The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • Introducing the Rule of Locus Standi in Competition Jurisprudence: Clipping the CCI’s Wings

    Introducing the Rule of Locus Standi in Competition Jurisprudence: Clipping the CCI’s Wings

    By VANSHAJ DHIMAN, A STUDENT OF THIRD-YEAR AT RMLNLU, LUCKNOW

    On 29th May, 2020, the National Company Law Appellate Tribunal (‘NCLAT’ or ‘Tribunal’) rendered a judgement – in Samir Aggarwal v. CCI & Ors. – wherein it was held that unless a person’s legal rights “as a consumer or as a beneficiary of healthy competitive practices” have been infringed, he/she cannot file an information before the Competition Commission of India (‘CCI’) levelling allegations for the contravention of Sections 3 and 4 of the Competition Act, 2002 (‘Act’).

    This myopic and unnecessary view of the NCLAT, in essence, reserved the position of an informant for the competitors, consumers and their associations only and thereby failed to uphold the true legislative intent behind the said provision. In this blog, the author shall present a two-pronged argument to highlight the errors in the findings of the Tribunal – firstly, the fetters of locus standi will more likely frustrate the very object and scheme of the Act; secondly, it will cause great damage to consumer welfare and effective competition in the market.

    Factual Matrix

    In the present matter, Mr. Samir Aggarwal (‘Appellant’) challenged the CCI’s order, wherein the CCI found no prima facie case since no agreement, understanding or arrangement existed either between Ola and Uber and their respective drivers or between the drivers inter-se qua price-fixing. Therefore, the allegations against the Ola and Uber contravening Section 3 of the Act by forming hub and spoke cartel were dismissed by the CCI under Section 26(2) of the Act. While ruling on this matter, the NCLAT also questioned the locus standi of the Appellant, albeit rejected the appeal on the basis of merits as well.

    • Tracing the object and scheme of the Act

    The CCI was primarily constituted to enforce the competition policy of India and to prevent market failures. The preamble of the Act confers the duty on the CCI to eliminate practices having adverse effect on competition, to promote and sustain competition and to protect the interests of consumers. This wide amplitude of mandate reverberates with Section 18 of the Act as well.

    Interestingly, no qualifications or requirements have been prescribed by the legislature which a person has to fulfil before filing an information with the CCI under Section 19(1) of the Act. As per Section 19(1) of the Act, the CCI may carry out an inquiry suo motu; or upon receipt of information from any person, consumer or their association or trade association; or upon a reference made to it by the Central Government or a State Government or a Statutory Authority.

    Section 2(l) of the Act defines the expression ‘person’ and includes, inter alia, an individual, Hindu undivided family, company, corporation, association and every artificial juridical person. Indubitably, the expression ‘person’ has been given a broad and inclusive meaning. Thus, the legislative intent seems to be very clear regarding entrusting the duty on every citizen for highlighting any potential antitrust violation before the CCI to uphold the sanctity of the economic legislation.

    An Informant cannot be and should not be considered as a party to the dispute merely because of its status of being an informant because he/she merely works as one of the sources of information for the CCI. What matters is the substance of an information and therefore should be given primacy over the standing or antecedents of the informant. As rightly pointed out by the CCI that “antecedents of the informant cannot be made a ground for the Commission to not take cognizance of abusive conduct of any entity”.

    In the matter of Saurabh Tripathy v. Great Eastern Energy Corporation Ltd., the CCI observed that in order to highlight any anti-competitive practices before the CCI, the informant need not be a personally aggrieved person from such practice as the proceedings before the CCI are not ‘in personam’ but are rather ‘in rem’ affecting an entire market. Interestingly, even the Director-General (‘DG’) can furnish an information, a complaint or a memo before the CCI under Section 19(1)(a) of the Act, albeit, the DG cannot initiate a suo motu investigation.

    In Surendra Prasad v. CCI, the Competition Appellate Tribunal (‘COMPAT’) highlighted the judicious scheme of the Act and held that “there is nothing in the plain language of Sections 18 and 19 read with Section 26(1) from which it can be inferred that the Commission has the power to reject the prayer for an investigation into the allegations involving the violation of Sections 3 and 4 only on the ground that the informant does not have a personal interest in the matter or he appears to be acting at the behest of someone else.”

    • Free Market more important than the standing of an informant

    In Central Circuit Cine Association v. Reliance Big Entertainment Pvt. Ltd., by assailing the order of the CCI, the appellant i.e. CCCA, questioned the locus standi of the informant (respondent) contending that the CCCA is an association of the distributor or exhibitors and only members of the association are governed by the rules of the association, therefore, non-members should not be allowed to file an information with CCI levelling allegations for contravention of Sections 3 and 4 of the Act. Negating the contention of the CCCA, the COMPAT held that since the CCI can take suo-motu cognizance of any anti-competitive matter, rules of association cannot be made a ground to question the locus of a non-member who attracts CCI’s attention towards an anti-competitive practice flourishing in the market.

    Had the information could only be filed by an aggrieved party, the foregoing anti-competitive practices of the association might not be challenged and ultimately, damaged the freedom of trade in the market. Therefore, the role of an informant as information provider is indispensable and should not be weighed on the anvils of antecedents of the informant. The informant only initiates the proceeding before the CCI to obtain a prima-facie order under Section 26(1) of the Act. Accordingly, the DG would then conduct an investigation into the matter and submit its report to the CCI. Indubitably, the locus of the informant’s information is subservient to the evidence brought on record by the DG and further assessed by the CCI. Hence, the case against the opposite parties is made on the basis of findings of the DG and not on basis of any information so being received.

    Countering frivolity of information

    It is a well-settled principle that a person approaching a court must come with clean hands. Now, even though there was no locus standi requirement under competition jurisprudence, the COMPAT had, in L.H. Hiranandani Hospital v. CCI, cautioned the CCI to critically examine the identity of the informant before acting on the information and regard its submission with suspicion where the informant is a third party espousing someone else’s cause with an ulterior motive.

    Indeed, the liberal interpretation of the terms ‘information’ and ‘person’ have resulted in some vexatious and frivolous cases before the CCI but in response to that shackling the CCI with the rule of locus standi cannot be a plausible justification. Alternatively, the CCI may avert unscrupulous people by adopting a mechanism to scrutinize the information and if found agitated with oblique and mala-fide motives, a penalty should be imposed to punish such opportunistic people.

    International Positions

    The European Commission has the power to initiate ex-officio investigation into the suspected cartels or infringements of Article 101 of Treaty on the Functioning of the European Union after receiving a complaint or information from various sources such as, inter alia, informant, consumer, whistle-blower or any third party, other departments or competition authorities.

    The United Kingdom’s Competition and Markets Authority and Canada’s Competition Bureau may also start an investigation after receiving a complaint or information from consumers, businesses, informants or whistle-blowers leveling allegations for violating their respective competition acts. Evidently, information provided by third parties or whistle-blowers helps countries in making effective Intelligence system vis-à-vis completion policy.

    Some antitrust watchdogs including Hungarian Competition Authority and Korea Fair Trade Commission are even authorised to give rewards to the informants or whistle-blowers for providing indispensable information to the competition authorities, which will eventually help them in detecting and unveiling the hard-core cartels.

    Concluding Remarks

    The concept of an aggrieved party was diluted when the expression “receipt of a complaint” was replaced with a wider expression “receipt of any information” by the Competition (Amendment) Act, 2007. Unfortunately, the NCLAT has now saddled the CCI with the rule of locus standi by overlooking the plain and natural meaning of the statutory provision.

    This inhibitive decision of the NCLAT would, ergo, preclude the third parties and whistle-blowers from approaching the CCI regarding any unfair or anti-competitive trade practices carried out in the market. Hence, keeping in mind the foregoing arguments and international practices, the author hopes that either the Supreme Court or the NCLAT itself will soon correct this position in a suitable case, otherwise, its consequences will be far-reaching in the competition domain of India.

  • Lifting the Suspension On Section 10 Of IBC- Need Of The Hour?

    Lifting the Suspension On Section 10 Of IBC- Need Of The Hour?

    By Chirali Jain and Chahak Agarwal, fifth-year students at NLU, Jodhpur

    In a recent development, a PIL has been filed by Mr. Rajeev Suri in the Delhi High Court, challenging the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (‘the Ordinance’) by way of which applicability of section 10 has been suspended for a period of 6 months owing to the current pandemic. The petition challenges the Ordinance as it suspends the operation of sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’), depriving the corporate applicant of the ability to initiate the Corporate Insolvency Resolution Process (‘CIRP’). Following submissions have been made through the petition to challenge the suspension of the aforementioned provisions:

    a. Such suspension in these extraordinary times is “irrational, arbitrary, unjust and mala fide” as it stops a corporate applicant from exercising its statutory rights.

    b. It will push the companies towards liquidation, discourage entrepreneurship and defeat the objectives of the Code.

    c. Suspension is ultra vires Articles 14 and19(1)(g) of the Constitution of India.

    d. It would result in further deterioration of the affairs of the corporate debtor and result in making the restructuring/ revival of the corporate debtor unviable.

    The Delhi High Court has issued a notice to the Union Ministry of Law and Justice and Insolvency and Bankruptcy Board of India on July 28, 2020 and sought a reply till August 31 in the matter. 

    Background

    The current pandemic has impacted small and large businesses in various sectors across the economy. The Government, in an attempt to provide some relief to the distress caused by the pandemic, introduced a slew of changes to the insolvency framework of the country. 

