INDIA UNLEASHEDJuly 2017

Dear Readers, IN BRIEF

Notification

Combination

CCI

Act

In a bid to align the Indian competition regime with global best practices and as a demonstration of its commitment towards facilitating ease of doing business in India, the Indian Government has, vide its notification dated 29 June, 2017 (“Notification”), exempted parties to a notifiable merger, amalgamation or acquisition (“Combination”) from the requirement of giving notice of such Combination to the anti-trust regulator, Competition Commission of India (“CCI”), within 30 days. The Notification provides such exemption for a period of five years from the date of the Notification.

The Indian Combination framework is suspensory, as Combinations can only come into effect either 210 days from the day on which the notice is given to the CCI or once the CCI has passed an order approving the Combination, whichever is earlier. However, apart from this requirement, the Competition Act, 2002 (“Act”) also requires Combinations to be notified to CCI within a strict timeline of 30 days of approval of such Combination in the form of a board resolution, execution of definitive agreement or communication of the Combination to any authority.

Delay in notifying the CCI has resulted in the CCI imposing heavy penalties in the past. In the Tesco-Trent and GE-Alstom deals, while the Combination itself was approved by CCI, it imposed penalties as high as INR 30 million and INR 50 million respectively, for a delay in filing the notice of such Combinations.

While the Notification does away with the deadline for the Combination notice, parties to the Combination are still required to take CCI's approval before a Combination can be made effective. Accordingly, in the future, parties to a Combination will not fear heavy penalties due to their inability to file the notice of Combination within the artificial deadline of 30 days.

While this is a welcome step, it remains to be seen whether the Government will give more permanence to this temporary relief of five years by amending the Act to remove this provision altogether.

Bill

FIs

RC

The Union Cabinet is planning to introduce the Financial Resolution and Deposit Insurance Bill, 2017 (“Bill”) in the current monsoon session of the Parliament. The Bill aims to create a comprehensive code for resolutions of entities in the financial sector, such as banks, insurance companies, etc. (“FIs”) and to provide a specialised resolution mechanism to deal with their bankruptcy situations.

The Government has been in the process of streamlining the insolvency resolution laws and procedures in India. To this end, the Insolvency and Bankruptcy Code, 2016 was enacted last year, to consolidate the fragmented insolvency resolution laws in India. However, the Code did not cover FIs; and solvency standards and insolvency processes of different types of FIs are still governed under their respective laws.

The Bill aims at streamlining the same, while also protecting the interest of the FIs' customers, limiting the public spending as well as reducing the time and cost of resolving their insolvency.

The Bill envisages the setting up of a Resolution Corporation (“RC”) to inter alia (a) determine and assign level of risk to viability of the FIs; and (b) inspect, resolve and act as liquidator for FIs that are determined to be insolvent or at a higher risk to viability.

While the main intent of introduction of RCs is to set up a specialised institution with the wherewithal to determine and resolve insolvency events of FIs, it will be interesting to see how the actual procedure and implementation is brought about by the RC. Streamlining the calculation of solvency for different FIs, which is currently based on their respective criteria, into the specified levels of risk to viability may prove to be an interesting challenge before the RC.

Given that FIs have widespread reach, an insolvency event in an FI would not only

affect the economy but also the public at large, and having a specialised institution dealing with

such events will instil confidence in the

public.

GST

Code

One term of a Government is too short a time to judge the long term implications of the laws that it legislates or the policies that it has framed during its tenure. Even as the jury is still out on the efficacy of the Goods and Services Tax (“GST”) that came into force on 1 Ju ly, 2017 amidst fanfare, celebrat ion and opposit ion, depending on which side of the bench you were on, the Insolvency and Bankruptcy Code, 2016 (“Code”) silently completed its first year in the statute-books.

While GST witnessed the expected birth pangs, it has been a brush with reality for the Code in the last couple of months, especially with respect to insolvency resolut ion of corporate persons.

In the last one year as the Government steadily created the rules and regulations surrounding the Code, the real action has now started unfolding in the National Company Law Tribunal, National Company Law Appellate Tribunal and the courts. One year on, we take a hard relook at the Code in this edition of India Unleashed and the challenges that lie ahead for the Code that has the potential of being the panacea for India's distressed debt predicament .

