Author name: CBCL

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 [email protected]. 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 [email protected]. 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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Section 26 of the Arbitration (Amendment) Act, 2015 gets Retrospective and Prospective Application

Arbitration Law /

Section 26 of the Arbitration (Amendment) Act, 2015 gets Retrospective and Prospective Application. [Fathima Nooh] The author is a third-year student at National University of Advanced Legal Studies, Kochi. She may be reached at [email protected]. The Supreme Court has, in its latest judgment in the case of Board of Cricket Council of India v. Kochi Cricket Board, settled an important issue about the applicability of the 2015 amendments to the Arbitration and Conciliation Act, 1996. The Court was called upon to decide whether section 36 of the Act, as amended by the 2015 Amendment Act, was applicable to applications filed under section 34 before the commencement of the Amendment Act. The Court decided in the affirmative. The decision is welcome as it is in line with the pro-arbitration approach followed by the Supreme Court in its recent decisions. Section 26 of the 2015 Amendment Act, which deals with the applicability of the amendments, has been controversial ever since its introduction as it left unclear whether the amendments would apply to the court proceedings in relation to the arbitration proceedings commenced prior to the commencement of the Amendment Act. There have been several conflicting decisions by various High Courts in the country in this regard. The Case The case came before the Supreme Court as a civil appeal arising out of a Special Leave Petition of 2016. Seven other similar appeals were also considered along with this appeal.  Four of these appeals related to section 34 applications filed prior to the commencement of the Amendment Act and the remaining four appeals pertained to similar applications filed after the commencement of the Amendment Act. The issue involved in the case was whether the amended section 36 would apply to section 34 applications filed before the commencement of the Act i.e. the pending applications, and whether the same would apply to section 34 applications filed after the commencement of the Act, though the arbitration proceedings were commenced prior to the coming into force of the Amendment Act. Before discussing the decision of the Court, it is pertinent to have a look at section 36 of the Act in both the pre-amendment and the post-amendment versions. The pre-amendment version reads as follows: Where the time for making an application to set aside the arbitral award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court. The post-amendment section 36, while providing that the arbitral award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908, in the same manner as if it were a decree of the court in case the time for making an application to set aside the award under section 34 has expired, subjects the same to its sub-section (2), which provides that: Where an application to set aside the arbitral award has been filed in the Court under section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.  The Decision Section 26 of the Amendment Act lays down that the Amendment Act shall not apply to“the arbitral proceedings commenced, the arbitral proceedings commenced, in accordance with the provisions of section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree, but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.” The Court observed that section 26 has two separate and discrete parts as indicated by the word “but” in between. The first part refers to the Amendment Act not applying to certain proceedings and the second refers to its applicability to certain proceedings. The first part undoubtedly applied to arbitration proceedings as evident from the wording of the section “…to arbitration proceedings…,” but the second part makes the interpretation of the section difficult by using the expression “in relation to arbitration proceedings.” The second part does not have any reference to section 21, which speaks of the arbitration proceedings commencing on the date on which the request for referral has been received by the respondent; therefore, it was concluded that the second part does not include arbitration proceedings but rather court proceedings in relation to arbitral proceedings. Thus, the Court found that it is the commencement of these court proceedings that is referred to in the second part of section 26. The Court thus noted:  “The scheme of Section 26 is thus clear: that the Amendment Act is prospective in nature, and will apply to those arbitral proceedings that are commenced, as understood by Section 21 of the principal Act, on or after the Amendment Act, and to Court proceedings which have commenced on or after the Amendment Act came into force.” While the position regarding the arbitration proceedings commenced after the coming into force of the Amendment Act was clear, the same was not true regarding section 34 applications filed before the commencement of the Amendment Act. In order to make the position clear, the Court equated “enforcement” (as found in section 36) with execution. Under section 36 of the principal Act, the arbitration award is a decree and thus is enforced as per the provisions of the Code of Civil Procedure, 1908. The decree can be enforced only through the execution process given in order XXI of the Code. The Court further observed that the old version of section 36 was only a clog in the right of the decree-holder, who cannot execute the award in his favour unless the conditions in the section are met. This does not mean that there is a corresponding right in the judgment debtor to stay the execution of the award.  Thus, since execution clearly pertains to the “realm of procedure,”  the new section 36 would also

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Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating

