TO EXPLORE CORPORATE LITERACY · 2020-06-05 · Swati R. Jain Advocate, Rajasthan ... Gurgaon ===== Ishita Sharma Legal Associate Legis Legal ... New Delhi ===== Corporate Law Journal

CORPORATE LAW JOURNAL

ISSN : 2581-3692

TO EXPLORE CORPORATE LITERACY

VO L U M E I I I I S S U E I I

J U N E 2 0 2 0

I S S N : 2 5 8 1 - 3 6 9 2

Corporate Law Journal Volume III Issue II

i An Initiative To Explore Corporate Literacy

ADVISORY COUNCIL

Hon’ble Justice K.S.P. Radhakrishnan

(Former Judge, Supreme Court of India)

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Hon’ble Justice Pankaj Naqvi

(Judge, Allahabad High Court)

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Hon’ble Justice Mridula Mishra (Vice Chancellor of Chanakya National Law University, Former Judge, Patna HC)

==================================================

D.R. Mehta

(Former Chairman of SEBI)

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Lalit Bhasin

(President of SILF & Bar Association of India)

==================================================

CA Amarjit Chopra

(Former President of ICAI)

==================================================

Dr. (h.c.) Advocate Mamta Binani

(Founder, Chamber of Advocate Mamta Binani &Former President of ICSI)

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ii An Initiative To Explore Corporate Literacy

ADVISORY COUNCIL

Prof. Dr. A. Lakshminath

(Founder & Former VC of Chanakya National Law University)

==================================================

Prof. Paramjit S. Jaiswal

(Vice Chancellor of Rajiv Gandhi National University of Law)

==================================================

Karan S. Thukral (Founder of Thukral Law Associates)

==================================================

Hemant K. Batra

(Legal Counsel – Advocate | Author | Speaker)

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Mr. Vinod Surana

(CEO & Managing Partner of Surana and Surana International Attorneys)

==================================================

Mr. Biswajit Chatterjee

(Partner at Squire Patton Boggs)

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iii An Initiative To Explore Corporate Literacy

EXPERT FORUM

Anirban Bhattacharya

Partner at Chambers of Anirban Bhattacharya

==================================================

Ekta Bahl

Partner at Samvad Partners

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Rajesh Vellakkat

Partner at Fox Mandal & Associates

==================================================

Savitha Kesav Jagadeesan

Senior Partner at Kochhar & Co.

==================================================

Abhinav Kumar

Partner at Cyril Amarchand Mangaldas

==================================================

Neeraj Dubey

Partner at Lakshmikumaran & Sridharan

==================================================

Dhruv Suri

Partner at PSALegal Counselors

==================================================

Ajar Rab

Partner at Rab & Rab Associates LLP

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Manisha Chaudhary

Managing Partner of UKCA and Partners

==================================================

Isha Sharma

Director at Trayambak Overseas Pvt. Ltd.

==================================================


iv An Initiative To Explore Corporate Literacy

EXPERT FORUM

Vikas Sharma

President at H2 Life Foundation

==================================================

Payal Parikh

Managing Partner at ANB Legal

==================================================

Dr. Sheetal Vohra

Founder & Managing Partner at Vohra & Vohra

==================================================

Ashish Kumar Singh

Partner at Capstone Legal

==================================================

CA Mukesh Bajaj

Partner at Tax & Regulatory Services

==================================================

CA Manoj Agrawal

Senior Manager, Finance, Dabur International Ltd.

==================================================

Yuvraj P. Narvankar

Managing Partner atNarvankar Legal Chambers

==================================================

Jyoti Shekhar

Legal Consultant & Founder Editor at EYRA

==================================================

Mini Gautam

Legal Consultant at SREI Group

==================================================

PallaviPareek

Managing Partner at Ungender.in

=================================================


v An Initiative To Explore Corporate Literacy

EXPERT FORUM

Mohit Singhvi

Founder at Singhvi & Co.

==================================================

CA Hemant Chopra

Finance Director at CMS Info System Ltd.

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Pankaj Agarwal

Founder at Quad Legal

==================================================

CA Rajeev K. Sharma

Indirect Tax Practitioner

==================================================

Naman Mohnot

Founder at Aapka Consultant

==================================================

CA Kalpesh Semlani

Founder & Proprietor at Kalpesh G. Semlani & Associates

==================================================

Kanchan Khatana

Founder & Managing Partner at Kanchan Khatana & Associates

==================================================

CS Padam Semlani

Founder & Proprietor at Padam G. Semlani & Associates

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Roopanshi Khatri

Advocate

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Bishwa Bandhu

Advocate, Supreme Court of India

==================================================

Swati R. Jain

Advocate, Rajasthan High Court

======================================================


vi An Initiative To Explore Corporate Literacy

CORPORATE RESEARCH CELL

Khushboo Khatreja

Senior Associate

DSK Legal

==================================================

Seema Choudhary

Policy Advocate

==================================================

Nilanjan Chaterjee

Associate Counsel

R.R. Prasad Associates

==================================================

Surabhi Singh

Associate

Cyril Amarchand Mangaldas, Delhi

==================================================

Akshita Goel

Associate

Cornellia Chambers, Gurgaon

==================================================

Ishita Sharma

Legal Associate

Legis Legal, New Delhi

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vii An Initiative To Explore Corporate Literacy

FACULTY EDITORS

Professor Subhash Chandra Roy

Professor of Law

Chanakya National Law University

==================================================

Dr. Ajay Kumar

Professor of Law


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Dr. Father Peter Ladis F

Assistant Professor of Law


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Dr. Pradeep Kumar Das


School of Law and Governance, Central University of South Bihar

==================================================

Aashish Jain


College of Legal Studies, UPES

==================================================

Sarvesh Kumar Shahi

Assistant Professor, Law

KIIT University, Bhubaneshwar

==================================================

P. Mohan Chandran

Business Content Writer

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viii An Initiative To Explore Corporate Literacy

ADMINISTRATIVE TEAM

Shubham Jain

Founder & Managing Editor

==================================================

CA Raunak Mohnot

Co-Founder & Marketing Head

==================================================

Harshit Anand

Executive Editor

==================================================

Priyanka Pangtey

Networking Head

==================================================

CA Khushboo Jain

Operating Head

==================================================

Rohan Singh

Publishing Director

==================================================

Ankit Yadav

Project Coordinator

==================================================

Mayank Kumar

Public Relation Head

==================================================

Madalsa Jain

Research Wing Coordinator

==================================================


ix An Initiative To Explore Corporate Literacy

STUDENT EDITORS

Shubham Jain

--------------------------------------------------

Rohan Singh

--------------------------------------------------

Sumit Kumar

--------------------------------------------------

Ankit Yadav

--------------------------------------------------

Mayank Kumar

--------------------------------------------------

Madalsa Jain

--------------------------------------------------

Gaurav Jain

--------------------------------------------------

Anisha Jain

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x An Initiative To Explore Corporate Literacy

FROM THE DESK OF THE PUBLISHER

Corporate Law Journal prays for good health and safety of all during these

tough times. We proudly announce the publication of its Volume III Issue II. After the

successful run of our previous issues, we are eager to implement the feedback we

have received from our readers and make the journal even better. The past year has

taught us many lessons and we have met excellent people along the way who have

contributed to our journal drawing from their varied expertise.

The Journal demonstrates our commitment to excellence in scholarship and

student development. The legal industry is really about people, which ties in with

one of our core beliefs that people make a difference. Our goal is always to produce

a reputable legal journal.

The Journal primarily covers the latest topics of discussion and debate in

corporate law around the world and also the emerging trends in the field of

corporate law.

Like any reader, we rate publications that are readable, indeed fun! We hope

you enjoy Corporate Law Journal and we welcome your feedback. We are confident

that this edition will be valued by judges, lawyers, students, researchers and scholars.

As you read the topics addressed in this Journal, we are sure that you will agree that

this is an impressive work produced by the authors and editors. It is a pleasure to

work with such fine individuals and students on a daily basis.


xi An Initiative To Explore Corporate Literacy

CONTENTS

THREE YEARS OF INSOLVENCY & BANKRUPTCY CODE, 2016: A

THROWBACK!

WOMEN DIRECTORS AND THE COMPANIES ACT

THE TATA- MISTRY FEUD- A MILESTONE CASE FOR OPPRESSION

AND MISMANAGEMENT IN INDIA

IMPACT OF COVID-19 ON CONTRACTS- FORCE MAJEURE AS A

TOOL TO SAVE FROM FRUSTRATION?

DUALISM IN TREATMENT OF CREDITORS: A WELL-SETTLED

PRINCIPLE OF IBC

THE CONFLICT OF NATIONALIZATION AND EXPROPRIATION

IN PROJECT FINANCE

RELATED PARTY TRANSACTIONS AND INDIA’S CONCENTRATED

OWNERSHIP STRUCTURE


xii An Initiative To Explore Corporate Literacy

THREE YEARS OF INSOLVENCY & BANKRUPTCY

CODE, 2016: A THROWBACK!

(Mohit Singhvi1 & Himanshu Choudhary2)

“Bankruptcy is good. Unemployment is good. They are necessary evils.

Unemployment makes workers available to industries that are rising. Bankruptcy

makes resources available to the industries that are rising.”-William Strauss

he Insolvency and Bankruptcy Code, 2016 (‘Code’ or ‘Act’ or ‘IBC’)is

redefining the framework for insolvency resolution in India. The novel

Insolvency& Bankruptcy legislation is based on the report submitted by the

Bankruptcy Legislative Reforms Committee (hereinafter referred to as ‘BLRC’) chaired

by Dr. T.K. Viswanathan, former Secretary General, LokSabha& former Union Law

Secretary3which submitted its final report on 4th November, 2015. In pursuant to the

same, the Code was introduced in Parliament on 21st December, 2015; passed on 5th

May, 2016 and also by RajyaSabha on 11th May, 2016 and received the President’s

assent on 28th May, 2016.

The arrangement of the Code has achieved a benchmark development in comparison

with the previous regime. For empowering the financial creditors, the Code

introduced a creditor-in-control regime with intent to focusing, a time-bound

resolution process and abridged scope for judicial intervention, and established

institutions such as the Insolvency and Bankruptcy Board of India, Insolvency

Professionals and Information Utilities etc. Though, all the provisions of the Code

1 Founder &Head, Singhvi& Co., Advocates and Legal Consultants, Jodhpur, Rajasthan. 2Principal Associate, Singhvi& Co., Advocates and Legal Consultants, Jodhpur, Rajasthan. 3The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design

T


xiii An Initiative To Explore Corporate Literacy

have not been brought into force yet, the Code for the time being only provides for

application to be filed against the companies and not partnership firms or individuals.

Not only has this, many provisions of the Code also been assailed in as much as the

constitutional validity of various provisions of the Code has been laid before various

High Courts, and the Supreme Court.

Prior to enactment of the Code, there was no specific law which had dealt with

Insolvency & Bankruptcy in India under one roof but was contained in distinct&

overlapping legislations like, the Recovery of Debt Due to Banks & Financial

Institution Act, 1993, the Securitisation and Recovery of Financial Assets and

Enforcement of Security Interest Act, 2002 & the Companies Act, 2013.Apart from

companies, individual insolvency is dealt with under the Presidency Towns

Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.Due to availability of

distinct legislations, multiple fora such as Debt Recovery Tribunal (DRT), Board of

Industrial & Financial Reconstruction (BIFR) were having jurisdiction regarding

insolvency resolution process. In case of individual’s insolvency, the respective

District Courts of the states were having jurisdiction as well as the High Courts were

designated for liquidation and winding up of the companies.

The previous regime of Insolvency & Bankruptcy was inadequate, ineffective and also

was superabundant complex in nature reason being existing legislation was need of

the hour apart from being time consuming and defeating the very purpose of speedy

justice as laid down in pronounced by the Hon’ble Supreme Court. The objective4 of

the Code is “to consolidate and amend the laws relating to reorganisation and insolvency

resolution of corporate persons, partnership firms and individuals in a time bound manner for

maximisation of value of assets of such persons, to promote entrepreneurship, availability of

credit and balance the interests of all the stakeholders including alteration in the order of

priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board

of India, and for matters connected therewith or incidental thereto”5.

4 Statement of Objects and Reasons, Insolvency and Bankruptcy Code, 2016 5 Preamble, Insolvency & Bankruptcy Code, 2016


xiv An Initiative To Explore Corporate Literacy

The National Company Law Tribunal (hereinafter referred to as ‘NCLT’) & Debt

Recovery Tribunal (hereinafter referred to as ‘DRT’) are the Adjudicating Authorities

for resolution of insolvency, liquidation and bankruptcy. The Code expresses that,

NCLT shall be Adjudicating Authority in relation to insolvency resolution and

liquidation for corporate persons and the DRT shall be Adjudicating Authority in case

of insolvency matters of individuals and firms.6Not only this, Section 224 of the Code

proposes to establish a fund known as the Insolvency and Bankruptcy Fund for the

purposes of insolvency resolution, liquidation and bankruptcy of persons under the

Code.

To enable this consolidation, the Code repeals and modifies provisions of various laws

that are directly in conflict with it. That for implementation of the Code some of the

related Acts like the Central Excise Act, 1944, the Customs Act, 1962, the Income Tax

Act, 1961 the Recovery of Debt Due to Banks & Financial Institution Act, 1993, the

Securitization and Recovery of Financial Assets and Enforcement of Security Interest

Act, 2002, The Companies Act, 2013, the Limited Liability Partnership Act, 2008, the

Payment and Settlement System Act, 2007 & the Indian Partnership Act, 1932 have

been amended in as much as the Presidency Towns Insolvency Act, 1909 and the

Provincial Insolvency Act, 1920 have been repealed.7

The reasons behind merger of numerous insolvency laws are primarily to dwindle the

uncertainty that arises from the application of multiple laws administered by different

authorities, and to make the system result oriented. The previous laws have never

been absolutely effective and reasons being one after another special legislations were

proposed regarding insolvency but neither of which was comprehensive and result

oriented. The multiple legal paths and multiple layers of court system witnessed

confusion and made it inefficient & rigid process from recovery aspect. Availability of

different foras for redressal of the same cause was a key difficulty, in a situation where

one forum decides on matters relating to the rights of the creditor, while another

6 Section 60 & 179 of the Code, respectively 7 Section 243 to 255 & Schedules to the Code, respectively


xv An Initiative To Explore Corporate Literacy

decides on those relating to the rights of the debtor, the decisions are readily appealed

against and either stayed or overturned in a higher court.8

That by removing previous difficulties, anomalies and also by considering future

aspect, this novel code has been introduced. It would not be out of place to mention

here that the distinct feature of the new code which emphasises on revival and

restructuring of business enterprises rather than recovery of debts carries more

realistic approach and transpires the legislative intent behind promulgation of the Act.

