The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • Future Retail v. Amazon: Time to Strike Out Emergency Arbitration in India

    Future Retail v. Amazon: Time to Strike Out Emergency Arbitration in India

    By Swikruti Nayak and Vaishnavi Bansal, third-years students at NLU, Jodhpur

    Introduction

    The single bench decision of Future Retail Ltd. v. Amazon.com Investment LLC passed by the Delhi High Court on 21st December, 2020 has resulted in a lot of turbulence and furore in the legal community for the future of emergency arbitration (“EA”) in India. This judgement sets the tone for increasing the ease of doing business in India and making it more arbitration friendly. The court  upheld the validity of an emergency arbitrator’s order of interim relief in the favour of Amazon. However, this matter is yet to be resolved. On appeal, a division bench of the Delhi High Court passed an interim order against the validity of EA which was upheld in the said judgement. Subsequently, Amazon filed a special leave petition to the Supreme Court, contending that the Delhi High Court neither had the jurisdiction to entertain Future Group’s appeal against Amazon nor can it pass any interim order that acts against the SIAC’s emergency arbitrator order, as the same is valid under Indian law.

    The concept of Emergency Arbitration

    EA, as a process, is based on the importance of obtaining interim relief for the parties which is key to protect and preserve the relationship of parties involved in a dispute, before a final relief is secured. The concept of emergency arbitration finds its origins in the Pre-arbitral Referee Rules of the International Chamber of Commerce (“ICC”) in 1990, however, it was rarely used by the parties.[i] In the Asia-Pacific region, the Singapore International Arbitration Centre (“SIAC”) was the first to introduce provisions regarding EA in 2010, to obtain emergency interim relief before an Arbitral Tribunal is constituted. Essentially, EA enables parties to obtain urgent relief and not spend a considerable amount of time, awaiting the appointment of an arbitral tribunal. This will also enable parties to exercise confidentiality even while seeking interim relief, which is not possible in court system.

    The concept of EA is based on two legal maxims, fumusboniiuris and periculum in mora, which mean that there is a reasonable possibility that the requesting party will succeed on merits and if the measure is not granted immediately, the loss cannot be compensated through damages. The specific details of the procedure may vary in different jurisdictions, but the two common procedures for obtaining a relief in emergency arbitration is, filing of the proof of service of the application to an emergency arbitrator upon opposite parties and payment of the fee decided according to the centre, where the arbitration will be carried out.

    Future Retail v. Amazon: A Shift in the Judicial Trend

    The dispute arose between parties in the present case, Future Retail and Amazon, because of non-compliance with the provision in the Shareholders Agreement, that prohibited Future Retail from selling its assets to some enlisted entities. In the agreement, the parties had chosen the Arbitration Rules of SIAC as the law of the conduct of arbitration making it to be the curial law for their arbitration agreement. Since SIAC rules provide for the appointment of an emergency arbitrator, the parties chose to go for EA. The issue for consideration before the court was whether the emergency arbitrator provision under the SIAC Rules is contrary to the mandatory provisions of the Arbitration and Conciliation Act 1996 (“the Act”), thereby examining the validity of emergency arbitration conducted between the parties.

    The court in its discussion relied heavily on the Supreme Court case NTPC v. Singer which deals with the situation of parties choosing a different curial law and proper law. It came to the conclusion that SIAC rules which is the curial law of arbitration agreement will apply to the extent they are not contrary to the public policy of India or against the mandatory requirement of the Act. Thereafter, the court used the bedrock of the arbitration law i.e. party autonomy to hold that since the rules are chosen by express consent of the parties, the court would not unnecessarily interfere with the award. Rule 30 of the SIAC Rules provide that the parties are also entitled to plead before the judicial authority for the interim relief, thus it is also not taking away the substantive right of the parties to reach the courts for interim relief. Moreover, there is nothing in the Act to invalidate the whole process of EA, merely because it is not strictly falling under the definition of section 2(1)(d). The court also clarified the applicability of section 9 along with section 27, 37(1)(a), 37(2) of the Act in the judgment. It said that applicability of these sections may be derogated with the agreement in International Commercial Arbitration and there is no inconsistency between SIAC Rules and Part 1 of the Act. The court defended it relying on the phrase “even if the place of arbitration is outside India” in proviso section 2(2), making it obvious that the exception is also valid for international commercial arbitrations. Hence, the court upheld the validity of the emergency arbitrator’s order of interim relief.

    However, this was not the first instance where the courts were faced with the question of enforceability of the EA in India. In 2016, Raffles Design International India Pvt. Ltd. &Anr. v. Educomp Professional Education Ltd. and Ors.was decided by the Delhi HC wherein the court upheld the maintainability of application for interim measures under section 9 after an emergency award was obtained from a foreign seated arbitral tribunal. The court held that section 9 cannot be used to enforce emergency awards but can be used by the parties to file interim relief. This judgment, however, fails to take note of the Bombay HC judgment of HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd. &Ors. which was the first case to recognise the concept of EA in India. In this case, the emergency arbitrator in SIAC had passed two interim awards and the court had also granted interim relief to the party. The judgement of the HC was affirmed by the SC in 2020.

    Ashwani Minda and Anr v. U-Shin Ltd. and Anr, a Delhi HC judgement of 2019, laid the foundation to enable the bold stance of the court in Future Retail. The court recognised the concept of EA, however, dismissed the application for interim relief as the emergency arbitrator had declined the same.  The Japan Commercial Arbitration Association (“JCAA”) Rules governing the conduct of the arbitration, which provides for emergency arbitration to obtain relief before an arbitral tribunal is constituted. The arbitration agreement did not contain a provision for obtaining relief from domestic courts. The enforceability of emergency awards was not clearly discussed, however, the court held that once EA is invoked, interim relief cannot be sought from domestic courts. According to the court, the emergency arbitrator passed a very detailed and reasoned order and hence it did not interfere with it.

    Hurdles Lying Ahead

    It is quite evident that the judicial trend in India is gradually changing from circumventing discussions on the status of EA to discussing relevant issues related to the validity of EA. However, the concept of EA is far more complex, involving separate and specific procedures that need to be answered before India adopts an authoritative status of EA. As under section 2(1)(d) of the Act, an emergency arbitrator has not been recognised as an ‘arbitral tribunal’- his position and statutory benefits are not clear. Concurrent jurisdiction also presents a major issue since for obtaining interim relief, parties will be free to approach both the courts as well as the emergency arbitrator. The status of EA proceedings needs to be clarified, for instance, whether under section 8 which provides a judicial authority with the power to refer the parties to arbitration in the presence of an arbitration agreement, is applicable to an EA agreement or not. The scope of interference by court under EA as in full arbitral proceedings under section 34 also needs to be laid down. Moreover, an arbitral tribunal may continue proceedings ex-parte under section 25(3) of the Act and grant an award on the basis of the evidence before it, however, the same is not clear in case of an emergency arbitrator. Emergency arbitral awards apart from above are also susceptible to various enforcement issues in different jurisdictions as it is  more of a voluntary practice between parties. Moreover, it is mostly agreed upon, because of the consequences of refusing an EA order on the full arbitral tribunal process. There is no mention of the procedures like EA in Model law on which India’s arbitration law is based, which further strikes on its enforceability and acceptance in India.

    Conclusion

    The concept of EA holds a promising future worldwide as, besides Singapore, countries such as Hong Kong, Netherlands and Bolivia have amended their rules to include provisions regarding an emergency arbitrator. The Stockholm Chamber of Commerce (SCC), the London Court of International Arbitration(LCIA), the International Centre for Dispute Resolution of the American Arbitration Association(ICDR/AAA) and the International Chamber of Commerce(ICC) have also inserted provisions specifically dealing with emergency arbitration. In the USA, there is no specific provision regarding an emergency arbitrator, but national courts have generally tended to favour their validity.

    The decision of the Delhi HC in Future Retail v. Amazon revived a much-needed discussion on the status of EA in India. In the light of the principle of party autonomy, parties are free to choose the curial law of arbitration which can have specific provisions for approaching an emergency arbitrator to obtain interim relief. The same does not restrict a party to approach the domestic courts under section 9 of the Act. There is nothing contained in the Act which invalidates the whole process of EA and makes the emergency arbitrator’s order unenforceable. Although, the decision paves the way for facilitating a more business-friendly economy in India and reaffirms the true essence of arbitration i.e. party autonomy, it left the door wide open for interpreting what exact position an emergency arbitrator holds and the technicalities of EA.

    [i] Suraj Sajnani, ‘Emergency Arbitration in Asia: Threshold for Grant and Enforcement of Emergency Relief’ in Arbitration: The International Journal of Arbitration, Mediation and Dispute Management (Brekoulakis ed., 2020).

  • Jurisdictional Defect Beleaguering the Assessment Proceedings under Income Tax Act, 1961

    Jurisdictional Defect Beleaguering the Assessment Proceedings under Income Tax Act, 1961

    By harshita agarwal and raj aryan, third-year and fourth-year students at ms ramaiah college of law, bangalore and llyod law college, respectively

    It is well-settled under Section 232(9)(c) of the Companies Act, 2013, that after a merger between two or more entities, all the legal proceedings in the name of blending entities pending or arising before the effective date of the deal will be enforced against the name of the blended entity. Any legal proceedings initiated against the blending entities individually would be considered void ab-initio. Surprisingly, Income Tax Appellate Tribunal, New Delhi (“Delhi ITAT”) recently in the case of Boeing India Pvt. Ltd (Successor v. Acit Circle- 5(1), New Delhi on 17 August 2020 (“Boeing India case”) came across the same issue wherein the Assessing Officer (“AO”) as per above law erred in taking into consideration that after a merger no legal proceedings can be initiated against the name of blending company which have lost its existence after the merger.                                                                          

    In this blog, the authors critically analyse the issue of whether the jurisdictional defects in the later stages of the proceedings can be remedied under the law in the light of the Boeing India case. Further, the authors analyse whether proceedings under Section 144C of the Income Tax Act, 1961 (“the Act”) can be initiated on the ambivalence of jurisdictional validity of the assessment order.

