The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-II in a two-part series]

    Having expounded upon the merger control regime in India along with the dilemma of open market purchases as well as compliances in the previous part, the following part details the impact of the draft combination regulations along with the global position and suggestive solutions.

    V. Impact of the Draft Combination Regulations, 2023 

    The CCI Draft Combination Regulations, 2023 further clarify the rights that can be safely acquired in such transactions. Under Regulation 6, the acquirer would be allowed to avail certain rights such as dividend, subscription to rights issue, bonus shares, etc. The acquirer can also dispose the shares or securities acquired and exercise voting rights only to the extent of liquidation and/or insolvency proceedings. 

    These regulations are crucial because they adequately address the problem of acquiring de facto control through such transactions. By specifying that the voting rights of the acquirer would only be allowed in limited circumstances, it does away with the problem of acquisition of control in public bids.  The European Commission, for example, recognised this issue in the case of Marine Harvest ASA, whereby it was held that exemption to a public bid would not be provided if the seller acquires a significant block of shares amounting to de facto control. The element of de facto control is adjudged based on the votes cast at previous ordinary and extraordinary general meetings. Lastly, even the proviso to Regulation 6 also states that exemption would not apply where the acquirer directly or indirectly, influences the target enterprise.

    VI. Global Position 

    A quick sojourn of international antitrust laws would also reveal that similar dispensations have been made worldwide.Article 7(2) of the European Union Merger Regulation (‘EUMR’) provides that standstill obligations shall not prevent the implementation of a public bid or of a series of transactions in securities including those traded on a stock exchange and Article 7(3) gives the Commission the power to grant derogations. However, statistics reveal that the EU has rarely granted such exemptions. These derogations are subject to a twofold-criteria: (1) high degree of urgency in the transaction and (2) the lack of any plausible competition issues raised by the proposed transaction. Moreover, the EU has repeatedly held that while acquiring voting rights is not prohibited on securities purchases, the exercise of these rights is actively discouraged to prevent gun jumping. 

    Similarly, in Brazil, the transactions made through stock markets or organized over the counter market do not need the approval of the antitrust authority for their consummation. On the other hand, certain sophisticated merger regimes of UK and Italy do not impose any standstill obligations and parties are free to implement transactions without approval 
    by undertaking a self-assessment of the potential competition concerns. 

    In comparison, the Indian regime reflects a balanced approach as the regime retains its suspensory character without any absolute derogations. At the same time, there is no absolute ban on exercise of voting rights attached to shares bought in such transactions like in the EU. Moreover, there is sufficient scope for the parties to provisionally implement their transaction and subsequently wait for clearance while retaining certain rights. 

    However, a suggestion must be noted in this regard. It is not clear why the amendment did not adopt the CLRC report’s recommendation to mandate an escrow account. If the transaction is later disapproved by the CCI, the reversal of the transaction could be eased by selling the shares in the escrow account and undo any competitive harm.  

    VII. Way Ahead

    The rationale behind merger control in antitrust is to promote economic efficiency and enhance the process of corporate restructuring in the country. In this context, the amendment is welcome as it aligns with international best practices and will boost transactional efficiency in India. However, there is still uncertainty regarding how the Takeover Code would complement the amendment, given the requirement of obtaining a statutory approval for open offer still stands. In the meantime, as fertile jurisdictional ground develops and the Draft Regulations are adopted, it is crucial that parties tread with caution and avoid acquiring beneficial rights before securing the watchdog’s approval and attract potential scrutiny. 

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-I in a two-part series]

    Introduction

    The merger control regime in India has undergone monumental changes with the recently passed Competition (Amendment) Act, 2023 (‘Act’). One of these changes include the dilution of standstill obligations for open market purchases by way of introduction of section 6A in the Act. This amendment is crucial as it lifts the blanket prohibition on combinations to await the approval of the Competition Commission of India (‘CCI’) before executing a combination and facilitates the ease of doing business. 

    Consider this example: Company A and Company B announce a merger. The merger deal is structured as a multi-stage process where firstly, Company A will acquire 30% equity shares in the target B through an existing shareholder; and secondly, Company A announces a public bid for buying up the remaining shares. The following day the Board of Directors of the respective companies authorize and complete the market purchase and a notice is also filed with the CCI for approval of the merger.

    Earlier, Company ‘A’ would receive backlash for implementing the open offer without clearance from CCI. However, with the recent amendment, the CCI is expected to take a lenient view to open market transactions subject to certain conditions. In this context, this article discusses the ambiguities leading to the amendment and appraises the consequences of the same, especially in the context of the Draft Combination Regulations, 2023.  

    II. Merger Control Regime in India

    In order to understand the development introduced by the Amendment, it is necessary to appreciate the scheme of mergers and combinations in the competition regime. Essentially, the merger control regime in India is a mandatory and suspensory one. In broad terms, this implies that parties that propose to enter into a merger (referred to as ‘combinations’ in India) must first, give notice to the CCI in accordance with the requirements prescribed by Section 6(2) of the Act. Second, as part of the suspensory regime, the parties are pre-empted from carrying out any integration before receiving the approval of the CCI. 

    Section 5 and Section 6 of the Act are the key provisions regulating such mergers.  Any potential merger or acquisition that fulfils the thresholds laid down under Section 5 must be mandatorily notified to the CCI. Thereafter the CCI proceeds to investigate under section 6 to determine if the combination has or is likely to have any adverse effect on competition (‘AAEC’) in India.

    Standstill obligations are embodied under Section 6(2A) of the Act. Before the amendment, the Act prescribed a standstill obligation of 210 days, or until the approval by the CCI – whichever is earlier – on the parties to a proposed combination, from the date of notifying the proposed combination to the CCI. During this period, the parties were prevented from giving effect to the combination and must operate their businesses as independent entities. Notably, this period has now been reduced to 150 days, along with an exemption for open market purchases to implement the acquisition without approval.

    Later on, if the CCI is of the opinion  that the combination is likely to hamper competition, it can modify the combination through remedies, for example, by divestiture of assets, or it can revoke the combination altogether. 

    III. The Dilemma of Open Market Purchases or “Open Offer”

    The relevant laws governing open offers are the Competition Act, 2002 and the Securities and Exchange board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’). An open offer is made by the acquirer to the shareholders of the target company inviting them to submit their shares at a specific price.  As per the Takeover Code, an open offer is triggered when the acquirer takes control over a target company or shares or voting rights in the target company beyond certain threshold limits. There are primarily two threshold limits:

     (i)  Acquisition of 25% or more shares or voting rights 

    (ii) Acquisition of more than 5% shares or voting rights in a financial year

    Further, Regulation 8 (11) of the Takeover Code mandates that the acquirer is responsible for obtaining the necessary statutory approvals before concluding the open offer. In practice, such statutory approvals generally consist of approvals from regulatory bodies like CCI, Reserve Bank of India (‘RBI’), Telecom Regulatory Authority of India (‘TRAI’) etc. 

    Therefore, as soon as the threshold limits were crossed, the acquirer was simultaneously required to notify the open offer to the CCI and await its approval. However, unlike negotiated transactions, market purchases have low liquidity leading to significant volatile conditions. The acquirer has to seize the small window of opportunity on a stock exchange platform before the cost of acquisition rises in a few minutes. Moreover, these obligations also impeded confidentiality concerns as notifying the transaction could trigger public scrutiny and drive the price of the stock. Resultantly, the acquirer was placed in a dilemma- whether to await the CCI’s approval and forego the window of opportunity or to face penalty for gun jumping?

    The rationale behind standstill requirements was stated in the Ultra Tech Cement case, where the CCI was of the opinion “the objective of standstill obligations is to ensure that the parties remain as independent competitors as they were before the proposed transaction”.  As a result, a perusal of CCI’s decisional practice reveals that it had previously adopted a stringent approach against such transactions. For instance, in the combination between Thomas Cook India Limited (‘TCIL’) and  Sterling Holiday and Resorts India Ltd. (‘SHRIL’), the CCI imposed a penalty of Rs. 1 crore. TCIL had issued an open offer to purchase 26% equity shares from public shareholders of SHRIL. The open offer, which was part of an interconnected transaction, triggered the thresholds under Section 5 and was authorized before submitting notice to the CCI. Hence, the parties were held liable for gun jumping under Section 43 of the Act which was upheld by the Supreme Court.  

    In contrast to this stringent approach, the amendment offers several benefits. First, it removes the challenges associated with the volatility of the markets, allowing companies to move quickly in response to market changes, which is crucial in fast-moving sectors like tech and e-commerce. Second, as the EU experience shows, it could improve cross-border investments in the Indian economy. Third, it would also expedite the merger approval process for the CCI with respect to securities transactions and unarguably, quicken the process of combinations. 

    IV. Compliance requirements under the amended law

    As per the newly inserted Section 6A, an acquirer is permitted to implement the open offer or an acquisition of shares or securities by way of a secondary transaction, either as a single transaction or a series of transactions. This is subject to the conditions that:

    (i) the notice for the combination transaction has been given to the CCI as per the Act and the regulations thereunder; and

    (ii) the acquirer does not exercise any ownership or beneficial rights or interest in relation to such shares or convertible securities (including voting rights and receipt of dividends or any other distributions), except as may be specified by regulations, till such time that the combination is approved by the CCI.

