Author name: CBCL

India’s New E-Commerce Policy: Leveling the Playing Field for Online Retailers

Leave a Comment / Contemporary Issues /

[ Himanshu Shembekar ] The author is a 2nd year student of NLU, Odisha Introduction The Department of Industrial Promotion & Policy (DIPP) on 26thDecember, 2018 released a notification revising the policy on the Foreign Direct Investment in e-commerce. The new notification has shocked the big e-retailers like Amazon, Flipkart, etc. This notification has affected the way B2B business activities take place in the e-commerce industry. The new notification has taken effect from 1stFebruary, 2019. Through this post, the author intends to analyze the impact of the new notification of DIPP on the e- commerce industry in India. Provisions of the notification The DIPP has retained the policy of allowing 100% FDI in the E-commerce sector but it imposed new conditions on foreign-owned market places. The following are certain new and important set of rules: “An e-commerce entity cannot have complete control or exercise over the ownership or the control over the inventory. A vendor’s inventory shall be treated to be controlled by an e-commerce marketplace if more than 25% of its purchases are from the marketplace entity or its related companies.” “An entity having equity participation by any e-commerce entity or any of its related company or having control over its inventory by e-commerce market entity or related company, then it shall be not permitted to sell its product on platform run by such marketplace entity.” “E-commerce entity providing marketplace will not be allowed to directly or indirectly influence the sale price of goods and services. Provision of any service to any vendor on certain terms which are not available to other vendors in certain circumstances will be deemed to be unfair and discriminatory.” “E-commerce marketplace entity shall not mandate any seller to sell any product to sell any product exclusively on its platform only.” “The e-commerce companies have to furnish a certificate along with the report of a statutory auditor to the Reserve Bank of India to confirm the compliance of guidelines, by 30thSeptember, every year for the preceding fiscal year.”[i] Necessity for the changes These regulations have come up after the complaints which have been made by the small and medium Indian retailers, accusing the giant e-commerce companies for creating unfair marketplace, as these companies keep control over the inventory through affiliates and exclusive agreements.[ii] In addition to these complaints, the All India Online Vendors Association (AIOVA) had filed a petition to the Competition Commission of India (CCI), accusing that Amazon favored merchants  it partially owns such as the Cloudtail and Appario.[iii] It is a fact that Cloudtail India Pvt Ltd is the biggest retailer of Amazon. Prione Business, which is a joint venture between Amazon Inc. (48% stake) and Infosys co-founder N R Narayana Murthy’s Catamaran Advisors (51% stake), holds 99.99% of the shares of Cloudtail India.[iv] The other retailer is Appario Retail, which is a subsidiary of the Frontizo Business Services. Frontizo Business Services is a joint venture between Amazon India Ltd and Ashok Patni, the co-founder of Patni Computer Systems.Thus, it can be seen that how the big e-commerce companies through their subsidiary companies enter into such agreements which results in their capturing majority of the market share and adversely affecting other businesses. How new rule has impacted the big E-commerce companies? It is not surprising that the new regulations have brought all the big rivals in the e-commerce industry like Flipkart and Amazon together to fight against these new regulations which have threatened their business strategies. Due to the new rules, the e-commerce companies can get impacted in the following way- The affiliate sellers of the big e-commerce companies have to shift 75% of their business to other retailers, to ensure that affiliate sellers are able to continue with their business activity to provide goods and services. The big e-commerce companies have to bring in major changes in their equity structure so as to ensure that they are able to continue business with the sellers. As the big e-commerce companies cannot get the benefit of bulk purchases and selling their goods and services at low prices, this shall result in an end of big discount sales. The new rules also put an end to the flash sales in which the e- commerce companies can exclusively promote or sell their products on their platform. As the e-commerce companies are no longer able to buy majority of inventory through their affiliates, their costs shall increase. History of cases challenging E-commerce companies There have been many cases in which e-commerce companies have been accused of practicing non-competitive market practices. Few of the cases are as follows: Ashish Ahuja v. Snapdeal.com In this case, the complainant had accused Snapdeal and SanDisk of colluding with each other. Snapdeal had imposed a condition that to sell SanDisk products through online platform one must be authorized dealers i.e. must be recognized as an authorized dealer by Snapdeal as well as SanDisk, thus violating section 3 and 4 of the Competition Act, 2002 which provide for anti-competitive agreements and abuse of dominant position.[v] The Commission after enquiry held that the condition that SanDisk products sold through online portals must be bought through authorized dealers is no way an abusive conduct. This decision was within the scope of the company to protect its sanctity of its distributive channel.[vi]It was considered as a normal practice of business. M/s Mohit Manglani & Others Versus M/S Flipkart Pvt Ltd In this case, the publisher of Chetan Bhagat’s new book ‘Half Girlfriend’, Rupa publication had entered into an exclusive sale agreement with Flipkart, thus granting Flipkart exclusive right to sell the book. It was claimed by the competitors that this led to unfair trade practices as the consumer is given no choice. Flipkart had the 100% market share for the product for which it had exclusive dealing rights, therefore leading to dominance. In this matter CCI stated that an arrangement between manufacturer and an e-portal did not create any barrier for the new entries. Rather, it stated that with the emergence of the new e- commerce companies,

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Case Analysis of Appeal Mechanism under Insolvency & Bankruptcy Code 2016

