Author name: CBCL

BEPS MLI Changes- Prevention of Treaty Abuse

1 Comment / Taxation Law /

[By Shivam Parashar] The author is a fourth year student of University School and Law and Legal Studies, GGSIPU Delhi and can be reached at shivam.parashar13@gmail.com. Background In 2017, India became a signatory to a unique multilateral instrument- Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“BEPS MLI”). At the time of signing, it aimed to amend over eleven hundred (1,100) Double Taxation Avoidance Agreements (“DTAA”). India ratified the treaty in June 2019. The Indian instrument of ratification was received by the Organization for Economic Co-operation and Development (“OECD”) on 25 June 2019 and came into force on 1 October 2019. It will change the way Tax Treaties are used by assessees in India, from the next financial year, when it comes into effect. How it functions The BEPS MLI lays down provisions, which have been evolved from deliberations over a total of fifteen (15) Action Plans. Two of these Action Plans were treaty related minimum standards. That is to say, Action Plan 6, dealing with Prevention of Treaty Abuse provisions, and Action Plan 14, providing for a dispute resolution mechanism, are to be mandatorily adopted by the signatories of the BEPS MLI. Each ratifying country in its instrument of ratification can reserve the application of any of the sections of the BEPS MLI, other than those corresponding to the mandatory action plans- Action plan 6 and Action Plan 14. The BEPS MLI was intended to bring changes to tax treaties without the contracting states undergoing the laborious procedure of individual amendments. To achieve this, the instrument, in Article 2 of BEPS MLI instructs every signatory to notify in its ratification the tax agreements it intends to alter by way of the BEPS MLI. Each agreement that appears in such a list is referred to as a “Covered Tax Agreement” (“CTA”). No separate action on behalf of the countries is required to incorporate the changes introduced by BEPS MLI. [i] Treaty Abuse – Article 7 Action Plan 6 (a mandatory action plan) refers to measures for prevention of treaty abuse. It corresponds to two articles of the BEPS MLI, namely – Article 6- Purpose of a Covered Tax Agreement; and Article 7 – Prevention of Treaty Abuse Both of these provisions are to be mandatorily ratified by the signatory nation. Article 6 of BEPS MLI refers to amendment to the preamble of the Covered Tax Agreement. The Preamble becomes essential in interpreting the intent of the provisions that follow. Article 7 changes substantial provisions of the Covered Tax Agreements. Article 7 acts as a firewall against individuals who seek to exploit the treaty benefits unfairly. A choice is provided to the signatories with regards to the provisions they wish to implement. They may either adopt the Principal Purpose Test (“PPT”) in its Covered Tax Agreements or create a combination of a Simplified Limitation of Benefit clause along with the PPT. A Simplified Limitation of Benefit clause allows a state to restrict tax treaty benefits to a person on the basis of his ‘residential status’. The Principal Purpose Test allows a country to deny tax benefits arising from a tax treaty. Such a denial of benefits can be done if it is ‘reasonably concluded’ that obtaining of the benefit was ‘one of the principal purpose’ of the ‘transaction or arrangement’. [ii] Countries by notifying a list of tax treaty and the required part of the tax treaty can replace the existing anti-treaty abuse provisions of the treaty with the PPT of the BEPS MLI (specified in its Article 7(1)). Where such a provision is not already found in a Covered Tax Agreement, the provisions of PPT shall be inserted. The other alternative provided in Article 7 is the Simplified Limitation of Benefits (“SLOB”) Clause. This is also applied in a similar manner- by notifying the provisions of existing treaties that stand to be replaced. However, for the application of SLOB provisions, it is imperative that both countries agree to its application. A SLOB clause restricts benefits of a treaty only to a pre-specified list of qualified persons. It must be noted that the SLOB is applied only in addition to the PPT test, thereby making PPT the ‘default setting’ of Article 7. When any entity would henceforth seek treaty benefits from a Covered Tax Agreement, it will have to necessarily pass the Principal Purpose Test. Position in India India in its Instrument of Ratification has stated that it shall replace the erstwhile anti-treaty abuse provisions of 36 tax treaties with the PPT laid down by the BEPS MLI. It has also expressed, in pursuance of Article 7(6) of BEPS MLI, its desire to bilaterally negotiate limitation of benefit clauses with countries. India intends to apply the Simplified Limitation of Benefits Clause with 9 countries. India has intended to amend Tax Agreements with 93 countries. These may be classified into two subsets. Firstly, those agreements that do not contain anti-abuse provisions, for example, Australian Tax Treaty. Secondly, agreements that contain anti-abuse provisions, for example, treaties with UAE and Singapore. When India ratified Article 7 of the Multilateral Instrument, it dealt with the second subset. In doing so, India has listed out the provisions that it seeks to replace. However, even within this subset not all countries are listed for replacement (treaty with UAE finds mention, but treaty with Singapore does not). This effectively creates the following three categories of countries: Treaties mentioned as CTA that do not contain anti-abuse provisions Treaties mentioned as CTA that contain anti-abuse provisions and are mentioned under Article 7 ratification Treaties mentioned as CTA that contain anti-abuse provisions and are not mentioned under Article 7 ratification (1) Treaties mentioned as CTA that do not contain anti-abuse provisions For those agreements that do not have an anti-abuse provision, the BEPS MLI’s Article 7(1) shall effectively be inserted. (2) Treaties mentioned as CTA that contain Anti-Abuse provisions and are mentioned under Art. 7 ratification The existing provision(s) shall stand replaced by

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Bhanu Ram & Ors v. HBN Dairies: An Ill-Advised Broadening of the IBC’s Purview

