Property Rights of Daughter in India: Post-Supreme Court Ruling, 2022

In January 2022, the Apex Court, through its decision in Arunachala Gounder (dead) v. Ponnuswamy’s[1] held that the self-acquired property of a Hindu male dying intestate would devolve by inheritance and not by succession. Further, the daughter shall be entitled to inherit such property, as well as property obtained through the partition of a coparcenary or family property.  It was also observed that, in case a woman dies intestate, then the ancestral property devolved on her from her father would be bestowed upon her father’s heirs and the property devolved on her from her husband’s side would be assigned to her husband’s heir in case she dies issueless.

The Court observed that “The basic aim of the legislature in enacting Section 15(2) is to ensure that the inherited property of a female Hindu dying issueless and intestate, goes back to the source.”

The judgment establishes a scheme of succession that is in alignment with the “rule of proximity and the entitlement of the sole surviving daughter” to her father’s separate properties, even as far back as before the enactment of the 1956 Act.

Prior to this deliberation, the Supreme Court on August 11, 2020, also expanded on a Hindu woman’s right to be a joint legal heir and inherit ancestral property on terms equal to male heirs in the case of Vineeta Sharma vs. Rakesh Sharma & Ors.

Different benches of the Supreme Court and various High Courts have taken conflicting views on the issue in the past.

  1. In Prakash vs. Phulavati (2015), the Supreme Court held that Section 6 is not retrospective in operation and the benefit of the 2005 amendment could be granted only to “living daughters of living coparceners” as on September 9th, 2005 (the date when the amendment came into force).
  2. In February 2018, the Court ruled that, contrary to the 2015 ruling, the share of a father who died in 2001 will also pass to his daughters as coparceners during the partition of the property as per the 2005 law.
  3. Then in Danamma @Suman Surpur vs. Amar (April 2018), the Court reiterated the position taken in 2015.

         These clashing views by benches of equal strength led to a reference to a three-Judge Bench in the case. The three-judge bench of Justices Arun Mishra, S. Abdul Nazeer and M. R. Shah passed the verdict in a reference that was made in appeals raising the issue of whether the amendment to the Act granting equal rights to daughters to inherit ancestral property would have retrospective effect. What this means is that whether with the passing of the Hindu Succession (Amendment) Act, 2005, a daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son, or if she can be denied her share on the ground that she was born prior to the enactment of the Act on September 9, 2005, and therefore cannot be treated as a coparcener.

The verdict makes it clear that the amendment to the Hindu Succession Act, 1956 granting equal rights to daughters to inherit ancestral property would be retrospective. The daughters cannot be deprived of their right to equality conferred upon them by Section 6. Daughters, like sons, have an equal birth right to inherit joint Hindu family property. Since the right to coparcenary of a daughter is by birth, it is not necessary that the father should be alive on September 9, 2005. The Court has thus overruled an earlier 2015 decision.

         The Court also stated that the statutory fiction of partition created by the proviso to Section 6 of the Hindu Succession Act, 1956 as originally enacted, did not bring about the actual partition or disruption of the coparcenary. An unregistered partition, or oral partition, without any contemporaneous public document, cannot be accepted as the statutorily recognised mode of partition. However, in exceptional cases, where the plea of oral partition is supported by public documents and the partition is finally evinced in the same manner as it had been affected by a decree of a court, it may be accepted. 

         The Court has clearly settled the issue on the effective date of the 2005 amendment, by laying no relevance on the date of birth of the daughter or alternatively, the date of death of the father, whether prior to the 2005 amendment or post. So long as the daughter is alive post 2005, she has an equal right as a son in the coparcenary property. Therefore, it is irrelevant whether her father was alive or not or whether she was married or not on the cutoff date of September 9, 2005.

         If a daughter is born before September 9, 2005, she would become a coparcener, in her own right, in the same manner as sons. i.e., with the same rights and liabilities, provided there had been no parting/partition/devolution before December 20, 2004. As long as the property remained coparcenary property and was not partitioned as of the date, a daughter can now claim an interest in the same.    

         Putting the last nail on male primacy in the division of Hindu ancestral property, the Supreme Court cleared the legal cobwebs to declare that daughters will have inheritance rights equal to those of sons from the properties of fathers, grandfathers and great-grandfathers right from the codification of the law in 1956. The Bench held that daughters will have equal coparcenary rights in Hindu Undivided Family properties irrespective of whether the father was alive or not on September 9, 2005, asserting that this right under Section 6 of the Hindu Succession Act, 1956 is acquired by birth. Daughters can claim the benefit in the case of Intestate Succession and not Testamentary Succession. However, daughters, while claiming coparcenary rights, would not be able to question the disposal or alienation of ancestral properties by the existing coparceners prior to December 20, 2004.

