Author name: CBCL

Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016

Insolvency Law /

Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016. [Jai Bajpai] The author is a third-year student of School of Law, University of Petroleum and Energy Studies. The Insolvency and Bankruptcy Code, 2016 (“Code”) arrived at a critical stage where the banking industry was facing credit financing problems and had been looking for an efficient time-bound solution to the same. Having ushered in a new regime, the Code, enacted with the primary objective of compiling laws relating to insolvency, re-organization, liquidation and bankruptcy as regards companies and individuals, is witnessing an evolving jurisprudence in relation to its provisions. Recently, the National Company Law Appellate Tribunal (“NCLAT”) pondered upon the question of the elements that constitute a “demand notice” on behalf of an operational creditor under section 8(1) of Code, which provision deals with the initiation of the insolvency resolution process by an operational creditor. The NCLAT has paid heed to the fact that the provisions of the Code are being casually used and applied by lawyers and chartered accountants. The pertinent question before the NCLAT was whether a demand notice, drafted and sent by a lawyer, could be regarded as a demand notice under section 8(1) of the Code. This question was answered in the case ofMacquarie Bank Limited v. Uttam Galva Metallics[1], wherein it was held that if any person who issues a demand notice on behalf of the operational creditor is not authorized in this behalf by the operational creditor and does not stand in or with relation to the said creditor, the concerned notice would not be termed as a demand notice under section 8(1). Again, in Centech Engineers Private Limited & Anr v. Omicron Sensing Private Limited,[2] the NCLAT made similar observations with regard to a demand notice. In this case, it was brought to the notice of the tribunal that the demand notice was not issued by the operational creditor, but by the Advocates Associates. It was observed that a demand notice not issued in consonance with the requirements enumerated in the Macquarie Bank Limitedcase would deem the notice to be a lawyer’s or a pleader’s notice under section 80 of the Civil Procedure Code, 1908. A demand notice is necessary if an operational creditor wishes to initiate the corporate insolvency resolution process against a corporate debtor. Along with the said notice, the operational creditor is required to deliver an invoice pertaining to the defaulted amount. Moreover, under rule 5(1) of the Insolvency and Bankruptcy Rules, 2016 (“Rules”), it has been provided that the demand notice can only be sent by an operational creditor or a person authorized by him. Therefore, the language of section 8 of the Code could not interpreted in a manner that goes against rule 5(1). Accordingly, in this case, the NCLAT held that the order passed by the Adjudicating Authority appointing an insolvency resolution professional and declaring moratorium was illegal and liable to be set aside. The purpose of the demand notice under section 8 of the Code is to convey to the corporate debtor the consequences that would follow upon non-payment of the operational debt. On the other hand, a legal notice under section 80 of the Civil Procedure Code, 1908 is to notify the other party about the initiation of the legal proceedings against it. The corporate insolvency process is distinct from a normal legal process, as a case filed for claiming debt under section 9 of the Code cannot be disputed by a corporate debtor until there is existence of a prior dispute before the sending of notice under section 8. Thus, a demand notice under section 8 stands different from a legal notice as stipulated under section 80. There have been many instances where the Code has catered to the needs of the creditors but has suffered from ambiguity while doing so. The above-mentioned cases were two such instances where the tribunal interpreted the law so as to give effect to the aim of the legislation. [1] Macquarie Bank Limited v. Uttam Galva Metallics Limited, III (2017) BC 10. [2] Centech Engineers Private Limited and Ors. v. Omicron Sensing Private Limited, Company Appeal (AT) (Insolvency) No. 132 of 2017.

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Passage to Cheap Internet: A Case Study on Competition Commission’s decision in Airtel v. Reliance

