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This article has been written by Aparna Tiwari, a 3rd year B.A. LL.B (Hons.) student from Ram Manohar Lohia National Law University, Lucknow.

INTRODUCTION

The Competition Law was introduced in India with an aim to establish a healthy atmosphere for economic development. It has evolved through these years and the principles mentioned in the Competition Act, 2002, have been enunciated according to the best global interpretations. Ashok Chawla, former chairman, CCI, has said that “while the commission passes cease-and-desist orders, it is hoped that jurisprudence settles, and culture of the competition is imbibed by industry.” [1] If the business methods have to improve, the CCI must adopt the best practices when it comes to penalties and practices of compensation. However, one of the major areas where Indian Competition policy lags behind is the area concerning private enforcement of competition law.

PROCEDURE TO CLAIM COMPENSATION IN INDIA

Section 42A deals with an application of compensation before the Appellate Tribunal. It paves way for an order of recovery of compensation from an enterprise if any loss has occurred as a result of the said enterprise violating either any direction of the commission or contravening, without any reasonable ground, any decision of the commission. The Appellate Tribunal, under section 53N, is empowered to adjudicate on a claim for compensation but the task of the tribunal is to assess the quantum of compensation and not reassess whether there has been a violation or not.

These provisions do not allow an independent action of compensation by a private party for an alleged violation of competition law. Only when the commission says that a violation has occurred and passes appropriate orders in this regard, can a private party file an application. Therefore, it follows implicitly that public enforcement guides private enforcement.[2] The procedural route available for claiming compensation has proved to be ineffective and the act is failing in its objective of protecting the interests of consumers.

Since the inception of the competition law in India, there have been only two cases wherein the parties have claimed for damages. In the first case, the private damages litigation was subsequently withdrawn[3] Another case involving the National Stock Exchange and the MCX Stock Exchange[4] remains sub judice before the Supreme Court. Such a small number of cases indicate that the private enforcement regime in the act isn’t living up to the objective that it seeks to achieve and there are plenty of reasons for it.

INTERNATIONAL TRENDS

In the US, both the Sherman Act and the Clayton Act (section 4, 4A) lay down provisions enabling private parties to sue for treble damages. The European Union has also adopted the EU Damages Directive, 2014, to give effect to private enforcement. The sections 47A and 47B of Competition Act, 1998, U.K. ensure that private parties can approach the courts for redress of the losses suffered by them as a result of violations of competition law. Section 82 of Competition and Consumer Act, 2010 of Australia also provides a private enforcement mechanism and prescribes a time limitation of six years to bring the action. In Courage Ltd. v. Crehan[5], it was held that for Article 81 of the treaty to practically work in its full vigor, it is essential to be open to a claim of damages. Thus, the need to provide for a sound mechanism to sue for damages has been acknowledged worldwide.

FALLACIES IN THE INDIAN REGIME

Firstly, neither does the Competition Act, 2002 nor did its predecessor, the MRTP Act, 1969, prescribe any time limitation for filing an application for recovery of compensation. The authorities, therefore, follow the ‘doctrine of laches.’[6] This doctrine envisages a general rule that if a claim is to be made, it has to be made within a reasonable period of time. It has been left on the courts to decide the reasonable time depending upon the facts and circumstances of each case. This makes the provision redundant, less effective and uncertain.

Secondly, the process to claim damages in India is slow and takes a lot of years to ripen. The Supreme Court has held that the proceedings before the commission must be completed ‘most expeditiously’[7] but practically; this is proving to be a herculean task. The lack of economic incentives and the court fees’ amounts, together discourage the private parties to pursue the litigation. Our system does not even allow the contingent fees arrangements so that the claimant may at least not worry about the stupendous amounts of fees of their lawyers. In the U.S., if the damages claims are proven, the violators have to pay the treble damages. Thus, public enforcement, which tends to be highly selective is supplemented by private enforcement which augments the likelihood of a violator being brought to book and pay triple the amount of damages and thereby, discouraging illegal conduct.[8]

The Indian scheme, however, ensures that the compensation shall be given after much deliberations and possible deductions. This adds to the misery of the consumers as the compensation isn’t viable given the costs incurred in earning it. The NCLAT, which is the appellate tribunal for competition law, is comprised of the judicial and technical members.[9] The inclusion of more economic experts will also help in the correct quantification of the damages in the claims and such a step will inspire trust in the judgment of the tribunal in calculating the damages amount. This way the consumers may be able to get at least what they rightfully deserve for the losses suffered, if not more.

Thirdly, India allows the violators to take the ‘Passing-on Defence.’ If a party has mitigated his losses by passing it on to the next consumer, he shall not be liable for compensation. This impairs the efficacious administration of not only the damages scheme but also of the law itself. At times, the ultimate consumer may have little interest in bringing the suit for damages and the violators are at liberty to bear the fruits of their illegal conduct. The U.S. Supreme Court, in Hanover Shoe, Inc. v. United Shoe Mach. Corp.[10] asserted that allowing this defense will have an adverse effect on the private enforcement of the anti-trust laws.

Fourthly, under the scheme of the act, a private party can bring a claim for compensation against an enterprise only after the commission has established the enterprise’s misconduct. In order to substantiate a claim of compensation, the private parties are required to prove a nexus between the findings of the commission and the loss suffered by them. In the absence of a specific provision for enabling these parties the access to the DG report, the inquiries and the proceeding records of the commission, it becomes immensely difficult to prove this nexus. As a result, seeking compensation becomes a far-fetched dream.

CONCLUSION

The primary objective of the Competition Act, which was to secure the interests of the consumers, has taken a backseat due to the procedural difficulties and financial hurdles. It is necessary at this stage to fill in the gaps which thwart the consumers from seeking compensation.

The Act should be amended in order to specify time duration to bring in the claims and the composition of the appellate tribunal should be amended in order to include more economic experts so that the quantification of damages is more accurate and informed. If the private parties are not allowed to bring independent suits claiming damages, then a decisive provision should be introduced wherein the parties are expressly allowed the access to the DG Reports and the findings of the commission. This will strengthen their cases to a great extent as these reports contain a precise analysis of the relevant market and conclusively determine how the conduct of the enterprise violates the law. Also, the violators should not be permitted to use the ‘passing-on defense’ as the chain of consumers so affected loses ground to sue for damages and the misconduct goes unpunished.

The competition law violations affect the consumers the most and making good their losses should be made the primary concern of the act. Only then, the competition law shall be able to operate in a stringent fashion and the enterprises shall be forced to abide by the ethical norms of doing business.

ENDNOTES

[1] Malini Bhupta & Sudipto Roy, Corporate India learns to live with competition law (Dec. 21, 2014), Business Standard (Feb. 17, 2019), http://www.business-standard.com/article/opinion/corporate-india-learns-to-live-with-competition-law- 114122200003_1.html.

[2] Albert A.Foer, Jonathan W. Cuneo, Gilbert & La Duca, The International Handbook on Private Enforcement of Competition Law (2010), Edward Elgar Cheltenham, U.K. (Feb. 18, 2019), http://www.cutsccier.org/pdf/India_paper_International_Handbook_on_Private_Enforcement_of_Competition_Law.pdf.

[3] Belaire Owner’s Assn. v. D.L.F.Ltd., Case No. 19 of 2010.

[4] M.C.X. Stock Exchange Ltd. v. National Stock Exchange of India Ltd., 2011 S.C.C. OnLine C.C.I. 52.

[5] Courage Ltd. v. Crehan, [2001] E.C.R. I-6297.

[6] Corporation Bank v. Navin J. Shah, (2000) 2 S.C.C. 628.

[7] Competition Commission of India v. S.A.I.L., (2010) 10 S.C.C. 744.

[8] 1 S.M. Dugar, Guide to Competition Law 959 (6th ed. LexisNexis 2016).

[9] The Companies Act, 2013 § 410.

[10] Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481 (1968).

This article has been written by Mahak Paliwal, a 4th year B.B.A. LL.B. (Hons.) student at Symbiosis Law School, Pune.

