The Corporate & Commercial Law Society Blog, HNLU

Tag: featured

Proxy Advisors: A Look at the Growing Intermediary & Increasing Regulations

BY ABHIRAJ DAS, FOURTH YEAR STUDENT AT GNLU, GANDHINAGAR

In the past few years, there have been some striking recommendations and red-flags being given by “proxy advisors” regarding corporate-governance of some of the leading incorporates of India. A few instances can be red-flagging the 35-years-long tenure of RIL’s auditors, or recommendation in the Tata-Mistry skirmishes. Very recently, in Crompton-Greeves Power, a huge value depreciation for minority shareholders owing to the issues of corporate governance & conflict of interest of independent director was highlighted.

What are Proxy advisory firms?

Proxy advisory firms are independent analyst offering analysis and voting recommendations to the institutional shareholders and investors. Securities and Exchange Board of India (SEBI) defines proxy advisors as “a person who provides advice in relation to the rights of the shareholders and investors including recommendations on public offer or voting on agenda items.” The term “proxy-advisory” originates from the concept of “proxy voting” where shareholders authorizes other person to vote on his/her behalf, and offer services related to proxy-voting by aggregating-and-standardizing information.

Roles/impact

It is a gospel truth that shareholders do not pay much attention to the voting in the AGMs or EGMs. In large public listed companies, public shareholders have relatively small stakes and there remains a collective-action problem and “shareholder-apathy” which lead them to vote as per the vox populi, and institutional investors like mutual funds, banks, DFIs, insurance companies, etc. cannot possibly make an well informed decisions in such voting owing to the huge-number of stocks they handle. Proxy advisory firms (PAF) undertake heavy-data researches and analyse the major agendas which are subjected to voting, providing detailed reports on voting to strengthen the corporate governance within the company.

The recommendations by these independent and expert firms have tendencies of de-stabilising (or re-stabilising) management and raise corporate governance standard as these advisories may be related to voting against re-appointment of independent directors, auditor’s appointment, M&A and corporate structuring where there seem possibilities that public shareholding might erode, and thus, have become important corporate intermediaries. While proxy advisories in India are still at nascent stage, the American ISS deal with around 44,000 meetings in 115 markets yearly to execute more than 10.2 million ballots representing 4.2 trillion shares. A recent study has shown that around 83% of ‘vote against’ recommendations include mainly “reappointment of non-executive directors” and “remuneration of statutory auditors”.

Issues concerning the PAF

In addition to the potentially huge impacts these firms have, there are several downsides as well. Sometimes, simultaneously these firms also offer voting advices to the shareholders of the same companies to whom they provide corporate governance recommendations which leads to conflict of interest. There are conflicts also when the key managerial persons of proxy firms hold important positions in the subject companies. Another major concern is that these advisory firms are not subjected to fiduciary duty to show that their recommendations are in the best interest of shareholders and the corporations. Independent study has shown that ratings used by these firms do not accurately foretell subject’s performance. Further, there have been diametrically opposite opinions on the same issue. Concerns are also there that they sometimes provide distorted recommendations to further their own interests. Another issue is that even when any error is highlighted they have not always been rectified.

Recent Regulatory Developments in the US

The Concept-Release of 2010 by the US Securities and Exchange Commission had raised concerns inter alia regarding the influence proxy advisors had over their clients “without appropriate oversight” or “an actual economic stake in the issuer”. Amendments have been adopted by SEC allows investors utilising proxy voting advice to receive “more transparent, accurate, and complete information on which to make their voting decisions.”

In July 2020, Exchange Act Rule 14a-1(l) has been amended to include if a person (includes entity) offers proxy advises, it shall constitute as “solicitation” under s. 14a and that such persons shall be generally required to file and furnish information regarding definitive proxy statements. Further, paragraph ‘A’ is inserted to Rule 14a-1(I)(1)(iii) clarifying that the terms “solicit” and “solicitation” include any proxy voting advice.

Addressing the issue of conflict-of-interest, amendment has been made to Rule 14a-2(b) which now obligates that proxy-voting recommendations includes the conflicts-of-interest disclosure specified in new Rule 14a2(b)(9)(i). Further facilitating informed decision-making by the clients of such advisors, a new Rule 14a-2(b)(9)(ii) has been adopted which requires that “proxy voting advice business” adopt and publicly disclose written policies and procedures. This new term provides flexibility to cover future business models which may engage in type of advice the rules aims to address, and does not merely base upon the businesses which presently provide such services. It has also been provisioned that the registrants i.e. the subject companies shall also be provided with the report of the voting-recommendations under Rule 14a-2(b)(9)(ii)(B). Para ‘E’ has been inserted to Rule 14a-9 to define the scope of ‘misleading’ which means “the failure to disclose material information regarding proxy-voting-advice, such as the business’s methodology, sources of information, or conflicts-of-interest.” Adoptions of these amendments addresses the different concerns with the proxy firms.

Recent Regulatory Developments in India

SEBI brought SEBI (Research Analyst) Regulations, 2014 within a few years of the advent of the industry in India. The Regulation requires such entities to register with SEBI and lays down internal policy, and also imposes a fiduciary duty to offer detailed disclosures if required. Further, firms must proffer unbiased advice based on reliable information. Under regulation 23, they are also required to disclose the reasoning to the public. An eight-point Code-of-Conduct for firms and their employees has been adduced which broadly covers honesty & good faith, diligence, conflict of interest, insider-trading or front-running, confidentiality, professional standards, compliance, and responsibility of senior management. Recently, SEBI has introduced Procedural Guidelines for Proxy Advisors and Grievance Resolution between listed entities and proxy advisors. These circulars are the result of SEBI Working Group which recommended improvements through disclosures of conflict-of-interests, voluntary best practises, setting up code-of-conduct which are to be followed by proxy advisors on “comply or explain” basis. One of the remarkable procedures required is that the firms must also share the recommendation to the subject company as well and to include company’s response thereto as addendum. This will allow subjects to clarify on any aspect which it considers have not been completely regarded while extending the proxy recommendations.

It is very much evident that the circulars issued by SEBI are similar to the US SEC issued Rule Amendment for Proxy Voting Advice 2020 in various terms such as affording subject companies a copy of the recommendation, client access to company response, conflict of interest disclosure norms, etc. However, given the fact that Indian industry for proxy advisors is still at nascent stage, and the US market is relatively aged, it was prudent only on the part of the regulator to consider the US model. The advisory firms are required to disclose the recommendations on their website and are mandated to devise policies for voting advices including the situations when voting-recommendations are not to be offered. These policies are required to be reviewed at least once a year.

It is pertinent to note that there is no specific mention about foreign proxy-advisory-firms in either of the circulars, thus it will be interesting to observe how the code-of-conduct, as was recommended by the Working Group, are applied to them. Another interesting aspect is that compulsory disclosures of revenue models, key income-sources, clientele have not been provisioned. Since there is a possibility of conflict-of-interest in situations where the firms may retaliate against the incorporates who didn’t avail their services by way of aggressive advices to their clients, though proxy advisors are required to disclose and mitigate any “potential” conflicts, the disclosures of the clientele could have offered reassurance against such recommendations. However, in case of any grievance the listed entities are at liberty to approach SEBI which shall investigate the matter considering non-compliance with regulation 24(2), which provides for Code-of-Conduct, r/w regulation 23(1) of SEBI (Research Analyst) Regulations, 2014 or the procedural guidelines circular recently issued. If any contravention is established, it can lead to inter alia suspension/cancellation of the registration under SEBI (Intermediaries) Regulations, 2008.

Conclusion

Shareholder’s votes have the potential of wide consequences on corporate decisions and governance of a company which in turn affects the market and economy ultimately. Therefore, there lies a fiduciary responsibility upon the institutional investors, who represent large number of shareholders, to vote in the best interest, and attributes a huge relevance to the recommendations made by the proxy-voting advisors. The extensive impact such recommendations may have and the possible conflict-of-interest which may arise are the major reasons for regulating these proxy-advisors.

Having higher standards of transparency and oversight will certainly enhance the quality and credibility of this intermediary. These various aspects would require that investors take the ultimate decision based on the proxy advices and the company’s responses thereto, which would lead to more-informed exercise of voting rights and at the same time ensure that proxy advisors do not ‘control’ the voting. This sector needs nurturing at the hands of regulators & this could prove to be a major step. But time will only tell how these rules perform.

December 23, 2020
Desolated Future Of Investments In India- Disregarding The Vodafone Verdict

By Shobhit Shulka, second-year student at MNLU, Mumbai

India is an attractive destination for foreign investment. However, given the hitherto arbitration regime in the country and uncertainty in smooth enforcement of awards in India, foreign companies are becoming more skeptical about investing in India. Even at a time when the judiciary has been more supportive of arbitration, the government has continued to be incredulous of the practice. The issue has been further aggravated recently by the Solicitor General of India when he refused to accept the award given by the Permanent Seat of Arbitration in the case of Vodafone International Holdings BV v. The Republic of India (‘Vodafone Judgment’). This post briefly discusses the judicial trend on this issue and analyses the consequences of this orientation by the government towards arbitration.

In a unanimous decision, The Permanent Seat of Arbitration ruled on 25^th September 2020 that the Indian income tax authorities had violated the guarantee of fair and equitable treatment under the Bilateral Investment Treaty (‘BIT’) signed with the Netherlands, by retrospectively amending the law to demand Rs. 22,000 crores from Vodafone.The judgement seemed to bring the infamous retrospective tax battle to a close, however, closure is still uncertain. After the declaration of the award, India as a state had two options: 1) To accept the award and close this long pending matter which would suit India’s contention of it being a better place to do business, with a tax-friendly regime for business incorporators and foreign investors. 2) Challenge the award at another international forum and not implement the award as decided by the arbitral tribunal. At this juncture, the government seems more inclined towards the second option, which was affirmed bythe Solicitor General’s comments. However, this might have a severe impact on India’s tax friendly regime and would disincentivise investors and businesses to invest in India, at a time when the deteriorating economic conditions are in desperate need of such investments.

