The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • 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 Although it superseded the debt recovery mechanism under the Companies Act, it is essential to keep in mind that Section 230 still remains an important tool in the hands of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.

  • Anti-competitive Probes Against E-commerce Platforms: A Shift in Regulatory Approach

    Anti-competitive Probes Against E-commerce Platforms: A Shift in Regulatory Approach

    By Sajith Anjickal, a third-year Student at NLSIU, Bangalore

    E-commerce platforms have significantly changed the way in which businesses are conducted. The perceived benefits of e-commerce markets continue to draw in more and more buyers and sellers to transact on online platforms. This change in market dynamics has, however, begun to attract the scrutiny of competition regulators across the world. In certain jurisdictions, like the European Union, reports have been published examining the opportunities and challenges that online markets may present for competition. Regulators in some jurisdictions have also initiated detailed anti-competitive probes against major online platforms.

    Earlier this year, the Competition Commission of India (‘Commission’) also published a report identifying certain competition issues/concerns in e-commerce markets. Subsequently, the Commission, in In Re: Delhi Vyapar Mahasangh and Flipkart Internet Pvt Ltd & Anr, ordered an investigation against Amazon and Flipkart (Opposite Parties, ‘OPs’) under section 26(1) of the Competition Act, 2002 (‘Act’) for alleged violation of section 3(1) read with section 3(4) of the Act. This was based on the information that the OPs were allegedly involved in anti-competitive practices such as exclusive agreements, excessive discounts, preferred sellers, and preferential listings. In response, the OPs approached the Karnataka High Court by way of writ petition challenging the Commission’s order. The Court granted an interim stay against the order on multiple grounds, including the Commission’s failure to form a prima facie opinion as to the existence of the alleged anti-competitive agreements. In this piece, I shall demonstrate that the present order of the Commission marks a shift in its regulatory approach towards e-commerce platforms.

    Departure from Precedents

    With respect to the procedure leading up to the order under section 26(1), it appears that the Commission did not conduct a preliminary conference with the parties. While admittedly the law does not mandate a preliminary hearing to be held, such an opportunity is often provided to parties by the Commission as a matter of practice/norm. In fact, the Commission’s decision to not hold a preliminary hearing is particularly surprising given that it has previously, in similar cases such as In Re: All India Online Vendors Association and Flipkart India Pvt Ltd & Anr (‘AIOVA’), engaged with e-commerce platforms before passing orders under section 26 of the Act. A preliminary conference in the present case would have made the Commission appreciate the issues from the viewpoint of the e-commerce platforms as well. This, in turn, would have led the Commission to consider certain facts capable of affecting its decision to order the investigation. Some of these facts also formed the grounds on which the Karnataka High Court granted the interim stay. For instance, the Commission failed to take note of the fact that the OPs were being investigated by the Enforcement Directorate (‘ED’) under the Foreign Exchange Management Act, 1999. This ongoing investigation becomes relevant in view of the ruling of the Supreme Court in Competition Commission of India v. Bharti Airtel Ltd & Ors. The Supreme Court, in the context of jurisdictional conflicts, held that the jurisdiction of the Commission would be deferred until the specialised regulator takes requisite actions at first instance. Therefore, consideration of the ongoing investigation would have required the Commission to defer its jurisdiction until there are findings returned by the ED.

    In directing the investigation in the present order, the Commission observed that exclusive agreements, together with discounts and preferential listing, may have an adverse effect on competition. While making this observation, however, the Commission did not address or acknowledge its observations in prior similar cases. For instance, in In Re: Mohit Manglani and M/S Flipkart India Pvt Ltd & Ors, the informant had alleged that exclusive agreements between manufacturers/suppliers of goods and e-commerce platforms were anti-competitive. The Commission, however, dismissed this allegation noting that such agreements are unlikely to create any barriers to entry or adversely affect existing players. It also went on to highlight the benefits accrued to the consumers by virtue of online distribution platforms. Further, as regards discounting practices, online platforms have often contended that e-commerce is a comparatively nascent mode of retail in India and thus, offering products at discounted prices is essential to attract and retain consumers. This contention had found support from the Commission in In Re: Ashish Ahuja and Snapdeal.com & Anr, wherein it noted that special deals and discounts help e-commerce platforms grow. The premise of the contention, i.e., the nascency of the e-commerce marketplace, was even endorsed recently by the Commission in the AIOVA case. Interestingly, in the AIOVA case, the Commission, highlighting the consumer benefits, efficiencies, and growth potential of the e-commerce model, also observed that e-commerce markets must be regulated in a manner that does not inhibit innovation. Given these prior observations, the Commission’s contrary stance in the present order is telling.

