The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • Could The UK Face The Fire Of Investment Claims From Huawei? – An Analysis

    Could The UK Face The Fire Of Investment Claims From Huawei? – An Analysis

    BY SUNIL SINGH, FOURTH-YEAR STUDENT AND SOURAV VERMA THIRD-YEAR STUDENT AT HNLU, RAIPUR

    Huawei is a Chinese phone-maker company. It is the world’s second largest smartphone supplier with 18% market share. It started its operation in the UK in 2001 and since then it had strong ties with the country. In 2012, The company surpassed Euro 2 billion five-year investment and procurement target for UK, thereby becoming one of Britain’s largest sources of investment from China. The Company invests in R&D partnerships with British universities and works with UK’s top academic institutions.

    However, On 15th July, the UK government banned Huawei from its 5G infrastructure, by reversing its January order where Huawei was excluded from participating in sensitive ‘core’ parts of 5G and gigabit-capable networks. According to the order passed in July, the telecom operators by the end of this year had to stop buying any 5G equipment from Huawei and also were directed to remove all the 5G gears installed in their telecom network by the end of 2027. This decision came forth as a result of a report submitted by the National Cyber Security Centre (‘NCSC’) which highlighted some “significant technical issues”. The core issue highlighted in the report was Huawei’s relation with the Chinese govt. This caused reasonable amount of apprehension that Huawei’s equipment could be used by the Chinese govt. for the purpose of conducting espionage.

    However, the decision has some repercussions and can backfire against the UK in the form of investment claims resulting from the 1986 UK-China Bilateral Investment Treaty (‘BIT’). The authors through this article attempt to evaluate – whether the level of security contemplated by the BIT between the UK and China is impaired by the govt.’s decision to ban Huawei from participating from its 5g infrastructure. Further, the article analyses the safeguards that the UK could use under the BIT and customary international law in the context of investment arbitrations resulting from such infringements.

    Protection against Expropriation

    Expropriation is the act of a govt. claiming private property forcibly from the owners, ostensibly to be used for the benefit of the general public. In the context of international investment, an act/measure of state is said to be expropriatory  in nature if such an act deprives the foreign Investor from the economical or other benefits arising from his investment. Foreign investors are often protected by an expropriation clause provided in the BIT.

    The expropriation clause, as provided in Article 5 of the UK-China BIT, stipulates the host state’s pledge not to forcefully deny the investor of the contracting party of its investment or to implement any action which might adversely affect the valuation of the invested property of the contracting party.

    Regardless of the consequences of the individual expropriation cases, in expropriation disputes, tribunals usually look at the overall severity of the conduct of the host state to decide whether or not, the substantial protection under the expropriation clause can be conferred upon the investors. If the tribunal is of the view that an expropriation has taken place, such an action will be in the breach of relevant agreement or treaty unless the owner is not compensated. However, the liability of compensation stands precluded for acts concomitant with public interest, provided that the acts performed are not discriminatory in nature and the investors are duly reimbursed by the host state.

    Usually, the state takes the defence of ‘The police powers doctrine’, which basically acts as a frontier safeguard in situations of expropriation. Police powers doctrine signifies powers that reside in the governments., allowing them to take bona fide, non-discriminatory action in general to preserve public welfare. Such rights grant the state the right to control the interests of the public in its jurisdiction, even though the investment is significantly impacted. The UK hence, can defend its act by contending that the measure was introduced as a part of the police forces of the state.

    Even though the BIT does not include any specific clause in this respect, as a principle of customary international law, its acceptability is not subject to a specific provision to that effect. Additionally, several ISDS tribunals have also ruled that when operating in execution of their police powers, states do not breach any BIT obligations.

    Another defence originating from customary international law is that of ‘necessity’ resulting from Article 25 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (‘ARSIWA’). Although the presence of urgency as a basis for the avoidance of wrongdoing under international law is no longer questioned, grounds of invocation of Article 25 of ARSIWA have a high threshold to avoid abuse[i]. Various sources of international law (present state policy, rulings of the international forum, and academic writings[ii]) amply support the need to take stringent approach in interpretation of ‘necessity’ as a defence. For instance, in the Rainbow Warrior arbitration[iii], the arbitral tribunal expressed doubt as to the existence of the defence of necessity. It observed that the Commission’s draft article “allegedly authorises a state to take unlawful action invoking the defence of necessity” and identified the commission’s proposal to be “controversial”. The plausibility of this defence may therefore rely on a case-by-case basis, paying attention to the responsibilities from the measures, as well as the circumstances surrounding them such as the scope of the obligation, the degree of the effect, the expediency of the contested measure and the factual conditions surrounding it.

    National Treatment and Most Favoured Nation Clause

    National Treatment and the Most Favoured Nation Clauses are the two types of status given by one contracting state to another for easy regulation of trade & investment. While under national treatment clause both – goods imported from contracting state and locally produced ones – are treated equally, MFN Clause ensures that one party is treated no less favourably by the respective member states to a treaty than any other member state. In other words, restricts the states from acting in a discriminate manner, under identical conditions, between the investors of the contracting state and local investors or other overseas investors. This means that pursuant to Article 3 of the UK-china BIT, the UK is under an obligation not to differentiate between Huawei and other locally or foreign investors under identical conditions. In order to safeguard UK’s position, the examination that needs to be made here is about interpreting the term ‘like circumstances’. The term ‘like circumstances’ ensures that only investors or investments with similar traits are compared. These conditions include not only competition in the relevant business sector or economic sectors but also other specific conditions, including the legal and regulatory system in place, or if the differential treatment is rendered on the basis of certain legitimate welfare goals[iv] .

    Thus, invocation of these clauses requisites a traditional fact-specific interpretation and requires the conditions surrounding the investment disputes to be holistically considered. After looking into situations in entirety, some awards such as Daniel Midland v. United Mexican States, have held that investors or investments, despite being in “identical situations” have been treated unfairly on the basis of their nationality. However, awards have also been made, for instance, in the case of Grand River Enterprises v. the United States of America, where courts have recognised differences in treatment between investors or investments that are plausibly related to valid public welfare goals and also have given weight to whether investors or investments are subject to similar legal requirements according to their conditions.

    In addition to investment law, a breach of the status of MFN through the prism of international trade law may theoretically amount to violation of the obligations of the World Trade Organization (‘WTO’) between UK and China. Nonetheless, it is important to note that member nations are entitled to exclude from being governed by these commitments in such matters relating to national security. Under the defence exceptions of Article XXI of the General Agreement on the Trade and Tariffs (‘GATT’), it is noteworthy that the exception is given to any action, which is deemed necessary for the safety of ‘critical security interests’. For instance, in 2019, in a WTO settlement between Russia and Ukraine, WTO affirmed the assertion of a national security exemption under the GATT in order to validate Russia’s trade blockade in breach of some WTO obligations with a regard to national security.

    Conclusion

    This ban can potentially trigger investment claims against the UK as Huawei already has made its intention to initiate investment claims against Canada, Australia the Czech Republic, if the ban violates its right as a foreign investor. However, this ban was applauded by countries like USA and Australia who already have banned Huawei from their 5G infrastructure. The UK govt. may justify the ban on grounds of national security. However, the BIT provides sufficient space to accommodate Huawei’s claims. It will be interesting to see how these claims will be dealt with by arbitral tribunals or some other quasi-judicial body.

    Alternatively, a solution may also be adopted to avoid disputes: instead of blanket-banning Huawei, the UK government may provide Huawei a window of 6 months or 1 year to remove all gears that are susceptible of snooping and replace them with new gears under the strict supervision of NCSC – this may prove to be a win-win situation for both the parties. Howsoever, this idea too seems far-fetched and is unlikely to happen, for UK’s decision is influenced by the US govt., which is already in loggerheads with the Chinese govt. over trade policies.

    [i] Commentary to the Articles on the Responsibility of States for Internationally Wrongful Acts, ILC Yearbook 2001/II (2),80 Para 2; CMS V Argentina (n 4) Para 317

    [ii] August Reinisch, ‘Necessity in International Arbitration’ (2010) 41 Netherlands Yearbook of International Law 142, Badar AIModarra, ‘The defense of Necessity in International Law and Investor Versus State Dispute Settlement’ (2019) 23 (37) Journal of Legal Studies 78

    [iii] France-New Zealand Arbitration Tribunal, 82 I.L.R. 500 (1990)

    [iv] Drafter’s Note on Interpretation of “In like circumstances” under National Treatment and Most Favoured Nation Treatment, http’//www.mfat.govt.nz/assets/Trans-Pacific-Partnership/Other-documents/Interpretation-of-In-Like-Circumstances.pdf.

  • HC’s Power To Review It’s Order For Appointment Of Arbitrator

    HC’s Power To Review It’s Order For Appointment Of Arbitrator

    BY AYUSHI PANDIT, FOURTH-YEAR STUDENT AND PRANJAL PANDEY, FIFTH-YEAR STUDENT AT MNLU, NAGPUR

    Introduction

    The arbitration regime in India has been changing it facets from changing judicial mindset towards arbitration to making India the hub of ICA. The last quarter of 2019 saw significant developments with the Supreme Court rendering judgments that will have lasting impact on how the arbitrations are concluded in India. If India is to be seen as a country having a mature and efficacious arbitration regime, arbitration should be treated as an independent mechanism. There exists the cardinal rule of minimal judicial intervention under the Arbitration and Conciliation Act, 1996 (‘the Act’). When parties have chosen arbitration as their preferred mode of dispute resolution party autonomy needs to be respected and given full play. Thus, the scope of the same should be kept to minimum possible. Owing to the minimum judicial intervention, courts rarely review/recall their orders.

    In case of a pre-existing arbitration agreement, parties have autonomy for the appointment of arbitrator. However, despite a pre-existing agreement to arbitrate it is possible for the party(s) unwilling to arbitrate to frustrate the terms of the agreement and delay the appointment of arbitrator. In any of the similar circumstances it is a right of either of the parties to seek for appointment of arbitrator from courts vide section 11 of the Act for both ICA and domestic Arbitrations.