Competition Law /

Passage to Cheap Internet: A Case Study on Competition Commission’s decision in Airtel v. Reliance. [Anmol Gupta] The author is a second-year student of National University of Juridical Sciences, Kolkata. On September 1, 2016, the Reliance Industries under the aegis of Mukesh Ambani launched a new subsidiary Reliance Jio (‘Jio’) in the telecom sector. Jio, unlike its competitors- Airtel, Idea and Vodafone- offered Volte services to its customers, and the media soon termed Mukesh Ambani as a game changer. However, its competitors described Jio and Reliance Industries’ actions as predatory in nature. Following its claims, Airtel filed a complaint against Jio before the Competition Commission of India (“Commission”). In its decision,[1] the Commission rejected Airtel’s complains and held Jio’s activities to be a legitimate exercise of competitive pricing. The following note offers an insight into the decision. Competitive or Predatory Pricing? For a policy to be predatory in nature, the following conditions must exist: the company must be a dominant market player in the relevant market, the prices offered must be lower than the cost of production of such goods, and such lower prices must be coupled with an intention of driving out competitors and recovering the losses in the long term.[2] It is submitted that at the time of decision, Jio was the only company to provide free calling and SMS services to its customers. Ignoring the cost which Jio had to incur on Jio-to-Jio services, Jio still would have been required to pay a 14- paise per minute cost to other networks.[3] This shows that Jio charged for services at a rate lower than its cost of production. Further, Jio had intention to drive out competitors and recover market losses gradually. It is submitted that the Commission has wrongly interpreted the free calling and internet services offered by Jio to be part of fair competition. The Commission, ignoring Jio’s high share in the market and its presence since September 2016, held Jio to be new entrant in the market.[4] Further, the Commission failed to consider merger of Jio with Reliance Communications- another player of the relevant market.[5] Reliance Communications, prior to its merger with Jio, had already made plans for merger with Aircel and Sistema in the year 2017;[6] such move, if considered, would have been enough to establish Jio’s intention to reduce competition. As per section 4 of the Competition Act, 2002, for a pricing policy to be classified as predatory, the company must have a dominant position in the relevant market. Further, as per section 19(4), dominant position can be determined by seeing the size and resources, the economic power, the source of such position along with the consumer dependence on the company. Hence, the Commission should have focused only on the market share of Jio while determining its position in the market. Airtel presented two key submissions before the Commission. First, Reliance Industry, being a parent company of Jio, had given Jio full access to its funds for its development purposes, and second, Jio’s offers such as Jio Welcome Offer were predatory in nature aimed at taking away Airtel’s customers. However, both of these contentions were rejected by the Commission on the certain grounds. For the first contention, the Commission noted that the relevant market of the concerned parties was characterized by presence of ‘entrenched players’ like Tata in a well-developed telecom market. However, the Commission’s reply did not answer the possibility of the parent company’s money injection into its subsidiary; further, as per the Commission, a company can only be liable for predatory pricing when it enjoys a dominant position in an under developed market. For the second contention, the Commission observed that Jio’s Welcome offer was a legitimate strategy to attract new customers in order to strengthen its position in the market. It is submitted that the issue was not the legality or illegality of the offer but the effect of the offer on the market. Although the telecom giants such as Airtel and Idea were able to ward off the effects of the strategies, the same had not been possible for the middle and lower-class businessmen who had only two options- to switch or to resign. In the decision, the Commission denied the possibility of Jio being a dominant player on grounds of it being a new entrant in the market. However, it can be argued that Jio as of the date of decision did have a dominant position. Interpreting section 4 of Competition Act, 2002 and the Commission’s decisions, for a company to be charged for predatory pricing, such company must have a dominant market position. This being the established Indian position, a new entrant irrespective of being loaded can never be held to be holding a dominant position. The same was showcased in this case; however, Jio was not a new entrant. It is submitted that Jio entered the market in September 2016, which gave it a substantial incubation period. As of August 2017, the time when the case was heard, Jio had one-third of India’s consumer base and 85% of Indian mobile data network market.[7] Despite such facts, the Commission held Jio to be a new entrant in the market. Not Pricing but Predatory Behaviour and Intention The Commission had ruled in favour of Jio on grounds of it being a new entrant in a well- developed competitive telecom sector and its pricing having no ‘tainted anti-competitive objective.’ The following part analyses predatory intention and predatory behavior of Jio. Predatory Intention For predatory pricing, the company through its actions and policy must signify a predatory intention. Jio’s predatory intention could be inferred from the facts given below. Reliance Industries being the financial muscle Reliance Jio is a subsidiary of Reliance Industries, the latter being a dominant player in other markets. The unlimited investments made by the latter were a clear breach of section 4(2)(e) Competition Act, however, Commission while linking predatory pricing with the dominant position in the same relevant market stated otherwise. By way of its decision, the Commission implicitly allowed subsidiaries with strong financial backing to

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Employee of a Party Allowed as Arbitrator: Analyzing Aravali Power v. Era Infra Engineering

