VHVK E Newsletter April 2023

Consent terms can be the basis to compute limitation for initiating insolvency proceedings

When a borrower agrees to consent terms with creditors and signs necessary documents, they represent debt acknowledgment; the documents would determination limitation period for insolvency proceedings. With this ruling in Edelweiss Asset Reconstruction v Perfect Engine Components,₁ the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, reversed the decision of the Mumbai bench of the National Company Law Tribunal (NCLT) and permitted the financial creditor to continue with the insolvency resolution proceedings.

Perfect Engine Components’ loan account was declared non-performing in 2009 and it was subsequently the subject of several settlement proposals and agreements. The final settlement agreement, signed in June 2017, was filed with the Debt Recovery Tribunal. Upon breach of the settlement terms, Edelweiss, the financial creditor, initiated insolvency resolution proceedings against Perfect Engine Components. In defence, the borrower argued the debt was barred by limitation and the insolvency proceedings are not maintainable. NCLT Mumbai agreed and dismissed Edelweiss’ action.

Allowing Edelweiss’ appeal, the Appellate Tribunal affirmed that the execution of settlement documents in 2017 triggered a fresh period of limitation and the insolvency resolution proceedings were not time barred. This longstanding principle, reaffirmed by NCLAT, maintains legal continuity.

Anti-competition complaint against PVR Cinemas-INOX merger dismissed

The complaint that the merger of PVR Cinemas and INOX would adversely affect competition was rejected by the Competition Commission of India in Consumer Unity & Trust Society v PVR Ltd.₂ PVR and INOX are, respectively, the largest and second largest movie theatre operators in India. Competition Commission declined to block the merger on the apprehension of the complainant that the merger would make an adverse impact on competition in the theatre market.

The complainant, a non-profit consumer welfare society, argued the proposed merger did not attract prior regulatory approval under the Competition Act, 2002 (section 6) due to COVID outbreak and consequent fall in turnover below ₹ 1,000 crores, which is the applicable threshold. Nonetheless, the merger would create a giant that controlled 1546 screens in 341 commercial properties across 109 cities of India. The resulting market share will lead to even more concentration in the film exhibition industry, leaving just four players – the combined entity of PVR-INOX, Cinepolis, Miraj Cinemas and Carnival Cinemas.

The Competition Commission declined to be proactive and rejected the plea to block PVR-INOX merger. In doing so, the Commission clarified the complainant could bring a fresh complaint if it found anti-competitive practices from the merged entity.

Arbitration remedy not excluded by initiating insolvency proceedings

In Brilltech Pvt Ltd v Shapoorji Pallonji Pvt Ltd,₃ the Delhi High Court held relief could be granted under the Arbitration and Conciliation Act, 1996 despite a creditor initiating insolvency proceedings. Creditors can resort to arbitration even when insolvency proceedings are pending against debtors.

Brilltech, an electrical sub-contractor in a residential project, completed work and even received a letter of appreciation from the client. However, a sizable amount was withheld by Shapoorji Pallonji, the main contractor. The agreement between the contractor and sub-contractor included arbitration.

Brilltech initiated insolvency proceedings against Shapoorji Pallonji under the Insolvency and Bankruptcy Code, 2016 (IBC) and also approached the Delhi High Court for appointing an arbitrator. Appointing an arbitrator to inquire into the issue, the High Court rejected the contractor’s argument that the pendency of insolvency proceedings precluded the sub-contractor’s right to the arbitration remedy. By opening up additional remedies, the ruling strengthens creditors in their efforts to recover from defaulting debtors.

Self-regulation proposed for online gaming industry

Draft rules for self regulation of online gaming were recently published by the Ministry of Electronics and Information Technology, Government of India.₄ The proposed rules would be included in the Information Technology (Intermediaries Guidelines and Digital Media Ethics Code), Rules, 2021. Regulation includes registration of games with a self-regulatory agency and chief compliance officers and nodal contact persons for companies hosting online gaming platforms.