Background of the case

In May 2007, Vodafone bought a 67% stake in Hutchinson Telecommunications (‘Hutchinson’)for an $ 11bn deal, this included the mobile business and other assets of Hutchinson in India. In September that year, the Indian Government raised a demand of about 8000 crores in capital gains and withholding tax from Vodafone saying the company should have deducted the tax at source before making a payment to Hutchinson. Vodafone moved the Bombay High Court which ruled against Vodafone. It then appealed against the order in the Supreme Court, which ruled Vodafone’s interpretation of the law as the correct one and ruled that it did not have to pay any taxes. In an ideal world, the matter would have ended then and there. However, that same year the then Finance Minister came with a proposal to amend section 9(1)(i) of the Income Tax Act and retrospectively tax such deals. The Bill passed the onus on Vodafone to pay the taxes. The Government circumvented the effect of the apex court’s judgment by resorting to retrospective legislation and created an unpredictable and unstable business environment. Vodafone then challenged the amendment under the India-UK BIT and the India-Netherlands BIT. The arbitral award was announced in Vodafone’s favour, finding the Indian government in violation of section 4(1)of the India-Netherlands BIT.A BIT is an agreement between two sovereign states for the protection of investors and businesses from one state to another. The government’s stand has been that tax matters do not come under the purview of BITs. The retrospective law allowed the indirect transfers of Indian capital assets even if the transfer was a sale. Thus, the argument from the government has been that they should challenge the award under the tax treaty because it questions the sovereign right of the government. This award negates India’s general position that tax disputes do not come under the ambit of investment treaties. The Indian Revenue department has thus raised objections over the arbitral award coming under the purview of the BIT and not under the tax treaty.

Options that India has to challenge the infamous award

India stands at a tricky crossroad here as challenging this award seems very unreasonable as the dispute has already been ruled against India by the Supreme Court and then the arbitration tribunal. However, the government’s contention here is that the award seems to challenge its sovereign right to tax and would impact other cases against the government.

Vodafone too cannot enforce its victory and will have to approach Indian courts again, because India does not recognise any foreign court in a commercial dispute that questions the state’s sovereign right to intervene. The Apex Court in State of West Bengal v. Keshoram Industries held that if the terms of an arbitration treaty are inconsistent with India’s sovereign laws, a court will not give effect to such treaty. This has resulted in the lapsing of 70 BITs between foreign governments and India which has lapsed since 2016 and is not being renewed. India’s latest bilateral investment deals, such as the India Belarus BIT in 2018 and the India Brazil BIT in 2020, have largely omitted from their domain, measures relating to taxes or compliance of tax obligations. In the future, India may negotiate vigorously to integrate such exclusions into bilateral investment treaties.

Uncertainty of investment regimes in India

Unless new agreements have been negotiated between India and the related transaction states, new investments in India between foreign investors and the country will cease to gain BIT security. Current investments related to BITs with ‘sunset provision’,which means that the treaties may continue such as, the India Netherlands BIT that specifies, for investments made before the termination, substantial provisions may continue to extend for fifteen years after the termination. Several of India’s other deals, such as those with the United Kingdom and Mauritius, have identical ‘sunset’ provisions.

However, this uncertainty could affect India’s business with global powerhouses such as the European Union (‘EU’).Talks aimed at reaching a free trade agreement between the EU and India (which may include investor rights provisions) were started in 2007 but allegedly reached a deadlock in 2013.India, even after a request from EU officials, is hesitant so far to briefly expand its BITs with EU countries to fill the gap with any new agreements. The consequence of the termination of these bilateral agreements is not limited to investment into India but by India too. As westbound investment by Indians rises, Indian investors are increasingly looking at BITs to secure their investments and provide have a roadmap to seek any violations in host countries of the promised safeguards. India’s woes, however, are not limited to uncertainties in trading regimes. The dismissal of an international arbitral award may also have a detrimental effect on the future of investments in India.

What this means for future investments in India

New York Convention awards were enforced in India through the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). Before this, India’s arbitration was afflicted by setbacks, lack of clarification on the grant of temporary relief, no finality on arbitral awards owing to court requests for setting aside, and a belief that arbitrators were not always unbiased and neutral. Though major cities in India may take several more years to become common international arbitration seats such as those in Singapore or Paris, India is becoming an arbitration-friendly jurisdiction.However, refusalto accept such awards by the government could have a severe impact on such ambitions.

An international investment usually includes a trade arrangement (‘Investment Contract‘) between the foreign investor and the host state. Investment arrangements, either before domestic courts or regulatory tribunals or by international arbitration, allow for dispute settlement. Refusing to accept an international arbitration award will disincentivize the investors. Investors will start contemplating on investing in India as any dispute arises the government of such countries might not comply with the international order, putting the investors to losses. It creates a hindrance in the ease of doing business in such countries and thus discourages them to make any investments to indulge in any form of funding

The way forward

The Government has 90 days to file an appeal in Singapore, as the seat of the dispute was in Singapore. At a time when India is in desperate need of investments due to its deteriorating economic conditions, it seemed like it would accept the award and make India seem like a country where foreign investors have a remedy under International Law. However, quixotically enough the government is inclined to challenge the award further, with a slim chance of overturning the award. This could have a severe impact on investor confidence in India and could adversely affect foreign direct and indirect investments in India.

December 1, 2020
Getting the nod: Intersection of Companies Act & RERA

BY BODHISATTWA MAJUMDER, FIFTH YEAR STUDENT AT MNLU, MUMBAI

Winding up of companies have been dealt by the company law tribunals jointly under the Companies Act, 1956, (“Former Act”), Companies Act, 2013 (“Act”) and Insolvency and Bankruptcy Code 2016 (“IBC”). In order to avoid jurisdictional disputes and for the speedy disposal of pending proceedings, the Tribunal has been given various powers under the legislations to oust the jurisdiction of other civil courts. One of them being Section 279 of the Act (formerly Section 446 under the former Act) which makes the leave of the tribunal mandatory for commencement/pendency of ‘any suit or legal proceeding’, after passing of an order of winding up or appointment of a liquidator in case of a new suit. However, there have been various instances of conflict between jurisdiction of the Tribunal and other specialised courts. These disputes have been brought due to the conflict between the Companies Act and other specialised legislations of niche subject areas such as Admiralty Law, Insurance Law or other Bankruptcy Laws.

In the same vein, there arises a question of law regarding the requirement of leave of the Tribunal to commence or continue legal proceeding when placed against the authorised brought by the Regulation and Development) Act, 2016 (“RERA”). This article delves in the above question of law in the context of Kuldeep Kaur v. MVL (“Kuldeep Kaur”) where the same issue had been dealt summarily. This article strives to provide detailed analysis on the subject, based on the issues of law which may arise when the appeal is made against the Kuldeep Kaur ruling.

RERA vis-a-vis Companies Act – A Comparative Approach

Under the principles of statutory interpretation, a later statute always abrogates an earlier statute (leges posteriors priores contraries abrogant). However, the exception to this being that a special statue always prevails over a general statute (generalia specialibus non derogant). A specialized act operates in a limited field and its application is over a limited nature, as decided by the legislation while drafting the law. The Parliament while passing a specialized statute devotes it complete consideration over a subject and passes the statute tailor-made for achieving a specific purpose. In cases where there exists a conflict between two specialized legislations, with each having the non-obstante clause to override any other legislation, the conventional method of interpretation cannot be considered. In these cases the Court bases its decision on the consideration of policy and purpose behind the acts needs to be understood along with the language of the legislature.

Time and again it has been argued that the Companies Act also operates in a specific area of law (Company law), and hence should be treated in par with the specialized legislations. However, the case laws have majorly maintained the stance against Companies Act that the Companies Act is an act relating to companies in general, thus being a general law. Be it against the RDDB Act in Allahabad Bank, Negotiable Instruments Act in Indorama Synthetics, or Admiralty Act in Raj Shipping. The RERA Act came into effect on 1^st of April, 2016 for the purpose of laying a structure related to real estate sector and protection of consumers by speedy disposal of cases. It contained no provisions as such which provided for seeking leave of company law tribunals under §446 of the Companies Act, 1956. The proceedings under RERA stands in a different footing keeping the interests of homebuyers/promoters which does not allows or requires being influenced by the Companies Act. Hence, it can be reasonably assumed that in all possible scenarios of interpretation that the RERA shall prevail over the Companies Act due to being a later and special legislation.

Existence Of Special Forums Oust Jurisdiction Of Company Court By Necessary Implication

The Legislature may entrust a special tribunal or body with a jurisdiction which includes the jurisdiction to determine whether the preliminary state of facts exists as well as the jurisdiction, on finding that it does exist, to proceed further or to do something more. The Legislature shall have to consider whether there shall be an appeal from the decision of the tribunal as otherwise there will be none. In cases of this nature, the tribunal has jurisdiction to determine all facts including the existence of preliminary facts on which exercise of further jurisdiction depends. In the exercise of the jurisdiction the tribunal may decide facts wrongly or if no appeal is provided therefrom there is no appeal from the exercise of such jurisdiction. By the virtue of Section 79 of the RERA Act, the jurisdiction of all civil courts in respect of matters dealing with the RERA Act has been barred. This exclusion by the virtue of a provision in a statute presents itself as a textbook example of an expressed legislative intent.

Hence, in cases of RERA matters, the jurisdiction of civil courts will be ousted by the RERA Authority by necessary implication. Similar stance was taken in Damji Valji Shah, where the court referred to Section 41 of the LIC Act which provided that no civil Court shall have jurisdiction to entertain or adjudicate upon any matter which a Tribunal is empowered to decide or determine under that Act. The court held that it is undisputed that the Tribunal had jurisdiction to entertain the application of the Corporation and thereby given the exclusive jurisdiction over this matter.

Section 446 and its influence on RERA: Analysis in context of Kuldeep Kaur Case

In Kuldeep Kaur, the Rajasthan RERA Authority faced the similar question of law when a complaint was filed under Section 31 of RERA. These complaints were filed in a stage where there already been an appointment of the liquidator. The RERA Authority was faced the impediment of leave under Section 446 of the Act, and the matter dealt with the obligation of authorities under RERA.