We hope you find this edition of India Unleashed useful. We welcome your feedback at indiaunleashed@khaitanlegal.com.

Competition Laws: Temporary Relief from Artificial Deadline

Bill for Resolution of Insolvency in Financial Institutions ready to be an Act

Warm Regards,

Sakate Khaitan Senior Partner

The New Insolvency Regime

Code

Initial Issues Decided by the NCLT and NCLAT

NCLT

NCLAT”

The New Insolvency Regime

India ushered in its new insolvency regime with the enactment of Insolvency and Bankruptcy Code, 2016 (“Code”) in May 2016. The Code was to become the first c o n s o l i d a t e d l e g i s l a t i o n i n I n d i a encompassing various aspects of insolvency law for corporate persons, individuals and partnerships. It promised a paradigm shift in the erstwhile insolvency regime by giving an upper edge to the creditor and eliciting greater accountability from the debtor.

The Code is being implemented in a phased manner and the provisions for corporate insolvency were notified in December 2016. As the Code now plays itself out in the tribunals and courts, in this article we take a look at the important issues that have emerged during the last six months and the potential challenges for the Code in meeting its objective.

Initial Issues Decided by the NCLT and NCLAT

The Code aims to provide a robust mechanism to tackle and address insolvency of corporate persons and the power to do so has been conferred upon the National Company Law Tribunals (“NCLT”). The NCLT has one Principal Bench at Delhi and ten coordinate benches across India. Appeals from orders of the NCLT lie with the National Company Law Appellate Tribunal (“NCLAT”).

Enumerated below are a few issues under the Code which have so far been decided by the NCLT and NCLAT.

Opportunity of being heard and interface of other laws vis-à-vis the Code

The first ever insolvency application was filed before the NCLT Mumbai Bench against Innoventive Industries Ltd. by ICICI Bank (a

1financial creditor) . In this case, the NCLT admitted the petition without giving a notice of hearing of the application to the corporate debtor. The corporate debtor filed an application before the NCLT seeking dismissal of the insolvency application since the debt in question had been suspended under the Maharashtra Relief Undertaking (Special Provisions) Act,1958. NCLT Mumbai held that the provisions of the Code override that of the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 and that the two legislations operate in different fields. This order was challenged by the debtor in an appeal before the NCLAT. While the NCLAT dismissed the appeal, it specifically observed that while deciding the application of a financial creditor, NCLT must observe the principles of natural justice and a notice of the

3hearing must be given to the debtor . The order addressed an important anomaly in the Code, since the Code does not specifically stipulate providing such a notice to the corporate debtor.

Meaning of “dispute”

Perhaps the most debated issue before the NCLT and NCLAT has been the interpretation of the term “dispute” and “existence of dispute” in the context of a petition filed by an operational creditor. Under the Code, an operational creditor is required to send a notice of demand to the corporate debtor and the Code envisages that within 10 days of receipt of the demand notice, the corporate debtor ought to either pay or reply by bringing to the attention of the creditor, existence of a dispute. The entire controversy revolved around whether only a pending suit or arbitration which was initiated prior to receipt of a demand notice under the Code (and as per the wordings used in the Code) would constitute a “dispute” within the meaning of the Code, or would a dispute reflected through documents and correspondences exchanged between parties also be sufficient to prove existence of dispute. Initially, different benches of NCLT had taken contradictory

3views on this issue. However, this controversy has now been put to rest by the NCLAT in an appeal filed by Kirusa Software

Pvt. Limited against the order passed by the Mumbai Bench of NCLT, wherein the NCLAT has, inter alia, held that a pending suit or arbitration prior to the receipt of the demand notice is not the only dispute envisaged in Section 8 of the Code and that such a dispute can be reflected via correspondence between parties, etc. provided such dispute is bona fide, which assessment needs to be made by

4the NCLT on a case to case basis .

Mandatory Certificate from a Financial Institution: No recourse for Foreign Operational Creditors under the Code

One of the documents required to be submitted along with the petition by an operational creditor is a certificate from a financial institution maintaining its accounts, confirming that the debtor has not paid the sum in demand. Recently, the NCLAT

5observed that this certificate ought to be procured only from an Indian financial institution since the definition of financial institution under the Code currently envisages only Indian entities. For those foreign operational creditors who do not have an account with an Indian entity, the NCLAT has suggested recourse to alternative remedies.