Arbitration Law /

Employee of a Party Allowed as Arbitrator: Analyzing Aravali Power v. Era Infra Engineering. [Akshita Pandey] The author is a third-year student of National Law Institute University, Bhopal.] The preamble to the Arbitration and Conciliation Act, 1996 (hereinafter, “1996 Act”) states that it is an Act to amend and consolidate the law relating to domestic arbitration. The 1996 Act is based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980. Though a marked improvement compared to its predecessor, the legislation has witnessed several issues and challenges in its implementation. One of the contentious issues relates to the appointment of an employee as an arbitrator in the arbitration proceedings. On the one hand, concerns as to the impartiality and independence of the arbitrator arise and, on the other hand, the question as to the extent of a court’s interference with the arbitration procedure agreed upon by the parties is also to be considered. The following discussion delves into aforementioned issues by analyzing the latest Supreme Court decision in the case ofAravali Power Company Pvt. Ltd. v. Era Infra Engineering Ltd..[1] Facts of the Case The construction work of a permanent township for Indira Gandhi Super Thermal Power Project at Jhajjar, Haryana was awarded to the Respondent-M/s. Era Infra Engineering Ltd. A contract consisting of the General Conditions of Contract (GCC) was signed, clause 56 of which contained the arbitration clause. The relevant portion of the clause is as follows: “There will be no objections, if the Arbitrator so appointed is an employee of NTPC Limited (formerly National Thermal Power Corporation Ltd.), and that he had to deal with the matters to which the contract relates and that in the course of his duties as such he had expressed views on all or any of the matters in disputes or difference.” Due to failure to complete the work on the scheduled time, the Appellant-Aravali Power Company Pvt. Ltd. cancelled the remaining works. The Respondent alleged that the delays were not attributable to them and invoked arbitration, further stating that the arbitrator be a retired High Court judge. The Chief Executive Officer of the Appellant was appointed as the sole arbitrator by the Appellant pursuant to the GCC. The arbitrator fixed the date of hearing wherein the Respondent sought an extension of one month. It was after that that the Respondent objected to the appointment of the arbitrator. The arbitrator rejected the objection on the ground that the Respondent had participated in the previous arbitral proceedings without any protest. The Respondent approached the High Court of Delhi where the arbitration proceedings were stayed and the appointment of the arbitrator was set aside. The decision of the High Court was challenged by the Appellant. Issue before the Court The issue involved in the case, therefore, was whether naming an employee of one of the parties as an arbitrator before the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter, “Amendment Act”) came into force, renders such appointment invalid and unenforceable. The Decision The division bench of the Supreme Court undertook an analysis of the statutory provisions and the judgments dealing with the appointment of an employee of a party to the arbitration agreement as an arbitrator. Section 12(1) of the 1996 Act requires an arbitrator to disclose in writing any circumstances that give rise to justifiable doubts as to his independence or impartiality. Section 12(3) states that the appointment of an arbitrator can also be challenged on this ground. The general rule is that courts should give effect to the provisions of the arbitration agreement.[2] But where the independence and impartiality of the arbitrator is in doubt, the court has the power to make alternative arrangements.[3] Thus, referring the dispute to the named arbitrator shall be the rule and nominating an independent arbitrator an exception.[4] In its previous decisions, the Supreme Court has held that no provision of the 1996 Act suggests that any provision in an arbitration agreement naming the arbitrator will be invalid if such named arbitrator is an employee of one of the parties to the arbitration agreement. However, a situation may arise where there is a justifiable apprehension of the independence or impartiality of the employee arbitrator. This is possible (i) if such person was the controlling or dealing authority in regard to the subject contract, or (ii) if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject-matter of the dispute.[5] In the instant case, the Court considered both the scenarios where the appointment of employee as an arbitrator gives rise to justifiable doubts with respect to his independence or impartiality. With respect to the first ground, the Court held that in light of the facts placed before it, the arbitrator in the present matter cannot be said to be a dealing authority in regard to the contract. Further, the arbitrator held the position of the CEO and was in no way subordinate to the officer whose decision is the subject matter of dispute. In fact, the decision, which could be a subject matter of dispute, was that of his subordinates. Hence, there was no justifiable apprehension as to the independence or impartiality of the named arbitrator and his appointment was valid. Dealing with the question of the applicability of the Amendment Act, the Court held that the arbitration proceedings were invoked on 29.07.2015 and the amendment to the 1996 Act was deemed to have come into force on 23.10.2015 and, therefore, the instant case would be governed by the pre-amendment Act. The Court also clarified that in post-amendment cases, if the appointment of the arbitrator is contrary to the amended provisions, it would be illegal, notwithstanding the fact that it is in conformity with the arbitration clause. Analysis The Supreme Court has once again upheld the validity of an arbitration clause providing for the appointment of an employee of one of the parties as an arbitrator. Generally, the provision of an employee arbitrator is found in

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Application of Natural Justice in Arbitral Proceedings

Arbitration Law /

Application of Natural Justice in Arbitral Proceedings. [M. Koshy Mammen] The author is a third-year student of Jindal Global Law School. Since arbitration is increasingly being favoured over litigation, it is imperative that the principles of natural justice which guide the judiciary should also be followed by arbitration when giving an award. This article examines whether the Arbitration and Conciliation Act, 1996 (“Act”) mandates the arbitral tribunal or the arbitrator to follow the principles of natural justice when adjudicating upon a matter. The first part discusses why it is essential that arbitration proceedings must follow the principles of natural justice. The next part deals with the principle audi alteram partem and whether it is observed in arbitrations. And the final part explores whether the principle nemo judex in sua causa is adhered to in arbitrations in India. There are three major reasons why the principles natural justice must be followed in arbitration proceedings. Firstly, the award of an arbitral tribunal is final and binding and cannot be challenged like a court decision (save for certain situations). For appealing an order,[1] there are even more limited grounds and it is not ordinarily allowed. Hence, it is essential that the principles of natural justice are followed when adjudicating upon a matter and giving an award for the first time. Secondly, not all the countries have a sophisticated arbitration system like Singapore or London. Modern seats of arbitration may have flaws since they do not have a history of arbitration culture. This lets arbitrators and the parties take advantage of the system and use it to their benefit. One instance is the arbitrator giving an award in favour of the influential and more powerful party so that they may be reappointed again for arbitrations later. There may be an instance where the parties are at unequal bargaining power, or where one of the parties may be lured into the arbitration, or where one party is unknowingly invited to arbitrate or is not aware of its rights. Thirdly, more often than not, the arbitrator appointed is skilled only in a particular area of knowledge and does not know the manner in which judges must conduct themselves. One cannot reasonably expect arbitrators to behave in the same standard as the judiciary. Therefore, it is essential that principles of natural justice are set as the minimum benchmark to adhere to in order to make certain that the adjudication happens in a fair manner. In an arbitration agreement, after a breach, if one party refuses to appear in front of the arbitral tribunal, the tribunal can go ahead with the proceedings[2] and give an award not in favor of that party and the Courts would not entertain a challenge on the ground that he was not provided with a chance to present his case. However, the case is not the same when a party not mentioned in the arbitration agreement is forced to become a party in an arbitration he did not agree to. If the non-signatory refuses to come before the tribunal, the tribunal may still go ahead and give an award in the absence of one party. One needs to examine if this process complies with the principle of audi alteram partem. One can argue that the non-signatory had the chance to present his case but deliberately rejected it and hence must face the outcome but this argument is flimsy considering the fact that audi alteram partem is the cornerstone of principles of natural justice and it is a clear violation of it. The law in India regarding forcing non-signatories to be bound by arbitration is unsettled. In Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya[3], the Court stated that arbitration was a viable option only as against some of the parties and the Act did not confer any power on the judiciary to add non-signatories to arbitration agreements. The case Indowind Energy Ltd. v. Wescare (I) Ltd.[4] upheld the Sukanya Holdings judgement. Both the cases did not allow a non-signatory to be added to the arbitration proceedings. Following these judgments, in Sumitomo Corporation v. CDS Financial Services,[5] the Court refused to refer non-signatories to the arbitration stating that arbitration strictly needs to be between parties mentioned in the agreement, as per section 2(1)(h) of the Act. One can observe that until this judgement, the Court was cautious not to violate the rule of audi alteram partemin arbitral proceedings. However, in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc.,[6] the Court reversed this position and expanded the scope of arbitration agreements. This landmark judgement extended arbitration agreements to non-signatories as well. Taking a cue from this judgment, the Amendment Act of 2015 amended section 8 of the Act to include ‘any party claiming through or under such party.’[7] Therefore, with this amendment, arbitration agreements may be extended to non-signatories in both domestic arbitrations and in international arbitrations seated in India. If a non-signatory is asked to present himself before a tribunal and he refuses to do so, the tribunal can make an award in his absence. Therefore, this might trigger the principle of audi alteram partem. No matter how cautious the tribunal may be to anticipate the arguments which may be put forward by the absent party, it will not be sufficient. Section 18 states that the arbitral tribunal shall give each party the opportunity to present its case.[8] This provision may seem to incorporate the principle of audi alteram partem. However, it was held by the Court that section 18 by itself is not a ground for challenging an award.[9] To the casual eye, the provisions seem to be in compliance with the hearing rule; however, a careful examination has shown otherwise. As regards the question whether the rule of nemo judex in sua causa is adhered to in arbitrations in India, it is pertinent to examine section 13 which lays down the procedure to challenge an arbitrator in order to remove him. Section 13(3) states that the arbitrator who is being challenged can himself determine his own competence as an arbitrator.[10] This is a clear violation of the principle of nemo judex in causa

