This article has been written by Ishan Saxena, a 3rd year B.A. LL.B (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow.

The SC in the recent case of Dharani Sugars and Chemicals vs Union of India [1] held RBI’s 12^th Feb circular which replaced restructuring schemes such as SDR, S4A, JLF with a strict forcible classification, resolution and subsequently, insolvency if resolution fails, as ultra-vires. While, this provides relief to sectors such as power sector as most of their defaults are on account of governmental defaults, the judgement has negatively affected the credit discipline in the market which had just started to gain momentum.

Let us first have a glance at Section 35A, 35AA and 35AB of the Banking Regulations Act. Section 35A empowers the RBI to issue binding directions to any banking company in public interest, interest of the banking policy/economy, to protect the depositors or to secure proper management of the company. Sec. 35AA empowers the government to authorize the RBI to issue directions to any banking or non banking company to initiate insolvency under the IBC, in respect of a default. Sec. 35AB empowers RBI to issue directives to banking company for resolution of stressed assets which excludes insolvency proceedings.

Petitioners challenged section 35AA and 35AB on two grounds that the sections are manifestly arbitrary and they suffer from an absence of guidelines. They are also arbitrary as they provide for excessive delegation.

The Court held that these sections confer regulatory power on the RBI to carry out its functions under the banking regulation act and hence, are not any different in quality from any other provision of the act which has already conferred such power.  It was also held that these Sections provide vast powers to RBI so that they can issue directives to banking companies, in public interest [2].

The court also held that guidelines can be obtained not only from the statement of objects and reasons and preamble to the act but also from the provisions of the act, hence, the constitutional plea failed.

The Main Challenge, however, was challenging the RBI Circular as being ultra vires the provisions of the act.

Petitioners claimed that article 35A of the Act, which empowers the RBI to issue directives to banking company under certain requirements cannot be the source of power for the circular as the article was introduced before the insolvency code came into existence and hence, could not be used to relegate banks to insolvency procedure. It was also claimed that RBI’s Functions under Sec 35A are limited to the RBI Act and Bankings Regulation Act as these laws govern RBI.

The Court, however, opined that a parliamentary enactment is deemed to be “always speaking” which basically means that an expansive approach to interpretation must be taken to include new facts and situations, if the words allow it and if it is consistent with the intention behind the provision. The Court, subsequently held that Article 35A did not have a specific bar against directions by RBI for insolvency proceedings.

The Court further held that if a specific provision empowers the RBI to direct banks to the insolvency process under the IBC, then it cannot be said that RBI was acting out of the scope of the laws that govern them.

The petitioners, also challenged the circular as invalid as the power under 35AA requires a specific default [3] while the circular was in the form of a general guideline.

The Court summarized and arrived at the two requirements of Section 35AA, namely, that there must be government authorization (which was not present) and that the default must be specific (the court analyzed the definition of default, debt and corporate debtor along with the press release of the amendment to banking regulations act to arrive at the conclusion)

The Respondents, interestingly, argued that “specific cases” would also include specification by category or class and this was corroborated earlier by the Internal Advisory Committee Report to show the criteria behind choosing of the accounts to be referred to Insolvency.

The Court rejected the specification by category argument by claiming that the authority which the respondents are relying on, talk about a single provision and not a class or category of provisions. This rejection, it seems is highly problematic. I do not see any issue as to why the central government cannot authorize the RBI to direct a class of defaulters to initiate insolvency. The Court could have argued that the circular does not have a well-defined class which it refers to as lenders and so, lenders, referred in the circular are generic to negate the specification by category argument.

The Respondents also argued that Section 21 and Section 35A, alternatively, confer power on the RBI to issue the circular. The Court opined that this could have been the case, had a specific provision like Section 35AA not been enacted. Since the enactment of Section 35AA, which was a specific provision, the court, through the help of various case laws, concluded that if a specific provision exists in the act, then general provisions cannot be taken recourse to.

Whilst the major parts of the judgement deliberated on the source of power for the circular, the most contentious issue was of the circular itself. I’ll concede that it is more of a policy issue than a legal issue, which is why the legal aspect had to be clarified earlier.

Moving on to the circular itself, petitioners, who collectively represented various sectors such as energy, telecom, infra, steel, sports infra etc claimed that the circular follows a one-size-fits-all approach, in the sense that there is a lack of nuance in differentiating between the needs, the conditions, the eco-system of different sectors and a blanket imposition of the circular directives across the different sectors.

Dr Abhishek Manu Sanghvi, representing the association of power producers delivered most of the petitioner arguments. He argued that the power sector is fully regulated and thus, is a player in a restricted market, where there is requirement of licenses and approvals at almost every stage of the process. He also relied on the Report on NPA in the electricity sector [4] to show that most of NPA’s in the power sector are due to governmental/regulatory failures and not because of mis-management or wilful defaulting.

All of this was relied on to show that the circular was made in disregard to the specific needs of each sector which basically amounted to treating unequals equally and thus, was arbitrary, discriminatory and violative of article 14.

The Respondents countered this by claiming that the circular is in public interest and interest of the economy to see that the evergreening of debts does not carry on indefinitely. Therefore, these huge amounts that are due should come back into the economy for productive use.

The Court opined in the favor of petitioners and held that the circular was ultra-vires section 35AA and gave another reasoning apart from the already existing reasoning which was that under the circular, segregating between banking and non banking financial institutes to sever the circular’s operation was almost impossible.

The positives of this judgement are that it lays down that one size fits all approach cannot be applied to solve the NPA problem, that directives to banks to initiate insolvency can only be done in specific cases of default after proper analysis and government’s authorisation under section 35AA rather than issuing general orders, invalidated all insolvency proceedings initiated under the circular meanwhile preserving the rights of creditors to statutory remedies, gave some leeway to banks to explore varied options in resolving stressed assets and even if it cannot be automatically assumed that the earlier schemes like SDR, S4A, JLF etc. are back until RBI clears it with another notification, there is a high probability that these schemes, be it by themselves or in a hybrid form would make a comeback, allowing for greater flexibility and freedom. Resolution plans can prove to be more successful as the time limit of 6 months has been done away. Lenders will also not be constrained by section 29A of the IBC (which bans promoters bidding before their dues are cleared) , if there is confidence in the promoters. The judgement is also an implicit recognition of the fact that not all defaulters are wilful and thus, there has to be a distinction between genuine and wilful defaulters. Restructuring of assets without the insolvency code under the circular demanded unanimous concurrence, which was inherently problematic as any lender who has even 1% voting power can disrupt the resolution, forcing the bank to initiate insolvency. Raghuram Rajan has also claimed that the judicial process is simply not equipped to handle every NPA through a bankruptcy process. Banks and promoters have to strike deals outside of bankruptcy, or if promoters prove uncooperative, bankers should have the ability to proceed without them. Bankruptcy should be a final threat, and much loan renegotiation should be done under the shadow of the Bankruptcy, not in it [5].

The negatives of this judgement are equally distressing, namely, that the judgement may lead to the earlier problem of evergreening of loans, where it is in the mutual interests of both the lenders and the promoters to not classify an account as NPA and thus, comes about the evil of forbearance. Another problem is that the judgement has diluted the powers of the RBI to the extent that the ability of RBI to direct banks to refer cases to insolvency is now restricted to governmental authorization, this becomes problematic as now the government will have a veto over the RBI’s ability which could prove detrimental in high-profile cases and anyway, erodes RBI’s autonomy. Another problem is the failure of the restructuring schemes such as SDR, S4A, JLF in correcting the ever growing losses and instead they led to more forbearance. The invalidation of this circular has one more problem, that is of credit discipline, which was sort-of inculcated in the banking system by the circular through forceful classification and resolution. Credit discipline, reminiscent of a strong regulatory framework ensures that financially un-healthy practices are not overlooked for short-term gains so that it does not lead to snowballing of the crisis.

It remains to be seen how RBI will tackle this new setback and proceed to a more nuanced approach of classification and resolution of NPA and also ensure proliferation of a credit discipline culture.

ENDNOTES

[1]https://www.sci.gov.in/supremecourt/2018/42591/42591_2018_Judgement_02-Apr-2019.pdf / TRANSFERRED CASE (CIVIL) NO.66 OF 2018.

[2] Section 35A, Banking Regulations Act.

[3] Press release.

[4] 37th Parliamentary Standing Committee Report on Stressed / Nonperforming Assets in the Electricity Sector dated 07.03.2018

[5] https://www.thehindubusinessline.com/money-and-banking/article24924543.ece/binary/Raghuram%20Rajan%20Parliamentary%20note%20on%20NPAs

This article has been written by Ria Kotian, a 4th year B.B.A. LL.B. student at Jindal Global Law School.

The Specific Relief Act, 1963 was amended recently, upon receiving the Presidential assent and passing the scrutiny of both houses of the Parliament, and came into force on 1^st October, 2018.

The Amendment acknowledges the requirement for a stringent and a time bound adjudication of cases under the Act, and aims to provide greater certainty in contractual enforcement. It aims for smoothening the process of trade and commerce, and of doing business in India by improving investor protection.  Upon a perusal of the Expert Committee Report on the Amendments to the Act, it is understood that there exists a need to mitigate the adverse impacts on Government contracts due to delays, thus resulting in inconvenience to the citizens. Interference by courts and other interruptions to public works projects, hampers the creation of essential infrastructure facilities, which in turn negatively impacts the welfare and the quality of living conditions in India.

I – INTRODUCTION

The Specific Relief Act, drafted upon the considerations of the 9th Report of the Law Commission of India, is premised on the principles of equity, justice and good conscience.

The Act makes available the following remedies to the parties- (i) Recovery of Possession of Property (ii) Specific Performance of Contracts (iii) Rectification of Instruments (iv) Rescission of Contracts (v) Cancellation of Instruments (vi) Declaratory Decrees and (vii) Injunction.

The bench in Kamal Kumar v Premlata Joshi and others, ( 2019 Indlaw SC 16) has provided important considerations regarding the material questions which are to be discussed prior to the grant of relief under the Act. Firstly, there must be a valid and concluded contract for the sale or purchase of the suit property. It must also be shown that the plaintiff is willing, and has abided by the terms of the contract, and that there are no inhibitions with still carrying on the performance as per the terms of the contract. It must be equitable for the court to grant the motion of specific performance, upon consideration of the hardships that the defendant may go through following such order, and the extent of performance of the contract by the plaintiff.

