Author name: CBCL

Invocation of Bank Guarantees: Conflicting Opinions Adding to the Uncertainty

Leave a Comment / Banking Law, Uncategorized /

[By Talin Bhardwaj] The author is a student at Rajiv Gandhi National Univerisity of Law, Patiala. Introduction: Bank guarantee is a type of guarantee under section 126 of the Indian Contract Act, 1872 (“ICA”) in which the bank becomes a guarantor to reduce the risk in a commercial transaction between parties. The Supreme Court in various cases while considering the judgments given by the Courts of the United Kingdom (“UK”), has held that the invocation of bank guarantees ideally should not be restrained as it may act as a detriment to trust in internal and international commerce. However, the Supreme Court, at the same time, through various judgments has also held that the invocation of bank guarantees may be restrained in two cases: Firstly, in cases of egregious fraud which vitiates the entire transaction and secondly, in cases where there is a risk of an irreparable harm/injustice to one of the parties. These grounds were in furtherance to the judgments given by the courts of the UK and the USA.  Additionally, the High Court of Calcutta in the case of Texmaco Ltd. v. State Bank of India & Ors. added a condition of “special equities” for restraining the invocation of bank guarantees. The condition of “special equities” was to be considered as a measure for providing relief to the parties due to the harm suffered in exceptional circumstances and was also accepted by the Supreme Court recently in the case of Standard Chartered Bank v. Heavy Engineering Corporation Ltd. These conditions have become particularly pertinent in light of the catastrophic financial distress brought about by the COVID-19 pandemic. The Delhi and the Bombay High Courts have presented conflicting opinions on whether COVID-19 can act as ground under “special equities” to restrain the invocation of bank guarantee in recent times. The author through this article seeks to analyze the conundrum posed by the recent judgments and provide some clarity on the question of whether COVID-19 constitutes a valid ground for restraining the invocation of bank guarantees. The saga of conflicting judgments: As mentioned earlier, both the Delhi and the Bombay High Court have presented diverging opinions on whether COVID-19 could act as a ground for the court to restrain the invocation of bank guarantee. The Bombay High Court in the case of Standard Retail Pvt. Ltd. v. GS Global Corp. & Ors., denied granting an injunction to restrain a party from invoking the bank guarantee. On account of the financial impact of the pandemic, the petitioners contended that the commercial contracts that were entered between the parties were frustrated, and thereby, the encashment of the bank guarantees should be prohibited. The Bombay High Court, however, refused to restrain the respondents from encashing the letters of credit and the bank guarantees even in the circumstances emanating from COVID-19, majorly due to the nature of the contract. On the contrary, the Delhi High Court in the case of M/S Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. restrained the encashment of eight bank guarantees due to the pandemic. The parties entered into a contract for the construction of walls. On account of certain differences arising between the parties pertaining to the completion of the project, the petitioner moved to the Delhi High Court pursuant to section 9 of the Arbitration & Conciliation Act, 1996. The petitioner claimed that COVID-19 had adversely affected the completion of the project as a nation-wide lockdown was announced by the government to tackle the transmission of the virus, which consequently led to a shortage of labor due to their migration. The Delhi High Court, in consonance with the Standard Charted Bank judgment, upheld that special equities and irretrievable harm are two separate grounds on which the court can interfere with the encashment of a bank guarantee. The court, while reviewing the facts and circumstances of the case, finally came to the conclusion that the unprecedented circumstances brought about by the pandemic would validly constitute “special equities”, which thereby, entitles a party to seek interim relief for restraining the invocation of bank guarantees. Increasing complications to an already persisting conundrum: The verdict of the Delhi High Court in the case of Indirajt Power Private Ltd. v. Union of India & Ors. has added fuel to the already persisting conundrum. In the present case, the petitioner was assigned the responsibility for the completion of a thermal project. The petitioner thereby, contended that due to the adverse circumstances brought by the pandemic, the court should stay the invocation of the bank guarantees, in furtherance to the judgment given by the court in the M/S Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. case. The Delhi High Court in this case noticed that the project was to be completed in April-May 2018 and was repeatedly delayed by the petitioner. On these grounds, the court held that the petitioner cannot be entitled to an interim relief on the ground of “special equities”. Further, the court while relying on the judgment of Umaxe Projects Private Limited v Air Force Naval Housing Board & Anr., held that the court shall not interfere in the case of encashment of bank guarantees even if a party would suffer damages unless these damages are irreparable. Recently, the opinion of the Delhi High Court again oscillated in the case of Technimont Pvt. Ltd. & Ors. v ONGC Petro Additions Ltd., whereby, it restrained the respondent from encashing the bank guarantees because of the pandemic and due to the fact that these guarantees remain valid for a period till December 2020 which shall balance the interests of both the petitioner as well as the respondent. Understanding the juxtaposing Delhi High Court judgments: A closer look at the initial two juxtaposing judgments of the Delhi High Court has clearly made the applicability of the “special equities” more complex to understand. Both the cases involved the completion of a project in which the deadline for completing the project was much before the outbreak of the pandemic and thereby, time

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Nascent Acquisitions Turning into Killer Acquisitions – A Potential Competitive Threat