The approach of the central government while introducing this law seems to be

reformative and pragmatic and shall without a doubt prove foster the economic

growth of the country.

As a matter of practice, any creditor entitled to receive more than Rs. 1 Lac can

approach the National Company Law Tribunal, for matters related to insolvency.

Subsequent to registration before the NCLT, parties are heard and the decision is taken

with respect to the admission of the petition. Once admitted, an Interim Resolution

Professional as suggested by the applicant is appointed by the NCLT.9 The objective

of the resolution process to be taken up by the IRP is to come up with a plan and file

a report before the NCLT with intent to restructure the business that is acceptable to

creditors. In case the creditors do not accept the resolution plan then only Company

will be liquidated.

The Code provides a mechanism for the corporate debtor to specifically raise a dispute

while replying to the statutory notice and that can be related to specific grounds as

enumerated in section 5(6) of the Code. Dispute raised while replying to the statutory

notice for the first time had frustrated the filing of the insolvency proceedings. The

Hon’ble Supreme Court while clarifying the situation and putting a dead end to the

debate in Mobilox Innovations Pvt. Ltd v Kirusa Software (P) Ltd. 10had observed

that "What is important is that the existence of the dispute and/or the suit or arbitration

8The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design 9 Section 16 of the Act 10 (2018) 1 SCC 353


xvi An Initiative To Explore Corporate Literacy

proceeding must be pre-existing – i.e. it must exist before the receipt of the demand notice or

invoice, as the case may be."

DOCTRINE OF HANDS-OFF

The resolution process is predominantly governed by the doctrine of hands off and

accordingly, the Adjudicating Authority refrain itself from interference with the

formulation of the resolution plansince commercial decisions are basically driven by

incentive structures as well as framework of the Indian insolvency law is the

maximization of the value of a corporate debtor. Accordingly, under the Code,

discretion of making decisions regarding the resolution of a corporate debtor has been

awarded to the creditors. Not only this, the Code has also empowered the creditors to

constitute a committee of creditors (‘CoC’) to make decisions related to resolution or

liquidation.11

After availability of the perspicuous law the decisions of the committee often got

challenged and inspite of rejection same also got scrutinized by the Authorities and

reason being the Apex Court in K. Sashidhar v Indian Overseas Bank and Ors.12,

reaffirmed that “the legislature has not endowed the adjudicating authority (NCLT) with the

jurisdiction or authority to analyze or evaluate the commercial decision of the CoC.” In

pursuant to the said judgment, the Apex Court has awarded numerouno status to the

CoC while adjudicating the matter of Committee of Creditors of Essar Steel India

Limited through Authorised Signatory v. Satish Kumar Gupta & Ors.11and has also

accomplished the judicial intervention debate. Resultantly, uncertainty surrounding

the status of CoC approved resolution plans has come to an end.

11 Section 21 of the Code 12 2019 SCC Online 257


xvii An Initiative To Explore Corporate Literacy

EXPEDITIOUS DECISION MAKING

That every litigation process shall always be bounded with strict timelines but in India

even after availability of specific guidelines and provisions pertaining to adhering to

timeline in strictosensu, though our judicial system has brutally failed to achieve the

same resulting into delayed justice which loses its charm apart from color of

importance and vitality. This was very well imbibed within the minds of the

legislators and accordingly the same cannot be afforded with the economic

legislations like IBC. In previous regime, consideration was not paid towards the time

bound process and same can be traced with the fact that, at initial stage, banks were

having option of civil courts for recovery but after enactment of the RDDBFI Act, 1993

it was anticipated that, novel & special legislation would increase the recoveries but

this anticipation did not turn into reality. Due to non-working of RDDBFI Act, 1993 as

expected, another legislation known as SARFESAI Act, 2002 was enacted to enable the

banks and financial institutions to improve recovery by exercising powers to take

possession of securities, sell them and realise the losses. The SARFESAI enlarged the

recovery process but the same did not reach up to expectations. Thereafter, the Code

has been enacted for sustainability & revival of the business enterprise and not for

liquidation with a primary objective to remove. ‘Those who drive the companies to

insolvency, exit from management’13

Apropos to the above, it can be said that time is the essence of the Code, which

provides tenure of 180 days for the IRP &Committee of Creditors to conclude

Corporate Insolvency Resolution Process which can be extended once for epoch of

ninety days. After availability of the data, it is apparently clear that, this Code is

pragmatic towards time bound process and achieving its objectives at the threshold.

Since its inception & implementation in the year 2016 till the end of 2018, the Code has

helped recover Rs. 1210 million from 61 big corporate debtors. The recovery rate is

much higher now as compared to the previous bankruptcy regime. Within the first 2

years, 115 cases had completed the resolution process of which 92 were liquidated and

13Two years of insolvency and Bankruptcy Code (IBC)” by former Finance Minister Late Mr. Arun Jaitley dated 03.01.2019 published by Press Information Bureau, New Delhi.


xviii An Initiative To Explore Corporate Literacy

23 were reorganized through what has come to be known as the corporate insolvency

resolution process (CIRP). The CIRP ends with either a resolution plan or an order for

liquidation and liquidation commences only after CIRP has failed. The CIRP cases

have taken an average of 243 days; while the average time for the liquidation order

was 224 days. The Code had set a target of 270 days by which the resolution process

was to be completed.14

Apart from expeditious disposal, another crucial aspect which cannot be left

undiscussed is that, applicability of the limitation law. At the time of enactment of the

Code, the limitation was not dealt with the Code and this vagueness turned into a

debate regarding applicability of the Limitation Act, 1963.The NCLTs across had

divergent views unless the same was set at rest by NCLAT in Neelkanth Township15

case. The issue pertaining to applicability of Limitation Act to IBC proceedings was

subsequently settled through insertion of Section 238A16 but the petitions filed during

the interregnum period was still open which came to be decided by the Hon'ble

Supreme Court of India in the matter of B.K. Educational Services Private Limited

vs. Parag Gupta & Associates17held as follows:

"It is thus clear that since the Limitation Act is applicable to applications filed under Sections

7 and 9 of the Code from the inception of the Code (IBC), Article 137 of the Limitation Act gets

attracted.”The right to sue", therefore, accrues when a default occurs. If the default has

occurred over three years prior to the date of filing of the application, the application would be

barred under Article 137 of the Limitation Act, save and except in those cases where, in the

facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing

such application".

To clarify the issues further, the Hon’ble Supreme Court in Sagar Sharma& Anr. vs.

Phoenix ARC Private Limited &Anr.18 held that Article 141of the Constitution of

14Efficiency of Bankruptcy Institutions by Mr. Shubhashis Gangopadhyay published by IBBI in Insolvency & Bankruptcy Code: A Miscellany of Perspective 15(Company Appeal (AT) (Insolvency) No.44 of 2017) vide order dated August 11, 2017 16 Inserted by the Insolvency & Bankruptcy (Second Amendment) Act, 2018 brought into force on June 6, 2018 17 (2018) SCC Online SC 1921 18 (2019) 10 SCC 353


xix An Initiative To Explore Corporate Literacy

India, 1950 lays down the doctrine of Stare Decisis which mandates that judgments

pronounced by the Apex Court possess binding force and are required to be complied

with and followed in truest letter and spirit and that the date on which IBC came into

forceis irrelevant to the trigger of any limitation period for the purposes of the Code

and that the Limitation Act would have retrospective application i.e. from the date of

inception of Code.

VALIDITY OF THE CODE

The numerous petitions were moved for challenging the validity of the Code on

distinct counts inter alia raising primary contention that, the Code is discriminatory

and unfair to operational creditors as compared to financial creditors because Due to

the supremacy of financial creditors in CoC, the claims of operational creditors are

often completely ignored or neglected. The Supreme Court of India, in its landmark

judgment of Swiss Ribbons Pvt. Ltd. & Anr. V. Union of India & Ors.19categorically

opined that “preserving the corporate debtor as a going concern, while ensuring maximum

recovery for all creditors being the objective of the Code, financial creditors are clearly different

from operational creditors and therefore, there is obviously an intelligible differentia between

the two which has a direct relation to the objects sought to be achieved by the Code. ”Not only

this, while pronouncing aforecaptioned judgment, the Apex Court upheld the

constitutional validity of the Insolvency and Bankruptcy Code, 2016 in its entirety.

Next significant development in the short life span of the Code was the passing the

Insolvency and Bankruptcy Code (Amendment) Act, 2018 which provide legislative

clarity stating that the Home Buyers/Allottees will also to be treated as “Financial

Creditors” under the Code. That to challenge the constitutional validity of the

Insolvency and Bankruptcy Code (Amendment) Act, 2018 various Petitions were

preferred by Builders/Real Estate Companies in the Hon’ble Supreme Court. Finally

inthe matter of Pioneer Urban Land and Infrastructure Ltd. and Ors. Vs. Union of

19(2019) SCC Online SC 73


xx An Initiative To Explore Corporate Literacy

India and Ors20, the Hon’ble Supreme Court was pleased to uphold the validity of

Insolvency and Bankruptcy Code (Amendment) Act, 2018.That with the baleful

motive of overturning the Judgment of the Hon’ble Apex Court pronounced in the

case of Pioneer Urban case, the Insolvency and Bankruptcy (Amendment) Ordinance,

2019 has been brought in, which creates an embargo that, financial creditors who are

allottees under a real estate project, an application for initiating corporate insolvency

resolution process against the corporate debtor shall be filed jointly by not less than

one hundred of such allottees under the same real estate project or not less than ten

per cent of the total number of such allottees under the same real estate project,

whichever is less.That the said Ordinance amounts to violation of Article 14 of the

Constitution of India, 1950 which creates a class within a class and suffers from

manifest arbitrariness. Subsequent to promulgation of the Ordinance, a petition titled

as Manish Kumar vs. Union of India21&various other petitions were preferred before

the Supreme Court, wherein validity of the Ordinance of 2019 was challenged. The

Apex Court was pleased to issue notices, while ordering to maintain ‘status quo’ with

respect to the pending applications. It is not too far from being struck down too, in the

humble opinion of the authors. Unfortunately, during the pendency of said petitions

regarding Ordinance of 2019, on 6th March, 2020 after having been scrutinized by the

Standing Committee, the bill has been passed and same has been enacted as The

Insolvency & Bankruptcy Code (Amendment) Act, 2020.

CONCLUDING REMARKS

This legislation deals with economic matters and in the larger sense, deals with the

economy of the country as a whole which had led to the highest recovery of stressed

assets during 2017-18 but at the same time, it takes at least six months for admission

of an application as compared to 14 days period as envisaged under section 9 (5) of

20(2019) 8 SCC416 21 Writ Petition (Civil) No. 26/2020 along with 27/2020, 28/2020, 47/2020 and 52/2020, interim order dated 13.01.2020.


xxi An Initiative To Explore Corporate Literacy

the Code. Such delay leads into erosion of asset and delay also reduces the chance to

get maximum value and assets of the debtor.

The afore captioned data (as mentioned in Para II of Expeditious Decision Making)

shows that, the novel legislation has started achieving its objectives, which can also be

fortified from the opinion expressed by the Apex Court Swiss Ribbons Case, the

Hon’ble stated that “The defaulter‘s paradise is lost. In its place, the economy‘s

rightful position has been regained. ”In upcoming years it would be considered as

most revolutionary law related to economy, though the misuse has to be curbed as

well. The Apex Court has played a significant role in the last 3 years and removed

hidden ambiguities by pronouncing several landmark judgments. This legislation is

not a medicine for all the glitches but it shows that, after availability of this Code, the

Non-Performing Assets (NPAs) can be reduced. A major challenge to the resolution

process under the Code is clogging of the matters pending before the tribunals. The

pendency has started increasing in NCLTs but at the same time, some of the benches

work for two days in a week, which is a serious issue and cannot be avoided in as

much as The existing NCLTs are not having appropriate infrastructure and are also

not well equipped, which is hampering to handle sudden influx of the cases. By

considering it genuine difficulty, the government has announced to establish a bench

of National Company Law Appellate Tribunal (NCLAT) at Chennai by issuing

notification dated 13th March, 2020.22 The recent notification of the government for

setting up, bench of the NCLAT in Tamil Nadu shall play a significant role in reducing

the burned of pendency as well as save a lot of cost for the litigants belonging to

Karnataka, Tamil Nadu, Andhra Pradesh, Kerala, Telangana, Lakshadweep and

Puducherry. Hope, in coming years, the Code along with other recovery measures

will reduce the level of NPAs.

22 Notification published in the official gazette by the Ministry of Corporate Affairs, New Delhi on March 13, 2020


xxii An Initiative To Explore Corporate Literacy

WOMEN DIRECTORS AND THE COMPANIES ACT

(Shristi Verma)23

ABSTRACT

In this article, the researcher studies the provision for Woman director in the

Companies Act, 2013. The paper elaborates on the jurisprudence for appointing

females as directors in the board while substantiating it with reports of the Kotak

committee appointed to recommend suitable changes to the Companies Act for

ensuring the same. The researcher examines two points for study, First, the reason for

underrepresentation of females in the Indian corporate boardrooms and, Second, the

impact of having Female Directorship in companies. This research paper aims to look

at the data and find a co-relation between the numbers and the issues at hand. This

paper explores the ‘Critical Mass theory’ and critically analyses the situation of

employment of Women Directors and Women Independent Directors in India. This

article also critically examines the corporate reaction to legislative proviso to Section

149(1) of Companies Act of 2013 which mandates the inclusion of at least one woman

director on the Board of Directors. In the end the paper provides from some

suggestion that can be implemented in furtherance to the amendment that has been

brought.

KEYWORDS

Woman Director, Independent Director, Female Representation, Gender Diversity,

Companies Act 2013, Corporate Boardroom

23 Student, 3rd Year, B.A LL.B (Hons.), Symbiosis Law School Pune


xxiii An Initiative To Explore Corporate Literacy

INTRODUCTION

Gender Diversity on a large scale has been brought to the corporate table by making

it mandatory for companies to have at least one woman director24. The only conditions

specified, is that, if it is a Private Company it should be listed and every Public

company,

i. Having a paid-up share capital of at least Rs.100 crore or;

ii. Having a turnover of at least Rs.300,

have to appoint one woman director by 31 March 201525. The same rule for

appointment of at least one independent woman director has been emphasized upon

for composition of board of directors of the listed entities by the Indian market

regulator26 as the panel recommended the applicability date for the amendment for

the top 500 listed entities to be 1 April 2019 and for top 1000 listed, 1 April 202027. The

Companies Act, now, also states that any intermittent vacancy of a women director

should be filled by another woman director within three months of such vacancy, or

by the company’s next board meeting, whichever is later. The Companies Act,

2013 does not prescribe any qualifications or minimum industry experience criteria

for candidature as Women Director of any applicable company. Some Progressive

Indian companies as active champions of gender diversity on boards welcomed

women directors while others complied with the new provision by appointing women

family relatives. The announced penalty for not complying with the amendment

would attract a sum of at least Rupees 50,000 with extra charges for extended period

of non-compliance28.