II – AMENDMENTS

• One of the key Amendments made, provides for the remedy of Specific Performance as a substantive right of the party, thereby eliminating the element of discretion enjoyed earlier by the courts. The only exception under the provision is instances wherein the remedy of specific performance is unenforceable, and are listed under Section 14, Section 12 and Section 11(2) of the Amended Act. It is not an uncommon sight for parties to drop out of contracts merely because the cost of performing the contract overwhelms the cost of breaching one. Moreover, the often pedantic route taken by the Courts while scrutinising the eligibility for a grant of Specific Performances does not aid in discouraging such errant attitudes by defaulting parties.

• The Amendment introduces the concept of ‘Substituted Performance’, under Section 20 of the Principal  Act which allows the non-defaulting party to obtain costs of performing the contract by a third party, or by their own agency, in the event of a default, and subsequently recover any losses incurred by such breach. The provisions under Specific Performance do not disentitle the party suffering the breach from recovering a price that is greater than the agreed price in the contract. However, it is essential that such amount quoted to be recovered has been actually spent in the process of substituted performance. This provides an immediate remedy to the party suffering the breach, since the continuation of the execution of the contract need not await a judicial order for a solution.

• The courts, under Section 14A are now empowered to engage experts to assist them in matters that require innate technical knowledge, thus acknowledging the need for a thorough evaluation of the intricacies of matters relating to construction, public utilities etc. This move shall provide the court with an informed perspective on niche matters pertaining to the varying fields in infrastructure etc, and help dispose off technical matters more effectively.

• Section 6 of the Principal Act has also been amended to make an addition to the persons who can claim dispossession under the Act. The amendment provides for the insertion of “through whom he has been in possession or any person” as an additional category.

• Section 20A provides for a bar to grant injunctions to parties concerned in a dispute relating to infrastructure contracts, if it can be ascertained that such an order may result in a delay in the completion of the project. Infrastructure has been defined to mean categories of projects such as water, energy, etc. which have been mentioned by the insertion of a Schedule to this effect . This amendment is crucial considering the rapid increase in infrastructure projects over the last couple of years. The Amendment also recognises the public utility projects as a boon for the general public, and obstacles and inordinate delays due to injunctions must be avoided.  This can play a major role in the risk assessment by investors especially in capital-intensive and long-duration projects. The untimely delay caused by these obstructions can lead to unviable costs and an uncertain project environment.

• Special Courts have been provided for, to deal with matters pertaining to infrastructural contracts, under Section 20B. This is aimed at avoiding backlog of cases, and an avenue for a speedy disposal of disputes, considering time is an essence of most infrastructure contracts.

• The Amendment Act, 1963, by virtue of an insertion of a clause under Section 15(fa) categorises Limited Liability Partnerships under those who may avail of remedies set forth under the Specific Relief Act, 1963. Section 19 (ca) of the Principal Act has also been amended to recognise Limited Liability Partnerships.

• The Amendment under Section 20C of the Amended Act, provides for a twelve month window from the date of service of summons for specific performance by the defendant. This period can further be extended by six months. This is a welcome move, considering the interminable court processes and the undue delays that plague court proceedings.

• Prior to the Amendment, Section 16( c) of the Arbitration and Conciliation Act, 2015 had mandated that the plea of the parties seeking specific performance must find a specific averment to that effect. This retirement has presently been done away with. One need only prove or show willingness to perform the contract, and it is not obligatory to aver the same in the complaint.

III – ANALYSIS

It is important to however notice an oversight in the execution of the Amendment. The provisions do not clarify the applicability of the Amendments as prospective or retrospective. On evaluating the nature or the objective of the Amendment, we understand that it proposes a substantive change, providing for repeal and substitution of certain provisions.

However, it is also necessary to read through Section 6 of the General Clauses Act which provides that a repeal shall not invalidate any accrued or a vested right or a privilege. As of the provisions of the un-amended Act, the defaulting party can only be brought to court for specific performance if it can be proven that monetary compensation would cease to suffice, and this is interpreted as a right of the defaulting party. What is then interesting to note, that it is accrued right vested in a party, the day the breach occurs, which if after the date of amendment, shall provide the non-defaulting party with a vested right for a grant of specific performance [1].

This clash of interpretations and the lack of clarity may prove to counter the initiative and the objective for a smoother contract enforcement platform. The ambiguity may only increase the court intervention on controversies regarding the applicability, and the resulting rights and duties of the parties. An episode of such confusion regarding applicability of the amendment provisions has taken place with the Arbitration and Conciliation Act, 2015, and several court discussions are present on the same, thus, unfortunately, defying the attempt to strip the idea of excessive paternalism by the Indian courts and make India a preferable destination for Alternate Dispute Resolutions.

There also exists a conflict between the jurisdiction of the courts provided under the Commercial Courts Act, 2015, and the special courts introduced under Section 20B of the Amendment Act. Both platforms are entrusted with the responsibility of adjudication and speedy disposal of cases relating to infrastructure projects. [2]

Although, promising amendments have been introduced, and important issues have been highlighted, it will be interesting to witness how the paradigm shift will be handled, considering the existing roadblocks.

ENDNOTES

[1] Deshmukh Indranil et al (2018, 12 September) Specific Relief (Amendment) Act, 2018 : Prospective or Retrospective? Retrieved from- https://corporate.cyrilamarchandblogs.com/2018/09/specific-relief-amendment-act-2018-prospective-retrospective/

[2] Chakrabarti Ran et al ( 2018,17 September) India: The Specific Relief (Amendment) Act, 2018: Overview & Implications Retrieved at-http://www.mondaq.com/india/x/736966/Contract+Law/The+Specific+Relief+Amendment+Act+2018+Overview+Implications

This article has been written by Aastha Ananya, 4th year B.A. LL.B. student at UPES Dehradun.I

In the course of recent years, regulatory changes have plotted to re-define and re-evaluate the corporate structures keeping in mind the end goal to have a proficient and transparent environment to work in. An extremely later and urgent step taken by the Ministry of Corporate Affairs (“MCA”) is with respect to revamping the provisions of Section 89 and 90 through the Companies (Amendment) Act, 2017. A clarity was awaited to come in by way of rules, of which MCA vide its notification no. G.S.R. 561(E) dated 13^th June 2018 [1] introduced the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”). The amended sections and the Rules are being considered as one of the most onerous provisions rolled out by MCA. The notification of Section 89(10), Section 90 of the Act and the SBO Rules fundamentally builds the onus on companies to recognize and keep up sufficient records and refresh the Registrar with the details of SBOs.

Disclosure Requirements under the Act

As per the amended Section 90 of the Act, every individual who, either by himself or with others (including a trust and persons resident outside India), qualifies as a Significant Beneficial Owner (“SBO”) of a company is required to make a declaration to that company specifying his beneficial interest. A SBO is a person who holds beneficial interests, of not less than 25% or such other percentage, as may be prescribed. As per the definition provided in the Act, the government is empowered to prescribe even other holding percentages for the determination of the SBO. The SBO Rules significantly expand the definition of SBO as provided in Section 90(1) of the Act and clearly lays down as to who shall qualify as an SBO.

According to the Amendment Act, the newly notified Section 89(10) gives the definition of beneficial interest. Additionally, while Section 89 deals with the disclosure of beneficial interest, Section 90 of the Act goes further and particularly aims at individuals or natural persons who holds or controls significant holding in the company.

Though, both the sections and the SBO Rules calls for clarity at their ends, Section 89 and the SBO Rules aim at uncovering the shareholding of structures holding beneficial interest in shares of company exceeding the threshold limit thereby unearthing the benami shareholders. Also, it ought to be noted well that the inability to comply with the requirement or concealment of any material information would attract both fiscal and punitive outcomes.

The Existing Lacuna

Despite a major endeavour to unravel benami and shadow holdings in companies, there exists numerous ambiguities arising out of the poor drafting of the provisions in the Act as well as the SBO Rules.

• The term significant influence has not been characterized subsequently causing a trouble to determine as to who really holds a significant influence in a company while identifying a SBO.
• Also, the term control has been defined in a way that except if a person has an expansive holding in a company, he may not be said to have control. This invalidates the purpose of the provisions by allowing real/benami holders to evade getting recognised.
• Further, there lies a vagueness in the fact as to who precisely is required to disclose. There is a perplexity that both legal as well as the beneficial owner are required to disclose. If that is so, then an absurdity would lie in the fact that the legal ownership is already on record. This would at last prompt the revelation of something that is as of now known by lakhs of owners and companies and along these lines invalidating the purpose, again.
• The scope is very wide as to which type of companies do the provisions apply but then it is unclear at the same time too. They apply to almost all the companies with the exceptions for certain SEBI regulated entities, however it isn’t completely evident whether listed companies are also excluded or not. Unfortunately, we must be at standard with the way that the Act and the Rules in itself says diverse things.

It can be thus concluded from the above examined existing lacuna that the provisions may misfire because of such poor drafting though the intentions seems to be clear. One of the reason for the fizzle being that the disclosure has to be made by lakhs of persons who are not even benami holders. This may prompt eye them with suspicion and face investigation. Besides, the real benami holders exercising their ownership and control through fronts may escape detection.

CONCLUSION – The way forward

The notification of Section 90 of the Act and the SBO Rules shows the determination of the Government of India to keep the abuse of corporate vehicles by acquiring transparency with respect to both the lawful and the beneficial owners, the wellspring of the corporate’s assets, and its activities. Also, the sweeping arrangements of the SBO rules evince that the law endeavours to battle every possible strategies through which beneficial holding in a company may be organized or disguised and guarantee most extreme transparency of a company’s holding structure. Despite a major endeavour to unravel benami and shadow holdings in companies, there exists numerous ambiguities arising out of the poor drafting of the provisions in the Act as well as the SBO Rules.

This would enable the authorities to “follow the money” in monetary examinations including suspect accounts/assets held by corporates. Be that as it may, neither the Act, nor the SBO Rules recommend any bright-line tests for recognizable proof of ‘significant influence’ and this will represent a few difficulties in agreeing to the requirements by shareholders and companies. To determine the natural persons who hold ‘ultimate’ control over companies, the SBO Rules have recommended puncturing through the veil of non-individual shareholders.

