The Corporate & Commercial Law Society Blog, HNLU

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  • Sanctity Of The Commercial Wisdom Of CoC’ Vis-À-Vis ‘Interest Of The Dissenting Financial Creditors’ Under IBC : A Curious Case

    Sanctity Of The Commercial Wisdom Of CoC’ Vis-À-Vis ‘Interest Of The Dissenting Financial Creditors’ Under IBC : A Curious Case

    By Vijpreet Pal and Sanskar Modi, third-year students at NLIU, Bhopal.

    Introduction

    Before the enactment of the Insolvency and Bankruptcy Code (Amendment) Bill of 2019 (‘2019 Amendment’), there were no provisions to guide the Committee of Creditors’ (‘CoC’) discretionary power in the approval of the resolution plan. However, the 2019 Amendment demystified the distinction between the secured and unsecured creditors under the resolution plan and illustrated distinct provisions for dissenting Financial Creditors. The Amendment added, “the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor,” to Section 30(4) of the Insolvency and Bankruptcy Code (‘IBC’).

    However, this amendment gave rise to the conundrum that whether the secured financial creditors can challenge the approved resolution plan by arguing that enforcement of the entire security interest is their prerogative and henceforth they must be awarded a higher amount. The Honorable Supreme Court (‘SC’) in the recent case of India Resurgence Arc Private Limited vs. Amit Metaliks Limited & Another resolved this dubiety by holding that it would be against the objectives of IBC if the secured creditor is allowed a higher amount than entitled under the approved resolution plan on the basis of security interest available to him over the corporate debtor’s assets. The Court basically tried to create a balance between the established principle of sanctity of the commercial wisdom of CoC and the interests of the dissenting secured creditor post 2019 amendment. This article shall briefly delineate upon the misconstrued understanding of the 2019 amendment. It will also examine the inequitable scenario which would be created if the financial creditors are awarded higher amount than proposed in the resolution plan for the same class of creditors.

    Background to the dispute

    The appellant company i.e India Resurgence Arc Pvt. Ltd. was the secured financial creditor of the corporate debtor i.e. Amit Metaliks Ltd. (respondent). In the Corporate Insolvency Resolution Process (‘CIRP’) commenced against the respondent, the appellant expressed his dissatisfaction on the share being proposed with reference to the value of security interest held by it and remained a dissentient financial creditor. However, the resolution plan proposed by the resolution applicant got appreciably approved by the CoC with 95.35% votes. Since all the mandatory compliances prescribed under Section 30 of the IBC were fulfilled and entitlements of all the stakeholders were taken care of, the National Company Law Tribunal (‘NCLT’) Kolkata approved the resolution plan. On an appeal before the National Company Law Appellate Tribunal (‘NCLAT’), the appellate tribunal relying upon the judgment of Committee of Creditors of Essar Steel India Ltd. vs. Satish Kumar & Ors.(Essar) observed that the amendment to Section 30(4) falls into the exclusive domain of the CoC and therefore, it is a discretionary, a non-mandatory power conferred upon the CoC to take into account the security interest like considerations.

    Aggrieved by the NCLAT’s ruling, the appellant challenged it before the SC. The major contention of the appellant was the failure on the part of CoC to consider the value of security interest even after the amendment made to Section 30(4). The appellant urged that the value of the security possessed by him was INR 12 Crores, still he was offered the minimal amount of INR 2.026 Crores against the admitted claim of the amount INR 13.38 Crores. 

    It was strongly postulated by the appellant that Section 30(4) manifestly requires the CoC to consider the waterfall mechanism (if a company is being liquidated, secured financial creditors must be first paid the full extent of their admitted claim before any sale proceedings are distributed to any other unsecured creditor) as laid down under Section 53(1), including the value of the security interest created by the secured creditor and CoC cannot shut their eyes to the value of security interest while considering the viability and reasonableness of the proposed resolution plan.

    Judicial Review of the Resolution Plan confined to Section 30(2)

    The Honorable SC on the issue regarding judicial review of the approved resolution plan held that it is undisputed that the scope of judicial review of the commercial wisdom of CoC is limited within the mandatory requirements mentioned under Section 30(2) of the IBC.

    Placing reliance on K. Sashidhar vs. Indian Overseas Bank & Ors., the court noted that the legislature while enacting the IBC has knowingly not provided any ground to challenge the commercial wisdom of the CoC before the Adjudicating Authority (‘AA’) and that the decision of CoC’s commercial wisdom has been made non-justiciable. Further, relying upon Jaypee Kensington Boulevard Apartments Welfare Association and Ors vs. NBCC (India) Ltd. & Ors (Jaypee Kensington), the court observed that the powers of the AA dealing with the resolution plan do not extend to examine the correctness of the commercial wisdom exercised by the CoC. AA by exercising its power under Section 30(2) is only authorized to examine that the resolution plan does not contravene any of the provisions of law and it confirms other requirements like payment of IRP Cost, payment of Debts of operational creditors, payment of debts of dissenting financial creditor, management of affairs of corporate debtor after the approval of resolution plan and implementation and supervision of resolution plan. It is not vested with the power to assess the resolution plan on the basis of qualitative analysis and therefore, the dissatisfaction of every secured creditor like the appellant cannot take a legal character under the IBC.

    The CoC accountable for equitable treatment of similar class creditors

    The appellant reiteratively contended that the CoC has not prioritized its claims as per the amended provision of Section 30(4) which obligates the CoC to take into account priority and value of security interest of the secured creditor. The Court clarified this issue by referring to the Essar ruling which observed that the amended provision of Section 30(4) only amplified the considerations for the CoC while exercising its commercial wisdom so as to make an informed decision regarding the feasibility and viability of the resolution plan.  The business decision of the CoC does not call for interference unless creditors belonging to a similar class are denied fair and equitable treatment. Similar reasoning could be traced from the case of Hero Fincorp Limited v. Ravi Scans Private Limited & Others wherein the NCLAT ruled that IBC does not provide any discrimination among financial creditors on the ground of their dissenting status, post the 2019 amendment made to Section 30(2)(b).

    In the instant case, the court noted that the proposal for payment to the dissenting financial creditor (appellant) is equitable and is at par with the percentage of payment proposed to other secured financial creditors. Therefore, the dissenting secured creditors like the appellant cannot suggest a higher amount to be paid by relying on the value of the security interest held by them.

    Amended S. 30(2)(b)- Not a panacea for the dissenting Financial Creditors

    The SC further observed that the amended provision of Section 30(2)(b), on which the excessive reliance has been placed by the appellant, only states that the dissentient financial creditor shall be provided with the payment of a debt which shall not be less than the amount paid to such creditors in accordance with the waterfall mechanism enshrined in Section 53(1).

    The Insolvency Law Committee Report of 2018, which lead to 2019 amendment, has also observed that providing priority to the dissenting financial creditors will not be prudent as it may encourage financial creditors to vote against the plan and may consequently hinder resolution. The objective behind the 2019 amendment was never to provide the enforcement of the entire security interest available with the secured creditors. The only intention was to grant security to dissenting financial creditors who may be cramped down by the secured creditors holding majority votes, overpowering dissenting financial creditors and giving them nothing or next to nothing for their dues.

    Such creditors are only allowed to receive payment to the extent of their entitlement and that would satisfy Section 30(2)(b) of the IBC which mandates that a dissentient secured creditor be provided with a certain minimum amount which shall not be less than the amount paid to such creditors in the event of liquidation.

    As a result, the Court while dismissing the appellant’s claim observed that any dissenting secured creditor like appellant cannot interfere in the CIRP process by urging a higher amount to be paid with reference to the value of their security interest.

    The ruling of the Court, henceforth, leads to two main observations-:

    • Commercial Wisdom of CoC can’t be interfered.

    The commercial wisdom of CoC is amenable to judicial review as long as it goes in consonance with the basic provisions and objectives of the IBC.

    • Equitable Treatment among the creditors is the main objective.

    The Resolution Plan submitted under Section 30 does not advocate equal treatment among all the creditors, rather it obligates a fair and equitable treatment.

    Therefore, the interest of the dissenting secured creditor like appellant can’t be satisfied under the guise of ‘Security Interest’ and the commercial wisdom of CoC prescribing the equitable treatment of creditors shall prevail in such cases.

    Conclusion

    The instant judgment gives an important observation on the issue when the commercial wisdom of the CoC in respect of the distribution of assets is challenged by the secured financial creditor. The Court while answering in favor of the commercial wisdom of CoC noted that a resolution plan under the IBC cannot be challenged by a dissenting financial creditor just on the ground that he is entitled to a higher amount based on the value of security interest. If the reasoning as contended by the appellant were to be accepted, the process will witness more liquidation than resolution with every secured financial creditor choosing to dissent. Therefore, by reiterating the principles of ‘limited judicial review’ and the ‘supremacy of the commercial wisdom of CoC’ after the approval of the resolution plan, the Court has bolstered the objectives of the IBC which is balancing the interest of all the stakeholders by maximizing the value of assets of interested persons.

  • Bar of Limitation on Arbitral Proceedings under the MSMED Act

    Bar of Limitation on Arbitral Proceedings under the MSMED Act

    By sudipta choudhury and arnav singh, fourth-year students at nalsar, hyderabad

    Introduction

    The applicability of the Limitation Act, 1963 (‘Limitation Act’) to certain statutes has been a contentious issue in India. One aspect of this issue was recently settled by the Supreme Court in the case of M/s. Silpi Industries etc v. Kerala State Road Transport Corporation &Anr. (2021) where the Court addressed the applicability of the law of limitation on arbitration proceedings initiated under section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’). In holding that the Limitation Act would be applicable to the said arbitral proceedings, the Court upheld and endorsed the reasoning of the Kerala High Court in this regard, dismissing the appeal against it. This article aims to analyse the judgment and unpack its implications.

    Legal Issue

    The Court in the present case was faced with a two-fold question. Firstly, whether the Indian Limitation Act would be applicable to arbitration proceedings under section 18(3) of the MSMED Act, and secondly, whether it would be possible to maintain a counter-claim in such arbitration proceedings. This article deals with the first issue and attempts to break it down in the context of precedents surrounding it. 

    The Apex Court’s Findings


    On the question of applicability of the law of limitation to arbitration proceedings initiated under the MSMED Act, the Court noted that a perusal of the provisions of the MSMED Act indicates that in the event of a dispute arising out of a sale agreement between parties, the same shall be referred to the MSME Facilitation Council under sections 17 and 18 of the MSMED Act which lay down the ‘recovery mechanism’. Once such reference is made, it was noted that the MSME Facilitation Council is conferred with the power to initiate arbitration or conciliation or refer the matter to any other alternative dispute resolution body or institution, under sections 18(2) and (3) of the MSMED Act. In any case, the Apex Court observed that such an arbitration or conciliation arising out of the MSMED Act shall be governed by the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), as though initiated in accordance with an arbitration agreement between the parties, under section 7(1) of the Arbitration Act, or in case of conciliation, it would be applicable as though initiated under part III of the Arbitration Act.

