SC weighs in on interplay of labour laws and IBC

By Abhishek Dutta and Vineet Shrivastava, Aureus Law Partners

India as a welfare state has enacted various labour laws in order to ensure the protection and promotion of the social and economic status of workers and the elimination of their exploitation.

Under the Indian constitution, trade union, labour and industrial disputes are included in the concurrent list, where both the central and state governments are competent to enact legislation, with certain matters reserved for the central government. In addition to these, the preamble of the constitution has secured social, economic and political justice, equality of status and opportunity. There have been some recent court decisions under the Insolvency and Bankruptcy Code, 2016, (code) that deal with the interpretation of labour legislation.

labour laws
Abhishek Dutta
Founder and managing partner
Aureus Law Partners

Recently, the Supreme Court, in the case of JK Jute Mill Mazdoor Morcha v Juggilal Kamalpat Jute Mills Company Ltd, upheld the insolvency application filed under section 9 of the code by a registered trade union considering it to be an operational creditor for the purposes of the code.

The National Company Law Tribunal (NCLT), while adjudicating the application filed by the trade union on behalf of nearly 3000 workers of the debtor, had held that the trade union was not covered as an operational creditor and had dismissed the insolvency application. In the appellate proceedings, the NCLAT had also dismissed the trade union’s application by stating that each worker could file an individual application before the NCLT.

The Supreme Court, after studying various provisions of the Trade Unions Act, 1926 (act), observed that a trade union being an entity established under the provisions of the act would fall under the definition of a person under section 3(23) of the code.

Further, rule 6, form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, also recognizes that claims can be made not only in an individual capacity but also conjointly.

labour laws
Vineet V Shrivastava
Partners
Aureus Law Partners

Also, a trade union that is recognized under section 8 of the act can sue or be sued in its name. The Supreme Court relied on the judgment of the division bench of Bombay High Court in the case of Sanjay Sadanand Varrier v Power Horse India Pvt Ltd, where a winding-up petition by a trade union under section 434 read with 439 of the Companies Act, 1956, was held to be maintainable. On the basis of these observations, the Supreme Court was of the view that filing individual petitions would be burdensome as each worker would, therefore, have to pay insolvency resolution process costs, costs of the interim resolution professional, costs of appointing valuers, and so on.

It observed that since a trade union is formed for the purpose of regulating the relations between employees and their employer, it can surely maintain a petition as an operational creditor under the code. On the basis of this, the Supreme Court remitted the petition to the NCLAT to decide the matter on its merits.

In another case, Alchemist Asset Reconstruction Co Ltd v Moser Baer India Limited, an application was filed by the workers of the debtor in liquidation, praying for a direction to the liquidator to exclude the amount that is due towards their provident fund, gratuity fund and pension fund from the waterfall mechanism provided for under section 53 of the code. The liquidator was of the view that as per explanation II to section 53 of the code, “workmen’s dues” have the same meaning as that assigned to it under section 326 of the Companies Act, 2013, and therefore gratuity shall be included for the purposes of section 53 of the code.

The NCLT observed that “liquidation estate” as defined under section 36 of the code clarifies in unequivocal terms that all sums due to any employee from the provident fund, pension fund and gratuity fund are not to be included in the expression “liquidation estate”.

Accordingly, the NCLT relying on the judgment of the NCLT Bombay bench in the case of Asset Reconstruction Company (India) Ltd v Precision Fasteners Ltd held that employees’ dues towards pension, provident fund and gratuity were not to be included in the liquidation estate and would not, therefore, be recovered by way of waterfall mechanism provided for under section 53 of the code. It further issued directions to make available funds to the provident fund, gratuity fund and pension fund of the debtor company in case of deficiencies in the said funds.

NCLAT says statutory dues also operational debt

By Abhishek Dutta and Sayli Petiwale, Aureus Law Partners

The National Company Law Appellate Tribunal (NCLAT) on 20 March 2019 dismissed a batch of appeals in the matter of PR Director General of Income Tax (Admn & TPS) v Synergies Dooray Automotive Ltd & Ors, which claimed taxes to be an exception to the definition of operational debt under section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC).

The NCLAT held that taxes were subsumed within the definition of operational debt and tax authorities were operational creditors under IBC.

Abhishek Dutta id
Abhishek Dutta
Founder and managing partner
Aureus Law Partners

Section 5(21) of IBC: The appellants challenged section 5(21) of the IBC stating that the word “or” before the sentence “…a debt in respect of the payment of dues arising under any law for the time being in force payable to the Central Government…” should be interpreted as “and”. Therefore, they argued that: (i) debt would be related only to supply of goods or services rendered to the corporate debtor; and (ii) tax does not qualify as either, and would not be an operational debt.

