Author name: CBCL

The Bankruptcy Code & Sections 270-272 of The Companies Act, 2013- An Analysis

Company Law, Insolvency Law /

The Bankruptcy Code & Sections 270-272 of The Companies Act, 2013- An Analysis. [Shreya Choudhary] The author is a third year law student from ILS Law College Pune. The Insolvency and Bankruptcy Code, 2016 (hereinafter the “Code“) envisages an effective time-bound insolvency resolution process, aiming to maximize the returns for its stakeholders, namely, corporate debtors, individuals and unlimited partnerships. The commencement of the new regime has affected certain provisions of the Companies Act, 2013, including the winding up process envisaged therein. It, therefore, becomes significant to analyse the Code having regard to the said provisions. Overview of the Code The Code lays down a two-step process for corporate debtors- insolvency resolution process and liquidation. First, an application has to be made to the adjudicating authority by the creditor or the debtor. This process is to be supervised by the resolution professional with the help of a creditors’ committee, and they have 180 days from the date of admission of the application to facilitate a resolution plan to either restructure or liquidate the debtor. The adjudicating authority orders a moratorium for this period. The resolution plan needs the approval of 75% of the financial creditors by voting share and the approval of the adjudicating authority to be binding on all creditors. If the debtor’s situation cannot be resolved within the time allowed or the creditors reject the resolution plan or the 75% majority of the creditor’s committee resolves to liquidate the corporate debtor at any time during the process, the debtor is placed into liquidation and the resolution professional becomes the liquidator who realizes and distributes the assets in the new order of priority. To meet its objective of time bound resolution of defaults, seamless implementation of liquidation/bankruptcy and maximization of asset value, the Code envisages a new institutional set-up comprising of- (1) the Insolvency and Bankruptcy Board of India (IBBI) to regulate the insolvency process, (2) the insolvency resolution professional to ensure efficient management and working of the bankruptcy process, (3) the informational utilities (IUs) to act as a depository of financial information to avoid asymmetry in the resolution process. (4) the National Company Law Tribunal (NCLT) to act as the adjudicating authority for corporate insolvency and liquidation. Changes Introduced in Sections 270, 271 & 272 of the Companies Act, 2013 and in the Code The Code has brought about certain changes in sections 270, 271 and 272 of the Companies Act, 2013. Through a notification issued under the Code, section 270, which provided for the different modes of winding up, has been substituted so as to include only winding up by the tribunal. Likewise, section 271, which elucidates the circumstances in which a company may be wound up by the tribunal, no longer covers the situation where a company is unable to pay its debts, for the said situation is now dealt with by the Code. Similar changes have been made to section 272, so as to remove “any creditor or creditors, including any contingent or prospective creditor or creditors” from the list of persons who may present a petition to the tribunal for winding up. The provision for winding up on the ground of inability to pay debts now falls under the ambit of Section 7 to 9 of the Code. Further, creditors have the right to initiate resolution of insolvency proceeding on failure of which a liquidation application may be filed. Analysis (1) Voluntary liquidation Voluntary winding up has been incorporated in the Insolvency and Bankruptcy Code, 2016 under the provisions of Section 59. A corporate person who has not committed any default can initiate the voluntary liquidation process before the NCLT. The winding up process shall commence on the date on which a special resolution is passed by the members/partners of the corporate person to liquidate the corporate person and to appoint an insolvency professional to act as the liquidator. This remedy to initiate winding up proceedings against financially solvent companies that had defaulted in payment of debts was not available under the Companies Act, 2013. However, this is possible under the Code. With respect to proceedings pending before the High Court relating to voluntary winding up, an inference can be drawn from the case of West Hills Realty Private Ltd. and Ors. v. Neelkamal Realtors Tower Private Limited[1] that only the petitions which are at a pre-admission stage and have not been served on the respondent will be transferred to the tribunal; others shall be dealt with by the High Courts. Further, it is clear from the decision in Ashok Commercial Enterprises v. Parekh Aluminex Ltd.[2] that NCLT has jurisdiction over winding up proceedings even on account of inability to pay debts where such petition is served to a respondent after 15th December, 2016 and the High Court will continue to have jurisdiction over those winding up petitions which were served before 15th December, 2016. (2) Winding up on inability to pay debts As indicated earlier, section 271(1)(a) of the Companies Act, 2013 has been omitted by section 255 of the Code and the same is now dealt with in accordance with sections 7-9 of the Code. These sections deal with the initiation of corporate insolvency resolution process. On occurrence of a default, an application has to be made to the Tribunal by a creditor (financial and operational). An insolvency professional is appointed. Upon failure, there is liquidation of the corporate person is relation to whom application was made. The scope of default under the Code is also wide as compared to the situation of inability to pay debts which was provided under the Companies Act, 2013. Section 3(12) of the Code defines ‘default’ as non-payment of debt, when whole, any part or an installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. ‘Inability to pay debts’, as interpreted by the Andhra Pradesh High Court in the case of Reliance Infocomm Ltd. v. Sheetal Refineries Pvt Ltd.[3] , means a situation where a company is commercially insolvent, that is, the existing and provable assets would be insufficient to

