Author name: CBCL

Better Late Than Early? On Objections To Compromises & Arrangements

Leave a Comment / Company Law /

[By Anchit Jasuja and Preksha Mehndiratta] The authors are second year students of Gujarat National Law University, Gujarat. The sanction of a scheme or arrangement under the Companies Act, 2013 (“Act”) cannot be done without the sanction of the National Company Law Tribunal (“NCLT”) under its supervisory jurisdiction. However, if a shareholder or creditor has any grievance with respect to the scheme, he may approach the NCLT to file the objections provided that he has the requisite qualifications. Though the Act is clear as to who may file objections against the scheme, there remains ambiguity as to the stage at which objections, if any can be filed. Who can file? The Act only allows the filing of objections by shareholders and creditors if they meet the requisite criteria laid in the proviso of Section 230(4)[i] which is at least 10% of the shareholding for shareholders and at least 5% of the outstanding debt for creditors. Even when the Companies Act, 1956 was in force and there was no statutory criteria for locus standi, the courts have recognized in cases such as Indian Metal and Ferro Alloys Ltd. [ii]that a person, who has no interest in the company as a shareholder or a creditor, cannot file objections before a company court. With the coming of the Act, provision for locus standi was added. However, the proviso and rather the entire act is silent about the time of filing such objections. Judicial approach to appropriate time for filing objections The confusion with respect to the appropriate time to file objections is evidenced by contradictory judgements given by courts of law. In the case of Landesbank Badenurttemberg v. Nova Petrochemicals Ltd., [iii]which predates Section 230(4) of the Act and its proviso, when the issue raised was alleged non-disclosure of material interests and objections, the Gujarat High Court held them to be premature and ordered them to be raised up at the floor of meetings. The court reasoned that since the objections could be raised at the meeting or even when the application to the court was filed for sanction, therefore, there is no reason for the court to consider objections at the stage when the meeting has not been convened. In a contrary view, the Gujarat High Court in another case allowed objections to a scheme even before the court passed orders for the conduct of meetings of shareholders and creditors. [iv] When a case with similar facts came before the Supreme Court in Rainbow Denim Ltd. v. Rama Petrochemicals Ltd. [v], the court did not allow the appeal from the order of the supervisory court and directed it to reject the objections until the meeting has been convened, thus, implicitly rejecting the objections for being filed at an early stage. Though what must be noted is that none of the cases on the issue explained the legal basis for either rejecting or accepting the objections against a scheme before convening the meeting of the shareholders and/or creditors. Legislative intent and analysis Since the power to file objections has been given in a proviso to Section 230(4), therefore it has to be seen and read in the context of that proviso. Firstly, it has to be noted that the proviso cannot be disconnected from the enactment it follows and has to be read together with it. In other words, a proviso does not travel beyond the provision for which it is a proviso.[vi] This is because it is assumed that the legislature would not have added a proviso under a Section if that proviso had nothing to do with the Section. Therefore, since the proviso in Section 230(4) follows the procedure for voting, the proviso cannot be disconnected from the voting procedure. Secondly, the proviso is made as an exception to something out of the enactment or to qualify something enacted therein which would otherwise be outside the purview of the enactment.[vii] Furthermore, it has been stated that the cardinal rule of interpretation of a proviso is that the proviso only operates in the area of law encompassed by the main provision. It creates an exception to the main provision under which it operates and no other.[viii] Therefore, it is only natural to interpret that the main enactment, i.e., the voting procedure is to be followed in most cases, but in special cases when that voting procedure fails to address the concerns of the shareholders or creditors, then objections may be filed. Thirdly, the proviso cannot swallow the general rule. [ix] Which means that even if there is an exception to the voting procedure, i.e., filing of the objections, that exception cannot be used to wholly subvert the procedure established to get a scheme approved by a meeting of creditors or shareholders. The scheme that emerges from the interpretation of the locus standi provision is that a voting procedure has to be adopted, which would be a tool to address concerns of shareholders and creditors for which they might object and when that procedure fails to achieve its purpose of addressing the concerns, then special circumstances arise where objections may be filed before the NCLT. Additionally, since the proviso cannot swallow the main enactment, thus the power to file objections is to be read as a power which does not exist as a right and can only be materialized when the main enactment fails its purpose, i.e., when voting fails to address the concerns of the shareholders and creditors. Such an approach would also be in line with expediting the process of approval of a scheme or compromise, since it would eliminate any possibilities of the involvement of the NCLT in addressing the concerns of the shareholders and creditors, when that can be done by the company itself. This would not only benefit the company, but would also reduce the burden on the tribunals. This approach would also synchronise the legislative policy with regard to filing of objections since the NCLT regularly takes into account the chairman’s report of the meeting of

