CBCL, Author at NLIU CBCL

Strict Interpretation of Arbitration Clause Surpasses Section 11(6A) of Arbitration & Conciliation Act

[Pulkit Khare] Pulkit Khare is a 4th year B.A., LL.B. (Hons.) student at The National University of Advanced Legal Studies, Kochi Introduction The Arbitration and Conciliation Act, 1996 (hereinafter the “Act”) was enacted to consolidate and amend the laws relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as well as to define the laws relating to conciliation by adopting the UNCITRAL Model Law on International Commercial Arbitration, 1995 and the UNCITRAL rules.[1]The said Act was amended by the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter the “Amending Act”) to make arbitration process cost effective and speedy, with minimum court intervention.[2] As per Section 6 of the Amending Act, it stipulated addition of sub-section 6A in Section 11 of the Act (Section 11 provides for appointment of arbitrators under the Act), as follows: (6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement. At this point before proceeding with Section 11(6A), it is necessary to understand sub-sections (4), (5), (6) of Section 11 which primarily speak of situations where the parties to an arbitration agreement were unable to appoint an arbitrator(s) within the 30-days of arbitration notice, or where the parties were unable to follow the procedure for appointing an arbitrator so agreed between them. In such a scenario to bring effect to a valid Arbitration clause, one of the parties may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the appointment procedure forward. In United India Insurance Co. Ltd. & Anr. v. Hyundai Engineering and Construction Co. Ltd. & Ors.[3] the question before the apex court in light of Section 11(6A) was, Whether submitting to arbitration clause under an agreement posits unequivocal expression of the intention of arbitration or is hedged with a conditionality? Facts Respondents were awarded a contract for design, construction and maintenance of a bridge for which they undertook an agreement for a Contractor All Risk Insurance Policy (“Agreement”) from the Appellants for the entire project. The Agreement stipulated that in cases of dispute arising out of quantum of compensation, such shall be referred to Arbitration within three months. But the agreement also stipulated that no difference or dispute shall be referable to arbitration, if the Appellants had disputed or not accepted liability under or in respect of the Policy. Incident During the construction of the bridge, an accident occurred for which the Respondents submitted their claim to the Appellants. Appellants appointed a surveyor who assessed the loss to be below the Appellants claim but also opined that the damage was on account of the faulty design and improper execution of the project and hence was not payable under the policy to the Respondents. Another report of a Committee of Experts set up by the of Ministry of Road Transport and Highways, Government of India, was also taken into consideration to enquire into the accident. Appellants taking into account both the aforementioned reports intimated the Respondents that the claim put forth was not payable, since policy specifically excludes any loss/damage caused by faulty design, defective workmanship/material and also the damage was caused due to willful acts/negligence in execution of work of such nature. Reconsideration to the matter raised by the Respondents was rejected by the Appellants. View of the Madras High Court Respondents invoked the Arbitration clause and upon non appointment of Arbitrator by the Appellants approached Madras High Court under Section 11(4) and 11(6) of the Act. The Madras High Court stating the post amendment position (insertion of sub-section 6A) under the Amending Act said it had a limited mandate to examine the factum of existence of an arbitration agreement and nothing more or less. Hence allowing the petition, it appointed an Arbitrator in the matter. Decision of the Supreme Court On appeal by the Appellants against the judgment of Madras High Court, in regards, whether the courts were to send the matter directly to arbitration in case of a valid arbitration agreement or they could consider circumstances in pre-invigoration of Arbitration. The Supreme Court relied on Oriental Insurance Company Limited v. Narbheram Power and Steel Private Limited[4] and The Vulcan Insurance Co. Ltd. v. Maharaj Singh and another[5] holding that the arbitration clause has to be interpreted strictly, since in the present case the arbitration clause will get kindled if the dispute between the parties is limited to the quantum to be paid under the policyThus, to put is differently, there can be no arbitration in cases where the insurance company disputes or does not accept the liability under or in respect of the policy. The court therefore instead of the mandate under subsection 6A, didn’t confine itself to examination of existence of arbitration agreement, rather went ahead and decided as to whether the arbitration agreement was triggered or invigorated in the circumstances or not. Hence, the Court chose to surpass the exclusive provision for appointment of arbitrator and went ahead to check whether arbitration was enlivened in the circumstances. The Dilution of the Courts jurisdiction which was brought about by inserting sub-section 6A through Section 6(ii) of the Amending Act is now being sought to be omitted under Section 3(v) of the Arbitration and Conciliation (Amendment) Bill, 2018 (Amending Bill). This step of the Court is in line with the legislative intent, since the Amending Bill, inter alia, has been brought out to plug some of the loopholes brought in by the Amending Act. Conclusion The issues raised by Section 11(6A) of the Act has been plugged by the Supreme Court, while rendering the decision in the present case by surpassing the mandatory appointment of arbitrator on existence of an arbitration agreement. The Amending Bill shall eventually fructify the position laid down by

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The Law of Bank Guarantees: Important Tools of Modern Day Commercial Transactions