Sports Law /

Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating. [Ayushi Singh] The author is a third-year student at National Law University, Jodhpur. She may be reached at [email protected]. The South Africa-Australia Test Series saga has not stopped unravelling since the ball-tampering scandal was captured on live telecast during the third test match. Whether or not South Africa manages to clinch a Test Series win against Australia at home-a feat last achieved in 1970- is yet to be seen; however, it is not wrong to say that this series will be remembered for the hullaballoo caused when Cameron Bancroft was caught red-handed with sandpaper and tape – foreign substances being used to scuff up the ball on live television, with Australian captain Steve Smith confessing to being the ring-leader behind the offence. The public reception to this collusive act of cheating has been scathing and acute. During the third test match, Australian supporters removed their flag and stuck naked flags instead. Cricket legends have come forward in collective disdain for the acts of the Australian captain including past captains like Michael Clarke; even the Australian Prime Minister Malcolm Turnbull called for swift action against the disgraceful act of cheating. Personal opinions aside, as far as tangible backlash is concerned, Steve Smith and David Warner have been demoted from their posts of Captain and Vice-Captain respectively. Even coach Darren Lehmann is liable to be removed from his post with reports stating thathe knew about the plan as he had tried to warn Bancroft about being caught on camera. Steve Smith has also been removed from captaincy of the Indian Premier League team Rajasthan Royals. Cricket Australia is still carrying out investigations on Johannesburg and is yet to reply to reports of whether the players involved would be facing a year-long ban from the team. Despite the bitter fallout faced by the players, mainly Smith and Bancroft, the punishment meted out by the International Cricket Council has been surprisingly lukewarm. Steve Smith was charged under Article 2.2.1 of the Code of Conduct i.e. act of serious nature that is contrary to the spirit of the game – a Level 2 offence which brought forth a fine of 100% of his match fee and one Test Match ban. Cameron Bancroft was charged under the Level 2 offence of Article 2.2.9 of the Code i.e. changing the condition of the ball in breach of clause 41.3 of the ICC Standard Test Match, ODI and T20I Playing Conditions, receiving a fine of 75% of his match fee and three demerit points. With glorious expectations that hoped for the ICC to take strict action against this premeditated act of cheating and set a strong precedent for the future, this punishment was met with less than warm reviews. ICC Demerit Point System for Offences The demerit points system of the ICC was introduced in December 2016 as a tool to crackdown on repeat offenders of the ICC Code of Conduct. The mechanism in place simply notes the presence of demerit points in the record of the player in correspondence with the Level of Offence committed by him/her. These points remain in the record of the player for 24 months and the accumulated demerit points may translate into corresponding punishments of suspension in ICC International matches. Even after a ban or suspension has been meted out, the demerit points remain in the record for 24 months so as to hold the player accountable and deter recidivism. This does bring in questions of double jeopardy, however, the intention is to increase the gravity of the punishment with every repeated offence. The number of offences defined by the ICC Code are divided into to four Levels: Level 1 constitutes minor offences; Level 2 constitutes serious offences; Level 3 covers very serious offences, while Level 4 constitutes overwhelmingly serious offences.[1] According to Article 6 of the Code, which defines the standard of proof for the offences, the Match Referee or the Judicial Commissioner must be satisfied as to the commission of the offence.[2] This “comfortable satisfaction” is subject to the sliding standard of proof wherein minor offences have to be proved on the basis of balance of probabilities while overwhelmingly serious offences have to be proved beyond a reasonable doubt. The nature of evidence must of the kind that can be proved by reliable means: i.e. as in this case, the presence of live television footage and the players’ admission. It must also be noted that, the level of offence is also dependent on the context of the occurrence. It is on the foundation of context that the action taken by the ICC seems to fall short. On his very own admission, Steve Smith brings to light a premeditated, concerted effort to indulge in the act of cheating during the Test Series. Bancroft admits complying with the instructions of the captain and “a bunch of senior players” to use the foreign objects to tamper with the ball. This shows that an intention to cheat and influence the course of the game was present from the very beginning. If past instances of ball tampering are referred to for perspective, these acts seem to have been resorted to in the spur of the moments. For example, Faf du Plessis, who has been charged for this offence twice, used the zip of his trousers and later saliva from a mint to tamper with the ball. Shahid Afridi bit the ball, Vernon Philander scratched the ball with fingers and more recently, Dasun Shanaka picked the seam of the ball to tamper with it. This is not to say that these acts are not incidents worthy of action, but they can be distinguished with the present offence. The introduction of a foreign object onto the field from the very beginning displays a premeditated mala fide intention to be dishonest rather than an act of desperation during the game. It is also unfortunate to note that a new player in Bancroft was used as a vessel by the Captain and the “bunch of senior players” to indulge in dishonest acts. It is on the basis

