The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • Rationalizing the Need for Inclusion of Mens Rea in Insider Trading Regulations

    Rationalizing the Need for Inclusion of Mens Rea in Insider Trading Regulations

    By Sezal Mishra, fourth-year student at NLIU, Bhopal

    Introduction

    Securities Regulations in India prohibit the offence of Insider Trading under the SEBI (Prohibition of Insider Trading Regulations), 2015. (‘PIT Regulations’) Insider Trading is the offence of dealing in the securities of a company on the basis of unpublished price sensitive information (‘UPSI’) in order to gain an unfair advantage over the general public. UPSI refers to any information relating to a company or its securities, directly or indirectly, that is not generally available and which upon becoming generally available is likely to materially affect the price of the securities. In simple words, information which relates to internal matters of a company and is not disclosed by it in the regular course of business can be considered as UPSI. Communication of UPSI by an insider without any legitimate reason is prohibited under Regulation 3 of the PIT Regulations.

    Recently, through a series of orders, SEBI penalized several individuals in the ‘WhatsApp Leak Case’ for the unlawful communication of UPSI relating to several companies like Asian Paints, Wipro, and Mindtree through the popular messaging app. An exorbitant penalty of Rs 45 Lakh was levied upon these individuals who were found to be in violation of Regulation 3. These orders interpret some of the most important aspects of Regulation 3 of the PIT Regulations and have severe implications in deciding the liability of insiders in communication of UPSI. Through this article the author advocates the need of taking cognizance of mens rea while adjudicating liability in insider trading cases to ensure just penalization of offences.

    Communication of UPSI and the Need for Mens Rea

    The PIT Regulations have been enacted in accordance with Section 12A of the Securities and Exchange Board of India Act, 1992 with a purpose of ensuring a level playing field and to prevent undue benefit to any individual at the expense of public investors. Regulation 3(1) of the PIT Regulations prohibits an insider from communicating any UPSI, relating to a company, to any person except for legitimate purposes or in discharge of legal obligations. The aim of the legislature in enacting such regulations is to oblige all insiders to handle sensitive information with care since a leak of such information can lead to an undue advantage to both – the tipper and the tippee. The legislature, however, fails to take into consideration a scenario entailing an accidental leak of information which yields no benefit to the tipper or the tippee. Since it has already been established that the purpose of insider trading regulations is to prevent undue advantage to the tipper or the tippee over public investors, a paradox is created when regulation agencies seek to punish even the accidental communication of UPSI which entails no profit to the parties.

    In India, at present, communication of UPSI without personal benefit or even unknowingly, is a ground for liability under the insider trading regulations. Mens rea or intention of the tipper is considered irrelevant under the PIT Regulations. The only available means of solving this paradox lies in the insertion of the element of mens rea in insider trading regulations. The consideration of mens rea at the time of imposition of liability under insider trading regulations can be justified on the two grounds –

    (i.) Mens Rea is in Consonance with the Objectives of PIT Regulations

    Firstly, the purpose with which the PIT Regulations have been enacted is rendered meaningless by the non-inclusion of mens rea. The basic purpose of insider trading regulations is to prevent undue advantage to individuals engaging in trade on the basis of sensitive information. At present, however, the control of SEBI in such cases has been strengthened to a point where the mere possession or communication of UPSI can be considered as a ground for insider trading.

    The legislature has lost sight of its true purpose and engaged itself in policing information and its spread rather than regulating trading done with the intention of acquiring profits. If an insider is penalized for mere communication of information or for trade in securities with no advantage to him over the general investors, the interest of investors remains unharmed. In such a scenario, penalization of such acts becomes meaningless and is clearly beyond the scope of the purpose of the PIT Regulations.

    (ii.) Punishment without Mens Rea is Unjustified

    Secondly, the penalty levied upon an individual for a violation of the PIT Regulations is often exorbitant. Due to the diverse repercussions entailed by the offence, it is of utmost significance that the market regulations take steps towards prosecuting individuals after ascertaining proper cause. This has lead Securities Regulation Agencies in countries like the USA to consider mens rea as a vital element in imposition of liability in order to avoid imposing large penalties in cases of accidental tipping.

    In India, the opinion of the Supreme Court in SEBI v. Shriram Mutual Fund and the legislative notes to Regulation 4 have made it clear that mens rea cannot be considered as an essential element for penalization under the PIT Regulations since it is neither a criminal nor a quasi-criminal offence. Insider trading proceedings pertain to Section 15G of the SEBI Act which are essentially civil proceedings and so the question of proof of mens rea does not arise. However, the Securities Appellate Tribunal has not always subscribed to the same opinion. Previously in Rakesh Agarwal v. SEBI, SAT decided that if an insider deals in securities based on the UPSI for no advantage to him, over others, it is not against the interest of investors and hence should not constitute an offence. It can be similarly inferred that mere communication of information without any advantage to the insider must not be considered an offence. The position adopted by SAT widens the scope of PIT Regulations by correctly interpreting the purpose for which the Regulations were enacted. 

    Mens Rea as a Requirement for Insider Trading in the UK and US

    For the first time in 1984, the US Supreme Court in Dirks v. SEC established that while adjudicating liability in insider trading cases, the mens rea of the tipper must be considered. The Court arrived at its decision by devising a test to decide whether or not breach of a fiduciary duty had been committed by the insider and consequently, whether or not the tippee had committed the offence of insider trading. This was explained by the Court as,

    “The test is whether the insider personally will benefit, directly or indirectly, from his disclosures. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach by the tippee.”

    Hence, post the judgment in Dirks case, the simple test for insider trading violations was whether the insider has communicated sensitive information with the unlawful intention of earning undue personal benefit. If communication of information was done with a guilty intention, the insider had breached his fiduciary duty and would be liable under the regulations. Additionally, the tippee would be considered liable on the basis of his knowledge of the said breach by the tipper.

    The prosecution of individuals was made much more difficult by the Court in the subsequent case of US v. Newman. Here, the Court reinstated its faith in the personal benefit test by clarifying that a mere breach of an insider’s fiduciary duty to not disclose sensitive information is not sufficient to constitute an offence of insider trading, even if the information was communicated to a friend, unless some improper purpose on the part of the insider is demonstrated.

    Similarly, insider trading is illegal under Section 52 of the Criminal Justice Act, 1993 in the UK. Since the offence entails criminal liability under the Act, the requirement for mens rea is indispensible. Section 53 of the Act lays down three defences that can be used by individuals accused of insider trading. To qualify for a defence, the accused must exhibit that, (i) it was not expected at the time of dealing that the transaction would result in a profit; or, (ii) the accused was under the impression that the information is within the public domain; or, (iii) that transaction would have been undertaken even without access to the sensitive information. 

    In a situation entailing an accidental communication of sensitive information where no personal benefit is derived by the tipper, an application of the personal benefit test or the defences enlisted under Section 53 would lead us to the conclusion that there exists no ground for imposing penalty under insider trading regulations.

    Conclusion

    Over the years, the scope of SEBI’s insider trading norms has been widened in order to protect the interests of the investors and to create a healthy environment for trade in the securities. While recent orders in the WhatsApp leak case provide an impression of SEBI’s tireless efforts in curbing insider trading, upon close scrutiny it becomes evident that these orders establish a new threshold of evidence for liability under the existing PIT Regulations. The orders omit discussion on the issue of mens rea and turn a blind eye to a situation where the sharing of the information is accidental and has not resulted in any insider trading or undue benefit. Evidently, at present, the Insider Trading Regulations operating in India are much more rigid and strict than those operating in other countries of the world. It is, thus, proposed that the tipper-tippee test and other principles relating to mens rea prevalent in other jurisdictions should be incorporated in the Indian jurisprudence at the earliest.

  • U.S. Ruling on Disgorgement of Profits: A Model for Indian Securities Market

    U.S. Ruling on Disgorgement of Profits: A Model for Indian Securities Market

    By kartik singh, a second-year STUDENT OF at NLUO, CUttack

    Disgorgement refers to the repayment of unlawful profits earned by an individual arising from unlawful activities. Disgorgement of ill-gotten profits has been a potent tool for global regulatory authorities in preserving the interests of the stakeholders in the securities markets. In spite of having a provision to that effect incorporated under Section 11B of the SEBI Act, 1992, added by an amendment in 2013, the Indian market regulatory authorities have been hesitant in enforcing such powers, primarily due to the lack of clarity in the legislation itself and precedents thereof as to how the amount for disgorgement must be computed. The Indian courts and tribunals, thus, often look to foreign pronouncements on the subject.

    The Indian regulatory law for disgorgement has been inspired by the provisions of the US securities law, therefore, the developments in the US securities market are of considerable importance to the Indian regulatory regime. Recently, the US Supreme Court’s decision in Liu v. SEC has thrown light on the issue of the quantum and computation of disgorgement amount by expounding certain guiding principles for the same. Considering the absence of such a computation mechanism in the Indian securities regulations, the ruling serves as an example for India.

    The Securities and Exchange Commission (‘SEC’) charged Charles Liu and Xin Wang with defrauding Chinese investors of a project that the couple falsely claimed met the requirements of the Immigrant Investment Program, following which they diverted the investment funds to overseas marketers and by paying themselves generous salaries. Proceedings were initiated against them and the matter ultimately reached the US Supreme Court.

    Observations of the US Supreme Court: A guiding example for the Indian Framework

    Firstly, the US Supreme Court categorically observed that the power to order disgorgement must not be viewed as a “punitive remedy”, rather it must be considered as an “equitable remedy” i.e. the same must be meant to remedy the wrong and not to punish the wrongdoer. The amount ordered to be disgorged must not exceed the amount of ill-gains gained by the wrongdoer, the contrary of which would fall within the ambit of a “punitive remedy”. The Securities Appellate Tribunal (‘SAT’) in Gagan Rastogi v. SEBI and Shadilal Chopra v. SEBI had too observed the same principle. The US ruling further exemplifies the principle by providing useful direction to enable the courts and tribunals to differentiate between an equitable order and a punitive order.