Discussing the scope and nature of the term operational debt, the NCLAT, based on the precedents in statutory interpretation, considered the positioning of the words “or” as well as “and” in the provision. It observed that there was no ambiguity in the IBC and that the legislature has intentionally used the words “or” and “and” at different places in the provision.

The NCLAT, relying on the judgment in the Swiss Ribbons Pvt Ltd & Anr v Union of India & Ors (2018) case, held that “and” had to be read conjunctively while “or” had to be read disjunctively in the said provision. On the basis of this, the NCLAT held that statutory dues were operational debt.

The appellants argued that because the corporate debtors’ operation did not rely on statutory dues, the question of tax being an operational debt would not arise. The NCLAT, instead, observed that taxes had a direct nexus with the corporate debtor’s operation as they would not arise if the corporate debtor was not in operation.

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Sayli Petiwale
Associate
Aureus Law Partners

Based on the above, it held that statutory dues such as taxes were an operational debt; and tax authorities as such would qualify as operational creditors.

What the NCLAT did not discuss: Another argument made by one of the appellants was that liability under the tax statute is a first charge and therefore cannot be a part of the resolution plan. Although the NCLAT did not discuss this point, the case of Pr Commissioner of Income Tax v Monnet Ispat And Energy Ltd, is seminal in this regard, where the Supreme Court categorically adjudged that section 238 of the IBC overrides any statute inconsistent with it, including the Income Tax Act, 1961. Therefore, it would appear that having a first charge (under another statute) may become immaterial if a company enters the ambit of insolvency under IBC.

Ambiguity over tax statutes and IBC: This decision raises significant questions regarding the status of the tax authorities’ claims in light of the overriding effect of the IBC provisions.

In August 2018, High Court of Andhra Pradesh and Telangana, in Leo Edibles and Fats Limited v The Tax Recovery Officer case, permitted liquidation of assets of a company undergoing liquidation under IBC despite ongoing recovery proceedings by the income tax authorities.

The high court said in no uncertain terms that the income tax authorities could not be considered at par with secured creditors. The court also said that because the income tax authorities are not secured creditors, they must take recourse under section 53 of the IBC with regards to the distribution of assets and they would come fifth in the order of the disbursal of claims as taxes are a contribution to the Consolidated Fund of India. It is interesting to note here that section 53 of the IBC does not mention the term operational creditor.

With the NCLAT’s decision declaring the tax authorities as operational creditors, the ambiguity exists in the interplay between tax (dues) and the IBC. The tax department in October 2018 was reported to have prepared a proposal seeking the intervention of the Ministry of Finance to resolve the issue.

Recently, the Insolvency and Bankruptcy Board of India has reconstituted the Insolvency Law Committee as the Standing Committee to review the implementation of the IBC. It will be interesting to see what recommendations the committee will make on the issue of the ambiguity regarding tax and the IBC.

Supreme Court upholds constitutional validity of IBC

By Abhishek Dutta, Vineet Shrivastava and Manish Parmar, Aureus Law Partners

The Supreme Court, while deciding the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016 (code), in the case of Swiss Ribbons Pvt Ltd v Union of India, upheld the mandate of section 29A with minor distinctions. Section 29A of the code lists persons or entities not eligible to submit a resolution application in insolvency proceedings before the National Company Law Tribunal.

Abhishek Dutta id
Abhishek Dutta
Founder and managing partner
Aureus Law Partners

The challenge to the constitutional validity of section 29A, more particularly clause (c), was made on the grounds that it restricts the speedy disposal of a resolution process, and as such is contrary to the object of the code. Clause (c) of section 29A provides that a person who exercises control and management over a corporate debtor’s non-performing asset (NPA) account or who is a promoter of the corporate debtor, and at least one year has elapsed from the date on which such account was classified as NPA. is not qualified to be a resolution applicant.

A proviso to the provision makes exceptions in casesc where (1) the applicant discharges their debt under the said NPA accounts, (2) the applicant is a financial entity and is not a related party to the corporate debtor, and (3) the applicant has the control and management of the NPA accounts and is a promoter of the corporate debtor pursuant to a resolution plan approved under the code.

Section 29A(c) was challenged on the grounds that it brings about a blanket ban on all the promoters of the corporate debtor. Also, it does not provide any mechanism to bar unscrupulous promoters responsible for the stressed state of the corporate debtor and does not allow efficient managers to revive the corporate debtor, and is manifestly arbitrary.

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Vineet V Shrivastava
Partners
Aureus Law

Also, it was contended that retrospective application of the provision has erroneously restricted the former promoters who may have the best resolution plan, resulting in the maximization of value, and as such is contrary to the object of the code.

Further, the classification of an account as NPA may be due to various reasons without the person being a willful defaulter. Restricting such a person from making a resolution application otherwise valid under the code is without any basis in law and rationality. Also, restricting relatives of former promoters (clause (h)), who do not have a business connection with such promoters, from submitting a valid resolution plan may not be a rational interpretation of the mandate of the code.

