The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • Sanctity Of The Commercial Wisdom Of CoC’ Vis-À-Vis ‘Interest Of The Dissenting Financial Creditors’ Under IBC : A Curious Case

    Sanctity Of The Commercial Wisdom Of CoC’ Vis-À-Vis ‘Interest Of The Dissenting Financial Creditors’ Under IBC : A Curious Case

    By Vijpreet Pal and Sanskar Modi, third-year students at NLIU, Bhopal.

    Introduction

    Before the enactment of the Insolvency and Bankruptcy Code (Amendment) Bill of 2019 (‘2019 Amendment’), there were no provisions to guide the Committee of Creditors’ (‘CoC’) discretionary power in the approval of the resolution plan. However, the 2019 Amendment demystified the distinction between the secured and unsecured creditors under the resolution plan and illustrated distinct provisions for dissenting Financial Creditors. The Amendment added, “the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor,” to Section 30(4) of the Insolvency and Bankruptcy Code (‘IBC’).

    However, this amendment gave rise to the conundrum that whether the secured financial creditors can challenge the approved resolution plan by arguing that enforcement of the entire security interest is their prerogative and henceforth they must be awarded a higher amount. The Honorable Supreme Court (‘SC’) in the recent case of India Resurgence Arc Private Limited vs. Amit Metaliks Limited & Another resolved this dubiety by holding that it would be against the objectives of IBC if the secured creditor is allowed a higher amount than entitled under the approved resolution plan on the basis of security interest available to him over the corporate debtor’s assets. The Court basically tried to create a balance between the established principle of sanctity of the commercial wisdom of CoC and the interests of the dissenting secured creditor post 2019 amendment. This article shall briefly delineate upon the misconstrued understanding of the 2019 amendment. It will also examine the inequitable scenario which would be created if the financial creditors are awarded higher amount than proposed in the resolution plan for the same class of creditors.

    Background to the dispute

    The appellant company i.e India Resurgence Arc Pvt. Ltd. was the secured financial creditor of the corporate debtor i.e. Amit Metaliks Ltd. (respondent). In the Corporate Insolvency Resolution Process (‘CIRP’) commenced against the respondent, the appellant expressed his dissatisfaction on the share being proposed with reference to the value of security interest held by it and remained a dissentient financial creditor. However, the resolution plan proposed by the resolution applicant got appreciably approved by the CoC with 95.35% votes. Since all the mandatory compliances prescribed under Section 30 of the IBC were fulfilled and entitlements of all the stakeholders were taken care of, the National Company Law Tribunal (‘NCLT’) Kolkata approved the resolution plan. On an appeal before the National Company Law Appellate Tribunal (‘NCLAT’), the appellate tribunal relying upon the judgment of Committee of Creditors of Essar Steel India Ltd. vs. Satish Kumar & Ors.(Essar) observed that the amendment to Section 30(4) falls into the exclusive domain of the CoC and therefore, it is a discretionary, a non-mandatory power conferred upon the CoC to take into account the security interest like considerations.

    Aggrieved by the NCLAT’s ruling, the appellant challenged it before the SC. The major contention of the appellant was the failure on the part of CoC to consider the value of security interest even after the amendment made to Section 30(4). The appellant urged that the value of the security possessed by him was INR 12 Crores, still he was offered the minimal amount of INR 2.026 Crores against the admitted claim of the amount INR 13.38 Crores. 

    It was strongly postulated by the appellant that Section 30(4) manifestly requires the CoC to consider the waterfall mechanism (if a company is being liquidated, secured financial creditors must be first paid the full extent of their admitted claim before any sale proceedings are distributed to any other unsecured creditor) as laid down under Section 53(1), including the value of the security interest created by the secured creditor and CoC cannot shut their eyes to the value of security interest while considering the viability and reasonableness of the proposed resolution plan.

    Judicial Review of the Resolution Plan confined to Section 30(2)

    The Honorable SC on the issue regarding judicial review of the approved resolution plan held that it is undisputed that the scope of judicial review of the commercial wisdom of CoC is limited within the mandatory requirements mentioned under Section 30(2) of the IBC.

    Placing reliance on K. Sashidhar vs. Indian Overseas Bank & Ors., the court noted that the legislature while enacting the IBC has knowingly not provided any ground to challenge the commercial wisdom of the CoC before the Adjudicating Authority (‘AA’) and that the decision of CoC’s commercial wisdom has been made non-justiciable. Further, relying upon Jaypee Kensington Boulevard Apartments Welfare Association and Ors vs. NBCC (India) Ltd. & Ors (Jaypee Kensington), the court observed that the powers of the AA dealing with the resolution plan do not extend to examine the correctness of the commercial wisdom exercised by the CoC. AA by exercising its power under Section 30(2) is only authorized to examine that the resolution plan does not contravene any of the provisions of law and it confirms other requirements like payment of IRP Cost, payment of Debts of operational creditors, payment of debts of dissenting financial creditor, management of affairs of corporate debtor after the approval of resolution plan and implementation and supervision of resolution plan. It is not vested with the power to assess the resolution plan on the basis of qualitative analysis and therefore, the dissatisfaction of every secured creditor like the appellant cannot take a legal character under the IBC.

    The CoC accountable for equitable treatment of similar class creditors

    The appellant reiteratively contended that the CoC has not prioritized its claims as per the amended provision of Section 30(4) which obligates the CoC to take into account priority and value of security interest of the secured creditor. The Court clarified this issue by referring to the Essar ruling which observed that the amended provision of Section 30(4) only amplified the considerations for the CoC while exercising its commercial wisdom so as to make an informed decision regarding the feasibility and viability of the resolution plan.  The business decision of the CoC does not call for interference unless creditors belonging to a similar class are denied fair and equitable treatment. Similar reasoning could be traced from the case of Hero Fincorp Limited v. Ravi Scans Private Limited & Others wherein the NCLAT ruled that IBC does not provide any discrimination among financial creditors on the ground of their dissenting status, post the 2019 amendment made to Section 30(2)(b).

    In the instant case, the court noted that the proposal for payment to the dissenting financial creditor (appellant) is equitable and is at par with the percentage of payment proposed to other secured financial creditors. Therefore, the dissenting secured creditors like the appellant cannot suggest a higher amount to be paid by relying on the value of the security interest held by them.

    Amended S. 30(2)(b)- Not a panacea for the dissenting Financial Creditors

    The SC further observed that the amended provision of Section 30(2)(b), on which the excessive reliance has been placed by the appellant, only states that the dissentient financial creditor shall be provided with the payment of a debt which shall not be less than the amount paid to such creditors in accordance with the waterfall mechanism enshrined in Section 53(1).

    The Insolvency Law Committee Report of 2018, which lead to 2019 amendment, has also observed that providing priority to the dissenting financial creditors will not be prudent as it may encourage financial creditors to vote against the plan and may consequently hinder resolution. The objective behind the 2019 amendment was never to provide the enforcement of the entire security interest available with the secured creditors. The only intention was to grant security to dissenting financial creditors who may be cramped down by the secured creditors holding majority votes, overpowering dissenting financial creditors and giving them nothing or next to nothing for their dues.

    Such creditors are only allowed to receive payment to the extent of their entitlement and that would satisfy Section 30(2)(b) of the IBC which mandates that a dissentient secured creditor be provided with a certain minimum amount which shall not be less than the amount paid to such creditors in the event of liquidation.

    As a result, the Court while dismissing the appellant’s claim observed that any dissenting secured creditor like appellant cannot interfere in the CIRP process by urging a higher amount to be paid with reference to the value of their security interest.

    The ruling of the Court, henceforth, leads to two main observations-:

    • Commercial Wisdom of CoC can’t be interfered.

    The commercial wisdom of CoC is amenable to judicial review as long as it goes in consonance with the basic provisions and objectives of the IBC.

    • Equitable Treatment among the creditors is the main objective.

    The Resolution Plan submitted under Section 30 does not advocate equal treatment among all the creditors, rather it obligates a fair and equitable treatment.

    Therefore, the interest of the dissenting secured creditor like appellant can’t be satisfied under the guise of ‘Security Interest’ and the commercial wisdom of CoC prescribing the equitable treatment of creditors shall prevail in such cases.

    Conclusion

    The instant judgment gives an important observation on the issue when the commercial wisdom of the CoC in respect of the distribution of assets is challenged by the secured financial creditor. The Court while answering in favor of the commercial wisdom of CoC noted that a resolution plan under the IBC cannot be challenged by a dissenting financial creditor just on the ground that he is entitled to a higher amount based on the value of security interest. If the reasoning as contended by the appellant were to be accepted, the process will witness more liquidation than resolution with every secured financial creditor choosing to dissent. Therefore, by reiterating the principles of ‘limited judicial review’ and the ‘supremacy of the commercial wisdom of CoC’ after the approval of the resolution plan, the Court has bolstered the objectives of the IBC which is balancing the interest of all the stakeholders by maximizing the value of assets of interested persons.

  • Bar of Limitation on Arbitral Proceedings under the MSMED Act

    Bar of Limitation on Arbitral Proceedings under the MSMED Act

    By sudipta choudhury and arnav singh, fourth-year students at nalsar, hyderabad

    Introduction

    The applicability of the Limitation Act, 1963 (‘Limitation Act’) to certain statutes has been a contentious issue in India. One aspect of this issue was recently settled by the Supreme Court in the case of M/s. Silpi Industries etc v. Kerala State Road Transport Corporation &Anr. (2021) where the Court addressed the applicability of the law of limitation on arbitration proceedings initiated under section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’). In holding that the Limitation Act would be applicable to the said arbitral proceedings, the Court upheld and endorsed the reasoning of the Kerala High Court in this regard, dismissing the appeal against it. This article aims to analyse the judgment and unpack its implications.

    Legal Issue

    The Court in the present case was faced with a two-fold question. Firstly, whether the Indian Limitation Act would be applicable to arbitration proceedings under section 18(3) of the MSMED Act, and secondly, whether it would be possible to maintain a counter-claim in such arbitration proceedings. This article deals with the first issue and attempts to break it down in the context of precedents surrounding it. 