Leave a Comment / Competition Law /

[By Pragya Dixit] The author is a student at ILS Law College. Introduction In contemporary times, it is an evidentiary fact that the core stimulus of any economy is its Nascent firm industry. It is an industry that is a representative of new and developing ventures by novice entrants to bring new operations, products, and value addition into the market. They are a hub of fresh talent, ideas, disruptive innovation, and with their non-conformist approach, they become a flag bearer of evolution and development in the industry.  But what makes their existence all the more crucial is their role in maintaining balance and healthy competition in the market. They do so, by breaking into the concentrated markets and forcing the incumbent firms to either keep up with the innovations to co-exist or accept defeat in the race of competition and exit the market. As significant as their presence is for the market, it surely acts as a hurdle for the incumbent dominant firms, as they are a source of potential future threat for them. It is this fear and threat which persuades existing firms to engage in acquisitions of such novice firms. Nascent Firm Industry a Threat – But Why?  The most prominent reasons for the companies to perceive this industry as a threat are:- The Nascent firms are in a position to accrue various benefits from the government in the form of subsidies, tax cuts, etc, which gives them an advantage over others to develop. They generally possess such technologies that have the potential to knock down an entire line of product of a dominant player. Also, their gradual entry into market space takes away the consumer base of the incumbent players. Thus, contributing to monetary losses. The above-mentioned factors inter alia lead to an undesirable increase in the competition in the market for the incumbent firms. Sometimes, it also results in their complete elimination. So, as a way out, the dominant firms adopt the practice of acquiring such firms. This practice not only helps them in lessening the future competition but it also provides them with added benefits by giving them access to the resource bank of the target firm. Thus, this practice is widely followed and for some time now we have seen a surge in another trend, where Nascent Acquisitions are turned into “Killer Acquisitions”. What are “Killer Acquisitions”?  In such cases not only the competitor is killed but also the product. Hence, it is detrimental to both market competition as well as consumer welfare. The most common reasoning used behind Killer Acquisitions is that the big firms find it more convenient to buy and shut down a new firm rather than carrying on with it at a risk of putting the sales of its own product in danger or suffering a loss of revenue that it was expecting to earn from the sale of the product that it might substitute. Every industry has the potential for such acquisitions but the major prey are the firms that are specifically acquired for their potential know-how or technological advancements like pharma industries and digital markets. In a study report of  Cunningham et al(2018), it has been found that 6% of the acquisitions that take place in the pharmaceutical industries with drug projects are Killer Acquisitions. An example of such acquisition in the United States was the “acquisition of a pharmaceutical firm Mallinckrodt by Questor, who was a dominant player in the category of ACTH drugs(with its product named Acthar). In the mid-2000s, the Mallinckrodt started working on the development of a new synthetic called Synacthen, having the potential of being a direct competitor to Acthar. Sensing this threat, in 2013 Quesctor acquired the US development rights in Synacthen and followed the path of killer acquisition, acquired Mallinckrodt rights, and did not develop Synacthen at all”. The same adverse impact can also be seen in the purchase of US-based Newport Medical Instruments by Covidien, which is an established ventilator manufacturer, used in cases of viruses like flu or Covid-19. In 2010, Newport received a tender from the US government to produce ventilators for any future emergency that may arise. But, in 2012 when Covidien acquired Newport, they reached out to the government citing the reasons they needed extra funding for the completion of the deal. Later, in 2014, they rescinded the contract on account of unprofitability from the deal,  and the government had to later award the deal to Philips. This single act of Covidien delayed the supply in general, we can see its impact on the masses. The situation in cases of digital Market are no better, In 2020, a study by the world-famous researchers showed that recently companies like Google, Amazon, Facebook, and Microsoft are engaged in some 175 acquisitions, out of which 105 brands of the target firms were discontinued within a year. What Measures Does India Have In This Regard? In India, competitive matters related to acquisitions are dealt with under the Competition Act. But the competition law regime of our country is inadequate in deterring such acquisitions. Currently, only the acquisition of shares that meet the monetary and asset level thresholds which are mentioned in section 5 of the Competition Act is needed to be mandatorily notified to the CCI. The nascent acquisitions are way beyond such prescribed limits. Thus, these limitations make the scrutiny of such acquisitions impossible. Does “Competition Amendment Bill, 2020” Offer a Solution? In 2018, the government set up the Competition Law Review Committee (CLRC) to review the competition act. Committee in its report while deliberating over the issue of acquisitions in the digital markets, opined that the business models in the digital world are asset-light and have lesser turnovers, thus they easily escape the radar of the competition authorities. These regulatory gaps are a major lacuna and somehow leave a place for anti-competitive activities to flourish. Thus, there is a need for stringent regulations. With this thought in mind, the amendment bill proposed to provide powers to the

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Decoding the SEBI (Investment Advisers) (Amendment) Regulations, 2020

