Author name: CBCL

Who appoints the Arbitrator of a Company?

Arbitration Law /

[By Anchit Jain and Lovish Jain] Anchit is a student at ICFAI University, Dehradun and Lovish is a CS (Executive) Candidate. Prelude In the present era of increasing disputes mainly in the corporate sector and inextricable compliance requirements, alternate dispute resolution through arbitration is the new preference of the parties to settle the same, but on the contrary various judgments and rulings in past on the matter of corporate disputes and their resolution through arbitration didn’t prove to be of much utility as the very significant topic of ‘Appointment of Arbitrator in a Company’ and the procedure for the same is more into chaos these days. In the very article, authors powered their views on the unaddressed topic of ‘Appointment of Arbitrator in a Company’ and what are the implications of recent rulings of the court i.e. “how the board of directors specifically ‘managing director’, is not eligible to appoint an arbitrator in the company.” Authors endeavour to guide the issue and also provide a possible solution which encompasses the delegation of authority of arbitrator’s appointment and procedure to be followed for the same on the shoulders of ‘Appointing Authority’ or the other possible way is a route through ‘Institutional Arbitration’. Asymmetrical Arbitration Clause An Asymmetrical Arbitration Clause allows a party to single-handedly choose an arbitrator(s) for the resolution of a dispute.[i] This clause is aggressively disputed as the other party has no say in the abovementioned decision making. On the question of a party’s autonomy over the asymmetrical arbitration clause, the Delhi High Court in the case of Proddatur Cable TV Digi Services v. Citi Cable Network Limited[ii] held that a company is run by the ‘collective’ efforts of directors i.e. ‘Board of Directors’ (Board) and Board performs in the good faith of the company. Section 166[iii] prohibits a director’s involvement from a situation where he has a direct or an indirect interest that conflicts or possibly may conflict with the interest of the company. The Court said that it was natural that the Board will have an interest in the outcome of Arbitration, and thus, based on the Supreme Court’s ruling in the Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd.[iv], Court restricted a person who has an interest in the outcome of a dispute and consequently held that the Managing Director must not have the power to appoint a sole arbitrator. If consideration is given to only one party on the matter of the appointment of an arbitrator, it may violate the soul of arbitration i.e. an arbitrator must be impartial and independent and both the parties should equally contribute in the appointment of an arbitrator. Impartiality and Independence The Supreme Court, in the case of Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited[v], ruled that impartiality and independence are the hallmarks of any arbitration proceedings. The judgment cites the 246th Law Commission’s Report[vi] in which the 57th paragraph states that party autonomy cannot be stretched to a point where it negates the very basic impartiality and independence of the adjudicators. In Voestalpine[vii], Supreme Court relied on the ‘Cour de Cassation, France’s judgment of 1972 in Consorts Ury’ which also reiterated that “An independent mind is indispensable in the exercise of judicial power, whatever that source of power may be, and it is one of the essential qualities of an arbitrator”. The current position draws a debate between two basic features of Arbitration- ‘Independence & Impartiality’ and ‘Party Autonomy’. This debate needs to end for the settlement of this conflict as it is a barrier in the Indian practice of Arbitration. What will be the procedure of appointing an arbitrator and who will effectuate it: An Inadequate Precedent The article now needs to enlighten the view on the act of appointment of the arbitrator, to which Perkins[viii] held that both parties nominating their respective arbitrator would balance the situation. This does not bring the concept of sole arbitrator to an end as the cases of Perkins[ix] and Proddatur[x] also ended with the Court appointing Judges as the replacement for the sole arbitrators. Balancing the power between both parties is the answer to ‘How’, and involvement of both the parties answers ‘Who’. In the Institutional arbitration method, arbitrators are provided by the institution. The situation is conciliated when both the parties opted for Institution and the arbitrators provided are impartial and independent. But when ad-hoc is the pattern, then the arbitrators have to be chosen by the parties. This is a stage where Proddatur’s[xi] judgment fails to provide an answer and instead creates a barrier, especially for a company that is a party in a dispute. Ineligible Board of Directors and Inapplicable Article of Association Proddatur[xii] held that a company is run by none other than the directors collectively. This excluded the collective decision of the Board from nominating an arbitrator because Section 166(4)[xiii] restricts a director’s participation in a situation that attracts his direct or indirect interest. Moreover, Perkins[xiv] relies on the principle of “Qui facit per alium facit per se” (what one does through another is done by oneself). Both these factors bar a company from nominating and appointing authority for nominating an arbitrator. Proddatur[xv] explicitly excludes the Board, the governing authority of the company, and forgets to clarify ‘who’ from a company can nominate an arbitrator. If a company’s Articles of Association (AOA) provides that a Board is allowed to appoint a sole arbitrator, then that specific clause of the AOA cannot be given effect because u/s 6[xvi] it overrides the provision of The Act.[xvii] One Possible Solution: Appointment of Appointing Authority The Act[xviii] provides that the parties can choose their procedure[xix] and if the parties fail to agree on the appointment of the: (i) Umpire,[xx] (ii) Sole arbitrator[xxi] or, (iii) Arbitrator as per the procedure,[xxii] then the Supreme Court or the High Court, as the case may be, can make the appointment. The Act also provides that the Court, on its behalf, can ask a graded institution to appoint the

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Ease of minority squeeze out: An analysis of the new squeeze out provisions

