The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • 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.

  • 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.