    The Apex Court’s Findings


    On the question of applicability of the law of limitation to arbitration proceedings initiated under the MSMED Act, the Court noted that a perusal of the provisions of the MSMED Act indicates that in the event of a dispute arising out of a sale agreement between parties, the same shall be referred to the MSME Facilitation Council under sections 17 and 18 of the MSMED Act which lay down the ‘recovery mechanism’. Once such reference is made, it was noted that the MSME Facilitation Council is conferred with the power to initiate arbitration or conciliation or refer the matter to any other alternative dispute resolution body or institution, under sections 18(2) and (3) of the MSMED Act. In any case, the Apex Court observed that such an arbitration or conciliation arising out of the MSMED Act shall be governed by the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), as though initiated in accordance with an arbitration agreement between the parties, under section 7(1) of the Arbitration Act, or in case of conciliation, it would be applicable as though initiated under part III of the Arbitration Act.

    In addition to this, in the case of Andhra Pradesh Power Coordination Committee & Ors. v. LancoKondapalli Power Ltd. & Ors. (‘AP Power’).  the Supreme Court held that the arbitration proceedings conducted under the MSMED Act fall within the scope of the Limitation Act. The reasoning of the Court in the aforementioned case is in consonance with a plain reading of section 43 of the Arbitration Act which lays down that the Limitation Act shall apply to arbitrations, in the same manner as it applies to court proceedings. With due regard to this, the Court in the present case opined that section 43 shall survive in its operation and applicability to arbitration proceedings within the MSMED Act and accordingly, the Limitation Act will apply. Thus, the assailed judgment of the Kerala High Court was upheld, insofar as it placed reliance on the Apex Court’s reasoning in AP Power, and interpreted the impugned provisions of the three Acts to hold that the Limitation Act would be applicable to the proceedings initiated under the MSMED Act.

    Analysis

    It is important to note that despite the MSMED Act is silent about the applicability of limitations on disputes referred to MSME Facilitation Councils, the Court’s reasoning is largely hinged upon the arbitration proceedings being governed by the Arbitration Act, and thus, being subject to the operation of the Limitation Act. However, it is also pertinent to not be remiss of the fact that section 2(4) of the Arbitration Act bars the application of the Limitation Act under section 43 to proceedings initiated under an enactment. The MSMED Act, being one such enactment, gives way to a plethora of questions and confusion. The question of applicability of the Limitation Act to the arbitration proceedings under the MSMED Act has thus been mired in ambiguities that have been addressed by the Courts in a catena of decisions.

    A perusal of the initial judgments in the area shows that the Courts were faced with the question of applicability and the prevalent argument was that there were two remedies under the MSMED Act: one, before the MSME Facilitation Council and another, before a civil court. Thus, for the sake of consistency in proceedings, it was argued that if the Limitation Act is applicable in court proceedings, it shall also apply to disputes before the MSME Facilitation Councils.

    This came up before the Bombay High Court squarely in the case of Delton Electricals v. Maharashtra State Electricity Board, along with the question of section 2(4) of the Limitation Act explicitly excluding arbitration proceedings arising out of an Act from its ambit. On the first question, the Court took note of the availability of two separate trajectories under the MSMED Act, and observed that if one resolution mechanism before the civil court is subjected to the Limitation Act, while another resolution mechanism before the MSME Facilitation Council is not, it will lead to an “incongruous situation.” On the question of express exclusion of statutory arbitration, the High Court noted that the provisions of the Arbitration Act are made applicable to arbitral proceedings arising out of the MSMED Act, and no specific exception is made therein for section 43 of the Arbitration Act which lays down that the Limitation Act shall be applicable to arbitrations in the same manner as it applies to court proceedings. Thus, it was held that the provisions of the Limitation Act would be applicable to arbitrations under section 18(3) of the MSMED Act, in the same manner as they would apply to arbitrations arising out of an arbitration agreement between parties under section 7(1) of the Arbitration Act.

    Further, in AP Power, the Apex Court dealt with a dispute arising out of the Electricity Act, 2003, which provides for statutory arbitration before the Electricity Commission. The issue that arose before the Court was whether, in the absence of a limitation provision in the Electricity Act, the same had to be presumed in order to ensure uniformity with arbitral or civil court proceedings. This was so because otherwise the parties concerned stood a chance of getting enriched in a manner, not contemplated in the pursuance of an ordinary suit, due to the operation of the bar of limitation. Further, the Court noted that no right was vested through the Electricity Act that could permit claims otherwise barred by limitation. Therefore, such a claim will not survive because it is not recoverable as an ordinary suit owing to being time-barred. The Court, placing reliance on the object and the intent of the Electricity Act, further observed that “not only because it appears to be more just but also because unlike Labour laws and Industrial Disputes Act, the Electricity Act has no peculiar philosophy or inherent underlying reasons requiring adherence to a contrary view” (para 29)

    Thus, a primary view of the Court’s reasoning points to its inclination to examine the legislative intent behind an Act, in addition to the rights it seeks to confer, and the “philosophy” it follows, indicating a purposive and well-rounded interpretation of the enactment.

    In consonance with the Court’s rationale in AP Power, it is submitted that the legislative intent and the philosophy of the MSMED Act should also be taken into account while considering whether it should be subjected to the Limitation Act. A perusal of the MSMED Act’s Statement and Objects reveals that it is aimed at the expeditious resolution of disputes and legislative intervention is intended to secure an efficacious remedy for timely payment. Thus, the MSMED Act should be interpreted in a manner which allows it to facilitate timely payment to suppliers. The author submits that instead of recognising new rights which are not expressly conferred by the statute, the MSMED Act should be interpreted in a manner which allows the facilitation of timely payment to suppliers. This is in consonance with the principle that disallows claims from ordinary suits on account of being time barred, unless it is explicitly allowed in the statute. 

    Thus, it is submitted that the present case, in so far as it addresses the first issue, correctly applies the rationale laid down in the AP Power, and places due reliance on the legislative intent behind the MSMED Act, effectively bringing its objects to full fruition by ensuring that there is uniformity in the adjudication proceedings across civil courts and arbitration tribunals. It has done so by engaging in a purposive reading of the statute that allows the applicability of the Limitation Act to arbitration proceedings arising out of the MSMED Act.

    Conclusion

    The Supreme Court has laid the matter to rest by discerning the scope of the Limitation Act vis-à-vis arbitration proceedings under the MSMED Act. It has ensured that claims under MSMED Act would be subject to limitation, like any other commercial claim, while also effectuating the legislative intent of the MSMED Act, which is aimed at providing a speedy redressal of disputes. Although a welcome development, the matter remains to be a subject for debate as the question of the extent of applicability of the Arbitration Act, especially in the event of clashes with the MSMED Act, remains ambiguous. For instance, section 18(5) of the MSMED Act lays down that every reference shall be decided within 90 days, in contrast with the Arbitration Act, which stipulates the time period for passing an award as twelve months from the date of completion of pleadings under section 23(4).

    However, the Court’s reasoning in subjecting the proceedings to the bar of limitation is in consonance with the larger intent of the MSMED Act, and fits with the scheme of other civil and arbitral proceedings. Thus, it largely remains successful in settling the dispute and interpreting the provisions involved.

  • Analysis of NN Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. vis-à-vis Doctrine of Separability

    Analysis of NN Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. vis-à-vis Doctrine of Separability

    By Anurag Mohan Bhatnagar and Amiya Krishna Upadhyay, third-year students at NLUO, Orissa.

    Introduction

    In the case of NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (‘NN Global’), a division bench of the Apex Court recently pronounced that an arbitration agreement would not be deemed ineffective just because stamp duty on a commercial transaction was not paid. It would be safe to see the pronouncement as a source of impetus towards creating an impartial process of arbitration in India. It pronounced that the view has become obsolete, and has to be done away with. With the onset of the particular judgment, Indian legislation has now come in similar lines with a lot of jurisdictions in the world of arbitration.

    To comprehend the legal issue at hand, the article intends to evaluate (a) the coherence of the Stamp Act 1899 (‘the Act’) vis-à-vis the doctrine of separability; (b) application of the doctrine of separability; (c) cross-jurisdictional analysis with the legislations of the USA, the UK and Singapore; and lastly, (d) conclude with suggestions on the basis of the discussion on the aforementioned elements.

    Factual Matrix of the Case

    The case raises pertinent issues with regards to the future of arbitration proceedings in India, and the importance of getting the arbitration agreement stamped as per the relevant Act. Indo Unique was a company put in for a grant for work of washing of coal to the Karnataka Power Corporation Ltd. (‘KPCL’) in an open tender, which, later awarded the Work Order to Indo Unique. Later, Indo Unique furnished Bank Guarantees in favor of KPCL. Subsequently, Indo Unique entered into a sub-contract with Global Mercantile for the process of transportation. As per the contract, Global Mercantile also furnished a bank guarantee in favor of Indo Unique to secure the stocks. Later, KPCL invoked the bank guarantee furnished by Indo Unique owing to certain disputes between the two, due to which, Indo Unique also invoked the bank guarantee furnished by Global Mercantile under the sub-contract.  

    Stamp Act- Coherent with Doctrine of Separability?

    Anyone with legal authority is required by Section 33 of the Act, “to scrutinize the instrument in front of them and determine whether it is properly stamped; if it is not, the relevant authority may appropriate the instrument and command the parties to bill the adequate stamp duty with the added penalty of five or ten times the amount of the inadequate portion”. Under Section 35 of the Act, “an unstamped instrument cannot be used as evidence or acted upon”. Section 40 of the Act entails the procedure for instruments which have been impounded. It is necessary for the instrument to be endorsed within one month of the date of impounding as per Section 42(1) of the Act. Section 42(2) states that a document that has been lawfully stamped is admissible as evidence and can be acted upon. However, the Apex Court, in SMS Tea Estates Pvt. Ltd. v M/s Chandmari Tea Co. Pvt. Ltd. (‘SMS Tea’) failed to consider Section 3 read with Schedule I of the Act which states that only an arbitration award needs to be stamped and not an arbitration agreement. The court misinterpreted the basis behind the fiction of separability and erroneously linked the arbitration agreement to that of the fundamental substantive contract.

    Finally, the court took a shift in its approach in N.N Global. The Apex Court concluded that there should be no legal hinderance in the enforcement of an arbitration agreement. This hinderance can be considered as the “outstanding payment of stamp duty” on the substantial contract. This is the reason for which the Court held that the arbitration agreement is not included as a stamp duty-chargeable instrument under the Maharashtra Stamp Act 1958.

