delaware the conversion is essentially a change in its status and not the formation of a new entity. The HC adverting to the argument of lex domicilii followed the lead of the Supreme Court (SC) in the case of Technip SA v. SMS Holdings[iv] (Technip SA), upheld the application of the principle and passed confirmed that the LLC will be treated as the erstwhile trust and would thus, be allowed to carry forward its losses. Analysis The Supreme Court of UK in the case of Kuwait Airways Corporation v Iraqi Airways Co[v] (Kuwait Airways) opined that in cases involving foreign elements and parties, more weightage must be accorded to the laws of another country irrespective of them being different from the laws of the forum court. To appreciate the judgments, it is relevant to revisit the case of Technip SA, wherein the jurisprudence laid in Kuwait Airways was made the law of the land. In the instant matter, Technip, a French company acquired control over another French company, Coflexip which had under its control Seamec, a listed Indian company. The SC was to decide whether Indian or French law will apply in determining the date on which Technip acquired control of Seamec. The SC held that as per PIL, the question of legal status must be determined according to the law of the land, where the entity/person was incorporated unless it is contrary to public policy. Elaborating upon the same, the court held that merely because laws of two sovereign states are different will not make them ipso facto contrary to public policy; rather they will have to be tested on the touchstone of morality and justice. Adverting to another ruling of M/s Citicorp trustee Company Ltd. v. Commissioner[vi] were in the AAR, was to determine the taxability of a UK based trust that converted into a company. It observed that neither the Indian tax laws nor the Double Tax Avoidance Agreement between India and the UK discussed about the taxability of entities in event

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Scope of Settlement Agreement Under IBC: Elucidating The Fate of Corporation in the Pandemic