LEGAL INCONVENIENCE – POSITION IN INDIA

Considering the fact that cross-border merger is a still growing concept the field suffers from immense ambiguity and loopholes as far as legal position is concerned. Especially, in developing countries like India, there still exists a scope for the betterment. The laws passed by the legislature although, lays down the rules and regulations and provide guidelines, however, it fails to address a certain immensely integral issue which is essential for ensuring the development of cross-border mergers in the country. The laws need to undergo stringent scrutiny and requires to be amended to bring them in consonance with the ongoing developments. The most significant ambiguity prevails with respect to whether the concept of demerger is inclusive in a cross-border merger. While sec. 234 [1] deals with only the cross-border mergers and amalgamation sec. 394 [2] provides for demerger as well. Also, the draft of regulations which has been circulated by the Reserve Bank of India includes demerger. Thus, there exists ambiguity as to whether the provisions cover demerger or not. Further, a notification pertaining to sec. 234 [3] was notified by the Ministry of Corporate Affairs in the year 2017 to introduce amendments to the CARA rules [4]. The developments read together approves of cross-border mergers. However, irrespective of the existence of such provisions the cross-border merger between an Indian company and foreign company remain a challenging task. Say, for instance, a company ‘A’ which is an Indian company enters into a cross-border arrangement with company ‘B’ which is a foreign company. The merger of both the corporate entities gives birth to company ‘G’ which is identified as a foreign entity. Thus, an ambivalence exists with regard to the settlement of ownership of such assets. Accordingly, certain guidelines ought to be published to do with such weak provisions. Next, the definition of compromise/arrangement under the relevant laws and regulations incorporate within itself demergers. On another hand, the proviso dealing with the outbound merger in the territory extensively discusses merger but does not mention demerger. The irregularity amidst the concerned laws always puts up an element of doubt for as far as the inclusion of demerger is concerned.

Furthermore, another legal issue that needs to undergo scrutiny is the issue pertaining to the fast-track process. There exists an absence fast-track process for disposal of cross-border mergers disputes. While the company law provisions specifically provide for such process for the mergers of a wholly-owned subsidiary into holding company the proviso has been restricted to aforesaid. The scope of such provisions needs to be expanded to include cross-border mergers as well.   

As per 234(2) [5] prior approval of the RBI is needed to undertake an arrangement of merger and acquisition. This proviso is somehow unreasonable. The discretion as to approval of cross-border transaction must be left at the insight of authorities supervising with FEMA and related regulations. Regulation 7 [6] must override the requirement of approval specified under former law. Additionally, while the approval is a must for a cross-border merger the Indian law stands complex in this regard. The corporations entering into such agreement are not only required to obtain approval from RBI and FEMA but also, they are often if not always required to undergo steady process of receiving approval from varied other authorities like Securities and Exchange Board of India and Telecom Regulatory Authority of India etc., A clarity as to approval of which of the following authorities is needed will aid in ensuring smooth arrangement between the entities. Under the existing Income Tax and other relevant laws in India where a foreign entity is said to have a permanent establishment within the Indian territory relating to a business carried on by Indian entity the deal between the later and former with respect to cross-border mergers will be subject to profits of Indian operation being taxed. Also, till recent past, the RBI and ODI regulations stood silent as far as the guidelines pertaining to an automatic route is concerned. Relative steps need to be taken to provide adequate guidelines as far as Indian exchange control regulations are concerned. Lastly, as per sec. 47(vi) [7] where there is a transfer of capital assets by the transferor company by way of merger and the resulting company is an Indian company the exemption is provided with respect to capital gain tax. Similarly, sec. 47(vii) [8] enumerates exemption for the shareholder of the transferor company where shares of the transferor company are transferred in consideration for the issue of shares in the resulting company, provided the resulting company being an Indian company. However, such exemption is available for an outbound merger. Thus, it will not be wrong to contend that the Indian legal system is yet to gain stability as far as the legal ambiguity and loopholes with respect to the cross-border mergers are concerned.

CRITICAL ANALYSIS OF THE CROSS-BORDER MERGERS

Primarily the purpose of any corporate entity while entering into the cross-border merger is threefold. First, to build a good position for itself in the marker or obtain the benefit of other entities goodwill. Second, to attract new customers. In other words, acquire access to other entities customer base. Third, to expand its business in a new potential geographical area to enlarge its returns. In the last two decades, the globe has witnessed a considerable increase in the cross-border mergers. May it be because of the increased liberalization or considerably flexible trade policies. However, the fruits of cross-border mergers do not come easy. This method of expansion amidst the corporation has often attracted criticism. In my opinion, while the two entities from different countries merge they ought to abide by the legal guidelines, rules, and regulations which differ drastically from country to country thereby making the entire process complex and increasing the risk [9]. At times it may so happen that the other entity finds it incompatible leading to deadlock as happened in case of Sony and Colombia pictures. Another crucial criticism in my viewpoint is the valuation done while carrying out this transaction. The determination of the value of the two entities and preparation of financial statement play a significant role in the success or failure of any cross-border merger accordingly, enormous care is needed while dealing with the same since often the different territories regulate different methods of valuation and preparation of financial statements respectively [10]. While the companies are preparing financial statement the lack of internal control might result in assets being overvalued or undervalued. For instance, the cross-border merger that took place between HLL and Brooke Bond India Ltd.  

Furthermore, in order to ensure that the cross-border merger is undertaken smoothly, the entities ought to ensure that both of them gain from the deal which is highly unpredictable.  Additionally, the cross -border mergers often suffer from passing evenly the political and social risk prevalent at almost all the levels. Political risk in terms of obtaining approval from the regulatory bodies since the deals cannot go through whilst it suffers from political defect. The business models and principles in each country differ considerably due to the differences in consumer choice, culture, prevalent rules and regulation, economic conditions etc., In such a situation it becomes immensely hard for one entity to acquire appreciable knowledge of the fundamentals on which the other entity stands. This often affects the estimated benefits or results in driving them out. In 2000 the merger between the Deutsche Bank and Dresdner Bank failed primarily due to this reason. To my understanding, technological differences is another major criticism of cross-border mergers. While an entity which developed might wish to use advanced technology the relatively less developed entity might want it otherwise thereby resulting in a deadlock in the deal. As I see it while the two entities merge under the cross-border merger it to some extent develops the feeling of distrust amidst the employees considering while some of them leave the others laid off. It often leads the concerned entity to pay a huge cost as happened between two corporate giants Bridgestone and Firestone. The cross-border merger often suffers from the defect of poor communication and integration rendering the entire purpose of such deal futile. Lastly, certain additional factors such as external and internal environment, job security, corporate governance, customer’s expectations and operating style of the entities entering into the cross-border mergers deal also brings forth suspension as far as the utility of entering into such deals are concerned.

ENDNOTES

[1] Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).

[2] Companies Act, 1956, No. 1, Acts of Parliament, 1956 (India).

[3] supra at 1.

[4] Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

[5] ibid.

[6] Foreign Exchange and Management Act, 1999, No. 1, Acts of Parliament, 1956 (India).

[7] Income Tax Act, 1961, No. 43, Acts of Parliament, 1961 (India).

[8] ibid.

[9] https://simerkukreja.wordpress.com/2017/01/30/the-reality-of-cross-border-mergers-and-acquisitions/

[10] R. Sklenár, Problems Linked to Cross-Border Mergers: Focused on the Company Located in the Czech Republic Vol. 5 IJMMMAS (2011).

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

Introduction

The Insolvency and Bankruptcy Code (“IBC”) was passed with the aim to revive the companies in the distressed condition. Several amendments had been made earlier and the other amendments are proposed by the government from time to time. Recently, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018 (“CIRP Regulations”) was notified in the official gazette on 3^rd July 2018. These regulations will apply to the ongoing corporate insolvency resolution process.

During the Insolvency Resolution Process, a Resolution Professional (“RP”) is appointed and acts an in charge of the company. Regulation 36 A of the CIRP Regulations elucidates about the procedure for an invitation of expression for expression of from the prospective resolution applicants to submit their resolution plans. The Resolution Professional shall publish a brief particular of the invitation of expression of interest in the Form – G of the Schedule mentioned under the CIRP Regulations. The invitation of expression of interest shall be published by the RP within 75 days (seventy-five) of the insolvency commencement date.

The RP would publish Form – G in one English and one Regional language Newspaper that has the vide circulation at the registered and principal office of the corporate debtor and at such other place where the corporate debtor conducts the material business operation. The particulars have to published at the website of, the corporate debtor, website designated by the board or in any other manner decided by committee.