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The Arbitration and Conciliation (Amendment) Bill, 2018: Unclogging the Arbitral Logjam

Arbitration Law /

The Arbitration and Conciliation (Amendment) Bill, 2018: Unclogging the Arbitral Logjam. [Soham Banerjee] The author is a fourth-year student at GLC Mumbai. He may be reached at [email protected]. Ever since India moved into the top 100 in the World Bank’s Ease of Doing Business report, the general perception about our country steadily becoming investor-friendly has received a major fillip. The path to ensuring that India becomes a major industrial hub has been possible majorly through the sustained efforts of the government in policy reforms and formulations, something which was on display in full flow recently when the Union Cabinet approved the Arbitration and Conciliation (Amendment) Bill, 2018 (Bill). It is a foregone conclusion that the principal deterrence behind investors not perceiving India as a major investment hub is the protracted dispute resolution mechanism currently in operation in the country. The clogged up judicial system coupled with the ineffective Alternate Dispute Resolution (ADR) mechanisms makes the resolution of disputes arising out of investments in the country a costly and expensive affair. This is why the recent Bill approved by the Union Cabinet in bringing about amendments to the Arbitration and Conciliation Act, 1996 (Act) serves as a much-needed intervention in the ills that have plagued the arbitral regime in India. Proposed Amendments The object and intent of the Bill makes it evident that the government is keen on establishing India as a major hub of ADR. The amendments to the 1996 Act, it is said, would “facilitate achieving the goal of improving institutional arbitration by establishing an independent body to lay down standards, make arbitration process more party friendly, cost effective and ensure timely disposal of arbitration cases.” The following are the primary amendments sought to be introduced via the passing of this Bill: Establishment of the Arbitration Council of India (ACI), a statutory body tasked with promoting and upholding institutional arbitrations in the country; Amendment to section 29A of the Act; Introduction of sections 42A and 42B in the Act; and Introduction of section 87 in the Act. We shall deal with each of these amendments in greater detail hereon. The Arbitration Council of India The creation of the ACI is by far the most unique feature of this Bill. The Bill suggests the formation of a separate, independent and statutory body in the form of the ACI which shall be presided over by: a judge of the Supreme Court; or the Chief Justice or any other judge of the High Court; or any other eminent person, including an academician, apart from other government nominees. The primary functions of the ACI include inter alia: grading arbitral institutions and accrediting arbitrators by laying down prescribed norms; initiating measures to promote arbitration, mediation, conciliation and other ADR Mechanisms; evolving policy guidelines and regulations which shall lay down uniform standards for the practice and propagation of ADR mechanisms in India; facilitating quick appointment of arbitrators through designated arbitral institutions by the Supreme Court or the High Court; clothing the Council with the function of maintaining an electronic depository of all arbitral awards rendered. Amendment to Section 29A of the Act Section 29A of the Act, introduced by the Arbitration and Conciliation (Amendment) Act, 2015, sought to impose a time limit of 12 months on the way arbitrations were to be conducted. The section mandated that an award should be passed within twelve months of the arbitrators entering reference.[1] The parties were, however, free by consent to extend the said time limit to 6 more months. The problem in the implementation of this section arose in the lapse of the mandate of the tribunal should the award not have been made within this 18-month period, subject to the court extending the said period before or after its lapse. Furthermore, the proviso to this section also empowered the courts to deduct the fee of the tribunal should the delay be attributable to the same and vested the courts with the power to substitute one or all the arbitrators on the tribunal. Therefore, merely in terms of broadening the scope of judicial interference in arbitral proceedings and destroying party autonomy, section 29A posed grave challenges to the independence of the arbitral regime in the country. However, the Bill makes an honest effort to do away with the incongruencies introduced by section 29A of the amended Act. The operation of section 29A had made it difficult for arbitral tribunals to conclude proceedings within the prescribed time limit as the stage of pleadings and recording of evidence (wherever necessary) often made the rendering of the award within the prescribed time limit nugatory. The Bill seeks to counter the imbalance inherent in section 29A through the following two ways: initiating the 12-month cut-off period from the date of conclusion of pleadings of the parties as opposed to the date of the arbitrators entering upon reference; and excluding international arbitrations from the limited timeline of making the arbitral award. Introduction of Sections 42A and 42B A novel addition to the arbitral regime, the proposed sections 42A and 42B, seek to redress the lacunae left unaddressed by the amendments to the Act in 1996 and 2015. Section 42A enjoins upon the arbitrators and the arbitral institutions the duty to ensure confidentiality of the arbitral proceedings, save the award. Section 42B thereafter absolves the arbitrators from any suit or legal proceeding initiated against them in respect of any action they undertake in good faith during the arbitral proceedings. The intent, therefore, behind the incorporation of these two sections is clear: ensuring a speedy and efficient arbitral process where the arbitrators are free from any extraneous consideration while conducting the proceeding or rendering the award; ensuring a transparent and equitable arbitral process, bereft of any unintended breaches of information or data; and encouraging and promoting investors to resort to arbitration for the settlement of their disputes in an efficacious and time-bound manner. Introduction of Section 87 Another significant change envisioned by the Bill is the removal of difficulties posed by the interpretation of section 26

