Author name: CBCL

45 Day-Payment Rule for MSMEs: Regulatory Overreach or Opportunity?

Leave a Comment / Taxation Law /

[By Shaurya Talwar] The author is a student of Gujarat National Law University, Gandhinagar.   Introduction  The Finance Act of 2023 introduced a juggernaut for business entities dealing with Micro and Small Enterprises by insertion of clause (h) in the Section 43B of the Income Tax Act of 19611 which has now come in force from the Financial Year 2024-25. To understand the repercussions of the same let us go through the relevant provisions.  The Section 43(b), IT Act, 1961 provides for such deductions which are only allowed if there is an actual payment before the filing date, with certain exemptions. Section 43(B)(h), Income Tax Act, 1961 provides that if the assessee has any payment due to any Micro or a small enterprise beyond the time period mentioned under S.15, MSMED Act,2 it shall only be allowed to be deducted in the year in which the actual payment is made. To simplify, any deductions on account of any purchase will only be allowed to be deducted in the year in which it is actually paid and not accrued.   If the tax is not paid within the time limit mentioned under the Section 15 of the MSMED Act, 2006 such purchase is to be treated as your business income under Section 28, IT Act, 1963 and the assessee will have to incur higher tax liability on account of such additional income.   Time period under the MSME Act  The MSMED Act, 2006 defines Micro and small enterprises on the basis of turnover and investments in plants & machinery. It is categorised as follows:  a. Micro enterprises  Turnover: Does not exceed Rs.5 Crores.  Investment in Plants & Machinery: Does not exceed Rs.1 Crore  b. Small Enterprises  Turnover: Does not exceed Rs.50 Crores  Investment in Plants & Machinery: Does not exceed Rs. 10 Crores.  The Section 15 of the MSMED Act, 2006 provides for the time period under which the payment is to be made to Micro and Small Enterprises. There are two categories for the same, which are as follows:  In case of a written agreement: The payment is to be made within the credit period as agreed under a written agreement, however such period cannot exceed 45 days. In case of no written agreement: The payment is to be made within a period of 15 days.  Intention of the Legislature  The clause was inserted as a socio-economic measure to make sure there is sufficient liquidity with the Micro and small enterprises who often faced stretched credit cycles ranging from 67 days to 195 days which ultimately stretched their liquidity and consequently affecting their solvency. The clause was inserted to promote timely payments to such enterprises and to increase efficiency of the credit cycles as delayed payments often have a domino effect across all incidental sectors and industries, therefore the Government takes it very seriously. Prior to the Amendment itself, under the Section 16, MSMED Act,4 upon non-payment of the amount to the Micro and small enterprises within the stipulated time period attracted a compound interest at three times the bank rate notified by RBI.   The Standing Committee on Finance (2021-22) in its 46th Report titled “Strengthening credit flows to MSME Sector” highlighted the issues faced by micro and small enterprises in receiving timely payments from its buyers. Many stakeholders highlighted that despite the Section 15 statutory period many buyers often imposed a business condition of payment not before 60 or more days and micro and small enterprises often had to agree to such credit cycles due to business compulsion. In order to guarantee that all businesses, regardless of size, can function with comparable financial flexibility and promote a more equitable and balanced economic environment, it is imperative that these legislative frameworks be reevaluated.  Further the interest payments on such delayed payments was also not received by MSMEs. Therefore, MSMEs requested for a more strict control mechanism to ensure timely payment.   Delayed payments lead to working capital crunch which forces the MSMEs to avail loan and credit lines from banks, incurring interest payments which ultimately also lead to increase in prices of goods and services which then further reduces liquidity in the market. This essentially is a vicious cycle. In view of such requests of MSMEs, the clause was inserted to ensure timely payments to MSMEs via the Finance Act, 2023.   (Un)Intended Consequences   a. Competitive Advantage of Medium Enterprises vis-a-vis Micro and Small Enterprises Increased size and resources, medium-sized businesses can now provide more flexible payment options. On the other hand, these rules frequently place restrictions on micro and small businesses, making it impossible for them to offer more lenient terms for payments even though they are capable of doing so. This might make such buyers prefer medium enterprises which can offer a more liberal payment tenure in tune with the practical market credit cycles.   The Government has to realise the payment tenure just does not depend on the willingness of the buyer but on the market conditions and receipt of payment from further traders. Buyer of the first instance often have to first realise payment from further buyers to make the primary payment, however such payments again depend on market dynamics such as consumption and demand of such product, logistics-transportation efficiency as the goods might be moved from one part of the country to another via road or rail, seasonal changes and broad market conditions. It is no secret that private consumption has not quite picked up post Covid-19. Such forced regulatory changes will not change the market conditions rather further rattle the market players. In order to guarantee that all businesses, regardless of size, can function with comparable financial flexibility and promote a more equitable and balanced economic environment, it is imperative that these legislative frameworks be reevaluated.  b. Increased difficulties of Exporters  The Indian Exporter community have voiced their concerns with the Section 43B(h), IT Act, 1961. They have sought exemption from the clause as they often faced longer credit cycles compared to domestic consumptions. Indian Exporters receive payments

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Section 12A of the IBC: Facilitating Collective Withdrawals and Balancing Creditor Interests