Leave a Comment / Insolvency Law /

[ Rahul Kanoujia ]   The author is a 2nd year student of GNLU, Gandhinagar. Introduction: The most important feature of Insolvency and Bankruptcy Code, 2016[i] (hereinafter referred to as “IBC”) is the time bound resolution process, which tries to make sure that the process of resolution and liquidation does not suffer the trauma of never ending litigation. Such time bound resolution has been made possible through the introduction of limitations under various provisions of the Code, such as those given under Section 61and Section 62. These limitations are going to be the primary focus of this article. Section 61 of IBC,provides that the Appellate authority for filing an appeal from final order of the National Company Law Tribunal shall be National Company Law Appellate Tribunal. Similarly, Section 62 of IBC provides that an appeal from the order of National Company Law Appellate Tribunal on a question of law shall lie before the Supreme Court. Such appeal shall be filed within a period of 90 days. [ii] The year 2018 saw a multitude of case laws directly addressing appeals, significantly developing the law. The following section deals with some of those cases and the issues that they address. Issues before the National Company Law Appellate Tribunals: Whether an appeal filed beyond the maximum prescribed period of 45 days under Section 61 of the Code is maintainable? In the matter of State Bank of India v. MBL Infrastructure Ltd.[iii]the NCLAT Delhi held that Section 61 clearly stipulates that an appeal has to be preferred within 30 days from the order of the adjudicating authority. A delay not exceeding 15 days can be condoned in filing the appeal if the appellant is able to satisfy the appellate authority that there was sufficient cause for not filing the appeal within the prescribed period of 30 days. Thus, the maximum time frame for preferring an appeal is 45 days, which cannot be extended further on any ground whatsoever. Whether Appellate Tribunal has jurisdiction to condone delay beyond 15 days apart from the 30 days for preferring an appeal, as prescribed under section 61(2) of the I&B Code? In the matter of Sunil Sharma v. Hex Technologiesand Industrial Services v. Electrosteel Steels,[iv]the NCLAT held that Appellate Tribunal has no jurisdiction to condone delay beyond 15 days apart from the 30 days for preferring an appeal, as prescribed under Section 61 (2) of the Insolvency and Bankruptcy Code. Whether the Insolvency and Bankruptcy Board of India (IBBI)has the standing to challenge the findings of the adjudicating authority? In Insolvency and Bankruptcy Board of India v. Wig Associates,[v] the Insolvency and Bankruptcy Board of India (“IBBI”) challenged an interpretation accorded to Section 29(A) which allegedly resulted in approval of an ineligible resolution plan. The NCLAT Delhi held that under section 30(2), the resolution professional is duty bound to ensure that resolution plans are in conformity with the provisions prescribed thereunder. If the resolution plan submitted by an applicant is contrary to Section 29A, in view of Section 30 (2) (e) read with Section 30(3), the resolution professional should not have placed such resolution plan before the committee of creditors. In any case, if the legal interpretation accorded by the adjudicating authority contravenes the provisions of the Code, it is duty of the resolution professional to bring the same to the notice of the appellate authority by preferring an appeal. Further, it was also held that the IBBI does not have the locus standi to challenge a finding of an adjudicating authority under Section 61 of the Code. However, it is empowered under Section 196(g) to monitor the performance of the insolvency professionals and in appropriate cases, pass any direction as may be required for compliance of the provisions of the Code. Therefore, the appeal filed at the instance of the IBBI was dismissed. The tribunal however also clarified that the IBBI was at the liberty to inform the resolution professional to move an appeal under S.61. Scope of appellate jurisdiction of NCLAT vis-à-vis the power conferred on the central government under section 242 of the Code. In the matter of Principal Director General of Income Tax v. M/s. Spartek Ceramics Indiaand National Engineering Industries Ltd. v. Cimmco Birla,[vi]The NCLAT held that the NCLAT is empowered to hear the appeal under the Companies Act, 2013, the Code and the Competition Act, 2003only. The central government by exercising the power under section 242 cannot empower the NCLAT to hear an appeal pursuant to a Notification which granted ninety days’ period to prefer an appeal under section 61(1). Grant of ninety days’ period was in clear violation of section 61(2) of the Code, which clearly prescribed a time limit of 45 days only. Thus, while the central government is empowered under section 242 to make any provision to remove the difficulty in giving effect to the provisions of the Code, the provision cannot be in violation of any of the substantive provisions of the Code. Distinction between the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 as regards the period of limitation for an appeal before the NCLAT. In the matter of Prowess International Private Limited v. Action Ispat & Power Private Limited, the NCLAT drew a distinction between the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 as regards the period of limitation for an appeal before the NCLAT. In an appeal preferred under Section 421 of the Companies Act, 2013, the period of limitation is counted from the date on which a copy of the order is made available by the tribunal pursuant to sub-section (3) of Section 421 of the Companies Act, 2013. [vii] Under Section 61 of the Code, the appeal is required to be filed within thirty-days, means within thirty-days from the date of knowledge of the order against which appeal is preferred. Conclusion The above judgements provide much needed clarity with regard to the Appeal Mechanism under Section 61, that appeal is to be filed within thirty days. However, as per proviso

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Post-regulatory private sector employments and their corporate governance implications