Below is a summary of the important rules proposed for the online gaming sector.

• Online game is defined as a game offered on the internet and accessible to users depositing money with the expectation of winning the game and earning more money.
• Online platforms that host the games and allow user interaction would be covered by regulation.
• A self-regulatory agency approved by the Ministry of Electronics and Information Technology will be established to manage registration of online games.
• Intermediary platforms must certify and verify that their online games are duly registered with the self-regulatory body and prominently display the registration on their websites and mobile applications.
• To protect users, online platforms must comply with a number of due diligence requirements:
  o Display registration of online games registered with the self-regulatory body
  o Provide information to users about the risks of financial loss and addiction associated with online games
  o Provide information on measures taken by the platforms to protect deposits made by users and the policy on withdrawal/refund of deposits
  o Identify and verify users opening accounts with online gaming platforms
  o Appoint Chief Compliance Officer to be responsible for non-compliance
  o Appoint nodal contact person for coordination with law enforcement agencies.
  o Physical address in India to be published on website/mobile app, for receiving communications addressed to online gaming platforms
  o Implement mechanism for redressal of complaints and grievances from users 

  The proposed amendments aim to streamline online gaming and protect online gamers. The new rules are consistent with the growth of financial speculation in recent decades and broad government support for the trend. In this setting, the new rules can certainly improve transparency and accountability for online gaming platforms; but they are unlikely to forestall any misfortune gamers meet from bad bets they might make.

Extraordinary general meeting must be called if requisition valid under Companies Act

In Invesco Developing Markets Funds v Zee Entertainment Ltd,₅ Bombay High Court directed Zee Entertainment Ltd to call an extraordinary general meeting (EGM) as the requisition it received was valid under the Companies Act, 2013. The company’s objection that the proposed resolutions, if passed, would result in breach of obligations under Securities and Exchange Board of India (SEBI) Listing Rules and the terms of the company’s broadcast license was not a material consideration in calling the meeting.

Invesco Funds, a large shareholder in Zee Entertainment Ltd, submitted a request for an EGM to remove the Managing Director of the company and some other directors, and elect new independent directors in their place. Zee Entertainment refused to call the EGM on the plea the resolutions proposed were invalid; removal of Managing Director without a replacement would violate SEBI Listing Rules and change in board of directors required approval from the Ministry of Information and Broadcasting, Government of India. The mere fact the shareholder held 10 percent shares, as required under the Companies Act, 2013 (section 100), was not decisive.

The court rejected Zee Entertainment’s arguments. It held the issues about the validity or ineffectiveness of the resolutions proposed for the EGM were not material; the company was under a duty to call the EGM when requested by an eligible shareholder. The meeting can then decide on the resolutions and related issues, including their validity and effectiveness. Considering the high-profile parties involved in the dispute, it is quite likely the issue will be carried in further appeal to the Supreme Court.

Gender equality emphasized for employment eligibility

In Priyanka Patil v Kendriya Sainik Board,₆ Karnataka High Court invalidated the exclusion of married daughters of deceased military personnel, but not married sons, from the reservation quota for jobs. The discriminatory rule, clearly archaic and dating back to a different era, was struck down as violative of the principle of equality under the Constitution of India.

The petitioner’s father, who served in the armed forces, died in a military operation in 2001. The petitioner was then 10 years old. On completing her studies, the petitioner wished to apply for an Assistant Professor’s position advertised by the government of Karnataka. The position had 10 percent reservation for ex-servicemen, their widows and wards. Wards included sons and daughters, but not married daughters.

Priyanka Patil, the petitioner, was denied the special identity card required for consideration under the reserved category because she was married. Upholding Priyanka Patil’s challenge to the exclusion of married daughters from benefits available for ex-servicemen and their families, the Karnataka High Court quashed the discriminatory rule. The court held the rule unconstitutional and in breach of the principle of equality under Articles 14 and 15 of the Constitution of India.