The Supreme Court, in upholding the constitutional validity of section 29A, observed that the Statement of Object and Reasons of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, clearly stated that persons, who with their conduct have contributed to the defaults of the corporate debtor, and are otherwise undesirable, may misuse the code to participate in the resolution process, and gain or regain control of the corporate debtor.

The retrospective application of the said provision was held to be valid on the basis of the fact that an applicant has no vested right for consideration and approval of its resolution plan (ArcelorMittal India Private Limited v Satish Kumar Gupta and Ors), and no vested right is being taken away by the retrospective application of section 29A.

Further, the Supreme Court observed that restricting an efficient erstwhile manager or promoter of the corporate debtor from making a resolution application under the code is valid. The court held that such persons do not have a vested right to make an application as they are also restricted from purchasing stressed assets of a corporate debtor under liquidation.

With regard to restrictions imposed on the relatives of such ineligible resolution applicant, the Supreme Court applied the doctrine of nexus (Attorney General for India & Ors v Amratlal Prajivandas & Ors), and observed that categories of persons qualified to be relatives under the code should not be considered to be ineligible resolution applicants under section 29A in the absence of any (real) connection with the business activity of former promoters or managers.

The above ruling of the Supreme Court furthers the principle that a person, owing to whose conduct the corporate debtor has gone into insolvency, should not be allowed to regain control of the stressed enterprise at a discounted value, and is in line with its judgment in the case of State Bank of India v V Ramakrishnan.

IBC: Law of guarantees and corporate insolvency process

By Abhishek Dutta, Vineet Shrivastava and Manish Parmar, Aureus Law Partners

The National Company Law Appellate Tribunal (NCLAT), in its recent ruling in the case of Vishnu Kumar Agarwal v Piramal Enterprises Ltd, while examining the validity of an application made under section 7 of the Insolvency and Bankruptcy Code, 2016 (code), against corporate guarantors, held that: (1) there is no bar on filing two simultaneous applications under section 7 against the principal borrower as well as the corporate guarantors and against both guarantors; and (2) it is not necessary to initiate a corporate insolvency resolution process (CIRP) against the principal borrower before initiating a CIRP against the corporate guarantors.

Abhishek Dutta id
Abhishek Dutta
Founder and managing partner
Aureus Law Partners

The NCLAT was hearing the appeal preferred by one of the shareholders against the order of the National Company Law Tribunal, New Delhi, initiating CIRP against the corporate guarantors.

The CIRP proceedings were initiated as the principal debtor, being a society, was not amenable to the insolvency proceedings under the code.

Moreover, two separate insolvency applications were filed by the creditor and admitted simultaneously against the two corporate guarantors for the same claim amount and default.

The NCLAT held that the liability of the corporate guarantors is coextensive with the principal debtor, and consequently there is no requirement under the code to exhaust the remedies against the principal debtor before initiating proceedings against the corporate guarantors, as laid down by the Supreme Court in the case of Bank of Bihar v Damodar Prasad and Anr (1969) and State Bank of India v Indexport Registered and Ors(1992).

Further, it held that once, for the same set of claims, an application under section 7 filed by the financial creditor is admitted against one of the corporate debtors (principal borrower or corporate guarantors, the financial creditor cannot subsequently initiate a CIRP against the other corporate debtor (the corporate guarantors or the principal borrower) for the same set of claims and default.

Vineet Shrivastava Partner Aureus Law Partners
Vineet Shrivastava
Partner
Aureus Law Partners

This case also follows the Supreme Court’s judgment in the case of State Bank of India v V Ramakrishnan (applicability of moratorium to the corporate guarantors), denying the corporate guarantors the option of insulating themselves from the recovery proceedings as against the default by the principal borrowers or debtors.

By upholding the principles of law of guarantee to insolvency applications made under the code, the above ruling once again provides an insight into the principles of interpretation of the provisions of the code in consonance with the provisions of the Indian Contract Act, 1872 (act).

However, the tribunal did not deal with situations where the creditor may choose to claim only a part of the debt from one of the corporate guarantors. This question is still open to interpretation. In this regard, it may be pertinent to consider sections 146 and 147 of the act, which provides for the limit of liability of the guarantors in accordance with the contract of guarantee. Hence, the validity of applications filed simultaneously in such situations remain a contentious issue.

The above ruling is in contrast with an earlier order of the NCLAT in the case of Export Import Bank of India v CHL Limited. In this case, the tribunal held that where the reconciliation of the claim amount is pending with the principal borrower, the creditor cannot proceed to issue proceedings against corporate guarantors.

