Contemporary Issues

Supreme Court Settles Jurisdictional Conundrum for Appeals from ITAT Orders

Leave a Comment / Contemporary Issues, Taxation Law /

[By Harshit Joshi] The author is a student at the Vivekananda Institute of Professional Studies. An appeal was brought before the Supreme Court in which both the Delhi High Court and the Punjab & Haryana High Court refused to have territorial jurisdiction over the dispute due to a difference of opinion and dismissed appeals filed before them. The Supreme Court solved the conundrum concerning appellate jurisdiction of the High Courts under Section 260A of the Income Tax Act, 1961 (‘Act’) in its judgment dated 18 August 2022 in the case of Pr. Commissioner of Income Tax-I, Chandigarh v. M/s. ABC Papers Limited. Another question that the Supreme court resolved is the jurisdiction of the High Court consequent upon an administrative decision transferring a “case” under Section 127 of the Act from one Assessing Officer to another Assessing Officer (‘AO’) located in a different State. The court ruled that the jurisdiction of the High Court stands on its own foundation and cannot be susceptible to the executive power of transferring a matter. The Apex Court also overturned the finding rendered by the High Court of Delhi in CIT v. Sahara India Financial Corporation Ltd. and CIT v. Aar Bee Industries Ltd. holding they do not lay down the correct law. In this post, we shall dissect and analyze the judgment of the Supreme Court. Factual Background The Appellant M/s. ABC Papers Ltd. (‘Assessee’) is a company engaged in the manufacture of writing and printing paper and filed its income tax returns before AO, New Delhi in 2008. The Deputy Commissioner of Income Tax (‘DCIT’), New Delhi, issued a notice of assessment under Section 143 (2) of the Act and followed it up with an order dated 30.12.2010. Aggrieved by that order, the Assessee preferred an appeal to the Commissioner of Income Tax (‘CIT’) (Appeals) – IV, New Delhi who by order dated 16.02.2012, allowed the appeal. Against this appellate order of CIT, the Revenue carried the matter to Income Tax Appellate Tribunal (‘ITAT’), New Delhi. The ITAT, New Delhi, by its order dated 11.05.2017, upheld the order of the CIT (Appeals) – IV, New Delhi, and dismissed the appeal filed by the Revenue. Meanwhile, by an order of transfer dated 26.06.2013 passed under Section 127 of the Act, the CIT (Central), Ludhiana, centralized the cases of the Assessee and transferred the same to Ghaziabad. The DCIT, Ghaziabad, passed another assessment order on 31.03.2015. Aggrieved by that order, the Assessee filed an appeal which came to be allowed by the CIT (Appeals) – IV, Kanpur, on 20.12.2016. Against this appellate order, the Revenue preferred an appeal to ITAT, New Delhi which was also dismissed by its order dated 01.09.2017. The cases of the Assessee were re-transferred under Section 127 of the Act to the DCIT, Chandigarh, w.e.f. 13.07.2017. Revenue decided to file appeals, being ITA No. 517 of 2017 (against the order of the ITAT dated 11.05.2017) and ITA No. 130 of 2018 (against the order of the ITAT dated 01.09.2017) before the High Court of Punjab & Haryana. The High Court of Punjab & Haryana by its judgment dated 07.02.2019, disposed of both the appeals by holding that, notwithstanding the order under Section 127 of the Act which transferred the cases of the Assessee to Chandigarh, the High Court of Punjab & Haryana would not have jurisdiction as the AO who passed the initial assessment order is situated outside the jurisdiction of the High Court. The Revenue also filed an appeal, ITA No. 515 of 2019 before the High Court of Delhi. The High Court of Delhi had taken a view that when an order of transfer under Section 127 of the Act is passed, the jurisdiction gets transferred to the High Court within whose jurisdiction the situs of the transferee officer is located and dismissed the appeal. The question came up before the Supreme court to resolve the issue as to which High Court would have the jurisdiction to entertain an appeal against a decision of a Bench of the ITAT exercising jurisdiction over more than one state. Analysis of legal provisions Given that each state has its own High Court and that ITATs are designed to exercise jurisdiction over multiple states, the question of which High Court is the appropriate court for filing appeals under Section 260A emerged. The question arose because Section 260A is open-textual and does not specify the High Court before which an appeal would lie in cases where Tribunals operated for a plurality of States. The structure established in Article 1 of the Constitution is not followed by the jurisdiction the ITAT Benches exercise. Benches are sometimes constituted in a way that their jurisdiction encompasses territories of more than one state. The Allahabad Bench, for example, comprises areas of Uttarakhand. The Amritsar Bench has jurisdiction over the entire state of Jammu and Kashmir. An AO is given the authority and jurisdiction over anyone conducting business or exercising a profession in any area that has been assigned to them by virtue of Section 124. A “case” may be transferred from one AO to another AO under Section 127 at the discretion of a higher authority. These clauses are all located in Chapter XIII of the Act and exclusively relate to the executive or administrative authority of the Income Tax Authorities. The issue regarding the appropriate High Court for filing an appeal is well settled since when it fell for consideration before a Division Bench of the High Court of Delhi way back in 1978 in the case of Seth Banarsi Dass Gupta v. Commissioner of Income Tax. It was held that the “most appropriate” High Court for filing an appeal would be the one where the AO is located. This was held so that the authorities would be bound to follow the decision of the concerned High Court and has been followed and abided in subsequent judgments of the High Court of Delhi. However, the question in the instant case is in the context of an order

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‘Vidarbha Industries’- A Problematic Interpretation