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Innoventive Industries v. ICICI Bank: A Creditor-Friendly Approach in Insolvency Law

Insolvency Law /

Innoventive Industries v. ICICI Bank: A Creditor-Friendly Approach in Insolvency Law. [Sakshi Dhapodkar] The author is a fourth-year student of National Law Institute University, Bhopal. The Supreme Court on August 31, 2017 delivered its first substantive ruling under the Insolvency and Bankruptcy Code, 2016 (the “Code”). In the case of Innoventive Industries Ltd. v. ICICI Bank Ltd.,[1] the Supreme Court rejected a determined challenge to the insolvency proceedings put forth by the corporate debtor (Innoventive), and ruled in favour of the financial creditor (ICICI Bank). In doing so, the Court re-emphasized the creditor-friendly nature of the Code. After Innoventive entered into financial difficulties due to labour problems, it agreed upon a corporate debt-restructuring plan with the creditors. On December 07, 2016, ICICI Bank initiated a corporate insolvency resolution process (the “CIRP”) under the Code, and to that response, the corporate debtor took shelter under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (the “Maharashtra Act”) under which Innoventive’s liabilities were suspended by way of moratorium. The National Company Law Tribunal (the “NCLT”) admitted ICICI Bank’s application initiating the CIRP by holding that the Code would prevail over the Maharashtra Act in view of the non-obstante clause under section 238 of the Code. The NCLT also declared a moratorium as obligatory by the Code. On appeal, although the National Company Law Appellate Tribunal (the “NCLAT”) did not disturb the findings of the NCLT, on the point of law, it did not find any repugnancy between the Code and the Maharashtra Act. It is against the order of the NCLAT that Innoventive appealed to the Supreme Court. The main question before the Supreme Court was whether there was any conflict between the Code and the Maharashtra Act. Innoventive argued that given the moratorium already placed under the Maharashtra Act, there was no debt payable and the provisions of the Code will not be applicable. The Court hence focused on the issue of repugnancy and analyzed the case of Deep Chand v. State of UP[2] under article 254 of the Constitution. The Court observed that the Maharashtra Act derives its power from Entry 23, List II (State List)[3] in the Seventh Schedule to the Constitution whereas the Code is attributable to Entry 9, List III (Concurrent List).[4] This made it crystal clear that by giving effect to the earlier State law, the scheme which may be adopted under the Parliamentary statute will directly be barricaded and/or obstructed to that extent in that the management of the relief undertaking, which, if taken over by the State Government, would directly impede or come in the way of the taking over of the management of the corporate body by the interim resolution professional (IRP) prescribed under the Code. It was also stated that the moratorium imposed under section 4 of Maharashtra Act would clash with the moratorium imposed under sections 13 and 14 of the Code to such an extent that the insolvency resolution procedure under the Code might not move forward. The second issue in question was whether Innoventive was under an obligation to pay and, if yes, whether the debt payable was conditional upon infusion of funds by the creditors (which infusion was stipulated in the master restructuring agreement). The Supreme Court observed that the plea of failure to pay on account of non-release of funds was raised in the second application filed by Innoventive, clearly indicating that the argument was an after-thought. Further, the plea was raised beyond the 14-day period, the time prescribed under the Code for determining existence of a default. Substantively, upon analysis of the said restructuring agreement, the Court found that the payment obligations of Innoventive were unconditional and not subject to the infusion of funds by the creditors. Another question before the Court was whether a director of a sick management could bring an application of CIRP under the Code. The Court explained that once the insolvency proceeding was admitted by the NCLT and the moratorium declared, the directors of the company are no longer in management. Hence, it is likely that the directors would have to file objections in their individual capacity as interested “aggrieved persons” rather than as directors of the company. Although the Supreme Court indicated its stand, it did not decide on this specific corporate insolvency perspective. Examining the policy and background of the Code, the Supreme Court adopted a credit-friendly approach. The Supreme Court’s assertion of the creditor-orientation of the Code will arguably strengthen the hands of creditors, whether financial or operational, and incentivize them to take more companies into the insolvency process. At the same time, the question remains whether creditors now have more power to abuse. With reference to the other incidental question pertaining to the 14-day period for determination of default, it must be noted that the Supreme Court has time and again reemphasized on the strict application of time periods prescribed in the Code. As regards the last issue as to who can challenge the proceedings, the Supreme Court made a stand that if the challenges are brought from the corporate debtor’s side, they must be in the name of former directors and in their individual capacity. This judgment provides assurance that there would be stricter compliance of the Code and more credit-friendly decisions in future. [1] Innoventive Industries Ltd. v. ICICI Bank Ltd.,  2017 (11) SCALE 4. [2]Deep Chand v. State of UP,  1959 Supp. (2) SCR 8. [3] Entry 23, List II: Social Security and Social Insurance; Employment and Unemployment. [4] Entry 9, List III: Bankruptcy and Insolvency.