Only when the principal borrower fails to pay the reconciled amount, would the creditor be entitled to invoke the corporate guarantee against the corporate guarantors. The connected question, however, is if there are reconciliation issues pending in relation to the claim amount, would the same qualify as a dispute under the code?

The ruling in the CHL Limited case can be distinguished from the Vishnu Agarwal case judgment in as much as the amount claimed was not settled with the principal borrower, and the reconciliation of the interest was pending.

However, leaving aside the distinction in the factual matrix it will be interesting to see how these two conflicting judgments will be applied in the future. At the time of publication, the Vishnu Agarwal judgment has been appealed in the Supreme Court and is pending admission. Hence, it would be relevant to see the Supreme Court’s view on this.

Existence of dispute under insolvency code

By Abhishek Dutta, Vineet V Shrivastava and Manish Parmar, Aureus Law Partners

2 February 2019

Under the Insolvency and Bankruptcy Code, 2016, the corporate insolvency resolution process (CIRP) can be initiated by an operational creditor if there is no dispute in relation to the default on the part of the corporate debtor.

Abhishek Dutta Aureus Law Partners
Abhishek Dutta
Aureus Law Partners

The application filed with the National Tribunal (NCLT) must be preceded, under section 8, by a demand to repay the debt. The corporate debtor should, within a period of 10 days from the date of receipt of notice, either repay the unpaid operational debt or mention the existence of a dispute or record of the pending suit or arbitration proceedings filed before the receipt of such notice or an invoice in relation to such a dispute.

While a record of a pending suit or an arbitration proceeding filed before the receipt of notice or invoice in relation to the dispute would lead to an immediate cessation of further proceedings, the stand-alone term “dispute” has lent itself to interpretation by the courts. Under section 5(6) of the code, “dispute” includes a suit or arbitration proceedings relating to (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty.

Evaluation of dispute: The definition clause provides that the term “dispute” shall include a suit or an arbitration proceeding. Principles of statutory interpretation provide that the word in respect of which “includes” is used, bears both its extended statutory meaning and its ordinary, popular and natural sense, whatever is properly applicable. Also, the definition in relation to which “includes” is used would have an extended meaning, and cannot be restricted to receive its ordinary, popular and natural meaning.

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Vineet V Shrivastava
Aureus Law Partners

Further, where the word is defined to “include” something, the definition is prima facie extensive. The word “include” is generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the statute. It is also instructive to note that in the code as enacted, the word “includes” was substituted for the word “means”, which occurred in the Insolvency and Bankruptcy Bill.

In view of the above, the meaning of the term “dispute” as defined in the code would include other forms of dispute which have not culminated in judicial proceedings, in addition to the suit or arbitration proceedings.

According to the definition of “dispute”, suits or arbitrations are examples of dispute. However, such suits or arbitrations should be specifically related as provided under section 5(6) of the code.

As discussed, being inclusive, the definition of “dispute” can be extended. The Supreme Court, in Mobilox Innovations Pvt Ltd v Kirusa Software Pvt Ltd (2017), held that the dispute in the form of suits or arbitration proceedings must relate to one of three conditions laid down under section 5(6) of the code either directly or indirectly. Further, the Supreme Court has held that passing of an arbitral award and steps taken to challenge the arbitral award constitutes a valid dispute with regard to operational debt, as well as a pending appeal under the Arbitration and Conciliation Act, 1996.

A part settlement of the disputed amount as opposed to arbitration proceedings would not entitle the creditor to contend that a dispute did not exist.

Existence of dispute: The Supreme Court has observed that the dispute must be pre-existing prior to the receipt of the demand notice or invoice. A dispute raised after the application for CIRP cannot be a ground for rejection of such application.

Manish Parmar Aureus Law Partners
Manish Parmar
Aureus Law Partners

The true meaning of section 8(2)(a) read with section 5(6) of the code clearly brings out the intent of the code, that the corporate debtor must raise a dispute with sufficient particulars. In case a dispute is being raised by showing the records of dispute in a pending suit or arbitration, the dispute must also be relatable to the conditions provided under section 5(6). In addition, such dispute should have been raised with or brought to the notice of the creditor.

Hence, for rejection of an insolvency application, the adjudicating authority does not have to go into the merits of the dispute as to whether such a dispute would withstand judicial scrutiny. However, it is important that the authority determines two things – firstly that the dispute raised is valid in its estimation and secondly that the dispute has been brought to the notice of the creditor before the notice is served. The first of these two aspects is subjective, but the second is an objective assessment. Remedying this, in the authors’ view, would lead to better solutions under the law.

Data, Privacy: What’s on the Cards

The Data Lawyer and Aureus Law Partners wish you a very happy 2019 (and we sincerely hope that in the new year, no one infringes your privacy, steals your data or leaves you with a lack of choice!). 

