Author name: CBCL

Cross-Border Insolvency under the Insolvency and Bankruptcy Code 2016: Opportunities and Challenges

Insolvency Law /

Cross-Border Insolvency under the Insolvency and Bankruptcy Code 2016: Opportunities and Challenges. [Ishita Das] The author is an LL.M. Candidate at the West Bengal National University of Juridical Sciences, Kolkata Introduction Increasing international trade and commerce is one of the results of globalization where countries are dependent on one another for several goods and services. Therefore, in a scenario where a multinational corporation undergoes insolvency, such proceedings will naturally have ramifications in several jurisdictions, involving stakeholders such as foreign creditors. There are three situations broadly associated with cross-border insolvency: (a) where foreign creditors have claims over the assets of the corporate debtor in another jurisdiction and the insolvency proceedings have been initiated there; (b) where the corporate debtor has multiple branches or places of business and as a result, different assets in jurisdictions apart from the place where the insolvency proceedings have been initiated; and (c) where the corporate debtor is subjected to multiple proceedings in concurrent jurisdictions. In this regard, it is crucial to underscore the rights and claims of the foreign creditors vis-à-vis that of the domestic creditors.[i] Recognition and enforcement of insolvency proceedings are extremely crucial. There are three schools of thought in this regard, globally. First, territorialism, wherein the effect of insolvency is limited to the jurisdiction where it has been initiated. Second, universalism, wherein there is recognition of a single insolvency proceeding in all relevant countries. Third, modified universalism, wherein a court takes the ‘main’ lead in the insolvency proceedings and the other ‘non-main’ courts provide cooperation and assistance.[ii] The Model Law drafted by the United Nations Commission on International Trade Law (“UNCITRAL Model Law”) embodies the third school of thought. With regard to India, the Insolvency and Bankruptcy Code, 2016 (“IBC”) is touted to be a major step towards improving the system of financial laws and enhancing the ease of doing business in the country. Further, as evidenced by the recent World Bank rankings, wherein India jumped from 130 in 2016 to within 100 in 2017, it seems to be a move in the right direction.[iii] However, as pointed out by ASSOCHAM-EY in their joint study, the Code does not maintain any distinction between the domestic and foreign creditors, therefore, leading to the assumption that the two categories of creditors would be treated in an equivalent manner.[iv] The two sections that deal with cross-border insolvency under the IBC are inadequate and do not lay down a comprehensive framework to deal with the problems arising from transnational proceedings. According to a recent Economic Times report, cross border insolvency is on the agenda for the Insolvency and Bankruptcy Board of India (“IBBI”) and expansion of the IBC to cover the transnational insolvency proceedings might be a reality very soon.[v] The report of the Bankruptcy Law Reforms Committee (“BLRC”) while dealing with the need for an effective domestic framework highlighted the need for adopting provisions dealing with the issue of cross-border insolvency in their report.[vi] The Joint Parliamentary Committee on the Code then incorporated two enabling sections in the IBC to ensure that the code was not incomplete.[vii] Sections 234 and 235 embody the opportunities for the inclusion of a detailed cross-border insolvency regime under the new Code. However, there are several challenges that need to be addressed urgently. Cross-border Insolvency under the IBC and the Challenges Section 234 of the IBC deals with agreements entered into with foreign countries. It provides that the Indian government may enter into an agreement with a government of another country for enforcing the provisions of the Code. The Indian government may direct that the application of the provisions of the IBC, as regards the assets of the corporate debtor or debtor, located in a country outside India with which reciprocal arrangements have been made, shall be subject to the conditions as may be specified from time to time.[viii] The IBC, therefore, emphasizes on reciprocity as observed in the insolvency regimes of countries such as South Africa. However, there are certain problems associated with this provision. First, as the Indian government needs to enter into bilateral agreements with different countries, it may not be practically feasible to negotiate such agreements which could be long-drawn and time-consuming. Second, there is a possibility that each country may choose to incorporate different provisions in their bilateral instruments, which would only lead to fragmentation of India’s cross-border insolvency regime. Last, this could lead to multiplicity of litigations in cases where a corporate debtor has assets in more than one foreign jurisdiction, wherein the countries would fall back on their separate bilateral agreements to raise claims in connection with the insolvency proceeding. At the same time on contrary, a one-size-fits-all approach, where a model bilateral insolvency agreement (on the lines of the model bilateral investment treaty brought by India) is favoured by India might prove to be counterproductive for a variety of reasons. First, there could be a high possibility that countries will not agree to such a uniform agreement, and second, any such mechanism which paints different canvases with the same brush i.e. tries to harmonize different examples and situations unique to each jurisdiction, tends to be flimsy and hardly effective. The best way out of this mess could be a model insolvency agreement, built on the lines of the Model Law; in which the contentious issues can be deliberated and modified by countries according to their unique requirements – thereby retaining the best of both methods. While the IBC has provisions for imposing moratorium on all suits and proceedings against the corporate debtor in India during the insolvency resolution period, a creditor or contract counterparty can initiate proceedings in another jurisdiction. Further, even though Section 234 of the IBC has been already notified, no such bilateral agreement has been entered into by India yet. Section 235 of the IBC deals with letter of request to a country situated outside India in certain cases. It lays down that if during the pendency of the insolvency resolution process, or liquidation, or bankruptcy proceeding, the resolution professional,

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Out of Court Settlement of Claims after Commencement of Insolvency Process under IBC, 2016

