VHVK E Newsletter August 2020

RBI directives for lockdown relief to borrowers and court interpretation

In the wake of the situation created by the COVID 19 pandemic in March 2020, Reserve Bank of India (RBI) announced a moratorium for borrowers, to permit non-payment of loan instalments falling due between 1 Mar and 31 May 2020.₁ Subsequently in April 2020, RBI instructed that non-payment of instalments in the moratorium period must be excluded in determining the status of loan accounts as Non-Performing.₂ In keeping with the spirit of the RBI initiatives, courts have also been considerate in granting relief against enforcement of securities provided by borrowers (mainly, shares in companies).

The following are some cases where courts intervened on borrowers’ behalf in the unusual circumstances created by the COVID 19 pandemic.

• In Ideal Toll & Infrastructure Pvt Ltd v ICICI Home Finance,₃ dealing with default by borrower even prior to 1 Mar 2020, the Bombay High Court recognized that the income stream from the toll operations of the borrower were seriously depleted and endorsed a revised payment schedule. The court also granted injunction against sale of the pledged shares subject to the borrower making repayments per the revised schedule.
• Similarly, recognizing “the peculiar facts of [the] case and the present lockdown,” the Delhi High Court granted interim relief against redemption of nonconvertible debentures (Indiabulls Housing Finance Limited v SEBI).₄

SEBI Appellate Tribunal incompetent to rule on validity of SEBI circulars

In National Securities Depository Ltd (NSDL) v Securities And Exchange Board Of India (SEBI),₅ the Supreme Court held that the appellate jurisdiction of SEBI Appellate Tribunal (SAT) did not extend to adjudicating the validity of administrative circulars issued by SEBI. Adopting a restrictive approach, the court ruled that SAT’s power is confined to quasi-judicial orders passed by SEBI.

The appeal in the Supreme Court involved a circular SEBI issued in 2005 that depository institutions must not levy fees when investors transferred their securities from one depository institution to another, subject to some conditions. National Securities Depository Ltd (NSDL) challenged the fee ban circular before SAT. Responding to NSLD’s challenge, SEBI raised a preliminary issue that SAT lacked authority to inquire into administrative circulars. In advancing this argument, SEBI relied on the Securities and Exchange Board of India Act, 1992, section 15T under which SAT derives jurisdiction. SEBI argued that SAT’s appellate jurisdiction was confined to quasi-judicial orders and not administrative circulars, such as the one banning depository institutions from collecting fees from investors for transfer of accounts. SAT overruled the objection. It assumed powers to rule on SEBI’s administrative circulars, and quashed the circular assailed by NSDL.

SEBI carried the matter in appeal to the Supreme Court of India. Upholding SEBI’s position that SAT only had power over quasi-judicial orders, the Supreme Court reversed the decision of SAT. In result, it is clear that only state High Courts can determine the validity of SEBI circulars, in exercise of their writ jurisdiction.

National Company Law Tribunal can inquire into complex disputes

National Company Law Tribunal (NCLT) has complete jurisdiction to inquire into all disputes concerning registers of members, including those requiring determination of facts. This position was reaffirmed by the National Company Law Appellate Tribunal (NCLAT) in MAIF Investment India v Ind-Barath Power Infra Ltd.₆

The investor-appellant, MAIF Investment India, questioned the conversion of its debentures into equity shares of the respondent-company, Ind-Bharat. The appellant had subscribed to Compulsory Convertible Debentures (CCD) in Ind-Bharat. Under the terms of issue of the debentures, they were converted into equity shares. The appellant disputed the conversion and challenged it in the National Company Law Tribunal (NCLT). The grounds included validity of the meeting of Ind-Bharat board of directors at which the decision to convert the debentures into equity shares was made. MAIF Investments sought rectification of Ind-Bharat’s register of members and deletion of its name from the register.

Holding that the dispute raised by the appellant involved complex factual questions and relying on the law prior to the introduction of the Companies Act, 2013, NCLT rejected MAIF Investments’ case. The investment agreement under which MAIF Investments had acquired the debentures provided for arbitration and NCLT referred the parties to arbitration. The investor preferred an appeal against NCLT order. Allowing the appeal, National Company Law Appellate Tribunal ruled that NCLT had complete jurisdiction in the matter under the new Companies Act and it could inquire into disputed facts in adjudicating parties’ rights. In doing so, NCLAT followed Supreme Court’s decision in Shashi Khemka v NEPC Micon (2019),₇ which is based on the new scheme of remedies in the Companies Act, 2013.

Bombay High Court intervenes in Insolvency & Bankruptcy matter

The jurisdiction in matters under the Insolvency & Bankruptcy Code (IBC) is with the National Company Law Tribunal (NCLT), which IBC terms “Adjudicating Authority.” Any appeals against orders passed by NCLT must be filed with the National Company Law Appellate Tribunal (NCLAT). In a rare instance, in Kamal Singh v Union of India,₈ the Bombay High Court intervened in its writ jurisdiction to quash an order of admission passed by NCLT against a corporate debtor and remitted the matter to NCLT for fresh consideration.