    Inconsistent and Indeterminate Approach Finally Settled?

    The doctrine of separability was pronounced in the case of Heyman v Darwins Ltd. by the House of Lords. It held that, “an arbitration agreement is collateral to the substantial stipulations to the contract”. The application of the theory of separability of an arbitration agreement from the fundamental substantive contract into which it is incorporated presents severe issues. The Apex Court examined the rationale on an agreement of arbitration in an unstamped contract in SMS Tea.  Due to the lack of stamp duty payment, the arbitration agreement would remain void until the contract was seized and the tax and penalty were paid.

    Following the 2015 Amendment, the Apex Court revisited the issue of stamp duty and arbitration agreements under Section 11 of the Arbitration and Conciliation Act (‘Arb. Act’) in Garware Wall Ropers Ltd v Coastal Marine Constructions (‘Garware Ropers’).  When a court determines that a contract is unstamped as a result of an application under Section 11 of the Arb. Act, the Stamp Act requires the court to impound the contract and ensure that stamp duty and penalty are paid until the agreement as a whole, can be acted on. The phrase “in a contract” of Section 7(2) of the Arb. Act was provided due weightage while analysing the fundamental meaning of an arbitration agreement in the Garware Ropers case. As a result, the arbitration clause in such a contract is incompatible with separation. This particular stand was upheld in Dharmaratnakara Rai v M/s Bhaskar Raju and was also affirmed in Vidya Drolia v Durga Trading Corporation, by a division bench.

    However, the Apex Court in NN Global reverted from their previous stand and overruled the judgment in the previous cases. On the aspect of separability, it held that “an arbitration agreement is separate and different from the underlying commercial contract”. It is a contract that specifies the method for resolving disputes and can stand alone from the substantive contract. The Court further observed that non-payment under the Act was a corrigible fault; therefore, arbitration could not be postponed until stamp duty was paid. Thus, the court adopted a harmonious construction between the provisions of the Act and the enforcement of arbitration agreements. Hence, it held that, failure to pay a stamp duty on the commercial substantive contract would not make the arbitration agreement included therein null or unenforceable.

    Cross-Jurisdictional Analysis

    One of the abstract and practical cornerstones of domestic and international arbitration is the doctrine of separability. Article 16(1) of the United Nations Commission on International Trade Law (‘UNCITRAL Model Law’) recognizes the doctrine of separability and provides that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”. Despite its limited scope, this regulation is followed by several jurisdictions. Most of the countries which have ratified the New York Convention, have accepted the idea of separability.

    In English law, Section 7 of the Arbitration Act 1996 (‘AA 1996’) enshrines the idea of separability. The theory of separability, according to English courts, “is solely intended to give legal force to the parties’ choice to settle disputes through arbitration rather than to separate the arbitration agreement from the underlying contract for all purposes”. This approach by the courts could be called partial separability in layman terms. The Supreme Court of USA recognized the concept of separability in the case of Prima Paint Corp v Flood & Conklin Mfg. Co.case.

    In the context of Singaporean arbitration, the Singapore High Court, in the case of BNA v BNB held that doctrine of separability is a “tool of arbitration law that treats an arbitration agreement as distinct from the substantive contract containing it”. In the case at hand, the High Court held that “the doctrine of separability could be used to save an arbitration agreement even where the purported defect was inherent to the arbitration agreement itself”. All in all, the judgment propounded in the NN Global case has now made the Indian arbitration regime consistent with UNCITRAL Model Law, New York Convention, and both the English as well as Singaporean jurisdictions, as far as the doctrine of separability is concerned.

    Conclusion

    The stand of various High Courts has been varied as far as the doctrine of separability is concerned. Needless to say, the Apex Court’s decision in NN Global will be welcomed by arbitration practitioners in India. As far as the foreign jurisdictions are concerned, the ruling will now be consistent with the New York Convention countries and the legislation in Singapore. The judgment in the case of NN Global has to be applied widely and practically. With the help of this ruling, the judiciary has resolved the dilemma that had been lingering owing to prior instances, and the court’s decision may be safely regarded as a stand that will benefit arbitration procedures in India.

  • The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

    The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

    By abhigyan tripathi and anmol mahajan, fourth-year students at rgnul, patiala

    Introduction

    One of the primary objectives of the Insolvency and Bankruptcy Code,  2016 (“IBC”) is to facilitate the rescue of the Corporate Debtor (“CD”) as a going concern. In furtherance of fulfilling the IBC’s legislative intent, MS Sahoo was appointed to chair a sub-committee and recommend a regulatory framework for Pre-packaged Insolvency Resolution Process (“PPIRP”). The President, on the basis of the sub-committee’s suggestions, promulgated the IBC (Amendment) Ordinance, 2021 which allows MSMEs to go for PPIRP.

    One of the ways of rescuing a corporate entity is through the PPIRP wherein the objective is to establish a balance between the creditors’ interests and the business and assets of the Corporate Debtor (“CD”). PPIRP is an insolvency procedure involving a smooth transition of its assets by the CD to the prospective buyer prior to the appointment of a Resolution Professional who facilitates the corporate restructuring. The aim of this piece is to engage in a cross-jurisdictional analysis of the aforementioned Ordinance and test its efficacy in the Indian market scenario on the basis of three parameters, i.e., transparency, debtor-in-possession methodology, and the role of the adjudicating authority.

    I. Analysing the Pre-packaged Insolvency Framework in the United Kingdom

    Following the suggestions put forth by the Cork Report, the United Kingdom (“UK”) introduced its first wave of insolvency reforms in 1986 which envisaged the concept of ‘Corporate Rescue’.[i] The second wave of these reforms was introduced when Part 10 of the Enterprise Act, 2002 revised and improved the Insolvency Act of 1986. Even though the bare texts of both aforementioned statutes do not make a mention of “pre-packaged insolvency”, the UK always has had a Debtor-in-Possession based insolvency procedure, namely the Company Voluntary Arrangement (“CVA”). The CVA is analogous to PPIRP in the sense of the same being an informal and voluntary method of going through the insolvency process. Keeping in mind the pandemic situation, the UK has made even further attempts to make the insolvency framework more “debtor-friendly” by introducing the Corporate Insolvency and Governance Act, 2020. Since a company availing the CVA is required to couple it with the formal Administration procedure for a court-ordered moratorium, it cannot be used as a tool of financial restructuring. Therefore, this Act aims at providing financially riddled enterprises a chance at informal restructuring through a standalone moratorium on adverse creditor action.

    1.1 Transparency

    Ms. Teresa Graham, CBE, an Advisor to the UK Government and a renowned accountant, was given the responsibility to carry out a review of the PPIRP practice in the UK in 2013. As a result of the same, ‘The Graham Review of 2014’ was released. As was anticipated, the review was in favour of PPIRP practice in the UK but highlighted the lack of transparency as a major concern specially for unsecured creditors. A set of voluntary measures were suggested by the review to counter the transparency issue.

    One such solution proposed was setting up a group of experienced business people called ‘pre-pack pool’. This group shall be responsible to carry out an independent scrutiny of the pre-pack sale and suggest improvements to the same. Another solution to tackle the issue of transparency, as suggested by the Review, was the Statement of Insolvency Practice (SIP) 16 that may be understood as guidance for Insolvency Practitioners to conduct Insolvency Administrations. SIP16 provides for disclosure to be made by the Insolvency Practitioners to the creditors explaining and justifying the reasons for which a pre-packaged sale was undertaken.  

    An enterprise can still go through with a pre-pack deal even if a pre-pack pool member issues a negative statement, though the same has to be reflected as per the SIP16 requirements. In case the pre-pack member issues a positive statement, it would also be referred to in the SIP16 statement. The Insolvency Practitioners’ Association adopted these voluntary measures in November, 2015.

    1.2 Administration of the CD

    In the UK, the management of the debtor company rests with an administrator who is appointed for this purpose. Such an appointment can be made (a) by the Court, (b) by the holder of the floating charge, or (c) by the company or its directors. The administrator has the primary objective to rescue the debtor company as a going concern.

    1.3 Role of the Courts/Tribunals

    The role of courts can be looked at from both a positive and negative prism. The positive aspect of court involvement will not only protect the interests of the unsecured creditors but also will act as a grievance redressal mechanism. The final stamp of the court will also provide a credible authority to the procedure. However, the negative aspect is that such an intervention of the courts is discretionary and time taking which defeats the basic purpose of a pre-packaged insolvency.

    The UK has a mixed solution to this, on one hand where the insolvency practitioner is entrusted with finalizing the pre-pack transaction, on the other hand the creditors can approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway.

    II. Analysing the Pre-packaged Bankruptcy Regime in the United States

    The United States insolvency regime provides for three kinds of proceedings: pre-packaged bankruptcy proceedings, pre-arranged bankruptcy proceedings, and pre-plan sales. These procedures are an amalgamation of both out-of-court and formal mechanisms. It is therefore necessary to gauge the three procedures on the basis of the following criterion:

    2.1 Transparency

    The provisions of the US Bankruptcy Code, 1978, have been able to ensure a substantial amount of transparency through its provisions since they require approval of any resolution/reorganization plan within Chapter 11 by all the classes of creditors for bankruptcy proceedings to move forward. As per section 1123(a)(4) of the Code, every interested party in a class of creditors is required to be treated equally through the reorganization plan envisaged by the CD. To avail the benefits of flexibility within the ambit of Chapter 11, a CD has to ensure that the interested stakeholders are on board at every step and therefore cannot ignore the rights of even unsecured creditors as per section 1129(a).

    Even pre-plan sales under section 363 of the US Bankruptcy Code, though not requiring approval from all the interested stakeholders, need to be approved by the requisite Bankruptcy Court.[ii][1] In the context of section 363 sales, a bidder used to set the purchase price floor for other prospective buyers to know the minimum bidding amount is termed as the ‘stalking-horse’. The stalking-horse bidding, which is often engaged in by the debtors, helps in ensuring a proper due-diligence by the interested buyers. This has resulted in highly successful restructurings since the creditors are able to reap the benefits of high-value sale of the CD’s assets.[iii]

    2.2 Administration of the CD

    The pre-packaged/pre-arranged bankruptcy regime in the United States does not involve an automatic appointment of a Trustee (analogous to RP or Administrator in the UK) since the CD assumes the role of a debtor-in-possession and performs restructuring responsibilities while being in control of its assets under Chapter 11. A debtor remains in possession till the approval of the reorganization, dismissal of the same and subsequent liquidation proceedings (under Chapter 7) or the appointment of a court appointed trustee.