The timeline for initial compliance of the SBO Rules was ninety days from the date of the commencement i.e. till 11^th September 2018 but through a general circular dated 10^th September 2018 [2], the Ministry of Corporate Affairs has relented and extended the timelines for filing of form BEN-1, to be made by the SBOs. The extension has been made keeping in mind the difficulties expressed by certain stake holders in filing the declaration under the said form. It will be a wait and watch game from here on and all we can hope for is that the changes that have been proposed, provides clarity and certainty on interpretation wherever lacking.

As India adapts to this new disclosure administration, it is clear that these new adoptions under the Act is the iron block of another transparency in the way in which shareholding of companies is held and the corporate veil is not anymore hallowed.

However, this conflicts with the basic principle of Company Law, i.e. that a company is an autonomous corporate personality and has a separate juristic nature. Also, these provisions will build the cost of compliance significantly. There will be numerous functional troubles in acquiring the required data. It will be interesting to perceive how these compliance requisites shall play out for all intents and purposes, in the coming months.

ENDNOTES

[1] http://www.mca.gov.in/Ministry/pdf/.

[2] http://mca-circular-pdf.

This article has been written by Arshit Kapoor and Suprabh Garg, 1st year B.B.A. LL.B (Hons.) and 2nd year B.A. LL.B students respectively at National Law University, Odisha.

Background

The inception of the entire proceedings can be traced back to May, 2017 with the notification of The Banking (Amendment) Ordinance, 2017, which gave Central Government (CG) the power to authorize the Reserve Bank of India (RBI) to initiate insolvency resolution process (IRP) under Insolvency and Bankruptcy Code, 2016 (IBC). 

Section 35 AA and 35 AB were inserted in the Banking Regulation Act (BR). While the former gave power to RBI to direct a bank to initiate IRP against a defaulting borrower, after authorization from the CG, the latter empowered RBI to issue directions to the banking companies for resolution of stressed assets. Subsequently, RBI came out with a Circular [1] with a revised framework for resolution of stressed assets (Circular) which stated its source of power as Section 35A, 35 AA and 35 AB of BR Act; and Section 45 L of The RBI Act, 1934.

As per the Circular, the lenders had to identify early signs of stressed assets with an outstanding aggregate exposure of Rs. 5 crore and above into SMA’s depending upon the principal or interest payment due [2] and had to file the information with the Central Repository on Information on Large Credits [3]. Further, all lenders were required to place in Board approved resolution plan (RP) for resolution of stressed assets [4]. The RP was to be implemented within a period of 180 days from the date on which the default was made, the date of default being on or after March 1, 2018 [5] and in case of failure of timely implementation of RP, the account must be dragged into IRP under Section 7 [6] within a period of 15 days.

Furthermore, the framework had repealed all other existing framework for dealing with stressed assets viz., Corporate Distressed Assets, Corporate Debt Restructuring Scheme (CDR), Flexible Structuring of Existing Loans Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR etc. [7] 

The Verdict of the Hon’ble Supreme Court

The Hon’ble Supreme Court heard a batch of petitions and transferred cases challenging the constitutional validity of Sections 35 AA and 35 AB of the BR Act in the case of Dharani Sugars and Chemicals Ltd. v. Union of India & Ors. (Dharani) [8].

Constitutional Validity of BR Ordinance and The BR Act

Refuting the petitioner’s contention that the Section 35 A, 35 AA and 35 AB of the BR Act was manifestly arbitrary, the Hon’ble Court held the aforementioned sections to be constitutionally valid.  In the recent case of Swiss Ribbons v. Union of India [9] the Apex court had held that an economic legislation was to be viewed with great latitude and cannot be manifestly arbitrary. The Court relied upon Swiss case and held that the Amendment and Ordinance were made in public interest and vested powers in RBI to issue certain regulatory framework in public interest and therefore, were not manifestly arbitrary and hence not violative of Article 14 of The Indian Constitution.

Source of Circular can only be Section 35 AA

The Supreme Court relied upon the well-known rule in Taylor v. Taylor [10], which was subsequently relied upon in the case of State of U.P. v. Singhara Singh [11], that when a statute confers power to do a particular act and has laid down the method to be exercised, it mandatorily forbids the doing of that act in any other manner than the one specified in the statue. The Court upheld this principle and thus ruled that the RBI could issue direction to banking company to initiate IRP under the IBC, only and only under the four corners of Section 35 AA of The BR Act. However, the court has observed that prior to the enactment of Section 35 AA, the RBI could have had issued such directions to the banking companies.

The Court also held that the resolution of stressed assets could be done through the IBC or otherwise. When the resolution was to be done via IBC, the RBI could only and only avail the power under Section 35 AA but when it was to be done through some other source de hors the IBC, the general power under Section 35 A and Section 35 AB would come into play. Therefore, the court held that Section 35 AB and Section 35 A cannot be the source of the circular. 

Circular -Ultra Vires of Section 35 AA

The court held that, RBI could direct banking institutions to move under the IBC under Section 35 AA of The BR Act only and only if two conditions laid down were satisfied, first that the Central Government authorized the same to do so; and secondly that it should be in respect of specific default. It also held that both the condition was not met by the Circular.

Section 35 AA enables the Central Government to authorize the RBI to issue such directions in respect of “default” (same meaning as assigned to it under Section 3 (12) of IBC). The Court has held that reference to IBC under Section 35 AA could only be made only on a case to case basis, i.e. in respect of specified defaults by specific debtors. This was further supported by the Press Note dated 05-05-2017 which specifically refereed to resolution of “specific” stressed assets, which would empower the RBI to intervene in those “specific” cases of resolution of NPAs. The circular was thus struck down as it referred to all debts “generally” above Rs. 2000 crores without drawing a distinction 

“Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorized the RBI to issue such directions only in respect of “a default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA”, held the Court in Dharani [12] while striking down the circular.

The circular was therefore struck down as being ultra vires, and furthermore all proceedings under Section 7 of IBC taken by the lenders in furtherance of it was declared “non-est”.

Implications and the way forward

The court has finally given the much-awaited verdict on the contentious circular and struck it down as being ultra-vires. Consequently, it holds various implications. This has created a cumbersome situation. While it has relieved the aggrieved companies, some stakeholders are considering it as a setback for the country’s insolvency process [13].

An ambiguous situation has been created for the banking companies who have acted upon the circular and have either implemented the resolution plan or initiated IRP under IBC in furtherance of circular. These lenders may probably react in either of the two ways. In cases where RP has been already implemented, the lenders may continue with the RP, treating it as a restructured account and in cases, where IRP have been initiated and are pending in the NCLT, it can be contended by lenders that they had initiated it pursuant to section 7 of the IBC or they may let their corporate debtor breathe the chances of relief which are very minimal. 

However, the sword on the companies of compulsory being dragged into insolvency proceedings has been uplifted. A major relief has been granted to the giants of power, shipping, and sugar including major companies like ESSAR power, KSK energy they being saved from insolvency proceedings [14]. Jet Airways (having a debt of more than $1 Billion) is also relieved from the threat of insolvency proceedings, on the failure of default payments due on June 30 [15]. According to ICRA Ltd., “the decision will aid about 70 borrowers with outstanding loans worth about 3.8 trillion rupees ($55 billion)” [16]

The problem of resolution of stressed assets is still persisting and the impugned question of tackling with the alarming situation of NPA needs serious consideration. ₹3.8 lakh crore of the debt has been classified as NPA, after the circular. The circular mandated the banks to take swift action and was a perfect cure to the cancer of stressed assets which the banks are suffering from. Now, it is upon the discretion of banks to take action [17].

SC has nullified the judgment as a whole and therefore the ‘withdrawal’ clause too has no effect of law now. Therefore, the old restructuring framework such as JLF, SDR, CDR is now legal and existing as on date. However, these frameworks have not been successful in the past; CDR failed as it had a short tenure of restructuring, under SDR finding buyers for large borrowers in just 18 months proved to be difficult, the challenge under JLF was to accommodate all [18].

The RBI has to now issue specific circulars on identifying specific defaults by the companies and thereafter, the insolvency resolution process is to be initiated. This will attract more time and effort of RBI and is subject to unnecessary delays in the resolution of the default. RBI may come with a revised circular soon. However, it may lead to ambiguity as different mechanisms may be opted by then. These implications have to be considered by RBI in the new circular to make it beneficial for the economy, as the previous circular did by inducing credit discipline and to pass the litmus test of law.

ENDNOTES

[1] Circular No. DBR. No. BP. BC. 101/21.04.048/ 2017-18, dated 12-02-2018

[2] Paragraph 2, RBI Guidelines of Stressed Assets, Circular No. DBR. No. BP. BC. 101/21.04.048/ 2017-18, dated 12-02-2018.

[3] Paragraph 3, RBI Guidelines of Stressed Assets, Circular No. DBR. No. BP. BC. 101/21.04.048/ 2017-18, dated 12-02-2018. 

[4] Paragraph 4, RBI Guidelines of Stressed Assets, Circular No. DBR. No. BP. BC. 101/21.04.048/ 2017-18, dated 12-02-2018.

[5] Paragraph 8, RBI Guidelines of Stressed Assets, Circular No. DBR. No. BP. BC. 101/21.04.048/ 2017-18, dated 12-02-2018.

[6] The Insolvency and Bankruptcy Code, 2016.

[7] Paragraph 18, RBI Guidelines of Stressed Assets, Circular No. DBR. No. BP. BC. 101/21.04.048/ 2017-18, dated 12-02-2018.

[8] Dharani Sugars and Chemicals Ltd. v. Union of India & Ors., 2019 SCC OnLine SC 460.

[9] Swiss Ribbon v. Union of India, 2019 SCC OnLine SC 73.

[10] Taylor v. Taylor, [1875] 1 Ch. D. 426

[11] State of U.P. v. Singhara Singh, (1964) 4 SCR 485

[12] Dharani Sugars and Chemicals Ltd. v. Union of India & Ors., 2019 SCC OnLine SC 460.

[13] V. Anantha Nageswaran ‘An Apex Court judgement that forces reflection on all sides’ LiveMint <https://www.livemint.com/opinion/columns/opinion-an-apex-court-judgement-that-forces-reflection-on-all-sides-1554747366767.html> Last Visited on 13 April 2019.

[14] Live Law News Network ‘ SBI Strikes Down RBI Circular Asking Banks To Take Defaulting Companies To Insolvency’ LiveLaw <https://www.livelaw.in/top-stories/sc-strikes-down-rbi-circular-asking-banks-to-take-defaulting-companies-to-insolvency-144006> Last Visited on 13 April 2019.