24 Section 149 (1) of Companies Act 2013 25 Companies (Appointment and Qualification of Directors) Rules 2014 26 Regulation 17 (1) of SEBI (LODR) Regulations, 2015 27Amendment to SEBI Listing Regulations pursuant to Kotak Committee Recommendations : An overview https://assets.kpmg/content/dam/kpmg/in/pdf/2018/06/Amendments-sebi-listing-regulations.pdf 28https://www.business-standard.com/article/companies/monetary-penalty-for-companies-without-women-directors-115040801144_1.html

https://taxguru.in/company-law/presidents-assent-companies-act-2013.html

https://taxguru.in/company-law/presidents-assent-companies-act-2013.html

https://assets.kpmg/content/dam/kpmg/in/pdf/2018/06/Amendments-sebi-listing-regulations.pdf

https://assets.kpmg/content/dam/kpmg/in/pdf/2018/06/Amendments-sebi-listing-regulations.pdf

https://www.business-standard.com/article/companies/monetary-penalty-for-companies-without-women-directors-115040801144_1.html

https://www.business-standard.com/article/companies/monetary-penalty-for-companies-without-women-directors-115040801144_1.html


xxiv An Initiative To Explore Corporate Literacy

Securities Exchange Board of India accepted the Kotak Committee on Corporate

Governance29 recommendations with modifications as it agreed on some aspects and

decided that something more substantial is required to make it a good amendment.

SEBI decided in addition that Nomination & Remuneration Committee30 should

have at least one woman Independent Director since it is best suited to take leadership

in ensuring better gender balance in the company’s workforce & to ensure that the

company provides a safe, comfortable and equal opportunity environment to women

employees31. According to SEBI’s research there should be at least two women

directors, at least of which one should be independent director which will lead to

approximately 20% women directors in the long term. In its opinion for women to be

more effective on Boards, there should be at least two women on the Board and Boards

not having at least 30% gender diversity should be required to set a time-bound target

to increase female representation to 30%. This provision should also be extended to

Scheduled Castes, Scheduled Tribes, and religious minorities. The said induction

should be implemented in a phased manner32. In addition to these improvements,

SEBI doesn’t agree with some assumptions which are: Gender diversity is already

achieved by specifying one woman director. It criticized the action of only creating

additional reservations for a specific gender without giving preference to

qualifications. What remains the bottom line is female representation still remains a

minority and why are we not going for an ‘equal to’ or ‘close to equal’ representation

approach for both men and women on the board?

The key research questions are:

(1) Whether female directors are being appointed beyond tokenism in India and its

relation to cultural bias.

(2) What is the relationship between Gender Diversity and firm performance?

29 SEBI constituted a Committee under the Chairmanship of Shri UdayKotak to make recommendations to SEBI for improving standards of corporate governance of listed entities in India in June 2017. 30Section 178 of Companies Act 2013 31SEBI: Report submitted by the Committee on Corporate Governance http://www.nfcg.in/KOTAKCOMMITTEREPORT.pdf 32 SECURITIES AND EXCHANGE BOARD OF INDIA BOARD MEMORANDUM View on the Recommendations of Kotak Committee on Corporate Governance https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2018/1524031522572_1.pdf

http://www.nfcg.in/KOTAKCOMMITTEREPORT.pdf

https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2018/1524031522572_1.pdf


xxv An Initiative To Explore Corporate Literacy

CRITICAL ANALYSIS

(1) The minority representation of females can be studied in relation to the ‘Critical Mass

Theory’ given by Rosabeth Moss Kanter33. Her notable work on how women behave

in corporations and how women, as minorities in male-dominated environments, have

little chance to exert influence on the organization until they become a consistent or

significant minority. Above this minority mark, they could begin to effect

organizational changes. Despite the appeal of critical mass theory and its use in areas

like legislative and political research, there are few studies that have used critical mass

theory to explore women's contributions to corporate boards of directors34. In a

research done by Deloitte in December 2015 just after the companies act was revised

by adding the proviso, shows that out of the total 132 companies examined, the

Industry with highest percentage of women on board was Technology, Media and

Communications (16%) followed by Consumer Business Industry and Life sciences

and Health care (15%) with a total of 140 women on board, 6.6% being CEOs35.So the

question is whether this inclusion of Mandatory Woman Quota is working for Indian

Companies? The answer to that will be available not immediately after but certainly in

the near future. The reason why small quotas can potentially result in large increases

in social justice rests upon an important observation in the literature on gender equality

among top managers. Adopting low quotas can improve proportionally more the

position of disfavoured groups by subtly increasing the connectivity among the

affected members to the point of passing a critical threshold36.

33 Critical Mass Theory and Women’s Political Representation: By Sarah Childs & Mona Lena Krook ; POLITICAL STUDIES: 2008 VOL 56, 725–736 , https://mlkrook.org/pdf/childs_krook_2008.pdf, Accessed on 15th January 2020. 34 Journal of Business Ethics, Vol. 102, No. 2 (August 2011), pp. 299-317, Women Directors on Corporate Boards: From Tokenism to Critical Mass By MariateresaTorchia, Andrea Calabrò and Morten Huse. 35 Women in the boardroom: A global perspective – 5th edition, Deloitte Global Center for Corporate Governance. Accessed on 16th January 2020. https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/risk/deloitte-cn-ra-ccg-e1-women-in-the-boardroom-a-global-perspective-fifth-edition.pdf 36 STRUCTURAL EQUALITY AT THE TOP OF THE CORPORATION: MANDATED QUOTAS FOR WOMEN DIRECTORS Author(s): BRUCE KOGUT, JORDI COLOMER and MARIANO BELINKY Source: Strategic Management Journal, Vol. 35, No. 6, In Memoriam Mary Lou Schendel 1934-2014 (JUNE 2014), pp. 891-902 Published by: Wiley Stable URL: https://www.jstor.org/stable/24037259 Accessed: 17-01-2020 11:05 UTC

https://mlkrook.org/pdf/childs_krook_2008.pdf

https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/risk/deloitte-cn-ra-ccg-e1-women-in-the-boardroom-a-global-perspective-fifth-edition.pdf

https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/risk/deloitte-cn-ra-ccg-e1-women-in-the-boardroom-a-global-perspective-fifth-edition.pdf


xxvi An Initiative To Explore Corporate Literacy

Women have remained largely unrecognised for their calibre, efforts and key

managerial positions even when they have been instrumental in playing a crucial role

in the rapid economic and social development worldwide. In a study conducted on

gender disparity, India was ranked 101 out of 136 countries in the world37. However,

lately, due to profound changes in the status of women, there has been a significant

transformation in the attitude of the society towards women employment. Many

successful women have finally been able to prove their mettle by achieving high

ranked positions in some of the most renowned corporations. On an average, women

in India make up to 50% of the workplace but account for less than 4% of top

executives of the nations38.

There are 539 companies listed on National Stock Exchange India having no woman

on the board (Indian Boards Database, 2015). There is 80.96 percentage of gender gap

found in number of directors in NSE listed companies (1466) whereas this gap is 82.22

percentage in number of independent directors. There are only 41 women directors

having 4.12 percentage representations whereas 1oo percentage gap lies in case of

independent directors of on boards of unlisted financial sector companies (217). It is

observed that women are taken as tokenism and their impact in decision making is

still minimal. Due to existence of impact of glass-ceiling, women are very less on

senior positions specially director on companies’ boards in India. Mere introduction

of legislation is not sufficient for empowerment of women; companies should

understand the benefit of gender diversity on boards39.

In order to survive in competitive environments and acquire legitimacy, organizations

must design their organizational structure in line with the set of rules and belief

systems that prevail in the country in which they operate. Thus, conformity to social

expectations is considered key to the survival of a company. Companies are therefore

37 World Economic Forum, The Global Gender Gap Report, 2013, http://www3.weforum.org/docs/WEF_GenderGap_Report_2013.pdf (last visited on Jan. 18, 2020) 38 Representation of Women on the Board of Directors under the Companies Act, 2013; Christ University Law Journal, 4, 1 (2015), 33- 47 ISSN 2278-4322|doi.org/10.12728/culj.6.2 33 ByVaibhaviTadwalkar and SoundaryaLahariVedula. 39 Woman on Boards: A gap Analysis of India Vis – a- Vis the world By Dr Simmi Arora & Naresh Kumar, ICSI March 2016


xxvii An Initiative To Explore Corporate Literacy

social entities embedded in an institutional order set. They tend to shape their

organizational structures to fit the established social order and gender stereotypes or

roles associated with women that gain legitimacy. Indeed, it can be shown by research

data how differences in institutional environment are the basis for women induction

in corporate governance structures40.

(2) A number of nations like India are putting efforts for more female representation in

company boardrooms. Harvard Business Review research says that one possible

reason for having women on the board, results in better acquisition and

investment decisions and less aggressive risk-taking, yielding benefits for shareholders,

is because they are instrumental in tempering the overconfidence of male CEOs,

improving overall decision making for the company. For analyzing the various benefits

of having a woman on board, one can look into – Quality of Board Deliberations,

Corporate Strategy, Performance during Crisis, Differences in accounting and stock

performance etc.41.

In a study done by Harvard University Department of Sociology, suggests that when

firms appoint directors who are only nominally independent, they tend to appoint

subsequent women directors with the same profile. The research also saw that firms

that decrease board size increase their share of women42. To study the dynamics

between woman directors and Company performance, an elaborative understanding of

Company innovation is a must. ‘Organizational Innovation’ & ‘Product Innovation’ are

the two major sub subjects under this broad subject of study. But, to analyze the direct

relationship between the inclusion of minority group (Critical Mass theory) and firm

innovation there needs to be extensive research on ‘Organizational Innovation’ as it’s

40 Appointing Women to Boards: Is There a Cultural Bias? Author(s): Amalia Carrasco, Claude Francoeur, Réal Labelle, Joaquina Laffarga and Emiliano Ruiz-Barbadillo Source: Journal of Business Ethics, Vol. 129, No. 2 (June 2015), pp. 429-444 Published by: Springer Stable URL: https://www.jstor.org/stable/24702923 Accessed: 17-01-2020 11:17 UTC 41https://hbr.org/2019/09/research-when-women-are-on-boards-male-ceos-are-less-overconfident Research: When Women Are on Boards, Male CEOs Are Less Overconfident. Accessed on 16th January 2020. 42 Corporate Board Gender Diversity and Stock Performance: The Competence Gap or Institutional Investor Bias? By Frank Dobbin and Jiwook Jung Harvard University Department of Sociology ; Alexandra Kalev University of Arizona, Department of Sociology & Tel Aviv University, Department of Sociology.

https://www.sciencedirect.com/science/article/pii/S0929119913001120

https://www.sciencedirect.com/science/article/pii/S0929119913001120

https://www.sciencedirect.com/science/article/pii/S0304405X12002516

https://hbr.org/2019/09/research-when-women-are-on-boards-male-ceos-are-less-overconfident


xxviii An Initiative To Explore Corporate Literacy

more people, decision making & implementing oriented which in turn can speak

volumes of impact of women influencing the process.

Drawing on critical mass theory and its application to the corporate board domain,

results suggest that women directors' contribution to the level of firm organizational

innovation depends on the size of the minority group (the number of women

directors). By validating 'at least three women directors' as the size that the minority

group has to reach to make a significant contribution to firm organizational

innovation, the findings clearly show that it is possible to operationalize the critical

mass construct. This contributes substantially to strengthening the importance and

challenges of the critical mass of women directors in the corporate board debate43.

The issue of Product Innovation comes into picture with the growing importance of

gender diversity to spur innovation which is especially relevant today with businesses

across sectors struggling to cope with the disruptions accompanying sweeping

technological advancements44. From automation to artificial intelligence, these

transformations bring opportunities as well as challenges for businesses as they strive

to stay competitive against new products, services or business models that are

completely supplanting the existing versions. Women managers are positively

associated with such “disruptive innovation”, as they are more likely than men to

exhibit key leadership behaviours, such as investing in people development and

matching professional expectations to suitable rewards45. Despite being critical to the

business needs of the future, these leadership qualities are in short supply today,

strengthening the case for firms to foster gender diversity and leverage it toward

navigating a rapidly changing marketplace in the future.

The regulatory objective behind board diversity stems from the need to have a proper

composition of the board. Significantly, requiring companies to devise a policy on Board

43Journal of Business Ethics, Vol. 102, No. 2 (August 2011), pp. 299-317, By Mariateresa Torchia, Andrea Calabrò, Morten Huse. Accessed on 17th January 2020. 44 Ernst & Young. Navigating disruption with gender diversity? Think again. Retrieved from: http://www. ey.com/Publication/vwLUAssets/EY-women-in-indus - try/$FILE/EY-women-in-industry.pdf 45 McKinsey and Company. 2008. Women Matter 2, Fe - male Leadership, a competitive edge for the future

https://www.jstor.org/action/doBasicSearch?si=1&Query=au%3A%22Mariateresa+Torchia%22

https://www.jstor.org/action/doBasicSearch?si=1&Query=au%3A%22Andrea+Calabr%C3%B2%22

https://www.jstor.org/action/doBasicSearch?si=1&Query=au%3A%22Andrea+Calabr%C3%B2%22

https://www.jstor.org/action/doBasicSearch?si=1&Query=au%3A%22Morten+Huse%22


xxix An Initiative To Explore Corporate Literacy

Diversity, which in essence could require them to explain their position on how they

intend to meet the regulatory requirements regarding appointment of women directors.

Board Diversity has emerged a strategic necessity to bring a balanced judgment in the

thinking of Board and forms a critical aspect the nomination committee must keep in

mind46.

CONCLUSION & SUGGESTIONS

“As women constitute nearly half of the population, their point of view is very

critical. And, there are enough competent women who are eligible, I have seen that the

quality of dialogue and attention to detail shifts when you have diversity of gender.

Boards need diversity of functional expertise and a proven track record, leadership

skills and maturity”, said Vinita Bali, former managing director of Britannia47.

The existing literature from various academic, non-academic and business research is

mostly limited to observing gender diversity in corporate boardrooms and senior

management. As a matter of natural hierarchy in the corporate world, reaching these

positions of ‘Higher Management’ depends on the opportunities and resources that

women are afforded early on in their careers. Does this call for an introduction to

Mandatory Women Quota in the lower workforce for Companies?