Leave a Comment / Insolvency Law /

[By Rahul Ranjan] The author is a student of National Law University, Odisha.   Introduction  The Insolvency and Bankruptcy Code (IBC), introduced in 2016, addressed the issue of financial distress for corporate entities, partnerships, and individuals by offering a time-bound framework for resolving insolvency. The 2015 BLRC report highlights that one of the core principles behind the design of the code is to ensure a Collective Process. Thus, the code aims to discourage individual actions that benefit only specific creditors at the expense of broader benefits for all creditors.  ​​​However, despite the inherent design of the code requiring creditor participation in a collective approach to liability restructuring through negotiation, before the second amendment which inserted Section 12A to the IBC, the code did not have any provisions that provided for the withdrawal of the Corporate Insolvency Resolution Process (CIRP) application after its admission before the Adjudicating Authority (AA) by a collective decision of the Committee of Creditors (CoC).  In this post, the author attempts to analyse Section 12 A of the code in the context of a recent NCLAT decision. An argument has been raised for collective decision-making under this section based on a comprehensive understanding of the intent behind the Act and its subsequent amendment.  Recent NCLAT’s decision  In Vijay Saini v Shri Devender Singh & Ors., the NCLAT, recently dealt with a case wherein an application under Section 12A was submitted by the respondent before the CoC. The proposal was supported by 40.15% votes of Financial Creditors in a class and Punjab National Bank which held 12.42% votes. Upon analysis of the results, the Resolution Professional concluded that the total votes in favour of the proposal are 52.57%, falling short of the 90% mark as stipulated under Section 12A. An application was filed eventually before the AA which in turn held that home buyers are to be treated as a class for all purposes including approval of a plan under Section 12A and consequently, the procedure under Section 25A(3A) ought to have been followed.  The question before the NCLAT was the manner in which voting with respect to an application under Section 12A needs to be computed.  At first, the Tribunal referred to the case of Swiss Ribbons Pvt. Ltd. vs Union Of India, wherein the Supreme Court explained the rationale of the 90% threshold and reiterated the Insolvency Law Committee 2018 (ILC) Report which held that reaching consensus among all financial creditors is crucial for permitting individual withdrawals because an ideal outcome is a comprehensive settlement encompassing all parties involved. Thus, a substantial majority of 90% is required to approve such withdrawals, reflecting the collective interest of the creditors. Thereafter, it referred to the provisions under the IBC and held that the proviso to sub-section 3A brought in a different voting process for Section 12A.   ​​​Under Section 25A (3A) it has been provided that the Authorised Representative (AR) under Section 21(6A) shall vote on behalf of all represented financial creditors based on the decision reached by a majority vote (over 50%) of those creditors who participated in the voting process but for applications submitted under Section 12A, the AR must vote as per the provisions of Subsection (3) which in turn provides that AR must act in the best interests of each represented creditor, in accordance with their instructions and vote based on their proportionate voting share, fulfilling the requirement of 90% as stipulated therein.   Scope for Collective Decision Under Section 12A  Though the tribunal rightly acknowledged the effect of the proviso under Section 25A(3A), it missed an opportunity to touch upon the scope of expanding the collective approach under Section 12A.   The rationale behind Act No. 26 of 2018, as outlined in its Statement of Objects and Reasons (SOR), was the need for further refinement of the IBC. This refined approach in the form of Section 12A underscores the shift from a creditor-debtor-specific proceeding to one encompassing all creditors of the debtor, as envisaged by the IBC. By discouraging individual actions for enforcement and settlement that prioritize individual benefits over the collective good, the IBC aims to ensure a more equitable outcome for all creditors. The Lok Sabha debates that occurred before the insertion of Section 25A relied on the 2018 report and explained the rationale behind the amendments brought in through the IBC (Amendment) Bill, 2019 which aimed to ensure the expeditious admission and completion of CIRP cases. Additionally, they seek to address the issue of voting deadlock, which has arisen in certain situations.   Furthermore, upon perusal of the provisions for AR, it can be seen that these have been inserted based on the recommendations of the 2018 report itself which in turn acknowledged that though the Code strives for greater participation by all CoC members in decision-making during meetings, large CoCs present significant logistical hurdles which can thus, be addressed through the use of ARs.  When the AR votes under the Section 12A, they must adhere to sub-section 3. But it should be noted that this sub-section unlike sub-section 3A does not explicitly provide for making decisions reached by a majority vote, however, it does not rule it out either. AR thus, should be able to make the collective decision after considering individual opinions of all creditors as directed under sub-section 3. This interpretation is in line with the principle of the Collective Process of the IBC. When the number of creditors in the CoC exceeds a certain threshold in number, a reduced percentage of votes can be prescribed, being subject to legislative domain.  Thus, upon securing such a reduced percentage of votes, the AR after considering the individual opinions of all the creditors should be allowed to make a collective vote. This style of voting will enhance the effectiveness and efficiency of the withdrawal process as it will enable the swift elimination of resolution plans that do not resonate with a specified percentage of creditors. This allows for more timely amendments and the introduction of new plans that better reflect the inclusive

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RBI’s Regulatory Clampdown: Navigating the Paytm Saga