         The provisions contained in the substituted Section 6 of The Hindu Succession Act, 1956 confer status of coparcener on the daughter born before or after amendment in the same manner as son with same rights and liabilities. The court was dealing with an interpretation of Section 6 after it was amended in 2005. The amendment granted equal rights to daughters in ancestral property. The rights can be claimed by the daughter born earlier with effect from September 9, 2005. The judgement widened the rights of daughters. The retrospective application of section 6 was analysed and ruled that the daughters would get the rights from 1956, when the law came into force. However, it would not reopen alienation of the ancestral property earlier through existing coparceners. Only a coparcener has the right to demand the partition of property. A share in a property is adulated by birth or death in a family.

A daughter, living or dead, as on the date of the amendment, shall be entitled to a share in her father’s property. It means that even if the daughter was not alive on the date of the amendment, her children could claim her rightful portion.

The court recognised that just like sons, the amendment also extended the status of the coparcener to a daughter, allowing her to enjoy the same rights as a son. Daughters possess the right of inheritance from birth, so it does not matter whether she is married or not, she will be entitled to an equal share.

While the prospective statute operates from the date of its enactment, conferring new rights, the retrospective statute operates backwards and takes away the impairment of the vested rights acquired under existing laws prior to its coming into force. This amendment operates in the future but by virtue of its retrospective effect, it confers rights on daughters from the time of their birth, even if the birth took place prior to the amendment.

The Court held that coparcenary was the birth right of daughters and it would be discordant to restrict it with the condition that the father must be alive. The goal of gender justice embodied in the Constitution is effectuated and the fundamental right to equality under the Indian Constitution has been upheld in the truest sense and translated into ground reality by substituting the provisions of Section 6 by the 2005 Amendment Act.


Impact


Daughters will now be treated at par with sons of coparceners and granted equal coparcenary rights in their father’s property upon birth itself. Daughters shall remain coparcener throughout life, irrespective of whether their father is alive or not. Hence, even their marital status will not affect the rights conferred to them by way of amendment, and hence they shall continue to be part of their father’s HUF post marriage. The door of alienation of their share of property will be opened for daughters without any ambiguity. Daughters can now seek partition of their father’s coparcenary property, claiming their equal share the same as their siblings and other coparceners and they cannot be denied on the basis of an oral family settlement. Upon acquiring a share in a coparcenary property, a female coparcener can bequeath her HUF share under her Will to any beneficiary she chooses and to the exclusion of others.

The law applies to ancestral property and to intestate succession in personal property where succession happens as per law and not through a Will. Suppose a Hindu makes a Will or makes a disposition of property in favour of the son according to The Hindu Succession Act, 1956 and not the daughter, then the daughter will not be able to question the Will and not claim the benefit of the Supreme Court Judgment. But if a Hindu dies intestate without making any disposition of property, then the daughters have the right to claim an equal right of inheritance.

The daughters, while claiming coparcenary rights, would not be able to question the disposal or alienation of ancestral properties by the existing coparceners prior to December 20, 2004. If a daughter is unable to reap any benefit from an ancestral property and enforce her right, and another male co-owner is reaping the benefits, she can enforce her rights by filing a suit following a 2005 amendment supported by a Supreme Court judgement on equal right of inheritance for daughters. Daughters can, however, claim partition of the property prior to the Amendment Act. Apportionment of benefit in the property will be accessible to the daughters distinctly along the other coparceners.

The judgements are landmarks and help in the forward march of women’s rights and the law. Traditionally, Indian business families prefer sons as successors, and daughters are not included in the business as successors. Thus, the latest rulings will have a wider impact on various family settlements and asset divisions, especially in family business. Though the judgments envisage rectifying one of the discriminatory social practices, it would require no less than a behavioural change in the mindset of Indian society to fulfil the goal of gender parity.

References:

[1] https://www.livelaw.in/pdf_upload/arunachala-gounder-dead-vs-ponnusamy-a-2022-livelaw-sc-71-407962.pdf

 

Image Credits:

Photo by Rahul: https://www.pexels.com/photo/silhouette-of-people-climbing-stairs-1009900/

If a daughter is born before September 9, 2005, she would become a coparcener, in her own right, in the same manner as sons. i.e., with the same rights and liabilities, provided there had been no parting/partition/devolution before December 20, 2004. As long as the property remained coparcenary property and was not partitioned as of the date, a daughter can now claim an interest in the same.    

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Inter-Se Priority Among Secured Creditors in Liquidation - A Judicial Dichotomy  

The Insolvency and Bankruptcy Code, 2016 (“IBC”/”Code”) came into force on 28th May, 2016 with the primary objective of consolidating and amending the laws of reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner to maximise the value of their assets. The Code has been evolving over the last six years, with changing scenarios and adapting to practical circumstances along the way. As a result, the Code has undergone amendments from time to time. The provisions in the Code have also been interpreted and clarified by judicial pronouncements of the Hon’ble NCLTs, the Hon’ble NCLAT and the Hon’ble Supreme Court of India. The law relating to the Code is still emerging and there are a number of issues which are still required to be addressed with unambiguous certainty. One such issue is the distribution of proceeds in liquidation from the sale of assets under Section 53 of the Code to the secured creditors vis-à-vis the validity of inter se priority among secured creditors in respect of their security interests (charges) during liquidation.