Insolvency Law /

[By Jyotiranjan Mallick and Sai Akanksh Deekonda] The authors are students at the National Law Institute University, Bhopal. Introduction The current Pandemic has affected the economy by disrupting the demand and supply chain. It has exacerbated the situation by bringing financial institutions on its knees, owing to the increase in non-performing assets, and default by corporations. Policies are being introduced around the world to protect the state of the economy. It includes “reducing the interest rates” or by introducing “economic stimulus” to balance the economic disruption. The Government of India introduced the ‘Aatmanirbhar’ plan under which it has proposed Rs. 3 lakh crores Collateral-free Automatic Loans for Businesses, including Medium and Small Enterprises. Further, to protect corporations, from facing the brunt of unnecessary liquidation, the government, introduced the Insolvency and Bankruptcy Code (“I&B Code”) Amendment Ordinance, 2020, through which, it has suspended the initiation of the Corporate Insolvency Resolution Process (“CIRP”) for all defaults under section 7, 8, and 9 of I&B Code for 6 months, after 25th March 2020. In a step further, National Company Law Appellate Tribunal (“NCLAT”) in Vivek Bansal v. Burda Druck Pvt Ltd, has allowed the parties, to exit the CIRP midway, and settle through an agreement. This comes as a relief for corporate debtors, who are already in the process of resolution. In this article, we will analyse whether broadening the scope of a settlement agreement is favourable in the current crisis, and what changes can be implemented to further improve the process. A Brief Look at the Case The CIRP was initiated by an operational creditor, Vivek Bansal. The National Company Law Tribunal (“NCLT”) New Delhi Bench, in its order, appointed an Interim Resolution Professional (“IRP”) and a moratorium was imposed on the corporate debtor, However, after the order, the parties settled their dispute through an agreement, and an appeal was filed to NCLAT by Bansal, to allow them to exit the CIRP so that they can act upon the settlement. The NCLAT using its inherent power under Rule 11 of NCLAT Rules 2016 (“Rule-I”) set aside the order of NCLT and permitted the parties to exit the CIRP. Background of ‘settlement agreement under I&B Code’ To settle through an agreement, the parties first have to withdraw their application filed before the adjudicating authority, under Rule 8 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“Rule-II”). However, during the initial phase of the enactment of the I&B Code, the scope of the settlement was highly limited, as Rule 8  of Rule-II, only permits the withdrawal of application before its admission to the NCLT. Ergo, if parties wanted to settle after the admission of the application, the NCLT used to apply Rule 8 and discard such settlement. As a result, appeals started mounting in the Supreme Court, to provide the requisite relief. In Lokhandwala Kataria Limited v. Nisus Finance Managers LLP, the apex court refused to interfere with the decision of NCLAT where it rejected the settlement reached between the parties after the application has been admitted by the NCLT. The NCLAT here refused to use its inherent powers under Rule 11 of Rule-1since the same wasn’t adopted for the I&B Code. Following this, the Apex court in Uttara Foods Pvt Ltd. v. Mona Parachem directed the competent authority to make changes in the code through which the NCLT/NCLAT may allow such settlement, which would restrict unnecessary appeal filed before the Apex court. The Insolvency Law Committee discussed this issue; following which section 12 A was inserted in the code, by IBC (Second Amendment) Act, 2018. Section 12 A gives the power to the adjudicating authority to allow such settlement when it gets the support of at least 90% voting share of the Committee of Creditors (“COC”). In Swiss Ribbons v. Union of India, the apex court observed that even if CoC hasn’t been constituted, the NCLAT may allow the settlement agreement using its inherent power under Rule 11 of the Rule-I. Hence, this judgment extended the scope of inherent powers under Rule 11 to matters under the I&B Code.  The NCLAT in the Vivek Bansal’s case allowed the settlement following this observation in Swiss Ribbons. What Makes the Settlement Agreement Favorable in the Current Crisis Since the inception of the I&B Code, a huge chunk of cases is still pending for resolution. The average time taken for the resolution of completed cases took around 375 days, which is way more than 330 days limit as set by the code. The delay in results and monetary loss makes alternatives like settlement a suitable option. The pandemic has caused India’s economic growth and activities to shrink by 45%., this has made the scope of settlement even more favorable. To understand this, one has to look at the recovery mechanism under CIRP. If a corporate debtor defaults, then CIRP can be initiated. In case, a corporate debtor fails to pay the debt, then the company is either restructured by taking over its management or is liquidated. However, due to the economic turmoil, it is neither beneficial for the creditors to take over the management of the company, as businesses are in complete distress, nor the current market is favorable for liquidation which is considered to be the last resort under I&B Code. As a result, creditors are resorting to settlement. The IBC ordinance 2020, has suspended the initiation of CIRP for any default after 25th March for 6 months. This means that CIRP cannot be initiated, for any default by a corporation within this period. The implication would make it more favorable, even for financial creditors to follow a settlement, which wasn’t earlier preferred, owing to the institutional formalities and the nature of lending. The crisis has made the courts to give flexibility even in terms of the time limit set for such settlement. In a recent verdict of ES Krishnamurthy v. Bharath Hitech Builders, NCLAT observed that considering the present crisis; a concession can be given to the corporate debtors to

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Taxation of Unintended Home PE and Work From Home Model

