VHVK E-Newsletter August 2018
August 2018
Volume II Issue 4
VHVK Law Bulletin
In this fourth issue of VHVK Law Bulletin 2018, we bring you recent developments in business and corporate law. The subjects include (i) court’s recognition of notice sent by WhatsApp, (ii) streamlining of SEBI rules to facilitate insolvency resolution for listed companies, (iii) settlement of balance and impact on creditors’ remedy under the Insolvency and Bankruptcy Code, 2016, (iv) restrictions on registering generic names as trademarks (in this case, “Malabar”), (v) collaborative transactions and manipulating share prices in the stock market, and (vi) transparency rules governing the reopening of income tax assessments.
Bombay High Court recognizes service of notice by WhatsApp
Keeping pace with the developments in digital technology and communications, the Bombay High Court ruled that notice sent from cell phone through WhatsApp coupled with electronic proof of receipt by the addressee is sufficient service of the document. In SBI Cards & Payment Services Pvt Ltd v Rohidas Jadhav,1 a State Bank of India (SBI) affiliate faced challenges in serving a notice on the legal representative of a deceased debtor against whom it had obtained a decree. Finally, the SBI affiliate sent the notice through WhatsApp and submitted this to the court with proof that the notice had been received and opened by the respondent. In what is apparently a “first-of-its-kind” situation, the Bombay High Court accepted WhatsApp notice as sufficient.
SBI Cards & Payments Pvt Ltd, which manages the credit card business of State Bank of India had obtained a decree against a customer. With the death of the cardholder, the SBI affiliate had to bring the legal representatives of the deceased customer on record in the execution proceedings started for recovering the money due. The proceedings, begun in 2015, dragged on because of delay in serving the legal representative of the deceased customer. The indications were the legal representative was evading the notice. In response, an officer of the SBI affiliate sent the notice as a portable document file (pdf) through WhatsApp and submitted the WhatsApp icon notification showing that the recipient had received and opened the notice. Accepting the electronic evidence submitted by the SBI affiliate, the Bombay High Court held that sending the notice through WhatsApp was sufficient service on the legal representative of the deceased cardholder.
The ruling recognizes emerging technologies and means of communication. This can promote efficiency in litigation because in many cases, several months – in some, even a few years – are spent in serving legal documents on parties who are attempting to delay proceedings by evading service.
SEBI streamlines delisting and takeover rules to facilitate insolvency resolution plans
Often, insolvent companies under restructuring need greater flexibility in rearranging their affairs and capital structure. Recognizing this reality, the Securities and Exchange Board of India (SEBI) recently amended delisting and takeover regulations to exempt corporate debtors implementing insolvency resolution plans approved under the Insolvency & Bankruptcy Code, 2016 (IBC). Companies in restructuring are now exempt from the general restrictions on delisting shares from the stock exchanges, or going private. Another relaxation for such companies is enabling bidders to acquire complete ownership. Bidders for companies in restructuring will not be subject to the 75 percent cap applicable to takeover bids under SEBI regulations.
SEBI Delisting Regulations, 2009 imposes conditions on publicly-traded companies in delisting their shares. Restrictions include a 3-year minimum listing period before delisting, no delisting when convertible options are outstanding, and no delisting following buyback of shares. The rules aim to promote stability and healthy functioning of capital markets, by discouraging companies from “quick-in, quick-out” listing. The recent amendment exempts companies with resolution plans approved under IBC from the general restrictions.2 The exemption is subject to any procedural safeguards specified in the insolvency resolution plan. The exempting provision also requires fair treatment of public shareholders and payment of exit price on par with the promoter group, but this may not be very relevant because in insolvent companies it is a moot point if any equity is still left.
A related relaxation is the lifting of the cap of 75 percent for bidders planning to acquire listed companies implementing insolvency resolution plans. As a general rule, SEBI takeover regulations restrict bids to 75 percent of issued shares. This is to maintain the minimum public float of 25 percent. Recognizing that this condition can hinder insolvency resolution options for corporate debtors if there are suitors seeking complete ownership, the amendment exempts companies with approved resolution plans from the ceiling of 75 percent for bidders interested in takeover of such companies.3 This facilitates insolvent companies to find buyers interested in getting full ownership and delisting from the market.
The amendments SEBI has introduced are consistent with the goal of IBC to facilitate and aid troubled companies to turnaround and achieve rehabilitation. They evidence SEBI’s keenness to ensure that its regulations do not hinder the process in any way.
Creditor accepting settlement cannot launch insolvency proceedings
A creditor that accepts a settlement from a corporate debtor would have no rights left for that transaction. It would have no right to initiate insolvency resolution process under section 9 of IBC. In Suprabha Protective Products Pvt Ltd v Phoenix Trading & Consulting Pvt Ltd,4 the National Company Law Appellate Tribunal, New Delhi affirmed this salutary principle.
The appellant had sold goods to the respondent in 2016 and the respondent had raised quality concerns about the products. In 2017, the parties agreed on a settlement and the agreed amount was paid by the respondent. From this, the National Company Law Tribunal concluded that a dispute existed between the parties with respect to the transaction and rejected the seller’s effort to initiate proceedings against the buyer for insolvency resolution under IBC. The seller carried this order in appeal to the Appellate Tribunal.