Insolvency Law /

Out of Court Settlement of Claims after Commencement of Insolvency Process under IBC, 2016. [Kunal Dey] The author is an Advocate practicing in the Calcutta High Court.. A plea for settlement of claims after commencement of insolvency process has now become a key strategy for many corporate debtors since they feel that they would be left in a better position to continue their business post settlement rather than after the completion of the insolvency process. The rationale behind the same lies in the fact that the corporate insolvency resolution process is predominated by the creditors and enumerates a limited role on the part of the corporate debtor in the Committee of Creditors. Thus, a settlement being a mutual decision is much more favourable to both the parties in cases where they regard the same to be feasible and permissible. The intention of the Hon`ble Supreme Court to allow for out-of-court settlements to take effect even after the commencement of insolvency process can be traced back to the case of Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP,[1] where the Hon`ble Supreme Court while exercising its special powers under Article 142 of the Constitution of India, allowed the out-of-court settlement of disputes between the parties. This line of decision-making was reiterated by the Hon`ble Supreme Court in the case of M/s Sysco Industries Ltd. v. M/s Ecoplast Ltd.[2] However, the decision of the Hon`ble Supreme Court in the above two cases lies in stark contrast to its decision in the case of Uttara Foods and Feeds Private Limited v. Mona Pharmachem,[3] where the Hon`ble Supreme Court has observed that since Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, does not provide an option to prima facie invoke the inherent powers of the National Company Law Tribunal (NCLT) under Rule 11 of the NCLT Rules, 2016, the relevant Rules must be amended by the Competent Authority in order to incorporate such inherent powers. The Hon`ble Supreme Court had also opined that such a measure was necessary in order to prevent unnecessary appeals from being filed before the Apex Court against any out-of-court settlement or comprises amongst/between the parties. This decision therefore warrants an observation of Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) which states that:- “(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company law Tribunal shall have jurisdiction to entertain or dispose of- any application or proceedings by or against the corporate debtor or corporate person; any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.” The intention of the Legislature to provide a larger scope to the powers of the National Company Law Tribunal is also evident from the perusal of Section 31 of IBC which states that:- “(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. (2) Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.” The different use of terminology by the Legislature in the two above-mentioned provisions indicate that the National Company Law Tribunal can exercise its powers which has been conferred upon it by the Legislature under the NCLT Rules, 2016 and it must not be restricted to only the powers which has been provided to it by under the Code including through the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 while determining any application pertaining to the out-of-court settlement of insolvency process unlike that of determining the authenticity of a resolution plan. Therefore, even though Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, does not provide an option to prima facie invoke the inherent powers of the NCLT under Rule 11 of the NCLT Rules, 2016, the IBC, itself provides for an alternate route for invoking the same. The issue for allowing out-of-court settlement of insolvency matters once the proceedings have commenced before the ‘Adjudicating Authority’[4] is therefore a persisting one since neither the Code nor its Rules clearly specify the procedure for executing it which manifests the need of an amendment in the Code and its Rules to incorporate the same in accordance with the decision of the Hon`ble Supreme Court in Uttara Foods and Feeds Private Limited v. Mona Pharmachem.[5] [1]http://www.ibbi.gov.in/LokhandwalaKatariaConstruction9279of2017.pdf [2] https://indiankanoon.org/doc/58757679/ [3] https://indiankanoon.org/doc/80652506/ [4] Section 5(1) of the IBC. [5] Supra note 3.

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Is Institutional Arbitration Worth the Expense? – An Asian Perspective