    The present article discusses the contemporary jurisprudence in the appointment of arbitrators by courts in light of the recent judicial pronouncements and legislative amendments. Making a reference to Adani Enterprises Limited v. Antikeros Shipping Corporation wherein the Bombay High Court recalled an order for appointment of arbitrator in an ICA within the meaning of section 2(1)(f) of the Act on the ground of order being null and non-est. HCs lack inherent jurisdiction for appointment of arbitrator, when either of the party fails to appoint an arbitrator in ICA. Recognizing that the body corporate in question is incorporated and functions out of India, an order passed by HC for the appointment of arbitrator calls for want of jurisdiction and was hence recalled in addition to being barred by limitation period. The subsequent portion of the article discusses at what stage of proceeding a review petition is maintainable asking for a review on procedural grounds.

    Appointment of Arbitrator u/s 11

    When the parties are unable to appoint arbitrators within 30 days from the receipt of request to do so, recourse to section 11 can be taken. In ICA jurisdiction for appointment of sole/third arbitrator vests solely with Apex Court. In any arbitration other than ICA, HCs are vested with the jurisdiction for appointment of sole/third arbitrators on request of the parties vide Section 11(12)(b) of the Act.  In ICA, when the dispute is of a specified value, the jurisdiction for filing all applications or appeals arising out of such arbitration under the Act vests solely with the commercial division of the respective HC. In similar circumstances, arbitrations other than ICA where the subject matter of dispute is commercial with specified value, the jurisdiction for filing all applications or appeals arising out of such arbitration under the Act vests solely with any principal civil court of original jurisdiction in a district and heard and disposed of by the commercial court exercising territorial Jurisdiction.

    Jurisdiction of High Courts to recall their Orders

    It was a contentious aspect, because the Act does not provide the Chief Justice with the power to review its order passed under section 11, and the Act being a self-contained Code impliedly excludes the applicability of general procedural law. Hence, the legislative intent of judicial non-intervention must be duly acknowledged.  To clarify, the SC carved out the difference between a procedural review and review on merits. It was held that procedural review is an inherent power of the court/tribunal to set aside a palpably erroneous order passed under a misapprehension and  on the contrary, a review on merits is specifically provided by the statute.

    However, when the verdict of the court is erroneous due to a procedural default, the petitioners are not precluded from seeking a procedural review of the matter. HCs possess inherent jurisdiction to recall their orders when either of the parties have committed a procedural irregularity which stretches to the root of the matter inter alia, an order for appointment of arbitrator passed by a court lacking jurisdiction or an order for appointment of arbitrator passed in the absence of arbitration agreement.

    The division bench of the Bombay HC set aside the order of a single bench in an appeal filed u/s 37 of the Act which recalled an order for appointment of arbitrator on the ground that Part 1 did not prescribe any provision for the court to review its own orders. A petition was raised before SC for consideration of this issue. Then the Apex Court in the case of Municipal Corporation of Greater Mumbai & Anr clarified that HCs being the courts of record must have an inherent jurisdiction to correct the records. The acts and proceedings enrolled in perpetual memory and testimony of the Court must be in accordance with law and entitled for review/recall if vitiated by any patent illegality. The SC relied on various judicial precedents inter alia National Sewing Thread Co. Ltd. v. James Chadwick & Bros. Ltd concluded that HC being constitutional courts and superior court of record have an inherent power to recall its own orders. In the instant case parties did not choose for arbitration as a forum for dispute resolution. The dispute resolution contract expressly stated an in-house dispute resolution mechanism as the first resort and expressly repudiated for arbitration as a method for dispute resolution, Hence, an order for appointment of arbitrator which is bad in law and is a sheer procedural default, must be ratified. 

    The power of courts enshrined in section 11(6) is non-derogable. The same cannot be waived of by consent or acquiescence. It can be only vested by a statute. This non-derogable power is not barred by the law of limitation. It is well within the jurisdiction of the courts to condone the delay in filing for a review petition if the impugned order is vitiated by parent illegality. 

    Adani Enterprises Limited v. Antikeros Shipping Corporation

    The dispute arose between Antikeros Shipping Corporation (company incorporated in Liberia) and Adani Enterprises Limited (company incorporated in India). The parties on failing to appoint an arbitrator resorted to relief envisaged in section 11 of the Act. Being undisputed that the impugned dispute is an ICA. Hence, HCs inherently lacked jurisdiction for appointment of sole/third arbitrator in an ICA. Jurisdiction for the same exclusively vests with the SC.

    A review petition was filed seeking a review of the order for appointment of arbitrator on the ground of suffering from procedural default. The Bombay HC concluded that the impugned order called for want of jurisdiction. The impugned dispute qualified to be an ICA. 

    The dispute being an ICA, calls for an application for the appointment of arbitrator to be filed before SC and not before the HC. In view of the order being null and non-est in law condoned the delay of eight years and the review petition was allowed and the impugned order was recalled.

    In another significant ruling the Allahabad HC refused to exercise its power under section 11 of the Act, as the recourse under section 15(6) was not taken by the applicant. The Court observed that where the mandate of an arbitrator terminates by virtue of section 15(6), a substituted arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. Once the parties fail to appoint an arbitrator in terms of the rules, only then the Chief Justice or his delegate under section 11(6) on a request by a party can appoint an arbitration. In the instant case, the procedure was not followed therefore review petition was not held maintainable.

    Conclusion

    The Law Commission of India observed that ad hoc arbitration in India usually ends up in the shackles of litigation. Thus, to ensure a successful enactment of minimal judicial intervention both judiciary and the legislature are taking efforts for institutionalization of arbitration. This by and large includes referring to the rules of Arbitral Institutions at the stage of formation of arbitration agreement itself. The clause “Any Institution designated by such Court” in the act can be inferred as a statutorily formed Arbitration institution conferred with the status of national importance. In line with this school of thought, the 2019 Amendment Act  seeks to establish the body- The Arbitration Council of India, which is an integral step towards institutionalization of Arbitration. Bodies like Delhi International Arbitration Centre and Mumbai Council of International Arbitration (MCIA) have been successfully implementing the recommendations of the committee and Courts often refer the arbitral disputes to these institutions. Thus, this will thus ensure a paradigm shift to project India as the hub of arbitration.  

  • Cryptocurrency And Dispute Resolution

    Cryptocurrency And Dispute Resolution

    BY PRIYA AGARWAL, FIFTH-YEAR STUDENT AT RMLNLU, LUCKNOW AND RIYA AGARWAL, FOURTH-YEAR STUDENT AT VIPS, IP UNIVERSITY, DELHI

    Disruptive Technology is any innovation that changes the way how the industry and markets operate. Its attributes are comparatively superior and therefore can change consumer behavior and sweep away old practices. Television, Radio, and GPS, etc. were all disruptive technologies in their own time. Currently,  the most talked about disruptive technology is ‘Blockchain’ which is often confused with Artificial Intelligence (‘AI’) but is quite different as AI delivers completely new services while Blockchain has the potential to revamp currently existing processes.

    Blockchain, in simple terms, is a register or distributed ledger. It is an open-ended decentraliSed software platform enabling smart contracts and decentralised applications. “Each transaction is added to a chain of all previous transactions, validated by a network of computers”[i], before being added to the network, and thus creates a Blockchain. Two of its main characteristics are a decentraliSed way of tracking ownership of property, and the ability to directly transfer property. One of the most important products of blockchain technology is Cryptocurrency.

    Cryptocurrency is a virtual or digital currency secured via cryptography and functions outside the control of any bank. It is a record of transactions (blockchains) kept on a decentralized database, which can be accessed by all members and is updated whenever another transaction is verified, which implies that choices influencing the database are made by an agreement of the users of that blockchain.[ii] It provides a certain level of pseudonymity as the members use a digital, blockchain wallet to send money and conduct their operations and every wallet is connected to a key and not to names and addresses.

    Cryptocurrency in India

    Cryptocurrency exchanges started to operate in India in a regulatory vacuum. There was neither a legislation defining it nor one prohibiting it. They grew and the RBI started taking measures to control its use without defining it. In June 2013, RBI through its Financial Stability Report defined Virtual Currency (‘VC’) as “A virtual currency can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”[iii]In 2013, RBI issued a caution to users dealing in cryptocurrency of the risks involved. In July 2017, the Inter-Disciplinary Committee advised against engaging in VCs and also insisted the government to take legislative measures. And finally, in April, 2018, RBI issued a circular prohibiting dealing in VCs to regulated entities. These regulated entities were instructed to quit the relationship within three months. This Circular was challenged in the case of Internet and Mobile Association of India v. Reserve Bank of India[iv].

    The Petitioners made the following contentions:

    1. the legal character of VCs i.e. it is not money but good,

    2. it is a property as it is stable, definable, permanent and can be exclusively controlled;

    3. the circular violates the rights of the petitioners under Article 19(1)(g) of the Constitution to carry on their occupation, trade or business;

    4. the RBI has acted beyond the scope of its powers and arbitrarily;

    5. the RBI acted in a predetermined manner and jumped the gun in virtually outlawing VCs.

    The court found that while the RBI has the power to regulate VCs, the prohibition imposed is disproportionate; as it did not consider less intrusive measures and, therefore, ultravires the Constitution. In the absence of any legislative prohibition, dealing in these currencies must be treated as legitimate.

    The verdict had a positive impact on the fintech landscape of the country but, various members of the legal community believe that this festive mood is going to be a short-lived affair if “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” is passed. However, in the absence of any regulation, the transactions and dealing with regards to cryptocurrency may witness many disputes.

    Potential Disputes

    One of the most innovative uses of cryptocurrency is using it for investment via Initial Coin Offering (‘ICO’). In an ICO, a company may issue coins in exchange for money or any other cryptocurrency. This coin may act as an equity share providing dividends and voting rights etc. These coins can also function as retailer loyalty programs providing specific products or services by the company. Similar to any venture involving investment put to risk, uncertainties regarding the allocation of risk or on the basis of which risk was assumed give rise to disputes.