Taxation Law /

[By Shikha Mohini] The author is a student at Symbiosis Law School, Pune. Introduction In sync with international standards, India follows two types of taxation mechanisms- residence-based and source-based. In case of residence-based taxation, the tax is levied on the global income whereas in source-based, the tax procured is only on the income generated from the source country. In order to avoid double taxation on the same income in a particular time period in two different jurisdictions, countries usually enter into a Double Tax Avoidance Agreement (DTAA). The different articles of the DTAA govern taxation in matters where two states have simultaneous right to tax a particular income. Article 7 of the DTAA concerning taxation of business profits settles that the profits of an enterprise of one contracting state shall be taxable in the other contracting states only when a ‘Permanent Establishment (PE)’ is maintained in the latter. The source state shall tax the profits of the enterprise only to the extent attributable to the PE. In order to constitute a PE, there must be an existence of a fixed place of business where a foreign enterprise either partly/wholly carries out the business.[i] Due to the ongoing Covid-19 pandemic, countries have imposed lockdowns and international travel is banned. The employees of various multinational corporations have been stranded in different jurisdictions or have returned back to their home state, both of which may be different from the residential or incorporating state of the corporation. The employees are contributing to the generation of profits for the foreign enterprise by working from their home in a different jurisdiction which can lead to the emergence of a PE and consequent taxation of the profits of the enterprise in the state where the employee is residing. The present article seeks to analyse the emergence of unintended PEs and tax liability arising out of the Covid-19 pandemic. It also sheds a light on the grey area existing in international taxation with respect to a permanent ‘Work from Home’ model. Analysing The Concept Of Permanent Establishment As mentioned above, a PE must fulfill three essential criteria which are the existence of a place of business, the place should be fixed and a part/whole of the business of the foreign enterprise must be carried through it.[ii] A place of business[iii] can cover any premise, facility, or installation which is used for carrying out the business of the foreign enterprise in the source state. Exclusivity in carrying out the business and a formal legal right[iv] on the place is not considered a requirement for a PE. It is however necessary that the place of business carries on the core functions of the enterprise and the same is not intermittent in nature. The term ‘fixed’ means that the PE must be located at a distinct place and there must essentially be a link between the place of business and a specific geographical point in the source state.[v] There must be an identifiable location that constitutes a “coherent whole-commercially and geographically with respect to that business.[vi]” In addition, there must be a degree of permanency, i.e., the place of business must fulfill the threshold limit enumerated in the DTAA to constitute a PE. The threshold limit usually varies between 6 months and 1 year. The two exceptions to the ‘fixed place’ criteria is when the activities are of recurrent nature or when activities are wholly carried out in the source state for a short period of time. In the former scenario, all the periods of time during which the PE is in use is calculated in combination, and in the latter case, since the connection with the source country is exceptionally strong, the place may constitute a PE despite not crossing the threshold period. A third criteria mandates the PE to carry out the business of the foreign enterprise, in part or whole. It is necessary to note that interruptions in the operations will not lead to the ceasing of a PE status. A PE begins to exist at the commencement of the business activity of the foreign enterprise through it and ceases with the cessation of activity or disposal of the fixed place.[vii] Establishment Of Home Office As Fixed Place PE In India A complete lockdown was announced in India on 25th March, 2020 with international travel still majorly suspended. Due to the lockdown, either the employees of multinational companies were stranded in India or Indian employees of foreign enterprises returned back to their country. In either situation, provided they resumed their operation from their home, it could be argued that a possible PE is constituted. India will then have a right to tax the foreign enterprise on the income arisen or accrued here due to the operations of the employee. If such a home office operates, it satisfies the condition of ‘place of business’ and ‘fixed place’. The criteria of the foreign enterprise running its business ‘wholly or partly’ through the PE will depend on the facts and circumstances of each case.[viii] It is also necessary that such a home PE must carry out functions that are not preparatory or auxiliary in nature but constitute the core functions of the foreign enterprise.[ix] This again is a factual exercise and a subjective test.[x] The OECD commentary also mandates that for PE’s constitution, the foreign enterprise must require its employee to use the location for carrying out its business either by not providing an office when the nature of employment requires it or otherwise.[xi] It further goes on to give an example of a cross-border worker working from his home office in one State rather than the office made available to him in the other State. The commentary states that this scenario would not constitute a PE as the home office was not a requirement of the foreign enterprise. India in its observation however disagrees with the above example holding the stated situation to constitute a PE.[xii] Hence, when Indian nationals working in foreign companies returned back to India and

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The Merchant of Flipkart: Analyzing What NCLAT’s Recent Decision Means For The Indian E-Commerce Market