The main challenge to induct women directors in boards of companies is from the

grass root level as there is a limited pool for women independent directors which in

turn will reduce options for selection of such directors or independent in cases where

there are specific skill sets required for a Director in a particular industry (i.e.: oil &

Gas, Construction, Infrastructure etc.) Also, there is no established rationale as to how

one woman Independent Director will improve governance/ gender diversity not

significantly related to financial performance of company. It is suggested that

Nominees of Financial Institutions should be considered as Independent Directors so

46 Handbook for Independent Directors : Upholding the Moral Compass; Second Edition By Kaushik Dutta Lexis Nexis 47https://economictimes.indiatimes.com/jobs/many-companies-still-to-induct-woman-independent-director/articleshow/67733197.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

https://economictimes.indiatimes.com/jobs/many-companies-still-to-induct-woman-independent-director/articleshow/67733197.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst




xxx An Initiative To Explore Corporate Literacy

that some respite is available. The director need not be independent; a company may

promote a woman senior executive to the rank of woman director with the aim of

motivating fellow workers by setting an example for providing just and equal chances

for females in the workplace.


xxxi An Initiative To Explore Corporate Literacy

The TATA- Mistry Feud- a milestone case for oppression

and mismanagement in India

(Simran Jain)48

ABSTRACT

In 2016, Mr. Cyrus Pallonji Mistry was removed as the Executive Chairman of TATA

Sons Limited (“TSL”). This removal was challenged under section 241- 242 of the

Companies Act 2013 before the Mumbai bench of NCLT by Cyrus Investments Private

Ltd. The Appellants who constituted the minority group of shareholders. The

Tribunal concluded that there was no cause action for either oppression or

mismanagement and it upheld the removal of Mr. Cyrus Mistry as the Executive

Chairman of TATA Sons Limited.

The order of NCLT was challenged in NCLAT, New Delhi. NCLAT reversed the

decision of NCLT and among the other relief granted to the petitioners, NCLAT

reinstated Mr. Mistry back to his position in TSL. Presently, the Supreme Court has

stayed the order of NCLAT, upon the appeal of the respondents.

This piece analyses the orders passed by both NCLT and NCLAT and argues in favor

of the NCLAT order to be upheld by the Supreme Court.

INTRODUCTION

In 2016, Mr. Cyrus Pallonji Mistry was removed as the Executive Chairman of TATA

Sons Limited (“TSL”). As a result, the petitioners- Cyrus Investments Pvt. Ltd. and

Sterling Investment Corporation Pvt. Ltd., the minority shareholders moved an

application under s 241-242 of the Companies Act 2013in the Mumbai Bench of

48 Student, 4th year, B.A LL.B (Hons.), National Law University Delhi.


xxxii An Initiative To Explore Corporate Literacy

National Company Law Tribunal (“NCLT”), alleging oppression.49 There was also a

contention related to whether the petitioners had more than 10% equity shareholding

of the company, to be able to even file an application under s 241 of the Companies

Act 2013 (s244(1) categorically mentions that the members complaining under s 241

shall not have less than one-tenth of the issued share capital of the company). But this

requirement can be waived off by the Tribunal. Therefore, the petitioners also filed a

petition for waiver of the mentioned requirement, under s 244 of the Companies Act

2013. The Mumbai Bench of NCLT had dismissed this petition, despite the order of

National Company Law Appellate Tribunal (“NCLAT”) in September 2017, wherein

it held that the present case was a fit case for waiver, as Cyrus investments had

invested one thousand crores out of six thousand crores of the total investment of TSL.

Further, it also upheld the decision of TSL to dismiss Mr. Mistry and dismissed the

petition relating to oppression of minority shareholders.

The order of NCLT was challenged before the NCLAT, which on 18th December 2019,

reversed the order of NCLT and held that the actions of majority shareholders were

oppressive and prejudicial to the minority shareholders. It also held that removal of

Mr. Cyrus Mistry was illegal and he was reinstated to his position of Executive

Chairman. The key points from the decision of NCLAT are stated in the section below.

CYRUS INVESTMENTS PVT. LTD. V TATA SONS LTD.50

In the appeal, along with the contentions raised before NCLT, the appellants alleged

potential abuse of Article 75 of Articles of Association of TSL. Article 75 empowers

TSL, at any time, to transfer the ‘ordinary shares’ of any of the shareholders upon

passing of a special resolution and without following the normal procedure of

transfer. They also contended that when the matters for these proceedings were sub

judice, TSL had illegally converted the company from a public company into a private

limited company.

49 Cyrus Investment Pvt. Ltd. And Ors. v Tata Sons Ltd and Ors, (2017)2CompLJ332. 50Cyrus Investments Pvt Ltd v TATA Sons Ltd Company Appeal, (AT) No. 254 of 2018.


xxxiii An Initiative To Explore Corporate Literacy

ISSUES, CONTENTIONS AND DECISION TRIBUNAL

Removal of SP group from management and Mr. Mistry from the post of ‘executive

chairman’

The Appellants argued that the removal of Mr. Mistry should be seen in the context

of his efforts to remedy the past acts of mismanagement, instituting a formal

framework governance to regulate the role of Tata Trusts and yet being respectful in

resisting interference from Mr. Ratan TATA. Further, no selection committee was

formed for the removal of the chairman, as required under Article 118 of the Articles

of the company.

The respondent counsel denied allegations against Mr. Ratan Tata and submitted that

the allegations pertaining to removal of Mr. Cyrus Pallonji Mistry were in the nature

of directorial complaints and could not be raised in a petition under Sections 241 of

the Companies Act, 2013. Reliance was placed on Hanuman Prasad Bagri and Ors. v.

Bagress Cereals Pvt. Ltd. & Ors51, wherein the Hon’ble Supreme Court held that a mere

single act of illegal termination of Directors cannot lead to winding up of the company.

They contended that the board resolution replacing Mr. Mistry was not contrary to

Article 118 of the AoA as it dealt with appointment of chairman and provided for

constitution of the selection committee for that purpose.

Article 121- tool of prejudicial and oppressive interference and breaking down of

corporate governance

The Appellants contended that Article 121 & Article 121A were introduced in the year

2000 and 2014 respectively in the Articles of Association of the company to safeguard

the interest of the Company with regard to vital issues. Under Article 121, all decisions

of the Board of Directors of TSL will need the affirmative consent of a majority of the

Trusts nominated Directors. Under Article 121A, certain decisions should be brought

to the Board of Directors of TSL, whereby majority of Trustees Nominated Directors

could take the final decision. It was contended that Article 121 had been used as a tool

51 Hanuman Prasad Bagri and Ors. v. Bagress Cereals Pvt. Ltd. & Ors,(2001) 4 SCC 420.


xxxiv An Initiative To Explore Corporate Literacy

of oppression whereby irrespective of the strength of the Board, just two trustee

nominee directors could alone decide what gets approved.

The respondents referred to different Articles of Articles of Association including

Article 121 etc., it and submitted that all actions had been taken as per the provisions

of the ‘Articles of Association’, ‘Companies Act, 2013.’

Analysis and decision of the Tribunal: The court clarified that in the Indian context,

for evoking s 241-244 against an action, the standard is not that it has to be ‘unfairly

prejudiced.’ The only thing to be seen is whether the power exercised by majority can

reasonably lead the minority to say that it is ‘prejudicial’ or ‘oppressive’ to their

interest or of the Company or the public.

The court cited relied on the case of SP Jain v Kalinga Tubes Ltd52, wherein the Supreme

Court held that the word 'oppressive' is not defined but it is possible, by way of

illustration, to figure a situation in which majority shareholders, by an abuse of their

predominant voting power, are 'treating the company and its affairs as if they were

their own property' to the prejudice of the minority shareholders.

In order to determine whether there was any direct control of Tata Trusts on TSL, the

court considered Article 86 of the AoA which was related to ‘Quorum at general

meetings.’ Its provisions mandated that a quorum for general meeting was not

constituted unless one authorized representative jointly nominated by Sir Ratan Tata

Trust was personally present. Article 104B related to nomination of directors and it

stated that so long Tatat Trusts owned and held at least 40% of the paid up ordinary

share capital, they shall have the right to nominate 1/3rd of prevailing directors on the

Board and likewise remove such persons appointed. Article 121 mandates that the

majority decision of the Board required affirmative vote of nominated Directors of

‘Tata Trusts’ otherwise majority decision could not be given effect.

52 S.P. Jain v Kalinga Tubes Ltd, 1965 AIR 1535.


xxxv An Initiative To Explore Corporate Literacy

Based on these provisions, the Tribunal concluded that, it was clear that the nominated

Director of ‘Tata Trusts’ were in the direct control of ‘Tata Companies’, Group

Companies or its subsidiaries.

Some of the documentary evidence of correspondence and that Mr. Ratan Tata was

determined to remove Mr. Cyrus Mistry and had asked him earlier to step down.

Besides there was no record to show that the Sir Ratan Tata Trust, at any point of time,

had expressed displeasure about the performance of Cyrus Mistry. However, after the

removal TSL had sent out a press statement wherein they had addressed the global

concerns since Mr. Mistry’s removal. Therein his inability to lead the company was

highlighted as the reason for his removal.

The Tribunal was of the opinion that if the removal of Mr. Mistry was purely

directorial in nature, then there was no need to issue the press statement but clearly

there were concerns worldwide.

Based on the chain of events, the Tribunal concluded that the impairment of

confidence with respect to affairs of the company was attributable to the abuse of

power by the respondents and not Mr. Mistry.

Therefore, the Tribunal held that the present case was a fit case of oppression and

mismanagement under sections 241-244 of the 2013 Act.

CONVERSION OF PUBLIC LIMITED COMPANY TO PRIVATE LIMITED

COMPANY

According to the appellants, the sudden conversion of TSL into a private limited

company was wholly against the provisions of the Companies Act itself and the only

motivation was to marginalize and further oppress the only independent minority

shareholder.

The respondents denied these allegations and contended that the conversion from

Public Limited Company to Private Limited Company had been made by the Registrar

of Companies in view of the definition of ‘Private Company’, as defined under Section


xxxvi An Initiative To Explore Corporate Literacy

2(68) of the Companies Act, 2013 and for such changing, according to the counsel, no

application is required to be filed under Section 14 of the Companies Act, 2013

The Tribunal stated that there is no provision of automatic conversion of a private

company into a public company under the 2013 Act. As per Section 14 of the

Companies Act, 2013, if any Company decides to alter its articles having the effect of

conversion of a ‘Private Company’ into a ‘Public Company’; it is required to pass a

special resolution and as per subsection (2) of Section 14. Only then can the registrar

be approached to register the company as a ‘public company.’ The respondents had

relied on a 2013 notification by the Central Government, which stated that a company

falling within the meaning of s 2(68) could take direct permission from the registrar to

be recorded as private company.

However, the Tribunal stated that such a notification could not surpass the

requirements of s 14 of the Act.

POTENTIAL ABUSE OF ARTICLE 75

The appellants contended that though Article 75 was never viewed by the minority

shareholders as a possible tool of oppression, the recent events had created a more

than reasonable apprehension that Article 75 could be sought to use to eliminate the

minority shareholders from the company.

The respondents placed reliance on the decision of the Hon’ble Supreme Court in V.B.

Rangaraj v. V.B. Gopalakrishnan and Ors53 and contended that the Articles of Association

are the regulations of the Company and binding on the Company and its shareholders.

The Board was directed to not exercise its powers under article 75 against the minority

members. It further directed that such power can be exercised only in exceptional

circumstances and in the interest of the company and for that, reasons should be

recorded in writing.

53 V.B. Rangaraj v. V.B. Gopalakrishnan and Ors, (1992) 1 SCC 160.


xxxvii An Initiative To Explore Corporate Literacy

RELIEF GRANTED BY THE TRIBUNAL

The Tribunal declared the resolution related to removal of Mr. Cyrus Mistry was

illegal and he was restored to his earlier position. The Tribunal was of the view that

for better protection of minority interest, in future, at the time of appointment of the

executive chairman, independent directors and directors, Tata group, which is the

majority group should consult the minority group and that person should be

appointed as the executive chairman, who both the parties trust. Mr. Ratan Tata and

the nominee of Tata Trusts were directed to not take any decision in advance which

requires majority decision of the board. The conversion of TSL into a private company

was also declared illegal on the grounds of noncompliance with s 14 and was also

oppressive to the minority members. The Tribunal directed that the company shall be

recorded as a ‘public company’ and the RoC was directed to correct the records.

On January 10 2020, the Supreme Court of India has stayed the order of NCLAT,

including its order for conversion of Tata Sons from private to a public entity.54 The

Court has ordered TATA group not to exercise power under Article 75 of AoA and

push out shares of minority holders in the company. Mr. Mistry has stated that he

shall not pursue chairmanship but will continue to fight in order to protect their

interest as minorities.

ANALYSIS AND CONCLUSION

In the case of Rajahmundry Electric Supply Corpn Ltd v Nageswar Rao55, the Supreme

Court held that Courts would not interfere in the internal management of the

company, so long the management acts within the powers conferred to them under

the Articles of Association. The removal of Mr. Mistry was done without following

the procedure laid down under Article 118 of the Articles of Association. The NCLT

permitted to surpass the said requirements. However, the NCLAT acknowledged this

54RuchikaChitravanshi, ‘Tata-Mistry case: SC stays NCLAT order, issues notice to Cyrus Mistry’ Business Standard (January 112020) < https://www.business-standard.com/article/companies/tata-mistry-case-sc-stays-nclat-order-issues-notice-to-cyrus-mistry-120011001586_1.html> 55Rajahmundry Electric Supply Corpn Ltd v Nageswar Rao, 1956 AIR 213.


xxxviii An Initiative To Explore Corporate Literacy

procedural violation, intervened in the internal management of the company and held

that the removal of Mr. Mistry was a result of abuse of power by the respondents.

The respondents, in the appeal to Supreme Court, have challenged the reinstatement

of Mr. Mistry by NCLAT on the grounds that a prayer to that effect was not made by

the petitioners.56 However, section 242 of the Companies Act 2013 clearly states that if

the Tribunal is of the opinion that the company’s affairs are being conducted in a

manner which is oppressive towards its members, then the Tribunal can bring an end

to such matters by making an order that it deems fit. Thus relying on this section as

well on the case of Rajahmundry Electric Supply, upon the conclusion that Tata Trust

was in complete control of TSL and the company’s was oppressive towards the

minority shareholders, NCLAT was well within its bounds to intervene in the matters

of TSL and put an end to the arbitrary removal of Mr. Mistry by reinstating him back

to his position.