    Secondly, the Supreme Court noted that the process of disgorgement must be followed by the restitution of such amount to the victims of the wrongdoing. It is often observed that the regulatory authorities disgorge the amount and then claim to have brought justice to the victims. The US Supreme Court depreciated such practice and observed that the true essence of the disgorgement provision would only prevail if the process of restitution of the disgorged amount is followed. Emphasizing the point that mere collection of the disgorged amount and depositing the same in the government treasury would amount to a penalty, the Supreme Court ordered to follow the principle of restitution. To facilitate this, the regulatory authorities must consider the number of stakeholder/victims of the wrongdoing and pass necessary order to protect their interests. A similar approach has been adopted by SAT in Ram Kishori Gupta v. SEBI, wherein it observed the exclusion of principle of restitution in the disgorgement process to be unacceptable, remarking “disgorgement without restitution does not serve any purpose”. Again, the backing of the US Supreme Court on the aforesaid principle augurs well for the Indian securities framework going forward.

    Thirdly, the US Supreme Court noted that the disgorgement of money must be computed based on the net profits earned by the wrongdoer and not from the money earned from the wrongdoing. It must be taken into account that the wrongdoer may have incurred certain legitimate expenses during the course of wrongdoing. It would be unfair to account and extract such legitimate expenses through the process of disgorgement. Depreciating such practice of the regulatory authorities, the court remarked that there have been instances where they have used disgorgement as a tool to shirk their responsibility of applying their mind in order to compute the “actual” amount for disgorgement i.e. by deducting the legitimate expenses incurred by the wrongdoer.

    In the Indian framework too, it is often seen that the authorities order to disgorge the entire amount in question instead of acknowledging the legitimate expenses of the wrongdoer. The US Supreme Court acknowledging such facet said the same can be done by analysing the facts and circumstances of each case, following which the remedy would be truly equitable in nature.

    Lastly, the court also raised concerns about the repeated use of the “jointly and severally liable” principle by the regulatory authorities. Generally, fraudulent activities are committed by several individuals in connivance of each other. Consequently, authorities punish or impose a penalty on one of the wrongdoers for the acts of others using the ‘jointly and severally liable’ principle. The court was of the opinion that although the use of such principle is justified and may be reasonable in circumstances peculiar to a case, however, in cases of disgorgement authorities must be mindful of the person being asked to disgorge the amount unlawfully gained by the wrongdoers as such person may not actually be in possession of the unlawful gains, thereby impeding his ability to disgorge the amount to the regulatory authorities.

    Conclusion

    The US ruling has certainly paved the way for developing a mechanism to ascertain the disgorgement amount from the wrongdoer. While it may be argued that the securities market of the US is different than that of the Indian market, the principles enunciated by the court form the basic structure and the essence as to the computation for disgorgement. Disgorgement differs from a claim of damages, the former being a right in rem and the latter being a right in personam, thus, the method developed by the courts over the years in computing claims for damages must not be applied for the purpose of disgorgement.

    Further, disgorgement, especially in the Indian context, allows the regulators to be more liberal in deciding the quantum since they are themselves the court of first instance. The concept of disgorgement is still at a nascent stage and it is expected that the US ruling would guide the development of the subject in India.

  • Why Lenders are Withdrawing Applications under the IBC and Opting for One-Time Settlement?

    Why Lenders are Withdrawing Applications under the IBC and Opting for One-Time Settlement?

    By Nitya Jain, a fifth-year student at NLU, Jodhpur

    Introduction

    There has been a rising trend of the corporate debtor and the creditor settling their claims out of court after initiating a formal insolvency proceeding in the National Company Law Tribunal (“NCLT”). This has been made possible due to Section 12A of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which provides for withdrawal of insolvency applications. An aggrieved party first files an insolvency application against the corporate debtor in the NCLT but thereafter realises that a private settlement is more feasible and withdraws the application. In fact, data from Insolvency and Bankruptcy Board of India (“IBBI”) shows that out of the 142 cases closed in the second-half of 2018, 63 had been withdrawn under Section 12A. This is 45 percent of the total insolvency cases closed. Thus, it is relevant to understand the laws governing withdrawal of insolvency applications.

    The withdrawal of the application can be done at various stages of the insolvency proceedings. It can be withdrawn before it’s admission by the tribunal, after its admission, before the setting up of Committee of Creditors (“CoC”) or after the CoC has been set up. It can be withdrawn even after the invitation for expression of interest has been issued and the resolution plan has been made. The laws applicable at each stage differs and the approvals required change. These can be divided into four stages.

    Stage 1: Before the admission of the application

    Before the coming of Section 12A, applicants relied on Rule 8 of the Insolvency & Bankruptcy (Adjudicating Authority) Rules, 2016 to withdraw their insolvency applications. This rule provides for “withdrawal of application on a request made by the applicant before its admission.” The term ‘before its admission’ is of relevance here. In Mother Pride Dairy India v. Portrait Advertising & Marketing , the NCLT acknowledged that a private settlement had been reached between the applicant and the corporate debtor. But it held that the application cannot be withdrawn once it has been admitted by the tribunal. The rationale for the same was that other creditors are entitled to raise their claim after the admission of the application and the proceeding has become in rem. Similarly, in Lokhandwala Kataria Construction v. Nisus Finance and Investment Managers LLP, it was held that irrespective of the settlement between the applicant and the corporate debtor, the matter cannot be closed till the claim of all the creditors is satisfied by the corporate debtor.

    Stage 2: After the admission of the application but before the constitution of CoC

    Section 12A of the IBC was introduced via an amendment to provide a mechanism for withdrawal of application after it has been admitted. In order to protect the interest of all creditors, a safeguard was added in the provision whereby such withdrawal is possible only with the approval of ninety percent voting share of the CoC. Here a doubt arises as to what will happen in a case where the application has been admitted but the CoC has not yet been set up. Can such an application be withdrawn? If yes, how?

    This riddle was solved by the Hon’ble Supreme Court in Swiss Ribbons v. Union of India in January 2019, where it stated that “We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement…….”

    Consequently, in July 2019, an amendment was made in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016  (“Regulations”) to accommodate a pre-CoC situation. Accordingly, Regulation 30A (1) (a) of the Regulations provides that before the CoC has been constituted withdrawal may be made by the applicant through the interim resolution professional.

    Stage 3: After the constitution of CoC

    Section 12A will simply apply and the application can be withdrawn provided that such withdrawal is approved by ninety per cent of the CoC. This has to be read with Regulation 30A (1) (b) of the Regulations which states that withdrawal after the constitution of the CoC has to be made by the applicant through the interim resolution professional or the resolution professional, as the case may be.

    Stage 4: After the issue of invitation for expression of interest

    Once the CoC has been set up, the next stage in the insolvency proceeding is invitation for expression of interest. It is an invite to the general public whereby those interested in submitting resolution plans for the corporate debtor can do so. Initially, Regulation 30A of the Regulations did not allow withdrawal of application after issuance of invitation for expression of interest. However, the judiciary still allowed the withdrawal in various cases overlooking the regulation and acting in pragmatic economic terms.

    The Supreme Court in the case of Brilliant Alloys v. Mr. S. Rajagopal  held that the insolvency application for can be withdrawn even after issuance of invitation for expression of interest. The rationale for doing so was that the out of court settlement was more beneficial for all the stakeholders involved. It was considered prudent to ignore the Regulations in this matter to ensure maximum economic benefit to the parties.

    Eventually, the Regulations were amended and the withdrawal of insolvency application was allowed after the issuance of invitation for expression of interest provided there are reasons justifying such withdrawal.

    The judiciary went one step further in the matter of SBM Paper Mills and allowed withdrawal even after the resolution plan was accepted by the CoC. The NCLT acknowledged the value that the one-time settlement was offering the parties which was much better than the resolution plan. However, the tribunal also cautioned against such withdrawals and stated that withdrawal at such a later stage of insolvency proceedings must be discouraged.  Such withdrawals waste the time of the court as well as of the insolvency resolution machinery. Accordingly, the NCLT awarded high costs as a deterrent.

    Conclusion

    Settlement has been sought time and again by creditors in lieu of insolvency proceedings under IBC. Although IBC provides a time limit for resolution of insolvency, it is rarely followed and cases get stretched for more than 500 days which is almost double of the time limit provided in the IBC. In light of this, many lenders opt for withdrawing their application and choose to settle outside court with the debtor. For instance, in January 2020, the Union Bank of India withdrew a couple of insolvency petitions and opted for settlements with the defaulting companies for a much better realisation. The reason for the same was that the bank had not seen any successful resolution for cases referred by it to the NCLT. In a statement the MD and CEO of the United Bank stated that looking at the kind of value that lenders are getting through NCLT and the time taken for resolution, the preferred route is settlement with the corporate debtor. 

    It can be concluded that the judiciary is allowing withdrawal of applications filed under IBC where such withdrawal is economically advantageous to the parties. This practice is in line with the central theme of the IBC i.e. maximization of economic benefit for the lenders. However, it also raises an important question about the effectiveness of IBC in providing maximum fiscal relief.