Leave a Comment / Capital Markets and Securities Law /

[By Deepanshu Agarwal] The author is a student at the University of Petroleum & Energy Studies (UPES), Dehradun In July 2020, the Securities & Exchange Board of India (SEBI) notified the Investment Advisers (Amendment) Regulations to bring some regulatory changes to the Investment Advisers Regulations, 2013 (the Regulations). SEBI received a plethora of complaints from the investors regarding the malpractices done by the investment advisors (like charging excess fees, making fake promises for higher returns, non-disclosure of the complete service fee, extracting money in the name of various charges) due to which it became necessary to bring these changes. Thus, the main objective behind this new regulatory amendment is to give primary importance to the interest of investors over the interest of the investment advisors (IAs). As per regulation 2(m) of the  Regulations, ‘investment adviser’ means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons and includes any person who holds out himself as an investment adviser, by whatever name called. Investment advice in this regard means advice relating to investing in, purchasing, selling, or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products for the benefit of the client (regulation 2(l)). Putting it in simpler terms, investment advice means advising the client regarding the best suitable investment options he can avail, by looking at his risk appetite and long term goals. With this backdrop, this post analyses the key highlights of the new amendment brought by SEBI and the way it affects the advisory market in India. Segregation of Advisory and Distribution Services Advisory service refers to the investment advice given by the IAs to the clients, whereas distribution service refers to making a product (or a scheme) available to the clients. Prior to the amendment, individual and partnership firms were not allowed to provide distribution service along with the advisory service. Only banks, NBFCs, and corporate entities (Non-individual entities) were authorized to do so subject to the condition that the IA shall maintain an arms-length relationship between its activities as an investment adviser and distribution services. This had to be achieved by ensuring that in such cases, the investment advice is given through the Separate Identifiable Division or Department (SIDD). According to the new amendment in Regulation 22 of the Regulations, non-individual entities are now required to segregate the advisory and distribution services at the client level itself. This means that even though such entities have different departments for both the advisory and distribution services, they cannot provide both of these services to a single client. An Individual adviser, on the other hand, shall have the option to register as an IA or provide distribution service as a distributor. This change brought by SEBI is a positive step towards ensuring the protection of investors. An investment adviser should act in the best interests of his/her/their clients when providing advisory services and should disclose to the client any actual or potential conflicts of interest. Due to the multiple roles played by the entities, it was necessary to segregate both the activities so as to minimize any such conflicts. This segregation will ensure the availability of complete information with the clients and the same may result in informed investment decisions by them. Moreover, there may be cases where the IAs distribute products on which they could earn higher commissions, thus leading to a serious conflict of interest with the client’s goals. In such cases, the advice given by the IAs may not be in the best interest of its client. Therefore, in order to tackle this issue arising out of the dual roles played by the IAs (both as adviser and distributor), it was imperative to segregate both the activities. No Consideration for Implementation Services Prior to the amendment, it was observed by SEBI that the IAs were charging extra consideration from the clients in the name of implementation (execution) fees. This practice followed by the IAs has been banned by SEBI. Now, the IAs are allowed to provide the implementation services only through direct schemes/products, without charging any consideration for the same. Agreement Between Investment Adviser and Client Unlike the erstwhile regulations, the requirement of an advisory agreement between the client and the adviser has been made mandatory by the new amendment. This will make the clients aware of the terms and conditions, provide transparency in the process, and would also ensure that the clients are able to prove their claim and exercise their rights with much ease. Fees As per the code of conduct specified under the Regulations, the IAs were required to charge a fair and reasonable fee for the advisory services given to its clients. There was no cap upon the fees to be charged and thus the amount of ‘reasonable fee’ was kept subjective. Thereafter, SEBI received more complaints from the investors regarding exorbitant fees charged by the IAs. In order to solve this issue, SEBI has prescribed two ways to calculate the amount of fees. IAs can charge either 2.5% of ‘Asset under Advice’ (AUA) or a fixed fee of INR 75,000 per annum. As per the regulation 2(aa) inserted by the new amendment, AUA means the aggregate net asset value of securities and investment products for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by an investment adviser or concluded by the client directly or through other service providers. Practically, this model is very difficult to follow. There are certain portfolios that contain high-risk products that require more skills and essential time to provide any investment advice. These cases are to be treated differently, and therefore, fixing a maximum ceiling to be followed in every case may not be a good option. Net Worth Before the amendment, the IAs which are body corporate were required to have a net worth of not less than twenty-five lakh rupees and IAs who are individuals were required to have

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An Analysis Of NCDRC Rulings on Insurance of Lifestyle Diseases