Additionally, at least fifteen days shall be provided for the submission of expression of interest from the date of issue of detailed invitation. The Invitation shall prescribe specific criteria for prospective resolution applicants, as approved by the committee in accordance with section 25(2)(h) of the IBC. The invitation shall also provide for the ineligibility norms as mentioned under Sec. 29A of IBC to the extent applicable for prospective resolution applicants.

Furthermore, the details about the corporate debtor shall also be provided by the Resolution Professional in the invitation letter inviting the expression of Interest. The prospective applicants are required to submit the Form with the stipulated time failing which their expression of interested shall be rejected in accordance with Regulation 36A (6) of the Regulations.

Undertaking

An expression of interest shall be unconditional and be accompanied by following:

1. An undertaking by the prospective resolution applicant that it meets the criteria specified by the committee and the relevant records substantiating the same.
2. An undertaking by the prospective resolution applicant that it does not suffer from any ineligibility under section 29A of IBC and the relevant records substantiating the same.
3. An undertaking by the prospective resolution applicant that it shall intimate the resolution professional if it becomes ineligible at any time during the corporate insolvency resolution process
4. An undertaking by the prospective resolution applicant that every information and records provided in an expression of interest is true and correct and discovery of any false information or record at any time will render the applicant ineligible to submit resolution plan apart from forfeiting the refundable deposit and attracting the penal provisions.
5. An undertaking by the prospective resolution applicant to the effect that it shall maintain the confidentiality of the information and shall not use such information to cause an undue gain or undue loss to itself or any other person and comply with the requirements under sub-section (2) of section 29 of IBC.

Due Diligence by the Resolution Professional

Thereafter, resolution professional shall conduct due diligence based on the material on record in order to satisfy that the prospective resolution applicant complies with all the eligibility criteria proposed by the committee and does not face any applicable ineligibility norms under section 29A of IBC. The Resolution professional may seek any clarification or additional information or document from the prospective resolution applicant for conducting Due Diligence.

The resolution professional shall issue a provisional list of eligible prospective resolution applicants within ten days of the last date for submission of expression of interest to the committee and to all prospective resolution applicants who submitted the expression of interest. Any objection to inclusion or exclusion of a prospective resolution applicant in the provisional list may be made with supporting documents within five days from the date of issue of the provisional list. On considering the objections received from the applicants, the resolution professional shall issue the final list of prospective resolution applicants within ten days of the last date for receipt of objections, to the committee.

Conclusion

The invitation of expression of interest is the major step taken by the Resolution Professional to provide an adequate remedy to financial creditors. All the necessary details shall be provided by the RP during the invitation of expression of interest so as to put financial creditors in a situation where they could make appropriate decisions. This is also in compliance with the objective of IBC Code whose major aim is to remedy the creditors of a company.

This article has been written by Shreesh Chadha, a 4th year B.A. LL.B (Hons.) student at Jindal Global Law School.

The very purpose of a Winding Up petition is the realization of debts. The idea is that if the company is unable to pay its debts to its creditors[1], they could move a winding-up petition and coerce the company into paying the debts. However, what if during the pendency the Directors of the company settled the amount? Or what if the Directors want to revive the company and end the lengthy process and litigation?

This article focusses on the development and current position of the legal proposition of withdrawal of the winding up petition under the 3 phases of Company Law in India- the Companies Act,1956; Companies Act,2013 and the Insolvency and Bankruptcy Code,2016, along with what the Supreme Court of India recently held on the constitutionality of this provision.

COMPANIES ACT, 1956

Upon a bare reading of Rule 100 (1) of the Company (Court) Rules,1959 (hereinafter Rules 1959), it can be understood that the court could take cognizance of an application to withdraw a petition of winding up under the Companies Act,1956.  Such application could be made by the original petitioner who filed the winding up petition under S. 439, subsequent to a change in circumstance, particularly a settlement with the creditors. This was subject to the satisfaction of ALL the creditors of the company.

 However, Rule 101 (3) of the Rules, 1959 protected the creditor who has not been settled outside of court or is not as satisfied with the settlement and wants to continue the winding up proceedings against the company. Such an action from a creditor would result in him being replaced as the petitioner as if he were the original petitioner according to Rule 102, Rules 1959.[2] This, in fact, was the most important tenet of this procedure, so much so that the court insisted on publishing the intention to withdraw the winding up petition. This is done so that the Company does not settle the dues of only one creditor or a part of creditors and consequently gets the winding up petition withdrawn.[3] This procedure also granted a protection to the Company who has in good faith discharged the liabilities of the creditors by disallowing any creditor to ask for any payment over and above the settlement agreed upon by the parties when the Consent Order (the document being negotiated containing the terms and conditions, payment plans etc. of the settlement between the creditor and company) by filing any objection to the withdrawal of the winding up petition and continuing the litigation.[4]

COMPANIES ACT,2013 and INSOLVENCY AND BANKRUPTCY ACT, 2016

Even though there were no express rules in the Companies Act,2013 as under the old Companies Act, the proceedings which were in their evidence stage under Rule 100, Rules,1959 simply continued in the High Courts[5].

Nevertheless, the Ministry of Corporate Affairs did release the Company Draft (Winding Up) Rules,2013 for public comment, unfortunately to no avail. The Draft (Winding Up) Rules,2013[6] provided for a similar procedure as in Rule 100 & Rule 101, Rules,1959 in Rules in Rule 5 (6) and Rule 5 (7) wherein the only difference is the substitution of the NCLT as the adjudicating authority instead of the High Court.

Then came the Insolvency and Bankruptcy Code,2016 (hereinafter IBC 2016) which came into effect in August 2016 and streamlined the process of insolvency and made it cost-effective.

The Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016 (Rules 2016 hereinafter) provided for withdrawal of the Winding Up Petition by the corporate debtor (Company) before the petition was accepted by the NCLT.[7] This meant that there was uncertainty with regards to withdrawing the petition for winding up before the NCLT if the financial or operational creditor settles the debt or the corporate debtor wished to revive the business concern/company, after the admittance of the petition, as there was no express provision for the same.

However, the Hon’ble Supreme Court had provided an interpretation which supported the earlier position in the matter of Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Manager LLP[8]. In this case, the appellant was the guarantor to a third party (principal debtor). The respondents as financial creditor approached the NCLT under S. 7, IBC 2016 to commence the insolvency resolution process against the appellants. During the pendency of the application, the amount was settled between the two parties and the appellant applied for withdrawal of the insolvency resolution application before the NCLT, which was denied due to the absence of an express provision regarding withdrawal of an application after it was admitted. The same was upheld on an appeal to the NCLAT. In addition to the affirmation of the order of the NCLT, the NCLAT also held that even the inherent powers of the appellate tribunal under Rule 11, National Company Law Appellate Tribunal Rules, 2016 did not allow for the withdrawal of an application under S. 7, IBC 2016. Thereafter, the appeal was preferred before the Apex Court, which realized that the lack of an express provision under the Rules 2016 could not result in injustice being met to the corporate debtor who has fulfilled his liability and discharged the debt that warranted such an application from the financial creditor. Therefore under Article 142 of the Constitution, the Supreme Court set aside the order of the NCLT and NCLAT and allowed the appeal, thereby allowing the application for withdrawal of insolvency resolution process of the company.

This judgment is quite significant as it shed light on a lacuna which was created by the absence of a provision similar to Rule 100, Rules, 1959. This was recognized as an issue by the Insolvency Law Committee which was constituted to check the implementation of the IBC,2016 in November 2017. This committee specifically recommended the acceptance of applications by corporate debtors upon the consent of the creditors of the concerned company.

This resulted in an amendment to The IBC,2016 by the insertion of Section 12A.

Under this provision, if the committee of creditors agrees in a supreme majority that the debt has been appropriately settled and that no more than 10% of the creditors have an objection to the disposal of the insolvency resolution process, then it may be withdrawn. Post this, the NCLAT has allowed for the withdrawal of an application under S. 7 or S. 9, IBC 2016 under this provision in Vijender Kumar Singla v. Oriental Bank of Commerce & Anr[9].