Leave a Comment / CBCL - LSPR Series, Kaizen /

[By Rohan Kohli] This Blog is part of a series of posts as a collaboration titled “KAIZEN” between the Centre for Business and Commercial Laws (CBCL), NLIU Bhopal and Law School Policy Review (LSPR). To view this blog on LSPR, please click here. Rohan Kohli is the Co-Convenor of CBCL and a 5th Year B.A. LL.B. Student at  NLIU, Bhopal. The corporate governance discourse in India today has moved rapidly, especially with contemporary developments in the form of Kotak Committee Report, [1] but still lags in several aspects vis-à-vis more mature financial jurisdictions. While our precocious model of economic development[2] has been instrumental in addressing governance issues such as equitable board composition,[3] or more recent niche issues such as separating key managerial positions,[4] there is still a glaring absence on understanding of certain nuanced issues. One such nuanced issue is the recent trend of regulators taking up post-retirement private sector employments. In the past year, there have been a constant influx of regulatory and government companies’ seniors in the corporate sector, from former SBI Chairman Arundhati Bhattacharya [5] to former SEBI Chairman U K Sinha.[6] In the more distant past, this trend was also visible in several instances – from ex – SBI senior management [7] to ex – RBI Governor.[8] The trend of their preferred destinations being corporate law firms also is extremely intriguing. Ordinarily such practices may seem in the usual course of events, there carry a number of ethically and morally problematic implications, the legal issue in which is insider trading. Indian laws on the subject [9] have been largely successful in preventing major embarrassment to the corporate sector in the recent times, due to a combination of reasons such as effective corporate compliance and harsh legal implications including financial and penal consequences.[10] Similarly, while the ethical implications of post-retirement political appointments such as Governors [11] is well recognised and even frowned upon in the mainstream media discourse, this does not translate into recognising similar examples in the corporate space. The official line that corporates take while appointing such ex-regulators is that they are sought for their decades of experience in the field, their unique insight developed due to such extensive experience and use these insights to leverage the corporate’s interests in the market. While these are valid considerations and their insights are valuable for any corporate, the devil is in the details. While the PIT Regulations provide a clear demarcation to using these insightsin the form of price-sensitive information, they do not provide an absolute bar to such appointments. In all probability the biggest selling factor of these ex-regulators provide is insight in what manner will regulatory authorities react and respond to contentious issues, be it approving or disallowing mergers, or macro-level policy inputs into future regulatory trends. At the same time, these ex-regulators also give firms opportunity to leverage their soft power, which in latent forms could be utilising their familiarity with current regulators (as in most cases the current regulator would be the ex-regulator’s junior and in most instances would have worked closely together till recent times), to more patent forms where firms use this familiarity to influence regulator’s decisions and engage in seriously problematic crony capitalism. The government currently has a policy of mandating a one-year long (in most institutions) cooling-off period during which they eschew any private appointments. However, as the above analogy shows this period hardly serves its purpose given their juniors or peers will be in their erstwhile jobs at the time they accept appointment in the private sector. Further, the current examples of Mrs. Bhattacharya, Mr. Sinha shown earlier that occurred as soon as their cooling-off period lapsed, reducing this into a mere formality. A solution to this is making the cooling-off period in sync with the term of the previous office (i.e. the cooling off period for SEBI Chairman will be 5 years, beginning from the day of retirement). This might serve as a reasonable control and ensure that by the time the ex-regulators assume private employment, their peers and juniors might no longer in office to negate chances of influencing the regulator’s actions. In more advanced markets such as USA, there is a greater mainstream understanding of the inter-corporate-regulator appointments, but that recognition does not necessarily translate into eschewing such practices. While India has seen examples of ex-regulators and government companies’ management taking up private employment, the former, i.e. corporate head taking up regulatory jobs is almost unheard of, until very recently.[12] USA has seen plenty of examples for each, from Alan Greenspan in the former[13] to Henry Paulson in the latter.[14] Their impact in deregulating the financial and banking sector has been so immense that its role in the sub-prime crisis was the subject of a widely acclaimed documentary – Inside Job. The US story in this regard also goes down to corporate-regulator appointments translating into impacting the entire discipline of economics at the world level, ably documented in Inside Joband in other media.[15] Given that our regulators are more hawkish than US and other jurisdictions, especially given ours is a developing economy, we are in a much better position to prevent such corporate governance issues at a very nascent stage itself. Apart from the solution regarding cooling-off period offered above, comprehensive conflict-disclosure compliances should prevent any major future situations that US had to go through. SEBI’s current conflict-disclosure model for public-company directorships has proved to be a successful model so far in capital markets, and can surely be extended to other markets and even post-regulatory appointments that is the subject of this blog. India is hardly at a stage that the US was in 2008, or is currently, with complex corporate governance issues such as detailed above. However, that does not mean that we negate those examples. Rectifying such issues will only happen after we start recognizing them. [1] Report of the Committee on Corporate Governance, October 5, 2017. See, https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html. [2] Subramaniam, Arvind, “Of Counsel: The Challenges of the Modi – Jaitley Economy”, Penguin Viking, December 2018.

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Classification of Creditors: Constitutional Validity of the Insolvency and Bankruptcy Code, 2016