[15] Bloomberg ‘Supreme Court ruling on RBI circular to give tycoons reprieve on $55 billion of bad debt’ Economic Times <https://economictimes.indiatimes.com/news/company/corporate-trends/supreme-court-ruling-on-rbi-circular-to-give-tycoons-reprieve-on-55-billion-of-bad-debt/articleshow/68699252.cms> Last Visited on 13 April 2019. 

[16] Ibid.

[17] Bloomberg ‘Supreme Court ruling on RBI circular to give tycoons reprieve on $55 billion of bad debt’ Economic Times <https://economictimes.indiatimes.com/news/company/corporate-trends/supreme-court-ruling-on-rbi-circular-to-give-tycoons-reprieve-on-55-billion-of-bad-debt/articleshow/68699252.cms> Last Visited on 13 April 2019. 

[18] Radhika Merwin ‘Will Banks Act Proactively to Deal with Stressed Assets or Kick the Can down the Road?’ The Hindu Business Line <https://www.thehindubusinessline.com/money-and-banking/will-banks-act-proactively-to-deal-with-stressed-assets-or-kick-the-can-down-the-road/article26714151.ece> Last Visited on 13 April 2019.

This article has been written by  Gautami Govindrajan, 3rd year B.A. LL.B (Hons.) student at National Law University, Jodhpur.

Introduction

A key aspect of corporate governance is ensuring that directors and managers do not violate their fiduciary duties to the company by placing their personal interest over the interests of the company. Conflict of interest is a serious concern for companies, because they stand to lose substantially. This issue has come to the forefront time and again, with several corporate scams coming to light. The most recent one is the Chanda Kochhar scam. The then-ICICI Bank CEO authorised huge amounts of loan to Videocon group on account of business ties between her husband, and the Videocon promoter, Venugopal Dhoot.

Understanding the Legal Framework of Related Party Transactions

A related party is someone who has a relationship with the company, body corporate, or its directors in any way that is not related to the company’s transactions; i.e., someone who has a pre-existing special relationship with the company, prior to the relevant transaction taking place. S. 2(76) of the Companies Act [“the Act”] defines who constitutes a related party. The provision encompasses relatives of directors and key managerial personnel, as well as firms and companies, etc., in which the director or manager holds a stake or interest; and any person upon whose advice the manager or director is accustomed to act.

S. 188 prohibits the company from entering into any contract or arrangement in respect of a given list of transactions. However, the prohibition is not in the nature of a blanket ban. The section stipulates certain conditions within which such transactions are regulated. No related party transaction can take place legally without the consent and prior approval of the company’s Board of Directors. Further, a resolution must be passed by the Board to approve such a transaction, and the concerned person is not allowed to vote in such a proceeding. Rule 15 of Companies (Meeting of Board and its Powers) Rules 2014 also stipulates this requirement. Some transactions also require a special resolution to be passed in order to authorise a related party transaction.

The section also provides for the concept of arm’s length transactions. Arm’s length transactions have been defined under the Act to mean a transaction between two related parties, which is conducted as if these parties were unrelated. Thus when a transaction is carried in good faith as an ordinary commercial transaction as though no relationship existed, it is allowed.

The Act also provides for disclosure requirements. S. 184 obligates a director to disclose his interest in any transaction that the company undertakes. Every such transaction must be referred to in the Board’s Report to the shareholders, along with a justification for such a transaction. Further, the company is required under S. 189 to maintain a register which contains particulars of all contracts and transactions entered into wherein one or more directors had an interest. The Audit Committee must audit or modify any related party transaction, as per S. 177.

The rationale behind these provisions prohibiting related party transactions is to prevent any conflict of interest. Every director has a duty to act in good faith and undertake fair dealings. They must act in such a way that they do not breach their fiduciary duty to the company and its members. Related party transactions posit situations wherein the directors and managers face a conflict between their fiduciary duties and personal interests. The prohibitions exist to prevent any misuse of company’s assets and business to satisfy a director’s personal benefits and interests.  

Contravention of any of these provisions would make such directors concerned personally liable to indemnify the company for losses occurred. The company can also proceed against a director or any employee who entered into a related party transaction to recover any loss that was sustained by the company as a result therefrom. The impugned agreement is also rendered voidable.

Factual Matrix of the Chanda Kochhar Case

The Chanda Kochhar scam came into the spotlight recently because the former ICICI Bank CEO derived indirect benefit from the lending of a substantial loan to Videocon. The allegations are that the sanctioning of the loan by Kochhar was only due to a quid pro quo arrangement between Venugopal Dhoot, promoter of Videocon and Deepak Kochhar, Chanda’s husband.  Deepak Kochhar and Dhoot had business ties prior to the grant of loan by ICICI Bank to Videocon.

Deepak Kochhar and Dhoot together set up NuPower Renewables Pvt. Ltd. (NRPL), in December 2008. While Deepak Kochhar, Pacific Capital (owned by his father), and Chanda Kochhar’s brother’s wife held a 50% stake in the company; the remaining 50% was held by Dhoot along with his family members and associates. Dhoot resigned from his position as director in NRPL in January 2009. He thereafter transferred his 24,999 shares in the company to Kochhar for a sum of Rs. 2.5 lakh. In March 2010, NRPL obtained a loan from a company owned by Dhoot (99% holding), Supreme Energy Pvt. Ltd. (SEPL). [i]  

SEPL became a 94.99% shareholder in NRPL by the end of March 2010. The remaining 4.99% was held by Deepak Kochhar. Dhoot transferred his entire shareholding in SEPL to Mahesh Chandra Puglia in November 2010. Punglia then transferred his holding to Pinnacle Energy, which was a trust wherein Deepak Kochhar was the managing trustee, between September 29, 2012 to April 29, 2013; for Rs. 9 lakh. [ii] In short, Dhoot enabled the transfer of SEPL to Kochhar indirectly through a complex web of transactions.

The alarming concern is that the transfer of ownership of SEPL was done about 6 months after ICICI bank sanctioned a substantial loan to Videocon. ICICI Bank was part of a consortium of banks lending money to the Videocon group for the group’s oil and gas capital expenditure programme. It lent about Rs. 3250 crore to the group. Chanda Kochhar was on the sanctioning committee to authorise these loans. She at no point disclosed any concerns regarding conflicts of interest; and did not choose to recuse herself from the position.

Following the grant of the loan, the Videocon account was declared as a Non-Performing Asset in 2017. [iii] ICICI Bank appointed a committee, headed by retired Justice B.N. Srikrishna, to investigate this matter. The report found that Chanda Kochhar had indeed violated the company’s code of conduct, and had acted in a clear conflict of interest. [iv] Thereafter, ICICI Bank sacked her from her position, treating her voluntary step-down from her position last year, as “termination for cause”.[v] Further, Kochhar has been asked to return all bonuses paid to her from April 2009 to March 2018. [vi] The CBI has also registered cases against both Chanda and Deepak Kochhar, for cheating and criminal conspiracy. [vii]

Was the Transaction a Related Party Transaction?

So did the sanctioning of the loan by Chanda Kochhar to the Videocon group constitute a related party transaction under the Companies Act, 2013? S. 2(76) elaborates who constitutes a related party. The first two sub-clauses of this provision, which contemplate relatives of directors and key managerial personnel, clearly do not apply, as Chanda Kochhar had no direct relationship or family ties with Dhoot. The third sub-clause covers a firm in which the director or relative is a partner. This would have been applicable, if the loan sanctioned had been to one of the ventures between Kochhar and Dhoot. However, the loan was sanctioned to Videocon group, wherein neither of the Kochhars had any stake.  Similarly, sub-clauses (iv) and (v) do not apply, as Chanda Kochhar herself was never a member in Videocon or any of the other companies; and neither did she have any holding in them. The only sub-clause under which she could possibly be brought under the ambit is sub-clause (vii), which talks about any person on whose advice a director is accustomed to act.

This sub-clause coincides with the concept of a shadow director; and in such transactions it must be shown that the director did not exercise any judgement or discretion on his own part. The SEBI Board has held that the founder of a company, who was also a majority shareholder, could be considered to be someone on whose directions a director could be accustomed to act. [viii] Further, where the person vested complete trust and confidence in another; and the latter was privy to all information regarding the financial affairs of the former, it was held that the former was accustomed to act on the direction of the latter. [ix] Thus, there seems to be a high threshold being followed while determining whether a person is accustomed to act in accordance with the direction of another. It is unlikely that such a threshold would be met in the present case. While there was certainly an element of quid pro quo in the granting of the loan, it would be a stretch to say that Chanda Kochhar was “accustomed to act” as per the directions of Venugopal Dhoot. Therefore, it appears to me that the impugned transaction would not qualify as a related party transaction under the Companies Act, 2013.

An analysis of the fact situation makes it quite clear that there were some red flags in the sanction of the loan to the Videocon group. The fact that the transfer of ownership in SEPL to Deepak Kochhar came so close in the heels of Chanda Kochhar sanctioning the loan shows that there was an element of quid pro quo in the grant of the loan. The right course of action to take then would have been to disclose the business ties between her husband and Dhoot, and let the Board of Directors decide whether she could continue with the transaction. An abundantly cautious approach would have been to recuse herself from the matter altogether.

Conclusion

While examining the law, it is important to remember that the fundamental rationale behind the concept is respected, i.e., the aim to prevent conflict of interests. Some gaps clearly exist in the Act, as indirect relations such as the one in the present case, manage to slip under the radar of these provisions. Ingenious parties can avoid liability under these provisions by spinning a complex web of transactions that will help evade any direct relationship. Such transactions, too, need to be brought under the ambit of related party transactions, to force directors to disclose any kind of relationship in advance so that they can be examined by the board and shareholders before entering into any transactions or contracts. Directors need to in good faith disclose any and all conflicts of interest, to abide by their duties to companies, and to avoid any of these scams happening again in the future. Stricter implementation of disclosure requirements is vital to ensure that the spirit of the section is not lost, and the raison d’être of the provision is not frustrated by evasion.

[i] Sandeep Singh & Krishn Kaushik, Videocon gets Rs 3250-crore loan from ICICI Bank, bank CEO’s husband gets sweet deal from Venugopal Dhoot, The Indian Express (Mar. 31, 2018), https://indianexpress.com/article/business/banking-and-finance/videocon-gets-rs-3250-cr-loan-from-icici-bank-chanda-kochhars-husband-gets-sweet-deal-from-venugopal-dhoot-5115267/.