    For instance, during an ICO the issuing company may provide certain information to the investors including the prospectus and the offering memorandum. A possible breach of the terms of such a memorandum can give rise to a claim and therefore it is important to include logical dispute resolution mechanisms in such documents. In the Bancor Foundation ICO, the network congested due to high demand, moreover the offering was kept open longer than planned which enraged the early investors who claimed that the initial cap was exceeded and the value of the coins purchased before was depreciated.

    Many disputes can arise out of the failure of the blockchain system itself. In 2016, the Ethereum cryptocurrency platform was hacked and cryptocurrency worth $64 million was siphoned off. Investors who experience the ill effects of similar disappointments in the blockchain fundamental to their cryptocurrency investments may normally wish to acquire damages from the platform provider.

    There is also uncertainty whether these economic activities in this industry would be classified as an “investment”. To answer this, it may stated that such characterisation is possible under the broad ambit of “investment” provided in major investment treaties. Regulatory policies offered by the USA explains the complexity of the subject. The US has developed the required regulations for the treatment of these activities as an investment, however, the US Courts, in several cases, have treated cryptocurrencies as a form of money, while in India, the legality of cryptocurrency is not defined. while in countries like India, the courts and legislatures have remained largely silent on the legality of cryptocurrency.

    An investor makes an investment based on several considerations such as risks and profits. In the case of cryptocurrencies, there are no geographical or other considerations to be made and the foreign country’s legislation seems to be the only decisive factor. Under the existing investment regime, laws of a state may be attractive or otherwise ‘inherently prospective’, defined in the case of Total S.A. v. Argentine Republic as a division between the specific investment laws of the state, which entail a certain legal expectation and the general regulatory framework, which is more difficult to be understood as to create such expectations. Anyhow, according to the decisions held in Enron v. Argentina[v] and CMS v. Argentina[vi], an investor can hold the state liable for breach of legitimate expectations in case of any amendment to laws that were an incentive for investment.

    One of the major concerns for the cryptocurrency is the anonymity of transactions, which may justify the change in policy by the state. Central Banks and Financial Regulators all over the world discourage people to deal in cryptocurrency as it may be used in illegal activities like money laundry, tax evasion, terrorism, etc. Moreover, the governments also fear that it might undermine the value of the national currency as third party actors may be able to speculate the prices of goods and other crucial issues of sovereign nature.

    Arbitration as a means of Resolving Cryptocurrency Disputes

    Disputes arising from borderless currencies may be best served by a borderless form of dispute resolution and thus arbitration is the preferred means for resolution of blockchain-based disputes, given the international profile of ICO investors.

    Arbitration is a non-national and neutral dispute resolution forum that enables the parties to nominate a tribunal or technical specialists to efficiently and effectively resolve the different types of disputes that may arise. The ease of cross border enforcement also makes it highly compatible with the transnational nature of technology and investors of the blockchain industry.

    The award provided in arbitration is enforceable in 157 countries under the New York Convention. Moreover, it ensures flexibility to the parties as the parties can choose experts of the field and arbitral rules can be customised to suit the peculiarities of cryptocurrency disputes, while protecting the confidentiality of sensitive propriety information.

    Indeed, the inherent flexibility of the arbitral proceeding enables efficient conflict management approaches to be developed. The flexibility of arbitration can also enable the parties to agree to an arbitration procedure which helps to head off the challenges that arise from the pseudonymity of users on the blockchain and the immutability of published ‘blocks’.

    While uncertainty remains regarding the classification of crypto-based transactions as ‘investments’ under the existing investment arbitration regime, the regulation and ban by certain states mean that investment arbitration can be used as a viable option to resolve regulatory disputes.

    Therefore, the arbitrators should promote the benefits of arbitration and its usage to the tech sector. Moreover, there is a scope to develop model arbitration clauses regarding cryptocurrency disputes and make modifications to institutional rules accommodate such disputes better.

    Conclusion

    Arbitration is well-placed to cater to a new breed of disputes, as long as its practitioners are prepared to evolve rapidly to meet their clients’ developing needs. New Dispute resolution procedures must be looked into like Online Dispute Resolution (‘ODR’), Blockchain arbitration etc. that are efficient and better at preserving the gains created through the use of blockchain even when a dispute arises. Blockchain technology is rapidly developing and is being adopted by several businesses and industries, therefore the interplay between blockchain and arbitration will grow and legal professionals and arbitrators must be well equipped in handling the forthcoming plethora of disputes.

    [i] Reggie O’Shields, Smart Contracts: Legal Agreements for the Blockchain, 21 N.C. Banking Inst. 177 (2017).

    [ii] James Rogers and Ayaz Ibrahimov, Cryptocurrencies and arbitration: A match made in heaven?, Norton Rose Fulbright International Arbitration Report, 25, 25 (May 2018), https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/imported/20180416—pdf-file—interntional-arbitration-report—issue-10.pdf?la=en&revision=958b9eac-61b9-416d-8111-350583176022.

    [iii] Financial Sector Regulation and Infrastructure, Reserve Bank of India, (Jun 23, 2013),  https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=709.

    [iv] 2020 SCC Online SC 275.

    [v] ICSID Case no. ARB/01/3, Award, 2007, paras. 264 – 268.

    [vi] ICSID Case no. ARB/01/8, Award, 2005, para. 274.

  • Seat And Venue – Quippo Constructions Case Muddies The Water Again

    Seat And Venue – Quippo Constructions Case Muddies The Water Again

    BY AANCHAL GUPTA, A FOURTH-YEAR STUDENT AT HNLU, RAIPUR

    Introduction

    The arbitration regime in India has struggled with the seat v. venue debate for quite some time now. The ‘venue’ of arbitration proceeding determine where the proceedings will be conducted whereas the ‘seat’ of arbitration proceeding determines which court has a supervisory jurisdiction over the proceeding and which substantive law will be applicable to the proceeding. Issue arises when the arbitration agreement does not mention the specifics of the venue and seat. There is a long list of cases discussing the issue in International Commercial Arbitrations as well as Domestic Arbitrations. The Supreme Court recently made pertinent observations regarding this issue in the case of Quippo Construction Equipment Ltd. v. Janardan Nirman Pvt. Ltd. and held that objections regarding the place of arbitration are not significant in a domestic arbitration proceeding.

    Background of The Case

    The case involved four distinct agreements for the supply of construction equipment, containing arbitration clauses. Three of these agreements assigned New Delhi as the venue of arbitration whereas one stated Kolkata as the venue. When a dispute arose, the appellant gave notice invoking arbitration and a sole arbitrator was appointed to conduct the proceedings according to the Construction Industry Arbitration Association Rules. The respondent denied the existence of any agreement between the parties and chose not to participate in the arbitral proceedings. Instead an application initiating civil proceedings was moved in the District Court of Sealdah seeking injunction against conducting arbitration proceedings under Section 5 and Section 8 of the Arbitration and Conciliation Act, 1996 (‘the Act’). An ex-parte award was passed in the appellant’s favour covering claims under all of the four agreements. Aggrieved by the award, the respondent filed a petition for setting aside of the award under Section 34 of the Act but was rejected due to lack of jurisdiction. However, the High Court of Calcutta observed that the respondent was amenable to the jurisdiction of the court and sent the case back to the lower court. A revision petition was filed in the Calcutta High Court which was dismissed as not being maintainable. Aggrieved by this order, the appellant has preferred the instant appeal.

    Decision of The Court

    The SC held that the venue in an arbitration proceeding is of significance in an international commercial arbitration proceeding as it determines which crucial law would be applicable, however in the instant case, the substantive law applicable to the proceedings would be the same in either of the venues. Hence, the court held that the venue of arbitration is not significant in a domestic arbitration proceeding. According to the court, a change in the venue of a domestic arbitration proceeding within the territorial limits of the country will not make a difference on the proceedings as the substantive law applicable throughout the territory is the same.

    Analysis

    Although prima facie the judgement of the court seems to be pro-arbitration for all the right reasons, on a closer look it reveals a problem. As a result the rules that can be adduced from the judgement lay on unsteady ground.

    The court dismissed the set aside application filed by the respondent quoting ‘lack of jurisdiction’. The court determined that the seat of arbitration was at New Delhi based on the fact that arbitration proceedings were held at New Delhi and the award was made at New Delhi. The court stated that the venue of arbitration is only significant to determine the crucial substantive law that is applicable in the arbitral proceedings and in the instant case the substantive law applicable would be the same in either of the venues. However, the court failed to recognise that the choice of venue would result in the determination of the seat of arbitration and an essential consequence of the choice of seat would be the jurisdiction of the court.

    The determination of the seat not only determines which crucial law would be applicable but is vital to determine which court has jurisdiction to set aside the award or make any order on other allied questions. In the instant case, the issue of venue and seat of arbitration is ambiguous. The four agreements between the parties with different venues were clubbed and an award was made which makes it difficult to determine the seat of arbitration clearly. No argument can be made to rely on a seat specified in one agreement as the arbitrator would have no jurisdiction to club all the agreements. The questions of jurisdiction of arbitrator and the selection of venue of arbitration are mixed and the court decides on the issue of waiver.

    The SC in its earlier judgements regarding this issue has taken two different views. In the case of BGS SGS SOMA JV v. NHPC Ltd., the SC observed that choice of seat determines which court has the exclusive jurisdiction to deal with set-aside application or any other proceeding related matter. It held that the ‘venue’ of arbitration will be regarded as the ‘seat’ of arbitration in absence of any contrary indication. However, in the instant case one of the agreements related to arbitration designated Kolkata as the venue and seat of arbitration which clearly marks a contrary indication but the court did not consider the same and answered the question of the venue of arbitration partially.