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Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited: A Critique

Arbitration Law /

Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited: A Critique. [Shaalini Agrawal] is a third-year student of Gujarat National Law University. The seat of arbitration has various internal and external implications for the arbitral proceedings. One such implication is that the administration and control over the arbitration is done by the courts of the country where the seat is located. Such courts have the power to regulate the conduct of arbitration and hear application challenging the arbitral award.[1] Where the seat of arbitration is designated, expressly or by implication, by the parties as India, the courts in India will have supervisory jurisdiction over the arbitral proceedings and Part 1 of the Arbitration and Conciliation Act, 1996 (“Act”) will apply. In case of domestic arbitration where parties have chosen a neutral city as the seat of arbitration, the question that arises for consideration is which courts in India will have the jurisdiction- courts of seat of arbitration or court which has the subject matter jurisdiction under sections 16-20 of the Civil Procedure Code, 1908 (“Code”). There have been conflicting judgements of various High Courts and the Supreme Court on this issue. Most recently, the Supreme Court in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited[2] (“Indus Mobile”) has held that the designation of seat in the arbitration agreement is akin to an exclusive jurisdiction clause. It means that when the parties have chosen a particular place as the seat of arbitration, the courts of that place will have exclusive jurisdiction to regulate the arbitral proceedings. This is irrespective of where the cause of action arose or where the parties or the subject matter of dispute is located. This case comment argues that the judgement in Indus Mobile was erroneous because firstly, it completely ignored the wording of section 2(1)(e) of the Act and secondly, it ignored the judicial precedents of over 70 years that interpreted section 2(1)(e) to confer jurisdiction only on the courts that have territorial jurisdiction over the subject matter of the arbitration according to sections 16-20 of the Code and misplaced reliance on Bharat Aluminium Co v. Kaiser Aluminium Technical Services[3] (“BALCO”). Facts of the Case In this case, Respondent no. 1 was engaged in the manufacture, marketing and distribution of mobile phones and tablets with its registered office at Amritsar. An agreement was entered into between the Appellant and the Respondent no. 1 where the latter would be the former’s retail chain partner. Respondent no. 1 was supplying goods to the Appellant from New Delhi to Chennai. Dispute arose between the two parties. Respondent no. 1 sent a notice to the Appellant stating the default of outstanding dues of Rs.5 crores with interest on the part of the latter and called upon it to pay the outstanding dues within 7 days. Appellant failed to pay and the arbitration clause in the agreement was invoked by the Respondent No. 1. Clause 18 of the agreement provided that the “…dispute shall be finally settled by arbitration conducted under the provisions of the Arbitration & Conciliation Act 1996 by reference to a sole Arbitrator which shall be mutually agreed by the parties. Such arbitration shall be conducted at Mumbai, in English language.” Clause 19 of the agreement further provided that “all disputes & differences of any kind whatever arising out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of courts of Mumbai only.” Respondent no. 1 then filed two petitions under sections 9 and 11 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court. The Delhi High Court disposed of both the petitions holding that since no part of the cause of action arose in Mumbai, only the courts of Delhi and Chennai (from and to where goods were supplied), and Amritsar (which is the registered office of the appellant company)  could have jurisdiction over the matter. This is so irrespective of the exclusive jurisdiction clause as the courts in Mumbai would have no jurisdiction in the first place. Since the court in Delhi was the first court that was approached, it would have exclusive jurisdiction over the matter. Appellants approached the Supreme Court where they argued that even if no part of the cause of action arose at Mumbai, yet courts in Mumbai would have exclusive jurisdiction over all the proceedings as the seat of the arbitration is at Mumbai. Respondents supported the Delhi High Court judgement by stating that one of the tests prescribed by section 16-20, Civil Procedure Code, 1908, to give a court jurisdiction over the matter must at least be fulfilled and merely the designation of seat as Mumbai would not give exclusive jurisdiction over the proceedings to the Mumbai courts. Decision of the Supreme Court and its Analysis The Supreme Court set aside the order of the Delhi High Court in the following words: “..the moment the seat is designated, it is akin to an exclusive jurisdiction clause. On the facts of the present case, it is clear that the seat of arbitration is Mumbai and Clause 19 further makes it clear that jurisdiction exclusively vests in the Mumbai courts. Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to ‘seat’ is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction – that is, no part of the cause of action may have arisen at the neutral venue and neither would any of the provisions of Section 16 to 21 of the CPC be attracted. In arbitration law however, as has been held above, the moment ‘seat’ is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.” However, the Supreme Court in the above paragraph upheld two conflicting propositions. Firstly, it held that “On the facts of the