[ii] Aarati Krishnan, All you wanted to know about conflict of interest, The Hindu Business Line (Apr. 16, 2018), https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-conflict-of-interest/article23563094.ece.

[iii] ICICI-Videocon case: Chanda Kochhar, Venugopal Dhoot appear before ED, The Indian Express, https://indianexpress.com/article/business/icicis-chanda-kochhar-videocons-venugopal-dhoot-called-by-ed-for-questioning-5607821/.

[iv] Justice Srikrishna panel indicts Chanda Kochhar, ICICI Bank sacks her, The Economic Times (Jan. 31, 2019), https://economictimes.indiatimes.com/industry/banking/finance/banking/justice-srikrishna-report-indicts-chanda-kochhar-says-she-violated-banks-policies/articleshow/67758632.cms.

[v] Chanda Kochhar sacked by ICICI Bank over Videocon loan case, asked to return bonuses, India Today (Jan. 30, 2019), https://www.indiatoday.in/business/story/chanda-kochhar-icici-videocon-loan-case-1442831-2019-01-30.

[vi] Id.

[vii] CBI registers case against Chanda Kochhar: All you need to know about fresh FIR, India Today (Jan. 24, 2019), https://www.indiatoday.in/business/story/cbi-registers-case-against-chanda-kochhar-all-you-need-to-know-about-fresh-fir-1438721-2019-01-24.

[viii] In Re: Issuance of Optionally Fully Convertible Debentures by Sahara India Real Estate Corporation Limited (Now Known as Sahara Commodity Services Corporation Limited) and Sahara Housing Investment Corporation Limited, MANU/SB/0045/2011, ¶27.11, https://www.sebi.gov.in/sebi_data/attachdocs/1310556344733.pdf.

[ix] Krishna Kumar Birla vs. Rajendra Singh Lodha and Ors., (2008) 4 SCC 300, https://www.sci.gov.in/jonew/judis/31027.pdf.

This article has been written by Aditya Anand, a 3rd year B.A. LL.B. (Hons.) student at National Law University, Delhi.

Towards the end of 2017, Reuters published a news report [1] in which it claimed that three days before Dr, Reddy’s Laboratories Ltd announced quarterly results, a message was circulated on the popular social media platform, ‘WhatsApp’, that the company would be going to report a loss which proved to be true. The report further named at least 12 more companies in which prescient numbers about them, related to their financial results, and due for announcement were shared on some of the WhatsApp groups by the users. These 12 companies involved names like – HDFC Bank, Axis Bank, Tata Steel, Mahindra Holidays, to name a few [2].

This lead to Securities and Exchange Board of India conducting investigation and led to a search, being conducted on 31 brokers and analysts in Mumbai, Delhi and Bengaluru, by a team of 70 SEBI officials and they ended up seizing devices such as mobiles, laptops, computers and other documents with the intention of accessing the WhatsApp and other social media accounts, as well as the data that was stored in these devices. [3]

This was done because the leakage of the figures which were not yet declared by the Company, falls under the category of ‘unpublished price sensitive information’ and the same is in contravention of Regulation 3 of the Prohibition of Insider Trading Regulations, 2015 which states that no insider shall communicate, provide or allow access to any unpublished price sensitive information, relating to a company or its securities unless it is in furtherance of legitimate purposes, performance of duties or for discharging of legal obligations. [4]

Further Section 12A (d) and (e) of the SEBI Act [5] bars any person from indulging in insider trading and dealing with securities while being in possession of material or non-public information and also bars the person from communicating such information.

Thereby, SEBI conducted an inquiry in this matter and even asked WhatsApp to share the specific data [6], which was required in order to trace the origin of such messages that allegedly contained the UPSI and was crucial for the market regulator, in order to further its investigation but WhatsApp declined the same, citing its privacy policy [7]. This entire incident was labelled as the ‘WhatsApp Leak Case’, but the real question that arises is whether this seizure of smart-phones can be justified or not, especially with the emerging jurisprudence of data security and privacy.

The seizure of smart phones can be termed as a violation of the Fundamental Rights granted under Part III of the Constitution. Many experts argue that there is an urgent need to ensure the privacy is accorded and respected of the citizens especially in this new and ever-growing era of cyberspace. The same has been opined by the Supreme Court in the case of Justice K.S. Puttaswamy (retd) and Anr v Union of India [8] where the court opined that, ‘The existence of zones of privacy is felt instinctively by all civilized people, without exception. The best evidence for this proposition lies in the panoply of activities through which we all express claims to privacy in our daily lives. We lock our doors, clothe our bodies and set passwords to our computers and phones to signal that we intend for our places, persons and virtual lives to be private.’ [9] In the same case, the Supreme Court held that the right to privacy is protected as an intrinsic part of the right to life and personal liberty under Article 21 [10] and is guaranteed by the Part III of the Indian Constitution.

Various legal systems around the world have accorded the attempt to extract such passwords or to gain access to the personal devices as an invasion of privacy and the United States Supreme Court in the case of Riley v California [11] held that ‘a cell phone is unlike a physical lock box and is in a sense the extension of the person to whom it belongs as it is a vast repository of information pertaining to its owner [12].’ Therefore in the light of emerging jurisprudence relating to privacy, SEBI’s power to seize smart-phones and other electronic devices can be questioned.

In addition to that in the case of Indian Council of Investors v Union of India, [13] SEBI had asked for the Call Data Records and the details related to the location of the towers from the telecom service providers in order to investigate a matter. The same was challenged but however allowed by the Bombay High Court with a caveat that such a power should be used ‘carefully’ [14] as it can lead to a situation where in the  privacy of a citizen can be compromised and stated that certain safeguards should be there in order to ensure the same.

Talking about another Constitutional Law facet, Article 20 (3) [15] guarantees protection against self-incrimination which basically means that no man, not even the accused can be compelled to answer any question, which may tend to prove him guilty of any crime, he is accused of. The concept of ‘personal knowledge’ was introduced in the case of State of Bombay v Kathi Kalu Oghad [16] and applying the same concept, it can be asserted that passwords, pass-codes etc. required in order to unlock such devices can be said to be a part of the personal knowledge of any given person, which he or she is not required to divulge during the course of investigation.

But the real issue that exists is the absence of proper statutory framework, for the purpose of regulating the conduct of the social media platforms as observed by the Delhi High Court in the case of Karmanya Singh Sareen and Ors v Union of India [17]. Later the Supreme Court also constituted a committee of experts in the same case, under the leadership of Justice B.N. Srikrishna, to identify key data protection issues in India and to recommend methods for addressing the same. It submitted the report in the month of August 2018 and stated that collection, recording, analysis, disclosure of personal data should be done only for ‘clear, specific and lawful’ purposes [18], which was a vague standard to set.

In conclusion, it can be said that the policy makers should understand that the interest of the market regulator as well as the individuals should be balanced and if SEBI succeeds in extracting the information from WhatsApp or the cell phones, then it would lead to an extremely problematic jurisprudence in the data security realm. SEBI has the power to protect the interests of investors, backed by Section 11 of the SEBI Act [19] but at the same time, it has to form its Regulations in such a way that they are not in contravention to the Constitutional safeguards.

ENDNOTES

[1] Rafael Nam, ‘Prescient Messages About Indian Companies Circulate in WhatsApp Groups’ Reuters <https://in.reuters.com/article/india-whatsapp/exclusive-prescient-messages-about-indian-companies-circulate-in-whatsapp-groups-idINKBN1DG0IQ > Last Visited on 24 March 2019

[2] ibid.

[3] Jayshree P.Upadhyay, ‘SEBI Conducts searches on 31 Brokers’ LiveMint <https://www.livemint.com/Money/8jq7gLVsDMeF9Cku5OUYQO/Sebi-conducts-searches-on-31-stockbrokers-in-WhatsApp-leak-c.html > Last Visited on 24 March 2019.

[4] Prohibition of Insider Trading Regulations, 2015, Regulation 3.

[5] Securities and Exchange Board of India Act, 1992.

[6] Pavan Burugula, ‘WhatsApp Refuses to Share User-Specific Data With SEBI’ Business Standard <https://www.business-standard.com/article/technology/whatsapp-refuses-to-share-user-specific-data-with-sebi-118030100069_1.html>  Last Visited on 24 March 2019.

[7] ibid.

[8] Justice K. S. Puttaswamy (Retd.) and Anr. vs Union Of India And Ors., (2017) 10 SCC 1 (India).

[9] ibid.

[10] Constitution of India, Article 21.

[11] Riley v. California, 134 S. Ct. 2473, 2477 (2014) (U.S.).

[12] ibid.

[13] Indian Council of Investors v. Union of India & Ors. ,(2014) 123 CLA 267 (India).

[14] ibid.

[15] Constitution of India, Art. 20 (3).

[16] State of Bombay v. Kathi Kalu Oghad, 1962 SCR (3) 10 (India).

[17] Karmanya Singh Sareen And Anr. v. Union Of India, (2017) SCC Online SC 434 (India).

[18] Sushovan Sircar & Vakasha Sachdev , ‘Key Highlights From Srikrishna Committee Report on Data Protection’ The Quint <https://www.thequint.com/news/india/key-highlights-from-srikrishna-committee-report-on-data-protection > Last Accessed on 24 March 2019.

[19] Securities and Exchange Board of India Act, 1992.

This article has been written by Soham Gurjar, 4^th year B.A. LL.B (Hons.) student at Institute of Law, Nirma University.

Case: M/s Lyca Productions v J. Manimaran and Ors, on 22^nd Feb 2018 Madras High Court, Division Bench

INTRODUCTION

Films are regarded as medium of communication to the mass population and it appeals to people with the suitable title. This mass communication is remembered and recognized through its title, therefore it is pertinent to explore the legal protection to movie titles. This analysis deals with the subject that “Are movie titles entitled to be protected under Copyright Law?”

Copyright is granted on the ground of originality to literary and artistic work but the question arises that ‘can movie titles be construed under section 13 of the copyright act’. This Particular issue is discussed in the recent Madras High Court Judgment of M/s Lyca Productions v J. Manimaran and Ors [1], on 22^nd Feb 2018.