    Notably, this amendment is in line with the recommendations of the Competition Law Review Committee (‘CLRC’) Report. The report had identified the dilemma and observed that “…mandating a standstill on acquiring of shares pending the approval of the combination may hamper the viability of acquisitions via public bids”. Accordingly, it suggested that the CCI allow parties to such transactions to purchase securities, provided they surrender all beneficial rights (of dividend and voting) attached to such securities until the combination gets a green signal. However, the amendment does not prescribe that such securities should be placed in an escrow account pending CCI’s approval, a proposal which was put forth in the CLRC report. 


  • The Boundaries of Judicial Intervention In Arbitration: Navigating Section 34

    The Boundaries of Judicial Intervention In Arbitration: Navigating Section 34

    BY MANAV PAMNANI, THIRD-YEAR STUDENT AT NALSAR UNIVERSITY OF LAW, HYDERABAD

    Introduction

    Recently, a three-judge bench of the Supreme Court (‘SC’) in the case Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (‘Gayatri Case’) decided to refer the matter regarding court modification of arbitral awards to a Constitution Bench. This comes in light of the relatively unsettled legal position regarding the power of a court to amend or modify an arbitral award under section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’). Against the backdrop of multiple conflicting decisions over the course of several years, the judgement in the Gayatri case, which is yet to be pronounced, is expected to settle the position. However, there is a discernible trend that can be observed lately with the majority of court decisions holding that the court does not have this power.

    The epitome of this is the landmark judgement delivered in National Highways Authority of India v. M. Hakeem (‘Hakeem Case’), wherein the SC declared that the court under section 34 has no jurisdiction to modify the arbitral award as doing so, will amount to crossing the line (Lakshman Rekha) under the guise of judicial interpretation of statutes. 

    One of the most recent SC decisions that upheld the several precedents mentioned was delivered on 4th January 2024 in the case of S.V. Samudram v. State of Karnataka. The SC, in this case, held that any attempt to modify or amend an arbitral award while adjudicating section 34 and section 37 petitions is not permissible. A modification can be effected only by the SC in the interests of justice under Article 142 of the Indian Constitution, provided such a modification is in tandem with relevant statutory laws.

    The power under section 34 of the Act extends only to the setting aside of an award under the grounds specified in sub-section (2), which include incapacity of the parties, invalid arbitration agreement, lack of proper notice, decisions beyond the scope of arbitration, improper tribunal composition or procedure, or if the Court finds the subject matter non-arbitrable or the award in conflict with India’s public policy. With the intention of analysing the intricacies of section 34, this article explores the rationale behind the restriction on court modification, its implications, and potential solutions to address the inherent challenges.

    The Rationale Behind the Restriction on Court Modification

    The most plausible rationale is the express exclusion of such a power from the purview of section 34 of the Act. This power was explicitly included under section 15 and section 16 of the erstwhile Arbitration Act of 1940 but has been omitted under the current statute. As explained in  Larsen Air Conditioning and Refrigeration Company v. Union of India, this reflects the intention of the Legislature to amend the law pertaining to modification. Adopting a contrary approach would undermine the very purpose of excluding this power, making such an interpretation unsound. An analysis of the law in other jurisdictions like England, Singapore, Australia, and the United States reveals that such power has expressly been conferred under the respective statutes, which is not the case in India. Moreover, the purpose of Section 34 is to set aside awards on the basis of procedural or jurisdictional issues, whereas modification involves re-evaluating the substantive merits of the tribunal’s decisions, which deviates from the provision’s principal intention. This reasoning was given in the Hakeem Case mentioned previously, wherein the SC held that section 34 is not like an appellate provision. Considering it to be so is fallacious since it will violate section 115 of the Civil Procedure Code 1908, which deals with revisional jurisdiction. Moreover, the Court stated that since the right to get the award set aside is itself very truncated, the enforcement of such a right should also be very limited in nature. The SC further observed that section 34 of the Act aligns with the UNCITRAL Model Law,  which confers no modification power to a court hearing a challenge to an award, as well as the legislative policy of minimal judicial interference in arbitral awards.

    A deeper substantive analysis of arbitration’s fundamental tenets also results in the same conclusion. Firstly, arbitration aims to provide a speedy and cost-efficient resolution to disputes, and allowing courts to modify awards would undermine this objective by leading to protracted litigation involving high costs akin to traditional court proceedings. The grant of such a power would also vitiate the core principle of party autonomy,  by allowing external interference in the parties’ agreed-upon process of resolving disputes through chosen arbitrators, thus potentially undermining their autonomy to determine the terms and conditions of the resolution process.

    Additionally, it would be against the interests of efficiency and specialisation to give this power to courts since arbitrators are often chosen for their specific subject matter expertise, and judicial modification could devalue this specialised knowledge, as judges may lack the same expertise level in the given subject matter. Lastly, on a practical level, limiting court intervention to setting aside awards rather than modifying them, helps conserve judicial resources and reduces the burden on the court system. 

    Implications

    The restriction on this power ensures the finality and certainty of arbitral awards, promoting confidence in arbitration as a preferred dispute resolution method. Parties can rely on the arbitral process knowing that awards, once issued, are less susceptible to judicial interference beyond specified grounds for setting aside, which can also be cured by the Tribunal itself under section 34(4) of the Act, thus reinforcing the pro-arbitration approach. This stability enhances the enforceability of arbitral awards, both domestically and internationally, which is crucial for businesses operating in a globalised economy. 

    However, the restriction also presents challenges, particularly in cases where an award contains minor errors or miscalculations that do not warrant setting aside the entire award but still require correction for fairness. Parties may feel aggrieved if they cannot seek judicial correction of such errors, potentially leading to dissatisfaction and increased challenges to awards. Although they have the right to approach the SC for modification under Article 142, this is not feasible if the modification required is not substantial. Moreover, the power under Article 142 is also restricted.

    Thus, the binary approach of either upholding or setting aside the entire award limits available remedies, potentially leaving parties with incorrect or unfair outcomes. This may compel them to initiate fresh arbitration proceedings to rectify errors, increasing costs and delays, and undermining arbitration’s efficiency goals. Furthermore, dissatisfaction with limited recourse may lead to more appeals and litigation, increasing judicial workload and contradicting arbitration’s purpose as a swift and efficient dispute resolution method. Balancing finality with the need for fairness and efficiency remains a critical challenge in the arbitration landscape, necessitating thoughtful reforms and procedural enhancements to address these concerns effectively.

    Potential Solutions

    Legislative clarity through well-drafted guidelines should be achieved through amendments that grant courts limited powers to correct errors in awards. This would align with international practices, allowing selective corrections without compromising award finality. This is the practice in the United Kingdom wherein the power of courts to modify awards is largely restricted to limit judicial intervention and uphold fundamental principles of arbitration. Additionally, emphasising enhanced arbitration agreements can empower parties to include internal review mechanisms, such as appellate arbitration panels or expedited procedures, to address errors or ambiguities. This approach would minimise judicial intervention.

    Opting for a three-member tribunal instead of a sole arbitrator can also improve decision quality and reduce the need for modifications. Moreover, ensuring that arbitrators have relevant expertise is crucial for sound decisions. Judicial guidance should also clearly differentiate between grounds for setting aside an award and situations needing corrections, thus ensuring consistency and transparency in judicial decisions.

    An increased use of section 34(4), allowing the tribunal to make necessary modifications, can also be beneficial since it limits judicial intervention, alongside effectuating the required changes. This balancing act, along with other solutions, if effectively implemented, will contribute towards a robust arbitration framework.

    Conclusion

    The evolving jurisprudence surrounding section 34 underscores clear judicial intent to preserve the finality and autonomy of arbitral awards by restricting courts from modifying the same. The accepted position is largely clear, with numerous precedents establishing that courts do not have this power. The Gayatri Case, as mentioned in the beginning, is likely to follow this established norm.  While this approach bolsters the integrity and efficiency of arbitration, it also presents challenges that necessitate thoughtful reforms, particularly in addressing minor errors that do not justify setting aside an award. A more balanced and effective arbitration framework can be established by implementing legislative amendments, enhancing arbitration agreements, providing judicial guidance, and leveraging the tribunal’s powers under section 34(4). Such measures will ensure that arbitration remains a preferred method for dispute resolution, combining finality with fairness and efficiency, thus bringing about a balanced framework. 

  • Settlement Agreements and Section 12A Withdrawals: A Comparison with Section 230 of the Companies Act, 2013

    Settlement Agreements and Section 12A Withdrawals: A Comparison with Section 230 of the Companies Act, 2013

    BY ARSHIA ANN JOY AND ADITI SINGH, FOURTH-YEAR STUDENTS AT NUALS, KOCHI.