Leave a Comment / Insolvency Law /

[Medhashree Verma and Kavya Lalchandani] The authors are 3rd year students of National Law University Odisha, Cuttack.  Introduction  The long-standing dilemma regarding the constitutionality of the Insolvency and Bankruptcy Code, 2016 (IBC) has been finally settled by the Hon’ble Supreme Court of India. In Swiss Ribbons Pvt. Ltd. & Anr v. Union of India,[i]the court answered all the issues regarding the constitutionality of the IBC and stands as a perfect example of Judicial Deference to enter into the sphere of legislaturefor matters relating to the economy of the country which the legislature has the liberty to experiment with. Keeping in mind the background and the pre-existing state of laws regarding insolvency, the court observed that unification of law governing insolvency was necessary and a system of speedy disposal of insolvency matters and a fast resolution process was necessary to save the economy from rising Non-Performing Assets. The Court also referred to the BLRC report which stated that “In such an environment of legislative and judicial uncertainty, the outcomes on insolvency and bankruptcy are poor”. Thus, in order to expedite the process of insolvency resolution and to save the financially unstable companies as a going concern, the IBC was enacted. The court stated that “The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being mere recovery legislation for creditors”. It dealt with the following pressing issues related to the IBC: Classification of creditors: Article 14 IBC happens to be the first insolvency legislation to have created a distinction between the creditors as operational creditors and financial creditors. The preferential treatment given to the financial creditors under the scheme of the Act to the extent of ignoring the interest of the operational creditors has been a topic of moot since the inception of the IBC. It was also contended that the classification between the two kinds of creditors is discriminatory as the debtors to the operational creditors are given a notice of demand under the provisions of the Act and are even entitled to raise a genuine dispute regarding the same while the debtors to the financial creditors are not entitled to the same. Moreover, vires of section 21 and 24 of IBC were also assailed on the ground that the operational creditors do not get a right to vote in the meetings of the committee of creditors. It was contended that there is no intelligible differentia in the classification of creditors and hence the same violates Article 14 of the Constitution. However, the Court rejected the arguments and held that the class of financial creditors is mostly limited to the banks and financial institutions who lend huge amounts to the corporate debtors. Their credit is usually secured, unlike the operational creditors who are unsecured and grant loans in small amounts. Also, the nature of lending is different between the financial and operational creditors. The financial creditors lend money to the enterprises for working capital or on term loan which helps the corporate debtor in initiating and running the business. On the other hand, operational creditors are related to lending and supply of goods and services. The court noted that the amount that is owed to the operational creditors is generally less and contracts entered into with the operational creditors do not have clauses relating to a specific repayment schedule. The court further observed that in the case of an operational creditor there is a larger possibility of existence of a genuine dispute and can use arbitration as a means of settling their dispute. In contrast, the financial debts lent by the financial creditors have authentic documentation maintained by the banks and the financial institutions and the defaults made can be easily verified. Furthermore, financial creditors are concerned with the financial health of the corporate debtor and are in a better position to restructure the loans and help the corporate debtor recuperate from the financial stress which the operational creditors do not and cannot do because of the nature of contract that they enter into with the corporate debtor. Thus, there exists an intelligible differentia in the classifications of the creditors which is directly related with the object of the act which is to preserve stressed entities as a going concern and implements fast resolution mechanisms for the corporate debtor. The court observed that vires of Section 21 and 24 of IBC cannot be assailed on the ground that the operational creditors do not get a right to vote in the meetings of the committee of creditors as no resolution plan is passed by the adjudicating authority without ensuring that roughly equal treatment is given to the operational creditors as well. It is to be ensured that the minimum payment is made to the operational creditors which should not be less than the liquidation value. Analysis: The reasoning that the court used to justify the preferential treatment given to the financial creditors over operational creditors fails to address the fact that in some legislations may incidentally affect the rights and welfare of a party which may not have been its may concern. In the present case, this anomalous situation circles the operational creditors as the primary focus of the legislation is to give control of the stressed company to the financial creditors. This can be explained throughthe matter of Bhushan Steel ltd[ii].,in which Larsen and Toubrochallenged the claims it was supposed to receive as the operational creditor to the Bhushan Steel. Bhushan Steel owed about nine hundred crores to Larsen and Toubro. Larsen and Toubro made a move to the NCLAT and pleaded that the committee of creditors (which consists only of the financial creditors) had satisfied most of its claims. But, on the other hand the dues of the operational creditors were not settled.  It further contended out of the total amount of the total amount of 12 billion that has been earmarked for the settlement of dues of the operational creditors, 10 billion must be given to Larsen and Toubro. The Tata

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Depositing A Post-Dated Cheque During Moratorium