    2.3 Role of the Courts/Tribunals

    In both the pre-packaged and pre-arranged bankruptcy proceedings, the CD is required to file a Chapter 11 petition with the concerned bankruptcy court after having completed the procedure associated with voting and negotiation upon the reorganization plans. Even the section 363 pre-plan sales require the court’s stamp over the validity of asset sale. 

    There are various bankruptcy-specific courts in the United States which analyze the reorganization plans in an expedited manner. They ensure that there is no gross discrimination against any impaired class of creditors while clamping-down upon the minority dissenting creditors if the reorganization plan is fair and equitable as per the requirements of the Bankruptcy Code under section1129(b).

    Such flexible structures and procedural guidelines ensure that restructurings are successfully wrapped within two and four months for pre-packaged and pre-arranged bankruptcy proceedings as compared to 11 months for traditional Chapter 11 proceedings. Pre-plan sales under section 363 take only as much time as the auction process and the courts only require the CD to have successfully served the notice of asset sale to all stakeholders.[iv]

    Conclusion and Analysis

    Insolvency in India and the rules governing it are still at a nascent stage of development. The COVID-19 pandemic led to a complete standstill of the framework since the Central Government paused all fresh filings of insolvency proceedings. Hence, the introduction of pre-pack insolvency comes as a breath of fresh air.

    Firstly, with respect to transparency, concerns surrounding transparency in the process have not yet been addressed but the analysis of the UK and US models of pre-pack above gives valuable input. The introduction of a pre-pack pool as seen in the UK regime can be a game changer in this regard. Not only will this make the process more transparent but will also help in the corporate rescue of the debtor. Additionally, the pre-pack pool might have been even more effective in the UK, if referral to the same was mandatory. The authors believe that mandatory referral to a similar body may have been conducive for medium and large enterprises in India.

    Secondly, with respect to the administration of the CD, the recent ordinance provided for the debtor-in-possession regime, wherein unlike the CIRP, the CD is responsible for protection of its assets so that the position of the creditor is not jeopardized. One important advantage of this regime is that it will minimise the obstacles to business during PPIRP since the CD is empowered to continue running its business operations, with the express objective of working in the best interests of the creditors. It is essential to derive insight from the UK framework and mould the Indian model in a manner which lets the Insolvency Resolution Professional proceed with the implementation of the plan while giving the creditors a right to approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway as is done by the UK.   

    Thirdly, as far as the role of NCLT is concerned, the procedure requires an initial application for moving forward with PPIRP before the NCLT under section 54A(1) by a CD which falls under the category of MSME. Thereafter, the NCLT has 14 days to either reject or accept the same. Furthermore, the approval of a resolution plan requires a 66% vote by value in its favour by the creditors, post which it is submitted to the NCLT for consideration. Therefore, the highly overbearing role of NCLT as per the procedure defined by this ordinance might possibly help in reducing the problem of delays and discretion which already plagues CIRP.  Therefore, the NCLT needs to adopt a fast-track approach which is similar to the one adopted by Courts in the US. Sub-tribunals specialized in dealing with insolvency matters in a more efficient fashion (as compared to the current regime) may be instituted which can make sure that restructuring plans, if in accordance with equity and fairness envisioned by the IBC, are approved and applied to successfully rescue the CD.

    Despite the Ordinance having been passed to counter the adverse effects of COVID-19 on insolvency, the expedite nature of PPIRP can potentially benefit the Indian insolvency regime as a whole. It should also be kept in mind that maximising returns from this PPIRP framework requires a great amount of transparency during the entire process to ensure that certain categories of creditors do not partake in backdoor negotiations, which might result in a win-lose position between the concerned stakeholders. The authors are of the opinion that PPIRP framework for MSMEs is a first step in a series of reforms and if implemented properly, goes a long way towards ease of doing business in India as a whole.

     

    [i] Cork Report of the Review Committee, Insolvency Law and Practice, (Cmnd 8558, 1982), para 198.

    [ii] Bo Xie, Pre-pack Approach in Corporate Rescue (Edward Elgar Publishing, 2016), 205-206.

    [iii] Ben Larkin et al, Restructuring Through US Chapter 11 and UK Prepack Administration, para 8.51.

    [iv] Ibid.

  • The Mitsui & Co. Challenge: Time to Rethink the Retrospective Tax Amendment?

    The Mitsui & Co. Challenge: Time to Rethink the Retrospective Tax Amendment?

    By Aarushi Srivastava and Ridhi Gupta, second-year students at RGNUL, Patiala

    INTRODUCTION

    After Cairn and Vodafone, the latest instance of a company initiating investment arbitration proceedings against a hefty amount demanded under India’s infamous retrospective taxation regime, is Earlyguard Ltd., a British subsidiary of the Japanese behemoth, Mitsui & Co. The 2,400-Crore tax is being charged over a transaction that took place in 2007, consisting of the sale of Earlyguard’s shares of Finsider International Co., a UK domiciled company which had a 51% stake in Sesa Goa. Earlyguard treated the capital gain properly and in accordance with taxation rules prevalent then, but despite that, the company was served with a tax notice. Thereafter, it initiated arbitration proceedings, before the Permanent Court of Arbitration, under the India-UK Bilateral Investment Treaty.

    Previously, Vodafone, as well as Cairn, have won arbitration cases against retrospective taxation by India and its violation of bilateral investment treaties in international tribunals. However, instead of honouring the arbitration awards of INR 75 Crore and INR 8842 crore respectively, the Indian Government(hereafter Government) has challenged both these awards. In the case of Cairn, the Government stated that it never agreed to arbitrate the dispute, despite it sending a judge to the tribunal. While in Vodafone’s case, the Government has filed an appeal before the Singapore appeals court, stating that it has the sovereign right to taxation and no private individual can decide on it.

    RETROSPECTIVE TAX AMENDMENT

    The origin of the retrospective tax can be traced back to 2007, when Vodafone was taxed by Indian tax authorities. In the case of Vodafone International Holdings B.V. v. Union of India & Anr., the Supreme Court ruled in favour of the telecom company by stating that, “tax laws must be strictly construed and the provision of income tax must not be expanded to impose tax on any exchange that was otherwise untaxable.” It was to override this judgement that the then Government introduced the Finance Bill, 2012 to amend the Income Tax Act, 1961 with retrospective effect, returning the onus of payment to Vodafone.

    1. Fair and Equitable Treatment in Investment Treaties

    Article 1(a) of the Draft Convention on Protection of Foreign Property has influenced various countries to incorporate the principles of fairness in international dealings. The meaning and substance of fair and equitable treatment (“FET”) has been laid down in various arbitral awards such as Biwater Gauff Ltd. v. United Republic of Tanzania and Rumeli Telekom AS v. Republic of Kazakhstan. The following concepts have emerged under the scope of FET :

    • Prohibition of manifest arbitrariness in decision making, that is measures taken purely on the basis of prejudice or bias without a legitimate purpose or rational explanation;
    • Prohibition of denial of justice and disregard to the fundamental principles of due process;
    • Prohibition of targeted discrimination on manifestly wrongful grounds of gender, religion, race or religious belief.;
    • Prohibition of abusive treatment of investors, including coercion, duress and harassment; and
    • Protection of investors’ legitimate expectations arising from a government’s representation and balancing the same with host State’s right to regulate in public interest.

    The introduction of the retrospective tax amendment was a direct violation of the FET under international law. Firstly, the Government had no rational reason to introduce the amendment, other than the motive to reverse the Supreme Court judgment. Secondly, the due process of law was disregarded as all the dealings were based on the India-UK Bilateral Treaty, which is silent on taxation, except in cases where already an international or domestic legislation provides for the tax. Thirdly, the investors, at the time of making the dealings with India in all the cases, Vodafone (2007), Cairn (2006-07) and Mitsui (2007) could not legitimately expect the Government to enforce a tax on these dealings after a period of 5-6 years, as there was no such representation or intention shown by the Government.

    Expropriation means the act of nationalising or taking away money or property, especially for public use without payment to the owner, or through illegal measures. Expropriation could be direct, where an investment is nationalised or directly expropriated, or indirect, through state interference without effect on legal title. Under International law the property or assets of an ‘alien’, i.e., a person from another state must not be expropriated, without adequate compensation. The India- UK Bilateral Treaty states under Article 5(1) that the investments of an investor shall not be expropriated except for a public purpose regulating economic activity on a non-discriminatory basis and equitable compensation. However, in all the aforementioned dealings, the Government enforced the tax regime neither for a public purpose to regulate economic activities nor for the purpose of equitable compensation, and thus, the retrospective tax is a direct violation of the ‘very law’ i.e. the treaty governing all these dealings.

    There have been cases where Tribunals have considered tax measures as indirect expropriation. In the EnCana v. Ecuador, the Tribunal held that, from the perspective of expropriation taxation is in a special category, only if a tax law is punitive, extraordinary or arbitrary, issues of indirect expropriation would be raised. It was held that, in the absence of a specific commitment from the host state, the foreign investor has neither right nor any legitimate expectation that the tax will not change perhaps to its disadvantage, during the period of investment. Further, the Tribunal in Feldman v. Mexico held that a tax measure may amount to expropriation, where the investor had an acquired right with regard to which the tax authorities behaved arbitrarily through a sufficiently restrictive nature.

    The act of the Government of enforcing retrospective taxes on its investors was, thus, not only against the FET but also an act of expropriation. To begin, the amendment was introduced arbitrarily without any consultation with the investors or regard to the India-UK Treaty. Further, the investors had no legitimate expectation that the tax regime would change to their disadvantage and that the tax authorities would function in such a restrictive nature.

    POSSIBLE NEGATIVE OUTCOMES

    When the amendment was introduced in 2012, the then-opposition party, BJP, raised its voice against it and criticized the government. However, years after coming into power, there have  been no attempts from its side to remove the amendment. Instead, tax notices have been sent to companies, their assets have been seized, and the taxation regime has been defended in the arbitration proceedings. This shows the unwillingness of the present Government to discontinue with the tax amendment of 2012.