In order to understand the brief ruling provided in the 7-paged order of the authority, it is essential to understand why the dispute erupts in the first place. The genesis of the dispute arises due to the wide wording of the Section 446, which prohibits any commencement or continuation of any “suit or other legal proceeding” once a winding up order has been passed or a liquidator has been appointed. However, despite the liberal wording of the statute it has been held that this provision should be invoked judiciously and not include every legal proceeding. The courts of law while making an interpretation should decide upon each case at hand keeping the intent of the conflicting legislations and decide which forum will be ‘appropriate’. It must be kept in mind if a later legislation is enacted with an overriding provision, the legislating body drafted the same keeping in mind the previous legislations.

Hence, the courts should refrain from construing a wide ambit and including forums which are not intended to be included. In Kuldeep Kaur, the bench rightly moved with the ruling of Damji Valji Shah, and concurred that as RERA is a later act and a specific one, it will prevail over the Act. The Court opined in this ruling that as the proceedings are pending under the RERA Act, which is a special act in this case. It was emphasised in Kuldeep Kaur that the RERA Act is a special act which has established specific forums for speedy disposal of the matters before it.

Concluding remarks

The Companies Act is general law for companies, and has been classified by judicial rulings when placed in contrast with other legislations. However, even if it is regarded special act for the sake of it along with RERA, the latter act consisting of non obstante clause shall prevail over the former. In Kuldeep Kaur’s case it was rightly observed that RERA Act is a special Act as it was enacted with a special purpose of regulating and promoting the real estate sector, with a specialised forum for the same. Its special nature is also borne out of Section 89 which is a non-obstante clause along with Section 79 of RERA further shows that it is a self-sustained code.

The intention of RERA is to bring the complaints of allottees before the specified Authority to simplify the process, and that is indeed difficult if it is made to seek the leave of the company courts in the first stage. The Rajasthan RERA authority held in clear stance that it shall prevail over all earlier laws as well as general laws including Companies Act 2013. The final nail on the coffin was laid when the Court emphasized that arguendo, it was an older or general law, still, by the virtue of Section 89 would prevail over all general laws such as Companies Act. The ruling of Kuldeep Kaur represents the persisting problem of conflict of jurisdiction which have arisen frequently due to the improper wording of the section. Despite the enactment of the Code, it is evident that the impediments in swift winding up of companies still remain at large.

November 30, 2020
Arbitrability of Fraud Disputes in India: Discussing the Development Post-Ayyasamy

BY ABHINAV GUPTA, FIFTH YEAR STUDENT AT NLU, JODHPUR

Introduction

The issue of arbitrability of fraud disputes has consistently been a predicament faced by the Indian Courts. The ever-developing jurisprudence on this issue did not seem to settle the debate and surely did not reflect the pro-arbitration ideology that Indian Courts seek to portray. The Courts in a quest to bring certainty and settle the position of law have ignored certain important questions that still need to be answered. In this article, the author seeks to highlight the recent developments in the jurisprudence regarding the arbitrability of fraud disputes and analyze the change in Indian Court’s stance over the years.

A brief overview of position till Ayyasamy

The issue regarding arbitrability of a dispute arises because the Arbitration and Conciliation Act, 1996 [‘the Act’] does not explicitly provide for disputes that are arbitrable or non-arbitrable. In such a scenario, while referring a case to arbitration under section 8 of the Act, a court has to see whether a valid arbitration agreement exists and if the subject matter of dispute is arbitrable.

The issue regarding arbitrability of fraud first arose in the case of Abdul Kadir v. Madhav Prabhakar Oak [‘Abdul Kadir’], where the court held that court will refuse to refer disputes to arbitration if there are serious allegations of fraud and the party charged with fraud desires that the matter be tried in court.

By placing reliance on this judgment Supreme Court of India[‘SCI’] in N. Radhakrishnan v. M/S. Mastero Engineers [‘N. Radhakrishnan’] held that matters of serious allegations of fraud cannot be properly dealt by an arbitrator and hence, in the interest of justice only a court of law can decide such complex matters. The position in N. Radhakrishnan has been discussed in detail in the post here.

Indian regime saw a paradigm shift in this position in the case of A. Ayyasamy v. A. Paramasivam [‘Ayyasamy’] where it was categorically laid down that simple allegations of fraud touching upon the internal affairs of the party inter se and having no implication in the public domain are arbitrable.

Development post-Ayyasamy

One of the first cases post Ayyasamy inculcating its reasoning was Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Ors., where the SCI declared that mere allegation of fraud by a party to obstruct arbitration would not render disputes inarbitrable. Court also observed that the arbitrator so appointed can examine the allegations related to fraud.

Even though there was consistency in court’s approach that mere allegation of fraud did not make a matter inarbitrable, there still was uncertainty as to what can be considered as “serious offence”. SCI to some extent tried tackling this uncertainty by explaining the judgment of Ayyasamy by delineating a twin test in Rashid Raza v. Sadaf Akhtar [‘Rashid Raza’].

1. Does the plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or

2. Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

The most recent and significant development in this regard has been the case of Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. [‘Avitel’]. In this case, HSBC and Avitel entered into a Shareholders Agreement. Avitel informed HSBC that they are in the advanced stage of finalizing a contract with BBC and was expected to generate huge revenues. Subsequently, HSBC discovered that there was no such contract and it was fabricated by Avitel in order to induce HSBC to invest. Due to this, HSBC invoked arbitration proceedings before the Singapore International Arbitration Chamber as per the dispute resolution clause.

SCI while referring to Afcons Infrastructure v. Cherian Varkey and Booz Allen v. SBI Home Finance, observed that the statement “cases involving serious and specific allegation of fraud, fabrication of documents, forgery, impersonation, coercion etc.” have to be interpreted by applying the test laid down in Rashid Raza. It categorically laid down that same set of facts can lead to civil as well as criminal consequences and a matter will not cease to be arbitrable merely because criminal proceedings are pending in that matter. This is a significant deviation by the SCI from position in Ayyasamy which provided for a blanket bar on arbitrability by stating that if “serious allegations of fraud give rise to criminal office” then it is inarbitrable.

SCI referred the matter for arbitration and stated that, the fraud does not have a “public flavour” and is not such that it would render the contract and the arbitration agreement null and void. While discussing the issue at hand SCI also clarified that N. Radhakrishnan does not have precedential value while affirming the observation in Swiss Timing v. Organising Committee, which held N. Radhakrishnan to be per incuriam as it failed to consider essential precedents.

Another judgment passed on the same day as Avitel was Deccan Paper Mills Co. Ltd. vs Regency Mahavir Properties [‘Deccan Paper Mills’], where the court relied on the observation in Avitel and held that if the matter has no “public overtone” and if a valid arbitration agreement exists, the court has to refer the dispute to arbitration.

Analysis of the developments

The observation in Ayyasamy and Rashid Raza that allegations of serious fraud are not fit to be decided in arbitration proceedings is problematic. The reasoning behind such observation by the court was that such a dispute requires collection and appreciation of evidence which can only be done by a civil court. This observation and reasoning is in complete disregard of section 27 of the Act. Section 27 of the Act allows the arbitral tribunal or a party to apply to the court for its assistance in taking of evidence and court can take evidence applying procedure as applicable in a proceeding before it. Moreover, even if party do not intend to take the assistance of courts, under section 19 of the Act, they are free to choose the rules of procedure. In such a scenario, parties can incorporate elaborate rules such as IBA Rules on Taking of Evidence for governing procedures related to evidence during arbitration proceedings.

It is noteworthy that the SCI did not resort to such a reasoning in Avitel. In fact, the Court tried explaining the two tests laid down by Rashid Raza. The issue regarding Ayyasamy and Rashid Raza was that even when these cases changed the position of law from what was observed in N. Radhakrishnan, the usage of phrase “serious allegations of fraud” continued since the 1960s’ (see Abdul Kadir).The court, in these cases, failed to explain and remove the ambiguity surrounding cases that can be categorized as ‘mere allegations of fraud simplicitor’ and cases that can be considered as ‘complex cases of fraud’.

Avitel took a positive step towards explaining and narrowing the same. SCI referred to Rashid Raza to explain when the two tests can be considered satisfied. The first test is satisfied when the agreement or arbitration agreement could not have been entered into by the party if not for the fraud. The Court laid down the “public flavour” standard while explaining the second test. It observed that second test is satisfied when the allegations are made against the state or its instrumentalities and these allegations are questions arising in public domain rather than from a breach of contract.

This kind of observation will also clear the uncertainty regarding the kind of merit-based analysis a court can conduct while determining the arbitrability of a dispute. Under Section 8 of the Act the court only has to analyze if a prima facie valid arbitration agreement exists and not enter into a merit-based analysis. The Court laying down a narrow test in Avitel seen in conjunction with the fact that in the 2015 amendment, legislature inserted the phrase “prima facie” in section 8 to reduce the judicial intervention, signifies a true movement towards the pro-arbitration approach.

The aforementioned cases of Abdul Kadir, N. Radhakrishnan, and Ayyasamy show judiciary’s clear lack of confidence in capability of arbitral tribunals to handle complex matters with utmost care and caution. This may be due to the fact that India lacks an institutional arbitration setup. Where the objective of the 2015 amendment to the Act was to reduce judicial intervention, the 2019 amendment focused on the institutionalization of arbitration mechanism in India on recommendation of Justice Srikrishna Committee. Despite having some obvious concerns, this amendment is a positive step towards having qualified arbitrators and intuitional arbitration reinforcing the judiciary’s and international community’s trust in India as an arbitration hub.

Conclusion

Over the years, India has been criticized for being anti-arbitration and having unfettered judicial intervention in arbitration. In order to change this outlook, the 246^thLaw Commission Report suggested major changes in the Act in order to reduce judicial intervention and adopt a pro-arbitration approach. Avitel acts as a progressive precedent that would strengthen India’s position internationally and help it in achieving the status of an arbitration friendly jurisdiction. A change initiated by Ayyasamy having certain faults was molded appropriately by SCI in Avitel by narrowing the scope for judicial scrutiny. It remains to be seen whether upcoming cases on arbitrability of fraud apply the broader test laid down in Ayyasamy or a narrow test propounded in Avitel.