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Minimum Public Float Under the Securities Contracts (Regulations) Act, 1956

Capital Markets and Securities Law /

Minimum Public Float Under the Securities Contracts (Regulations) Act, 1956 [Ashlesha Mittal] The author is a student of National Law University, Jodhpur. The Securities Contracts (Regulation) Act, 1956 (SCRA) was enacted to prevent undesirable transactions in securities by regulating the business of dealings therein, and by providing for certain other matters connected therewith. Section 21 of the SCRA mandates all listed companies to comply with the conditions of the listing agreement with the stock exchange. The provisions of the Securities Contracts (Regulation) Rules, 1957 (SCRR) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) provide a framework to maintain this balance. The blog article examines the framework, the rationale therefor and the implications of the same on the market in general and the shareholders in particular. Regulatory Framework and its Evolution The SEBI regulates financial markets, and minimum public shareholding ensures that listed companies offer their shares to the public in order to increase liquidity and ensure maximum protection of interest. The SEBI regulations have been centered around the protection of individual shareholders, and hence strict compliance of all the laws is mandatory. Any deviation leads to imposition of penalty, and even delisting of securities in some instances. The framework relating to minimum public shareholders has evolved through the years. From a regime of extensive restrictions, it has moved towards a liberated market, and recently the trend has again been to increase restrictions. Prior to 1993, listed companies were required to issue 60% of their shares to the public. This was eventually relaxed to 25% and then to 10% to ease listing requirements as companies with large amount of share capital did not require such amount of outside funds.[1] However, to maintain liquidity of shares and prevent price manipulations, the SCRR was amended vide the Securities Contracts (Regulation) (Amendment) Rules, 2010 to amend rule 19(2)(b) and insert rule 19A, and increase the public shareholding threshold from 10% to 25%. Companies with capital above Rs. 1600 crore were given a period of 3 years to achieve the threshold, by using methods prescribed by SEBI. Rule 19A of the SCRR provides that maintaining public shareholding of at least 25% is a requirement for continued listing. Where the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of twelve months from the date of such fall. The increased threshold of 25% was made applicable on listed public sector companies in 2014 by the Securities Contracts (Regulation) (Second Amendment) Rules, 2014 and had to be met within three years from the commencement of the amendment. The amendment not only increased opportunities for investors to invest in PSUs, but also assisted Government’s disinvestment programme. To avoid undervalued transfer of shares of the public-sector companies and distress sale of government stocks, the period for compliance was increased to four years by the Securities Contracts (Regulation) (Third Amendment) Rules, 2017. Further, regulation 38 of the LODR provides that the listed entity shall comply with minimum public shareholding requirements in the manner as specified by the SEBI from time to time. This was earlier provided in clause 40A of the Listing Agreement. SEBI via its circular has also prescribed methods by which the minimum level of public shareholding specified in rule 19(2)(b) and/or rule 19A of the SCRR can be achieved.[2] These methods are: issuance of shares to public through prospectus; offer for sale of shares held by promoters to public through prospectus; sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012; institutional placement programme in terms of Chapter VIIIA of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009; rights issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, that may arise from such issue; bonus issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, that may arise from such issue; any other method as may be approved by SEBI on a case to case basis. Implementation of the Regulations Shareholders of a public company have an advantage that the shares are freely transferable and that there is quick liquidity of investment. The liquidity arises due to ready availability of buyers and sellers in the market, and an established procedure for the transfers. However, if the promoter group refrains from trading in their shares, the number of buyer and sellers reduces in the market, thus affecting the liquidity factor. In June 2013, when the deadline for complying with the requirement of 25% public shareholding ended, SEBI issued an order against 108 companies which failed to do so. The rights of the promoters with respect to shares exceeding the maximum promoter shareholding were frozen. Restrictions were imposed on trading of shares of these companies by promoters except for the purpose of complying with the minimum public shareholding, and also on the promoters holding any new position of director in any listed company. All the restrictions were to apply till the minimum public shareholding threshold was finally met by the company.[3] In the Bombay Rayon’s case,[4] the delay in compliance with minimum public shareholding requirement occurred on account of the CDR process pursued by Bombay Rayon with its lenders. Sufficient period of non-compliance had lapsed in ensuring implementation of the CDR package, which inter alia was also subject to necessary approvals from SEBI. As noted in the confirmatory order dated December 11, 2015, the restructuring of Bombay Rayon’s debt by CDR–EG was for the company’s “sound growth, which in effect will benefit its shareholders also.” Since the non-compliance was beyond the control of the company and was only due to the conversion of GDRs into equity, the SEBI reversed the penalty imposed on the company. Rationale and Implications Minimum public participation in listed companies has always been advocated by the regulators as this ensures liquidity in the market and discovery of fair price.[5] Further, the availability of requisite floating stock ensures reasonable market depth. This enables an investor