  • An Inevitable Collision Under The Insolvency Code

    An Inevitable Collision Under The Insolvency Code

    BY PALAK AGRAWAL AND VISHESH JAIN, third-year students at nluo, odisha

    Introduction

    The National Company Law Appellate Tribunal [‘NCLAT’] in its recent decision of SBI v. Metenere held the substitution of Insolvency Resolution Professional [‘IRP’] under the Insolvency Bankruptcy Code 2016 [‘Code’] to be valid. The question dealt with the possibility of unfair and biased Corporate Insolvency Resolution Process [‘CIRP’] since IRP appointed was an ex-employee of the creditor. The author attempts to test the NCLAT judgement against the various provisions of the Code, which is identified as creditor centric, therefore leading to inevitable collision.

    Background of the Case

    In the case of SBI v. Metenere, the Resolution Professional [‘RP’] appointed by the Committee of Creditors [‘CoC’] was an ex-employee of one of the financial creditors i.e., State Bank of India and was also drawing pension from it. M/s Metenere Ltd., the corporate debtor objected to such appointment based on apprehension of bias. The point of deliberation before NCLAT was whether the appointment of an ex-employee of a creditor as RP would render the CIRP process unfair and biased? The NCLAT held that substitution of RP is valid on the basis of apprehended bias. The Adjudicating Authority while dealing with the aforementioned issue acted beyond its jurisdiction and certainly overlooked the literal rule of interpretation.

    Analysis

    • Overstepping of Jurisdiction by the NCLAT

    Entry 8A of the First Schedule of the IBBI Regulation 2016 mandates RP to disclose any association with the financial creditors to the CoC, thereby leaving his appointment on the discretion of the CoC. However, any party to the CIRP aggrieved by the compliance of this provision can approach the Insolvency and Bankruptcy Board of India [‘IBBI’] under Section 217 of the Code. The IBBI is the appropriate authority to take any disciplinary action against the irregular conduct of the RP. A reading of Section 217 elucidates that IBBI shall be the proper authority deciding irregular conduct of the RP, instead of Adjudicating Authority. Therefore, a decision by the Adjudicating Authority on apprehended biasness of the RP, lacks  jurisdiction.

    • Apprehension of Bias

    NCLAT while formulating its decision relied on ‘real danger’ test of apparent bias. The real danger test traces back its origin in the English case of Regina v. Gough, wherein the House of Lords laid the test in term of real danger than likelihood. The court opined that the merits of the case should lead to possibility rather than probability. In the Indian context, the Supreme Court in Kumaon Mandal Vikas Nigam Ltd. v. Girja Shankar Pant also opined, that the surrounding circumstances must be collated and then a conclusion must be drawn, to ascertain that whether there is a mere apprehension of bias or real danger of bias. In the instant case, IRP appointed was merely a pension drawee from the creditor and was not on a panel vested with any decision-making power. Even at a later stage, if the IRP is appointed as the RP, there are certain limitation on the power of RP which require prior approval of the CoC. Therefore, the Adjudicating Authority did not examine the charges of biasness based on any evidence and adopted a lower threshold for determination of biasness.  

    • Disregard to Literal Rule of Interpretation

    Under Regulation 3(1) of IBBI (Insolvency regulation for corporate person) 2016, the IRP shall be eligible to be appointed as RP, if he is independent of the corporate debtor. A bare perusal of Regulation 3(1) shows that it does not prohibit the appointment of RP if related to any party other than the corporate debtor. However, in the present case, NCLAT held the appointment of the RP to be wrong, due to his relationship as ex-employee with the financial creditor. The said finding appears to be inconsistent with the literal rule of interpretation as reiterated by the apex court in Kanai Lal Sur case. In this case, it was held that if the words used were capable of one construction only then it would not be open to the court to adopt any hypothetical construction that is more consistent with the present act. The NCLAT, therefore, on the apprehension of bias took the path inconsistent with the established principle of law and propounded a new judicial principle.

    • IRP/RP as the Custodian of the Corporate Debtor

    IRP/RP acts as a custodian to the corporate persons undergoing CIRP. It has been reiterated by tribunals and courts that the role of IRP/RP is not merely supervisory but also of a negotiator between the creditors and the corporate person to assess and formulate a plan which is best suited for the corporate debtor in keeping his business as a going concern.

    Section 18 of the Code provides for the statutory duties of the IRP which includes carrying every task that is crucial for bringing the insolvency process in motion and collating information on all assets, operations, finance of the corporate person and taking control over the same until the RP is appointed. IRP after assessing the financial position of the corporate person constitutes a CoC under Section 21 of the Code. Once the CoC is constituted, RP under Section 25 of the Code takes over the activities as performed by IRP and carries out further processes involved in a CIRP like preparing information utility and inviting prospective Resolution Applicants. Apart from this, Entries 5 to 9 of the IBBI Regulations provides for the Code of conduct for impartial and independent conduct of the RP.

    Therefore, it is clear from the aforesaid reading, that IRP/RP plays a quintessential role in the whole process of reviving the corporate debtor through CIRP. The IBC scheme and the IBBI Regulation mandates the RP/IRP to be impartial and independent, otherwise it will defeat the very purpose of the Code, which is to balance the interest of all the stakeholders involved in the process.

    • Supervision of CoC over the duties of RP

    During CIRP, the appointment of RP is put-forth before CoC which in its first meeting appoints either the IRP or any other person of their choice as RP by majority ratification of 66%. Apart from this, the CoC is also empowered to change the appointed RP at any point of time during the CIRP process by the majority of 66%. This section makes it significantly clear that the appointment or removal of the RP is directly in the hands of CoC. Putting it differently, if Adjudicating Authority does not endorse the RP as selected by the CoC, then the CoC by the majority vote of 66% can appoint the same person. Therefore, the very independence given to IRP/RP remains to be ambiguous, as its appointment, as well as its removal depends on the CoC. Therefore, the NCLAT’s judgement clearly poses a question on independence of RP.

    Apart from the power of appointment and removal, the CoC oversees and ratifies all the functions undertaken by the RP. Besides, the CoC is called upon to consider the resolution plan vetted and verified by the RP and the RP is not required to express his opinion on matters within the domain of CoC to approve or reject the resolution plan. Therefore, every decision by RP regarding the selection of a resolution plan or liquidation has to be aligned with the commercial wisdom of the CoC. Furthermore, it is a settled principle that RP cannot challenge the commercial wisdom of the CoC unless it is against the very purpose of the Code i.e. it does not balance the interest of all the stakeholders concerned.

    Therefore, it is no harm to mention that a biased action taken by the RP towards CoC at the stage of CIRP has a negligible scope of being checked or corrected. This leads to a bias and may prove to be detrimental towards the corporate debtor. Thus, making RP more dependent on CoC, therefore leading to loss of independence in decision making power.

    Conclusion

    In conclusion, the NCLAT’s decision in Metenere emphasises on the independence of the IRP/RP in order to conduct CIRP in an unbiased and fair manner. But once the Adjudicating Authority assumes the power to adjudicate upon the appointment of IRP/RP, this will open the Pandora box inviting challenges against every appointment and nomination of IRP/RP by the corporate debtor which is against one of the objectives of the Code i.e. the timely completion of the insolvency process.

    Lastly, the author believes that the objective of the Code can be truly achieved when the RP/IRP performs its duties without being influenced by CoC. But it is almost impracticable for the IRP/RP to work independently in the current arrangement of the Code, as the CoC overlooks the appointment as well as functions of the IRP/RP. Therefore, a shift towards institutionalising the appointment of IRP/RP will help break the chain between CoC and IRP/RP and will enable them to work in a more fair and unbiased manner. The aforementioned case has been appealed in Supreme Court and hence, positive changes which align with the Code are awaited.

  • The Requirement of ‘Intention’ in Special Resolutions

    The Requirement of ‘Intention’ in Special Resolutions

    By Gunjan Bahety and Tanmay Joshi, fourth-year students at MNLU, Nagpur

    Introduction

    Under the Companies Act, 2013 (‘Act’), decisions are taken and executed with the consent of the shareholders through resolutions. The consent of the shareholders is duly taken by the casting of votes. Special Resolution under the Act has been defined as:

    “A resolution shall be a special resolution when

    1. the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution; 
    2. the notice required under this Act has been duly given; and 
    3. the votes cast in favor of the resolution… are required to be not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.”[i]

    The very first requirement that the section provides is for “intention to propose the resolution as a special resolution” which needs to be “duly” mentioned in the notice. Going by the literal text of the statute, prima facie it seems that the requirement of intention is mandatorily an element for classification of a resolution as a special resolution. However, the courts have interestingly taken an opposite view of the same. 

    Is Intention Really a Mandatory Requirement?

    The Courts have time and again held that the requirement of “intention” under clause (a) of section 114 is not a mandatory requirement.[ii]

    The Andhra Pradesh High Court had held in a case:

    “requirement of setting out the intention to move a resolution as a special resolution in the notice could not be said to be such a mandatory requirement, that the failure to comply with it would invalidate the resolution.”[iii]

    The Court then differentiated between a directory requirement and a mandatory requirement. The Court held:

    “There is no general rule for determining whether a particular provision in a statute is mandatory or directory. The court must look at the purpose of the provision, its nature, and intention of the Legislature to find out whether it is directory or mandatory.”[iv]

    The Court was of the view that even the use of the word “shall” is not decisive of the matter and many other aspects have to be looked into.[v] However, there are other aspects that the Courts need to consider while reaching this conclusion. The Supreme Court (‘SC‘) recently has stated that:

    “the Legislature inserts every part of a statute with a purpose & the legislative intention is that every part thereof should be given effect to. If the words used are capable of only one construction, it is not open to the court to adopt any other hypothetical construction on the ground that it finds it more consistent with the alleged object and policy of the Act.”[vi]

    Parallelly, the SC had held in a case that “the first and primary rule of construction is that the intention of the legislation must be found in the words used by the legislature itself.”[vii] Citing various case laws, the Apex Court had concurred, “when the Legislature has employed a plain and unambiguous language, the Court is not concerned with the consequences arising therefrom”[viii] and construal is to be done only when the text is incomprehensible. The Court further held that “it is a cardinal principle of interpretation of statutes that the words of the statute is to be given prima facie meaning, irrespective of the consequences”. However, equally it is important to look at the interpretation from another perspective, as cited by the SC:

    “In matters of interpretation one should not concentrate too much on one word and pay too little attention to other words. No provision in the statute and no word in any section can be construed in isolation. Every provision and every word must be looked at generally and in the context in which it is used.”[ix]

    The above-mentioned method of interpretation would obviously make it reasonable to give effect to the legislative intent and the purpose of the provision while keeping in mind to not focus much on the wordings of the section so as to defeat the purpose of the legislation. In light of the above analysis, even the court opined that the inconveniences which would arise if the resolution would fail even after being passed as a special resolution were certainly not the intention of the legislature.[x] Hence, the requirement of intention under section 114 cannot be said to be a mandatory requirement but only a directory requirement. Further, the Court held that the decisions which require a special resolution to be adopted are mandatory but the notice convening the meeting and implying the intention that the resolution is to be passed as a special resolution is only directory. The Court thus, adopted harmonious construction in practice. 