Arbitration Law /

Is Institutional Arbitration Worth the Expense? – An Asian Perspective. [Rishabh Malaviya] The author is an LLM (International Arbitration & Dispute Resolution) student at National University of Singapore. Introduction Every arbitration is conducted within the framework provided by the lex arbitri (law of the place of arbitration). Complementary to the lex arbitri is the choice of the mode of arbitration, i.e. parties make a choice between conducting the arbitration on an ad hoc basis or conducting it under the aegis of an arbitral institution.This essay has been divided into three parts. In the first part, the additional costs of institutional arbitration (with specific reference to institutional arbitration by the Singapore International Arbitration Centre (“SIAC”), the Hong Kong International Arbitration Centre (“HKIAC”), and the Mumbai Centre for International Arbitration (“MCIA”)) and (despite this) the preference for institutional arbitration are highlighted. In the second part, I underscore some of the perceived advantages of institutional arbitration, and compare this model to ad hoc arbitrations. In the third part, I conclude by attempting to answer the question, ‘Whether institutional arbitration is worth the expense?’. Part I: The Costs and the Contradiction Institutional arbitration, of course, imposes additional costs on the parties. These costs are in addition to the regular expenses (like tribunal fee and expenses for hiring rooms for hearing, etc.) that would be incurred in ad hoc arbitrations as well. Parties are usually required to pay a ‘filing’ or ‘registration fee’ along with an ‘administration fee’. This latter fee is usually calculated on an ad valorem basis, while the former represents a fixed sum. For example, the SIAC provides for a filing fee of S$2000 for overseas parties, and for an administration fee ranging from S$3800 to S$95000 depending on the sum in dispute.[1] The HKIAC provides for a registration fee of HKD 8,000, and for an administrative fee ranging from HKD 19,800 to HKD 400,000.[2] In turn, the MCIA provides for a filing fee of Rs. 40,000, and an administration fee ranging from Rs. 110,000 to Rs. 4,160,000.[3] Ordinarily, these additional costs would discourage parties from opting for institutional arbitration. In fact, as per a 2015 survey, 68% of respondents considered costs as one of the three worst characteristics of international arbitration.[4] Despite this, and counter-intuitive though it may seem, there seems to be a preference among parties for institutional arbitration for the resolution of their disputes. A 2008 study found that 86% of awards were rendered under institutional rules.[5] The above-mentioned 2015 survey found the figure to be 79% of respondents’ arbitrations over the preceding 5 years.This is also reflected in the massive surge in the number of cases handled by institutions over the years. In 2016, 343 new cases were filed with the SIAC, up from 90 in 2006.[6] The HKIAC saw 271 new arbitration cases filed in 2015.[7] The MCIA is a relatively new institution, but is receiving immense support from the local government.[8] Part II: ‘Off the Peg’ v. ‘Tailor Made’ The above-mentioned statistics make one wonder why parties who dislike the notion of steep costs in international arbitration, concurrently prefer the more expensive institutional arbitration. Of course, institutional arbitration has several advantages. To begin with, it is conducted in accordance with a set of pre-existing and time-tested procedural rules, administered by experienced staff.[9] This ‘reduces the risk of procedural break-downs, particularly at the beginning of the arbitral process’.[10] This is because once parties agree to abide by institutional rules, they do not need to keep agreeing on every aspect of the arbitral procedure. For example, institutional rules contain detailed provisions for the appointment of an arbitrator, if the parties cannot agree on a procedure for appointment or if any party/arbitrator fails to act in accordance with an agreed procedure. The SIAC Rules empower the President of the SIAC Court of Arbitration to appoint the arbitrator where the parties fail to nominate an arbitrator or fail to agree upon a nominee.[11] The HKIAC Rules confer similar powers on the HKIAC;[12] and the MCIA Rules confer the power on the Council of Arbitration of the MCIA.[13] The significance of these provisions is that if the parties face difficulties in appointing an arbitrator, there is no need for them to resort to the provisions of the governing lex arbitri to overcome such difficulties. This can be especially advantageous in situations where the lex arbitri provides for appointment of the arbitrators by national courts (for example, the (Indian) Arbitration & Conciliation Act, 1996, provides for the appointment by courts).[14] Parties would not need to waste time and money in protracted court proceedings (on average, a contractual dispute takes 1420 days to resolve in the courts of Mumbai, and costs 39.6% of the claim amount)[15]. Further, institutional rules lay down strict qualifications for arbitrators and often have a highly-reputed panel of arbitrators from which the parties may choose.[16] Typically, the appointment of arbitrators is subject to the confirmation of the institutional authorities.[17] Further, challenge procedures under institutional arbitration rules usually impose substantial additional costs on the parties.[18] It is submitted that these provisions ensure that highly qualified arbitrators are appointed in the proceedings, and that the parties think twice before raising frivolous challenges to the appointment of arbitrators. Incidentally, arbitrators’ fees are also ordinarily fixed by the institution, which precludes awkward negotiations about the same. Another advantage of institutional arbitration is that the institutional rules contain detailed provisions on consolidation and joinder of parties.[19] National arbitration legislation usually does not specifically deal with such issues and the UNCITRAL Model Law, in particular never intended to regulate matters such as consolidation.[20] Therefore, these provisions in the rules provide valuable guidance to arbitrators dealing with these issues.Additionally, institutional rules include innovative procedures such as expedited proceedings and emergency arbitrations. Provisions on expedited proceedings allow tribunals, in some circumstances, to consist of a sole-arbitrator, and the proceedings to be completed within truncated timelines (usually six months).[21] Provisions on emergency arbitrators allow parties to apply for emergency interim relief, even before the final tribunal is constituted.[22] Furthermore, during

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Specific Relief Amendment Bill, 2018: Importance of Discretionary Power of the Court with Relation to Specific Performance