    In addition to this, in the case of Andhra Pradesh Power Coordination Committee & Ors. v. LancoKondapalli Power Ltd. & Ors. (‘AP Power’).  the Supreme Court held that the arbitration proceedings conducted under the MSMED Act fall within the scope of the Limitation Act. The reasoning of the Court in the aforementioned case is in consonance with a plain reading of section 43 of the Arbitration Act which lays down that the Limitation Act shall apply to arbitrations, in the same manner as it applies to court proceedings. With due regard to this, the Court in the present case opined that section 43 shall survive in its operation and applicability to arbitration proceedings within the MSMED Act and accordingly, the Limitation Act will apply. Thus, the assailed judgment of the Kerala High Court was upheld, insofar as it placed reliance on the Apex Court’s reasoning in AP Power, and interpreted the impugned provisions of the three Acts to hold that the Limitation Act would be applicable to the proceedings initiated under the MSMED Act.

    Analysis

    It is important to note that despite the MSMED Act is silent about the applicability of limitations on disputes referred to MSME Facilitation Councils, the Court’s reasoning is largely hinged upon the arbitration proceedings being governed by the Arbitration Act, and thus, being subject to the operation of the Limitation Act. However, it is also pertinent to not be remiss of the fact that section 2(4) of the Arbitration Act bars the application of the Limitation Act under section 43 to proceedings initiated under an enactment. The MSMED Act, being one such enactment, gives way to a plethora of questions and confusion. The question of applicability of the Limitation Act to the arbitration proceedings under the MSMED Act has thus been mired in ambiguities that have been addressed by the Courts in a catena of decisions.

    A perusal of the initial judgments in the area shows that the Courts were faced with the question of applicability and the prevalent argument was that there were two remedies under the MSMED Act: one, before the MSME Facilitation Council and another, before a civil court. Thus, for the sake of consistency in proceedings, it was argued that if the Limitation Act is applicable in court proceedings, it shall also apply to disputes before the MSME Facilitation Councils.

    This came up before the Bombay High Court squarely in the case of Delton Electricals v. Maharashtra State Electricity Board, along with the question of section 2(4) of the Limitation Act explicitly excluding arbitration proceedings arising out of an Act from its ambit. On the first question, the Court took note of the availability of two separate trajectories under the MSMED Act, and observed that if one resolution mechanism before the civil court is subjected to the Limitation Act, while another resolution mechanism before the MSME Facilitation Council is not, it will lead to an “incongruous situation.” On the question of express exclusion of statutory arbitration, the High Court noted that the provisions of the Arbitration Act are made applicable to arbitral proceedings arising out of the MSMED Act, and no specific exception is made therein for section 43 of the Arbitration Act which lays down that the Limitation Act shall be applicable to arbitrations in the same manner as it applies to court proceedings. Thus, it was held that the provisions of the Limitation Act would be applicable to arbitrations under section 18(3) of the MSMED Act, in the same manner as they would apply to arbitrations arising out of an arbitration agreement between parties under section 7(1) of the Arbitration Act.

    Further, in AP Power, the Apex Court dealt with a dispute arising out of the Electricity Act, 2003, which provides for statutory arbitration before the Electricity Commission. The issue that arose before the Court was whether, in the absence of a limitation provision in the Electricity Act, the same had to be presumed in order to ensure uniformity with arbitral or civil court proceedings. This was so because otherwise the parties concerned stood a chance of getting enriched in a manner, not contemplated in the pursuance of an ordinary suit, due to the operation of the bar of limitation. Further, the Court noted that no right was vested through the Electricity Act that could permit claims otherwise barred by limitation. Therefore, such a claim will not survive because it is not recoverable as an ordinary suit owing to being time-barred. The Court, placing reliance on the object and the intent of the Electricity Act, further observed that “not only because it appears to be more just but also because unlike Labour laws and Industrial Disputes Act, the Electricity Act has no peculiar philosophy or inherent underlying reasons requiring adherence to a contrary view” (para 29)

    Thus, a primary view of the Court’s reasoning points to its inclination to examine the legislative intent behind an Act, in addition to the rights it seeks to confer, and the “philosophy” it follows, indicating a purposive and well-rounded interpretation of the enactment.

    In consonance with the Court’s rationale in AP Power, it is submitted that the legislative intent and the philosophy of the MSMED Act should also be taken into account while considering whether it should be subjected to the Limitation Act. A perusal of the MSMED Act’s Statement and Objects reveals that it is aimed at the expeditious resolution of disputes and legislative intervention is intended to secure an efficacious remedy for timely payment. Thus, the MSMED Act should be interpreted in a manner which allows it to facilitate timely payment to suppliers. The author submits that instead of recognising new rights which are not expressly conferred by the statute, the MSMED Act should be interpreted in a manner which allows the facilitation of timely payment to suppliers. This is in consonance with the principle that disallows claims from ordinary suits on account of being time barred, unless it is explicitly allowed in the statute. 

    Thus, it is submitted that the present case, in so far as it addresses the first issue, correctly applies the rationale laid down in the AP Power, and places due reliance on the legislative intent behind the MSMED Act, effectively bringing its objects to full fruition by ensuring that there is uniformity in the adjudication proceedings across civil courts and arbitration tribunals. It has done so by engaging in a purposive reading of the statute that allows the applicability of the Limitation Act to arbitration proceedings arising out of the MSMED Act.

    Conclusion

    The Supreme Court has laid the matter to rest by discerning the scope of the Limitation Act vis-à-vis arbitration proceedings under the MSMED Act. It has ensured that claims under MSMED Act would be subject to limitation, like any other commercial claim, while also effectuating the legislative intent of the MSMED Act, which is aimed at providing a speedy redressal of disputes. Although a welcome development, the matter remains to be a subject for debate as the question of the extent of applicability of the Arbitration Act, especially in the event of clashes with the MSMED Act, remains ambiguous. For instance, section 18(5) of the MSMED Act lays down that every reference shall be decided within 90 days, in contrast with the Arbitration Act, which stipulates the time period for passing an award as twelve months from the date of completion of pleadings under section 23(4).

    However, the Court’s reasoning in subjecting the proceedings to the bar of limitation is in consonance with the larger intent of the MSMED Act, and fits with the scheme of other civil and arbitral proceedings. Thus, it largely remains successful in settling the dispute and interpreting the provisions involved.

  • Analysis of NN Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. vis-à-vis Doctrine of Separability

    Analysis of NN Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. vis-à-vis Doctrine of Separability

    By Anurag Mohan Bhatnagar and Amiya Krishna Upadhyay, third-year students at NLUO, Orissa.

    Introduction

    In the case of NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (‘NN Global’), a division bench of the Apex Court recently pronounced that an arbitration agreement would not be deemed ineffective just because stamp duty on a commercial transaction was not paid. It would be safe to see the pronouncement as a source of impetus towards creating an impartial process of arbitration in India. It pronounced that the view has become obsolete, and has to be done away with. With the onset of the particular judgment, Indian legislation has now come in similar lines with a lot of jurisdictions in the world of arbitration.

    To comprehend the legal issue at hand, the article intends to evaluate (a) the coherence of the Stamp Act 1899 (‘the Act’) vis-à-vis the doctrine of separability; (b) application of the doctrine of separability; (c) cross-jurisdictional analysis with the legislations of the USA, the UK and Singapore; and lastly, (d) conclude with suggestions on the basis of the discussion on the aforementioned elements.

    Factual Matrix of the Case

    The case raises pertinent issues with regards to the future of arbitration proceedings in India, and the importance of getting the arbitration agreement stamped as per the relevant Act. Indo Unique was a company put in for a grant for work of washing of coal to the Karnataka Power Corporation Ltd. (‘KPCL’) in an open tender, which, later awarded the Work Order to Indo Unique. Later, Indo Unique furnished Bank Guarantees in favor of KPCL. Subsequently, Indo Unique entered into a sub-contract with Global Mercantile for the process of transportation. As per the contract, Global Mercantile also furnished a bank guarantee in favor of Indo Unique to secure the stocks. Later, KPCL invoked the bank guarantee furnished by Indo Unique owing to certain disputes between the two, due to which, Indo Unique also invoked the bank guarantee furnished by Global Mercantile under the sub-contract.  

    Stamp Act- Coherent with Doctrine of Separability?

    Anyone with legal authority is required by Section 33 of the Act, “to scrutinize the instrument in front of them and determine whether it is properly stamped; if it is not, the relevant authority may appropriate the instrument and command the parties to bill the adequate stamp duty with the added penalty of five or ten times the amount of the inadequate portion”. Under Section 35 of the Act, “an unstamped instrument cannot be used as evidence or acted upon”. Section 40 of the Act entails the procedure for instruments which have been impounded. It is necessary for the instrument to be endorsed within one month of the date of impounding as per Section 42(1) of the Act. Section 42(2) states that a document that has been lawfully stamped is admissible as evidence and can be acted upon. However, the Apex Court, in SMS Tea Estates Pvt. Ltd. v M/s Chandmari Tea Co. Pvt. Ltd. (‘SMS Tea’) failed to consider Section 3 read with Schedule I of the Act which states that only an arbitration award needs to be stamped and not an arbitration agreement. The court misinterpreted the basis behind the fiction of separability and erroneously linked the arbitration agreement to that of the fundamental substantive contract.

    Finally, the court took a shift in its approach in N.N Global. The Apex Court concluded that there should be no legal hinderance in the enforcement of an arbitration agreement. This hinderance can be considered as the “outstanding payment of stamp duty” on the substantial contract. This is the reason for which the Court held that the arbitration agreement is not included as a stamp duty-chargeable instrument under the Maharashtra Stamp Act 1958.

    Inconsistent and Indeterminate Approach Finally Settled?

    The doctrine of separability was pronounced in the case of Heyman v Darwins Ltd. by the House of Lords. It held that, “an arbitration agreement is collateral to the substantial stipulations to the contract”. The application of the theory of separability of an arbitration agreement from the fundamental substantive contract into which it is incorporated presents severe issues. The Apex Court examined the rationale on an agreement of arbitration in an unstamped contract in SMS Tea.  Due to the lack of stamp duty payment, the arbitration agreement would remain void until the contract was seized and the tax and penalty were paid.