Leave a Comment / Insolvency Law /

[By Suyash Tiwari and Aditya Prasad] The authors are fourth year students of Hidayatullah National Law University, Raipur and can be reached at tiwarisuyash475@gmail.com. The Insolvency and Bankruptcy Code (“IBC” or “the Code”) recently dealt with a spate of jurisdictional disputes vis-à-vis various other statutes including the Companies Act, 2013; Prevention of Money Laundering Act, 2002; the Arbitration and Conciliation Act, 1996 and the Tea Act, 1953. This article is concerned with such a conflict between the Securities and Exchange Board of India (“SEBI”) and the National Company Law Tribunal (“NCLT”). The present dispute is with regards to the attachment of certain properties by SEBI in an action against illegal mobilization of funds by a company, HBN Dairies. Background In 2015, a SEBI order was passed against HBN Dairies wherein it found floating a Collective Investment Scheme (“CIS”) without duly obtaining registration from SEBI under Section 12(1B) of the SEBI Act (“the Act”) read with Regulation 3 of the CIS Regulations, 1999. On appeal, SEBI’s founding was upheld by the Securities Appellate Tribunal. Subsequently, in 2017, SEBI ordered the attachment of 41 properties of the Company and a recovery certificate was issued to the tune of Rs. 1136 Crores to pay off the investors. However, since the investors under the scheme had not been paid off for several months, a group of 36 investors approached the NCLT preferring an insolvency application under Section 7 of the IBC. On 14th August, 2018, the NCLT admitted the application and declared a moratorium under Section 14 of IBC on the basis that the investors could be considered as financial creditors of the Company. Moreover, it was held that, the provisions of Section 14 of IBC would, by virtue of the non-obstante clause present in Section 238 of IBC, prevail over Section 28A of the SEBI Act which provides for recovery of money from a Company by selling movable or immovable property. The same was upheld by NCLAT on appeal. SEBI has now preferred an appeal before the Hon’ble Supreme Court of India in the case of SEBI v. Rohit Sehgal. [i] Feasibility of a Resolution Process On a prima facie inspection of the facts, we see that there is uncertainty whether the Code is the appropriate machinery under which the investors ought to seek remedy. Should the Supreme Court uphold the NCLAT order, it would be tantamount to defeating the express legislative intent of the Code. The Code seeks to act, not merely on behalf of the creditors, but for the more wholesome endeavour of insolvency resolution, while attempting to maintain or revive the business as a going concern. Reference can be made to Binani Industries Ltd. v. Bank of Baroda & Anr. [ii] which elucidates the above point. The NCLAT in that case made the following observations: The Code in Section defines Resolution Plan as a plan for insolvency resolution of the Corporate Debtor as a going concern. The Code does not allow liquidation of a Corporate Debtor directly, but only on the failure of the Resolution process. Further, the Code prohibits and discourages mere recovery of debt, which might only end up bleeding the Debtor’s resources to its death, as opposed to a resolution which seeks to keep it alive. On perusing the above, we find that the primary objective of any resolution proceeding under the Code is to preserve the business as a going concern; to which the recovery of debts is ancillary. An application under Section 7 of the Code does not entail a mere garage sale of the Debtor’s properties to satisfy his debts, but an earnest attempt to keep the business alive. However, keeping the business alive cannot be a suitable course of action with regard to HBN Dairies whose operations were declared illegal as it is in contravention of Section 12(1B) of the SEBI Act. Accordingly, SEBI ordered HBN to cease collection of further funds and initiated attachment and recovery proceedings against it. What this implies is that the business has effectively been brought to an end and the only remaining course of action left with regard to it is recovery, which as pointed out earlier, is not under IBC’s domain. A Resolution Plan is, thus, an inappropriate remedy for the investors to pursue, more so because the appropriate remedy, that is, the SEBI’s auctioning of HBN’s properties in order to pay back the investors has already been put into motion. Thus, the Supreme Court, in overturning the NCLAT’s order would be upholding the legislative intent of the Code as well as preventing an encroachment of the SEBI’s jurisdiction in investor protection issues. Jural Relationship as a requisite for existence of legal debt The Supreme Court also had the opportunity to shed some light on the question whether these investors may be categorized as financial creditors. In the instant case the investors were classified as financial creditors after relying on Nikhil Mehta & Sons (HUF) v M/s AMR Infrastructure Ltd. [iii] wherein it was held that those who have been committed assured returns on their investment are financial creditors. However, that order pertained to a legally binding relationship between the investors and the investees, whereas in the present case, the scheme run by HBN Dairies under which the returns were assured was illegal ab initio. In Shobha Ltd v Pancard Clubs [iv] NCLT Mumbai dealt with a similar factual matrix involving attachment of properties of a Company who had floated a CIS without registration. When the tribunal was adjudicating about the existence of a financial debt it held that: “There is no jural relationship in between this Petitioner and the Corporate Debtor because the contract purported to have been entered between this Petitioner and the Corporate Debtor is not recognised by any law, indeed there is a prohibition under SEBI Act to collect funds as mentioned under Section 11AA of the SEBI Act unless and until license for CIS has been granted by the SEBI.” Thus, the NCLT stated that the returns promised cannot be

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FDI E-Commerce Guidelines: A Reflection of Loopholes and Repercussions