Contract Law /

Specific Relief Amendment Bill, 2018: Importance of Discretionary Power of the Court with Relation to Specific Performance [Jennifer Maria D’Silva] The author is a 4th year BA LLB (Hons) student of School of law, Christ University, Bengaluru Introduction: The Specific Relief Amendment Bill, 2018[1] (henceforth referred to as the bill) which was passed by the Lok Sabha in 2018 had recommended several changes to the Specific Relief Act, 1963 (henceforth referred to as the Act). Some of the major changes that was seen in the Amendment Bill was the changes in certain provisions and words that gave the courts discretionary powers, the substitute performance, special courts, experts and so on. The main focus here would be on the provisions relating to the courts discretionary powers and the previous decisions of the courts regarding importance of the same. Though there are provisions mentioning the grounds under which specific performance under the Act could be denied but the discretion still lies in the court as to whether to award the same of not. Provisions to be changed in the Amendment Bill with regard to Specific Performance:- Under the Act specific performance of contracts is seen under Section 11 which states that ‘specific performance of a contract may be enforced according to the courts discretion’ is to be amended by the Bill and changed to ‘specific performance shall be enforced’, taking away the discretionary power of the court. Section 14, which lists the contracts that cannot be specifically enforced is also amended. The main provisions that were removed were: contracts where compensation is adequate (Section 14(1) (a))  – to be replaced by ‘where a party has receive substitute performance’. Substitute performance is when the party whose contract has not been performed can get the said performance done by a third party. Section 20 of the Act is also to be amended by the Bill, the present provision talks about discretion as to decreeing specific performance, this will be changed to provisions regarding substitute performance and the manner in which substitute performance could be done by the aggrieved party. Under Section 21 of the act compensation could be given ‘in substitution or in addition to specific performance’, the same is changed in the bill to ‘in addition to specific performance’ ensuring that specific performance be given and compensation would not be an alternative. Importance of Court Discretion in Specific performance cases Before compensation was the only means of redressal for breach of contract and it was noticed that many people were not satisfied with the monetary remedy they received and so specific performance was considered for those that preferred their contract be completed than receiving monetary compensation. Though at first it was not preferred as the courts did not have the power to enforce such orders but when the court were given the power for the same more people started claiming specific performance. The specific performance was first seen in the Court of Chancery where this was given in cases of property disputes. In the Indian scenario the Specific Relief Act was first enacted in the year 1877 on the lines of the New York Civil Code, 1867. This legislation had a lot to clarify and the same was replaced by the current Act.[2] The rule for a long time was considered to be compensation and specific relief the exception, when no other relief is available[3]. Specific Relief was only given in cases where the compensation could not be determined or the compensation would not suffice for the damages[4]. When giving specific performance the provisions were not solely considered, but the court was guided by the principles of equity[5].Specific performance was only granted by the courts when exercising its discretionary power because specific performance isn’t considered a matter of right[6]. It is because of the discretionary powers that the courts have found certain circumstances where specific performance could be substituted with compensation and cases where specific performance was considered better. It was considered by the courts that if a commodity is easily available then compensation would be adequate as the same commodity could be bought by the claiming party.[7] But in cases where the commodity is not easily available then specific performance could be granted.[8] It is also seen that the courts consider the interests of the parties when awarding specific performance, mainly such a relief is given when there is readiness and willingness to do by the party.[9] Hence specific performance is given on reasonable conditions and not for the advantage of the claimant and disadvantage of the respondent. Things like permission of an authority for specific performance would not bar the same[10].Also there were times when the disadvantage of the party was considered due to escalation of prices, yet the court held that mere escalation of prices would not amount to refusal of specific performance.[11] There are times when time is the essence of the contract and non completion of the same would make the claimant not want the performance done. In such cases if claim cannot be given after a certain time,[12] the damages are given instead of specific performance. The intentions of the claimant are very important when considering the decision of the courts. The court looks into the circumstances of both parties as well in order to determine whether the claims were just or not. Parties are not allowed to benefit from their own negligence and to seek relief as a result from it.[13] These are some of the circumstances where the court gives proper thought before granting specific performance. Conclusion: It is seen that the specific performance should be in the discretion of the court for various reasons mainly the circumstances stated above. The circumstances under which each party approach the court has to be taken into consideration when dealing with specific performance. The importance of the court giving specific performance in certain cases is to ensure that the best relief is given for both the parties and to ensure that proper compensation is received. The court looks into

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Enforcement of Arbitral Awards Against Non-signatories: Supreme Court

Arbitration Law /

Enforcement of Arbitral Awards Against Non-signatories: Supreme Court. [Ankit Shrivastava] Ankit Shrivastava is a 2nd year B.A.LLB(Hons.) student  from National Law Institute University, Bhopal. The Supreme Court has at last, answered two increasingly pertinent questions regarding the implications accompanying an outsider to the arbitration proceedings, and the magnitude of the NCLT’s say in arbitral awards and their valid enforcement. The judgment under analysis is Cheran Properties Limited v. Kasturi and Sons Limited and Ors.[i], wherein the apex court upheld the award by the NCLT and enforced the same against the appellants who were not a party to the arbitration proceedings. The judgment has reinstated the Supreme Court’s arbitration-friendly outlook and is being widely seen as a progressive step by the legal community. This post aims to analyse the judgment which has cleared the cloud over a number of recurring issues. Factual matrix: “K.C. Palanisami” (KCP), “Cheran Properties Limited” (Cheran) and other entities entered into an agreement with respondents “Sporting Pastime India Limited” (SPIL), a wholly-owned subsidiary of “Kasturi & Sons Limited” (KSL), for transfer of shares. According to the agreement the stipulated transaction was such that SPIL would transfer a certain amount of shares to KSL, out of which 90% of which would then be sold to KCP and its nominees which included Cherian and subsequently, Cherian would receive 95% of KCP’s 90% share. Thereafter, disputes regarding the transfer of shares and title arose between the transacting parties and the matter was settled by way of arbitration. Cheran was not a party to the arbitration proceedings despite being a nominee and the recipient of 95% of the concerned shares. The arbitral award directed KCP and SPIL to return the documents of title and share certificates to KSL and Hindcorp. KCP challenged the award of the arbitral tribunal in the Madras High Court under Section 34 of the Arbitration and Conciliation Act, 1996 (henceforth, the Act).The challenge was dismissed first by single judge and on appeal by division bench of Madras High Court. Even the appeal against the said order of Division Bench of Madras High Court was dismissed by the Supreme Court. The High Court had made an observation that the shares had not been purchased by the CPL as a matter of an independent right but as a nominee of KCP. Meanwhile KSL commenced proceedings, inter alia, for the rectification of the register of SPIL before the National Company Law Tribunal (‘NCLT’) to give effect to the Award. This was vehemently opposed by Cherian. Consequently, NCLT allowed the petition and later the appellate body i.e. the National Company Law Appellate Tribunal (NCLAT) dismissed the appeal leading to the filing of proceedings before the Supreme Court of India. Procedural contentions: It was contended on behalf of Cherian (“the Appellants”) that KSL compounded proceedings on wrong legal basis in the first place, therefore, its approach was untenable and that, the appellant ought to have been a party to the arbitral proceedings. Emphasis was placed with regard to Section 36 of the Act to assert that that an arbitral award has to be enforced as a decree of a civil court. The case of Chloro Controls India Private Limited v. Severn Trent Water Purification Inc.[ii] was distinguished by contending that the concerned case dealt with the provisions of international arbitration while the case at hand dealt with domestic arbitration. Reliance was placed on Indowind Energy Limited v Wescare (India) Limited[iii] and S.N.Prasad, Hitek Industries (Bihar) Limited v Monnet Finance Limited[iv] to contend that Cherian cannot be made to be a party to the arbitration agreement and the subsequent award as it wasn’t a signatory to the proceedings. Another principal contention put forth by the appellants was that the arbitral award couldn’t be executed by a tribunal such as the NCLT/NCLAT in a “camouflaged petition” under sections of the Companies Act, 1956 which would then be prohibited by the Act. Counsel for the respondents contended that the exclusive share transfer agreement between the parties stipulated Cherian to be bound by it. The Indowind case, as relied upon by the appellants is not applicable here as it involves a completely different set of laws. The counsels also argued that Section 35 of the Act, indicates that an arbitral award binds parties to an arbitration and persons claiming under them. They have, at all material times, been aware of the fact that they were claiming under KCP in pursuance of the original agreement. It was also argued that the NCLT possessed the exclusive jurisdiction to direct a rectification of the register of the company while trying to retain the authority of Chloro Controls whose judgment explicitly said that an arbitration agreement entered into by a company within a group of companies could bind non-signatory affiliates, if the circumstances could demonstrate a mutual intention of the parties to bind both signatories and non-signatories. Judgment: The court upheld the validity of Chloro Controls and declared along the same lines that Cherian was bound by the agreement even though it wasn’t a signatory and observed that the transfer of shares to nominees was also subsequent to the express condition requiring the nominees to be bound by the share transfer agreement. Relying on the very recent judgment of Sundaram Finance Limited v Abdul Samad[v], the court also concluded that execution proceedings can be initiated anywhere in the country where the assets of the judgment debtor are located and decisively held that award could be enforced by the NCLT. The Court further deemed approaching the NCLT necessary for registration of transfer and rectification of the register, and the only remedy available to KSL, thereby dismissing the appeal. Analysis: The case highlights and reminds us of some important concepts of arbitration law that have evolved over time. To establish Cherian’s inclusivity in the award meted out, the Supreme Court aptly relied on Indowind, in which it was held, “It is fundamental that a provision for arbitration to constitute an arbitration agreement for the purpose of Section 7 should satisfy two conditions: (i) it should be between