Competition Law /

[By Hitoishi Sarkar and Mr. Animesh Anand Bordoloi] Hitoishi is a student at Gujarat National Law University and Animesh is pursuing his LL.M from the National University of Singapore (NUS), Law. On 4th March 2020, the National Company Law Appellate Tribunal (India) (NCLAT) set aside an earlier order by the Competition Commission of India (CCI), which refused to investigate Flipkart India on charges of abuse of dominant market position under section 4 of the Competition Act, 2002. The informant’s primary contention was that Flipkart India sold goods to companies such as WS Retail Services Private Limited owned by its founders at heavily discounted rates and the same companies later listed these goods on Flipkart’s e-commerce platform thereby making it a clear case of preferential treatment. The decision is significant because it may open the floodgates of antitrust litigation for e-commerce companies such as Amazon, which are also battling increasing anti-trust litigation in Indian courts.[[i]] This post aims to expound on the broader implications of this decision for the e-commerce sector while also addressing the Indian statutory framework on competition law. Background The CCI has recently stepped up its enforcement activities in the e-commerce space. For instance, in January 2020, it released a Market Study on E-Commerce, which identified platform neutrality as a critical concern in the operation of such platforms. The Study is significant as for the first time it analyzed the issue of preferential treatment meted out to certain vendors’ by e-commerce platforms from the standpoint of anti-trust laws. However, interestingly the CCI had, in its earlier decision which was set aside by the NCLAT, refused to investigate Flipkart despite its alleged preferential treatment to promoter owned companies such as WS Retail Services Private Limited, holding that “the terms and conditions on which sellers access the Flipkart marketplace are standard and the incentive is based on objective criteria such as quality of product and volume and value of sales.” Likewise, the Ministry of Commerce & Industry vide its revised FDI policy dated 26th December 2018, prohibited e-commerce platforms from exercising ownership or control over the goods purported to be sold on their platforms. However, this policy has been heavily critiqued for its implications from the standpoint of customer dissatisfaction. Legal Analysis The NCLAT concurred to the appellant, in this case, the All India Online Vendors Association’s (AIOVA) argument of there being a ‘prima facie’ case of abuse of dominant position under section 4(2)(a)(ii) of the Competition Act, 2002. This is for the reason that Flipkart India Private Limited sold goods to its promoter owned company (WS Retail Private Limited) at unjustifiably low rates. Interestingly, the evidence of such predatory pricing was drawn from an earlier order of the Income Tax Appellate Tribunal (ITAT)(Bangalore Bench), which found that the parties purchasing products from Flipkart India were unrelated third parties, including WS Retail Services Private Limited. The CCI’s order refusing an investigation against Flipkart hinged on the aforementioned ITAT’s exoneration of Flipkart. However, the NCLAT rejected the CCI’s misplaced reliance on the ITAT’s order, ruling that the ITAT was “dealing only with the question of applicability of the concerned provisions of the Income Tax Act to the facts which were found by the Assessing Officer.” Furthermore, the NCLAT found the facts recorded in the same ITAT order to be of significant relevance to its adjudication as the facts provided scathing evidence against Flipkart of having sold goods to WS Retail Private Limited at preferential rates. For instance, the ITAT order records that Flipkart’s business model was based on a practice of “buying goods at say Rs.100/- and selling them to the retailers at Rs.80/-.” Such practices as was highlighted by the Assessing Officer before ITAT contrary to popular opinion was not an ‘irrational economic behavior’ of suffering continuous losses but that of predatory pricing which was used to enhance branding as well as market intangibles so as to increase their valuations, leading to more venture capitalist’s investment. Such predatory pricing by established players in the market, is additionally harmful to the small retailers and could lead to a contravention of section 4(2) and 3(4) of the Competition Act. CCI’s dilemma in investigating Flipkart and other such entities for anti-competitive practice is further aggravated by the absence of the definition of “competition” from the Competition Act, 2002. Although the CCI has treated “competition” by leaning towards the US approach of following a consumer welfare standard which focuses on the price of goods and services rather than the number of players in the market, the theoretical ambiguity around the meaning of the term has also clouded the understanding of “dominance” given that its assessment depends significantly on the economic considerations. It is argued that while dealing with digital firms the meaning of dominance must be extended to include non-price considerations thereby extending the ambit beyond the traditional metrics so that the unique nature of online services provided by digital platforms is kept in check.  However, if we are to rely on the international understanding of dominance, it is pertinent here to note the ruling of the European Court of Justice in the United Brands v. Commission, which defined dominance as “a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.” Flipkart’s practices scratch the ambit of this definition given their multi-layered business model which has helped them achieve deep discounts to see off competitions, at the risk of making huge losses, which also points out the economic strength enjoyed by such platforms. Interestingly, the Supreme Court, in Uber India Systems v. Competition Commission of India, had held such losses bereft of any economic sense suffered by companies to see off competitors as a prima facie indication of their position of strength. It would only be logical given the current circumstances to extend the findings to e-commerce platforms as well.