Leave a Comment / Contemporary Issues /

[By Koshy Mammen and Shabna Stephen] The authors are students at Jindal Global Law School. Introduction In the case of Neelam Chopra v. Life Insurance Corporation of India (2018) handed down by the National Consumer Disputes Redressal Commission (“NCDRC”), it was settled that common lifestyle diseases cannot be a ground to repudiate insurance claims. The petitioner’s husband, who was suffering from diabetes for the past 3-4 years, issued a life insurance policy in 2003 from LIC. However, while filling the proposal form, he failed to report his disease. He died of a cardiac arrest, non-related to diabetes, in 2004. The NCDRC was of the opinion that even though the insured was diagnosed with diabetes, the disease was under control at the time of filling up of the proposal form. Consequently, the apex commission concluded that the non-disclosure of information regarding common lifestyle diseases such as diabetes, will not totally disentitle the insured from claiming the policy amount and may only suffer a reduced claim amount. This judgment was relied on by NCDRC as a precedent in several cases including the recent Reliance Life Insurance Co. Ltd. v. Tarun Kumar Sudhir Halder (2019) to decide that diabetes is a lifestyle disease in India and the entire of an insurance claim cannot be rejected only based on its non-disclosure. In light of these judgments, this article advances the argument that the NCDRC has made an apparent error in the primary precedent case – Neelam Chopra v. LIC. The crux of the issue before the NCDRC in the case was whether the fact that the insured was suffering from diabetes at the time of taking out the policy was “material fact”. And on account of non-disclosure of this fact in the proposal form, whether the insurance company was justified in avoidance of the insurance contract. By going through the established principles of insurance law, the failure of the NCDRC to notice certain nuanced aspects of insurance law in Neelam Chopra v. LIC is highlighted. Duty of Utmost Good Faith According to Section 19 of the Marine Insurance Act, 1963, an insurance contract is a contract of utmost good faith, and if good faith is not observed by either party, the contract may be avoided. The duty of utmost good faith was aptly summarized in Carter v. Boehm (1905) and reiterated in several Indian judgments in the following words: – “The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured only and the underwriter trusts to his representation…Good faith forbids either party, by concealing what he privately knows…” Thus, it needs little emphasis that when required in the proposal form, the insured is under a solemn obligation to make a true and full disclosure of all information, which is within their knowledge. Applying this doctrine to the case in the discussion, the insured did not disclose the fact that he was suffering from diabetes in the medical history section of the proposal form. Therefore, it would appear that there is a violation of the duty of disclosure by the insured. Material Fact The next issue for consideration would be as to whether diabetes for the past 3-4 years was a “material fact” for the purpose of a life insurance policy. Section 20 of the Insurance Act, 1938 states that every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether they will take the risk. The term “material fact” has been further explained in Pan Atlantic Insurance Co v Pine Top Insurance Co (1994), relied on in several Indian cases, as any fact which goes to the root of the contract of insurance and has a bearing on the risk involved. Whether or not a fact is material, is a question of fact. The question does not depend upon what the insured thinks or even what the insurer thinks, but whether a ‘prudent and experienced’ insurer would be influenced in their judgement if they knew it (The Prudent Insurer Test). Further, in Satwant Kaur Sandhu v New India Assurance Co Ltd  (2009), it was emphasized that any inaccurate answer will entitle the insurer to repudiate his liability because there is a clear presumption that any information sought for in the proposal form is material for the purpose of entering into an insurance contract. Applying this to the case at hand, all past and present health of the insured is a material fact as no prudent insurer would underwrite the life of a person with diabetes and without diabetes, on the same terms. Diabetes adversely affects the chances of longevity of the insured and the insurance company in the case was unable to assess the real risk as all facts were not disclosed. Further, any contention that the insured was medically examined by a panel of doctors authorized by the insurance company has no merit since this is a standard procedure that happens in all cases. It cannot be employed as an excuse to absolve the duty on the insured to disclose material facts. Therefore, the fact that the insured had diabetes is unquestionably a material fact as any prudent insurer would take this into account when assessing the risk. Suppression of Material Facts The next issue is whether the non-disclosure tantamount to suppression of material facts enabling the insurance company to repudiate its liability under the policy. It would be impossible to contend that the insured was not aware of the fact that he was suffering from diabetes, more so when he was diagnosed 3-4 years back. His diabetes was a material fact and answers given in the proposal form were definitely factors that would have influenced and guided the insurance company to enter into the contract of life insurance with the insured. Judged from any angle, the statement made by the insured about his disease in the proposal form was palpably untrue to his knowledge. There was clear suppression of material facts regarding his

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Corporate Board Gender Diversity in the Shadow of the Controlling Shareholder