Banking Law / CBCL

The Law of Bank Guarantees: Important Tools of Modern Day Commercial Transactions. [Rangeet Poddar] The author is a 4th year B.A.LLB(Hons.) student of WBNUJS, Kolkata. Introduction According to Section 126 of the Indian Contract Act, a contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default.[1] A bank guarantee is a contractual assurance that is given by the bank to a third party creditor. By virtue of this commercial instrument, the concerned bank undertakes liability on behalf of the principal debtor to fulfill his contractual obligation in the event of default. This secures the transaction by ensuring that no detriment is caused to the creditor. The nature of obligations of the principal debtor is primary while the obligations of the bank are secondary. By issuing a guarantee, a bank ordinarily undertakes to pay the amounts specified in the guarantee agreement to the beneficiary on demand made by him in accordance to predetermined terms and conditions.[2] The object of a bank guarantee is to ensure the due performance of certain works contracts. The guarantee can also be towards security deposit for a contract or of any kind.[3] In the case of State Trading Corp. of India Ltd. v. Jainsons Clothing Corp.[4], the Supreme Court held that the bank guarantee is a trilateral contract in which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in domestic or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of events mentioned in the guarantee contract, the bank guarantee becomes enforceable.[5] There are two types of guarantees: A conditional performance guarantee is one where the surety becomes liable to the party, claiming under the guarantee upon proof of breach of terms of the underlying contract, or on proof of both breach as well as the loss occurring from the breach. Under unconditional guarantee, the guarantor becomes liable to pay the beneficiary the stated amount whenever the demand is made in the manner provided for in the guarantee, without the need for that beneficiary to prove any breach or loss; the guarantor is bound to immediately perform the contract of guarantee without further requirements. The object of unconditional bank guarantees or on demand bank guarantees are to secure hassle-free commercial transactions. Where the bank unconditionally and irrevocably promises to pay on demand, the amount of liability undertaken in the guarantee without ‘demur or dispute’ under the terms of the guarantee, the liability of the bank is considered to be absolute and unequivocal.[6] An on-demand bank guarantee consists of three separate and substantially independent but formally accessory agreements, namely: The underlying transaction or main agreement The indemnity agreement between the account party or principal and the guarantor The on-demand instrument between the guarantor and the beneficiary[7] The question whether the guarantee is a conditional or an unconditional one payable on demand, is a matter of construction in each case from the terms of the bond.[8] Independent nature and encashment of the bank guarantee In Ansal Engineering Projects v Tehri Hydro Development Corporation[9], it was held by the Supreme Court of India that the bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary.[10] The question whether the express terms of the guarantee give rise to the contract of guarantee to be enforced will be the limited enquiry for deciding the rights and obligations flowing from such a guarantee. Bank guarantees are independent in nature.[11] It is a separate autonomous contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the beneficiary and the person at whose instance the bank guarantee is given.[12] In a bank guarantee it is not necessary to go beyond the guarantee contract between the creditor and the surety bank and one must not look at any other contract including the underlying or primary one. However the underlying contract comes into the picture only if the guarantee itself makes its encashment, subject to proof of performance of underlying contract as it happened in the Hindustan Construction case[13]. In that case, the bank guarantee was for securing mobilization advance given by State of Bihar and it was provided in the terms of the guarantee that the beneficiary would not have the unfettered right to invoke the guarantee in the event the obligations expressed in the clause of the original contract were not fulfilled by the contractor. In such exceptional scenarios, the bank guarantee loses its autonomous character and depends upon the result of inquiry to the underlying contract. [14] Besides such cases, the court does not interfere with the enforcement of bank guarantees and guarantee contracts are not qualified by underlying transactions.[15]Where the bank guarantee is unconditional and payable on demand or demur, the liability of the bank is absolute and does not depend on the ultimate decision of a pending case in a court or tribunal. The bank only has to ascertain the amount claimed within the terms of the guarantee.[16]The question of encashment of the bank guarantee is entirely upto the beneficiary to invoke the guarantee at any time as he deems to be proper.[17] The National Highways Authority v Ganga Enterprises and Another[18] case laid down that that bank guarantees furnished in the form of security for not withdrawing a bid is fundamentally different from withdrawal of offer before acceptance as per the statutory provisions of the Indian Contract act. In such cases, when a person withdraws his offer within a stipulated time, he has no right to claim the earnest money that he has given in the form of a bank guarantee.

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Determination of Jurisdiction in cases of Trans-boundary Trademark Violations in the Cyberspace, in light of the Civil Procedure Code