    An Overall Shift

    The contrary stance in the present order must be viewed in the backdrop of the Commission’s recent orders in In Re: FHRAI and MMT Pvt Ltd & Ors and In Re: Rubtub Solutions Pvt Ltd and MMT Pvt Ltd & Anr. The Commission clubbed these cases and ordered an investigation into allegations regarding the preferential nature of the agreement between MMT-Go and OYO. It also directed an investigation into certain practices such as excessive discounts, noting that the combination of MMT and GoIbibo resulted in dominance in the relevant market. This denotes a significant departure from previous orders of the Commission. For instance, while approving the MMT-Go combination back in 2017, the Commission observed that the proposed combination was not likely to adversely affect competition. Additionally, in In Re: RKG Hospitalities Pvt Ltd and Oravel Stays Pvt Ltd, the Commission, citing the nascent stage of the relevant market, had rejected the charge of abuse of dominance against OYO. It is therefore apparent that the Commission has not had a uniform approach in scrutinizing allegations against e-commerce platforms.

    Conclusion

    A precedent-based assessment of the Commission’s recent orders (including the present order) indicates a notable shift in its approach towards regulating online platforms. The Commission previously seemed to follow a mild approach while examining the conduct/practices of online platforms. However, considering the market study and the recent orders, it appears that the Commission is moving towards an approach that is being increasingly followed globally, i.e., greater and aggressive regulation of online players. One hopes that the Commission channels its newfound approach into establishing competition jurisprudence that strikes a balance between various interests.

  • UK Parallel to India: Inspiration for Improvement in Insolvency Laws

    UK Parallel to India: Inspiration for Improvement in Insolvency Laws

    BY Pallavi Mishra, A FOURTH-YEAR STUDENT AT HNLU, RAIPUR

    Amidst the Covid-19 pandemic, companies have been facing an increased threat of undergoing an insolvency resolution process due to the default in repayment of loans as well as failure to abide by other statutory demands for many consecutive months now. In light of this, governments throughout the world have introduced changes in their insolvency laws to relieve companies from the stress of liquidation. The author in this article lays down the key measures taken by the United Kingdom (‘UK’) government, parallel to the status in India. It suggests the need to introduce long-term changes in the Insolvency and Bankruptcy Code which extends beyond the Covid-19 situation.

    UK Regime:

    To overcome the hue and cry surrounding t the UK Government has recently enacted the Corporate Insolvency and Governance Bill as a recovery attempt for the survival of the companies which in turn, directly impacts the employment market. This approach towards a debtor-friendly regime consists of both temporary and permanent measures.

    1. Autonomous moratorium period

    The bill proposes an autonomous moratorium period, which gets triggered not only upon the initiation of the insolvency process but also before such formal commencement. This will provide space for giving effect to the restructuring proposals which a corporate debtor may find feasible for getting new credit influx into the company. The intent behind this is to give a ‘break’ to the company from the continuous piling of monthly loans leading to an increment in the claims of the creditors. As of now, 20 days of initial moratorium has been suggested which may be extended further for another 20 days by the management of the company. The directors shall remain in control of the company during this period. However, similar to an administrator, a qualified insolvency practitioner shall be appointed as the ‘monitor’ to overlook the entire process.  While this provision gives relaxation to the loans incurred prior to the moratorium, the loans incurred during the moratorium shall remain payable after 20 days, or such extension as granted.