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Shalin Ghosh] The author is a student at the Maharashtra National Law University, Mumbai. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) contemplates the initiation of insolvency proceedings only by financial and operational creditors under Section 7 and Section 9 respectively. Section 7 (5) (a), in particular, triggers the insolvency process for financial creditors, once the Adjudicating Authority (“AA”) decides the existence of debt and default. The Supreme Court’s (“SC”) recent judgement, in Vidarbha Industries Power Ltd. v. Axis Bank Ltd (“Vidarbha Industries”), rendered the aforementioned provision discretionary. The ruling disturbs settled law and could significantly impact India’s insolvency and credit recovery mechanism. Facts The appellant, a power generating company, was contracted for implementing a Group Power Project (“GPP”) by the Maharashtra Industrial Development Corporation (“MIDC”). In 2016, the appellant filed an application before the Maharashtra Electricity Regulatory Commission (“MERC”) demanding the actual fuel costs for the Financial Years 2014-2015 and 2015-2016. MERC rejected the appellant’s request, disallowing a major proportion of the demanded fuel costs while also capping the tariffs for the Financial Years 2016-2017 to 2019-2020. This was challenged before the Appellate Tribunal for Electricity (“APTEL”). Allowing the appeal, APTEL directed MERC to allow the actual costs incurred by the appellant to purchase coal for the plant’s first unit. It also temporarily imposed a limit on the fuel costs for the second unit. According the appellant, Rs. 1,730 crores were due to it as a result of the APTEL’s order. Subsequently, the appellant filed an application before the MERC for implementing the APTEL’s order. However, MERC filed a civil appeal before the SC which remained pending. The appellant claimed that it was unable to implement the directions in the APTEL’s order due to MERC’s pending appeal before the SC and that it faced a fund shortage. An implementation of the said order, the appellant argued, would help it discharge its outstanding obligations. In 2020, Axis Bank, the financial creditor, initiated CIRP against the appellant under Section 7 of the IBC before the National Company Law Tribunal (“NCLT”), Mumbai. Upon being challenged, NCLT, Mumbai declined the appellant’s plea demanding a stay on the CIRP, ignoring the pending amount realizable by the APTEL’s order, adding that disputes between the appellant and MERC were irrelevant to the concerned issue. The National Company Law Appellate Tribunal (“NCLAT”) affirmed NCLT’s observations, also adding that if the latter is satisfied about the existence of both debt and default, that itself would be sufficient to trigger CIRP. The appellants, aggrieved by the order, approached the SC for relief. Decision Section- 7(5)(a)- Discretionary or Mandatory? While deciding the nature of the provision, the Court acknowledged that although no extraneous factor should impede a speedy insolvency resolution under the IBC, it importantly held that aspects particular to the case, such as a pending appeal and the appellant’s financial condition cannot be termed ‘extraneous. The SC categorically stated that the NCLAT incorrectly observed that it merely has to ascertain the presence of a debt and default as sufficient conditions to trigger CIRP. The Court opined that the NCLT must apply its mind and consider relevant factors and examine the corporate debtor’s arguments against admission on its own merits, before admitting a CIRP application. Notably, it pondered on the connotations of ‘may’ in Section 7 (5) (a) observing that had the legislative intent been to construe the aforementioned provision as ‘mandatory’, then it would have used ‘shall’ instead of ‘may’. The Court reasoned that the object of the IBC is not to penalise solvent companies who temporarily defaulted on their dues. Therefore, CIRP, in the Court’s opinion, does not arise unless the concerned entity is insolvent or bankrupt. These observations led the Court to hold that Section 7 (5) (a) is a discretionary provision and that the NCLT is not compelled to admit a financial creditor’s CIRP application even when the corporate debtor has defaulted on its dues. The SC noted that the admission in the cases of financial creditors may be suspended indefinitely, till the extraneous matter is sorted. However, spelling out different standards for operational creditors, the Court observed that if such a creditor files a CIRP application, then it is obligatory for the AA to admit it, provided it is satisfied about the existence of a debtor’s default. Analysis Troubling consequences for the insolvency regime This is a concerning judgment that can potentially hamper the IBC’s effective application and dilute the robustness and efficacy of the prevailing insolvency culture. Firstly, the legislative scheme prescribed by the IBC provides for a judicial ‘hands-off’ approach by strictly limiting the scope of judicial intervention. The Court clarified this legal position in the landmark Essar Steel judgment wherein it was held that the AA is merely required to ascertain whether the legal requirements under the IBC have been satisfied and that it cannot sit in judgment over the ‘commercial wisdom’ of the CoC. Other than several orders of the NCLTs and the NCLAT, this position was reiterated by the Court itself in a number of well-known precedents like  K. Sashidhar v. Indian Overseas Bank and Vallal RCK v. Siva Industries and Holdings Limited. By requiring NCLT to scrutinize the corporate debtor’s financial health and viability, generally considered to be the domains of the CoC, the judgment in Vidarbha Industries completely goes against this established and settled legal principle, distorting the clearly defined boundaries stipulated both in the IBC and in a litany of judgments. It deprives the CoC of having an authoritative say in matters crucial to their interests while paving the way for greater judicial overreach. Secondly, the Court’s opinion, that the AA is required to examine additional grounds raised by the corporate debtor on merits before admitting a CIRP application, could adversely impact both the IBC’s application and its objectives. Till now, the NCLT only had to consider the existence of a debt and the evidence proving that the corporate debtor has defaulted on honouring the said debt. Once these two elements were ascertained, a CIRP application could

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Competition (Amendment) Bill 2022- Amiss for Cartel Enforcement?