FACTS

The original Plaintiff is the owner of small production house and was the producer of the film named KARU, additionally the plaintiff was also the member of the filmmaker association famously known as “Guild” in state of Tamil Nadu. The plaintiff registered the title with guild in 2011 and as members of the guild; people are contractually bound to follow the rules of the Guild.

In later time plaintiff learnt that the movie named as “LYCAVIN KARU” was also registered with the guild. The producers (Original defendant) of this movie was also the member of the Guild and as per the rules of the guild no person can register the movie with same title which is already been registered.

Aggrieved by the act of the defendant, plaintiff approached Madras High Court praying the permanent injunction for the infringement for copyright of the movie title and also seeking the declaration that plaintiff is registered holder of the title.

CONTENTIONS

Plaintiff argued the case on two limbs

A. The title of the film is protected under the copyright Act.

B. Rules of the Guild with which both plaintiff and defendant are registered, prohibits the original defendant to register the title similar to the already registered title.  

Single Judge Bench has favoured the original plaintiff and granted injunction. The defendant challenged the order and judgment before the division bench.

JUDGEMENT

On the premise the first limb of the argument the court held that the section 13 of copyright act does not give protection alone to title of the film as the words used in section 13 are original literary work and cinematographic film, which does not protect the title alone but the movie as whole. In addition, copyright cannot be granted unless it is proved that the it is original work.  In this case, the word “KARU” is commonly used word, therefore no copyright can be given to create monopoly over the use of common word.

And on the second limb the court held that the rules prescribed by the guild is only Binding on its members to regulated the film industry These rules do not hold any value in the court. Moreover, the registration of title with guild is not a trade practice, owing to which it cannot grant legal safeguard to the tiles of the film. These societies or associations are not registered under section 33 of the Copyright Act as copyright societies.

CASES RELIED ON

In this case of Krishika Lulla and others v. Shyam Vithalrao Devkatta [2] Hon’ble Supreme Court held that there has to be some element of originality in the title of work otherwise it won’t be protected under the protection of Copyright Act. In this case, the Supreme Court has discussed the applicability of section 13 of Copyright Act regarding the protection of movie titles.

RELEVANT JUDGEMENTS

1. Biswroop Roy Choudhary v. Karan Johar [3]

Delhi High Court denied the application of the infringement of the title “Kabhi Alvida Naa Kehna” by stating that the phrase is of common parlance therefore could not used exclusively by anyone. In this case applicant has registered the title with trademark authority, which was not done by the defendant.

2. Kanungo Media (P) Ltd. v. RGV Film Factory [4]

In this particular case, the court has established the ground rule even a single title can acquire trademark protection if it satisfy the requirement. Two categories that were recognized are title of single film and tile of the film series. Title of film series can acquire the protection of trademark but when it come single film title, the applicant has onus to prove that title has acquired secondary meaning.

ANALYSIS

The Hon’ble court while adjudicating this case has noted that the conjoint reading section 13 and 16 of Copyright Act specifically lays down the protection to visual recording, sound recording to a cinematograph film etc. but not to the movie title alone.  Protection of copyright cannot be extended to movie titles, which comprises of common words.

In this particular case, the Hon’ble Court held that there is no legal framework for the proper protection of movie titles.  This seems to be major concern as movie titles are often hold a lot of economic value in the film industry. However, there may not be copyright protection available to the Movie titles but it can protected under trademark though onus of proving the phrase to be of secondary meaning is itself herculean task.

Movie title can be protected under trademark law, one of the example is Sholay movie which has acquired the honor among movies, owing to which Delhi High Court has passed injunction order against the defendant. As a result, the applicant movie title was changed from ‘Ram Gopal Verma Ki Sholay’ to ‘Ram Gopal Verma Ki Aag’.

CONCLUSION

Madras high court has rightly arrived at the decision that the copyright protection cannot be given to movie title alone under section 13 of the Copyright Act. Section 13 does not directly prescribe the protection of the titles of the movies. It is pertinent to note that the court has interpreted the word the cinematographic film as in whole film including the title. That means no copyright to title alone.

In my opinion, the regulatory body of IP protection should recognize the registration of film titles with association or guild because the process of registration of title is recognized in film industry to co-operate with each other and save the interest of contracting members. If we go by the law not much protection is given to the titles under IP protection as title alone is not covered under copyright law unless it is original, also the trademark protection has also set up very standard in order to register the title under trademark law.

ENDNOTES

[1] M/s Lyca Productions v J. Manimaran and Ors, O.S.A.No.63 of 2018 and CMP.Nos.3492 & 3493 of 2018.

[2] Krishika Lulla & Ors. vs Shyam Vithalrao Devkatta & Anr. [Criminal Appeal No. 258 & 259 of 2013 (SC decided this case on 15.10.2015).

[3] Biswaroop Roy Choudhary vs Karan Johar, 131 (2006) DLT 458.

[4] Kanungo Media (P) Ltd. v. RGV Film Factory, 138 (2007) DLT 312.

This article has been written by Isha Choudhury, a 4th year student of Amity Law School, Noida.

Before any combination comes into being they require a statutory clearance from the competent authority (CCI in case of India) before commencing their business, but any combination which begins operation without the statutory ratification is said to be jumping the gun. However, gun jumping is a practice which doesn’t find a legal definition in any of the acts.

Section 6 of the Competition Act, 2002 provides for proper guidelines in relation to the commencement of the business and the deadline for submission of all the required credentials after approval of the proposal. It is important to note that according to the section 6 (2) of the act, no business shall commence its operation until 210 days have passed from the day on which the notice has been given to the CCI or the CCI has passed orders in relation to such notice, whichever is earlier. Non-compliance with these regulations of the act can lead to incurring a huge cost on the enterprises; the penalty for violating these rules can be imposing around 1% of the total turnover or assets of such an arrangement. However, gun-jumping in India has to be regulated because there is a wide ground of reasoning as to why do some enterprises jump the gun. Heavy scrutiny is to be applied while examining cases in proximity to filing norms and specifically, gun jumping.

THE INDIAN PERSPECTIVE

Talking about combinations in India the first case that comes into anyone’s mind who is familiar with the provisions of Competition Act, is definitely the case of Etihad Airways and Jet Airways [1], a landmark merger which happened on a large scale and also is the most highlighted case when we speak of gun jumping in India. Etihad is a UAE based, fully owned and operated by government airlines and on the other hand Jet Airways is a low cost airline, which caters to the international passengers. They had decided to merge their services, and acquire a joint control over the assets and operations of the Jet Airways. CCI had to analyze the AAEC (Appreciable Adverse Effect on Competition) this combination had in the market. So determining the ‘control’ , ‘effect’ and ‘market’ had been the prime concern for the CCI to look into [2]. This transaction wasn’t as smooth as the papers or the books tell us, ahead of the ratification of the combination, Etihad had been slapped with a fine of INR 1 crore [3] under the Section 43A for violating the provisions of the Competition Act, this occurred because before the CCI gave a green signal to this combination Etihad had invested in buying three slots at Heathrow Airport, London for Jet Airways by entering into a sale and lease back agreement without notifying the CCI about agreement [4]. However the said order had no bearing on the previous approval of the Jet-Etihad deal by CCI.

CCI as a body works quite diligently towards the regulation front, though it is constantly slapped by minority stakeholders in the pretext of approval of any big shot merger. Even after this case, gun-jumping didn’t come across as a crucial issue to be answered till a few more instances and most particularly the Thomas Cook & Sterling Resort Combination Case [5]. Thomas Cook (India) Limited (TCIL), Thomas Cook Insurance Services (India) Limited (TCISIL) and Sterling Holiday Resorts (India) Limited (SHRIL) had entered into a composite scheme of arrangement and amalgamation wherein SHRIL would be transferred to TCISIL and the residual business will be absorbed into TCIL. While assessing this combination CCI noticed that the ‘market purchases’ which constituted to be a part of the said combination had already been consummated prior to the filing of the notification [6]. All the transactions which formed a part of this arrangement were of inter-dependent nature and no function related to the same could be carried out by the parties, hence this amounted to gun-jumping. The Supreme Court it ruled out in its judgment that ‘for ensuring the compliance with the requirements of the act its open to consider whether the parties transaction was an individual transaction or a part of the whole transaction’ [8]. Pertaining to the same, Thomas Cook had been fined with a whopping INR 1 crore. This case is an highlighted case in gun-jumping because it ruled out that it is important to comply with the provisions mentioned in the Competition Act irrespective of the fact whether the combination in question in question raise any anti-competitive concern or not.

COMPARATIVE ANALYSIS OF EUROPEAN UNION, USA & CCI IN REGARD TO GUN JUMPING

Gun Jumping is a practice which is not confined to a specific statutory provision or a geographical area. It finds its place in USA, EU and India as well. Though the laws for gun jumping are more stringent in the former countries as compared to Indian laws for gun jumping. Though, a significant thing to note here is, like India even the American and European legislations don’t expressly define gun jumping. Hence it won’t be wrong to say that gun jumping is not a concept but a practice.

In the USA there a provisions related to the filing norms and regulations related to the combination, are mentioned in the Sherman Act of 1890 and the HSR Act, 1976 (Hart–Scott–Rodino Antitrust Improvements Act of 1976) which has provisions corresponding to that of section 6 (2) and 6 (2A) of the Competition Act, 2002. For any combination to be completed, both parties must file a “notification and report form” with the Federal Trade Commission and the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice. The parties who have then filed the notification and report form then must wait for 30 days, and during this stipulated time regulatory agencies may request further information or furnishing of additional documentation in order to assess that the proposed merger is in violation of the anti-trust laws or if they are anti-competitive in nature [8]. The HSR Act places a due emphasis on the term ‘control’ as well, in simpler terms control basically means the amount of influence the firm would have in the market hence ‘controlling’ the market forces and competitors. Hence it’s important for the HSR Act regulators to curb any such practice which may cause interference in the market. The penalty provisions have also been increased now by the US Federal Trade Commission which was earlier at $11,000, and now its $16,000 per day. The HSR filings are important for every firm that plans to come together, and the firms are not only filed due to non-compliance or delay, the penalties maybe even get attracted if the full documentation or the required credentials are not furnished to the authorities [9]. USA has a history of penalties against firms which have failed to comply with the HSR guidelines. In 2015, Barry Diller had to furnish a fine of $720,000 due failure to file relating to share acquisition of Coca-Cola amongst many others [10].