    Following the 2015 Amendment, the Apex Court revisited the issue of stamp duty and arbitration agreements under Section 11 of the Arbitration and Conciliation Act (‘Arb. Act’) in Garware Wall Ropers Ltd v Coastal Marine Constructions (‘Garware Ropers’).  When a court determines that a contract is unstamped as a result of an application under Section 11 of the Arb. Act, the Stamp Act requires the court to impound the contract and ensure that stamp duty and penalty are paid until the agreement as a whole, can be acted on. The phrase “in a contract” of Section 7(2) of the Arb. Act was provided due weightage while analysing the fundamental meaning of an arbitration agreement in the Garware Ropers case. As a result, the arbitration clause in such a contract is incompatible with separation. This particular stand was upheld in Dharmaratnakara Rai v M/s Bhaskar Raju and was also affirmed in Vidya Drolia v Durga Trading Corporation, by a division bench.

    However, the Apex Court in NN Global reverted from their previous stand and overruled the judgment in the previous cases. On the aspect of separability, it held that “an arbitration agreement is separate and different from the underlying commercial contract”. It is a contract that specifies the method for resolving disputes and can stand alone from the substantive contract. The Court further observed that non-payment under the Act was a corrigible fault; therefore, arbitration could not be postponed until stamp duty was paid. Thus, the court adopted a harmonious construction between the provisions of the Act and the enforcement of arbitration agreements. Hence, it held that, failure to pay a stamp duty on the commercial substantive contract would not make the arbitration agreement included therein null or unenforceable.

    Cross-Jurisdictional Analysis

    One of the abstract and practical cornerstones of domestic and international arbitration is the doctrine of separability. Article 16(1) of the United Nations Commission on International Trade Law (‘UNCITRAL Model Law’) recognizes the doctrine of separability and provides that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”. Despite its limited scope, this regulation is followed by several jurisdictions. Most of the countries which have ratified the New York Convention, have accepted the idea of separability.

    In English law, Section 7 of the Arbitration Act 1996 (‘AA 1996’) enshrines the idea of separability. The theory of separability, according to English courts, “is solely intended to give legal force to the parties’ choice to settle disputes through arbitration rather than to separate the arbitration agreement from the underlying contract for all purposes”. This approach by the courts could be called partial separability in layman terms. The Supreme Court of USA recognized the concept of separability in the case of Prima Paint Corp v Flood & Conklin Mfg. Co.case.

    In the context of Singaporean arbitration, the Singapore High Court, in the case of BNA v BNB held that doctrine of separability is a “tool of arbitration law that treats an arbitration agreement as distinct from the substantive contract containing it”. In the case at hand, the High Court held that “the doctrine of separability could be used to save an arbitration agreement even where the purported defect was inherent to the arbitration agreement itself”. All in all, the judgment propounded in the NN Global case has now made the Indian arbitration regime consistent with UNCITRAL Model Law, New York Convention, and both the English as well as Singaporean jurisdictions, as far as the doctrine of separability is concerned.

    Conclusion

    The stand of various High Courts has been varied as far as the doctrine of separability is concerned. Needless to say, the Apex Court’s decision in NN Global will be welcomed by arbitration practitioners in India. As far as the foreign jurisdictions are concerned, the ruling will now be consistent with the New York Convention countries and the legislation in Singapore. The judgment in the case of NN Global has to be applied widely and practically. With the help of this ruling, the judiciary has resolved the dilemma that had been lingering owing to prior instances, and the court’s decision may be safely regarded as a stand that will benefit arbitration procedures in India.

  • The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

    The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

    By abhigyan tripathi and anmol mahajan, fourth-year students at rgnul, patiala

    Introduction

    One of the primary objectives of the Insolvency and Bankruptcy Code,  2016 (“IBC”) is to facilitate the rescue of the Corporate Debtor (“CD”) as a going concern. In furtherance of fulfilling the IBC’s legislative intent, MS Sahoo was appointed to chair a sub-committee and recommend a regulatory framework for Pre-packaged Insolvency Resolution Process (“PPIRP”). The President, on the basis of the sub-committee’s suggestions, promulgated the IBC (Amendment) Ordinance, 2021 which allows MSMEs to go for PPIRP.

    One of the ways of rescuing a corporate entity is through the PPIRP wherein the objective is to establish a balance between the creditors’ interests and the business and assets of the Corporate Debtor (“CD”). PPIRP is an insolvency procedure involving a smooth transition of its assets by the CD to the prospective buyer prior to the appointment of a Resolution Professional who facilitates the corporate restructuring. The aim of this piece is to engage in a cross-jurisdictional analysis of the aforementioned Ordinance and test its efficacy in the Indian market scenario on the basis of three parameters, i.e., transparency, debtor-in-possession methodology, and the role of the adjudicating authority.

    I. Analysing the Pre-packaged Insolvency Framework in the United Kingdom

    Following the suggestions put forth by the Cork Report, the United Kingdom (“UK”) introduced its first wave of insolvency reforms in 1986 which envisaged the concept of ‘Corporate Rescue’.[i] The second wave of these reforms was introduced when Part 10 of the Enterprise Act, 2002 revised and improved the Insolvency Act of 1986. Even though the bare texts of both aforementioned statutes do not make a mention of “pre-packaged insolvency”, the UK always has had a Debtor-in-Possession based insolvency procedure, namely the Company Voluntary Arrangement (“CVA”). The CVA is analogous to PPIRP in the sense of the same being an informal and voluntary method of going through the insolvency process. Keeping in mind the pandemic situation, the UK has made even further attempts to make the insolvency framework more “debtor-friendly” by introducing the Corporate Insolvency and Governance Act, 2020. Since a company availing the CVA is required to couple it with the formal Administration procedure for a court-ordered moratorium, it cannot be used as a tool of financial restructuring. Therefore, this Act aims at providing financially riddled enterprises a chance at informal restructuring through a standalone moratorium on adverse creditor action.

    1.1 Transparency

    Ms. Teresa Graham, CBE, an Advisor to the UK Government and a renowned accountant, was given the responsibility to carry out a review of the PPIRP practice in the UK in 2013. As a result of the same, ‘The Graham Review of 2014’ was released. As was anticipated, the review was in favour of PPIRP practice in the UK but highlighted the lack of transparency as a major concern specially for unsecured creditors. A set of voluntary measures were suggested by the review to counter the transparency issue.

    One such solution proposed was setting up a group of experienced business people called ‘pre-pack pool’. This group shall be responsible to carry out an independent scrutiny of the pre-pack sale and suggest improvements to the same. Another solution to tackle the issue of transparency, as suggested by the Review, was the Statement of Insolvency Practice (SIP) 16 that may be understood as guidance for Insolvency Practitioners to conduct Insolvency Administrations. SIP16 provides for disclosure to be made by the Insolvency Practitioners to the creditors explaining and justifying the reasons for which a pre-packaged sale was undertaken.  

    An enterprise can still go through with a pre-pack deal even if a pre-pack pool member issues a negative statement, though the same has to be reflected as per the SIP16 requirements. In case the pre-pack member issues a positive statement, it would also be referred to in the SIP16 statement. The Insolvency Practitioners’ Association adopted these voluntary measures in November, 2015.

    1.2 Administration of the CD

    In the UK, the management of the debtor company rests with an administrator who is appointed for this purpose. Such an appointment can be made (a) by the Court, (b) by the holder of the floating charge, or (c) by the company or its directors. The administrator has the primary objective to rescue the debtor company as a going concern.

    1.3 Role of the Courts/Tribunals

    The role of courts can be looked at from both a positive and negative prism. The positive aspect of court involvement will not only protect the interests of the unsecured creditors but also will act as a grievance redressal mechanism. The final stamp of the court will also provide a credible authority to the procedure. However, the negative aspect is that such an intervention of the courts is discretionary and time taking which defeats the basic purpose of a pre-packaged insolvency.

    The UK has a mixed solution to this, on one hand where the insolvency practitioner is entrusted with finalizing the pre-pack transaction, on the other hand the creditors can approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway.

    II. Analysing the Pre-packaged Bankruptcy Regime in the United States

    The United States insolvency regime provides for three kinds of proceedings: pre-packaged bankruptcy proceedings, pre-arranged bankruptcy proceedings, and pre-plan sales. These procedures are an amalgamation of both out-of-court and formal mechanisms. It is therefore necessary to gauge the three procedures on the basis of the following criterion:

    2.1 Transparency

    The provisions of the US Bankruptcy Code, 1978, have been able to ensure a substantial amount of transparency through its provisions since they require approval of any resolution/reorganization plan within Chapter 11 by all the classes of creditors for bankruptcy proceedings to move forward. As per section 1123(a)(4) of the Code, every interested party in a class of creditors is required to be treated equally through the reorganization plan envisaged by the CD. To avail the benefits of flexibility within the ambit of Chapter 11, a CD has to ensure that the interested stakeholders are on board at every step and therefore cannot ignore the rights of even unsecured creditors as per section 1129(a).

    Even pre-plan sales under section 363 of the US Bankruptcy Code, though not requiring approval from all the interested stakeholders, need to be approved by the requisite Bankruptcy Court.[ii][1] In the context of section 363 sales, a bidder used to set the purchase price floor for other prospective buyers to know the minimum bidding amount is termed as the ‘stalking-horse’. The stalking-horse bidding, which is often engaged in by the debtors, helps in ensuring a proper due-diligence by the interested buyers. This has resulted in highly successful restructurings since the creditors are able to reap the benefits of high-value sale of the CD’s assets.[iii]

    2.2 Administration of the CD

    The pre-packaged/pre-arranged bankruptcy regime in the United States does not involve an automatic appointment of a Trustee (analogous to RP or Administrator in the UK) since the CD assumes the role of a debtor-in-possession and performs restructuring responsibilities while being in control of its assets under Chapter 11. A debtor remains in possession till the approval of the reorganization, dismissal of the same and subsequent liquidation proceedings (under Chapter 7) or the appointment of a court appointed trustee.

    2.3 Role of the Courts/Tribunals

    In both the pre-packaged and pre-arranged bankruptcy proceedings, the CD is required to file a Chapter 11 petition with the concerned bankruptcy court after having completed the procedure associated with voting and negotiation upon the reorganization plans. Even the section 363 pre-plan sales require the court’s stamp over the validity of asset sale. 

    There are various bankruptcy-specific courts in the United States which analyze the reorganization plans in an expedited manner. They ensure that there is no gross discrimination against any impaired class of creditors while clamping-down upon the minority dissenting creditors if the reorganization plan is fair and equitable as per the requirements of the Bankruptcy Code under section1129(b).