    Factual Matrix of the Case

    Boeing India Pvt. Ltd.(“BIPL/Appellant”) notified its merger with Boeing International Corporation India Private Limited (“BICIPL”) to the Regional Director. The effective date of this scheme was 15.02.2018. On 10.04.2018 the Appellant apprised the AO that the BICIPL was dissolved and all the legal proceedings after the merger will be initiated or transferred in the name of the BIPL. Further, on 19.10.2018 the Transfer Pricing Officer (“TPO”) under Section 92 CA(3) of the Act drafted an order determining the arm’s length price of the international transaction of BICIPL with its Associated Enterprise in the name of the Appellant. But later the AO issued the draft assessment order in the name of a non-existent company i.e., BICIPL. On appeal to the Dispute Resolution Panel (“DRP”), it turned the deaf ear to the Appellant’s appeal. Aggrieved by the DRP order, the Appellant approached the ITAT Delhi claiming that there exists a jurisdictional defect in the draft assessment order. In this case, the Tribunal strived to discuss whether the jurisdictional defects can be remedied under assessment proceedings of Section 144C of the Act . 

     Understanding the legal anatomy of Section 144C assessment proceedings 

    Firstly, while referring to any issue before DRP, the procedure embodied under Section 144C of the Act needs to comply. Under Section 144C(1) of the Act, the AO needs to frame the draft assessment order in the name of the ‘eligible assessee’. The draft assessment order constitutes the foundational structure before inbounding into further procedural aspects under the Act. For better clarity, it is pertinent to note the definition of the eligible assessee. The definition is under Section 144C(15)(b) in accordance to which an ‘eligible assessee’ is any person whose variation of income or expenses arises as a consequence of the TPO’s order passed under Section 92CA(3). As per the definition outlined above, the eligible assessee before the merger was BICIPL. However, after the merger, it is BIPL. In the instant case, the AO defaulted in addressing the concerned person, thereby causing a jurisdictional defect.

    The DRP obviated that the defect can be remedied in the further proceedings under the Act. However, the DRP’s order under Section 144C(5)  lacked legal standing as firstly, Section 144C(3) specifies that the final assessment order needs to be drafted based on the draft assessment order. Secondly, Section 144C(2) narrows down the order of DRP as according to this sub-section, once the draft assessment order has been framed then the immunity to accept or change it lies in the hands of the assessee only. In other words, the AO’s power to make further changes in the draft assessment order is inhibited. While drawing reference to the above contention, reliance can be placed in the case of Turner International Pvt. Ltd v. DCIT wherein the Hon’ble High Court ruled that failure in complying with Section 144C(1) will make the whole final assessment proceedings void. The act of the AO outbroke the foundational structure of Section 144C, thereby making the entire proceedings null and void.

    Remedying the jurisdictional defect under Section 144C

    In the second contention of remedying the jurisdictional defect under Section 144C of the Act, it is pertinent to ponder over the question of whether all the procedural mistakes can be remedied under the Act. For this, it is necessary to first understand the comparative analysis of jurisdictional defects between the initial stages and later stages of the proceedings. 

    To understand the comparative analysis of the jurisdictional defect between the initial stages and later stages of the proceedings under the Act, it is pertinent to canvass the ruling of Sky Light Hospitality LLP v. Acit (“Sky Light Hospitality LLP case”) to distinguish the procedural matter in the beginning and later stages of the proceedings. In this case, the AO committed a mistake by issuing notice under Section 148 of the Act, under the name of the non-existent company. Based on the above facts, the Delhi High Court ruled that the procedural mistakes at the beginning of the proceedings can be cured under Section 292B, as it does not form the root of the matter. The Delhi ITAT in Boeing India case construed that the Sky Light Hospitality LLP case was distinguishable to the instant case as in the above case the procedural defect happened at the initial stages of the proceedings, thereby not affecting the root of the proceeding. However, where the defect occurs at the later stages of the proceedings, the mandatory requirement to complete the assessment proceedings under Section 144C of the Act is contravened, thus vitiating the final proceedings in-toto.

    In this case, the draft assessment order has not been treated as a mere irregularity but as incurable illegality . The reference to the above can be drawn from the case of The Asst. Commissioner Of Income v. Vijay Television Private Ltd. wherein the court held: “Section 292B of the Act cannot be read to confer jurisdiction where none exists.” Further, the Circular No.179 dated 30 September, 1975 has limited the scope of Section 292B of the Act to rectify the mistakes of notices, the return of income, assessment, summons, or other proceedings only if they are in substance form and do not deviate from the intent or purpose of the Act. The jurisdictional defect is outside the intent of the Income Tax Act, 1961, thereby excluding such defect from Section 292B of the Act.

    In other words, the basis of refusal to remedy the jurisdictional defect lies in the context that Section 292B can be invoked only when there subsists technical irregularity in the order but not in the stance where there exists wrong jurisdiction. Thus, this made it clear that the jurisdictional defect cannot be cured under Section 292B of the Act. 

    Conclusion

    The enforceability of law demands the requisite of valid jurisdiction. To invoke the provisions of any law in India, a person is required to satisfy all the jurisdictional requirements set down by the laws in India. The failure of valid jurisdiction will allow the courts or tribunals to repudiate the validity of any order, plea, petition, or any case. The Delhi ITAT’s stern response to the jurisdictional defect under Section 144C (1) of the Act envisaged that jurisdictional defect cannot be sustained by any court in India. This even implies to all the authorities and regulatory bodies in India. This case had further drawn light on the procedural mistakes in the assessment proceedings that can be cured under Section 292B of the Act and the procedural mistakes in the assessment proceedings that cannot be cured under Section 292B of the Act by differentiating them as procedural mistakes at the initial and later stages of the assessment proceedings.

    The second loophole that subsists in this case was the lack of independence of DRP. The DRP, in this case, intentionally supported the Department Representative in the procedural mistake under Section 144C (1) of the Act even after being acquiescent to the fact that there was a jurisdictional defect in the draft assessment order. This connotes that the DRP overlook the procedural irregularities of the case, which can affect the tax adjudication in India. It is a need of an hour that even DRP should look into technical intricacies of the case before adjudicating any dispute.

  • Sanctity Of Legal Process Vis-À-Vis Maximisation Of Value Under The IBC: A Watertight Case?

    Sanctity Of Legal Process Vis-À-Vis Maximisation Of Value Under The IBC: A Watertight Case?

    BY DEVASH GARG, THIRD-YEAR STUDENT AT VIVEKANAND INSITUTE OF PROFESSIONAL STUDIES, NEW DELHI

    The Insolvency and Bankruptcy Code, 2016 (hereinafter the “Code”) since its enactment has become a routine subject of exchange in the legal community due to its dynamic character. It has proved to be a milestone of the Indian legislature inasmuch as it has successfully improved the Indian insolvency and bankruptcy laws by simplifying and bringing them under one umbrella.

    The Code mandates the creation of a Committee of Creditors (hereinafter “COC”) for managing the transactions of the corporate debtor during Corporate Insolvency Resolution Process (hereinafter “CIRP”). Be it as it may, the Code places its complete faith in the commercial wisdom of the COC for protecting the commercial interest of the stakeholders and as well as for reviewing and selecting the resolution plans (hereinafter R-Plan) submitted by the rival Resolution Applicants (hereinafter “RA”). Even the Insolvency Law Committee reinstated in its report that one of the primary objectives of the Code is to respect the ‘commercial wisdom’ of the COC. However, it has been observed that under the guise of commercial wisdom, ofttimes COC misuse its wide discretionary powers thereby, abusing the due process laid down by law.

    Therefore recently, on 5th August 2020, the Hon’ble NCLAT passed an elaborate order in the case of Kotak Investment Advisors Ltd. v. Krishna Chamadia, where it observed that, while the COC is indeed fully authorised to exercise its discretionary powers in pursuance of its commercial wisdom, however it doesn’t mean that COC has unfettered powers under the guise of its commercial wisdom to instruct the Resolution Professional (hereinafter “RP”) to adopt an arbitrary or an ab-initio illegal procedure or a procedure which violates the principles of natural justice in the conduct of CIRP. The author attempts to analyse the decision of NCLAT along with its implications in the article.

    I. Constitution of COC- steering body of the CIRP

    Though, unlike Part III (insolvency and bankruptcy for individuals and partnership firms), Part II of the Code doesn’t define the COC for Corporate Persons, but harmonious reading of Code’s provisions would give a fair idea about the purpose, constitution, functions, and powers of the COC. Once all the claims of corporate debtor are collated, under s.21(1) of the Code, the Interim Resolution Professional is required to appoint the COC under s.18(c) of the Code. As a general rule laid down under s.21(2), the COC primarily consists only of financial creditors however, if a corporate debtor doesn’t has any financial creditor, then as per Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter the “CIRP Regulations”), the COC will consist of, 1) operational creditors, and 2) one representative each, elected by workmen and employees.

    The Code helms the COC as one of the steering bodies of the CIRP. As a result, various provisions of the Code acknowledge the significance accorded to the COC at the different stages of the CIRP.

    The RP is obliged to carry out every act in conducting business of the corporate debtor with COC’s prior approval. More specifically, s.28 of the Code lays down certain decisions which can’t be taken without prior clearance from the COC, like raising interim finance or changing capital structure of corporate debtor etc.  

    The COC remains in the saddle even at the very end of the CIRP. According to s.30(4) of the Code, for a valid approval, the R-Plan must be approved by at least 66% members of the COC. Regulation 39(3) of the CIRP Regulations, while further relying upon COC’s commercial wisdom, provides that the approved plan must have been strictly scrutinised and measured by the COC. And, once the COC approves the R-Plan, the RP becomes bound under s.31 of the Code to place it for review before the NCLT.

    Most importantly, the Code doesn’t subject the COC’s decision of approving the R-Plan to per se judicial review as the NCLT i.e. Adjudicating Authority (hereinafter “AA”) is obliged under s.31 of the Code to approve the R-Plan submitted to it by the RP. It may not grant such approval only on the basis of the limited grounds mentioned under s.30(2) of the Code. Similarly, NCLAT can examine appeals from such challenge only on the grounds mentioned under s.61(3) of the Code. On similar lines, the Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta and Ors., laid down the doctrine of commercial wisdom and crystallised the law on this point by observing that COC exercises its “commercial wisdom” while accepting, rejecting or abstaining the R-Plans submitted by the RAs to it.

    In this manner, the Code has conferred exclusive access to negotiations and the final hand in taking commercial decisions, to the COC.

    II. Commercial wisdom- “Non reviewable”

    Accruing to this statutory backdrop, Courts have adopted a deterrent approach in interfering with the commercial decisions taken by the COC.

    The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, while interpreting the Code’s preamble held that; as the fundamental aim of the Code is to revive and run the corporate debtor as a going concern, to balance the interests of all stakeholders, and to maximise the value of its assets, thus, CIRP can’t be at odds with the interests of the corporate debtor. And thus, paramount importance must be given during the CIRP to protect corporate debtor’s interests. In this context, the Court upheld the BLRC report which pegged the financial creditors (who constitute the COC) of the corporate debtor as the most qualified persons to manage and revive the said corporate debtor.