SUPREME COURT RULING:

S.12 A, IBC 2016 was recently upheld by the Supreme Court of India, without much hesitation. The bench of Justice Nariman and Justice Sinha held that S. 12 A, provided a high threshold, one that could not be provisionally fulfilled, and only upon the approval of 90 percent of the creditors could the application be moved. Not only does this procedure protect the creditors but also provides a guarantee to the corporate debtor. S. 60, IBC 2016 also provides for the NCLT and NCLAT to intervene and set aside the decision of the committee of creditors if it is manifestly arbitrary. Therefore, S. 12 A, “passes constitutional muster”.[10]

All in all, it is a welcome judgement which aids in developing much-needed jurisprudence surrounding the IBC, 2016 and S.12 A. It validates the age-old argument in support of the withdrawal of winding up petition/ CIRP in that if the company has paid off its debts then there is no need of rendering it insolvent.

In some circumstances of a settlement, the creditors might also get a higher amount than they would receive after the CIRP. As seen in the case of Essar Steel, the promoters had proposed to pay off 100 % of the claims, which is more than that they would receive under the plan of Arcelor Mittal, who was the approved resolution applicant. [11]Therefore, the law in this regard should be well propagated and promoted, after all the purpose of a provision is achieved outside court, reducing the burden on the NCLT (s) and the single bench of the NCLAT.

ENDNOTES

[1] S. 271(1)(a), Companies Act 2013.

[2] Flakt India (P) Ltd. vs 24 Assured Services P. Ltd. Company Appeal No. 16 of 2015 available at : https://indiankanoon.org/doc/19109701/

[3] In Re: Lily Maritime (P) Ltd. and Ors. (2003) 4 CompLJ 98 Bom available at : https://indiankanoon.org/doc/1470692/

[4] Mr. P.D. Jain And Ors. vs Oswal Agro Mills Ltd 2007 139 CompCas 33 P H available at : https://indiankanoon.org/doc/75401/

[5] S. 434, Companies Act,2013.

[6] DRAFT RULES UNDER THE COMPANIES ACT, 2013,CHAPTER XX, Companies (Winding Up) Rules 2013,Ministry of Corporate Affairs, available at: http://www.icaiknowledgegateway.org/littledms/folder2/draft-rules-5th-tranche-under-the-companies-act-2013.pdf

[7] Rule 8, The Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016 available at : http://www.mca.gov.in/Ministry/pdf/InsolvencyRules_01122016.pdf

[8] (Civil Appeal No. 9279 of 2017) available at : https://indiacorplaw.in/wp-content/uploads/2017/07/21226_2017_Order_24-Jul-2017.pdf

[9] Company Appeal (AT) (Insolvency) No. 143 of 2018 available at : http://ibbi.gov.in/webadmin/pdf/order/2018/Jul/24th%20Jul%202018%20in%20the%20matter%20of%20Vijender%20Kumar%20Singla%20Vs.%20Oriental%20Bank%20of%20Commerce%20&%20Anr.%20CA%20(AT)%20No.%20143-2018_2018-07-30%2011:30:15.pdf

[10] Swiss Ribbons Pvt. Ltd. Vs. Union of India W.P. (C) 99 of 2018 available at : https://indiankanoon.org/doc/17372683/ [11] Rakhi Mazumdar “Essar Steel seeks withdrawal from IBC process, offers Rs 54,389 cr to all creditors” Economic Times, Oct 26, 2018 available at- https://economictimes.indiatimes.com/industry/indl-goods/svs/steel/essar-steel-seeks-withdrawal-from-ibc-process-offers-to-pay-all-creditors/articleshow/66364125.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

This article has been written by Maitrii Dani, a 5th year B.Comm. LL.B (Hons.) student at Institute of Law, Nirma University, Ahmedabad. 

INTRODUCTION

Every type of business is being reviewed in today’s world, and people do actually consider it more trustworthy and persuasive, and rely on it, as it comes directly from a customer’s point of view. Thus, these reviews work as reassurances [1] so that customers don’t waste their money on unworthy product or services or to mitigate the risks associated with online transactions with unknown sellers. Also, not only is the positivity or negativity of the review impactful, but also the number of reviews has an impact on customer decisions, as this shows the popularity of the product. Online reviews are the first thing that customers look for [2] when they discover a new product or when they wish to compare one brand over the other. Customers tend to rely more on these reviews, rather than relying on the opinion of a salesperson regarding, say, the durability of the product, or other information about its care and maintenance. These reviews prove to be more effective when making online purchases, where it is difficult for customers to judge the product by themselves. Also, after relying on online reviews to make their own decisions, these customers post their reviews as well. Customers would post about the usefulness of a product or the credibility of a service provider.

E-WOM

With the growth of digital age built on the foundation of the internet in the last few years, the popularity of online reviews of almost everything has also grown significantly. Online reviews are one type of electronic Word of Mouth (e-WOM) [3], which consists of analysis and commentaries posted by end users of products who have spent their money on the product and have used it. These reviews range from how a product or service was, to where should people travel or eat. Reviews, both positive and negative, impact not only the popularity of business [4], but also its sales and profitability. Reviews also help job seekers to search for potential employers by disseminating information about who is looking for new candidates or what it is like to work at a particular place. e-WOM assumes so much importance in today’s world because of the number of perceived risks involved. Potential shoppers tend to wait and observe the experience [5] of others.

SOURCES OF ONLINE REVIEWS

These online reviews may come either from [6] sources like Google or Yahoo, which provide the customers with valuable product information or in the form of social networking sites and blogs through which people express their opinions. These platforms not only allow customers to broadcast their views but also serve as an interactive platform allowing customers to discuss and disseminate information. The power of such communication has somewhat weakened the power of marketing communication [7]. Thus, there seems to be a direct relationship between the online reviews of a business and the sale of its products or services.

WHY THE IMPACT?

However, one thing that needs to be kept to be kept in mind is that how customers view online reviews is also largely affected by their cognitive psychology. Consumers often filter and process information according to a specific way. Some customers are accustomed to thinking from the positive side, while some are used to thinking from the negative side. Thus, this affects how these online reviews, in turn, affect their buying behavior. Also, another thing that affects the impact of online reviews is the time spent by the customer online. The more time spent online, the more is the customer likely to rely on online reviews [8].

HOW TO HANDLE NEGATIVE BUSINESS REVIEWS

Now that it is clear that customer reviews have become very powerful and that online reputation does affect a business, employers have started becoming uncomfortable at the thought of receiving negative public reviews [9]. Thus, it has become imperative for business men to handle negative reviews in a way so as to reduce its impact [10]. One of the best ways of doing this is to have a website. Websites help a business establish who they actually are and what they have to offer, and point people in the right direction when they are looking for you through online resources [11]. Another way of handling negative reviews is to respond to them promptly. Responses may include an offer to remedy the situation or maybe just a simple apology.

THE POSITIVE SIDE OF ONLINE REVIEWS

However, there is also a positive side to it. By allowing people to rate a product or service, businessmen become more motivated to put in a little extra effort to get reviews that are positive [12]. It is important to understand that if customers are happy they will market your product and that would probably be among the most effective strategies than any other marketing strategy that a business may adopt. Thus, it is worth the risk [13] to allow customers to leave a review of a business’ product or service.

CONCLUSION

Thus, whether positive or negative, it is necessary in today’s world to have customers review your business. Hence, businesses should themselves provide a way for their customers to put forward a review, by sending out surveys or merely asking a happy customer to share a review on your website. Online reviews should be seen by businesses as a way of creating new customers; especially if the business is new in the market. A new business is already well behind its competitors whom its customer base already trusts. Thus, by building up a positive online reputation, a new business may very well get ahead of the competitors.

ENDNOTES

[1] https://www.ischool.berkeley.edu/sites/default/files/lhankin_report.pdf

[2] https://www.business.com/articles/7-surprising-ways-online-reviews-have-transformed-the-path-to-purchase/

[3]https://pdfs.semanticscholar.org/b276/52a73c8f98dbf4f4ebf57b70e34be2b95f8c.pdf

[4] https://www.brightlocal.com/2017/03/15/the-impact-of-online-reviews/

[5]https://www.academia.edu/8597037/The_Impact_of_Positive_Electronic_Word-of-Mouth_on_Consumer_Online_Purchasing_Decision?auto=download

[6] http://www.naturalspublishing.com/files/published/7fv52zp828lf9t.pdf

[7] http://www.scitepress.org/Papers/2016/58610/58610.pdf

[8]https://pdfs.semanticscholar.org/df1f/5ed9e72c73590060c1f3fb8f258065e73cae.pdf

[9] https://www.forbes.com/sites/jaysondemers/2014/09/09/how-negative-online-company-reviews-can-impact-your-business-and-recruiting/#1670c31d9b67

[10] https://www.business2community.com/infographics/impact-online-reviews-customers-buying-decisions-infographic-01280945

[11] https://www.inc.com/michael-fertik/online-reviews-make-big-difference-small-business.html

[12] http://knowledge.wharton.upenn.edu/article/do-online-reviews-matter/

[13] http://www.thedrum.com/news/2017/03/27/online-reviews-impact-purchasing-decisions-over-93-consumers-report-suggests

This article has been written by Harshita Lal, a 4th year B.A. LL.B (Hons.) student at Symbiosis Law School Pune.