    On June 5, 2020, the President promulgated the Ordinance with immediate effect. The Ordinance introduced section 10A to the Code, thereby effectively suspending the operation of sections 7, 9 & 10 and consequently section 14 of the Code with respect to defaults arising on or after March 25, 2020 for a period of six months, extendable up to a maximum period of one year from such date as may be notified. The proviso to section 10A also bars any insolvency application from ever being filed, for any default occurring during the Suspension Period. 

    Sections 7 and 9 of the Code, allow filing of an insolvency application against the corporate debtor, by a financial creditor and an operational creditor, respectively, when a default occurs above the threshold limit. Section 10, on the other hand, allows corporate entities to voluntarily file an insolvency application against themselves, where a default has occurred. By giving the corporate debtor the right to approach the adjudicating authority for initiation of CIRP, this provision affords the defaulting entity a chance to revive themselves through the resolution of debt. However, by suspending the applicability of this section, the Ordinance, despite having the aim of protecting corporate entities from creditors, does considerable harm to the corporate debtor.  It takes away the much needed resort, available to the corporate debtor, to subject itself to an insolvency proceeding for resolution of debt or revival of the entity. Moreover, the inability of creditors to file insolvency applications against intentional defaults or for debts that are not linked to Covid – 19, may further impede the flow of financial resources to the commercial sector in India. That said, the Ordinance does not render the corporate debtors and creditors remediless as there are other remedies available to them which are discussed later in the post. By way of insertion of section 66(3), the Ordinance also seems to exempt liability of directors or partners of corporate debtors in case of potential losses to creditors during the exemption period, due to lack of due diligence. However, this may provision may be misused and lead to further deterioration of realisable value for creditors.

    It may be observed that the Ordinance protects companies and promoters from liability arising due to no fault of their own. However, the position regarding the liability of promoters is still not clear, owing to the fact that proceedings can still be initiated against personal guarantors.  

    Implications Of Suspension Of Section 10

    The rationale behind suspending the applicability of section 10 is not clear. Suspending the applicability of section 7 and Section 9 may be seen as a necessary or a justifiable move in order to revive economic activity and provide temporary relief to companies under severe distress caused on account of the Covid-19 pandemic and the national lockdown. However, suspending section 10 has sparked massive debate as move may cause more harm than the intended benefit. This provision has been used as a tool for companies to opt out of the market in times of extraordinary financial distress. This refusal of freedom to companies during this uncertain period acts as an impediment to the fulfilment of the spirit of the Code.

    Suspension of section 10 is further detrimental to companies under huge financial distress, whose value of assets is deteriorating rapidly and their only viable option is to file for insolvency. Instead of enabling quick sale of assets so as to realise some value, suspension of this provision will only lead to more problems. A huge influx of insolvency applications could further impede the capital flow of the economy and can bring unexpected economic disruptions during COVID-19 when  ideally the target should be to get the capital flow moving. This move can also affect India’s position in the context of Ease of Doing Business which has been the guiding light for a lot of changes introduced by the government recently.

    The suspension also deprives the corporate debtor from exercising the fundamental rights guaranteed under the Constitution. Article 19(1)(g) of the Indian Constitution guarantees every citizen the right to practise any profession, or to carry on any occupation, trade or business. Rights to carry on a business also include rights to start a business, right to continue a business and right to close a business.

    In Excel Wear V. Union of India, the Supreme Court held that the right to carry on any business also provides an inherent right to close the business as no person can be compelled to carry on the business in case of losses or other circumstances. The act of the government to close the exit route for the corporate debtor by striking off section 10 of the Code is infringing the fundamental right provided to the corporate debtor under Article 19(1)(g) of the Constitution of India. Moreover, this would only result in keeping the industry alive forcibly to suffer the pain until it collapses.

    However, the right to close the business comes along with reasonable restrictions as per Article 19(6) of the Constitution. The Court while considering this right has to take into account the background of the facts and circumstances under which the order was made, the nature of the evil that was sought to be remedied by such law, the ratio of the harm caused to individual citizens by the proposed remedy and to the beneficial effect reasonably expected to result to the general public. It will also be necessary to consider in that connection whether the restraint caused by the law is none than was necessary in the interests of the general public. Here, it is important to note that keeping Section 10 operational would not harm the creditors or any other stakeholders in any manner, thereby not violating public interest.

    The Way Forward

    The Ordinance has taken the corporate debtor to the pre-IBC era and uses alternative remedies which would defeat the whole purpose of the enactment of the Code. Some of these remedies are application under Section 230 of the Companies Act, 2013, application for recovery of money under Civil Procedure Code, applications under SARFAESI before DRT, bank negotiated restructuring, etc. 

    However, even after resorting to these alternative remedies, they would still be less efficacious as the insolvency proceedings under the IBC because (i) the corporate debtor would still be liable to pay through the restructuring of debt despite being in a dubious position; (ii) the benefits of moratorium on legal proceedings would not be available; and (iii) it would have a low binding effect.

    An alternative option could be the introduction of pre-packaged insolvency schemes, which are already prevalent in the UK and the US, as an aid to the current insolvency framework. An exception may also be created under the Code with respect to section 29A of the Code, in order to allow promoters to participate in pre – packaged schemes who have defaulted due to economic reasons stemming from the pandemic.  

    It will also be beneficial to take a look at the approaches being followed in various countries such as the UK, Australia and Singapore. These countries have managed to keep the doors open for voluntary insolvencies while suspending any action by creditors against the companies in case of default. In UK, wrongful trading provisions of the Insolvency Act have been suspended,  effective from 1 March until 1 June 2020. This change seeks to remove the threat of directors incurring personal liability for ‘trading while insolvent’ during the pandemic. In Australia, due to the provision of voluntary insolvency proceedings, Air Mauritius, second largest airline of the country filed for insolvency. In Spain, companies can file voluntary bankruptcy applications, and in case of pending declarations on voluntary bankruptcy applications, judges might declare insolvency if waiting for too long might cause irreparable damage. Further, Singapore has provided relief by introduction of moratorium against commencement of insolvency of only an affected debtor.

    Therefore, it is the opinion of the authors that while suspending section 7 and section 9 is justified, suspending section 10 is an extreme step and is not in accordance with the inherent spirit of the Code. 

  • India Mauritius Double Taxation Avoidance Treaty: Assessing AAR Decision Implications

    India Mauritius Double Taxation Avoidance Treaty: Assessing AAR Decision Implications

    By Anupriya Nair, A fourth-year student at NALSAR, Hyderabad

    On 26 March 2020, The Authority for Advance Ruling, New Delhi (‘AAR‘) in the case of  Re Tiger Global International II Holdings, Mauritius  denied the capital gains tax exemption pertaining to the indirect transfer of shares of Indian companies under the India Mauritius Double Tax Avoidance Agreement (‘DTAA‘). The ruling was a result of a favourably designed DTAA  which allowed Mauritius-based companies selling Indian shares to benefit from the exemption, and to promote tax avoidance practices involving the repositioning of investments into India via Mauritius-based shell entities.

    This article examines the economic implications of the AAR decision in light of the uncertainty brought about by COVID-19. The ruling in the instant case brings forth a substantial shift in practice with regard to the interpretation of the DTAA and will have a lasting effect on international investment relationships with India.

    Brief Facts of the Case

    The applicants in Re Tiger Global International II Holdings, Mauritius, comprising of Tiger Global International II, III, and IV Holdings (‘TGM’), were part of a tripartite structure of private companies which engaged in long term investment activities undertaken for the purpose of gaining capital returns. These three companies are residents of Mauritius for taxation purposes pertaining to the DTAA.

    The applicants invested in Flipkart (Singapore) between 2011-2015 which attributed a significant value of its shares to India as a result of its investment in various India-based companies. The three Mauritian taxpayers subsequently transferred a portion of their Flipkart (Singapore) shares to Fit Holdings S.A.R.L.(Luxembourg) . This sale was a consequence of a larger transaction involving Walmart’s acquisition of a majority stake in Flipkart (Singapore).

    Initially, the applicants approached the Revenue Tax authorities (‘Revenue’) in August of 2018 under Section 197 of the Income Tax Act 1961 (‘IT Act’) seeking a ‘nil’ withholding certificate in relation to the aforementioned transfer. The request was denied on grounds of ineligibility arising out of lack of independence and control and the Mauritian applicants held in the transaction in question.

    Subsequently, the applicants approached the AAR under Section 245Q (1) of the IT Act in order to determine whether the transaction would be taxable under the existing DTAA.

    Breaking Down the AAR Ruling

    The AAR’s ruling, after consideration of the factual matrix of the case, upheld the ruling of the Revenue. It was held that the share transfer transaction in question was an investment strategically designed for tax avoidance purposes. The AAR made the following key observations:

    • Since the financial statements of the applicant revealed that Flipkart (Singapore) was their only recorded investment, it was concluded that the transaction was an exploitation of the DTAA that Mauritius specifically shared with India.
    • The operating structure within which the transaction was to function, although not held to be a definite indication of tax avoidance, reflected an intention to exploit the benefits of the DTAA. This was termed as an ‘inescapable conclusion’ by the Court.
    • The role of Charles Coleman (a US-resident) over the entirety of the TGM group structure, as a director, beneficial owner, and applicant appointed signatory of bank cheques, gave the AAR reason to believe that the real control and management of the business was not situated in Mauritius but in the USA. Determining the ‘head and brain of the Companies’ as opposed to the daily affairs of business activity was a deciding factor in this aspect.
    • The AAR concurred with the Revenue to conclude that the holding-subsidiary structure in combination with the USA-based control and management of the business was indicative of the intention of applicants to exploit the DTAA as ‘see through’ entities.
    • Since the transaction involved the share transfer of Flipkart (Singapore) which only procured a substantial value of its company from India, and not an Indian company, the DTAA was held to be inapplicable and the applicants ineligible to claim benefit under the premise of the investment.