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The Fugitive Economic Offenders Bill, 2017: The Mallya-Chidambaram Effect

Contemporary Issues /

The Fugitive Economic Offenders Bill, 2017: The Mallya-Chidambaram Effect. [Param Pandya, Tarika Jain, Margi Pandya] In the wake of the rising non-performing assets crisis, the Indian legal system seems to be grappling with major challenges than before. While turnaround of debt remains a problem, wilful default of debt adds to this menace. As banks and the government are dead beat trying to prosecute Mr. Vijay Mallya for wilful default of loans and Mr. Karti Chidambaram on money laundering charges, they continue to evade law by residing out of India. The Fugitive Economic Offenders Bill, 2017 (the “Bill”) seems to be a knee-jerk reaction which attempts to remedy such regulatory fiascos. The Bill was put in public domain on May 19, 2017 for comments.   Background To state that the existing legal framework to deal with high value multi-jurisdictional economic offences is inadequate would be an understatement. The RBI Master Circular on Wilful Defaulters (July 01, 2015) provides for barring a wilful defaulter from (a) raising any loans from banks, financial institutions and non-banking companies; and (b) floating a new venture. The other remedies available to banks and financial institutions are contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debt due to Banks and Financial Institutions Act, 1993 which are time consuming since they involve prolonged litigation. Moreover, even though the Insolvency and Bankruptcy Code, 2016  aims to provide for a speedy bankruptcy process, the National Company Law Appellate Tribunal  by holding that the timelines prescribed in Sections 7, 9 and 10 of the Code are directory in nature[1] has reduced its effectiveness to an extent. Further, liquidation/ bankruptcy process is not a sufficient deterrent in case of high value economic offences. The provisions of civil law in India do not address the issue of high value multi-jurisdictional fugitive economic offenders whereas the process prescribed under the Code of Criminal Procedure, 1973 is time consuming and hence inefficient. The Explanatory Note appended to the Bill states that fleeing of economic offenders leads to several “deleterious” consequences such as (a) hampering investigation in criminal matters; (b) wasting the precious time of the court; (c) undermining the rule of law; and (d) cases which involve non-payment of bank loans cause strain on the banking system. The Bill aims to deter fugitive economic offenders by providing for confiscation of all properties of a wilful defaulter prior to conviction. Key Features (1) Definition of Fugitive Economic Offenders The Bill defines a “Fugitive Economic Offender” as any individual against whom a warrant for arrest in relation to a scheduled offence[2] has been issued by any court in India who (a) leaves or has left India so as to avoid criminal prosecution; or (b) refuses to return to India to face criminal prosecution. Further, in order to ensure that the courts are not overburdened with such cases, only such cases where the total value involved is INR 100 crores or more shall be within the purview of the Bill. This is a higher threshold and must be reduced. (2) Applicability The provisions of the Bill shall apply to any individual who is, or becomes, a Fugitive Economic Offender on or after the date of coming into force of this law. It may be argued that the Bill (when becomes law) will be an ex post facto law i.e. it will impose penalties retroactively.[3] It may appear that such a provision shall the violate Article 20(1) of the Constitution of India. In case this line of argument is upheld by the court, by application of doctrine of severability, the remainder of the Bill may survive as good law which means that those individuals who fall within the definition of a “Fugitive Economic Offender” on the date of enactment of the Bill may be excluded from penalties under the Bill. [4]   (3) Process The Director[5] or any authorised officer shall make an application to the Special Court[6] for declaring an individual as a Fugitive Economic Offender. The Director or any authorised officer may pass an order attaching the properties as described in the application. Such attachment shall be valid for a period of 180 days from the date of the order. The Special Court shall serve notice and call upon the said individual to present himself before the Special Court within a stipulated time period. The Special Court may terminate such proceedings if the said individual appears in person within the specified time. However, the prescribed time may be provided by the Special Court if the individual seeks to be represented by a counsel. If the Special Court concludes that the individual is a Fugitive Economic Offender, the Special Court is required to record the reasons in writing. (4) Penalty Upon an individual being declared as a Fugitive Economic Offender, the Special Court shall pass an order confiscating all the properties which are enlisted in the application or as determined by the Special Court. From the date of such order, all rights and title in respect to such confiscated property shall vest with the Central Government, free from all encumbrances. Further, a Fugitive Economic Offender may, at the discretion of the court, be disentitled to file or defend a civil claim. If such Fugitive Economic Offender is a promoter or a key managerial personnel or a majority shareholder of a company, such company may also be disentitled to file or defend a civil claim. (5) Non-conviction-based Asset Confiscation Under the Prevention of Money Laundering Act, 2002 (“PMLA”), confiscation of the assets of the offender can only be resorted post conviction which is not an expeditious remedy. Hence, to address this, the Bill adopts a non-conviction based asset confiscation (“NCBAC”) approach as envisaged in the United Nation’s Convention against Corruption (2003), which was ratified by India in 2011. The NCBAC approach is based on the principle that “crime does not pay” i.e. those who commit unlawful activity should not be allowed to profit from their crimes.

