The Corporate & Commercial Law Society Blog, HNLU

Category: The Covid-19 Pandemic

  • Funding of Food Aggregators & Competition law: A Post Covid Analysis

    Funding of Food Aggregators & Competition law: A Post Covid Analysis

    By Rohan Mandal and Jeezan Riyaz, fourth and third year students at USLLS, GGSIPU, Delhi and NLIU, Bhopal respectively.

    In an exclusive arrangement as part of its strategic push, the food delivery giants, Zomato and Swiggy are all set to raise more than $1 billion, which will help them to leverage a position of dominance in the food delivery business. Duopolistic designs, coupled with pricing below the belt, and the viability of recuperating losses have led to a strategic dominance for these entities in the food delivery market, thereby harming the consumers in the long run.  Accordingly, the food aggregators have been under the constant radar of the Competition Commission of India (“CCI”) for manipulating pricing, deep discounting and offering of rebates with an intention to distort competition.

    At the heart of the Competition Act, 2002 (“The Act”), lies the principles of fair competition and therefore any activity or strategy that abuses the ongoing competition in the marketplace, is said to fall within the ambit of the anti-competitive activities.  The Act in the explanation under section 4(2) defines “dominant position”, as a position of strength or dominance, enjoyed by any enterprise which enables it to: (a) individually dominate or function without the competing opponents in a marketplace; or (b) manipulate the consumers in a sense, that is grossly disadvantageous to the other forces of the market. This gains more traction particularly in light of the increased use of these apps and reluctance to dine out in light of Covid.

    • Abuse of Competition & Appetite for market dominance

    Section 4(2)(a)(ii), of the Act disallows an enterprise from engaging in predatory pricing, which is understood as selling goods below cost to drive out competition. While, 4(2)(c) prohibits those activities that deny access to the market and lead to foreclosure of competition. Economies of scale may lead to dominance, and if deep discounting and new rounds of funding received by the food aggregators is viewed holistically, a conclusion to that effect can be drawn.

    With Zomato having acquired Uber Eats and other small start-ups alongside its strategy to rechristen Zomato gold to Zomato pro (a premium subscription model), it gets a strategic edge to dominate the marketplace. Swiggy, on the other hand has launched their initiative called Swiggy Super, which has forced small start–ups to wind up their operations by diverting the consumer base to their platform. This comes at a time when people do not have the luxury of going out to a restaurant due to the ongoing pandemic and are reliant on food delivery apps. Section 19(4) lays down relevant factors to be considered to ascertain abuse of dominance, which include the economic power of the entity vis-à-vis their competitors and market share of the enterprise. The Food aggregators have control over the listing of restaurants and have access to consumer data, which is being leveraged for their benefit and to promote their in-house kitchens. Therefore, an argument can be made thatabuse of dominance is prevalent in the marketplace.

    Further, CCI in its report on e-commerce states that the food aggregators have benefitted immensely by establishing cloud kitchens (cooking spaces without a dine-in-option). These aggregator-run-establishments have an edge over normal restaurants on the app in terms of the user data available to them, preferential listing provided and by forcing other restaurants to purchase items from them. This has led to an unequitable profit earning structure, thereby exhibiting anti-competitiveness from the legal standpoint. Therefore, with data in the hands of these in-house-kitchens in the present digital economic paradigm, they are in a better position to maximize sales and entice consumers.

    In Matrimony.com Ltd. v. Google LLC, Google was accused of violating anti-trust provisions by manipulating their search algorithms and giving preferential listing to its own products and features. This caused the complainant to be listed lower, and thereby affected their business. It was held by the CCI that Google was directly manipulating the consumers by diverting their attention from rival services to their own. Google abused its dominant position to exert pressure on other players to exit the market, which was accordingly dealt with under section 4(2)(e). The CCI has laid down in MCX v. NSE, that  activities which are covered under section 4 such as predatory pricing and denying access endanger competition in the market. In a similar vein, it can be argued that the food aggregators are abusing their position of dominance through their in-house kitchens.

    • Assessment of dominance and abusive conduct: CCI analysis

    Fueled by the stiff domestic competition among restaurants, lack of alternative dine-in-options and buoyed by the ever-expanded funding inthe food delivery business, it has paved a way for a duopoly in the Indian paradigm. This makes it imperative on the part of the CCI to conducta thorough investigation from a competition law standpoint.

    In the new normal of the restrictions worldwide, the food delivery aggregators are engaging in anti-competitive practices such as predatory pricing, violation of platform neutrality, exclusivity, barriers to entry and obliging the already existing rivals to exit. Thus, impacting footfalls and diverting the entire consumer rush to their own benefit. The National Restauranters Association of India’s (“NRAI”), a body which represents over 5,00,000 restaurants, in their complaint to the CCI also echoes this sentiment, wherein they allege abuse of dominance by the aggregators. In their complaint they allege that aggregators charge restaurants exorbitant fees, give preferential listing to restaurants on payment of fees, and engage in deep discounting (non-adherence to deep discount schemes means lower visibility for the restaurants).