    Hence, what would be of material importance would be the contents of the resolution and the consent of the members and certainly not what the irregularities in the notice would say. Therefore, it would be sufficient if the provision is only substantially complied with. The Gujarat High Court had also observed that the requirement of intention in the notice under section 114 to move a special resolution could not be said to be such a strict and necessary requirement that the failure to comply with it would invalidate the resolution.[xi]

    It would be of relevance to discuss here the Duomatic Principle as was laid down in In Re Duomatic Limited 1969[xii]. Buckley J. held that given the shareholders who had a right to attend and vote at a general meeting, had informally assented to a decision in the meeting, that assent is binding and a formal meeting cannot be insisted upon.[xiii] The English Court took the view of In re Express Engineering Works Ltd.[xiv] and other cases[xv], wherein it was held that “where all the corporators in fact approve, the mere absence of the technicality of a formal resolution in general meeting is immaterial”. The Court accordingly held that “the agreement between all shareholders of the company had the effect of overriding the articles so far as was necessary.”[xvi] However, for the application of this principle, the existence of consensus-ad-idem among all the shareholders of a company for a particular course is a condition precedent.[xvii] The scope of this principle has been defined in various foreign cases. In Stakefield (Midlands) and others v. Doffman and another[xviii], it was held that “the principle cannot be applied for a transaction amounting to an unlawful return of capital”. In some cases, it has been held that the principle can be employed to alter the company’s articles.[xix] It has also been accepted as a defense for violation of fiduciary duties.[xx] It is to note that, “the Duomatic principle does not permit shareholders to do informally what they could not have done formally by way of written resolution or at a meeting.”[xxi]

    In India, there have been numerous cases wherein the learned counsels have taken the aid of the Duomatic Principle.[xxii]The Indian Courts too applied the principle, for example in Darjeeling Commercial Co. Ltd. v. Pandam Tea Co. Ltd.[xxiii] the court while applying the principle concluded that the company adopted the loan in its annual general meeting through its members and now cannot take the defense that the said loan is fictitious or fraudulent. Even the Delhi HC had applied this principle and cited various English cases to back its view.[xxiv] Additionally, the Andhra Pradesh High Court in another case held that the principle in essence provides that if a statute provides that a course can be taken by the sanction of a certain number of members which is to be given in accordance with the prescribed procedure under the statute, then provided that the required number of members of that group sanction the decision, the prescribed procedure is not normally treated as being essential.[xxv]  However, extending the proposition, the Court concurred that “this should be the case when the Court is satisfied that the purpose of the given procedure is for the benefit of the members” of that group and enables a majority of that group to bind the minority in relation to the course in question.

    Conclusion

    Hence, what can be said is that the requirement of intention setting out in the notice under section 114 of the Companies Act, 2013 though not mandatory, but to avoid future instances of disputes, it would be better to declare such a notice as convening a meeting for the passing of a special resolution as there is no Supreme Court judgment to that effect. As we have seen the different approaches that the courts adopt while interpreting a statute and there is no straight-jacket formula to that, at times even plain text of the statute requires interpretation to mark it as “plain”. What is necessary to understand is to read the purpose of the section and not to fuss about the procedural requirements when can be easily resolved given the sanctions of the members.

    Endnotes:

    [i] Section 114, Companies Act 2013.

    [ii] In Re: Novopan India Limited 1997 88 Comp Cas 596 AP, Brilliant Bio Pharma Limited v. Company Petition No.91 Of 2012; In Re: Maneckchowk And Ahmedabad [1970] 40 Comp Cas 819; C. Rajagopalachari v. Corporation of Madras [A.I.R. 1964 S.C. 1172].

    [iii] In Re: Novopan India Limited 1997 88 Comp Cas 596 AP.

    [iv] Ibid.

    [v] Ibid.

    [vi] N Sampath Ganesh v. Union of India (2020) Cr. Writ Petition NO. 4144 OF 2019.

    [vii] Kanai Lal Sur vs Paramnidhi Sadhukhan 1957 AIR 907.

    [viii] N Sampath Ganesh v. Union of India (2020) Cr. Writ Petition NO. 4144 OF 2019.

    [ix] Illaichi Devi v. Jain Society, Protection of Orphans India, (2003) 8 SCC 413.

    [x] In Re: Novopan India Limited 1997 88 CompCas 596 AP.

    [xi] Maneckchowk and Ahmedabad Manufacturing Co. Ltd. [1970] 40 Comp Cas 819.

    [xii] In Re Duomatic Ltd. [1969] 2 Ch 365.

    [xiii] Re Duomatic, Buckley J at page 373.

    [xiv] In re Express Engineering Works Ltd. [1920] 1 Ch. 466.

    [xv] In Re Newman (George) & Co. Ltd. [1895] 1 Ch. 674, C.A.; Parker & Cooper Ltd. v. Reading [1926] Ch. 975; Salomon v. Salomon & Co. Ltd.[1897] A.C. 22, H.L.

    [xvi] Ibid.

    [xvii] Euro Brokers Holdings Ltd. v. Monecor (London) Ltd. [2003] 1 BCLC 506.

    [xviii] Stakefield (Midlands) and others v. Doffman and another [2010] EWHC 3175.

    [xix] Cane v. Jones [1980] 1 WLR 1451, The Sherlock Holmes International Society Ltd. v. Aidiniantz [2016] EWHC 1076 (Ch). 

    [xx] Sharma v. Sharma [2013] EWCA Civ 1287.

    [xxi]  Madoff Securities International Ltd v Raven & Ors. [2013] EWHC 3147 (Comm).

    [xxii] Urban Infrastructure Trustees Ltd. v. Joyce Realtothers Pvt. Ltd. LNIND 2015 Bom 776; Dr. Renuka Datla And Others Versus M/Biological E Limited And Others Lnindord 2017 Ap 258; Advansys India Private Limited & Others Versus M S Ponds Investment Limited & Others Lnind 2014 Bom 434.

    [xxiii] Darjeeling Commercial Co. Ltd. vs Pandam Tea Co. Ltd. 1983 54 CompCas 814 Cal.

    [xxiv] Adobe Properties Private Limited vs Amp Motors Private Limited CO.APPL.(M) 150/2016.

    [xxv] In Re Torvale Group Ltd. [1999] All ER (D) 944, In Re Brilliant Bio Pharma Limited [2013] 180 Comp Cas 168 (AP).

  • IBC And The Homebuyers’ Debacle: One Step Forward and Two Steps Back

    IBC And The Homebuyers’ Debacle: One Step Forward and Two Steps Back

    BY srihari gopal and vedant malpani, fourth-year students at GNLU, gandhinagar

    In the latter half of the last decade, the Real Estate (Regulation and Development) Act, 2016 (‘RERA’) and the Insolvency Bankruptcy Code, 2016 (‘IBC’) have arguably been the two most revolutionary legislations in India. While IBC replaced a broken system of corporate resolution and restructuring under disparate laws with a comprehensive self-contained code, RERA introduced accountability to the opaque real estate sector, which over the years had gained infamy for its severe delays, irregularities and unfair practices. The legislations also provide for the constitution of two regulatory bodies, i.e. the Insolvency and Bankruptcy Board of India (‘IBBI’) and the Real Estate Regulation Authority respectively to protect the interest of the stakeholders. Over the years, RERA and IBC have come to be recognized as complementary legislations. However, their interplay has resulted in significant overlapping issues which cannot be ignored.

    So far, the biggest issue concerning the two legislations has been the result of a recent amendment to the IBC in March 2020 (‘the Amendment’), which has left the homebuyers nearly remediless. This Amendment takes the homebuyers, who were only recently recognized as creditors under the IBC, a step backwards. The amendment’s constitutional validity has been challenged, and on 15th June 2020, the Supreme Court (‘SC’) has ordered the government to respond to the petitioner’s claims.

    Before delving into the issues with this Amendment and the judgement, it would be relevant to briefly touch upon the status of homebuyers under these legislations over the years.

    Position of homebuyers under the IBC before 2018

    Under Section 2(d) of the RERA, a homebuyer is an allottee who acquires a property through sale, transfer or otherwise but does not include a tenant. Before the enactment of RERA, a homebuyer had no remedy against a real estate developer to receive a monetary compensation in case of default and had to resort to the Consumer Protection Act (‘CPA’). Even after enactment of RERA, there were no provisions for a time-bound resolution, which left homebuyers in dire need of an effective, speedy remedy.