    Exploring the Implications of the decision

    Economic Implications

    There is an air of uncertainty and impermanence that surrounds the present state of economic affairs owing to the pandemic. The AAR ruling in the instant case will deter investors from engaging with the Indian market. Mauritian investors were operating under the premise that all existing investments up to March 31, 2017 have been grand-fathered (protected) and exits/shares transfers beyond this date will not be subject to capital gains tax on exit. However, exit plans for Mauritian entities were constricted by virtue of amendments in the convention between India and Mauritius for the avoidance of double taxation and fiscal evasion with respect to taxes on income and capital gains. The denial of treaty benefits, despite the existence of the grandfathering rule, is likely to attract ramifications on future exits by start-up investors who have routed money from tax havens.

    The added rigidity in the parameters for the exemption of tax under DTAA will encourage international investors to move their investments to alternate routes and investment destinations. This can cause severe implications on an economy already on the brink of recession owing to the pandemic.

    Context-Specific Approach

    The context-centric approach adopted by the AAR may mark a shift in the analysis of claim for benefits with respect to tax treaties in the future. A key take-away from the ruling is the increased relevance placed in the examination of substance matter of the parties involved in the DTAA. Further, the holistic perception of the transaction was deemed indispensable, wherein the roles of not only the sale of the shares, but rather the purchaser/buyer involved were also analysed. The intention behind the transaction was also determined by careful perusal of the structure, credibility, conduct, ownership and control of the business.

    This level of specificity in the analysis of the transaction leads to the question of the possible arbitrariness in future AAR rulings due to the broadening of scope of analysis made available to them. In the instant case, the AAR found one of the purposes of the transaction arrangement to be for obtaining tax benefit, failing the Principal Purpose Test. However, despite the AAR having utilised the aforementioned test, it was not explicitly mentioned in the ruling, leaving scope for wider analysis/interpretation of operational structure and consequently, easier deconstruction of DTAA in the future.

    An Uncertain Future

    The CBDT Circular No. 789/2000 clarifies that the tax residency certificate (TRC) issued by the Mauritian Tax Authorities would constitute sufficient evidence of residency as well as beneficial ownership of the Mauritian entity for application of the tax treaty. Further, the landmark ruling of the Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. wherein the apex court unequivocally found that the language of the IT Act was inadequate to tax offshore indirect transfers, upholds the eligibility to claim benefits under the treaty (grandfathering rule).

    It is therefore essential to understand that the ruling in the instant case was rooted in the scrutiny of the specificities of the factual matrix presented before the AAR and is not to be held as the conclusive and settled jurisprudence on the DTAA between the two countries. Although it is an important AAR ruling, it is important to consider its position in jurisprudence in light of the above-mentioned circulars and judicial pronouncements. The primary relevance of this judgement lies in its dissonance from this previously deep-rooted position of law.

    This discord in the position of law created by this ruling will create an uncertainty in the mind of investor. Further, the way in which the standard treatment of indirect transfer of shares with respect to capital gains exemption will be affected by the current AAR ruling with Tiger Global is unpredictable. We can only wait and observe the way in which issues surrounding the economic impact, grandfathering clause and principle purpose test will be addressed when Tiger Global moves to Delhi High Court to challenge AAR’s decision.

  • NPA Crisis: Pressing Need For Bad Bank

    NPA Crisis: Pressing Need For Bad Bank

    BY ADITI SINGH, GRADUATE FROM SYMBIOSIS LAW SCHOOL, PUNE

    Indian banks especially the public sector banks are heavily burdened with bad loans and an ongoing pandemic is further making the crisis worse. For banks to effectively operate, it’s imperative that they continue lending loans and advances which are categorised as a standard asset or a non-performing asset (‘NPA‘). In an event when the borrower defaults in payment of interest or principal amount of loans and advances made by the bank for more than 90 days, the asset which was earlier categorized as a standard asset is then converted to an NPA.

    According to the Financial Stability Report the Gross NPA ratio of Scheduled Commercial Banks may rise from 8.5% in March 2020 to 12.5% by March 2021 under the baseline scenario however the same may be escalated to 14.7% under a very severely stressed scenario. Banks suffer enormous losses in provisioning for already existing NPAs, due to the Covid-19 pandemic, the world has been facing economic slowdown which has forced the Reserve Bank of India (‘RBI’) to allow a moratorium period and the government to suspend resolution procedure under Insolvency and Bankruptcy Code which will further burden the already burdened banks with NPAs.

    Asset Reconstruction Companies away from Efficient Resolution of NPAs

    There are Asset Reconstruction Companies (‘ARC’) registered with the RBI and regulated under the SARFAESI Act, 2002 that purchase NPAs from the banks at a discounted price and then focus on realising such financial assistance. In order to secure finances, ARCs under section 7 of SARFAESI Act, 2002 are authorised to issue security receipts to qualified buyers evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation. However, ARCs have not been able to provide relief to the stressed banking sector. ARCs have been poorly capitalised to purchase NPAs from the banks and to make 15% of upfront payment as required. Even if ARCs have capital to purchase NPAs the price offered by them after haircut is far too less for banks to agree upon which is why the banks delay and avoid to put NPAs for auction. Delay by the banks in selling NPAs to ARCs leaves restrictive space for ARCs to realise the stressed assets, ultimately defeating the entire purpose behind ARCs existence. Looking at the near future, Indian Banks’ Association has proposed to set up a ‘Bad Bank’ for the recovery of banking sector from the financial distress.

    How will Bad Bank resolve NPAs? How will it work differently from already existing ARCs? Who will fund the Bad Bank in India? These are some of the questions that come hand in hand with the discussion of establishing Bad Bank.

    The Bad Bank Approach

    A Bad Bank essentially is an ARC which aims at reducing NPAs from the books of banks thereby reducing the load of stressed assets upon the banks. The banks will first segregate their assets and then transfer their stressed assets to the Bad Bank. The Bad Bank will then focus on realizing those stressed assets.

    Experiences of United States of America, Ireland, Germany, Sweden, Malaysia suggests various significant features behind success of Bad Bank. Mellon Bank of USA was the first bank to use the Bad Bank approach to resolve stressed assets. Further, The United States established, the Resolution Trust Corporation in the year 1989 funded by government and a few private investors. Thereafter, in the year 1992 Sweden incorporated Securum, a state sponsored company to resolves stressed assets, which successfully resolved ailing assets and was closed in the year 1997. Some of the major factors behind its success were state intervention, well framed laws and policies, transparency and political unity.

    Another significant model is Danaharta, established by the Malaysian government in the year 1998, a government funded asset management company with finite life to resolve stressed assets and recapitalisation. Malaysian government focused on strengthening its laws to support the effective operation of Danaharta. Malaysian government also stressed upon involving experts around the world which contributed immensely towards its success. However, there is no correct model for Bad Bank but intervention of state in ownership of Bad Bank needs to be carefully determined before establishing Bad Bank in India.

    The structure of the Bad Bank will be the main area which will distinguish it from the already existing ARCs in India. Indian Banks Association has proposed three stages of Bad Bank which includes an Asset Reconstruction Company (‘ARC‘) which will house the NPAs, an Asset Management Company (‘AMC’), and an Alternate Investment Fund (‘AIF’). The ARC will be owned by the Government of India, the AMC will be a professional body with participation from public and private sector, and the AIF is where a secondary market can be created for security receipts. The association recommended that the capital of Rs. 10,000 for Bad Bank to start operating shall be funded by the government.

    The idea of Bad Bank has been avoided for a long time in India. However, looking at the enormous number of distressed assets it becomes significant to find a way to resolve them. The role of ARCs and IBC has been significant yet not sufficient to resolve enormous number of NPAs. Bad Bank which is essentially an ARC has the potential to get financial sector ready to release funds. Some of the significant factors that will help the Bad Bank to effectively operate and resolve the enormous amount of bad loans in India are as follows:

    Structure of the Bad Bank

    The structure is the significant feature that will distinguish it from ARCs. Amid Covid-19, it is unreasonable to expect state owned Bad Bank, even otherwise Bad Bank requires minimum state intervention. However, Experiences around the world are a testimony that the state cannot be entirely excluded from the ownership structure of Bad Bank.

    The suitable structure for Bad Bank would be a Public-Private Partnership (‘PPP‘) to maximise recovery. Size of NPAs in public sector banks is such that the Government cannot be entirely excluded from the ownership but can stand as a minority stake holder so that the bank has the commercial freedom and transparency to avoid red-tapism while resolving the stress of bad loans.

    Adequate guidelines and Framework: For Bad Bank to resolve NPAs effectively there must be adequate guidelines and frameworks from the very beginning, firstly, to determine the value at which assets shall be transferred and secondly, to determine how these NPAs shall be resolved. The major issue ARCs have been facing is to reach an agreement on the value at which banks can sell off the NPAs. Moreover, in the case of ARCs, the RBI launched guidelines on sale of stressed asset by banks in 2016 much after the enactment of SARFAESI Act.

    Banks have been selling NPAs to ARCs either by an auction or bilateral negotiations. However, auction cannot be a suitable way for Bad Banks to acquire NPAs as it will further complex the entire time bound procedure the Bad Bank needs to follow.

    One of the key aspects of having PPP structure is the profit sharing link between the owners of the Bad Bank. Framework may include links of profit sharing between the owners of the Bad Bank so that once the bad asset has been resolved by the Bad Bank the profit will accrue to the owners of Bad Banks i.e. the banks, the original institution itself. If the banks have a profit sharing link then they would not shy away from transferring assets to Bad Bank without any unnecessary delay.