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Hinged Upon Misplaced Reasoning: NCLAT Disallows Set-Off Under the Insolvency Regime

Insolvency Law /

[By Riya Jain and Kajal Singh] Riya is a graduate from the Institute of Law, Nirma University and Kajal is currently a student at the Institute of Law, Nirma University. Introduction Set-off is a plea in defense, which by adjustment would wipe-off or reduce the liability of the debtor.[i] It is an equitable right that allows parties to cancel or offset the mutual debts that the parties owe towards each other. Under Indian laws, set-off is categorized under two heads, namely, equitable set-off, which stems from the basic principles of equity, justice and good conscience, and legal set-off, which is envisaged under Order VIII Rule 6 of the Code of Civil Procedure, 1908. The usage of set-off in insolvency cases has occasioned much debate across jurisdictions. Recently, NCLAT in the case of Vijay Kumar V Iyer v. Bharti Airtel & Ors.[ii] had the opportunity to comment upon the nature of set-offs and their utility in matters concerning insolvency. NCLAT in the instant judgment held that no dues can be set off during the period of the Corporate Insolvency Resolution Process (CIRP) when the company is under moratorium. Further, NCLAT opined that if such set-off is allowed it would mean that creditor is accorded preferential treatment which stands in contravention to the tenets of the Insolvency and Bankruptcy Code, 2016 (the Code). NCLAT’s judgment raises certain important questions with reference to a creditor’s right to claim set-off against a company under insolvency. The authors in the subsequent discussion will critically analyze the judgment and argue that NCLAT’s ruling, in not allowing the set-off, lacks perspicuity and fails to provide the much-needed clarity required in respect of set-off of claims under the Code. Factual background & Judgment A Spectrum Trade Agreement (“STA”) was entered into between Aircel Limited & Dishnet Wireless Limited (Aircel Ltd.) and Bharti Airtel. Pursuant to the agreement, Airtel Ltd. was to furnish bank guarantees of approximate INR 453 crores on behalf of the Aircel Ltd. Pertinently, Aircel, pursuant to unpaid invoices, also owed an approximate amount of INR 112 crores to Airtel Ltd. As Aircel Ltd. entered into insolvency, certain differences with reference to the STA arose between the parties. Consequently, the differences were first adjudicated by the Telecom Disputes Settlement and Appellate Tribunal, and subsequently by the Supreme Court (SC). In view of the SC judgment, Resolution Professional (RP) pursued Airtel Ltd. to pay INR 453 crores to Aircel Ltd.  Subsequently, Airtel Ltd. paid INR 341 crores to Aircel Ltd. and withheld 112 crores by setting-off the said amount against the total amount owed to Aircel. Airtel then moved an application before NCLT Mumbai to get an affirmation order with respect to the set-off made.  