1 Comment / Contemporary Issues /

[By Samanth Dushyanth and Yashaswi Rohra] The authors are final year students of Symbiosis Law School, Pune and can be reached at yashaswirohra@gmail.com. Introduction On 26th December 2018, Department for Promotion of Industry and Internal Trade (DPIIT), released Press Note No. 2 of 2018 (“Pn2”) introducing certain key changes to the Consolidated FDI Policy, 2017 (“FDI Policy”) in the e-commerce sector. Pn2 amends paragraph 5.2.15.2 (E-commerce activities) of the consolidated FDI Policy of India providing for these changes to come into effect from February 1, 2019. The FDI Policy permits 100% FDI through the automatic route. However, FDI is not permitted in the inventory based model of e-commerce. A ‘marketplace based model’ refers to an e-commerce entity which provides the information technology platform and acts as an intermediary that facilitates trade between buyers and sellers.[i] An inventory based model on the other hand is defined to mean a model in which the e-commerce entity exercises ownership over the goods, and sells directly to the consumers (B2C).[ii] The subsequently mentioned changes were introduced as an initiative to bridge the gap, since the current FDI Policy being a widely worded legislation provides a window for the large market players to circumvent the provisions. Key changes Inventory Control Pursuant to the Pn2, ownership or control both shall be the determining factors to differentiate between marketplace and inventory based model. Any control or ownership over the inventory shall render the business of the marketplace entity as an inventory-based model of e-commerce. The control in the aforementioned change is further explained as the marketplace entity shall be ‘deemed’ to have control over the inventory of a seller , if more than 25% of the purchases of such seller are from the Marketplace Entity or its group companies. This statement leads to two possible interpretations: Interpretation 1 – Sales generated by the vendor through the marketplace and its group companies. Interpretation 2 – Purchases of the vendor through the marketplace and its group companies. These interpretations arise due to the different kind of business models that exist in the market to which the government has failed to provide any clarification. Similarly, the earlier restriction on 25% sales on an e-commerce platform not originating from a single seller has been largely ineffective. Large e-commerce entities simply created more affiliated sellers (and ensured that sales from each remain under 25%). Pn2 has removed this requirement. Equity Participation Pn2 dictates that a seller shall not be allowed to sell on the platform of the marketplace entity, if the marketplace entity or its group companies have any equity participation of the seller entity.[iii] The intent of the legislature with regards to this change is to prevent the e-commerce entities from exercising control over the pricing policy or inventory of the vendor. It does not explicitly state that both direct and indirect equity participation would count. With this requirement, the government has sought to restrict the ability of e-commerce entities to have a minority equity stake in entities that act as sellers on their platforms. However, the same is a blanket prohibition and may claim unintended victims. Level Playing Field E-commerce entities are required to provide the same suite of services or facilities to all sellers under “similar circumstances”. Like any other business, e-commerce entities may wish to reward or provide enhanced services to suppliers/ vendors who stand out. [iv] Interestingly, the Pn2 appears to recognize an existing practice of providing ‘cashbacks’, which is a system set out to selectively incentivise the customers to choose certain products and to reject other products leading to failure of smaller sellers and unfair competitive market. Pn2 considers this system as not being violative of the prohibition on e-commerce entities influencing the sale price of goods. Instead, only requires cashbacks to be given in a fair and non-discriminatory manner. Compliance Pn2 of 2018 requires an e-commerce entity to furnish an annual certificate, confirming compliance with these guidelines by September 1 of every year. This however does not explain whether they will be required to perform any diligence of their own, or can they rely on self-certification by vendors. Exclusivity Pn2 places a blanket restriction adversely impacting the exclusive arrangements between e-commerce marketplaces and manufacturing companies, to sell products exclusively on their online platforms. The ambiguity surrounding this restriction is regarding the question of how would the enforcement authorities determine if a seller has been “mandated” to sell its products exclusively on an e-commerce platform, or if the seller is choosing to do so voluntarily. Recent Developments Due to mass confusion amongst both e-commerce companies as well as parties interested in foreign investments, the DPIIT held a meeting with stakeholders including companies and groups that were affected by the said guidelines. On turning down demands of the deadline, the government convened the meeting to address the concerns of the e-commerce entities. As a consequence, the Union Minister of Commerce and Industry held a marathon meeting with online players on 26th June 2019. The meeting yielded a vague and ambiguous assurance that the institutional framework would be put in place only within a time frame of a year. However, the DPIIT clarified that the objective of conducting the meeting was not to bring about further changes to the existing FDI rules, but to assist with implementation of the guidelines laid down in Pn2. Amazon In compliance with the new guidelines, Amazon reduced its ownership stake in Cloudtail from 49% to 24% of total shareholding. With the compliance clock ticking over Amazon’s head, it is expected to similarly offload its stake in Appario. Amazon India’s Pantry service faced a temporary suspension following the release of the Pn2. NASDAQ-listed Amazon and NYSE-listed Walmart reported a combined loss of 50 billion dollars in the week following the implementation of the regulations. Over a dozen small scale vendors exited or suspended their accounts on Amazon in the month of June 2019, since they were unable to manage deliveries and logistics on their own after the new policy came into effect. Flipkart

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Compulsory Corporate Literacy for Independent Directors: Last Resort To Ensure Efficiency?