Introduction

In the instant case of Samir Agrawal v. ANI Technologies Pvt. Ltd. and Uber India Systems Pvt. Ltd. (Case No. 37 of 2018), the Informant alleged violation of provisions of Section 3 of the Competition Act (hereinafter “the Act”)  by the Opposite Parties, Ola and Uber (hereinafter “OPs”). Mainly aggrieved by the pricing mechanism adopted by the OPs while providing radio taxi services, the Informant alleged that it amounted to price fixing as it hindered the freedom of individual drivers to compete amongst each other. However, the Competition Commission (hereinafter “Commission”) took the view that no case of contravention of provisions of Section 3 had been made out and dismissed the Informant’s allegations against the OPs.

Factual Background

The OPs provide radio taxi services on-demand by the process of matching riders and drivers and providing an estimate of the fare/price beforehand, using an algorithm. The Informant, as an aggrieved consumer of the services provided by the OPs, has raised three allegations:

First, the Cab Aggregators use algorithms that deliver the centralised power of fixing ride prices booked through their respective Apps into their hands, not allowing the drivers who are attached as independent third party service providers, to compete on prices. This was alleged to be a hub and spoke arrangement where the OPs act as ‘hub’ and the competing drivers act as ‘spokes’ colluding on prices;

Second, the acts of price fixing are an imposition of a minimum resale price agreement between the Cab Aggregators and the drivers, as the drivers don’t have the liberty to reject algorithm calculated prices or offer their services for a lower price; and

Third, the Cab Aggregators have considerable personalised information about every rider, owing to the information asymmetry, giving them the ability to discriminate on the basis of price to the disadvantage of the riders.

The Informant supported his aforementioned allegations with the arguments that (i) the Ola/Uber model is comparable to Zomato, Trivago or Airbnb who do not own any restaurants, properties or hotels, respectively, but acts only as platforms that connect buyers and sellers and the price isn’t fixed by the platform and (ii) Ola/Uber had facilitated a cartel of drivers in a digital mode and should be accorded a similar treatment/liability under the Act as the Commission’s judgement of Builders Association v. Cement Manufacturers Association & Ors (Case No. 29 of 2010).

The Commission’s Findings and Decision

The Commission found no substance in the first allegation regarding the existence of a hub and spoke arrangement between the Cab Aggregators and the drivers. In both the Cab Aggregator models, the fare was estimated through their Apps on the basis of ‘big data’ by the algorithm, taking into account personalised information of riders along with other factors, resultantly determining prices for each rider and trip differently. The drivers did accede to the algorithmically determined prices, but there was no agreement between them to set prices through the platform or for the platform to coordinate the prices between them. Therefore, there did not appear to be any such agreement inter-se between the drivers to delegate pricing power to the Cab Aggregators.

The Commission found the second allegation of contravention of Section 3(4)(e) of the Act not tenable, explaining that resale is essential to conduct resale price maintenance, however, there was no sale of any goods/services by the OPs to the drivers, resold by the drivers to the riders. When operating through the OPs platform, the drivers were effectively their extensions or agents, therefore resulting in a single transaction between the rider and the OPs. Further, the algorithmic determination of prices by the OPs was vital to the functioning of the aggregation-based models. These pricing algorithms allowed for modification and optimization of prices based on numerous factors, including available stock and anticipated demand, resulting in fares that were dynamic in nature and updated on the basis of real-time market and traffic conditions. Accordingly, the Commission was of the view that the Informant had arrived at an erroneous conclusion without placing any evidence on record, that an algorithm determined price would eliminate price competition and would necessarily be higher than the prices negotiated by drivers and riders on an individual trip basis.

Price discrimination was alleged by the Informant but not under Section 4 of the Act, where Section 4(2)(a)(ii) deals with prohibition of imposing discriminatory prices by a dominant enterprise. Further, the Act does not recognise collective dominance whereas the market in question had two players, none of which was alleged to be dominant. This position was clarified in previous matters relating to the Cab Aggregators market (Fast Track Call Cab Pvt. Ltd. V. ANI Technologies Pvt. Ltd. and In re Meru Travel Solutions Pvt. Ltd.). The Commission found the third allegation of price discrimination misplaced and unsupported by any evidence on record.

Lastly, the Commission dealt with the Informant’s supporting arguments in the following manner: (i) The Commission found it inappropriate to equate Ola/Uber with Airbnb, Trivago and Zomato as they purely acted as platforms, whereas Ola was held to be a radio taxi operator in Fast Track Call Cab Pvt. Ltd. V. ANI Technologies Pvt. Ltd. and not merely a platform and Uber was held to be a transport service company  in Asociación Profesional Élite Taxi v. Uber Systems Spain SL (C-434/15), which not only intermediates between drivers but also acts as a service provider; and (ii) The Commission found the Informant’s demand for uniform application of the Builders Association judgment in the present case devoid of an understanding of economic literature and practical realities of the digital markets. As Ola and Uber acted as separate entities from their respective drivers where there was no opportunity for the drivers to coordinate their actions with other drivers. Therefore, this cannot be termed as cartel conduct through Ola/Uber’s platform.

Pricing Algorithms and their impact

Pricing algorithms such as the ones used by the OPs are intended to gather and analyse a large amount of relevant market data and price products/services after considering numerous factors. They can enable an enterprise to react instantaneously to the price movements of its competitors, therefore, the speed and complexity are such that cannot be replicated by humans. This creates a perception that the price fixing is a result of machine-driven processes irrespective of the human element creating potential antitrust liability [1].

This gives an advantage to enterprises using such pricing algorithms for exchanging market information and fixing prices thereby colluding tacitly. The difficulty lies in proving the intention or understanding behind such tacit collusion. Therefore, such algorithms may assist with collusion and complicate detection of unlawful agreements. Thus, it is challenging to deal with such anticompetitive behaviour and enforce laws regarding the prohibition of price parallelism.

CONCLUSION

The Competition Act is well equipped to deal with a case of price fixing using pricing algorithms, however, in certain matters where there is no communication between the enterprises and no available circumstantial evidence, just as held in the Eturas case (C- 74/14), the significant option left is to create a presumption that two or more enterprises with similar prices using pricing algorithms would indicate knowledge of the price-fixing carried out by the pricing algorithms and engagement in concerted practice. This rebuttable presumption is acceptable; it does not shift the burden of proof entirely onto the defendants thus not going against the concept of a fair trial.

ENDNOTES

[1]https://www.arnoldporter.com/en/perspectives/publications/2018/04/pricing-algorithms-the-antitrust-implications

This article has been written by Shrishti Mittal, a 4th year student at Bharati Vidyapeeth New Law College, Pune.

Referring to the increased issues related to competition in the Indian pharmaceutical industry and health care sector the Competition Commission of India (CCI) issued a Policy Note on ‘Making Markets Work for Affordable Healthcare’. It is very important for the development of any country that its citizens have access to essential medicines at affordable prices. The branded companies have made this difficult by increasing the gap between the production costs and the maximum retail prices. The major reason behind this is because they want to have more profits which can be used to give incentives to pharmacists, doctors, and other diagnostic laboratories.

The Indian pharmaceutical industry began to proliferate only after the 1960s and mainly after the implementation of The Patents Act, 1970. During the early years of independence the healthcare sector was based mainly on the import of medicines from foreign countries but today India ranks amongst the top 15 drugs and medicine exporters in the world [1]. The CCI is a statutory body of the Indian government established under the Competition Act, 2002. The Competition Act came into force on 13th January 2003, with an objective to regulate the anticompetitive practices and to set up a regulatory body to supervise and contempt such practices.