Leave a Comment / Banking Law /

[By Manav Pamnani & Teesha Arora] The authors are students of NALSAR University of Law, Hyderabad and Symbiosis Law School, Pune respectively.   Introduction and Background  In a recent move, the Reserve Bank of India (RBI) has imposed restrictions on Paytm Payments Bank, prohibiting it from accepting fresh deposits in its accounts, facilitating credit transactions, and offering fund transfers, including the Unified Payment Interface (UPI) facility, after March 15, 2024. This has emerged in light of the multiple violations on the part of the bank to meet the regulatory requirements and directions given by the RBI.    Paytm Payments Bank, an associate of One 97 Communications Limited (OCL), is an Indian Payments Bank founded in 2017. It is a part of the financial network of one of India’s largest payment companies, Paytm. In fact, on October 7, 2021, it was officially added to the second schedule of the RBI Act of 1934. In its press release on March 11, 2022, the RBI directed the Paytm Payments Bank to stop onboarding new customers. It further added a condition that such onboarding would only be permissible if the bank appointed an Information Technology (IT) audit firm to conduct a comprehensive system audit of its IT system and if, after a thorough review, the audit report seemed satisfactory. This audit report would comprise compliance checks with reference to Section 43A and Section 79 of the IT Act. The reason for ensuring compliance with the aforementioned provisions of the IT Act can be inferred from the preamble of the Act itself which lays down its objective, which is to facilitate lawful digital transactions while mitigating cybercrimes and other potential non-compliances. Since the operations of Paytm involve digital transactions and storage of data, these provisions become relevant. In this regard, Section 43A deals with compensation for failure to protect data. It requires a body corporate to uphold acceptable security standards and procedures while managing, dealing with, or having any sensitive personal data or information on a computer resource that it owns, controls, or manages, failing which, it would have to compensate the affected people who have incurred wrongful loss. On the other hand, Section 79 encompasses an exception, according to which, intermediaries may be immune from liability if they operate as mere middlemen in the transmission, storage, or exchange of third-party information or data.   The audit report, however, indicated persistent non-compliance on the part of the bank coupled with material supervisory concerns. It reflected that lakhs of accounts had not followed the mandatory Know Your Customer (KYC) procedure. Adhering to KYC guidelines is non-negotiable due to the significant purpose it serves which mainly includes verifying the identities of customers in order to prevent money laundering activities. The omission on part of Paytm thus violated Section 12 of the Prevention of Money Laundering Act, 2002 which mandates the verification of the identities of clients before entering into financial transactions. The importance of the KYC procedure leads financial institutions and conventional banks to strictly follow it. In the given case, since Paytm has repeatedly violated this crucial norm, RBI’s clampdown is justified. The exacerbating factor in this case is that the transactions in the non-KYC accounts exceeded millions of rupees, far beyond the prescribed regulatory limits, as specified in the Reserve Bank of India (Know Your Customer) Directions, 2016.   Moreover, over a thousand users had the same Permanent Account Number (PAN) linked to their accounts which further raised money laundering concerns. This led the RBI to utilise its power under Section 35A of the Banking Regulation Act, 1949 and issue the aforementioned directions. It also passed an order on October 10, 2023, imposing a monetary penalty of rupees 5.39 crore on Paytm Payments Bank for breaching the several regulatory requirements.   Justification of the Action in light of Section 35A of the Banking Regulation Act, 1949   Section 35A of the Banking Regulation Act provides for the power of the RBI to give directions. This power extends not only to specific banking companies in cases of non-compliance but also to general guidelines or circulars issued in interest of the overarching banking framework. For example, in 2016, the RBI issued the Master Directions on Fraud to consolidate and update seven earlier circulars on the classification, reporting and monitoring of fraud. Thus, the power enshrined under this section has a wide ambit and can be utilised in any scenario right from breaches pertaining to banking norms to introducing guidelines or amendments to upkeep the integrity of the banking sector. In this regard, Section 35A states, “(1) Where the Reserve Bank is satisfied that – (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.” This implies that the RBI has the power to issue such directions if any of the three conditions specified in this Section are met. These conditions are disjunctive, and even if only one among them is fulfilled, the RBI can utilise this power. The present situation entails an overlap of all the stated requirements. Adherence to the regulatory requirements and guidelines is paramount to the effective functioning of the financial ecosystem, and any form of deviance affects the confidence of the investors and affiliated business entities, thus negatively affecting the public interest. Non-compliance also indicates that the management of the banking company is not being conducted properly. Therefore, since the conditions mentioned in this Section (at least one) are fulfilled, the utilisation of the power prescribed is

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RBI’s Clampdown on Kotak Bank: Examining IT Governance Directions and Its Impact on Stakeholders