    Timeline: Timeline in which the assets need to be resolved by the Bad Bank is crucial to the entire resolution process and must be strict. Bad Bank should be able to resolve the acquired NPAs within 5 years which can be extended up to 7 years in special circumstances. The extension must not give any leverage otherwise it can start a vicious cycle of bad loans all over again.

    No Barriers to foreign skills and capital: The valuation mismatch between ARCs and bank is because ARCs have been under capitalised due to stringent policies for foreign investors to invest in ARCs which were relaxed only in 2016. This has been the major cause for ARCs limited role in resolving NPAs. The same shall not be done with the Bad Bank, foreign investors must allowed to invest in the Bad Bank from the very beginning so that the Bad Bank does not remain under capitalised.

    Along with the investors, Bad Bank shall also include experts from all around the globe to deal with complex NPAs. Also, in an event when it takes time to resolve NPAs, it’s the experts who can use their expertise to deal with the assets meanwhile a suitable buyer can be found.

    Having a Bad Bank will let the banks continue the lending however, it will bring its own challenges but this seems be to be the best suited time for its incorporation for the recovery of the banking sector. It’s also significant to not completely rely on a successful model of a foreign nation as India will need its Bad Bank to meet its own challenges. Since, the resolution procedure stands suspended in such circumstances banks specially the Public sector banks need to have confidence to keep up the lending. In such circumstances it’s important to segregate distressed assets and let them be realised by the experts.

  • IBC Ordinance: A Double-Edged Sword for MSMEs

    IBC Ordinance: A Double-Edged Sword for MSMEs

    BY JUBIN MALAWAT AND BHAVYA KALA, SECOND-YEAR STUDENTS AT RGNUL, PUNJAB

    Introduction

    CoVID-19 has created worst ever recessional conditions in the markets worldwide leaving everyone in distress. In light of the prevalent market conditions and the anticipated future contraction in the market, the government of India has introduced a few stabilizing and corrective measures keeping in mind the vulnerability of the Micro, Small and Medium Enterprises (‘MSMEs’) in these challenging times. One of the best examples of the measures adopted by the Union Government is the vision of making India self-reliant, ‘Atmanirbhar Bharat’. The government has also introduced a few changes in the Insolvency and Bankruptcy Code, 2016 (‘IBC’) with an intent to safeguard the MSME sector from the leash of CoVID-19 and improve the ease of doing business.

    Although the intent of the government behind the promulgation of ordinance dated 5th June 2020 was to amend the IBC to provide some breathing space to the MSME sector, the measures have had some unintended effects on the sector. This piece analyses the impact of the recent ordinance to amend the IBC on the MSME sector and highlights the gaps which are to be bridged. Bridging of these gaps would not only make MSMEs sustainable in the times of economic downturn but also help India become ‘Atmanirbhar’. 

    Highlights of the ordinance introducing sec. 10A to the IBC:

    1. Suspension of S. 7, 9 and 10 of the IBC for default arising on or after 25.03.2020 till 25.09.2020 and extendable up to 25.03.2021.
    2. No new application shall be allowed to initiate fresh CIRP from 25.03.2020 for a minimum period of 6 months extendable up to 12 months as and when notified.
    3. No application shall ever be filed for the initiation of CIRP of a corporate debtor concerning any default arising during disruption period starting from 25.03.2020.
    4. An application seeking initiation of fresh CIRP shall be allowed only if the following two conditions are fulfilled:
      • The default arose before 25.03.2020.
      • The said default amount is greater than Rs.1 Crore. 

    Impact on MSME Sector

    Micro, Small and Medium Enterprises, as defined in S. 7 of MSMED Act 2006, contribute significantly to the economy of the nation. It employs around 111 million people and accounts for approximately 48% and 28% of the nation’s export and GDP respectively. Hence, it is clear the MSME sector remains the backbone of the nation’s economy and deserves to be protected in these unprecedented times. The legislators with a similar intent promulgated an ordinance amending the IBC but the letter didn’t seem to match to the authority’s intent.

    Recent changes in the IBC, including the rise in the default threshold under S. 4, suspension of S. 7, 9, and 10, and insertion of the proviso in S. 10A providing blanket protection to the debtors defaulting during the disruption period starting from 25th March have raised debates as to whether the ordinance helps MSMEs or harms them. Owing to the recent ordinances, MSMEs have been impacted in two ways, i.e. being a creditor and being a debtor.

    MSMEs being the Operational Creditors

    As per the study by the Brickwork Ratings, MSMEs have approximately Rs.303 lakh crore of their funds stuck with large corporates in the form of receivables. Hence, it can be asserted that MSMEs play a vital role in the economy being operational creditors to the large corporate houses. In the times of CoVID-19 when the whole economy is struggling to escape from the rippling effect over the economy, it becomes all the more important to ensure that the smaller firms contributing to the nation’s economy on such a large scale are duly paid back.

    • Suspension of S. 9 adding to the plight of MSMEs

    The un-amended IBC framework facilitated negotiating leverage to the smaller firms against the mighty corporates as the MSMEs could enforce S. 9 of the IBC to recover their dues in a time-bound manner. But the recently introduced ordinance, although passed to provide breathing space to the distressed firms, has made the MSME firms helpless by disabling them to invoke insolvency proceedings for the recovery of their dues. In numerous cases, it has been that the corporate houses, fearing wide-ranging ramifications, settled their debts against the smaller firms after the application for insolvency proceeding was filled but before the same was taken up by the tribunals.

    According to the data provided by the Insolvency and Bankruptcy Board of India, up to March 2020, 157 applications for corporate insolvency resolution process were withdrawn under S. 12A of the IBC, of which 64 cases involved amounts less than Rs.1 crore. The reasons for early withdrawal of cases were full settlement with the applicant and other settlement with creditors.

    Now under the garb of amended IBC framework, the corporates who earlier feared harsh consequences of the insolvency proceedings would now fearlessly strong-arm the smaller firms by defaulting the repayment of their dues. Furthermore, the redressal forums other than NCLT fail to provide timely redressal adding to the plight of the creditors.

    • Proviso incentivizing corporate debtors to default

    Apart from the above-stated problems, the proviso in the newly introduced S.10A has placed the MSMEs in a vulnerable position by allowing complete amnesty to the corporate debtors who default during the disruption period. The expression “no application shall ever be filed” has opened the flood gates of varied interpretation.

    Recently, the Hon’ble National Company Law Tribunal, Chennai Bench in Siemens Gamesa Renewable Power Private Limited v. Ramesh Kymal interpreted the proviso to S. 10A and held that there shall be no insolvency proceedings ever against the defaults which arise after 25.03.2020. This interpretation allows an exemption to the defaulting debtors whether or not such default has arisen due to the economic downturn in the times of the pandemic.

    If such an interpretation is taken up, it would incentivise the non-payment of dues by the corporates and would lead to the MSMEs turning up into non-performing assets. In these trying times when the economy is struggling to move out of the rippling effect, fall of MSME sector would adversely impact the nation’s economy. Among other things, a decline in MSME sector would cause a steep rise in the unemployment rate and set off India’s ambition of becoming self-reliant. 

    MSMEs being the Corporate Debtors

    Objectives of IBC include maximization of the value of assets, to promote entrepreneurship, availability of credit and balance the interests of the stakeholders. In consonance with the objectives, S.10 facilitates an exit route to a corporate debtor wherein the loss-making business is transferred to a prospective resolution applicant based on a resolution plan to revive the sick enterprise. The resolution plan is sanctioned by the adjudicating authority keeping in mind the interests of all the stakeholders.

    Blanket suspension of S.10 defeats the core objective of the IBC to revive and not to liquidate the enterprise. Suspension of the section would lead to a slow death of the business enterprises which could be revived with a prospective plan. The ordinance would not only deprive the corporate debtor of rehabilitating the business but also force him to continue the distressed business. This would not only deplete the value of assets rather than maximizing them but also lead to the winding-up of a potentially viable business.

    Conclusion

    In the testing times of this pandemic, although the government has tried to modify the provisions of the IBC with a bonafide intention to provide safeguard to the MSMEs, it has ended up worsening the situation for them. The recent ordinance adding S. 10A in the IBC and the notification has created loopholes which would act against the interest of the MSMEs. These would make the smaller businesses vulnerable in the hands of larger corporates.

    Furthermore, these additions and modifications to the IBC would act as a barrier for MSMEs to pull off under the government’s “Atmanirbhar Bharat” initiative. The liquidity crunch faced by the MSMEs owing to the suspension of S. 7 and 9 of IBC would compel the MSMEs to avoid further payments of their debtors and undergo unnecessary litigation which would certainly raise the burden of the MSMEs in the near future. Moreover, blanket suspension of S. 10 of IBC will destroy every hope of reforming viable MSMEs.

    Keeping in mind the flickering market conditions and the upcoming competition in domestic as well as international market, more focused actions are called for on the part of the authorities. As pointed out by the Hon’ble Finance Minister in her press note, a special insolvency framework needs to be introduced under S. 240A of IBC accompanied with other focused initiatives. This would not only provide leverage to the MSMEs against the powerful corporates but also help India holdup its ambition of self-reliance.

  • Material Influence Test – A Convoluted Approach For Determining Control

    Material Influence Test – A Convoluted Approach For Determining Control

    By Priyashi Chhajer, fourth-year student at NLU, Jodhpur

    The concept of control has been laid down in various statutes and defined differently as per their requirements. Competition Act, 2002 (‘Act’), Companies Act, 2013, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Foreign Direct Investment policy are a few examples. ‘Control’ is defined in explanation of section 5 of Act, which reads as “Controlling the affairs or management by one or more ‘enterprises’ or ‘groups’, either jointly or singly, over another enterprise or group.” Acquiring control of enterprise may lead to appreciable adverse effect on competition and is therefore required to be notified to the Competition Commission of India (‘CCI’).