What is the meaning of “Charge” and “Inter se Priority”?

Section 3(4) of the Code defines the term “charge” as an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage.

Several charges can be created in respect of a particular asset. This can be done by way of creating a pari passu charge over the asset where all the charge holders are placed on an equal footing or by way of the creation of a first charge and a subservient charge wherein the first charge holder can satisfy its debts in entirety prior to the subservient charge holders. This principle is embodied in Section 48 of the Transfer of Property Act, 1882. However, under Section 52 of the Code, a secured creditor has two options to realise its debts from secured assets held by it relating to a corporate debtor in liquidation:

Although the Code does not specifically indicate the validity of inter-se-priority of charges at the time of distribution in accordance with the waterfall mechanism provided under Section 53, the issue has been deliberated and decided upon by the Hon’ble NCLTs, Hon’ble NCLAT and Hon’ble Supreme Court of India in recent times, through judicial interpretation.

Pre-IBC Regime: Legal Position under the Companies Act, 1956

Under the earlier Companies Act, 1956, Sections 529 and 529A governed the ranking of creditors’ claims and the distribution of sale proceeds by the Official Liquidator in respect of a corporate debtor in liquidation.

The legal position vis-à-vis inter-se-priority of charges in the pre-IBC regime was discussed at length by the Hon’ble Supreme Court of India in the case of ICICI Bank vs Sidco Leathers Ltd. [Appeal (Civil) 2332 of 2006, decided on April 28, 2006]. In the said case, the Hon’ble Apex Court, while interpreting Sections 529 and 529A of the Companies Act, 1956, observed that even though workmen’s dues and secured creditors’ debts are treated pari passu, this does not negate inter se priorities between secured creditors. The Hon’ble Court stated that since the Companies Act of 1956 is a special statute which contains no provisions regarding inter se priority among secured creditors, the specific provisions set forth in the Transfer of Property Act, 1882 shall prevail. The Hon’ble Court further held that if Parliament, while amending the provisions of the Companies Act, 1956, intended to take away secured creditors’ entitlement to property, it would have stated so expressly. The Hon’ble Court, while deciding the issue, observed the following:

“Section 529A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read therein to things, which the Parliament did not comprehend. The subject of mortgage, apart from having been dealt with under the common law, is governed by the provisions of the Transfer of Property Act. It is also governed by the terms of the contract.”

Merely because section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated.”

From the aforesaid, it is evident that the Hon’ble Apex Court upheld the validity of the Transfer of Property Act, 1882, which is a general law, over the provisions of the Companies Act, 1956, which is a special law and which did not recognise the concept of inter-se priority of charges.

 

Post-IBC Regime: Legal Position under the Code and the Report of the Insolvency Law Committee 2018

 

Report of the Insolvency Law Committee dated March 26, 2018

In the Report of the Insolvency Law Committee (ILC) dated March 26, 2018, it was noted that inter-creditor agreements should be respected. The ILC relied on the judgement of the Hon’ble Supreme Court in the case of ICICI Bank vs. Sidco Leathers Ltd. and came to the conclusion that the principles that emerged from the said case are also applicable to the issue under section 53 of the Code. The ILC in its report stated that Section 53(1)(b) of the Code only kept the workmen and secured creditors, on an equal pedestal and no observations were made on the inter-se priority agreements between the secured creditors and the same would therefore remain valid. The Report further clarified that the provision of Section 53(2) would come into effect only in cases where any contractual arrangement interferes with the pari passu arrangement between the workmen and secured creditors which means that contracts entered into between secured creditors would continue to remain valid.

 

Judicial Interpretation in recent times

Section 53 of the Code lays down the waterfall mechanism with respect to payment of debts to the creditors of the corporate debtor. The workmen’s dues and the debts of secured creditors rank pari passu under Section 53. However, the Code does not expressly provide for the preservation of inter-se-priorities between secured creditors at the time of distribution of sale proceeds realised by the liquidator by the sale of assets. The issue is to be understood and interpreted in the light of recent judicial decisions. Some of the recent judgments which have dealt with the issue are:

 

Technology Development Board vs Mr. Anil Goel & Ors. [I.A No. 514 of 2019 in CP(IB) No. 04 of 2017 decided on 27th February, 2020 by the Hon’ble NCLT, Ahmedabad]

In the instant case, the liquidator had distributed proceeds from the sale of assets to the first charge holders, in priority to the applicant who was a second charge holder without considering the claim of the applicant as a secured creditor that such distribution ought to have been made prorate among all secured creditors. It is pertinent to mention here that all the secured creditors had relinquished their security interests in the common pool of the liquidation estate. The Applicant was one of the secured financial creditors of the Corporate Debtor having a 14.54% voting share in the CoC of the Corporate Debtor.