Leave a Comment / Company Law, Contemporary Issues, Guest Posts /

[By Dr. Akshaya Kamalnath] The author completed her graduation from NALSAR University of Law, Hyderabad, and her post-graduation from New York University (NYU). The author is currently a lecturer at Auckland University of Technology, Law School, New Zealand. Dr. Kamalnath runs a blog named The Hitchhiker’s Guide to Corporate Governance which can be accessed here. In an article co-authored with Professor Annick Masselot, I examined corporate board diversity in the Indian context. In this blog post, I will introduce some of the arguments in the article and build on them with ideas from other articles. India introduced a mandatory quota that requires companies to have at least one woman director on their board of directors in 2013. Since then, India’s market regulator, Securities Exchange Board of India (SEBI) has required listed companies to have at least one woman director who is also an independent director. In terms of numbers, the percentage of women on boards rose from 5.5% in 2010 to 12. 7% in 2017. But do these numbers have the potential to improve corporate governance? Corporate board gender diversity has been canvassed for two reasons – business benefits and gender equality. The most convincing reason for board gender diversity to yield better results seems to be that diverse boards are more effective monitors of management. In other words, the corporate governance case is the most convincing aspect of the business case. Drawing from the analogy of independent directors who are meant to improve corporate governance, we focused (in the article) on the effectiveness of board gender diversity as a corporate governance measure in India. Since controlling shareholders influence board nominations, independent directors in India are not likely to be effective monitors. Some reputed directors have also pointed out that even where independent directors take their monitoring role seriously, the problem is that management does not share adequate information with them. While this is also a problem in countries like the US, the concentrated ownership model makes information flow even more challenging. Could gender diversity be one way in which the structure of the independent director institution is enhanced? Studies in various countries have shown that gender diversity does indeed enhance board functioning in terms of board processes. There could be gains even beyond just enhanced board processes. A recent news article reported Biocon’s Biocon, Kiran Mazumdar-Shaw recounting her experience on a company board which was dealing with a sexual harassment complaint lodged by an employee: “The men on the board, she says, described the complaint as “silly”, “rubbish” or “an exaggeration”. Mazumdar-Shaw says it took her, a woman director, to object to this “flippant” approach, put her foot (down)”. Despite Mazumdar-Shaw’s story having a happy ending, it is not easy for a single board member to change the board culture or even quality of decisions. We have to rein in our expectations in terms of what can be achieved by one woman director on the board. The controller dominated firm structures means that we cannot expect too much from independent directors, let alone a single women director. Further, the mandatory law means that in many cases, companies are merely appointing women directors to comply with the law rather than to enhance board processes and governance. Such a lack of genuine motivation to improve governance would impose a burden on the incoming women directors in terms of having to deal with an unwelcoming board. Ultimately, solutions to improve corporate governance, including board culture, should go beyond a requirement for companies to appoint one woman independent director.

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Right of Subrogation Under IBC: Impact on Market

Leave a Comment / Banking Law, Insolvency Law /

[By Gopal Gour] The author is a student at Maharashtra National Law University Mumbai. Introduction Guarantees play a pivotal role in any commercial transaction because the parties prefer to be secured if the other party fails to perform its obligation. For example, in a loan transaction between A & B; C stands as a guarantor of B, ensuring the repayment of the loan if B defaults. Guarantee is purely a contractual arrangement between/among the parties, and it can be drafted according to the transaction and needs of the parties. However, there are certain principles enshrined under the Indian Contract Act, 1872 (‘Contract Act’) that protect the rights of both, the parties, and the guarantor. Anything done, or promised to be done, in favour of the party is a sufficient consideration for the guarantor.[1] Further, the surety/guarantor is subrogated to all the rights of the creditor against the principal debtor viz. the guarantor steps into the shoes of the creditor, and is entitled to enforce all the securities that the creditor has against the borrower, on whose behalf the payment is made.[2] Recently, the issue of subrogation came to be discussed in the cases of Insolvency and Bankruptcy Code, 2016 (‘IBC’), wherein the right of subrogation was denied to the guarantor. In the very celebrated case of Essar Steel, followed by many, the Apex Court approved the resolution plan which denied the rights of subrogation to the guarantors. Subrogation is a right of equity and natural justice. Even though the Courts have been justifying the denial of right of subrogation citing cogent reasons, it is unjust on the part of the guarantor; besides, the principle borrower gets unjustly enriched in this set-up. This article discusses the concept of ‘Equitable Subrogation’ with the help of foreign jurisprudence, and analyses the impact of such denial of the right of subrogation of the guarantor on the Indian credit market. Right of subrogation under IBC It is established that the approval of the resolution plan and consequent extinguishment of the liabilities of the Corporate Debtor does not absolve the guarantor of its liability under the Contract Act.[3] The primary reason for this is that the discharge of Corporate Debtor’s liability is through the operation of law as the same is stemming from the proceeding under the Insolvency and Bankruptcy Code.[4] Now, once it is established that the guarantor is still liable to pay the principle creditor even though the Principle Borrower (Corporate Debtor) is absolved, the question of the right of subrogation surfaces naturally. The right of subrogation is an equitable and natural right of the guarantor against the Corporate Debtor on whose behalf he has paid the money. In the Essar Steel[5] case, the creditors of the corporate debtor sought to invoke the guarantees given for the remainder amount, after receiving the haircut amount through the Resolution Plan.[6] In the said case, the Supreme Court relied upon SBI v. V. Ramakrishnan[7] and held that the guarantor’s liability remains intact even after the approval of the resolution plan.[8] Further, the Court approved the resolution plan that rest the guarantors devoid of their right of subrogation and did not hold anything substantial, backed by reasoning in this regard. In the case of Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd. & Ors.[9], the NCLAT discussed the issue of subrogation when the promoters, who were also the personal guarantors, sought to claim the right of subrogation under section 133 and 140 of the Contract Act. The NCLAT held that the resolution under IBC is not a recovery suit, and it was not the intention of the legislature to benefit the ‘Personal Guarantors’ by excluding the exercise of legal remedies available in law by the creditors, to recover legitimate dues by enforcing the personal guarantees, which are independent contracts. Further, NCLT Mumbai in the case of State Bank of India v. Calyx Chemicals & Pharmaceuticals Limited[10] and IDBI Bank Ltd. v. EPC Constructions India Limited[11] again approved a resolution plan that had not given the right of subrogation to the guarantors of the Corporate Debtor on whose behalf the payment was made. Subrogation: An Equitable Right The surety paying off a debt shall stand in the place of the creditor and have all the rights which he has, for the purpose of obtaining reimbursement. This rule here is undoubted, and it is founded upon the plainest principles of natural reason and justice.[12] Subrogation rests upon the doctrine of equity and is a settled common law principle.[13] In the case of Kundanmal Dabriwala v. Haryana Financial Corporation and Ors.[14] the High Court of Punjab & Haryana discussed the liability of the surety where the liability of the Principle Borrower stands extinguished through a sanctioned scheme of arrangement under section 391 of the Companies Act, 1956. The Court absolved the surety of the liability on the ground inter alia that the surety cannot be placed in the shoes of the creditor i.e. cannot have the right of subrogation. This case becomes significant as it stresses the importance of subrogation right, in absence of which, the liability of the surety stands pointless. The foreign jurisprudence considers the right of subrogation as one of the ways to cure the ‘unjust enrichment’ under the law of restitution.[15] In the case of Swynson Ltd. v. Lowick Rose LLP[16] the UK Court discussed the equitable subrogation and unjust enrichment in the following words, Equitable subrogation as a remedy for unjust enrichment …It belongs to an established category of cases in which the claimant discharges the defendant’s debt on the basis of some agreement or expectation of benefit which fails.[17] … …The cases on the use of equitable subrogation to prevent or reverse unjust enrichment are all cases of defective transactions. They were defective in the sense that the claimant paid money on the basis of an expectation which failed.[18] … …What this suggests is that the real basis of the rule is the defeat of an expectation of benefit which was the basis of