Therefore, overall the decision of NCLAT was in compliance with sections of the

Companies Act dealing with prevention of oppression of minorities, s14 of the Act as

well as the Articles of Association of TSL. The said decision of NCLAT should be

upheld by the Supreme Court and if such is the case, the standard for evoking s 241-

244 shall be a situation where the minority can ‘reasonably’ say that the action is

prejudicial or oppressive.

Lastly, a key takeaway from this case is that minority shareholders in any company,

henceforth, should not assume that use of Articles by the majority group cannot be

oppressive towards them, even if they have a long standing relation of mutual trust.

Minority shareholders must ensure a director in the Board to represent their interests

as per section 151 of the Companies Act 2013.

56Ruchika Chitravanshi, supra note 6.


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Impact of COVID-19 on Contracts: Force Majeure as a tool

to save from Frustration?

(Abhishek Iyer)57

ABSTRACT

COVID-19 has taken the commercial world by storm as its rising spread has led to

global border closure, halt in trade and commerce which has further led to a massive

disruption of the existing supply chain. Owing to these events, commercial contracts

have been affected significantly whereby the performance of obligations is hit by

impossibility. Through this paper, the author delves into the Indian legal scenario

specifically to analyse the remedies for a contract that is suffering from non-

performance due to the outbreak of COVID-19. The author scrutinizes on the concept

of Contingent contracts and, ‘Force Majeure’ as a tool to save contracts from

frustrating under The Indian Contract Act, 1872. Lastly, this paper also discusses in

brief Government contracts in the current scenario apart from the intricacies involved

in invoking Force Majeure as a valid excuse of non-performance, for COVID-19 being

considered as a Global Pandemic beyond human control.

INTRODUCTION AND BACKGROUND

Earlier in March 2020, World Health Organization (WHO) had declared the outbreak

of COVID-19 as a ‘Global Pandemic´58 and requested states to take preventive measures,

owing to which Ministry of Home Affairs, Government of India through

its notification59 ordered a total lockdown. In the backdrop of the above developments

57 Student, 3rd Year, B.A LL.B (Hons.), Gujarat National Law University 58WORLD HEALTH ORGANIZATION, EUROPE, http://www.euro.who.int/en/health-topics/health-emergencies/coronavirus-covid-19/news/news/2020/3/who-announces-covid-19-outbreak-a-pandemic (last visited April 12th, 2020). 59MINISTRY OF HOME AFFAIRS, GOVERNMENT OF INDIA,


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and overall disruption of the supply chain globally, the performance of obligations

under different contracts has taken a blow. Here, we try to analyze the consequences

of non-performance in a contract and also look into the scenario of invoking ‘Force

Majeure’ Clause (Hereinafter ‘FMC’) as an excuse for non-performance to save the

contract. Further, the emphasis is laid on how risk is allocated to both parties in such

situations and whether parties can save the contract from being void automatically.

So, in a COVID-19 vis-à-vis non-performance scenario, it is important to emphasize

on concepts of contingent contracts, force majeure, and frustration to have a nuanced

understanding of available remedies.

FORCE MAJEURE AND CONTINGENT CONTRACTS

Force Majeure literally means Superior Force in French, or ‘something that you cannot

prevent60 from happening’, beyond your control. An FMC is essentially a contractual

provision where parties to that specific contract have agreed on consequences of non-

performance due to extraordinary circumstances out of human control, which

typically includes act of god, disasters, war-like-situation, etc. Force Majeure is

governed by Chapter III of Indian Contract Act, 187261 and more so, specifically by

Section 3262 thereof which deals with ‘contingent contract’ where parties may agree to

do or not to do anything depending on happening or non-happening of a particular

event. The performance of obligations in that contract is subject to contingency of a

particular event. The Hon’ble SC in Satyabrata Ghose vs Mugneeram Bangur & Co.63 had

held that in contracts with such a clause, performance will be discharged under those

pre-agreed terms of the contract itself and such cases fall within the ambit of Section

32. So for an instance, if parties agree that on happening of a disaster, the performance

will be delayed by 6-months then, on happening of such a disaster, the performance

https://mha.gov.in/sites/default/files/MHAorder%20copy.pdf (last visited April 12th, 2020). 60 Edmund BenditAnd Anr. v. Edgar Raphael Prudhomme, AIR 1925 Mad 626. 61 The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India). 62 The Indian Contract Act, 1872, § 32, No. 9, Acts of Parliament, 1872 (India). 63 Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 AIR 44.


xli An Initiative To Explore Corporate Literacy

of obligation will automatically be delayed by 6-months, due to the existing clause

which formed a Contingent Contract and such a contract will not lead to frustration.

There may be situations where the unforeseen event renders the impossibility of

performance for a certain period, an FMC will help skip such period and shift the

performance to a future window where performance could normally be executed. So

essentially when a contingent event recognised as Force Majeure happens, a party is

excused for their performance and such obligation depending on the FMC maybe

delayed. The contract shall remain intact and is not barred due to frustration. A typical

FMC will start reading as “None of the Parties shall be liable for any delay, failure in

performance, loss or damage due to Force Majeure events.” However what events and

circumstances constitute a Force Majeure event can vary on interpretational basis by

the parties to a contract.

DOCTRINE OF FRUSTRATION & IMPOSSIBILITY: IMPACT ON CONTRACTS

WITHOUT FORCE MAJEURE CLAUSE

Outbreak of COVID-19 has made it impossible to perform obligations under a

contract. Impossibility of performance after execution of a contract is provided in

Chapter IV under Section 56 of the Indian Contract Act, 187264 which is also known as

the ‘Doctrine of Frustration’. Impossibility need not be physical or literal, even the very

sense of performing something which is useless can constitute impossibility as held

by Hon’ble SC in Satyabrata Ghose vs Mugneeram Bangur & Co.65If the promisor had

agreed to perform on existence of a certain condition and now if the untoward event

taking place renders such condition as non-prevalent the promisor need not perform

such obligation because it becomes impractical and contrary to what was agreed. So

if there is no FMC part of the contract, it is obvious that the contract will not dissolve

as per agreed terms because of the emergence of an untoward event. Hence, a

64The Indian Contract Act, 1872, § 56, No. 9, Acts of Parliament, 1872 (India). 65Supra.at 6.


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particular contract without FMC and non-performance due to impossibility will be

governed by Section 56 of Indian Contract Act, 1872.

A particular contract will be termed as void and cannot be revoked even if the

circumstances surrounding the contract change in the future, invoking Section 56

would cease the contract from existing, following due remedial process. A party to a

contract cannot ignore the performance merely because of an untoward event,

moreover in light of the circumstances existing when such a contract was made, party

has to prove that they never agreed to be bound in a fundamentally different

situation66 which had unexpectedly emerged. The different situation here being the

untoward event, if this is clarified, an FMC can be invoked because this leads to

impossibility of performance in a condition that the party never accepted as part of

their contract.

Hon’ble SC in Energy Watchdog vs CERC67has substantively discussed on Force Majeure

even though the approach was narrowly construed, it significantly noted, “As has been

held in particular in (Mugneeram) Satyabrata Ghose Case, when a contract contains a force

majeure clause which on construction by the Court is held attracted to the facts of the case,

Section 56 can have no application”. Therefore, Hon’ble SC has clearly stated that in

presence of FMC in a contract, the same will not be governed by Section 56 and the

parties to a contract have to dissolve such contract even in extraordinary situations

only as per the FMC. There is no remedy under Section 56.

Lastly, while applying Doctrine of Frustration, courts have increasingly opined that,

intention of parties in implied sense should be construed depending on the terms of

the contract i.e. practical, commercial purpose of the contract, how the parties

intended to carry out the performance, etc.

FORCE MAJEURE AND GOVERNMENT CONTRACTS

66 M/S. AlopiParshad& Sons, Ltd v. The Union Of India, 1960 AIR 588. 67 Energy Watchdog v. CERC (2017) 14 SCC 80.


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Department of Expenditure (Procurement Policy Division) of the Ministry of Finance,

issued an office memorandum68 dated 19 February 2020 in relation to the 'Manual for

Procurement of Goods, 2017, states that COVID-19 outbreak can be covered under the

broad definition of a ‘natural calamity’, and that a Force Majeure Clause can be invoked,

subject to due process.

Similarly, Ministry of New and Renewable Energy (MNRE) in the office

memorandum69 dated 20 March 2020, in relation to the scheduled commissioning of

renewable energy projects directed all agencies of MNRE to treat any delay in

commissioning of projects due to the disruption of supply chain owing to COVID-19

as Force Majeure.

While these notifications does show the intention of Government to consider the

outbreak of COVID-19 and surrounding delays as Force Majeure but this is true to only

few sectors. However, these notifications certainly help in interpreting contracts with

Government of India but for other contracts, this may not stand as binding.

CAN A FORCE MAJEURE CLAUSE COVER A ‘PANDEMIC’?

It is important to analyse and take into consideration70 the language of clauses in a

contract, the terms agreed and the broad intention of parties to interpret whether an

existing FMC can cover Pandemic. An FMC usually covers an act of god, disasters,

war, riots, i.e. activities essentially out of control of any of the parties which causes

large scale unforeseen disruption. Alternatively, if a force majeure clause is open-ended

with words such as ‘any other happening’ or ‘any other such event’, it will be

interpreted ejusdem generis, so as to engulf within its fold other man-made happenings

or natural catastrophes, depending on the intention of the parties.

68DEPARTMENT OF EXPENDITURE, GOVERNMENT OF INDIA, https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf (Last visited 12th April, 2020). 69MINISTRY OF NEW AND RENEWABLE ENERGY, GOVERNMENT OF INDIA, https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf (Last Visited 12th April, 2020). 70MULLA& POLLOCK, On Indian Contract Act, 1872 & Specific Relief Act, 1967, page 1181.


xliv An Initiative To Explore Corporate Literacy

Looking at COVID-19, most international borders have been sealed, the travel

industry is affected thereby disrupting all supply chains and manufacturing globally.

Thus, if we take into account the existing scenario around COVID-19, it does constitute

as a disaster which is beyond human control owing to which performance of

obligations can be deemed to be impossible for the time this situation prevails, hence,

a pandemic like this should ideally be covered under FMC.

NOTICE OF NON-PERFORMANCE:

In contracts where FMC is invoked as an excuse of non-performance, there may be a

formal requirement for the proposing party to inform that Force Majeure has been

triggered. Other formal requirements may include, time period for notice, duty to

mitigate and its proof, etc.

For instance, an ideal clause will read as, “The Party suffering a Force Majeure event shall:

i. inform without delay the other Party by notice, giving details of the Force Majeure

event;

ii. inform the other Party when the Force Majeure event is at an end and resume

performance of this Agreement forthwith thereafter unless the Parties have decided

otherwise.”

In case, the Force Majeure event takes longer that expected to end, any of the parties

may also request for termination of contract by way of notice.

DUTY TO MITIGATE AND ITS RELEVANCE TO INVOKE FMC

Mitigation of losses occurring is ideally part of the FMC, and it usually reads as, “The

Party suffering a Force Majeure event shall remedy the situation, with its best efforts and

minimize the effects.” When a Party which suffers and invokes FMC due to a Force

Majeure event, it has to necessarily demonstrate the steps it put into place for

performance and how things beyond its control affected its performance and raised

impossibility. The underlying principle is to ensure minimal impact of such non-

performance on the other party to the same contract.


xlv An Initiative To Explore Corporate Literacy

BEST ALTERNATIVE?

Invoking Section 56 will lead to immediate termination of contract while invoking

FMC shall save the performance & the contract by pushing it to a future bracket.

However in a situation when the latter is not part of your contract, you have to be very

careful because of the fact that any remedy under Section 56 i.e. Frustration, shall

mean that the very contract will cease to exist forever. Even in a future time frame if

surroundings return to normalcy, such a contract cannot be revoked or enforced. So

in order to avoid hasty dissolution through Section 56, it is important that parties to

that contract analyse the situation well before seeking any remedy.

CONCLUSION

Whether force majeure can be invoked by a party will depend mainly on the nature

and the general terms of the contract, the events that precede or follow it and the facts

of the case. Broadly to conclude, the following aspects are relevant while considering

the implications of COVID-19 on contractual obligations:

If your contract does not ideally have a clause whereby the parties have mutually

contemplated on consequences of an event that may render the performance of a

contract invalid, your remedy shall lie under Section 56 of Contract Act, 1872, post

which the damages could be determined once the contract is frustrated for

impossibility.

Force Majeure clauses are usually interpreted in a very narrow sense. Therefore, it is

for the parties to determine whether the FMC part of their contract covers the wider

ambit of a pandemic like COVID-19 and the subsequent shutdown that it triggers.

Even if express events are stipulated as Force Majeure in your contract, it should be

clarified if COVID-19 outbreak shall qualify under any of such expressed events. FMC

cannot come to the party's rescue merely because it was a part of their contract,

recognition of COVID-19 is equally important.


xlvi An Initiative To Explore Corporate Literacy

The party invoking FMC has to ensure it has exhausted all alternate means available

to perform its obligation and has made the best efforts to mitigate any potential losses.

The one who asserts that his/her non-performance is due to COVID-19 generally

invokes the FMC. Hence, the initial burden of proof to establish such prevailing

conditions is upon the party so invoking.


xlvii An Initiative To Explore Corporate Literacy

DUALISM IN TREATMENT OF CREDITORS- WELL SETTLED

PRINCIPLE OF IBC

(Varun Akar)71

INTRODUCTION

There has been a lot of debate on the unequal treatment to different types of creditors

since the enactment of the Insolvency and Bankruptcy Code (IBC).72 The code divides

the class of creditors into two parts, i.e., Operational Creditors and Financial Creditors,

based on the nature of the transaction done with the Corporate Debtor. The Financial

Creditors being given an upper hand in the insolvency resolution and liquidation

process as compared to the Operational Creditors ignited the discussion on the issue

of equality. On the other hand, Regulation 3873 which provides for the treatment of

the Operational Creditor in priority to the Financial Creditor during the corporate

insolvency resolution process (CIRP) brought the ambiguity as to the exact treatment

of the different types of creditors concerning their claims.

The issue is so sensitive and prominent that there was no conceptual clarity on the

subject matter until the Supreme Court came out with its verdict in the case

of Committee of Creditors of Essar Steels India Limited through Authorised

Signatory v. Satish Kumar Gupta and Others74. The court opined and finally once and for

all settled the ambiguous question of law on the equitable treatment of differentially

placed creditors. The court upheld the doctrine of security recognition which provides

for the preferential payments to the secured creditors in the event of insolvency.