Determination of Jurisdiction in cases of Trans-boundary Trademark Violations in the Cyberspace, in light of the Civil Procedure Code. [Anushka Sharma] The author is a 3rd year B.A.LLB.(Hons.) student of WBNUJS, Kolkata. Introduction The advent of internet has opened the doors for a wide range of inter-state and international transactions in the commercial setup. The content posted online can be accessed worldwide which opens up the possibility of it being contradictory to the laws of some faraway jurisdiction. Numerous companies have cited the risk of prosecution in distant jurisdictions as one of the most serious threats that they encounter. Thus, in order to ensure that the laws do not come in the way of economic development it is imperative to answer the question of jurisdiction with utmost diligence. This paper seeks to answer this question of jurisdiction with reference to trans-boundary trademark violations arising out of acts committed in the cyberspace, in context of The Civil Procedure Code (‘CPC’), while discussing some general principals which can be applied to other online torts as well. The General Principle The statutory provision that governs the jurisdictional questions pertaining to civil matters in India is the § 20 of the Civil Procedure Code, 1908 and the same is applicable for determining jurisdiction pursuant to torts committed online. As per the section the plaintiff might bring an action against the defendant either at the place where the defendant resides or carries on business or at the place where the cause of action arises.[1] In addition to the above provision the Delhi High Court has evolved the following three fold test in the News Nation Networks Private Limited v. News Nation Gujarat & Ors[2] case relying on Cybersell v. Cybersell[3] to decide matters of jurisdiction pertaining to a non resident foreigner regarding the content displayed on a website. It confers jurisdiction on the forum court only when[4]- The acts of the defendant have sufficient proximity with the forum state. The resultant cause of action due to defendants acts falls in the forum state. The exercise of jurisdiction tends to be reasonable. Trademark Violations The technology today has made it possible for a person to create a website that can be used to conduct business across the globe. Now a company while offering its services on such a website might violate the trademark of another company in a faraway jurisdiction by virtue of the global accessibility of its website, which it neither targeted nor foresee. Can the courts exercise jurisdiction over such a company if it is not located within their territorial jurisdiction? Can the company said to be in the court’s jurisdiction by virtue of the accessibility of its website there? Earlier, there existed two contradictory opinions in this regard, each given by a single judge bench of the Delhi High Court. The first view which was given in the case of Casio India Co. Limited v. Ashita Tele Systems Pvt. Limited[5] (‘Casio’) held that the mere likelihood of a person getting deceived in the forum state due to the accessibility of the defendant’s website there is sufficient to establish jurisdiction of the forum court. While the other view given in the case of India TV Independent News Service Pvt. Limited v. India Broadcast Live Llc And Ors[6] (‘India TV’) warranted for a higher standard to be adopted and said that mere accessibility of the website cannot grant jurisdiction to the court. Additionally it should be established that the website is highly interactive for the court to exercise jurisdiction.[7] The current governing precedent on this issue is Banyan Tree Holding Limited v. A Murali Krishna Reddy & Anr[8] (‘Banyan Tree’) which settled the position by overruling the Casio case and upholding the India TV case. This case was a passing off claim in which the court held that to establish jurisdiction in cases where the defendant does not reside/carry on business in the forum state but the website in question is ‘universally accessible,’ the plaintiff will have to show that “the defendant purposefully availed the jurisdiction of the forum court.”[9] This includes proving that (1) The website was used with an intention to effectuate a commercial transaction and (2) The defendant specifically targeted the forum state to injure the plaintiff.[10] While in cases where the website is ‘accessible in the forum state’ it needs to establish that (1) The website was not a passive but an interactive one (2) It was targeted towards the consumers of the forum state for commercial transactions (3) A commercial transaction was entered into by the defendant using such a website which resulted in injuring the plaintiff.[11] A defining judgement on this issue post Banyan Tree was of World Wrestling Entertainment Inc. v. M/s. Reshma Collection[12] (‘WWE’). This case dealt with infringement of trademark in which the court had to decide whether the accessibility of the website of the plaintiff which was used to sell goods in the court’s jurisdiction can be held to mean that the plaintiff ‘carried on business’ there as required by the §64 of the Trademark Act. [13] The court observed that “the availability of transactions through a website at a particular place is virtually the same thing as a seller having shops in that place in the physical world” and thus, held that it had the jurisdiction to entertain the present suit.[14] Contradictory or Not Some authors have pointed out that the decision in WWE is in contravention to Banyan Tree because while in Banyan Tree the court held that the mere presence of an interactive website in a particular forum is insufficient, it must also be shown that the defendant has targeted the forum state and the culmination of commercial transactions via that website has resulted in injuring the plaintiff. In WWE they said that the mere presence of the website of the plaintiff in a particular forum which is used to conduct commercial transactions is akin to having a physical shop there and will confer jurisdiction on the forum courts. This, in my opinion is an

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Regulatory challenges faced by Equity based Crowd-funding Platforms