    Such flexible structures and procedural guidelines ensure that restructurings are successfully wrapped within two and four months for pre-packaged and pre-arranged bankruptcy proceedings as compared to 11 months for traditional Chapter 11 proceedings. Pre-plan sales under section 363 take only as much time as the auction process and the courts only require the CD to have successfully served the notice of asset sale to all stakeholders.[iv]

    Conclusion and Analysis

    Insolvency in India and the rules governing it are still at a nascent stage of development. The COVID-19 pandemic led to a complete standstill of the framework since the Central Government paused all fresh filings of insolvency proceedings. Hence, the introduction of pre-pack insolvency comes as a breath of fresh air.

    Firstly, with respect to transparency, concerns surrounding transparency in the process have not yet been addressed but the analysis of the UK and US models of pre-pack above gives valuable input. The introduction of a pre-pack pool as seen in the UK regime can be a game changer in this regard. Not only will this make the process more transparent but will also help in the corporate rescue of the debtor. Additionally, the pre-pack pool might have been even more effective in the UK, if referral to the same was mandatory. The authors believe that mandatory referral to a similar body may have been conducive for medium and large enterprises in India.

    Secondly, with respect to the administration of the CD, the recent ordinance provided for the debtor-in-possession regime, wherein unlike the CIRP, the CD is responsible for protection of its assets so that the position of the creditor is not jeopardized. One important advantage of this regime is that it will minimise the obstacles to business during PPIRP since the CD is empowered to continue running its business operations, with the express objective of working in the best interests of the creditors. It is essential to derive insight from the UK framework and mould the Indian model in a manner which lets the Insolvency Resolution Professional proceed with the implementation of the plan while giving the creditors a right to approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway as is done by the UK.   

    Thirdly, as far as the role of NCLT is concerned, the procedure requires an initial application for moving forward with PPIRP before the NCLT under section 54A(1) by a CD which falls under the category of MSME. Thereafter, the NCLT has 14 days to either reject or accept the same. Furthermore, the approval of a resolution plan requires a 66% vote by value in its favour by the creditors, post which it is submitted to the NCLT for consideration. Therefore, the highly overbearing role of NCLT as per the procedure defined by this ordinance might possibly help in reducing the problem of delays and discretion which already plagues CIRP.  Therefore, the NCLT needs to adopt a fast-track approach which is similar to the one adopted by Courts in the US. Sub-tribunals specialized in dealing with insolvency matters in a more efficient fashion (as compared to the current regime) may be instituted which can make sure that restructuring plans, if in accordance with equity and fairness envisioned by the IBC, are approved and applied to successfully rescue the CD.

    Despite the Ordinance having been passed to counter the adverse effects of COVID-19 on insolvency, the expedite nature of PPIRP can potentially benefit the Indian insolvency regime as a whole. It should also be kept in mind that maximising returns from this PPIRP framework requires a great amount of transparency during the entire process to ensure that certain categories of creditors do not partake in backdoor negotiations, which might result in a win-lose position between the concerned stakeholders. The authors are of the opinion that PPIRP framework for MSMEs is a first step in a series of reforms and if implemented properly, goes a long way towards ease of doing business in India as a whole.

     

    [i] Cork Report of the Review Committee, Insolvency Law and Practice, (Cmnd 8558, 1982), para 198.

    [ii] Bo Xie, Pre-pack Approach in Corporate Rescue (Edward Elgar Publishing, 2016), 205-206.

    [iii] Ben Larkin et al, Restructuring Through US Chapter 11 and UK Prepack Administration, para 8.51.

    [iv] Ibid.

  • The Mitsui & Co. Challenge: Time to Rethink the Retrospective Tax Amendment?

    The Mitsui & Co. Challenge: Time to Rethink the Retrospective Tax Amendment?

    By Aarushi Srivastava and Ridhi Gupta, second-year students at RGNUL, Patiala

    INTRODUCTION

    After Cairn and Vodafone, the latest instance of a company initiating investment arbitration proceedings against a hefty amount demanded under India’s infamous retrospective taxation regime, is Earlyguard Ltd., a British subsidiary of the Japanese behemoth, Mitsui & Co. The 2,400-Crore tax is being charged over a transaction that took place in 2007, consisting of the sale of Earlyguard’s shares of Finsider International Co., a UK domiciled company which had a 51% stake in Sesa Goa. Earlyguard treated the capital gain properly and in accordance with taxation rules prevalent then, but despite that, the company was served with a tax notice. Thereafter, it initiated arbitration proceedings, before the Permanent Court of Arbitration, under the India-UK Bilateral Investment Treaty.

    Previously, Vodafone, as well as Cairn, have won arbitration cases against retrospective taxation by India and its violation of bilateral investment treaties in international tribunals. However, instead of honouring the arbitration awards of INR 75 Crore and INR 8842 crore respectively, the Indian Government(hereafter Government) has challenged both these awards. In the case of Cairn, the Government stated that it never agreed to arbitrate the dispute, despite it sending a judge to the tribunal. While in Vodafone’s case, the Government has filed an appeal before the Singapore appeals court, stating that it has the sovereign right to taxation and no private individual can decide on it.

    RETROSPECTIVE TAX AMENDMENT

    The origin of the retrospective tax can be traced back to 2007, when Vodafone was taxed by Indian tax authorities. In the case of Vodafone International Holdings B.V. v. Union of India & Anr., the Supreme Court ruled in favour of the telecom company by stating that, “tax laws must be strictly construed and the provision of income tax must not be expanded to impose tax on any exchange that was otherwise untaxable.” It was to override this judgement that the then Government introduced the Finance Bill, 2012 to amend the Income Tax Act, 1961 with retrospective effect, returning the onus of payment to Vodafone.

    1. Fair and Equitable Treatment in Investment Treaties

    Article 1(a) of the Draft Convention on Protection of Foreign Property has influenced various countries to incorporate the principles of fairness in international dealings. The meaning and substance of fair and equitable treatment (“FET”) has been laid down in various arbitral awards such as Biwater Gauff Ltd. v. United Republic of Tanzania and Rumeli Telekom AS v. Republic of Kazakhstan. The following concepts have emerged under the scope of FET :

    • Prohibition of manifest arbitrariness in decision making, that is measures taken purely on the basis of prejudice or bias without a legitimate purpose or rational explanation;
    • Prohibition of denial of justice and disregard to the fundamental principles of due process;
    • Prohibition of targeted discrimination on manifestly wrongful grounds of gender, religion, race or religious belief.;
    • Prohibition of abusive treatment of investors, including coercion, duress and harassment; and
    • Protection of investors’ legitimate expectations arising from a government’s representation and balancing the same with host State’s right to regulate in public interest.

    The introduction of the retrospective tax amendment was a direct violation of the FET under international law. Firstly, the Government had no rational reason to introduce the amendment, other than the motive to reverse the Supreme Court judgment. Secondly, the due process of law was disregarded as all the dealings were based on the India-UK Bilateral Treaty, which is silent on taxation, except in cases where already an international or domestic legislation provides for the tax. Thirdly, the investors, at the time of making the dealings with India in all the cases, Vodafone (2007), Cairn (2006-07) and Mitsui (2007) could not legitimately expect the Government to enforce a tax on these dealings after a period of 5-6 years, as there was no such representation or intention shown by the Government.

    Expropriation means the act of nationalising or taking away money or property, especially for public use without payment to the owner, or through illegal measures. Expropriation could be direct, where an investment is nationalised or directly expropriated, or indirect, through state interference without effect on legal title. Under International law the property or assets of an ‘alien’, i.e., a person from another state must not be expropriated, without adequate compensation. The India- UK Bilateral Treaty states under Article 5(1) that the investments of an investor shall not be expropriated except for a public purpose regulating economic activity on a non-discriminatory basis and equitable compensation. However, in all the aforementioned dealings, the Government enforced the tax regime neither for a public purpose to regulate economic activities nor for the purpose of equitable compensation, and thus, the retrospective tax is a direct violation of the ‘very law’ i.e. the treaty governing all these dealings.

    There have been cases where Tribunals have considered tax measures as indirect expropriation. In the EnCana v. Ecuador, the Tribunal held that, from the perspective of expropriation taxation is in a special category, only if a tax law is punitive, extraordinary or arbitrary, issues of indirect expropriation would be raised. It was held that, in the absence of a specific commitment from the host state, the foreign investor has neither right nor any legitimate expectation that the tax will not change perhaps to its disadvantage, during the period of investment. Further, the Tribunal in Feldman v. Mexico held that a tax measure may amount to expropriation, where the investor had an acquired right with regard to which the tax authorities behaved arbitrarily through a sufficiently restrictive nature.

    The act of the Government of enforcing retrospective taxes on its investors was, thus, not only against the FET but also an act of expropriation. To begin, the amendment was introduced arbitrarily without any consultation with the investors or regard to the India-UK Treaty. Further, the investors had no legitimate expectation that the tax regime would change to their disadvantage and that the tax authorities would function in such a restrictive nature.

    POSSIBLE NEGATIVE OUTCOMES

    When the amendment was introduced in 2012, the then-opposition party, BJP, raised its voice against it and criticized the government. However, years after coming into power, there have  been no attempts from its side to remove the amendment. Instead, tax notices have been sent to companies, their assets have been seized, and the taxation regime has been defended in the arbitration proceedings. This shows the unwillingness of the present Government to discontinue with the tax amendment of 2012.

    However, the Government’s disregard to the arbitral awards will not prevent investors to fight tooth and nail to enforce these awards. Cairn Energy, for instance, is leaving no stone unturned to monetize the award. The company has successfully got the award registered in countries like the US, the UK, France, the Netherlands and Singapore, in order to further the process of enforcing the award against overseas Indian assets. This would mean that Cairn can seize Indian assets in these countries, if India fails to pay the amount. The company can enforce the award in over 160 countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Cairn has also filed a lawsuit in New York to declare Air India, the national carrier, as an alter ego of the Indian Government. If Cairn does get successful in enforcing the award, this will set precedent for other companies facing the same issue of retrospective taxation. This might lead the country having to lose a significant number of its overseas assets in the future. As a result of which, India’s investment environment can be perceived in a negative light, having a toll over its future investment dealings.

    Since the amendment was introduced, there has been zero revenue collection under it, rather it has resulted in substantial amount of losses in foreign direct investment (FDI) and foreign institutional investors (FII). The FII’s invest huge amounts of money in India that provides a great boost to the economy.  The investors, while investing in a country take close notice of the existing legal framework and then decide on investment. A consistent legal environment is not ‘much’ that the investors expect a country to give, as it is a part of minimum standard of protection of foreign investments under customary international law. However, with all these initiations against India’s retrospective tax regime and yet no reconsideration by the Government, the investors would not legitimately expect a consistent scenario of taxes in India, and they may fear any future amendments that could again impair their rights.