Leave a Comment / Company Law /

[By Saket Agarwal] The author is a fourth year student of National Law University, Jodhpur and can be reached at saketagarwal16@gmail.com Introduction India in the past few years has been a major victim of corporate frauds including the Nirav Modi scam. When it came to affixing liability, one person was found to be negligent in performing his duties in almost all cases, the independent director of the company. However, independent directors have attempted to evade liability claiming lack of knowledge. To fix this issue, the government is planning to conduct compulsory exams to qualify as an independent director.[i] This Blog post aims to assess the feasibility of such proposed examination. Section 149(6) of the Companies Act, 2013 [“Act”] defines independent director as “a director who is not a managing director or a whole time director or a nominee director”. Schedule IV of the Act prescribes the supervisory function of independent directors over board of directors. They are expected to act as internal watchdog over affairs of the company. Their liability under Section 149(12) of the Act is limited to acts or omissions occurring within his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. It appears that the plan of conducting the proposed examination intends to target this aspect of knowledge. The proposed exam will test various facets of an independent director like business ethics, capital market regulations, etc. The proposed exams will ensure that the independent directors do not claim lack of knowledge; where the aspect of knowledge will depend upon the facts and circumstances of each case. However, there exists a basic lacuna in this premise. The argument presented by the government presupposes that lack of knowledge among independent directors is only due to the lack of corporate literacy, which might not happen in every case. Independent directors: a flawed concept in itself The motive behind introducing the position of independent director was to highlight irregularities going on within the company. The duty was considered so crucial that any failure in his behalf could make him personally liable. In the case of Zylog Systems,[ii] the question of liability of independent directors was discussed regarding non-payment of dividend by the company post declaration. The decision was given in favour of independent directors because they registered their protests in the minutes of the meetings and resigned in protest later. This case shows that the independent directors are confined to stage protests against the unlawful actions of the company and to take exit if the company does not relent. They do not have any actual powers to perform their functions for which they were appointed. The author contends that Schedule IV of the Act is a complete enigma on role of independent directors. Therefore, the proposed exams will not ensure ‘independence’ of independent directors. Schedule IV of the Act advocates for strong role of independent directors without any influence.[iii] Further, it asserts that independent directors shall bring objectivity in performance of the board of directors.[iv] However, their re-appointment is subject to their evaluation by board of directors. Moreover, they can be easily removed through an ordinary resolution. Existing provisions on the issue There is nothing new in the proposal of financial literacy for independent directors. Financial literacy is something which was there previously as well in the Act. Clause 49 of SEBI Listing Agreement of 2004 on corporate governance provides for audit committee in a listed company. Such an audit committee should consist of at least three directors where the independent directors shall be two-third of total members. Section 177 of the Act makes it mandatory for all members of the audit committee to be financially literate. The revised Clause 49(II)(B)(7) of Equity Listing Agreement makes it mandatory for the companies to conduct compulsory training of independent directors. The author suggests that intent behind this move might be to ensure that the independent directors are vigilant about their responsibilities in the company. To ensure its compliance, a disclosure was made mandatory in the annual report along with details of such training. If the sufficient provisions are already present to keep a check on their knowledge, then it is futile to bring in another separate provision. The case of Dr. Sambit Patra: independent director of ONGC BJP’s National Spokesperson, Dr. Sambit Patra was appointed as the independent director of Oil and Natural Gas Corporation [“ONGC”] in 2017. His appointment was challenged in the court for his lack of sufficient financial knowledge required in a director of a company. [v] The Court held that there are diverse areas which a corporation needs to take care of when it is operating in a society. The importance of the knowledge in these different areas cannot be ruled out. Moreover, it is mandatory for every company to perform corporate social responsibility [“CSR”]. CSR ensures the inclusive growth of each section of the society which could not keep pace with the rapid industrialization.[vi] Schedule VII of the Act containing CSR activities have a direct impact of the environment and human rights. The court held that relevance of a medical expert in the board of directors in such a case cannot be ignored. Rule 5 of the Companies (Appointment and the Qualification of Directors) Rules, 2014 provide for qualifications of an independent director in one or more fields of finance, law, management, sale, etc. The author feels that such a wide ambit of the above provision was deliberately kept to maintain that the company cannot isolate itself from the society. Therefore, the officials of the company cannot confine themselves to the matters solely related to company. Having a separate examination would therefore be redundant.                       Violation of Article 14 of the Constitution of India The current norms of the regulatory authorities have made the liability of the independent directors at par with the executive directors of the company although they may not enjoy equal powers and remunerations. In the Neesa Technologies case,[vii] an independent additional director was held

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Buyer’s Cartel: Is it Even a Concern?