Company Law /

[By Anurag Shah and Vijay Nekkanti] The authors are students at Christ (Deemed to be University), School of Law Introduction The Ministry of Corporate Affairs (MCA), Government of India, has brought into effect the eagerly anticipated and much-required sub-sections (11) and (12) of Section 230 of the Companies Act, 2013.[i] These provisions pertain to the takeover of a company via squeezing out the minority shareholders under a scheme of compromise/arrangement. While the whole Chapter XV of the Act pertaining to compromise, arrangements, and amalgamations were notified in the year 2016, it took MCA approximately 3 (three) years to notify these two sub-sections. To align these provisions with the company law MCA also had to make consequential revisions to the National Company Law Tribunal Rules, 2016 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. These revisions would streamline the procedure given under the new sub-sections. Squeeze out implies the compulsory acquisition of equity shares of a company from the minority shareholders of that company through fair cash compensation.[ii] Prior to this notification, it was done under Section 235. The method under Section 235 was enshrined to ensure that shareholders holding 90 percent or more shareholding in a company can acquire shares from minority shareholders during a takeover. The rationale behind such a provision was to ensure smooth takeovers of a company once the majority has consented to it. However, the minority shares should be bought at a fair value and this is what forms the crux of this method and the Courts have enumerated its importance time and again. In the case of Sandvik Asia Limited v. Bharat Kumar & Ors[iii], the Bombay High Court was of the view that if a fair price is being paid to the non-promoter shareholders, and at no point, the same is challenged; the Court should not withhold the sanction to the transaction. This shows the intent behind the method. Section 230(11) and (12) of the Companies Act, 2013 The provisions notified by MCA would now enable the majority shareholders holding 3/4th of the concerned company’s shares to make a takeover offer and to acquire all or a part of the shares. This can be done through an application before the NCLT. The term shares for the purpose of these provisions would include equity shares and securities that vest the holder with the power of exercising voting rights. The application for such an offer should be accompanied by a report disclosing the detailed valuation of the shares proposed to be acquired. Adding to this, the acquirer is also required to deposit a sum of not less than 50% of the total consideration for the offer into a separate bank account. The offer should ensure that fair value is being paid to the minority shareholders. The fair should be computed by taking into account the highest price paid by any person or group of persons for the acquisition of these shares during the last 12 months. Other factors such as the return on net worth, book value, and Earning per Share (EPS) should also be considered. Section 230(12) read with the amended NCLT rules provides for the raising of grievances by the minority shareholders in front of the NCLT which shall act as a quasi-judicial body for this whole procedure. These provisions provide for another formal route for the minority to squeeze out from a company. Earlier known routes were selective reduction under Section 66 of the Act and squeeze out under Section 235 and 236. However, these provisions have been introduced in consonance with the jurisprudence related to the issue of squeeze out of minority shareholders. Now it would be important to see the role NCLT would play in presiding over these transactions, given the view of the Court in the landmark case of Miheer H. Mafatlal v. Mafatlal Industries Ltd[iv], wherein it was stated that the Courts do not have the expertise, time or the means to sit over the wisdom of such a transaction, and the Court should only concern itself with the question as to whether the valuation report is demonstrated to be so unjust, unreasonable and unfair that it would lead to inequity or injustice to the minority shareholders. Analysis of the provisions from an acquirer’s perspective Analyzing from the acquirer’s perspective, unlike the erstwhile regime under Section 235 that mandated 90% of control so as make an offer to the dissenting shareholders or initiate squeeze out, under the current provisions a 3/4th majority would suffice to move such a resolution. On the face apparent, although this particular relaxation might seem to be very liberalistic, one needs to understand in the context of private companies that, under the erstwhile Sections 235 and 236 albeit having acquired 90% of the shareholding, many acquirers were confronted with problems allied with various restrictions imposed on the transfer of shares by the private companies through various instruments such as Pre-Emptive Rights, etc. Thus, although it is easier to reach the threshold of 75% to make an offer, one has to understand that the new provisions amidst the herculean restrictions imposed by private companies have only burdened the acquirers with an additional 15% of shareholders to surpass. Further, in the case of AIG (Mauritius) LLC v. Tata Tele Ventures[v], the Hon’ble Delhi High Court interpreted Section 395 of the Indian Companies Act of 1956 (corresponding to Section 235 of the 2013 Act) in a way that justice is meted out to the minority shareholders, and had inter alia held that: “90% majority must comprise of different and distinct persons and only in that event this will fall within the rationale of this section a justify the overriding of the interests of the dissentients……………. the offeror should be substantially different to the majority” Although this judgment had imported the ideals of Shareholder Democracy within the Indian corporate jurisprudence, when applied in toto to all kinds of companies, it had posed several anomalies for the closely-held private and unlisted companies. Thus, the current provisions by providing

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IBC Ordinance, 2020 and the MSME Sector in India: Analysing the Implications