Leave a Comment / Competition Law, Contemporary Issues /

[By Prakriti Singh] The author is a student at HNLU. The Indian Competition Law Regime is bracing for the first amendment to the Competition Act, 2002. The Competition (Amendment) Bill, 2022 has proposed substantial changes for both the arms of the Indian Competition Law Regime, i.e., merger control and cartel enforcement. Cartels are considered to be a heinous offense under the antitrust law. These twenty years of the Competition Act have witnessed a robust anti-cartel drive in India. Unlike the USA, India does not consider cartels to be a crime. However, the imposition of huge penalties is the Competition Commission of India’s (“CCI”) weapon to create a deterrent effect on the cartels. The Amendment Act has proposed several progressive changes to the Competition Act, 2002. In line with the Competition Law Review Committee Report, it has included hub and spoke cartels under the Act. The Leniency Regime goes hand in hand with the Cartel enforcement. The Amendment Act seeks to revamp the leniency provisions by permitting the withdrawal of leniency petition and dealing with the disclosure of multiple cartels. While the Amendment Act has taken an active step in recognizing different categories of cartels and advancing the leniency provisions under the Indian Competition Law Regime, it has failed to cure the existing mischief in the cartel enforcement law in India. The primary objective of cartel enforcement law is to alleviate cartel formation and thereby promote competition in the market. The statistics presented in India Chapter of Asia Pacific Antitrust Review, 2022 clearly demonstrates the failure to achieve this goal. The primary cause is the inconsistency in cartel enforcement on the part of the CCI. In order to prevent the death of enterprises in the wake of the pandemic, the CCI has abstained from imposing penalties in a number of cases. However, this soft approach might be antithetical to the antitrust regime. This article aims to present an analysis of the missing parts in the 2022 Amendment on the cartel enforcement arm. It will suggest some changes in the cartel enforcement provisions in order to strengthen the regime. Cartel enforcement in India Monopolies and Restrictive Trade Practices Act, 1969 is the predecessor of the Competition Act, 2002. One of the mischiefs pointed out in the 1969 Act by the Raghavan Committee was the absence of any provision to reduce cartel activity. The 2002 Act brought in provisions to prevent cartel activities in the economy which are extremely secretive and difficult to prosecute. The CCI (Lesser Penalty) Regulation, 2009 was notified in order to enhance the cartel detection rate which has led to the evolution of the cartel enforcement regime. As opposed to relying on mere circumstantial evidence, the CCI has now transitioned to relying on the evidence gathered from dawn raids. Analysing the inconsistency in the Cartel enforcement- Case Study of the Railway Sector The Railway market is a monopsony market prone to cartel formation. The first ever order of the leniency regime was related to cartelization in the Railway sector. In recent times, cartel detection in this market has been made possible by the exercise of the Leniency application. However, the inconsistent approach of the regulator is problematic. It even bears the threat of discouraging the leniency petitions. On 10 June 2022, the CCI released an order imposing penalties on seven firms. These seven firms were engaged in cartelization in the supply of protective tubes. The detection of this cartel was made possible by one of the member firms in the cartel. The Director General in his report had submitted evidence of cartelization relating to the polyacetal protective tube in the Indian Railways. The CCI, after a detailed analysis, concluded that the communication between the firms clearly demonstrated the existence of a cartel arrangement. The CCI took a harsh stance on the cartel arrangement. The member firms attempted to justify the presence of a cartel in the monopsony Railway market. However, the CCI strictly demonstrated an anti-cartel stance. The monopoly of the Indian Railways is no good ground to engage in cartelization and manipulate the bidding process. Except for the whistleblower, all the firms were penalized. Even in this cartel, there were MSMEs facing economic disruptions caused by the pandemic. However, the CCI, instead of issuing a stringent warning, imposed penalties on these firms. In 2021, in Eastern Railway, Kolkata v. M/S Chandra Brothers and Others, the CCI found evidence of cartel activity in the Axle Bearings market. This cartel was also detected as a result of a Lesser Penalty Application. Even the suppliers, in this case, attempted to justify a cartel in a monopoly market. This cartel also included MSME enterprises bearing the brunt of the pandemic. The CCI abstained from imposing penalty and rather issued a cease-and-desist order. In Re: Chief Materials Manager, South Eastern Railway v. Hindustan Composites Limited and Others, the CCI had found evidence of cartel in the supply of Brake Blocks to the Railways. However, it restrained from imposing any penalty as the MSMEs were adversely affected by the pandemic. In this case, the CCI, analysed the turnover of the Opposite Parties, on the basis of which, it issued a cease-and-desist order. Similar leniency towards MSMEs engaging in cartelization in the supply of cartel brushes to the Railways was demonstrated in Mr. Rizwanul Haq Khan, Dy. Chief Material Manager, Office of the Controller of Stores, Southern Railway v Mersen (India) Private Limited and Another. Thus, within a single market, the CCI’s approach has been replete with inconsistency, that too, while deciding cases with similar circumstances. This inconsistency causes mischief on two counts. Firstly, it dilutes the magnitude of deterrence originally envisioned by the cartel enforcement regime. Secondly, it also dilutes the efficacy of the Leniency Programme. If the applicant has no incentive of getting lenient treatment compared to the other cartel members, the entire process of filing a Lesser Penalty Application would seem to be futile. A stringent approach to cartels- the cure for the mischief of inconsistency? In the past two years,

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Analyzing the Competition Amendment Bill vis-a-vis Regulation of Digital Market