    CONCLUSION

    India was ranked 63rd in the Ease of Doing Business Rankings, 2020 which is indeed a development for India, however, due to the hasty 2012 amendment, the country has been attracting negative attention lately. Not only is the retrospective law against the FET and way of expropriation but also, it can act as a major discouragement for investors globally, who would have otherwise been interested in making investments in India. With two major judgements against the Government, its high time for the Government to look back and revise its arbitrary amendment. It is ironical, that though the present Government has always promoted international trade and business, it has failed to address this major hindrance to international dealings. The retrospective tax amendment should be done away with, in order to regain the trust of the investors and ensure a secure environment for investments in India.

  • ESL v. UEFA: Federation(s) Actions Transgress Principles of Competition?

    ESL v. UEFA: Federation(s) Actions Transgress Principles of Competition?

    By Shubham Gandhi, third-year student and Tanish Gupta, second-year student at Dharmashastra National Law University, Jabalpur

    Introduction

    The furore surrounding the proposed breakaway European Super League (“ESL“) has yet again spurred with the issuing of joint statement canned by the three so-called European giants i.e. Barcelona, Real Madrid, and Juventus bolstered up the ESL keeping the faith of the league alive. This came in the aftermath of a preliminary ruling dictated by the Madrid Commercial Court on 20 April 2021 holding the league to be in violation of EU competition law.

    The idea of Super league, much of its disgrace, has posed a serious question to the world of sport. The author(s) in this manuscript will give readers the premise of the formulation of ESL, how the league is in contempt of the EU Competition law, and also distil the legality of the statement made by the Union of European Football Association President (premier governing body for football in Europe) barring the players’ from participating in the domestic league and world cup. 

    Instaurating European Super League

    The European Super League has been in talks for over the years. As early as 1988, a similar move, a two billion deal was signed to establish a new league of elite, surfaced in the world of football, famously known as  Project Gandalf . The ESL President Mr. Florentina Perez who is also chairman of Real Madrid C.F on Sunday, 18 April 2021 trumpeted to the world the newly formed Super league consisting of 20 teams with a total of 15 clubs as founding members and with 5 spots left for other clubs to earn through promotion. For Mr. Perez the league formation was quintessential in order to revivify the TV rights by recuperating the losing interest of fans towards  football and also to provide indispensable financial assistance to the clubs.

    The founding members (European giants) approached by the ESL, will bring exuberance of watching big star studded matches on every midweek, resurrecting the interest of football fans, making the league popularized. The ESL will also provide the clubs necessitated financial stability, by sanctioning 200 million euros every year.

    UEFA right to forswear

    The presence of Article 49 (3) of UEFA statutes grants the federation to intrude in the formation of the ESL. The statues read as: –

    “International matches, competitions or tournaments which are not organised by UEFA but are played on UEFA’s territory shall require the prior approval of FIFA and/or UEFA and/or the relevant Member Associations in accordance with the FIFA Regulations Governing International Matches and any additional implementing rules adopted by the UEFA Executive Committee.”

    The Article accords UEFA and FIFA as the premier body to grant ratification to any new league, planning to engage in football across Europe. Connoting that the ESL were to take prior permission from UEFA for its formulation, perverse to that, the ESL was devised in silence and publicized, as surprise, not to the world but to the players and manager of the clubs as well.

    The riveting point is that many members were part of both the federation this includes Mr. Andrea Agnelli, chairman of Juventus F.C and chairman of European Club Association (“ECA“) who later resigned on the very day when the proposed ESL came into reality. His participation in two opposing federations casted doubt of potential sharing of confidential information for advantage of ESL formation, giving UEFA right of action, based on breach of confidentiality.

    Delving into Competition law

    The European courts have time and again precedented that sports and activities are dictated by competition law. The ECJ in Klaus Hofner and Fritz Elser v. Macrotron GmbH held that the football clubs are termed as “Undertaking” which are capable of affecting competition within Article 101 (1) of Treaty on the Functioning of the European Union (“TFEU”). Also, the ECJ in Meca Medina v. Majcen decreed that competition law does apply to sporting events in relation to economic activities. 

    It renders every restrictive (cartel) agreement as a violation of competition law, but subject to exceptions i.e. if the federation pursues a legitimate objective, are inherent to these objectives, necessary and proportionate.

    The ESL principally infract the principle of equality between the clubs which was endorsed by the courts around Europe. In the Bosman decision of 1995, the court in para 106, summarised the test as “the aims of maintaining a balance between clubs by preserving a certain degree of equality and uncertainty as to results and of encouraging the recruitment and training of young players must be accepted as legitimate”, similar ruling was dictated in the UEFA Champions League decision of 2003. It is safe to say that the ESL being a close league, with 15 members guaranteed spots regardless of their performance, will fail to stand the test of legitimate objective.

    It is to be borne in mind that ESL being a new competition, will gamble upon the existing system and will diminish the financial interest of UEFA, as they are the only federation regulating football in Europe, holding a dominant position.

    The UEFA could be prohibited by virtue of Article 102 i.e. Abuse of Dominant position, from exercising its dominant position by prohibiting other leagues and favouring their  league which is Champions and Europa league. The same be held in Motoe case adjudged by ECJ.

    UEFA’s incongruous statement banning players

    The other wrangle in the brawl between ESL and UEFA is the statement made by UEFA President suspending the players from domestic teams and national teams. The legality of this statement can be posited by Article 102 of TFEU, which declares action taken while holding dominant position as void. The Munich court criticized Fédération Internationale de Basketball (“FIBA“) rule of banning athletes from club and nationals teams, taking part in competition other than the one staged by FIBA. The court while demeaning this rule of FIBA, held them accountable for abusing the dominant position.

    In a much recent case, the EU court in International Skating Union Case 2020 held that International Skating Union (national governing body for the sport of figure skating in the United States)rules regarding blanket ban on players from national teams who are participating in tournaments not accredited by ISU are not proportionate to the legitimate objective as per Article 101(1).

    Moreover, a decision rendered by the regional court of Frankfurt held that, if the federation announces the selection of players for the national team not on the basis of sporting merit, then it will be deemed to be a decision based on abuse of dominant market position.

    Likewise in the German Wrestling League case, the Nuremberg court of appeal while citing the ISU case held though federation are allowed to take measures in order to protect their own economic interest against the competitive organisation but banning players is against the principle of EU and German competition law.

    This in clear terms implies that the announcement threatening to ban all the 12 clubs and players from participating, will not hold a grasp on the courts. The vogue of courts upholding players autonomy is a strong inference that if ESL ever to approach the court, the ruling can be in their favour, same be affirmed by ESL Chairman.

    The banning of players will also stand in violation of the principle of ‘restraint of trade’ as players are free to move, as enshrined in the common law system. The creation of ESL has resulted into a much serious breach of duty on part of the club as the planned league carried out without letting the players know, which is in violation of rules of domestic leagues i.e. to abide by the rules of UEFA and FIFA. This in turn will give the right to players to repudiate the contract on grounds of breach of duty and contractual obligation.

    In the present case all the disputes arising out of ESL, the ban on teams from domestic leagues and the ban of players from playing in the world cup is likely to have breached any law or regulation for the time being in force, will likely be referred to CAS.

    Conclusion

    It will be interesting to watch out how this tale of world football develops in the coming months. The EU courts, while deciding the legality of ESL, also have to set out measures hinting whether TFEU licenses a competitive league ever to be formed finer than ESL or UEFA will continue to hold the dominant positions, concerning all small footballing activities played out in Europe.

    It is safe to say that the decision banning players from all the competition will not hold strong in court and the actions of UEFA will, in turn, violate Antitrust law as insinuated by the court through various precedents.

  • Are Ed-tech Companies Amenable to the Consumer Protection (E-Commerce) Rules, 2020?

    Are Ed-tech Companies Amenable to the Consumer Protection (E-Commerce) Rules, 2020?

    By Aniket A. Panchal and Gauransh Gaur, second-year students at GNLU, Gandhinagar

    Introduction

    Ever since the introduction of the Consumer Protection (E-Commerce) Rules,2020 (hereinafter referred to as ‘Rules‘), the vexing question is whether Ed-tech companies would be subjected to these rules and if they are subjected, whether they would come under the inventory-based e-commerce or marketplace e-commerce model. The applicability of the Rules will differ according to the category to which an Ed-Tech entity belongs. Moreover, if the definition provided under the Consumer Protection Act, 2019 (hereinafter referred to as ‘Act‘) and the Rules is dissected, it can be concluded that the all-embracing definition of ‘e-commerce entities’ could, in fact, capture entities that create and disseminate products or services over digital or online media. However, it is not unequivocally answered in the Rules if they apply to Ed-Tech companies which primarily impart their services through online websites, mobile applications, and similar digital platforms. This article seeks to analyse the newly introduced Rules and their applicability to Ed-tech platforms after a thorough perusal of the diverse judicial opinions regarding the categorization of ‘education’ as a service under the Act. In doing so, the article will also outline how different models of Ed-tech companies are subject to different regulations in light of these Rules.

    Analysis of the Consumer Protection (E-Commerce) Rules, 2020

    As per the Rules, the definition of an e-commerce entity encompasses any Ed-tech platform which provides or facilitates the provision of educational services (online courses, examination preparation, online tutoring, etc.) in return for a fee. There are two models of an e-commerce entity as per the rules, namely: inventory e-commerce entity and marketplace e-commerce entity.

    To contextualise the same, an inventory e-commerce entity would include an “e-commerce entity which owns the inventory of goods or services and sells such good or services directly to the consumers”. This model is used by many Ed-tech platforms wherein they curate their own educational services and provide them to the consumers directly through this platform.

    The other e-commerce model referred to under the rules is the marketplace e-commerce entity. According to the Rules, this e-commerce entity provides “an information technology platform on a digital or electronic network to facilitate transactions between buyers and sellers”. It covers Ed-tech platforms which connect the students to teachers and allow the students to purchase courses offered by various teachers and educational institutions. These platforms could be said to have “facilitated the transactions” between the course offerors and the students.

    Therefore, the determination of compliance requirements by an Ed-tech company regarding inventory-based e-commerce entity or marketplace e-commerce entity would be on a case-to-case basis depending upon their operating procedures among other features.

    Education as a Service? Unravelling The Conundrum

    The question whether education would be considered as a service is a murky one under consumer protection law. Different opinions have emerged on this subject through a myriad of judgements by the Supreme Court, the National Consumer Disputes Redressal Commission (hereinafter referred as ‘National Commission‘) and the State Consumer Disputes Redressal Commission. This part of the article analyses this tumultuous area of consumer protection law, and highlights its implications on the central question- whether Ed-tech companies are covered under the new E-Commerce Rules.