Insolvency Law /

[By Poorna Poovamma K.M. and Abhishek Wadhawan] The authors are students at Gujarat National Law University, Gandhinagar Introduction: A Conceptual Understanding The President promulgated The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“Ordinance”) on June 05, 2020. The Ordinance has suspended Sections 7, 9 and 10 of The Insolvency & Bankruptcy Code, 2016 ( “Code”) to prevent the corporate bodies facing financial distress from being dragged by the creditors to insolvency proceedings for not being able to meet their financial obligations due to the spread of the COVID-19. In essence, the Ordinance has inserted Section 10A in the Code which provides for suspension of the Section 7, 9 and 10 of the Code for a period of six months (extendable by maximum one year). Further, no application for initiation of insolvency proceedings against any corporate persons for any default arising on or after March 25, 2020 shall be filed. The Ordinance has also inserted Section 66(3) to the Code that states that no application can be made to the Adjudicating Authority for directing the Director of the corporate debtor to contribute to the assets of the corporate debtor, if it comes under the ambit of Section 10A of the Ordinance. The period from March 25, 2020 till the suspension of the Code is often referred to as the ‘Disruption Period’ as all business and economic activities are disrupted due to the pandemic. This Disruption Period has hit the Micro, Small and Medium Enterprises (“MSMEs”) the hardest. To protect the MSMEs in these trying times, the Ministry of Micro, Small and Medium Enterprises revised the definitions of MSME through the Gazette Notification dated June 01, 2020 in order to ensure that more enterprises fall within the ambit of the Micro, Small and Medium Enterprises Development Act, 2006 which provides various economic incentives to the MSMEs. Indeed, through the gamut of the Aatmanirbhar Bharat Package, the Government has introduced various incentives for MSMEs like approval of equity infusion of Rupees 50,000 crores from the Fund of Funds, Rupees three lakh crore of collateral free loans to the MSMEs for their operational needs among many others. With the suspension of Section 7, 9 and 10 of the Code, initiating insolvency proceedings against any corporate debtor will not be possible and hence the cases of wilful defaults by the corporates might exponentially rise. These increased wilful defaults by the corporate debtors will have a negative impact on the MSMEs majorly as they may face a shortage of cash flow leading to operational difficulties, given the fact that MSME sector enterprises form a major part of the operational creditors. Through this article, the author will try to analyse the potential impact of the Ordinance on the MSME sector of India. The Ordinance and the MSME Sector The promulgated Ordinance gives rise to a number of concerns for the MSME sector to ponder. A few concerns that arise are: The micro and small industries which make up a large part of the MSME sector have recently been accorded new definitions according to which maximum investment in a micro enterprise is rupees one crore and that for a small enterprise is rupees ten crore. Additionally, the Central Government recently acted on the powers conferred on it by way of the proviso to Section 4 of the Code, 2016 and increased the minimum amount of default with relation to the insolvency and liquidation of corporate debtors from rupees 1 lakh to 1 crore. As a result of this, MSME creditors, in reality would not be empowered to file for defaults lower than 1 crore and, considering their altered definitions, it would be next to impossible for the micro enterprises, and highly unlikely for small enterprises to file a claim for default. Issues in this regard that need clarification with respect to the blanket suspension of the Code are: Whether a MSME can file an insolvency petition against a corporate debtor for two separate claims that add up to a total of one crore, provided that the default occurred before the disruption period? Further, in case, a default is continuous in nature and the total value of default is more than rupees one crore, but the default for a part of this transaction occurs during the disruption period, can a creditor still initiate an insolvency proceeding for the default of the entire amount, or even a part thereof? Only an affirmative response by the Adjudicating Authority to these questions can ensure financial stability of the MSMEs. The Adjudicating Authority will definitely be in a dilemma as on one hand it would have the corporate debtors to be saved from insolvency proceedings and on the other hand, the financial soundness of the MSMEs, the wheels of the Indian economy will be at stake. Another concern arising with respect to MSMEs is the suspension of Section 9 of the Code, which provides for the initiationbtw of Corporate Insolvency Resolution Process (“CIRP”) by an operational creditor. This concern is also fuelled by the fact that the Reserve Bank of India came out with a COVID-19 Regulatory Package whereby, a moratorium period of  6 months (till Aug. 31, 2020), for repayment of  loans provided by financial institutions has been provided to be availed by debtors in order to mitigate the disruption caused by the pandemic; operational creditors are not included in such capacity. It is to be noted that MSMEs have been considered to form a major part of operational creditors in the Indian economy. This, in all certainty, might lead to a high possibility of MSMEs not being able to invoke Section 9 of the Code even if the default reaches the minimum threshold of Rupees 1 crore that is prescribed, since Section 10A of the Ordinance has suspended initiation of CIRP during the disruption period. Furthermore, Section 10A in the Ordinance provides that “no application for insolvency can be filed for any default arising on or after 25th March 2020 for a period of six months or further extendable till

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WhatsApp Pay and Competition in India: A Cause for Concern?