Sanctity of the timelines prescribed in the Code

Strict timelines is the essence of the Code. However, in J.K. Jute Mills Co. Ltd. vs.

6Surendra Trading Co. , the NCLAT has clarified that the timeline of 14 days prescribed under the Code is not mandatory and that the NCLT has inherent powers to extend the 14 day period on a case-to-case

INDIA UNLEASHED

The New Insolvency Regime:Story Thus Far…

1ICICI Bank Ltd. v..M/s. Innoventive Industries Ltd. C.P.No.01/I&BP/NCLT/MAH/2016 (Dated 17.1.17)2M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1&2 of 2017 (Dated 15.6.17)3See Kirusa Software Pvt. Ltd. v. Mobilox Innovations Pvt. Ltd. CP No.02/I&BP/NCLT/MAH/2016 (Dated 27.1.17); KKV Naga Prasad v. M/s. Lanco Infratech Ltd. CP (IB) No.9/9/HDB/2017 (Dated 21.2.17); One Coat Plaster v. Ambience Pvt. Ltd. Company Application No.(IB)07/PB/2017, Company Application No.(IB)-08/PB/2017 (Dated 1.3.17); Philips India Ltd. v. Goodwill Hospital and Research Centre Ltd. C.P. No. (IB)-03(PB)/2017 (Dated 1.3.17); Essar Projects India Ltd. v. MCL Global Steel Pvt. Ltd. C.P. No. 20/I & BP/NCLT/MAH/2017 (Dated 6.3.17); Annapurna Infrastructure Pvt. Ltd. & Ors. v. Soril Infra Resources Ltd C.P. No. (IB)-22(PB)/2017(Dated 24.3.17); VDS Plastic Pvt. Ltd. v. Pal Mohan Electronics Pvt. Ltd. Company Petition No. IB-37(ND)/2017 (Dated 21.4.17)

4Kirusa Software Pvt. Ltd v. Mobilox Innovations Pvt. Ltd. Company Appeal (AT) (Insolvency) No.6 of 2017 (Dated 24.5.17)5In Smart Timing Steel Ltd. v. National Steel and Agro Industries Ltd, Company Appeal (AT) (Insolvency) No.28 of 2017 (Dated 19.5.17)6Company Appeal (AT) (Insolvency) No. 9 of 2017 (Dated 01.05.2017 )

basis in the interest of fairness and justice. Surprisingly, vide the same order, the NCLAT upheld the other timelines in the Code, including the 7 day period for applicants to rectify defects in their applications and the 180 day (extendable by 90 days) period for completion of corporate insolvency resolution process, as mandatory, with no concession.

Imposition of costs on frivolous applicants

In a first of its kind order, NCLAT, in Starlog 7Enterprises Ltd. vs. ICICI Bank Limited ,

imposed substantial costs on the financial creditor for presenting a false claim and obtaining an ex-parte order against the debtor.

Scope of Operational Debt

8Various NCLT benches have clarified that , the scope of an operational debt is restricted to claims listed under its definition under the Code, i.e., claims in respect of the provision of goods and services, employment and debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. In the case,

9Wanbury Ltd. vs. M/s Panacea Biotech Ltd. , the Chandigarh Bench of the NCLT further clarified that operational debt does not include within its ambit interest on the sum due, unless it is agreed between parties.

Post-Admission Withdrawal

Kolkata Bench of NCLT, in Parker Hannifin India Pvt. Ltd. vs. Prowess International (P)

10Ltd. , rejected the request of an operational creditor to withdraw the insolvency petition after admission and observed that once admitted, the nature of an insolvency petition changes to that of a representative suit and therefore, the parties cannot be permitted to withdraw it by consent. However, contrary to

INDIA UNLEASHED

Challenges Going Forward

this, in Agroh Infrastructure Developer Pvt. Ltd. vs. Narmada Construction Indore (P) Ltd.,

11the NCLAT permitted withdrawal of an insolvency petition pursuant to settlement between parties even after admission. However, in this case, the NCLAT did not refer to the order passed by the Kolkata Bench of NCLT. Further, in a more recent order, in the case of Lokhandwala Kataria Constructions Pvt. Ltd. vs. Nisus Finance and Investment

12Manager LLP , the NCLAT took the view that the Code does not envisage withdrawal of an insolvency petition post admission.