In this post, we take stock of some imminent developments within the realm of data privacy in India, and its potential impact on individuals and businesses alike. Needless to say, what’s on the horizon is mostly tied to what transpired in the last year.  

Aadhaar and Other Laws Amendment Bill

On December 17, 2018, the Cabinet approved certain amendments to the Prevention of Money Laundering Act, 2002 (the “PMLA”), the Telegraph Act, 1885, and the Aadhaar (Targeted Delivery of Financial and other Subsidies, benefits and services) Act, 2016 (the “Aadhaar Act”) that are intended to pave the way for use of Aadhaar details for obtaining new mobile numbers or opening bank accounts when customers opt for its use ‘voluntarily’. We had written about the possible outcomes of this here: https://thedata.lawyer/2018/12/18/what-the-proposed-pmla-amendments-might-mean/.

The Bill was introduced in Parliament in this week. The Bill proposes a regime for allowing every client, beneficial owner, or person (such terminology depending on whether the necessary identification is in relation to telecom or PMLA requirements) who is sought to be identified, the voluntary choice of one of the following modes of identity verification:

  1. authentication under the Aadhaar Act if the party doing the verification is a banking company (under the PMLA regime), and by all persons licensed to ‘establish, maintain, or work a telegraph’ (read: telcos and ISPs); or
  2. offline verification under the Aadhaar Act (whether the offline verification will be paper-based or paperless mechanisms is not currently known and will be “through such offline modes as may be specified by regulations” says the Bill); or
  3. use of passport issued under Section 4 of the Passports Act, 1967; or
  4. use of any other officially valid document (“OVD”) or modes of identification as may be notified by the Central Government.

Simply put, the Bill allows Aadhaar e-KYC, Aadhaar offline KYC and other forms of KYC through passport or other OVDs, depending on the individual’s choice. 

Note that there are several additional steps that need to occur before we see the result of these amendments: these include the issuance of specific regulations that would, presumably, set out the details of how each of these various forms of identity verification are to take place. Here are a few additional points about the changes proposed in the Bill that one needs to keep in mind:

  • While the proposed changes to the PMLA currently contemplate the use of Aadhaar eKYC only by banking companies, the Bill also states that the Central Government may permit other types of entities that to use Aadhaar eKYC is they meet the standards or privacy and security set out under the Aadhaar Act. This leaves significant opportunity for regulatory widening of the permissibility of Aadhaar eKYC by – you guessed it – ‘fintech’ companies
  • Several industry bodies and associations have made representations to regulators in the past months, urging the adoption of ‘paperless’ processes for non-Aadhaar-authentication-based (read: non-Aadhaar-eKYC) identification processes; whether these have been accepted, and if so, to what extent, would only be apparent once the updated regulations are published and made available.
  • The Bill states emphatically that no person may be denied services for not having an Aadhaar number. But it keeps a window open for mandatory authentication of an Aadhaar number holder for the provision of any ‘service’ if such authentication is required by a law made by Parliament. Possibly, the ‘service’ in question is one for which the expenditure is incurred from, or the receipt thereform forms part of, the Consolidated Fund of India, as described in Section 7 of the Aadhaar Act.
  • Other noteworthy changes proposed by the Bill relate to granting of teeth to the UIDAI by allowing it to appoint officers and employees to discharge its functions, issue directions to any entity in the ‘Aadhaar ecosystem’, and also impose hefty fines ranging from one crore to additional penalties of upto ten lakh per day of an unremedied contravention. This is important, because one of the grounds on which the compulsory use of Aadhaar eKYC was challenged is that private players were allowed to gather demographic data without much oversight over their use, retention, or processing of such data. These changes may result in greater compliance by entities within the ‘Aadhaar ecosystem’; but note that the proposed changes in the Bill do not include specific provisions under which an Aadhaar number holder could file a complaint against an erring ‘Aadhaar ecosystem’ member: inquiries under the new Section 33A(l) of the Aadhaar Act may only be initiated upon a complaint made by the UIDAI. 

Watch this space for timely updates on the Bill’s journey through Parliament. 

Review Petition against the Aadhaar Judgment

Even as the Government and the regulators showed sluggishness in reacting to the Supreme Court’s Aadhaar judgment (in the matter of Justice K.S. Puttaswamy (Retd.) v. Union of India & Others), we hear that a petitioner by the name of Imtiyaz Ali Palsaniya has made some quick moves to file a review petition against this judgment, contending that various grounds urged in applications filed in the matter had not been considered by the Hon’ble Court in its judgment. The petition purportedly sets out eight grounds for reviewof the judgment, of which the following is of interest to us:

“The absence in the judgment of any direction by the Hon’ble Court for deletion of Aadhaar data which already is in the possession of private companies, entities, schools, colleges, work places, banks, post offices, telecommunication service providers, etc. The petitioner contends that such a direction ought to have flowed as a consequence of the Supreme Court Bench’s reading down of Section 57 of the Aadhaar Act. While the contention appears logical, it remains to be seen whether it garners the apex court’s interest. If it does, it is hoped that the directions if any issued, are not impractical to comply with.”