    Introduction

    A liquidation order is passed as per the Insolvency and Bankruptcy Code 2016 (“IBC“)  when the Corporate Insolvency Resolution Process (“CIRP“) falls through, and the company cannot be revived within the stipulated timeline. However, courts, over time, have interpreted that issuing a liquidation order is not to be treated as a death sentence to the company and its operations. This is because the ultimate aim of the IBC is to facilitate the revival of the company if it is a feasible option. This further implies that the order permitting an entity’s liquidation can be reversed if the petition initiating CIRP proceedings is itself withdrawn. Section 12A was introduced in the IBC in 2018 to allow settlements between the Corporate Debtor (“CD“) and the creditors by allowing withdrawal of proceedings, with 1035 such withdrawals recorded till December 2023.

    This article explores the legality of allowing the withdrawal of proceedings after issuing the liquidation order, when a settlement agreement is reached. The authors also look at how the lack of procedural clarity surrounding the acceptance of the settlement agreement leads to difficulties in reviving the CIRP if the settlement agreement fails. Further, solutions are suggested through a comparison with section 230 of the Companies Act, 2013 (“CA”), which facilitates arrangements aiming at debt restructuring and thereby resolving the financial crisis of the company. The authors argue that allowing the Adjudicating Authority (“AA”) to thoroughly analyse the settlement agreements while admitting section 12A applications, similar to the procedure envisaged in section 230 of CA, would be a step in the right direction in addressing the ambiguities surrounding the withdrawal of CIRP and revival of proceedings, if need be.

    Reversibility of a Liquidation Order and Withdrawal of Proceedings Post Issuance of Liquidation Order

    The parties are said to have arrived at a settlement agreement if the CD agrees to pay the creditor an agreed sum to resolve the conflict. Once a settlement agreement is reached after a liquidation order is passed, the parties can approach the AA under section 12A and withdraw the proceedings initiating CIRP. The primary intention behind introducing section 12A is to recognise post-admission settlement cases in line with statutory provisions. 

    The NCLAT, in Navaneetha Krishnan v. Central Bank of India, settled the law on reversibility of a liquidation order. It was held that even during the liquidation period, if any person satisfies the Committee of Creditors (“CoC”) , and CoC accepts the said offer with a 90% voting share, such a person may apply for a withdrawal of the proceedings before the AA.

    In 2019, the NCLAT, in a similar case, emphasised the importance of allowing the promoters/shareholders to arrive at a settlement as per section 12A. In such cases, the application seeking initiation of CIRP can be withdrawn. The Supreme Court in Vallal RCK v. Siva Industries held that the wisdom of the CoC in approving a settlement plan must not be interfered with by the AA unless such a decision was wholly ‘capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.’ In this case, the CoC had failed to approve the proposed resolution plan with the requisite 66% majority. Subsequently, the Resolution Professional filed an application under section 33(1)(a) of IBC seeking liquidation of the entity pending which the promoter of the CD approached the AA with a settlement plan. The AA had, in turn, refused to approve it without giving due regard to the 90% majority decision of the CoC to go ahead with the settlement plan. 

    More recently, in 2022, the NCLT analysed the rationale put forth in Navaneetha Krishnan and Vallal RCK to conclude that even after the order of liquidation is passed, the application for withdrawal of proceedings may be allowed. In this case, the liquidator had received a settlement proposal from the promoter of the CD duly approved by the CoC with the requisite majority. 

    The NCLT Chennai Bench rightly noted:

    “Thus, it could be seen that even during the liquidation process, the parties have arrived at a settlement, then the application filed under Section 7, 9 and 10 can be withdrawn. Consequently, the CIRP and the liquidation initiated against the CD also stand withdrawn.”

    Thus, the order of liquidation already passed does not hinder the AA from passing an appropriate order of withdrawal as per section 12A if all the requisite conditions are satisfied.

    The Dilemma: Applying Section 12A Post Issuance of Liquidation Order

    Although the law seems to be settled regarding the impact of section 12A on a liquidation order, the lack of procedural clarity has led to contradictory results in the past few years. 

    In Jayashree Mohan v. Pathukasahasram Raghunathan, the NCLT laid down the limited scope available for reviving an entity undergoing liquidation. It was stated that once the liquidation process is initiated, the entity cannot come out of the process except through the two avenues, namely, by way of a scheme under section 230 of CA or by sale as a going concern. In this case, section 12A is not seen as a potential avenue which could result in the revival of the entity once liquidation is initiated.

    Similarly, the NCLT Chennai bench in Narayan Maheshwari disallowed the withdrawal application made under section 12A while the liquidation process was going on. It was emphasised that section 12A was inserted in Part II of the IBC, which deals exclusively with CIRP and not liquidation. Since no specific amendment is made in the liquidation process regulations, an application for withdrawal under section 12A cannot be allowed post-issuance of a liquidation order. It was further held that in Navaneetha Krishnan, the application under section 12A was never filed during liquidation and that the ex-promoter of the CD had filed an application under section 230 of CA for approving a scheme of compromise. In this case, the NCLT has voiced its concerns regarding allowing withdrawal of proceedings once the order of liquidation has been passed as it might potentially lead to every suspended Director/Promoters waiting till the liquidation order to enter into a settlement agreement at a ‘throw away price.’

    The above rationale of the tribunals could hamper the prospects of reviving a company through settlement, just because the order of liquidation has been initiated against it, thus defeating the purpose for which section 12A was included in the IBC. The application of section 12A to Part III of the IBC has to be specifically inculcated in the regulations to put a rest to these contradictory judgements.

    Revival of CIRP in case of Failure of Settlement Agreement

    In  the cases where withdrawal of proceedings was allowed after issuing the order of liquidation, the stakeholders had agreed on a one-time settlement (“OTS”) or a settlement agreement. In Sudip Dutta, the NCLT, while analysing a catena of decisions including Navaneetha Krishnan stated that:

    “In the instant case, no application was filed under Section 12A of IBC since there was no OTS that was acceptable to the Respondent No. 2 bank.”

    As noted above, the application for withdrawal under section 12A is considered after the issuance of the liquidation order only when the CoC approves a settlement agreement with the requisite majority. 

    However, the procedure for accepting or analysing such a settlement agreement is not specified in the statute or the relevant regulations. As seen above, the commercial wisdom of the CoC is given primacy and judicial intervention is permitted only if the decision of the CoC was wholly arbitrary or capricious. Analysing whether the decision itself was arbitrary or capricious would, in turn, require the settlement agreement to be on the record, which might not happen in most cases, especially when the statute/regulations fail to mandate the same, as was noted by the NCLAT in Krishna Garg. 

    In this case, the CD did not adhere to the terms of the settlement agreement after the CIRP proceedings were withdrawn. The NCLAT refused to revive the CIRP proceedings because the settlement agreement terms were not filed or brought on record before it. The NCLAT in SRLK Enterprises categorically stated that IBC is not a recovery proceeding where parties can repeatedly approach the AA owing to the non-repayment of debt. Proceedings can be revived only if the settlement agreement has been brought on record and has been made a part of the order of withdrawal. The AA can revive the CIRP proceedings, if the settlement agreement has a clause which provides for the revival of CIRP proceedings upon failure of setttlement agreement. The AA need not specifically grant the liberty to revive the proceedings in such cases. This would also imply that if there is no such clause allowing revival, the parties may be granted the liberty to do so specifically, by the AA. These recent orders suggest that the settlement agreement need not always become a part of the order allowing the withdrawal of proceedings, thus complicating the revival of proceedings under the IBC later when the parties fail to adhere to the settlement terms.

    Additionally, in Vallal RCK, the Supreme Court noted how the CoC has entered into many ‘deliberations’ before accepting the settlement plan, and stated that the CoC decision is not ordinarily subject to judicial scrutiny. The analysis done by the court gets confined to checking whether the CoC has done enough ‘deliberations’ before approving the settlement agreement. This seems to be in stark contrast to the procedure followed under section 230 of CA, where the AA is empowered to delve deeper into the actual contents of the proposed scheme.

    Comparison with Section 230 of the Companies Act, 2013

    Even after passing the order of liquidation, if a scheme of Compromise demonstrates viability, feasibility, optimisation of the CD’s assets, and equitable consideration of creditors, the liquidator may submit an application under section 230 of the CA to the AA in a bid to revive the company. As per regulation 2B of the Liquidation Process Regulations 2016, a scheme of compromise and arrangement may be completed within 90 days post the order of liquidation. 

    Furthermore, clauses (2) to (10) of section 230 puts forth the powers of the AA in overseeing the admission of the scheme of compromise and arrangement. The AA is to be made aware of the latest financial position of the entity, the creditor’s responsibility statement, the auditor’s report on the fund requirements, the valuation report on the assets of the company, etc. Further, in SREI Equipment Finance Limited, the NCLAT observed that sections 230-232 cast an obligation on the AA to ensure that the scheme is not contrary to public policy and not prejudicial to the company’screditors and members. Greater checks and balances are put in place under section 230 of the CA while admitting a proposed scheme of compromise and arrangement even after a liquidation order is passed.