    However, the Government’s disregard to the arbitral awards will not prevent investors to fight tooth and nail to enforce these awards. Cairn Energy, for instance, is leaving no stone unturned to monetize the award. The company has successfully got the award registered in countries like the US, the UK, France, the Netherlands and Singapore, in order to further the process of enforcing the award against overseas Indian assets. This would mean that Cairn can seize Indian assets in these countries, if India fails to pay the amount. The company can enforce the award in over 160 countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Cairn has also filed a lawsuit in New York to declare Air India, the national carrier, as an alter ego of the Indian Government. If Cairn does get successful in enforcing the award, this will set precedent for other companies facing the same issue of retrospective taxation. This might lead the country having to lose a significant number of its overseas assets in the future. As a result of which, India’s investment environment can be perceived in a negative light, having a toll over its future investment dealings.

    Since the amendment was introduced, there has been zero revenue collection under it, rather it has resulted in substantial amount of losses in foreign direct investment (FDI) and foreign institutional investors (FII). The FII’s invest huge amounts of money in India that provides a great boost to the economy.  The investors, while investing in a country take close notice of the existing legal framework and then decide on investment. A consistent legal environment is not ‘much’ that the investors expect a country to give, as it is a part of minimum standard of protection of foreign investments under customary international law. However, with all these initiations against India’s retrospective tax regime and yet no reconsideration by the Government, the investors would not legitimately expect a consistent scenario of taxes in India, and they may fear any future amendments that could again impair their rights.

    CONCLUSION

    India was ranked 63rd in the Ease of Doing Business Rankings, 2020 which is indeed a development for India, however, due to the hasty 2012 amendment, the country has been attracting negative attention lately. Not only is the retrospective law against the FET and way of expropriation but also, it can act as a major discouragement for investors globally, who would have otherwise been interested in making investments in India. With two major judgements against the Government, its high time for the Government to look back and revise its arbitrary amendment. It is ironical, that though the present Government has always promoted international trade and business, it has failed to address this major hindrance to international dealings. The retrospective tax amendment should be done away with, in order to regain the trust of the investors and ensure a secure environment for investments in India.

  • ESL v. UEFA: Federation(s) Actions Transgress Principles of Competition?

    ESL v. UEFA: Federation(s) Actions Transgress Principles of Competition?

    By Shubham Gandhi, third-year student and Tanish Gupta, second-year student at Dharmashastra National Law University, Jabalpur

    Introduction

    The furore surrounding the proposed breakaway European Super League (“ESL“) has yet again spurred with the issuing of joint statement canned by the three so-called European giants i.e. Barcelona, Real Madrid, and Juventus bolstered up the ESL keeping the faith of the league alive. This came in the aftermath of a preliminary ruling dictated by the Madrid Commercial Court on 20 April 2021 holding the league to be in violation of EU competition law.

    The idea of Super league, much of its disgrace, has posed a serious question to the world of sport. The author(s) in this manuscript will give readers the premise of the formulation of ESL, how the league is in contempt of the EU Competition law, and also distil the legality of the statement made by the Union of European Football Association President (premier governing body for football in Europe) barring the players’ from participating in the domestic league and world cup. 

    Instaurating European Super League

    The European Super League has been in talks for over the years. As early as 1988, a similar move, a two billion deal was signed to establish a new league of elite, surfaced in the world of football, famously known as  Project Gandalf . The ESL President Mr. Florentina Perez who is also chairman of Real Madrid C.F on Sunday, 18 April 2021 trumpeted to the world the newly formed Super league consisting of 20 teams with a total of 15 clubs as founding members and with 5 spots left for other clubs to earn through promotion. For Mr. Perez the league formation was quintessential in order to revivify the TV rights by recuperating the losing interest of fans towards  football and also to provide indispensable financial assistance to the clubs.

    The founding members (European giants) approached by the ESL, will bring exuberance of watching big star studded matches on every midweek, resurrecting the interest of football fans, making the league popularized. The ESL will also provide the clubs necessitated financial stability, by sanctioning 200 million euros every year.

    UEFA right to forswear

    The presence of Article 49 (3) of UEFA statutes grants the federation to intrude in the formation of the ESL. The statues read as: –

    “International matches, competitions or tournaments which are not organised by UEFA but are played on UEFA’s territory shall require the prior approval of FIFA and/or UEFA and/or the relevant Member Associations in accordance with the FIFA Regulations Governing International Matches and any additional implementing rules adopted by the UEFA Executive Committee.”

    The Article accords UEFA and FIFA as the premier body to grant ratification to any new league, planning to engage in football across Europe. Connoting that the ESL were to take prior permission from UEFA for its formulation, perverse to that, the ESL was devised in silence and publicized, as surprise, not to the world but to the players and manager of the clubs as well.

    The riveting point is that many members were part of both the federation this includes Mr. Andrea Agnelli, chairman of Juventus F.C and chairman of European Club Association (“ECA“) who later resigned on the very day when the proposed ESL came into reality. His participation in two opposing federations casted doubt of potential sharing of confidential information for advantage of ESL formation, giving UEFA right of action, based on breach of confidentiality.

    Delving into Competition law

    The European courts have time and again precedented that sports and activities are dictated by competition law. The ECJ in Klaus Hofner and Fritz Elser v. Macrotron GmbH held that the football clubs are termed as “Undertaking” which are capable of affecting competition within Article 101 (1) of Treaty on the Functioning of the European Union (“TFEU”). Also, the ECJ in Meca Medina v. Majcen decreed that competition law does apply to sporting events in relation to economic activities. 

    It renders every restrictive (cartel) agreement as a violation of competition law, but subject to exceptions i.e. if the federation pursues a legitimate objective, are inherent to these objectives, necessary and proportionate.

    The ESL principally infract the principle of equality between the clubs which was endorsed by the courts around Europe. In the Bosman decision of 1995, the court in para 106, summarised the test as “the aims of maintaining a balance between clubs by preserving a certain degree of equality and uncertainty as to results and of encouraging the recruitment and training of young players must be accepted as legitimate”, similar ruling was dictated in the UEFA Champions League decision of 2003. It is safe to say that the ESL being a close league, with 15 members guaranteed spots regardless of their performance, will fail to stand the test of legitimate objective.

    It is to be borne in mind that ESL being a new competition, will gamble upon the existing system and will diminish the financial interest of UEFA, as they are the only federation regulating football in Europe, holding a dominant position.

    The UEFA could be prohibited by virtue of Article 102 i.e. Abuse of Dominant position, from exercising its dominant position by prohibiting other leagues and favouring their  league which is Champions and Europa league. The same be held in Motoe case adjudged by ECJ.

    UEFA’s incongruous statement banning players

    The other wrangle in the brawl between ESL and UEFA is the statement made by UEFA President suspending the players from domestic teams and national teams. The legality of this statement can be posited by Article 102 of TFEU, which declares action taken while holding dominant position as void. The Munich court criticized Fédération Internationale de Basketball (“FIBA“) rule of banning athletes from club and nationals teams, taking part in competition other than the one staged by FIBA. The court while demeaning this rule of FIBA, held them accountable for abusing the dominant position.

    In a much recent case, the EU court in International Skating Union Case 2020 held that International Skating Union (national governing body for the sport of figure skating in the United States)rules regarding blanket ban on players from national teams who are participating in tournaments not accredited by ISU are not proportionate to the legitimate objective as per Article 101(1).

    Moreover, a decision rendered by the regional court of Frankfurt held that, if the federation announces the selection of players for the national team not on the basis of sporting merit, then it will be deemed to be a decision based on abuse of dominant market position.

    Likewise in the German Wrestling League case, the Nuremberg court of appeal while citing the ISU case held though federation are allowed to take measures in order to protect their own economic interest against the competitive organisation but banning players is against the principle of EU and German competition law.

    This in clear terms implies that the announcement threatening to ban all the 12 clubs and players from participating, will not hold a grasp on the courts. The vogue of courts upholding players autonomy is a strong inference that if ESL ever to approach the court, the ruling can be in their favour, same be affirmed by ESL Chairman.

    The banning of players will also stand in violation of the principle of ‘restraint of trade’ as players are free to move, as enshrined in the common law system. The creation of ESL has resulted into a much serious breach of duty on part of the club as the planned league carried out without letting the players know, which is in violation of rules of domestic leagues i.e. to abide by the rules of UEFA and FIFA. This in turn will give the right to players to repudiate the contract on grounds of breach of duty and contractual obligation.

    In the present case all the disputes arising out of ESL, the ban on teams from domestic leagues and the ban of players from playing in the world cup is likely to have breached any law or regulation for the time being in force, will likely be referred to CAS.

    Conclusion

    It will be interesting to watch out how this tale of world football develops in the coming months. The EU courts, while deciding the legality of ESL, also have to set out measures hinting whether TFEU licenses a competitive league ever to be formed finer than ESL or UEFA will continue to hold the dominant positions, concerning all small footballing activities played out in Europe.

    It is safe to say that the decision banning players from all the competition will not hold strong in court and the actions of UEFA will, in turn, violate Antitrust law as insinuated by the court through various precedents.

  • Are Ed-tech Companies Amenable to the Consumer Protection (E-Commerce) Rules, 2020?

    Are Ed-tech Companies Amenable to the Consumer Protection (E-Commerce) Rules, 2020?

    By Aniket A. Panchal and Gauransh Gaur, second-year students at GNLU, Gandhinagar

    Introduction

    Ever since the introduction of the Consumer Protection (E-Commerce) Rules,2020 (hereinafter referred to as ‘Rules‘), the vexing question is whether Ed-tech companies would be subjected to these rules and if they are subjected, whether they would come under the inventory-based e-commerce or marketplace e-commerce model. The applicability of the Rules will differ according to the category to which an Ed-Tech entity belongs. Moreover, if the definition provided under the Consumer Protection Act, 2019 (hereinafter referred to as ‘Act‘) and the Rules is dissected, it can be concluded that the all-embracing definition of ‘e-commerce entities’ could, in fact, capture entities that create and disseminate products or services over digital or online media. However, it is not unequivocally answered in the Rules if they apply to Ed-Tech companies which primarily impart their services through online websites, mobile applications, and similar digital platforms. This article seeks to analyse the newly introduced Rules and their applicability to Ed-tech platforms after a thorough perusal of the diverse judicial opinions regarding the categorization of ‘education’ as a service under the Act. In doing so, the article will also outline how different models of Ed-tech companies are subject to different regulations in light of these Rules.