    In another case, Mankatsu Impex Pvt. Ltd. Vs Airvisual Ltd. , the SC made an observation on the question of place and seat of arbitration. They observed that the seat of arbitration cannot be decided on the basis of the place of arbitration and instead the seat should be decided by the conduct and agreement between the parties. However, in the instant case, the set-aside application of the respondent was rejected due to lack of jurisdiction. New Delhi was stated to be the seat of arbitration as the proceedings took place and the award was made there. The agreement between the parties also designated Kolkata as a venue for arbitration but it was neglected by the arbitrator and the court.

    Suggestions and Conclusion

    The SC in this case took steps towards a pro-arbitration approach in an attempt to make India arbitration friendly and hoped to strengthen the domestic arbitration system. The scope of judicial intervention in an arbitration proceeding was narrowed. The non-participation of parties in an arbitration proceeding is discouraged and the court did provide certain amount of clarity on the questions of waiver and time for raising objections regarding the arbitral process; however, the decision suffers from certain loopholes and the mixing up of issues which makes any rules carved out of it to stand on a steady ground. The court had an opportunity to settle the issue of ‘seat’ and ‘place’ of arbitration for once and for all but the court answered it partially and overlooked some important consequences. The issue needs to be tackled effectively soon to ensure that India is set out in on a pro-arbitration path. 

    Drafting of the arbitration clause –A well drafted arbitration clause that not only sets out the parties’ intentions but also mentions the specifics of the arbitration proceedings can tackle the entire problem. Changes can be made in the Act to state that an arbitration clause must be well drafted and to be effective must contain the disputes that can be arbitrated and clearly mention the place of arbitration along with the seat of arbitration to avoid confusion. It should also mention the governing law of the arbitration agreement, the number of arbitrators and the method for establishing the arbitral tribunal. These specifics will ensure that the parties do not squander with the questions of intent, ambit and application of the arbitration agreement. The focus should be resolution of the dispute through effective proceedings rather than the frustration of the agreement due to parties’ failure to mention the particulars clearly and this step also ensures that party autonomy is not interfered with.

    Prima facie standard of review – In case a dispute regarding the seat and venue of arbitration arises between the parties, the court should undertake the prima facie standard of review. A prima facie enquiry is conducted by the court to ascertain the consequences of selecting a particular seat and whether this will affect any of the terms of the arbitration agreement. A seat which is in consonance with all the other terms of the agreement and does not violate any term which was decided according to common consensus between the parties is picked as the seat of arbitration. The Singapore High Court in the case of K.V.C Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd. applied the prima facie standard of review. In this case the bare arbitration clause did not specify the seat of arbitration and applying this standard, it was held that Singapore is the place and seat of arbitration in each of the cases. This step would effectively ensure that part autonomy is upheld in terms of other specifics of the agreement and a seat of arbitration can be decided.

    There is an urgent need to put a rest to the issue of venue and seat of arbitration in domestic proceedings as well. Attempts made by the Indian system to be more arbitration friendly needs these specifics to be sorted out so that the focus of the parties is to resolve their dispute through an alternative mechanism outside the court rather than inevitably dragging the matter to the court.

  • The Viability Of The Failing Firm Defence In Indian M & A Transactions

    The Viability Of The Failing Firm Defence In Indian M & A Transactions

    BY MADHULIKA IYER, FOURTH-YEAR STUDENT AT SYMBIOSIS LAW SCHOOL, PUNE

    Introduction

    Owing to the economic uncertainty due to the ongoing COVID-19 pandemic, many businesses are in search of potential avenues to wither this impact – one of which is the “failing firm” defence (‘FFD’).  The FFD is employed by businesses in cases where their transactions raise anticompetitive issues. The acquirer argues that this transaction, if approved, is unlikely to have an appreciable adverse effect on competition (‘AAEC’), as the target firm would invariably exit the market, if the transaction remains unsuccessful. Hence, the rationale behind this defence is such that the firm’s dominant position will not be strengthened, instead the post-merger performance would aid in maintaining competition in the relevant market.

    As widely documented, the effects of the COVID-19 pandemic on the financial stability of various businesses has been almost disastrous. Therefore, this post seeks to analyse that whether the ongoing pandemic (or any financial crisis) affects the assessment of the FFD, the pro-active role of the Competition Commission of India (“CCI”), and its viability post this outbreak as well.

    What is the Failing Firm Defence?

    First explored in the case of Kali und Saz (now reflected in the European Union’s Merger Guidelines), this defence lays down a 3-point test, which is as follows –

    • The failing firm must be on the verge of exiting the market,
    • There is no less anti-competitive alternative, and
    • In the absence of this merger, the failing firm would invariably exit the market.

    Once these 3 conditions are established, it could be stated that there would be no reduction in competition, and therefore, the proposed combination should be approved. A similar test is applicable in the United States (US) as under Section 11 of its 2010 Horizontal Merger Guidelines.

    The Indian Competition Law recognises this concept as well. Section 20(4)(k) of the Competition Act, 2002 (“Competition Act”) recognises the ‘possibility of a failing business‘ as a factor in regulating combinations. The S.V.S. Raghavan Committee Report, also commented that no social welfare loss would occur if the assets of the failing business were to be taken over or combined with another firm. Hence, while it is not regarded as an absolute defence under the law, the CCI considers it as a factor while determining whether the combination would have an AAEC or not.

    It is also pertinent to note that this defence is still in a nuanced stage in India, as factors such as what constitutes a failing business, or how the CCI should evaluate this defence remain unclarified.

    Implications on the assessment of the FFD due to the pandemic or any financial crisis

    While answering the question regarding the implications on the assessment of this defence, due to the ongoing pandemic or any financial crisis, it is relevant to highlight the EU’s Olympic/Aegean Airlines case, wherein a merger cited this defence during the 2007-08 worldwide financial crisis. The party’s defence was initially rejected by the Commission, as the conditions of the test were not fulfilled, nor was there satisfactory evidence to establish actual bankruptcy or that the firm would actually exit the market. The Commission observed that temporary losses were a common feature in a financial crisis, which did not warrant any inference that the firm was “failing” per se.

    Notably, the Commission approved the same transaction filed in Aegean/Olympic II two years later, owing to the dismal state of the Greek economy, and its finding that the merger posed no negative impact on competition, or that the firm would exit the market upon failure of the same. With reference to the ongoing pandemic, the Commission has published a ‘Guidance Note’, whereby firms first have to avail assistance, in the manner prescribed, before approaching the Commission. Such form of assistance includes existing instruments deployed from the EU budget in order to support the hard-hit SMEs and small mid-caps, as well as credit holidays, which allow for delayed repayment of loans – which will also be implemented for affected companies under the same instruments, in order to relieve the strain on their finances.

    The American stance is even more stringent, whereby firms have a higher burden of establishing bankruptcy, due to the presence of both the “failing” and “flailing” firm defence. The latter indicates those firms who have been weakened, merely due to market competition. During times of financial crisis as well, the standards of this defence have never been compromised upon by the US Justice Department. With respect to the ongoing pandemic, American authorities have called for expedited review of failing firms, whereby parties have a timeline within which they can base their transaction upon, providing clarity to their overall business functioning as well.

    The takeover of Bhushan Steel by Tata Steel, shows India’s accepting stance on the FFD. The CCI has approved, without any objection, almost-all mergers, which have significantly increased since the establishment of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as well. Despite their pro-active approach as highlighted above, it is interesting to note that the Advisory issued by the CCI, is void of any specific merger mention, and contains only a general warning for businesses to refrain from violating any provisions under the Competition Act. As stated above, there is also no clarity regarding the FFD, nor has it been provided during the ongoing pandemic either.

    The threshold the CCI should establish for the FFD and its importance post COVID-19

    It is common knowledge that India is facing an economic slowdown, with the GDP at a decline of 23.9%. Owing to the same, the CCI is faced with an issue of balancing market competition, while also saving essential failing businesses. Another point to note is the suspension of the application of IBC for a year, due to which any combination approaching the CCI during this period, will not go through the rigour of IBC to adduce its bankruptcy, and whether it truly is failing. Hence, the burden of this determination rests solely upon the CCI at this point in time. I believe it is the need of the hour to put forth regulations de-marking the criteria for utilising the FFD in India. The factors the Commission should keep in mind while establishing the same are as follows –

    1. Parties to the proposed combination should be given the chance to put forth their case, with factors such as proof of the possibility of exiting the market upon failure of this combination, proof of no AAEC by demonstrating their nearly bankrupt state or evidence of alternative negotiations with other potential buyers as well. All in all, the factors as considered under the Olympic/Aegean case, would in my opinion provide a holistic approach to the CCI while trying to adduce the true intentions of the parties. With reference to this point, the Canadian Merger Enforcement Guidelines , which suggest that parties can rely on projected cash flows, audited financial statements and proof of continuing operating losses to prove the FFD could also be taken into account. By looking into the same, it can be proved by the parties that the firm truly is failing and is likely to exit the market. Emphasis can also be placed upon other information such as financial analysis memorandums, minutes of the board meetings or even documented negotiations which have taken place with other competitors, in order to prove that there is no less-competitive alternative to the proposed combination and also that the firm is incapable of being reorganised.  
    2. Secondly, factors such as accessibility, price, and cost should be given greater consideration, especially during any financial crisis, as they have higher relevance to consumers as well. Demonstrating the same, during the analysis of the FFD in the minority stake acquisition of Deliveroo ( a food delivery start-up) by Amazon, the Competition and Market’s Authority   in the United Kingdom, adduced  that loss of the food delivery application would have a negative effect on consumers, owing to the possibility of higher prices along with a decrease in quality and choice.
    3. Following the steps of the United States, with respect to their differentiation on “failing” and “flailing”, as highlighted above could also be beneficial to our country. It is evident that the service industry, from airline companies, to the hospitality sector and tourism have bourn the brunt of the pandemic to a greater extent. Hence, adopting different standards or thresholds based on industry-specific impact will also, to some extent, prevent the decline of these industries, and uphold their overall welfare and business functions. One can also seek guidance from the South Korean Free Trade Commission, wherein they adopted a similar approach with respect to the relaxation of merger guidelines, in order to assist their aviation sector.
    4. Lastly, keeping in mind the lack of clarity regarding the FFD and its interpretation in India currently, potential parties could also opt for a pre-consultation with the CCI, in order to clear any ambiguity present in their proposed transaction and its interpretation. Another possibility would be adopting the Green Channel mechanism, specifically for COVID-19 mergers, and transactions citing the FFD as well, under regulation 5A. This possibility was also recommended by the Competition Law Review Committee, although not adopted. There are often circumstances wherein the competition in the market could be best secured by authorising a deal that allows for the assets of the failing firm to remain in the market, in the absence of which the market share of the failing firm will be taken over by the present competitors, and in any event would have an effect on the competitive constraints. Following the basis of this argument, there is no reason to set-back the approval of a combination, involving the acquisition of the failing firm, once the resolution plan has been approved. While some may argue that this possibility would serve as an additional burden on the CCI, I truly believe this mechanism outweighs the inefficiencies present.