Leave a Comment / Competition Law /

[By Aditya Goyal] The author is a fourth year student of National Law Institute University, Bhopal and can be reached at goyal.aditya173@gmail.com. Introduction Lately, there have been growing concerns over the exploitation of buyer’s power, which has raised issues concerning the sphere of functioning of Competition law in India. The Competition Act, 2002, (“the Act”)  was introduced to streamline growing industrial practice in India and to provide a robust institution to deal with ever-increasing anti-competitive practices. The erstwhile Monopolies and Restrictive Trade Policies Act, 1969, was amended as it became redundant with time and provided various escape routes to enterprises to interfere with the market forces and capitalize at the expense of buyers. However, after almost two decades of operation of the new Act, it has started to wear out on new avenues that have opened up — one of such areas being the emergence of cartels with respect to buyers. Understanding ‘Cartel’ A plain and outright reading of the substantive law on cartelization in the Act [i] shows that the drafters had a ‘seller-oriented cartel’ in mind. This could be inferred from the fact that the definition of cartel provided in the Act is an inclusive one and mentions explicitly the aspects related to a seller. Section 2 (c) of the Act defines cartel as “an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”. The definition limits its scope to other emerging venue of a possibility of a cartel being formed by buyers. It is a settled principle that the basic premise of an anti-competitive practice is that it has an appreciable adverse effect on competition. This principle is mainly neutral as it does not specifically state as to who should be behind that anti-competitive practice, i.e., it could be a seller as well as a buyer. Buyers, as a group have the equal potential of making an appreciable adverse effect on competition. There have been examples where the buyers have formed ‘buyer groups, ‘ which is nothing but a disguised form of a cartel as it tends acting in concert with an objective, that is to say, get the lowest prices and have the upper hand as a negotiating party. The examples may include a co-operative society which may exert pressure to lower the prices. Further, the number of buyers in an oligopsonistic form of the market may severely affect the position of sellers, and it is the buyer group, indeed, which appreciably affects the competition adversely. The purpose of the Competition Act is to create an environment for healthy competition in the market, and no exchange is complete without interplay between buyers and sellers. Therefore buyers have an equal opportunity to exploit the market and the game therein for their benefits. In the US, the buyer’s cartel has been well recognized under anti-trust laws. In United States v. Crescent Amusement Co.,[ii] the buyers colluded to pay a specific price for a particular commodity at an auction and thereby decided to reallocate the goods among themselves through a second auction. This agreement within the buyers was held to be violative of the anti-trust laws because such conduct ultimately affected the efficiency and purpose of the bidding process and hence, anti-competitive. Analysis of Indian position on buyer’s cartel The Competition Commission of India (“CCI”) had various avenues to identify and punish the cartels formed by buyers. However, they lost all opportunities. In the case of Pandrol Rahee Technologies Pvt Ltd. v. Delhi Metro Rail Corporation and Ors.,[iii]the CCI had to deal with the anti-competitive activities allegedly undertaken by the respondents in the buying process of metro rail fastening system for ballastless tracks wherein they allegedly nominated only one type of proprietary system and therefore foreclosing competition. The CCI observed that the term ‘trade’ under Section 2 (x) of the Act deals with “production, supply, distribution, storage or control of goods” and therefore, does not include the aspect of buyer. Although the Courts in the US have held the buyer’s cartel as anti-competitive, the Competition law in India loses out on this particular aspect and leaves for the court to open an interpretation of the provisions that can fit well to a buyer’s cartel. However, given the specific terminology of producers, distributors, traders, or service providers, the courts in India are having a tough time reading a ‘buyer’ in the given definition. However, this does not mean that an activity of a buyer’s cartel is unchecked. A plain reading of Section 4 of the Act can accommodate a group of buyers as a ‘group in a dominant position’ and, therefore, accounts for abuse by them. This, however, is mere interpretation advanced by the author as the CCI, as well as the appellate authorities, have at no single instance used these provisions against a buyer’s group. One of the significant issues in incorporating a provision related to a buyer’s cartel is that there is a thin line of difference between a buyer’s group and a buyer’s cartel. A buyer’s group, on one hand, always aims at getting the best prices for its members, i.e., caveat emptor, whereas on the other hand, a buyer’s cartel has an element of collusion between them, irrespective of existence of an agreement. Conclusion There has always been a concern regarding the protection of legitimate buyers group which may knowingly or unknowingly pose a challenge to a competitive market by manipulating the supply and demand curves. [iv] Therefore, it is necessary that the buyers cartel is well addressed through some settled principles. It is to be noted here that the Competition Law Review Committee was set up in the year 2018 to look into the required amendments according to the economic needs of the country. The Committee, chaired by Shri Injeti Srinivas (Secretary, Corporate Affairs, Government of India) recommended, among other things, that the definition of cartel under Section 2(i) of the Act should be

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Essential Goods and Services during Corporate Insolvency Resolution Process: Interpretation and Treatment

Leave a Comment / Insolvency Law /

[By Jubin Jay and Kirti Vyas] The authors are fifth year students of National Law University, Odisha Introduction A Corporate debtor is provided with a surviving mechanism during moratorium through the application of Section 14 of the Insolvency and Bankruptcy Code, 2016 (“the Code”). The moratorium period is declared by the adjudicating authority under Section 13 of the Code after admitting the application for initiating Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor during which, continuation of all the pending suits is suspended and institution of any new suit is prohibited. Among other things, moratorium is applicable to all the “essential contracts” of the Corporate Debtor. Section 14(2) of the Code states that when an order initiating the CIRP is passed, “the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.” The term “essential goods and services” has been defined under regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) to mean electricity, water, telecommunication services and information technology services to the extent these are not a direct input to the output produced or supplied by the corporate debtor. A mere reading of the definition highlights that it is restrictive in nature. However, the National Company Law Tribunal has in some cases sought to expand the scope of the term ‘essential’, which in turn has created a lot of confusion. Another issue which arises from this restriction under section 14 of the Code is the manner of payment for such essential contracts being rendered by the suppliers of those particular contracts. The reason being that suppliers of essential goods and services are qualified to be mere operational creditors, and this being the case, they will never be able to recover their full payment through CIRP. The Courts have tried to deal with this situation time and again, and the position is mostly settled in this regard that such expenses incurred will be qualified as Insolvency Resolution Process cost. However, whether the payment has to be made during moratorium or not is still a point of contention. What constitutes “Essential Goods and Services”? ICICI Bank v. Innoventive Industries [i] The Tribunal opined that on a bare reading of the CIRP Regulations, it appears that electricity, water and telecommunication services and information technology services are to be considered as essential as long as these services are not a required to the output produced or supplied by the corporate debtor. Further, “essential service” is a service for survival but not for doing business and earning profits without making payment for the services used. When a company is using it for making profits, then the company owes payment to the supplier for such non-essential services/goods utilized in manufacturing purpose. The Tribunal in this case restricted the ambit of the definition to a large extent. However, soon after, the Tribunal in another case, deviated from its strict interpretation and expanded the scope of the definition, the latter interpretation being inconsistent with the definition as provided under the CIRP Regulations. Canara Bank v. Deccan Chronicle Holdings Ltd.[ii] In this case, the Tribunal held that printing ink, printing plates, printing blanker, solvents etc. will also come under the purview of exemption along with the heads as defined. The corporate debtor i.e. Deccan Chronicles Holdings Limited was in the business of publishing newspapers and periodicals. Including the above-mentioned products will be a direct input to the output product. However, the order does not even explain why additional goods and services have been covered under the ambit of essential goods and services. This created ambiguity on the position of law in this regard. However, recently National Company Law Appellate Tribunal (“NCLAT”) has again differentially opined in the case of Dakshin Gujarat VIJ Company Limited v. ABG Shipyard Limited [iii] that “from subsection (2) of Section 14 of the ‘I&B Code’, it is also clear that essential goods or services, including electricity, water, telecommunication services and information technology services, if they are not a direct input to the output produced or supplied by the ‘Corporate Debtor’, cannot be terminated or suspended or interrupted during the ‘Moratorium’ period.” The Insolvency Law Committee [iv] had advocated for expanding the scope of mandatory essential supplies covered under section 14(2) of the Code. Subsequently, the Committee had recommended that there should be a proviso added to Section 14(2) which states that “for continuation of supply of essential goods or services other than as specified by IBBI, the IRP/ RP shall make an application to the NCLT and the NCLT will make a decision in this respect based on the facts and circumstances of each case”. However, this recommendation was not adopted as an amendment to the Code. Manner of Payment for such Essentials during Moratorium. Regulation 31 read with Regulation 32 of the CIRP Regulations makes it aptly clear that any expense or amount due to the suppliers falling under Section 14(2) of the Code, during moratorium will be considered as insolvency resolution process cost and thereby will be given priority over other debts. However, the question remains as to whether these payments are to be made during the moratorium period or can they be paid later? Dakshin Gujarat VIJ Company Limited v. ABG Shipyard Ltd.[v] NCLAT mandated that payments for supply of goods and services is to be made during the moratorium period. Explanation provided by the Appellate body was that such payment is not covered by the order of moratorium. Law does not stipulate that such suppliers will continue to supply the essentials free of cost until the completion of the period of moratorium and that the corporate debtor is not liable to pay till such completion. Emphasising further on the point of regular payments, NCLAT noted that if the company does not even have funds to pay for the essentials to keep it a going entity, then it has become sick and the very question