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Pre-packaged bankruptcy arrangements in the Indian context

Insolvency Law /

Pre-packaged bankruptcy arrangements in the Indian context. [Priyadarsini T P and Vishnu Suresh] The authors are 3rd year students pursuing B.A.LLB(Hons.) from National University of Advanced Legal Studies, Kochi. Introduction The Insolvency and Bankruptcy Code, 2016 was enacted to overhaul the erstwhile haphazard legal framework to govern the matters of bankruptcy in India.  It has been observed to be creditor-friendly. The corporate insolvency resolution process envisaged under the Code involves enormous participation of the adjudicating authority. It does not leave any scope for any out of court settlement of bankruptcy. Such an approach has been taken under the notion that the Indian market is not matured enough for an informal bankruptcy resolution. This is in stark contrast to countries such as U.S.A where bankruptcy resolution through out of court procedures is prevalent. Further, U.S.A and many other jurisdictions have also recognized a semi-informal arrangement known as pre-packaged bankruptcy or pre-pack. Pre-packaged bankruptcy is a quasi-formal arrangement that combines the aspects of a private workout and legal bankruptcy. In a conventional bankruptcy case, the debtor files a bankruptcy petition, then negotiates a reorganization plan and solicits votes. In a pre-packaged plan, the applicant negotiates a plan and solicits votes before filing of a petition.[1]  In U.S.A, the Bankruptcy Reform Act of 1978[2] provides that a debtor may file a plan for reorganization simultaneously with a petition for a voluntary bankruptcy case. The court’s role is limited to setting a date for approval of the reorganization plan. The creditors before entering into negotiations enter into agreements such as waiver or forbearance agreements to modify or waive their rights to collect debts. This is to avoid any creditor from initiating formal bankruptcy proceedings amidst the negotiations.In U.K, pre-packs have gained momentum as a result of the reforms introduced by Enterprise Act 2002and include a system of out-of-court entry into administration and simpler exit routes.[3] Benefits of Pre-packaged arrangements Pre-packs are a result of the promotion of rescue culture as opposed to debt collection during insolvency. Distressed companies may resort to pre-packs for the following reasons: 1.Decreased costs and increased speed: A pre-pack will minimize the time the company will have to spend in insolvency and thus increase the chance of rescuing its business.[4] They open up the scope for debt restructuring at a stage when the company’s business may still be viable. 2.Role of Existing Management:The Code entirely excludes the management of the corporate debtor once the insolvency resolution professional takes over.  This may not be ideal in cases where the distress of the company cannot be attributed to the management and they may actually be able to play a role in the revival. Moreover, increased role of management would decrease the role played by insolvency professionals and thereby bring down the insolvency resolution process costs as well. 3.Prevents undue depreciation in value of assets:There is a stigma attached to insolvency which often plummets the value of whatever assets that may be remaining, especially of those businesses that are heavily dependent on reputation. This is not the case in pre-packs, as the plan of revival is drawn up in secrecy by way of negotiations between the management and creditors. Indian Scenario The interim bankruptcy law reforms committee, in its report debated on the viability of pre-packs in India. However, it was opined that the Indian market is currently not sufficiently developed to allow sales with zero intervention by the NCLT. Although, the report pointed out the possibility of allowing such arrangements after getting approved by NCLT within 30 days of filing. [5] Further, the Supreme Court, in its decision in Lokhandwala Kataria Construction (P) Ltd. V. Nisus Finance and Investment Managers LLP allowed a settlement between the parties after the application was admitted even though the NCLT rules expressly prohibit the same.[6] Recently, the NCLT-Kolkata Bench suggested an out of court settlement in the matter of Binani Cements insolvency.[7] This incident sparked a debate on whether insolvency can be resolved through methods other than the formal Court-driven CIRP. The Supreme Court has allowed the out of court settlement bid to be considered by the committee of creditors along with other bids Criticism Though allowing such settlements may be desirable in the interests of corporate rescue, doing so in the absence of legal provisions to satisfy the claims of other creditors is dangerous in as much as it reminiscent of the time before the Code when the debtor was able to get away from not paying all the creditors, especially the unsecured ones. Pre-packaged arrangements now in existence have received criticism on many grounds. One such ground is that there are increased chances of connected party sales to the existing management, their kin, promoters etc. with the sale grossly undervalued. Another drawback is that the market may not tested properly before the sale of assets leading them to be sold off at a lower value. Generally unsecured creditors who do not have access to information by way of contract are often left out of the negotiations nor are they given an opportunity to make representations. The business may be sold off without their claims being satisfactorily redressed. The efficacy of pre-packs as an alternative informal insolvency arrangement is also questionable. There is no convincing evidence that pre-packs will always lead to maximum realization of value of assets. In cases where there are a large number of creditors with different interests, it will be difficult to reach an agreement to sell off the business to one or a few of the creditors. In those cases, formal bankruptcy procedure must be resorted to. Conclusion Nevertheless, the judicial trend and rise in resort to arbitration in India indicates the preference towards out of court/quasi-judicial insolvency resolution.  Therefore, there is a need to amend the present insolvency regime so as to accommodate such pre-packs into the Indian insolvency regime. One existing method which could be utilized as a pre-pack is the scheme of arrangement under the Companies Act. A pre-pack pool, an independent body of professionals in existence in the