Company Law / CBCL

Regulatory challenges faced by Equity based Crowd-funding Platforms. [Amala George] The author is a 5th year student of B.A.LLB (Hons.) of ILS Law College, Pune. What is Crowdfunding? With the rise of the Internet, a new method of fund raising has emerged- Crowdfunding. Crowdfunding is the solicitation of funds from multiple investors through web-based platforms.[1] Different kinds of organisations including NGOs, small companies and business ventures use Crowdfunding to raise funds for different activities, expansion, diversification etc. Crowdfunding can be broadly classified into two kinds- donation based and reward based. Donation based crowdfunding involves grants and donations with no expectation or obligation of returns. Reward based crowdfunding can be further classified into- debt based or equity based. In debt based crowdfunding if it is in the form of loans, it is called peer to peer lending and should come under the banking regulator, whereas if it is debt securities based then it would come under the purview of the securities regulator. The subject matter of this article is equity based crowdfunding in which equity shares of the company are issued in lieu of funds raised from investors. It is a popular method of fund raising by start-ups. There are web based platforms which facilitate information exchange and advertising of companies as well as act as intermediaries for fund and equity share transfer. In web-based platforms for equity crowdfunding, investors and companies looking to raise capital through equity have to register with the platforms and pay a registration fee for the same. Start-ups advertise and solicit funding on these platforms and therefore the web-based platforms act as intermediaries or a marketplace for investors and start-ups. Social media platforms are also often used by start-ups to solicit funds from multiple investors. The need for regulation Traditionally, start-ups raise funding through Venture Capital funds and Private Equity investors who have a high risk appetite. The funding is also at a later stage, after the product/ service becomes commercially viable. However with the advent of crowdfunding platforms, multiple investors with smaller individual investment are tapped into, usually at an early stage. The benefits of crowdfunding are that it is easier, faster and cheaper method of fund raising, requires no mandatory disclosures, and possesses easier and wider access to funding and investors. While the benefits of crowdfunding are manifold for the start-ups, the risk to the investors is high. There is an information asymmetry in the functioning of these crowdfunding platforms as there are no straight jacket regulations on mandatory disclosures which apply to them. These are also characterized as high risk investments and involve a high exposure to retail investors which makes the regulators uneasy. Start-up companies also offer less liquidity and therefore might not be viable for retail investors who do not have the required skills and assessment of risk to invest in such securities. There is a lack of regulatory certainty due to absence of regulations in which these crowdfunding platforms function. Current regulatory framework The applicable laws to Equity based crowdfunding are- 1) Companies Act, 2013- Any issue of securities by a company would come under the purview of the Companies Act, 2013. In relation to issue of securities, there are two recognised modes available to companies under Section 23 of the Companies Act, 2013- Public offer through prospectus and Private placement through an offer letter[2]. 2) Securities Contract (Regulation) Act, 1956, Securities and Exchange Board of India Act (SEBI Act) and Regulations- Under Section 24 of the Companies Act, 2013, Securities Exchange Board of India (SEBI) shall regulate the issue and transfer of securities of listed companies and those companies which intend to get their securities listed. A public offer requires a ‘prospectus’ and there is a list of matters to be disclosed in the prospectus. The prospectus also needs to be filed with the Registrar of Companies (RoC) and SEBI.[3] A private placement offer under Companies Act, 2013 cannot be made to more than 200 people in a financial year.[4] The newly amended Section 42 also stipulates that private placement shall be made only to persons identified by the Board and prohibits public advertisements or utilisation of any media, marketing or distribution channels or agents to inform the public at large about such an issue.[5] Explanation III to Section 42 dealing with offer or invitation for subscription of securities on private placement reads- “If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter”. Therefore the modus operandi of crowdfunding platforms[6] of raising funding through issue of equity shares through the medium of electronic platforms with a number of registered/ member investors would neither meet the stringent regulations for a public offer nor qualify as a private placement under the Companies Act, 2013. There is more similarity to a public offer than a private placement which is on a one-to-one basis. The decision of the Supreme Court in the Sahara judgment[7] concluded that an offer to 50 or more persons constitutes a public issue and will come under the regulatory oversight of SEBI even in case of unlisted companies. In case of crowdfunding, there is no filing of prospectus with the RoC and the disclosures to be made are not complied with, therefore there is a violation of public offer norms. Private Placement under Section 42 (7) specifically bars the utilisation of any media to market and distribute to the public at large about such an issue. The solicitation made to more than 50 persons also makes crowdfunding beyond the scope of private placement. In the opinion of the author equity based crowdfunding platforms are

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The Judicial Debate on Discharge of Surety