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Reinstatement of Mr. Cyrus P. Mistry: Analysing NCLAT’s Contested Order

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[By Prakhar Khandelwal] The author is a third year student of National Law Institute University, Bhopal. The National Company Law Appellate Tribunal’s (“NCLAT”) order dated 18 December 2019 (an appeal against which is pending before the Supreme Court) directed Tata Sons to reinstate Mr. Cyrus Pallonji Mistry as their Executive Chairman of the Board and as a director on the boards of Tata Sons and other group companies. Under Section 244 of the Companies Act, 2013 (“Act”), a waiver for an application under Section 241 of the Act was granted to Mr. Mistry, on account of Shapoorji Pallonji Group’s investment of Rs.1,00,000 crores out of total investment in Tata Sons’ of Rs. 6,00,000 crores. Subsequently, the application was accepted under Sections 241 and 242 of the Act alleging prejudicial and oppressional acts of the majority shareholders (The Tatas). Mr. Mistry then moved the NCLAT, Delhi Bench against National Company Law Tribunal’s (“NCLT”) order pronounced in favour of the Tata Sons. The Board of Directors (“BoD”) of Tata Sons includes 9 directors (1 Executive Chairman, 3 Nominee Directors nominated by Tata Trusts and 5 independent directors), which takes decisions by the way of a majority. The Tribunal adjudicated on various points of contention: A.       Legitimate Expectations The counsel for Mr. Mistry (Appellants) contended that there has been a pre-existing relationship for over 50 years, based on mutual trust and confidence between SP Group and Tata Group, on business as well as personal levels. Such a non-formal relationship, which is a result of “factors outside of pure economic factors”[i], results in a “legitimate expectation of being treated in a mutually just & fair manner.”[ii] The Tribunal concurred with Tata’s contention that the concept of ‘legitimate expectation’ is not recognized under Sec.241 and 242 of the Act and therefore not applicable to the instant case. B.       Affirmative Voting Power akin to Veto Right  The appellants further contended that Articles 121 & 121A of the Articles of Association (AoA) of the company confer affirmative voting power to the Nominee Directors on the Board, subject to the condition that such a decision is required to be taken by a majority of the Board. This, in essence, gives veto power to the Nominee Directors, and indirectly to Tata Trusts in every decision of the Board.  Before the Tribunal, even Mr. Ratan N. Tata and Mr. N.A. Soonawala themselves took a specific plea that Articles 121 and 121A mandated a ‘prior consultation’ and ‘pre-clearance’ from them.[iii] The Tatas contention that a mere affirmative right, which is permissible by law, does not constitute veto Power as it does not confer any special rights to ensure Board approval was discarded by the Tribunal on account of their vote’s indispensability in all matters. C.       