The pharmaceutical and healthcare sectors are influenced mainly by five aspects which are the availability of supply, price, quality, ability to pay and access to affordable consultations. These aspects are affected adversely by a number of other factors such as lack of infrastructure, outdated technology, lack of professionals, lack of awareness, insufficiency of funds, unfair trade practices, brand-based sales of medicines, price competition, lack of choices to the consumer, etc. Most of these problems can be solved by the implementation of a proper and just competition policy hence the CCI took them into consideration and discussed the problem on the following four issues.

1. The role of intermediaries in drug price build-up

India is a huge exporter of drugs and medicines to the US but still, about 55-60% of the Indian population does not have access to basic medicines also. This is mainly because of the huge profit margins maintained by the branded medicine manufacturers. They use this margin to give incentives and perks to druggists, pharmacists, lab technicians, hospitals and doctors.

Recommendation – the government should ensure that the basic medicines are made available to the entire population by implementing standard rates and prices policies. They can also promote e-pharmacy as it is more transparent and chances of deceptive practices are less. The central government can also take up public procurement of medicines from manufacturers and their equal distribution like the Tamil Nadu and Rajasthan government.  

2. Quality perceptions behind the proliferation of branded generics

There is a misconception that the branded medicines are of a higher quality since they are associated with the big names and the generic medicines are of poor quality. Also, the branded medicines are supported by doctors, hospitals, pharmacists, etc. with a monetary intention. This creates an illusion of better quality in the consumers thus leading to the problem of inability to purchase the higher cost Medicare.

Recommendation – the government should ensure that the public is aware of the fact that both the branded and generic medicines are subject to the same statutory rules and regulations and hence are of the same standards. The CCI also recommends the application of a ‘one company-one drug-one brand name-one price policy.’ This policy will ensure that the manufacturers who create artificial differentiation of the medicines by selling them under different names are not allowed to do so.

3. Vertical arrangements in healthcare services and lack of transparency

There is a lack of knowledge and information asymmetry in the Indian pharmaceutical industry. There are agreements between hospitals and manufacturing companies which compel the hospital to promote their medicines only. And due to this, the patients are forced to purchase the medicines from the in-house pharmacy only. Many times the rates of these in-house pharmacies and other pharmacies vary resulting in higher costs to the patients. Again the patients choose any hospital because of recommendation from a doctor only and not based on other statistical information such as mortality rates, infection rates, number of specialized personnel, comparison of the rates of the procedure etc. this is due to lack of knowledge.

Recommendation – the standard price policy needs to be implemented by the government to ensure that the patients are not exploited by the hospitals. The government should make the transparency of vital data of the hospitals compulsory. The hospitals should be asked to share the mortality rates, infection rates and the prices of various procedures in their hospitals. This will ensure that the patients make a decision based on the statistical information based on facts and not suggestions.

4. Regulation of the pharmaceutical sector and competition

The pharmacy and health care sector are governed by two sets of rules, one at the central level and another at the state level which creates confusion. There are certain medicines which are licensed by the central government while the rest are licensed and monitored by the state government. Another major issue is the new drug approval procedure which is very lengthy and time-consuming. Various discriminatory practices have been reported in this process, drug approval is many times subject to the name of the applicant. When the applicant company is well renowned the process automatically becomes less time-consuming.

Recommendation – there should be a single policy governing the medicines which should be the same at both central and state levels. Such a uniform policy need not only be implemented by it must be properly monitored also by the CDSCO [2]. The new drug approval process should be made non-discriminatory by implementing such laws which are uniform. Also, this process shall have a time limit within which its approval or disapproval shall be finalized. The CCI also recommends the formation of a data bank having all the necessary data related to the number of clinical trials, a number of drug tests, having information about the rejected drugs etc. to create further awareness.

This Policy Note of the CCI received a reply from the Ministry of Corporate Affairs in way of a press release [3]. The press release of the MCA addressed the following two issues along with the ones mentioned by the CCI:

1. Shortage of healthcare professionals in the country owing inter alia to a high cost of medical education
2. Inadequacy in health insurance.

The MCA was of the opinion that in order to ensure that the health care sector keeps up with the pace of the changing trends owing to the changes in technology there is a need to ensure that the medical professionals are properly trained and are given adequate resources. The insurance policies in the medical sector need to be reformed and implemented in a manner which benefits the patients and ensures that their claims are allowed.

The Policy Note of CCI is not binding on the government but only a recommendation. In the past, there have been instances where such recommendations of the CCI have become the basis for the implementation of new laws and policies in the country. The CCI’s views on real estate led to the early implementation and enforcement of the Real Estate (Regulation and Development) Act, 2016. This was after the CCI gave its judgment in Shri Jyoti Swaroop Arora vs M/s Tulip Infratech Ltd. & Ors. [4] wherein it highlighted the need for a proper regulatory policy in real estate. Hence, we can expect a change in the pharmaceutical and health care sector based on these recommendations of the CCI.

ENDNOTES

[1] www.worlstopexports.com

[2] Central Drugs Standard Control Organization

[3] www.pib.nic.in/PressReleaseIframePage.aspx?PRID=1550527

[4] Case No. 59/2011, Order dated 3 February 2015 (Upheld by the High Court of Delhi vide order dated 16 May 2016 in W.P(C) 6622/2015)

This article has been written by Medhashree Verma and Kavya Lalchandani, 3rd year B.B.A. LL.B. students at National Law University, Odisha.

The Hon’ble Supreme Court of India in a recent judgment of Swiss Ribbons v Union of India [1], the Court cleared the air that surrounded all the contentious provisions of the much debated Insolvency and Bankruptcy Code, 2016. One of such issues is related to the provision of ineligibility of some persons from becoming a resolution applicant. The same provision is included under Section 29A which was introduced as an amendment to the IB Code.  Section 29A is in the nature of a restrictive provision which deals with the ineligibility of a person to become a Resolution Applicant.

The Court in Arcelor Mittal [2] has already held that a purposive interpretation has to be given to Section 29A depending on the text and context in which it was enacted. It may also be noted that there is a difference in the opening lines of the Section as under the Ordinance 2017 and the Amendment Act, 2017 widening the interpretation of the same. This enabled the Court to go beyond the literal meaning of the words and see through all the persons who were in control of the business whether jointly or in concert.  

The scope of the same was further clarified in Chitra Sharma v Union of India [3] in which the Court held that the provision is wide enough to rope in all the persons who are liable for the insolvency of the Corporate Debtor and are ineligible to become the resolution applicant for the cause of enhanced corporate governance in the country.

Retrospective Application of the Provision

The point of the retrospective application has been argued in reference to the vested rights of the resolution applicant. The Apex Court in Arcelor Mittal had already held that there is no vested right for approval or even consideration of the resolution plan, in the resolution applicant. Therefore this contention was rejected in toto.

Consideration of 29A(c)

It was contended by the appellants that Section should not apply to liquidation. However, the court observed that the appellants had failed to take into account the scheme and purpose of the IBC. The persons who are otherwise ineligible to become the resolution applicants should also be excluded from the list of people who can buy assets in liquidation for the same reason for which they cannot become the resolution applicants as they do not have any vested right in them for claiming over the assets.

Differentiation has to be made between a wilful defaulter who from the very nature is an ineligible resolution applicant and an NPA. An NPA occurs only when after a period of one year when the payment becomes due; the debt is not paid within 90 days of it becoming overdue. A grace period is given for the sub-standard asset to get paid off. It is even pertinent to note that the banks and the financial institutions do not declare any debtor company as NPA unless the 1 year and 3 month grace period expires. Therefore a person who cannot himself pay the debt cannot claim to be a resolution applicant for the same. The ineligibility, therefore, comes only after expiry of the period.

Therefore, it is humbly submitted that the period referred to in the RBI master circular and in Section 29A in consequence thereof is correct both in terms of law and procedure.

Furthermore, under Section 29A(j), a related party of an ineligible person is also not allowed to be a resolution applicant and therefore it was the contention of the petitioners that the doctrine of nexus cannot be unreasonable overreaching. However, the Court held that this interpretation is misconstrued because under Section 5(24A) which defines the connected persons so as to mean persons who collectively or jointly are connected to the business activity of the resolution applicant. The term relative under the contested Section is not and cannot be construed as one which has no connection with the business activity of the resolution applicant. The contention of the petitioners was too far-fetched to be accepted as the whole context in which a particular term was used had to be seen and not the term in isolation.