Competition Law /

[By Naga Sai Srikar] The author is a student at Christ (Deemed to be University), School of Law Introduction The Unified Payments Interface (UPI) has been India’s greatest achievement in the digital payments sector so far. It is no secret that the demonetization of banknotes announced by the Union Government on 8th November, 2016 acted as a great catalyst in promoting digital payments across the country. While large Peer-to-Peer (P2P) wallet providers such as Paytm, Freecharge, and Mobikwik were compelled to introduce UPI to their existing infrastructure owing to scalability and ease of use, others such as Phonepe and Google Pay went on to build their payment services solely on the UPI platform. Seeing this as a great opportunity, Facebook Inc. owned messaging giant WhatsApp too joined the bandwagon and demonstrated its intent to foray into the digital payments market. On 16th February, 2018 the National Payments Corporation of India (NPCI) which spearheaded the UPI granted an in-principle approval for WhatsApp’s pilot project.[i] According to the consent, WhatsApp could roll out UPI for a limited userbase of 1 million and with a stipulated per transaction limit. However in July, 2018 a legal think tank named Centre for Accountability and Systemic Change (CASC) filed a PIL before the Hon’ble Supreme Court stating that WhatsApp had failed to comply with the data localization rules notified by the RBI thereby violating the privacy of citizens.[ii] WhatsApp’s reluctance to comply finally came to a hold when the Supreme Court ordered RBI and NPCI to submit reports of compliance thereafter which WhatsApp assured the Court that they would comply to the data localization rules before rolling out their full-fledged payments feature.[iii] The latest order explicitly mentions – “It is made clear that there will be no stay of the proceedings with respect to the application of respondent No.3 (i.e. WhatsApp) by the Government, which shall be processed in accordance with law”[iv] indicating NPCI and RBI to go ahead with its regulatory approvals if conditions are met. Subsequently, it has been reported that the Competition Commission of India (CCI) has been reviewing antitrust complaints against WhatsApp Pay.[v] Therefore, a question arises as to whether the CCI would now knock the doors of WhatsApp? The Abuse of Dominance Conundrum A. Relevant Product Market Before delving into the discussion regarding the possible abuse of WhatsApp’s dominant position, the relevant market has to ascertained. In the instant case, it must be noted that WhatsApp which is predominantly an instant messaging application would enter the Digital Payments Market (offering only UPI initially) by enabling the said feature on its existing application. Thereby, WhatsApp is said to utilize its already existing userbase to push its digital payments presence. Taking into account factors such as interchangeability, characteristics of the product or service, their prices, consumer preferences and intended use as provided under Section 2(t) and Section 19(7) of the Competition Act, 2002 (the Act), two markets emanate for discussion. Firstly, the ‘Instant Messaging Services’ market. Although the focus is on WhatsApp’s payment feature, yet it is opined that WhatsApp’s primary market, i.e. instant messaging, has to be assessed in the instant case as the UPI feature (popularly called as WhatsApp Pay) is being added as an extension to its existing application. The second market that is relevant here is that of ‘Digital Payment Systems’ offering UPI as a feature. B. WhatsApp’s Scale of Dominance In the Instant Messaging market, WhatsApp holds 33.37% of global market share with more that 2 billion active users.[vi] Of this mammoth subscriber base, 400 million users are from India making it the largest market for WhatsApp.[vii] A study indicates that WhatsApp is installed on 95% of Android Devices and 75% of the users use the app on a daily basis in India.[viii] The statistics above clearly indicates WhatsApp as the market-leader and in a position to dominate. As far as the Digital Payment Systems market offering UPI as a feature is concerned, a leading payment gateway provider’s report indicates that Google Pay holds a market share of over 61% followed by PhonePe and PayTM with shares of 24% and 6% respectively.[ix] In terms of number of users, Google Pay boasts of 67 million active monthly users[x] followed by PhonePe with 55 million users. With an average of 790 million UPI transaction per month[xi] (as per data for January, 2019 to September, 2019), the addition of UPI feature onto its messaging platform would enable WhatsApp with a 400 million subscriber base to instantaneously penetrate into the payments market. Even the slightest translation of instant messaging users to the UPI feature would dent the other players in the market. Therefore, factors such as position of strength, operations independent of competitive forces and effect on its competitors in the relevant market is opined to be satisfied in the instant case and thus falls squarely within the ambit of “dominant position” as explained under Section 4 of the Act. C. The Abuse of Dominant Position Charge It well known that a market-player’s dominant position is not per se prohibited under the Act. However, the abuse of a player’s dominant position is prohibited. Section 4(2)(e) of the Act expressly states that – There shall be an abuse of dominant position if an enterprise or a group “uses its dominant position in one relevant market to enter into, or protect, other relevant market.” In the instant case, WhatsApp’s dominant position in the Instant Messaging Services market is being utilized to enter the payment services market, clearly violating the said provision. Similarly, Section 4(2)(c) of the Act categorizes practices resulting in denial of market access in any manner as an abuse of dominant position. It is opined that WhatsApp’s integration of UPI into its existing app forms a market denial practice since the user is incentivized to utilize the UPI feature without having to download additional applications. The mere fact of WhatsApp’s mammoth subscriber base would create a large network effect thereby affecting the already existing players in the market. Although there is

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Assessing Competition and FDI Policy Concerns over Cloud Kitchens