November 27, 2020
Future of Reliance in Retail: Analysing Competition Concerns
by Sampurna Kanungo and Sanjana Bhasin, fifth year students at NMIMS Kirit P. Mehta School of Law, Mumbai

The recent acquisition of the retail, wholesale, warehousing and logistics undertaking of the Future Group by Reliance Retail Ventures Limited (“Reliance-Future acquisition”) has caused a wave in the market as it is a combination of two key market players in the organised retail segment. Post the acquisition, Reliance would be poised to pose a formidable threat to rivals and local players within the market along with the elimination of a key competitor. Under these circumstances, an investigation into the combination is warranted to ensure that the combination does not cause an appreciable adverse effect on competition in the relevant market.

The proposed combination has been notified to the Competition Commission of India (‘CCI’) as per the statutory obligation imposed under Section 6(2) of the Competition Act, 2002. In the present deal, the parties to the acquisition have submitted that the relevant markets are (a) market for retail in India; and (b) market for B2B sales in India. In this article, the authors break down the decisional practice of the CCI to determine the extent to which such an assessment holds ground and analyse the treatment conferred upon unique aspects of the acquisition as well as explore the possibility of abuse of dominant position.
1. Delineation of Relevant Market
While assessing a combination, the foremost step is to delineate a “relevant market”. The market for retail sales in India is extremely fragmented and comprises of several smaller spheres such as the divide between online and offline segments, organised and unorganised markets etc., each of which are capable of constituting a separate market by itself. Further, a closer look at the parties to the transaction indicates that both have businesses that are spread out across the online/offline retail spectrum.

a. Online/ Offline modes of distribution as a separate relevant market

While considering the demarcation between online and offline retail markets, the decisional practice of the CCI, such as in the case of Ashish Ahuja V. Snapdeal, has been to regard it as merely two modes of distribution of the same product and not two different relevant markets. Similarly, in the case of Jasper Infotech (Snapdeal) V. Kaff Appliances, the CCI considered the overall market share in the broader market of “supply and distribution of kitchen appliances in India” rather than assessing the market shares individually in the online and offline space.

Interestingly, it is pertinent to note that post 2014, there has been a shift in the outlook of the CCI towards the treatment of online and offline markets. In the case of All India Online Vendors Association v. Flipkart India private limited, the relevant market was exclusively considered as “services provided by online marketplaces for selling of goods in India”, thus highlighting the online retail market as a separate relevant market altogether. The CCI has also acknowledged the growing importance of online commerce in its Market Study on E-Commerce, which highlights the limitation of a unified retail market as a whole on account of the nature of the goods and extent of price differential between sales channels and accordingly calls for a product specific assessment of markets.

Thus, the conception of retail sales as a broader relevant market as submitted by the parties may not be viable, given the decisional practice of the CCI in recent times. Further, the extent of substitutability between products available for sale via the online and offline modes has also been thrown into question post the COVID pandemic which has acted as a catalyst for the popularity and development of online channels of retail. The CCI has considered factors like ease of choice, convenience etc. for delineating a separate relevant market (of ‘radio cabs service’) in the case of Fast Track Call Cab Pvt. Ltd. V. ANI technologies Pvt. Ltd.,which could further be used to cement the position of online and offline channels of retail as separate relevant markets.

b. Assessment of B2B/B2C sales as overlaps within the relevant market

The other proposed market is the ‘market for B2B sales in India.’ The two common models for retail sales are Business to Business (‘B2B’) and Business to Consumer (‘B2C’). Following previous decisions of the CCI, B2B/ B2C Sales are usually analysed as a horizontal/vertical overlap between the parties and not as a separate relevant market. Overlaps are assessed within the contours of the determined relevant market. An overlap is considered to be horizontal if the parties are close competitors in similar lines of business. On the other hand, a vertical overlap refers to a situation wherein the parties are at different stages of the production chain, such as a combination between a manufacturer and a distributor. A vertical overlap may pose competition concerns since it has the ability to foreclose competition for other distributors.

In case of the Reliance-Future acquisition, not only does Reliance gain a foothold in the B2B segment via the acquisition of the logistics and warehousing segment, it will also continue to operate a B2C business model by way of retail sales to customers through acquisition of physical stores. Since this transaction involves the presence of both business models, it would have to be assessed as a horizontal/vertical overlap within the relevant market.

Illustratively, in Re: Walmart International Holdings, B2B business at the granular level of verticals (i.e. individual goods) was considered while assessing horizontal overlaps. This B2B segment had further been divided into organised and unorganised sectors, even though such a distinction had not been made by the parties. Further, B2C sales were considered under the segment of vertical overlaps. Since Walmart was not engaged in any online marketplace business for B2C sales (on account of such prohibition under the extant FDI Policy), the CCI did not find any vertical overlap.

Thus, the CCI is likely to assess B2B/B2C sales while examining overlaps in the relevant product market.

2. Assessment of Combination

Post the determination of a relevant market, the effect on competition within that market on account of the proposed combination must be assessed. Pursuant to the same, certain unique aspects of the Reliance Future acquisition, such as the nature of the non-compete clause as well as the structure of e-commerce market itself and its implication on the proposed combination, warrant a more detailed examination.

a. Analysing inordinately long Non-Compete Clauses

One of the features of the Reliance-Future acquisition is the inclusion of a non-compete clause as one of the terms of the transaction. As per the Non-Compete Clause, Mr. Kishore Biyani and his family members have been barred from competing in the retail space for 15 years.

The guiding principle for assessment of non-compete clauses is whether the restriction is “ancillary” i.e. directly related and necessary to the implementation of the combination. As a rule of thumb, the CCI has prescribed a period of 3 years in case of transfer of goodwill and know-how and 2 years for transfer of goodwill.

Consequently, while such an inordinately long restriction period is likely to fall under CCI’s scanner, it is unlikely to sound the death knell for the transaction given the regulatory body’s favourable assessment of the same in recent times. CCI has permitted a longer duration in certain sectors wherein customer loyalty would persist for longer duration. This specific carve out would prove to be beneficial for RRVL in justifying the long duration of the non-compete clause given the expansive loyalty base that has been garnered by Future Group, especially in case of its retail outlets such as Big Bazaar. While the CCI has ordered the reduction of the restriction period under non-compete clauses in numerous cases, a departure from the “ancillary” principle is not considered to be an infringement of the provisions of the Act. Further, the recent stance of the CCI regarding non-compete clauses has been indicative of a more relaxed assessment in view of modern business arrangements, which can be gauged by a proposal to omit the obligation to disclose details of non-compete clauses.

b. Increase in level of concentration due to network effects

A significant threat to competition within the market is an increase in the level of concentration i.e. the presence of limited key players. A peculiar feature of the functioning of e-commerce platforms is the presence of network effects, which acts as a catalyst in increasing concentration in the market. Network Effect is a phenomenon whereby a product/ service becomes more valuable with the increase in number of users. The importance of e-commerce platforms further increases as growing number of users makes the platform more valuable, which attracts more sellers in return and leads to a ‘positive feedback loop’.

In the present combination, combining both front end and back end services (logistics and warehousing), would make the platform more viable for sellers, which would conversely lead to a larger customer base. This is not only lucrative for emerging platforms such as Jio-Mart which doesn’t have an existing customer base, it can very quickly lead to a concentrated market in this case, especially when combined with the advantages of the existing brand value and loyalty base of the Future Group. Thus, the acquisition of back end services in particular would have the effect of strengthening the network effect of e-commerce platforms of Reliance, and lead to an increase in the level of concentration in the market.

3. Abuse of dominant position

The deal provides massive synergies to Reliance by doubling the retail outlets under operation alongside development of strong back-end and front-end retail businesses, conferring the highest market share to them in the organised retail segment. Key factors such as market share of the enterprise, size and resources of the enterprise and size and importance of the competitors are essential to determine the dominant position of the post-acquisition enterprise.

With Reliance Industries now having access to a strong supply chain and warehousing facility, overlapping with their venture into the online retail space JioMart raises concerns of them abusing their dominant position in one relevant market i.e. offline retail to enter into, or protect, the other relevant market of e-commerce retail. It has been established that the regulator considers not just immediate effects on competition, but also scenarios where the combination may adversely affect competition in the future. Therefore, such vertical integration of the enterprises with large sales and service network puts them in a dominant position, making available the opportunity to indulge in unfair and discriminatory pricing and denying market access to new players in the offline organised retail segment and strengthening their position in the e-commerce retail.

Conclusion

The Reliance-Future acquisition is arguably one of the largest and most significant transactions in recent times, which is likely to have far-reaching consequences in the entire retail space. Consequently, it is imperative to analyse the effects of this combination on the overall level of competition in the market. While an analysis of anti-competitive agreements or abuse of dominance is not conclusive at this preliminary stage, an analysis from a merger control perspective highlights some key aspects. The question of delineating the relevant market has always been one of substantial uncertainty, and the CCI’s decision in this particular combination would be especially significant given that all stages of the production chain as well as different modes would have to be taken into consideration. Moreover, some aspects such as network effects and the ability to leverage position in one market to capture another would have a bearing on a subsequent assessment of dominance as well owing to the plausible increase in market share and concentration.
November 16, 2020
Anti-Arbitration Injunction Suits in India: A Nightmarish Scenario

By Kabir Chaturvedi and Ridhima Bhardwaj, third-year students at RGNUL, Patiala

On 12 August 2020, the Calcutta High Court – in the case of Balasore Alloys Limited v. Medima LLC (‘Balasore’) – ruled that “courts in India do have the power to grant anti-arbitration injunctions”, even against foreign seated arbitrations. This decision came just months after the Delhi High Court – in the case of Bina Modi and ors. v. Lalit Modi and Ors. (‘Bina Modi’) – stated that an anti-arbitral injunction suit is not maintainable. The law on anti-arbitration injunctions is already far from consistent but the handling of recent suits by the Indian Judiciary has been nightmarish. Analysing the two judgements, this article critiques the Balasore approach and advocates for the one adopted in Bina Modi.

Setting the Scene

Justice Rajiv Sahai Endlaw in Bina Modi relied on Kvaerner Cementation India Limited v. Bajranglal Agarwal and Anr. in 2001 (‘Kvaerner’) given its precedential value and concluded that a civil court could not grant an anti-arbitration injunction. However, when Bina Modi – and subsequently Kvaerner – were raised before the Court in Balasore, Justice Shekhar B. Saraf placed an “overwhelming reliance” on the majority dictum in SBP & Co. v. Patel Engineering Limited in 2005 (‘SBP’) to rule that Indian Civil Courts could injunct arbitral proceedings. Through this reliance, he inferred that SBP had implicitly overruled Kvaerner and stated that Bina Modi is per incuriam because it ignored the decision in SBP. However, scrutiny of the facts and ratio decidendi of SBP indicate otherwise.