    Prior to the 2018 Amendment to the IBC, homebuyers could not file for insolvency of real estate developers as there was no clarity as to the nature of debt owed to a homebuyer. Since the IBC classified debts as either operational or financial in nature, homebuyers, whose transactions were in the nature of a ‘sale and purchase’, did not fall under either categories.

    The issue of classification of homebuyers under IBC resurged  in decisions like Nikhil Mehta v. AMR Infrastructure, where the NCLT Delhi considered that homebuyers could be brought under the definition of financial creditor due to the nature of their transactions having the ‘commercial effects of a borrowing’. Further, in Chitra Sharma v. Union of India, the Supreme Court   attempted to protect the interest of homebuyers by appointing an Advocate on Record to represent their interest in the Committee of Creditors. Nonetheless, courts could only grant limited protection without a change in legislation.

    Further, it became all the more important to resolve this issue, considering that once an insolvency petition is initiated, a moratorium under Section 14 of the IBC is imposed on all legal proceedings, including those under the RERA (essentially leaving homebuyers out of the process). It was in this light that the IBC Amendments of 2018 and 2020 were introduced.

    Issues with the 2020 Amendment: You can have an apple, but you cannot eat it

    Through the 2018 Amendment to the IBC, homebuyers were recognized as financial creditors, with the amount owed to them coming within the definition of a financial debt having the commercial effects of a borrowing. This came as a huge respite to homebuyers, who often made substantial investments into real estate projects, both in terms of loans and EMIs. The Amendment also survived a constitutional challenge in the decision of Pioneer Urban Land and Infrastructure Ltd. and Anr. v. Union of India and Ors.

    Due to the extraordinary number of appeals brought forth by real estate developers challenging the 2018 Amendment, another amendment was introduced in 2019 through an ordinance, which was later inserted in the IBC by an amendment in March 2020. It introduced a minimum threshold for initiation of insolvency proceedings against a builder, requiring that an application for corporate insolvency resolution process should not be filed by less than 100 or 10 per cent of all homebuyers in a project, whichever was lesser. It was also stated that the threshold limit had to be complied with within 30 days of the promulgation of the ordinance. This was largely unfair to the homebuyers, as before this Amendment even a single homebuyer, with a claim of Rs.1 lakh or more could move to NCLT against the defaulting developer. The Amendment placed homebuyers in a disadvantaged position as compared to other financial creditors who were not subject to such a requirement. The constitutionality of this Amendment was challenged before the Supreme Court in the case of Manish Kumar v. Union of India & Anr. At present, the matter is sub-judice.

    In this case, homebuyers have challenged the Amendment claiming that it has rendered them remediless under the IBC. They further contended that the Amendment is unfair, arbitrary and in violation to Article 14 and 21 of the Indian Constitution due to unequal treatment of similarly placed creditors. Interestingly, the idea of a similar threshold was already rejected by the Supreme Court in the Pioneer case, which makes it all the more confusing as to why the amendment was introduced in the first place. The SC, in this case, stated that the objective of keeping the threshold limit at Rs. 1 lakh was to specifically enable small financial creditors (homebuyers) to trigger the Code just like other similarly placed financial creditors such as banks and financial institutions to whom crores of money may be due.

    The threshold requirement has been subjected to critique in several other instances. Mr. T.K. Rangarajan, a Rajya Sabha MP and a member of the Standing Committee of Finance, had written a letter to the chairman of the Committee citing his concerns with the minimum threshold requirement. In his report, he alleged that (a) the legislature has been influenced by a strong lobby of builders in introducing the Amendment, (b) it is unfair to homebuyers, having individual claims of more than the minimum threshold of Rs. 1 lakh (now Rs. 1 crore), as unlike other operational and financial creditors, they cannot file an proceed against defaulting builders without fulfilling the minimum threshold requirement, (c) it is unreasonable to expect the homebuyers to unite for the purposes of an application when they are unaware of each other in most cases, and (d) there is no such requirement placed on other similarly placed financial Creditors, such as creditors who are a part of a joint lenders scheme.

    The Insolvency Law Committee released a report in February, 2020 in an attempt to justify the threshold. The primary reasons stated were that (i) the threshold was imposed so that an application is filed only in the collective interest of the homebuyers (ii) even if an application under the IBC fails for want of the threshold, alternative remedies under RERA are still available, (iii) undue pressure will be exerted on the corporate debtor for even ‘minor disputes’ without the threshold and (iv) RERA disputes are heavily contentious, and this will be a set-back on the time-bound RERA process.

    None of these reasons justifies the requirement. Undermining claims of single homebuyers as ‘minor issues’ irrespective of the claim they are owed is unfair and arbitrary, considering that homebuyers often invest their life savings or incur significant debt in real estate purchases. In fact, the requirement of the minimum threshold will only make the disputes more contentious, considering that homebuyers, with their limited resources, now have to not only gather information about other homebuyers by themselves but also consolidate their individual claims to file the insolvency application, all within a span of 30 days. Further, as discussed above, though the remedies in RERA and the IBC are concurrent, IBC provides the more time-bound and efficacious solution. Therefore, the mere existence of another remedy is no excuse to limit homebuyers’ rights under the IBC.

    Conclusion

    The ailing real estate sector has been drastically hit due to the pandemic. Many experts from the industry have shown concern about the severe reduction in demand in the housing sector. It is also forecasted that homebuyers are among the ones who are going to be the most affected, as real estate constructions have come to a standstill due to the nationwide lockdown imposed by the Government. With the subsequent costs being expected to exponentially increase, it can be reasonably expected that the number of cases relating to insolvencies in the real estate sector will also rise considerably once the IBC comes back into force. This makes it all the more important to provide expansive protections to homebuyers.

    We believe that the current amendment leaves homebuyers without any effective recourse under the IBC. Corporate debtors are already protected against bogus applications through the new increased thresholds under Section 4 of the IBC. The amendment is therefore nothing but an unnecessary obstacle. However, in case the amendment is found to be constitutional, the RERA should be amended to devise a mechanism for homebuyers to be aware of other homebuyers involved in the project. However, the legislature should primarily consider repealing the amendment completely, considering that the Supreme Court had already struck down the idea of such thresholds before.

  • Seat versus Venue: The Persisting Conundrum in the Indian Arbitration Context

    Seat versus Venue: The Persisting Conundrum in the Indian Arbitration Context

    BY Devanshi Prasad AND Arjun Chakladar, THIRD-YEAR STUDENTS AT NLIU, BHOPAL

    The question regarding the selection of ‘seat’ and ‘venue’ of arbitration is integral to the enforcement of the arbitral award, as well as the determination of the applicable law. However, there has been a lack of unanimity resulting in judicial ambiguity as seen in the Mankastu judgment surrounding the selection of the ‘seat’ and ‘venue’, which is analyzed and covered in the following article.

    A contract containing an arbitration clause has three underlining laws governing it, namely the proper law or the law governing the performance obligations, and contractual terms and agreement. The procedural laws namely, the curial law regulating the conduct of the arbitration proceedings and the lexarbitri or the juridical seat of arbitration. It is the Court which has supervisory jurisdiction over all arbitral aspects of the contract.

    The determination of the lexarbitri is a drawn-out and lengthy debate. Uncertainty in the contract to specify the discernible applicable laws leads to disparity and confusion surrounding the juridical seat of any arbitration. The Arbitration and Conciliation Act (‘the Act’) enacted in 1996 had failed to provide clarity to the concept. Courts have worked tirelessly to interpret the provisions and provide uniformity in the construction of its sections but the debate around delineation of seat and venue remains unresolved.

    The Ambiguity Surrounding ‘Place’, ‘Venue’ and ‘Seat’ Under the Act

    The Act does not define ‘seat’ but introduces the term ‘place’ in the statute. However, the same has not been well-defined and can be interpreted to have different meanings under various sections of the Act. This leads to ambiguity in deciding which court has the sole jurisdiction over the arbitration proceedings.

    On reading Section 20 of the Act, the initial implication points that the party autonomy extends only to the choice of ‘venue’ of arbitration. However, the Apex Court in Bharat Aluminium Company v. Kaiser Aluminum Technical Services Incorporation(‘BALCO’) has partly cleared the confusion. It established the concepts of ‘seat’ and ‘venue’ under the Act. It is imperative to read the abovementioned two sections in consonance thereby leading to the conclusion that ‘place’ connotes ‘seat’ under Section 20(1) and (2), whereas, it would connote ‘venue’ under section 20(3).

    It is common to use seat of arbitration interchangeably with place of arbitration. It determines which court has the jurisdiction to the exclusion of other courts in the arbitral proceedings. The venue on the other hand merely indicates the geographical location where the proceedings might be conducted. It may be a neutral venue decided entirely on the convenience of the parties. The seat exists independently and separately as to the venue of arbitration.

    The conundrum of seat and venue of arbitration begins where the contract remains ambiguous or silent on the provision of a seat. The possibility of concurrent jurisdictions introduces the fatality of discord and disharmony into the settlement process of claims. A new peril arises in deciding which courts’ decision would prevail over the dispute. Therefore, the determination of the seat of arbitration is of utmost importance in any arbitral dispute.

    Tests for Determining The ‘Seat’ Of Arbitration

    The Courts effectively provided some respite in the whole debate by interpreting the vague sections of the Act. Two acceptable tests have been devised through precedents for conclusive determination of the seat. They are:

    1. Closest and most intimate connection, and
    2. Bright-line test.

    The Sulamerica case establishes that when an agreement lacks an express or implied choice of law governing the arbitration agreement, the system of law which has the closest and most intimate connection is significant. The expressly selected substantive law of contract is the implied choice of law for the arbitration agreement. In the case of Enercon (India) Ltd. v.Energon GmbH (‘Enercon’), the division bench of the Supreme Court relied on the NavieraAmazonica case and devised the first set of tests. As per this, careful attention is to be paid towards party intention and whether the legal system where the proceedings are to be conducted have a close and intimate connection to the arbitral process. The test is applicable when the arbitration clause is silent or unclear and fails to ascertain the applicable law. The intention of the parties becomes the most decisive factor in clearing up the confusion. Further, the location where the arbitration is to be conducted is a relevant point of consideration.