Competition Law, Contemporary Issues /

[By Sanchit Khandelwal and Shreya Iyer] The authors are students at NALSAR University of Law. Over the past decade, Indian market landscape driving on the shoulders of technology and innovation has changed drastically. Convenience and comfort have now become an important consideration in the lives of people, especially millennials. Such alterations in the lifestyle of the society or part of the society have stimulated and pioneered the emergence of certain business opportunities like food deliveries. The advent of food aggregating platforms like Zomato, Swiggy, etc. has made food delivery service an intrinsic part of our lives and the restaurant industry. Hectic lifestyle, economical rates, promotional schemes and multiple cuisines have contributed to this growth. According to the CCI market study on e-commerce in India (hereinafter referred to as CCI’s study), growing at a rate of 12% annually, food deliveries today make for 29% of restaurant revenue and 78% of restaurants can be found online. High demand, coupled with increased purchase power is likely to ride the Indian online food delivery industry to touch $5Bn by the end of the year 2023. Banking on the promising prospects of the food delivery business, there has been an emergence of a distinct delivery only restaurant model known as ‘cloud kitchen.’ Cloud kitchens are delivery exclusive restaurants that do not offer dine-in facility. Lower fixed cost, variable cost and operating cost adds flexibility to the new model and enables rapid expansion into newer territories, which is evident from 80% growth in non-metro cities. Most of these cloud kitchens take orders through food aggregators. In the last 2-3 years, several food aggregators have invested significantly in cloud kitchens, and some have even launched their own private labels. Food aggregators like Swiggy and Zomato have promoted the inclusion of these cloud kitchens on their platforms. For example, Swiggy through its #SwiggyAccess service provides free real estate to select restaurants and bills them on a revenue sharing model per delivery. Such developments wherein the food aggregators (owning or having a stake in cloud kitchens) have assumed the dual role of the operator of the platform and the seller not only draws competition law related concerns but also seems to be at cross with the FDI policy of the country. Competition law related concerns The dual role assumed by the food aggregators as a platform sketches an inherent conflict of interest between the platform’s role as an intermediary between the consumer and the seller on the one hand and as a market participant on the other. The market outcome of platforms lacking neutrality is likely to be compromised by being under the influence of the food aggregators (marketplace) rather than being a result of pure competition based on merits. The absence of platform neutrality allows the food delivery platforms to establish their leverage in their favour through access to transactions data and ranking of search results. The food aggregators role as an intermediary platform provides them with competitively critical data such as price, quantities sold, demand patterns, etc. pertaining inter alia to each product, seller and geography. Access to such data allows the platforms, which are also the sellers, to enhance the sale of its preferred sellers and better target the introduction of their own private labels. As per the CCI’s study, several restaurant owners have alleged that with the cross usage of data, several food aggregators have launched their own cloud kitchens in high demand food categories in hyper-local markets. Seller’s interaction with customers on the platform depends upon the seller’s ranking on the platform in response to related search queries generated by customers. The organic search ranking which any restaurant obtains is generated by the platform’s algorithm. It is the platform that tunes the algorithm and is in control of the search parameters and results. The duality of the platform hints towards biases that may creep in search rankings, a critical determinant of consumer traffic that one can attract. Several respondents (restaurant owners) of the CCI’s study complained that platforms’ algorithms are devoid of transparency and cloud kitchens, in which platforms themselves have stakes, are placed better on the platforms. Such manipulation by platforms with search results, seller’s data and user reviews hamper the ability of independent restaurants to compete effectively with the vertically integrated entities or the platforms’ preferred entities. The European Commission in the Google shopping case charged Google with $2.7Bn fine for using its position as a search engine to push its own shopping comparison website to top of search results. In 2019, the CCI had fined Google $21 million for ‘search bias’ and abusing its dominant market position. In the Indian food aggregators marketplace, Zomato and Swiggy are the two major market leaders and after the acquisition of Ubereats by Zomato, Zomato is likely to become the dominant market leader in the relevant market. Unfortunately, the CCI unlike its foreign counterparts has disregarded the prospective and potential effects of such conduct on the existing as well as future competition. However, it seems that the new policy on FDI in e-commerce has come to the rescue, as it lays down general restrictions on the activities of the e-commerce in India. Do cloud kitchens flout FDI policy? The new FDI policy that came into effect in February, 2019 mandates business models of online players to realign themselves with the new guidelines. Additionally, the new policy restricts the sale of those goods by the platform in which they have an equity participation. The FDI policy identifies two types of e-commerce models, the marketplace model and the inventory model. According to the marketplace model, the e-commerce enterprise should solely act as a technology facilitator between buyers and sellers. Whereas, under the inventory model there exists no such restriction on the e-commerce enterprise to own goods and services that it trades on its platform. Further, up to 100% FDI is allowed under the marketplace model and none under the inventory model. Most of the food aggregators, if not all, are backed by FDIs and therefore, are

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Pre-Package Schemes: An efficient mechanism?

Insolvency Law /

[By Utkarsh Mishra] The author is a student at Nirma University, Institute of Law. Introduction The Government of India on 24 March 2020 announced an increase in the threshold of default under Section 4 of Insolvency and Bankruptcy Code (“IBC”) to Rs 1 crore from the previous threshold of Rs 1 lakh. This move was taken by the government to protect the small and medium enterprises (“MSMEs”) from initiation of insolvency proceedings against them. Further, to address the plight of the corporations, the government on 22 April 2020 took the much-needed step of suspending the filing of new cases under Insolvency and Bankruptcy Code for six months. Pertinently, on 17 May 2020, the ongoing suspension was further extended from 6 months to 1 year. Finally, on 5 June 2020 the government promulgated an ordinance which clarifies the suspension of IBC. The said ordinance categorically suspends the IBC for the purpose of initiation of Corporate Insolvency Resolution Process (“CIRP”) for a period of six months for defaults occurring after 25 March 2020. However, when this suspension will be lifted, the tribunals i.e National Company Law Tribunals (“NCLT”) will be flooded with insolvency applications under Sections 7, 9 and 10 because of the already existing economic crisis coupled with the absence of workforce. Therefore, the corporations will not be able to perform with full efficiency, and eventually, they will commit a default. This problem of burdening on the NCLT could be resolved by introducing another mechanism known as ‘Pre Package Scheme’. What is a Pre Package Scheme? In this mechanism, the negotiation of assets of the corporate debtors occurs before the filing of an application under Sections 7, 9 and 10 of IBC. After the negotiation comes to an end, it will only have to be approved by the committee of creditors (“CoC”) and later by the NCLT. Thus, the mechanism acts as a time saving tool for both the debtor as well as the creditors from all the litigation and other legal formalities like invitation to prospective resolution applicants under Section 25(2)(h) of the IBC. The average time taken in an IBC proceeding is of 340 days, and after the above-mentioned suspension gets over, if the ‘Scheme’ is timely implemented, corporates can focus more on reviving themselves rather than getting involved in lengthy legal procedures. Apparently, this procedure is not new; countries like the United States of America (USA) and the United Kingdom (UK) have successfully implemented this procedure in their respective insolvency laws. Additional advantages of Pre Package Scheme: As per the insolvency law in India, one of the significant problems with the appointment of the interim resolution professional (“IRP”) is damage and deterioration to the goodwill and image of the corporate debtors in the market. The whole process ultimately results in a decrease in the market value of the corporate’s assets as new investors will not risk their money. Therefore, when the entity goes into liquidation, it will not get the full value of its assets. On the contrary, if the ‘Pre Package Scheme’ is introduced, then the problem of value deterioration can be bypassed. It is because of the mechanism of the Scheme, as in this, all the negotiation is done privately and before filing of the application. Further, this negotiation cum resolution plan only needs to be approved by the CoC and then by the NCLT, thus, giving lesser time for the market to react. After the completion of the CIRP, creditors generally do not get the full return of the debt given to the corporate debtors, especially the operational creditors. Since, the Pre Package Scheme provides lesser time for the market to react, accordingly creditors might have a higher chance to make the most out of the assets. Challenges to the Implementation of the ‘Pre-Package Scheme’ One of the most prominent challenges to the implementation of ‘Pre Package Scheme’ is Section 29A of IBC. This provision was introduced by the Insolvency Bankruptcy Code (Amendment) Act, 2018, and it states the disqualification criteria for persons who want to be a resolution applicant. A resolution applicant is defined under Section 5(25) as a person who submits a resolution plan to the resolution professional. The quintessence characteristic of a Pre Package Scheme is that the corporate debtors themselves try to negotiate with the creditors before any legal proceedings under the IBC. However, Section 29A(c) of the IBC explicitly disqualifies the following persons: firstly, has account classified as NPA, secondly is a promoter of a corporate debtor the account of which has been classified as NPA, thirdly is in the management of a corporate debtor the account of which has been classified as NPA, lastly is in control of a corporate debtor the account of which has been classified as NPA. In simple words, Section 29A was brought with an intention to stop the backdoor entries of the defaulting promoters back to the management. Further, in the case of Jaiprakash Associates Ltd. and Ors. Vs. IDBI Bank Ltd. and Ors.,[i] it was held that strict adherence to Section 29A is mandatory. Therefore, because of the strict application of Section 29A, corporate debtors would not be able to formulate a resolution plan with the creditors as these section prohibits the same. Even if the Scheme is implemented, a question on the resolution’s credibility and transparency will always arise. As the directors/promoters/management are involved in the resolution, there is a high chance that the debtor’s related party creditors might end up getting all the assets. On the other hand, some of the remaining creditors will definitely challenge the concerned resolution, thus adding more time to the process, which will vitiate the essence of the Pre Package Scheme. Conclusion: Points to be considered during the implementation of the Scheme Pre Package Scheme as a tool for resolution has been very successful in countries like the USA and UK. Moreover, keeping in mind the characteristics of the Scheme, Singapore, in its insolvency laws, introduced the ‘Pre Package Scheme’ in 2017. Similarly, India also