After preliminary hearing on a creditor’s application against Rolta India Ltd on 20 August 2019, NCLT Mumbai reserved the case for orders. Subsequently, one of the Tribunal members retired in October and by this time, no admission orders had been pronounced against Rolta, the corporate debtor. When the matter was thus understood as still pending, a Resolution Professional took possession of the registered office of the corporate debtor on 8 November 2019.

The Chairman & Managing Director of the corporate debtor, Rolta, filed a writ petition in the Bombay High Court that the action of the Resolution Professional in taking possession of the registered office on 8 November 2019 was in violation of natural justice. It was pointed out that NCLT’s admission order on the creditor’s application against Rolta was only posted on NCLT website on 13 November 2019. Till then, Rolta had no knowledge of the order that had been passed against it.

Accepting the submission, the Bombay High Court quashed the admission order passed against Rolta and directed NCLT to hear the matter afresh. The ruling is a reminder that, in exceptional circumstances, High Courts entertain writ challenges in insolvency and bankruptcy cases.

Competition Act applies to government agencies too, rules Competition Commission of India

Acting on a complaint filed by a rice mill operator in Odisha, charging state government agencies with abuse of dominant position and anti-competitive practices in rice procurement, Competition Commission of India ordered an investigation by the Director-General. This affirms that competition law rules equally apply to public agencies and the Competition Commission’s willingness to intervene against them.

In Maa Metakani Rice Industries v Odisha,₉ the complainant-rice mill owner alleged that Odisha Civil Supplies Corporation and the Food Supply & Consumer Welfare Department of the state government resorted to arbitrary and highhanded practices. These included withholding of payments due to rice mills that processed the paddy procured by the government agencies. Pointing out that these agencies handled about 90 percent of the total paddy grown in the state, the complainant alleged that they were abusing their dominant position in the market and engaged in anti-competitive practices. These are actionable under the Competition Act, 2002.

The Competition Commission of India ordered an investigation to be carried out by the Director General, being satisfied prima facie with the allegations made by the rice mill owner. It is a fact that in many sectors, government agencies hold dominant positions and often resort to questionable practices. The approach adopted by the Competition Commission provides one more avenue to those affected by the practices and actions of public agencies and officials.

SEBI clamps down on free trials offered by Investment Advisers

Continuing with the efforts to protect investors, in particular retail investors, Securities and Exchange Board of India (SEBI) introduced new rules to govern investment advisers.₁₀ They are barred from offering free trials to investors, without completing the required risk profile of clients and receiving client consent for the profile.
Investment advisers are governed by SEBI (Investment Advisers) Regulations, 2013 and an important procedure applicable under the regulations is risk profiling of clients by advisers. The process aims to inform advisers about the risk appetite and capacity of clients. The rule that clients must consent to the profile constructed for them improves investors’ awareness about financial decisions and their possible consequences. On noticing a practice among investment advisers to offer free trials to prospective clients without completing any risk profile, SEBI has intervened. Stressing the importance of the risk profiling procedure, SEBI has introduced the following measures.

• Investment advisers not to offer free trials or accept part payments of fees.
• Investment advice can only be provided after completion of risk profile and receiving clients’ consent to the profile.
• Fees from clients can only be received through banking channels, no cash deposits are to be accepted.
• Investment advisers must display on their websites any complaints they receive from clients.

The new norms continue with SEBI’s efforts to strengthen professionalism, integrity and healthy practices in the financial markets. As circumstances evolve, it becomes necessary for regulators to implement new norms and rules become necessary to cope with emerging dynamics.

Supreme Court defines limits to NCLT’s powers under IBC

In Embassy Property Developments Pvt Ltd v State of Karnataka,₁₁ Supreme Court clarified that the jurisdiction of National Company Law Tribunal (NCLT) in insolvency proceedings did not extend to passing orders against state governments under mining legislation. The Supreme Court gave its ruling in the context of a corporate debtor seeking extension of mining rights in an insolvency resolution proceeding.

The corporate debtor, Tiffins Barytes Asbestos & Paints Ltd, held a mining lease from the government of Karnataka. The lease, granted under the Mines and Minerals (Development and Regulation) Act, 1957, was terminated by the state government during the pendency of the insolvency resolution proceedings. In terminating the lease, the government charged the corporate debtor with violations and irregularities. The debtor sought directions from NCLT to the government of Karnataka to continue with the lease of the mine. NCLT granted the directions sought and this was challenged by the government of Karnataka.
When the matter reached the Supreme Court a few months later in 2019, the court quashed NCLT’s directions to the government of Karnataka to extend the lease. The Supreme Court pointed out that the matter was governed by a different legislation and different set of principles that were outside the scope of insolvency resolution. With the ruling in Embassy Property Developments, it is clear that corporate debtors cannot seek remedies in insolvency proceedings on issues under other legislation, such as the Mines and Minerals Act, 1957.

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