Contemporary Issues / CBCL

The Judicial Debate on Discharge of Surety. [Debanga Goswami] The author is a 4th year student of B.A.LLB (Hons.) of NUJS, Kolkata. Introduction According to Section 126 of the Indian Contract Act, 1872, (hereinafter referred to as “the Act”) a surety is a person who provides a guarantee in a contract of guarantee.[1] The same section defines a contract of guarantee as a contract to “perform the promise, or discharge the liability of a third person in case of his default”.[2] A contract of guarantee consists of three parties- the creditor, the principal debtor (hereinafter referred to as the “PD”) and the surety, (or the guarantor) and there is a privity of contract between all of them.[3] The liability of the surety is co-extensive with that of the PD.[4] Since a surety guarantees the performance of the obligations of a third party, the laws related to him are interpreted by the Court in his favour. The legislature has made provisions to discharge the surety in circumstances under which it would be inequitable to hold him responsible for the failure of the PD. Here, the author is making an attempt to critically examine the judicial debate pertaining to the circumstances which lead to the discharge of the surety. Issue 1 The Rule Any variance made in the terms of the contract between the PD and the creditor, without the consent of the surety, discharges him as to the transactions subsequent to the variance.[5] But, Section 133 only applies to the concept of continuing guarantee, which is clear from the phrase ‘transactions subsequent to the variance’, present in the provision.[6] This implies that the surety would be liable only for the transactions that are precedent to the variance in the contract between the creditor and the PD, without his consent.[7] He would be discharged for all the subsequent transactions.[8] The Debate Section 133 is based on the premise that the surety can’t be bound to do something which he hasn’t contracted to.[9] The Indian courts have interpreted this section to mean that in order for the surety to be discharged, the variance has to be a substantial one.[10] The test to ascertain substantial variance is that whether the variance materially affects the position of the surety or not.[11] But, the courts have not been able to reach at a uniform opinion pertaining to a peculiar situation. The situation arises when the variance is of a beneficial nature for the surety. In an English case[12], it was ruled that the though the surety was not prejudiced by the variance, yet he stood discharged. The same was reiterated in an Indian case.[13] Here, the creditor and the PD contracted to reduce the mortgage amount. The Court discharged the surety by stating that in such cases, the surety is the sole judge to decide whether he wants to continue with the contract or not. However, in another Indian case[14] the debt amount was decreased from Rs. 25,000 to Rs. 20,000 through a variance in the terms of the contract. But, the Court held that the change was unsubstantial and was for the benefit of the surety. Hence, he was not discharged. The guarantee of the protection of the assets of the creditor is crucial for the commercial world to thrive. Thus, the author opines that the surety should be discharged by the courts only in cases where there is a material alteration which goes against his interests. Issue 2 The Rule Section 134 inter alia states that the surety is discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the PD.[15] The omission of the creditor, the legal consequence of which is the discharge of the PD also includes failure to sue PD within the limitation period. The Debate The issue on which courts have differed is that whether failure of the creditor to sue the PD within the limitation period discharges the surety or not. The judges who believe that the surety is discharged in such a situation have a three-pronged argument. First, liability of the surety is co-extensive with that of the PD[16] and thus his discharge should lead to the discharge of the surety. Second, the liability of the surety being a secondary one, when the PD with a primary obligation is discharged, then there is no reason to hold the surety liable.[17] Third, discharge of the PD and consequent lack of a debt on his part can be used by him as a defense to not indemnify the surety after the surety fulfills his contractual obligations.[18]Viewing the same from PD’s perspective, if he remains liable to indemnify the surety even after he is discharged from his liability towards the creditor, then the effect would be to render his discharge of little or no consequence.[19] But, courts have also come up with a counter view. When Section 134 is read along with Section 137 of the Act, the phrase ‘mere forbearance’[20] implies that except express contracts, the surety is not discharged. The Madras High Court has made a distinction between barring of the remedy and complete extinction of the debt.[21]It said that when the suit of the creditor becomes time-barred against the PD, his remedy against the latter is gone. It means that he cannot approach the Court to get an order for the PD to repay his debt. But, it doesn’t mean that his right over the debt is non-existent. The debt as well as his right over it are very much existent. So, after the surety had paid off the debt to the creditor, he can get indemnified by the PD. [22] This was re-affirmed in the case of Mahant v U Ba Yi.[23] The author also supports the above-mentioned line of reasoning. Even after the suit gets time-barred against the PD, the debt and the creditor’s right over it are not extinguished. Thus, the surety should be directed to pay the creditor and later get indemnified by the PD. This would also justify the

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A Shot in the Arm or a Knee-Jerk Riposte? : Dissecting the Fugitive Economic Offenders Ordinance, 2018

Company Law / CBCL

Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating. [Harshit Anand] Mr. Harshit Anand works at Khaitan & Co, Kolkata and deals with Real Estate and Corporate matters. He may be reached at [email protected]. Introduction In the annals of finance, the promulgation of the Fugitive Economic Offenders Bill, 2018 (“the Ordinance”) is being lauded as another bold step of the government after the Insolvency and Bankruptcy Code of 2016. The intent behind the Ordinance is to target those economic offenders who flee the jurisdiction of India and evade the rigours of the legal process, and impending criminal prosecution. This Ordinance empowers the Government to seize the property of such economic offenders- Benami and otherwise- situated in India as well as in foreign jurisdictions. The Ordinance would, under its purview, deal with cases in which the total amount involved is INR 100 crores or more. As the instances of fraudulent conduct in corporate behaviour pile up day upon day, relevance of this Ordinance cannot be overemphasized. I shall briefly discuss the important provisions and procedures listed under the Ordinance and its potential impact on our economy. Offences under the Ordinance One singular feature of the Ordinance is that it defines significant terms and phrases such as ‘fugitive economic offender’, ‘schedule offence’ and ‘special courts’, amongst others. It makes provisions for presenting an application before such special courts for a juridical declaration that an individual is a fugitive economic offender. Attachment of the offender’s property- which would include their Benami property- situated in India or in some other country is an option explicitly available under the Ordinance. For management and disposal of such confiscated property, the Ordinance provides for the appointment of an Administrator. With the Ordinance in operation, offenders who fit the definition of a ‘fugitive economic offender’ would be tried for all offences listed under the schedule of the Ordinance The Ordinance defines a ‘fugitive economic offender’ as any individual against whom an arrest warrant concerning a scheduled offence has been issued by any Indian court, who has either left India so as to evade criminal prosecution or being abroad, has refused to return to India to face criminal prosecution.[i] In other words, all individuals who have left India in order to avoid criminal prosecution and refuse to return to the Indian jurisdiction would satisfy the text of § 2(1) (f). However, leaving the country to dodge the legal process does not automatically make a person a fugitive economic offender (“FEO”); what is of essential requirement is commission of a schedule offence under the Ordinance. The Ordinance lays down that a ‘Schedule Offence’ would mean an offence specified in the schedule, if the total amount involved in the commission such offence or offences is rupees one hundred crore or more.[ii] This Section implies that every offence laid down under this schedule would come under the ambit of economic offence and any person indulging in this schedule offence would be tried in special courts established under the Prevention of Money Laundering Act of 2002. The schedule is quite comprehensive, in the sense that it lists offences under a plethora of existing laws such as the Indian Penal Code of 1860, the Prevention of Corruption Act of 1988, the Customs Act of 1962, the Companies Act of 2013, the SARFAESI Act of 2002, the Limited Liability Partnership Act of 2008, the Prevention of Money Laundering Act of 2002 and the Insolvency and Bankruptcy Code of 2016. Authorities under the Ordinance The Ordinance defines certain authorities and accords them functions and some special powers. Three authorities who bear primary responsible for the operation of the Ordinance are: 1.Administrator: 2(a) describes an administrator as one who has been appointed under §15(1). §15 deals with management of the properties confiscated under the Ordinance, and under §15(1), the Central Government may, by notification in Official Gazette, appoint as many officers, as they may think fit not below the rank of Joint Secretary of the Government of India to perform the function of an administrator. An administrator is therefore a subordinate officer or officers of the Central Government, who perform(s) their function on the direction of Central Government. The administrator receives and manages the properties confiscated under the Ordinance. §12 of the Ordinance dictates the administrator to disposes of such property on the direction of the Central Government. Special Courts: A special court under §2(n) of the Ordinance refers to a court of session designated as a special court under §43(1) of the Prevention of Money-laundering Act of 2002. Under the Ordinance, a special court (“Court”) has the right to declare a person as an FEO under §12 of the Ordinance and issue a notice requiring appearance of such person. With the permission of the Court, a property may be attached under §5(1), if with regard to the referred property, there is a reason to believe that the property is a proceed of crime or is a property owned by an individual who is an FEO, and which is being or is likely to be dealt with in a manner which may result in the property being unavailable for confiscation. Director: A director in the Ordinance is one appointed under §49(1) of the Prevention of Money-laundering Act of 2002, which defines a director as a person deemed fit to be an authority for the purposes of the Act and appointed by the Central Government. Under the Ordinance, the director may file an application before the Court if he has reason to believe, or any other material in his possession indicates that an individual is an FEO under the Ordinance. §6 of the Ordinance states that the director shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of discovery and inspection. Powers of survey, as well as of search and seizure have been given to the Director under the Ordinance, provided he has reason to believe that