1 Comment / Banking Law, Insolvency Law /

[ Vatsal Patel ]   The author is a 3rd year student of Nirma University. Introduction The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as“Act”) augmented by its 2018 Amendment Act[1](hereinafter referred to as“Amended Act”) has received wide-spread positive response from different sides of corporate sector.[2]The bringing in of the Act resulted in immediate shifting form a debtor-in-control regime to a creditor-in-control regime and is buttressed by a stipulated time period of 180/270 days for the completion process which is adhered to strictly by the National Company Law Tribunals (hereinafter referred to as“NCLTs”) all across the country. The moratorium period stipulated under Sec. 14 is one of the prominent feature of this act which restricts the continuation of the mentioned proceedings against the corporate debtor in case of an admission and subsequently, commencement of the Corporate Insolvency Resolution Process (hereinafter referred to as“CIRP”). Moreover, it has already been established that the moratorium does not apply to all proceedings in light of the NCLAT judgement in the case of Canara Bankv. Decan Chronicle Holding,[3]which noted the absence of the word “all” in Section 14 of the Act. The moratorium as prescribed for by Sec. 14, inter-alia, provides for prohibiting: “…(1)(c). any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its propertyincluding any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” It would be pertinent to note that by virtue of Section 3(31) of the Act, a “security interest” would include a claim to property. Moreover, the term “property” as defined under Sec. 3(27) would include money. Therefore, the question that arises for consideration in this article is whether a cheque, more specifically, a post-dated cheque, the date of beginning of which falls within the stipulated moratorium period could be deposited during the moratorium period or would it be against the moratorium? In terms of an Example – Consider that A (Operational Creditor) contracted with  B (Corporate Debtor) on 01.01.2019 for the supply of goods/services. For the same, cheques were issued by B to A dated 02.07.19 (first cheque), 02.07.20, 02.07.21 and 02.07.22. All these cheques were delivered on 01.01.2019 to the Operational Creditor. Subsequently, CIRP was initiated against the Corporate Debtor and moratorium was granted between 01.07.19 to 01.10.19. Therefore, the question that arises is whether A can encash the first cheque in the instant case? The answer to the aforementioned question could be related to the proposition of law which governs the date of payment of a cheque i.e. if the date of payment by cheque is the date on which the cheque is delivered then the payment has already happened and therefore, there is no bar to encashment via cheque and vice-versa. Supreme Court On Delivery Of Cheque The First Casethat comes for consideration is CIT, Bombayv. Ogale Glass Works Ltd.,[4] wherein the Supreme Court while dealing with a cheque which was not subsequently dishonoured held that the cheque would be considered to be payed on the date of its delivery. However, had the cheque been dishonoured, the same would not be the case. In the words of Supreme Court: “…The position, therefore, is that in one view of the matter there was, in the circumstances of this case, an implied agreement under which the cheques were accepted unconditionally as payment and on another view, even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed, the payment related back to the dates of the receipt of the cheques and in law the dates of payments were the dates of the delivery of the cheques.”[5] The same position of law was supported by a three-judge bench of the Supreme Court in the case of K. Saraswathyv. P.S.S. Somasundaram Chettiar.[6] The Second Casethat comes for consideration is the case of Jiwanlal Achariyav. Rameshwarlal Agarwalla,[7]wherein themajority of the three-judge bench of the Supreme Court distinguished between a conditional and an unconditional payment while dealing with Section 20 of the Limitation Act, 1908. It was held that an ordinary cheque amounted to an unconditional payment if the cheque was subsequently honoured.[8]However, the court also considered a post-dated cheque to be a conditional payment for which the date of payment would not be the date of delivery but the date on which it was dated to begin. The case also distinguished from Ogale’sCase,[9]by stating that the issue before that court was not specifically in relation to a post-dated cheque and as such the court was not bound by that case. However, it is pertinent to note that the minority opinion by Justice R. S. Bachawat did not distinguish Ogale’scase from the instant case and as such held that Ogale’scase applied even to a post-dated cheque.[10]Thus, according to the minority opinion, even payment by a post-dated cheque related back to the date of delivery of the cheque in terms of payment. One would expect that the courts would rely on the aforementioned two cases for the payment in terms of delivery all types of cheque i.e. ante-dated, date of the delivery and post-dated. However, the Supreme Court has deviated from its established position of law. The Third Casethat arises for our consideration is the recent case of Director of Income Tax, New Delhiv. Raunaq Education Foundation,[11]wherein the Supreme Court dealt with an issue pertaining to a cheque which was delivered on 31.03.2002 and dated 22.04.2002. The court herein again relied on Ogale’s Case.[12]However, in doing so it did not distinguish between an ordinary cheque and a post-dated cheque and the payment of a post-dated cheque was also considered to be completed on the date of the delivery of the cheque. Conclusion Thus, on perusal of the aforementioned judgements it can be distinctly observed that the position of law in terms of the ordinary cheques is clear i.e. the date of delivery of cheque is the date of payment via cheque if the cheque is subsequently honoured. However, as far as post-dated cheques are concerned,

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Substituted performance: A new perspective in Specific Relief (Amendment) Act, 2018

Leave a Comment / Contemporary Issues, Contract Law /

[ Sayak Banerjee ]   The author is a 2nd year student of NLU, Jodhpur. The Specific Relief (Amendment) Act, 2018( the Act), published in the official gazette on 1stAugust, 2018 amends the Principal Act, the Specific Relief Act, 1963. The Act came with multitude of changes relating to the enforcement of contracts in India. The said Act was passed without discussing the importance of its impact in both Houses of Parliament, disregarding the scope of this Amendment impacting not only contractual obligations of businesses but also of common people. The Amendment was passed without taking the opinions of other stakeholders, judges, advocates, businessmen, alike. With the amendment coming hastily, the objective sought to be achieved was preventing any hindrances to infrastructure projects. It can also be seen as a genuine effort by India to climb the ranks in World Bank’s Ease of Doing Business Index. But in achieving the said objectives, the Parliament forgot that the Act applicable to everyone personally also. The most important change has been brought in Chapter II of the Specific Relief Act, 1963, dealing with specific enforcement of contracts. Within the Chapter, the Act has introduced the concept of ‘substituted performance.’[[i]] This essentially means that on breach of contract, the party who has been affected by such breach, has the option of substituted performance through third parties or by his own agency, the cost of which is to be borne by the defaulting party. This cost cannot burden the party who has been affected by such breach gives a 30 day notice obligating the defaulting party to fulfil the obligations of the contract. If there is failure on part of the defaulting party to perform after receiving the said notice, then the affected party has the option of substituted performance. It needs to be noted that if the party exercises the option of substituted performance he forfeits the right to sue for specific performance, though the parties are not precluded from obtaining compensation from the defaulting party. Section 11 of the Act has removed the discretion of court by replacing “may, in the discretion of the court, be enforced” with “shall be enforced by the court,” thereby making specific performance a statutory remedy, subjected to preclusion due to the limited grounds mentioned in the statute.[ii] Prior to the amendment, Section 14 allowed specific performance wherein compensation was not provided as adequate relief. The amendment has done away with this requirement, ensuring the generality of specific performance as a remedy in the statute. One of the grounds mentioned now in Section 14, is substituted performance. In addition, specific performance is precluded from being granted as a relief to a person, if substituted performance has been availed, notwithstanding, that Section 20(3) already provided for preclusion to avail specific performance when substituted performance has been availed. A conundrum therefore, arises on considering substituted performance as option available to the parties, on one hand, the Court is implicitly enforcing the contract through substituted performance. And on the other hand, the substituted performance as a ground for contracts cannot be specifically enforced in Sections 14 and 16. This shows redundancy on the part of the lawmakers, but the main question remains unanswered whether substituted performance is equivalent to enforcing the contract, because if that is not the case, then why is the option under Section 20 available to the parties. A cross-jurisdictional analysis reveals that UK gives third parties the right to enforce contractual terms, and availability of specific performance as a remedy.[[iii]] The concept of substituted performance  as specific performance was introduced in UK through the case of Liberty Merican Ltd. v. Cuddy Civil Engineering Ltd., wherein in place of defaulting performance bonds, Court directed the defaulting party to deposit a sum of money as substituted performance.[[iv]] In Canada, as per Article 1602 of the Quebec Civil Code, a promisee can avail the right of substituted performance provided the promisor is notified, allowing the promisee to get the contract performed at the expense of the promisor.[[v]] When we consider contractual remedies, damages do not help in mitigating the losses that arise from expenses that are indirectly incurred in getting the contract performed. Moreover, injunctions are a way by which the status quo is protected, but specific performance in the form of substituted performance helps in bringing the changed relationship between the parties that was originally intended to be brought,  and allows the aggrieved party to restore to the position it would have been in had the breach not occurred. Therefore, it is the most effective alternative to the event of breach, in comparison to injunctions and compensations. [[i]]Specific Relief (Amendment) Act, 1963 No. 18 of 2018, s 20. [[ii]]Specific Relief (Amendment) Act, 1963 No.18 of 2018, s 11. [[iii]]Contracts (Rights of Third Parties) Act 1999, s 1(5). [[iv]]Liberty Merican Ltd. v. Cuddy Civil Engineering Ltd. [2013] EWHC 4110 (TCC). [[v]]Civil Code of Quebec CCQ-1991, Article 1602, Chapter VI.