Leave a Comment / Banking Law /

[By Nakshatra Gujrati] The author is a student of National Law University, Odisha.   Introduction The Reserve Bank of India (“RBI”) on April 24, 2024 directed Kotak Mahindra Bank Limited (“Bank”) to suspend the onboarding of new customers through online channels and the issuance of new credit cards (“action”). The action resulted from significant deficiencies and non-compliances on the part of the bank. The RBI in its press release stated “…Serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch, and change management, user access management, vendor risk management, data security, and data leak prevention strategy…”. These compliances are of pivotal importance under the newly notified “Reserve Bank of India (Information Technology Governance, Risk, Controls and Assurance Practices) Directions, 2023” (“IT Directions”)  This post aims to analyze the RBI’s actions against Kotak Bank, encompassing its new IT Directions, and their impact on stakeholders. It begins by reviewing the events precipitating the RBI’s intervention. Subsequently, it examines the recent IT Directions and regulatory requirements set forth by the RBI. Thirdly, it investigates the impact of the RBI’s actions on stakeholders, namely banks and customers. Lastly, it offers recommendations to maximize the benefits derived from these IT Directions.  Background of RBI’s Move against Kotak RBI conducts a Statutory Inspection for Supervisory Evaluation (“ISE”) to assess compliance of regulations by the banks. In 2018-19 an ISE of Kotak Bank was conducted by RBI and it was observed that among non-compliance of its directives, Kotak bank failed to “…credit (shadow reversal) the amount involved in the unauthorized electronic transactions to the customers’ account within 10 working days from the date of notification by the customer, in certain cases…”. This was in contravention of Regulation 9 of the RBI’s directions on “Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Banking Transactions”. The RBI imposed a monetary penalty of ₹1,05,00,000/- on Kotak Bank for non-compliance with its directives vide an order dated July 04, 2022.  In October 2023, again a penalty of ₹3.95 crore was imposed on Kotak bank by RBI for non-compliance with its directives. Further, Kotak bank had failed to ensure minimum standards of customer service as stipulated in the RBI’s directions on “Customer Service in Banks”.   On April 15, 2024, several users of Kotak Bank complained that they were not able to use its mobile banking services. Some customers were not able to make payments through the bank’s debit card and UPI services as well. In light of this, several customers via social media expressed their dissatisfaction with the bank’s services. The RBI took cognizance of this issue and as per Section 35A of Banking Regulation Act, 1949, it is empowered to make directions on its own motion in public interest, in the interest of banking policy or prevent banks to act in prejudicial manner.   RBI’s Directions on IT Governance and Risk Management RBI has from time to time via circulars provided directions pertaining to Information Technology (IT) Governance and Risk Management. In November 2023, the RBI consolidated all the circulars on IT Governance and notified “Reserve Bank of India (Information Technology Governance, Risk, Controls and Assurance Practices) Directions, 2023” (“IT Directions”) that came into force on April 1, 2024.   These directions are applicable on all banking companies, non-banking financial companies, credit information companies and foreign banks operating in India. The directions are uniform for these entities, but the post discusses its applicability on banks only.   Analysis of RBI’s IT Directions Over time, banking has significantly transitioned to e-Banking, making it hard to imagine a bank today without substantial IT involvement in its key processes. The growing customer base has compelled banks to digitalize processes for registrations, transactions, and timely provision of other financial services. While IT in banking offers numerous advantages, potential concerns must not be overlooked. For instance, vast amounts of customer data are stored on cloud servers for centralized and quick access, which poses a risk of breaches and theft of sensitive customer information. In 2022, BharatPe, a digital financial services provider, experienced a significant data breach, with data from around 150 million customers reportedly stolen.  To address such events, the IT Directions mandate the creation of IT Governance frameworks in banks. Banks should establish IT Governance frameworks and IT strategy committees comprising board members, and technical experts having experience in IT and Cybersecurity. The objective should be to develop an effective IT strategy. The committee should convene quarterly to assess IT-related risks periodically. This involves analyzing existing IT-related risks and proactively preparing strategies to mitigate them.  Additionally, a Disaster Recovery policy should be implemented to ensure business continuity in the event of disruptive incidents. Disaster Response sites must be established in geographically distinct locations from the primary operating sites to avoid being affected by the same threat. These sites should be equipped with necessary e-Surveillance measures. To ensure data security during transmission, the IT Directions prescribe the use of strong encryption and cryptographic controls in accordance with international standards.  Banks are required to establish a Change and Patch Management policy. This involves identifying system features that can be improved or fixed, primarily focusing on security updates, bug fixes, and minimizing downtime. Additionally, banks must ensure that their systems support business functions and maintain service availability. A vendor risk assessment process must also be implemented to ensure that third-party vendors comply with the prescribed standards for safeguarding consumer data.  Impact on Stakeholders The IT directions directly impact the banks and customers and therefore it is crucial to analyze the directions from the viewpoint of both stakeholders.  Impact on Banks  The RBI has repealed 12 circulars to introduce the IT Directions and hence made it easier to comply with one consolidated direction. As many foreign banks operate in India through their branches, they will be subjected to a ‘comply or explain’ approach instead. This provides certain discretion to foreign banks with respect to non-mandatory provisions of IT Directions as they merely need to explain the reasons behind non-compliance. This is to ensure that foreign

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Mandating Interoperability under Digital Competition Laws: Tracing the basis and boundaries of Enforcement

Leave a Comment / Competition Law /

[By Dhanshitha Ravi & Rishabh Guha] The authors are students of Symbiosis Law School, Pune.   INTRODUCTION Interoperability refers to the synergy between different systems to communicate with one another. Users can access multiple complementary services through a single access point. An example of interoperability in our everyday lives is the ability to upload one’s Instagram content on Meta (erstwhile, Facebook). The Draft Digital Competition Bill, 2024 (Bill), released by the Committee on Digital Competition law on 27 February 2024 mandates interoperability of third-party applications by Systemically Significant Digital Enterprises (SSDEs) i.e., Big Tech companies, on their platforms. This coincides with the European Commission’s active role in clamping down on the practices of Tech giants to an extent where Apple was forced to allow sideloading of applications from native websites and third-party app stores. The move seeks to comply with the interoperability mandate of the Digital Markets Act (DMA) that is effective from March 2024.  At this juncture, though mandating interoperability is in vogue, it is not only crucial to decipher where this modern remedy draws its legal foundations from, but also evaluate the same in the context of technological feasibility.   INTEROPERABILITY: A MODERN-DAY APPLICATION OF THE ESSENTIAL FACILITIES DOCTRINE  Concept of Essential Facilities Doctrine (Doctrine)  Briefly, the Doctrine mandates a duty on the monopolist incumbent controlling such essential facilities to ‘share’ such inputs with the competitors. A four-pronged test was devised based on which an input shall be determined as ‘essential’, if the following factors are satisfied –  A monopolist controls the essential facility  A competitor is unable to practically duplicate the essential facility.  The monopolist is refusing the use of the facility to a competitor  Providing the facility is feasible.  Furthermore, the courts also examine whether the facility should be a necessary input in a distinct, vertically related market. Though, traditionally, the doctrine has been applied to infrastructural facilities (such as railway bridges and telecommunications networks, to name a few), however, scholars have urged its applicability to regulate Big Tech.   Warranting application of EFD to regulate Big Tech  To understand whether the Doctrine can be directly applied while regulating Big Tech platforms, it is vital to consider whether it can be deemed as an essential facility and it is not feasible for the competitors to duplicate the same. Only then it is possible to establish a link between interoperability as a remedy in the modern sense to the sharing of facilities that is mandated, once the court opines that the facility is essential.  Firstly, in evaluating whether digital platforms are truly ‘essential facilities’, the core argument revolves around the assertion that these platforms are the railroads of the modern era which connect groups of consumers on either ends i.e., business users (sellers) and end consumers. Simply put, the usage of these platforms directly determines the volume of business or visibility that a seller gets and correlates to the number of choices that a consumer, by virtue of being a ‘bottleneck’ i.e., a service/an infrastructure that controls a process for which there is no sufficient bypass. This argument can be supported by the Court of Justice in Google and Alphabet v. Commission (Google Shopping case) which held that a search engine represents a ‘quasi-essential facility’ with no actual or potential substitutes. Furthermore, even the Competition Commission of India (CCI) in XYZ v. Alphabet Inc. & Ors. (Google Playstore case) has recognised that Google Playstore is a “critical gateway between app developers and users”, thereby indirectly affirming the theory that these platforms are indeed essential in the modern times.  Secondly, the requirement is that a ‘monopolist’ controls the essential facility. While prima facie reading shows that the tech space witnesses a massive influx of new companies, a deeper probe will reveal that the majority of the market share is still held by Google, Apple, Meta, Amazon and Microsoft (GAMAM), acting as gatekeepers, equivalent to monopolists in the traditional sense. As observed by the CCI in Umar Javeed & Ors. v. Google & Anr. (Google-Android case), the status quo maintained by GAMAM is attributable to strong network effects.  Thirdly, once a facility has been deemed as ‘essential’, the Courts assess whether competitors can reasonably duplicate the facility before mandating sharing. As discussed previously, due to advantages of network effects, it is impossible to duplicate the same without incurring significant costs.  Manifestation of the doctrine  In the EU, the DMA designates certain Big Tech platforms that serve as an important gateway for ancillary markets, as Gatekeepers supplying ‘Core Platform Services’, such as online search engines, online social networking platforms and operating systems, to name a few. Similarly in India, the Bill that draws inspiration from the DMA, designates such core platforms as ‘Systematically Significant Digital Enterprise’ (SSDE) supplying a ‘Core Digital Service’ in India.   Once designated, the entities will have to fulfil a set of behavioural obligations and ensure interoperability of third parties with the gatekeeper’s own services, so as to prevent refusal to access services that act as important gateways for business-to-business and business-to-consumer communication under Section 13 of the Bill and Article 5 of the DMA.   Thus, even though the terminologies differ, at the heart of both the legislations lie the intent to regulate such platforms that possess the characteristics of essential facilities, which if in the traditional sense would have required ‘sharing’, the modern-day application of which is interoperability.  MANDATING INTEROPERABILITY: ESTABLISHING A BOUNDARY  As much as regulating abusive behaviour by these Big Tech platforms is the need of the hour, mandating open sharing of platforms i.e., ‘interoperability’ might be problematic. Currently, the DMA mandates the platform to ensure interoperability and allow sideloading as well.  Technological considerations  It is argued that technology considerations take a back seat while mandating interoperability, thereby not being truly ‘feasible’. Scholar Guggenberger has suggested a renewed approach for the Doctrine wherein after an appropriate amortisation period, the regulator would mandate horizontal interoperability that would require the platforms to provide open access to their Access Point Interfaces (API). This would mean that Amazon would