    An uncertain and wide definition was adopted in the Act as the legislature intended to determine acquisition of control on factual basis. However, because of an absence of clear and specific guidelines the scheme of control continues to be ambiguous. The uncertain boundaries of control have also led to inconsistency in interpretation resulting in improper imposition of penalties.

    Recently Ministry of Corporate Affairs introduced Draft Competition (Amendment) Bill, 2020 in February wherein; material influence over the affairs of business and management has been proposed as a standard to determine control. This test on one hand will put large number of transactions under scrutiny and help in monitoring competition in market; but at the same time it will give excessive power to CCI thereby hampering the ease of doing business.

    Ambit of Control – Asymmetrical Interpretation Leading to Confusion

    As a matter of practise, CCI  has attempted to assess control by the yardstick of “decisive influence” over the affairs of another enterprise or group by way majority shareholding, veto rights or contractual agreements. However, these boundaries have diluted over the period of time.

    In Multi Screen Media Private Limited Case,  veto rights over strategic commercial decisions were exercised. CCI in this order extended the ambit of control to  not only proactive rights but also negative and affirmative rights. In subsequent RB Mediasoft/ IMT order, mere right to convert zero coupon optionally convertible debentures into equity share,  was  considered as control. Threshold was further lowered in case of Jet- Eithad, where  Eithad acquired 24% stake without any veto or quorum rights, along with the right to appoint 2 out of 12 directors.  CCI took into account  Eithad’s ability to control the managerial affairs of business and considered the transaction as acquisition of control.

    Later on, CCI started shifting the threshold towards material influence for determining ability to exercise control. In Argium Inc. and Potash Corporation of Saskatchewan, Inc., it was observed that although Potash Corp. held 14% interest, it still had the capacity to control the affairs as it was leading in production in global market and thus might exercise influence.

    In the recent  Ultratech/Jaiprakash Order , CCI defined material influence as “the lowest level of control, implies presence of factors which give an enterprise ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc.” CCI expanded the ambit of control to include material influence and not just de facto and de jure control (acquiring more than 50% of voting rights by way of shareholding).

    Later in 2018,  this expansive threshold was reiterated in Meru Travel Solutions vs. ANI Technologies and Ors, where CCI ruled that Softbank has ability to exercise  material influence even though it is a minority shareholder in Ola and Uber. Therefore, even the acquisition of  minority shareholding, for investment purposes may attract section 5 and section 6 under competition Act.

    The scope of  policies is left wide and inclusive, so as for the CCI to interpret it in a manner favouring competition law objectives. The strict definition may impede promotion of social and economic cause. However, inconsistent factual determination of control by regulatory body has clearly lead to dysfunctionality, as it has breed vagueness for business entities and lack of clear legislative guidance has vested excessive discretionary power with CCI.  

    Complexities  that are Propagated by “Material Influence” Test

    Firstly, unavailability of codified guidelines and the open-ended interpretation of ‘control’ adopted by CCI will empower them with unrestricted power to take up suo-moto cognizance of any transaction. For instance, in Jet – Eithad Case where there was acquisition of mere 24% stake without any significant rights; CCI still took the matter into its hands and reviewed the deal. Not only this, disparity amongst different regulators makes compliance unmanageable  for the businesses . As was seen in abovementioned case where affected by the CCI’s orders, SEBI reopened the case and ordered to investigate the matter again.

    Secondly, even when there is likeliness of appreciable adverse effect on competition, the transaction needs to be notified in accordance with section 6(2) of Act. Sporadic definition and lack of precedential clarity will result in ambiguity pertaining to determination of transactions that needs to be notified. There have been instances wherein the CCI took 60-90 days to conclude prima facie inquiry, which in turn should be completed in 30 days. Open ended test of control will bring more transactions under review which will lead to delay in execution of  transactions and deterrence in ease of doing business.

    Thirdly, expansion of definition of control has also led to expansion of the meaning of ‘group’ under explanation (b) of section 5. In this explanation group is considered to be formed when “two or more enterprises are directly or indirectly in position to control the management or affairs of another business”. The new threshold will affect the applicability of  numerous exemptions available to intra group dealings. Also, it will be difficult to determine horizontal and vertical overlaps during merger filings.

    Fourthly, many financial investments and private equity transactions will now come under the review of competition commission as because of the expansive definition the pure minority protection rights can also now be seen as negative control triggering mandatory notifying obligation under section 6 of the Act.

    Position of Law in other Jurisdictions

    Indian regime is similar to that of the EU. However unlike in India, EU provides detailed guidelines for interpretation of control. Article 3(2) of ‘Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings’ defines control as the ‘possibility of exercising decisive influence on an undertaking’. It implies that one may or may not actually exercise decisive influence but even a slightest possibility of exercising effective decisive influence is ample enough to bring it under the ambit of control. There are no particular thresholds specified to assess when there is change of control. However, European Commission issued a Consolidated Jurisdictional Notice, which acts as a guide and tool for interpretation. It anticipates and provides for all possible instances when merger regulations can be triggered. Possibility of exercising decisive influence can be on the basis of right, assets or contracts, or any other means, either separately or jointly.

    In the US, the concept of control is defined in Hart-Scott-Rodino Regulation (‘HSR’). Section 7 of Clyton Act  provides for three tests – the commerce test, the size of transaction test and the size of person test. For the transaction to fall under HSR filing obligation, above tests must be fulfilled. Generally, acquisition of voting rights and assets is looked into to determine change in control.

    CCI has failed to remedy the indefiniteness surrounding the concept of control. International organisations such as  OECD endorse global uniformity for the definition of control. Unfortunately, the domestic inconsistency has resulted into cross-border disparities for the understanding of control.

    Conclusion

    A transaction can be reviewed under section 5 of Act only if there is change in control. Earlier it was decided by way of decisive influence over management or affairs of business by way of majority shareholdings, veto rights and contractual agreements.  By virtue of this threshold those transactions comprising acquisition of non-controlling powers, however having appreciable adverse effect on competition were left unchecked. To alter the situation Competition Law Review Committee, 2019 proposed to lower the threshold of control so as to include those minority shareholdings that can affect competition.

    Material Influence test is the lowest threshold of control. As a consequence of this, majority of combination transactions will come under review process. It will increase the load of the CCI with insignificant notifications and will also be onerous for the parties involved in transactions. Moreover, lack of guidance and inconsistency in precedential trail adds to the existing confusion on kinds of transactions that are eligible for notification.

    Therefore, there is pressing need to make the market investor friendly for economic growth. Sizable problems posed by the proposed amendment weighs down the benefits that it purports. Cues must be taken from other jurisdictions so as to promote certainty in domestic regime. CCI must tread with caution so that ease of doing business is not affected and market entities do not get caught in clutches of cumbersome notifying process, unforeseen penalties and vagueness.

  • Converting Preference Shares into Debts: Tax Evasion or Tax Planning?

    Converting Preference Shares into Debts: Tax Evasion or Tax Planning?

    BY YASH MORE AND HITOISHI SARKAR, THIRD-YEAR STUDENTS AT GNLU, GANDHINAGAR

    In December 2019, the National Company Law Appellate Tribunal (“NCLAT“) in Joint Commissioner of Income Tax v. Reliance Jio Infocomm Ltd. & Ors., while approving a demerger under s. 230-232 of the Companies Act, 2013, allowed the conversion of preference shares of a company into debt during the scheme of arrangement. However, the tribunal failed to adjudicate and determine the legal validity of such a transaction. The ramifications of such conversion include a considerable reduction in the profitability of the demerged company and a consequent estimated loss of Rs 258.16 crores to the public exchequer which would otherwise have received such payment in the form of dividend distribution tax under s. 2(22)(a) of the Income Tax Act. 

    The main thrust of the argument before the NCLAT was that by the scheme of arrangement, the transferor company sought to convert the redeemable preference shares into loans, i.e., conversion of equity into debt, which is contrary to the principles in s. 55 of the Companies Act, 2013. However, the NCLAT dismissed this contention stating such a determination is not a subject matter of the Income Tax Department. It noted that such an objection could be raised only by the competent authorities, i.e., Regional Director, North Western Region and the Registrar of Companies.

    This article aims to determine the legality of such a conversion of preference shares into debt under the scheme of the Companies Act. In doing so, the authors have first expounded on the nature of preference shares and delineated on the vanishing line of distinction between tax evasion and tax planning. The authors have concluded the discussion by highlighting the problems faced in law while such conversion transactions are carried out.

    Preference Shares under Companies Act

    As per Explanation (ii) to s. 43 of the Companies Act, 2013, preference share capital refers to those shares which carry a preferential right with respect to (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, and (b) repayment, in the case of a winding-up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up.

    The problem that arises when preference shares are converted into a loan is that the shareholders turn into creditors of the company. This leads to two main consequences – firstly, the shareholders who are now creditors can seek payment of the loan irrespective of whether there are accumulated profits or not and secondly, the company would be liable to pay interest on the loans to its creditors, which it otherwise would not have had to do to its shareholders.

    Tax Evasion v. Tax Planning

    S. 2(22)(a) of the Income Tax Act, 1961, taxes any distribution of accumulated profits by a company to its shareholders, if such distribution entails the release of all or any part of the assets of the company. By way of converting preference shares into loans, there is an “indirect release” of assets by the demerged company to its shareholders without appropriating funds from the accumulated profits of the company. Thus, the conversion aid companies to circumvent payment of dividend distribution tax which would have otherwise been attracted in light of s. 2(22)(a). Further, the payment of interest on such vast amounts of loans would lead to a reduction in the company’s total income in an artificial manner.