    Conclusion

    At this time, while it is crucial to exercise caution in order to prevent any problematic mergers which may have an AAEC, it is also pertinent to protect businesses which truly are financially distressed and whose exit would impact or cause adverse market reactions. The FFD is one of the potential avenue’s businesses are venturing into, especially during the current economic slowdown. However, the lack of any legislative framework or clarity proves to be a drawback.  Hence, the pro-active role of the CCI in this matter is the need of the hour, in order to provide and maintain a balance between market competition and the considerations for the FFD in merger proposals, as well as its impact and precedence post the pandemic as well.

  • Section 69 (2) Of The Partnership Act – High Time For a Definitive Interpretation

    Section 69 (2) Of The Partnership Act – High Time For a Definitive Interpretation

    BY SHAGUN SINGHAL, THIRD-YEAR STUDENT AT NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

    Introduction

    The Partnership Act, 1932 (“Act”) was enacted after repealing certain provisions of the Indian Contract Act, 1872. Under this Act, the registration of partnership firms has been given due relevance under Schedule VII. The same, however, has not been made mandatory by law. Even though registration under the Act is not compulsory, the absence of the same can lead to certain disadvantages. One of these disadvantages has been laid down in Section 69(2) (“Section”) of the Act. The Section states; “no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.” Although this Section has been heavily relied upon over the years, it suffers from some glaring ambiguities. In this blog post, the author, first, lays down the uncertainties in the Section and thereby asserts that the Courts, have, till date, not been able to solve these conundrums and second, concludes that the only way to reach an unambiguous solution is by amending the wording of the Section altogether.

    Applicability of Section 69(2) of the Partnership Act on insolvency proceedings

    Recently, in the case of M/s Shree Dev Chemical Corporation v. Gammon India Limited, the National Company Law Tribunal (“NCLT”) answered the question of applicability of the Section on insolvency proceedings. While rendering its decision, the NCLT stated that procedures under the Insolvency and Bankruptcy Code, 2016 (“IBC”) are, undisputedly, ‘proceedings’ under law. Hence, relying on the strict interpretation of the Section, it opined that since suits and proceedings are different in nature, the bar under this Section can only be applicable to the former i.e. suits.

    In another case of M/s NN Enterprises v. Relcon Infra Projects Limited, the NCLT, while considering the same question of law, held that the absence of the term “proceedings” in the Section itself indicates the intention of the legislature. In addition to these interpretations, the tribunals have also been of the view that Corporate Insolvency Resolution Process (“CIRP”) is not a term arising out of a contract. Rather, it is a statutory right that accrues to the IBC. Therefore, as per these cases, the bar envisaged in this Section cannot, in any case, be applicable to the insolvency proceedings.

    However, in contrast to the aforementioned judgements, Section 69(3), which is read in conjunction with Section 69(2), distinctly mentions the applicability of the bar to “other proceedings”. It states, “the provision of Section 69(1) and (2) will apply to a claim of set-off or ‘other proceedings’ to enforce a right arising out of a contract”. Earlier, the term “other proceedings”, as construed in this Section, was understood to be in relation to a claim of set-off. However, the Court, in the case of Jagdish Chander Gupta v. Kajaria Traders (India) Ltd adjudged otherwise. It asserted that the word “other proceedings” should receive its full meaning, which should not be limited to a claim of set off. Hence, as per this judgement, it is clear that the instant Section can be made applicable to insolvency proceedings. Therefore, presently, there are two differing opinions of the Courts for matters pertaining to this issue.

    However, to add on to the already existing conundrum, the Court, in the case of Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited and Another, while considering the application of Limitation Act on IBC, held that cases filed under the latter are applications and not suits. Hence, it would only attract Article 137 of the Limitation Act, 1963. By adjudging this, it ruled out the relevancy of Article 100 of the same Act, which, distinctively, is applicable to “other proceedings”. If this decision is related to the instant issue, the bar in the section cannot, in any situation, be applicable to the insolvency proceedings. Further, in case it is not applicable, no Court has provided a justification citing the reasons for the same, thereby making its exclusion to be arbitrary in nature.

    In furtherance to these complications, it might be contended that this issue, even if resolved, would only matter if the right arises out of a contract. Thus, to prove that CIRP is a right arising out of contract, it is pertinent to refer to the landmark judgement of Swiss Ribbons Pvt. Ltd. v. Union of India. The Court in this case explicitly affirmed that the creditors can ‘claim’ for CIRP when a debt is due, in the case of an operational creditor and when it is ‘due and payable’, in the case of a financial creditor. In any case, claim, as defined under the IBC, arises in cases of a breach of contract, when such breach gives rise to a right to payment. Hence, since the initiation of a claim is through a contract itself, it cannot be understood as a right accruing solely to a statute.

    Interpretation of the term “persons suing”

    The Section, as mentioned, has vaguely used the words ‘persons suing’, without acknowledging its applicability in certain situations. For instance, in a circumstance wherein a change in the partnership takes place, does it become imperative for the new partner(s) to submit their names to the Register of firms before initiating a suit ?

    The Punjab High Court in the case of Dr. V.S. Bahal v. S.L. Kapur & Co. answered this question in the affirmative. In this case, the firm was initially run by three partners. However, one of them eventually retired and a new partner had to replace him. The name of this partner, while filing the suit, had not been submitted to the Register of Firms. Accordingly, while considering the aforementioned question of law, the Court held that since all partners names were not registered, the suit, as per Section 69(2), cannot be maintainable in law. In addition to this, the Court in the case of Firm Buta Mal-Dev Raj v. Chanan Lal & Ors, asserted that the ascertainment of the word “persons” in the impugned section is deliberate in nature. This is because, singular, in certain cases, can imply plural, but it is never the other way round. In conjunction to this, it further went on to state that the plural form, in this instance, implies that all partners should be registered while filing a suit. Therefore, relying on these cases, the Courts have affirmed that the registration of all partners (new or old), while filing a suit, is mandatory in law.

    While Punjab High Court has ruled on the non-maintainability of such suits, the Patna High Court, in the case of Chaman Lal v. Firm New India Traders, has adjudged otherwise. Similar to the aforementioned case, three new partners had joined the firm, whose names were yet to be registered. Taking the same question of law into consideration, the Court held that the non-registration of their names had no effect on the maintainability of the suit. The view taken by the Punjab High Court, according to the author, is erring for several reasons. First, the Section nowhere mentions that all names of the partners have to be registered at the time of filing a suit. Hence, adjudging the same would amount to reading imaginary words into the applicable law, which thereby shall contravene the general rule of interpretation. Moreover, usage of word “persons” cannot necessarily imply all partners at the time of filing a suit. It could mean partners when the cause of action arises, or partners when the firm was formed. Hence, relying on grammar alone could result in an incorrect interpretation of the Section in toto. Second, Order XXX Rule 1 of Civil Procedure Code (“CPC”), which lays down the procedure of such suits, permits two or more of the partners to sue, as long as they represent the firm. Therefore, relying on the legislature’s wordings in this provision, the Punjab High Court’s decision, as per the author, is contrary to the law in force.

    Conclusion

    This Section, even though modelled after the English Statutes of 1916 and 1985, has used several vague terms. Due to this ambiguity, the Judges, since its enactment, have had the discretion to interpret the terms, based on their own individual understanding. It is only because of this reason that the Courts, till date, have not been able to finalise the impugned words definite reasoning. Hence, the author is of the opinion that the only way to arrive at an unambiguous position is by changing the wordings of the Section altogether. This can be implemented in two ways, first, the words “proceedings” and “applications” can be added to Section 69(2) itself. Through its addition, the Courts will be certain that the bar, as envisaged in this Section, can be made applicable to suits, proceedings as well as applications. This will further remove the irrationality behind it being made applicable only to suits, when the others, similarly, are initiated to pursue a remedy. Second, a proviso can be added, which clarifies that the non-registration of new partners will have no bearing on the maintainability of a case, as long as the original partners are registered. However, it should mention that their registration must be filed, along with the suit. The reasoning behind this is that registration in usual circumstances can take around two weeks or more, which in certain instances, can unnecessarily delay the filing of a suit. Therefore, in such situations, the non-registration of certain members should not serve as a bar for initiating a court procedure. The author thus concludes that these alterations should be made, for the long-standing conundrum to end. Otherwise, the Courts shall continue to base their interpretations on their own psyche, which ultimately shall result in unjust decisions being rendered, time and again.