    1. Cross-clam down provision

    Further, the bill seeks to introduce cross-class clam down provision. This provision has its origin from Chapter 11 of the US Bankruptcy Code. In the simplest sense, it allows for the implementation of a restructuring plan despite the fact that some creditors may have expressed dissent against the provision. The provision has been meticulously enacted – the proposal for restructuring has to be submitted before the court. The court shall then direct the convening of a meeting of creditors who will vote on the plan. The threshold for approval of the plan has been kept at 75% and binding on both secured and unsecured creditors. The court will assess the alternatives, and the reasons for dissent, and may “clam-down” the dissenting votes if it is seen that the creditors may not be worse-off than if such restructuring plan was not approved. The restructuring plan must provide a “better alternative” than the option of liquidation or insolvency for every class of creditors.

    1. Demands for winding up petitions

    If any petition for winding up of a company was filed between the months of April and June (“relevant period”), pursuant to the non-fulfillment of statutory demands, such petitions shall not be given effect. It will be deemed that the corporate debtor underwent financial stress due to the Covid-19 pandemic, resulting in failure of its obligations under the statute. However, this has not been imposed as a blanket ban; meaning that if a creditor is able to rely on the balance sheets, accounts as well as the prior records to show that the company would have still undergone the insolvency process irrespective of the Covid-19 pandemic, then such winding-up petitions shall be entertained by the court as prescribed. This has been introduced as a temporary measure.

    1. Relaxation on the personal liability of directors

    The threats of personal liability on a director arising from indulgence in any wrongful trading have also been relaxed.  This is a temporary measure curbing the rights of the liquidators to take any action against the directors who continued to trade during the relevant period despite the director’s knowledge of the company’s position with respect to its future prospects. The intent is to reduce the personal liability of the directors if later the company is to face liquidation due to any liability resulting within the relevant period. However, the directors will continue to have a deemed responsibility to act in the best interests of the company. Provisions with respect to fraudulent trading and preferential transactions shall also continue to have an effect.

    Indian Regime

    While the above provisions have been introduced in the UK, parallel to these, India too has enacted an array of amendments including the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. The main changes include suspension on filing of insolvency proceedings for a year as well as raise in the threshold of default to Rs. 1 Crore. While this announcement has come as a rescue call for the corporate borrowers, the creditors, lenders and guarantors will definitely have to find other solutions to overcome the delay in loan repayment. The author believes that the insolvency regime in India requires long term changes not just limited to the effects of the present circumstances.

    This quest for an alternative is also essential to reduce the backlog of cases and burden upon the Adjudicating Authority once the abeyance of the IBC is over.

    1. Pre-Packaged Insolvency Resolution Process

    To this effect, the author believes that an alternate as well as a complementary  mechanism to the Corporate Insolvency Resolution Process (‘CIRP‘) is a Pre-Packaged Insolvency Resolution Process (‘PPIRP‘) which allows for a similar outcome while leading to the achievement in a much cost-effective, simplified and a shortened manner.

    A unique benefit of the PPIRP is that it allows for a pre-planned arrangement of assets with an objective of relieving stress upon the company much before the default has actually accrued. In fact, in some jurisdictions, the company is allowed to manage its operations throughout this process and even after the default has occurred.

    The implementation of the IBC, though has shown positive results, has not particularly led to a smooth process for approval of the resolution plans. As of January 31, 2020, 3455 cases were admitted under the CIRP. Of these, only 265 could get a resolution plan approved, while 826 of them went into liquidation.  In 2019, the World Bank had put India at 52nd position in resolving insolvency in the Ease of Doing Business rankings and overall 63rd position in the Ease of Doing Business report of 2020. As far as recovery is concerned, India stands at 5%, compared to an average of 20% in the developed economies.