    It is pertinent to mention that the Supreme Court in another case, i.e. in K. Shashidhar v. IOB and Ors., observed certain intrinsic assumptions with regards to COC to explain the Code’s rationale for conferring it wide discretionary powers. The Court said that COC possess requisite expertise to analyse and assess the commercial viability of the R-Plans submitted to revive the corporate debtor and that its decisions are outcome of a thorough commercial analysis of the proposed resolutions based upon assessment, deliberations and voting and thus, judicial intervention in commercial decisions of the COC is barred to ensure completion of the CIRP within the timelines prescribed by the Code.

    In a comparatively recent case of Karad Urban Cooperative Bank Ltd. v Swwapnil Bhingardevay, the Apex Court, while saluting the commercial wisdom of the COC, observed that the decisions taken by the COC under its commercial wisdom are non-justiciable. The Court even remarked that as compared to COC, the NCLT has merely a “hand’s-off” role during the entire CIRP.   

    However, above decisions didn’t involve the issue of sanctity of process of law. These decisions are merely binding on the issue of exercise of “commercial wisdom” of the COC, and not whether the COC has the power to go beyond the process envisaged under the Code and mould it according to its whims and fancies under the guise of its “commercial wisdom”.  

    III. NCLAT’s decision in the instant case

    In the present case, the RP invited expressions of interest (EOI) from the interested RAs after initiation of the CIRP of corporate debtor, i.e. Ricoh India Ltd. After receiving EOIs, the RP issued process memorandum with the express approval of the COC to mandate the last date for submission of R-Plans. Two plans were submitted under the said deadline. Both the plans were opened by COC and discussions started within the COC in respect of these plans. However, after initiation of discussion and lapse of considerable time, the RP accepted two R-Plans which were submitted well beyond the last date of submission without issuing a fresh notice calling for EOIs. Most interestingly, one of these two plans, was approved by the COC as a successful plan and the RP moved an application under s.30(6) of the Code for the approval of AA. At this juncture, the unsuccessful RA (who submitted the R-Plan under the prescribed timeframe), filed miscellaneous application with the NCLT challenging the approval of the said plan.

    The AA clubbed both the matters and rejected the miscellaneous application filed by unsuccessful RA thereby, accepting the application filed by RP for approval of the R-Plan. The AA placed its reliance on K. Shashidar (supra), and held that “the commercial decision of the COC for approval of R-Plan is non-justiciable and hence, is required to be sanctioned by the adjudicating authority.” This decision was challenged by the unsuccessful RA before NCLAT in the instant case.

    The main issues before the NCLAT were 1) whether the RP with the approval of COC, was authorized to accept the R-Plans after the expiry of the deadline for submission of the Bid, without extending the timeline for submission of EOI? and 2) whether grant of approval by the COC to the RP, in accepting the R-Plan after the expiry of the deadline was under the commercial wisdom of the COC?

    In consonance with the jurisdictional bounds laid down in Essar Steel (supra), the NCLAT, while answering both of the issues in negative, described the RP’s act of accepting the R-Plan which was submitted beyond the mandated cut-off date, though, with due approval of COC, as “material irregularity” under s.61(3)(ii) of the Code. The NCLAT held that:

    “The act of the Resolution Professional to accept the R-Plan after opening the other bids, which were all submitted within the deadline for submission of R-Plan cannot be justified by any means and is a blatant misuse of the authority invested in the Resolution Professional to conduct CIRP.”

    It also observed that COC in exercise of its commercial wisdom doesn’t possess the power to authorise RP to “adopt a procedure in the conduct of CIRP which is, ab-initio illegal, arbitrary and against the Principles of Natural Justice.”

    The tribunal went on to remark that the RP with the prior approval of COC is fully authorised to call for fresh invitations of EOIs of R-Plans even after the expiry of last date of submission, provided that such timeline for submission of R-Plan can only be extended by publishing a fresh notice in Form ‘G’ under Regulation 36A of the CIRP Regulations. Lastly, NCLAT clarified that COC can’t accept R-Plans from those RAs who haven’t submitted EOI within the prescribed deadline. The NCLAT finally held that COC, under exercise of its commercial wisdom can’t adopt any special procedure for accepting R-Plan after expiration of the deadline otherwise it would tantamount to vitiation of CIRP.

    IV. Conclusion

    The NCLAT grabbed the opportunity with both hands and indisputably flagged the objectives in the preamble to the Code, which reads as “the objective of the IBC is resolution, in a time-bound manner, for maximization of assets”, and successfully established that the objective of maximisation of value doesn’t supersede the sanctity of the process under CIRP. The objective of maximisation of value of assets of the corporate debtor is intrinsically weaved with the sanctity of process and objective of speedy resolution and hence, must not be put upon a higher pedestal.  This submission gains certitude from the decision of the Supreme Court in the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta, wherein R.F. Nariman, J. said that “it is of utmost importance for all authorities concerned to follow…model timelines as closely as possible”. The decision of NCLAT in the instant case was commendable, for it dealt forensically with the meat of the matter, i.e. collision between maximisation of value and sanctity of law. However, it’s submitted that the Courts must further balance the conflict between maximisation of value and sanctity of process to build a water-tight case in near future by declaring the law on the basis of the objectives and provisions of the Code, the regulations and the BLRC report.

  • Proxy Advisors: A Look at the Growing Intermediary & Increasing Regulations

    Proxy Advisors: A Look at the Growing Intermediary & Increasing Regulations

    BY ABHIRAJ DAS, FOURTH YEAR STUDENT AT GNLU, GANDHINAGAR

    In the past few years, there have been some striking recommendations and red-flags being given by “proxy advisors” regarding corporate-governance of some of the leading incorporates of India. A few instances can be red-flagging the 35-years-long tenure of RIL’s auditors, or recommendation in the Tata-Mistry skirmishes. Very recently, in Crompton-Greeves Power, a huge value depreciation for minority shareholders owing to the issues of corporate governance & conflict of interest of independent director was highlighted.

    What are Proxy advisory firms? 

    Proxy advisory firms are independent analyst offering analysis and voting recommendations to the institutional shareholders and investors. Securities and Exchange Board of India (SEBI) defines proxy advisors as “a person who provides advice in relation to the rights of the shareholders and investors including recommendations on public offer or voting on agenda items.” The term “proxy-advisory” originates from the concept of “proxy voting” where shareholders authorizes other person to vote on his/her behalf, and offer services related to proxy-voting by aggregating-and-standardizing information.

    Roles/impact

    It is a gospel truth that shareholders do not pay much attention to the voting in the AGMs or EGMs. In large public listed companies, public shareholders have relatively small stakes and there remains a collective-action problem and “shareholder-apathy” which lead them to vote as per the vox populi, and institutional investors like mutual funds, banks, DFIs, insurance companies, etc. cannot possibly make an well informed decisions in such voting owing to the huge-number of stocks they handle. Proxy advisory firms (PAF) undertake heavy-data researches and analyse the major agendas which are subjected to voting, providing detailed reports on voting to strengthen the corporate governance within the company.

    The recommendations by these independent and expert firms have tendencies of de-stabilising (or re-stabilising) management and raise corporate governance standard as these advisories may be related to voting against re-appointment of independent directors, auditor’s appointment, M&A and corporate structuring where there seem possibilities that public shareholding might erode, and thus, have become important corporate intermediaries. While proxy advisories in India are still at nascent stage, the American ISS deal with around 44,000 meetings in 115 markets yearly to execute more than 10.2 million ballots representing 4.2 trillion shares. A recent study has shown that around 83% of ‘vote against’ recommendations include mainly “reappointment of non-executive directors” and “remuneration of statutory auditors”.

    Issues concerning the PAF

    In addition to the potentially huge impacts these firms have, there are several downsides as well. Sometimes, simultaneously these firms also offer voting advices to the shareholders of the same companies to whom they provide corporate governance recommendations which leads to conflict of interest. There are conflicts also when the key managerial persons of proxy firms hold important positions in the subject companies. Another major concern is that these advisory firms are not subjected to fiduciary duty to show that their recommendations are in the best interest of shareholders and the corporations. Independent study has shown that ratings used by these firms do not accurately foretell subject’s performance. Further, there have been diametrically opposite opinions on the same issue. Concerns are also there that they sometimes provide distorted recommendations to further their own interests. Another issue is that even when any error is highlighted they have not always been rectified.

    Recent Regulatory Developments in the US

    The Concept-Release of 2010 by the US Securities and Exchange Commission had raised concerns inter alia regarding the influence proxy advisors had over their clients “without appropriate oversight” or “an actual economic stake in the issuer”. Amendments have been adopted by SEC allows investors utilising proxy voting advice to receive “more transparent, accurate, and complete information on which to make their voting decisions.”

    In July 2020, Exchange Act Rule 14a-1(l) has been amended to include if a person (includes entity) offers proxy advises, it shall constitute as “solicitation” under s. 14a and that such persons shall be generally required to file and furnish information regarding definitive proxy statements. Further, paragraph ‘A’ is inserted to Rule 14a-1(I)(1)(iii) clarifying that the terms “solicit” and “solicitation” include any proxy voting advice.

    Addressing the issue of conflict-of-interest, amendment has been made to Rule 14a-2(b) which now obligates that proxy-voting recommendations includes the conflicts-of-interest disclosure specified in new Rule 14a2(b)(9)(i). Further facilitating informed decision-making by the clients of such advisors, a new Rule 14a-2(b)(9)(ii) has been adopted which requires that “proxy voting advice business” adopt and publicly disclose written policies and procedures. This new term provides flexibility to cover future business models which may engage in type of advice the rules aims to address, and does not merely base upon the businesses which presently provide such services. It has also been provisioned that the registrants i.e. the subject companies shall also be provided with the report of the voting-recommendations under Rule 14a-2(b)(9)(ii)(B). Para ‘E’ has been inserted to Rule 14a-9 to define the scope of ‘misleading’ which means “the failure to disclose material information regarding proxy-voting-advice, such as the business’s methodology, sources of information, or conflicts-of-interest.” Adoptions of these amendments addresses the different concerns with the proxy firms.