    The COMPAT in  Schott Glass appeal case, had observed that abuse of dominance and predatory pricing involves the satisfaction of two important requirements: (i) unequal treatment of similar transactions; and (ii) harm meted out to the competition in the marketplace. This places all the sellers on an unequal footing and is disadvantageous to the interests of the buyers. In another important case, the XYZ v. REC Power Distribution Company related to abuse of dominance, the CCI held that “establishing a denial of access”, indicates exclusivity and sizeable degree of market power being controlled by those in position of dominance.

    The NRAI complaint to the CCI has also alleged that the practices of the deep funded aggregators have forced several restaurants to shut down. Consequently, there is a need to reach a middle ground to ensure that there is stability and transparency in the process and that capitalism doesn’t hamper the very essence of competition as abuse of strength can impact both the competition and the consumers in the long run.

    • The Impact of IPO and the new rounds of funding

    The Zomato IPO will raise Rs. 9,375 crores against the backdrop of Zomato posting losses of Rs. 886 crores in the last financial year. On the other hand, Swiggy is set to raise Rs. 9,297 crores  in their newfunding round against losses of Rs. 3,768 crores in the 2019-2020 accounting year. This inflow of cash against the continued loss-making nature of these food aggregators, makes the market interesting from a section 4 standpoint as the entities will have the financial capability to strengthen their grip on the market, while posting losses, therefore, adversely affecting competition. In Uber v. CCI, the Supreme Court dealt with a case involving taxi aggregators offering rides at lower rates while making losses. The Hon’ble Court held that continued losses incurred by aggregators is prima facie indicative of abuse of dominance because predatory pricing helps them to drive out competition and control the marketplace at the same time. The CCI was ordered to investigate the activities of the aggregators. Although, the Commission would later give the taxi aggregators a clean chit, but the principle that continued losses merit an investigation by the CCI still stands, and should be applied in the present case.

    Zomato and Swiggy have stated that they will continue to make losses in the near future in order to develop business. This would be done by starting operations in new cities, and also diversifying to the item delivery market. At the same time, they also continue to give deep discounts and preferential treatment to certain enterprises. These activities should be investigated under section 4 and the possible appreciable adverse effect on trade under section 3 needs to be looked at. This becomes necessary, particularly in light of the fact that the CCI has also investigated such models in the case of taxi aggregators and e-commerce giants,  Amazon in Lifestyle v. Amazon. In this case the CCI held Amazon guilty under the Act  for not granting visibility to the products of the complainant. The decision of the CCI in Ashish Ahuja v. Snapdeal is also relevant for this purpose, where Snapdeal was accused of granting exorbitant discounts on their platform, which affected the business of their competitors. The CCI held that discounts coupled with harm to the market amounts to abuse of dominance. In the current paradigm, it is evident that the food aggregator market is dominated by two players, whose activities such as continuous deep discounts and preferential listing is prima facie indicative of abuse of dominance, and this merits an investigation by the CCI.

    All these factors have been put forward in the NRAI complaint. Further, the new cash inflow means that the aggregators will have the capacity to continue with the above-mentioned activities, which if left unchecked could have serious effect on the market.

    • Conclusion

    To sum up the above discussions, the authors submit that two important factors need to be considered, namely, the new funding and the previous activities of the food aggregators. When these two factors are looked at in tandem, it becomes imperative that a thorough investigation is conducted by the CCI, to gauge the market situation and address the apprehensions of the NRAI. Zomato and Swiggy have maintained that they will continue to make losses in the near future in order to develop business, which further makes it important for the CCI to probe the allegations against the aggregators. Covid has resulted in the popularity of food delivery giants soaring to greater heights. Therefore, there is a need to critically analyze the legal impediments of anti-competitive strategies that form the basis of the competition laws in India.

  • COVID-19 and M&A: Reshaping The Deal Making Process

    COVID-19 and M&A: Reshaping The Deal Making Process

    BY HARSH KUMRA AND HARSH MITTAL, FIFTH-YEAR STUDENTS AT AMITY LAW SCHOOL, DELHI (GGS IP UNIVERSITY)

    COVID-19 has strongly affected the M&A scenario in India. Corporates are facing difficulties in going through deals due to various factors led by economic deterioration by lockdown. Some of the thrusting factors for business decisions regarding such transactions are changes in business sentiment, valuation concerns as well as liquidity constraints due to reduced lending by banks especially after suspension of IBC. For April 2020, Grant Thornton India’s deal tracker reported a 37% fall in aggregate M&A volumes and 22% fall in aggregate Private Equity deals compared to April 2019 and March 2020. However, the deal activity across different industries such as Telecommunications, Healthcare and Consumer Staples has carried on despite lockdown restrictions and COVID-19 will give rise to more opportunities in M&A sector.   