Leave a Comment / Competition Law, Contemporary Issues /

[By Akrama Javed and Aditya Maheshwari] The authors are students at the Gujarat National Law University. Introduction Recently, after a coon’s age of introduction of the Draft Competition (Amendment) Bill, 2020, the legislature introduced the Competition (Amendment) Bill, 2022 (hereinafter as “Bill”), wherein certain changes in the present legal regime have been incorporated. The Bill so proposed needs to be analyzed in the context of the digital market (hereinafter as “market”) owing to two major reasons. Firstly, the complexity in the regulation of the market owing to its complex and multifaceted nature due to the involvement of data, complex algorithms, and lack of technical tools for regulation. And secondly, the effect of the anti-competitive dominant policies of these Big-Tech on new entrants, as well as the existing competitors in the market. Therefore, in this article, the authors have analyzed the upcoming legal regime pertaining to the rise of the digital market in India. Competition Bill 2.0 – amendments pertaining to Market Some of the indispensable changes in regard to regulating the market are: Inclusion of Technology Experts in the Competition Commission of India  Taking a leaf out of Indian security law wherein the special focus is being made on the expertise of the members with regard to the securities market, the legislature intending to add investigative muscle and professional expertise to intensify scrutiny of Big-Tech companies, introduced the inclusion of expression ‘technology’ under Section 8 of the Competition Act (hereinafter as “Act”) wherein it would be one of the factors for the selection of the chairperson and other members. Moreover, while complementing section 8, an amendment is also introduced in Section 9 of the Act to include ‘technology’ while forming the selection committee. Material influence as part of the control Through the amendment, the legislature intends to amend the definition of ‘control’ to include the lowest threshold of control i.e., material influence. The inclusion of this would keep the digital transactions under the Competition Commission of India’s (hereinafter, “CCI”) supervision as such transactions don’t come under the realm of quantitative criteria provided. Hub and Spoke Cartel Propelling from the traditional cartel i.e., horizontal and vertical cartel, the CCI introduced Hub and Spoke Cartel under Section 3 of the Act. Here, the CCI intends to include such transactions which are done through intermediaries. For instance, the use of price algorithms for anti-competitive activities by companies like Ola and Uber shall be scrutinized under this provision. Demystifying the existing conundrum in the market in India As mentioned earlier, the amendment is introduced keeping in mind various actions being taken by the CCI against Big-Tech and it is pertinent to discuss the same to understand the contemporary contextual issues existing within the domain. The data induced jurisdictional tussle The issue was ignited for the first time when suo-moto cognizance was taken by the CCI against WhatsApp’s Terms and Services relating to Privacy Policy which effectively asked users to accept the sharing of their data with Facebook and initiated an investigation. It should be noted that prior to this, CCI had generally avoided intervening in matters having data privacy undertones to them. However, herein, CCI had held that WhatsApp Inc., through this policy, was arbitrarily degrading the non-price parameters of competition i.e., data, to an extent that it violated Section 4(2)(a)(i) of the Act through the imposition of unfair terms and conditions. In all of this, the idea of the CCI overstepping its jurisdiction to meddle in privacy issues is concerning when there is almost a legal vacuum in the area of data privacy due to the withdrawal of the Data Protection Bill, 2021. The case of apprehensive App Store arrangements The case of apprehensive app store arrangements is exacerbated by dominant tech firms i.e., Apple Inc. and Google, and action was taken against them. Recently, an investigation was launched against Apple Inc. on grounds including App Store Review Guidelines being violative of Section 4(2)(a)(i) of the Act due to its ‘take it or leave it’ nature, the mandatory use nature of the in-app payment system and the tie-in arrangement restricting other developers to develop iOS apps. Likewise, Google has also been found guilty of abusing its dominant position by denying market access, leveraging, and restricting technology to the prejudice of consumers. The problematic allegory of the algorithms The concept of Algorithmic collusion has been addressed by the CCI in two cases. Taking a narrow approach in the case of Samir Agrawal v. ANI Technologies Pvt. Ltd, CCI held that there did not exist hub and spoke agreement because there existed no agreement to set the prices or coordinate the prices between the parties. Secondly, in the case of Re: Alleged Cartelization in the Airlines Industry where the existence of hub and spoke agreement was investigated w.r.t common software algorithm software used by airlines to determine the ticket pricing. In this, the CCI found that the revenue management team of the airline modulated the algorithm, and the role of the algorithm was limited only to aiding the team in arriving at the price which would ensure optimal revenue. Here, the question would again arise in front of the CCI in case there is an employment of a self-learning algorithm. Foreign Approaches Countries around the world getting a move on from the traditional competition laws by reconsidering the present legal regime to include safeguards against modern anti-competitive activities such as tacit collusion. Some of the best safeguards being adopted by various countries are discussed below. Digital Market Act – European Union The European Union recently enacted the Digital Market Act as a means of limiting the ability of major digital firms to respond to and head off the competitive threats posed by their business models. It is enacted to impose a stringent regulatory regime on the gatekeepers. Moreover, investigation regarding the compliance of regulations is provided to give ex-ante effect to it. Moreover, the obligations are imposed on gatekeepers to explain their algorithms and the non-compliance of the same would invite severe penalties. Open Market App

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Vidarbha v. Axis Bank: A Case of Reinventing the Wheel?