    Conclusion and Recommendations

    A similar procedural clarity on the AA’s oversight is absent when it comes to the role of the AA in a section 12A application involving a settlement agreement. Section 12A must specifically be made applicable to Part III of the IBC. Further, a time period may be mentioned in section 12A, similar to section 230 of CA, for accepting and analysing the settlement agreement once the AA has issued the order for liquidation. The regulations must also specify that the settlement agreement entered into must mandatorily be brought on record while withdrawing the proceedings so that revival of the CIRP can be made possible without much hassle if the said agreement falls through at a later stage.

  • SEBI’s Norms For Sharing Real-Time Price Data: Laudable Yet Restrictive

    SEBI’s Norms For Sharing Real-Time Price Data: Laudable Yet Restrictive

    BY SACHIN DUBEY AND SUKRITI GUPTA, THIRD-YEAR STUDENTS AT NLU, ODISHA

    Introduction

    Securities and Exchange Board of India (‘SEBI’), vide circular dated 24th May 2024, introduced ‘Norms for sharing of real-time price data to third parties.’ The circular has been brought to tackle the concerns arising from the unauthorized sharing of real-time price data (‘Price data’) with online gaming platforms and other third parties and to protect the securities market. Price data refers to the current data of information which is made accessible as soon as it is generated. It is used in time-centric applications like stock trading and navigation to have real-time price analytics.

    This restriction was made in the purview of an upsurge in online gaming platforms, virtual trading apps, fantasy stock trading apps, and various other websites. Since the past couple of years, there has been an incremental increase in trading through these virtual platforms which therein invited attention to regulate the functioning of these platforms. It works in a way that provides its users with an illusionary image ofhow stock trading is done by featuring the exact parallel stocks listed on Stock Exchanges and also by citing similar price values and fluctuations. Since they do not fall under the domain of SEBI, they,therefore, become an unregulated fragment. Sharing real-time price data poses a high risk of leakage of sensitive information related to securities in the market. These virtual trading platforms appropriately use the data for their apps and websites to build a real trading atmosphere for their users which in turn fabricates their mind to construe this trading to be an actual stock market trading. This may also create parallel, unregulated platforms which would continue to hamper the trust of its users thus, promoting unfair trading. The sharing of real-time price data also acts as a disruptor in the securities market, because of which the regulator is consistently trying to prioritize the interests of investors above all else.

    The circular also mentions that market infrastructure institutions (‘MIIs’) and market intermediaries such as brokerages are forbidden to share price datawith third parties. However, it comes with an exception that price data can be shared if such information is essential for the systematic functioning of the securities market and regulatory compliances. Further, a written agreement needs to be entered and due diligence is required before transferring price data with third parties so that it will not be put to any illegal use.

    This post delves into the impact of SEBI’s recent circular on investors and virtual stock trading apps, highlighting its broader implications. Additionally, it sheds light on the potential drawbacks of the circular and suggests measures to cure the same.

    REGULATORY GREY ZONES AROUND VIRTUAL STOCK TRADING PLATFORMS

    Hitherto, Virtual stock trading apps operate in an ambiguous regulatory environment. Regulatory officials describe it as a form of Dabba Trading, an unlawful practice which involves placing bets on the movement of the price of underlying assets such as stocks or commodities. In India, Dabba trading activities flout various provisions of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and are subject to punishment under section 23 of the SCRA. 

    SEBI already made its intention clear in 2016 when it issued a warning to investors against various entities offering leagues/schemes/competitions etc. based on the securities data. SEBI stated that these schemes are neither authorized nor endorsed by SEBI or any SEBI-recognized exchanges. It further sought public input on proposed amendments to SEBI Investments Advisers (Regulations), 2013 which included a provision to prohibit anyone from organizing schemes, games, leagues, or competitions related to the securities market. However, it did not forward the proposal and instead prohibited Stock Brokers from participating in games, leagues, schemes, competitions, etc., that involve the distribution of prizes, medals, gifts, etc. SEBI’s recent circular will further force virtual trading stocks to shut down their operations.

    Apart from SEBI, the National Stock Exchange (‘NSE’) vide circular dated 20th April 2023 observed that some market participants are misusing its data for gaming and virtual trading, which undermines fair and transparent trading principles. It reminded trading members that NSE Data should only be used for legitimate trading activities by their clients and not for gaming or virtual trading purposes.

    Therefore, there has never been regularity clarity regarding virtual stock trading apps which made them operate in a regulatory grey area.

    SEBI’s OBJECTIONS AGAINST VIRTUAL STOCK TRADING APPS USING REAL TIME PRICE DATA

    Although SEBI was not concerned with these platforms working as stock market simulators for education or entertainment purposes utilizing price data, the problem arose with the involvement of money. Platforms like India Trading League or Stock Race charge a small entry fee and award monetary rewards tied to the performance of stocks or commodities. This has sparked an addictive interest among users leading to the successful development of their business model.Further, they do not come within the regulatory foothold of SEBI and therefore are not required to provide disclaimers to users regarding the difference between actual trading and virtual trading as well as the risks attached to virtual trading.

    Further SEBI’s concern about restricting price data with these platforms comes from its objective to protect the interest of investors in the securities market. Out of the regulatory foothold of SEBI, these platforms tend to create a virtual, parallel and uncontrolled securities market where there will be no trust among the users.

    Stock Exchanges primarily generate revenue through transaction fees on trades and subscription fees for providing price data. SEBI has explicitly forbidden the creation and operation of games or competitions related to securities and security markets.If a third-party platform acquires price data and uses it to operate subscription-based games, it would undermine the exchanges’ revenue sources and breach SEBI regulations.

     KEY CONCERNS

    The move to regulate the sharing of price data with third parties, including fantasy stock trading games, is commendable for its aim to prevent investors from becoming addicted to these games and getting duped into the fraudulent practices of these platforms.Still, it has certain shortcomings which need to be acknowledged and taken care of.

    To start with, SEBI should not view every such development with suspicion which is beneficial for innovation and the growth of private businesses in the economy. SEBI should promote these business platforms while simultaneously bringing them under its regulatory foothold.

    SEBI should take a proactive approach by establishing a clear framework for these platforms, detailing the rules and regulations related to securities they must adhere to, and specifying the required disclosures for registration. Such measures will not only ensure compliance but also promote transparency and encourage innovation, creating a more dynamic and trustworthy financial ecosystem. It could have also outlined the eligibility criteria for participants, including age limits, net worth, and other intriguing requirements. The Board can take a cue from the Australian Securities and Investments Commission (‘ASIC’) which requires platforms like fantasy stock trading games to obtain a license before starting operation. Licensed platforms which are called binary options providers in Australia ensure protection to investors as they need to make certain disclosures as well as need to fulfil certain obligations imposed by ASIC.

    Further, the circular states that that price data will be provided to investor educational platforms with a delay of one day.If price data is allowed to be shared with educational platforms with lag of one day, then these platforms will be compelled to use delayed data which will not serve the purpose of such learning platforms. Their business model would go in negatives as its whole object of live simulation-based tasks would be affected, offering no monetary incentives. Their contribution in enhancing investment skills and simplifying the investment process for individuals through realistic stock market simulations will be significantly impacted. Therefore, SEBI should consider repealing it from the circular.

    Hence, while SEBI’s plan to issue a circular regulating the sharing of price data with third parties, including virtual trading platforms, is praiseworthy, yet restrictive. This regulation may hinder innovation that aids in the development of investment skills and simplifies the investment process for individuals.

    Conclusion

    Globally, many countries are adapting to digital era due to the rise of various online platforms offering monetary services. With the increase in these platforms, there is a growing concern regarding sharing price data with the third parties. Regulators around the globe are becoming aware of the risks and challenges connected with manipulation of markets, and leakage of sensitive data. So, it has become essential to have rules and regulations to regulate data sharing. Therefore, amidst this, SEBI has brought such norms which restricts sharing price data with third parties to bring credibility and stability in the worldwide stock market. Although it is commendable, SEBI could have implemented regulations to bring these platforms under its regulatory framework while still allowing them to operate. After all, a country’s legislation aim should be to let the private business develop in the country with having certain regulatory control over them.

  • Aligning RBI Directives with DPDP Act in the Banking Sector

    Aligning RBI Directives with DPDP Act in the Banking Sector

    BY VISHWAROOP CHATTERJEE AND NACHIKETA NARAIN, SECOND-YEAR STUDENTS AT RGNUL, PATIALA.

    Introduction 

    The intersection of banking and data protection is perhaps the next big leap for both the sectors. The banking sector is one of the most prone and vulnerable spaces for massive data breaches that can have severe financial and legal consequences. The lack of an effective cybersecurity infrastructure will lead to an onslaught of cyber-crimes such as fraudulent financial activities, phishing, data selling, ransomware, etc. The Government has introduced the  Digital Personal Data Protection Act (‘DPDP Act’) and the proposed Digital India Act which sheds positive light on the government’s intention for data protection. However, the mere introduction of legal provisions is not the solution, corporations have been notorious for acting as data brokers which results in data leaks. As a result, the financial data has always been prone to data breaches. 