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Restricting the Scope of “Suit or Other Proceedings” under Section 446 of the Companies Act, 1956 vis-`a-vis Section 138 of the Negotiable Instruments Act, 1881

Company Law /

Restricting the Scope of “Suit or Other Proceedings” under Section 446 of the Companies Act, 1956 vis-`a-vis Section 138 of the Negotiable Instruments Act, 1881. [Jasvinder Singh] Jasvinder Singh is a third-year student of National Law Institute University, Bhopal. Introduction It is manifest from a bare reading of section 446(1) of the Companies Act, 1956 [“Companies Act”], that when a winding-up order has been passed against a company or where a provisional liquidator has been appointed, then, except by the leave of the tribunal, neither a suit can be initiated against such company nor any other legal proceedings be commenced or proceeded therewith.[1] The purpose behind this provision is to safeguard the company, which is wound-up, against wasteful and expensive litigation by bringing all the matters against that company before a single adjudicating authority. Moreover, in cases of winding-up, as the assets of the company get distributed to all of its creditors and contributories, the proceedings are stayed in order to avoid situations of chaos among the creditors regarding the distribution of the assets. Similar provisions exist under the Insolvency and Bankruptcy Code, 2016 [“IB Code”], which states that after the admission of the application of insolvency, the adjudicating authority can by order, declare moratorium, prohibiting the institution of suits or the continuation of pending suits or legal proceedings against the corporate debtor.[2] However, presently, we are only concerned with the application, the scope as well as the ambit of section 446 of the Companies Act. The aim of this post is to discuss the effect of section 446 of the Companies Act on the proceedings under Section 138 of the Negotiable Instruments Act, 1881 [“N.I Act”], which provision creates a statutory offence in case of dishonour of a cheque on account of insufficiency of funds, among other things. The Problem There have been certain disagreements with respect to the scope of the expression “suit or other legal proceedings” under section 446(1) of the Companies Act. Various high courts in several of their judgments have time and again delved into the provisions of the Companies Act so as clarify and demarcate the ambit of the said section. The High Court of Bombay took divergent views on the application of section 446(1) of the Companies Act to the proceedings under section 138 of the N.I Act. In the case of Firth (India) v. Steel Co. Ltd. (In Liqn.),[3] the issue before the court was whether the expression ‘suit or other legal proceedings’ in section 446(1) of the Companies Act includes criminal complaints filed under section 138 of the N.I Act?  It was held by the Single Judge Bench that section 446(1) has no application to the proceedings under section 138 and hence leave of the Court is not necessary for continuing proceedings under the N.I Act. Further in an unreported decision of Suresh K. Jasani v. Mrinal Dyeing and Manufacturing Company Limited & Ors.,[4] in order to decide on the relevance of section 446 of the Companies Act to the proceedings under section 138 of the N.I Act, the Single Judge Bench has taken diametrically opposite view altogether, and held that by virtue of the former provision, the matter under the latter could not be proceeded any further after the passing of the winding-up order as the proceeding under section 138 of the N.I Act arose out of civil liability of the company, which brings it under the purview of section 446(1). It was further held by the Court that the words “other legal proceedings” have a wider connotation and meaning and thus they include even the criminal proceedings which have some relevance with the functioning of the company. Because of such disagreements in relation to the issue, the Single Judge Bench of the Bombay High Court decided to refer the matter to a larger bench. Decision of the Division Bench of the Bombay High Court The Division Bench of the Bombay High Court on May 06, 2016, in the case of M/S Indorama Synthetics (India) Limited v. State of Maharashtra and Ors.,[5] tried to reconcile and resolve the conflicting views taken in the above-mentioned judgments. The Division Bench discussed the scheme and object of section 446 of the Companies Act. The court held that when the proceedings of winding-up against a company have been filed, the tribunal has to see that the assets of the company are not imprudently given away or frittered. It is the fundamental duty of the tribunal to oversee the affairs of the company and to meet the debts of its creditors as well as contributories. With regard to section 138 of the N.I Act, the court stated that the main object of the provision is to assure the credibility of commercial transactions by making the drawer of the cheque personally liable in case of dishonour of cheques. The Bench cited the case of S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (In Liquidation) v. V.M. Deshpande, Income Tax Officer, Companies Circle I (8), Bombay & Anr.,[6] wherein the Hon’ble Supreme Court considered the provisions of  section 446 of the Companies Act vis-à-vis those of section 147 of the Income Tax Act, 1961 dealing with the initiation of the reassessment proceedings against a company which is undergoing liquidation process, and held that “[t]he Liquidation Court cannot perform the functions of the Income Tax Officials while assessing the amount of tax payable, even if the assessee be the company which is undergoing a winding up process. The language of section 446 of the Companies Act must be so interpreted so as to eliminate any startling consequences.” The Court observed that the expression “other legal proceedings” under section 446 of the Companies Act, should be read ejusdem generis with the expression “suit” and could only mean civil proceedings. Further, the expression “legal proceedings” under section 446 does not mean each and every civil or criminal proceeding; rather, it signifies only “those proceedings which have a direct bearing on the assets of a company in winding-up or have some relation to

