Author name: CBCL

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

Leave a Comment / CBCL - LSPR Series, Kaizen /

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

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

Leave a Comment / Arbitration Law /

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

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Competition Policy and Exchange of Information: An Analysis

Leave a Comment / Competition Law /

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

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BEPS MLI Changes- Prevention of Treaty Abuse

1 Comment / Taxation Law /

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

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

Leave a Comment / Insolvency Law /

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

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

1 Comment / Contemporary Issues /

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

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

Leave a Comment / Company Law /

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

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