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Moody’s optimism turned sour: Need to review the FRBM Act, 2003

Contemporary Issues /

[By Dushyant Sharma and Sanskriti Shrimali] The authors are students at Nirma University, Institute of Law Introduction One of the premier rating agency, Moody’s has recently joined the league of other two rating agencies in downgrading India’s status to the lowest investment grade option. In its report dated 1st June 2020, the agency stated that it has downgraded India’s sovereign rating to Baa3 from Baa2 with a negative outlook which reflects deeper stresses in the economy and financial system of the country. The report also explicitly mentioned that this action has not been taken in the wake of pandemic and has not been affected by its implications. Key reasons highlighted for adopting this stand are worsening fiscal discipline, rising stress in the financial sector and prolonged period of slow growth compared to India’s potential. Further one more downgrade would lead India to ‘Junk’ rating. This action would seriously impair the country’s creditworthiness as it would become difficult to raise money from the international market coupled with higher interest rates. However, the agency maintained that this event is unlikely to happen in the next 24 months while citing caution that if the current economic scenario worsens and growth does not pick up then the junk bond rating would be suicidal for the government. It should be noted that it is the same Moody’s which had approved government’s institutional reforms back in November 2017. So, why the optimism of Moody’s turned sour towards India, and what reform policies should be adopted by the country to push the economy back on its track? Among the major reasons for downgrading India’s rating, lack of fiscal discipline continues to be the prominent one. Prudent management of public finances demands a comprehensive fiscal rule to be adopted by the country. For instance, a fiscal rule is a legislated cap being put on budgetary aggregate to maintain the fiscal discipline of the country.[i] The importance of maintaining a fiscal discipline is greatly emphasised by the developed and emerging economies. In line with the same, India also enacted Fiscal responsibility and Budget management Act (FRBM), 2003 to maintain the state of finances in the country. The act provides the fiscal deficit to be reduced steadily to 3% of gross domestic product (GDP) by 31st March, 2021. Despite the mandate, the government has been breaching its own fiscal target for the  past few years with the experts warning that the deficit numbers for FY 21 could be as high as 7% of GDP against the budgeted 3.5. A rise in the percentage of fiscal deficit is obvious this year as the first two months of FY21 has seen highly restricted economic activity leading to lower tax collection and increased spending of government due to COVID-19 pandemic. In budget session of 2020-21, the union government announced to spend around Rs. 30,42,230 crore this year and the shortfall of Rs.7,96,337 crore against the expenditure would be financed through borrowing, but the Corona crisis has completely disrupted this calculation. Amid this crisis, various economist believed that estimated revenues of the government would take a big hit due to stalled economy for nearly 2 months. The economic stimulus of Rs. 20 lakh crores, out of which actual spending is merely Rs. 1 lakh crore clearly shows the inability of the government to spend more. This clearly signifies that the past deviations from the fiscal targets is seriously impairing the ability of the government to spend more in times of serious economic crisis like the present one. To avoid free falling of the Indian economy due to such a gross negligence, it’s high time to take required reforms. In 2016 the government has realised this need and constituted a committee headed by N.K. Singh. Even after the report submission no major steps have been taken. Measures and recommendations Independent Fiscal Council In India lack of an independent institution is serious lacuna in securing compliance to the letter and spirit of fiscal rules.[ii] A sound fiscal policy is a key to maintain the overall macroeconomic stability of the country.  By 2014 more than 80 countries have adopted some or the other fiscal rules and 35 of them have constituted autonomous fiscal councils  to evaluate fiscal policies and performance of the government.[iii] As India is increasingly getting integrated with the world economy, the need for this council is indefeasible to foster the trust of international investors. This council may be tasked with the work to identify the best rule or combination of rules to be applied in India. For instance, there are four fiscal rules namely Budget Balance Rule, Debt rule, Expenditure rule and Revenue rule. Apart from this, the council would also oversee that the fiscal target of the government would not go off track and suggest measures for the same. At present all these activities are performed by various institutions like the Finance Commission, NSO and Office of CAG. An Integrated autonomous institution in the form of Fiscal Council must assume all these functions to cater to the emerging needs of the market. 14th  Finance Commission have also advocated for such an Independent body, tasked with maintenance of fiscal discipline in the country. Transparency provided by this council would help to deter discretionary shifts from the existing fiscal targets of the government. At present when the whole world is looking towards India as an alternative to China, the constitution of this council must be announced by the Union government in the next budget session of 2021. The existence of such independent council can be seen in developed economies like UK (Office of Budget responsibility) and USA (Congressional Budget Office). These councils provide budget analysis as well as evaluate that legislative actions do not result in breach of spending levels set by the budget resolutions. Debt-ceiling The rising public debt to GDP ratio of India is an area of concern. With an estimated 69% of public debt to GDP ratio, the country has been dampening fiscal prudence for the past 70 years. An obvious but often missed