Addressing the Dichotomy between SBP and Kvaerner

The matter before the Apex Court in Kvaerner was whether the court could act outside the purview of The Arbitration and Conciliation Act, 1996 (‘Act’) and grant a stay on arbitration proceedings. The court relied on a bare reading of section 16 of the act to conclude that a civil court does not have the jurisdiction to injunct an arbitral proceeding. Section 16(1) empowers the arbitral tribunal to rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement.

On the other hand, the seven-judge bench in SBP was summoned to decide the nature and scope of the exercise of power by the Chief Justice (or his designate) to refer parties to arbitration and appoint the arbitral tribunal, vested in them by sections 8 and 11 of the Act respectively. Subsequently, the bench also had to decide whether this power under sections 8 and 11 could be overridden by a tribunal’s power to decide its own jurisdiction under section 16. The potential overlap between the two was resolved when the bench established that such exercise of power was a judicial function and not an administrative function. The court held that “where the jurisdictional issues are decided under these Sections (8 or 11), Section 16 cannot be held to empower the arbitral tribunal to ignore the decision given by the judicial authority or the Chief Justice before the reference to it was made.”

This limitation on the tribunal’s power exemplifies a hierarchy which is ensconced within the ecosystem of the Act – wherein the courts are placed on a higher rung. The judicial authorities’ power to review a decision of the tribunal regarding its jurisdiction under section 34 (recourse available to parties to apply for setting aside arbitral award) or section 37 (appealable orders) of the Act are further instances of the existence of this hierarchy within the Act, and were accentuated in SBP. These powers, however, fall under the purview of the Act.

An anti-arbitration injunction looks to essentially proscribe arbitration proceedings, and a civil court considering an objection to an anti-arbitration injunction suit which does not represent a substantive action on the basis of merits cannot be said to be exercising powers under sections 8 or 45 in the true sense. Therefore, when civil courts grant an anti-arbitration injunction, they exercise powers ordinarily conferred upon the tribunal under section 16, and operate outside the purview of the Act. The bench in SBP went on to unequivocally condemn any such court interference in arbitration proceedings outside the purview of the Act unless permitted by the Act itself, as it “is a complete code in itself”.

In a nutshell, the ratio in SBP was centred around the possible overlap and sharing of authority within the purview of the Act, while the Kvaerner judgment addressed the civil court’s jurisdiction to issue an anti-arbitral injunction outside the purview of the act. These two verdicts thus lay down rules in vastly different contexts and Kvaerner is evidently more relevant to the grant of anti-arbitral injunctions than SBP. Thus, it would be incorrect to assume that SBP implicitly overruled Kvaerner and civil courts can injunct arbitration proceedings. Therefore, the decision in Bina Modi cannot be invalidated by relying solely on SBP and should’ve been given precedential value in Balasore.

The Impracticality of Anti-Arbitral Injunctions

Apart from being legislatively flawed, the Balasore approach is also impractical. By mulling over an anti-arbitration injunction suit – and eventually not injuncting the arbitral proceedings – Justice Shekhar utilised judicial resources to deal with an issue an arbitral tribunal is competent to deal with under section 16 of the Act. Parties prefer arbitration to litigation because of its quick and efficient nature. When courts mull over anti-arbitration injunctions, it gives rise to prolonged judicial proceedings and interference at the initial stage itself. This creates uncertainty and adds to the costs to be borne by the parties to the dispute, making the whole process of arbitration tiresome, inefficient and expensive. Consequently, parties are discouraged to opt for India as a seat for arbitration. Further, there already exists a huge pendency of cases in India and instead of handling anti-arbitration injunction suits, it must adopt the practice of efficient utilisation of limited judicial resources to swiftly clear the backlog of the pending civil and criminal cases.

Additionally, Justice Endlaw in Bina Modi cited section 41(h) of the Specific Relief Act, 1963 – which provides that an injunction cannot be granted when an equally efficacious relief can certainly be obtained by any other usual mode of proceeding – to conclude that anti-arbitration injunctions cannot be granted since the tribunal is empowered to offer efficacious relief under Section 16. Therefore, anti-arbitration injunctions amount to unnecessary judicial interference and are, as Gary B. Born puts it, “in most cases, deliberately obstructionist tactics, typically pursued in sympathetic local courts, aimed at disrupting the parties’ agreed arbitral mechanism.”[i] Judicial interference by Indian Courts is also one of the primary reasons why India is considered “non-friendly jurisdiction” for arbitration. India has adopted an aggressive pro-arbitration approach with the objective of making itself a hub of international arbitration, and the 2015 and 2019 Amendments to the Act are testament to the same. Therefore, granting anti-arbitral injunctions would conflict with our overarching objective of fueling the growth of international arbitrations in India.

Conclusion

Anti-Arbitration injunction suits in India have been a source of controversy since the decision in Kvaerner and many advocates for such injunctions can be found. However, injuncting an arbitral proceeding violates the basic tenets of arbitration. Misguided by malafide intentions of the parties, courts in India have fallen prey to unnecessarily interfering with – and perusal of – arbitration agreements, a task the tribunal is competent to carry out. Parties’ decision to arbitrate instead of litigate becomes redundant when Civil Courts take the matter into their own hands. Therefore, it is evident that Justice Shekhar’s approach in Balasore is not only legislatively flawed, but also impractical, and that the Bina Modi approach is the way forward.

[i] Gary B. Born, International Commercial Arbitration (Kluwer Law Intl 2009).

November 9, 2020
Afflictions In The Mandatory Filing Of Records With The Information Utility Under IBC

BY SHREYASHI TIWARI, LEGAL OFFICER AT EXPORT IMPORT BANK OF INDIA AND SHAMBHAVI SRIVASTAVA, FIFTH-YEAR STUDENT AT NUSRL, RANCHI.

Recently, in Univalue Projects Pvt. Ltd v. Union of India & Ors., the Hon’ble Calcutta High Court has quashed the order passed by National Company Law Tribunal (“NCLT”), New Delhi whereby it was mandated that financial creditors file a record of default from the Information Utility (“IUs”) when an application for initiation of corporate insolvency resolution process is being filed under section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”). The article analyses the scope of powers conferred upon NCLT to formulate such laws and further highlights how the provisions of IBC as well as the rules and regulations thereunder clearly showcase existence of no such fixed criteria for establishing the proof of default before an adjudicating authority.

Background of the case

The petitions in the present case have been filed against the impugned order passed by the Registrar of NCLT, New Delhi, with the approval of the Hon’ble Acting President of the NCLT, New Delhi dated May 12, 2020 passed by NCLT, New Delhi, whereby it was made mandatory for the financial creditors at the time of filing an application under Section 7 of the IBC, to submit record of default from IU before the NCLT. Further, the order also allowed for the said provision to be made applicable to the applications which have been pending for admission before the NCLT under Section 7 whereby it would be mandatory for the financial creditors to submit such information to the IUs before the next date of hearing in order for their applications to not be dismissed.

Concept of Information Utility

IU is one of the four essential pillars of the IBC. Section 210 of IBC provides for registration of IUs for the purpose of providing core services viz. accepting, recording authentication & verification of the financial information submitted by a person (Corporate/Operational Debtor or Insolvency Professional) to persons as may be specified, thus, IUs act as a catalyst in the CIRP process. The IUs are regulated vide the IBBI (Information Utility) Regulations, 2017. Despite having an indispensable role, the IU continues to be the least utilised even after a passage of three years since IBC was passed.

It was in the light of the above that the NCLT passed the order mandating the Financial Creditors who approach the NCLT for CIRP (including the ones already pending before the bench) to mandatorily file ‘default record’ from IU.

Repercussions that would have followed the NCLT judgment

IBC defines “core services” under section 213 as all the services which are provided by the IUs. However, there do exist various anomalies in the IBBI (Information Utility) Regulations, 2017 (“IU Regulations”)which would have caused undue impact on the CIRP had the NCLT’s order mandating the filing of records with the IU been upheld. For example, Regulation 19(3) of the IU Regulations states that a user can access information stored with an IU through any IU. It is not unknown that all the companies have potentially sensitive data which may put the company in a vulnerable position if accessed by the general public. The risk of data piracy and data theft mulls over the financial creditors, operational creditors and corporate debtors, considering that the entire database is digital and hence, they might prefer not revealing the information in its full capacity. Similarly, Regulation 20 of the IU Regulation stipulates that the IU should provide an acknowledgment in the light of the data not being mishandled. The draft regulations provided that such acknowledgment shall be coupled with digital signature of the IU. However, since the IU Regulations do not resonate the same, it may bring in shadow the credibility of the IU in case of any mismanagement with the data.

Moreover, the IU Regulation 20(1) also states that the information shall be submitted in accordance with ‘Form C’ of the schedule provided in the IU Regulation, much against the framework of IBC which intends the IUs to be an electronic repository of financial information, and not merely one conventional document management system. Even the electronic storing of the data comes with its own repercussions. Yet another issue arises with IU Regulation 25 (2) which provides for the authority to any user to unilaterally mark any data as erroneous. This regulation, hence, provides arbitrary authority to any user to manipulate the data, since the IUs, upon registration, provide a unique identifier under IU Regulation 18, and hence, a user may access the information stored with an IU through any IU Therefore, such access makes the company vulnerable to unforeseeable risks and damages.

Merely mandating that the IUs adopt a “Secure system” as per Regulation 20 is not enough to ensure data protection of any company and cannot be used as admissible evidence with already so many loopholes existing.

More often than not, IUs have been faced with an entry barrier. This is one of the most fundamental reasons as to why till today there exists but one IU (National e-Governance Services Ltd. (NeSL) in India. Regulation 3 of the IU Regulations mandates the IUs to have a net worth of at least Rs. 50 crores, and further prevents foreign control of IUs. Moreover, Regulation 6(2)(e) provides that an IU must pay a fee of fifty lakh rupees to the Board annually. For a financially struggling nation, placing such minimum eligibility criteria has no rationale. This may lead to monopoly in the market structure.