    Analysis of the Consumer Protection (E-Commerce) Rules, 2020

    As per the Rules, the definition of an e-commerce entity encompasses any Ed-tech platform which provides or facilitates the provision of educational services (online courses, examination preparation, online tutoring, etc.) in return for a fee. There are two models of an e-commerce entity as per the rules, namely: inventory e-commerce entity and marketplace e-commerce entity.

    To contextualise the same, an inventory e-commerce entity would include an “e-commerce entity which owns the inventory of goods or services and sells such good or services directly to the consumers”. This model is used by many Ed-tech platforms wherein they curate their own educational services and provide them to the consumers directly through this platform.

    The other e-commerce model referred to under the rules is the marketplace e-commerce entity. According to the Rules, this e-commerce entity provides “an information technology platform on a digital or electronic network to facilitate transactions between buyers and sellers”. It covers Ed-tech platforms which connect the students to teachers and allow the students to purchase courses offered by various teachers and educational institutions. These platforms could be said to have “facilitated the transactions” between the course offerors and the students.

    Therefore, the determination of compliance requirements by an Ed-tech company regarding inventory-based e-commerce entity or marketplace e-commerce entity would be on a case-to-case basis depending upon their operating procedures among other features.

    Education as a Service? Unravelling The Conundrum

    The question whether education would be considered as a service is a murky one under consumer protection law. Different opinions have emerged on this subject through a myriad of judgements by the Supreme Court, the National Consumer Disputes Redressal Commission (hereinafter referred as ‘National Commission‘) and the State Consumer Disputes Redressal Commission. This part of the article analyses this tumultuous area of consumer protection law, and highlights its implications on the central question- whether Ed-tech companies are covered under the new E-Commerce Rules.

    This question was considered by the Apex court in Bihar School Examination Board v. Suresh Prasad Sinha(hereinafter referred as ‘Bihar School Case‘) Here, the issue for adjudication was whether there was any deficiency in services provided by the Bihar School Examination Board (hereinafter referred as ‘Board‘) when they failed to issue correct roll numbers to the candidates, and subsequently failed to declare the result of one of the candidates. The court held that the Board, in discharging its statutory functions, could not be subject to the consumer protection law. Further, the fees paid by the candidates to the Board to conduct the exams and other related activities could not be equated with ‘consideration’, and hence, the students could not be brought under the definition of ‘consumers’.

    A different stance was taken in Oza Nirav Kanubhai v. Centre Head Apple Industries Ltd,[i] where a student was alleged to have been treated prejudicially by a private college. When the faculty member learned that the student had brought his misbehaviour to the attention of the institution’s head, he insulted him and treated him with bias, even refusing to check the complainant’s homework. He was not even refunded his fees after being rusticated from the college. The National Commission, after observing the misconduct of the faculty, emphasized upon the contractual relationship between the student and the teacher, and thus, brought educational activities under the ambit of ‘services’. The court, through this decision, made a distinction between private and statutory bodies by bringing educational services rendered by a private institution under the consumer protection laws, and exempting the services rendered by a statutory educational institution.

    Following this, a private coaching institute was also brought under the ambit of consumer protection laws in Jai Kumar Mittal v. Brilliant Tutorials, where the coaching institution provided outdated study material to their students.

    However, the Supreme Court has always been reserved in bringing educational institutions under the ambit of consumer protection law. For instance, when the court was confronted with this question in the case of Maharshi Dayanand University v. Surjeet Kaur, it nearly expanded the ratio of Bihar School Case. Nonetheless, it seems to have ‘ostensibly’ settled the debate in P.T. Koshy v. Ellen charitable trust[ii] (hereinafter referred as ‘P.T. Koshy‘), where it ruled that educational institutions do not render any services through their “performance of educational activities”. Consequently, no complaints regarding deficiency in educational services can be entertained against the educational institutions as consumer forums do not have jurisdiction to entertain these complaints.

    Therefore, if the P.T. Koshy decision is taken as the final answer on this quintessentially tumultuous question, the current position of law can be ascertained. It would mean that statutorily and privately established educational institutions providing educational services are not subject to consumer protection laws. Conversely, as a settled law, private coaching institutions are amenable to consumer protection laws as they are recognizably different in nature from private institutions.

    The Implications of Judicial Pronouncements on Ed-tech companies’ amenability to the rules

    The ratio propounded in P.T. Koshy will not have much effect on the amenability of coaching institutions which are providing educational training through virtual learning platforms, as they are different from the regular schools and colleges. In fact, they would be subject to consumer protection laws for the following reasons: fees charged for their services, profit making objective (the element of ‘commercialization’ in dissemination of courses and training), and the ‘consumer and a service provider’ relationship that is established between a student and a teacher respectively. However, the situation would become tantalizing when any online course would be offered directly by the educational institutions, or through any intermediary acting as a facilitator between the students and the teachers.

    Any statutorily established institution would clearly be exempted the Rules in light of the Apex court’s ruling in Bihar School Examination Board case. Nonetheless, the moot point would be whether private educational institutions would be exempted from the Rules if they provide online courses. If the issue is addressed, considering the decision in P.T. Koshy, they would not be held liable for their educational activities. Therefore, it could be fairly argued that private educational institutions (except coaching centres) would not be subject to the Rules even if their courses go online.

    Ed-tech companies acting as an intermediary between the students and any other education institution, would not be liable under the E-commerce Rules as educational institutions are not amenable to the consumer protection laws. However, the definition of e-commerce entity which includes the marketplace e-commerce model does not exempt Ed-tech companies, which are acting as an intermediary between the students and coaching centres.

    Furthermore, the daunting question is the one concerning the amenability of coaching institutions which operate on a Freemium Model. This model is premised on a combination of free and premium services, where the consumer can avail the basic services free of cost and would be charged only for premium features in case he/she wishes to use them. Thus, a Freemium model operates on two-tiered user acquisition where free users have limited access to the product/services while the premium users get greater access to the product/services. Resultantly, only the premium users can be regarded as true consumers who are receiving education as a service; primarily for the reason that they are paying for availing some extra features/services. Therefore, coaching institutions operating on a freemium model ought to be made liable as far as their services are concerned with respect to the premium users.

    Conclusion

    In light of the foregoing analysis, the authors have arrived at the following conclusion. Firstly, Ed-tech companies operating as private coaching institutes would be subject to consumer protection laws under the Rules. However, when they are operating on a freemium model, they will be amenable to the Rules but only for those aspects which are being provided for a fee. Secondly, these companies would also be required to comply with the Rules when they would be operating in the form of a marketplace e-commerce model by acting as an intermediary between students and private coaching centres. Lastly, educational institutes providing online courses or educational training, or any Ed-tech company providing online courses and training, would not be subject to the Rules owing to the ratio propounded in the P.T. Koshy judgement.

    [i] (1992) 1 CPR 736.

    [ii]P.T. Koshy v. Ellen Charitable Trust, (2012) 3 CPC 615 (SC).

  • Cryptocurrency: A Revolution in the Making

    Cryptocurrency: A Revolution in the Making

    By Aayush Jain and Devansh Parekh, fourth year law students at GLC, Mumbai.

    Introduction

    On 21st April, 2021, for the first time ever, a completely paperless trade transaction between Tata Steel and HSBC India was executed using blockchain technology. The genesis of the technology which enabled this transaction can be traced back to 2008, when a pseudonymous white paper was uploaded online, which envisioned a new way to transfer value over the internet – and thus commenced the era of cryptocurrencies, blockchain and Bitcoin. While they pose significant controversy, fear and caution, cryptocurrencies have attracted immense interest from businesses, consumers, monetary authorities and governments across the world, as they have a promising future to replace the need for the trust in long-standing institutions such as banks.

    The Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 defines cryptocurrency in a broad manner as, any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in a business activity, or acts as a store of value, or a unit of account. A more comprehensive definition has been given by the Financial Action Task Force as a math-based decentralized, convertible virtual currency which is protected by cryptography.

    Potential Uses

    Companies across the globe have begun raising capital through initial coin offerings – where the company sells cryptocurrency either for money or for another cryptocurrency. The time frame and the costs are greatly reduced when compared to a regulated Initial Public Offering. Another important characteristic associated with initial coin offering is that they do not come with voting rights. Today, crypto assets boast a combined market capitalization of over $1.75 trillion.

    Could we have ever imagined a completely paperless transaction? Just as it was hard to guess in the early 1990s how the internet would help sell products across the world, an attempt to precisely understand the use of blockchain technology today is challenging. The advantages and disadvantages vary depending on the nature of the transaction. This nascent technology has several characteristics as discussed below.

    Instant, Low-Cost, Secure Settlement: Crypto-assets, such as Bitcoin, solve the problem of counterparty risks by creating a single, decentralized distributed database, accessible to everyone, but controlled by no single entity. The technology has the potential to bring about safe, real-time trade verification and settlement, through simplification of administrative processes in settlement, which has the ability to handle high volumes at low costs. Since all parties agree on a single database, without the presence of a financial intermediary, transferring money from one account to another is effortless, cost effective and quick as against a banking transaction that would otherwise require confidence that the payment would happen risk-free. The presence of a more secure payment mechanism has the potential to improve access to credit.

    As per a recent report by the innovation fund of Santander Bank, blockchain technology would result in a cost-savings of USD 15 to 20 billion by 2022 as it reduces financial infrastructure costs and time period for the transactions, as compared to traditional transfer of money, which can be done only during banking hours which would take at least a day or two with fees ranging from 1% to 8%.

    Tokenization: Cryptocurrency has a convenient way of tackling the problem of counterfeiting and fraudulent transactions. Tokenization involves maintaining a record of ownership of physical assets in a secure electronic manner. The only way for someone to ‘own’ a digital asset was if a trusted third party recorded the ownership in a database. Because the database is accessible by everyone and controlled by no one [also called permissionless network], crypto assets can provide ownership guarantees that were previously non-existent in the digital world Therefore, the risks arising from a controlling third party are eliminated. For example, blockchain could provide specific financial services without the need of a bank through distributed ledgers. In fact, one could argue that cryptocurrencies have more secure record-keeping capabilities, providing better ownership assurances, than most of the physical ones, while providing an efficient cross-border payment system.