    Proceeding to the second test, the Shashou principle, laid down in Roger Shashoua &Ors. v. Mukesh Sharma elucidates when the ‘venue’ can be considered as the juridical ‘seat’ in any proceeding. The ‘venue’ must be expressly designated without providing any alternative situs as the ‘seat’. There must be no ‘contrary indicia’ or anything indicating the contrary combined with the arbitration being governed by a supranational body of rules.

    This was conclusively applied by the three Judge Bench of the Apex Court in BGS SGS SOMA JV v. NHPC Ltd. (‘SOMA JV’). It stated that use of expressions like “arbitration proceedings” that “shall be held” at a “venue” emphatically denotes the ‘venue’ being the appointed ‘seat’, subject to no contrary indication of the same.

    The judgment was successful in resolving the ‘seat’ and ‘venue’ dilemma. It demystified the ambiguous portion of the BALCO judgment which sought to introduce the concept of concurrent jurisdiction, and reiterated that once parties have chosen the seat of arbitration the same would indicate that the role of the seat is to have exclusive jurisdiction. It would mean that they have consented to ousting the jurisdiction of the courts of cause of action.

    SOMA JV case solidifies the principle of party autonomy, and holds the judgment pronounced in Union of India v. Hardy Exploration and Production (India) Ltd. (‘Hardy’) to be bad in law. The Hardy case, limiting party autonomy holds that ‘venue’ would not ipso facto imply the appointment of ‘seat’ without a positive indicator in furtherance of the same intention. As a test, it is precisely contrary to the bright-line test. The ‘venue’ would become the ‘seat’ only where there is something submitted in concomitance of it. However, the compeer bench of the SOMA JV case cannot inexorably overrule the Hardy case principle.

    Judicial Scenario Post SOMA JV

    Even after the SOMA JV case, discrepancies in determining the seat of arbitration subsist. If we look at two recent judgments dealing with the issue, we find that there is not much clarity on the subject.

    In Hindustan Construction Company Ltd.v. NHPC Ltd. and Ors.(‘Hindustan Construction’), the Apex Court relied upon the SOMA JV case and upheld that once a ‘venue’ is indicated to be the chosen ‘seat’, the court of that seat has jurisdiction to the exclusion of other courts.

    However, the very next day, three-judge bench of the honorable Supreme Court passed its judgment in the case of Mankastu Impex Pvt. Ltd. v. Airvisual Ltd deviating from the judgment in the Hindustan Construction case. The dispute arose from a sale-purchase agreement and led to invocation of arbitration clause over disagreements regarding renewal of original terms of agreement. A section 11 application was filed in the Supreme Court for appointing the sole arbitrator. However, contentions were raised that the seat vests in Hong Kong, the venue of arbitration proceedings in the agreement. The Court held that the seat of arbitration was in Hong Kong. The finding was based on the clause appointing Hong Kong as the “place of arbitration” along with the clause providing for referring and finally resolving all controversies and disagreements in Hong Kong.

    The Court side-stepped the bright-line test of SOMA JV and held that ‘seat’ and ‘venue’ must be distinguished and cannot be used interchangeably. The SOMA JV case’s reasoning that use of “arbitration proceedings” would inexorably conclude to the ‘venue’ being chosen as the ‘seat’ was not favored. Reliance was placed on the Hardy case analysis. A mere mentioning of the ‘venue’ or ‘place of arbitration’ does not conclusively relay intention to choose the ‘seat’; it must be substantiated by the conduct of the parties towards the same. Therefore, clauses must be read holistically to arrive at a conclusion. A stand-alone reading of the clause was insufficient for treating a ‘venue’ as the ‘seat’. Furthermore, the coordinate bench of SOMA JV case could not overrule the judgment rendered by the coordinate bench of the Hardy case.

    Conclusion

    The myriad of possible judicial interpretations determining the seat and venue of the arbitration still find a lack of unanimity on the concept. Therefore, parties should exercise caution in the drafting of such arbitration clauses in order to avoid any unnecessary deliberation on the same and clear any future ambiguity. The Courts in India have yet not provided a consistent clarification as to the question of seat versus venue. There still exists reluctance on the part of the courts to settle the conflicting opinions with regard to this question. The parties must ensure an express agreement, with regard to the seat of arbitration and to avoid the quagmire caused by the interchangeability of seat and venue. The Enercon and SOMA JV cases provide adequate tests however; the possibility of employing the test adopted in Hardy case inculcates chaos in the judicial process. The SOMA JV case tends to be more in line with the principles of party autonomy and therefore, should be lauded for its observations. The matter must be settled by a larger bench of the Supreme Court to reduce undue litigation on the issue, which it failed to do in the SOMA JV case.

  • Cross Border Demergers In India: Analysing the Legislative Intent

    Cross Border Demergers In India: Analysing the Legislative Intent

    By Abhishek Wadhawan and Devarsh Shah, second-year students at Gujarat national law university, Gandhinagar

    Conceptualising Demergers under Indian Laws

    A demerger is a type of restructuring strategy through which a single company gets divided into two or more entities and the resulting companies are registered as separate corporate entities under the law and function independently. However, neither the Companies Act, 1956 nor the Companies Act, 2013 (‘the Act’) define the term demerger.  Thus, before examining the idea of cross border demergers and their legality in India, it is necessary to analyse the status quo. Section 2(19AA) of the Income Tax Act, 1961 defines demerger in relation to companies as ‘a transfer by the demerged company of its one or more undertakings to any resulting company as per the scheme of arrangement under sections 391 to 394 of the Companies Act, 1956’. The Bombay High Court in Renuka Datla v. Dupahar Interfran Ltd. acknowledged the formal recognition of the definition of  demergers in Indian jurisprudence by its inclusion in the Income Tax Act and noted that the same are relevant to the Companies Act as well.

    To allow demergers in India, the Courts have often taken the aid of section 232(1)(b) of the Act that corresponds to the Companies Act, 1956 which clearly states that a scheme of arrangement may also propose to divide the undertaking among one or more companies.

    Dissecting the debate over cross-border demergers in India

    In 2017, the Ministry of Corporate Affairs had notified section 234 of the Act and also inserted Rule 25A in the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016 (Merger Rules) (‘Companies Rules, 2016’) to allow the cross-border mergers and amalgamations in India. While this solved the issues pertaining to cross border mergers, the debate over the legality of cross border demergers under the Indian laws is not yet settled. This debate has been further fuelled by the recent series of contrary decisions given by the National Company Law Tribunal of Ahmedabad (‘NCLT’). In the matter of Sun Pharmaceutical Industries Limited (2018) of 2018, (‘2018 Order’) the Bench allowed an application for an inbound cross border demerger by making reference to section 234(1) of the Act which specifies that the provisions of Chapter XV of the Act, dealing with Compromises, Arrangements, and Amalgamations, will apply to it mutatis mutandis unless otherwise provided. Thus, the scheme of arrangement as provided under section 232(1) of the 2013 Act can be read into it. It further noted that since an ‘arrangement’ includes a demerger, a cross border demerger was allowed by the Act. Reference was also made to Regulation 9 of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘TISPROI Regulations’) which provides that the Tribunal may allow a company subsequent to its scheme of merger or demerger to issue capital instruments to the shareholders of the existing company, even if they are residing outside India. Thus, the scheme for an inbound cross border demerger was allowed.

    Subsequently, in 2019, NCLT Ahmedabad (‘2019 Order’) took a completely opposite view of its aforementioned 2018 Order involving the same entity and held that cross border demergers are not allowed in India. In this matter, Sun Pharmaceutical Industries Limited had sought permission for the scheme of arrangement (demerger) from NCLT Ahmedabad, whereby it wanted its two specified investment undertakings to be transferred to its two wholly-owned subsidiaries incorporated in the Netherlands and the USA and hence had a feature of outbound cross border demerger arrangement.  While rejecting the petition, it was specifically noted by the Bench that cross border demergers are prohibited in India as there is no mention of the term ‘demerger’ in either section 234 of the 2013 Act or in the Rule 25A of the Companies Rules. Further, it also stressed upon the legislative intent to not permit cross border demergers in India as the draft FEMA (Cross Border Merger) Regulations, 2018 included the term demerger in the definition of ‘cross border merger’ but the same was removed in the final regulations as notified by the Reserve Bank of India (‘RBI’) which, according to the Tribunal, highlights the intent of the legislature and the RBI to exclude cross border demergers in India.

    Thus, through the two extremely contrary orders, the NCLT Ahmedabad on one hand sanctioned a scheme of arrangement that proposed an inbound cross border demerger and on the other hand, rejected an identical scheme that proposed an outbound cross border demerger. These contrasting decisions are based on different interpretations made by NCLT Ahmedabad on the basis of the legislative intent and accordingly, this conundrum can be solved only by the analysis of the true legislative intent in reference to cross border demergers in India.

    Analysing the true legislative intent

    The 2018 Order appraises Regulation 9 of TISPROI Regulations which deals with merger, demerger, or amalgamation of companies registered in India. The order recognizes that if the legislature had intended to disallow cross border mergers, it would not have been covered explicitly under the regulations. On the contrary, the 2019 Order of the NCLT absolutely ignores the 2017 Regulations while arriving at its conclusion.