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Spentex Industries Ltd. v. Quinn Emanuel Urquhart & Sullivan LLP: Analysing Commercial Nature of Contracts and Agreements for Foreign Attorneys

Arbitration Law /

[By Apoorv Jaiswal and Gokul Holani] The authors are students at National University of Juridical Sciences, Kolkata and National Law Institute University, Bhopal respectively. Background The relevancy of arbitration as a method of dispute resolution has grown manifold to resolve disputes of varied subject matters. The relationship between a client and a lawyer is purely contractual, thus, the remedy of the lawyer for recovering the fee, etc., can be arbitration proceedings since it is a defined legal relationship and subject matter is arbitrable. However, in cases of foreign seated arbitrations, existence of a commercial relationship is necessary.[i] Recently, this issue came before the Delhi High Court (HC) in Spentex Industries Ltd. v. Quinn Emanuel Urquhart & Sullivan LLP where a dispute arose as to enforcement of award under Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 relating to payment of outstanding fee to the law firm by the client. The facts of the case were that the Plaintiff approached the Respondent for its legal services and an engagement letter was issued by the Respondents containing a clause to arbitrate in cases of possible future disputes. Later, the Respondents raised invoices for the dispute and an award was passed in the arbitration proceedings. Proceedings before Delhi HC arose when an application was filed by Respondents for rejection of the Plaintiff’s suit challenging the arbitration agreement. The Plaintiff’s two fold arguments in the suit were that (a) the relationship between the Plaintiff and the Respondent cannot be considered as ‘commercial’ under the law in force in India and, (b) the agreement also involved an element of contingent fee, thus violative of public policy in India. Lawyer-Client Relationship vis-a-vis Commercial Relationship Section 44 of the Arbitration and Conciliation Act, 1996 (ACA) warrants that a foreign award should arise out of a legal relationship that is commercial in nature under the Indian laws. However, the term ‘commercial’ has not been defined in ACA and courts have previously relied on the ‘common parlance’ meaning of the term.[ii] The term ‘commercial’ has been broadly interpreted to “embrace every phase of commercial business activity and intercourse.”[iii] In the present case, the Plaintiff argued that the lawyer-client relationship is not commercial in nature as per the laws in India and thus, the arbitration agreement is null and void. Rationale being that the primary duty of a lawyer is to administer justice, which cannot be classified as commercial.[iv] However, HC distinguished the judgments cited by the Plaintiff in the present case, stating that the rulings were with respect to advocates practising in India, whereas, here the Respondent was a foreign law firm. Therefore, the rules for code of conduct for advocates in India could not be made applicable to them. Further, the Court reasoned that as the arbitration was merely carried out by the Respondent for recovering their outstanding fees and not relating to professional issues, it was indeed commercial in nature. Although the judgment seems to follow the pro-arbitration stance taken by the judiciary lately, there are certain problems with the analysis given by the HC relating to the commercial nature of foreign lawyer-client relationship. The two rationales employed while reaching this conclusion were (i) Respondent, being a foreign law firm, was not obliged by the non-commercial character of lawyer-client relationship in India and (ii) That the arbitration was solely for the outstanding fee. First rationale seems problematic considering the express terms ‘commercial under the law in force in India’ used in Section 44.On a plain reading, it is clear that the legal relationships ought to be commercial in nature as per the laws in India. However, HC in the present case has artificially ignored the phrase ‘commercial under the law in force in India’. Though, an interpretation that even foreign lawyers and law firms must adhere to the commercial relationship requirement as per laws in India seems to be regressive, but the same is warranted by the provision. A better approach can be deleting the phrase “under the law in force in India” from Section 44 by means of an amendment, to maintain the progressive, pro-arbitration approach. The reasoning of the second rationale follows from the first, i.e. as the Indian law of non-commercial relationship between lawyer-client is not applicable on the Respondent being a foreign law firm, the terms of the arbitration agreement have to be interpreted to determine the commercial or professional nature of relationship. As the arbitration was for outstanding fee and not relating to professional issues, the Court upheld the commercial nature of the relationship. However, as the second rationale is based on the erroneous first rationale, rendering the judgment devoid of merits and liable to be overruled on appeal. Validity of agreement in lieu of contingency fee Enforcement of an award could have been challenged on a few grounds under the ACA, that are as follows:  (i) Section 45 where the said arbitration agreement must be null and void, inoperative or incapable of being performed; or  (ii) under Section 48(1)(a) where the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or (iii) under Section 48(2)(b) where the enforcement of the award would be contrary to the public policy of India. Plaintiff further argued the existence of elements of contingency fee in the agreement would thus, render agreement null and void, inoperative and incapable of being performed and against the public policy of India. Lawyers in India are not allowed to charge contingency fee in India.[v] In Re: ‘G’, A Senior Advocate of The Supreme Court, where a senior advocate was suspended by the Bar Council for misconduct under Section 11(1) of Bar Councils Act, 1926 for entering into an agreement of contingent fee with the client, his suspension was upheld by the Supreme Court and the agreement was held to be illegal and void. The Hon’ble Supreme Court in Sasan Power Ltd. v. North American

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Independent Resolution Professional: A mythological being under the IBC?