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Swiss Ribbon Pvt. Ltd. V. Union of India : The IBC Case

Leave a Comment / Insolvency Law /

[Anmol Jain and Srishti Rai Chhabra] The authors are 3rd year students of NLU, Jodhpur. Introduction “The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.” The Insolvency and Bankruptcy Cody, 2016 [“the Code”] received the official sanction[i]recognizing its constitutional tryst in entirety in quite a significant verdict. We still remember the packed courtroom to hear the amusing and intelligent arguments of the virtuoso lawyers. IBC, a landmark aspired by high-ranked officials for improving the financial structure of the country (seeI do as I doby Raghuram G. Rajan and Of Counselby Arvind Subramanian) has sustained the constitutional scrutiny. It is worth mentioning that the judgment is beautifully written and structured. Though at certain places one might feel less satisfied with the restricted reasoning of the Court, however, such concession can be granted for the Court’s recognition of limited judicial review in economic matters at the outset of the judgment. Here, we endeavour to present a brief overview of the judgment spiced with our critique. The Case The Court has tried to establish the premise behind its reasoning and exercising judicial restraint by considering the fall of Lochnerdoctrine (practice of the US Supreme Court to declare the socio-economic legislations as unconstitutional using the ‘due process’ clause) in the US, which initiated with the dissents of Justice Holmes and Justice Brandeis of the U.S. Supreme Court. As per Justice Holmes’ dissenting opinion in Lochner v. New York[198 U.S. 45 (1905)]: “The courts do not need to substitute their social and economic beliefs for the judgment of legislative bodies, who are elected to pass laws.” Further, the Court relied on its own judgment in R.K. Garg v. Union of India[ii]to hold that the laws relating to economic activities should be viewed with greater latitude as compared to laws relating to civil rights. As there is no straitjacket formula to solve an economic problem, the legislature will employ trial and error method to find solution of such problems. The Court, therefore, should exercise judicial restraint in interfering with legislations like the Code, and question the constitutionality only when such legislations are ‘palpably arbitrary, manifestly unjust and glaringly unconstitutional’. The Court, after establishing the premise behind presuming the constitutionality of the court, delved into the objects underlined the Code – to bring the insolvency law in India under a single unified umbrella, to speed up the insolvency process and to ensure revival and continuation of the corporate debtor. Prior to the Code, the insolvency matters were dealt by multiple fora under various laws such as Sick Industrial Companies (Special Provisions) Act, 1985; the Recovery of Debts Due to Banks and Financial Institutions Act, 1993; the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and the Companies Act, 2013. The petitioner had successfully argued that the constitution of the NCLAT, with its lone bench in Delhi, goes against the judgment of the Court in Madras Bar Association v. Union of India[iii](2014) where it was held that permanent benches of NCLAT have to be constituted wherever there is a seat of the High Court, or circuit benches be constituted. The Court has ordered the Union of establish circuit benches of NCLAT within 6 months. Next, the petitioner argued that in Madras Bar Association v Union of India[iv](2015), it was held that the administrative support to all the tribunals should be from the Ministry of Law and Justice; therefore, the NCLAT should not function under the Ministry of Corporate Affairs. Though the Government cited Article 77(3) of the Constitution and Delhi International Airport Limited v. International Lease Finance Corporation and Ors.[v]to argue that the allocation of rules of business among various Ministries is mandatory, the Court accepted petitioner’s claim. However, we see the existing regime, the Ministry of Corporate Affairs deals exclusively with all the matters pertaining to the administration of companies – the Code;[vi]the Insolvency and Bankruptcy Board of India; the Competition Commission of India; the Companies Act, et al. Therefore, we argue that for better corporate governance, NCLT and NCLAT should continue to function under the Ministry of Corporate Affairs only. This goes in line with the existing setup wherein Ministries provide administrative support to their corresponding tribunals. For instance, Department of Telecommunication administers Telecom Disputes Settlement and Appellate Tribunal; Ministry of Environment, Forest and Climate Change administers National Green Tribunal and Department of Revenue administers the GST Appellate Tribunal. Next, the Court was confronted with multiple challenges related to arbitrariness, the first being the issue of reasonable classification between financial creditors and operational creditor. At the outset, the Court laid down a common rule of Article 14 for all such challenges – A constitutional infirmity is found in Article 14 only when the legislation is manifestly arbitrary.The petitioners had challenged the requirement of a demand notice to the operational debtor by the operational creditor before initiating the process under the Code, which is absent in case of a financial debt. The Court did not uphold this argument and distinguished the two debts as follows: Financial Debt Operational Debt Financial debt is given for establishment of business and keeping the business as a  going concern in an efficient manner. Operational debt is generated as part of a business activity owing to exchange of goods and services, including employment. Evidence of debt is readily available with the financial creditor and in the records of information utilities. The information utilities are under the duty to send notice to the debtor before recording any debt for verification purposes. All operational creditors might not have accurate account of all liabilities in verifiable form due to its recurring nature. It increases the possibility of disputed debts. It is generally given in large sum and by a small number of persons. It is given in small sum by a large number of persons. It is a secured debt. Sometimes, it is not secured against collaterals. Here, the contracts provide a specified repayment schedule, wherein defaults entitle financial creditors to recall a