NCLT Mumbai, in its order dated 1.05.2019, allowed Airtel to set off the amount to the tune of approx. Rs.112 crores. Pursuant to NCLT Mumbai’s order, RP of the Corporate Debtors filed a complaint under section 61 of the Code. RP alleged that the NCLT, by permitting the set-off, has accorded Airtel Ltd. a preferential treatment over other operational creditors and has resultantly violated the objective of the Code, which is to balance the interest of all stakeholders. Moreover, it was contended by the RP that this has also led to a violation of section 14 of the Code. NCLAT observed that in light of the non-obstante clause, the provisions of the Code will prevail over accounting conventions. Further, it adverted to the judgments in the case of Indian Overseas Bank v. Mr. Dinkar T.Venkatsubramaniam[iii] and MSTC Ltd. v. Adhunik Metaliks Ltd &Ors[iv] to conclude that no dues can be set-off when moratorium under section 14 is in force. Analysis NCLAT in the instant judgment has failed to explain the application of the cases and provisions so referred, to the facts and circumstances of the present case. NCLAT relied upon the case of Indian Overseas Bank and MSTC to conclude that set-off shall not be permitted. In the aforementioned cases, NCLAT held that after the admission of an application under Section 7 or 9 of the code, the creditor is not allowed to recover any dues from the corporate debtor as the same would lead to the creation of additional burden on an already stressed debtor.[v] Notably, set-off does not tantamount to recovery of dues as set-off is not merely a defense to a creditor’s claim but provides equal relief to the debtor as well. Additionally, set-off does not create stress on the assets of a company as both the parties are reciprocally creditor and debtor to one another, whereas, recovery of debts leads to the creation of a liability on the debtor, thereby, exacerbating its condition. Resultantly, set off in a way helps in reducing the pressure on the debtor by either reducing or extinguishing the outstanding amount altogether. NCLAT could have examined the issue better had it revisited the elementary rationale behind moratorium. The primary purpose of the moratorium is to disallow any transaction that will result in creating more burden on an already stressed Corporate Debtor (CD). However, if the transaction carries the prospect of any kind of refund of money to the CD, then the same shall not be disallowed at any cost. Axiomatically, as held in the case of SSMP Industries Ltd. vs. Perkan Food Processors Pvt. Ltd.[vi], the term “proceedings” as envisaged under section 14(1)(a) of the Code does not include “all” proceedings. Therefore, the ambit of section 14(1)(a) extends only to those proceedings and suits which might pose a coercive action against the CD. Appositely, NCLAT, instead of rejecting the set off categorically, should have objectively assessed the situation taking into consideration the situation of the CD. Essentially, if allowing the set-off does not lead to further dissipation of the assets of the debtor and strengthens the financial position of the same, the parties should have been allowed to carry out the set-off. Further, as opposed to the Provincial Insolvency Act, 1920, even though there is no particular provision of set-off under the present code, it