  • Section 68 of FERA: Liability Of Directors For Offences Committed By Companies

    Section 68 of FERA: Liability Of Directors For Offences Committed By Companies

    BY RISHABH KUMAR, FOURTH-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, JODHPUR

    The Liability of people acting on behalf of companies, for offences committed by companies, has been a very widely debated topic under the law of corporate governance. The general rule in the cases involving criminal liability stands against vicarious liability. This means that no one can be held criminally liable for offences committed by others. However, this general rule is overridden by specific provisions, provided by statutes, extending liability to others. An example of one of such provisions can be found under the Foreign Exchange Regulation Act, 1973 (‘FERA’). Section 68(1) of FERA provides that, in case of contravention of any of the provisions of the act by a company, a person in charge of, and responsible to the company for, the conduct of the business of the company has to be deemed guilty. Recently,in the case of Shailendra Swarup v. The Deputy Director, Enforcement Directorate, a bench of the Hon’ble Supreme Court dealt with the question of liability for offences under FERA, committed by a company, and the procedure for attributing such liability to persons acting on behalf of the company. 

    Facts

    A show cause notice was issued by the Enforcement Directorate against all the directors of a company named Modi Xerox Ltd. (‘MXL‘) for alleged violation of FERA provisions.  The appellant, Mr.Shailendra Swarup was a practising advocate of the Supreme Court and only a part-time non-executive director of MXL. He replied to the show cause notice stating that he was a part-time non- executive director for MXL and that he was not in the employment of the company nor he played any role in conducting the affairs of the company. Irrespective of this, the Enforcement Directorate went on to conduct a hearing, implicating the appellant and imposed a fine of Rs. 1,00,000/- on all the directors including the appellant. On appeal, this order was upheld by the appellate tribunal as well as the High Court resulting in an appeal before the Supreme Court.

    Judgment

    It was held by the court that, the adjudicating officer was wrong in imposing a penalty on the appellant and, the same was wrongly upheld by the appellate tribunal as well as the High Court. Moving further on, the court held that, for holding a person liable under the provisions of FERA, the active involvement of such person in company affairs must be looked into rather than just superficially taking into consideration the designation they are accorded. The court, to come to this conclusion, heavily relied on the ratio of judgments involving section 141 of the Negotiable Instruments Act, 1881 (“NIA”).

    Ratio

    The court said that, section 68(1) of FERA contains a legal fiction, i.e. “shall be deemed to be guilty” which is qualified by certain conditions that have to be fulfilled in order to establish liability under the provision. The conditions as mentioned in the provision require a person to be in charge of, and responsible to the company for, the conduct of the business of the company for them to be liable for any contravention of the section. In N. Rangacharivs. Bharat Sanchar Nigam Limited, the apex court had observed that, although a person in the commercial world transacting with a company is entitled to presume that the directors of the company are in charge of the affairs of the company, the court has held that such a presumption is rebuttable. The provision cannot be interpreted in a manner so as to implicate each and every person who was a director of the company at the time the offence was committed. Therefore, if a person is to be proceeded against and punished for any contravention, necessary ingredients as required by section 68 have to be fulfilled.

    Since the appellant was just a part-time non-executive director and was neither in charge of nor responsible for the conduct of the business of the company, the ingredients under Section 68 are not fulfilled in order to hold  him liable for the contravention.

    Relevance of Section 141 of the Negotiable Instruments Act, 1881

    In view of the court, section 68 of FERA is pari materia to Section 141 of NIA, 1881. Section 141 of NIA imposes the liability of a company, for the dishonour of cheques, on a person who at the time of such dishonour was in charge of and responsible for the conduct of the business of the company. Therefore, the ratio of judgments involving liability under section 141 of the NIA, 1881 are of considerable importance while interpreting section 68 of FERA.

    The ratio of the following two judgments have been referred by the court, while deliberating upon the present case:

    S.M.S Pharmaceuticals Ltd. vs. Neeta Bhalla and another

    Since section 141 of the NIA creates criminal liability, the conditions provided thereunder have to be strictly complied with. What is required is that the persons who are sought to be criminally liable under section 141 should be, at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. The condition requires so because a person in charge of and responsible for the conduct of the business of the company is supposed to know the purpose behind the issuing of a cheque and the reasons for its dishonour. Furthermore, a complaint under section 141 must contain specific averments disclosing the facts that fulfil the conditions under the provision. If facts making a person liable under the provision are missing from the complaint, the conditions as required by the provision cannot be said to have been satisfied.

    N. Rangchari vs. Bharat Sanchar Nigam Limited

    Reiterating the principle given in Neeta Bhalla (supra), the court held that, besides mentioning in the complaint that the person implicated is a director of the company, it is important to specifically allege that they were in charge of and responsible for the conduct of the business of the company at the time of the commission of the offence. Otherwise, a complaint may be found unsustainable.

    Referring to the above mentioned case laws, the court has laid down a due procedure for proceeding against a director under section 68 of FERA.

    Due procedure for conducting proceedings under the FERA

    The court has laid down that, even though FERA is silent on filing of written complaints, while proceeding under section 51, the person who has to be proceeded against shall be informed of the contravention for which penalty proceedings are to be initiated against them. This flows from section 51 which imposes an obligation on the adjudicating officer to give a reasonable opportunity to a person to be proceeded with for making a representation in the matter. The requirement under section 51 envisages due communication of the allegations of contravention and requires fulfilment of the ingredients of the offence under section 68. If this due procedure is not followed, the reasonable opportunity, as contemplated by section 51, cannot be said to have been given to the person to make representation in the matter. After a reasonable opportunity to make representation is granted in true sense, the adjudicating officer shall hold an inquiry and if on such inquiry he finds the person guilty of the alleged contravention he may impose the requisite penalty in accordance with section 50.

    Conclusion 

    The general notion that persists in the corporate world about non-executive directors is that, they are not involved in the day to day affairs of the company, i.e. they are not in charge of, or responsible for the conduct of the business of the company. Although, by virtue of this, they may not be held liable for various offences or contraventions committed by the company, it doesn’t provide them with blanket immunity. As held in Chaitan M. Maniar vs. State of Maharashtra, they can still be held liable for those contraventions in which their active involvement is shown. The judgment in the present case has furthered this standing. While settling the law as to the liability of directors under FERA, it has also laid down a due procedure for establishing such liability. Moreover, the court, by widening the scope of the phrase “reasonable opportunity for making representation” under section 51, has ensured that the principle of audi alteram partem is duly adhered to under FERA. The judgment shall act as a good precedent, while determining the corporate criminal liability of directors of companies in future.

  • Whatsapp Pay: A Dicey Neophyte In UPI Market

    Whatsapp Pay: A Dicey Neophyte In UPI Market

    BY SWIKRUTI MOHANTY AND TUSHAR CHITLANGIA, SECOND YEAR STUDENTS AT NLU, ODISHA

    Introduction

    The long wait of WhatsApp to enter into the Unified Payment Interface (‘UPI’) enabled digital market in India has finally come to an end. In an order dated 18 August 2020 in Harshita Chawla v WhatsApp, the Competition Commission of India (‘Commission’) has allowed WhatsApp to launch its payment service termed WhatsApp Pay. Additionally, National Payment Corporation of India has also assented to WhatsApp Pay’s data localisation compliance and gave permission for it to go live. WhatsApp Pay is a UPI based payment service and will undoubtedly come out to be a massive winner in the digital payments market as WhatsApp already has the largest user base in India with 400 active million users; hence attracting users will not be a problem. However, this may lead to WhatsApp abusing its dominant position, which the post discusses further. The post also discusses why Big Data, which WhatsApp can abuse after the launch of WhatsApp Pay, should come under the Commission’s ambit. The post also lays down the ways which the Commission can consider to bring Big Data under its jurisdiction to prevent possible problems.

    Issues Raised and the Judgement

    In the instant case, Harshita Chawla, the informant, has alleged that WhatsApp is taking the leverage of its predominance in one market (market of OTT messaging apps through smartphones) to enter into another market (UPI enabled digital market) by authorising pre-instalment of WhatsApp Pay on WhatsApp, and bundling WhatsApp with WhatsApp Pay. Therefore, she contended that WhatsApp is abusing its dominant position under section4(2)(d), and 4(2)(e) of the Competition Act, 2002 (‘the Act’). She also pointed out that UPI enabled digital payment apps dealt with  Big Data which are essentially vast chunks of personal data which have characteristics like that of high volume, variety, value, and velocity and are available to corporations, which use it for targeted advertising.. With a given volume of such data, WhatsApp might adversely affect the integrity of personal data and national security in the future. Hence, Harshita Chawla prayed for the cease and desist order of the anti-competitive operations.

    Despite the acknowledgement of WhatsApp’s dominance in the market of over-the-top  (‘OTT’) messaging Apps through smartphones in India, the Commission was of the view that pre-instalment of WhatsApp Pay did not appear to be in contravention of section 4(2)(d) and 4(2)(e). Users will still have a choice to utilise any other UPI based apps which might be already downloaded on their smartphones, and there will be no express or implied encumbrance which can take away this liberty. Further, the Commission added that UPI enabled digital market is already established with eminent players competing enthusiastically, and it appeared improbable that WhatsApp Pay will consequently claim a more vital position only on account of its pre-installation. The Commission also noticed that WhatsApp which managed Big Data was prone to abuse and it can raise a potential anti-trust concern. However, the Commission held that it could not examine the matter of misuse of sensitive due to lack of concrete evidence. Hence, the Commission ordered the closing of the case under section 26(2) of the Act as it found no prima facie case arising from the issues raised by Harshita Chawla.

    Critical Analysis

    Abuse of Dominant Position by WhatsApp

    The Commission examined the matter of tying under section 4(2) (d) in detail. It laid down four conditions which have to be satisfied to determine a case of tying. The first two conditions were met, as WhatsApp and WhatsApp Pay were separate products, and WhatsApp was dominant in the market for tying product. However, the Commission opined that the last two conditions, namely: iii) a complete restriction to only obtain a tying product without tied product, and iv) tying capable of hampering the competition in the market, was not met by WhatsApp. On the contrary, authors opine that last two conditions were also met as WhatsApp Pay feature came embedded with the WhatsApp and thus essentially the tying product (WhatsApp) cannot be obtained without tied product (WhatsApp Pay). The last condition is also met as WhatsApp Pay is capable of hampering the competition in relevant market due to huge existing user base of WhatsApp. The Commission refuted the fourth condition on the basis of it being premature but instead the Commission could have taken Dynamic Analysis approach in which future outcomes are predicted using the real time data.