    This question was considered by the Apex court in Bihar School Examination Board v. Suresh Prasad Sinha(hereinafter referred as ‘Bihar School Case‘) Here, the issue for adjudication was whether there was any deficiency in services provided by the Bihar School Examination Board (hereinafter referred as ‘Board‘) when they failed to issue correct roll numbers to the candidates, and subsequently failed to declare the result of one of the candidates. The court held that the Board, in discharging its statutory functions, could not be subject to the consumer protection law. Further, the fees paid by the candidates to the Board to conduct the exams and other related activities could not be equated with ‘consideration’, and hence, the students could not be brought under the definition of ‘consumers’.

    A different stance was taken in Oza Nirav Kanubhai v. Centre Head Apple Industries Ltd,[i] where a student was alleged to have been treated prejudicially by a private college. When the faculty member learned that the student had brought his misbehaviour to the attention of the institution’s head, he insulted him and treated him with bias, even refusing to check the complainant’s homework. He was not even refunded his fees after being rusticated from the college. The National Commission, after observing the misconduct of the faculty, emphasized upon the contractual relationship between the student and the teacher, and thus, brought educational activities under the ambit of ‘services’. The court, through this decision, made a distinction between private and statutory bodies by bringing educational services rendered by a private institution under the consumer protection laws, and exempting the services rendered by a statutory educational institution.

    Following this, a private coaching institute was also brought under the ambit of consumer protection laws in Jai Kumar Mittal v. Brilliant Tutorials, where the coaching institution provided outdated study material to their students.

    However, the Supreme Court has always been reserved in bringing educational institutions under the ambit of consumer protection law. For instance, when the court was confronted with this question in the case of Maharshi Dayanand University v. Surjeet Kaur, it nearly expanded the ratio of Bihar School Case. Nonetheless, it seems to have ‘ostensibly’ settled the debate in P.T. Koshy v. Ellen charitable trust[ii] (hereinafter referred as ‘P.T. Koshy‘), where it ruled that educational institutions do not render any services through their “performance of educational activities”. Consequently, no complaints regarding deficiency in educational services can be entertained against the educational institutions as consumer forums do not have jurisdiction to entertain these complaints.

    Therefore, if the P.T. Koshy decision is taken as the final answer on this quintessentially tumultuous question, the current position of law can be ascertained. It would mean that statutorily and privately established educational institutions providing educational services are not subject to consumer protection laws. Conversely, as a settled law, private coaching institutions are amenable to consumer protection laws as they are recognizably different in nature from private institutions.

    The Implications of Judicial Pronouncements on Ed-tech companies’ amenability to the rules

    The ratio propounded in P.T. Koshy will not have much effect on the amenability of coaching institutions which are providing educational training through virtual learning platforms, as they are different from the regular schools and colleges. In fact, they would be subject to consumer protection laws for the following reasons: fees charged for their services, profit making objective (the element of ‘commercialization’ in dissemination of courses and training), and the ‘consumer and a service provider’ relationship that is established between a student and a teacher respectively. However, the situation would become tantalizing when any online course would be offered directly by the educational institutions, or through any intermediary acting as a facilitator between the students and the teachers.

    Any statutorily established institution would clearly be exempted the Rules in light of the Apex court’s ruling in Bihar School Examination Board case. Nonetheless, the moot point would be whether private educational institutions would be exempted from the Rules if they provide online courses. If the issue is addressed, considering the decision in P.T. Koshy, they would not be held liable for their educational activities. Therefore, it could be fairly argued that private educational institutions (except coaching centres) would not be subject to the Rules even if their courses go online.

    Ed-tech companies acting as an intermediary between the students and any other education institution, would not be liable under the E-commerce Rules as educational institutions are not amenable to the consumer protection laws. However, the definition of e-commerce entity which includes the marketplace e-commerce model does not exempt Ed-tech companies, which are acting as an intermediary between the students and coaching centres.

    Furthermore, the daunting question is the one concerning the amenability of coaching institutions which operate on a Freemium Model. This model is premised on a combination of free and premium services, where the consumer can avail the basic services free of cost and would be charged only for premium features in case he/she wishes to use them. Thus, a Freemium model operates on two-tiered user acquisition where free users have limited access to the product/services while the premium users get greater access to the product/services. Resultantly, only the premium users can be regarded as true consumers who are receiving education as a service; primarily for the reason that they are paying for availing some extra features/services. Therefore, coaching institutions operating on a freemium model ought to be made liable as far as their services are concerned with respect to the premium users.

    Conclusion

    In light of the foregoing analysis, the authors have arrived at the following conclusion. Firstly, Ed-tech companies operating as private coaching institutes would be subject to consumer protection laws under the Rules. However, when they are operating on a freemium model, they will be amenable to the Rules but only for those aspects which are being provided for a fee. Secondly, these companies would also be required to comply with the Rules when they would be operating in the form of a marketplace e-commerce model by acting as an intermediary between students and private coaching centres. Lastly, educational institutes providing online courses or educational training, or any Ed-tech company providing online courses and training, would not be subject to the Rules owing to the ratio propounded in the P.T. Koshy judgement.

    [i] (1992) 1 CPR 736.

    [ii]P.T. Koshy v. Ellen Charitable Trust, (2012) 3 CPC 615 (SC).

  • Future Retail v. Amazon: Time to Strike Out Emergency Arbitration in India

    Future Retail v. Amazon: Time to Strike Out Emergency Arbitration in India

    By Swikruti Nayak and Vaishnavi Bansal, third-years students at NLU, Jodhpur

    Introduction

    The single bench decision of Future Retail Ltd. v. Amazon.com Investment LLC passed by the Delhi High Court on 21st December, 2020 has resulted in a lot of turbulence and furore in the legal community for the future of emergency arbitration (“EA”) in India. This judgement sets the tone for increasing the ease of doing business in India and making it more arbitration friendly. The court  upheld the validity of an emergency arbitrator’s order of interim relief in the favour of Amazon. However, this matter is yet to be resolved. On appeal, a division bench of the Delhi High Court passed an interim order against the validity of EA which was upheld in the said judgement. Subsequently, Amazon filed a special leave petition to the Supreme Court, contending that the Delhi High Court neither had the jurisdiction to entertain Future Group’s appeal against Amazon nor can it pass any interim order that acts against the SIAC’s emergency arbitrator order, as the same is valid under Indian law.

    The concept of Emergency Arbitration

    EA, as a process, is based on the importance of obtaining interim relief for the parties which is key to protect and preserve the relationship of parties involved in a dispute, before a final relief is secured. The concept of emergency arbitration finds its origins in the Pre-arbitral Referee Rules of the International Chamber of Commerce (“ICC”) in 1990, however, it was rarely used by the parties.[i] In the Asia-Pacific region, the Singapore International Arbitration Centre (“SIAC”) was the first to introduce provisions regarding EA in 2010, to obtain emergency interim relief before an Arbitral Tribunal is constituted. Essentially, EA enables parties to obtain urgent relief and not spend a considerable amount of time, awaiting the appointment of an arbitral tribunal. This will also enable parties to exercise confidentiality even while seeking interim relief, which is not possible in court system.

    The concept of EA is based on two legal maxims, fumusboniiuris and periculum in mora, which mean that there is a reasonable possibility that the requesting party will succeed on merits and if the measure is not granted immediately, the loss cannot be compensated through damages. The specific details of the procedure may vary in different jurisdictions, but the two common procedures for obtaining a relief in emergency arbitration is, filing of the proof of service of the application to an emergency arbitrator upon opposite parties and payment of the fee decided according to the centre, where the arbitration will be carried out.

    Future Retail v. Amazon: A Shift in the Judicial Trend

    The dispute arose between parties in the present case, Future Retail and Amazon, because of non-compliance with the provision in the Shareholders Agreement, that prohibited Future Retail from selling its assets to some enlisted entities. In the agreement, the parties had chosen the Arbitration Rules of SIAC as the law of the conduct of arbitration making it to be the curial law for their arbitration agreement. Since SIAC rules provide for the appointment of an emergency arbitrator, the parties chose to go for EA. The issue for consideration before the court was whether the emergency arbitrator provision under the SIAC Rules is contrary to the mandatory provisions of the Arbitration and Conciliation Act 1996 (“the Act”), thereby examining the validity of emergency arbitration conducted between the parties.

    The court in its discussion relied heavily on the Supreme Court case NTPC v. Singer which deals with the situation of parties choosing a different curial law and proper law. It came to the conclusion that SIAC rules which is the curial law of arbitration agreement will apply to the extent they are not contrary to the public policy of India or against the mandatory requirement of the Act. Thereafter, the court used the bedrock of the arbitration law i.e. party autonomy to hold that since the rules are chosen by express consent of the parties, the court would not unnecessarily interfere with the award. Rule 30 of the SIAC Rules provide that the parties are also entitled to plead before the judicial authority for the interim relief, thus it is also not taking away the substantive right of the parties to reach the courts for interim relief. Moreover, there is nothing in the Act to invalidate the whole process of EA, merely because it is not strictly falling under the definition of section 2(1)(d). The court also clarified the applicability of section 9 along with section 27, 37(1)(a), 37(2) of the Act in the judgment. It said that applicability of these sections may be derogated with the agreement in International Commercial Arbitration and there is no inconsistency between SIAC Rules and Part 1 of the Act. The court defended it relying on the phrase “even if the place of arbitration is outside India” in proviso section 2(2), making it obvious that the exception is also valid for international commercial arbitrations. Hence, the court upheld the validity of the emergency arbitrator’s order of interim relief.

    However, this was not the first instance where the courts were faced with the question of enforceability of the EA in India. In 2016, Raffles Design International India Pvt. Ltd. &Anr. v. Educomp Professional Education Ltd. and Ors.was decided by the Delhi HC wherein the court upheld the maintainability of application for interim measures under section 9 after an emergency award was obtained from a foreign seated arbitral tribunal. The court held that section 9 cannot be used to enforce emergency awards but can be used by the parties to file interim relief. This judgment, however, fails to take note of the Bombay HC judgment of HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd. &Ors. which was the first case to recognise the concept of EA in India. In this case, the emergency arbitrator in SIAC had passed two interim awards and the court had also granted interim relief to the party. The judgement of the HC was affirmed by the SC in 2020.