    Recent Regulatory Developments in India

    SEBI brought SEBI (Research Analyst) Regulations, 2014 within a few years of the advent of the industry in India. The Regulation requires such entities to register with SEBI and lays down internal policy, and also imposes a fiduciary duty to offer detailed disclosures if required. Further, firms must proffer unbiased advice based on reliable information. Under regulation 23, they are also required to disclose the reasoning to the public. An eight-point Code-of-Conduct for firms and their employees has been adduced which broadly covers honesty & good faith, diligence, conflict of interest, insider-trading or front-running, confidentiality, professional standards, compliance, and responsibility of senior management. Recently, SEBI has introduced Procedural Guidelines for Proxy Advisors and Grievance Resolution between listed entities and proxy advisors. These circulars are the result of SEBI Working Group which recommended improvements through disclosures of conflict-of-interests, voluntary best practises, setting up code-of-conduct which are to be followed by proxy advisors on “comply or explain” basis. One of the remarkable procedures required is that the firms must also share the recommendation to the subject company as well and to include company’s response thereto as addendum. This will allow subjects to clarify on any aspect which it considers have not been completely regarded while extending the proxy recommendations.

    It is very much evident that the circulars issued by SEBI are similar to the US SEC issued Rule Amendment for Proxy Voting Advice 2020 in various terms such as affording subject companies a copy of the recommendation, client access to company response, conflict of interest disclosure norms, etc. However, given the fact that Indian industry for proxy advisors is still at nascent stage, and the US market is relatively aged, it was prudent only on the part of the regulator to consider the US model. The advisory firms are required to disclose the recommendations on their website and are mandated to devise policies for voting advices including the situations when voting-recommendations are not to be offered. These policies are required to be reviewed at least once a year.

    It is pertinent to note that there is no specific mention about foreign proxy-advisory-firms in either of the circulars, thus it will be interesting to observe how the code-of-conduct, as was recommended by the Working Group, are applied to them. Another interesting aspect is that compulsory disclosures of revenue models, key income-sources, clientele have not been provisioned. Since there is a possibility of conflict-of-interest in situations where the firms may retaliate against the incorporates who didn’t avail their services by way of aggressive advices to their clients, though proxy advisors are required to disclose and mitigate any “potential” conflicts, the disclosures of the clientele could have offered reassurance against such recommendations. However, in case of any grievance the listed entities are at liberty to approach SEBI which shall investigate the matter considering non-compliance with regulation 24(2), which provides for Code-of-Conduct, r/w regulation 23(1) of SEBI (Research Analyst) Regulations, 2014 or the procedural guidelines circular recently issued. If any contravention is established, it can lead to inter alia suspension/cancellation of the registration under SEBI (Intermediaries) Regulations, 2008.

    Conclusion

    Shareholder’s votes have the potential of wide consequences on corporate decisions and governance of a company which in turn affects the market and economy ultimately. Therefore, there lies a fiduciary responsibility upon the institutional investors, who represent large number of shareholders, to vote in the best interest, and attributes a huge relevance to the recommendations made by the proxy-voting advisors. The extensive impact such recommendations may have and the possible conflict-of-interest which may arise are the major reasons for regulating these proxy-advisors.

    Having higher standards of transparency and oversight will certainly enhance the quality and credibility of this intermediary. These various aspects would require that investors take the ultimate decision based on the proxy advices and the company’s responses thereto, which would lead to more-informed exercise of voting rights and at the same time ensure that proxy advisors do not ‘control’ the voting. This sector needs nurturing at the hands of regulators & this could prove to be a major step. But time will only tell how these rules perform.

  • Desolated Future Of Investments In India- Disregarding The Vodafone Verdict

    Desolated Future Of Investments In India- Disregarding The Vodafone Verdict

    By Shobhit Shulka, second-year student at MNLU, Mumbai

    India is an attractive destination for foreign investment. However, given the hitherto arbitration regime in the country and uncertainty in smooth enforcement of awards in India, foreign companies are becoming more skeptical about investing in India. Even at a time when the judiciary has been more supportive of arbitration, the government has continued to be incredulous of the practice. The issue has  been further aggravated recently by the Solicitor General of India when he refused to accept the award given by the Permanent Seat of Arbitration in the case of Vodafone International Holdings BV v. The Republic of India (‘Vodafone Judgment’). This post briefly discusses the judicial trend on this issue and analyses the consequences of this orientation by the government towards arbitration.

    In a unanimous decision, The Permanent Seat of Arbitration ruled on 25th September 2020 that the Indian income tax authorities had violated the guarantee of fair and equitable treatment under the Bilateral Investment Treaty (‘BIT’) signed with the Netherlands, by retrospectively amending the law to demand Rs. 22,000 crores from Vodafone.The judgement seemed to bring the infamous retrospective tax battle to a close, however, closure is still uncertain. After the declaration of the award, India as a state had two options: 1) To accept the award and close this long pending matter which would suit India’s contention of it being a better place to do business, with a tax-friendly regime for business incorporators and foreign investors. 2) Challenge the award at another international forum and not implement the award as decided by the arbitral tribunal. At this juncture, the government seems more inclined towards the second option, which was affirmed bythe Solicitor General’s comments. However, this might have a severe impact on India’s tax friendly regime and would disincentivise investors and businesses to invest in India, at a time when the deteriorating economic conditions are in desperate need of such investments.

    Background of the case

    In May 2007, Vodafone bought a 67% stake in Hutchinson Telecommunications (‘Hutchinson’)for an $ 11bn deal, this included the mobile business and other assets of Hutchinson in India. In September that year, the Indian Government raised a demand of about 8000 crores in capital gains and withholding tax from Vodafone saying the company should have deducted the tax at source before making a payment to Hutchinson. Vodafone moved the Bombay High Court which ruled against Vodafone. It then appealed against the order in the Supreme Court, which ruled Vodafone’s interpretation of the law as the correct one and ruled that it did not have to pay any taxes. In an ideal world, the matter would have ended then and there. However, that same year the then Finance Minister came with a proposal to amend section 9(1)(i) of the Income Tax Act and retrospectively tax such deals. The Bill passed the onus on Vodafone to pay the taxes. The Government circumvented the effect of the apex court’s judgment by resorting to retrospective legislation and created an unpredictable and unstable business environment. Vodafone then challenged the amendment under the India-UK BIT and the India-Netherlands BIT. The arbitral award was announced in Vodafone’s favour, finding the Indian government in violation of section 4(1)of the India-Netherlands BIT.A BIT is an agreement between two sovereign states for the protection of investors and businesses from one state to another. The government’s stand has been that tax matters do not come under the purview of BITs. The retrospective law allowed the indirect transfers of Indian capital assets even if the transfer was a sale. Thus, the argument from the government has been that they should challenge the award under the tax treaty because it questions the sovereign right of the government. This award negates India’s general position that tax disputes do not come under the ambit of investment treaties. The Indian Revenue department has thus raised objections over the arbitral award coming under the purview of the BIT and not under the tax treaty.

    Options that India has to challenge the infamous award

    India stands at a tricky crossroad here as challenging this award seems very unreasonable as the dispute has already been ruled against India by the Supreme Court and then the arbitration tribunal. However, the government’s contention here is that the award seems to challenge its sovereign right to tax and would impact other cases against the government.

    Vodafone too cannot enforce its victory and will have to approach Indian courts again, because India does not recognise any foreign court in a commercial dispute that questions the state’s sovereign right to intervene. The Apex Court in State of West Bengal v. Keshoram Industries held that if the terms of an arbitration treaty are inconsistent with India’s sovereign laws, a court will not give effect to such treaty. This has resulted in the lapsing of 70 BITs between foreign governments and India which has lapsed since 2016 and is not being renewed. India’s latest bilateral investment deals, such as the India Belarus BIT in 2018 and the India Brazil BIT in 2020, have largely omitted from their domain, measures relating to taxes or compliance of tax obligations. In the future, India may negotiate vigorously to integrate such exclusions into bilateral investment treaties.

    Uncertainty of investment regimes in India

    Unless new agreements have been negotiated between India and the related transaction states, new investments in India between foreign investors and the country will cease to gain BIT security. Current investments related to BITs with ‘sunset provision’,which means that the treaties may continue such as, the India Netherlands BIT that specifies, for investments made before the termination, substantial provisions may continue to extend for fifteen years after the termination.  Several of India’s other deals, such as those with the United Kingdom and Mauritius, have identical ‘sunset’ provisions.

    However, this uncertainty could affect India’s business with global powerhouses such as the European Union (‘EU’).Talks aimed at reaching a free trade agreement between the EU and India (which may include investor rights provisions) were started in 2007 but allegedly reached a deadlock in 2013.India, even after a request from EU officials, is hesitant so far to briefly expand its BITs with EU countries to fill the gap with any new agreements. The consequence of the termination of these bilateral agreements is not limited to investment into India but by India too. As westbound investment by Indians rises, Indian investors are increasingly looking at BITs to secure their investments and provide have a roadmap to seek any violations in host countries of the promised safeguards. India’s woes, however, are not limited to uncertainties in trading regimes. The dismissal of an international arbitral award may also have a detrimental effect on the future of investments in India.

    What this means for future investments in India

    New York Convention awards were enforced in India through the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). Before this, India’s arbitration was afflicted by setbacks, lack of clarification on the grant of temporary relief, no finality on arbitral awards owing to court requests for setting aside, and a belief that arbitrators were not always unbiased and neutral. Though major cities in India may take several more years to become common international arbitration seats such as those in Singapore or Paris, India is becoming an arbitration-friendly jurisdiction.However, refusalto accept such awards by the government could have a severe impact on such ambitions.

    An international investment usually includes a trade arrangement (‘Investment Contract‘) between the foreign investor and the host state. Investment arrangements, either before domestic courts or regulatory tribunals or by international arbitration, allow for dispute settlement. Refusing to accept an international arbitration award will disincentivize the investors. Investors will start contemplating on investing in India as any dispute arises the government of such countries might not comply with the international order, putting the investors to losses. It creates a hindrance in the ease of doing business in such countries and thus discourages them to make any investments to indulge in any form of funding

    The way forward

    The Government has 90 days to file an appeal in Singapore, as the seat of the dispute was in Singapore. At a time when India is in desperate need of investments due to its deteriorating economic conditions, it seemed like it would accept the award and make India seem like a country where foreign investors have a remedy under International Law. However, quixotically enough the government is inclined to challenge the award further, with a slim chance of overturning the award. This could have a severe impact on investor confidence in India and could adversely affect foreign direct and indirect investments in India.