    Within the corporate arena, liquidation poses a major threat to any company but unfortunately is the automatic result arising out of a failure of the CIRP. To combat this issue, the PPIRP provides an additional level of protection to the corporate debtors. It is proposed that the PPIRP be introduced in a manner wherein the creditors are mandated to initiate it first. Only upon its failure should they proceed for filing of the CIRP before the Adjudicating Authority. This will allow for a caveat to introduce important changes to the plan in case it fails to get adequate votes or approval by the Adjudicating Authority at the PPIRP stage. It will also stand as a safeguard against liquidation especially in the Micro, Small and Medium Enterprises (MSMEs) wherein there is an acute paucity of investors and liquidation in fact poses a major concern. Another incentive for the creditors to indulge in a PPIRP rather than the traditional CIRP is to avoid the usual media coverage, defamation and elongated harm which is caused to the reputation of the company in a CIRP.

    A PPIRP is a viable option even through the eyes of company law as it gives a negotiating table for the formulation of lucrative proposals to the creditors and the corporate debtor. Most importantly, this out-of-court mechanism may be considered to be a “peaceful method of settling the dispute.”

    1. Other alternatives to suspension of the IBC

    The Government has inserted Section 10A prohibiting the commencement of CIRP for the defaults made by the company post March 25, 2020 for up to a year. This provision lacks enough criteria to determine which companies have actually defaulted in their payments due to Covid-19. The provision may be misused by willful defaulters in the absence of guidelines to differentiate companies who defaulted during that period but not as a result of the pandemic.

    Conclusion

    By now, it is definitely understood that the effects of the pandemic will have a huge impact on the economy and employment sector. Keeping this in view, the Government should take steps forward to enact permanent measures which will serve as a balanced approach between the creditors and the corporate debtors in the long run. PPIRP, clear categorisation of companies facing financial distress, need to introduce alternatives to suspension of the CIRP are some of the inspiration points from the UK Corporate Insolvency and Governance Bill.

  • Host States: The Perpetual Respondents in Investment Arbitration?

    Host States: The Perpetual Respondents in Investment Arbitration?

    By Vaidehi Balvally, a fourth-year student at HNLU, Raipur

    Here is what international investment arbitrations conventionally look like: a company contracts with a country to invest in mining, power plants, electricity, waste management, or other similar sectors. Apart from this investor-state contract, there exists a state-state international investment agreement between the home state of the company and the host state of investment, typically a Bilateral Investment Treaty (‘BIT’). This BIT guarantees investors of both states procedural rights (e.g. the right to an investment claim) and substantive rights (e.g. right against expropriation by host state). Upon breach of such rights under the contract or the BIT, a claimant-company can opt to institute an investment arbitration against the respondent-host state. 

    Off-balance access to the filing of claims

    In response to the filing of an investment claim, host states have often chosen to file counter-claims (albeit unsuccessfully, barring a few exceptions). However, it is exceptionally infrequent for host states to institute claims independently before investment tribunals. International Center for Settlement of Investment Disputes (‘ICSID‘) data exhibits that host states have largely either turned to domestic dispute resolution or worse, traded human rights for investment-friendliness (as in the case of Urbaser v. Argentina). 

    Only five cases under ICSID have moved past the jurisdictional and investor-consent barrier: Gabon’s proceedings against Société Serete S.A. which ended in a settlement (1976) (i); Tanzania’s case against a partly-owned Malaysian corporation (1998) (ii); an Indonesian province’s proceedings which failed since the province could not represent the host state (2007) (iii); Equatorial Guinea’s conciliation proceedings with CMS, which failed in coming to a settlement (2012) (iv); and a Rwandan government company’s case against a London-based power plant operator which is pending (2018) (v). 

    This asymmetry in filing claims before investment tribunals is not without good reason. Investment arbitration was created to protect foreign investment, and in turn, the investors from unbridled use of sovereign power by host states. Consequently, BITs rarely accord investors with substantive obligations, similar to third-party beneficiaries in contracts, and if host states do premise their substantive cause of action upon the BIT, the BIT either is silent or confers incomplete procedural rights to bring forth a claim. 