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Re–Examining the Domestic Tax Scenario in a Pandemic (Part 2)

Leave a Comment / Contemporary Issues, Guest Posts, Taxation Law /

[By Mohit Gupta] The author is a PhD Researcher at Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi. To read Part 1 of the article, please click here. Now, if one talks about the indirect taxes in the country then there are various types of indirect taxes that were levied by Central Government and various State governments before the introduction of The Goods and Service Tax (GST), which are referred at the beginning of the discussion. However, the GST which came into effect on 1 July 2017, following the passing of The (Constitution 122nd Amendment) Bill, 2014 by the parliament of India, and an amendment to the constitution of India which changed the arrangement of powers of taxation between central and state government, and also subsumed a majority of then-existing centre and state-level taxes[1]. The need to re-examine the GST also stems from the fact that recently it completed three years of its implementation and the voices of unrest related to this tax reform are getting louder[2]. The key rationale for the introduction of GST was that it would broaden the tax base and remove the cascading effects of taxation. However, the realisation of these objectives was constrained by various facts which included; that the GST on a few important products like diesel, petrol, air turbine fuel, natural gas etc. were immediately not included in the scope of the GST at the time of its introduction while goods like alcohol for human consumption was kept out of the purview of the GST. The obvious reason was that GST took away the power to levy taxes like sales tax which are the single largest source of tax revenue for the states and the states were not ready to compromise on their autonomy to levy and collect the taxes on these goods immediately. This then takes to the debate between the apologists and critics of the GST around the issue of Efficiency Considerations with GST vs. Fiscal autonomy of the states. There were various reasons provided to support the efficiency rationale emanating from the implementation of the GST which included its ability to improve the competitiveness of the domestic industry in the international market, creation of a common national market for India, broadening of the tax base by expanding the coverage of economic activities and prevention of leakages from the system (Rao and Mukherjee, 2019). However, what has received less attention is the question that whether or not introducing GST was a desirable choice for a country like India where there are a federal structure and a lot of heterogeneity among states in their tax base. A few studies, at the time of introduction of GST, made a case against the introduction of this tax by pointing out the likely pitfalls of introducing this tax form – that it will significantly undermine the fiscal autonomy of the states in India, efficiency considerations were not the basis of its introduction in various jurisdictions around the world thereby cautioning against any attempt to transplant this form of tax from other jurisdictions and most importantly that it has not been adopted by the largest economy of the world with a federal structure- the United States of America (USA).[3] However, despite these cautions against the efficacy of GST in a country like India, it was adopted with haste in 2017. These concerns around the fiscal autonomy of the states getting compromised with GST have visibly surfaced over time and more cogently in the times of a pandemic. This is in so far as the central government and the state governments have now realised that with the introduction of GST – they are left with very limited or no space to manoeuvre around indirect taxation structure in emergencies like a pandemic; especially the resource-constrained state governments. Hence, when the revenues began to dry up because of the halt in economy induced by pandemic, both central and state governments levied hefty taxes on products which currently don’t attract GST – an increase in excise duty by the central government on petrol and diesel, increase in value-added tax and special cesses by state governments on petrol, diesel and alcohol for human consumption etc.[4] Following this surge in taxes, while one can always debate the case for an excess tax on alcohol because it is a sin good but an increase in taxes on fuel is surely not the desired way of filling the government coffers because the very nature of a regressive tax is to hurt the poor more and likely to push up food inflation as well. Further, the finance ministers of various states have now begun to echo the demand to overhaul the GST regime and finding out ways of increasing the revenue share of states in the GST[5]. Adding to the concerns of the state is also the fact that The Goods and Services Tax (Compensation to States) Act, 2017 that has assured states to protect revenue during the first five years of GST introduction (also known as transition period) is approaching its deadline in June 2022 and given the shortfall in GST collection and uncertainty associated with revenue on account of State Goods and Services Tax (SGST) collection, many states have approached the Fifteenth Finance Commission (FFC) for a possible extension of the GST compensation period by another three years, i.e., up to 2024-25 (Mukherjee 2020) and this was demanded even before the onslaught of the pandemic. The real conundrum here is that the centre may not have the fiscal space to provide the compensation beyond the transition period while states may suffer a major fiscal blow with the withdrawal of the GST compensation after the transition period. At the heart of all these developments lies a twofold  problem; one is that from the beginning GST debate abstracted away from the issues of intra-state disparity in its assumption of a uniform tax spread within the state in the projection of its potential gains, ignoring the structural constraints of intra-state