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Unauthorized Communication of UPSI: Communicator Presumed Guilty?

Capital Markets and Securities Law / CBCL

Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating. [Ankit Sharma] Ankit Sharma is a 4th year student of B.Com.L.L.B (Hons.) at Gujarat National Law University. Introduction Given the evidentiary problems in insider trading cases, SEBI has resorted to the use of presumptions in its enforcement of the SEBI (Prohibition of Insider Trading) Regulations[1]. Hence, if an insider trades in securities whilst in the possession of Unpublished Price Sensitive Information (‘UPSI’ hereinafter) there is a presumption of guilt against him. The law also prohibits the immediate insiders from communicating UPSI to anybody who is not an insider. The research note seeks to examine if there exists any such presumption against the immediate insider also that he communicated UPSI to a relative or a spouse etc. in instances where any relative or spouse or any other connected person commits insider trading Analysis: SEBI (Prohibition of Insider Trading) Regulations, 2015 prohibit insiders from trading[2] in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information[3]. ‘Insider’[4] is anybody who is in possession of or has access to unpublished price sensitive information or is either a connected person, which includes spouse[5]. ‘Unpublished price sensitive information’ means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities[6]. The note appended to regulation 4(1) casts a rebuttable presumption of guilt on a person who has traded in securities, whilst in possession of unpublished price sensitive information (UPSI), that such trade was motivated by the knowledge and awareness of such information in his possession, thereby making him guilty of Insider Trading. Further, regulation 3 prohibits any insider from communicating any UPSI relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Thus, in case where a person is an insider possessing UPSI and the spouse or relative of such person commits insider trading, there will be a presumption of guilt against such individual who is trading on securities but there has to be undertaken an inquiry as to whether such presumption of guilt will exist against the immediate insider possessing UPSI also that he communicated the information to spouse or relative and thus acted in contravention of prohibition under regulation 3. Though any express provision providing for such presumption under regulation 3 is absent, the existence of such presumption of guilt seems very natural and rational as the communication of UPSI by immediate insider is the only way that the spouse or any other connected person can garner such information. But be that as it may, such a presumption may not exist because of two cogent reasons. Presumption under Regulation 4 cannot be extended to Regulation 3. SEBI (Prohibition of Insider Trading) Regulations, 2015 is a penal statute[7]. It is a general rule[8] of construction that the provisions of a statute enacting an offence or imposing a penalty are strictly construed[9] and not be enlarged by implication[10]. If the statute requires the accused to disprove even by preponderance of probabilities a presumed fact which an essential element of the offence as distinguished from a proviso or exception, the statute may offend a due process clause in a constitution to design fair trial[11] and the provision may be read down strictly[12]. In any case a deeming provision which reverses the onus of proof in relation to an element of the offence has to be strictly construed and cannot be extended beyond its language to cover another offence[13]. In the instant matter also, the onus of proof and presumption under Regulation 4 should be read as to cover only the cases envisaged by the aforementioned regulation i.e. where there has been trading transaction on the basis of UPSI and should not extend to the cases where the immediate insider has communicated to UPSI to any insider/non insider when such communication was not made in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. 2.Such presumption in Regulation 3 was intentionally omitted by legislature. A statute is an edict of the Legislature[14]. The duty of judicature is to act upon the true intention of the Legislature—the mens or sententia legis”[15]. In the matrix at hand it can be reasonably presumed that the legislating authority never intended any such presumption against the communicator of UPSI under Regulation 3(1). According to the test laid down by Blackburn J. in R v. Cleworth[16], to determine what the correct presumption, arising from an omission in a statute should be, was whether what was omitted but sought to be brought within the legislative intention was “known” to the law makers, and could, therefore, be “supposed to have been omitted intentionally”[17]. To re-iterate, note appended to the regulation 4 unequivocally mentions that there will be a presumption against the trader that the transacted on the basis of UPSI if he did so while in the possession of UPSI. And hence it can be well deduced that the legislature was well aware that a presumption could be imposed in case of other offences also, or to be specific on the communicators of UPSI as envisaged in regulation 3(1). But the legislature chose to omit any such presumption in case of regulation 3(1) thereby satisfying the absence of any intention to treat the communicators of UPSI at par with the person who trades in securities while in possession of UPSI. Conclusion While it remains to be seen as to how judiciary clarifies the issue, the reasons suggesting the absence of presumption of guilt under Regulation 3 are highly persuasive and convincing. As a general rule of interpretation of penal statutes, presumptions are usually given a restricted effect and hence,