    In this article, the authors shall deal with the analysis of the current laws that govern data protection with an understanding of the DPDP Act and its emphasis on the role of RBI as the watchdog of data privacy in the banking sector. 

    Failure To Comply with Data Protection Protocols: The Kotak Mahindra Bank Incident

    Digital banking is the new norm and yet, banks have been failing to be well equipped with a robust digital infrastructure for the protection of their consumer’s data. The recent actions against Kotak Mahindra Bank by the apex financial institution (‘RBI’) under Section 35A of the Banking Regulation Act, 1949 is an example of failure of banks to equip themselves with robust digital infrastructure for the protection of consumer data. RBI has barred the mentioned bank from onboarding customers through its online service platforms and issuing new credit cards. According to the RBI, Kotak Mahindra Bank failed to comply with various data protection protocols, and deficiencies were identified in IT inventory management, risk vendor management, data security and data leak prevention strategy, etc. RBI had notified the mentioned bank in 2022 and 2023 about the security lapses and provided them with a corrective action plan which Kotak Mahindra failed to comply with. A well-established Indian Bank failing to meet RBI’s data protection protocols is a worrisome event as other banks might follow if these lapses are left unchecked. 

    Data Privacy in Banking Sector

    In the case of  HDFC Bank Limited v. Jesna Jose,   it was held that with the advent of the digital age, the bank must be held liable for any unauthorised transaction or fraudulent activity from an act arising out of the bank’s negligence. This was done to keep a watch on the banks’ data privacy systems and to ensure that they minimise any unauthorised or fraudulent activity. The judgement relied upon the precedent set by the Chairman, Punjab National Bank v. Leader Valves Ltd which held that if the bank manages the account, it is incumbent upon the bank to ensure the safety and security of the account. The section 43(a) of the Information Technology Act, 2000 deals with the liability of a corporate body to compensate in instances of failure to protect sensitive data. Most importantly, the master direction issued by RBI on IT outsourcing services serves as a cornerstone to keep third-party data processors in the financial ecosystem in check.  

    One question that may arise here is, does RBI have the legal jurisdiction to enforce banks with data privacy compliances? In the case of Internet & Mobile Assn. of India v. RBI, (2020) one of the issues was the jurisdiction of RBI in matters not directly linked with traditional monetary policies. The judgement held that when RBI is not any other statutory body but a creature on its own that can exercise its power in its capacity for policymaking, operational risks or  regulation for enforcement and such directions would become supplementary to the Reserve Bank Of India Act, 1934 itself. Hence, it becomes a duty for the banks to comply with the data privacy directives of RBI.

    Analysis and Suggestions to the DPDP Act

    In the digital economy, consumers utilise the financial services offered to them by giving their personal data. This trade of confidential data for financial services is a highly sensitive aspect that must be backed by sturdy mechanisms protecting the confidentiality of sensitive data from misuse. 

    The most prominent issue that arises with the DPDP Act is that it has failed to differentiate between personal data and sensitive personal data. Under Section 2(h) of the Act, it defines data as the representation of information, facts, concepts, opinions or instructions in a manner suitable for communication, interpretation or processing by human beings or by automated means. This classification may perhaps be too vague in the realm of the banking sector since it deals with highly sensitive consumer data that needs greater protection than other personal data since it contains sensitive financial information besides personal information. 

    The first suggestion is to classify the various types of data that need regulation. The vague definition is restrictive for the efficient regulation of different data sets. Therefore, there should be categorisation of data sets. The EU GDPR, UK GDPR, and US state laws like the California Consumer Privacy Act categorise certain types of data as ‘sensitive’ and deserving of extra protection. The DPDP Act can take a similar approach. This will provide clarification to data fiduciaries in the banking sector to regulate sensitive financial data with a well-defined approach.

    Moreover, the DPDP Act has misaligned accountability with respect to data fiduciaries and data processors. It defines data fiduciaries essentially as corporations who possess customer data and determine how the data will be processed. Whereas, a data processor is an entity that processes the data on behalf of the fiduciary.  The DPDP Act focuses on the guidelines for the data fiduciary and leaves the data processors with minimal regulation. The only significant element for data processors is subsection (9) of section 9 which states that a data fiduciary must have a contract with the data processor. 

    The DPDP Act falls short of providing the necessary clarity for processors on how to handle such data. Firstly, it fails to specify the security controls that processors are expected to implement. Secondly, the Act is deficient in outlining clear protocols for processors to follow in the event of security lapses. Lastly, the Act neglects to establish clear guidelines for handling requests for data from government authorities, resulting in ambiguity and potential liability issues. 

    This essentially makes it clear that there are hardly any guidelines or standards that ensure that these data processors undertake their responsibilities in a safe and secure manner so as to protect the sensitive data they handle; these data processors can ultimately emerge as the ‘unruly horse’ in the digital realm. This necessitates the framing of certain standards which the data processors comply with. Chapter 5 of the Master Direction by the RBI can be referred that clearly outlines the rules of the agreement pertaining to the data processors. 

    Hence, the second suggestion is to properly define the roles of the data processors in the DPDP Act like the RBI has done for its regulated entities by clearly laying out a roadmap that gives directions to data processors on data breaches, storage of data, risk management and etc. The relationship between data fiduciaries and data processors cannot be sufficed by a mere contractual agreement. 

    Some of the directions for data processors can be referred from the RBI Master Directions. As per this, the service providers (similar to data processors) are required to define the services they will deliver and the standards they will adhere to in order to meet in terms of quality and quantity. Moreover, the service provider is responsible for maintaining confidentiality and security of the data with ‘Regulated Entity’ (similar to data fiduciaries) pertaining to the customers or its own data. The agreement should define as to which data can the service provider share with other entities.

    Conclusion 

    The world of technology is adapting and the Banking and Finance world cannot be left behind. The RBI must act as the custodian of Data Privacy in the realm of Banking and Finance. The current DPDP Act needs revision and needs to be harmonised with the RBI directives to provide better clarity for the data protection of the finance world. 

    Moreover, it would be essential for the DPDP Act to categorise the various Data types as they may be susceptible to varying levels of risk. The Act must also adapt or incorporate RBI’s master directions on IT outsourcing to clearly establish the roles of Data Fiduciary and Data Processors. The legal ambiguity with the data processors is a regulatory gap that must be dealt with to create an efficient digital banking sector. India’s digital economy generating about $200 billion of economic value besides also being the second-fastest digitizing economy. Therefore, it is necessary for India to advance these data protocols. A secure digital infrastructure provides consumer trust and safety which paves the way for a resilient and sustainable banking sector. 

  • Imposing a ‘Duty of Curiosity’ on Parties: Keeping The Parties on Their Feet

    Imposing a ‘Duty of Curiosity’ on Parties: Keeping The Parties on Their Feet

    BY SPARSH SRIVASTAVA, A FOURTH-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, ODISHA

    Introduction

    Party Autonomy is the cornerstone of the arbitration process. It allows parties in a matter to choose inter alia the judge of their own case. Arbitration, being a quasi-judicial process, must be in accordance with the rules of natural justice. There is a settled principle – Nemo judex in causa sua or no one can adjudicate their cause. Deriving from the principle it is, therefore, necessary to ensure the neutrality of the arbitrators before their appointment. Any apprehension of bias may hamper the procedure’s fairness and dilute the essence of the arbitration.

    The neutrality of the Arbitrator cannot be compromised at any stage of the proceedings, particularly at the initial stages during the constitution of the Tribunal. In other words, the party autonomy cannot be exercised limitlessly disregarding these basic tenets of law– irrespective of whether there is a consensus between the parties in respect of the appointment. 

    The International Bar Association recently released a revised version of the IBA Guidelines on Conflict of Interest In International Arbitration (‘Revised Guidelines’), which is expected to be adopted by the Council soon. Chapter 7 of the Guidelines deals with the Duties of Arbitrators and the Parties. Arbitrator’s Duty of Disclosure is well-known under the Guidelines, the Revised Guidelines require the concerned parties to undertake ‘reasonable inquiries’, explicitly imposing a ‘duty of curiosity’ on them. Duty of curiosity, as the phrase suggests, may be defined as a parallel obligation of parties to conduct a due-diligence investigation regarding any potential conflict of interests or issues of impartiality or neutrality with the prospective arbitrators.  

    Indian Arbitration Act, 1996 (‘1996 Act’ or ‘Arbitration Act’) provides for the appointment of an ‘independent and impartial arbitrator’. It creates an obligation on the arbitrator(s) to disclose any relationship with the parties that may create a bias or prejudice against or in favour jeopardizing the sanctity of the proceedings. This Arbitrator’s ‘duty of disclosure’ is continuous, and therefore, applies both at the time of the arbitrator’s acceptance of their appointment and also during the proceedings.          

    Notably, there is no such duty on the parties to look into any past or prospective relations before the constitution of the Arbitral Tribunal. The author, through this article, proposes the inclusion of a ‘duty of curiosity’ on the parties under the Indian Arbitration law. 