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ITC Ltd. Appeals to NCLAT: Exemption Notification Retrospective or Not?

Competition Law /

ITC Ltd. Appeals to NCLAT: Exemption Notification Retrospective or Not? [Shravani Sakpal] The author is a student at Government Law College, Mumbai. She may be reached at ssakpal719@gmail.com. A party which proposes to enter into a combination that meets the thresholds stipulated in §5(a) of the Competition Act, 2002 is obligated to notify the Competition Commission of India (CCI) of its transaction(s) before consummation, and get prior approval.[1] This obligation is imposed so that the CCI, on a case-to-case basis, gets to adjudicate whether the combination has the potential to cause an appreciable adverse effect on competition (AAEC) in India, and consequently take appropriate action, which could mean an unconditional approval,[2] a conditional approval,[3] or a blanket prohibition on the combination taking effect.[4] A failure to notify the CCI can result in hefty penalties.[5] However, there are certain provisions which, if satisfied, can make parties involved in combinations exempt from notifying the CCI. One such exemption is provided in a notification issued by the Ministry of Corporate Affairs dated 27 March 2017.[6] The Notification The MCA notification dated 27 March 2017 exempts those combinations wherein the assets of the business division being acquired are less than INR 350 crores or the turnover is less than INR 1000 crores. This is a significant change in the merger control regime in India as now only the relevant assets and turnover of the specific business division being acquired are taken into consideration for assessing notifiability and consequently effect on competition in the relevant market. Furthermore, this practice is in conformity with the European merger control regime as only the turnover relating to the “part” of an undertaking being acquired is taken into account.[7] For instance, in Otto/Primondo Assets, the European Commission observed that “Otto acquires only specific assets out of the insolvent Primondo group… It therefore does not appear justified to take the entire…turnover into account in the competitive assessment.” Question of Retrospectivity The apex court has upheld the golden rule of construction that, in the absence of anything in a piece of legislation to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the previous prevailing legislation. A plain reading of the notification reveals that there is no provision in it making it retrospective in operation. Furthermore, it should be noted that another notification issued on the same day rescinded the 4 March 2016 notification—the previously prevailing notification—but stated that such rescission is not applicable to things done or omitted to be done before such rescission. This clearly indicates that the notification is operative only prospectively. However, despite the above, ITC Ltd. has argued otherwise before the CCI. ITC Ltd.’s Arguments vis-a-vis the Notification If legislation is proven to be merely clarificatory, as opposed to substantive, in nature, the legislation is considered to have retrospective operation. Hence, in order to argue that the notification should be taken into consideration for its asset purchases’ competitive assessment, ITC Ltd. submitted that the notification is merely clarificatory to the previousde minimis notification dated 4 March 2016. To substantiate this argument, ITC Ltd. cited a press release dated 30 March 2017 issued by the Ministry of Corporate Affairs, which states that the notification is clarificatory in nature. In addition to the above, ITC Ltd. submitted that it was entitled to draw benefit from the notification as the Show Cause Notice (SCN) under §43A of the Act was issued on 29 March 2017 i.e. after the notification was issued. The CCI rebutted the above by first arguing that the changes brought about by the notification were substantive in nature. It then relied on a Supreme Court judgment to argue that the press release does not have a statutory force and, hence, cannot alter the position as prescribed by statutes. Furthermore, the CCI brought attention to the date of ITC Ltd.’s signing of the binding documents (Asset Purchase Agreements), i.e. the trigger documents, which is 12 February 2015. According to §6(2)(b), the CCI must be notified within 30 days of signing the binding documents, which in the instant case would be 12 March 2015. Hence, the CCI adjudicated that as ITC Ltd.’s obligation to notify was well before the notification was issued (almost two years), it could not claim benefit under the notification. Ultimately, after taking into consideration all the submissions put forth, the CCI held ITC Ltd. liable for violating §6(2)(b) and §6-2A, but imposed a substantially mitigated penalty of only INR 5 lakhs. Analysis Although the CCI never gave in to ITC Ltd.’s argument for retrospectivity, the high degree of mitigation of penalty is a clear indication that the argument holds a heavy persuasive value and, perhaps, legal clout as well. Even though this nominal penalty is but peanuts to ITC Ltd., it has still appealed to the NCLAT against the CCI’s order. The substantial issue of law now lies in the hands of the NCLAT to decide upon. If the NCLAT takes into consideration the intent of the legislature of easing business in India along with the press release declaring the notification clarificatory, it is highly likely that the notification will be adjudicated to be retrospective. However, the CCI has already voiced its (valid) concern that declaring the notification retrospective would create chaos and perhaps lead to opening of all the old closed transactions for fresh scrutiny. A way to counter this problem could be adjudicating the notification to be operative only in the instant case, as the SCN under §43A was issued after the notification came out. Instead of blanket retrospectivity, such a judgment of the NCLAT would lead to the notification being operative for only those combinations that came under scrutiny by way of an SCN post 27 March 2017, despite their trigger documents being signed before the notification. Conclusion NCLAT has to now shoulder the heavy responsibility of maintaining the sanctity of the mandatory nature of the merger control regulations, while at the same time abiding by the legislature’s intent of easing business in India. The Appellate Tribunal must be careful in striking a balance between the two seemingly contradictory ends. [1] The Competition Act, 2002, §6(2)(b). [2] Id.,