The Information Technology Intermediaries Guidelines (Amendment) Rules

On December 24, 2018, the Ministry of Electronics & Information Technology (“MeitY”) issued a draft of “The Information Technology [Intermediaries Guidelines (Amendment) Rules] 2018” inviting public comments on certain measures to regulate social media, which had Indian social media buzzing for several hours. 
Among others, the draft Rules state: 

“When required by lawful order, the intermediary shall, within 72 hours of communication, provide such information or assistance as asked for by any government agency or assistance concerning security of the State or cyber security; or investigation or detection or prosecution or prevention of offence(s); protective or cyber security and matters connected with or incidental thereto. Any such request can be made in writing or through electronic means stating clearly the purpose of seeking such information or any such assistance. The intermediary shall enable tracing out of such originator of information on its platform as may be required by government agencies who are legally authorised.”

Since a previoushome ministry notification authorising 10 intelligence and security agencies to intercept data on computers, mobile devices, and servers caused uproar, the Government gave a longer reaction time to stakeholders on this one.  

While the Government’s efforts to reign in the internet and social media – much in contrast to the fundamental premises on which these are designed – are nothing new, one wonders what would happen to intermediaries if they are ever called upon to handover information or assistance of a nature that they are ill-equipped to even store, let alone handover. Even a law-abiding intermediary would be hard-pressed to think of all the types of information that might fall under a description as vague as “information concerning cyber security…matters connected with or incidental thereto”. It is hoped that stakeholders take due notice of such draft rules and regulations and make known their difficulty in complying with them. 

And in parting, let’s mention the Draft Personal Data Protection Bill, which generated much discussion and debate, but has not been presented before Parliament in the current session. With general elections around the corner, and a veritable sea of representations and suggestions having been made to MeitY in response to its invitation of comments from the public, the date of the Bill’s passing into law, as well as its final form, remain matters of speculation. 2019 promises to be an interesting year for privacy and data protection!

Here’s how you can reach the authors:
Bhavin Patel (bhavin.patel@aureuslaw.com)
Hemant Krishna (hemant.krishna@aureuslaw.com)

Cross-border insolvency report: A bird’s eye view

By Abhishek Dutta and Astha Srivastava, Aureus Law Partners

The Insolvency Law Committee issued a report on cross-border insolvency in October after considering public comments received on a draft framework issued by the Ministry of Corporate Affairs. The committee considered the UNCITRAL Model Law on Cross-Border Insolvency, 1997 (Model Law), and its implementation in the UK, the US, and Singapore.

Abhishek DuttaFounder and managing partnerAureus Law Partners
Abhishek Dutta
Founder and managing partner
Aureus Law Partners

Applicability: The proposed legislation may be applicable initially to corporate debtors (including foreign companies) under the Insolvency and Bankruptcy Code, 2016 (IBC). Following principles of legal reciprocity, benches of National Company Law Tribunal (NCLT) may be notified for recognition of foreign proceedings and cooperation with foreign courts and foreign representatives. Insolvency professionals or liquidators under IBC also may be authorized to act in foreign countries subject to regulations. NCLT may refuse to take action in a proceeding, if its implementation will be manifestly contrary to India’s public policy. Public policy exception is recommended to be applicable restrictively with the inclusion of the phrase “manifestly contrary”. The central government will be asked to weigh in whenever a question of public policy is involved and international jurisprudence is to be relied upon where an exception is needed. The central government may be granted the power to act on its own cognizance (suo motu) in case it feels that an NCLT order may be against public policy. Amendments to certain sections of Companies Act, 2013, have also been proposed.

Access to foreign representatives: According to the report, foreign representatives should be provided direct access to NCLT, and allowed to exercise their powers under the legislation through an insolvency professional. A code of conduct may be specified for foreign representatives including a penalty for infraction. After recognition of a foreign proceeding, foreign representatives may be permitted to participate in the insolvency proceedings of the debtor under the IBC. Foreign creditors may be extended similar rights as that of the Indian creditors for initiating or participating in insolvency proceedings.

However, claims of foreign tax and social security may be excluded. Notice to foreign creditors of a proceeding under IBC may be provided on the same terms as Indian creditors. The notice of initiation of IBC proceeding will include the time period and place for filing claims, the requirements for secured creditors and other relevant information.