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IBBI Recommends Mediation: Integration of ADR with IBC Laws

Leave a Comment / Insolvency Law /

[By Ayesha Nacario Gupta] The author is a student of Amity University, Rajasthan.   INTRODUCTION  The Insolvency and Bankruptcy code, 2016 (hereinafter the ‘Code’) is an important enactment by the legislature which provides for specialized mechanisms for insolvency and liquidation processes of corporate entities. The main highlight of this code is that it provides for the corporate insolvency process (hereinafter the ‘CIRP’) for financially distressed companies which is initiated on the application made to the Adjudicating authority i.e., the National Company Law Tribunal (hereinafter the ‘NCLT’) by financial or operational creditors, or even on the application of the corporate debtor itself by virtue of Sections 7, 9 and 10 of the aforesaid code respectively.  Even though the code emphasizes on providing a revival scheme for corporate entities in a “time bound manner” for “maximization of value of assets”, as stated in its preamble, it was observed that the code was unable to do so due to ambiguity in its text and various other external factors. The IBC laws were unable to provide a comprehensive mechanism to resolve matters relating to insolvency and bankruptcy within a reasonable time frame even though the law provides for it under Section 12. Therefore, in order to address this issue, an expert committee was constituted by The Insolvency and Bankruptcy Board of India (hereinafter the ‘IBBI’) to examine and produce a report regarding the scope of voluntary mediation in relation to various process under the code and also suggest recommendations. Therefore, this article aims to highlight various aspects of the report and its contribution to establishing a new paradigm of Insolvency and bankruptcy laws in India.  ABOUT THE REPORT  On 31st January, 2024, the IBBI published a report titled “Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016”. This report was prepared by an expert committee constituted by the board and was headed by former secretary of Ministry of Law and Justice, Shri. T.K. Viswanathan. The expert committee, in its report, proposed that mediation can contribute as a supplementary mechanism to resolve conflicts which are associated with IBC laws.  The report suggests that adopting a non-adversarial approach will not only foster goodwill in business relationships but will also shield the Corporate Debtor from the negative connotations of insolvency, all while facilitating reconciliation of conflicts through amicable settlements.  The report, under the heading “Fundamental Objectives of the Framework” lays down its objectives which encompasses the following-   to expedite the resolution of insolvency cases by means of voluntary mediation,  to reduce pending cases that lie before NCLT,  to provide a specialist mechanism and infrastructure to settle insolvency disputes,  to maintain sanctity of timelines provided under the code,  to promote phased implementation,  to increase awareness of various stakeholders by means of mediation,  to foster insolvency mediation culture and encourage the use of mediation.  Hence, the recommendations made by the committee is vital to address pre-existing challenges of the Code by offering a more efficient, flexible, cost effective and collaborative approach by integrating mediation with IBC laws.  WHAT DOES IT BRING TO THE TABLE?  Firstly, the committee has recommended opting for the path of mediation to be voluntary (with consensus of parties) and a parallel process to the CIRP to make efficient use of time while also protecting the interest of stakeholders. “The essence of the framework is its independence and flexibility to provide room for quick incorporation of implementational learning,” the committee report said. It proposed the incorporation of mediation as an alternative dispute resolution (hereinafter ‘ADR’) mechanism within the existing statutory limitations and timelines of the IBC.  The committee further stated that it aimed to reconcile the objectives of the Code, including the timely restructuring of businesses and the maximization of asset value, while also allowing parties the freedom to voluntarily choose an ‘out-of-court’ mediation process, thereby improving the efficiency of the resolution process.   With the delegation of powers given to the Central Government, it may also prescribe rules for the basic structure if the insolvency mediation framework, the establishment of mediation cells in NCLT, the qualification required for the appointment of mediators and other essential notifications. On the other hand, the IBBI may specify the various procedures for the purpose of appointment of mediators and the method and manner in which insolvency mediations shall be conducted. It may also provide for the “automatic termination” of the insolvency mediation on the expiration of the given timeline.  It further opines the establishment of an internal mediation secretariat within the NCLT which shall be responsible to oversee, administer and manage the enforcement and conduct of insolvency mediation. However, this will also require the appointment of specialized mediators for resolving insolvency mediation disputes. Therefore, the report provided that such specialized mediators may comprise of retired members of NCLT/NCLAT, ex-senior officials in finance sector, insolvency professionals with more than 10 year of experience, and senior advocates to name a few.  Additionally, to prevent mediation from becoming an expensive affair, the committee proposes to provide a designated schedule on the various cost or fees associated with the mediation process and such fees shall be nominal. It also provides for the creation of a budget to reimburse any fee spent by the parties to NCLT. Such budget shall be managed by the mediation secretariat.  The committee also proposes to conduct “paperless mediation” by facilitating e-filing as it is of the opinion that conducting e-meetings would help NCLT achieve operational efficiency. Further, the committee insists on adopting hybrid or online mode for conducting mediation wherever possible.  On account of the above recommendations, it is understood that mediation would be seamlessly integrated into the existing framework of the IBC which will allow parties and various stakeholders to initiate mediation proceedings at any stage of the insolvency process starting from the pre-insolvency negotiations to the resolution and liquidation stage.  AUTHOR’S REMARKS  The committee report represents a commendable initiative by the IBBI to acknowledge the unique characteristics of ADR mechanisms. The framework provided by Shri. T.K. Viswanathan led committee is a right step