    Smart Contracts: Other potential applications in finance include smart contracts – electronic contracts that are designed to execute automatically upon fulfilment of terms as agreed to by the counter-parties. For example, an options contract could be set up to be exercised automatically if certain defined conditions exist in the market. Such a ledger could potentially replace the paper real estate deeds currently filed at government offices.

    Key Issues and Analysis on India’s Stance towards Cryptocurrencies

    “Why ban when you can regulate?” New possibilities of cryptocurrencies are being discovered as the trading and usage increases day by day. As recent as March 2021, the Finance Ministry made it clear that it has no intentions of banning cryptocurrency in its entirety after witnessing several benefits of fintech and its dependance on blockchain technology. Interestingly, to battle the COVID-19 pandemic, the Government of Maharashtra has been using blockchain technology to store and maintain COVID-19 test results.  .

    In 2018, the Reserve Bank of India (“RBI”) materialized a circular (“RBI circular”) which required all entities within its purview to stop dealing in cryptocurrencies and rendered it illegal to initiate any such dealings or services in cryptocurrencies.

    Amidst concerns of high volatility and risky venture, what perturbed RBI the most was the anonymity of transactions. This raises significant concerns for consumer protection. No Indian regulation specifically targets cryptocurrencies. They have no sovereign guarantee and are of a speculative nature, hence making them very volatile. For instance, Bitcoin lost nearly 80% of its value between December 2017 and November 2018. Interestingly, recently Elon Musk and his tweetshave made some important headlines that led to  fluctuation in rates of certain  cryptocurrencies like  Bitcoin and Doge to the sky and back to the ground. The essence of money has always been to trust in the strength of its worth.

    Another particular concern with cryptocurrencies is that private keys (a ‘key’ which allows access to a user’s cryptocurrency) are stored by cryptocurrency exchanges, which are prone to hacking, malicious activities, human errors or operational problems of exchanges. On 22 April 2021, one of Turkey’s largest cryptocurrency exchanges had to cease operations due to lack of financial strength, leaving hundreds of thousands of investors in panic as their savings worth $2 billion would evaporate.

    Since cryptocurrencies are pseudonymous and decentralized, they could facilitate money laundering and other illicit criminal activities (such as tax evasion), providing a means for criminals to hide their financial dealings from authorities. It also raises the issue whether existing regulations can appropriately guard against this possibility. 

    If cryptocurrency becomes a widely used form of money, it could affect the ability of central banks to implement and transmit monetary policy in the country.

    The RBI circular aims to tackle the above issues by temporarily holding off trading in cryptocurrencies until a suitable legislation is enacted. However, the same was challenged and struck down by the Indian Supreme Court declaring it a violation of fundamental rights vested in Article 19(1)(g) of the Constitution of India. The Court applied the test of proportionality and concluded that RBI failed to consider the availability of least-restrictive alternatives. It must be noted that though the Supreme Court rejected the RBI Circular on the ground of proportionality, it does not rule out the presence of other risks that come along with this order.

    Conclusion

    The entire growth and foundation of Financial technology (“Fintech”) lies upon the initiative of a Sandbox. The United Kingdom and its regulatory body, the Financial Conduct Authority commenced this to reduce time and cost to get ideas to market, enable greater access to funding for innovators and allow more products to be tested and introduced in the market. Arizona was the first state to adapt this in the USA.

    Although growing at an exceptional speed, the fintech industry is still young. This has put some pressure on the regulators to adapt to the inevitable changes time and again. For instance, the USA has a fragmented structure of regulations that govern fintech. The Initial Coin Offering must fulfill the Howey Test in order to be regulated by the SEC. There is not one but several rules and regulations differing from state to state that govern Fintech in the USA. The State Licensing Requirements ensure that there are annual audits, record keeping as well as examination by regulators. Some of the recent initiatives include: In 2015, New York State Department of Financial Services approved the NY BitLicense that issues business licenses for virtual currency activities. In 2017 the Uniform Law Commission released the Uniform Regulation of Virtual Currency Businesses Act that ascribes certain extensive requirements for a virtual business currency to adhere to before it can engage in business activities with the residents of the state. Even though this act has not been enacted by any of the states so far, it is an exhaustive framework that details the transfers, exchange, definitions, licensing and other requirements as well as potential liabilities that can be enacted in the future.

    As it stands, there is an urgent need to provide clarity on the status of cryptocurrencies. India is working on its own law to regulate cryptocurrencies. However, the approach taken is severe, even more stringent than China. It would be interesting to see where India takes the project of Digital India from here on. If the draft cryptocurrency bill is passed, India would be first prominent economy to ban any form of engagement with cryptocurrency – including its mining. 

    Like other nations, India should regulate rather than ban cryptocurrencies. The aim should be to develop industry standards, promote transparency, work with regulators to detect fraud and misconduct. Crypto firms in India have experienced a successful phase during the pandemic as the volume of trading on crypto exchanges increased manifold. There is an increased inclination towards accepting cryptocurrencies. Around the world, companies such as Starbucks, Visa and Microsoft now accept certain cryptocurrencies as payment for their products/services. Although the crypto market is highly volatile in nature, regulators can introduce margins, limits, circuit breakers as well tax the transactions to ensure open competition in the market.

    It is well established that the nature of the cryptocurrencies is evolving continuously in the global economy. Due to its increasing acceptance, it should not come as a surprise if India publishes its own set of guidelines or regulations. As to which stand it takes is a question which remains to be answered.

  • Determination of the Status of A Creditor: Artificial Wisdom of the Committee of Creditors

    Determination of the Status of A Creditor: Artificial Wisdom of the Committee of Creditors

    A 4-minute read by Arihant Jain, a fourth-year student of Nirma University

    The National Company Law Appellate Tribunal (‘NCLAT’) on 18.12.20 in the case of Rajnish Jain v. BVN Traders and ors (‘Rajnish Jain’)held that the Committee of Creditors (‘CoC’) constituted under Section 21 of the Insolvency and Bankruptcy IBC, 2016 (‘IBC’) cannot determine the status of a creditor as a financial or an operational creditor. It is a matter of applying insolvency law to the facts of each case. The judgment clarified that only the adjudicating authority has power to adjudicate the status of a creditor as a financial or an operational creditor. The author hereinafter highlights the judiciousness of the Rajnish Jain judgment in the light of the principle of equality of similarly situated creditors, commercial wisdom of the CoC & limited rights of the CoC under the IBC.

    Factual Background

    The National Company Law Tribunal, Allahabad (‘NCLT’) admitted an application under Section 9 of the IBC to initiate Corporate Insolvency Resolution Process (‘CIRP’) against the corporate debtor, Jain Mfg (India) Pvt. Ltd. BVN Traders,the Respondent in this case had extended a loan of Rs. 80,00,000 to the corporate debtor having a secured title deed of the property of corporate debtor against the consideration of 18% per annum. BVN Traders had filed FORM C as financial creditors and the insolvency resolution professional (‘IRP’) admitted the claim of BVN Traders as a financial creditor.

    Rajnish Jain, the promoter, stakeholder and managing director of the corporate debtor, filed an application for removal of BVN Traders from the status of financial creditor. The NCLT directed the resolution professional (‘RP’) of the corporate debtor to seek approval from the CoC to change the status of BVN traders from financial creditor. Pursuant to this, the CoC passed a resolution that BVN Traders is to be treated as financial creditors.  In light of this resolution, the NCLT rejected the claim of the promoter via order dated 23.01.20.

    Subsequently, in the 7th meeting of CoC, the RP again proposed the agenda to determine status of BVN Traders. The CoC passed a resolution with its majority that BVN Traders is not a financial creditor. The CoC also discussed the agenda regarding withdrawal of CIRP under Section 12A of the IBC and for the same, prior approval of 90% majority of voting shares of CoC is required. However, the withdrawal resolution did not attain the 90% majority and the same was not passed. In the 8th meeting of the CoC, withdrawal of CIRP process was again discussed and the same was passed by CoC without including BVN Traders in the CoC. An appeal was filed by Rajnish Jain against the order dated 23.01.20 of the NCLT.

    Decision of the NCLAT:

    The NCLAT observed that the CoC cannot determine the status of creditor. It is a matter of applying the applying the IBC laws to facts. It further held that CoC cannot use its commercial wisdom to determine the status of creditor. The NCLAT observed that despite the order being passed by the NCLT, the CoC proceeded to change its earlier stance and passed a resolution contrary to NCLT order, thereby undermining its authority. The NCLAT also held that the resolution passed in the 8th meeting was bad in law since it was passed after illegally reconstituting the CoC. 

    Current Position of Law 

    Financial creditor and Operational creditor are defined under Sections 5(7) and 5(20) of the IBC. Pertinently, the Supreme Court’s judgment in the case of Swiss Ribbons Pvt. Ltd v.UOI differentiated both the terms by relying on the recommendation of  BLRC Report, 2015:

    “Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations.”

    Further, in Pioneer Urban Land and Infrastructure Ltd and ors v. UOI, the Apex Court observed that financial creditors owe financial debt to meet the working capital or requirement of corporate debtor. On the other hand, operational creditors provide goods and service to the corporate person. In the instant case, the loan extended to corporate debtor is a pure financial contract to meet the working requirement. Therefore, the NCLAT has rightly denied the arbitrary decision of CoC in determining the status of creditor.

    Analysis

    • Principle of Equality – Similarly situated creditors should be treated alike

    Article 14 of Constitution of India provides that equals should be treated equally and unequal should be treated unequally. Further, in CoC of Essar Steel Limited through Authorised Signatory v. Satish Kumar Gupta and ors., the Apex Court observed that similarly situated creditors should be treated equally. Empowering the CoC to determine the status of a creditor will create inequality amongst the same class of creditors as other creditors of the CoC would determine the status of a creditor of the CoC who is in pari passu with them. In the instant case, the NCLT failed to consider the principle of equality by authorizing the CoC to determine the status of BVN Traders.