    It is pertinent to note that all former claimant-state cases have only been based on rights conferred to host states under the investor-state contract. This implies that in the absence of BIT-based rights to investment arbitration, inequitable contracts will continue to remain unaddressed, with a change in BIT structure offering a much-needed resolution forum. 

    Possible solutions

    UK’s BITs are oft-cited as including a model clause which not only confers upon the host state a right to initiate arbitration but also establishes investor-state privity by drafting in the investor’s consent for all disputes brought forth the host state. 

    However, even with a procedural right to proceed to arbitration, most BITs are silent on substantive rights for host states. A solution adopted when the investor suffers only from contractual but not treaty-based breaches, is the use of an ‘umbrella clause’ in BITs which encompasses rights conferred upon investors in an investor-state contract into the larger umbrella of the BIT. Thus, an investor can sue for contractual breach claims in investment arbitration, the jurisdiction of which was established under the BIT, followed in Noble Ventures v. Romania, SGS v. Philippines, and Eureko v. Poland amongst others. Drawing a parallel from this solution, a reverse umbrella clause would allow the institution of investment arbitration by host states in case of a contractual breach, and was similarly used in Roussalis v. Romania to allow filing of counterclaims.  

    Breeding good governance

    After establishing how host states could be equipped with claimant’s rights, prudence demands a look at why host states should begin relying on investment arbitration more than they historically have:

    • Often, states dependent on foreign investment are hosts to judicial systems which do not fulfill rule-of-law requirements, while investment arbitration is systemically more impartial than domestic courts of host/home states. Moreover, it affords host states an international enforcement mechanism, the likes of which are unavailable for locally adjudicated decisions. 
    • Developing states of the global south are especially vulnerable to exploitation by investors with an economic prowess that parallels their whole economies. Conversely, if the judicial systems are entrenched with judicial corruption, host states may want to take a lesson from the Lago Agrio case to preserve their reputation as investment-friendly states by approaching the international investment tribunals in the first place. 
    • The adjudicatory mechanism of the host states may also be exceptionally drawn-out or unreliable, which may eventually lead a party to file for investment claims with a tribunal. To elaborate India was found guilty of a BIT breach for being unable to process investor claims locally for over nine years in White Industries v. India.
    • Another advantage for host states may be the unavailability of appeal against investment arbitration awards except to have them annulled, as opposed to the layered domestic judicial systems. Accounting for the standard of care exercised by tribunals in ensuring that it reaches the most equitable decisions, the time and economic resources invested by parties of the process are significantly lower, especially if the claimant believes it has a strong case. 
    • Even if none of these ring true for a host state, foreign investors commonly operate only out of a domestic investment vehicle in the host state, and enforcement of a decision extra-territorially may not be an option. Alternatively, extra-territorial investments may be of significance in a dispute, which lie outside domestic jurisdiction.

    Conclusion

    The number of cases that were filed under ICSID by host states but failed, if we include state-owned enterprises, have tripled in the past decade. With 70% of all investment arbitration favouring investors in 2018, the resultant backlash of host states against international investment arbitration is understandable. The reasons for this lack of trust by host states or their subsequent failure in investment arbitration has its roots in state-state BIT and investor-state contract construction, which can be remedied. 

    The drafters of the ICSID Convention were wary of investment arbitration turning into a mechanism akin to the domestic judicial review of regulatory measures and appended a report endorsing equality of access to investment arbitration to investors and host states. In contract to commercial arbitration where parties are private actors, host states intervene to secure serious human rights for its populace (water, electricity, labour rights). If this discourse of delegitimisation prevails, conduct incompatible with public welfare will lose its international voice. 

  • SEBI’s Approved Framework for Regulatory Sandboxes: Going the Right Direction?