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Part 2 – Case Note: In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899

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[By Swarnendu Chatterjee & Shreya Mittal] The authors are Advocate-on-Record, Supreme Court of India and a student at National Law Institute University, Bhopal respectively.   (This is in continuation of the Part I of the blog where the author discusses the background and the verdict of the Supreme Court in the above-captioned case. In this Part, the author highlights the principle of arbitral autonomy and minimum judicial intervention and the doctrine of harmonious construction as applied in this case. Finally, the author concludes by summarizing the judgment and underlining the apparent criticism.) A. Arbitral Autonomy and the Principle of Minimum Judicial Interference Arbitration is a voluntary method for resolving disputes between parties that is founded on their agreement to submit their issues to an arbitral tribunal made up of one or three impartial arbitrators, who are either selected by the parties themselves or on their behalf.[1] The Judgement visits important principles enshrined in the Arbitration and Conciliation Act, 1996 to reason its decision. The principle of arbitral autonomy gives the Arbitral Tribunal the power to govern its own jurisdiction. It comes from the consent of the parties which excludes or limits the jurisdiction of legal systems to that specifically given in the concerned statutes, i.e., for India being the Arbitration and Conciliation Act, 1996. The principle of judicial non-interference also encompasses the principle of arbitral autonomy. The Supreme Court holds that the principle of separability goes beyond the issue of Kompetenz-Kompetenz principle. The word “authority” under Section 33 of the Stamp Act includes the Arbitral Tribunal as it is a creation of law supported by the provisions of the Arbitration Act and the intention of the parties to arbitrate. The stamp objection could be before the Arbitral Tribunal and taking the issue before the court would hold up the process. Rather, the alternative could be to limit the jurisdiction of the Court to interfere to the stage after the Arbitral Award has been passed instead of derailing the process. B. Harmonious Construction of the Arbitration Act, the Stamp Act, and the Contract Act Every statute is enacted by the Parliament with a legislative intent which gives purpose for the existence of the statute that must be taken into consideration while interpreting various provisions of the statute. However, it may be possible that while interpreting a provision of a statute, it may come into conflict with some other statute. Here, the Courts try to interpret the conflicting provisions harmoniously, so that it does not defeat the purpose of the statute. While interpreting, the Courts should keep in mind to not render the statute a “dead” letter and it must be so interpreted to give full effect to the conflicting provisions. With emerging developments in the field of Arbitration and UNCITRAL Arbitration Rules coming into place, the Arbitration Act was enacted by the Parliament to put India’s domestic laws at par with the international standards. On one hand, the intent of the legislature in enacting the Arbitration Act was to ensure the facilitation of an effective arbitration process and the reduction of judicial intervention within the arbitral proceedings. While on the other, the object of the Stamp Act was to generate revenue for the State. The two Acts come into conflict over here which is most precisely dealt by in the Judgement. The Judgement gives primacy to the Arbitration Act over the Stamp Act and the Contract Act, in matters involving arbitration agreements. This is reasoned by the way of classifying the Arbitration Act as a special legislation and the other two as general laws. The Arbitration Act governs the domain of arbitration in India. The issue here is in relation to arbitration agreements and not in general agreements or contracts as defined in the Contract Act. The Arbitration Act defines arbitration agreements and broadly deals with all the legal aspects of them. The Court in N N Global 2, while interpreting the various conflicting provisions, observes that in proceedings under Section 11 of the Arbitration Act, the interdict in Section 5 of the Arbitration Act would not take away limb from Sections 33 and 35 of the Stamp Act, and that it would not amount to judicial interference. However, interpreting differently, the Judgement does not agree with the said position of law laid down. The Judgement gives importance to the non-obstante clause in Section 5 of the Arbitration Act which reads as, “5. Extent of judicial intervention.—Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.” The Arbitration Act being a special law coupled with the non-obstante clause, the Judgement observes that it excludes the operation of Sections 33 and 35 of the Stamp Act, thus observing that the decision in N N Global 2 was not the correct position of law. The unqualified object of the Stamp Act is, among others, securing revenue for the state. However, the consequent cost of holding an unstamped or under-stamped agreement as unenforceable would result in derailing many arbitration proceedings over the country. Eventually, the price to be paid would be disastrous and it would miss the purpose of the Stamp Act. On the other hand, the principles upheld in the SC Judgement by letting the Arbitral Tribunal decide the issue of the validity of unstamped or under-stamped arbitration agreements while not interrupting the arbitration process would be in the best interests of revenue. Additionally, the revenue demand could be met during the arbitration process. II. CONCLUSION In the author’s view, the Supreme Court has set the jurisdictional framework in line with accepted and expected international arrangements of arbitrability. The Supreme Court has effectively gone on record to say that it was the Parliament’s view to further endeavor to make India an arbitration friendly regime. In the same vein, the Supreme Court has correctly set the legal framework in the right direction by upholding the validity of arbitration agreements contained in the