    The International Backdrop

    In the international arbitration landscape, inaction in a case of constructive knowledge of the parties creates a form of estoppel, as introduced in the Revised Guidelines, and can be considered as a waiver of the right to challenge the appointment of the arbitrator. Thus, the parties need to be on their feet throughout the arbitration proceedings particularly at the time of appointment of arbitrators. Moreover, the parties challenge their own appointed arbitrator only for reasons known after the appointment.

    Recently, in a dispute between the Croatian football club and the Austrian coach, the Swiss Federal Tribunal (‘SFT’) highlighted the significance of the active participation of the parties to ensure the neutrality of the arbitrators in order to avoid potential conflicts of interest. SFT, while setting aside the award by Cout of Arbitration for Sports (‘CAS’), held that the International Federation of Association Football (‘FIFA’) should challenge the arbitrator’s appointment immediately, as his affiliation with the HNS (Hrvatski Nogometni Savez) Court of Arbitration was easily accessible. 

    Thus, in other words, the arbitrators have no obligation to disclose well-known facts or published information. The burden of proof lies on the parties that challenge the neutrality of the arbitrator to show they fulfilled their duty of curiosity and had no reasons to believe otherwise at the time of the constitution of the arbitral tribunal. 

    Lately, the International Chamber of the Paris Court of Appeal rendered its decision in the Vitadel case on an application to set aside an international arbitral award holding parties’ inaction or failure to look at easily available information could not be a reason to set aside the award. Under French law, an arbitrator must disclose any circumstances that could, in the eyes of the parties, give rise to a reasonable doubt regarding their independence or impartiality. However, the duty of arbitrators is not absolute and is shared by the parties’ duty of curiosity.

    In WADA v. Sun Yanf, CAS clarified that the duty of Curiosity is limited as it would otherwise convert to be a liability for the parties. This duty shall not be unlimited; as parties are not expected to conduct exhaustive investigations but are required to exercise a reasonable level of diligence.

    Analysing the Status Quo in India

    Both Arbitrators and Parties have a duty of disclosure under the Arbitration Act. This duty is not restricted to the appointment but extends till the entire proceedings conclude. The Fifth Schedule of the 1996 Act categorically provides for the grounds that might raise doubts as to the impartiality or independence of the arbitrators. The contents therein incorporate the Red and Orange Lists of the IBA Guidelines, which can be grounds to set aside the arbitral award as well. The Law Commission has also suggested incorporating the IBA Guidelines to ensure the neutrality of the arbitrators.

    Notably, the benchmark under the Indian law is not ‘existence of bias’ but rather ‘justifiable apprehension of bias’. The Supreme Court has not set the bar too high, which means that the parties need not assess or prove the existence of clear bias. Rather, it ought to determine whether the circumstances in question give rise to any justifiable apprehensions of bias that may affect the neutrality of the arbitrator. 

    Section 12(1) of the 1996 Act allows the parties to challenge the appointment ‘only for reasons of which he becomes aware after the appointment has been made.’ It provides the knowledge of the parties at the time of the appointment.  There is a duty of disclosure. However, a duty of curiosity is not imbibed in the provision, or in other words, there is no parallel duty of caution on the parties.  

    The duty of curiosity can be seen as an extension of the principles imbibed in the 1996 Act, requiring parties to actively engage in the arbitration process and fulfill their obligations to ensure a fair and effective outcome.

    It prevents any obstruction to the arbitral proceeding and enforcement of the arbitral award. As once the party did not actively participate and fulfill its obligation it may be considered as an acceptance of the same. Such implied acceptance may create an estoppel on the parties.

    Conclusion

    The duty of curiosity of parties in arbitration can be seen as the obligation of parties to actively seek out relevant information that could possibly impact the arbitration proceedings. Neutrality, i.e. independence and impartiality of the arbitrations is a crucial aspect of arbitration. With the adoption of the Revised Guidelines, international arbitrations would witness a paradigm shift, and the challenge of arbitration would be more difficult.

    Arbitrators’ duty of disclosure is well recognised under the Arbitration Act. There should be a parallel duty on the parties. It would ensure transparency, fairness, and integrity in the arbitration proceedings. It is well established equitable principle: “One who comes to seek justice must come with clean hands”. Thus, it is never one sided and the parties also must have certain obligations to comply with.

    Duty of curiosity is not to be unlimited but can be said to be a minimal level of due diligence that can be expected from the parties. It may be detrimental to the interest of parties to have blind belief and trust as in cases of Courts of Law, where the Judges decide. With rights come responsibilities: arbitration allows autonomy but also requires active participation.

    It though difficult to bring such changes in the 1996 Act, it is upon the court to recognize this principle of ‘duty of curiosity’ to solidify their pro-arbitration stance. The Courts’ approach should be pragmatic if the party with simple due diligence, especially in the present digital world, could have known the alleged fact, the benefit of the doubt should be in favor of the arbitrators.

  • NCLT’s Departure: Reviving Time-Barred Claims in Insolvency Proceedings

    NCLT’s Departure: Reviving Time-Barred Claims in Insolvency Proceedings

    By Navya Bassi and Rhythm Goel, fourth-year students at NLU, Odisha

    Introduction

    Recently, the Mumbai bench of National Company Law Tribunal (‘NCLT’) in Gokul Anilkumar v. Shailesh Bhalchandra held that claims that are time-barred can get revived by Corporate Insolvency Resolution Process (‘CIRP’). It laid down that even though remedy is restricted, right cannot be negated. The facts of this case were that CIRP was initiated against Maharashtra Theatres Private Limited, who was the  debtor. A claim was filed by Creditor alleging a financial debt arising out of a term loan facility of Rs. 55 crores.  An application was submitted by the suspended director of the debtor to dismiss the creditor’s claim contending that the debtor’s account was declared as a Non- Performing Asset (‘NPA’) prior to the date of default, rendering the claim to be barred by limitation. The bench addressed two pertinent questions- admissibility of claims that are barred by limitation and ‘one time settlement’ as an acknowledgement of liability to resume the limitation period . The author seeks to analyse whether the bench has gone a bit too far and deviated from well settled position of law.

    Position Prior To This Judgement

    The Report of the Insolvency Law Committee in March 2018 stated that the enforcement of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) was not to suit the interests of the creditors who failed to exercise the available remedies under the pre- existing laws within the prescribed period.

    In 2018, the Supreme Court (‘SC’) in the judgement of B.K. Educational Services Private Limited v. Parag Gupta relied on this report to derive the legislature’s intention of not giving an opportunity to present time- barred claims. It has been made explicitly clear by sections 7 and 9 of the IBC that the creditor can seek CIRP only for debts that have not crossed the limitation period.

    As held by the SC in Andhra Pradesh Power Coordination Committee & Ors v. Lanco Kondapalli Power Limited & Ors., it was not the intention of the legislature to enable a creditor to revive dead claims through the route of the IBC. Section 3 defines debt as “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”. This was interpreted by the court as debts that are “due and payable” in law.

    Section 238A of the IBC was inserted through an amendment to explicitly state that for any proceeding before the Adjudicating Authority, the provisions of the Limitation Act, 1963 (‘Limitation Act’) shall be applicable to the proceedings. On the question of retrospective applicability, the SC in Thirmalai Chemicals Limited v. Union of India held that in essence, limitation is procedural and would be applied retrospectively.

    The interpretation of section 18 of the Limitation Act has been a contentious issue. This provision stipulates that if there is a written acknowledgment of liability before the specified period lapses, a new limitation period starts from that acknowledgment. However, the Supreme Court’s ruling in Babulal Vardharji Gurjar v. Veer Gujjar Aluminium held that section 18 would not apply to applications for initiating insolvency proceedings under the IBC. National Company Law Appellate Tribunal (‘NCLAT’) relied upon this contradictory decision for some time until clarity was provided in the case of Laxmi Pat Surana v. Union of India., wherein, the court affirmed that section 18 of the IBC should not be disregarded if circumstances necessitate its application. The court elucidated that if the debt or the responsibility to pay has been acknowledged by the principal borrower or the corporate debtor, new statute of limitations begins from the date of such acknowledgment, as long as it transpires before the expiration of the existing limitation periodTop of Form

    Chaos Ensued

    The order of the NCLT has gone beyond its jurisdiction  to create ambiguity with respect to the limitation period of claim under CIRP.

    To justify its decision, the bench has cited two cases, both being irrelevant in the present context. One of these references was the judgement of the SC in Punjab National Bank and Ors. v Surendra Prasad Sinha.. The court in this case had held that due to limitation, only suit as a remedy is barred. The creditors’ right subsists till the debt is repaid, and thus, he can still exercise his right through an alternative remedy, i.e. balancing the payment through fixed deposit in this case.

    The bench has relied upon this case to hold that claim under CIRP cannot be dismissed on the grounds that it is time constrained. Placing the two cases in juxtaposition, the claims in both are completely dissimilar to each other,  as the Punjab National Bank case pertains to a claim of  criminal breach of trust under the Indian Penal Code, 1860 (‘IPC’) where the issue was of creditor deducting money from the debtor’s bank account outside the limitation period. Even the remedy obtained in this case was not sought through IBC as money was simply deducted from the account after which the validity of the same was challenged before the court. The extract used from this case is “only exception in which the remedy also becomes barred by limitation is that right itself is destroyed.” However, the same judgement also goes on to say that the remedy to enforce the liability stands destroyed after period of limitation lapses. Which, however, is conveniently ignored by the court in the Gokul case.