    The order of the NCLAT reminds one of the Supreme Court’s landmark verdict in Vodafone International Holdings BV v. Union of India wherein the Court had frowned upon artifice, which leads to tax avoidance. However, this has to be read in consonance with the ruling of the Gujarat High Court in Vodafone Essar Gujarat Ltd. v. Department of Income Tax, where it was held that the mere fact that a scheme may result in a reduction of tax liability does not furnish a basis for challenging the validity of the same.

    The Supreme Court in McDowell & Co. Ltd. v. CTO had acknowledged and dwelled upon the fine although significant distinction between tax planning and tax evasion and expounded that ‘tax planning may be legitimate, provided it is within the framework of the law.’ Therefore, in order for us to determine the validity of the scheme of arrangement, we must look into the legality of the conversion of equity into debt under the scheme of s. 55 of the Companies Act.

    Legal Validity of the Conversion under the Companies Act, 2013

    The pertinent question that needs to be addressed is whether such a conversion of preference shares to a loan is in contravention of s. 55 of the Companies Act, 2013. It deals with the issue and redemption of preference shares. However, it does not state anything about the conversion of preference shares. In fact, in the event where a company is not in a position to redeem any preference shares or to pay dividend, it may either (a) further issue redeemable preference shares equal to the amount due, including the dividend thereon, or (b) convert the preference shares into equity shares.

    S. 55(2)(a) of the Companies Act, 2013, necessitates the requirement that preference shares cannot be redeemed except out of the profits of the company. Likewise, s. 80(1) of the Companies Act, 1956, provided a similar requirement. Thus, when the preference shares are converted into loans, the problem lies in the fact that shareholders who would now have become the creditors of the company will have to be paid irrespective of the availability of profits, thereby presenting a prima facie conflict with provisions of the Companies Act, 2013.

    However, the courts have refused to construe such a conversion as a contravention of company law. In PSI Data Systems Ltd., the Kerala High Court while adjudicating upon a conversion held that the requirement under s. 80(1) of the Companies Act, 1956, is to protect the preference shareholders from a company’s unilateral action. However, if the preference shareholders consent to such a conversion of preference shares into loans, no contravention of s. 80(1) can be established. The same has been affirmed by the Andhra Pradesh High Court in In Re: SJK Steel Plant Ltd., where the Court refused to read a conversion of preference shares into Funded Interest Term Loan (FITL) as a contravention of the law.

    Did the NCLAT erroneously sanction the Scheme of Arrangement?

    It is beyond doubt that any scheme of arrangement needs to satisfy the requirements of s. 230-232 of the Companies Act, 2013, so as to be sanctioned by a competent court. The corresponding provisions of the erstwhile Companies Act, 1956 in this regard were s. 391-394 of the Companies Act, 1956. Thus, for a scheme of arrangement to be denied sanction, a violation of the aforementioned statutory provisions must be established.

    It is a well-settled position of law post the Supreme Court’s ruling in Miheer H. Mafatlal v. Mafatlal Industries that a scheme of compromise and arrangement which is in violation of any provision of law cannot be sanctioned and the Court has to first satisfy itself that any scheme of arrangement does not contravene any law or such compromise is not entered into in breach of any law. However, juxtaposing the legal pronouncements in PSI Data Systems Ltd. and SJK Steel Plant Ltd., it is evident that s. 55 nowhere prohibits conversion of the preference shares into a loan.

    A pertinent objection which was raised before both the NCLT and NCLAT was that the conversion of preference shares by canceling them and converting them into a loan would substantially reduce the profitability of the demerged company. The Andhra Pradesh High Court in In Re: T.C.I. Industries Ltd., laid down that while exercising powers under s. 391 and 394 of the Companies Act, 1956 the Court cannot sit in appeal over the decision arrived at by the shareholders or the secured creditors or the unsecured creditors, and minutely examine whether the proposed scheme as approved by the shareholders should be sanctioned or not. Thus, it is beyond the powers of a court under s. 230-232 of the Companies Act, 2013, to examine the implications of a particular scheme on the profitability of the company.

    Conclusion

    The authors duly acknowledge that conversion of preference shares into loans may lead to a massive loss to the public exchequer as the payment of loans to the creditors (who were formerly preference shareholders) cannot be taxed as opposed to payment of dividend under s. 2(22)(a) of the Income Tax Act. However, as detrimental as it may be to the exchequer, the courts have not found any explicit or implicit statutory provision that prohibits such transactions. The opposite, i.e., conversion of loan into shares, although, has statutory recognition under s. 62(3) of the Companies Act, 2013 by way of issuance of convertible debentures.

    Nevertheless, the NCLAT should have been careful while allowing such conversion and must not have dismissed the contention of Income Tax Authorities merely on the grounds of locus standi. The NCLAT alone is empowered and responsible for ensuring that no scheme of arrangement is carried out in contravention of any law even though shareholders or creditors agree to such terms. At the same time, there is a need to further deliberate upon the legality of such conversion and courts must not approve of such transactions merely because they have not been expressly prohibited.

  • Suspension of IBC: Is India ready for pre-packaged insolvency?

    Suspension of IBC: Is India ready for pre-packaged insolvency?

    by Swapnil singh, a student of fifth year at rmlnlu, lucknow

    Implementation of Insolvency and Bankruptcy Code, 2016 (“IBC”) has shown favorable outcome with India’s rank improving from 136 to 108 in 2018 to 52 in 2019 in the ‘Resolving Insolvency’ bracket of the Ease of Doing Business ranking, released by World Bank. IBC has exponentially reduced the time taken for an insolvency resolution. However, in the current crisis and lockdown, the resolution process will undoubtedly suffer an inexorable delay.

    The Central Government’s decision to suspend any fresh filing under Section 7, 9 and 10 for next six months which may be extended up to a year is seen as step in the positive direction but the fact that instead of solving a lot of issues, it is putting them on a back burner which will ultimately lead to a greater number of cases and increased burden on the Tribunal.

    Considering this and the persistent resolution delay in cases under IBC by NCLT, without any alternative mechanism for resolution of distress could lead to rapid depletion in asset value and huge losses for a number of stakeholders. Pre-packs are seen as a desirable solution to be incorporated to solve this issue and there are certain issues which will pose a challenge to smooth implementation of pre-packs within the existing regulatory system.

    The concept of pre-packaged insolvency

    Pre-packaged insolvency, often referred to as “pre-pack sale”, has been defined by the Association of Business Recovery Professionals (a trade association for the United Kingdom’s insolvency, restructuring, advisory, and turnaround professionals) as “an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on or shortly after his appointment”. It is different from traditional bankruptcy because in a case of a pre-pack the restructuring takes place prior to filing of application before the adjudicating authority.

    With the suspension of IBC, it becomes pertinent that alternative solutions to address the stress in the system be explored and pre-packs are a promising option due to its strongly built around the tenets of value preservation and timely resolution, which form the lifeblood of any insolvency law. In the Indian scenario, if introduced, it will be a subset of the existing pre-insolvency resolution instruments therewith providing financial creditors and corporate debtor a platform to negotiate in advance on the resolution strategy of the corporate debtor with the advice of an Insolvency Professional, before the filing application under IBC.

    The possibility of pre-packs to be introduced under IBC has always been a topic of debate in the Bankruptcy Law Reforms Committee (BLRC) and it was advanced that Indian market is not developed enough to go for pre-packs. However, NCLT has time and again recognised that the corporate insolvency resolution proceeding(“CIRP“) is broad enough to include a discussion and negotiation done beforehand, about the resolution plan. In the case of Essar Steel Ltd an objection was raised on the that application for commencement of CIRP pointing out that admitted Essar was already negotiating with its lenders. NCLT rejected the objection stating that these negotiations can later become basis of resolution plan under IBC. It is pertinent to note that in Lokhandwala Kataria Construction Pvt. Ltd. v. Nisus Finance and Investment Managers LLP, the Supreme Court used its power under Article 142 of the Constitution to accept the out of court settlement for the benefit of all the stakeholders and for meeting the ends of justice. 

    India has taken some steps in the direction of outside restructuring when Reserve Bank of India introduced Bank-led Resolutions through Prudential Framework for Resolution of Stressed Assets wherein a bank can try resolution before formally filing for insolvency but it only covers RBI-regulated creditors. The Ministry of Corporate Affairs has also invited comments from stakeholders regarding the introduction of pre-packs in India.

    Challenges in India

    Introduction of pre-packs in India will require developing a robust jurisprudence to address the number of challenges that will arise thereafter. To safeguard and protect interest of each stakeholder while maintaining transparency, following challenges will have to be worked upon:

    Role of Insolvency Resolution Professional and Shield of Moratorium

    Currently under IBC, Interim Resolution Professional (“IRP”) is appointed as soon as the application is admitted and is given the responsibility to manage the business of the debtor during the whole CIRP process. However, during a pre-pack process, the role of IPR will be performed by the debtor as he would ensure that interests of all stakeholders are taken into consideration similar to the ‘Debtor-in-Possession’ concept in US. There have been a lot of objections regarding debtor managing the whole process without any interference from NCLT.

    A shield of moratorium helps the debtor once proceeding is started under Section 7 and Section 9 of IBC. In absence such an automatic stay on the legal proceedings for pre-pack under IBC, nothing would stop the creditors from approaching the tribunal at any stage of the negotiations. This will put the company in a vulnerable position as the creditors can enforce their rights and remedies anytime while the corporate debtor is negotiating a pre-pack resolution.  