Further, the entity, since it would be in possession of such sensitive information, should be in a position to leverage cut tint edge technology. This in turn puts more burden on NeSL to carry out the functions single handedly on such a massive scale. Hence, the companies do not resort to IUs.

NCLT’s power to issue such orders

Needless to mention, the judgment of the NCLT has attempted to implement IBC in its letter and spirit. However, the question arises if the NCLT’s jurisdiction is wide enough to pass such orders?

This aspect was analysed at length by the Hon’ble Calcutta High Court taking a stance that it is outside the ambit of NCLT or the Registrar of NCLT to formulate laws and policies which are not in consonance with the parent acts which in this scenario is the Companies Act, 2013 (“CA, 2013”) as well as the IBC, 2016. The power of tribunals, when it comes to admitting evidence and following the rules of procedure, essentially should not be in In the present case, NCLT’s sudden order would affect the substantive rights of the financial creditors thus creating hindrances in timely recovery of their dues from the debtors, the very purpose of the IBC. In breaking down the limits of the nature of power, while tribunals such as NCLT/NCLAT are vested with incidental powers, such powers can only be exercised when there is no express provision prohibiting such incident or ancillary powers. The Supreme Court has held that incidental and tribunals must be vested with incidental and ancillary powers in order to provide justice to the parties as long as contrary provisions with respect to the same already exists. The Calcutta High Court ruled affirmed the ratio laid down in Union of India v. Paras Laminates that “[T]he powers of the Tribunal are no doubt limited. Its area of jurisdiction is clearly defined, but within the bounds of its jurisdiction, it has all the powers expressly and impliedly granted. The implied grant is, of course, limited by the express grant.” The Calcutta HC cited Section 424(1) of Companies Act, 2013 which mentions ‘natural justice’ as one such express criteria for the orders which are passed by NCLT and found the May 2020 order in violation of the same, thereby NCLT exceeding the scope of ancillary/incidental powers conferred upon it.

Methods of proving ‘existence of debt’

As mentioned, the IUs store in the information that helps in ascertaining the existence of a debt of a company. However, IBC also provides for other provisions that assist in concluding the existence of the debt. For example, interpreting Section 7(3)(a) of IBC, it clearly provides that a record of default submitted by an applicant is one of the methods to establish ‘existence of debt’ accrued to a financial creditor. Hence, section 7(3)(a) is disjunctive in nature and in addition to the records submitted to the IU, also enumerates any other record and evidence of default as may be specified as documents that can be submitted by the financial creditor to prove corporate debtor’s debt. The respondents argued that the term ‘as may be specified’ in Section 7(3)(a) be applicable to all the three conditions mentioned therein. The Court refuted their claim by applying the rules of interpretation and principles of litera legis to the said provision, and affirmed the term is applicable to any of the three categories. The Court also identified that ‘Part V’ of Form-1 under Rule 4(1) of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules, 2016”) read with Regulation 8 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provide more than one category such as a financial contract supported by financial statements, records of withdrawal by corporate debtor, order of court/tribunal adjudicated upon non-payment of debt etc. as other documents that can be attached to application under Section 7 to prove existence of debt.

Moreover, the Supreme Court has, in the case of Swiss Ribbons (P) Ltd v. Union of India, enumerated eight classes of documents enumerated under Part V- Form 1 of AA Rules, 2016 as ‘other sources which evidence a financial debt.’

Section 215 is not mandatory in nature

The word ‘shall’ used in Section 215(b) of IBC makes it mandatory for the financial creditors to submit information to the IUs which is in contradistinction to ‘may’ used in Section 215 (c) for operational creditors. The Calcutta High Court in Univalue Projects Pvt. Ltd. v. The Union of India & Ors. And Cygnus Investments and Finance Pvt. Ltd. & Anr.v. The Union of India & Ors., refuted the claim made on the grounds of interpretation of the provisions stating that Section 215(1) begins with stating ‘any person who intends to submit financial information’ which implies that the intention of provision is not to make it mandatory to submit financial information to IU and the heading of any provision does not necessarily limit the scope of provisions thereunder. On a harmonious construction of Section 215 with Section 7 of IBC as well as the rules and regulations thereunder would also render the same opinion wherein submitting of any financial information with the IU is not a compulsory precondition for admission of application before the NCLT/NCLAT.

Conclusion

The basic aim of IBC as a legislation is not only to minimise the liquidation of corporate entities but also to ensure recovery of dues in a timely manner. The order passed by NCLT Delhi created an unnecessary barrier in the process of financial creditors’ filing of claim under IBC. It attempted to prove redundant the claims of those applications which are pre-existing and have been filed under Section 7 of the IBC, 2016 pending before the various Benches of the NCLT, prior to such final hearing of these applications. This leads to creation of new financial disabilities for the creditors and hence alters the rights available to it. In the present case, the petitioner Cygnus Investment pressed writ petition citing urgency for initiating insolvency resolution process. Thus, ‘time’ being one of the most important criteria in recovery legislations, the said NCLT Order wrongly interpreted the provisions of IBC (say Section 7(3), Section 215 etc.) and clearly ignored the various methods of submitting records of evidence provided under the various rules and regulations thereunder. An observation however made by the Court that under Section 215 even IBBI does not carry the power of retrospective rule making is something future discussions over the issue would provide better clarification. This is because the Court highlighted that the current order passed by the NCLT (a delegate) is as per Section 240 of IBC whereby IBBI can formulate regulations of the nature of ‘delegated legislation’ and even IBBI has not been conferred with the power of retrospective regulation making thus rendering the impugned order promulgated by the NCLT is bad in law.

November 7, 2020
Could The UK Face The Fire Of Investment Claims From Huawei? – An Analysis

BY SUNIL SINGH, FOURTH-YEAR STUDENT AND SOURAV VERMA THIRD-YEAR STUDENT AT HNLU, RAIPUR

Huawei is a Chinese phone-maker company. It is the world’s second largest smartphone supplier with 18% market share. It started its operation in the UK in 2001 and since then it had strong ties with the country. In 2012, The company surpassed Euro 2 billion five-year investment and procurement target for UK, thereby becoming one of Britain’s largest sources of investment from China. The Company invests in R&D partnerships with British universities and works with UK’s top academic institutions.

However, On 15^th July, the UK government banned Huawei from its 5G infrastructure, by reversing its January order where Huawei was excluded from participating in sensitive ‘core’ parts of 5G and gigabit-capable networks. According to the order passed in July, the telecom operators by the end of this year had to stop buying any 5G equipment from Huawei and also were directed to remove all the 5G gears installed in their telecom network by the end of 2027. This decision came forth as a result of a report submitted by the National Cyber Security Centre (‘NCSC’) which highlighted some “significant technical issues”. The core issue highlighted in the report was Huawei’s relation with the Chinese govt. This caused reasonable amount of apprehension that Huawei’s equipment could be used by the Chinese govt. for the purpose of conducting espionage.

However, the decision has some repercussions and can backfire against the UK in the form of investment claims resulting from the 1986 UK-China Bilateral Investment Treaty (‘BIT’). The authors through this article attempt to evaluate – whether the level of security contemplated by the BIT between the UK and China is impaired by the govt.’s decision to ban Huawei from participating from its 5g infrastructure. Further, the article analyses the safeguards that the UK could use under the BIT and customary international law in the context of investment arbitrations resulting from such infringements.

Protection against Expropriation

Expropriation is the act of a govt. claiming private property forcibly from the owners, ostensibly to be used for the benefit of the general public. In the context of international investment, an act/measure of state is said to be expropriatory in nature if such an act deprives the foreign Investor from the economical or other benefits arising from his investment. Foreign investors are often protected by an expropriation clause provided in the BIT.

The expropriation clause, as provided in Article 5 of the UK-China BIT, stipulates the host state’s pledge not to forcefully deny the investor of the contracting party of its investment or to implement any action which might adversely affect the valuation of the invested property of the contracting party.

Regardless of the consequences of the individual expropriation cases, in expropriation disputes, tribunals usually look at the overall severity of the conduct of the host state to decide whether or not, the substantial protection under the expropriation clause can be conferred upon the investors. If the tribunal is of the view that an expropriation has taken place, such an action will be in the breach of relevant agreement or treaty unless the owner is not compensated. However, the liability of compensation stands precluded for acts concomitant with public interest, provided that the acts performed are not discriminatory in nature and the investors are duly reimbursed by the host state.

Usually, the state takes the defence of ‘The police powers doctrine’, which basically acts as a frontier safeguard in situations of expropriation. Police powers doctrine signifies powers that reside in the governments., allowing them to take bona fide, non-discriminatory action in general to preserve public welfare. Such rights grant the state the right to control the interests of the public in its jurisdiction, even though the investment is significantly impacted. The UK hence, can defend its act by contending that the measure was introduced as a part of the police forces of the state.

Even though the BIT does not include any specific clause in this respect, as a principle of customary international law, its acceptability is not subject to a specific provision to that effect. Additionally, several ISDS tribunals have also ruled that when operating in execution of their police powers, states do not breach any BIT obligations.

Another defence originating from customary international law is that of ‘necessity’ resulting from Article 25 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (‘ARSIWA’). Although the presence of urgency as a basis for the avoidance of wrongdoing under international law is no longer questioned, grounds of invocation of Article 25 of ARSIWA have a high threshold to avoid abuse[i]. Various sources of international law (present state policy, rulings of the international forum, and academic writings[ii]) amply support the need to take stringent approach in interpretation of ‘necessity’ as a defence. For instance, in the Rainbow Warrior arbitration[iii], the arbitral tribunal expressed doubt as to the existence of the defence of necessity. It observed that the Commission’s draft article “allegedly authorises a state to take unlawful action invoking the defence of necessity” and identified the commission’s proposal to be “controversial”. The plausibility of this defence may therefore rely on a case-by-case basis, paying attention to the responsibilities from the measures, as well as the circumstances surrounding them such as the scope of the obligation, the degree of the effect, the expediency of the contested measure and the factual conditions surrounding it.