    The 2019 Order asserted that the true legislative intention was to disallow cross border demerger of companies. It further justified this assertion by pointing out that though the draft FEMA (Cross Border Merger) Regulations, prepared in April 2017, included the word “demerger” in the definition of a merger, upon the notification in March 2018, they excluded the term ‘demerger’ and the definition remained restricted only to merger, amalgamation, and arrangement. This, according to the NCLT, was enough indication that cross border demergers were not permitted.

    In its order, the NCLT blatantly failed to appreciate the wide scope of the term ‘arrangement’. Section 19AA of Income Tax Act, 1961 explicitly mentions that demerger can be pursuant to a scheme of arrangement. Further, ‘arrangement’ as understood under section 232(1)(b) is inclusive of “whole or any part of the undertaking of any company proposed to be divided among and transferred to two or more companies”.  This implies assent to schemes of demerger as it supports an idea of a restructuring strategy that aims at dividing the undertaking, in whole or in part, between two or more companies. The argument is further strengthened by the fact that despite the absence of the term ‘demerger’ in  Chapter XV of the Act, domestic demergers have been allowed by various tribunals and courts under section 230 read with section 232 of the 2013 Act. Thus, the Courts have essentially read the legality of demerger as a process of restructuring even when it has not been explicitly recognised by the Legislature under the 2013 Act.

    Most importantly, the 2019 Order in paragraph 15 by itself mentioned that ‘arrangement’ is inclusive of the word demerger. The Tribunal’s reasoning that Regulation 2(iii) of the Cross-Border Regulations of 2018 does not include the term demerger explicitly and hence cross border demergers are not permitted in India is contrary to the inclusive and wide interpretation of the term  ‘arrangement’ by the Courts and Tribunals. Furthermore, section 234 of the 2013 Act stipulates that provisions of Chapter XV (which permit demergers) of the 2013 Act shall apply mutatis mutandis to cross border schemes of merger and amalgamations.

    Hence considering all the regulations and the broad ambit of provisions of merger and arrangement in the 2013 Act, it is difficult to assume that the legislature had an intention to prohibit cross border demergers.

    Conclusion

    The Companies Act 2013 neither expressly permits nor prohibits the cross-border demergers. However, Foreign Exchange Management (Cross Border Merger) Regulations, 2018, and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India), 2017 are supportive of the proposition that cross border demergers are permitted under Indian law.

    The narrow interpretation by the Tribunal in its 2019 Order is against the spirit of the progressive character of the 2013 Act. It seems that the Tribunal, in its 2019 Order, has erred in rejecting the petitioner’s proposal on the ground of lack of legislative intent. The tribunal’s reasoning that it cannot make law is undisputed but adopting a narrower approach by overlooking the law in its entirety is glaringly unfair and creates regulatory uncertainty for companies.

    In essence, though the permissibility of allowing cross border demergers in India can be made out through a proper interpretation of section 232(1)(b) read with section 234 of the Act, the entire debate on this matter can be settled only by a clarification from the Legislature or a decision of the Appellate Tribunal in this regard.

  • Google, Don’t Be Evil: Forecasting Antitrust Issues in Gmail-Meet Integration

    Google, Don’t Be Evil: Forecasting Antitrust Issues in Gmail-Meet Integration

    By Tilak Dangi, a fourth-year student at NALSAR, Hyderabad

    The lockdown has seen rapid growth in the use of video conferencing platforms. Data shows that Zoom and Skype have noted the highest increase of 185% and 100% respectively in Daily Active Users in three months in India. In the race to capture the market of virtual video conferencing applications, Google has been unable to capture a large market share so far. However, it does not want to stay behind. Consequently, Google has recently announced deeper integration between Gmail on mobile and Google Meet (‘Meet’) video conferencing service. The intention behind the integration is clear: Meet wants to tackle the market share among the technology giants for the market of virtual video conferencing applications.

    This article will analyse Google’s integration within the parameters of section 4(2)(d) & section 4(2)(e) of the Competition Act, 2002 (‘the Act’). Section 4(2)(d) prohibits one entity from concluding contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. Section 4(2)(e) prohibits entity using its dominant position in one relevant market to enter into or protect, other relevant markets. The author asserts that Google is using its large consumer base of e-mail users to enter into the video conferencing market.

    Relevant Market

    Section 4 of the Act prevents any dominant entity from abusing its dominant position in various ways. Section 4(2)(e) of the Act mentions two relevant markets:

    1. The market where the entity is in a dominant position.
    2. The market which the same entity aims to enter into or protect.

    However, both these relevant markets must be distinct from each other. Section 4(2)(d) of the Act mentions two different products which require to establish two distinct relevant markets:

    1. The market of the primary product; and
    2. The market of the supplementary product which, by their nature have no connection with the primary product.

    Section 19(7) of the Act mentions the factors to determine the relevant market. In the present fact scenario, one relevant product market would be of e-mail services and another would be of virtual video conferencing. That being said, Google may argue that both the markets are the same since both provide for online communication. Therefore, the determination of demand-side and supply-side substitutability of both the product is required to establish that both the products are not substitutes for each other.

    • Supply-side substitutability

    The services provided by Gmail are emailing services that users can access through the web and using third-party programs that synchronize email content through Post Officer Protocol and Internet Message Access Protocol. On the other hand, Meet provides video meeting platforms wherein 100 users can connect. The programs through which both of the applications run are different and therefore, one product cannot substitute the other because of a change in price, for instance.

    • Demand-side substitutability

    E-mail provides a consumer with services such as sending and receiving messages electronically. Additionally, the sender and receiver do not need to be online at the same time. However, Meet provides a consumer with video conferencing services similar to face-to-face communication between two or more people while all consumers are required to be online at the same time. Thus, e-mail is a textual conversation between two or more members over the internet while video conferencing is a real-time video conversation over the internet. Both the applications serve a different purpose and therefore, the consumers will not reasonably switch to the other commodity if the price of one commodity increases or decreases.

    Therefore, considering factors mentioned under section 19(7) of the Act, both the products are not supply-side or demand-side substitutable in the relevant geographic market of India.

    Position of Dominance

    While determining the position of dominance when an allegation is made under sections 4(2)(d) and 4(2)(e) of the Act, it is not necessary for a product to be dominant in the second relevant market also. As held in the National Stock Exchange of India v. Competition Commission of India (‘NSE case’), it is enough even if the enterprise wishes to use its strength in the market of its dominance to enter into or to protect itself in the other market. Therefore, the issue before the CCI is going to be: whether Google is in a dominant position in the market of e-mail services in India?

    Section 19(4) of the Act prescribes various factors that the CCI may need to consider in assessing a dominant position, such as market share, size, resources, competitors, economic power, commercial advantages, vertical integration, and etc.

    While the data of the number of users in India of Gmail is not publicly available, certain factors can be used to attribute the dominance of Google. Gmail enjoys 43% of market share worldwide followed by Apple’s iPhone having 27% and Apple Mail of 9% and 7 more competitors. On October 26, 2018, Gmail stated that it has over 1.5 billion active users through a tweet. In 2011, Gmail’s market penetration in India stood at 62%, the highest in the world as per digital marketing intelligence firm Comscore. Google has certain advantages that its product provides; it gives more than 15 gigabytes of storage, compared to the free version of Yahoo! Mail and MSN Hotmail that only give 1GB and 250MB respectively. Unlike its competitors, all of whom attempt to shove paid premium services with premium features, Gmail offers all its features to all its users without any such charges. Moreover, Gmail has vertical integration with Duo, YouTube, Photos, Google web platforms where Google is already declared in the dominant position. Considering the size of the subscribers of Gmail, the small size of its competitors, the technological and economic advantage it has; the dominance can be safely attributable to Google in the relevant market.

    Violation of Section 4(2)(d)

    For proving the case under section 4(2)(d) of the Act, the CCI after establishing dominance has to determine two factors:

    1. Sufficient market power; and
    2. An element of coercion i.e., the customer is coerced to take or purchase a second product if she wishes to buy a particular product.

    In the case of Sonam Sharma v. Apple Inc, the CCI noted that price bundling is a strategy whereby a seller bundles together many different good items for sale and offers the entire bundle at a single price.

    In the present factual scenario, if the user intends to install or update Gmail to use the email services, the user by default will be availing Meet even if the user does not require the same. In essence, Meet will come along with Gmail by default. A consumer who only intends to use Gmail will be arm-twisted into installing Meet also even when the user does not want or require it. Secondly, if the user only wants to install Meet, it requires Gmail ID, hence mandating someone to have a Gmail ID to use Meet.

    The situation is very similar to that of United States of America v. Microsoft Corporation, wherein a US District Court held Microsoft in violation of competition law as it integrated its operating system and web browser.

    Violation of section 4(2)(e)

    For establishing the case under section 4(2)(e) of the Act, the CCI after establishing dominance has to determine two questions:

    1. Whether Google enjoyed advantages in the video conferencing market by virtue of its dominance in the e-mail market?
    2. Whether Google customers in the e-mail market were potential customers in the video conferencing market?

    For any new application, creating a market share is a tough task. In a market where there are established players, competing merely based on features and quality is in itself not enough, but the competitor is required to increase knowledge about its product to achieve the consumers in the market. The Gmail application is already downloaded in all the Android phones in India due to its prior contract. Therefore, Google seems to increase the consumer base of Meet through Gmail’s consumers who are potential customers of the virtual video conferencing market and thus abusing its dominance.

    Foisting Meet into Gmail, while it functionally makes no sense whatsoever as the services of Gmail are different from that of Meet, is what Google can do to raise awareness of Meet to increase its market share, compete with rivals of virtual video conferencing market through existing consumer base of Gmail market.