Leave a Comment / Contemporary Issues /

[ By Paridhi Gaur] The author is a student at the University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University. Introduction The enactment of the Insolvency and Bankruptcy Code (hereinafter, “IBC”) was a paradigm shift in resolving debt-ridden companies expediently and without compromising on the value maximization of assets. Remarkably, it put the creditors on a pedestal by giving them decision-making powers in the Corporate Insolvency Resolution Process (hereinafter, “CIRP”). Financial creditors and operational creditors are empowered to initiate CIRP against corporate debtors under Sections 7 and 9 of the IBC, respectively. In Innoventive Industries Ltd. vs. ICICI Bank (hereinafter, “Innoventive”), the apex court had laid down that the NCLT must admit these applications if they are defect-free and upon satisfying itself on the following two grounds: whether there is an existing debt which is due, and whether the corporate debtor has defaulted in making a payment towards such debt. However, through its recent ruling in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. (hereinafter, “Vidarbha”), the Court has diluted this twin test. The NCLT now has the discretion to reject an application by a financial creditor to initiate CIRP, despite the existence of debt, by accounting for certain factors like the financial health and viability of a company. Contrastingly, an application of the operational creditor in a similar situation is mandatorily to be accepted, unless there is a pre-existing dispute between the parties about the debt. In this article, the author seeks to analyse if the apex court was right in unsettling a settled law or if the same is an attempt to reinvent the wheel. Factual Matrix Vidarbha Industries Power Limited (hereinafter, “VIPL”) is a power generating company and its business is under the regulatory control of the Maharashtra Electricity Regulatory Commission (hereinafter, “MERC”). MERC determines the tariff chargeable by electricity generating companies. As a result of certain developments between 2003-2013, a dispute arose between VIPL and MERC on the amount of the final tariff. The Appellate Tribunal for Electricity (APTEL) decided in favor of VIPL, who claims that a sum of Rs. 1,730 crores is realizable by it in terms of this order. However, MERC appealed this decision before the Supreme Court and the same is pending. As of date, the apex court has not granted a stay on the APTEL order. In 2021, Axis Bank Private Limited, a financial creditor of Vidarbha, filed an application for commencing insolvency against VIPL and claimed that Rs. 553 crores are owed to it. VIPL sought a stay on these proceedings on the ground that the appeal by MERC is pending before the SC. They argued that since the receivable due to them exceeds the claim amount, initiating CIRP is not necessary. The NCLT found no merit in this submission and reasoned that pending decisions are extraneous matters and therefore, cannot have any bearing on an application under Sections 7 or 9 of the IBC. The NCLAT, in appeal, upheld the decision of the NCLT. Aggrieved, Vidarbha approached the SC. Decision of the Supreme Court VIPL roped in the rule of literal interpretation to assert that Section 7(5)(a) of the IBC is discretionary because the legislature has used the word “may” instead of “shall” while giving the NCLT the power to admit an application. It was pointed out that if the legislature meant to impose a compulsion, the word “shall” would have been used, like in the parallel provision of Section 9(5)(a).  Therefore, the NCLT may reject an application, despite there being a debt, to meet the ends of justice. VIPL’s fleshed-out submissions before the apex court compelled a judicial interpretation of the legislative intent through the terminologies used. The Court agreed that the legislature, by making the active choice of using “may” in Section 7(5)(a) and “shall” in Section 9(5)(a), sought to provide different levels of discretion to the NCLT under the two otherwise similar provisions. As such, an application by the operational creditor under Section 9 is mandatorily required to be admitted, if- The application is complete in all respects; The application complies with the requisites of the IBC; there is no payment of unpaid operational debt; notices of payment or invoices have been delivered to the corporate debtor; no notice of dispute has been received by the operational creditor. On the other hand, the existence of debt (and default in payment thereof) only gives financial creditors the right to file an application. Under Section 7(5)(a), it is up to the NCLT to decide whether to admit it or not. To crystallize the contours of this discretion, a test of expediency has been stipulated. It requires the NCLT to adjudge the feasibility of initiating a CIRP by accounting for the overall financial health and viability of a company and applying its mind to other relevant circumstances. While the Court refrained from chalking out what these “relevant circumstances” entail, it justified the need for this change in status quo on the premise that the question of insolvency only arises if the corporate debtor is under financial duress. Analysis The twin test used as a touchstone for initiating insolvency was, in a way, the creditors’ paradise since it provided them a hassle-free path to recover their dues. However, the test was extremely rigid in its ambit and side-lined the corporate debtors’ interests. Even in a situation wherein the corporate debtor is solvent, but unable to meet its liabilities for the time being due to genuine extraneous factors (for example, a favorable arbitral award being under challenge), it would be compelled to sound its death knell by undergoing CIRP. In this regard, the ruling in Vidarbha will prove to be a game-changer if properly implemented. It can help prevent futile insolvency proceedings by providing the corporate debtors with a fair say in the process. Besides, the financial creditors are not prevented from filing a subsequent application under Section 7 if their dues remain unpaid. This way, the IBC’s objectives of reviving the corporate debtor and protecting the interests of

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Debunking the applicability of NCLT Rules on pronouncement of orders

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Utkarsh Pandit and Samridhi Shrimali] The authors are students at the Institute of Law Nirma University, Ahmedabad. Introduction The key intent of the existence of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘IBC’) is the resolution of companies in distress. The Code prescribes specific timelines for an efficient and swift resolution. However, these timelines are not always met due to delays from both, the bar and the bench. One such cause of delay on the part of the bench is the reservation of order and delayed pronouncement.  Rule 150 of the National Company Law Tribunal Rules, 2016 (hereinafter referred to as the NCLT Rules, 2016) provides for the pronouncement of orders. This rule provides for a limited time frame of 30 days to pronounce the order which has been reserved. There still exist procedural inconsistencies when it comes to the implementation of such rules. Resultantly, these issues acknowledged as mere irregularities have given them a flavor tantamount to being insignificant. This article analyzes the dichotomous stance of the courts/Tribunals on the delay in pronouncement of orders and if such delays can be a ground to challenge an order. By definition, pronouncement means to utter formally, officially, or solemnly, to declare or affirm, as pronounce a judgment or order.[i] In other words, pronouncement means to officially communicate the order to the parties after the hearing is concluded. It becomes pertinent to comprehend the trends of the tribunals/courts as the harbinger of rampant delay in pronouncements poses a threat to the ‘speedy trial’ essence of insolvency forums. These trends encounter impediments in the smooth procedural conduction of such NCLT rules, as well as the jurisdiction of the courts/tribunals while hearing petitions/appeals challenging orders on the ground of delayed pronouncement. Kamal K. Singh v. Union of India In this case, the Bombay High Court quashed the order of NCLT Mumbai, as it violated Rule 150 to 152 of the NCLT Rules, 2016. While analyzing the ambit of the pronouncement of the order, the Court observed that mere making known or communicating the order as per section 7(7) of IBC, is not tantamount to pronouncement. It also observed that NCLT being a statutory tribunal is bound by the procedural rules or else the non-adherence would defeat the principles of natural justice and fairness. Thus, it was held that the pronouncement of order is imperative under Rule 150 of the NCLT Rules, 2016. Notably, it was further held that after the conclusion of the arguments, when the pronouncement of the order has to be done, both the parties are to be notified in advance. Though the Bombay High Court did not delve into the issue of adherence to the timeline under Rule 150(1) of the NCLT Rules, it has definitely laid down a way for the aggrieved parties to exercise the jurisdiction of the High Courts in case an order is passed in violation of the procedural rules, specifically the NCLT Rules, 2016. Rajratan Babulal Agarwal v. Solartex Pvt. Ltd. & Ors. The NCLAT PB dismissed an appeal that prayed for setting aside of an impugned order of NCLT Ahmedabad, where inter alia the pronouncement of the impugned order was done six months post the conclusion of the final arguments. The appellants argued that the delayed pronouncement of the order was a direct violation of Rules 150 and 152 of the NCLT Rules, 2016. The appellants further relied on Anil Rai V. State of Bihar, where the Supreme Court laid down the guidelines for pronouncement of judgments and emphasized that for civil matters, the judgment ought to be pronounced within two months post the conclusion of the arguments. The appellants also brought non-adherence to Rule 89 of the NCLT Rules, 2016 to the NCLAT’s notice, wherein the publication of the cause list is to be published one day in advance. In the present case, the publication was done on the same day when the judgment was pronounced. Intriguingly, NCLAT while dismissing the appeal held that “It is true that in the present case, the parties have submitted written submissions on 06.01.2020, however, the impugned order was pronounced on 28.05.2020 i.e. after about five months from the conclusion of arguments which is against the aforesaid rule as well as guidelines laid down by the Hon’ble Supreme Court.  We are of the view that only on this count the impugned order cannot be set aside which is otherwise flawless.” For the violation of Rule 89 of the NCLT Rule, 2016, the NCLAT held that “even if the cause list was published on the same day, the same would be considered as an irregularity but not an illegality.” Thus, the Appellate Authority held that even if the orders are not in coherence with these rules, the same could take a back seat if the order otherwise does not have any other inconsistencies. It is reasonable to infer from the abovementioned case that the defect on account of pronouncement of orders would not impute sufficient ground to set aside such orders. Shaji Purushothman v. Union of India The Madras High Court, in a writ petition filed against the order passed by the NCLT Chennai Bench, observed the nature of NCLT Rules. Placing reliance on Balwant Singh and Others v. Anand Kumar Sharma and Others, Sharif-ud-Din v. Abdul Gani Lone, Bhavnagar University v. Palitana Sugar Mill (P) Ltd. and Others, and Pesara Pushpamala Reddy v. G.Veeraswamy and Others, the Madras High Court laid down a test and stipulated that if the law does not provide the consequences of non-compliance of the rule, then it should be deemed to be directory in nature. On the other hand, if the law provides for the consequences of non-compliance, then it should be deemed to be mandatory. While analyzing the nature of the NCLT Rules, 2016, and Rules 150 and 153 particularly, the High Court held that as the rules do not indicate any consequences on the account of non-adherence to the timelines, therefore, they can be considered as directory