National Treatment and Most Favoured Nation Clause

National Treatment and the Most Favoured Nation Clauses are the two types of status given by one contracting state to another for easy regulation of trade & investment. While under national treatment clause both – goods imported from contracting state and locally produced ones – are treated equally, MFN Clause ensures that one party is treated no less favourably by the respective member states to a treaty than any other member state. In other words, restricts the states from acting in a discriminate manner, under identical conditions, between the investors of the contracting state and local investors or other overseas investors. This means that pursuant to Article 3 of the UK-china BIT, the UK is under an obligation not to differentiate between Huawei and other locally or foreign investors under identical conditions. In order to safeguard UK’s position, the examination that needs to be made here is about interpreting the term ‘like circumstances’. The term ‘like circumstances’ ensures that only investors or investments with similar traits are compared. These conditions include not only competition in the relevant business sector or economic sectors but also other specific conditions, including the legal and regulatory system in place, or if the differential treatment is rendered on the basis of certain legitimate welfare goals[iv] .

Thus, invocation of these clauses requisites a traditional fact-specific interpretation and requires the conditions surrounding the investment disputes to be holistically considered. After looking into situations in entirety, some awards such as Daniel Midland v. United Mexican States, have held that investors or investments, despite being in “identical situations” have been treated unfairly on the basis of their nationality. However, awards have also been made, for instance, in the case of Grand River Enterprises v. the United States of America, where courts have recognised differences in treatment between investors or investments that are plausibly related to valid public welfare goals and also have given weight to whether investors or investments are subject to similar legal requirements according to their conditions.

In addition to investment law, a breach of the status of MFN through the prism of international trade law may theoretically amount to violation of the obligations of the World Trade Organization (‘WTO’) between UK and China. Nonetheless, it is important to note that member nations are entitled to exclude from being governed by these commitments in such matters relating to national security. Under the defence exceptions of Article XXI of the General Agreement on the Trade and Tariffs (‘GATT’), it is noteworthy that the exception is given to any action, which is deemed necessary for the safety of ‘critical security interests’. For instance, in 2019, in a WTO settlement between Russia and Ukraine, WTO affirmed the assertion of a national security exemption under the GATT in order to validate Russia’s trade blockade in breach of some WTO obligations with a regard to national security.

Conclusion

This ban can potentially trigger investment claims against the UK as Huawei already has made its intention to initiate investment claims against Canada, Australia the Czech Republic, if the ban violates its right as a foreign investor. However, this ban was applauded by countries like USA and Australia who already have banned Huawei from their 5G infrastructure. The UK govt. may justify the ban on grounds of national security. However, the BIT provides sufficient space to accommodate Huawei’s claims. It will be interesting to see how these claims will be dealt with by arbitral tribunals or some other quasi-judicial body.

Alternatively, a solution may also be adopted to avoid disputes: instead of blanket-banning Huawei, the UK government may provide Huawei a window of 6 months or 1 year to remove all gears that are susceptible of snooping and replace them with new gears under the strict supervision of NCSC – this may prove to be a win-win situation for both the parties. Howsoever, this idea too seems far-fetched and is unlikely to happen, for UK’s decision is influenced by the US govt., which is already in loggerheads with the Chinese govt. over trade policies.

[i] Commentary to the Articles on the Responsibility of States for Internationally Wrongful Acts, ILC Yearbook 2001/II (2),80 Para 2; CMS V Argentina (n 4) Para 317

[ii] August Reinisch, ‘Necessity in International Arbitration’ (2010) 41 Netherlands Yearbook of International Law 142, Badar AIModarra, ‘The defense of Necessity in International Law and Investor Versus State Dispute Settlement’ (2019) 23 (37) Journal of Legal Studies 78

[iii] France-New Zealand Arbitration Tribunal, 82 I.L.R. 500 (1990)

[iv] Drafter’s Note on Interpretation of “In like circumstances” under National Treatment and Most Favoured Nation Treatment, http’//www.mfat.govt.nz/assets/Trans-Pacific-Partnership/Other-documents/Interpretation-of-In-Like-Circumstances.pdf.

October 29, 2020
HC’s Power To Review It’s Order For Appointment Of Arbitrator

BY AYUSHI PANDIT, FOURTH-YEAR STUDENT AND PRANJAL PANDEY, FIFTH-YEAR STUDENT AT MNLU, NAGPUR

Introduction

The arbitration regime in India has been changing it facets from changing judicial mindset towards arbitration to making India the hub of ICA. The last quarter of 2019 saw significant developments with the Supreme Court rendering judgments that will have lasting impact on how the arbitrations are concluded in India. If India is to be seen as a country having a mature and efficacious arbitration regime, arbitration should be treated as an independent mechanism. There exists the cardinal rule of minimal judicial intervention under the Arbitration and Conciliation Act, 1996 (‘the Act’). When parties have chosen arbitration as their preferred mode of dispute resolution party autonomy needs to be respected and given full play. Thus, the scope of the same should be kept to minimum possible. Owing to the minimum judicial intervention, courts rarely review/recall their orders.

In case of a pre-existing arbitration agreement, parties have autonomy for the appointment of arbitrator. However, despite a pre-existing agreement to arbitrate it is possible for the party(s) unwilling to arbitrate to frustrate the terms of the agreement and delay the appointment of arbitrator. In any of the similar circumstances it is a right of either of the parties to seek for appointment of arbitrator from courts vide section 11 of the Act for both ICA and domestic Arbitrations.

The present article discusses the contemporary jurisprudence in the appointment of arbitrators by courts in light of the recent judicial pronouncements and legislative amendments. Making a reference to Adani Enterprises Limited v. Antikeros Shipping Corporation wherein the Bombay High Court recalled an order for appointment of arbitrator in an ICA within the meaning of section 2(1)(f) of the Act on the ground of order being null and non-est. HCs lack inherent jurisdiction for appointment of arbitrator, when either of the party fails to appoint an arbitrator in ICA. Recognizing that the body corporate in question is incorporated and functions out of India, an order passed by HC for the appointment of arbitrator calls for want of jurisdiction and was hence recalled in addition to being barred by limitation period. The subsequent portion of the article discusses at what stage of proceeding a review petition is maintainable asking for a review on procedural grounds.

Appointment of Arbitrator u/s 11

When the parties are unable to appoint arbitrators within 30 days from the receipt of request to do so, recourse to section 11 can be taken. In ICA jurisdiction for appointment of sole/third arbitrator vests solely with Apex Court. In any arbitration other than ICA, HCs are vested with the jurisdiction for appointment of sole/third arbitrators on request of the parties vide Section 11(12)(b) of the Act. In ICA, when the dispute is of a specified value, the jurisdiction for filing all applications or appeals arising out of such arbitration under the Act vests solely with the commercial division of the respective HC. In similar circumstances, arbitrations other than ICA where the subject matter of dispute is commercial with specified value, the jurisdiction for filing all applications or appeals arising out of such arbitration under the Act vests solely with any principal civil court of original jurisdiction in a district and heard and disposed of by the commercial court exercising territorial Jurisdiction.

Jurisdiction of High Courts to recall their Orders

It was a contentious aspect, because the Act does not provide the Chief Justice with the power to review its order passed under section 11, and the Act being a self-contained Code impliedly excludes the applicability of general procedural law. Hence, the legislative intent of judicial non-intervention must be duly acknowledged. To clarify, the SC carved out the difference between a procedural review and review on merits. It was held that procedural review is an inherent power of the court/tribunal to set aside a palpably erroneous order passed under a misapprehension and on the contrary, a review on merits is specifically provided by the statute.

However, when the verdict of the court is erroneous due to a procedural default, the petitioners are not precluded from seeking a procedural review of the matter. HCs possess inherent jurisdiction to recall their orders when either of the parties have committed a procedural irregularity which stretches to the root of the matter inter alia, an order for appointment of arbitrator passed by a court lacking jurisdiction or an order for appointment of arbitrator passed in the absence of arbitration agreement.

The division bench of the Bombay HC set aside the order of a single bench in an appeal filed u/s 37 of the Act which recalled an order for appointment of arbitrator on the ground that Part 1 did not prescribe any provision for the court to review its own orders. A petition was raised before SC for consideration of this issue. Then the Apex Court in the case of Municipal Corporation of Greater Mumbai & Anr clarified that HCs being the courts of record must have an inherent jurisdiction to correct the records. The acts and proceedings enrolled in perpetual memory and testimony of the Court must be in accordance with law and entitled for review/recall if vitiated by any patent illegality. The SC relied on various judicial precedents inter alia National Sewing Thread Co. Ltd. v. James Chadwick & Bros. Ltd concluded that HC being constitutional courts and superior court of record have an inherent power to recall its own orders. In the instant case parties did not choose for arbitration as a forum for dispute resolution. The dispute resolution contract expressly stated an in-house dispute resolution mechanism as the first resort and expressly repudiated for arbitration as a method for dispute resolution, Hence, an order for appointment of arbitrator which is bad in law and is a sheer procedural default, must be ratified.

The power of courts enshrined in section 11(6) is non-derogable. The same cannot be waived of by consent or acquiescence. It can be only vested by a statute. This non-derogable power is not barred by the law of limitation. It is well within the jurisdiction of the courts to condone the delay in filing for a review petition if the impugned order is vitiated by parent illegality.

Adani Enterprises Limited v. Antikeros Shipping Corporation

The dispute arose between Antikeros Shipping Corporation (company incorporated in Liberia) and Adani Enterprises Limited (company incorporated in India). The parties on failing to appoint an arbitrator resorted to relief envisaged in section 11 of the Act. Being undisputed that the impugned dispute is an ICA. Hence, HCs inherently lacked jurisdiction for appointment of sole/third arbitrator in an ICA. Jurisdiction for the same exclusively vests with the SC.

A review petition was filed seeking a review of the order for appointment of arbitrator on the ground of suffering from procedural default. The Bombay HC concluded that the impugned order called for want of jurisdiction. The impugned dispute qualified to be an ICA.

The dispute being an ICA, calls for an application for the appointment of arbitrator to be filed before SC and not before the HC. In view of the order being null and non-est in law condoned the delay of eight years and the review petition was allowed and the impugned order was recalled.