Insolvency Law /

[By Arshit Kapoor and Kartikey Bhalotia] The authors are students at National Law University, Odisha. Introduction This article enumerates the role of a Resolution Professional (“RP”) in carrying out the Corporate Insolvency Resolution Process (“CIRP”) as an independent umpire, as provided by the scheme of the Insolvency and Bankruptcy Code, 2016 (“IBC”). This is done in the context of the National Company Law Appellate Tribunal (“NCLAT”) recent decision the case of State Bank of India v. M/S Metenere Ltd. (“Metenere”) which directed substitution of the Interim Resolution Professional (“IRP”) stating that he is an ex-employee of the Financial Creditor and thus creating an apprehension of inclination towards the financial creditor. This article analyses the said NCLAT’s decision in contrast to the various provisions of the IBC which inherently creates an inclination of the RPs towards the financial creditors and hence, makes their collusion inevitable. The article also looks into the very scope of the NCLAT’s jurisdiction in giving the said order and tries to analyse whether it was merely a desperate attempt for instilling the importance of the independence of a Resolution Professional without considering the statutory backing for the same. Resolution Professional: Guardian of the Bankrupt The Bankruptcy Law Reforms Committee in its Report of 2015 (pg. 86) stated that an RP/IRP is the caretaker of the corporate person undergoing the CIRP. It has been stated in the Report that he is not only a supervisor of the bankrupt entity but also a negotiator between its creditors and the debtors in order to assess the prospective scope of keeping the said entity as a going concern. Taking these observations into account the legislature passed the IBC which explicitly provided for the duties and responsibilities of an RP/IRP. For instance, sections 18 and 25 of the IBC provide for the duties of the IRP and the RP respectively. As per these provisions, an IRP has the duty to carry out all the key tasks essential in setting the insolvency process into motion, which primarily includes inter alia collation of claims and formation of the Committee of Creditors (“CoC”). Once, this is done the RP appointed by the CoC (section 22 IBC) takes over and carries out further processes involved in a CIRP like preparing of information memorandum and inviting prospective Resolution Applicants. Apart from the IBC, the Insolvency and Bankruptcy Board of India (Resolution Professionals) Regulations, 2016 (“IBBI Regulations”) under the First Schedule explicitly provides for the ‘Code of Conduct for Insolvency Professionals’. Entries 5 to 9 to the First Schedule lays down certain code of conducts which are pre-requisites for ensuring the impartiality and independence of an RP. Therefore, it can be observed that an RP/IRP is at the centre stage of the CIRP. Moreover, the scheme of the IBC and the IBBI Regulations bring to the forefront the importance of their independence and impartiality. This is essential because a biased RP/IRP would defeat one of the primary objects of the IBC, i.e., “balancing the interest of all the stakeholders”. However, the question that arises is whether the provisions of the IBC read in entirety allow for such unaffected and independent conduct by an RP/IRP during the course of the CIRP. Independent Umpire or A Marionette? An IRP is appointed by the Adjudicating Authority on the recommendation of the financial creditor who files the application under section 7 of IBC. Further, it becomes pertinent to note that the IBC does not provide for any disqualification or eligibility criteria for the Adjudicating Authority to consider while appointing the recommended IRP. This essentially leads to making the Adjudicating Authority a mere rubber stamp in the appointment of IRP. This appointment of the IRP then at a later stage is put before the CoC which in its first meeting either appoints the IRP or any other competent person as the RP of the Corporate Debtor by a majority vote of 66% (section 22). Moreover, the CoC under section 27 has been empowered to resolve to change the RP by a majority vote of 66% at any time before the completion of the CIRP. Therefore, the above provisions make it apparent that the appointment and removal of the IRP/RP directly or indirectly vests with the CoC, leaving very negligible scope for interference by the Adjudicating Authority in this context. In other words, even if the Adjudicating Authority declines to appoint the recommended IRP under the section 7 application, the CoC can sub-silento go against the Adjudicating Authority’s decision by appointing an RP of their choice by a majority vote of 66%. Therefore, the very basis of the independence of an RP/IRP is shadowed because of the fact that their appointment, as well as removal, completely vests with the CoC. This fact clearly acts as a hurdle in giving effect to the NCLAT’s ruling in Metenere in terms of the necessity of an independent RP. Apart from the power of appointment and removal, the CoC also has leverage over an RP on the aspect of decision making. Every vital decision regarding the working of the Corporate Debtor needs to be ratified by the CoC, under section 28 of the IBC. Also, every decision concerning the selection of Resolution Plans or opting for liquidation, in which the RP participates, is protected by the doctrine of ‘Commercial Wisdom’. The Hon’ble Supreme Court in the case of Committee of Creditors of Essar Steel v. Satish Kumar Gupta has made it very clear that the commercial decision of the CoC cannot be challenged as it is protected by the doctrine of Commercial Wisdom. The only exception to the doctrine is that the impugned decision of the CoC should not have the effect of violating the very objectives of the IBC. Therefore, it would not be out of place to state that at the vital stage of CIRP, the bias of an RP towards the financial creditors can have a negligible scope of being checked or challenged. Thus, making an RP/IRP more of a marionette of the CoC

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