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Strengthening of Foreign Investment in India owing to the Foreign Exchange Management (Cross Border Merger) Regulations, 2018

Company Law /

Strengthening of Foreign Investment in India owing to the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 [Ayush Chowdhury and Rishika Raghuwanshi] The authors are third-year students at Symbiosis Law School, Pune. Until now, it was possible for a foreign company to merge with an Indian company, whereas the vice versa was a challenge within the scope of court-sanctioned merger framework set out under the Indian corporate law. This challenge was finally overcome in April 2017 when the company law provisions brought in regulations governing cross border mergers into force. Following this, the Reserve Bank of India (“RBI”) also issued draft regulations (“Draft RBI Regulations”) wherein it laid down standards of deemed approval from the RBI for mergers across the border. This enabled the companies to merge with foreign companies under specified jurisdictions. With the Draft RBI Regulations being at an elongated halt for nearly a year’s time, the RBI on March 20, 2018 notified the Foreign Exchange Management (Cross Border Merger) Regulation, 2018[1] vide notification No. FEMA 389/ 2018- RB (“Merger Regulations”). In this article, the authors would highlight how the Merger Regulations has brought about a change in the context of cross border mergers and how it would impact the economy by bringing foreign investments. The noteworthy changes brought about by the Merger Regulations are: Issue or Acquisition of Securities Inbound Mergers The Merger Regulations clarified that in cases of inbound mergers i.e. where the company is an overseas joint venture (“JV”) or a wholly owned subsidiary (“WOS”) of an Indian company, there arises a need for such company to comply with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (“ODI Regulations”). This is an additional compliance with a pre-requisite compliance with applicable foreign exchange regulations. Moreover, the winding up related obligations in the ODI Regulations should be assessed by the JV/WOS. Subsequently, in cases of inbound mergers which lead to acquisition of a step down subsidiary of a JV/WOS, such acquisition must comply with the conditions relating to total financial commitment, method of funding etc. as set out in the ODI Regulations. Regulations 6 and 7 of the ODI Regulations are mandatory compliances if the merger with the JV/WOS results into an acquisition. Outbound Mergers The acquisition of securities could be made by a resident of India conforming to the existing regulations relating to investment in a JV/WOS or a liberalized remittance scheme (LRS). Transfer of Assets/ Securities Estopped to be Acquired Inbound Mergers The duration to sell the assets not permitted to be held or acquired under FEMA has been increased from 180 days to 2 years from the date of sanction of the scheme. However, it remains to be tested whether such an elongated duration would be optimum for the sale of foreign assets in light of compliances under foreign laws. The referred resultant Indian company would have to seriously evaluate the provisions of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 to hold immovable property outside India. The sale proceeds shall be transferred to India immediately through banking channels. Outbound Mergers In case of a company not permitted to acquire or hold any asset or securities in India which is part of an Indian Company under an outbound merger, the foreign company can transfer such assets or securities within a period of 2 years from the date of sanction of scheme and the sale proceeds shall be transferred outside India immediately through banking channels. Borrowings Inbound Mergers The Merger Regulations henceforth provide a period of 2 years from the date of sanction of the scheme to bring overseas borrowings availed by the resultant Indian company. The clarification expressly provides for non-applicability of end-use restrictions under the Foreign Exchange Management Act, 1999 (“FEMA”) to such overseas borrowings. Prior to an inbound merger, if there happens to be any borrowing by the foreign company, it shall become the borrowing of the Indian company after the merger which should be in consonance with external commercial borrowing norms. Nevertheless, no remittance for repayment of such overseas borrowings can be made during the two-year period. Outbound Mergers Pursuant to outbound mergers, while the guarantees or outstanding borrowings of the Indian companies would become the liabilities of the resultant foreign company, the Merger Regulations put down that foreign companies shall not acquire liability in rupees payable to the Indian lenders non-compliant with FEMA; and with reference to this, a No Objection Certificate (NOC) must be availed from the Indian lenders. Acquisition of Assets Inbound Mergers After the inbound merger, the resultant Indian company may acquire or hold any assets or securities outside India which it is permitted to acquire under the RBI Act or the rules or regulations thereof. Outbound Mergers After the outbound mergers, the foreign company may acquire or hold any assets in India which it is permitted to acquire under the provisions of the RBI Act or the rules or regulations thereof. Location of the Office Inbound Mergers Under the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2015, any office of the foreign company outside India shall be deemed as a branch or an office of the resultant Indian company, thereby implying that the resultant Indian company would be allowed to undertake any transaction as permitted to a branch or an office. Outbound Mergers According to the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or Any Place of Business) Regulations 2016, a foreign company may undertake any transaction as permitted to a branch office as any office in India shall be deemed as a branch or an office of the resultant company in India. Other Consideration under the New Regulations In both inbound and outbound mergers, a bank account could be opened for a maximum period of two years, and the valuation parameter shall be applicable for both. Furthermore, in light of cross border mergers, it is deemed that prior approval has been taken and that no separate