In another significant ruling the Allahabad HC refused to exercise its power under section 11 of the Act, as the recourse under section 15(6) was not taken by the applicant. The Court observed that where the mandate of an arbitrator terminates by virtue of section 15(6), a substituted arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. Once the parties fail to appoint an arbitrator in terms of the rules, only then the Chief Justice or his delegate under section 11(6) on a request by a party can appoint an arbitration. In the instant case, the procedure was not followed therefore review petition was not held maintainable.

Conclusion

The Law Commission of India observed that ad hoc arbitration in India usually ends up in the shackles of litigation. Thus, to ensure a successful enactment of minimal judicial intervention both judiciary and the legislature are taking efforts for institutionalization of arbitration. This by and large includes referring to the rules of Arbitral Institutions at the stage of formation of arbitration agreement itself. The clause “Any Institution designated by such Court” in the act can be inferred as a statutorily formed Arbitration institution conferred with the status of national importance. In line with this school of thought, the 2019 Amendment Act seeks to establish the body- The Arbitration Council of India, which is an integral step towards institutionalization of Arbitration. Bodies like Delhi International Arbitration Centre and Mumbai Council of International Arbitration (MCIA) have been successfully implementing the recommendations of the committee and Courts often refer the arbitral disputes to these institutions. Thus, this will thus ensure a paradigm shift to project India as the hub of arbitration.

October 25, 2020
Cryptocurrency And Dispute Resolution

BY PRIYA AGARWAL, FIFTH-YEAR STUDENT AT RMLNLU, LUCKNOW AND RIYA AGARWAL, FOURTH-YEAR STUDENT AT VIPS, IP UNIVERSITY, DELHI

Disruptive Technology is any innovation that changes the way how the industry and markets operate. Its attributes are comparatively superior and therefore can change consumer behavior and sweep away old practices. Television, Radio, and GPS, etc. were all disruptive technologies in their own time. Currently, the most talked about disruptive technology is ‘Blockchain’ which is often confused with Artificial Intelligence (‘AI’) but is quite different as AI delivers completely new services while Blockchain has the potential to revamp currently existing processes.

Blockchain, in simple terms, is a register or distributed ledger. It is an open-ended decentraliSed software platform enabling smart contracts and decentralised applications. “Each transaction is added to a chain of all previous transactions, validated by a network of computers”[i], before being added to the network, and thus creates a Blockchain. Two of its main characteristics are a decentraliSed way of tracking ownership of property, and the ability to directly transfer property. One of the most important products of blockchain technology is Cryptocurrency.

Cryptocurrency is a virtual or digital currency secured via cryptography and functions outside the control of any bank. It is a record of transactions (blockchains) kept on a decentralized database, which can be accessed by all members and is updated whenever another transaction is verified, which implies that choices influencing the database are made by an agreement of the users of that blockchain.[ii] It provides a certain level of pseudonymity as the members use a digital, blockchain wallet to send money and conduct their operations and every wallet is connected to a key and not to names and addresses.

Cryptocurrency in India

Cryptocurrency exchanges started to operate in India in a regulatory vacuum. There was neither a legislation defining it nor one prohibiting it. They grew and the RBI started taking measures to control its use without defining it. In June 2013, RBI through its Financial Stability Report defined Virtual Currency (‘VC’) as “A virtual currency can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”[iii]In 2013, RBI issued a caution to users dealing in cryptocurrency of the risks involved. In July 2017, the Inter-Disciplinary Committee advised against engaging in VCs and also insisted the government to take legislative measures. And finally, in April, 2018, RBI issued a circular prohibiting dealing in VCs to regulated entities. These regulated entities were instructed to quit the relationship within three months. This Circular was challenged in the case of Internet and Mobile Association of India v. Reserve Bank of India[iv]^.

The Petitioners made the following contentions:

1. the legal character of VCs i.e. it is not money but good,

2. it is a property as it is stable, definable, permanent and can be exclusively controlled;

3. the circular violates the rights of the petitioners under Article 19(1)(g) of the Constitution to carry on their occupation, trade or business;

4. the RBI has acted beyond the scope of its powers and arbitrarily;

5. the RBI acted in a predetermined manner and jumped the gun in virtually outlawing VCs.

The court found that while the RBI has the power to regulate VCs, the prohibition imposed is disproportionate; as it did not consider less intrusive measures and, therefore, ultravires the Constitution. In the absence of any legislative prohibition, dealing in these currencies must be treated as legitimate.

The verdict had a positive impact on the fintech landscape of the country but, various members of the legal community believe that this festive mood is going to be a short-lived affair if “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” is passed. However, in the absence of any regulation, the transactions and dealing with regards to cryptocurrency may witness many disputes.

Potential Disputes

One of the most innovative uses of cryptocurrency is using it for investment via Initial Coin Offering (‘ICO’). In an ICO, a company may issue coins in exchange for money or any other cryptocurrency. This coin may act as an equity share providing dividends and voting rights etc. These coins can also function as retailer loyalty programs providing specific products or services by the company. Similar to any venture involving investment put to risk, uncertainties regarding the allocation of risk or on the basis of which risk was assumed give rise to disputes.

For instance, during an ICO the issuing company may provide certain information to the investors including the prospectus and the offering memorandum. A possible breach of the terms of such a memorandum can give rise to a claim and therefore it is important to include logical dispute resolution mechanisms in such documents. In the Bancor Foundation ICO, the network congested due to high demand, moreover the offering was kept open longer than planned which enraged the early investors who claimed that the initial cap was exceeded and the value of the coins purchased before was depreciated.

Many disputes can arise out of the failure of the blockchain system itself. In 2016, the Ethereum cryptocurrency platform was hacked and cryptocurrency worth $64 million was siphoned off. Investors who experience the ill effects of similar disappointments in the blockchain fundamental to their cryptocurrency investments may normally wish to acquire damages from the platform provider.

There is also uncertainty whether these economic activities in this industry would be classified as an “investment”. To answer this, it may stated that such characterisation is possible under the broad ambit of “investment” provided in major investment treaties. Regulatory policies offered by the USA explains the complexity of the subject. The US has developed the required regulations for the treatment of these activities as an investment, however, the US Courts, in several cases, have treated cryptocurrencies as a form of money, while in India, the legality of cryptocurrency is not defined. while in countries like India, the courts and legislatures have remained largely silent on the legality of cryptocurrency.

An investor makes an investment based on several considerations such as risks and profits. In the case of cryptocurrencies, there are no geographical or other considerations to be made and the foreign country’s legislation seems to be the only decisive factor. Under the existing investment regime, laws of a state may be attractive or otherwise ‘inherently prospective’, defined in the case of Total S.A. v. Argentine Republic as a division between the specific investment laws of the state, which entail a certain legal expectation and the general regulatory framework , which is more difficult to be understood as to create such expectations. Anyhow, according to the decisions held in Enron v. Argentina[v] and CMS v. Argentina[vi], an investor can hold the state liable for breach of legitimate expectations in case of any amendment to laws that were an incentive for investment.

One of the major concerns for the cryptocurrency is the anonymity of transactions, which may justify the change in policy by the state. Central Banks and Financial Regulators all over the world discourage people to deal in cryptocurrency as it may be used in illegal activities like money laundry, tax evasion, terrorism, etc. Moreover, the governments also fear that it might undermine the value of the national currency as third party actors may be able to speculate the prices of goods and other crucial issues of sovereign nature.

Arbitration as a means of Resolving Cryptocurrency Disputes

Disputes arising from borderless currencies may be best served by a borderless form of dispute resolution and thus arbitration is the preferred means for resolution of blockchain-based disputes, given the international profile of ICO investors.

Arbitration is a non-national and neutral dispute resolution forum that enables the parties to nominate a tribunal or technical specialists to efficiently and effectively resolve the different types of disputes that may arise. The ease of cross border enforcement also makes it highly compatible with the transnational nature of technology and investors of the blockchain industry.

The award provided in arbitration is enforceable in 157 countries under the New York Convention. Moreover, it ensures flexibility to the parties as the parties can choose experts of the field and arbitral rules can be customised to suit the peculiarities of cryptocurrency disputes, while protecting the confidentiality of sensitive propriety information.

Indeed, the inherent flexibility of the arbitral proceeding enables efficient conflict management approaches to be developed. The flexibility of arbitration can also enable the parties to agree to an arbitration procedure which helps to head off the challenges that arise from the pseudonymity of users on the blockchain and the immutability of published ‘blocks’.

While uncertainty remains regarding the classification of crypto-based transactions as ‘investments’ under the existing investment arbitration regime, the regulation and ban by certain states mean that investment arbitration can be used as a viable option to resolve regulatory disputes.

Therefore, the arbitrators should promote the benefits of arbitration and its usage to the tech sector. Moreover, there is a scope to develop model arbitration clauses regarding cryptocurrency disputes and make modifications to institutional rules accommodate such disputes better.

Conclusion

Arbitration is well-placed to cater to a new breed of disputes, as long as its practitioners are prepared to evolve rapidly to meet their clients’ developing needs. New Dispute resolution procedures must be looked into like Online Dispute Resolution (‘ODR’), Blockchain arbitration etc. that are efficient and better at preserving the gains created through the use of blockchain even when a dispute arises. Blockchain technology is rapidly developing and is being adopted by several businesses and industries, therefore the interplay between blockchain and arbitration will grow and legal professionals and arbitrators must be well equipped in handling the forthcoming plethora of disputes.

[i] Reggie O’Shields, Smart Contracts: Legal Agreements for the Blockchain, 21 N.C. Banking Inst. 177 (2017).

[ii] James Rogers and Ayaz Ibrahimov, Cryptocurrencies and arbitration: A match made in heaven?, Norton Rose Fulbright International Arbitration Report, 25, 25 (May 2018), https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/imported/20180416—pdf-file—interntional-arbitration-report—issue-10.pdf?la=en&revision=958b9eac-61b9-416d-8111-350583176022.

[iii] Financial Sector Regulation and Infrastructure, Reserve Bank of India, (Jun 23, 2013), https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=709.

[iv] 2020 SCC Online SC 275.

[v] ICSID Case no. ARB/01/3, Award, 2007, paras. 264 – 268.

[vi] ICSID Case no. ARB/01/8, Award, 2005, para. 274.

October 17, 2020