    This article addresses certain key issues and concerns that the companies have had to focus on due to the ongoing pandemic and it looks at the future of deal making process.

    Deal Considerations

    An important concern here would be to decide the kind of deal the companies are willing to enter into. Several factors will play a role in coming to this decision – valuation concerns, lending ability of banks and financial institutions, liquidity crunch faced by the company etc. In India, it is the inveterate mindset of companies to opt for a cash deal, given the fact that they are easier and offer lesser hurdles as compared to its counterpart. However, the times have changed substantially, and on this verge, companies have had to use their cash reserves on a number of other operations and to keep their business going. While cash-rich companies have been able to enter-into M&A transactions easily, the same has not been the case for most companies who require external financing. Additionally, in light of the recent changes and amendments, the lending capacity of banks and financial institutions has been impaired to some extent. The Insolvency and Bankruptcy Code, 2016 has been suspended and the RBI announced a special COVID-19 Regulatory Package through which –  it allowed rescheduling of payments; lenders have been permitted to defer the recovery of interest in respect of cash credit and overdraft facilities and lenders were allowed to give a three month moratorium on term loans.

    With this being said, the companies would try to rely more on stock deals and the buyer would be able to keep its cash reserves for other operations. This will also help the companies and its shareholders in saving the tax component in the sense that they may save on payment of transfer taxes. Companies might also consider investing using hybrid instruments featuring both cash and stock. The market is likely to see new forms of hybrid instruments. In the deal of JSW Energy, acquisition of Jindal Steel and Power witnessed such a structure combining both asset sale and share acquisition. However, the deal was called off by JSW Energy before it could be closed. A report published by the International Financial Law Review states that such hybrid structures provide the necessary balance between the regulatory constraints and commercial objectives.

    Further, some companies might prefer slump sale to avoid the extra hassles of due diligence and approvals from minority shareholders. This could be beneficial for buyers as the exposure to unknown liabilities is comparatively lesser and hence, the buyer need not expend much time on due diligence.

    Regulatory Framework

    With the ongoing pandemic still in place, India has seen regulators stepping in time and again to do their best to limit its impact on the economy. If we look at the measures that have been taken, we could say that the regulatory environment of our country is trying to facilitate the deal making process.

    The regulators such as Securities and Exchange Board of India (‘SEBI’), Ministry of Corporate Affairs (‘MCA’), Reserve Bank of India (‘RBI’) and Competition Commission of India (‘CCI’)have made relaxations and exemptions in terms of compliances and taxations. They have stepped up to facilitate e-filing procedures of applications, ultimately easing the transaction process for companies.

    As a major relief for corporates, the MCA has eased the rules with respect to the way the Board Meetings are conducted. In March, an amendment was introduced to the Companies (Meeting of Board and its Powers) Rules, 2014 and directors of the companies were allowed to participate in the Board meetings through video conferencing or other audio-visual means, for issues such as Approval of the matters relating to amalgamation, merger, demerger, acquisition and takeover. Additionally, it also allowed companies to hold Annual General Meetings through video conferencing for the entire year.

    Apart from this, SEBI asked all listed companies to make endeavors to ensure that investors are provided with timely and adequate information with respect to the impact of the pandemic on the company’s financial statements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. This will help the investors in making decisions in terms of company’s financials and will give the right valuation of the companies.

    Valuation

    The pandemic has created an atmosphere of uncertainty and volatility, leading to ambiguities in terms of company valuations. For deals that were initiated before the COVID-19 outbreak, buyers and sellers are back to the negotiation tables to deliberate upon the valuation of the buyer. For the companies who just began negotiating the deal, they are likely to face difficulties in reaching at an appropriate valuation. In the former case, buyers would try to reconsider and renegotiate the valuation, while in the latter; they would attempt to leverage the lower valuation of the target company. Additionally, both the parties would want to bridge the time gap between signing and closing the deal in order to lessen the impact of volatility on the deal.

    Due Diligence & Representation and Warranties

    This aspect of transaction is going to face deviations since there is a lesser scope of physical inspection and more reliance on virtual due diligence and video conferences for discussions on Seller’s financial statements and analysis of all material aspects to search for financial risk indicators and compliance lapses, operating results and cash flows, seller’s default on key contracts and leases, termination rights under various contracts, data protection concerns etc. The Representation and warranties (R&Ws) hold the seller to the confirmation provided regarding the Buyer’s due diligence findings, audited and unaudited financial statements, seller’s liabilities & obligations, and material contracts. If the R&Ws are misleading, the buyer may terminate the acquisition and may even entitle them to post-closing indemnities. Although it is impossible to predict the long-term effects of the pandemic, due diligence process could be altered in such a way that it facilitates quicker transactions rather than causing hindrance through engaging advisors as early as possible, preparing for the reality of dealing with more unknown factors than usual and appropriate measures in planning.