Reasons for Removal The removal of Mr. Mistry was inter alia linked to his alleged lack of performance which had never been deliberated upon by the BoD prior to his removal, as evidenced by the minutes of various meetings placed on record. Three months prior to his removal, the Nomination and Remuneration Committee(“NRC”)formed under Section 178 of the Act which also included a nominee director of Tata Trusts to the Board had lauded his performance and recommended a pay hike to Mr. Mistry. The recommendation was unanimously endorsed by the BoD. The Appellants contended that sudden removal of Mr. Mistry on the alleged ground of ‘lack of performance’ was a result of Mr. Mistry’s inquiries into legacy hotspots and the subsequent decisions made by him for the benefit of Tata Sons, instead of the Tata Trusts (held by the Tatas). The NCLAT accepted the submission that Mr. Mistry’s alleged lack of performance had indeed never been discussed or deliberated upon prior to his removal. D.       Lack of independent judgement Under Section 166 of the Act, the Directors are under a fiduciary duty to be independent in their judgement. The Tribunal held that a stark change in the Board’s opinion pertaining to the performance of Mr. Mistry within three months from the recommendation of the NRC clearly shows that the judgement was influenced by the majority shareholder i.e. Tata Trusts. The Tribunal also recognised the existence of a lack of clarity in the decision-making process of the Board as was evident from the email exchanges between Mr. Mistry and Mr. Tata. E.       Public to Private Company The Tribunal held that before the filing of the instant appeal, the conversion of Tata Sons from a public to a private company in accordance with General Circular No. 15/2013 dated 13.09.2013 and Notification dated 12.10.2013 cannot override the substantive provisions of Section 14 of the Act mandatorily requiring Tribunal’s approval for such conversion from public to private company. Thereby, such fiction of ‘deemed conversion’ was held to be illegal and in contravention with law. Analysing the decision of NCLAT A.       Corporate Democracy vs. Corporate Governance The Supreme Court of India in LIC of India v. Escorts Ltd. upheld the sovereign prerogative of the company along with its shareholders to appoint or remove a director from office without an obligation to provide reasons for their removal under ‘Corporate Democracy’.[iv] It further upheld the ratio in Ebrahimi case[v] wherein the Supreme Court recognised the absolute right of general meeting to remove the directors.[vi] Under principles of Corporate Governance, the Board is accountable to the shareholders. Corporate Governance is, therefore, corollary to the concept of corporate democracy. The procedure followed for removal of Mr. Mistry was in compliance with the provision of the AoA of Tata Sons. Such a decision by the BoD and shareholders of the Company regarding its matters of internal corporate affairs are governed by principles of ‘Corporate Democracy’ and cannot be superseded by the way of judicial interference B.       The supremacy of Articles of Association A company’s AOA definesa company’s nature, objective and forms part of the company’s constitution along with the MoA. In World Phone India Pvt case, the Shareholder’s Agreement conferring affirmative rights was held to be non-binding on the company and its shareholders