  • Getting the nod: Intersection of Companies Act & RERA

    Getting the nod: Intersection of Companies Act & RERA

    BY BODHISATTWA MAJUMDER, FIFTH YEAR STUDENT AT MNLU, MUMBAI

    Winding up of companies have been dealt by the company law tribunals jointly under the Companies Act, 1956, (“Former Act”), Companies Act, 2013 (“Act”) and Insolvency and Bankruptcy Code 2016 (“IBC”). In order to avoid jurisdictional disputes and for the speedy disposal of pending proceedings, the Tribunal has been given various powers under the legislations to oust the jurisdiction of other civil courts. One of them being Section 279 of the Act (formerly Section 446 under the former Act) which makes the leave of the tribunal mandatory for commencement/pendency of ‘any suit or legal proceeding’, after passing of an order of winding up or appointment of a liquidator in case of a new suit. However, there have been various instances of conflict between jurisdiction of the Tribunal and other specialised courts. These disputes have been brought due to the conflict between the Companies Act and other specialised legislations of niche subject areas such as Admiralty Law, Insurance Law or other Bankruptcy Laws.

    In the same vein, there arises a question of law regarding the requirement of leave of the Tribunal to commence or continue legal proceeding when placed against the authorised brought by the Regulation and Development) Act, 2016 (“RERA”). This article delves in the above question of law in the context of Kuldeep Kaur v. MVL (“Kuldeep Kaur”) where the same issue had been dealt summarily. This article strives to provide detailed analysis on the subject, based on the issues of law which may arise when the appeal is made against the Kuldeep Kaur ruling.

    RERA vis-a-vis Companies Act – A Comparative Approach

    Under the principles of statutory interpretation, a later statute always abrogates an earlier statute (leges posteriors priores contraries abrogant). However, the exception to this being that a special statue always prevails over a general statute (generalia specialibus non derogant). A specialized act operates in a limited field and its application is over a limited nature, as decided by the legislation while drafting the law. The Parliament while passing a specialized statute devotes it complete consideration over a subject and passes the statute tailor-made for achieving a specific purpose. In cases where there exists a conflict between two specialized legislations, with each having the non-obstante clause to override any other legislation, the conventional method of interpretation cannot be considered. In these cases the Court bases its decision on the consideration of policy and purpose behind the acts needs to be understood along with the language of the legislature.

    Time and again it has been argued that the Companies Act also operates in a specific area of law (Company law), and hence should be treated in par with the specialized legislations. However, the case laws have majorly maintained the stance against Companies Act that the Companies Act is an act relating to companies in general, thus being a general law. Be it against the RDDB Act in Allahabad Bank, Negotiable Instruments Act in Indorama Synthetics, or Admiralty Act in Raj Shipping. The RERA Act came into effect on 1st of April, 2016 for the purpose of laying a structure related to real estate sector and protection of consumers by speedy disposal of cases. It contained no provisions as such which provided for seeking leave of company law tribunals under §446 of the Companies Act, 1956. The proceedings under RERA stands in a different footing keeping the interests of homebuyers/promoters which does not allows or requires being influenced by the Companies Act. Hence, it can be reasonably assumed that in all possible scenarios of interpretation that the RERA shall prevail over the Companies Act due to being a later and special legislation.

    Existence Of Special Forums Oust Jurisdiction Of Company Court By Necessary Implication

    The Legislature may entrust a special tribunal or body with a jurisdiction which includes the jurisdiction to determine whether the preliminary state of facts exists as well as the jurisdiction, on finding that it does exist, to proceed further or to do something more. The Legislature shall have to consider whether there shall be an appeal from the decision of the tribunal as otherwise there will be none. In cases of this nature, the tribunal has jurisdiction to determine all facts including the existence of preliminary facts on which exercise of further jurisdiction depends. In the exercise of the jurisdiction the tribunal may decide facts wrongly or if no appeal is provided therefrom there is no appeal from the exercise of such jurisdiction. By the virtue of Section 79 of the RERA Act, the jurisdiction of all civil courts in respect of matters dealing with the RERA Act has been barred. This exclusion by the virtue of a provision in a statute presents itself as a textbook example of an expressed legislative intent.

    Hence, in cases of RERA matters, the jurisdiction of civil courts will be ousted by the RERA Authority by necessary implication. Similar stance was taken in Damji Valji Shah, where the court referred to Section 41 of the LIC Act which provided  that no civil Court shall have jurisdiction to entertain or adjudicate upon any matter which a Tribunal is empowered to decide or determine under that Act. The court held that it is undisputed that the Tribunal had jurisdiction to entertain the application of the Corporation and thereby given the exclusive jurisdiction over this matter.

    Section 446 and its influence on RERA: Analysis in context of Kuldeep Kaur Case

    In Kuldeep Kaur, the Rajasthan RERA Authority faced the similar question of law when a complaint was filed under Section 31 of RERA. These complaints were filed in a stage where there already been an appointment of the liquidator. The RERA Authority was faced the impediment of leave under Section 446 of the Act, and the matter dealt with the obligation of authorities under RERA.

    In order to understand the brief ruling provided in the 7-paged order of the authority, it is essential to understand why the dispute erupts in the first place. The genesis of the dispute arises due to the wide wording of the Section 446, which prohibits any commencement or continuation of any “suit or other legal proceeding” once a winding up order has been passed or a liquidator has been appointed. However, despite the liberal wording of the statute it has been held that this provision should be invoked judiciously and not include every legal proceeding. The courts of law while making an interpretation should decide upon each case at hand keeping the intent of the conflicting legislations and decide which forum will be ‘appropriate’. It must be kept in mind if a later legislation is enacted with an overriding provision, the legislating body drafted the same keeping in mind the previous legislations.

    Hence, the courts should refrain from construing a wide ambit and including forums which are not intended to be included. In Kuldeep Kaur, the bench rightly moved with the ruling of Damji Valji Shah, and concurred that as RERA is a later act and a specific one, it will prevail over the Act. The Court opined in this ruling that as the proceedings are pending under the RERA Act, which is a special act in this case. It was emphasised in Kuldeep Kaur that the RERA Act is a special act which has established specific forums for speedy disposal of the matters before it.

    Concluding remarks

    The Companies Act is general law for companies, and has been classified by judicial rulings when placed in contrast with other legislations. However, even if it is regarded special act for the sake of it along with RERA, the latter act consisting of non obstante clause shall prevail over the former. In Kuldeep Kaur’s case it was rightly observed that RERA Act is a special Act as it was enacted with a special purpose of regulating and promoting the real estate sector, with a specialised forum for the same. Its special nature is also borne out of Section 89 which is a non-obstante clause along with Section 79 of RERA further shows that it is a self-sustained code.

    The intention of RERA is to bring the complaints of allottees before the specified Authority to simplify the process, and that is indeed difficult if it is made to seek the leave of the company courts in the first stage. The Rajasthan RERA authority held in clear stance that it shall prevail over all earlier laws as well as general laws including Companies Act 2013. The final nail on the coffin was laid when the Court emphasized that arguendo, it was an older or general law, still, by the virtue of Section 89 would prevail over all general laws such as Companies Act. The ruling of Kuldeep Kaur represents the persisting problem of  conflict of jurisdiction which have arisen frequently due to the improper wording of the section. Despite the enactment of the Code, it is evident that the impediments in swift winding up of companies still remain at large.

  • Arbitrability of Fraud Disputes in India: Discussing the Development Post-Ayyasamy

    Arbitrability of Fraud Disputes in India: Discussing the Development Post-Ayyasamy

    BY ABHINAV GUPTA, FIFTH YEAR STUDENT AT NLU, JODHPUR

    Introduction

    The issue of arbitrability of fraud disputes has consistently been a predicament faced by the Indian Courts. The ever-developing jurisprudence on this issue did not seem to settle the debate and surely did not reflect the pro-arbitration ideology that Indian Courts seek to portray. The Courts in a quest to bring certainty and settle the position of law have ignored certain important questions that still need to be answered. In this article, the author seeks to highlight the recent developments in the jurisprudence regarding the arbitrability of fraud disputes and analyze the change in Indian Court’s stance over the years.

    A brief overview of position till Ayyasamy

    The issue regarding arbitrability of a dispute arises because the Arbitration and Conciliation Act, 1996 [‘the Act’] does not explicitly provide for disputes that are arbitrable or non-arbitrable. In such a scenario, while referring a case to arbitration under section 8 of the Act, a court has to see whether a valid arbitration agreement exists and if the subject matter of dispute is arbitrable.

    The issue regarding arbitrability of fraud first arose in the case of Abdul Kadir v. Madhav Prabhakar Oak [‘Abdul Kadir’], where the court held that court will refuse to refer disputes to arbitration if there are serious allegations of fraud and the party charged with fraud desires that the matter be tried in court.

    By placing reliance on this judgment Supreme Court of India[‘SCI’] in N. Radhakrishnan v. M/S. Mastero Engineers [‘N. Radhakrishnan’] held that matters of serious allegations of fraud cannot be properly dealt by an arbitrator and hence, in the interest of justice only a court of law can decide such complex matters. The position in N. Radhakrishnan has been discussed in detail in the post here.

    Indian regime saw a paradigm shift in this position in the case of A. Ayyasamy v. A. Paramasivam [‘Ayyasamy’] where it was categorically laid down that simple allegations of fraud touching upon the internal affairs of the party inter se and having no implication in the public domain are arbitrable.

    Development post-Ayyasamy

    One of the first cases post Ayyasamy inculcating its reasoning was Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Ors., where the SCI declared that mere allegation of fraud by a party to obstruct arbitration would not render disputes inarbitrable. Court also observed that the arbitrator so appointed can examine the allegations related to fraud.

    Even though there was consistency in court’s approach that mere allegation of fraud did not make a matter inarbitrable, there still was uncertainty as to what can be considered as “serious offence”. SCI to some extent tried tackling this uncertainty by explaining the judgment of Ayyasamy by delineating a twin test in Rashid Raza v. Sadaf Akhtar [‘Rashid Raza’].

    1.  Does the plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or

    2. Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

    The most recent and significant development in this regard has been the case of Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. [‘Avitel’]. In this case, HSBC and Avitel entered into a Shareholders Agreement. Avitel informed HSBC that they are in the advanced stage of finalizing a contract with BBC and was expected to generate huge revenues. Subsequently, HSBC discovered that there was no such contract and it was fabricated by Avitel in order to induce HSBC to invest. Due to this, HSBC invoked arbitration proceedings before the Singapore International Arbitration Chamber as per the dispute resolution clause.