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Cross-Border Insolvency and International Commercial Arbitration: The Need for Legislation

Arbitration Law, Insolvency Law /

[By Nidhi Thakur and Akshita Tiwary] The authors are students at Government Law College, Mumbai. Introduction The current Covid-19 pandemic has had an adverse impact on economies all over the world. The global financial crisis has resulted in recession, tightening of credit markets and a widespread lack of economic confidence. All of this has resulted in a substantial increase in insolvencies. Most commercial contracts include an arbitration clause that allows them to resort to arbitration in case of breaches. For parties participating in arbitral proceedings during or immediately after the pandemic, the potential insolvency of an award debtor will become a real concern. This interaction between national insolvency regimes and international commercial arbitration is an issue which has received relatively little attention. With several multinational companies declaring bankruptcy or insolvency, foreign creditors would be at a disadvantage when it comes to protecting their interests unless states endeavour to frame comprehensive laws on the subject. These laws can strengthen confidence in the international dispute resolution mechanism by paving the way for consistent procedures and predictable outcomes. In consonance with the same, this article aims to highlight the intersectionality and complexities arising out of parallel cross-border insolvency and international commercial arbitration proceedings, with a particular focus on the Indian stance. Intersectionality between International Commercial Arbitration and Cross-Border Insolvency “Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors.” The aforesaid was rightly upheld by the Singapore Court of Appeal in the case of Larsen Oil and Gas Pte Ltd v. Petroprod Ltd. International commercial arbitration is a transnational feature that seeks to resolve disputes arising out of commercial transactions conducted across national boundaries. On the other hand, insolvency is a mostly domestic proceeding which gets triggered when companies are no longer in a state to meet their financial obligations to creditors as debts become due. Cross-border insolvency occurs in a situation where the insolvent debtor has assets in more than one nation, or where some of the creditors belong to jurisdictions other than the one where the insolvency proceedings have been filed. The United Nations Commission on International Trade Law sought to create uniform model laws for both these areas. As a result, the UNCITRAL Model Laws on Cross-Border Insolvency and International Commercial Arbitration were formulated in 1997 and 1985, respectively. However, the organisation has failed to address the interrelationship between these model laws. International arbitration and insolvency regulation set in motion distinctive legal procedures, with each having its own distinct purpose, objective, and underlying policy. Therefore, intersectionality between both these areas of law poses a challenge for courts and arbitral tribunals. Certain judgements offer a unique opportunity to discuss the delicate interaction between arbitration and insolvency. In the case of Syska v. Vivendi, the English Court of Appeal upheld the decision of the LCIA arbitral tribunal that foreign insolvency proceedings should have no effect on pending arbitration proceedings, which are decided according to the law of the land where the lawsuit is pending. In this judgement, Lord Justice Longmore rightly said that to protect the legitimate expectations of people in business with regards to the certainty of transactions, lawsuits should come to an appropriate conclusion. The Swiss Supreme Court’s decision of 2009 in the Vivendi v. Elektrim dispute upheld the award of an arbitral tribunal seated in Switzerland, which declined to exercise jurisdiction over Elektrim after it had been declared insolvent in Poland. However, in 2012, the Supreme Court overturned this decision to declare that insolvency proceedings do not affect the arbitral tribunal’s jurisdiction. The rationale behind this was that the capacity to participate in an arbitral proceeding presupposes general ‘legal capacity,’ which bestows certain rights and obligations upon the company. These rights and obligations remain unaffected even when insolvency proceedings have been commenced according to domestic laws. Hence, insolvency proceedings would have no bearing on the arbitration agreement. This gives arbitrators in Switzerland a wide jurisdiction to decide disputes relating to insolvency cases as well, which includes claims made on behalf of the estate itself. This reasoning is a desirable one, given that it protects the interests of cross-border creditors who may find themselves left without any remedy when arbitration proceedings are subverted to domestic insolvency laws. Complexities arising due to Parallel Cross-Border Insolvency and International Commercial Arbitration Proceedings When considered unilaterally, both seem to have an established set of laws in place. However, an inter-jurisdiction parallel proceeding raises a multitude of issues. One difficulty might be the enforceability of an arbitration agreement made before the insolvency of one of the parties. A second might be whether and to what extent the insolvency matters or bankruptcy issues could be made the subject of the arbitration. A third could be whether a stay of the arbitral proceedings could be given when insolvency proceedings have commenced. A fourth relates to the enforceability or challenge of an arbitral award on substance pending or after insolvency. A fifth might be the role of the judiciary in controlling insolvency proceedings against the background of arbitral proceedings having been commenced. The list of different contextual settings and issues can go on.[1] This anomaly requires countries to develop their domestic legal framework, which can harmoniously resolve these issues. Unfortunately, many nations, including India, have not yet taken steps to rectify this lacuna. Given the context of the current pandemic, such measures need to be deliberated upon urgently. An Overview Of Key Indian Law Considerations The Arbitration and Conciliation Act, 1996, is the fundamental law governing arbitration in India and is widely based on the UNCITRAL Model Law on International Commercial Arbitration (1985). It was enacted to consolidate, define, and amend the law concerning domestic arbitration, international commercial arbitration, and the enforcement of foreign arbitral awards in India.

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Leniency Regime In India: An Incoherent Approach Of The CCI