    Ashwani Minda and Anr v. U-Shin Ltd. and Anr, a Delhi HC judgement of 2019, laid the foundation to enable the bold stance of the court in Future Retail. The court recognised the concept of EA, however, dismissed the application for interim relief as the emergency arbitrator had declined the same.  The Japan Commercial Arbitration Association (“JCAA”) Rules governing the conduct of the arbitration, which provides for emergency arbitration to obtain relief before an arbitral tribunal is constituted. The arbitration agreement did not contain a provision for obtaining relief from domestic courts. The enforceability of emergency awards was not clearly discussed, however, the court held that once EA is invoked, interim relief cannot be sought from domestic courts. According to the court, the emergency arbitrator passed a very detailed and reasoned order and hence it did not interfere with it.

    Hurdles Lying Ahead

    It is quite evident that the judicial trend in India is gradually changing from circumventing discussions on the status of EA to discussing relevant issues related to the validity of EA. However, the concept of EA is far more complex, involving separate and specific procedures that need to be answered before India adopts an authoritative status of EA. As under section 2(1)(d) of the Act, an emergency arbitrator has not been recognised as an ‘arbitral tribunal’- his position and statutory benefits are not clear. Concurrent jurisdiction also presents a major issue since for obtaining interim relief, parties will be free to approach both the courts as well as the emergency arbitrator. The status of EA proceedings needs to be clarified, for instance, whether under section 8 which provides a judicial authority with the power to refer the parties to arbitration in the presence of an arbitration agreement, is applicable to an EA agreement or not. The scope of interference by court under EA as in full arbitral proceedings under section 34 also needs to be laid down. Moreover, an arbitral tribunal may continue proceedings ex-parte under section 25(3) of the Act and grant an award on the basis of the evidence before it, however, the same is not clear in case of an emergency arbitrator. Emergency arbitral awards apart from above are also susceptible to various enforcement issues in different jurisdictions as it is  more of a voluntary practice between parties. Moreover, it is mostly agreed upon, because of the consequences of refusing an EA order on the full arbitral tribunal process. There is no mention of the procedures like EA in Model law on which India’s arbitration law is based, which further strikes on its enforceability and acceptance in India.

    Conclusion

    The concept of EA holds a promising future worldwide as, besides Singapore, countries such as Hong Kong, Netherlands and Bolivia have amended their rules to include provisions regarding an emergency arbitrator. The Stockholm Chamber of Commerce (SCC), the London Court of International Arbitration(LCIA), the International Centre for Dispute Resolution of the American Arbitration Association(ICDR/AAA) and the International Chamber of Commerce(ICC) have also inserted provisions specifically dealing with emergency arbitration. In the USA, there is no specific provision regarding an emergency arbitrator, but national courts have generally tended to favour their validity.

    The decision of the Delhi HC in Future Retail v. Amazon revived a much-needed discussion on the status of EA in India. In the light of the principle of party autonomy, parties are free to choose the curial law of arbitration which can have specific provisions for approaching an emergency arbitrator to obtain interim relief. The same does not restrict a party to approach the domestic courts under section 9 of the Act. There is nothing contained in the Act which invalidates the whole process of EA and makes the emergency arbitrator’s order unenforceable. Although, the decision paves the way for facilitating a more business-friendly economy in India and reaffirms the true essence of arbitration i.e. party autonomy, it left the door wide open for interpreting what exact position an emergency arbitrator holds and the technicalities of EA.

    [i] Suraj Sajnani, ‘Emergency Arbitration in Asia: Threshold for Grant and Enforcement of Emergency Relief’ in Arbitration: The International Journal of Arbitration, Mediation and Dispute Management (Brekoulakis ed., 2020).

  • Jurisdictional Defect Beleaguering the Assessment Proceedings under Income Tax Act, 1961

    Jurisdictional Defect Beleaguering the Assessment Proceedings under Income Tax Act, 1961

    By harshita agarwal and raj aryan, third-year and fourth-year students at ms ramaiah college of law, bangalore and llyod law college, respectively

    It is well-settled under Section 232(9)(c) of the Companies Act, 2013, that after a merger between two or more entities, all the legal proceedings in the name of blending entities pending or arising before the effective date of the deal will be enforced against the name of the blended entity. Any legal proceedings initiated against the blending entities individually would be considered void ab-initio. Surprisingly, Income Tax Appellate Tribunal, New Delhi (“Delhi ITAT”) recently in the case of Boeing India Pvt. Ltd (Successor v. Acit Circle- 5(1), New Delhi on 17 August 2020 (“Boeing India case”) came across the same issue wherein the Assessing Officer (“AO”) as per above law erred in taking into consideration that after a merger no legal proceedings can be initiated against the name of blending company which have lost its existence after the merger.                                                                          

    In this blog, the authors critically analyse the issue of whether the jurisdictional defects in the later stages of the proceedings can be remedied under the law in the light of the Boeing India case. Further, the authors analyse whether proceedings under Section 144C of the Income Tax Act, 1961 (“the Act”) can be initiated on the ambivalence of jurisdictional validity of the assessment order.

    Factual Matrix of the Case

    Boeing India Pvt. Ltd.(“BIPL/Appellant”) notified its merger with Boeing International Corporation India Private Limited (“BICIPL”) to the Regional Director. The effective date of this scheme was 15.02.2018. On 10.04.2018 the Appellant apprised the AO that the BICIPL was dissolved and all the legal proceedings after the merger will be initiated or transferred in the name of the BIPL. Further, on 19.10.2018 the Transfer Pricing Officer (“TPO”) under Section 92 CA(3) of the Act drafted an order determining the arm’s length price of the international transaction of BICIPL with its Associated Enterprise in the name of the Appellant. But later the AO issued the draft assessment order in the name of a non-existent company i.e., BICIPL. On appeal to the Dispute Resolution Panel (“DRP”), it turned the deaf ear to the Appellant’s appeal. Aggrieved by the DRP order, the Appellant approached the ITAT Delhi claiming that there exists a jurisdictional defect in the draft assessment order. In this case, the Tribunal strived to discuss whether the jurisdictional defects can be remedied under assessment proceedings of Section 144C of the Act . 

     Understanding the legal anatomy of Section 144C assessment proceedings 

    Firstly, while referring to any issue before DRP, the procedure embodied under Section 144C of the Act needs to comply. Under Section 144C(1) of the Act, the AO needs to frame the draft assessment order in the name of the ‘eligible assessee’. The draft assessment order constitutes the foundational structure before inbounding into further procedural aspects under the Act. For better clarity, it is pertinent to note the definition of the eligible assessee. The definition is under Section 144C(15)(b) in accordance to which an ‘eligible assessee’ is any person whose variation of income or expenses arises as a consequence of the TPO’s order passed under Section 92CA(3). As per the definition outlined above, the eligible assessee before the merger was BICIPL. However, after the merger, it is BIPL. In the instant case, the AO defaulted in addressing the concerned person, thereby causing a jurisdictional defect.

    The DRP obviated that the defect can be remedied in the further proceedings under the Act. However, the DRP’s order under Section 144C(5)  lacked legal standing as firstly, Section 144C(3) specifies that the final assessment order needs to be drafted based on the draft assessment order. Secondly, Section 144C(2) narrows down the order of DRP as according to this sub-section, once the draft assessment order has been framed then the immunity to accept or change it lies in the hands of the assessee only. In other words, the AO’s power to make further changes in the draft assessment order is inhibited. While drawing reference to the above contention, reliance can be placed in the case of Turner International Pvt. Ltd v. DCIT wherein the Hon’ble High Court ruled that failure in complying with Section 144C(1) will make the whole final assessment proceedings void. The act of the AO outbroke the foundational structure of Section 144C, thereby making the entire proceedings null and void.

    Remedying the jurisdictional defect under Section 144C

    In the second contention of remedying the jurisdictional defect under Section 144C of the Act, it is pertinent to ponder over the question of whether all the procedural mistakes can be remedied under the Act. For this, it is necessary to first understand the comparative analysis of jurisdictional defects between the initial stages and later stages of the proceedings. 

    To understand the comparative analysis of the jurisdictional defect between the initial stages and later stages of the proceedings under the Act, it is pertinent to canvass the ruling of Sky Light Hospitality LLP v. Acit (“Sky Light Hospitality LLP case”) to distinguish the procedural matter in the beginning and later stages of the proceedings. In this case, the AO committed a mistake by issuing notice under Section 148 of the Act, under the name of the non-existent company. Based on the above facts, the Delhi High Court ruled that the procedural mistakes at the beginning of the proceedings can be cured under Section 292B, as it does not form the root of the matter. The Delhi ITAT in Boeing India case construed that the Sky Light Hospitality LLP case was distinguishable to the instant case as in the above case the procedural defect happened at the initial stages of the proceedings, thereby not affecting the root of the proceeding. However, where the defect occurs at the later stages of the proceedings, the mandatory requirement to complete the assessment proceedings under Section 144C of the Act is contravened, thus vitiating the final proceedings in-toto.

    In this case, the draft assessment order has not been treated as a mere irregularity but as incurable illegality . The reference to the above can be drawn from the case of The Asst. Commissioner Of Income v. Vijay Television Private Ltd. wherein the court held: “Section 292B of the Act cannot be read to confer jurisdiction where none exists.” Further, the Circular No.179 dated 30 September, 1975 has limited the scope of Section 292B of the Act to rectify the mistakes of notices, the return of income, assessment, summons, or other proceedings only if they are in substance form and do not deviate from the intent or purpose of the Act. The jurisdictional defect is outside the intent of the Income Tax Act, 1961, thereby excluding such defect from Section 292B of the Act.

    In other words, the basis of refusal to remedy the jurisdictional defect lies in the context that Section 292B can be invoked only when there subsists technical irregularity in the order but not in the stance where there exists wrong jurisdiction. Thus, this made it clear that the jurisdictional defect cannot be cured under Section 292B of the Act. 

    Conclusion

    The enforceability of law demands the requisite of valid jurisdiction. To invoke the provisions of any law in India, a person is required to satisfy all the jurisdictional requirements set down by the laws in India. The failure of valid jurisdiction will allow the courts or tribunals to repudiate the validity of any order, plea, petition, or any case. The Delhi ITAT’s stern response to the jurisdictional defect under Section 144C (1) of the Act envisaged that jurisdictional defect cannot be sustained by any court in India. This even implies to all the authorities and regulatory bodies in India. This case had further drawn light on the procedural mistakes in the assessment proceedings that can be cured under Section 292B of the Act and the procedural mistakes in the assessment proceedings that cannot be cured under Section 292B of the Act by differentiating them as procedural mistakes at the initial and later stages of the assessment proceedings.