    SCI while referring to Afcons Infrastructure v. Cherian Varkey and Booz Allen v. SBI Home Finance, observed that the statement “cases involving serious and specific allegation of fraud, fabrication of documents, forgery, impersonation, coercion etc.” have to be interpreted by applying the test laid down in Rashid Raza. It categorically laid down that same set of facts can lead to civil as well as criminal consequences and a matter will not cease to be arbitrable merely because criminal proceedings are pending in that matter. This is a significant deviation by the SCI from position in Ayyasamy which provided for a blanket bar on arbitrability by stating that if “serious allegations of fraud give rise to criminal office” then it is inarbitrable.

    SCI referred the matter for arbitration and stated that, the fraud does not have a “public flavour” and is not such that it would render the contract and the arbitration agreement null and void.  While discussing the issue at hand SCI also clarified that N. Radhakrishnan does not have precedential value while affirming the observation in Swiss Timing v. Organising Committee, which held N. Radhakrishnan to be per incuriam as it failed to consider essential precedents.

    Another judgment passed on the same day as Avitel was Deccan Paper Mills Co. Ltd. vs Regency Mahavir Properties [‘Deccan Paper Mills’], where the court relied on the observation in Avitel and held that if the matter has no “public overtone” and if a valid arbitration agreement exists, the court has to refer the dispute to arbitration.

    Analysis of the developments

    The observation in Ayyasamy and Rashid Raza that allegations of serious fraud are not fit to be decided in arbitration proceedings is problematic. The reasoning behind such observation by the court was that such a dispute requires collection and appreciation of evidence which can only be done by a civil court. This observation and reasoning is in complete disregard of section 27 of the Act. Section 27 of the Act allows the arbitral tribunal or a party to apply to the court for its assistance in taking of evidence and court can take evidence applying procedure as applicable in a proceeding before it. Moreover, even if party do not intend to take the assistance of courts, under section 19 of the Act, they are free to choose the rules of procedure. In such a scenario, parties can incorporate elaborate rules such as IBA Rules on Taking of Evidence for governing procedures related to evidence during arbitration proceedings.

    It is noteworthy that the SCI did not resort to such a reasoning in Avitel. In fact, the Court tried explaining the two tests laid down by Rashid Raza. The issue regarding Ayyasamy and Rashid Raza was that even when these cases changed the position of law from what was observed in N. Radhakrishnan, the usage of phrase “serious allegations of fraud” continued since the 1960s’ (see Abdul Kadir).The court, in these cases, failed to explain and remove the ambiguity surrounding cases that  can be categorized as ‘mere allegations of fraud simplicitor’ and cases that can be considered as ‘complex cases of fraud’.

    Avitel took a positive step towards explaining and narrowing the same. SCI referred to Rashid Raza to explain when the two tests can be considered satisfied. The first test is satisfied when the agreement or arbitration agreement could not have been entered into by the party if not for the fraud. The Court laid down the “public flavour” standard while explaining the second test. It observed that second test is satisfied when the allegations are made against the state or its instrumentalities and these allegations are questions arising in public domain rather than from a breach of contract.

    This kind of observation will also clear the uncertainty regarding the kind of merit-based analysis a court can conduct while determining the arbitrability of a dispute. Under Section 8 of the Act the court only has to analyze if a prima facie valid arbitration agreement exists and not enter into a merit-based analysis. The Court laying down a narrow test in Avitel seen in conjunction with the fact that in the 2015 amendment, legislature inserted the phrase “prima facie” in section 8 to reduce the judicial intervention, signifies a true movement towards the pro-arbitration approach.

    The aforementioned cases of Abdul Kadir, N. Radhakrishnan, and Ayyasamy show judiciary’s clear lack of confidence in capability of arbitral tribunals to handle complex matters with utmost care and caution. This may be due to the fact that India lacks an institutional arbitration setup. Where the objective of the 2015 amendment to the Act was to reduce judicial intervention, the 2019 amendment focused on the institutionalization of arbitration mechanism in India on recommendation of Justice Srikrishna Committee. Despite having some obvious concerns, this amendment is a positive step towards having qualified arbitrators and intuitional arbitration reinforcing the judiciary’s and international community’s trust in India as an arbitration hub.

    Conclusion

    Over the years, India has been criticized for being anti-arbitration and having unfettered judicial intervention in arbitration. In order to change this outlook, the 246th Law Commission Report suggested major changes in the Act in order to reduce judicial intervention and adopt a pro-arbitration approach. Avitel acts as a progressive precedent that would strengthen India’s position internationally and help it in achieving the status of an arbitration friendly jurisdiction. A change initiated by Ayyasamy having certain faults was molded appropriately by SCI in Avitel by narrowing the scope for judicial scrutiny. It remains to be seen whether upcoming cases on arbitrability of fraud apply the broader test laid down in Ayyasamy or a narrow test propounded in Avitel.

  • Future of Reliance in Retail: Analysing Competition Concerns

    Future of Reliance in Retail: Analysing Competition Concerns

    by Sampurna Kanungo and Sanjana Bhasin, fifth year students at NMIMS Kirit P. Mehta School of Law, Mumbai

    The recent acquisition of the retail, wholesale, warehousing and logistics undertaking of the Future Group by Reliance Retail Ventures Limited (“Reliance-Future acquisition”) has caused a wave in the market as it is a combination of two key market players in the organised retail segment. Post the acquisition, Reliance would be poised to pose a formidable threat to rivals and local players within the market along with the elimination of a key competitor. Under these circumstances, an investigation into the combination is warranted to ensure that the combination does not cause an appreciable adverse effect on competition in the relevant market.

    The proposed combination has been notified to the Competition Commission of India (‘CCI’) as per the statutory obligation imposed under Section 6(2) of the Competition Act, 2002. In the present deal, the parties to the acquisition have submitted that the relevant markets are (a) market for retail in India; and (b) market for B2B sales in India. In this article, the authors break down the decisional practice of the CCI to determine the extent to which such an assessment holds ground and analyse the treatment conferred upon unique aspects of the acquisition as well as explore the possibility of abuse of dominant position.

    1. Delineation of Relevant Market

    While assessing a combination, the foremost step is to delineate a “relevant market”. The market for retail sales in India is extremely fragmented and comprises of several smaller spheres such as the divide between online and offline segments, organised and unorganised markets etc., each of which are capable of constituting a separate market by itself. Further, a closer look at the parties to the transaction indicates that both have businesses that are spread out across the online/offline retail spectrum.

    a. Online/ Offline modes of distribution as a separate relevant market

    While considering the demarcation between online and offline retail markets, the decisional practice of the CCI, such as in the case of Ashish Ahuja V. Snapdeal,  has been to regard it as merely two modes of distribution of the same product and not two different relevant markets. Similarly, in the case of Jasper Infotech (Snapdeal) V. Kaff Appliances, the CCI considered the overall market share in the broader market of “supply and distribution of kitchen appliances in India” rather than assessing the market shares individually in the online and offline space.

    Interestingly, it is pertinent to note that post 2014, there has been a shift in the outlook of the CCI towards the treatment of online and offline markets. In the case of All India Online Vendors Association v. Flipkart India private limited, the relevant market was exclusively considered as “services provided by online marketplaces for selling of goods in India”, thus highlighting the online retail market as a separate relevant market altogether. The CCI has also acknowledged the growing importance of online commerce in its Market Study on E-Commerce, which highlights the limitation of a unified retail market as a whole on account of the nature of the goods and extent of price differential between sales channels and accordingly calls for a product specific assessment of markets. 

    Thus, the conception of retail sales as a broader relevant market as submitted by the parties may not be viable, given the decisional practice of the CCI in recent times. Further, the extent of substitutability between products available for sale via the online and offline modes has also been thrown into question post the COVID pandemic which has acted as a catalyst for the popularity and development of online channels of retail. The CCI has considered factors like ease of choice, convenience etc. for delineating a separate relevant market (of ‘radio cabs service’) in the case of Fast Track Call Cab Pvt. Ltd. V. ANI technologies Pvt. Ltd.,which could further be used to cement the position of online and offline channels of retail as separate relevant markets.

    b. Assessment of B2B/B2C sales as overlaps within the relevant market

    The other proposed market is the ‘market for B2B sales in India.’ The two common models for retail sales are Business to Business (‘B2B’) and Business to Consumer (‘B2C’). Following previous decisions of the CCI, B2B/ B2C Sales are usually analysed as a horizontal/vertical overlap between the parties and not as a separate relevant market. Overlaps are assessed within the contours of the determined relevant market. An overlap is considered to be horizontal if the parties are close competitors in similar lines of business. On the other hand, a vertical overlap refers to a situation wherein the parties are at different stages of the production chain, such as a combination between a manufacturer and a distributor. A vertical overlap may pose competition concerns since it has the ability to foreclose competition for other distributors.

    In case of the Reliance-Future acquisition, not only does Reliance gain a foothold in the B2B segment via the acquisition of the logistics and warehousing segment, it will also continue to operate a B2C business model by way of retail sales to customers through acquisition of physical stores. Since this transaction involves the presence of both business models, it would have to be assessed as a horizontal/vertical overlap within the relevant market.

    Illustratively, in Re: Walmart International Holdings, B2B business at the granular level of verticals (i.e. individual goods) was considered while assessing horizontal overlaps. This B2B segment had further been divided into organised and unorganised sectors, even though such a distinction had not been made by the parties. Further, B2C sales were considered under the segment of vertical overlaps. Since Walmart was not engaged in any online marketplace business for B2C sales (on account of such prohibition under the extant FDI Policy), the CCI did not find any vertical overlap.

    Thus, the CCI is likely to assess B2B/B2C sales while examining overlaps in the relevant product market.

    2. Assessment of Combination

    Post the determination of a relevant market, the effect on competition within that market on account of the proposed combination must be assessed. Pursuant to the same, certain unique aspects of the Reliance Future acquisition, such as the nature of the non-compete clause as well as the structure of e-commerce market itself and its implication on the proposed combination, warrant a more detailed examination.

    a. Analysing inordinately long Non-Compete Clauses

    One of the features of the Reliance-Future acquisition is the inclusion of a non-compete clause as one of the terms of the transaction. As per the Non-Compete Clause, Mr. Kishore Biyani and his family members have been barred from competing in the retail space for 15 years.

    The guiding principle for assessment of non-compete clauses is whether the restriction is “ancillary” i.e. directly related and necessary to the implementation of the combination. As a rule of thumb, the CCI has prescribed a period of 3 years in case of transfer of goodwill and know-how and 2 years for transfer of goodwill.