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Section 29A: A Target On Party Autonomy

Arbitration Law /

Section 29A: A Target On Party Autonomy. [Shashank Chaddha] The author is a fourth-year student of National Law Institute University, Bhopal. The Arbitration and Conciliation Act, 1996 (“Act”), amended by the Arbitration and Conciliation (Amendment) Act, 2015 (“Amending Act”), introduced a host of changes, one of them being the insertion of two new sections– Section 29A and Section 29B- to the Act. The two sections, essentially, place an obligation on the parties, in addition to placing an obligation on the arbitral tribunal, to conclude the arbitration proceedings within a time period of 12 months, or if an extension is granted, within 18 months.[i] Section 29B talks about a new mode of procedure that may be adopted by an arbitral tribunal towards completing arbitration proceedings within 6 months’ time period. While this insertion may cure the evil of delays that used to considerably hamper the arbitration proceedings, section 29A, which forms the focus of this post, compromises with the grund-norm or the backbone on which arbitration lies– party autonomy. The present article attempts to highlight this scenario. Demystifying the Provision Section 29A uses the word ‘shall’,[ii] which implies a mandate on the part of the arbitral tribunal to deliver a final award within 12+6 months; else, there will be a penalty imposed by the High Court on the arbitrator’s fee,[iii] or the arbitrator’s mandate may be terminated.[iv] However, the section overlooks the possibility of cases where the parties themselves are responsible for delay in cases, or where due to reasons attributable to complex nature, the proceedings cannot be completed within the 12+6 months’ time, without any fault of the arbitrator or the parties. The section does not provide any mechanism to deal with such situation. Where the parties enter into an arbitration agreement, in case of ad-hoc arbitration, they lay down the procedure to deal with various aspects, such as evidence, submission of claims, etc., which might take some time when seen from a practical point of view. Therefore, when the agreement itself has provided for detailed steps to be undertaken during a proceeding, which cannot be practically completed within the statutory limited time frame, the provisions of the agreement come in direct conflict with section 29A. This means, on the one hand, that we have the arbitration agreement reflecting parties’ intention based on party autonomy, and, on the other hand, that we have the legislature’s will to complete the arbitration proceedings within a certain period, even if that has the power of overriding the express procedure laid down by the parties. When we deal with this section, it is also important to understand the intention behind the insertion of this section. The Law Commission of India, in its 176th Report[v] (2001), had suggested inserting a statutory limit to be imposed for completion of arbitration proceedings. However, in that Report, the Commission had suggested introduction of a 24-month time limit (inclusive of an extension of 12 months). The Commission observed in this regard: “We are not inclined to suggest a cap on the power of extension as recommended by the Law Commission earlier. There may be cases where the court feels that more than 24 months is necessary. It can be left to the court to fix an upper limit. It must be provided that beyond 24 months, neither the parties by consent, nor the arbitral tribunal could extend the period. The court’s order will be necessary in this regard.”[vi] However, after this Report was released, the Central Government released a Consultation Paper,[vii] based on the said Report, and the Committee was of the opinion that: “…neither any time limit should be fixed as contemplated by the proposed section 29A nor should the court be required to supervise and monitor arbitrations with a view to expediting the completion thereof. None of these steps is conducive to the expeditious completion of the arbitral proceedings. Moreover, court control and supervision over arbitration is neither in the interest of growth of arbitration in India nor in tune with the best international practices in the field of arbitration. The Committee is of the opinion that with the proposed amendment the arbitral tribunal will become an organ of the court rather than a party-structured dispute resolution mechanism. The Committee, therefore, recommends the deletion of the proposed section 29A from the Amendment Bill.”[viii] However, taking source from the 176th Report, the Parliament inserted section 29A to the Act, ignoring the Consultation Paper. Comment Observing that section 29A has the potential to comprise the basic tenets of arbitration, it would have been a pro-arbitration approach had there been a provision regarding allowing parties to give their own thought as to how long, and in what manner, do they wish to carry the proceedings forward through according primacy to the arbitration agreement, by beginning the section with “Unless otherwise agreed by the parties…”. The express intention of the parties must be respected, in entirety. Anything to the contrary might result in further litigation, rather than minimizing it, where a party can allege that the arbitration proceedings were carried out hastily and that proper opportunity was not given to such party. The sanctity of the principle of party autonomy must be restored, and the parties should be free to contract the methods for carrying out the private mode of dispute resolution mechanism. [i] The Act, section 29A(3). [ii] Ibid, section 29A(1). [iii] Ibid, section 29A(4), [iv]  Ibid, section 29A(6). [v]  Law Commission of India, 176th Report, available at http://lawcommissionofindia.nic.in/arb.pdf, pages 126-127. [vi]  Ibid, page 125, ¶ 2.21.4. [vii]  Ministry of Law & Justice, Government of India, Proposed Amendments to the Arbitration & Conciliation Act, 1996, available at http://lawmin.nic.in/la/consultationpaper.pdf (Annexure-IV of the Paper). [viii]  Ibid, ¶127.

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