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Re–Examining the Domestic Tax Scenario in a Pandemic (Part 1)

Leave a Comment / Contemporary Issues, Guest Posts, Taxation Law /

[By Mohit Gupta] The author is a Ph.D. Researcher at Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi. There are various types of taxes levied by the government which can broadly be categorized into two categories – Direct and Indirect Taxes. Direct Taxes are those taxes for which the burden and incidence of the tax fall on the same person- that is the tax cannot be shifted by a taxpayer on some else and it includes takes on Income, Wealth, Corporation Tax, etc. On the other hand in the case of Indirect taxes, the burden, and incidence of the tax fall on different entities which imply that tax can be shifted by the taxpayer to someone else and includes central excise duty, Valued Added Tax (VAT), customs duty, Goods and Services Tax (GST), etc. In the case of direct taxes like Income tax there is usually an increase in the percentage of taxes with an increase in intervals of a threshold level of income which is known as ‘progressive rate of taxation; whereas Indirect taxes may have to be paid by customers on commodities which are consumed by rich or poor irrespective of their income levels (like VAT on petrol, diesel or GST on eatables like biscuits, butter, etc.) and thus an increase in indirect tax hurts the poor more compared to the rich making them ‘regressive taxes’. It is important to keep this otherwise obvious distinction in mind regarding the nature of taxes. It is based on this difference and other important factors that we argue that there is an urgent need to re-examine the domestic tax scenario in the country in order to meet the economic challenges posed by the recent Covid-19 pandemic. This is more so because supply bottlenecks notwithstanding, what is a grave problem currently is a demand constrained economy. Thus, there is an urgent need for an expansionary fiscal policy that can revive domestic demand by an increase in government expenditure; more so because there is a near collapse of all other domestic activity following a negligible expenditure by household and private sector (Ghosh, 2020). In these difficult times, an impetus for such a policy can come from raising the tax revenues alongside other measures, especially when the government is reluctant to raise its borrowing (to fund any extra government spending)  to adhere to its objective of keeping the fiscal deficit in check. However, it is another matter of concern that the obsession of the government of keeping ‘fiscal deficit to Gross Domestic Product (GDP)’ ratio in check by not increasing government expenditure in times of a pandemic is a flawed economic policy because an attempt to do so by suppressing government expenditure, in turn, will lead to lower GDP which implies a lower denominator value in fiscal deficit to GDP ratio and thus an increase in the overall value of deficit ratio even with similar expenditure (Chandrasekhar and Ghosh, 2020). Be that as it may, let us shift our focus back towards gauging at ways resorted by the government for raising the tax revenues in the present times while struggling to keep the deficit ratio in check. In the present discussion, we shall keep our focus on two of the important taxes of the government and the need to re-examine their levy in times of a pandemic. One of these is a direct tax (Corporation tax) and the other is an indirect tax (GST). In addition to these two taxes being the key contributor to the overall tax revenues of the government, the need for re-assessing and focussing on these two taxes, in particular, emanates from the fact that there have been some key developments around them recently which requires a re-examination which is pointed out in the ensuing discussion. First, if one talks about the direct taxes then taxes on income is the main source of direct taxation in India. The rules for income tax in India are defined by the Income Tax Act, 1961. The rates of taxation for various entities (Individuals, HUFs, Firms, Companies, and Others)  laid down in this Act are amended every year through the Finance Act. These rates which are prescribed by law are called the ‘statutory rates of taxation’. These are defined in terms of tax slabs where a percentage of taxation is announced corresponding to a certain threshold income level. However, the income earned by the various assesses is not always subjected to this statutory rate of taxation. The total income that is subjected to taxation is reduced from the original income because of various deductions available as per law. Thus there is a distinction between the statutory rates prescribed by law and what actually the assessee end up paying as taxes because of these deductions. The actual payment of tax as a proportion of the total declared income of the assessee is the ‘effective rate of taxation’ (Bandyopadhyay, 2012; Rao, 2015).  Thus to put it simply, the effective tax rate paid by an assessee can be computed as the ratio of tax paid to the total income expressed in percentage terms. The effective rates of taxation by their very construct are thus lower than the statutory rates of taxation. It is important to understand this distinction in the backdrop of the recent changes in the corporate tax rates in India which were announced last year on 20th September 2019 through the Taxation Laws (Amendment) Ordinance 2019 by making amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. This amendment and the corresponding reduction in the corporate taxes were hailed as unprecedented structural reforms in the history of the country which were aimed at reviving a sluggish economy by boosting private investment[1]. After this amendment, the effective rate for existing companies was slashed to 25.17% (including surcharge and cesses) while that for new manufacturing companies (incorporated after 1st October 2019) the effective tax rate was slashed to 17.01% (including surcharge and cesses) subjected to the condition

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Indus Biotech Private Limited v. Kotak India Venture Fund-I: Arbitration Of Insolvency Proceedings?