    SEBI’s Approved Framework for Regulatory Sandboxes: Going the Right Direction?

    by aabha dixit, a fourth-year student at hnlu, raipur

    On June 5, 2020, the Securities Exchange Board of India (“SEBI”) rolled out the final framework enabling regulatory sandboxes for FinTech companies, after introducing draft mechanisms earlier last year – ‘Framework for Innovation Sandbox’ issued on 20 May, 2019 and the ‘Discussion Paper on Framework for Regulatory Sandbox’ issued on 28 May, 2019 (“Discussion Paper”). The framework is expected to provide a time-bound structure to mitigate regulatory uncertainty around new FinTech products.

    The concept of a regulatory sandbox

    The concept of a regulatory sandbox is a close-ended idea that allows FinTech companies to test disruptive technological products in a closed and controlled environment with limited regulatory relaxations. The need for such experimentation seems to arise from two evident challenges – firstly, the lack of regulations or inapplicability of existing regulations to the innovation and secondly, the trust deficit in the market to depend upon experimental FinTech products. The creation of a regulatory sandbox allows testing on innovative FinTech products in a strictly controlled environment.  Globally, over 20 other jurisdictions have successfully introduced sandboxes as a way of gradually integrating new financial innovations into the mainstream market, including the UK, Australia, Singapore etc. In the Indian scenario, the Reserve Bank of India (“RBI”) and the Insurance Regulatory and Development Authority of India (“IRDAI”) have both released guidelines for enabling regulatory sandboxes.

    SEBI’s framework for Regulatory Sandboxes

    SEBI’s framework for Regulatory Sandboxes (“Framework”) has strict eligibility criteria requiring genuineness of innovation, the need for live testing on real customers and relaxation of existing regulations. It also requires the participants to outline benefits for investors and/or the securities market and provide for a risk management system to control any potential threats to users. Further, the Framework mandates data privacy and disclosure of all possible risks to participating consumers along with setting up of a complaint redressal mechanism.

    Changes in the final Framework on Regulatory Sandboxes vis-à-vis the Discussion Paper

    The Framework extends eligibility for testing in the regulatory sandbox to all entities registered under Section 12 of the SEBI Act, 1992 either on its own or through a FinTech firm. While the Discussion Paper included the scope for SEBI to consider admitting FinTech start-ups, firms and other entities not regulated by it to the sandbox process independently, the same has not been adopted in the Framework. While this limits participation to regulatory sandboxes, the SEBI may reconsider the same based on testing results and market response.

    Further, registration granted under Section 12 is based on the nature of the specific activity undertaken by an applicant entity. To widen the ambit of products that can be tested by a participant beyond its registered category, SEBI has incorporated a cross-domain approach in the Framework. This is facilitated by a limited registration certificate issued to the entity which will allow it to operate in a regulatory sandbox without being subjected to the entire set of regulatory requirements to carry out that activity. Cross-domain testing adds to the flexibility of process and will encourage participants to venture into new product categories without excessive regulatory hindrances. 

    The chink in the armour

    Post publication of the Discussion Paper, SEBI has addressed and made necessary provisions for complaint redressal for consumers in the Framework by mandating participants to set up grievance redressal mechanisms. However, no mechanism for grievance redressal of participants has been provided by SEBI. Further, while the RBI Regulatory Framework includes clear safeguards for exercising intellectual property rights, the same are missing in SEBI’s Framework. 

    Since FinTech products may be governed by both the RBI and SEBI (and the IRDAI for products involving insurance-related solutions), the Framework needs to provide for coordination between the regulators to avoid replication of the processes and wastage of resources. For products that provide multiple solutions on the same technological platform, providing a unified channel for different regulators will simplify the compliance process. Additionally, post-testing, it is important that SEBI gives weightage to consumer feedback and complaints while drafting regulations for the new product. An inclusive and transparent approach by SEBI in this regard will benefit all stakeholders in the long run.   

    In conclusion, while the Framework seems structurally sound, it is imperative that SEBI conducts frequent evaluations of the actual outcomes as well as market responses and amends the regulations flexibly to uplift the FinTech sector through regulatory sandboxes.