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From Blurred Line to Bright Line: Concept of Control under the Takeover Law

Capital Markets and Securities Law /

From Blurred Line to Bright Line: Concept of Control under the Takeover Law. [Deeksha Malik] The author is a Fifth Year B.A. LL.B. (Hons.) student at NLIU, Bhopal The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter “Takeover Code”) prescribes a threshold limit of 25% of shares or voting rights in the target company which, when triggered, would require the acquirer of such shares or voting rights to make an open offer by way of a public announcement.[1] Irrespective of such acquisition, an acquirer is also obligated to make such an offer when he acquires control over the target company.[2] Regulation 2(1)(e) of the Takeover Code provides an inclusive definition of “control”, taking within its ambit the right to appoint majority of directors to the Board of the target company or to control the management or policy decisions of the said company by a person acting individually or in concert with other persons, either directly or indirectly, including by virtue of their shareholding, management rights, shareholder agreements, voting agreements or in any other manner. The definition expressly excludes exercise of control by a director or other officer of the target company merely by virtue of his holding such position. At this juncture, it is pertinent to note that the Bhagwati Committee, the recommendation of which formed the basis on which the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 were framed, suggested that though it is difficult to lay down a precise definition of “control” on account of the numerous different ways in which it could be exercised over a company, it is necessary to provide a broad inclusive definition which would “serve to indicate the circumstances when compliance with the provisions of the Regulations would be necessitated, even where there has been no acquisition of shares, so that SEBI would not be on an unchartered sea in investigating whether there has been change in control.”[3] It is against this backdrop that SEBI on March 14, 2016 came out with a discussion paper seeking comments from the public over the issue of the concept of control under the takeover law.[4] Various Approaches to Determination of Acquisition of Control Essentially, there are both objective and subjective tests to determine acquisition of control. The quantitative approach focuses on numerical thresholds in order to ascertain whether or not there has been an acquisition of control over the target. Many jurisdictions, including the European Union[1], Hong Kong[2], Italy[3] and Austria[4] opt for this approach on account of the relative efficiency and consistency in its application; such standards also significantly reduce the need for litigation. However, there appears to be considerable variation as regards the fixation of the shareholding percentage threshold for voting rights which would trigger the mandatory offer rule (ranging from 20% to 50% voting rights).[1] Much depends on the shareholding pattern that generally prevails in a particular jurisdiction; if shareholding is dispersed in that it is spread over a large number of shareholders, the trigger limit should be kept low, and vice-versa.[2] Objective standard has its own share of disadvantages. Being ‘mechanical’ in its application, it increases the possibility of sophisticated avoidance attempts. Let us take example of an acquirer ‘A’ in India, the takeover law of which provides for a trigger limit of 25% voting rights. ‘A’ acquires 24.5% of the voting rights in a company, thereby doing away with the requirement of an open offer and the economic cost it entails. If there is no other shareholder that exercises similar voting rights, one may reasonably draw the inference that A has a de facto control over the company. Similarly, there could be various kinds of agreements enabling a ‘stealthy’ acquisition of voting rights, and a takeover regulation providing for only an objective standard would not be able to catch hold of such an acquirer. On the other hand, some countries adopt the subjective route, enabling courts and regulators to check any kind of de facto control over the target. In countries such as Canada, France and Spain, an entity is deemed to be having control over another company if it is has the right to exercise majority of the voting rights at the general meeting of the company or has the ability to control the composition of a majority of the board members of the company.[3] Likewise, countries such as Brazil, China and Indonesia define control in terms of the ability to exercise influence over the company’s policies or its shareholder meetings.[4] Therefore, we find that a de facto concept of control essentially encompasses various modes through which an acquirer may gain control. Some of these modes could be the right of an acquirer to appoint or remove majority of the board of directors, ability to directly or indirectly determine the management or policy of the company[5], and the like. The process envisages fact-specific determination, making the law highly uncertain and unpredictable. In fact, many jurisdictions which previously had subjective definitions of control switched to objective definitions.[6] Indeed, such standards fail to take into account many situations where, as a protective measure, financial investors or borrowers seek certain rights in the company without any intention to seek control. The Combined Approach in India India follows both quantitative and qualitative approaches to determination of acquisition of control, providing a numerical threshold of 25% while at the same time giving a subjective definition under regulation 2(1)(e). As a result, the jurisprudence developed over time shows inconsistency among judicial decisions and multiple opinions as regards the scope of control. In 2001, the Securities Appellate Tribunal (SAT) held the acquirer in question to be in control over the target as it had veto rights on major decisions on structural and strategic changes.[7] More recently, in 2010, SAT significantly changed its stance in the much-talked-about case of Subhkam Ventures (I) Pvt. Ltd. v. SEBI[8]. In this case, Subhkam acquired more than 15% in the target company and made a public announcement in term of Regulation 10

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