The petitioners took a step further in contesting that in the Explanation (ii) to the Section creates a futuristic person who during the time of implementation of the Resolution plan can become a promoter or director or manager of the Corporate Debtor indicating at an indeterminable personality. But they failed to take into consideration the words ‘during the time of implementation’ which suggests that the Resolution Plan has not reached its conclusion but is still in its implementation stage and therefore the law is not creating an indeterminable personality but trying not to leave any gap for misuse of the provision.

The petitioners also argued on the exclusion of MSMEs from the purview of Section 29A which was justified by the Court on two main grounds which were based on ILC Report of 2018 and can be stated as under: firstly, that the right of application of the Financial Creditors arises only when the claim is more than one lakh rupees and in case of MSMEs it will most probably lead to liquidation and therefore it will defeat the purpose and secondly, that the MSMEs contribute in the growth of economy of India. It is submitted that while the first reason can be accepted as a logical argument the second argument can be refuted on the ground that it lacks reason as going by that logic all the enterprises and industries in an economy help in its development and are imperative for its growth.

CONCLUSION

It is opined that the judgment with respect to the constitutionality of Section 29A of the Insolvency and Bankruptcy Code, 2016 is a classic example of judicial deference of economic policy formulation by the legislature. The same is a welcome step for the Indian economy; however, complete deference can sometimes lead to injustice to a particular class of persons. In the present case, the justification given by the Court to uphold the intent of the legislature has far-reaching consequences. Be it provisions related to the retrospective application of 29A of IBC or persons included in its purview; it appears that the intent and the legislative history has been forcefully read into in the provisions. Further, the Court has also tried to justify its stance by the theory of vested rights which may or may not have a bearing on every case and should be decided on a case to case basis. Section 29A is a welcome provision, however, the manner in which every aspect of the provision has been justified is not convincing. It is further opined that complete deference to any economic provision should not be done in an absolute manner.

ENDNOTES

[1] Swiss Ribbons 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] Arcelor Mittal India Private Limited v Satish Kumar Gupta, CIVIL APPEAL NOs.9402-9405 OF 2018; https://www.sci.gov.in/supremecourt/2018/33945/33945_2018_Judgement_04-Oct-2018.pdf

[3] Chitra Sharma v Union of India, WRIT PETITION (CIVIL) NO 744 OF 2017; https://ibbi.gov.in/webadmin/pdf/order/2018/Aug/25878_2017_Judgement_09-Aug-2018_2018-08-09%2013:01:40.pdf

This article has been written by Sarthak Jain, 4th year B.A. LL.B (Hons.) student of Institute of Law, Nirma University.

INTRODUCTION

India is one of the fast developing nations in various fields. It has taken many farther steps in various fields to develop as a nation. Whereas there have been many foreign nations supporting India by investing in India. Only getting money through investment doesn’t complete the duty of the nation. As a nation, India has to protect the investments of foreign investors. When a company becomes insolvent there are necessary steps to be taken in order to protect foreign investors to protect their rights. But looking at the aspect of cross border insolvency, there has been limited laws dealing with it. The present laws related to cross border insolvency are Section 234 and 235 [1] of Insolvency & Bankruptcy Code of India. India can ratify bilateral treaties in relation to insolvency proceedings with a particular country with which reciprocal arrangements and further can make a letter of request for insolvency proceedings. But there are certain defects and inconsistencies in present legislation and thereby the country is in the stage to adopt the Model law on cross border insolvency [2] by introducing a bill for it and adding it as a new chapter to Insolvency Code. 

WHAT ACTUALLY IS CROSS-BORDER INSOLVENCY

Insolvency means a state when an organization or an individual is not able to fulfill its financial burdens which are due against the lenders in term of debts. When a company is declared as an insolvent there are certain procedures which a company goes through i.e. there are informal meetings which are organized between the company and the creditors for making an alternative mode of paying the debts. When the outcome of such meetings are not as per expected due to poor management of cash or the cash inflow is less than expected then the company can be declared as insolvent by performing certain insolvency proceedings where the liquidator would acquire all the assets of the company and evaluate them and liquidate those assets in order to pay off the debts.
The concept of cross border insolvency refers to the treatment of financially burdened debtors where the assets of the debtors are in more than one country or the creditors are in more than one country [3].

The cross border insolvency deals with three dimensions:
Firstly, protecting the rights of the foreign creditors who have certain rights on the assets of the debtor which are in different jurisdiction wherein the proceedings of the insolvency are in place. Secondly, when the assets of the debtors are in various jurisdictions and the creditor wants to involve those assets in a different jurisdiction in the proceedings of insolvency. Thirdly, the insolvency proceedings are going on or commenced on the same debtor in more than one jurisdiction [4].

UNITED NATIONS COMMISSION ON TRADE LAW (UNCITRAL) MODEL LAW: OVERVIEW

The need of this model law aroused due to the issue that every nation has its own specific manner of managing the issues of Cross Border Insolvency and bankruptcy laws which were too varied. A few nations had made arrangements with each other but still, there was no uniform way to deal with the Cross Border Insolvency issues. For dealing such issue, UNCITRAL received the content of Model Law on Cross Border Insolvency issues on 30 May 1997 and thereby was passed by United Nations (UN) General Assembly on 15 December 1997.

To provide greater flexibility, it was passed as a model law and not as a convention so that the nations can make necessary changes in their domestic laws regarding cross-border insolvency as per the model. Till now 44 states have adopted this model law. It focuses on authorizing, encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws [5].

In India, the existing provisions for cross-border insolvency i.e. Section 234 & 235 of IBC are insufficient and time taking, for which the government is adopting this model law as this will strengthen the framework of insolvency resolution.

In the context of bankruptcy laws, it was recommended in Justice Eradi Committee Report of 2000 for implementation of model law by amending Part VII of Companies Act, 1956, Recognition, coordination, and participation of creditors in foreign proceedings. Also in 2001, the N.L. Mitra Committee Report also provided that the cross border insolvency laws of India is outdated and there was a need of Bankruptcy Code.
The basic objective behind this model law is to ensure that the interest of banks and person involved including the creditor are protected in regard to cross border insolvency matters. By formulating these provisions there will be substantial growth in mergers and acquisitions which would thereby enhance the economy of the country.

In order to overcome the drawbacks of current law which are stated in the previous chapter, this Model Law was adopted which is applicable in a situation when;
• A Foreign court or a foreign insolvency professional needs support in State.
• Both foreign and domestic proceedings are simultaneously in progress.
• Insolvency proceedings need to be commenced in State by foreign creditors and other interested parties.
• In a foreign State, assistance is required relating to domestic proceedings.

BENEFITS OF ENACTING THE MODEL LAW

• With the enactment of this model law, India will become an attractive destination for foreign creditors for investment. The three main economic benefits achieved by Model Law are (i) reduction in time for exchanging necessary information between countries (ii) increase in credit recovery efficiency and (iii) cooperation and assistance helps in preserving the company’s assets from dissipating, resulting in successful reorganization [6].
• This law is much clearer than the Bankruptcy code in terms of remedy and procedure followed for foreign entities.
• This law is more flexible as a State can make changes in the model law as per the conditions and the local insolvency laws. Ex. US law provides remedies only after foreign proceedings are recognized.
• A country could refuse the validity of the foreign proceedings if such is against the public policy of the country.
• Through this Model Law coordination between courts and insolvency professionals will exist in domestic as well as foreign jurisdiction.

DRAFT ON CROSS BORDER INSOLVENCY: ANALYSIS

“The application for the recognition of foreign proceedings in India will have to be made to the NCLT by the foreign representatives pursuant to the Model Law as the tribunal is not compelled to automatically recognize the concurrent proceedings.”
The Insolvency Law Committee Report on March 2018 recommended to have an all-included mechanism for cross border insolvency matters as the current provisions i.e. Section 234 & 235 of Bankruptcy Code do not provide a comprehensive framework so a separate chapter was required to be inserted in the Code which will be based on UNCITRAL Model Law on Cross Border Insolvency. For this, a draft has been prepared by the Corporate Affairs Ministry on 20th June 2018.