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Confused Jurisprudence on Derivative Actions in India

Leave a Comment / Company Law, Contemporary Issues /

[By Harsh Tomar] The author is a student at the National Law School of India University (NLSIU), Bengaluru. In this piece, through the analysis of the case of ICP Investments (Mauritius) Ltd v Uppal Housing Pvt Ltd. (hereinafter “ICP Investments”), the author will highlight the common misconceptions around the jurisprudence on ‘derivative action’ in India. It will be argued that the reasoning in ICP Investments is one such manifestation of the lack of clarity. The author will point out the flaws in the reasoning adopted by the Court. Further, it will be argued that derivative action is not subsumed under any other remedy in the Companies Act. Therefore, the author will further argue for a clear and separate statutorily-recognized remedy of derivative action to be adopted under the Companies Act,2013. The Court in ICP Investments was of the opinion that after the enactment of the Companies Act, 2013 (“Act”) the derivative action as a separate remedy is no longer envisaged in India. This was mainly due to two grounds- 1) Derivative action as a separate form of remedy was not codified in the Act and 2) Such remedy is subsumed under the remedy provided under Sec. 241 of the Act. Section 241 and Derivative action Section 241(1) provides for remedy in cases of oppression, mismanagement, and prejudice. The Court in ICP Investments was quite confident in stating that derivative action in India is implicitly recognized under Section 241 of the Act. It is respectfully submitted that this case is a classic example of the failure of courts to understand the distinction between corporate wrongs and personal wrongs. Personal wrongs are wrongs suffered by individual shareholders and this can be remedied through oppression, mismanagement, and prejudiced actions. However, corporate wrongs are wrongs suffered by the company and it is the company only that can seek a remedy. Such wrongs can be remedied through derivative actions. Under the Companies Act, 1956 oppression and mismanagement were two separate remedies available. Oppression could be invoked when the affairs of the company were conducted in a manner that they were oppressive to any shareholder or caused prejudice to the public interest. Clearly, this was a remedy to address a personal wrong. While the mismanagement remedy could be invoked when due to a change in the company’s management, it was believed that the affairs of the company would be conducted in a manner that would be prejudicial either to the public interest or to the interests of the company. Despite the fact that this remedy can also be applied when the company suffered prejudice, there is no jurisprudence that suggests that this was used as a derivative action. The Companies Act, 2013 brought certain changes to this. It consolidated the oppression and mismanagement remedies and at the same time introduced an additional remedy called prejudice within a single provision i.e., Section 241. It is important to note that prejudice can be invoked when prejudice is caused not only to shareholders but also to the company. Hence, this may tempt one to jump to the conclusion that this is in fact statutory recognition of derivative action. This was the exact situation in the ICP Investments case.  At present, there doesn’t seem to have any clear court pronouncement on this, however, it is submitted that the provision should only be invoked when the prejudice caused to the company is coupled with evidence of personal wrongs. Otherwise in all corporate wrongs Section, 241 of the Companies Act 2013 can be invoked which is clearly not what the legislature would have intended. Such interpretation is also supported by some judgments from Singapore where a distinction between a purely private wrong and a private wrong which also comprises some corporate wrong was made.[i] Additionally, just because there is a possibility to grant a remedy to a company in a direct action under Section 241,[ii] it will not change the character of action from a direct to a derivative action. It is important to not conflate direct and corporate claims, which is what the court in fact did. This is because firstly, in a direct claim there are no substantive filters required.[iii] However, under the common law derivative claim, which is recognized in India, there are many criteria that the court may consider before admitting such a claim. First, the plaintiff has to establish that there is fraud on minority. Second, the shareholder must come with clean hands and hence is required to take leave of the court before proceeding with the derivative action. And third, since the action is on behalf of the company, the court will also consider whether proceeding with the action is in fact in the interest of the company. There are no such criteria provided under Sections 241-244 of the Act which further substantiates the argument that derivative action is not subsumed in them. Secondly, the remedy sought and the benefit of the action under both the claims is drastically different. The two remedies are different in nature and serve completely different needs. Section 245 and Derivative action Although the Delhi HC in the ICP Investments case for some unstated reasons did not allude to Section 245, people still tend to confuse it with derivative actions. This is mainly due to certain similarities between the two remedies.[iv] However, it is submitted that class action suits recognized under Section 245 are different from the idea of shareholder derivative action. Section 245 is an enabling provision that allows a few shareholders to seek remedy on behalf of all the other shareholders whose right has been infringed i.e., they form a ‘class’ among themselves. It is also quite relevant to note that under Section 245, the shareholder(s) can seek remedy against the company. This is very different from the conceptual understanding of derivative actions where the remedy is sought on behalf of the company. Also, in a derivative claim, a single shareholder can bring a claim to court. He is not mandated by law to collate his claim with similarly suited