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The Curious Case of Post-Award Interim Measures

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[By Mrudula Dixit] The author is a fourth year student of Symbiosis Law School, Pune. Introduction There are a few peculiar provisions in the Arbitration and Conciliation Act, 1996 (“Act”)[i] which stand out for instance Section 9 of the Act. Section 9 states that an interim measure can be granted by a court before, during or after making of the arbitral award at the instance of the party making an application. Section 9 is different in one aspect – it allows for the grant of an interim measure after the pronouncement of the final arbitral award as well. The parties can apply under Section 9 after the final award is granted but before it is enforced as per Section 36 of the Act.  This provision in the Indian law is a deviation from the UNCITRAL Model Law on International Commercial Arbitration which does not contain any post-award interim measure. Thus, in India, the parties have been granted a small window of opportunity to effectively secure their award or protect their interests. Further Section 36 of the Act clarifies that when the time for making an application to set aside the arbitral award under Section 34 has expired [i.e 3 months from the date of announcement of the award], then such final award can be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (‘Code’).[ii]  Though this part of the provision has been explicitly included in the impugned Section, its interpretation and practical application remains controversial. Recently, in November 2019, the Supreme Court made certain observations on this aspect in the case of Hindustan Construction Company Limited & Anr v. Union of India (‘HCC’).[iii] Here the primary question for consideration was whether Section 87 of the Act is liable to be struck down as ‘manifestly arbitrary’. Section 87 of the Act states that amendments made to the Act by the Arbitration and Conciliation (Amendment) Act, 2015 would not apply to court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings were commenced prior to or after commencement of 2015 Amendment Act. What is of relevance for the purpose of this Blog is not the wider question of law posed before the Apex Court but rather an ancillary observation made by Justice Rohinton Nariman in the judgment. He accepted the ratio previously laid down in two cases before the Bombay High Court and succinctly stated that Section 9 allows a party to secure the final arbitral award via an application for interim measure.  In view of the decision, this Blog aims at summarizing the jurisprudence of Section 9 and post-award interim measures. Further, it also seeks to analyse its implications of the same on Sections 34 and 36 of the Act. Jurisprudence As mentioned above, in course of the judgment, Justice Nariman made certain remarks about the interpretation of Section 36 of the Act. He carefully delineated the nexus between Sections 9, 34 and 36 before concluding that Section 36 does not prohibit grant of stay of a money decree under the Code. As he elucidated the scope of Section 9, he relied on a pivotal case, namely Dirk India Pvt. Ltd v. Maharashtra State Power Generation Co. Ltd. (“Dirk India“).[iv] Dirk India was the first judgment to bolster the legislative intent of granting an ‘interim’ relief at a post-award stage. The Bombay High Court was faced with the issue of determining whether a party which has lost in an arbitral proceeding can make an application under Section 9 post-award. Justice Chandrachud reiterated the words of the Section 9 and held in paragraph 12 that; ‘When [interim relief is] sought after an arbitral award is made but before it is enforced, the measure of protection is intended to safeguard the fruit of the proceedings until the eventual enforcement of the award. Here again the measure of protection is a step in aid of enforcement. It is intended to ensure that enforcement of the award results in a realisable claim and that the award is not rendered illusory by dealings that would put the subject of the award beyond the pale of enforcement.’ The decision made by the court in Dirk India effectively meant that post-award interim measure can only be sought by an Award–Creditor and not by the Award–Debtor. Dirk India was relied upon by Justice G.S Kulkarni in March 2019, in the case of Mahyco Monsanto Biotech (India) Pvt. Ltd. v. Nuziveedu Seeds Ltd.[v] The Petitioner in this case had made an application under Section 9 of the Act after he had succeeded in his claim before the Arbitral Tribunal. The tribunal, by majority, had granted the petitioner a sum of Rs. 117 Crores which the petitioner wished to secure before enforcement under Section 36. Justice Kulkarni relied heavily on Dirk India and held that the law is set in that regard. He reiterated the settled position by stating that post-award interim measures ensure that the award is not illusive or avoidable. The position laid down in these two cases of the Bombay High Court have been reinforced by the Supreme Court in HCC. Analysis of the judgments    The observations of the Author are: When an Award–Creditor approaches the court under Section 9 to secure the award, it acts on a presumption that the Award–Debtor will prefer an application to set aside the arbitral award under Section 34 of the Act. Moreover, when Section 34 is read together with Section 36, an arbitral award cannot be enforced until and unless the 90 days’ period expires or the application under Section 34 has been duly disposed of. Because of this obvious paradox, the pre-emptive right to secure the award, bestowed upon the Award–Creditor by the interpretation of Section 9 in Dirk India, is likely to prejudice the party affected by the arbitral award as it takes away its 3-month window given by law. As a way of a corollary, the ‘remedy’ under Section 34(4) which gives power to

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

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

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

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

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

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

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Resolution of Financial Institutions under IBC Regime: What Next?

Leave a Comment / Insolvency Law /

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

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

Leave a Comment / Insolvency Law /

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

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The Culpability of Telecom Sector Crisis?

Leave a Comment / Contemporary Issues /

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

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