    The second loophole that subsists in this case was the lack of independence of DRP. The DRP, in this case, intentionally supported the Department Representative in the procedural mistake under Section 144C (1) of the Act even after being acquiescent to the fact that there was a jurisdictional defect in the draft assessment order. This connotes that the DRP overlook the procedural irregularities of the case, which can affect the tax adjudication in India. It is a need of an hour that even DRP should look into technical intricacies of the case before adjudicating any dispute.

  • Sanctity Of Legal Process Vis-À-Vis Maximisation Of Value Under The IBC: A Watertight Case?

    Sanctity Of Legal Process Vis-À-Vis Maximisation Of Value Under The IBC: A Watertight Case?

    BY DEVASH GARG, THIRD-YEAR STUDENT AT VIVEKANAND INSITUTE OF PROFESSIONAL STUDIES, NEW DELHI

    The Insolvency and Bankruptcy Code, 2016 (hereinafter the “Code”) since its enactment has become a routine subject of exchange in the legal community due to its dynamic character. It has proved to be a milestone of the Indian legislature inasmuch as it has successfully improved the Indian insolvency and bankruptcy laws by simplifying and bringing them under one umbrella.

    The Code mandates the creation of a Committee of Creditors (hereinafter “COC”) for managing the transactions of the corporate debtor during Corporate Insolvency Resolution Process (hereinafter “CIRP”). Be it as it may, the Code places its complete faith in the commercial wisdom of the COC for protecting the commercial interest of the stakeholders and as well as for reviewing and selecting the resolution plans (hereinafter R-Plan) submitted by the rival Resolution Applicants (hereinafter “RA”). Even the Insolvency Law Committee reinstated in its report that one of the primary objectives of the Code is to respect the ‘commercial wisdom’ of the COC. However, it has been observed that under the guise of commercial wisdom, ofttimes COC misuse its wide discretionary powers thereby, abusing the due process laid down by law.

    Therefore recently, on 5th August 2020, the Hon’ble NCLAT passed an elaborate order in the case of Kotak Investment Advisors Ltd. v. Krishna Chamadia, where it observed that, while the COC is indeed fully authorised to exercise its discretionary powers in pursuance of its commercial wisdom, however it doesn’t mean that COC has unfettered powers under the guise of its commercial wisdom to instruct the Resolution Professional (hereinafter “RP”) to adopt an arbitrary or an ab-initio illegal procedure or a procedure which violates the principles of natural justice in the conduct of CIRP. The author attempts to analyse the decision of NCLAT along with its implications in the article.

    I. Constitution of COC- steering body of the CIRP

    Though, unlike Part III (insolvency and bankruptcy for individuals and partnership firms), Part II of the Code doesn’t define the COC for Corporate Persons, but harmonious reading of Code’s provisions would give a fair idea about the purpose, constitution, functions, and powers of the COC. Once all the claims of corporate debtor are collated, under s.21(1) of the Code, the Interim Resolution Professional is required to appoint the COC under s.18(c) of the Code. As a general rule laid down under s.21(2), the COC primarily consists only of financial creditors however, if a corporate debtor doesn’t has any financial creditor, then as per Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter the “CIRP Regulations”), the COC will consist of, 1) operational creditors, and 2) one representative each, elected by workmen and employees.

    The Code helms the COC as one of the steering bodies of the CIRP. As a result, various provisions of the Code acknowledge the significance accorded to the COC at the different stages of the CIRP.

    The RP is obliged to carry out every act in conducting business of the corporate debtor with COC’s prior approval. More specifically, s.28 of the Code lays down certain decisions which can’t be taken without prior clearance from the COC, like raising interim finance or changing capital structure of corporate debtor etc.  

    The COC remains in the saddle even at the very end of the CIRP. According to s.30(4) of the Code, for a valid approval, the R-Plan must be approved by at least 66% members of the COC. Regulation 39(3) of the CIRP Regulations, while further relying upon COC’s commercial wisdom, provides that the approved plan must have been strictly scrutinised and measured by the COC. And, once the COC approves the R-Plan, the RP becomes bound under s.31 of the Code to place it for review before the NCLT.

    Most importantly, the Code doesn’t subject the COC’s decision of approving the R-Plan to per se judicial review as the NCLT i.e. Adjudicating Authority (hereinafter “AA”) is obliged under s.31 of the Code to approve the R-Plan submitted to it by the RP. It may not grant such approval only on the basis of the limited grounds mentioned under s.30(2) of the Code. Similarly, NCLAT can examine appeals from such challenge only on the grounds mentioned under s.61(3) of the Code. On similar lines, the Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta and Ors., laid down the doctrine of commercial wisdom and crystallised the law on this point by observing that COC exercises its “commercial wisdom” while accepting, rejecting or abstaining the R-Plans submitted by the RAs to it.

    In this manner, the Code has conferred exclusive access to negotiations and the final hand in taking commercial decisions, to the COC.

    II. Commercial wisdom- “Non reviewable”

    Accruing to this statutory backdrop, Courts have adopted a deterrent approach in interfering with the commercial decisions taken by the COC.

    The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, while interpreting the Code’s preamble held that; as the fundamental aim of the Code is to revive and run the corporate debtor as a going concern, to balance the interests of all stakeholders, and to maximise the value of its assets, thus, CIRP can’t be at odds with the interests of the corporate debtor. And thus, paramount importance must be given during the CIRP to protect corporate debtor’s interests. In this context, the Court upheld the BLRC report which pegged the financial creditors (who constitute the COC) of the corporate debtor as the most qualified persons to manage and revive the said corporate debtor.

    It is pertinent to mention that the Supreme Court in another case, i.e. in K. Shashidhar v. IOB and Ors., observed certain intrinsic assumptions with regards to COC to explain the Code’s rationale for conferring it wide discretionary powers. The Court said that COC possess requisite expertise to analyse and assess the commercial viability of the R-Plans submitted to revive the corporate debtor and that its decisions are outcome of a thorough commercial analysis of the proposed resolutions based upon assessment, deliberations and voting and thus, judicial intervention in commercial decisions of the COC is barred to ensure completion of the CIRP within the timelines prescribed by the Code.

    In a comparatively recent case of Karad Urban Cooperative Bank Ltd. v Swwapnil Bhingardevay, the Apex Court, while saluting the commercial wisdom of the COC, observed that the decisions taken by the COC under its commercial wisdom are non-justiciable. The Court even remarked that as compared to COC, the NCLT has merely a “hand’s-off” role during the entire CIRP.   

    However, above decisions didn’t involve the issue of sanctity of process of law. These decisions are merely binding on the issue of exercise of “commercial wisdom” of the COC, and not whether the COC has the power to go beyond the process envisaged under the Code and mould it according to its whims and fancies under the guise of its “commercial wisdom”.  

    III. NCLAT’s decision in the instant case

    In the present case, the RP invited expressions of interest (EOI) from the interested RAs after initiation of the CIRP of corporate debtor, i.e. Ricoh India Ltd. After receiving EOIs, the RP issued process memorandum with the express approval of the COC to mandate the last date for submission of R-Plans. Two plans were submitted under the said deadline. Both the plans were opened by COC and discussions started within the COC in respect of these plans. However, after initiation of discussion and lapse of considerable time, the RP accepted two R-Plans which were submitted well beyond the last date of submission without issuing a fresh notice calling for EOIs. Most interestingly, one of these two plans, was approved by the COC as a successful plan and the RP moved an application under s.30(6) of the Code for the approval of AA. At this juncture, the unsuccessful RA (who submitted the R-Plan under the prescribed timeframe), filed miscellaneous application with the NCLT challenging the approval of the said plan.

    The AA clubbed both the matters and rejected the miscellaneous application filed by unsuccessful RA thereby, accepting the application filed by RP for approval of the R-Plan. The AA placed its reliance on K. Shashidar (supra), and held that “the commercial decision of the COC for approval of R-Plan is non-justiciable and hence, is required to be sanctioned by the adjudicating authority.” This decision was challenged by the unsuccessful RA before NCLAT in the instant case.

    The main issues before the NCLAT were 1) whether the RP with the approval of COC, was authorized to accept the R-Plans after the expiry of the deadline for submission of the Bid, without extending the timeline for submission of EOI? and 2) whether grant of approval by the COC to the RP, in accepting the R-Plan after the expiry of the deadline was under the commercial wisdom of the COC?

    In consonance with the jurisdictional bounds laid down in Essar Steel (supra), the NCLAT, while answering both of the issues in negative, described the RP’s act of accepting the R-Plan which was submitted beyond the mandated cut-off date, though, with due approval of COC, as “material irregularity” under s.61(3)(ii) of the Code. The NCLAT held that:

    “The act of the Resolution Professional to accept the R-Plan after opening the other bids, which were all submitted within the deadline for submission of R-Plan cannot be justified by any means and is a blatant misuse of the authority invested in the Resolution Professional to conduct CIRP.”

    It also observed that COC in exercise of its commercial wisdom doesn’t possess the power to authorise RP to “adopt a procedure in the conduct of CIRP which is, ab-initio illegal, arbitrary and against the Principles of Natural Justice.”

    The tribunal went on to remark that the RP with the prior approval of COC is fully authorised to call for fresh invitations of EOIs of R-Plans even after the expiry of last date of submission, provided that such timeline for submission of R-Plan can only be extended by publishing a fresh notice in Form ‘G’ under Regulation 36A of the CIRP Regulations. Lastly, NCLAT clarified that COC can’t accept R-Plans from those RAs who haven’t submitted EOI within the prescribed deadline. The NCLAT finally held that COC, under exercise of its commercial wisdom can’t adopt any special procedure for accepting R-Plan after expiration of the deadline otherwise it would tantamount to vitiation of CIRP.

    IV. Conclusion

    The NCLAT grabbed the opportunity with both hands and indisputably flagged the objectives in the preamble to the Code, which reads as “the objective of the IBC is resolution, in a time-bound manner, for maximization of assets”, and successfully established that the objective of maximisation of value doesn’t supersede the sanctity of the process under CIRP. The objective of maximisation of value of assets of the corporate debtor is intrinsically weaved with the sanctity of process and objective of speedy resolution and hence, must not be put upon a higher pedestal.  This submission gains certitude from the decision of the Supreme Court in the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta, wherein R.F. Nariman, J. said that “it is of utmost importance for all authorities concerned to follow…model timelines as closely as possible”. The decision of NCLAT in the instant case was commendable, for it dealt forensically with the meat of the matter, i.e. collision between maximisation of value and sanctity of law. However, it’s submitted that the Courts must further balance the conflict between maximisation of value and sanctity of process to build a water-tight case in near future by declaring the law on the basis of the objectives and provisions of the Code, the regulations and the BLRC report.