71Student 4th year law, Institute of Law, Nirma University, Ahmedabad 72The Insolvency and Bankruptcy Code, 2016, Acts of Parliament, No. 31 of 2016. 73Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, (March 17th, 2020, 03:40 P.M.), https://ibbi.gov.in//uploads/legalframwork/1e972e1431d061f08472e2b3ef3fb32d.pdf. 74 Civil Appeal No. 8766-67 of 2019.


xlviii An Initiative To Explore Corporate Literacy

Delving into the judicial reasoning of the judgment, the author through this article

will also analyse the jurisprudence behind the current settled position of law.

JURISPRUDENTIAL ASPECT OF DIFFERENTIAL TREATMENT AMONGST

THE CREDITORS

The United Nations Convention on International Trade Law (UNCITRAL) legislative

guide distinctively provides for the fair & equitable treatment to the creditors having

similar legal rights in the collective proceedings based on their interests and ranking

to their claim from the assets of the debtor.75 The purpose behind such a rule is to

create a division in the treatment of the differentially situated creditors concerning

their claims and relative bargaining power. This means that the similarly situated

creditors having similar legal rights shall be treated at par with each other. Thus, the

secured creditors who hold the majority of the value of debts owed by the debtor

should be satisfied by the reorganization plan before the unsecured ones. This is

because if the secured creditor enforces its security interest in the encumbered asset

by repossessing or selling, then the purpose of reorganizing the business of the debtor

will seem far from achievable.

The Bankruptcy Law Reforms Committee Report, 2015 (BLRC)76 also clearly states

that during the insolvency process the financial creditors being mostly the secured

creditors has the power to successfully restructure and revive the company of the

debtor as a going concern, bearing the responsibility that the liabilities of the other

creditors should be fully met in accordance with the plan and within a stipulated

reasonable period. The report also states that the rights of all the creditors are to be

treated equally and the negotiated solution should also protect the rights of the

creditors who are not the part of the negotiation process. Further, it also creates a

75UNCITRAL Legislative Guide on Insolvency Law, (March 16th, 2020, 12:30 P.M.), https://ibbi.gov.in/uploads/resources/c441c050a0eacd5754a2b5c7c03c31c1.pdf. 76 The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, (March 16th, 2020, 09:30 P.M.), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf.


xlix An Initiative To Explore Corporate Literacy

clarity of priority over the distribution of the assets in the case of bankruptcy to all the

stakeholders.

Moreover, the report provides that the committee of creditors (COC) should have the

members who can modify the existing terms of negotiation and also the capability to

assess the viability of the negotiation plans. It specifically excluded the Operational

Creditors on the ground that they are not competent to decide on the matters relating

to insolvency of the business entity and hence won't be willing to take the risk of

postponing payments thereby hindering in achieving the objective of the Code, i.e. to

maximize the value of the assets of the Corporate Debtor. Thus, the committee

concluded that the COC should only contain the Financial Creditors to provide rapid,

efficient and time-bound reorganization of the Corporate Debtor.

Further, the World Bank Report of 201577 also provides for the Treatment of

Stakeholder Rights and Priorities. It states that to provide for better commercial

relationships and to preserve the legitimate expectations of the creditors, the rights of

the creditors and the priority in their claims should be preserved and upheld, as is

done under other commercial laws. Deviation from this established rule should only

be done when the priority payments are not supporting the reorganization or when

the priority payments will not lead in maximization of the estate value of the

insolvent. It also furnishes that the security payments in respect of the distribution

should be promptly made to the secured creditor.

Also, the security received in return for giving loans provides for the super-priority

creditors at the time of insolvency.78 This concept of security becomes all the more

relevant and of importance at the time of insolvency. It is the result of the agreement

between the parties and should be imposed while dealing with the other creditors.

Thus, if equality principle is adopted while dealing with different classes of creditors,

the same shall motivate the secured financial creditor to go for the liquidation of the

77Principles for Effective Insolvency and Creditor/Debtor Regimes, (March 15th, 2020, 07:30 P.M.), worldbank.org/en/topic/financialsector/brief/the-world-bank-principles-for-effective-insolvency-and-creditor-rights ". 78Philip R. Wood, 1995, Principles of International Insolvency.


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company rather than its reorganization, as they will have better opportunities if the

debtor is being liquidated and hence will defeat the purpose of the Code.

JUDICIAL INTERPRETATION OF THE DIFFERENTIAL TREATMENT

AMONGST THE CREDITORS

Legal Scrutiny of Swiss Ribbons Pvt. Ltd. & Anr v. Union of India & Ors.79

As discussed in the Swiss Ribbons case, Financial Creditors being the provider of

capital to the companies bears a high risk as compared to the Operational Creditors

who generally run their business with the finances received from the former & operate

with higher profit margins and shorter business cycle. Also, the Operational Creditor

always has this option of quitting from the provision of the supply goods or services

when the Corporate Debtor defaults in payment. This option is generally not available

to the Financial Creditor who provides money for the long-term and their exit option

depends upon the full payment of their loans given along with the interest or by the

capitalization of their security interest in the assets of the Corporate Debtor after

lengthy and time-consuming litigation.

Financial Creditors before sanctioning any loan amount to the Debtor carries out a

detailed comprehensive market study about the business of the Corporate Debtor and

its prospects of repayment of the loan amount. And since they can assess the viability

and feasibility of the Corporate Debtor hence they stand in the better position to

undertake the business of making the resolution plan as compared to the Operational

Creditor which are only concerned with the particular transaction entered into with

the Corporate Debtor. Thus, harmonizing with the objectives of the Code, i.e.,

preservation of the Corporate Debtor as a going concern along with the maximum

recovery for all the classes of creditors.

The above differences bring out the distinction in between both the creditors and, fills

out the requirement of intelligible differentia along with the objective sought to be

achieved hence, the Financial Creditor by preserving the Corporate Debtor's entity

79Swiss Ribbons Pvt. Ltd. & Anr v. Union of India & Ors,.W. P. (Civil) No. 99 of 2018.


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along with ensuring the maximum recovery for all the creditors satisfies the

requirement of Article 14 of the Constitution of India. The court finally concluded that

the creation of two sets of creditors and differentiating in the treatment of the both

have the intelligible differentia, which has the direct relation with the objectives

sought to be achieved by the Code and is not discriminatory & arbitrary. Lastly, the

court also held that most of the financial creditors are secured creditors and most

operational creditors are unsecured.

Legal Scrutiny of Committee of Creditors of Essar Steels India Limited Through Authorised

Signatory v. Satish Kumar Gupta and Others

The Hon'ble Supreme Court in the Essar Steels case negated the impugned order of

National

Company Law Appellate Tribunal (NCLAT) which deviated from the settled position

of law by treating the Operational Creditors on an equal footing with the Financial

Creditor and also by not recognising the class within a class of secured and unsecured

creditors under the class of Financial Creditor. The Apex Court by quashing the

impugned order held that the principle of equity plays a fundamental role in

determining the treatment to be given to the different class of creditors. The court

further opined that by treating equally different classes of creditors having different

bargain capacities as done by the NCLAT has severely resulted in distorting the well-

settled law and the doctrine given under Article 14 of the Indian Constitution,

i.e., equals should be treated equally, unequal should be treated alike.

The court further held that the legislature has purposively differentiated between both

the types of creditors as evident from the distinct definitions of the Financial Creditor

and Operational Creditor in Section 5(7) and 5(20) of the Code respectively. Also, the

debts incurred by the Corporate Debtor to both the creditors are different as the debts

from the Financial Creditor involves a financial debt80 together with the interest

disbursed in consideration of time value of money whereas the debts from the

80 The Insolvency and Bankruptcy Code, 2016, §5(8), Acts of Parliament, No. 31 of 2016.


lii An Initiative To Explore Corporate Literacy

Operational Creditor involves the operational debts81 with regards to the claim in

consideration of the provision of goods and services. Additionally, the order of

payment in the event of liquidation as given under Section 53 of the IBC also buttress

the legislative intent of making two different class of creditors.

Furthermore, one set of argument also raised in the case was that the amended

Regulation 3882 and Section 30(2) (b) of the IBC directly or indirectly provides for the

prioritization of the claims of the Operational Creditors over Financial Creditors. The

court didn't take into consideration this argument and held that the COC constituted

under Section 21 of the Code has the sole authority to decide on the matters relating

to resolution plans and further went on to say that no one has the authority to question

the commercial wisdom of the COC which solely comprises of the Financial Creditor.

The Hon'ble Court also concluded that the amended regulation which talks about

priority in payment of claims of the Operational Creditor over the Financial Creditor

does not necessarily mean that the same level of percentage of payment shall be

disbursed to the Operational Creditor as compared to the Financial Creditor.

Besides, if the Operational Creditor receives nothing they shall receive the minimum

liquidation value after the payment of the secured creditors which in the majority of

the cases would amount to nil. This shall certainly not balance the interest of all the

stakeholders and would defeat the objective of the Code. Hence, it was observed that

the COC while exercising its commercial wisdom and thereafter making a resolution

plan must ensure to take into consideration these aspects before paying off the dues

of the creditors.

Once the resolution plan satisfies the conditions laid down in Section 30(2) of the

Code, which provides that the Operational Creditors should get the higher amount

either equivalent to the amount which they will get at the time of liquidation of the

Corporate Debtor or in the order of priority of distribution as given under section 53

81The Insolvency and Bankruptcy Code, 2016, §5(21), Acts of Parliament, No. 31 of 2016. 82Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, (March 17th, 2020, 03:40 P.M.), https://ibbi.gov.in//uploads/legalframwork/1e972e1431d061f08472e2b3ef3fb32d.pdf.


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of the IBC, the same cannot be challenged. The resolution plan should stand approved

by the minimum threshold of 66% value of the debts of the creditors then it would be

binding on all the classes of creditors, whatsoever class they may belong to and also

on all the stakeholders.83 Thus, this can be rightly concluded that the creditors having

different nature, value and kind of security interest cannot be placed on an equal

pedestal. In the words of the Hon'ble Supreme Court, the court held that

"Thus, it can be seen that the Code and the Regulations, read as a whole, together with the

observations of expert bodies and this Court’s judgment, all lead to the conclusion that the

equality principle cannot be stretched to treating unequals equally, as that will destroy the

very the objective of the Code - to resolve stressed assets. Equitable treatment is to be accorded

to each creditor depending upon the class to which it belongs: secured or unsecured, financial

or operational."

AFTER EFFECTS OF ESSAR STEELS CASE

Reiterating the principle laid down in the Essar Steels case, the NCLAT in the Pacific

World Shipping PTE Ltd. v. Dadi Impex Pvt. Ltd.84 has held that disparity in treatment

can be given to the different classes of creditors. The claim of the Operational Creditor

in the present case was that they were given only 2 % of their admitted claims whereas

the Financial Creditors were given 100 % of the admitted claims which stands

discriminatory to their end. This was countered by the COC stating that the allocation

of 2 % of the claims to the Operational Creditor was more than they would have

received in the situation when the Corporate Debtor if had went into liquidation, i.e.,

NIL as the liquidation value of the assets of the Corporate Debtor was far less than the

value of the claims of the Secured Financial Creditor. Further, the COC also argued

that if the debts are to be repaid as per the priority list as given under section 53 of the

Code, then also the Operational Creditor would not have received any amount. This

is because the liquidation value of the Corporate Debtor came around 41 crores which

were far less than the admitted claims of the Financial Creditor which stood at 48.5

83The Insolvency and Bankruptcy Code, 2016, §31(4), Acts of Parliament, No. 31 of 2016. 84 Company Appeal (AT) (Ins) No. 728 of 2019.


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crores. Thus, in any event, if the resolution plan is providing anything to the

Operational Debtor where they were to receive nothing will be appreciable.

The Appellate Tribunal concluded that since the resolution plan made by the COC

satisfied the conditions of Section 30(2) of the Code and subsequently it was approved

by the required majority, the same shall be binding on every stakeholder which also

includes the creditors. The NCLAT further recapitulated the decision of the Hon'ble

Supreme Court of India in the case of K. Shashidhar v. Indian Overseas Bank & Ors.85 that

the Tribunal doesn't have the power to challenge the commercial wisdom of the COC's

and change or alter any of the decision taken by the COC during the CIRP. The only

power the Adjudicating Authority has is to provide suggestions (not mandatory in

nature) which is solely upon the COC to take into consideration or not. The Tribunal

while delivering this judgement took into consideration the objectives of the Code,

i.e., to maximise the value of the assets of the Corporate Debtor while securing the

maximum interest of all the stakeholders.

Lastly, the judgment in Essar Steels has automatically nullified the decisions of

NCLAT in Standard Chartered Bank v. Satish Kumar Gupta. R.P. of Essar Steel Ltd. and

Ors.86 and also in the case of Pr. Commissioner of Income Tax- 6, Chennai v. M/s Star Agro

Marine Exports Pvt. Ltd. & Ors.87, wherein the Appellate Tribunal had held that the

Operational Creditor must be treated at par with the Financial Creditor.

CONCLUSION

The landmark judgment of the Supreme Court in the Essar Steels case depicts the

supremacy of the "Doctrine of Security Recognition" which means that in the event of

insolvency the secured creditors hold priority in the rights to receive the payments.

To render the order ineffective and deal with the catastrophic consequences of the

NCLAT's order the Insolvency and Bankruptcy Amendment Act, 2019 was notified

by the Ministry of Corporate Affairs. Section 6 of the Amending Act specifically

85Civil Appeal No. 10673 of 2018. 86Company Appeal (AT) (Ins) No. 242 of 2019. 87 Company Appeal (AT) (Ins) No. 717 of 2019.


lv An Initiative To Explore Corporate Literacy

provides for the payment of debts as contained in the Resolution Plan in accordance

with the order of priority as given under Section 53 of the Code. In the opinion of the

author, the continuous and constant deliberations by the legislature in giving

preference to the Secured Financial Creditor over every other creditor clearly shows

the legislative intent in protecting the rights of the secured financial creditor in

comparison to any other class of creditors. Hence, the differential treatment to the

different classes of the creditors is well protected under the realm of Article 14 of the

Constitution of India and is not arbitrary and unjustified.


lvi An Initiative To Explore Corporate Literacy

THE CONFLICT OF NATIONALIZATION AND

EXPROPRIATION IN PROJECT FINANCE

(PRIYA KUMARI)88

ABSTRACT

Since the 1990s, trade amongst nations did not remain a novel thing. Project finance

also bloomed as foreign investors started finding the same lucrative for investments.

However, everything comes with advantages as well as disadvantages. Several issues

started arising up because allowing foreigners a haven for investment demanded

sovereignty to loosen down a bit. But the nations in a bid to promote the economic

development of their own country started applying principles of Nationalization and

Expropriation. Although done primarily in the larger public interest, these two terms

never received a precise meaning. This led to conflict in the interest of the foreign

party involved and the host state.