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Supreme Court on Seat vs. Venue Conundrum in Domestic Arbitration: More Confusion than Clarity?

Leave a Comment / Arbitration Law /

[By Mreganka Kukreja] The author is a final year student of Symbiosis Law Schoole, Pune and can be reached at mreganka.kukreja@symlaw.ac.in. Introduction The seemingly unending saga of the seat versus venue debate seems to have taken an interesting turn in light of the Supreme Court’s recent decision in the case of Brahmani River Pellets Limited v. Kamachi Industries Limited. [i] In this judgment, the Division Bench revisited the applicability of the simple yet intriguing principles surrounding the seat and venue in the context of domestic arbitration, and thus sparked controversy. Through this blog post, the author discusses the background of the case; the key arguments of the parties; the decision of the court and the implications of the judgment on the Indian arbitration regime. Background Brahmani River Pellets Limited (hereinafter “Appellant”) entered into an agreement with Kamachi Industries Limited (hereinafter “Respondent”) for sale of iron ore pellets, which were required to be loaded from Bhubaneshwar, Odisha and were destined for the port in Chennai, Tamil Nadu. A dispute arose between the parties regarding the price and payment terms and the Appellant refused to deliver the goods to the Respondent. Accordingly, the Respondent invoked the arbitration clause under the agreement which provided that the arbitration shall take place under the Arbitration and Conciliation Act, 1996 (hereinafter “Arbitration Act”) and the venue of such arbitration shall be Bhubaneswar. The Appellant did not agree for the appointment of the arbitrator. Hence, the Respondent filed a petition under Section 11(6) of the Arbitration Act before the Madras High Court for appointment of an arbitrator. The Madras High Court vide its order appointed a sole arbitrator by holding that in absence of any express arbitration clause excluding the jurisdiction of other courts, both the Madras High Court and the Orissa High Court would have jurisdiction over the arbitration proceedings. Challenging the impugned order, the Appellant preferred an appeal before Division Bench of the Supreme Court. Issue for determination Whether the Madras High Court could exercise jurisdiction under Section 11(6) of the Arbitration Act even though the agreement contains the clause that the venue of arbitration shall be Bhubaneswar? Key Arguments of the Parties The Appellant contested the impugned order in a two-pronged manner- First, since the parties had agreed with Odisha as the venue for arbitration, it acquired the status of a juridical seat. Second, as observed in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited and others [ii] (hereinafter “Indus Mobile Case”), once the parties agree on the seat of arbitration in domestic arbitration, the said court acquires the exclusive jurisdiction. The Appellant, therefore, submitted that Odisha High Court, being the juridical seat, holds exclusive jurisdiction in the matter and the decision of Madras High Court must be set aside. In response to the assertions of the Appellant, the Respondent argued that- first, since the cause of action arose at both the places i.e. Bhubaneswar and Chennai, both the Madras High Court and the Odisha High Court would have supervisory jurisdiction over the matter. Second, reliance was placed on the decision of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [iii] (hereinafter “BALCO”) to argue that mere mention of the venue as a place of arbitration would not confer exclusive jurisdiction upon that court. There should be other concomitant circumstances, like the use of words “alone”, “exclusive”, “only” etc. to indicate the exclusive jurisdiction of the court over the matter. The Respondent, therefore, submitted that Madras High Court could also exercise jurisdiction over the matter. Decision [A.] Party autonomy to choose the exclusive jurisdiction of the court The Division Bench observed that Section 2(1)(e) of the Arbitration Act defines the court which would have jurisdiction to decide the questions forming the subject-matter of arbitration, and if such subject-matter is situated within the arbitral jurisdiction of two or more courts, the parties could agree to confine the jurisdiction in one of the competent courts. In this regard, Section 2(1)(e) must be read with Section 20 of the Arbitration Act which gave recognition to the autonomy of the parties as to the place of arbitration. It was noted that such party autonomy has to be construed in the context of parties choosing a court which has jurisdiction out of two or more competent courts having jurisdiction. The Division Bench then discussed the Supreme Court’s decision in Swastik Gases (P) Ltd. v. Indian Oil Corpn. Ltd. [iv] (“Swastik Gases”) In this case, the arbitration clause provided that the agreement shall be subject to the jurisdiction of the courts at Kolkata. However, the appellant filed an application before the Rajasthan High Court. In holding that Calcutta High Court shall have exclusive jurisdiction, it was observed that words like “alone”, “only”, “exclusive” do not make any material difference as to the intention of the parties to choose exclusive jurisdiction. The same was also not hit by Section 23 of the Indian Contract Act,1882 as it was not forbidden by law nor was it against public policy. Therefore, in the present case, since the parties agreed to Bhubaneshwar as the venue of arbitration, the parties intended to exclude the jurisdiction of all other courts. [B.] Juridical seat designates the exclusive jurisdiction of the court  The court in the instant case discussed the Indus Mobiles case in which it was laid down that under Section 20(1) and 20(2) of the Arbitration Act, where the word “place” is used, it refers to “juridical seat” and the moment the seat is designated, it is akin to an exclusive jurisdiction clause. Therefore, on the designation of Bhubaneshwar as the venue of arbitration, a status of the seat was acquired and thus, the Odisha High Court was vested with the exclusive jurisdiction for regulating the arbitral proceedings. Given above, the Supreme Court held that when the parties had agreed to have the venue of arbitration at Bhubaneswar, the Madras High Court erred in assuming the jurisdiction under Section 11(6) of the Arbitration Act. Therefore, the impugned order was set aside. Concluding Comments [A.] Questionable interpretation of the precedents  