NCLT not an Execution Court

The NCLT has been fiercely rejecting applications filed by award holders / decree holders intending to use the Code as an execution mechanism and has been directing

13parties to initiate execution proceedings .

Challenges Going Forward

With the NCLAT viewing the timelines under the Code as mandatory on one hand and expecting the NCLT to put every case through the “bonafide dispute” test on the other, the biggest challenge before the NCLT would perhaps be to curtail the time taken for adjudication of the insolvency petitions. A time-bound mechanism, being the essence of the Code, will have to be protected while at the same time, interests of all parties, including the corporate debtor, will be required to be balanced. The NCLAT having taken a liberal interpretation and advising to apply the test of “bonafide dispute” to each case, essentially takes the present insolvency regime back on the lines of the erstwhile provisions of winding up under the Companies Act, 1956. Further, the mandatory requirement of the certificate of an Indian financial institution is expected to make the Code unpopular among foreign operational creditors and may also affect foreign trade

opportunities.

Added to this would be the lack of experience amongst Indian insolvency professionals who are expected to replace the management of the debtor company and run such companies efficiently. Further, while the insolvency resolution under the Code has begun, the information utilities, which form an integral part of the Code, are still unoperational. News

14reports suggest that the National e-Governance Services Ltd. (a Government entity) has received the in-principle approval for establishing India's first Information Utility under the Code. Now that there is more clarity on how the Code is playing out, it may not be incorrect to say that the insolvency regime has not taken off on the right note. Originally famous for its “creditor in control” regime, the recent case law under the Code has laid out a slightly different picture. It appears that the intent of the legislature to tighten the screws into defaulting borrowers has not played out as planned.

Having said that, it is still too early to conclude one way or the other, particularly since not even a single company has attained its resolution plan or liquidation order under the Code. One of the key factors which has historically hampered the credit market in India is the lack of an efficient mechanism for resolving insolvency. In comparison with the previous regime, the Code is definitely a step forward towards achieving a time bound and perhaps more effective resolution of insolvency. With more time passing, more questions of law are also being settled by the NCLAT and clarity is being brought to the intent of the Code. Once all the institutions under the Code begin to work in tandem, it is only then that the progress of implementation and impact of the Code, can be assessed more accurately.

7Company Appeal (AT) (Insolvency) No. 5 of 2017 (Dated 24.05.2017)8Col. Vinod Awasthy v. AMR Infrastructures Ltd. C.P. No.(IB)10(PB)/2017 (Dated 22.2.17)9RT No.9/Chd/PB/2017 (Dated 18.4.17)10Company Petition No.150/2017 (Dated 20.4.17) (NCLT Kolkata)11Agroh Infrastructure Developer Pvt. Ltd. v. Narmada Construction Indore (P) Ltd. Company Appeal (AT) (Insolvency) No.57 of 2017 (Dated 2.6.17)12Company Appeal (AT) (Insolvency) No. 95 of 2017 (Dated 13.7.17)13Annapurna Infrastructure Pvt. Ltd. & Ors. v. Soril Infra Resources Ltd C.P. No.(IB)22(PB)/2017(Dated 24.3.17); Deem Roll-Tech Limited v. RL Steel and Energy Ltd., C.P. No.(IB)24(PB)/2017 (Dated 31.3.17)

14http://www.thehindu.com/business/markets/neslbecomesindias-first-information-utility-underinsolvency-bankruptcy-code/article19089468.ece

INDIA UNLEASHED

This briefing has been written for the general interest of our clients and business contacts. It is not intended to be exhaustive or a substitute for legal advice. We accept no legal liability for any errors or omissions.

@KhaitanLegal

E: indiaunleashed@khaitanlegal.com

Publisher: Sakate Khaitan

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©Copyright 2017 Khaitan Legal Associates. [Volume: 3 Issue: 3] All rights reserved.

IN OTHER NEWS...