Astha SrivastavaSenior associateAureus Law Partners
Astha Srivastava
Senior associate
Aureus Law Partners

Recognition of foreign proceeding: Foreign representatives may be permitted to apply for recognition of foreign proceedings before NCLT. Such an application has to be filed with documents substantiating the existence of foreign proceedings. Foreign representatives may also be required to submit a statement identifying all foreign and IBC proceedings pending against the corporate debtor in their knowledge. The corporate debtor’s registered office will be presumed to be its center of main interest (COMI).

A lookback period of three months to determine relocation of the registered office for COMI presumption is recommended. However, in case of any contradiction, NCLT may be authorized to ascertain COMI for a debtor. NCLT may recognize a foreign proceeding as foreign main proceeding, or foreign non-main proceeding. Reliefs including moratorium, distribution of Indian assets to foreign representatives may incur upon recognition of foreign proceeding as main or non-main.

With regards to cooperation with foreign courts and representatives, the central government has been mandated to act as a facilitator to ease the burden of NCLT. Notification of relevant authority for transmission of notices and correspondence with foreign courts has been suggested and cooperation and communication by the insolvency professional with foreign courts and representatives may be permitted.

Concurrent proceedings: After recognition of foreign main proceedings against a debtor, the initiation of IBC proceedings may be subject to certain conditions involving the existence of domestic assets. A creditor in receipt of part payment for a claim in a foreign insolvency proceeding may not be eligible for receiving payment in another proceeding against the same debtor. However, additional payment may be received if the same is proportionately less than the payment received by other creditors of same standing. Recognition of foreign main proceeding may be presumed as a proof of default under IBC by corporate debtor for the corporate insolvency resolution process. However, such foreign main proceeding should follow from an inability to pay debts or pursuant to a state of insolvency of the corporate debtor.

Analysis: High court powers down stressed sector

By Abhishek Dutta and Astha Srivastava, Aureus Law Partners

The Reserve Bank of India (RBI) issued a circular on 12 February 2018 under sections 35AA and 35AB (Provisions) of the Banking Regulation Act, 1949, on the identification and resolution of stressed assets.

In case of occurrence of default on accounts of debtors with aggregate exposure of lenders exceeding ₹20 billion (US$272 million) in aggregate (including specified previous RBI schemes). The circular mandates formulation of a resolution plan (RP) within 180 days from 1 March 2018 or from the date of default. In the event that a debt is not repaid, even by a day, RBI requires banks to file an insolvency application under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Independent Power Producers Association of India, Association of Power Producers and Prayagraj Power Generation Company filed writ petitions with the division bench of the Allahabad High Court. The petitioners sought reliefs including, inter alia, a declaration that the Provisions in the circular are ultra vires the constitution and an order for quashing of the circular. This is an analysis of the order of 27 August 2018 delivered by the court.

Main line of attack against the circular was in reference to the “sector agnostic” approach adopted by RBI. The challenge was made that the approach violates Article 14 of the constitution. Power sector should be treated differently due to “severe financial stress”. Fuel shortages, sub-optimal loading, unused capacity, absence of fuel supply agreement(s) and a lack of power purchase agreement(s) were cited as reasons justifying differential treatment. The 37th and the 40th reports of the Standing Committee on Energy (SCE) were submitted as evidence. It was argued that initiation of IBC proceedings would cause grave and irreparable harm to the sector and that the 180-day period should be extended. Petitioners applied for the circular to be suspended till the High-Level Empowered Committee (HLEC) tenders its report. Notably, RBI is not a part of HLEC.

Astha SrivastavaSenior associateAureus Law Partners
Astha Srivastava
Senior associate
Aureus Law Partners

The court observed that reliance could be placed on the SCE reports as the facts in them were not in dispute. However, the reports were not sufficient for granting interim relief as they are in nature of “advised relief”. On the issue of irreversible prejudice following IBC proceedings, the court stated that the core scheme of IBC includes timely identification of default, expeditious implementation of a resolution plan, suspension or removal of existing management.

The court noted that the 180-day period for RP under the circular (as opposed to under IBC) is in addition to the prescribed total period of 270 days under IBC. Further, judicial interference in the operation of economic legislation can take place only if the provisions of such legislation are patently arbitrary or in defiance of logic. As the circular is intended to expedite the resolution of stressed economic and financial assets, the court decided not to intervene. Agreeing with RBI, the court rejected the argument of violation of Article 14. It decided that RBI is a monetary and fiscal regulator, and hence, the formation of protective measures for a particular industry are outside its purview. Lastly, it held that the court cannot give lenders discretion whether or not to apply under IBC, as this would contravene the powers conferred upon RBI by statute.

The court therefore denied the petition for interim relief but directed the government to consider initiating consultative process under the Reserve Bank of India Act, 1934. It directed that HLEC should submit its report within two months from the date of its formation. The court went on to clarify that its order will not curtail the rights and powers of a creditor under IBC, or of RBI from issuing directions to initiate corporate insolvency resolution process.