    Consequently, while such an inordinately long restriction period is likely to fall under CCI’s scanner, it is unlikely to sound the death knell for the transaction given the regulatory body’s favourable assessment of the same in recent times. CCI has permitted a  longer duration in certain sectors wherein customer loyalty would persist for longer duration. This specific carve out would prove to be beneficial for RRVL in justifying the long duration of the non-compete clause given the expansive loyalty base that has been garnered by Future Group, especially in case of its retail outlets such as Big Bazaar. While the CCI has ordered the reduction of the restriction period under non-compete clauses in numerous cases, a departure from the “ancillary” principle is not considered to be an infringement of the provisions of the Act. Further, the recent stance of the CCI regarding non-compete clauses has been indicative of a more relaxed assessment in view of modern business arrangements,  which can be gauged by a proposal to omit the obligation to disclose details of non-compete clauses.

    b. Increase in level of concentration due to network effects

    A significant threat to competition within the market is an increase in the level of concentration i.e. the presence of limited key players. A peculiar feature of the functioning of e-commerce platforms is the presence of network effects, which acts as a catalyst in increasing concentration in the market. Network Effect is a phenomenon whereby a product/ service becomes more valuable with the increase in number of users. The importance of e-commerce platforms further increases as growing number of users makes the platform more valuable, which attracts more sellers in return and leads to a ‘positive feedback loop’.

    In the present combination, combining both front end and back end services (logistics and warehousing), would make the platform more viable for sellers, which would conversely lead to a larger customer base. This is not only lucrative for emerging platforms such as Jio-Mart which doesn’t have an existing customer base, it can very quickly lead to a concentrated market in this case, especially when combined with the advantages of the existing brand value and loyalty base of the Future Group. Thus, the acquisition of back end services in particular would have the effect of strengthening the network effect of e-commerce platforms of Reliance, and lead to an increase in the level of concentration in the market.

    3. Abuse of dominant position

    The deal provides massive synergies to Reliance by doubling the retail outlets under operation alongside development of strong back-end and front-end retail businesses, conferring the highest market share to them in the organised retail segment. Key factors such as market share of the enterprise, size and resources of the enterprise and size and importance of the competitors are essential to determine the dominant position of the post-acquisition enterprise.

    With Reliance Industries now having access to a strong supply chain and warehousing facility, overlapping with their venture into the online retail space JioMart raises concerns of them abusing their dominant position in one relevant market i.e. offline retail to enter into, or protect, the other relevant market of e-commerce retail. It has been established that the regulator considers not just immediate effects on competition, but also scenarios where the combination may adversely affect competition in the future. Therefore, such vertical integration of the enterprises with large sales and service network puts them in a dominant position, making available the opportunity to indulge in unfair and discriminatory pricing and denying market access to new players in the offline organised retail segment and strengthening their position in the e-commerce retail.

    Conclusion

    The Reliance-Future acquisition is arguably one of the largest and most significant transactions in recent times, which is likely to have far-reaching consequences in the entire retail space. Consequently, it is imperative to analyse the effects of this combination on the overall level of competition in the market. While an analysis of anti-competitive agreements or abuse of dominance is not conclusive at this preliminary stage, an analysis from a merger control perspective highlights some key aspects. The question of delineating the relevant market has always been one of substantial uncertainty, and the CCI’s decision in this particular combination would be especially significant given that all stages of the production chain as well as different modes would have to be taken into consideration. Moreover, some aspects such as network effects and the ability to leverage position in one market to capture another would have a bearing on a subsequent assessment of dominance as well owing to the plausible increase in market share and concentration.

  • Anti-Arbitration Injunction Suits in India: A Nightmarish Scenario

    Anti-Arbitration Injunction Suits in India: A Nightmarish Scenario

    By Kabir Chaturvedi and Ridhima Bhardwaj, third-year students at RGNUL, Patiala

    On 12 August 2020, the Calcutta High Court – in the case of Balasore Alloys Limited v. Medima LLC (‘Balasore’) – ruled that “courts in India do have the power to grant anti-arbitration injunctions”, even against foreign seated arbitrations. This decision came just months after the Delhi High Court – in the case of Bina Modi and ors. v. Lalit Modi and Ors. (‘Bina Modi’) – stated that an anti-arbitral injunction suit is not maintainable. The law on anti-arbitration injunctions is already far from consistent but the handling of recent suits by the Indian Judiciary has been nightmarish. Analysing the two judgements, this article critiques the Balasore approach and advocates for the one adopted in Bina Modi. 

    Setting the Scene

    Justice Rajiv Sahai Endlaw in Bina Modi relied on Kvaerner Cementation India Limited v. Bajranglal Agarwal and Anr. in 2001 (‘Kvaerner’) given its precedential value and concluded that a civil court could not grant an anti-arbitration injunction. However, when Bina Modi – and subsequently Kvaerner – were raised before the Court in Balasore, Justice Shekhar B. Saraf placed an “overwhelming reliance” on the majority dictum in SBP & Co. v. Patel Engineering Limited in 2005 (‘SBP’) to rule that Indian Civil Courts could injunct arbitral proceedings. Through this reliance, he inferred that SBP had implicitly overruled Kvaerner and stated that Bina Modi is per incuriam because it ignored the decision in SBP. However, scrutiny of the facts and ratio decidendi of SBP indicate otherwise. 

    Addressing the Dichotomy between SBP and Kvaerner

    The matter before the Apex Court in Kvaerner was whether the court could act outside the purview of The Arbitration and Conciliation Act, 1996 (‘Act’) and grant a stay on arbitration proceedings. The court relied on a bare reading of section 16 of the act to conclude that a civil court does not have the jurisdiction to injunct an arbitral proceeding. Section 16(1) empowers the arbitral tribunal to rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement. 

    On the other hand, the seven-judge bench in SBP was summoned to decide the nature and scope of the exercise of power by the Chief Justice (or his designate) to refer parties to arbitration and appoint the arbitral tribunal, vested in them by sections 8 and 11 of the Act respectively. Subsequently, the bench also had to decide whether this power under sections 8 and 11 could be overridden by a tribunal’s power to decide its own jurisdiction under section 16. The potential overlap between the two was resolved when the bench established that such exercise of power was a judicial function and not an administrative function. The court held that “where the jurisdictional issues are decided under these Sections (8 or 11), Section 16 cannot be held to empower the arbitral tribunal to ignore the decision given by the judicial authority or the Chief Justice before the reference to it was made.”

    This limitation on the tribunal’s power exemplifies a hierarchy which is ensconced within the ecosystem of the Act – wherein the courts are placed on a higher rung. The judicial authorities’ power to review a decision of the tribunal regarding its jurisdiction under section 34 (recourse available to parties to apply for setting aside arbitral award) or section 37 (appealable orders) of the Act are further instances of the existence of this hierarchy within the Act, and were accentuated in SBP. These powers, however, fall under the purview of the Act. 

    An anti-arbitration injunction looks to essentially proscribe arbitration proceedings, and a civil court considering an objection to an anti-arbitration injunction suit which does not represent a substantive action on the basis of merits cannot be said to be exercising powers under sections 8 or 45 in the true sense. Therefore, when civil courts grant an anti-arbitration injunction, they exercise powers ordinarily conferred upon the tribunal under section 16, and operate outside the purview of the Act. The bench in SBP went on to unequivocally condemn any such court interference in arbitration proceedings outside the purview of the Act unless permitted by the Act itself, as it “is a complete code in itself”. 

    In a nutshell, the ratio in SBP was centred around the possible overlap and sharing of authority within the purview of the Act, while the Kvaerner judgment addressed the civil court’s jurisdiction to issue an anti-arbitral injunction outside the purview of the act. These two verdicts thus lay down rules in vastly different contexts and Kvaerner is evidently more relevant to the grant of anti-arbitral injunctions than SBP. Thus, it would be incorrect to assume that SBP implicitly overruled Kvaerner and civil courts can injunct arbitration proceedings. Therefore, the decision in Bina Modi cannot be invalidated by relying solely on SBP and should’ve been given precedential value in Balasore. 

    The Impracticality of Anti-Arbitral Injunctions 

    Apart from being legislatively flawed, the Balasore approach is also impractical. By mulling over an anti-arbitration injunction suit – and eventually not injuncting the arbitral proceedings – Justice Shekhar utilised judicial resources to deal with an issue an arbitral tribunal is competent to deal with under section 16 of the Act. Parties prefer arbitration to litigation because of its quick and efficient nature. When courts mull over anti-arbitration injunctions, it gives rise to prolonged judicial proceedings and interference at the initial stage itself. This creates uncertainty and adds to the costs to be borne by the parties to the dispute, making the whole process of arbitration tiresome, inefficient and expensive. Consequently, parties are discouraged to opt for India as a seat for arbitration. Further, there already exists a huge pendency of cases in India and instead of handling anti-arbitration injunction suits, it must adopt the practice of efficient utilisation of limited judicial resources to swiftly clear the backlog of the pending civil and criminal cases.

    Additionally, Justice Endlaw in Bina Modi cited section 41(h) of the Specific Relief Act, 1963 – which provides that an injunction cannot be granted when an equally efficacious relief can certainly be obtained by any other usual mode of proceeding – to conclude that anti-arbitration injunctions cannot be granted since the tribunal is empowered to offer efficacious relief under Section 16. Therefore, anti-arbitration injunctions amount to unnecessary judicial interference and are, as Gary B. Born puts it, “in most cases, deliberately obstructionist tactics, typically pursued in sympathetic local courts, aimed at disrupting the parties’ agreed arbitral mechanism.”[i] Judicial interference by Indian Courts is also one of the primary reasons why India is considered “non-friendly jurisdiction” for arbitration. India has adopted an aggressive pro-arbitration approach with the objective of making itself a hub of international arbitration, and the 2015 and 2019 Amendments to the Act are testament to the same. Therefore, granting anti-arbitral injunctions would conflict with our overarching objective of fueling the growth of international arbitrations in India.

    Conclusion

    Anti-Arbitration injunction suits in India have been a source of controversy since the decision in Kvaerner and many advocates for such injunctions can be found. However, injuncting an arbitral proceeding violates the basic tenets of arbitration. Misguided by malafide intentions of the parties, courts in India have fallen prey to unnecessarily interfering with – and perusal of – arbitration agreements, a task the tribunal is competent to carry out. Parties’ decision to arbitrate instead of litigate becomes redundant when Civil Courts take the matter into their own hands. Therefore, it is evident that Justice Shekhar’s approach in Balasore is not only legislatively flawed, but also impractical, and that the Bina Modi approach is the way forward.