    Mitigation and Allocation of Risks

    Once the Memorandum of Understanding (‘MOU’)/ letter of intent, term sheet, Non-Disclosure Agreement (‘NDA’) and other non-binding preliminary agreements are entered, the next step is to work towards a definitive agreement. Pandemic driven provisions should be added to address closing risk and closing certainty. Although each agreement is specifically tailored to transaction’s structure, several clauses can be common such as R&Ws, covenants, and conditions which mutually address the allocation of risk in such transactions. R&Ws regarding ownership, contractual arrangements of Intellectual Property (‘IP’) as well as non-infringement of IP rights are some of the most significant clauses.

    Material Adverse Change (‘MAC’) is another important clause which now includes the events such as pandemics, lockdowns, and interruption of international trade in the transaction and functions between the signing of acquisition agreement and closing of the deal. This clause transfers the risk to the seller and therefore they push for a lenient MAC clause. Furthermore, the central government declared the COVID-19 outbreak as a “natural calamity” and directed that delays on account of the pandemic be treated as Force Majeure; however the direct effect of this on private contracts is absent. Although, the Force Majeure clause is common in conventional commercial contracts, the same cannot be said in case of M&A transactions as this provision is relatively rare in such agreements. Considering that the courts have expansively interpreted Force Majeure clauses and are not going to apply the defenses available outside of the terms of contract, the Force Majeure clauses could be included and tweaked to specifically address the threshold for invocation, methods of invocation, list of included events and consequences thereof.

    Conclusion

    While the world economy has taken a hit due to the pandemic, it has affected all the sectors in a very different manner. The deal making as a process is likely to see a new face and will emerge in a very different shape and manner. There are sectors like hospitality and tourism, that are fighting to keep their place, and then there are sectors like e-commerce and e-pharmacy that have shown ample amount of growth. It is most likely that in each sector, fewer players will survive. We will see an enormous amount of M&A with the buy side being influenced by ambition and the sell side by its stress and survival instincts.

    This being said, India is going to experience a fundamental shift in the M&A landscape. The companies will have to adjust with certain realities that have become the new normal for the country. The unpredictable nature of COVID-19 has made it difficult for companies to evaluate the targets accurately and they will have to come up with ways to make adjustments accordingly.

    The companies would want to go for acquisition as the mode of structure instead of schemes of compromise or arrangement, since they require NCLT approvals which are bound to delay the process further. Additionally, the time taken to complete the entire process might also get prolonged due to various other unresolved regulatory and technical hurdles.

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

    India Mauritius Double Taxation Avoidance Treaty: Assessing AAR Decision Implications

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

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

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

    Brief Facts of the Case

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

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

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

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

    Breaking Down the AAR Ruling

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

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

    Exploring the Implications of the decision

    Economic Implications

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

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

    Context-Specific Approach

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

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

    An Uncertain Future

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

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

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

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

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

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

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

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

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

    The concept of pre-packaged insolvency

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

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

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

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

    Challenges in India

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

    Role of Insolvency Resolution Professional and Shield of Moratorium

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

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

    Involvement of Promoters

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

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

    Lack of Cooperation and Sale of Assets

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

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

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

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

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

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

    Conclusion

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

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

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

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

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

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

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

    Relevant Market

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

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

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

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

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

    • Supply-side substitutability

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

    • Demand-side substitutability

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

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

    Position of Dominance

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

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

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

    Violation of Section 4(2)(d)

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

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

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

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

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

    Violation of section 4(2)(e)

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

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

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

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

    Rule of Reason Approach (Anti-competitive effects)

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

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

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

    Concluding Remarks

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

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

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

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

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

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

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

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

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

    Interplay-Section 230 and IBC

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

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

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

    Key Differences

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

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

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

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

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

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

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

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

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

    The way forward

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

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

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

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

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

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

    UK Parallel to India: Inspiration for Improvement in Insolvency Laws

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

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

    UK Regime:

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

    1. Autonomous moratorium period

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

    1. Cross-clam down provision

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

    1. Demands for winding up petitions

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

    1. Relaxation on the personal liability of directors

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

    Indian Regime

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

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

    1. Pre-Packaged Insolvency Resolution Process

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

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

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

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

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

    1. Other alternatives to suspension of the IBC

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

    Conclusion

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