  • Dissecting ‘Dispute’ and ‘Reference to Arbitration’ under Section 7 of IBC

    Dissecting ‘Dispute’ and ‘Reference to Arbitration’ under Section 7 of IBC

    By Shubham Kumar, a Fourth-Year Student at HNLU, Raipur

    In Innoventive Industries Ltd. v/s ICICI Bank the Hon’ble Supreme Court has provided the scheme of Insolvency and Bankruptcy Code, 2016 (“IBC”) with respect to a section 7 application. An application u/s 7 can be filed on the occurrence of a default and ascertainment of the same through records of the information utility or other evidence produced by the corporate debtor. Contrasting the scheme of section 7 with section 9, it was also held that a dispute regarding debt is of no relevance until it is “due”. Therefore, if the Adjudicating Authority is satisfied with the existence of the financial debt and the default, it will admit the application u/s 7(5)(a).

    Thus, a pre-existing dispute between the corporate debtor and financial creditor had no relevance for deciding a Section 7 application until the recent order of the National Company Law Tribunal (“NCLT“) Mumbai in Kotak India Venture Fund-I v/s Indus Biotech Private Limited.

    ‘Dispute’ in terms of section 7 and section 9

    According to section 5(6) of IBC ‘dispute’ includes a suit or arbitration proceedings relating to:

    • the existence of the amount of debt;
    • the quality of goods and services; and
    • the breach of representation or warranty.

    A corporate debtor may bring to the notice of the operational creditor, any pre-existing dispute between the parties. The application u/s 9 can be accepted only in the absence of a pre-existing dispute between the parties prior to the date of demand notice. The dispute can be related to an arbitration award in relation to a pre-existing dispute challenged by the parties or a dispute in relation to the amount claimed pending before an arbitral tribunal etc.

    The Supreme Court in Mobilox Innovations v/s Kirusa Software held that the Adjudicating Authority has to be satisfied only to the extent that there exists a bona fide dispute between the parties. The court is not concerned with the outcome of the dispute.

    However, while adjudicating upon an application u/s 7 the NCLT is not required to look into any pre-existing dispute between the parties. Overturning a decision of the Hon’ble NCLT, Chennai Bench where a section 7 application was dismissed on the grounds of a pre-existing dispute between parties and pendency of civil suit between them, the Hon’ble National Company Law Appellate Tribunal (“NCLAT“) in Vinayaka Exports and another v/s. M/s. Colorhome Developers Pvt. Ltd observed that only if an application is filed by an operational creditor, can the corporate debtor raise the defence of a pre-existing dispute.

    Kotak Case: A Pandora’s box to section 7?

    In the Kotak case, Kotak Private Equity Group (“Financial Creditor“) filed a section 7 application against Indus Biotech Private Limited (“Corporate Debtor”) for the failure to redeem Optionally Convertible Redeemable Preference Shares (“OCRPS“) amounting to Rs. 367,07,50,000 crores. The Corporate Debtor contested the claim of the Financial Creditor questioning its right to redeem such OCRPS when it had participated in the process of conversion of OCRPS into equity shares, including disputes raised regarding the valuation of Financial Creditor’s OCRPS and fixing of the QIPO date. The Corporate Debtor prayed before the Hon’ble NCLT to refer the parties to arbitration pursuant to Article 20.4 of the share subscription and shareholders agreement which contained an arbitration clause for resolving disputes between the parties.

    The Hon’ble NCLT held that since there exists an arbitration clause and the dispute is capable of being arbitrated, the section 7 application cannot be admitted. The said decision of the NCLT raises three-fold concerns: firstly, with regard to the NCLTs’ power to refer a dispute to arbitration in a section 7 application, secondly, the overriding effect of Arbitration and Conciliation Act, 1996 (“Arbitration Act”) over IBC and lastly, the scope for raising a dispute in an application under Section 7.