Affirming the order, the Appellate Tribunal applied the established principle that a creditor must have an undisputed debt to be able to bring insolvency proceedings against the debtor. This rule aims to restrict the scope of insolvency proceedings that are summary in nature and promote their efficiency. Insolvency proceedings are not designed to grapple with detailed factual inquiries and determine disputes between the parties. This longstanding rule in company law is also now applied in the new genre of proceedings under IBC.
Trademark violations and limitations for generic names
In Parakh Vanijya Pvt Ltd v Baroma Agro Products,5 the Supreme Court had to deal with the use of the word “Malabar” in conjunction with other words by different sellers of rice. The appellant sold rice with the tradename “Malabar Gold,” whereas the respondent sold “Malabar Baroma” rice. The issue was about any “deceptive similarity” between the two names. Deceptive similarity is the standard test for trademark infringement and also for “passing off,” which is about buyers mistaking the goods of one seller for those of another. On facts, the Supreme Court affirmed the adequacy of the safeguards stipulated by the Calcutta High Court in permitting the respondent to continue with “Malabar Baroma” tradename for its rice. It accordingly dismissed the appeal.
The appellant had a limited trademark registration for “Malabar,” a generic word, in Class 30 (staple foods – rice, flour and preparations from cereals, etc). The trademark registration for “Malabar” word came with the caveat that it did not confer any exclusivity of use. Claiming use of the “Malabar Gold” tradename for its rice since 2001, the appellant sought to stop the respondent from selling rice under “Malabar Baroma” brand. The Calcutta High Court passed an interim order permitting the use of “Malabar Baroma,” subject to the respondent making changes that distinguished the visual presentation of its name from that of the appellant. Not satisfied, the appellant approached the Supreme Court of India.
Dismissing the appeal, the Supreme Court stressed that the appellant had no exclusive right to the “Malabar” name, as clarified in the trademark registration. It also found that the changes stipulated by the Calcutta High Court for the presentation of the respondent’s “Malabar Baroma” were adequate for distinguishing the product from that of the appellant. The decision underscores the limitations inherent in using generic terms, such as Malabar,” as tradenames.
Collaborative Transactions and Stock Market Manipulation
The Securities and Exchange Board of India (SEBI) is active in detecting market fraud and initiating penal action. KII Ltd v SEBI6 is among a series of cases in which SEBI charged several persons with market fraud with respect to their dealings in the shares of six companies between March 2007 and November 2009. The main charge SEBI brought was that the collaborators had worked with Pan Asia to borrow money abroad, and buy the Global Depository Receipts (GDRs) for the shares of the six companies. These persons later sold the underlying shares in the Indian market. SEBI charged that their activities violated its Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market (PFUTP) Regulations, 2003. In a setback for SEBI, the Appellate Tribunal set aside the order passed against one such collaborator.
The actors involved, as noted, had borrowed funds overseas and purchased GDRs of the six companies listed in India. They later obtained the underlying shares for the GDRs and sold them in Indian market. SEBI’s charge was that the operation was designed to create an impression in the Indian market about overseas demand for the GDRs of the six companies, which would help boost their share price in India. On this premise, SEBI initiated proceedings against several persons including Pan Asia Advisors Pvt Ltd, the alleged mastermind of the operation. The validity of the proceedings were upheld by the Supreme Court of India.7 SEBI then brought proceedings against other persons alleged to have collaborated in the exercise.
Considering the elaborate documentation for the loan transaction and the subsequent events – namely, purchase of GDRs and sale of the underlying shares, SEBI Appellate Tribunal concluded that their actions were not tainted by fraud, regardless of the relationship among the parties. In coming to its conclusion, the Appellate Tribunal was influenced by the fact that SEBI had dropped proceedings against another person who had been charged with having similarly collaborated with Pan Asia Advisors. It is apparent that the Appellate Tribunal was not willing to condone the seemingly discriminatory actions of SEBI for the two persons charged with similar actions.
The decision underscores the challenges for SEBI in regulating the burgeoning securities market of India. Given the increasing volume and complexity of operations, it is important that SEBI applies the same regulatory standard to actors placed in similar positions. This can strengthen the efforts of SEBI to combat market manipulation and promote investor protection.
Failure to provide reasons to reopening income tax assessment fatal to reassessment
In Pr. CIT v Ramiah,8 High Court of Karnataka held that failure to provide taxpayers the reasons for reopening income tax assessment under Section 147 of the Income Tax Act, 1961 is a fundamental issue that vitiates reassessment proceedings. The issue about transparency in reopening income tax assessments is of longstanding, and in quashing the reassessment, Karnataka High Court followed the reasoning of the Supreme Court of India in GKN Driveshafts v ITO.9
The recent Karnataka case involved a real estate transaction about which information was received by tax officials. This led to the reopening of the assessment to tax any capital gains from the transaction that might have escaped income tax. A note made by the assessing officer in the order sheet had to be interpreted. The issue was whether the note meant/indicated that the taxpayer had been given the reasons for the reopening of the assessment. The Tribunal concluded that the wording of the note made by the assessing officer in the order sheet did not indicate that the reasons were, in fact, furnished to the taxpayer for reopening the assessment.
Holding that the failure to furnish reasons was not merely procedural, the High Court noted that the taxpayer had twice requested for them. The court characterized the lapse as fundamental, affecting the jurisdiction of the officer to proceed with the reassessment when the reasons for doing so are not provided to the taxpayer. The decision affirms the application of the principles of fairness and natural justice to tax proceedings and strengthens taxpayers in managing reassessment exercises.
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.