Since the conflict of Nationalization and Expropriation in project finance has been a

major area of debate on the international platform, this paper is an attempt to throw

some light upon it. In a bid to provide a vivid picture, India’s attempt to manage

Nationalization and Expropriation through a model Bi-lateral Investment treaty is

also explained.

INTRODUCTION

There was once a time when trade between nations was considered a distant dream.

However, slowly and steadily each nation started opening up their economies. This

was majorly because each and every country cannot be said to be self-sufficient to

88 Student, LLM (Corporate Law), National Law University, Jodhpur.


lvii An Initiative To Explore Corporate Literacy

fulfil all the demands of its citizens. The developing countries89 especially felt the need

to increase their production capacity and thereby, economic stability. Such a decision

meant influx of foreign investment and allowance of foreign private parties to meddle

up with another country’s sovereign.

Economies began to grow and the corporate sector started flourishing too. However,

competition grew and corporations needed financial stability to remain in the market.

Funding for company’s projects started becoming the major issue. Corporate

financing or the direct financing entails using the assets and cash flow of the company

itself to guarantee the credit granted by lender.90

However, project finance is a structured form of financing to create a different

economic entity known as the special purpose vehicle. The company’s creating the

same that is, the sponsors use equity to establish the same. The primary source of loan

repayment, however, is the cash flow of the project company and not that of the

sponsors.91 Naturally, this implies lesser risk and thus, project financing basically lures

foreign investors.92 Thus, the technicalities of foreign investment legislation sweeps

in.

Historically, foreign investors were not given the equal strata as that of domestic ones.93 This

allowed the government of host country to easily nationalize or expropriate foreign property.

Expropriation is when a sovereign uses its authority to take away private property

(herein, investment) in the name of public interest.94 Nationalization is considered a

type of expropriation covering a whole industry or sometimes, a region.95

89 For instance, China opened up its economy in 1949, India in 1991. 90STEFANO GATTI, Project Finance in Theory and Practice: Designing, Structuring and Financing Private and Public Projects, (Academic Press Publications, 2008). 91Supra note 90at 2. 92Kumar Saurabh Singh, Gahan Singh and AnujSahay, Project finance in India: Overview, THOMSON

REUTERS PRACTICAL LAW (2018). 93Newcombe&LluísParadell, Law and Practice of Investment Treaties: Standards of Treatment, KLUWER LAW

INTERNATIONAL (2009). 94 Mark W Friedman, Dietmar W Prager & Ina C Popova, Expropriation and Nationalisation, GLOBAL

ARBITRATION REVIEW. 95Id.


lviii An Initiative To Explore Corporate Literacy

There were limited remedies available. But expansion of project financing schemes

and the need of foreign capital urged sovereign nations to follow some etiquette in

such situations. Thereafter, Friendship, Commerce and Navigation treaties were

entered upon. This became the originating source of modern day Bi-lateral investment

treaties (hereinafter, BITs). These started having a separate clause on expropriation like:

“Investments of nationals or companies of either contracting Party shall not be nationalized,

expropriated or subject to measures having effect equivalent to nationalization or

expropriation in the territory of the Contracting Party except for a public purpose related

to the internal needs of that Party on a non-discriminatory basis and against prompt,

adequate and effective compensation.”96 BITs started mentioning the dispute

resolution mechanism providing an (almost) equal stand to foreign investment in case

of conflict.

India too started entering into BITs the first one with the United Kingdom in 1994. The

primary intention was protection of foreign investment and not regulatory powers of

the State.97 Project financing, foreign investment were almost functioning smoothly.

But in the year 2011, India faced a serious blow on its sovereign when a number of cases were

filed by investors against its investor proceedings.98The allegations were predominantly

on indirect expropriation and denial of fair and equitable treatment to White

Industries99. This led India to set up a working group to create a model BIT keeping

both State’s regulatory authority at par with investor rights.

This paper is an attempt to throw light upon the nationalization and expropriation

issues in project finance. For the same, the following research questions are proposed.

96 UK Model BIT, 2005. 97RashmiBanga, Impact of Government Policies and Investment Agreements on FDI Inflows, INDIAN COUNCIL

FOR RESEARCH ON INT’L ECON. RELATIONS, Working Paper (2003). 98 White Industries Australia Limited v. The Republic of India, IIC 529 (2011). 99 An Australian mining company.


lix An Initiative To Explore Corporate Literacy

ORIGIN AND CURRENT IMPLICATIONS OF NATIONALIZATION AND

EXPROPRIATION

The whole concept of Nationalization and Expropriation began with end of the Second

World War.100 This was the time when a number of colonies were formed (as a result

of decolonization). These colonies went on to become sovereign states thereafter.

When these newly formed states started having control over the resources of their

territory, inevitably they also started controlling foreign investments101. As foreign

trade and investment flourished, a need was felt to accommodate the interests of the

foreign investors so that the host state would not harm their goals. Friendship,

Commerce and Navigation (hereinafter, FCN) treaties102 were signed between the

countries so as to accommodate the domestic as well as foreign players. Eventually

the inter-state trade expanded. However, even after the advent of the aforementioned

treaties, foreign and domestic investors were not treated in the same manner.103

Needless to say, the legal rights granted were also different. Even though, it was

held104 that the foreign state could move ahead and provide diplomatic protection to

its national (the foreign investor) in cases of undue expropriation or nationalization

by the host state, it led to nothing less than undermining the investor’s rights.

Nevertheless, the FCN treaties laid down the foundation of modern day BITs105.

100 Edward D. Re, The Nationalization of Foreign-Owned Property, 36 MINNESOTA LAW REVIEW 323 (1952). 101 For instance, Oil assets of Britain nationalized by Iran (1951), Egypt nationalizing the Suez Canal (1956). 102 The beginning phase of the international investment law wherein international trade was promoted through these bilateral treaties and property rights held by foreigners was facilitated, Emily A. Arikaki, Treaties of Friendship, Commerce and Navigation and Navigation and Their Treatment of Service Industries, 7 MICHIGAN JOURNAL OF INTERNATIONAL LAW 343 (1985). 103R. ARNOLD, Aliens, R. Bernhardt (Encyclopaedia of Public International Law, Amsterdam: North-Holland Publication Company, 1992); A Newcombe& L Paradell, Law and Practice of Investment Treaties: Standards of Treatment, KLUWER LAW INTERNATIONAL (2009). 104 The Permanent Court of International Justice recognized the right of its home state to protect its national investing in other state as a guarantee under the public international law, Greece v. U.K. (The Mavrommatis Palestine Concessions), (1924) P.C.I.J. (ser. B) No. 3. 105 Bilateral Investment treaties or the Bilateral Investment Protection Agreements establish as well as expand the traditional notions of trade so as to include state’s responsibility towards the foreign investment, Bernard Kishiyian, The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law, 14 NORTH-WESTERN J. OF INTERNATIONAL LAW & BUSINESS, 327.


lx An Initiative To Explore Corporate Literacy

The first BIT was between Germany and Pakistan.106 Previously, BITs were though of

handling matters related only to nationalization and direct expropriation. But with the

passage of time, BITs evolved to include indirect expropriation, national treatment as

well as fair and equitable treatment.107 As and when need arises for interpretation of

BITs, rules of interpretation108 as mentioned under the Vienna Convention on Law of

Treaties, 1969 is followed.

The logical question that arises with such a background is how the investment

legislations and project finance are related. Project finance is defined109 as a means of

raising resources to fund a project (or the special purpose vehicle having a separate

existence from its sponsors) wherein the primary object of the sponsors is to shift the

burden of repayment upon the cash flowing through the project. The same is also used

to earn the return on equity supplied by the sponsors. Such financing is usually done

for infrastructure projects which is operated through a concession from the

government of the host country. The private players after building or after the end of

the concession period, transfer the project to the concerned state or its appointed

agents.110 Naturally, the state or the government cannot develop infrastructure alone

owing to budgetary constraints and other related reasons. Hence, involvement of

private parties became common. Involvement of private parties means inclusion of

foreign players too due to globalization policies. The moment foreign players became

the subject of project finance, it was necessary to refer to BITs for ascertaining the host

country as well as the foreign player’s rights.

106Jeswald W. Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries, 24 THE INTERNATIONAL LAWYER 655 (1990). 107Bilateral Investment Treaty Arbitration and India, NISHITH DESAI ASSOCIATES (2018). 108 Article 31: General Rule of Interpretation, Article 32: Supplementary Rules of Interpretation. 109JOHN D. FINNERTY, Project Financing Asset-Based Financial Engineering (John Wiley and Sons, 2013). 110NATALIE SCHOON, Islamic Banking and Finance, (Spiramus Press, U.K., 2009).


lxi An Initiative To Explore Corporate Literacy

Nationalization and expropriation are often used interchangeably.111 They both are

used to signify the very primary forms of political risk112 involved in investment in a

project.113However, the United Nations Conference on Trade and Development

(hereinafter, UNCTAD) defines them separately. This is done so as to maintain a

consistency regarding their meaning as International Investment Agreements (or IIAs)

of different countries have different definitions for it. Nationalization is defined as the

extensive appropriation of the property of private players either in all economic sectors so

as to gain complete state control over the economy or in some sectors to create a state

monopoly in that particular industry only.114 Expropriation on the other hand, is the

specific appropriation of property or enterprise wherein the property rights are either

retained by the state or passed on to some other operators.115 It can be done by the

state for the purpose of redistribution of land or to control the domination of a

particular industry by a foreign enterprise.

Nationalization was critically examined and defined116 as the mandatory transfer of the

private property to the state with the sole purpose of unchanged exploitation of the named

property. It is done only with economic motive. While, in expropriation the primary

motive can be non-economic and the use of the property might be different from that of the

use it was put into by the private player.

Now, here it is essential to mention that expropriation can be done either directly or

indirectly.117 When the private property’s title is mandatorily transferred to the state or

its agency leading to its absolute seizure, direct expropriation is said to occur.

111 Especially till the last stages of the Second World War as nationalization was defined as expropriation undertaken in furtherance of some national policy, BA WORTLEY, Expropriation in Public International Law, (University Press, Cambridge, 1959). 112 Political risks are those wherein there exists probabilities of a sovereign government altering its legislations or policies in a manner which becomes unfavourable to either domestic or foreign firms. 113 Kenneth W. Shotts, Political Risk as a Hold-Up Problem: Implications for Integrated Strategy, STANFORD

GRADUATE SCHOOL OF BUSINESS (2015), https://www.hbs.edu/faculty/conferences/2015-strategy-and-business/Documents/ShottsPoliticalRisk.pdf. 114 Expropriation, UNCTAD Series on Issues in International Investment Agreements II, (2012), https://unctad.org/en/Docs/unctaddiaeia2011d7_en.pdf. 115Id. 116ISI FOIGHEL, Nationalization: A Study in the Protection of Alien Property in International Law (Stevens & Sons Limited, Chancery Lane, London, 1957). 117 Ali Ghassemi, Expropriation of Foreign Property in International Law, The University of Hull, (1999), https://core.ac.uk/download/pdf/2731706.pdf.


lxii An Initiative To Explore Corporate Literacy

However, when there isn’t any formal procedure followed but in reality, the rights of

the property gets vested in the state it is said to be an indirect expropriation. There is

yet another form of expropriation identified by UNCTAD118 which is named as the

creeping expropriation. It is where a number of measures are taken by a state against

an investor’s property within a specified time-period. The outcome is the same that is,

loss of control over the property by the investor.One of the leading cases119 accepting

foreign investor’s right in cases of expropriation held that it to be in derogation of the

usually applicable rules used in cases of foreigners involved in investment. It

mentioned that even in cases of expropriation there should be respect for the principles of

vested rights.

Even after defining Nationalization and Expropriation in varied terms, UNCTAD puts

both of them in the same category of taking away of private property. While doing so,

it lays down certain prerequisites120 before the host state goes on to nationalize or

expropriate private property.

There must be a public purpose or public interest involved in the taking away of the

property

The host state must not discriminate between its citizens (or nationals) and foreign

investors. Any differential treatment between the two would be held arbitrary and

thus, illegal

Compensation must be paid in lieu of taking away of property. This gains importance

when a foreign investor is involved. The standard of appropriate compensation is

used which depends on equitable principles and not strictly on the market value to

decide the compensatory amount.121

118Supra note 114. 119 Germany v. Poland (The Charzow Factory Case); (1927) P.C.I.J. (ser. A.) No. 9. 120 Taking of Property, UNCTAD Series on Issues in International Investment Agreements (2000), https://unctad.org/en/Docs/psiteiitd15.en.pdf. 121The Restatement of the Law: The Foreign Relations Law of the United States, American Law Institute (1987).


lxiii An Initiative To Explore Corporate Literacy

A due process must be followed while taking away the private property. It can be by

setting up an independent tribunal to decide the matter and having a legislation (or

treaty) in place to decide the amount of compensation to be paid.

INDIA AND BITS: AN UNDERSTANDING OF ITS TAKE ON

NATIONALIZATION AND EXPROPRIATION

After the opening up of Indian economy, the first BIT she entered was with United

Kingdom. Its basic premise was to protect the interests of the foreign investor and not

to recognize the regulatory power of the host state.122 It went on to safeguard the

foreign investors’ rights through fair treatment. There did not arise a situation of

unfair expropriation of private property. There was a minor glitch in 1990s when

Dabhol Power Company123 started arbitration proceedings against the Maharashtra State

Electricity Board. However, these were settled smoothly and no arbitration award

resulted in lieu of the same. It was with the White Industries case124 that India began

reviewing the modus operandi of its BITs.

India then brought in the model text for the Indian BIT in the year 2016 with a view to

significantly increase its regulatory powers over investor’s rights.125 The preamble of

the model BIT, 2016 (hereinafter, Model BIT) reaffirms the aforementioned stance. It

states that the parties to the BIT will have the right to regulate investments made in

0their territory as per their domestic laws and policies. Also, the interpretation of the

treaty is to be made according due attention to the host state’s authority to develop

122Supra note103. 123Dabhol Power Company was a joint venture amongst Enron Corporation, Bechel Enterprises and General Electric. They having formed a joint venture entered into an agreement with Maharashtra State Electricity Board to generate electricity; Achinto Roy, Enron’s Dabhol Power Project in India, 5 INT. J. BUSINESS AND GLOBALIZATION 188 (2010); Maharashtra Power Development v. Dabhol Power Company and Ors., (2003) 4 CompCas 467 CLB. 124 An Australian mining company, White industries entered into a contract with Coal India Limited for mining purposes. However, the former alleged various claims such as bonus and quality issues to raise a number of arbitration proceedings against India which led to an award of around $ 4 million as compensation to White Industries; White Industries Australia Limited v. The Republic of India, IIC 529 (2011). 125Supra note 107 at 8.


lxiv An Initiative To Explore Corporate Literacy

and implement its domestic policies.126 Due to this, the structure of the Model BIT

differed significantly from the previous BITs. It has 38 articles split into 7 chapters.