In European Union, the procedure of filing for a combination has been laid down to the companies in an expressive form in the EC merger regulations under Article 7(1). The EU provides thresholds for the mergers that it would look into, along with a three stage procedure of filing and understanding the nature and control of the proposed merger. When EU is notified about the combination, it has 25 days to analyze during the phase one which is investigation and mostly 90% of the cases are cleared in this stage. If the merger hasn’t been passed unconditionally or passed with remedies, the EU does an in-depth research on the repercussions the proposed merger will bear on the market. During this phase, the EU has 90 days to furnish its findings regarding the same. Finally, the EU may unconditionally pass the merger, or pass the merger in respect to the suggested remedies or prohibit the merger in Toto [11]. Most recently, Altice, a multination telecommunications company had been fined €125 million for jumping the gun by controlling PT Portugal before obtaining clearance from the commission [12].

In India, when we draw a parallel with the laws in Europe and USA. India is much similar to that of USA in question of regulations regarding the merger control and gun jumping. In India for any combination to come in existence they have to approach the CCI, which then gives them a 30 day period for looking into the matter and examining the effect a proposed merger might have in the market and additionally no business can commence till 210 days have passed from the day notice has been given to the CCI. When compared to the EU, which gets 25 days and 90 days to finalize everything in regard of the merger, and imposes a heavy penalty of 10% of the aggregate turnover. India only imposes a fine of 1% of the aggregate turnover under Section 43A on non-furnishing of information on combinations. USA in the recent years has gotten stricter with the penalty system when they increased the per day fine to $16,000 where as in India it is 1 Lakh ($1,454)  a day during which such failure continues subject to a maximum of rupees 1 Crore. USA imposes a penalty which is 16 folds more than that of India. The CCI has identified the problem of gun-jumping and has issued a competition compliance manual in reference for planning and implementation of a transaction, which aims to reduce the instances of gun-jumping in our country, and for better planning of a transaction.

CONCLUSION

In regard to gun-jumping the penalty under the Indian Competition Law regime cannot be considered to be effectively taxing, and therefore an enhanced penalty if imposed could ensure more transparency in transactions and also better the filing practices thereby improving merger control regulations in India.

ENDNOTES

[1] Notice u/s 6 (2) of the Competition Act, 2002 given by: (i) Etihad Airways PJSC; and (ii) Jet Airways (India) Limited , Combination Registration No. C-2013/05/122 , COMPETITION COMMISSION OF INDIA (Nov 11, 2013)  https://www.cci.gov.in/sites/default/files/C-2013-05-122%20Order%20121113.pdf.

[2] Akansha Mehta, Jet-Etihad Deal and its Competitive Concerns, iPleaders, (March 23, 2014)  https://blog.ipleaders.in/jet-etihad-deal-and-its-competitive-concerns/

[3] Order under Section 43A of the Competition Act, 2002 , Combination Registration No. C-2013/05/122,  COMPETITION COMMISSION OF INDIA, (Dec 19, 2013) https://www.cci.gov.in/sites/default/files/faq/Order%20191213.pdf

[4] ET Bureau, CCI slaps Rs 1 Crore fine on Etihad in Jet Airways deal, THE E.T., (Dec 20, 2013)  https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/cci-slaps-rs-1-crore-fine-on-etihad-in-jet-airways-deal/articleshow/27661027.cms

[5] Order under Section 43A of the Competition Act, 2002 (‘Act’), Combination Registration No. C-2014/02/153, COMPETITION COMMISSION OF INDIA (May 25, 2014)  https://www.cci.gov.in/sites/default/files/C-2014-02-153R.pdf

[6] Ajay Goel & Subodh Prasad Deo, Composite Transactions and market purchases: Supreme Court upholds penalty for gun jumping in Thomas Cook and SCM Soilfert cases, COMPETITION POLICY INTERNATIONAL, (May 17, 2018)https://www.competitionpolicyinternational.com/composite-transactions-and-market-purchases-supreme-court-upholds-penalty-for-gun-jumping-in-thomas-cook-and-scm-soilfert-cases/

[7] Competition Commission of India vs. Thomas Cook (India) Ltd. , AIR 2015 SC 13578

[8] Hart–Scott–Rodino Antitrust Improvements Act 15 USC 1311 (1976)

[9] Mark W. Ryan & Ors, FTC Increases Civil Penalty Amounts for Violations of HSR Act and Other Laws, MAYER BROWN, (July 11, 2016) https://www.mayerbrown.com/ftc-increases-civil-penalty-amounts-for-violations-of-hsr-act-and-other-laws-07-11-2016/

[10] Emily Jane Fox, Diller hit with $480,000 penalty in Coke stock purchase, CNN MONEY, (July 2, 2013: 1:08 PM ET) http://money.cnn.com/2013/07/02/news/companies/barry-diller-coca-cola/index.html

[11] Council Regulation (EC) No 139/2004, Merger Control Procedures, European Union (2004) http://ec.europa.eu/competition/mergers/procedures_en.html

[12] European Commission Press Release, Mergers: Commission fines Altice €125 million for breaching EU rules and controlling PT Portugal before obtaining merger approval, EUROPEAN COMMISSION (Apr 24, 2018) http://europa.eu/rapid/press-release_IP-18-3522_en.htm

This article has been written by Kangan Pasricha and Shweta Raju, 5th year law students of University of Mumbai, School of Law, Thane Sub-campus.

“Just as modern mass production requires the standardisation of commodities, so the social process requires standardisation of man, and this standardisation is called equality.”

Erich Fromm

Standard setting is a procedure involving intended compliance which provides for common and repeated use of rules, guidelines or characteristics for products or related process and production methods. It includes or deals exclusively with terminology, symbols, packaging, marking or labelling requirements as applied to a product, process or production method which often promulgates competition for the welfare of consumers. Standards have a constructive effect on the economy as long as they encourage the expansion of new markets and improve supply conditions. Standards tend to upsurge competition and allow lower output and sales costs, consequently, boost the economy to advance. Existence of standards in an industry negates a situation wherein a buyer is secluded with a single seller and also propagates a reputation of being an ethically qualified industry.

In India there are numerous organisations engaged in formulating and implementing set of standards pertaining to variety of sectors which augment competition in the Indian markets.The fundamental function of these organisations involves evolving, co-ordinating, amending, circulating, reissuing, interpreting, or otherwise invent these standards to assist the affected consumers or adopters. Though most standards are voluntary, they become a requisite only when adopted by regulators as legal requirements in a particular domain and thereupon, competition law comes into effect. Even though standard setting can have significant welfare and efficiency enhancing effects, it is in these situations where competing firms might participate in setting standards which gives rise to concerns regarding the veil behind the effect of standard that may be anti-competitive.Thereby, Standard setting organisations have to ensure competition law is conformed with, in order to enable markets to operate proficiently and competitively.

The procedures and operations of Standard Setting Organisations (SSO) vary from sector to sector. Standards for a new product or service are typically set by representatives of companies producing or selling a particular type of product which invariably leads to confinement of competition.The representatives suggest various probable features or characteristics for the standard and then vote on proposed standards. Subsequently, standard setting may lead to collusive outcomes, as after the fortitude of a standard, considered “ex post,” manufacturers can then produce and/or sell devices that obey to the set standard,. Competition rules usually do not allow companies to discuss and agree the technical developments of an industry amongst themselves, but discussions of standard setting procedures defy the rules. Thus, to relish the fruits of standards, interests of standard adopters needs to be shielded. Another aspect of Standard Setting Organisations that appeals the provisions of Competition law are Standard Essential Patents (SEPs).They are patents that are essential for attaining interoperability between devices and thus, require SEP holders to issue license to the implementers which are to be on Fair, Reasonable and Non-discriminatory (FRAND) terms.

The focal theme of Competition law is to police such anti-competitive conducts present in the market which harnesses consumer welfare by limiting innovation and suppressing consumer choice. Anti-competitive effect resulted from the standard setting excludes the current and potential competitors from the market by effectively raising entry barriers to a market or costs of a firm, via the adoption of a standard. The Competition Commission of India (CCI), which is regarded as a competition regulator, also envisions to curb anti-competitive conduct adopted by corporations. This can be evidenced by a string of fines imposed upon the companies who misuse their power in the market. One such misuse of power is the “Abuse of Dominant Position” by the companies in market. Under the provisions of the Act, dominance refers to the ability of an enterprise to operate independently of market forces, and its position of strength, which empowers it to distress competitors or consumers or the relevant market in its favour.Abuse of a dominant position transpires when a dominant firm in a market, or dominant group of firms, engage in anti- competitive business practices to disregard a competitor or to dissuade future entry of new competitors; as a result, competition is vetoed or narrowed remarkably, thereby emboldening its position in the market. Nevertheless, it is not dominance that is menacing per se, it is abuse of such dominance that is the target of the radar.

Investigation of any complaint vis-à-vis abuse of dominance, spheres around the following three phases, inter alia,

1. Determination of a relevant market for the matter in question
2. Evaluating the dominance of the said enterprise
3. Lastly, if dominant, whether it is abusing its position

CCI reviews the cases under S.19 (4) of the act which enunciates a detailed list of factors that the Commission shall deliberate upon while inquiring into any allegation of abuse of dominance. Few of which are: market share of the enterprise, size and resources of the enterprise, size and importance of the competitors, dependence of consumers, entry barriers, social obligations and costs in the relevant geographic and product market. If the Commission is of the opinion that there exists a prima facie case of Abuse of Dominance it shall in such a case, direct for an investigation conducted by the Director General and after inquiry pass all or any of the orders mentioned under S. 27 of the Act. On passing of an order under above-mentioned circumstances, a person may move an application to Competition Appellate Tribunal (COMPAT) established under S. 53N of the act to adjudicate upon claim for compensation that may arise from the findings of the Commission within 60 days of the receipt of order.The Commission may temporarily kerb any party, during the pendency of the proceedings under S. 33 of this Act, from continuation of the alleged offensive act till the Commission deems fit or pass any order as defined under S. 27 of the act.

In Shri Ravindra Badgaiyan vs M/S Bureau of Indian Standards (Competition Commission Case No.71/2010)1, the informant was a manufacturer of a vermicompost bed. The informant alleged that BIS had set a certification standard for the product and therefore, no product could be introduced in the market without the set mandatory certification thereby, accused the OP of abusing its dominant position. However, CCI contended otherwise and further highlighted on the option to opt for and manufacture certified or non-certified products.