No appeal has been filed against the order. However, application of RBI for transfer of all cases pending before high courts seeking relief from the provisions of the circular to the Supreme Court was allowed. Supreme Court agreed to transfer such cases to itself with an assertion to maintain status quo as on 11 September 2018 till further order. It appears that Allahabad High Court’s order stands effectively stayed considering the petitioners before the High Court and the Supreme Court are common, being associations of power producers. However, it is unclear if this interim order is applicable on the ongoing resolution plans. It is also unclear whether this order applies to initiation of IBC proceedings by banks in the event of default by these petitioners et al under section 7 of IBC.

Cross-border insolvency requires a new framework

By Abhishek Dutta and the Knowledge Management Team, Aureus Law Partners

While a corporate entity may have creditors, debtors and assets in various countries, the Insolvency and Bankruptcy Code, 2016 (IBC), in its current avatar has no comprehensive legal framework on cross-border insolvency (CBI). The Ministry of Corporate Affairs on 20 June 2018 issued a public notice inviting comments on a draft chapter on cross-border insolvency, which is primarily based on the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency, 1997.

Currently, sections 234 and 235 of the IBC empower: (i) the government to make bilateral agreements with other countries for enforcing the IBC; and (ii) the National Company Law Tribunal (NCLT) to issue a letter of request to a foreign court for action on a debtor’s assets. Once a bilateral treaty is executed, and these provisions are notified, a foreign proceeding will be recognized in India, as per the Civil Procedure Code, 1908, while an Indian proceeding will be recognized in the foreign country based on its procedural rules.

Dealing with the issue of cross-border insolvency in Macquarie Bank Limited v Shilpi Cable Technologies Ltd, the Supreme Court recently gave foreign creditors the same right as a domestic creditor to initiate and participate in the corporate insolvency resolution process (CIRP). In this context of lack of a comprehensive framework on cross-border insolvency issues, the draft chapter would apply when: (a) assistance is sought in India by a foreign court or a foreign representative regarding a foreign proceeding; (b) assistance is sought in a foreign country regarding an IBC proceeding; (c) foreign and Indian proceedings for a corporate debtor are taking place concurrently; or (d) creditors in a foreign state have an interest in requesting initiation of or participation in the CIRP.

In a major departure from the Model Law, the draft chapter adopts the principle of reciprocity in that it will apply to countries which have adopted the Model Law. Further, access to the CIRP and information on notifications issued to a domestic creditor would be provided to foreign representatives and creditors.

A foreign proceeding could be recognized as a foreign main or non-main proceeding. This is paramount in determining the right to relief that may be granted by the NCLT. In the Model Law, the principle of centre of main interests (COMI) is used to determine the location of the main proceeding. COMI under the draft chapter is presumed as the place of debtor’s registered office.

A foreign main proceeding takes place in the country of the debtor’s COMI, while a non-main proceeding is at the debtor’s place of establishment. During a foreign main proceeding, the NCLT will ensure a moratorium on: (a) all proceedings against the debtor (including execution of judgments); (b) transferring, encumbering or disposing of any assets, rights or interests of the debtor; (c) enforcing any security interest on property of the debtor; and (d) the recovery of any property in the debtor’s possession by its owner or lessor. For non-main foreign proceedings, any relief is at the discretion of the NCLT. Before granting relief in a foreign proceeding, the NCLT is to ensure that the interests of creditors and stakeholders including the corporate debtor are protected. A foreign representative is also entitled to apply to the NCLT to avoid acts harmful to creditors.

The draft chapter provides for cooperation between the NCLT and the foreign court. The NCLT has the power to: (a) conduct a joint hearing with a foreign court; and (b) communicate with, request information or seek cooperation from foreign representatives. Resolution professionals (subject to NCLT supervision) are also empowered to communicate with foreign courts and representatives. Coordination between concurrent insolvency proceedings (for the same debtors) will ensure that the relief granted in a foreign non-main proceeding is consistent with the relief granted in a foreign main proceeding.

The NCLT also has the power not to give effect to the cross-border insolvency provisions if there is a violation of public policy.

The draft chapter is a step in the right direction. Among issues that need redressal, it does not govern cross-border insolvency proceedings of individuals. The term “foreign proceeding” is limited to an insolvency process and does not cover other forms of arrangement. Where the COMI falls outside India, the relief will depend on laws and courts of the foreign country. The draft chapter is silent on the rights and duties of an insolvency professional in a foreign proceeding. As public policy is not defined under the draft, parameters to ring-fence judicial discretion may be adopted, considering the inconsistent judicial approach towards the public policy doctrine.

Thus, once the draft chapter is enacted the question of whether it is better than negotiating bilateral treaties will be determined on the anvil of practical application.