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A primer on the transformations in the business of law for aspiring legal professionals

1 Comment / Contemporary Issues /

[By Ankur Gupta] The author is a law lecturer with Temasek Business School at Temasek Polytechnic in Singapore. Besides facilitating learning and conducting research in various areas of law, he has a keen interest in monitoring how the business of law may change bringing with it changing expectations of employers on Skills of lawyers and other professionals working in the legal services sector. He can be reached at Ankur.gup@gmail.com or on LinkedIn. Introduction The Business Standard recently carried a report[i] on the how certain law firms in India are at the cusp of engaging and experimenting with applications powered by transformative technology such as Artificial Intelligence (AI).   This ‘think anew, act anew’ mantra informing the business of law stems from global trends shaping the operating environment of law firms. The operating environment, globally, for businesses and in turn for law firms is being transformed on account of novel applications of transformative technologies like AI, Internet of Things (IoT) and Blockchain amongst others.  The chief catalyst for technological transformation impacting law firms are the consumers of legal services, especially multinationals and other heavyweight clients who themselves are in the process of digitization and revamping their own processes and products in a bid to remain competitive. Application of AI, IoT and Cloud Computing and other transformative technologies is playing a vital role. Arguably, these consumers are increasingly demanding that providers of legal services innovate the delivery of legal services, be it law firms or their own in-house legal counsels. This piece discusses broad trends associated with how law firms are positioning themselves in an increasingly crowded market where they must compete with a host of traditional and non-traditional rivals for the same pie of business. It is hoped that this will spur aspiring lawyers and other readers to engage with developments innovation in the business of law given the potential for new career opportunities for law graduates and experienced non law professionals as a by-product of such innovation. The article is jurisdiction agnostic, a reflection of the trend that the innovation and disruption in legal service delivery and legal business models is borderless. Legal Innovation: a demand for value innovation by law firm clients Technological change is not new, neither is disruption. Industries, jobs and economies have transformed on account of innovative technology since the Industrial Revolution, if not earlier. What is, perhaps, different is that change is multi-layered: a series of small and significant changes which add to the complexity.  Such change is charecterised by emergence of new products, new players and new processes which in turn impact and give rise to issues for legal practice, legal education as well as regulators.  This paper limits the discussion to legal innovation and its relevance for law firms. On the availability of new products, it worth noting that legal tech tools are available in almost every area of legal practice[ii].  What is also noteworthy about this proliferation is that several legal tech tools are designed not necessarily with the lawyers in mind but for mass consumption. One example is online dispute resolution and management platforms which are touted as ‘self-service sites and dialogue tools’ promising convenience, cost savings and accessibility to disputing parties[iii]. The efficacy and customizability of generic applications is progressively evolving with greater usage and user feedback flowing back to developers. Lawyers are professionals and law firms are businesses providing solutions to clients. Technology is a means to this end.  How law firms service their clients and continue to provide ‘value’ and ‘value innovation’ is mediated by technology. Clients in the B2B segment i.e. businesses which engage law firms are increasingly concerned about the efficiency of law firms in offering their services. This is perhaps a pressure point for law firms. Another trend forcing law firms to re-think their offerings to make them more appealing as many large clients seek ‘full service’ solutions rather than piecemeal legal advice which has been the case so far. One example of ‘Value Innovation’ is how the Big4 are offering legal services to their clients leveraging on in-house multi-disciplinary expertise delivered by teams of legal practitioners working alongside accountants, auditors, management consultants and other domain experts. This is where technology, process improvement, resourcing and project management are assuming importance in a law firm context[iv].  Established multinational law firms such as Clifford Chance, Linklaters, Dentons Rodyk as well as several national and regional law firms seem to be joining the legal innovation bandwagon, leveraging technology atop their brand, domain expertise and reach to in the face of competition from non-law firm service providers vying a slice of the lucrative pie for legal services markets across jurisdictions. Perhaps most notable about the ongoing transformation of the business of law is the proliferation of Alternate Legal Service Providers (ALSPs) often characterized as impinging on turf traditionally ‘belonging’ to law firms.  At the most basic level, some ALSPs are offering self-service apps for clients to create simple legal documents, thereby ‘commoditizing’ legal services and removing the lawyer from the picture[v]. A wider suite of products on offer includes access to platforms which enable consumers of legal services to resolve disputes online, access to subscription-based software to build contracts and consultancy on automation of workflows and processes, protracting the potential for distermediating[vi] law firms. Developments in legal innovation also catching attention of legal academics globally Legal Innovation and Academia Attempts to capture legal innovation, as an academic subject matter, are also on the rise. Stanford Law School’s Techindex is a unique compilation of legal innovation describes on the website as “a curated list of 1211 companies changing the way legal is done”[vii]. In Asia, the Singapore Academy of Law (SAL) teamed up with the Singapore Management University (SMU) publishing two editions of State of Legal Innovation Report aimed at covering developments in legal innovation and legal technology development in nations across the Asia Pacific.  Beyond reports and compilations, formation of multi-disciplinary, cross border groupings such as Asia-Pacific Legal Innovation and Technology Association (ALITA)[viii] aimed at foster collaboration around legal