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The Vague Concept of Public Interest as a Ground for Lifting the Corporate Veil

Company Law /

The Vague Concept of Public Interest as a Ground for Lifting the Corporate Veil. [Shivang Agarwal] The author is a third-year student at NALSAR University of Law, Hyderabad. He may be reached at shivangagarwal1597@gmail.com. The post seeks to assess the application of the ground of public interest by the judiciary in India by commenting on the case of State of Rajasthan & Ors. v. Gotan Lime Stone Khanji Udyog Pvt. Ltd. & Ors., which was decided by a two-judge bench of the Supreme Court of India on January 20, 2016. The primary question that would be addressed by this post through a comparative analysis of English and Indian jurisprudence on lifting the corporate veil is whether the bench was justified in invoking the ground of public interest in order to lift the corporate veil. Facts The Government of Rajasthan had granted a mining lease for extraction of lime stone to the Respondent, M/s. Gotan Lime Stone Khanji Udyog (GLKU), which was a partnership firm. The Respondents moved an application for transfer of the mining lease to a private limited company. The application was allowed as it was a mere change in the form of business of the Respondents and involved no premium, price etc.; further, the partners and the directors were the same. Subsequently, GLKU sold all of its shares to Ultra Tech Cement Limited and became a wholly owned subsidiary of the latter. It was alleged by the state government that the share price which came to be around Rs. 160 crores was nothing but a consideration for the sale of the mining lease. Judgement The bench quashed the impugned transfer of shareholdings. They disregarded the corporate veil by looking through the entire series of transactions. It was established that there were two transactions in the present case. When viewed in isolation, these transactions seemed perfectly legal. However, when viewed as a whole, the illegality became manifest. After a perusal of the “combined effects and real substance of two transactions,” the bench came to the conclusion that GLKU had successfully transferred the mining lease to UTCL by disguising the price charged for transfer of mining lease as the share price for the transaction. The transaction was void because it was in contravention to Rule 15 of the Rajasthan Minor Mineral Concession Rules, 1986, for the mining lease was transferred to UTCL without taking permission from the requisite government authorities. The Court also employed the ground of public interest to lift the corporate veil. The ownership mining rights, which constituted the subject matter of the lease in question, vested with the state and was to be regulated in pursuance of the public trust doctrine. Tracing the English and the Indian Jurisprudence In 2013, the Supreme Court of the United Kingdom delivered a landmark judgement in Prest v. Petrodel.  Lord Sumption engaged in a masterful analysis of past cases wherein the doctrine was applied. He came to a conclusion that the doctrine had more often than not been applied for the wrong reasons by the judges. He established the principle of concealment and that of evasion and called for the corporate veil to be lifted in the latter case only. The opinion of Lord Munby in Ben Hashem v. Ali Shayif that the corporate veil need not be lifted unless its absolutely necessary to do so, because there are no public policy imperatives underlying the course, was affirmed. Moreover, it was also held by Lord Sumption and Lord Neuberger that courts should not take recourse to veil piercing even if the evasion principle applies as long as other remedies are available. Ultimately, Lord Sumption came to the conclusion that lifting of the corporate veil should be confined to situations where “a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.” Henceforth, public interest is not employed as an independent ground to lift the corporate veil in England. Courts have adopted a narrow approach wherein they have limited the application of doctrine to certain grounds only. The philosophical underpinning of this judicial stance is the sacrosance of the independent corporate personality and the treatment of incorporation as a business facilitating activity in England. The Indian position largely differs from the English position as the former is more concerned with balancing the interests of all the stakeholders including third parties which would be affected if the corporate veil is lifted to reveal the persons controlling the company. Thus, Indian courts have been more amenable to lifting the corporate veil and have invoked extensive grounds, one of which is public interest. Each case has evoked different grounds which would suit the peculiar facts which are at issue and cited English authorities without application of mind in order to the buttress their findings.[1]. The ground of public interest has been used here and there by the judiciary without any specific pronouncement as to what would constitute public interest. In many cases, the ground has been employed to lift the corporate veil despite the test for establishing a façade or a sham not being satisfied. Dubious Application of the Doctrine in the Present Case Herein, the bench categorically held that GLKU was formed with the intention of avoiding the statutory requirement of obtaining consent of the government for the transfer of the mining lease to a third party. The underlying motive was to accrue private benefit at the cost of public interest. After a perusal of the judgement, it becomes evident that the bench had lifted the corporate veil rather haphazardly. It is argued that the bench need not have gone into the question of public interest when there was a prima facie violation of the impugned rules. It is also argued that in the absence of any statutory definition of public interest or a judicial pronouncement on its scope and import could mean anything and the ground itself could be molded as per the whims and fancies of the judge. The invocation of the public interest doctrine also militates against the juridical observation

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