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Counterclaims: A Need in Stockholm Chamber of Commerce

Leave a Comment / Arbitration Law /

[Srijan Srivastava]   The author is a 3rd year student of NLU, Jodhpur. Introduction “Counterclaims: An indispensible component of Investment Arbitration”. Counterclaims are the claims that are made by the respondent which retaliate the primary claims as put forth by the claimant. It basically lays down the defence of respondent by asserting a separate cause of action taken out by the claimants. It not only defends the respondent, it also attacks the claimant for their actions. The reason for allowing a counter-claim to be included as part of an existing case is not because it assists in disposition of the principal claim but, rather, to assist in the disposition of two autonomous claims.[i]The counterclaim is allowed to become a part of an existing case ‘in order to ensure better administration of justice, given the specific nature of the claims in question’ and ‘to achieve a procedural economy whilst enabling the Court to have an overview of the respective claims of the parties and to decide them more consistently’. Counterclaims in various tribunals ICSID Convention The ICSID convention categorically talks about rules of filling counterclaims in arbitration procedures. It says that, the tribunal shall if requested determine any counterclaims arising directly out of the subject matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.[ii] If we dissect this provision we will see that this provision sets out certain conditions to be complied with in order to file a counterclaim. First, the counterclaim must fall within the consent of the parties to a dispute. Second, there must be a close factual and legal connection between a counterclaim and the primary claim. This is also known as the close connection test. Finally, the counterclaim must fulfil the requirements as given under Article 25 of the Convention. This is to see that the counterclaim fits within the jurisdiction of the Centre, i.e. the counterclaim must directly arise out of an investment. The ICSID Additional Facility Rules under Article 47 permits the filing of the counterclaims. They just mandate that the counterclaim should fall within the arbitration agreement of the parties. Apart from the condition of consent, they do not pose further restrictions for the filing of counterclaims, leaving it to the consideration of arbitral tribunals whether they fall within their jurisdiction. UNCITRAL Convention UNCITRAL Convention talks about the twin requirements of any counterclaims to be admissible before the tribunal. The Arbitration rules require that the counterclaims should arise “out of the same contract.”[iii]This section when narrowed down is considered as “inappropriate to arbitration arising under international treaties.”[iv]In cases where an investment contract is absent between an investor and a host state, the Arbitration Rules has certain loophole with regard to treaty violations ad as the language of the arbitration rules were discarded by the tribunals. However the UNCITRAL working group on Arbitration and Conciliation proposed to modify the provision that will fill this loophole. The group allowed counterclaim that were substantially connected or arose out of the initial claim as put forth by the investor or claimant. After the abovementioned modification, the provision was replaced by Article 21(3) of the UNCITRAL Arbitration Rules, 2010. This provision includes a description of counterclaims in the state’s response to the notice of arbitration provided that the arbitral tribunal has a jurisdiction over it. Therefore UNCITRAL in a way give express permission of admissibility of counterclaims. International Court of Justice The ICJ Statute does not directly address the issue of the respondent filing a counterclaim against the applicant. Article 80 of the Rules, however, it provides that the Court may entertain such a counterclaim in certain circumstances, as a part of the incidental proceedings of an existing case. The Court has focused on the other language of Article 80(1) of the Rules, which provides that the Court may entertain a counterclaim ‘only if’ two requirements are met: First, when the counterclaim ‘comes within the jurisdiction of the Court’. Second, when the counterclaim is ‘directly connected with the subject matter of the claim of the other party’. The Court has characterized these two requirements both as requirements on the ‘admissibility of a counter-claim as such’, explaining that admissibility ‘in this context must be understood broadly to encompass both the jurisdictional requirement and the direct-connection requirement’.[v] Absence of provisions regarding counterclaims in SCC Arbitration Rules Despite the growing popularity of investment arbitration for the settlement of disputes between investors and host states that are governed by Stockholm Chamber of Commerce, provisions governing counterclaims are not well defined in the SCC arbitration rules. The rules only lay down general framework regarding filling of counterclaims. A provision of SCC Arbitration Rules says that counterclaims shall be outlined in Respondent’s answer to Claimant’s request for arbitration.[vi]The rules are silent when it comes to any other conditions such as the parties consent or the close connection test between the claim and the counterclaim. However the tribunal in the case of Amto v. Ukraine explained that the jurisdiction of the counterclaims depends on the terms of the dispute resolution provisions of the treaty, the nature of the counterclaim, and the relationship of the counterclaims with the claims in the arbitration.[vii]  The tribunal, therefore, confirmed uniform application of these requirements, irrespective of the nature of the rules governing the dispute settlement procedure. Impact and Consequences The recent UNCTAD statistics shows that there are over 800 known treaty-based investor-state arbitrations, yet counterclaims were filed and effectively addressed in less than 30 of them.[viii]This is clear enough to indicate why the host states are at certain disadvantage. They do not get adequate opportunity to adopt a more offensive tactics against investors is the language of IIAs that determines whether counterclaims can be heard or not. Arbitral tribunal has a vital role in smooth functioning of the disputes that arise. They have to lay down the procedures through which any dispute can be amicably resolved. They have to lay down certain guidelines