    • NCLTs’ power to refer to arbitration in a Section 7 application

    In Swiss Ribbon v/s Union of India the Hon’ble Supreme Court held that the Adjudicating Authority under IBC can exercise inherent powers given under Rule 11 of the NCLT Rules, 2016 which states that the NCLT has inherent powers to make such orders as may be necessary for meeting ends of justice or to prevent the abuse of process of the court. The inherent powers under Rule 11 are similar to the inherent power of the Company Law Board (“CLB”) under Regulation 44 which in turn is similar to the powers of the civil court u/s 151 of the Civil Procedure Code, 1909. In Union of India v. Paras Laminates (P.) Ltd. the Supreme Court has categorically held that tribunals function as court and being a judicial body, it has all those incidental and ancillary powers which are necessary to make fully effective the express grant of statutory power.

    Further, the Hon’ble NCLAT in Thota Gurunath Reddy & Ors. v/s. Continental Hospitals Pvt. Ltd. & Ors. has held that: “…it is clear that under Section 420 of the Companies Act, 2013, the National Company Law Tribunal passes an order as a ‘Tribunal’, whereas under the provisions of Section 7 or Section 9 or Section 10 or sub-section (5) of Section 60, the same very Tribunal passes an order as an ‘Adjudicating Authority’ and the same Tribunal in the capacity of ‘judicial authority’ passes order under Section 8 or Section 45 of the Arbitration Act, 1996. As the Tribunal is empowered to pass orders in different capacities under different provisions of the Act…”

    Therefore, while adjudicating upon an application u/s 7 of IBC, the NCLT ought to discharge its duty as a judicial authority, hence a reference to arbitration is not bad in law. While adjudicating an application u/s 7 or 9, the Adjudicating Authority is competent to decide upon a section 8 application under the Arbitration Act.

    • Over-riding effect of Arbitration Act over IBC

    Section 238 of IBC provides overriding effect to IBC compared to any other law for the time being in force. Section 5 of the Arbitration Act also provides for a non-obstante clause. The rules of statutory interpretation state that in case of an inconsistency arising between two special legislations, the latter enacted legislation will have an overriding effect on the previously enacted legislation. However, this is not the rule of thumb. The Hon’ble Supreme Court in Life Insurance Corporation of India and Ors. v/s D.J.Bahadur & Ors. laid down that a statute can be treated as special legislation vis-à-vis one legislation but there may be situations where the special statute will be treated as a general statute vis-à-vis another special statute. The categorisation of special or general depends on the specific problem, the topic for decision and other criteria.

    Providing a blanket overriding effect of IBC over all previous legislative enactments means going against the principles of statutory interpretation. The anatomy of the IBC is such that it does not deal with the determination of disputes and nor does it concern itself with fact-finding. The alpha and omega of IBC is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.  In contrast, the Arbitration Act is a complete code for resolution of disputes. The object of the code is to provide speedy resolution of disputes between the parties. Determination of rights and obligations is thus, not within the purview of IBC. Therefore, in an issue related to determination of rights and obligations, the IBC vis-à-vis Arbitration Act, would be considered as a general statute and should have no overriding effect. 

    • Scope for raising a ‘dispute’ in Section 7

    The Innoventive Industries Ltd. case itself leaves scope for raising a dispute under Section 7 of IBC. It states that where the debt is not payable in law or in fact, a section 7 application cannot be admitted. The Hon’ble NCLT in Carnoustie Management (P.) Ltd. v/s CBS International Projects (P.) Ltd. has rightly pointed out that where the loan is itself disputed, the NCLT in a summary proceeding cannot adjudicate upon the existence of the loan, and such questions shall be decided by the competent forum. In other words, the statute mandates the NCLT to ascertain and record satisfaction as to the occurrence of default, and not go into the question of rights of the financial creditor or the corporate debtor.

    Conclusion

    Section 7 of IBC allows NCLT to admit an application on proof of debt and default but it is silent on the aspect where the debt which is being shown as default, is itself disputed. The IBC does not intend to provide a recovery forum to the creditors and should be used only when there exists a debt and default which can be ascertained by the adjudicating authority through summary adjudication. The process should not be used in a manner to threaten corporate debtors and a question of creditors right to claim the amount as debt, when disputed, should be adjudicated upon by a civil court or through arbitration.