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SBI Cartel Case: Assessing the Liability of the Company for Independent Actions of the Director

Leave a Comment / Competition Law, Contemporary Issues /

[By Harshit Upadhyay and Sangita Sharma] The authors are students at the Gujarat National Law University, Gandhinagar. A cartel facilitator is an undertaking that ensures the proper functioning and operation of the cartel by providing logistical support to the cartel. The facilitator does not need to have any commercial interest in the relevant market in which the cartel operates. Recently, in the Re: Alleged anti-competitive conduct by various bidders in supply and installation of signages at specified locations of State Bank of India across India (‘SBI Cartel’) case, the Competition Commission of India (‘CCI’) held a company liable for the independent actions of its director for facilitating a bid-rigging cartel. This article argues that the CCI erred in holding the company liable for the independent actions of the director when it could have punished the director individually for his actions under Section 27 of the Competition Act, 2002 (‘the Act’). Moreover, there is a need for greater clarity with regard to the position of the facilitators under the Act, and the same can be resolved with the help of incorporating the principles developed in the European Competition jurisdiction. SBI Cartel Case In March 2018, SBI floated tenders for the supply and installation of signages at its branches, ATMs, and offices for specified metro centers of various circles of SBI across India, which was ultimately carried out on a ‘reverse e-auction’ basis among the eligible bidders. Five companies qualified for the technical and financial bids and were shortlisted for the final bidding. These five companies wanted to distribute the locations amongst themselves. In order to facilitate the same, the companies sought the assistance of Naresh Kumar Desarji (‘Naresh’), Managing Director (‘MD’) of Macromedia Digital Imaging Pvt. Ltd. (‘MMDI’). It is relevant to note here that MMDI is neither horizontally nor vertically aligned to the same market as the other five players. Further, Naresh maintained personal relationships with the MDs of some of these companies. Based on the price inputs and geographical preferences he received from the companies, Naresh laid out how the bidding should be done and who shall bid how much for which location in an email marked to the companies. The companies followed the email and bid accordingly. The CCI took suo-moto cognizance of the anti-competitive conduct of the parties and held all the six parties (including MMDI) involved in the bid-rigging liable. CCI Decision The CCI held MMDI liable for the acts of Naresh in facilitating anti-competitive conduct, stating that under Section 3 of the Act, every person involved in manipulating the bidding process could be held liable. The CCI imposed a penalty of 51 Lakhs on MMDI. Further, it also held Naresh liable under Section 48 of the Act. Analysis On holding a Company liable for the Independent Actions of a Director The CCI, in this case, held MMDI liable even though MMDI was never part of any bid-rigging agreement directly or indirectly, and the actions of Naresh had nothing to do with the day-to-day management or even with the business of the company. This position is contrary to established principles. A company is a distinct legal entity, and a company cannot act beyond the scope of its Memorandum of Association or Articles of Association. A company can carry out the objectives mentioned in its Memorandum of Association or Articles of Association, including anything incidental or conducive to it, although it must be connected to those objectives. Further, the relationship between the directors and the company is analogous to that of agent-principal. An act not within the scope of the agent’s express or implied authority (falls outside the power or apparent scope of his authority and such acts) cannot bind or be attributed to the principal. The authority of directors is specified in the Memorandum of Association or Articles of Association and beyond which it cannot travel. In MRF Ltd. v. Manohar Parrikar, the court held that the actions of the director, which are ultra vires the same, cannot bind the company. In the immediate case, the CCI holding MMDI liable does not provide anything to establish that Naresh was acting within his authority and, therefore, could bind the company. Further, the tender was entirely unconnected to the business of MMDI as it was not engaged in the production of the goods involved in the tender and was in no manner incidental or conducive to the day-to-day functioning of Naresh as MD. The CCI erred in penalizing MMDI under Section 27 of the Act since it requires the company to be ‘involved in such agreement.’ The CCI held Naresh liable under Section 48, which requires the company to be held liable before punishing the individual in charge of and responsible for the company. However, the CCI has the requisite authority to penalize Naresh for his independent actions under Section 27 and Section 3 because of the term ‘person’ in these provisions. Further, Section 27 does not require holding the company liable before punishing the individuals. Unclear Position of Facilitators under the existing Competition Law regime Defining Facilitators The CCI held the ‘facilitator’ liable. But, it failed to define a ‘facilitator’ properly. The jurisprudence surrounding this has yet not evolved under the Indian Competition law. However, the competition authorities in European Union have more evolved principles to deal with cartel facilitators vis-a-vis their Indian counterparts. The General Court in AC Treuhand (later upheld by the top EU court) laid down the following legal test to determine the liability of facilitators: “The Commission must prove that [facilitator] intended, through its own conduct, to contribute to the common objectives pursued by the participants as a whole and that it was aware of the substantive conduct planned or implemented by other undertakings in pursuance of those objectives, or that it could reasonably have foreseen that conduct and that it was ready to accept the attendant risk.” This is a twin test, which requires it to be established that the perpetrator objectively contributed to the implementation of infringing conduct and that the perpetrator intended