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Part 1 – Case Note: In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899

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[By Swarnendu Chatterjee & Shreya Mittal] The authors are Advocate-on-Record, Supreme Court of India and a student at National Law Institute University, Bhopal respectively.   Abstract: By a judgement dated December 13, 2023, a seven-judge bench of the Supreme Court in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, unanimously decided on the issue surrounding the admissibility of unstamped or insufficiently stamped instrument in evidence. By overruling the five-judge bench verdict in NN Global Mercantile Private Limited v. Indo Unique Flame Limited, the Court held that an unstamped or insufficiently stamped instrument would be inadmissible in evidence, however, the same is a curable defect and that in itself does not make the agreement void or unenforceable. In this case comment, we discuss the facts and view of the seven-judge bench verdict and critically analyze this decision and its impact while delving into the conflicting reasoning of previous judgements. The comment sheds light on the various key aspects discussed by the Supreme Court such as the distinction between admissibility and voidness, doctrine of arbitral autonomy, and the harmonious construction of the three statutes. Finally, the comment observes that even though the judgement promotes arbitration friendly regime in the country, it leaves room for further discussion. I. INTRODUCTION On December 13, 2023 the Supreme Court of India (“Supreme Court”) delivered the judgement In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899[1] (“the Judgement”). The Court laid to rest the long standing quandary of whether arbitration agreements would become non-existent, unenforceable, or invalid if the underlying contract is unstamped or under-stamped.Theseven-judge bench led by CJI D. Y. Chandrachud delivered its verdict to over-rule the law laid down inM/s N N Global Mercantile Pvt Ltd vs M/s Indo Unique Flame Ltd And Ors[2](“N N Global 2”). The issue arose in the context of three Statutes – the Arbitration and Conciliation Act 1996[3](“the Arbitration Act”), the Indian Stamp Act 1899[4] (“the Stamp Act”), and the Indian Contract Act 1872[5] (“the Contract Act”). On one hand, the quandary revolving around the enforceability of unstamped agreements has been a long-standing issue.On the other hand,Arbitration is a fast-emerging alternate dispute resolution mechanism.Unstamped or under-stamped arbitration agreements have,therefore,become a matter of exploration by the Courts in India. The conflicting decisions on this issue have been laid to rest by the Supreme Court. II. BACKGROUND The controversy began with the decision by the Supreme Court in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[6](“N N Global 1”),where Special Leave of the Court invokedto determine the enforceability of an arbitration agreement contained in an unstamped work order.It was observedthatthe arbitration agreements are separate and distinct from the underlying commercial contract and would not be rendered invalid, unenforceable, or non-existent by virtue of unstamping or under-stamping of the principal contract. The non-payment of stamp dutybeing a curable defect would not invalidate even the underlying contract. This was an important juncture in the series of cases as the view taken by the Supreme Court was at variance with previous decisions rendered by the Supreme Court. Relying on the decision in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd,[7](“SMS Tea Estates”), where the Court held that an arbitration agreement in an unstamped contract could not be acted upon, the Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd[8] (“Garware Wall Ropes”)was of the opinion that an arbitration agreement in an unstamped commercial contract would not exist as a matter of law and could not be acted upon until the underlying contract was duly stamped.  This was further fortified in the three-judge bench verdict of Vidya Drolia v. Durga Trading Corporation,[9]where the Court observed that an arbitration agreement exists only when it is valid and legal, thereby arbitration agreements must satisfy requirements of both the Arbitration Act and the Contract Act. However, N N Global 1 doubted the correctness of this position of law and referred the question of applicability of the statutory bar on arbitration agreement contained in an instrument, where the payment of stamp duty was pending,to a five judge bench which decided the matter in the case of N N Global 2. The court in N N Global 2 observed that the position of law given in N N Global 1 was not correct and reiterated the position of law as decided in SMS Tea Estates and Garware Wall Ropes. The majority judgement in N N Global 2 may be summarized as under: In accordance with Section 2(g) of the Indian Contract Act, 1872 an instrument lacking proper stamp duty and incorporating an arbitration agreement is rendered void. An instrument devoid of proper stamping, not constituting a contract and lacking legal enforceability, is non-existent in the eyes of the law. The arbitration agreement contained therein can only be given effect subsequent to its appropriate stamping; The conceptualization of the “existence” of an arbitration agreement as contemplated in Section 11(6A) of the Arbitration Act transcends mere facial or factual existence and encompasses a requisite “existence in law”; A tribunal operating pursuant to Section 11 of the Arbitration Act is precluded from overlooking the imperatives delineated in Sections 33 and 35 of the Stamp Act, mandating thorough scrutiny and impounding of instruments lacking proper stamping; The authenticated copy of an arbitration agreement must transparently delineate the discharge of the stipulated stamp duty. In Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers,[10](“Bhaskar Raju”) the court cited SMS Tea Estates with approval. Bhaskar Raju was decided before N N Global 1. On 7 December 2022, a curative petition was filed seeking a reconsideration of Bhaskar Raju. On 26 September 2023, a Bench of five judges took up the curative petition. Considering the larger ramifications and consequences of the decision in N N Global 2, the Court referred the proceedings to a seven-Judge Bench. Hence, the Supreme Court in the Judgement considered

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Is Limitation Act, 1963 Applicable to Condone Delay for an Application Filed Under 17(1) of the SARFAESI 2002?

