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July 2017
Volume I Issue 1

VHVK Law Bulletin

We are pleased to launch VHVK Law Bulletin, our e-newsletter. A new initiative from VHVK Law, our e-newsletter endeavours to bring you thegist of some major developments in business and commercial law. In selecting news items for the VHVK Law Bulletin,we attempt to ensure that they are useful and interesting to corporate and business clients, who operate in increasingly complex environmentsand are governed by a growing set of regulations. Our Bulletin is an effort to present to you current developments in business and commercial law, with an analysis that is accessible and helpful.

As always, we count on your support and welcome suggestions/comments for improvements.

Anti-competitive efforts by trade unions, attract bar under Competition Act, 2002

The reach of the law against anti-competitive efforts expanded with the recent decision of the Supreme Court of India in Competition Commission v Coordination Committee of Artists and Technicians(2017(. “Mahabharat,” a Hindi television serial was dubbed in Bengali and screened on two channels in West Bengal. The production of the serial and its later dubbing in Bengali language happened without the involvement of any artists in West Bengal, who would be affiliated with the Artists and Technicians of West Bengal Film and Television, a trade union representing workers in these fields in the state of West Bengal. The trade union launched an agitation against the showing of the serial in West Bengal and was able to block the shows.

The Competition Commission of India initiated proceedings under the Competition Act, 2002 that the actions of the trade union were anti-competitive and attracted the bar under section 3(3) of the Act. In defence, the trade union argued that it was not an “enterprise” for the purpose of section 3 and, therefore, its actions would not be hit by the bar under the provision against anti-competitive practices. The Supreme Court rejected the plea of the trade union and ruled that the term “enterprise” would include associations of persons, per the definition in clauses (h) and (l) of section 2 of the Competition Act. For more details, click here.

Government of India introduces “Fast-Track Mergers”

To facilitate reorganization by smaller companies, government of India recently introduced a simplified method of merger, or amalgamation. The new “Fast-Track” method applicable to smaller companies dispenses with the need to seek the approval of the National Company Law Tribunal – a time-consuming/expensive process – for companies that meet the eligibility criteria. The Fast-Track method is available for companies with paid-up capital of up to ₹50 lakhs and sales up to ₹2 crores.

The regulatory approval requirement, from the National Company Law Tribunal under the Companies Act, 2013,is intended to protect creditors’ interests in corporate reorganization. For eligible smaller companies, this is replaced with a rule that they seek and obtain consent from at least 90 percent (in value) of their creditors for the proposed merger. With the approval of the boards of directors of the merging companies, and at least 90 percent (in value) of the shareholders and the creditors, mergers can be approved by the Regional Director. More information here.

Real Estate (Development and Regulation) Act, an overview

The Real Estate (Development and Regulation) Act, 2016 came into effect in May 2017. The new law creates a framework for promoting order and transparency in India’s real estate market, which has seen enormous growth in the last over two decades. The Real Estate Act regulates the market at both ends – namely, promotion and implementation of projects as well as dispute resolution through a specialist agency. The new Act even carries criminal penalties for real estate developers who default intheir statutory duties. Below are some major duties of project promoters under the Real Estate Act, 2016:

  • Compulsory registration of projects with the Real Estate Regulatory Authority (RERA)
  • Compulsory posting of project information on website
  • Provide buyers a written agreement when collecting 10 percent or more of the property price
  • Obtain insurance for title to land, buildings, and construction
  • Maintain funds in earmarked project account under supervision of independent professionals
  • Pay compensation to buyers of properties for defects in title
  • Transfer of promoters’ interest in project subject to approval from buyers

Obviously, the law aims to protect buyers of properties in real estate project perceiving them to be the weaker party in the transaction. In case of disputes or complaints, a specialist agency – Real Estate Regulatory Authority – is empowered to grant appropriate relief. For more details, please click here.

Foreign Portfolio Investments in Unlisted Corporate Debt Securities

The Securities and Exchange Board of India(SEBI) recently opened up another source of debt finance for Indian enterprises. Foreign Portfolio Investments in the Indian markets have been growing since the introduction of SEBI (Foreign Portfolio Investors) Regulations, 2014. The Foreign Portfolio Investors (FPI) Regulations were mainly meant to promote investments in listed securities and restrict the classes of securities in which overseas investors can invest.

Last year, the Reserve Bank of India (RBI) amended the applicable FEMA regulations to permit overseas portfolio investments in unlisted corporate debt securities and securitised debt instruments. To implement the move, SEBI recently expanded the list of securities open to overseas portfolio investors. The list of eligible securities for FPI now include unlisted debentures /bonds issued by companies, subject to applicable guidelines from the Ministry of Corporate Affairs, and securitised debt instruments. The standard exclusion of real estate, capital market, and purchase of land continue to apply for the end-use of funds to be raised from overseas portfolio investors under the new facility. More information here.

Piercing the corporate veil in arbitration

In seeking legal remedy against companies – for example recovery of debt – it is sometimes necessary to travel beyond the company and make efforts to hold the concerned individuals (directors and/or shareholders) accountable. This is more common with closely-held or private companies that do not have significant assets and there are uncertainties in recovering money from such companies. In appropriate cases, company law permits “lifting the corporate veil” andthis enables holding the individuals running/owning companies to account for corporate liabilities.

With the increasing popularity of arbitration as Alternative Dispute Resolution (ADR) mechanism, the Delhi High Court recently considered whether arbitrators could lift the corporate veil. The question is important because arbitration requires the consent of parties, unlike litigation in courts. Difficulties arise when the individuals against whom relief is sought through the “lifting the corporate veil” device are not parties to the arbitration agreement.

In Sudhir Gopi v Indira Gandhi National Open University (2017), the Delhi High Court held that arbitrators could not lift the corporate veil to impose liability on individuals who were not parties to the arbitration agreement. Stressing the importance of consent in arbitration, the court ruled that the mechanism of “lifting the corporate veil” cannot be applied in arbitration to pass orders against persons who had not consented to arbitration. For more details, click here.

Recovery from corporate debtors under the Bankruptcy and Insolvency Code, 2016 – existence of “dispute”

The newly-introduced Bankruptcy and Insolvency Code (B&I Code) aims to speed up recovery from defaulting borrowers and facilitate business restructuring and turnaround. A first step for a creditor seeking to recover debts is to issue a notice demanding payment. The B&I Code provides a short time of 10 days for the debtor to either pay the amount demanded or, alternatively, issue a reply explaining the existence of a dispute (section 8(2)). The rules set a high standard on the existence of disputes. Creditors must show that dispute existed prior to the issue of demand notice by the creditor. This is meant to check the tendency for debtors to raise spurious disputes to avoid/delay payments.

The National Company Law Tribunal (Principal Bench) considered the issue about the dispute plea raised by a creditor and its impact. In One Coat Plaster v Ambience Private Limited (2017), NCLT applied a seemingly low bar and rejected the creditor’s application relying on a delayed reply issued by the debtor. The debt arose from contract work dues and the debtor raised issues about the quality of work done by the creditor. However, the reply was issued beyond the time limit permitted under the B&I Code and there was little evidence of any dispute being raised before the creditor issued its demand. The decision of NCLT could have a dampening effect on recovery proceedings under the B&I Code and undermine the position of creditors. For more information, click here.

VHVK Law Partners

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VHVK Law Bulletin, is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.