    The Commission further observed that the mere existence of an app on the phone does not necessarily guarantee the usage and hence the allegation cannot be scrutinised under the purview of section 4(e) However, the Commission possibly ignored the fact that if WhatsApp introduces its own UPI app, it does have an undue advantage since the user base of WhatsApp is practically being served on a silver platter to the upcoming app. Therefore, WhatsApp can use its dominant position in one market to enter into another and thus contravening section 4(2) (d).

    Further, the Commission held in Re Biocon Limited v Hoffmann-La Roche AG that even a partial denial of the market access, which deprives the competitors to compete effectively violates section 4 of the Act. The fact that these third-party payment apps have meagre margin and the prime factor for these apps to sustain in the market is to keep their users engaged through different tactics cannot possibly be taken out of consideration. In this manner, user-base shapes one of the major facets of driving competition among all market players.

    Additionally, the Commission was of the view that in the UPI enabled digital market, the competitors compete enthusiastically, and in such a scenario, it is difficult that WhatsApp will amass a market share solely owing to its pre-installation and a dominant position. However, in the case of Shri Vinod Kumar Gupta v. WhatsApp Inc. & Ors., the Commission observed that even if an app held a dominant position in the relevant market, once a new alternative app is installed on a device, users can quickly switch to the alternative app. In the instant case, WhatsApp Pay is the new alternative and pre-existing players like Google Pay, and Phone Pe are in the dominant position, the chances of WhatsApp taking over these apps within a short period does not seem all that improbable provided its gigantic existing user base of. Hence, WhatsApp can abuse its dominant position with the launch of WhatsApp Pay.

    Additionally, it is worth mentioning that South Africa Reserve Bank (‘SARB’), the Central Bank of South Africa, also suspended digital payment operations of WhatsApp shortly after it started in South Africa to “preserve an adequate competitive environment”.

    Big Data Conundrum

    The Commission once again got a chance to analyse the anti-trust concerns surrounding Big Data in the instant case, long after an unsuccessful stint in Vinod Kumar Gupta v WhatsApp Inc. & Ors. However, yet again, it failed to lay a definitive decision on the same. Big Data is useful to some extent; however, wrongful use of this user data can lead to wiping out of competitions in the market as the choices of the consumers remain only known to the data collecting entity and not to other competitors.

    The Commission in the present case has dismissed the possibility of looking into the issues surrounding big data stating  there is no concrete evidence to support the claim by Harshita Chawla. However, it was held in the case of Registrar of Restrictive Trade Agreements v. W. H. Smith and Sons that entities which combine “will not put anything into writing nor even into words” and will only hint in the slightest way possible. This implies that finding concrete data alleging violation of anti-trust rules is difficult. In such cases, The Commission should consider extending its reaches to include any wrongful use of big data as an anti-competitive activity and include it under the realm of its jurisdiction.

    To bring Big Data under its jurisdiction in cases of mergers, the Commission may treat Big Data as assets (precisely intangible assets) under section 5 of the Act. Due to this, mergers of kinds which involve Big Data transfers would be under the ambit of the Commission by virtue of section 6 of the Act. Section 6 states that combinations should not cause an appreciable adverse effect (e.g., barriers to entry) in the relevant market.

    Another, route which the Commission can take is that it should assign Big Data a relevant market. Relevant market refers to the market where the competition takes place. Defining the relevant market is the initial step of any anti-trust analysis. One of the major issues why big data has not come under the radar of Competition Tribunals around the world is that Big Data could not be assigned a relevant market as online providers use data as an input in their service and not as product being sold to consumers. The European Commission review of the merger of WhatsApp/ Facebook also declined to define the relevant market for Big Data. Some scholarly work suggests that ‘Big Data Relevant Market’ (‘BDRM’) should be the relevant market for Big Data. Companies use data for gaining a competitive advantage and thereby also showing an indication of exclusionary practice. Hence, demarcating a separate market for Big Data would encourage better identification of anti-trust issues like market power, entry barriers, and abuse of dominant position in BDRM.

    Concluding Remarks

    Although the launch of WhatsApp Pay will be a big rejoice for the users, it comes with a resounding blow to the anti-trust regulations in the country.  In this tech-upgrade saga, the chances are high that consumers would be at a losing end as the market will not have any competitor to provide them with different and innovative services other than WhatsApp. This may also lead to the problems of Big Data usage by WhatsApp as there is no law in India to govern big data and the Commission is yet to acknowledge the misuse of big data as a competition concern.. Also, incidents like that of Pegasus spyware in 2019 adds onto the vulnerabilities of privacy and data security in hands of WhatsApp. Therefore, to prevent such issues, the Commission must include Big Data under its jurisdiction, so that a check can be put on digital mammoths like that of WhatsApp.

  • Protection of IP Rights in Abuse of Dominance Cases: Is it needed?

    Protection of IP Rights in Abuse of Dominance Cases: Is it needed?

    BY MOHIT KAR, A fourth-year student At mnlu, aurangabad

    On 20th February, 2020, The Ministry of Corporate Affairs came up with the Draft Competition (Amendment) Bill, 2020 (“the Bill”) on recommendations of the Competition Law Review Committee (“CLRC”). The Bill, amongst other changes, has proposed for addition of Section 4A to widen the scope of protection accorded to Intellectual Property (“IP”) holders in Abuse of Dominance (“AoD”) cases. Section 4A acts as an exception to Section 3 (prohibiting anti-competitive agreements) and Section 4 (cases of AoD) and allows the IP holders the rights to safeguard themselves from infringement and impose reasonable restrictions to protect their rights under existing IP statutes. It is pertinent to note that a similar provision is already in existence in the form Section 3(5) of the Competition Act and the new section merely adds the protection to the AoD cases.

    Intersection of Abuse of Dominant Position and protection of Intellectual Property: Jurisprudence in India

    The Bombay High Court in the case of Aamir Khan Productions Pvt Ltd v Union of India held that the Competition Commission of India (“CCI”) had the jurisdiction to hear competition cases involving IPR. Subsequent to that decision, the CCI has dealt with a multiple of cases involving competition law and intellectual property. Most of the cases deal with the ‘refusal to license’ issue. In the case of Shri SamsherKataria v. Honda Siel Cars &Ors, the CCI held that the refusal to license the diagnostic tools and spare parts essential in the manufacturing of automobiles constituted an abuse of dominant position. This was the first case CCI took a significant look at the potentialities of competition abuse with the help of IP rights.

    In the case of Justickets Pvt. Ltd v. BigTree Internet Pvt. Ltd. & Another, CCI took a cautious approach while dealing with a delayed licensing conundrum. Justickets, an online movie ticket booking website, had alleged that BigTree, another online movie ticket booking portal, along with Vista Entertainment were misusing their dominant position by denying access to Vista’s Application Programming Interface (“API”) whose access was essential for ticket booking portals to smoothly transfer data from their website to Vista screens at theaters. After the DG investigation, CCI found that, although delayed, the access to the API was duly given by BigTree and Vista. CCI held that the delay in licensing was justified and as every business entity has a right to protect itself against threats of reverse engineering and protect its business interest, especially IPR before committing to licensing deals. In quite contrary to its position in the Samsher Kataria case, the CCI took the side of the IP holder in the present case and it was rightfully so. A mere delay in allowing a license cannot be considered as AoD since every party has a right to perform a due diligence and take the stock of the situation before entering into any licensing agreement with the other party.

    A key conflict between IP rights and competition law lies in the licensing of Standard Essential Patents (“SEP”). In the case of Telefonaktiebolaget LM Ericsson (PUBL) v. Intex Technologies (India) Ltd, the Delhi High Court while deciding about this conflict laid down certain guidelines for the holders of SEPs and the potential licensees to abide by so as to avoid AoD. This intricate balance between the SEP holder and licensees also exists in the EU to create an equilibrium between the rights of a holder of a patent that is essential for a standard and ensuring that said right does not allow it to hold a dominant position in the market.

    Analysis of Section 4A from an EU perspective

    As mentioned before, the added protection provided to IP holders that has been suggested by the Bill is not all together new and was previously in existing Section 3(5) of the Competition Act. The proposed section 4A merely extends the protection to cases of AoD under Section 4. Although the provision seems like a blanket protection to IP holders, a key aspect of it lies in the wordings of “reasonable conditions”. It states that the IP holders can make use of their rights under certain restrictions to ensure fair play and promote competition. The CLRC while drafting the provision have stated that the provision should be interpreted in a narrow sense so as to bring it in line with international jurisprudence.

    AoD in the EU is regulated under the Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) which states that: “Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States”. The EU courts have faced a number of cases on the question of whether use of intellectual property to facilitate market exploitation results in violation of Article 102. In the cases of AB Volvo v Erik Veng (UK) Ltd. and CICRA & Another v. Renault with regards to design rights of automobile parts, the European Court of Justice (“ECJ”) held that refusal to license the design rights could not amount to AoD as it was part of the exclusivity given by IP rights. Further in the case of Parke, Davis and Co. v. Probel, Reese, Beintema-Interpharm and Centrafarmthe ECJ had maintained that use of IPR to gain foothold in a market does not necessarily amount to AoD as there may be a significant amount of substitutes available in the market. However, the ECJ changed its stance moving forward, evidenced in the cases of Radio Telefis Eireann (RTE) & Independent Television Publications Ltd. (ITP)v. Commission and IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG wherein it held that a refusal to license IP rights would constitute AoD only in “exceptional circumstances”. It laid down the exceptional circumstances in a “narrow” sense as: (a) the IP is a necessity to compete in the market; (b) the refusal is no objective justification; (c) the refusal would hand over a secondary market to the IP owner without any competition; (d) the licensee offers to produce such products which is not in the inventory of the IP holder. In a different case involving Microsoft, the European Commission took a different stand and stated that licensing could be made compulsory under the following circumstances: (a) the IP right is a necessity for the competitor to stay viable in the market; (b) the refusal to license would reduce disclosures; (c) there exists a “risk” of elimination of competition in the secondary market; (d) the refusal to supply could end up stifling innovation; (e) the refusal to supply would not be objectively justified as it could lead a lack of balance between the incentives to innovation for the IP holders and the incentives to innovate for the market as a whole. This interpretation in the Microsoft case was very broad. It mandated access to licenses very strictly and led to situations where in the courts would find refusal to license as abusive when in fact they were not.  Such a strict interpretation reduced consumer welfare and led to an overall lack of social welfare.