    Rule of Reason Approach (Anti-competitive effects)

    The CCI has started following the rule of reason approach i.e., establishing an abuse of dominance by determining anti-competitive effects of the conduct. The question then arises here is: are there are any anti-competitive effects in the other market, i.e. the market of virtual video conferencing?

    Google may argue that since Meet is only an additional feature in Gmail, the same by its very nature does not force consumers to switch to Meet and does not restrict them to use any other video conferencing applications, therefore neither creating any entry barriers for new entrants nor driving out existing competitors out of the market. However, product bundling and entering another market through the dominant market may have following anti-competitive effects:

    1. The bundling of both the products may shift the consumer base of existing competitors who only deal within the video conferencing market and therefore, threatens to eliminate them from the market.
    2. The conduct may create entry barriers for new entities to solely enter into the market of video conferencing.
    3. The exit of the existing competitors and entry barriers for new entrants will also harm consumers as they might end up having no more choices within the product. Moreover, bundling is per se coercive for consumers who do not want both the products.

    Concluding Remarks

    The European Commission has previously in the European Union v. Google Android, declared that Google had been using product bundling as a strategy to capture market share in new markets. Google is already facing antitrust issues in various domains; such integrations would bring to light more such issues as the intention behind the same is clear and is not a fair play in the market. There are not many cases under section 4(2)(e) of the Act in India. The COMPAT in the NSE case was decided only based on the absence of two distinct markets. It thereby did not touch upon the next questions. Hence, it would be interesting to see how the CCI deals with such matters if the allegations of the same are filed.

    (The author thanks R. Kavipriyan and the Editors of the Blog for the inputs on this article.)

  • While IBC Takes a Nap, Could Scheme of Arrangement Rise to the Occasion?

    While IBC Takes a Nap, Could Scheme of Arrangement Rise to the Occasion?

    By Harsh Kumra and Divyanshi SrivastavA, fourth-year students at amity law school, Delhi

    The ongoing pandemic has resulted in a situation that the world has never seen before. While its cause is still unknown to us, its effect is not. Reports suggest that the global economy was undergoing turbulence since 2019, and now, in the wake of COVID-19, the risk of global recession is high.

    To this end, the Indian government has taken a number of policy reforms to limit the economic impact of this pandemic. One of the key reforms has been to put Insolvency and Bankruptcy Code, 2016 (‘IBC’) in abeyance via the IBC (Amendment) Ordinance, 2020, by suspending Sections 7, 9 and 10 for a period of six months to one year. Given such circumstances, it is only obvious that the companies will need an alternative to restructure their debts and make their way out of the distress.

    Debt restructuring laws have been in existence for more than a century now. In this respect, Section 230 of the Companies Act, 2013 (‘Act’) prescribes for a scheme of arrangement (‘SOA’) or compromise between the company and its creditors or between the company and its members. This provision was part of its preceding Acts of 1913 and 1956 as well; however, the process failed to meet the crucial requirements of a rescue mechanism, as it was a protracted procedure, too expensive and complicated to be effective where speed and urgency were required.1

    Resultantly, to address these problems and to change the regime of insolvency laws, IBC was enacted in the year 2016. Although it superseded the debt recovery mechanism under the Companies Act, it is essential to keep in mind that Section 230 still remains an important tool in the hands of companies, its creditors and other members.

    Interplay-Section 230 and IBC

    The primary focus of IBC – a beneficial legislation, since its birth, has been to revive and continue the corporate debtor,2 and therefore, during the suspension of certain provisions of the Code, its alternative mechanisms ought to achieve the same objective.

    The Hon’ble NCLAT, in a number of cases such as S.C. Sekaran v. Amit Gupta, directed the liquidator appointed under the IBC, to take steps in terms of Section 230 of the Act for the revival of the corporate debtor before proceeding with the liquidation of the company.

    Further, in the case of Y. Shivram Prasad v. S. Dhanpal, the Hon’ble NCLAT held that the SOA should be in consonance with the statement and object of IBC. Further, it was highlighted that the Adjudicating Authority can play a dual role, one as an Adjudicating Authority in the matter of liquidation and the other, as a Tribunal for passing orders under Section 230 of the Act.

    Key Differences

    To understand the utility of Section 230 during the suspension of IBC, it is important to understand the key differences between the two mechanisms.  SOA, being one of the oldest and worldly renowned debt recovery mechanisms, has primarily been used in large and complex transactions. It is an important tool at the behest of a company, while on the other hand, IBC is a creditor driven process. Wherein Section 230 can be used both in cases of solvent and insolvent companies, Corporate Insolvency Resolution Process (‘CIRP’) under IBC can be triggered only when there is a debt and subsequently a default of the same.

    Firstly, IBC provides that the Adjudicating Authority shall declare a moratorium after admitting an application under Sections 7, 9 or 10. Where, Section 14 of the IBC highlights moratorium as mandatory, automatic and of wide nature, the structure under Section 230 of the Act, excludes any moratorium provision. Although, under its erstwhile Act of 1956, Section 391(6) provided for a court discretionary moratorium but even so, its ambit was not as wide as that under the IBC. Nevertheless, the NCLT has inherent powers under Rule 11 of the NCLT Rules, 2016 to make such orders as may be necessary for meeting the ends of justice. This means that the NCLT may impose a moratorium to give proper effect to the Section 230 mechanism. In the case of NIU Pulp and Paper Industries Pvt. Ltd. v. M/s. Roxcel Trading GMBH, the Hon’ble NCLAT on the basis of its reasoning that “the Tribunal can make any such order as may be necessary for meeting the ends of justice or to prevent abuse of the process or the Tribunal,” stated that the NCLT has inherent powers to impose moratorium even before the start of CIRP.

    Secondly, under the IBC, Financial Creditors play a significant role throughout the CIRP and in approving the resolution plan. The committee of creditors comprises only of financial creditors and it is only after a resolution plan gets 66% votes that it gets approved.  On the other hand, SOA incorporates a more inclusive approach, where, Section 230(6) requires consent of every class of creditors, wherein each class is required to approve the scheme separately by the requisite majority of 75%.

    Thirdly, as to who can propose the schemes, as per Section 230 of the Act, the liquidator, a creditor, or class of creditors, or a member, or class of members can propose a scheme. Further, once the scheme gets the sanction of the court, it becomes binding on the company and all its members, even those who voted against the scheme (Re: ITW SignodgeIndia Ltd.). Under the IBC on the other hand, a resolution applicant can submit a resolution plan, for the insolvency resolution of the corporate debtor.

    In this respect, Section 29A was introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2017 to make certain persons ineligible to submit a resolution plan. Consequently, a promoter of the corporate debtor is barred from being a resolution applicant. However there is no such restriction on persons proposing a scheme of compromise or arrangement, resulting to ample amount of debate on the question of applicability of Section 29A of the IBC on SOA.

    Though NCLAT had given two contradicting decisions in respect of applicability of Section 29A to SOA, (R. Anil Bafna v. Madhu Desikan; Jindal Steel and Power Limited v. Arun Kumar Jagatramka) the debate was settled in January, 2020, through the amendment made to Regulation 2B of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. A proviso was added to the effect that a person ineligible under Section 29A shall not be a party to a compromise or arrangement under Section 230 of the Act.

    Fourthly, where, under the IBC, once a company is liquidated, Section 53 prescribes a ‘waterfall mechanism’ according to which the proceeds from the sale of liquidation assets of the company are distributed in the prescribed order. It must be noted that the same is not applicable to SOA. It follows a different approach in terms of distribution of proceeds. There is no straitjacket formula under the Act for this distribution, however it is upon the court to check if the distribution is fair and equitable and that creditors have been treated on an equal footing (Re: Spartek Ceramics India Ltd.).

    Lastly, Section 31 of the IBC has circumscribed the judicial review by NCLT only to the approved resolution plans. The scope of judicial interference is restricted to the assessment of factors under Section 30(2), which requires the plan to conform to the prescribed criteria. Further, in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Supreme Court clarified that the commercial decisions taken by the Committee of Creditors are outside the scope of judicial interference. 

    Contrary to this, the NCLT has wide powers in terms of SOA. The scheme can be made binding on the creditors only after it receives the sanction of the court. In the cases of Miheer H. Mafatlal v. Mafatlal Industries Ltd. & Re: Spartek Ceramics India Ltd., it was held that the court has extensive powers to see if the scheme is just and reasonable.

    The way forward

    The Indian judiciary and the legislature have played an important role in appreciating the IBC. If appropriate steps are not taken at this moment, then all the hard work done over the years can go in vain. SOA has been a well-known restructuring instrument globally, and with IBC under suspension, making proper use of Section 230 would undoubtedly be necessary.

    Although, the process of SOA varies from the process given under IBC, with the incorporation of key changes in the provision, it can certainly create an IBC like outcome. This provision within the Act being a more collective process and predicated upon the “debtor-in-possession” regime, would also provide the creditors, the opportunity to work with the already existing management of the company.

    However, the process also being more complicated in terms of creditor approval would require certain relaxations and/ or alterations in that respect. In such a case, an important alteration within the schemes would be the introduction of an automatic interim moratorium, like that under IBC, to provide a relaxation period to the company. This interim moratorium could be further confirmed by the NCLT once the tribunal is satisfied with the schemes brought in.  Moreover, since SOA is by and large a judicially driven process; efforts must be made, to make it more voluntary in nature, as this will help in solving the issues of prolonged delay that has often been witnessed and will also reduce the burden on judiciary.

    Additionally, this is also the right time to introduce some basic tweaks in Section 29A of the IBC, such as adopting a middle ground, wherein, the promoter could be permitted to bid for the corporate debtor but with sufficient safeguards that also protect the interests of the creditors.

    These changes can play a significant role in the debt restructuring mechanism and in the revival of Section 230 of the Act, making it a viable alternative to IBC.