As per draft law, Central Government after entering into an agreement with other countries may bring overseas asset of domestic corporate debtor into consideration of insolvency resolution in India. While initially cross border insolvency framework will apply only to corporate debtors, it can be extended to cases of personal insolvency resolution as well. The inclusion of cross-border insolvency framework will further enhance the ease of doing business, provide a mechanism of cooperation between India and other countries in the area of insolvency resolution, and protect creditors in the global scenario [7].

But still there are certain deficiencies in the Draft too:
1) By including the provision of foreign creditor right to participate in Indian proceedings, duplication will arise as there is already an existing structure for foreign creditors.
2) The word ‘State’ is used a lot in the draft but is nowhere defined in it.
3) Section 2(c) defines establishment which means the place where corporate debtor carries out non-transitory economic activity three months before commencement of insolvency proceedings in center of main interest of the debtor. But it fails to include all other places where the corporate debtor carries on principal economic activity.
4) Section 12(1) provides that a foreign representative may apply for recognition of the foreign proceedings to the Adjudicating Authority but does not specify what recognition of the foreign proceedings mean.
5) There is no such provision in the draft relating to prohibition/stay of foreign non-main proceedings.
6) The draft does not impact individual bankruptcies which thereby restrict cross-border insolvencies scope to corporate debtors.

END NOTES

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

[2]http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model.html

[3] Umakanth Varottil, Filling in the Gaps in the Insolvency And Bankruptcy Code-Cross Border Insolvency, India Corp Law, May 17,2016, https://indiacorplaw.in/2016/05/filling-in-gaps-in-insolvency-and.html

[4] The Indian Insolvency and Bankruptcy Code 2016.

[5]http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model.html.

[6] Fernando Locatelli, International Trade and Insolvency Law: Is the UNCITRAL Model Law on Cross-Border Insolvency an Answer for Brazil – An Economic Analysis of its benefits on International Trade, 14 Law & Bus. Rev. Am. 313 (2008).

[7] Government looking at adopting UN model for cross-border insolvency norms, The Economic Times, Jul 22, 2018, https://m.economictimes.com/news/economy/policy/government-looking-at-adopting-un-model-for-cross-border-insolvency-norms/amp_articleshow/65090797.cms.

This article has been written by Medhashree Verma and Kavya Lalchandani, 3rd year B.B.A. LL.B. students at National Law University, Odisha.

INTRODUCTION

Ratification of breach of duty by directors is a common law principle which suggests that a director can be absolved of the liabilities that would arise as a result as his breach of duty if the shareholders of the company ratify the breach. The directors owe a vast variety of duties to the company such as the duty to act in the best interest of the company and its members, the duty to prevent self-dealing, duty to avoid conflict of interest, duty to act diligently with skill and caution etc. However, if the directors commit a breach any such duty, the shareholders have the power ratify and relieve the directors of the liability that arises out of the breach of duty.

It is widely observed that the directors can protect themselves from the default if the shareholders of the company pass an ordinary resolution in the general meeting of the company to cure the director’s breach of duty [1]. However, this doctrine is not applicable to all kinds of breach of duties. This doctrine has its own limitations. Firstly, the breach of duty arising from an act that is ultra vires the company is not capable of ratification by shareholders [2]. Secondly, the directors acting as shareholders cannot ratify their own breach of duty [3]. Moreover, the same requires complete disclosure of facts in front of the shareholders regarding the breach and informed approval by the shareholders of the company.

The following article deals with theory of ratification by shareholders of breach of duty committed by directors under common law and possibility of its application in India SINCE Companies Act, 2013 is silent on the same.

POSITION IN COMMON LAW

Although in Taylor v. National Union of Mineworkers, it has been stated that the members of the company should vote in the interests of the company and in a bona fide manner when the persons in control of the company have committed an illegal act or an ultra vires act, in most of the common law jurisdictions the power of the shareholders to ratify the breach of duties of directors is a statutory one. In UK Companies Act, 2006, under Section 239, any conduct of the directors involving negligent acts, default and breach of duty or trust can be ratified by the shareholders of that company by passing an ordinary resolution in their meeting [4].

In Regal (Hastings) Limited v. Gulliver, the directors had acquired the shares of the company which were later sold for profit. The directors did not keep an account of the profits that they earned arising out of the same and therefore there was a breach of duty on their part. It was held by the House of Lords that such liability could have ceased to exist if the directors would have got the breach ratified by the shareholders of the company. Therefore, such breaches can be ratified by the shareholders and the directors could have retained the profits [5].

The provision is plainly worded but a problematic situation may arise where the shareholder(s) is the director himself and seeks to ratify his own breach. However, now the law is settled where in the exception to the above general rule has been carved out. In Goldtrail Travel Ltd (in liquidation) v. Aydin, it has been held that if the company has gone into liquidation then the director(s) who is/are the shareholder(s) cannot ratify their own breach of duty. Further, under Section 175 in general bestows upon the director the duty avoid conflict of interests. The Court also stated that the duomatic principle (the power to informally take consent of the shareholders to ratify the acts of the directors when the action is intra vires the company) has no application in such cases.

POSITION OF LAW IN INDIA

Companies Act, 2013 does not provide for ratification of breach of duty by directors as a statutory procedure. This leaves the possibility of ratification of director’s breach of duty in grey area. As already discussed, ratification of breach of duty by directors has a statutory backing in the United Kingdom in the form of Section 239 of the Companies Act, 2006 which expressly permits the same. However, Section 166 of the Companies Act, 2013 enumerates the fiduciary duties that a director owes to the company. Moreover, the same does not mention that the same breach can be cured by ratification by shareholders. This implies that in the absence of a specific provision providing for the same, the director’s liability arising out of their breach of duty under the Indian Company Law cannot be cured by ratification of the same by the shareholders of the company.

The only trace of applicability of this doctrine in India is visible through limited number of case laws of various High Courts; one of them being D.R. Banaji vs. Manilal T. Patel, in which the Court observed the following:

“Fraud practised on the Company even by directors who are themselves the sole share-holders cannot, in my judgment, be expurgated by recourse to any such fanciful ratification.” [6]

However, as the Companies Act, 2013 is silent on the same the possibility of ratification of breach of duty by shareholders remains bleak.

Therefore, the only possibility of avoiding liability for breach of duty under the Indian law for directors lies under Section 463 of the Companies Act, 2013. This provision gives the court a discretionary power to absolve any officer of the company from their negligence, default, breach of duty and misfeasance after giving due regard to all the circumstances of the mater in issue.

CONCLUSION

Across the various common law jurisdictions the breach of duty of directors can be ratified by the shareholders of the company. The same has been codified in their respective company laws and have well-developed judicial recognition and interpretation of the same. India currently lacks the requisite framework to recognise this principle as applicable.

It is suggested that for the purpose of strict adherence to the principles of corporate governance which requires directors to act in the best interest of the company, its members and other stakeholders, it is only prudent to not adopt the common law principle of ratification under the Indian company laws. Application of the same, will give the negligent directors a chance to escape the liability that they may owe to the company and its members in general and specifically to the creditors at the time of liquidation. Therefore, it is opined that the fiduciary duties of directors must remain an absolute and a sacrosanct obligation on them.

ENDNOTES

[1] R. J. C. Partridge, Ratification and the Release of Directors from Personal Liability, The Cambridge Law Journal, Vol. 46.; https://www.jstor.org/stable/4506981?seq=1#metadata_info_tab_contents

[2] In Re: Halt Garage (1964) Ltd., [ 1982 ] 3 All ER 1016; https://swarb.co.uk/re-halt-garage-1964-ltd-chd-1982/

[3] EIC Services Ltd v Phipps, [2003] 1 WLR 2360 at [122]; https://swarb.co.uk/eic-services-ltd-european-internet-capital-ltd-v-phipps-paul-barber-ca-30-jul-2004/

[4] Taylor v. National Union of Mineworkers, [1985] BCLC 237; https://www.lawteacher.net/free-law-essays/company-law/majority-rule-shareholders.php

[5] Regal (Hastings) Limited v. Gulliver, [1967] 2 A.C. 134; https://swarb.co.uk/regal-hastings-ltd-v-gulliver-hl-20-feb-1942/

[6] D.R.Banajivs.ManilalT.Patel,AIR1956Bom681; https://www.taxmanagementindia.com/web/tmi_blog_details.asp?id=134465&kw=Dr-DR-Banaji-Versus-Manilal-T-Patel

Regal (Hastings) Ltd v Gulliver: HL 20 Feb 1942