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[By Aryaditya Chatterjee] The author is a student of School of Law (Christ Deemed to be University).   INTRODUCTION On 3rd of January, 2024 the High Court of Madhya Pradesh (HC) in the case of Aniruddh Singh v Authorized Officer ICICI BANK LTD[1], held that Debt Recovery Tribunal has the power to condone delay for an application filed under Section 17(1) of the SARFAESI Act2002 through the application of Section 5 of the Limitation Act 1963 (Limitation Act). It is pertinent to mention that this particular judgment is not binding on all high courts as several high courts have passed judgments contrary to the same. This article will attempt to provide an answer to whether the DRT has the power to condone the delay for an application filed under Section 17 of SARFAESI Act 2002 by analysing various judgments pronounced by the High Courts and the Supreme Court. The first step towards answering the above question, is to decode the judgment given by the Madhya Pradesh High Court (HC). DECODING THE JUDGMENT The Madhya Pradesh High Court (HC) in its judgment held that Section 5 of the Limitation Act 1963 (Limitation Act) will be applicable to condone the delay for an application filed under section 17(1) SARFAESI Act 2002. The court relied on the decision of the Supreme court (SC) in the case of Baleshwar Dayal Jaiswal vs. Bank of India and others[2]wherein an ‘appeal’ under section 18(1) can be condoned by the Appellate Tribunal through the application of the Limitation Act 1963 (Limitation Act). However, when the judgments of other High courts (HC) are taken into consideration then they are on a different pedestal than that of the Madhya Pradesh High Court (HC). The Calcutta High Court (HC) in the judgment of the Akshat Commercials Pvt. Ltd v Kalpana Chakraborty[3] held that Section 5 of the Limitation Act 1963 (Limitation Act) will not be applicable to condone the delay for an application filed under section 17(1) of the SARFAESI Act 2002  because an application filed under this section is that of a civil suit in nature. The Orissa High Court (HC) in the Judgment of Bm, Urban Co-operative Bank Ltd v Debt Recovery Tribunal[4] held that delay in filing of an application under section 17(1) of the SARFAESI Act 2002 cannot be condoned by the DRT by applying Section 5 of the Limitation Act since an application may be disposed in accordance with the Recovery of Debts Due to Banks and Financial Institutions Act 1993 (RDB)  as per section 17(7) of the SARFAESI Act 2002 and RDB has not given any special power to the DRT to dispose an application filed under Section 17(1) .The Orissa High court also placed a special reliance on the judgment of the Supreme Court (SC) in International Asset Reconstruction Company of India Ld. v. Official Liquidator of Aldrich Pharmaceuticals Ltd[5]wherein it was held that Section 5 of the Limitation Act 1963 (Limitation Act) is only applicable to an original proceeding filed under Section 19 of the RDB Act. After a detailed analysis of the three High Court judgments, it is clear that there is a Question of Law as to whether Section 5 of the Limitation Act 1963 (Limitation Act) is applicable to an application filed under Section 17(1) of the SARFAESI Act 2002. The first step towards answering the above question, is to understand the nature of an application filed under section 17 of the SARFAESI Act 2002. NATURE OF AN APPLICATION FILED UNDER SECTION 17 OF SARFAESI ACT 2002 A remedial application under section 17 of the SARFAESI Act 2002 is filed in the DRT by an aggrieved borrower against any measures taken by the Secured Creditor under Section 13(4) of the SARFAESI Act 2002 and such an application shall be filed within 45 days of such measure taken against the borrower. Even though the statute considers an application under section 17 of SARFAESI Act 2002 to be an “Application” in nature, the Supreme Court (SC) has taken a contrary view in this regard through various judgments. In the case of Mardia Chemicals v Union of India[6], the Supreme Court (SC) observed that proceedings under an application filed under section 17 of SARFAESI Act 2002 are not an appellate-proceeding but a misnomer. The proceeding is an initial action which is brought before a Forum as prescribed under the Act, raising grievance against the action or measures taken by one of the parties to the contract. The Supreme Court in this case decided that an application under Section 17 of the SARFAESI Act 2002 falls within the lieu of a civil suit. Later in the judgment of M/s Transcore v Union of India[7],the Supreme Court relied on Mardia Chemicals[8] and were of the opinion that an application filed under section 17 of the SARFAESI is that of a “civil suit” in nature. It is clear from both the judgments of the Supreme Court (SC) that an Application filed under section 17 of the SARFAESI is a ‘civil suit’ in nature. APPLICABILITY OF LIMITATION ACT FOR AN APPLICATION FILED UNDER SECTION 17 OF THE SARFEASI The Supreme court (SC) in the case of Baleshwar Dayal Jaiswal vs. Bank of India[9] held that delay in filing an ‘appeal’ under section 18(1) of the SARFAESI Act 2002 can be condoned by the Appellate Tribunal by applying the Limitation Act 1963 (Limitation Act). However, it is pertinent to mention that the nature of an appeal under section 18(1) of the SARFAESI Act 2002 is that of an “Appeal” to an Appellate Tribunal. In such a scenario, delay in filing an ‘appeal’ can be condoned by the limitation act because it is an appeal in nature. It is pertinent to mention that an application under section 17(1) of the SARFAESI Act 2002 is that of a “Civil Suit” in nature as decided by the Hon’ble Supreme Court (SC) in the various of its judgments. The Limitation Act 1963 (Limitation Act) has defined both suit and an

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