Likewise, while ascertaining whether M/s Telefonaktiebolaget LM Ericsson was dominant, the Commission in Micromax Infomatics Ltd. vs M/s Telefonaktiebolaget LM Ericsson (Competition Commission Case No. 50/2013)2, trailed along the above-mentioned procedure pertaining to Abuse of Dominance and opined that the opponent wasprima facie abusing its dominant position according to S. 4 of the Act. In the instant case, the informant had alleged that the opposite party was abusing its position in the Indian markets by charging exorbitant royalty on the sale of the entire mobile sold by the informant and not the technology bought under the standard essential patents vis-à-vis GSM technology. Abuse of dominance was held in the light of the above-mentioned allegation by the Commission as it was not in the spirit of competition to dictate terms of agreement and act arbitrarily which curb the right of a consumer to choose and constrain a seller from selling a product.

Hence, as is above-mentioned, standard setting even though may be voluntary in nature, in occurrences when they must be adopted, power bestowed upon patent holders or representatives of manufactures acting during setting of standards may be against the fundamental intent of competition rules.

CONCLUSION

In denouement, standards are pivotal for furthering competition. Standard Setting Organisations enable a provision to attain certified quality standards, for the betterment of consumer welfare. Nevertheless, as regards to SEPs it is indicative that technological competency raises the risk that providers of certificates of conformity will have market power which has in some instances led to abuse of dominant position.Bearing the above in mind, enterprises present in the market have their own standard setting procedures wherein representatives set the standards thereby, contravene the competition policy.To avoid such an embargo, systematic considerations should be reserved to scrutinise the procedures. It is thus, ideal to interpret the set standards in their strict sense and rightful intention for fineness of a fair and justified competition.

ENDNOTES

[1] https://www.cci.gov.in/sites/default/files/OrderRavindra110511_0.pdf

[2] https://www.cci.gov.in/502013

This article has been written by Ayushi Saumya, a 3rd year B.A. LL.B (Hons.) student at Symbiosis Law School, Pune.

INTRODUCTION

A landmark development in the Insolvency and Bankruptcy Code, 2016 (“IBC”) was witnessed when the Supreme Court upheld the constitutionality of the Code in its recent judgment in Swiss Ribbons Pvt. Ltd. v. Union of India [1] on  25^th  January 2019. The Swiss Ribbons decision is undoubtedly a significant decision since the court pronounced this judgment amidst a batch of ten writ petitions and one special leave petition challenging the constitutional validity of the Code. The judgment endorsed the IBC right from its inception by dealing with the pre-existing state of insolvency law in India and the need for the enactment of the IBC. The Apex Court then analysed the objectives of the Code which was earlier interpreted in its previous decision in Innoventive Industries Ltd. v. ICICI Bank and Anr., [2] and emphasised on the fact that the primary focus of the legislation is to ensure revival of the corporate debtor and not just be a mere recovery legislation for creditors. Furthermore, the court brought a welcome insight and dealt with the approach to treat the IBC as an economic legislation and justified that legislation in economic matters is based on experimentation since there is no established equation to solve an economic problem hence it is unreasonable to expect the legislation to cover all possible abuses and if the same is not done, to strike it down as being invalid. In this article, the author is going to primarily focus on some substantive issues that arose in the case and has made sincere endeavours to provide a detailed analysis of those issues and the court’s ruling on the same.

DISTINCTION BETWEEN OPERATIONAL AND FINANCIAL CREDITORS

One of the paramount issues raised was with respect to there not being a real difference between financial creditors and operational creditors since both give money to the corporate debtor either in terms of loans or goods and services. Furthermore, it was contended that there is an apparent discrimination against operational creditors by not giving them a right to vote in the Committee of Creditors (‘CoC’) and by making it mandatory for the operational creditors to establish default to initiate the corporate insolvency resolution process (“CIRP”) whereas such requirement has been done away with for financial creditors. Thus, the same was challenged to be discriminatory under Article 14 of the Constitution.

THE CONSTITUTIONAL VALIDITY OF SECTION 29A

The Court dealt with this contention by placing relevance on ‘intelligible differentia’ which if present while distinguishing between the creditors, does not lead to any discrimination. As per the court, clear intelligible differentia exists between operational creditors and financial creditors in various facets like their nature of debt, underlying contract, ability to establish default, financial creditors involvement in assessing the viability of the corporate debtor, operational creditors being more in number etc. and hence “classification between financial creditor and operational creditor is neither discriminatory, nor arbitrary, nor violative of Article 14 of the Constitution of India”. Further, addressing the issue of discrimination against operational creditors, the court justified the same by raising the fact that financial creditors being involved in the arena of finance are better equipped with understanding the viability of the corporate debtor and unlike operational creditors, they are not just concerned with recovery. To further substantiate on this, the court laid down the fact that the rights of the operational creditors are anyway taken into consideration on a priority basis by ensuring that they are paid the liquidation value. Therefore, keeping the above points in mind, the Supreme Court resolved the issue of classification between operational creditors and financial creditors. The court managed to establish the difference between the two creditors in terms of their differential rights under the Code but the judgment was still not very clear in regard to their differentiation when it comes to recovery. Instead of constantly focusing on the equal treatment provided to operational creditors, the court should have instead elaborated more upon their differences.

THE CONSTITUTIONAL VALIDITY OF SECTION 29A

Section 29A of the IBC was inserted by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 with an objective of bringing about effective corporate governance and to achieve the same, the section incorporates a list of persons who will be ineligible to be resolution applicants. A plethora of contentions were raised with respect to Section 29A namely:

1. The first issue that arose was that due to the retrospective application of Section 29A, promoters were not allowed to participate in the recovery process and this was a clear violation of their ‘vested right’. The Supreme Court has already elucidated in depth regarding this issue in its decision in Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta [3] and concluded that promoters in the first place possess no vested right to be considered as resolution applicants. Therefore, this issue was done away with by the court by relying on the Arcelor judgment.
2. The second issue was that putting a ban on all promoters altogether without considering whether they have committed ‘malfeasance’ was equivalent to treating unequals as equals. This contention was rejected by the Supreme Court on the grounds that there are a variety of persons under the section and being a criminal is no ground to be restricted from the resolution process.
3. Another issue that arose was in relation to the one year period provided for classification of an account as a non-performing asset (“NPA”) as being arbitrary. The court rejected this contention on the basis that there is no fault with this policy since it is a legislative policy decided upon by the RBI and moreover, an account only becomes an NPA once the one year period and three months grace period expire, therefore, there is no fault with the time period.
4. Lastly, the ambit of Section 29A was alleged to be way too broad since it has extended the restriction to even the relatives of the promoter. The court brought clarity to this issue by noting that Section 29A was to be applicable only when “such a person is connected with the business of the activity of the resolution applicant”.

ISSUES w.r.t. SECTION 12A

Section 12A of the IBC permits a resolution applicant to withdraw an insolvency proceeding provided it is approved by a 90 percent voting share of the CoC. There were contentions raised that this provision in unreasonable due to the high threshold set which will unnecessarily cause delay and also gives arbitrary power to the CoC to reject settlements. The court justified the high threshold on the ground that insolvency is a collective proceeding thereby a proceeding in rem and all financial creditors need to contribute in taking the decision. Moreover, the CoC is not the final decision maker, if there is any arbitrariness found in their decision, the NCLT followed by the NCLAT can set aside such decision.

ISSUES w.r.t. ADMINISTRATION

The first issue raised was alleging that the selection committee which appoints members of the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) consisted of more bureaucrats than the judicial members which would result in unconstitutionality. The court provided clarification in this regard that the amendment to Section 412, Companies Act, 2013 had already addressed this issue and removed the discrepancy.

The second issue was the difficulties faced due to the bench of the NCLAT present only in New Delhi which also goes against the jurisprudence laid down in Madras Bar Association v. Union of India [4].To deal with this inadequacy, the Supreme Court directed the set-up of circuit benches of the NCLAT within 6 months from the date of the judgment.

Lastly, the administrative purview of the NCLT and the NCLAT under the Ministry of Corporate Affairs was held to be unconstitutional (as held in Madras Bar Association v. Union of India) [5] and therefore the court directed the shifting of administrative support to the Ministry of Law and Justice.

CONCLUSION

The Swiss Ribbon judgment upholding the constitutional validity of the IBC is definitely going to make a significant impact on the ease of doing business. The Supreme Court has, in this very well drafted judgment, given a very reasonable insight of upholding legislation dealing with economic matters and what was commendable was its approach of explaining the fall of the Lochner doctrine in the United States wherein economic legislations were consistently struck down by the US Supreme Court due to application of the ‘Due Process Clause’. The methodology adopted by the Apex Court to go in such depth of discussing the object and reasons behind the establishment of the Code and the pre-existing state of legislation before the Code was enacted, further contributed towards strengthening the stance of the court to move from strict interpretation mechanism to purposive interpretation mechanism for such legislation. The court while dealing with other aspects has given its support to information utilities under the Code and has also made it clear that the resolution professional strictly carries only administrative powers and not quasi-judicial powers. Undoubtedly, this judgment by the Supreme Court was the need of the hour to put to rest some of the much-disputed questions revolving around the provisions of the IBC.

ENDNOTES

[1] Swiss Ribbon Pvt. Ltd. V. Union of India, Writ Petition (Civil) No. 99 of 2018; https://www.sci.gov.in/supremecourt/2018/4653/4653_2018_Judgement_25-Jan-2019.pdf.

[2] Innoventive Industries Ltd. v. ICICI Bank and Anr., (2018) 1 SCC 407; https://www.sci.gov.in/supremecourt/2017/17291/17291_2017_Judgement_31-Aug-2017.pdf.

[3] Arcelor Mittal India Private Limited v. Satish Kumar Gupta, Civil Appeal No. 9402-9405 of 2018; https://www.sci.gov.in/supremecourt/2018/33945/33945_2018_Judgement_04-Oct-2018.pdf.

[4] Madras Bar Association v. Union of India, (2014) 10 SCC 1; http://d2.manupatra.in/ShowPDF.asp?flname=Madras_Bar_Association_vs_Union_of_India_UOI_25092s140880COM192227.pdf.

[5] Madras Bar Association v. Union of India, (2015) 8 SCC 583; http://d2.manupatra.in/ShowPDF.asp?flname=Madras_Bar_Association_vs_Union_of_India_UOI_and_OSC201515051522572534COM716965.pdf.