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Effects of the Amendment of the Arbitration & Conciliation Act, 1996

Arbitration Law / CBCL

Effects of the Amendment of the Arbitration & Conciliation Act, 1996. [Siddhart Jain] The author is a 2nd year student at DSNLU, Visakhapatnam. Introduction With the growth of legal awareness amongst the general populous, there is a rise in the number of suits pending before courts. The inability of courts in the speedy disposal of cases has led to a rise in the trend of using arbitration as a means of disposal of most cases, where time is of utmost importance. Arbitration, has primarily become a preferred option to settle commercial disputes Globally and in India as well. Arbitration in India is governed by the Arbitration and Conciliation Act, 1996. The Act was introduced due to the need to facilitate quick enforcement of contracts, reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration. However, another prime factor for the need of this Act was globalization since there was a need to project India as an investor friendly country having a sound legal framework and ease doing business in India. One of the most significant legal changes made by the Indian legislature in recent years has been the introduction of The Arbitration and Conciliation (Amendment) Act, 2015 (Amendment Act)[1]. The Amendment Act seeks to resolve issues that have traditionally afflicted the alternative dispute resolution framework in India, for example, protracted disputes, excessive judicial intervention, dearth of qualified and impartial arbitrators, and so on [2] Need for Amendment In the recent years, the Government has been taking considerable steps time and again to make India too an international commercial arbitration hub much to the likes of Paris or New Yorks. The case of White Industries v. Republic of India[3] was the first investment arbitration claim, wherein the decision was pronounced against the country, due to judicial delay. Though the Supreme Court has delivered some landmark judgements which support a pro-arbitration approach, the objective of the Act of 1996 was far from reached due to exploitation of several loopholes in the act. The major issue with arbitration in India is twofold: – Court interference becomes inevitable as most of the arbitral awards are challenged until they reach the highest court of the land. There is no provision in The Arbitration and Conciliation Act, 1996 to expedite the arbitration process where the arbitration tribunal shall have to make an award within a fixed period of time. The above reasons made the dispute settlement process more time consuming and defeated the purpose of the legislation. The effects of this are quite evident since even Indian companies who entered into contracts with international investors preferred execution of awards and arbitration proceedings in a jurisdiction other than India.[4] The amendment to the Act of 1996 was a must in today’s time in light of Modi government’s agenda to improve ease of doing business.[5] Major Amendment “Proceedings in arbitrations are becoming a replica of court proceedings, despite the specific provisions in Chapter V of the Act which provide adequate powers to the arbitral tribunal. The Commission hopes that arbitral tribunals would use the existing provisions in the Act, in order to reduce delays.”[6] The world’s leading international arbitral institutions have been revising their respective rules over recent years in an attempt to make arbitration faster and more efficient. This is evidenced by the suite of new rules and mechanisms introduced by such institutions that are aimed at reducing the time and cost of arbitration. One notable example is the so-called ‘expedited procedure,’ which has been adopted by the ICC Court of International Arbitration (ICC), the Singapore International Arbitration Centre (SIAC), and the Hong Kong International Arbitration Centre (HKIAC).[7] The recent Act of 2015 has provided for fast track arbitration by the addition of Section 29(A) & (B) which maybe the saving grace for arbitration in India due to growing demon of delayed proceedings. The section is at par with Expedited Procedure Provision in world’s leading international arbitral institutions. The section combats delayed proceedings by providing the parties to a dispute with an option to choose fast tract procedure, ensuring that the award shall be made within a period of twelve months from the date the arbitral tribunal enters upon the reference subject to other conditions.[8] The act has further incorporated features of Expedited Procedure Provision by enabling parties to settle dispute merely on the basis of written pleadings, documents and submissions filed by the respective parties, doing away with oral hearing. It is also noteworthy that the enabling provision in Sec 26 of the amendment Act provides for fast track arbitration to be applied to the existing disputes if the parties mutually agree to apply this procedure. The Act is undoubtedly aimed at reducing inordinate delays that plague dispute resolution in India. However, the boon of speedy disposal of proceedings comes at the cost party autonomy. Party autonomy is the most prominent features of arbitration on which arbitration framework rests. In this regard, Section 29(A) raises serious concerns. The section, as it stands now, allows the parties to extend the period for passing an award by another six months if the award is not passed within 12 months. However, if the award is not passed despite this extension of six months, the mandate of the tribunal automatically terminates and it is only the court, which on an application by one of the parties and upon being satisfied of sufficient cause, can extend the period for passing the award further. The parties, even if they mutually agree, cannot extend the mandate of the arbitral tribunal beyond the 18-month period allowed by Section 29(A). This mandatory requirement to file an application before the court, an agreement between the parties notwithstanding, is antithetical to the idea of parties having the autonomy to set down time limits and procedures for the adjudication of disputes. Conclusion The process of speedy disposal is still new in India and needs to be practiced to lessen the burden on the judicial system. The fast track arbitration comes at the