Competition Law /

[By Kirti Talreja and Abhishek Singh] The authors are students at National Law University, Odisha Introduction The Competition Act, 2002[i] (hereinafter “The Act”) was enacted with the objective of ensuring healthy competition and eradicating anti-competitive practices in the market. Competition authorities across the globe have considered cartels as the most heinous form of anti-trust offence. Eradicating cartels have been the top-most priority of most of the jurisdictions and the Competition Commission of India (‘hereinafter’ “The Commission”) has been no exception to it. However, over time, detecting and prosecuting cartels have become a challenging task for fair trade regulators. Henceforth, in a bid to aid enforcement, various jurisdictions, including India, have adopted leniency regimes to encourage undertakings involved in cartels to disclose information about any existing cartels in exchange for complete or partial immunity. Since the enactment of the legislation, the Act has gone through a series of amendments taking valuable insights and considerations from multifarious developed jurisdictions across the globe. In 2017, certain amendments were also made to the Lesser Penalty Regulations[ii] which considerably increased the scope of the powers conferred upon the Commission regarding leniency programmes in India. Why Leniency? Cartels are associations of manufacturers or sellers whose objective is to maximize their profits collectively through price-fixing, limiting supply, or any other practices. These types of agreements and associations deter healthy competition in the market thereby hampering the sustenance and growth of competitors in the market. For instance, a market study revealed that the end consumers pay, on average, 49% more than the authentic price of the products.[iii] It is appalling to note that, 249 cartel cases investigated in 20 developing countries exhibited that the excess profits bagged from the cartels were equivalent to 1% of the GDP of various countries.[iv] Cartels have been extremely difficult to prove as the unfolding of the events to detect a cartel is based solely on circumstantial evidence like communications among the firms, variations in bid quotations not justified by cost considerations, and minutes of the meetings held with competitors, etc.[v]The European Union, bestowed with a robust and erudite anti-trust regime, detects 70-75% of cartel cases spurred by undertakings seeking leniency before the Commission.[vi] Henceforth, the fair-trade regulators worldwide supplement cartel detection with a robust leniency regime. The leniency clauses are a type of whistle-blower protections that proffer undertakings involved in cartels an opportunity to take a step forward and disclose information about the cartels. The undertakings have a chance to provide substantial evidence and cooperate with subsequent investigations, in exchange for immunity or leniency in the penalty imposed, which would have otherwise faced stringent action if the existing cartel would have been disclosed by the Commission itself. Section 46 of the Act, which provides for the leniency clause, reads as follows: “The Commission may, if it is satisfied that any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have violated section 3, has made a full and true disclosure in respect of the alleged violations and such disclosure is vital, impose upon such producer, seller, distributor, trader or service provider a lesser penalty as it may deem fit, than leviable under this Act or the rules or the regulations.”[vii] This clause has been adopted with the prime motive of unveiling the cartels existing in the market and to deter undertakings from entering into anti-competitive agreements. The intent, based on prisoner’s dilemma, is to create a sense of distrust among the participants involved in cartels as there is a perpetual threat of disclosure of the cartel agreement by any of the participants to the authorities concerned. Pertinently, before delving into the lesser penalty regulations, the Commission must inoculate certain essential conditions in its orders such as the nature of the information,i.e., it must be a ‘vital disclosure’[viii], the cooperation of the applicant must be genuine, full and expeditious, and the relevant evidence must not be hampered with or manipulated, to mention a few.[ix] The Indian Leniency Regime: A Snail’s Walk The USA was the first country to adopt the leniency practices. This was done with the objective of alleviating the problems faced by the competition authorities in detecting cartel arrangements. A two-fold increase in the detection of such cases was witnessed by the country within 3 years. A market study exhibited that with the adoption of the leniency regime, the rate of cartel formation alleviated by a massive 59% and the cartel detection augmented by 62%.[x] However, the Indian Competition Law regime has not been successful in emulating success as that of the USA. The reason is the excessive discretionary powers bestowed upon the Commission in India. The Regulations state that the Commission thus enjoys a very vast discretion to decide the penalty to the first applicant, on the basis of parameters like vital disclosures, stage of the application, and subsequent confessions. Furthermore, “any other condition” parameter is rather ambiguous and adds a layer of uncertainty, thereby acting as a barrier to the undertakings involved in cartels to approach the Commission. Contrast this, the leniency regime in developed jurisdictions like the USA and Australia have well-formulated provisions wherein the first undertaking to disclose about the cartel gets leniency.[xii] Orders of the Commission- A String of Irregularity Continues  The ineffectiveness of the Commission in passing orders concerning leniency programmes can be gauged by the non-uniformity in all the five leniency orders that have been passed in the last 10 years of the clause’s inception. The first leniency order was passed by the Commission in 2007. In a suo-motu action of “Cartelisation in respect of tenders floated by Indian Railways for supply of brushless DC Fans and other electrical items”, the Commission penalized 3 undertakings inclusive of their officeholders for bid-rigging. The Commission granted one of them a 75% markdown in the total leviable penalty for becoming an approver and adding significant value to the determination of the existence of a cartel. However, despite Pyramid being the first applicant to plea leniency, the Commission did not scrap

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