It is to be noted that the Model BIT is applicable only to two types of investments.127

The first one comprises of those investments which have been acquired after the

advent of the Model BIT. And secondly, it is applicable to those investments which

remained in force even after the advent of the Model BIT. It explicitly mentions that

only those investments are to be permitted in India which are in consonance of its

domestic rules and regulations.128 It also goes on to exclude129 measures by local

governments, taxation by the state and compulsory licensing from being questioned

via BIT.

Article 5130 of the Model BIT explicitly mentions Expropriation. Since it falls under

Chapter II of the BIT, claim against undue expropriation can be brought under the

dispute settlement mechanism.131 Article 5 treats begins by stating that either of the

two parties involved cannot move ahead to nationalize or expropriate132 the investment

of the other party without following due process and non-payment of adequate

compensation133. Expropriation or nationalization is to be done only on accounts of

public purpose. The meaning of public purpose is not made clear. Interestingly, non-

discrimination which is a very basic principles in investment treaties around the globe

finds no mention in the Model BIT.134

126 Model text for the Indian BIT, Article 23.1 (2016). 127Id., Article 2.1. 128Id. 129Supra note 39, Articles 2.4 (i), (ii), (iii). 130Id, Article 5.1: “Neither Party may nationalize or expropriate an investment of an investor of the other party either directly or through measures having an effect equivalent to expropriation, except for reasons of public purpose, in accordance with the due process of law and on payment of adequate compensation.” 131 Claims can be initiated by the foreign investor only against those issues mentioned under Chapter II of the Model BIT, supra note 107 at 14. 132Supra note 126, Article 5.1. 133 Adequate compensation should at least be the same as that of the market value of the investment immediately before the date of expropriation. Additionally, valid considerations such as asset value, going concern value should be kept in mind while deciding the amount of compensation, Id. 134Supra note 107 at 24.


lxv An Initiative To Explore Corporate Literacy

Model BIT protects the rights of the foreign investor by both direct and indirect

expropriation.135 It defines direct expropriation136 to include all such nationalization or

expropriation of property which occurs through a formal procedure leading to the

transfer of the title of the property or outright seizure. On the other hand, indirect

expropriation137 is defined as all other kinds of expropriation which eventually takes

away the investor’s right to use the property invested without involving a formal

transfer or seizure. Indirect expropriation is stated to be one measure or a series of

measures indicating that even creeping expropriation is covered within its ambit.

Indirect expropriation was vividly defined in the case of Starrett Housing Corporation

and Ors. v. The Government of the Islamic Republic of Iran138. It said that those measures

by the host state which leads it to intervene so much into the property of the investor

that even though the property rights remains with the investor, it is rendered useless.

The Model BIT goes on to state that whether or not a measure of the state is

expropriation would have to be considered according to the facts and circumstances

of the case at hand.139 Some of the considerations140 to be kept in mind while deciding

whether or not expropriation has occurred are mentioned below. Needless to say,

these considerations are for determining an indirect expropriation as direct

expropriation can be easily established.

Economic impact of the measure (alleged to be an expropriation) has to be

evaluated keeping in mind that merely some effect on the economic value of

the foreign investment will not be assumed to be an expropriation.

The time duration of the alleged measure(s)

Context, objective as well as the intention of the alleged measure(s)

The capability of the alleged measure(s) to breach the initiating Party’s

obligations towards the investor (who has claimed relief due to illegal

135Supra note 126, Article 5.3. 136Supra note 126, Article 5.3(a) (i). 137Supra note 126, Article 5.3(a) (ii). 138 16 Iran-US CTR at 112. 139Supra note 39, Article 5.3(b). 140Id.


lxvi An Initiative To Explore Corporate Literacy

expropriation) promised through a contract or any other legal document

earlier.

However, investments of the foreign investor cannot be subjected to those measures which are

against the customary international law.141 It might seem to be a sigh of relief for the

foreign investors. But the reality is that the thresholds of denial of justice, undue

process and discrimination are set to be very high. The word “manifestly” is

incorporated to imply that the treatments mentioned above if meted out only through

manifestly unjust grounds would be held to be contrary to the BIT and international

customary laws. Also, no set guidelines are provided on how to decide what manifest

would mean in a given situation. The National treatment principle142 is also made

favourable towards the host state or the domestic investors of the host state by

specifying what would be considered as like circumstances.

It has to be kept in mind that before alleging undue taking away of property, the

foreign investor will have to establish that the property so expropriated comes under

the definition of investment143as defined in the Model BIT. To make things even more

problematic for the foreign investor, the Model BIT mentions that in case a dispute is

filed against expropriation, the tribunal (as set up under the BIT) would first assure

whether or not the investor first proceeded with the claim in any domestic courts and

only then consider the claim in front of it.144

CONCLUSION

It is assumed by many that difficulties arising out of expropriation or nationalization

have been a thing of the past. This is argued as most of the countries specially the

developing ones promote foreign investment as a means to develop their own

economy. However, the reality is different. As stated above, India being a developing

141Supra note 126, Article 3.1. 142 National treatments refers to providing no less favourable treatment to a foreign investor as that provided to a domestic investor in like circumstances; Supra note 126, Article 4. 143 The definition of Investment is broad enough specifying but not limiting what are to be considered investments and what not; Supra note 126, Article 1.4. 144Supra note 126, Article 5.6.


lxvii An Initiative To Explore Corporate Literacy

country has turned to formulate a Model BIT which at least on paper assumes to be

favorable towards the host state (herein, India as explained earlier). True, it is done to

maintain the territorial sovereignty of the host state. Or, to protect the country from

becoming a prey in the hands of a foreign investor. But enabling such investment

treaties has its repercussions too. Foreign investors might get discouraged from

investing in a country which pays more attention to its domestic policies than the

international customary laws pertaining to investment. This leads to the conclusion

that problems generating from expropriation or nationalization can never come to an

end.

Wherever there will be a foreign investment in project finance or otherwise, these

issues will exist. But the difficulty aggravates due to the fact that both these terms are

sometimes used interchangeably and sometimes differently. The non-settlement of the

conflict between expropriation and nationalization even after decades have passed

since these concepts first emerged, is creating a distress for the tribunals constituted

under various BITs or IIAs. This has led to a number of contradictory decisions if

looked at from an international platform.

It has to be kept in mind that international law provides right to a country to

nationalize or expropriate property for public interest but also grants certain

uninfringeable rights to the foreign investor. Both have to be balanced so as to

formulate an investment treaty which is beneficial for both the countries. This is the

primary objective of international investment law. Having said that, even after the

growth and development of a huge number of countries, they are still lacking behind

in achieving aforementioned objective. Rising above petty interests at the stake of

another country still seems to be a distant dream. There needs to be a proper blend of

binding international principles and regulated domestic policies so as to ensure

effective flow of trade and investment amongst different countries.


lxviii An Initiative To Explore Corporate Literacy

Related Party Transactions and India’s Concentrated

Ownership Structure

(Ananya Sivadas Menon)145

In recent times, related party transactions have posed serious concerns for corporate

governance reformers. Such concerns stem predominantly from the plethora of cases

highlighting the abuse of related party transactions to satisfy personal ends. Related

party transactions (RPTs) refer to those transactions between parties that have a pre-

existing relationship prior to the said transaction.

India’s corporate history has been tainted with financial frauds which have used RPTs

to facilitate the same. The Satyam-Maytas corporate fraud resulted in the need to

tighten the law concerning RPTs. However, a decade has gone by and the answer to

the simple question of whether or not we have enough checks and balances to avoid

scams of similar magnitude, continues to be a striking ‘no’. This is reflected in the high

number of corporate frauds that continue to pervade the system such as the DHFL

scam, Fortis Healthcare and Sun Pharma, to name a few.

While analysing the above illustrations, it is not possible to turn blind eye to the fact

that a point common to all of them is the concentrated ownership structure followed

in these companies. In India, the corporate ownership structure146 is primarily

concentrated, pyramidal and dominated by family business groups. Under these

ownership structures, the said business groups have affiliated firms with differential

cash flow rights and controlling rights known as ownership wedge.147 Such ownership

structures more often than not, tend to exhibit tunneling of resources to expropriate

145 Student, 4th year, Gujarat National Law University. 146Pankaj Gupta, Related Party Transactions and its’ Impact on Performance of Group Affiliated Firms in India, PBRI, 2017http://www.pbr.co.in/2017/marchThird.aspx. 147Id.

http://www.pbr.co.in/2017/marchThird.aspx


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minority shareholders. The term tunneling refers to a method of diverting resources

from a low cash flow firm to a high cash flow firm both of which being controlled by

a common owner. Related party transactions, have played a key role in enabling such

practices. Although viewed through a lens of skepticism, regulators don’t ban RPTs

because such transactions carry with them economic benefits for the company. It is

therefore pertinent to have a regulatory framework capable of accounting for such

abusive practices given the ownership structure seen to be followed in our country.

Section 188 of the Companies Act, 2013 (Act) concerns itself with related party

transactions. However, the same has not been sufficient in preventing the abuse of

RPTs. The Ministry of Corporate Affairs with the aim to improve ease of doing

business has issued multiple clarificatory circulars and amendments, which have

resulted in diluting the effect of the provisions concerning RPTs. The first circular148

to dilute the said provisions was issued in 2014, wherein it was clarified that a

shareholder would be considered a related party only with respect to those

transactions for which the special resolution was being passed. The second, was via

an amendment made to the Companies (Meetings of Board and its Powers) Rules,

2014, which removed the classification of companies based on paid up capital and

required companies to seek shareholder approval for those RPTs which cross the

transaction threshold of hundred crore rupees. The said circular was also responsible

for exempting companies from seeking shareholder approval for RPTs with wholly

owned subsidiaries which has further increased the risk of engaging in transactions

that go against the benefit of the minority shareholders. Additionally, in 2015, there

was an amendment made to the Act wherein it was provided that RPTs would require

to be passed by a mere ordinary resolution and not a special resolution of the

disinterested shareholders which is again to the disadvantage of the minority

shareholders.

While shareholder protection has been diluted by the MCA, the recent report of the

Working Group (WG) constituted by SEBI to re-examine the provisions of the SEBI

148MINISTRY OF CORPORATE AFFAIRS, https://www.mca.gov.in/Ministry/pdf/Circular_No_30_17072014.pdf, (last visited, March 22,2020).


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(Listing Obligations and Disclosure Requirements) Regulation 2015 (LODR) has

reflected the regulators intention to tighten the strings with respect to RPTs. The report

released on 27th January 2020 is indicative of the fact that the regulator themselves are

not convinced that the existing provisions on RPTs are sufficient in curbing abusive

practices with respect to the same.

The following are some of the key recommendations made by the WG:

i. It was suggested that the definition of the term “Related Party” be modified

to include any person or entity belonging to the promoter or promoter

group of the listed entity, irrespective of their shareholding. Presently, such

person is required to hold 20% or more shareholding of the listed entity in

order to be included within the ambit of the term related party. The reasons

accorded for the same are indicative of the fact that the regulator has taken

cognizance of the loopholes within the current framework with regards to

the concentration of ownership. The Working Group explicitly

acknowledged that a significant percentage of Indian businesses being

structured as an intrinsically linked groups with promoters exercising

significant control over the entire group, it is not unusual for such entities

to enter into intra group RPTs. This may result in excessive control over the

decision making which has in the past seen to be to the prejudice to those

outside the controlling members and hence such modification to the

definition of related party is imperative. Additionally, they were also of the

view that those shareholders holding above certain thresholds capable of

influencing the decisions of the company be deemed to be a related party as

seen in countries such as the United Kingdom, Italy and Korea.

ii. Recent corporate frauds have played an important role in the deliberations

of the Working Group, which can be seen from the discussions and

recommendations made with respect to the definition of ‘related party

transactions.’ The WG pointed the existing practice of employing complex

structures and extending loans to unrelated parties which in turn lends to a

related party, in order to circumvent the requirement of classifying the


lxxi An Initiative To Explore Corporate Literacy

transaction as a RPT. In this regard it was suggested that the definition be

broadened to include transactions which are undertaken directly or

indirectly, with the intention of benefitting related parties. While an

addition of indirect transactions to the checklist of the audit committee may

seem sufficient, it may be wise to include the concept of renewed approvals

for certain specific transactions and recurring RPTs as seen in jurisdictions

such as Israel.

iii. Currently as per Regulation 24(6) of the LODR, transactions undertaken by

an unlisted subsidiary with related parties do not require the prior approval

of the audit committee or shareholders of the listed entity, subject to certain

exceptions. This was viewed by the WG as a method that may be employed

to move out from the consolidated entity, the value or assets which belong

to the shareholders. The WG thereby suggested that prior approval of the

audit committee be made mandatory in such situations. While mandating

prior approval is well intentioned, there are certain aspects that are to be

rectified first. One such aspect is with regard to independent directors. As

far as practice is concerned, the term independent director is a mere title as

these independent directors are generally appointed by controlling

shareholders. Therefore, provisions to improve the selection process of

independent directors must be regarded as the step preceding mandatory

approval.

iv. Another important suggestion made by the WG was with regard to the

materiality threshold attracting the prior approval of shareholders. It was

observed that data collected based on 500 listed entities, reflected that the

threshold being set too high at 10%, several RPTs may not be placed before

shareholders for approval. It was accordingly suggested that this threshold

be reduced, with emphasis on the 5% threshold seen in other jurisdictions

such as UK, Singapore and Malaysia.

From the aforementioned changes it is clear that SEBI and MCA are furthering

different objectives with their framework on RPTs. While SEBI is seen to have


lxxii An Initiative To Explore Corporate Literacy

taken into account the promoter driven nature of Indian companies by tightening

RPT norms, MCA has been travelling in a diametrically opposite direction. While

the said propositions of SEBI may result in an increased compliance burden on

listed companies and greater workload for audit committees, events in the recent

past have mandated such tight scrutiny of RPTs. Certain deliberations of the WG

could also be contemplated by the MCA with respect to the Act. One such point

debated upon is with respect to aligning LODR with the Companies Act, 2013 and

allowing shareholders who are related parties of the listed entity but not connected

with the particular RPT to vote with respect to that RPT. However, the WG decided

against the said change on the grounds of subjectivity and collusion by various

promoter groups to influence the vote on the RPT. Considering the plethora of

corporate frauds that have employed RPTs in the recent past, it is highly advisable

that the MCA framework be amended to provide the right balance between ease

of doing business and protection of shareholder interest.


lxxiii An Initiative To Explore Corporate Literacy

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