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The Conundrum of ‘Interest’ as a part of Debt under IBC: The Dust Settles

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Neelabh Niket and Sanchita Makhija] The authors are students at the Hidayatullah National Law University. Introduction Recently, the National Company Law Appellate Tribunal (‘NCLAT’) in the case of Mr. Prashat Agarwal, Member of Suspended Board of Bombay Rayon Fashions Ltd. Vs. Vikash Parasrampuria (hereinafter referred to as the ‘Bombay Rayon case’) held that under Section 4 of the Insolvency & Bankruptcy Code (‘IBC’), an operational creditor can club the ‘interest’ with the principal amount to arrive at the threshold limit of Rs. 1 Crore, which is the default limit for filing of applications under Part II of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘IBC’), provided that the interest was perspicuously stipulated in an invoice or an agreement. In doing so, the three-judge bench effectively overruled the law laid down by the National Company Law Tribunal (‘NCLT’) Delhi in CBRE South Asia Private Limited v. United Concept and Solutions Private Limited (hereinafter referred to as the ‘CBRE case’), which had provided a ruling contrary to the Bombay Rayon case by holding that the principal and interest cannot be clubbed together to reach the Rs. 1 crore threshold limit. In this article, the authors seek to analyze the recent judgment of the Bombay Rayon case and its possible implications on similar cases pertaining to the treatment of ‘interest’ as debt. Factual Matrix The Appellant, Bombay Rayons Fashions Limited (hereinafter referred to as the ‘Corporate Debtor’) was supplied goods by the Respondent, ‘Vikash Parasrampuria’, the sole proprietor of the firm ‘Chiranjilal Yarns Trading’ (hereinafter referred to as the ‘Operational Creditor’). For the said supply, the Operational Creditor had raised nine invoices, out of which the Corporate Debtor did not make the payment for five invoices. The remaining principal amount was Rs. 97,87,220 and a condition for payment of 18% interest was made in all the invoices. The Operational Creditor, ergo, filed a Section 9 Application, which was admitted by the NCLT, and the Corporate Insolvency Resolution Process (‘CIRP’), was initiated. Aggrieved by the said order, an appeal was filed in the NCLAT by the Corporate Debtor. Ruling and Analysis The NCLAT analyzed the definition of the term ‘debt’ and subsequently the term ‘claim’ and stated that if interest has been unambiguously stipulated in an invoice or agreement, then it will fall under the ambit of the ‘right to payment,’ which has been anchored in the definition of ‘claim’ under Section 3(6) of the IBC. In doing so, the NCLAT also distinguished the judgment of NCLT Mumbai in Steel India vs. Theme Developers Pvt. Ltd.( ‘Steel India Case’)’ by stating that, unlike the Steel India case, the interest was stipulated in the invoices in the case in hand. Furthermore, the NCLAT sought the support of the case of Pavan Enterprises v. Gammon India and overruled the CBRE judgment into the bargain. In the CBRE judgment, the court, after due analysis of the definitions of the terms ‘debt’ and ‘claim,’ had held that since the definition of claim is common for both Operational and Financial Debts, the definition of both the terms shall be considered to understand the legislature’s intention. After analyzing the definitions of the said terms, the Adjudicating Authority (‘AA’) arrived at the conclusion that Operational Debt does not include interest as the definition of Operational Debt does not explicitly incorporate the term ‘interest’; unlike Financial Debt which clearly specifies the term ‘interest’. It should be noted that the Court in the CBRE case had failed to understand that the connotation of the term ‘interest’ is distinguishable in the case of an Operational Debt and a Financial Debt. The term ‘interest’ is explicitly mentioned in the definition clause of Financial Debt as it is an inherent component of the same. This interest clause as disbursed against the consideration for the time value of money makes the debt a ‘Financial Debt’. (It is another case, however, that the Supreme Court (‘SC’) has rendered this interest redundant for Financial Creditors in the case of Orator Marketing.). Per contra, ‘interest’ in the case of Operational Debt, is not something which is fundamental to the nature of the debt. It can be claimed to be a part of the debt, only if it is contractual in nature and has been clearly stipulated. Thus, ‘interest’ may or may not exist depending upon the clauses enshrined in a contract. The AA had erroneously deemed equivalent the connotation of the term ‘interest’ under both the definitions by placing them on the same pedestal, whilst in reality, they are very distinct. The term ‘interest,’ as has been mentioned in the definition clause of Financial Debt, is almost synonymous with the debt availed, while ‘interest’ in the case of an Operational Debt is a creature of a Contract that arises from a right of payment. The consideration in the case of Operational Debt is ‘the goods or services that are either sold or availed of from the operational creditor’ and there is no time value of money involved in the case of Operational Debt, as was held in the landmark case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India. Therefore, unlike Financial Debt, the concept of ‘time value of money’ is not prevalent in the cases of Operational Debt. As interest is a token of representation of the ‘time value of money’, the same is not indispensable for Operational Debt, thereby rationalizing the omission of the term from the definition of Operational Debt. Implications If the CBRE judgment is strictly followed, then a part of the debt, which has been mutually agreed as interest cannot be levied and collected without a hitch, as it would require an additional case in the Debt Recovery Tribunal, rendering the clause redundant under IBC. For instance, the Real Estate industry which comprises various Lease & License agreements feeds extravagantly on the interest rates, and these amounts usually run in crores. Given that the NCLAT has recently categorized Lease & License debt as ‘Operational Debt’, the landowners would

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