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Analysis: SEBI (Settlement Proceedings) Regulations, 2018

Leave a Comment / Capital Markets and Securities Law /

[ Debayan Gangopadhyay ]   The author is a 3rd year student of ILS, Law College. Introduction Settlement Proceedings in relation to violation of provisions in securities laws have been conducted under a mechanism by the Securities Exchange Board of India (“SEBI”) since 2007. The last legislation on settlement proceedings was stipulated by SEBI in 2014[i]. The said regulations apart from giving SEBI other powers of initiating proceedings on its own, also gave it the power to initiate settlement proceedings. However, to quantify the number of settlement cases more, a committee was set up by SEBI as the Justice Anil Dave Committee (“Committee”). The committee submitted its report in December, 2017 pursuant to which the SEBI notified the SEBI (Settlement Proceedings) Regulations, 2018 (“Settlement Regulations”) on 30thNovember, 2018 which are effective since 1stJanuary, 2019. The Settlement Regulations are the first piece of legislation in securities laws in India solely created for the purpose of regulating settlements in cases. These regulations provide for new scope in different factors of settlement proceedings and if implemented properly, is quite beneficial for the entire procedure. This article will discuss and review certain key highlights of the Settlement Regulations which provide for wider scope and sophisticated methods in settlement proceedings. “Securities Laws” and “Specified Proceedings” re-defined Securities Laws under the previous SEBI regulations on settlement proceedings[ii]had only given scope to the SEBI Contract (Regulations) Act, 1956 and Depositories Act, 1996. These regulations widen the scope by defining “Securities Laws” as: “securities laws” means the Act, the Securities Contract (Regulations) Act, 1956 (42 of 1956), the Depositories Act,1996 (22 of 1996), the relevant provisions of any other law to the extent it is administered by the Board and the relevant rules and regulations made thereunder;[iii] By adding “any other law”, the Settlement Regulations provide for the inclusion of other laws as well in relation to securities laws. There is an explicit recommendation of the Committee in the draft Settlement Regulations to include the contravention of the provisions of any other law (such as Companies Act, 2013) to the extent it is administered by the Board within the definition of ‘securities laws’ in the regulations, in order to settle any matter under the securities laws.[iv]This clause has widely increased the ambit of applicable laws to these regulations. Further, “specified proceedings” in the Settlement Regulations have been defined as: “specified proceedings” means the proceedings that may be initiated by the Board or have been initiated and are pending before the Board or any other forum, for the violation of securities laws, under Section 11, Section 11B, Section 11D, sub-Section (3) of Section 12 or Section 15-I of the Act or Section 12A or Section 23-I of the Securities Contracts (Regulation)Act, 1956 or Section 19 or Section 19H of the Depositories Act, 1996, as the case may be;[v] The definition provides for scope to cases which are pending before the SEBI Board or any other forum which is an effective tool to quantify settlement proceedings. The scope of pending cases has been re-iterated in further regulations of the Settlement Regulations. The Settlement Regulations have further introduced a new term called “settlement schemes”. SEBI shall specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme shall deemed to be a settlement order under the regulations.[vi] Also, the terms of settlement may include monetary or non-monetary terms or a combination of the two. This is given under Chapter IV of the Settlement Regulations.[vii]Non-monetary terms may include suspension or cessation of business activities for a specified period, disgorgement on account of the action or inaction of the applicant, exit from the management of the company, submit to enhanced internal audit and reporting requirements, locking – in securities, etc.[viii]  Confidentiality The Settlement Regulations provide for the scope of seeking confidentiality on the proceedings before the SEBI Board. The Committee recommendations in the draft regulations provide for a chapter similar to the practices of securities regulators globally and that provided in the Competition Commission of India (Lesser Penalty) Regulations, 2009 for “settlement with confidentiality” to any person that provides material assistance to the Board in its fact-finding process and proceedings.[ix]The said provisions are given under Chapter IX of the Settlement Regulations. These lay down the factors essential to the entitlement of confidentiality and the procedure thereof. As observed time and again, most of the provisions in SEBI have been adopted from US laws. The insertion of provisions dealing with confidentiality have been adopted though an understanding from the US Securities Exchange Commission and the Competition Commission of India. According to the regulations, such privilege of confidentiality shall be provided to such applicants who agree to provide “substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws”. However, the application herein shall be considered only in cases prior to or pending investigation, inspection, inquiry or audit.[x] Limiting the scope of settlement proceedings There are provisions in the new Settlement Regulations which deny settlement proceedings to certain categories of individuals under Chapter III which talks about the scope of settlement proceedings. Regulation 5 (2) lays down factors affecting which an alleged default will not come under the scope: (2) The Board may not settle any specified proceeding, if it is of the opinion that the alleged default, – has market wide impact, caused losses to a large number of investors, or iii. affected the integrity of the market.[xi] Similar restriction is provided for where the applicant is a wilful defaulter, a fugitive economic offender or has defaulted in payment of any fees due or penalty imposed under securities laws.[xii]The earlier regulations provided that breach of laws governing insider trading, fraudulent and unfair trade practices shall not be considered for settlement. However, in the Settlement Regulations, the scope of the settlement has been limited to

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