    • Commercial wisdom of the CoC – Not an absolute power

    Commercial wisdom of the CoC is not an absolute power. The Apex Court in CoC of Essar Steel Limited through Authorised Signatory v. Satish Kumar Gupta and ors has observed that commercial wisdom must be in consonance with the basic aims and objectives of IBC.  Decision of the CoC is subject to checks and balances of the IBC. In Swiss Ribbons Pvt Ltd. v. UOI, the Supreme Court has observed that the primary objective of the IBC is to balance the interests of all stakeholders. Under the IBC, an aggrieved person has the authority to challenge the constitution of CoC or categorization of creditors before the adjudicating authority. In the instant case, reclassifying the status of creditor by CoC is beyond the scope of commercial wisdom since it is in the hands of adjudicating authority to adjudicate the claims of categorization of creditors. Under Section 61(1) of the IBC, aggrieved party may challenge the order passed by NCLT before the NCLAT. However, in the instant case, the CoC sat in the position of NCLAT and gave a resolution contrary to the order passed the NCLT, which is beyond the aims and objectives of the IBC.

    •  The IBC is a complete code in itself

    Section 28(1) of the IBC which enumerates the conditions where prior approval of the CoC is required does not provide for seeking it for the determination of the status of a creditor during CIRP. Moreover, no provision under the IBC empowers the CoC to determine the status of a creditor. It is also pertinent to mention that the IBC is complete in itself. It has unambiguously laid down the powers of the CoC. 

    Further, an aggrieved party dissatisfied with the status of a creditor can submit an application to the NCLT through RP with the approval of 90% voting share of the CoC for the withdrawal of CIRP. However, in the 7th meeting of CoC in the instant case, only 66% of the CoC approved the withdrawal of CIRP. Further, a financial creditor, being a part of the CoC, cannot be excluded from taking part in the voting process of withdrawal of CIRP process. It would be violation of legal right of creditor of CoC mentioned under Section 12A of IBC.  However, in the 8th meeting of the CoC in the instant case, BVN Traders was not allowed to vote for the withdrawal of CIRP. Hence, the legal right of BVN Traders to vote under Section 12A is being defeated. 

    Judgment of Adjudicating Authority: It is a matter of applying law to the facts of each case    

     It is pertinent to mention that it is the statutory duty of court to deliver any judgment based upon the law. For clarifications, the court has the authority to take the opinion of experts. However, the judgment cannot be based solely on the expert opinion. The judgment has to be delivered by applying the law to the facts. In the instant case, the NCLT had delivered its judgment based solely on the decision of the CoC, however, the status of a creditor needs to be determined by the NCLT by applying the IBC to the facts of each case. The NCLAT has rightly clarified that the status of creditor could be determined only by applying the IBC to the facts of each case. 

    Conclusion

    The NCLAT has rightly adjudicated the matter by removing the flaws of NCLT’s decision which   would have led toimbalance by going against the purpose of commercial wisdom of the CoC. CIRP being the collective resolution process seeks parity amongst similarly situated creditors. Preference cannot be given to any similarly situated creditors. The adjudicating authority, by not providing legal reasoning for empowering the CoC to determine the status of creditor failed to consider that legal reasoning is the core of any judgment. The NCLAT has rightly adjudicated that empowering the CoC with such rights would have completely disabled the intent and purpose of the CIRP under the IBC.

  • Recent Trends: Measures taken by SEBI to Regulate the Indian Capital Market

    Recent Trends: Measures taken by SEBI to Regulate the Indian Capital Market

    By Nivedita Rawat, fourth-year student at AMity law school, noida

    Securities Exchange Board of India [“SEBI”] acts as a watchdog for the Indian Capital Market. The Board enacted by The Securities and Exchange Board of India Act, 1992 (“the Act”) has been accorded with comprehensive powers under the Act. The preamble of the Board describes its functions as to “protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto”. In addition to the intent behind the establishment of the Board, Section 11 of the Act lays down the functions of the Board that clearly illustrate “it shall be the duty of the board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit”. This provision exemplify that SEBI has been authorized to take any such measures that in its opinion would protect the interest of the investors and would aid to regulate the market. It’s the reason SEBI keeps on revising and updating by formulating new measures or directions that make securities market conducive, safe and friendly for all kinds of investors that include retail or institutional investors. In the past few months, during and after COVID-19 lockdown times, there have been some key instrumental measures that have been taken by SEBI, such as:

    1. Introduction of UPI and Application through online interface for Public Issue of Debt Securities

    SEBI, in its circular dated November 23, 2020 announced the introduction of Unified Payments Interface [“UPI”] Mechanism and application through online interface for public issue of debt securities. This system has already been in existence for issue of public shares since January, 2019 but is now made available for public debt securities through this circular issued by SEBI under Section 11 of the Act. The said mechanism is in addition to an already existing specified mode under Application Supported by Blocked Amount [“ASBA”]. It would be available for securities opening up for issuance from January 1, 2021 for applications up to a limit of 2 lacs. The concerned entities include National Payments Corporation of India [“NPCI”], UPI and the Sponsor Bank. 

    Analysis: The measure taken up by SEBI is extremely upright as it will make the process of subscribing to debt securities simple for the retail investors, will increase the investor base as the investors will have an option to use UPI interface to block their funds for debt securities during an issue through their brokers/intermediaries. Investing into debt instruments would be as similar as subscribing to equity initial public offerings [“IPO”] as it is now less time consuming and more digitalized. Although the initiative is bound to enlarge the responsibilities of the stock exchange, intermediaries and the sponsor bank, but the prevailing times call for such action as a physical process of issue of debt securities is not only a traditional approach but also make the process cumbersome altogether. Moreover, with the availability of UPI mechanism for subscription of debt securities, enhanced participation by the retail investors is anticipated. It is mainly because until now, the debt instruments had usually been subscribed by the high net investors and institutions, but such a measure by SEBI might change up the things and intends to encourage household investors to be a part of debt market as well.

    • Increased Efficiency of E-Voting mechanisms for Meetings 

    The Companies Act, 2013 mandates a company to provide e-voting facility to the shareholders. Section 108 of The Companies Act, 2013 along with Rule 20 of the Companies (Management & Administration) Rules, 2014 provide for such a facility. Additionally, regulation 44 of the SEBI (Listing and Obligatory Disclosure Requirement) Regulations, 2015 also contains provision to this regard.

    On Dec 09, 2020, SEBI released a circular directing the listed entities to provide e-voting facility to its shareholders. The mechanism called for a system wherein the shareholders will have an option to forecast their votes directly through their Dematerialized [“DEMAT”] accounts with the depositories which’ll forward their votes to the E-voting service providers [“ESP”]. The process would take place in two phases. First phase, wherein the shareholders can cast their vote either through the depository’s website or their DEMAT account. After which, the depositories will give the confirmation of the votes to the shareholders once received from ESP’s. In the second phase, the depository will set up an OTP system for login. For this new and much efficient mechanism, SEBI has also asked the Depositories and the ESP’s to provide helpline services to shareholders, whereas ESP’s have been directed to provide links for disclosures by the companies and the report of proxy advisors for investor’s awareness. 

    Analysis: The entire proposed mechanism aims to ease out the task of casting a vote for the shareholders. Elimination of registration with ESP’s and authentication from the point of depository will ensure security and legitimacy of the votes of shareholders. This is unlike the earlier mechanism in which the shareholders had to visit the ESP’s website to cast their votes with distinct usernames and passwords that created the voting procedure tedious and not very simple. The mandatory updating of key details of shareholders regularly by the stock exchange will also help the entities to be in contact with their users for one stop communication. Additionally, the initiative of providing the link for the disclosure by the entities and links to proxy advisor’s website etc.’ would guide the votes of the investors based on sound rationale, and would also enhance the participation in the e-voting process by the non-institutional shareholders or retail shareholders. 

    • Reclassification rules of promoters as public shareholders and disclosure of their shareholding pattern

    Rules for reclassification of promoters have been mentioned in Regulation 31A of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015. On 23rd of November, 2020, SEBI released a consultative paper on the same that proposed a few amendments to the existing rules pertaining to promoter reclassification. It composed of the following proposed amendments:

    1. Promoters with shareholding up to 15%, seeking to reclassify should be allowed with shareholding’s status quo maintained.
    2. One-month duration for meeting between board & shareholders and for reclassification request to be put up before exchange.
    3. Promoters seeking reclassification pursuant to an order/direction of government or regulator should be exempted like reclassification pursuant to resolution approved under Insolvency and Bankruptcy Code, 2016. 
    4. Promoters seeking reclassification pursuant to an offer should be exempted from the reclassification procedure where intent for reclassification is mentioned in the offer letter which needs to be in accordance with SEBI Substantial Acquisition of Shares and Takeover [“SAST”] Regulations and Regulation 31A(3)(b) and 31A(3)(c) of SEBI(LODR) Regulations, 2015. 
    5. Pursuant to an offer, where the former promoters aren’t traceable by the listed entity or not cooperative towards it, exemption from reclassification procedures should be given if erstwhile promoters aren’t in control of the company and diligent efforts have been made by the listed company to reach out to them.
    6. Mandatory disclosure of promoters.


    Analysis: SEBI after having acknowledged the shortcomings of the existing process of promoter reclassification, has proposed amendments which seeks to bring orderliness in the procedure of promoter or promoter entity reclassification. There have been instances where a person is tagged as a promoter of a company in spite of having zero shareholding, this not only influences the choices of the investors but also makes the functioning of a company strenuous. The application of one-month deadlines between shareholder and board meetings and for putting up reclassification request by entity in front of exchange has been done with the intent to Fastrack the whole process and not to have any undue delay. The exemptions made for promoters pursuant to an offer have been proposed keeping in mind the procedural formalities which can be set aside in case where the stance of a promoter has already been clear or when it had been impossible to reach out to them. The disclosure of shareholding pattern by a promoter even in case of zero shareholding is a proposed amendment that aims to curb the companies from misusing the law due to existing loopholes. 

    Conclusion

    Additionally, SEBI has been looking forward to revamp the grievance redressal system for the stock exchange, for which the regulator issued directions to the Bombay Stock Exchange regarding the clients of the defaulting trading members. All inclusive, SEBI keeps on making endeavors to structure the capital market in the interest of the investors, listed entities or any stakeholders that form a part of the capital market. The recent measures have been taken keeping into account, the shortcomings of the laid down procedures or regulations of investing in share market. The Indian capital market should essentially avail the benefit of the rise in fintech like any other sectors of the economy. Depository participants such as Zerodha, Angel broking, Motilal Oswal Financial Services etc. have reported massive increase in the newly opened DEMAT accounts. It thus becomes imperative to have stringent securities law in place at the moment, especially when the number of retail investors have leapt up to record high numbers throughout the period of lockdowns in the country.