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IBC Ordinance; Home Buyers to be Treated as Financial Creditors

Insolvency Law / CBCL

IBC Ordinance; Home Buyers to be Treated as Financial Creditors [Riya Goyal] The President has recently given his nod to promulgate an ordinance amending the insolvency law, recognising homebuyers as financial creditors to real estate developers. This settles a long drawn controversy created by various conflicting court decisions regarding the status of homebuyers as being financial or operational creditors, which was further deepened by the IBBI issuing a claim form for “creditors other than financial or operational creditors”[1] To understand the implications of this ordinance, it is pertinent to first understand the meaning of financial and operational creditors. Section 5(8) of the Code defines ‘financial debt’ to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and inter alia includes money borrowed against payment of interest, etc., As per earlier interpretations of the definition, the contract between the real estate developer and the homebuyer were seen as simple sale and purchase agreements and not as a ‘financial debt’. The only exception to this view was the assured return scheme contract, in which there was an arrangement wherein it was agreed that the seller of the apartments would pay ‘assured returns’ to the home buyers till possession of property was given.[2] However such judgments were given considering the terms of the contracts between the home buyers and the seller and were fact specific, thus no consistency existed. Further Section 5(20) of the Code defines operational debt as “debt that may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to centre or local authority”. In relation to this the NCLT in Col. Vinod Awasthy v. AMR Infrastructure Ltd. (Principal Bench-Delhi)[3] had ruled that, notwithstanding the presence of an assured return clause, a purchaser of a flat cannot be treated as a provider of ‘goods’ or ‘services’ to the builder and therefore, does not qualify as an ‘Operational Creditor’ and cannot initiate Insolvency Process in that capacity. This Non-inclusion of home buyers within either the definition of ‘financial’ or ‘operational’ creditors may be a cause for worry since it deprives them of, first, the right to initiate the corporate insolvency resolution process (“CIRP”), second, the right to be on the committee of creditors (“CoC”) and third, the guarantee of receiving at least the liquidation value under the resolution plan.This puts into jeopardy the future of millions of homebuyers in a situation where Delay in completion of underconstruction apartments has become a common phenomenon. the records indicate that out of 782 construction projects in India monitored by the Ministry of Statistics and Programme Implementation, Government of India, a total of 215 projects are delayed with the time over-run ranging from 1 to 261 months.[4] To resolve this issue a committee was constituted under the Corporate Affairs Ministry to review the various financial terms of agreements between home buyers and builders and the manner of utilisation of the disbursements made by home buyers to the builders,it was evident that the amounts so raised are used as a means of financing the real and are thus in effect a tool for raising finance, and on failure of the project, money is repaid based on time value of money. This could be covered under Section 5(8)(f)of the Code, which is in the nature of residuary entry to cover debt transactions not covered under any other entry, and the essence of the entry is that “amount should have been raised under a transaction having the commercial effect of a borrowing.” An example has been mentioned in the entry itself i.e. forward sale or purchase agreement. Though a forward contract to sell product at the end of a specified period is not a financial contract. It is essentially a contract for sale of specified goods, however if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f)[5]. Drawing an analogy, in the case of home buyers, the amounts raised under the contracts of home buyers are in effect for the purposes of raising finance, and are a means of raising finance. Thus, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8). This demonstrates eminent common sense and appears to be a correct application of the concept of ‘time value of money’. It recognizes that a purchaser of a real estate unit is under no obligation to pay a substantial amount of money as down-payment if the possession of the unit is not likely to be handed over to him in the near future. In that scenario, the builder would have to arrange finance from independent sources for the development of the project. This would not only require collateral/security but involve imposition of extremely onerous conditions, including but not limited to a relatively exorbitant rate of ‘interest’. Simply put, a bank lending money to the builder, needless to state, would qualify as a ‘Financial Creditor’ and entitled to all the rights emanating from such an arrangement under IBC, including the right to initiate insolvency process under IBC, in case of a default in repayment of debt. From that viewpoint, if the builder succeeds in inviting funds from an individual purchaser, as opposed to a Bank, on much more favorable terms, in that case – it does not stand to reason as to why that individual purchaser should not be entitled to similar protection as a Bank, when it is essentially serving the same purpose. Any other view discriminates between an individual purchaser of a real estate unit and the Bank, and to the former’s detriment. It also needs to remembered that the purchaser of a real estate unit under such an arrangement is parting with a huge amount

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Author name: CBCL