    Involvement of Promoters

    One of the reasons for the directors of a corporate debtor to undertake a pre-pack is to regain control of its business or assets, however, under a different identity. It is arguable that this roundabout manner of regaining control of the debtor company can result in circumvention of the insolvency laws. This concept is very popular as ‘phoenixing’ in the UK. This can raise a problem in cases where the company is facing huge losses primarily due to promoter or managerial inefficiency.

    Pre-packaged insolvency is a debtor-initiated process by a go-ahead company in distress which is willing to negotiate with its lenders, before the initiation of a formal CIRP under Section 7 or 9 of the Code. Hence, Section 29A of the Code will not be applicable as it to the pre-packaged insolvency process. Therefore, taking into consideration the aforementioned premises, it may be inferred that if a provision similar to Section 29A is made applicable to the entities willing to go for pre-packaged insolvency, it may tend to defeat the very objective of such a scheme as it would act as a barrier in a pre-pack process where the debtor is mainly in charge of management and negotiations.

    Lack of Cooperation and Sale of Assets

    Pre-packs are supposed to work on a degree of cooperation from side of both the corporate debtor and the creditors. The management of the debtor having the control of the process, if doesn’t share all the information with the creditors or if creditors are unable to come together due to their varied interest, it will be difficult to come to a conclusion.

    Further, sale of assets by debtor to another company before filing insolvency application can be one of the tools of pre-pack restructuring. The earning from these sales goes to the creditors, this helps in keeping the company afloat without any hassle arising due to dilution of assets’ value or loss of clientele. Sometimes due to contractual terms, creditors possess the right to give consent before debtor can dispose-off any asset. If the creditors become apprehensive, either in the divestment or because of the fact that the debtor is facing bankruptcy, it will jeopardise the whole process. Moreover, unsecured creditors will be left outside the picture, having absolutely no say in the matter as they wouldn’t have any contractual right.

    Lack of transparency and the plight of Operational Creditor/ Unsecured Creditors

    Pre-pack processes are usually confidential and do not involve open bidding process. These arrangements are usually agreed by the management of the corporate debtor and, therefore, there may be a possibility that the interests of the management and the secured creditors will be placed at a higher pedestal than that of the unsecured creditors/operational creditors. The independent Graham Review Report into Prepack Administration of June 2014 noted that the “lack of transparency disenfranchises creditors, especially unsecured creditors particularly where the purchase is being made by a connected party.”

    The potential harm of lack of transparency also comes into picture if undervalued transactions are involved. The wealth maximisation model focuses on the idea that creditors would prefer a system that keeps the size of the pool of assets as large as possible. This raises real doubts about the objective of wealth maximisation owing to the lack of transparency and open marketing of the business. There may also be instances where the business of the corporate debtor may be transferred to entities without keeping in mind the interests of the creditors or other stakeholders.

    Such a transaction would not carry the seal of approval of a court (unless the same is undertaken as a court approved scheme such as a scheme of arrangement under the Companies Act, 2013) and would, therefore, to that extent, be open to challenge by creditors if they were to object to such a transaction and require clawback, which is a safeguard provided to creditors under the Code. IBC provides for a claw-back in cases where any transactions are found to be preferential, undervalued, extortionate or undertaken to defraud creditors. An avoidance application is filed before the NCLT for appropriate relief, including for the transaction to be set aside.

    Conclusion

    With the suspension of any fresh filing under IBC, it is time to strengthen the outside restructuring process in India. This will make sure that instead of piling up of cases, there will actually be timely resolution of any insolvencies and bankruptcies. Pre-packs will have far reaching impact on corporate rescue in India but it has to be done with correct implementation, keeping in mind the Indian market and stakeholders. It is pertinent to note that this model has been there in the UK and the US for quite some time, for this reason there needs to be an in-depth study of both the jurisdictions to see what lessons can we learn from them.

    The system does come with its own challenges but if implemented well, it will help in smoothening the resolution plans while promoting the idea of keeping company as a going concern. This will help in retention of jobs and repayment of dues to the creditors. With the current ongoing crisis, it is safe to assume that it will have far more benefits and yield more fruitful outcomes.

  • SEBI in the Shoes of CCI: the Jurisdictional Tussle Continues

    SEBI in the Shoes of CCI: the Jurisdictional Tussle Continues

    By Deepanshu Agarwal, a fourth-year student at UPES, Dehradun

    Introduction

    The Securities & Exchange Board of India (‘SEBI’) and the Competition Commission of India (‘CCI’) are separate independent regulatory bodies which often jurisdictionally overlap with each other. This happens due to the commonality in their objectives of ensuring the protection of consumers and promoting a healthy market.

    In the case of Advocate Jitesh Maheshwari v. National Stock Exchange of India Ltd. (2019) (‘NSE Case’), CCI refused to deal with the matterregarding abuse of dominance by National Stock Exchange (‘NSE’) and allowed SEBI to continue with their practice. This was a drastic turn taken by CCI to allow a sectoral regulator to deal with the abuse of dominance, which is an issue majorly dealt with by CCI under section 4 of the Competition Act, 2002.

    In the instant case, the informant alleged that for almost four years (i.e. 2010-2014), NSE had been giving preferential treatment and unfair access to some of the traders by communicating to them price feed and other data. According to the informant, this was a discriminatory practice followed by NSE towards other traders on the same footing & thus resulted in ‘denial of market access’. Moreover, the informant proposed the relevant market as the ‘market for providing services of trading in securities’ and contended that NSE is a dominant player in the market as it holds a huge market share, consumer dependency and entry barriers for the new stock exchanges.

    Though CCI noted that such discriminatory practices exist in its jurisdiction, the case was dismissed without going into its merits. The reasoning of CCI was that: (i) the allegations against NSE were not final and are yet to be established in appropriate proceedings; and that (ii) there was a lack of evidence to form a prima facie opinion about the role of NSE. However, CCI mentioned that it could examine the discriminatory and abusive conduct independently, based on cogent facts and evidence after the completion of investigation by SEBI. But the question that remains unanswered here is that if SEBI does not reach an adverse finding on the question of NSE’s role, can CCI then still examine NSE’s conduct? To answer this question, it becomes imperative to analyse this order in the light of the Supreme Court’s judgment in the case of CCI v. Bharti Airtel Ltd. & Ors. (2019) (‘Bharti Airtel’).

    The jurisdictional tussle in Bharti Airtel

    Though this case revolves around the jurisdictional fight between Telecom Regulatory Authority of India (‘TRAI’) and CCI, yet it is a landmark judgment when it comes to the jurisdictional overlap between CCI and other sectoral regulators, apart from TRAI.

    Reliance Jio Infocomm Ltd., a new entrant in the telecom market, approached CCI against the Incumbent Dominant Operators (or ‘IDOs’ namely Bharti Airtel, Idea Cellular and Vodafone) for forming a cartel to deny market entry and thereby causing an adverse effect on competition in the telecom market. While the case was already under investigation by TRAI, CCI found out a prima facie violation against the IDOs. The Bombay High Court, in the appeal made by the IDOs, set aside the order of CCI on the grounds of lack of jurisdiction as the matter was already under investigation by TRAI.

    The Supreme Court while confirming the findings of the Bombay High Court did not deny the jurisdiction of CCI altogether but made its investigation subject to the findings of TRAI. It did so by giving CCI a secondary jurisdiction over the matter. In this regard, the court held that “Once that investigation is done and there are findings returned by the TRAI which lead to the prima facie conclusion that IDOs have indulged in anti-competitive practices, the CCI can be activated to investigate the matter going by the criteria laid down in the relevant provisions of the Competition Act and take it to its logical conclusion”.

    Applying the reading of Bharti Airtel to the NSE case, it can be concluded that the jurisdiction of the CCI begins only when there are adverse findings returned by SEBI. Similar to TRAI, SEBI is also a sectoral regulator and will have primary jurisdiction in dealing with the abuse of dominance/adverse competition in the capital markets. Therefore, it can be concluded in the instant order that the CCI was justified in not going into the merits, by accepting itself as a regulator having a secondary jurisdiction in such cases.

    Since the instant order passed by CCI is in line with Bharti Airtel, it also suffers from similar criticisms.

    Criticism of the NSE Case

    Since both SEBI and CCI have a common objective to ensure consumer protection and fair market competition, it is clear that there may be jurisdictional overlaps. Both the Securities and Exchange Board of India Act, 1992 and the Competition Act, 2002 provide for jurisdiction in addition to and not in derogation to other laws. However, neither of the two acts provide the remedy in case of a jurisdictional overlap. This ambiguity paves the way for concurrent jurisdiction of both the regulators which further leads to conflicting decisions and legal uncertainty.

    In such a scenario, putting CCI at a lower pedestal by giving it secondary jurisdiction (as evidenced in Bharti Airtel and the NSE case) may not be the optimal solution for jurisdictional issues. Rather, the CCI being an independent competition watchdog should be allowed to deal with the competition matters freely and irrespective of the findings of the sectoral regulators. It has to be noted that CCI is a specialized body created solely with the purpose to prevent abuse of dominance and adverse effect of competition. Therefore, subjecting CCI’s jurisdiction to the findings of any other sectoral regulator would only hamper the object for which it was created, thereby weakening its authority.

    The Way Forward

    The best way through which the jurisdictional tussle can be resolved is following the mandatory consultation approach. This means that if a situation of jurisdictional intersect arises, then both the regulators should consult with each other as to who can deal with the matter more effectively and efficiently. This can be a credible solution to remove all defects from such jurisdictional matters and ensure some technical input is also given by the sectoral regulator.

    Under the current regulatory framework, India follows a non-mandatory consultation approach. Section 21 & 21A of the Competition Act incorporates a mechanism for consultation between the statutory authorities and the commission. However, consultation under these sections is neither mandatory nor binding.