    Given the similarities between Section 4A, the CLRC recommendations and the aforementioned constructions laid down by the ECJ, it is expected that CCI is expected to refer to ECJ cases whenever it is faced with questions related to Section 4A. It would prove beneficial if CCI follows a similar route of the “narrow” construction while dealing with the issue. The CCI would also need to take a similar path when dealing with the SEP licensing cases so as to ensure that the SEP holders do not stifle competition while ensuring that they get the necessary freedom to enforce their IP rights.

    Conclusion

    The provision of Section 4A is a very adventurous step that has been recommended by the CRLC, given it’s a road not taken by other jurisdictions. It does come with certain flaws as it may lead to lengthy implementations and trials. But on an overall basis, it is quite positive and a move worth welcoming, as it could bring some much-needed clarity to the “conditions” under which the dominant IP holder can enforce its rights. It could also nudge CCI to refer much-appreciated interpretation made by ECJ in its narrow construction with regards to refusal to license cases and could bring about larger welfare for the society.

  • COVID-19 and M&A: Reshaping The Deal Making Process

    COVID-19 and M&A: Reshaping The Deal Making Process

    BY HARSH KUMRA AND HARSH MITTAL, FIFTH-YEAR STUDENTS AT AMITY LAW SCHOOL, DELHI (GGS IP UNIVERSITY)

    COVID-19 has strongly affected the M&A scenario in India. Corporates are facing difficulties in going through deals due to various factors led by economic deterioration by lockdown. Some of the thrusting factors for business decisions regarding such transactions are changes in business sentiment, valuation concerns as well as liquidity constraints due to reduced lending by banks especially after suspension of IBC. For April 2020, Grant Thornton India’s deal tracker reported a 37% fall in aggregate M&A volumes and 22% fall in aggregate Private Equity deals compared to April 2019 and March 2020. However, the deal activity across different industries such as Telecommunications, Healthcare and Consumer Staples has carried on despite lockdown restrictions and COVID-19 will give rise to more opportunities in M&A sector.   

    This article addresses certain key issues and concerns that the companies have had to focus on due to the ongoing pandemic and it looks at the future of deal making process.

    Deal Considerations

    An important concern here would be to decide the kind of deal the companies are willing to enter into. Several factors will play a role in coming to this decision – valuation concerns, lending ability of banks and financial institutions, liquidity crunch faced by the company etc. In India, it is the inveterate mindset of companies to opt for a cash deal, given the fact that they are easier and offer lesser hurdles as compared to its counterpart. However, the times have changed substantially, and on this verge, companies have had to use their cash reserves on a number of other operations and to keep their business going. While cash-rich companies have been able to enter-into M&A transactions easily, the same has not been the case for most companies who require external financing. Additionally, in light of the recent changes and amendments, the lending capacity of banks and financial institutions has been impaired to some extent. The Insolvency and Bankruptcy Code, 2016 has been suspended and the RBI announced a special COVID-19 Regulatory Package through which –  it allowed rescheduling of payments; lenders have been permitted to defer the recovery of interest in respect of cash credit and overdraft facilities and lenders were allowed to give a three month moratorium on term loans.

    With this being said, the companies would try to rely more on stock deals and the buyer would be able to keep its cash reserves for other operations. This will also help the companies and its shareholders in saving the tax component in the sense that they may save on payment of transfer taxes. Companies might also consider investing using hybrid instruments featuring both cash and stock. The market is likely to see new forms of hybrid instruments. In the deal of JSW Energy, acquisition of Jindal Steel and Power witnessed such a structure combining both asset sale and share acquisition. However, the deal was called off by JSW Energy before it could be closed. A report published by the International Financial Law Review states that such hybrid structures provide the necessary balance between the regulatory constraints and commercial objectives.

    Further, some companies might prefer slump sale to avoid the extra hassles of due diligence and approvals from minority shareholders. This could be beneficial for buyers as the exposure to unknown liabilities is comparatively lesser and hence, the buyer need not expend much time on due diligence.

    Regulatory Framework

    With the ongoing pandemic still in place, India has seen regulators stepping in time and again to do their best to limit its impact on the economy. If we look at the measures that have been taken, we could say that the regulatory environment of our country is trying to facilitate the deal making process.

    The regulators such as Securities and Exchange Board of India (‘SEBI’), Ministry of Corporate Affairs (‘MCA’), Reserve Bank of India (‘RBI’) and Competition Commission of India (‘CCI’)have made relaxations and exemptions in terms of compliances and taxations. They have stepped up to facilitate e-filing procedures of applications, ultimately easing the transaction process for companies.

    As a major relief for corporates, the MCA has eased the rules with respect to the way the Board Meetings are conducted. In March, an amendment was introduced to the Companies (Meeting of Board and its Powers) Rules, 2014 and directors of the companies were allowed to participate in the Board meetings through video conferencing or other audio-visual means, for issues such as Approval of the matters relating to amalgamation, merger, demerger, acquisition and takeover. Additionally, it also allowed companies to hold Annual General Meetings through video conferencing for the entire year.

    Apart from this, SEBI asked all listed companies to make endeavors to ensure that investors are provided with timely and adequate information with respect to the impact of the pandemic on the company’s financial statements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. This will help the investors in making decisions in terms of company’s financials and will give the right valuation of the companies.

    Valuation

    The pandemic has created an atmosphere of uncertainty and volatility, leading to ambiguities in terms of company valuations. For deals that were initiated before the COVID-19 outbreak, buyers and sellers are back to the negotiation tables to deliberate upon the valuation of the buyer. For the companies who just began negotiating the deal, they are likely to face difficulties in reaching at an appropriate valuation. In the former case, buyers would try to reconsider and renegotiate the valuation, while in the latter; they would attempt to leverage the lower valuation of the target company. Additionally, both the parties would want to bridge the time gap between signing and closing the deal in order to lessen the impact of volatility on the deal.

    Due Diligence & Representation and Warranties

    This aspect of transaction is going to face deviations since there is a lesser scope of physical inspection and more reliance on virtual due diligence and video conferences for discussions on Seller’s financial statements and analysis of all material aspects to search for financial risk indicators and compliance lapses, operating results and cash flows, seller’s default on key contracts and leases, termination rights under various contracts, data protection concerns etc. The Representation and warranties (R&Ws) hold the seller to the confirmation provided regarding the Buyer’s due diligence findings, audited and unaudited financial statements, seller’s liabilities & obligations, and material contracts. If the R&Ws are misleading, the buyer may terminate the acquisition and may even entitle them to post-closing indemnities. Although it is impossible to predict the long-term effects of the pandemic, due diligence process could be altered in such a way that it facilitates quicker transactions rather than causing hindrance through engaging advisors as early as possible, preparing for the reality of dealing with more unknown factors than usual and appropriate measures in planning.

    Mitigation and Allocation of Risks

    Once the Memorandum of Understanding (‘MOU’)/ letter of intent, term sheet, Non-Disclosure Agreement (‘NDA’) and other non-binding preliminary agreements are entered, the next step is to work towards a definitive agreement. Pandemic driven provisions should be added to address closing risk and closing certainty. Although each agreement is specifically tailored to transaction’s structure, several clauses can be common such as R&Ws, covenants, and conditions which mutually address the allocation of risk in such transactions. R&Ws regarding ownership, contractual arrangements of Intellectual Property (‘IP’) as well as non-infringement of IP rights are some of the most significant clauses.

    Material Adverse Change (‘MAC’) is another important clause which now includes the events such as pandemics, lockdowns, and interruption of international trade in the transaction and functions between the signing of acquisition agreement and closing of the deal. This clause transfers the risk to the seller and therefore they push for a lenient MAC clause. Furthermore, the central government declared the COVID-19 outbreak as a “natural calamity” and directed that delays on account of the pandemic be treated as Force Majeure; however the direct effect of this on private contracts is absent. Although, the Force Majeure clause is common in conventional commercial contracts, the same cannot be said in case of M&A transactions as this provision is relatively rare in such agreements. Considering that the courts have expansively interpreted Force Majeure clauses and are not going to apply the defenses available outside of the terms of contract, the Force Majeure clauses could be included and tweaked to specifically address the threshold for invocation, methods of invocation, list of included events and consequences thereof.

    Conclusion

    While the world economy has taken a hit due to the pandemic, it has affected all the sectors in a very different manner. The deal making as a process is likely to see a new face and will emerge in a very different shape and manner. There are sectors like hospitality and tourism, that are fighting to keep their place, and then there are sectors like e-commerce and e-pharmacy that have shown ample amount of growth. It is most likely that in each sector, fewer players will survive. We will see an enormous amount of M&A with the buy side being influenced by ambition and the sell side by its stress and survival instincts.

    This being said, India is going to experience a fundamental shift in the M&A landscape. The companies will have to adjust with certain realities that have become the new normal for the country. The unpredictable nature of COVID-19 has made it difficult for companies to evaluate the targets accurately and they will have to come up with ways to make adjustments accordingly.

    The companies would want to go for acquisition as the mode of structure instead of schemes of compromise or arrangement, since they require NCLT approvals which are bound to delay the process further. Additionally, the time taken to complete the entire process might also get prolonged due to various other unresolved regulatory and technical hurdles.