    Another case that has been referred by the bench is Sunil Kumar Aggarwal v. New Okhla Industrial Development Authority & Ors. by reproducing the part of the order which reads as “The claim cannot be rejected because it is time- barred or claimed by an entity other than the financial creditor.” The bench has read the order in isolation, not being cognizant of the order in entirety which held the claim to be admissible only as it was within the ambit of limitation period. Moreover, the limitation period in question was of twelve years as it pertained to immovable property. This cannot be used as a justification for the present order as the limitation period had not lapsed in the cited case, but it is time-barred in the instant case.

    These cited judgements hold no water as they are not in the context of initiating IBC proceedings outside the limitation period and only add to confusion of the legal fraternity.

    Questions Left Unanswered

    This judgement has encroached upon the already settled questions of law. section 60(6) of the IBC excludes the period of moratorium from the computation of limitation period under the Limitation Act. If the IBC’s intent were to operate in complete alienation of this Act, there would have been no need of incorporating this section in the first place.

    This case particularly had a One Time Settlement (‘OTS’) wherein the debt was acknowledged by the member of the board of directors of the corporate debtor. As per Tejas Khandahar v. Bank of Baroda, OTS proposals come within the ambit of ‘acknowledgement of debt’ in consonance with section 18 of the Limitation Act.

    However, there are certain loopholes in this judgement. Firstly, to what extent is it permissible to assess veracity of the claim when it already fails to meet the criteria provided under the Limitation Act? If this case is to be followed as a precedent by the courts, there will be no point in having an express provision in the first place that bars admissibility of such claims. Secondly, is this judgement phrased this way because of OTS as a recourse, or because the bench necessarily implies evaluating the merits of time-barred claims? An OTS has been repeatedly held as an acknowledgement of liability by the debtor and for the same, a fresh limitation period is permissible under law starting from the date of such an acknowledgement. However, the same is not true for the claims that do not have such a proposal in their agreements. This order fails to distinguish two such scenarios.

    This position was settled by the SC until now. And a departure from the same requires coherent reasoning, which this particular judgement fails to deliver.  

    Conclusion

    Even with the laid down position of law in place, we see that NCLT diverges from the same to lay down its own interpretation of law in the case of Gokul Anilkumar v Shailesh Bhalchadra. NCLT’s decision to revive time-barred debts has led to confusion, citing case law irrelevant to the issues raised in this case. One of the cases cited by the Bench clearly bars the remedy of suit for falling outside of the limitation period, while the other has accepted the claim solely because it falls within the purview of the limitation. So, it is irrational to cite these cases to justify the decision of the bench

    Prior to this order, both the legislative and judiciary seemed clear on the law that claims barred by limitation will not be admissible under the IBC, except in the cases wherein OTS proposals were incorporated. This judgement has the potential to open a pandora’s box of unanswered questions, particularly on assessing the veracity of time-barred claims.

    Until there is further clarification or intervention with respect to this order and the law interpreted therein, the decision stands as a contentious point, leaving room for continued debate and potential future legal challenges.

  • From Bias to Balance: Informed Consent in AI Arbitration

    From Bias to Balance: Informed Consent in AI Arbitration

    BY A.S. VAMSI KRISHNA AND SWAGAT AHUJA, THIRD-YEAR STUDENTS AT RGNUL, PUNJAB

    Introduction

    Recently, there has been a surge of interest in the notion of artificial intelligence (‘AI’) based platforms taking over the role of an arbitrator. This interest stems from their potential to provide a swift and cost-effective alternative to the traditional arbitration process, particularly in light of the fact that over 31 million disputes are currently pending before Indian courts. However, legal and ethical concerns have been raised regarding the use of AI-arbitrators due to their susceptibility to incorporating biases stemming from racial, cultural, religious, and geographic stereotypes into their assessments. For instance, COMPAS, an AI-based risk assessment tool implemented in American judicial systems to predict the likelihood of a defendant becoming a repeat offender, was found to exhibit significant bias. The program inaccurately categorised African American offenders as high risk nearly half of the time, raising serious concerns about its fairness and reliability. These concerns are firmly supported by both the UNCITRAL and  the Indian Arbitration & Conciliation Act, which recognise challenges against a biased arbitrator. Consequently, the question arises as to whether the inherent biases of an AI-arbitrator render it an unusable proposition, even if the parties involved consent to their usage. The answer is not so straightforward, since a blanket ban on the use of AI-arbitration would infringe upon the freedom of the parties to opt for their preferred arbitration process, even if it involves a fully-AI based arbitrator at its helm. 

    The authors argue that a balance must be found between preserving the parties’ freedom to submit their dispute to the arbitrator of their choice against the consideration of potential costs incurred should there be mass-unenforceability of AI-generated awards in courts. To achieve this balance, the authors suggest that AI-arbitration agreements should only be allowed where the parties involved fully understand the biases inherent in the AI-arbitration and provide informed consent accordingly. Further, this article delves into potential measures that could be implemented within a regulatory framework to ensure that parties are capable of providing informed consent to an AI arbitration agreement.

    The Need for Informed Consent

    In the context of AI-arbitration, informed consent must be understood to be fulfilled when the concerned parties have access to sufficient and accurate information regarding the AI’s inherent biases and predisposition prior to entering into the agreement. The need for informed consent is countered by some, who argue that the higher threshold of consent in selecting an AI-arbitrator imposes an unnecessary burden, especially when compared to their human counterparts who, despite sharing susceptibility to inherent biases, are exempt from such requirements. In response, the authors contend that equating AI-arbitrators with their human counterparts would be misguided, since the manner of the manifestation of their biases and the scale of their operations are not comparable. AI in general is in its nascent phase and as such, the methods of investigating inherent biases it may possess are complicated and time-taking. Expecting both parties to be sufficiently knowledgeable on the basis of their own investigations is a big ask and would often lead to challenges at the time of enforcement. This is certainly true in the cases of consumer facing contracts where an AI-arbitrator is employed by banks, large constructors and other large-scale operators, where the opposing party often consists of individuals who lack sufficient resources to investigate the AI-arbitrator thoroughly. Additionally, an AI-arbitrator differs from humans in that the multitude of cases it can resolve is much greater than a single human. This means that any bias challenged by a party in one case would lead to a domino effect, toppling every case it has previously dealt with on the basis of a single challenge. In light of these factors, the element of informed consent is a vital consideration with respect to AI-based arbitration.

    Integrating Informed Consent into AI-Arbitration Platforms

    To ensure that the parties involved are capable of providing informed consent, the regulatory framework must be such that the potential AI-arbitration platforms are examined thoroughly and any inherent predispositions undertaken by the AI is disclosed. However, as previously discussed, the complexity of investigating such AIs means that the regulation in place cannot evolve an independent statutory body which evaluates each AI and certifies it as this would increase the cost and resources of the state. Thus, the authors propose that the potential AI arbitrator should be made open-source, meaning the model whether a language learning model or otherwise on which the AI operates should be publicly accessible to ensure transparency. An open-source AI offers significant benefits, as complete access to its inner workings allows experts worldwide to examine it and identify potential loopholes, emulating a peer-review process of the code. This approach has proven effective, evidenced by the case of ChatGPT, an open-source AI. It was discovered to have inherent biases in favour of a more liberal stance, revealed only by the efforts of a group of experts who carefully examined the code. An open-source AI is preferable to a confidential program since it would reduce arbitration costs for the parties by mitigating the need for private investigations of the code in each case. Additionally, it would be more efficient for the arbitration platform, which would otherwise need to protect the secrecy of its code through rigorous Non-Disclosure Agreements and other tedious privacy measures before permitting parties access for investigation. Therefore, an open-source approach is a win-win situation for the parties involved and the arbitration platform. It ensures transparency regarding any inherent biases or errors within the AI and eliminates the need for parties to conduct an ex-ante investigation for each case.

    Furthermore, an additional element to informed consent is to ensure that the variant of the AI which both parties have tested and agreed is the AI which actually acts as the arbitrator. This factor is relevant in light of the capability of AI to be altered post-agreement due to new updates. For example, if both parties provide consent to appoint an AI variant developed in 2024 as their arbitrator, any subsequent updates to this variant could potentially alter the AI’s assessment of the case. This would create the possibility of challenges during enforcement. Thus, to prevent enforcement errors, AI-arbitration agreements must specify the variant which they choose to act as arbitrator and the AI-arbitration platform must possess the capability to assess disputes as per their previous variants as well. Alternatively, the parties can reach an agreement to consent to the use of the specific AI along with the updates therein to ensure that no claim regarding lack of informed consent leads to challenges during enforcement.