    Lessons should be drawn from other countries which are successfully following the mandatory consultation approach. For example, in Turkey, under the Electronic Communications Law No. 5809, the Competition Board has the statutory duty to receive and take account of the opinion of the relevant regulatory authority (the Information Technologies and Communications Authority) when enforcing the competition law in the telecommunications sector. Moreover, Turkey’s competition authority also sends its opinion to the Information Technologies and Communications Authority regarding draft regulations in the consultation process.

    The mandatory consultation process is also followed in other countries like Argentina and France. This process was also suggested in India by the National Committee on National Competition Policy and Allied Matters in 2011. Therefore, it is the need of the hour that this change be implemented.

    Considering the existing legislative framework, substituting the word ‘may’ with ‘shall’ in Sections 21 and 21A of the Competition Act and making the opinion of CCI or the sectoral regulators binding upon the other will leverage the expertise of both the entities and will enable the initiation of a cooperative regime.

    Conclusion

    Abuse of dominance/adverse effect on market is specifically the area that CCI deals with, it is erroneous for SEBI to encroach upon the same. Both the technical aspects and the competition matters in a case have to be viewed separately. SEBI being a sectoral regulator and a lex specialis in the capital markets can deal with the technical matters more effectively than CCI. Whereas, on the other hand, CCI being a lex specialis in competition matters can deal with the same with more proficiency. Therefore, in cases involving jurisdictional conflict, it is fallacious to place CCI at a secondary stage. Rather, the mandatory consultation approach should be followed by the regulators in such cases to solve the conflict in a more harmonious and effectual manner.

  • One Size Does Not Fit All: Effect of the IBC Ordinance on the Airline Industry

    One Size Does Not Fit All: Effect of the IBC Ordinance on the Airline Industry

    By Vatsalya Pankaj and Likhita Agrawal, third-year students at MNLU, Nagpur

    The COVID-19 outbreak has caused great economic predicament, with many financial institutions and companies on the verge of bankruptcy. With the backdrop of the nationwide lockdown, the Indian government has introduced an ordinance suspending provisions of the Insolvency and Bankruptcy Code (‘IBC‘) to protect the industries from the effect of the pandemic. The airline industry is among those worst hit due to the current situation. Although the ordinance seeks to protect the interest of companies, it may cause an unforeseen impact on the creditors.

    The current condition can be demystified as a no output; still interest, sort of scenario in many cases. The companies have obligations towards their creditors and the prevalent recrudescence makes them unable to meet their financial requirements in terms of the value of money on the credit sanctioned. If this continues, then it could bring the business entity in a state where its liabilities exceed its assets. The same is perilously known as the concept of Insolvency.

    Thus, to provide a cushioning effect for vulnerable industries, the President of India promulgated an ordinance adding Section 10A to the IBC. The section essentially suspends Sections 7, 8, 10 and 14 of the IBC for a period of at least six months (extendable up to a year) from 25 March 2020. Through this ordinance, the Government has provided for a blanket ban of any Corporate Insolvency Resolution Proceedings (‘CIRP’) against any company. It aims to provide some relief to the corporate debtors by preventing the creditors from initiating any form of resolution process against the company. This provides the company with some breathing space to get things back in order which were disturbed because of the pandemic.

    The suspension of CIRP provides for a variety of consequences on the different sectors of the economy, in particular the airline industry. The researches shall be attempting to trace how the finances of the airline industry work and what would be the consequences of the suspension of IBC on this industry.

    The Peculiarities of Airline Industry

    The Aviation Industry is one of the worst affected industries due to the spread of COVID-19 as it has resulted in the grounding of flights both locally and internationally. The Ministry of Civil Aviation had suspended all flight operations on the 24th of March, 2020 to prevent the spread of the epidemic. The Aviation Sector has always been high risk- high return. However, even the most successful airlines are under the threat of bankruptcy. Kingfisher Airlines and Jet Airways serve as examples having gone insolvent, while Air India is struggling to survive. With ever-increasing operational costs coupled with rising fuel prices, there is evidence that operating a consistently profit-making airline is a tough business. Further, reference can be made to an IATA report  (‘Report’) which estimated the losses that the airline industry has suffered globally, due to the COVID-19 pandemic which is expected to be around $84.3 billion in 2020.

    The main assets of airlines are their aircrafts. However, airlines in India are modelled around sale and leaseback transactions. If we analyse the data, airlines in India are rarely ever owned by the airline operator, they are majorly leased from international companies such as Avolon (62), Aircastle (30), BOC Aviation (24) & BBAM (29).

    Lease agreements in the aviation sector work with the principle of “come hell or high water” i.e. the lessee must pay the lessor the charges for the aircraft in all circumstances, without exceptions. It may be argued that in such cases, the defense of force majeure can be claimed to defer the payment of the lease. However as most of the lease agreements are modeled around Common Law, there is no direct assumption of force majeure. To not follow the contract, it must be proven in a court of law, that the situation precluded the performance of the contract. This implies that airlines need to approach a court of law, prove that the current situation provides substantial grounds to them to not follow the lease payment dates and then defer the payment. Thus, it would seem that airlines have no option but to pay the lessors for their aircrafts albeit they may be grounded.

    It is an established principle of aviation law that if the lessee is in possession of the aircraft, the lessee holds the responsibility to pay for it along with the responsibility of maintaining it as per the manufacturing standards and other regulations that may have been set to preserve the airworthiness of the aircraft.[1] Thus, despite no income, the airline would have to pay the dues to the lessors. Additionally, they have to maintain the aircraft up to airworthy standards and incur other expenses to maintain their fleet and crew.

    All of this comes in the backdrop of the fact that most of the airlines had a tough previous financial year with passenger demand decreasing and increasing prices. The pandemic has only worsened the problem. India’s carriers may have to make requests to their respective lessors for deferral of payments till they can make ends meet. However, that is entirely dependent on a host of factors including the airline’s creditworthiness, future business framework, past payment history with the lessor, present financial situation and the competency to pay deferred rentals in the future.

    With the current situation in mind and estimations that air travel demands, would fall significantly in the months succeeding the lockdown airlines undoubtedly, would like to reduce their fleet size. Most lease agreements do provide for the option of invoking “Early Termination Option” or ETO. It means that the lessee will terminate the contract before the due date and return the aircraft to the lessor. However, considering the principles on which lease agreements are made, this option is usually coupled with a hefty fine on the airlines, thereby meaning, that it becomes economically non-viable for the lessee to do so.

    With all the problems culminating into one, the major airlines in the world including those in India are on the verge of bankruptcy. There is the option of bailing out the airline industry. This would require providing economic support to the industry so that it can make ends meet in the short run. This can be done through an economic package which may include tax exemptions, and waiving off landing and parking charges at airports. The Government may also follow the example of the United States and directly infuse cash into the industry. Airline enthusiasts might argue that there is an urgent need to bail out the industry, but keeping in mind Air India’s struggles wherein the Government has already signed off crores in debt, pouring public funds into the already struggling industry would not be advisable or indeed viable.

    The Ramifications of the Suspension of IBC

    The airline industry suffers because of the pandemic and mounting losses makes the situation seems grim for the industry. Further, as most aircrafts are leased from foreign countries, the provisions of the Cape Town Convention govern the lease agreements. The aircrafts which are owned by foreign companies and leased in India, would be deemed to be “International Assets” and India’s international obligations would mandate the return of the aircraft if the lessor demands.[2] The return of aircrafts would render airlines with insufficient aircrafts to operate when air traffic rises again, limiting their chances of recovering losses. This would also lead to excess ground and flight crew and would eventually lead to layoffs in the company. There would be a domino effect and one thing would lead to another, thereby harming the airline industry as a whole.

    In the given scenario restructuring of debts under IBC is required. The ordinance, pose a series of problems to the airline industry as the option of approaching the NCLT for default in payment of lease dues is no longer available.

    Before the IBC came into force, most of resolution and liquidation proceedings were carried out through Sick Industrial Companies (Special Provisions) Act, 1985 and the Companies Act 1956 which were subsequently repealed.[3] Section 230 and 231 of the Companies Act, 2013 (‘Act‘) provides for the arrangements of the companies as an alternative to IBC. However, Section 230 and 231 of the Act does bind all the creditors of the debtor and hence does not serve the purpose.

    The ordinance, however, precludes what would have been best for the airline industry by adding Section 10A to the IBC. It imposes a blanket ban on all Insolvency Proceedings and does not allow creditors to initiate CIRP. While this would have been positive for the national context, but as most lessors are international parties, they would have the right to retake the aircraft. Thus, the airlines would be forced into a situation where the lessors are likely to demand repossession of aircraft which has often been allowed by Indian Courts.[4] This is an unwanted scenario and harms the industry as a whole and it would lead to unintended consequences as discussed above. It is up to the industry to wither the storm and get through this crisis.

    [1] Bunker D H, International Aircraft Financing, Volume 2: Specific Documents (1st edn, IATA 2005) 123.

    [2] Matthias Reuleaux & Morten L. Jakobsen, ‘The De-registration of Aircraft as a Default Remedy in Aircraft Leasing and Financing Transactions’, (2015) 40(6) Air & Space L 377.

    [3] Nithya Narayanan, ‘Aircraft Repossession in India: Turbulence ahead, Buckle up’ (2013) 38 Annals Air & Space L 445.

    [4] Awas 39423 Ireland Ltd. v. Directorate General of Civil Aviation, 2015 SCC OnLine Del 8177; Corporate Aircraft Funding Co. LLC v. Union of India, 2013 SCC OnLine Del 1085.