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Mitigating Liability of Directors and Officers

Company Law /

Mitigating Liability of Directors and Officers. [Mincy Mathew] The author is a third-year student at National Law Institute University, Bhopal. The board of directors is the primary management body of any company, and as such, it owes a fiduciary duty to the company and is expected to act in good faith and to promote the best interests of all the stakeholders. The directors are personally liable to pay losses suffered by the company following an act which is wrong, negligent, outside the company’s authority, beyond their power, or which evidences insufficient skill and care in managing the company’s affairs. The liability of the directors, in such cases, is joint and several. Along with the Companies Act, the directors must comply with income tax law, labor laws, and environmental laws, among others. With an increasing role of the directors in ensuring compliance with corporate governance norms, the directors may ask for protection against any future liability. The liability of an “officer in default” is unlimited and the directors would, therefore, seek to protect their personal assets. For mitigating the liability of a director, the Companies Act, 2013 provides certain safe harbor provisions. According to section 463 of the Act, if in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the court hearing the case that the officer has acted honestly and reasonably, and that having regard to all the circumstances of the case, he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it may think fit. In addition, for independent directors, the liability will be “only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.”[1] However, it is important to ensure that there is an additional protection given to the directors, because in certain cases, statutory protection may be inadequate. It may sometimes be difficult to ascertain whether an act was “within the knowledge” of a director or whether a director acted “diligently” and, therefore, such liabilities are difficult to foresee. Accordingly, a company may also provide certain indemnities to its directors for any liability arising out of any act done in his professional capacity, excluding intentional criminal conduct. The Companies Act, 1956 prohibited any indemnity to the director, but there is no corresponding provision in the 2013 Act. The 2013 Act, therefore, may allow greater flexibility to directors to ask for such indemnities from the company especially where no fault could be attributed to them. Such protection may be provided to them by incorporating an indemnity provision in the constituent documents, or by issuing a letter of indemnity to individual directors, as is the case with several companies in India. An indemnification agreement is entered into by a director with the company, which makes good any losses caused by the director to the company, during the performance of his duties. Even though indemnification may be provided in the charter documents, it is advisable that a separate indemnification agreement is entered into between the director and the company. A separate agreement provides the surety that the new management cannot amend the articles to the detriment of the directors and that its scope extends even after his resignation. In addition, a separate agreement, being a bilateral agreement, ensures a more detailed and a better negotiated deal. While negotiating the indemnities, care must be taken to draft it wide enough to cover any complicated corporate transaction, while still excluding dishonest or fraudulent conduct. The indemnification agreement should ideally also include a D&O insurance to provide security in case the company is financially unable to pay for the indemnification. The Companies Act, 2013 recognizes the right of the companies to purchase D&O insurance in section 197. The section provides that: Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel. Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration. D&O insurance provides indemnity to the directors and the officers of the concerned company against costs incurred in defending proceedings instituted against and in respect of any damages awarded to the claimants against them, such as an out-of-court settlement. A typical D&O insurance policy may include three types of coverage: A-side coverage. This part covers directors, officers, and sometimes employees for defense costs, settlement fees, or judgments in situations when they are not indemnified by the company. B-side coverage. This covers the company for the losses incurred by its directors, officers, and employees when the company does indemnify them. C-side coverage. This financially protects the entire corporation, against any loss and is also known as ‘entity coverage’. The company has to have the consent of the board of directors in order to avail itself of a D&O policy. Further, while procuring such policies, it must be ensured that the sameprovide for certain exceptions especially as regards fraud or wilful misconduct. D&O insurance is essential to mitigate the liability of the director, as it ensures indemnification of any loss even if the company is unable to pay. A mitigation strategy adopted by the company cannot decrease the liability of a director acting in complete disregard of his duties and cannot act as a replacement for corporate governance mechanisms. However, it will ensure that the directors feel safeguarded against any unknown liability. Thus, quality personnel stay in the company and are best able to fulfill their professional duties. [1]Section 149(12).

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