Cyber security, data protection and privacy are some of the toughest challenges faced by countries, economies, companies and individuals. To qualify the notion of cyber security as a “myth” may not be an exaggeration. In India, the debate on data security and privacy laws and the need for a stronger statutory and regulatory framework for IT security and privacy has also gathered steam in the wake of the Government’s push for a digital India following the demonetisation drive in November last year.

Experts dealing with several aspects of cyber risks congregated at the seminar jointly organised by Khaitan Legal Associates and India Insure in Mumbai to deconstruct the computer security landscape and data breach risks.

Unsurprisingly and worryingly, it was a consensus among commentators that the question of any organisation or person suffering a cyber-attack or data breach is a matter of "when" and not "if". All stakeholders, be it the Government, companies or individuals, therefore need to be in a state of preparedness to deal with such an eventuality including assessment of vulnerabilities, security measures, action plans, disaster recoveries and insurance.

Panel Discussion: Issues on Data Breach and IT Laws

From L to R: Ravindranath Patil, Director, Risk Consulting, KPMG, Sushant Sarin, Senior Vice President, Tata AIG General Insurance Co Ltd, Shankar Garigiparthy, Country Head, Lloyds, Saket Modi, CEO & Founder, Lucideus Tech, Sakate Khaitan, Senior Partner, Khaitan Legal Associates, Tim Smith, Partner, BLM, Yogesh Ginde, Corporate SVP, Risk Management, WNS Global Services, Moderator of the panel: Arindam Ghosh, India Insure.

OPENING PANDORA’S BOX?NCLT’S ORDER IN THE MCDONALD’S JV DISPUTE

JV Co

Articles

In an interesting case relating to the allegation of oppression and mismanagement stemming from a joint venture (“ ”) dispute, the National Company Law Tribunal (“ ”) has ordered reinstatement of the ousted managing director (“ ”) and appointed an administrator, with the power to vote at board meetings, for the JV company.

The case relates to a dispute between Vikram Bakshi and fast food chain McDonald’s, who are both 50% JV partners in Connaught Plaza Restaurants Private Limited (“JV Co”). Under t he JV ag reemen t , t he managing director was to be elected for a term of two years at a time, and McDonald’s and its nominee directors were under an obligation to ensure that Mr. Bakshi was appointed as the sole MD each time, except, inter alia, if he does not discharge his responsibilities as MD in a competent and faithful manner.

Further, McDonald’s had a call option on Mr. Bakshi’s shares in JV Co, if Mr. Bakshi ceased to be the MD of JV Co.

The terms of the JV agreement with respect to appointment, duties and remuneration of MD were incorporated by reference in JV Co’s Articles of Association (“Articles”).

Claiming that Mr. Bakshi did not discharge his responsibilities as MD in a competent and faithful manner, the nominee directors of McDonald’s voted against Mr. Bakshi’s reappointment as MD in 2013. Immediately thereafter, McDonald’s tried to exercise its call option in order to acquire Mr. Bakshi’s shares in the JV Co at a price which was significantly lower than the market value of the shares. Mr. Bakshi filed a case of oppression and mismanagement against McDonald’s, its nominee directors, etc. and prayed for reinstatement as MD of JV Co and to restrain McDonald’s from exercising its call option.

In light of the provisions of the Articles and JV agreement, and facts of the case, NCLT held that the action of McDonald’s and its nominee directors displayed their malafide intention of acquiring Mr. Bakshi’s shares at a subsidised rate. Accordingly, NCLT admitted the petition, set aside the proceedings of the 2013 board meeting relating to the re-election of Mr. Bakshi, declaring it to be illegal, unjust and malafide, and restored his status as the MD of JV Co. NCLT also appointed an administrator with the power to vote in JV Co’s board meetings, to break the impasse, as each JV partner has equal representation on the board of the JV Co.

While this case was decided on its own unique facts, the order seems to have opened up pandora’s box for some challenging questions: Can NCLT retrospectively appoint/reinstate a director on the board of a company? In such cases, what happens to the decisions of the board when he was not a director? Does the fact that the JV partners of a company have the right to appoint equal number of directors on the board, which may lead to an impasse, justify appointment of an administrator by the NCLT? Can an administrator so appointed, be appointed for an indefinite term?

It will be interesting to see how these questions will be dealt with, if the NCLT order is challenged in the higher courts.

JVNCLT

MD