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Group Insolvency Proceedings: Unravelling the Borders of IBC, 2016

Leave a Comment / Insolvency Law /

[By Ravleen Chhabra] The author is a final year student of Institute of Law, Nirma University and can be reached at ravleenchhabra096@gmail.com. Introduction The Insolvency and Bankruptcy Code (“IBC” or “the Code”) has been probably one of the greatest developments in the Indian Legal System in a bid to reform India’s irresistible Non-Performing Assets conundrum. The Insolvency and Bankruptcy Board of India (“IBBI”), is the body that regulates the working of the IBC, has been actively involved in disseminating understanding and regulating the space [i]. In the wake of recent developments, the IBC had various hits and misses during its execution and is expected to mature in the coming future with better results. Despite having covered a plethora of aspects, there still exist certain issues with no provisions to govern. The current framework of this striving piece of economic legislation provides for a variety of plans for the resolution of individual stressed companies. However, owing to the lack of regulatory framework providing for consolidating the connected companies in group insolvency proceedings, lenders were finding it difficult to proceed for group insolvency proceedings. The dearth of a provision dealing with group insolvency is adversely impacting the resolution process in numerous cases where group companies are lugged to the National Company Law Tribunal (“NCLT”) by the lenders themselves, requesting for a group insolvency approach. However, in the absence of a legal provision allowing the same, the NCLT is unable to help them in any possible manner [ii]. Anchoring the First Step: Formation of the Working Group The first step in the direction of understanding the concept of group insolvency and proposing a legal framework was taken by the Central Government in January 2019 by establishing a working group under the leadership of Mr. UK Sinha, former SEBI Chief [iii]. Two months later, a committee known as the Insolvency Law Committee was reconstituted by the Government to analyse the implementation of the IBC, and craft suggestions to deal with the issues [iv]. One of the largely debated topics during the discussions was to suggest legal provisions in the IBC for allowing group insolvency. These developments seem to suggest that soon, a highly efficient and standardized framework shall be incorporated within the IBC for the resolution of an entire stressed group company having various entities in different NCLT jurisdictions. Global Regulations: How India can benefit? While examining the chapter on “Insolvency Proceedings of Members of a Group of Companies” integrated in the revised European Union (“EU”) Insolvency Regulation, 2017 (“EU Regulation”), a lot of inspiration can be taken from the impeccable manner in which the EU aims at inculcating coordination and cooperation regarding groups of companies, thereby resulting in a win-win situation for both the creditors and the debtors [v]. Article 72 (3) of the EU Regulation, in fact, signifies the importance of coordination, and not consolidation. In conjunction with the same, the recent synchronized scheme of group insolvency law in the Indian IBC shall aim to keep a group of stressed companies concomitantly to either reorganize the group as a whole or liquidate the total asset of the  group in the paramount interest of all parties involved. The ideology behind the same is to formulate a restructuring mechanism that permits the initiation of insolvency proceedings of companies within a corporate group adjudicated by the single independent court/tribunal [vi].This approach shall be helpful, keeping in mind that the groups of debtors or creditors can ask for joint proceedings, thereby reducing the likelihood of spending a huge amount of time and money. The recent amendments to the German Insolvency Act also provide for having only one administrator, while dealing with the insolvency of particular companies of a group, to improve their cooperation and coordination [vii]. Though the legislation does not provide for explicit consolidation of individual proceedings into one, they offer an opportunity to begin working in that direction. In India, it is noticed particularly in case of the infrastructure sector, that the holding company is subjected to insolvency without subjecting the subsidiary company and in most of these cases; it is tougher to put the individual company through insolvency resolution, resulting into its liquidation eventually. If India, under all odds circumstances, is able to incorporate some of these provisions as located out in European or the German Insolvency regime, then India can scotch the burgeoning cases like this and help in pumping up the  value for lenders as well. For assistance on the effective mechanism of cooperation, reference can also be made to the UNCITRAL‘s Legislative Guide on Insolvency Law, Part three: Treatment of enterprise groups in insolvency. The process of group insolvency in India can reap beneficial results in situations wherein there exists a provision allowing the debtors or creditors to seek joint proceedings against the same debtors in the same group in cases where more than one application is pending in the same court against debtors in the same group. This viewpoint can be useful in those cases where those stressed companies who are part of same group barge into the vestibule into corporate guarantees for availing and doing borrowing of either of group members or a debtor may shift his assets to those group companies to deceive creditors, in instantly recognizable situations, in such case, creditors should be able to pierce the corporate veil and initiate the insolvency proceedings within the said corporate group.  Such a scenario is possible only if the group companies are bound to coordinate and cooperate, throughout the process. Further, if any of the members fail to fulfil the obligation, the other members would not suffer the consequences. Group Formation Although the inevitable need for group restructuring of companies has been recognised, the crucial task remains of the methodology or technique of forming such groups, keeping in mind that the interests of no company should be preferred over the other. Such an objective can be achieved probably by forming groups of companies involving some form of the economic relationship, resulting in a mutual or reciprocated environment in terms of

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