    Conclusion

    AI-based arbitration promises low-cost, expedited dispute resolution, a prospect that is so enticing that it has drawn investments to bring the idea to reality. While parties have the right to opt for AI arbitration as their preferred process, ensuring fairness and equitability is necessary to ensure that the awards so produced are not vulnerable to challenge in courts. It is in the interest of future AI-arbitration platforms to provide parties with the ability to give informed consent to ensure successful enforcement of awards. 

    Further, regulators face a daunting task since they always have to catch-up with the lightning-fast development of AI. Falling behind is not an option, since a defect in the AI-program could impact not just one, but potentially all the awards it has produced. The authors suggest a pre-authorisation process for AI-arbitration platforms, mandating open and peer-reviewed programs to uncover potential biases. This is since AI’s complex nature means that understanding and revealing its potential biases can only be done by a small group of experts and so cannot be expected to be understood by all potential users. Peer review allows for a breakdown of complex information into simple intelligible data that can be understood by the parties before agreeing. Should there be no regulation, the state risks having its people consent to arrangements for which it is not moral to hold them accountable since they are unable to give informed consent. Hence, it is a justified regulatory filter to require AIs to pass certain tests before being released into the market.

  • SECTION 29-A OF ARBITRATION ACT: THE EXIGENCY OF LEGISLATIVE PRESCRIPTION.

    SECTION 29-A OF ARBITRATION ACT: THE EXIGENCY OF LEGISLATIVE PRESCRIPTION.

    BY DIGVIJAY KHATAI AND ZOYA FARAH HUSSAIN, THIRD-YEAR STUDENTS AT

    NLU ODISHA

    Introduction

    Section 29-A (4) of the Arbitration and Conciliation Act, 1996, is currently under scrutiny in India due to its perceived impact on the efficiency and expediency of arbitration proceedings. This provision mandates the completion of arbitral proceedings within twelve months from the date of the arbitrator’s appointment, with an extension of six months by the consent of the parties. Non-adherence to this timeline leads to the cancellation of the arbitrator’s mandate. The issue of allowing extension after the expiry of the mandate arose recently in the Rohan Builders  case which awaits a final decision in the Supreme Court.  In that light, the first section analyzes the uncertainty regarding the contribution of the parties in seeking an extension of the mandate after its expiry. Beyond that, we expound on the dichotomous judicial stance on the said matter and its implications. Finally, we culminate our opinion to understand the need for a statutory prescription on this issue. 

    Comprehending the Conundrum

    In acknowledgment of the need for a fine balance between the two pillars of the Arbitration and Conciliation Act which are party autonomy and time-bound resolution of disputes, the 2015 amendment inserted Section 29-A to the act wherein sub-section (1) limits the time period for the arbitral tribunal to announce the arbitral award within twelve months from the ‘date of completion of pleadings for claims and defences’, which has to be concluded within six months from the date the arbitrator(s) received the notice of appointment as per sub-section 23(4) of the Act. Further the same can be extended, with the consent of the parties for a period not extending six months under sub-section 29-A (3).  

    However, under sub-section 29-A (4), in case the arbitral tribunal fails to announce the award either within the timeline under sub-section (1) or within the extended timeline sub-section (3), the mandate of the arbitrator shall expire, upon completion of such time-period, unless the court extends the same either prior or after the expiry. Sub-section (5) further mandates that such an extension by the court shall be on the ground of a ‘sufficient cause’ that must be proved by the party making the application under sub-section (4).  These provisions enshrine the essence of time-bound efficiency in the statute limiting the period of resolution within twenty-four months from the date of notice of appointment to arbitrators. 

    The legislation explicitly addresses the authority of courts to extend the arbitrator’s mandate, both preceding and following its expiration. However, it remains silent on the specific timing for parties involved in the proceedings to submit an extension request. Hence, the central legal quandary arising from this ambiguity is whether parties must adhere strictly to applying under sub-section 29-A (4) before the arbitrator’s mandate expires, or if they retain the autonomy to do so even after its expiration. 

    Judicial Dichotomy

    The scope of section 29A has been analysed in a catena of judgments. In Rohan Builders case, the Hon’ble Calcutta High Court examined the extension of the arbitrator’s mandate through the interpretation of the word “suspended” in the 176th Law Commission Report concerning section 29A (1). The learned Single Judge referred to this report which proposed using the term “suspension of arbitral proceedings” instead of “terminate” when suggesting the implementation of time limits for concluding arbitration proceedings. However, the statute uses the word “terminate” in recognition of the need for efficacy in arbitration proceedings. This choice implies that once the prescribed timelines expire without extension requests from either party, the tribunal’s authority would cease definitively rather than remain suspended. 

    Relying on the aforesaid judgement, Hon’ble Calcutta High Court in Vrindavan Advisory Services L.L.P. v. Deep Shambhulal Bhanushali rejected an extension application filed after the specified period under section 29A. Notably, the Hon’ble Supreme Court has ordered a stay of the Calcutta High Court’s verdict (given vide order dated November 06, 2023) after an SLP was filed against Vrindavan Advisory. 

    In a sharp turn of opinions, the Delhi High Court in ATC Telecom Infrastructure Pvt Ltd case, ruled that an application under section 29A (4) can be filed after the expiry of the mandate of the arbitrator. It reasoned that since the section has empowered the court to extend the arbitrator’s mandate either ‘prior’ or ‘after’ the expiry of the same, it saw no reason why an application of extension ‘after’ the expiry shall not be entertained. The rationale behind such a stance was justified by the expeditious approach of the arbitrator backed by the consent of the parties for the said extension. These were reasons enough for allowance of the extension application rather than rejecting it merely for filing the same after the expiry of the mandate.  

    The expeditious conduct of the arbitrators was again a crucial ground for the Hon’ble Delhi High Court in Wadia Techno-Engineering Services Ltd. v. Director General of Married Accommodation Project to grant an extension of arbitrator’s mandate despite the parties applying for the same after the expiry of the mandate. 

    Upholding the approach laid down by ATC Telecom (Supra), the Bombay High Court in Nikhil H. Malkhan case, has reasoned that since the courts are empowered under section 29-A (4) to grant an extension after the expiry of the mandate, such power conferred cannot be negated solely by the virtue of parties making application ‘after’ the expiry. 

    Legislative Prescription: A Need

    The approach opted by ATC Telecom, Wadia Techno-Engineering and Nikhil H. Malkhan adopts a logical viewpoint as opposed to a stricter and a more literal approach of the statute solely focusing on the efficiency of proceedings, taken by Rohan Builders. The former not only seeks to accurately construe the legislative intent of section 29-A (4), but it also intends to preserve the element of party autonomy which stands on an equally significant pedestal. While it shall be interesting to see how the Supreme Court balances both the aspects in the SLP filed against the Rohan Builder (Supra), we need to be cognizant of a potential loophole that shall entail at the event of allowance of the parties to apply for extension after expiry of the arbitrator’s mandate. 

    Notably, none of the rulings that advocate acceptance of applications after the expiry of the mandate, prescribe a specific time limit after the said expiry within which such an application must be made. In the absence of such an additional time limit, parties will have a free pass to apply for the extension after any unreasonable delay. For example, recently in Glencore India Pvt Ltd v. Amma Lines Limited case, the Bombay HC laid down that as per the current legal framework and given an expeditious conduct on behalf of the arbitrator, the arbitrator’s mandate may continue to be valid despite an ‘unreasonable delay of 6 months’ attributable to parties applying for extension of the mandate.     

     The direction to apply ‘before’ the expiry of the arbitrator’s mandate in Rohan Builders (Supra) contributes a sense of certainty to the ambiguous maze of specific time limits which the other cases are devoid of, creating an enriched ground for violation of the statute to conclude arbitral proceedings within twenty-four months. The entire scheme of discussions highlights the pernicious implications of enforcing the ATC Telcom approach coupled with an absence of a further statutory time limit, on the efficiency of arbitral proceedings.  

    The creases of the conundrum can be ironed out if a legislative endeavour is sought to be made to not only lay down conditions for extending the mandate under section 29-A(4), which includes expeditious conduct of arbitrator coupled with consent of parties; but also prescribe a specific time limit of say fifteen or thirty days within which an application for extending arbitrator’s mandate is to be mandatorily made. 

    Conclusion

    The slew of judgements paints conflicting pictures on the issue of extension of the arbitration mandate. While the decision in the SLP pending in the Rohan Builders case would be fascinating to observe, the approach to allow the extension of the mandate after the expiry of the timeline taken by another set of judgments does not come as a panacea either. The approach does entail some lacuna like the ‘absence of a specific period’ to adhere to while applying for an extension of the arbitrator’s mandate, after the expiry affects the time-bound efficacy of the legislation. In response to this a need for a statutory prescription of a certain timeline for requesting an extension after the expiry of the mandate has been proposed which could give certainty in such a scenario where the opinions of the courts are divided and act as an uncontested thumb rule to guide further decisions. 

    In conclusion, a balanced outlook to encapsulate the essence of both the pillars of the statute would ensure that both the judiciary and the legislature, in pursuit of endeavouring in the said matter would be guided by the original intent of the legislators.