    [i] Gary B. Born, International Commercial Arbitration (Kluwer Law Intl 2009).

  • Afflictions In The Mandatory Filing Of Records With The Information Utility Under IBC

    Afflictions In The Mandatory Filing Of Records With The Information Utility Under IBC

    BY SHREYASHI TIWARI, LEGAL OFFICER AT EXPORT IMPORT BANK OF INDIA AND SHAMBHAVI SRIVASTAVA, FIFTH-YEAR STUDENT AT NUSRL, RANCHI.

    Recently, in  Univalue Projects Pvt. Ltd v. Union of India & Ors., the Hon’ble Calcutta High Court has quashed the order passed by National Company Law Tribunal (“NCLT”), New Delhi whereby it was mandated that financial creditors file a record of default from the Information Utility (“IUs”) when an application for initiation of corporate insolvency resolution process is being filed under section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”). The article analyses the scope of powers conferred upon NCLT to formulate such laws and further highlights how the provisions of IBC as well as the rules and regulations thereunder clearly showcase existence of no such fixed criteria for establishing the proof of default before an adjudicating authority.

    Background of the case

    The petitions in the present case have been filed against the impugned order passed by the Registrar of NCLT, New Delhi, with the approval of the Hon’ble Acting President of the NCLT, New Delhi dated May 12, 2020 passed by NCLT, New Delhi, whereby it was made  mandatory for the financial creditors at the time of filing an application under Section 7 of the IBC, to submit record of default from IU before the NCLT. Further, the order also allowed for the said provision to be made applicable to the applications which have been pending for admission before the NCLT under Section 7 whereby  it would be mandatory for the financial creditors to submit such information to the IUs  before the next date of hearing in order for their applications to not be dismissed. 

    Concept of Information Utility

    IU  is one of the four essential pillars of the IBC. Section 210 of IBC provides for registration of IUs  for the purpose of providing core services viz. accepting, recording authentication & verification of the financial information submitted by a person (Corporate/Operational Debtor or Insolvency Professional) to persons as may be specified, thus,  IUs act as a catalyst in the CIRP process.  The IUs are regulated vide the IBBI (Information Utility) Regulations, 2017. Despite having an indispensable role, the IU continues to be the least utilised even after a passage of three years since IBC was passed.

    It was in the light of the above that the NCLT passed the order mandating the Financial Creditors who approach the NCLT for CIRP (including the ones already pending before the bench) to mandatorily file ‘default record’ from IU.

    Repercussions that would have followed the NCLT judgment

    IBC defines “core services” under section 213 as all the services which are provided by the IUs. However, there do exist various anomalies in the IBBI (Information Utility) Regulations, 2017 (“IU Regulations”)which would have caused undue impact on the CIRP had the NCLT’s order mandating the filing of records with the IU been upheld. For example, Regulation 19(3) of the IU Regulations states that a user can access information stored with an IU through any IU. It is not unknown that all the companies have potentially sensitive data which may put the company in a vulnerable position if accessed by the general public. The risk of data piracy and data theft mulls over the financial creditors, operational creditors and corporate debtors, considering that the entire database is digital and hence, they might prefer not revealing the information in its full capacity. Similarly, Regulation 20 of the IU Regulation stipulates that the IU should provide an acknowledgment in the light of the data not being mishandled. The draft regulations provided that such acknowledgment shall be coupled with digital signature of the IU.  However, since the IU Regulations do not resonate the same, it may bring in shadow the credibility of the IU in case of any mismanagement with the data.

    Moreover, the IU Regulation 20(1) also states that the information shall be submitted in accordance with ‘Form C’ of the schedule provided in the IU Regulation, much against the framework of IBC which intends the IUs to be an electronic repository of financial information, and not merely one conventional document management system. Even the electronic storing of the data comes with its own repercussions. Yet another issue arises with IU Regulation 25 (2) which provides for the authority to any user to unilaterally mark any data as erroneous. This regulation, hence, provides arbitrary authority to any user to manipulate the data, since the IUs, upon registration, provide a unique identifier under IU Regulation 18, and hence, a user may access the information stored with an IU through any IU Therefore, such access  makes the company vulnerable to unforeseeable risks and damages.

    Merely mandating that the IUs adopt a “Secure system” as per Regulation 20 is not enough to ensure data protection of any company and cannot be used as admissible evidence with already so many loopholes existing.

    More often than not, IUs have been faced with an entry barrier. This is one of the most fundamental reasons as to why till today there exists but one IU (National e-Governance Services Ltd. (NeSL) in India. Regulation 3 of the IU Regulations mandates the IUs to have a net worth of at least Rs. 50 crores, and further prevents foreign control of IUs. Moreover, Regulation 6(2)(e) provides that an IU must pay a fee of fifty lakh rupees to the Board annually. For a financially struggling nation, placing such minimum eligibility criteria has no rationale.  This may lead to monopoly in the market structure.

    Further, the entity, since it would be in possession of such sensitive information, should be in a position to leverage cut tint edge technology. This in turn puts more burden on NeSL to carry out the functions single handedly on such a massive scale.  Hence, the companies do not resort to IUs.

    NCLT’s power to issue such orders

    Needless to mention, the judgment of the NCLT has attempted to implement IBC in its letter and spirit. However, the question arises if the NCLT’s jurisdiction is wide enough to pass such orders?

    This aspect was analysed at length by the Hon’ble Calcutta High Court  taking a  stance that it is outside the ambit of NCLT or the Registrar of NCLT to formulate laws and policies which are not in consonance with the parent acts which in this scenario is the Companies Act, 2013 (“CA, 2013”) as well as the IBC, 2016. The power of tribunals, when it comes to admitting evidence and following the rules of procedure, essentially should not be in In the present case, NCLT’s sudden order would affect the substantive rights of the financial creditors thus creating hindrances in timely recovery of their dues from the debtors, the very purpose of the IBC. In breaking down the limits of the nature of power, while tribunals such as NCLT/NCLAT are vested with incidental powers, such powers can only be exercised when there is no express provision prohibiting such incident or ancillary powers. The Supreme Court has held that incidental and tribunals must be vested with incidental and ancillary powers in order to provide justice to the parties as long as contrary provisions with respect to the same already exists. The Calcutta High Court ruled affirmed the ratio laid down in Union of India v. Paras Laminates that “[T]he powers of the Tribunal are no doubt limited. Its area of jurisdiction is clearly defined, but within the bounds of its jurisdiction, it has all the powers expressly and impliedly granted. The implied grant is, of course, limited by the express grant.” The Calcutta HC cited Section 424(1) of Companies Act, 2013 which mentions ‘natural justice’ as one such express criteria for the orders which are passed by NCLT and found the May 2020 order in violation of the same, thereby NCLT exceeding the scope of ancillary/incidental powers conferred upon it.

    Methods of proving ‘existence of debt’

    As mentioned, the IUs store in the information that helps in ascertaining the existence of a debt of a company. However, IBC also provides for other provisions that assist in concluding the existence of the debt. For example, interpreting Section 7(3)(a) of IBC, it clearly provides that a record of default submitted by an applicant is one of the methods to establish ‘existence of debt’ accrued to a financial creditor. Hence, section 7(3)(a) is disjunctive in nature and in addition to the records submitted to the IU, also enumerates any other record and evidence of default as may be specified as documents that can be submitted by the financial creditor to prove corporate debtor’s debt. The respondents argued that the term ‘as may be specified’ in Section 7(3)(a) be applicable to all the three conditions mentioned therein. The Court refuted their claim by applying the rules of interpretation and principles of litera legis to the said provision, and affirmed the term is applicable to  any of the three categories. The Court also identified that  ‘Part V’ of Form-1 under Rule 4(1) of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules, 2016”)  read with Regulation 8 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provide more than one category such as a financial contract supported by financial statements, records of withdrawal by corporate debtor, order of court/tribunal adjudicated upon non-payment of debt etc. as other documents that can be attached to application under Section 7 to prove existence of debt.

    Moreover, the Supreme Court has, in the case of Swiss Ribbons (P) Ltd v. Union of India, enumerated eight classes of documents enumerated under Part V- Form 1 of AA Rules, 2016 as ‘other sources which evidence a financial debt.’

    Section 215 is not mandatory in nature

    The word ‘shall’ used in Section 215(b) of IBC makes it mandatory for the financial creditors to submit information to the IUs which is in contradistinction to ‘may’ used in Section 215 (c) for operational creditors.  The Calcutta High Court in Univalue Projects Pvt. Ltd. v. The Union of India & Ors. And Cygnus Investments and Finance Pvt. Ltd. & Anr.v. The Union of India & Ors., refuted the claim made on the grounds of interpretation of the provisions stating that Section 215(1) begins with stating ‘any person who intends to submit financial information’ which implies that the intention of provision is not to make it mandatory to submit financial information to IU and the heading of any provision does not necessarily limit the scope of provisions thereunder. On a harmonious construction of Section 215 with Section 7 of IBC as well as the rules and regulations thereunder would also render the same opinion wherein submitting of any financial information with the IU is not a compulsory precondition for admission of application before the NCLT/NCLAT.

    Conclusion

    The basic aim of IBC as a legislation is not only to minimise the liquidation of corporate entities but also to ensure recovery of dues in a timely manner. The order passed by NCLT Delhi created an unnecessary barrier in the process of financial creditors’ filing of claim under IBC. It attempted to prove redundant the claims of those applications which are pre-existing and have been filed under Section 7 of the IBC, 2016  pending before the various Benches of the NCLT, prior to such final hearing of these applications. This leads to creation of new financial disabilities for the creditors and hence alters the rights available to it.  In the present case, the petitioner Cygnus Investment pressed writ petition citing urgency for initiating insolvency resolution process. Thus, ‘time’ being one of the most important criteria in recovery legislations, the said NCLT Order wrongly interpreted the provisions of IBC (say Section 7(3), Section 215 etc.) and clearly ignored the various methods of submitting records of evidence provided under the various rules and regulations thereunder.  An observation however made by the Court that under Section 215 even IBBI does not carry the power of retrospective rule making is something future discussions over the issue would provide better clarification. This is because the Court highlighted that the current order passed by the NCLT  (a delegate) is as per Section 240 of IBC whereby IBBI can formulate regulations of the nature of ‘delegated legislation’ and even IBBI has not been conferred with the power of retrospective regulation making thus rendering the impugned order promulgated by the NCLT is bad in law.