Leave a Comment / Arbitration Law, Insolvency Law /

[By Hitesh Nagpal] The author is a student at Maharashtra National Law University, Mumbai. In a recent decision, dated 9 June 2020, the National Company Law Tribunal(“NCLT”) Mumbai Bench in Indus Biotech Private Limited v. Kotak India Venture Fund-I, referred the financial creditor and the corporate debtor to arbitration while adjudicating a plea under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In this article, the author contends that the decision of the NCLT is erroneous on two grounds; firstly, the disputes pertaining to insolvency are not capable of being referred to arbitration and secondly, the provisions of the IBC prevail over the provisions of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”). Factual Background In 2007, Kotak India Venture Fund-I (“Financial Creditor”) subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”) issued by Indus Biotech Private Limited (“Corporate Debtor”). In light of regulation 5(2) of the Securities and Exchange Board of India (Issue of Capital & Disclosure Requirements) Regulations 2018, the financial creditor opted to convert OCRPS into equity shares to make a Qualified Initial Public Offering (“QIPO”). During the QIPO process, a dispute arose between the parties pertaining to the calculation and conversion formula to be followed while converting OCRPS into equity shares and while the dispute was ongoing, the financial creditor invoked the provisions of the Share Subscription and Shareholders Agreement (“SSSA”) pertaining to the early redemption of OCRPS. When the corporate debtor failed to redeem the OCRPS within the prescribed timeline, the financial creditor filed an application under section 7 of the IBC to initiate the Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor alleging that there was a default of ₹367,07,50,000/-. Subsequently, the corporate debtor filed an application under section 8 of the Arbitration Act contending that the SSSA contains an arbitration clause and therefore, the application filed by the financial creditor shall be dismissed and the parties shall be referred to arbitration.  Issue Will the provisions of the Arbitration Act prevail over the provisions of the IBC? NCLT’s Judgement By placing reliance on the decisions of the Supreme Court in Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleums and P Anand Gajapathi Raju & others v PVG Raju (dead) & others, it was observed that where an arbitration clause exists, the court has a mandatory duty to refer the parties to arbitration. Moreover, the NCLT pointed out that “the Corporate Debtor is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a very desirable result at this stage.” In light of this, the NCLT dismissed the application filed under section 7 of the IBC and referred the corporate debtor and the financial creditor to arbitration.  Analysis Insolvency As A Subject Matter Is Not Arbitrable  In the present case, there is no dispute pertaining to the arbitration agreement as there is a specific arbitration clause in the SSSA. The pertinent question in the present case is whether the dispute is capable of settlement through arbitration. Even though section 8 of the Arbitration Act compels the court to refer the parties to arbitration, there are certain exceptions to the application of this rule. The Arbitration Act does not include any provision excluding a certain class of disputes terming them ‘non arbitrable’ however, section 34 and section 48 of the Arbitration Act provide that an arbitral award will be set aside if the court finds that “the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” In Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd., the Apex Court, while deciding the scope of section 8 of the Arbitration Act, held that:  “Sub-section (1) of Section 8 provides that the judicial authority before whom an action is brought in a matter will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.” The application for initiating CIRP belongs to the category of dispute which is not capable of settlement by arbitration. As held in Pioneer Urban Land and Infrastructure Limited & another v Union of India, these are matters in rem, which the arbitrator has no power to reward.  In the landmark case of Booz Allen and Hamilton Inc v SBI Home Finance Limited & others, the Supreme Court, while recognizing the mandatory duty imposed under section 8 of the Arbitration Act, stated that where the dispute is non arbitrable, the court should refuse to refer the parties to arbitration despite the fact that the parties have agreed upon arbitration as the forum for settlement of the dispute. In the aforementioned case, the Supreme Court explicitly stated that disputes pertaining to insolvency are not arbitrable even when there is an arbitration agreement between the parties. Therefore, the NCLT should have refused to refer the parties to arbitration as insolvency as a subject matter is not arbitrable. Overriding Effect Of IBC It is pertinent to note that the well-established principle of generalia specialibus non derogant i.e., special law prevails over general law, does not apply in the present case as both IBC and the Arbitration Act are special laws. In Engineering Enterprises v Principal Secretary, Irrigation Department, it was held that the Arbitration Act is “a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto.” Insofar as IBC is considered, section 238 clearly states that “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” In a plethora of cases such as Bhoruka Steel Ltd. vs. Fairgrowth Financial Services Ltd, it has been held that when there is a conflict between the provisions of two

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