Aggrieved by such distribution which recognised inter-se-priority among secured creditors, the Applicant moved the Hon’ble NCLT, Ahmedabad Bench.

The issue to be determined:

The primary issue that was to be decided by the Hon’ble NCLT was that once a secured creditor has not realised his security under Section 52 of the Code, and has relinquished the security to the liquidation estate, whether there remains no classification inter se i.e., by joining liquidation, all the secured creditors are ranked equal (pari passu), irrespective of the fact that they have inter-se-priority in security charge.

Observations of the Hon’ble NCLT

The Hon’ble NCLT while deciding the aforesaid issue held:

  • It is a settled position that when a charge is created on a property in respect of which there is already a charge, it cannot be said that the creation of the second charge on the property should have been objected to by the first charge holder as an existing and registered charge is deemed to be a public notice.
  • Emphasis was placed on Section 53(2) of the Code, which provides that any contractual arrangements between recipients under sub-section(1) with equal ranking, shall be disregarded by the liquidator if it disrupts the order of priority under that sub-section. In other words, if there are security interests of equal ranking, and the parties have entered into a contract in which one is supposed to be paid in priority to the other, such a contract will not be honoured in liquidation.
  • The whole stance in liquidation proceedings is to ensure parity and proportionality. However, the idea of proportionality is only as far as claims of similar ranking are concerned.

Decision:

The Hon’ble NCLT, relying on the judgement of the Hon’ble Supreme Court of India passed in ICICI Bank vs. Sidco Leathers Ltd., held that inter se priorities among creditors remain valid and prevail in the distribution of assets in liquidation.

 

Technology Development Board vs Mr. Anil Goel & Ors. [Company Appeal (AT) (Insolvency) No.731 of 2020 decided on 5th April, 2021 by the Hon’ble NCLAT, Principal Bench, New Delhi]

The issue to be determined:

Aggrieved by the aforesaid order dated 27th February 2020 passed by the Hon’ble NCLT, Ahmedabad, an appeal was preferred by the Applicant before the Hon’ble NCLAT wherein the issue raised for consideration was whether there could be no sub-classification among the secured creditors in the distribution mechanism adopted in a Resolution Plan of the Corporate Debtor as according to priority to the first charge holder would leave nothing to satisfy the claim of the Appellant who too is a secured creditor.

Observations of the Hon’ble NCLAT

The Hon’ble NCLT while deciding the issue took note of Sections 52 and 53 of the Code and held:

  • Section 52(2) of the Code stipulates that a secured creditor, in the event it chooses to realise its security interest, shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised. The liquidator’s duty is to verify such security interest and permit the secured creditor to realise only such security interest, the existence of which is proved in the prescribed manner. It is abundantly clear that there is a direct link between the realisation of a security interest and the asset subject to such security interest to be realised.
  • Section 53 deals with distribution of assets by providing that the proceeds from the sale of the liquidation assets shall be distributed in the order of priority laid down in the section. The provision engrafted in Section 53 has an overriding effect over all other laws in force.
  • The essential difference between the two provisions i.e Sections 52 and 53, lies with regard to the realisation of interest. While Section 52 provides an option to the secured creditor to either relinquish its security interest or realise the same, Section 53 is confined to the mode of distribution of proceeds from the sale of the liquidation assets.
  • Whether the secured creditor holds the first charge or the second charge is material only if the secured creditor elects to realise its security interest.
  • A secured creditor who once relinquishes its security interest ranks higher in the waterfall mechanism provided under Section 53 as compared to a secured creditor who enforces its security interest but fails to realise its claim in full and ranks lower in Section 53 for the unpaid part of the claim.
  • Section 52 incorporating the doctrine of election, read in juxtaposition with Section 53 providing for distribution of assets, treats a secured creditor relinquishing its security interest to the liquidation estate differently from a secured creditor who opts to realise its security interest, so far as any amount remains unpaid following enforcement of security interest to a secured creditor is concerned by relegating it to a position low in priority.
  • The non-obstante clause contained in Section 53 makes it clear that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force.
  • A first charge holder will have priority in realising its security interest provided it elects to realise and not relinquish the same. However, once a secured creditor opts to relinquish its security interest, the distribution would be in accordance with the Section 53(1)(b)(ii) wherein all secured creditors have relinquished their security interest.

Decision

It was held by the Hon’ble NCLAT that the view taken by the Adjudicating Authority on the basis of the judgement passed by the Hon’ble Apex Court in ICICI Bank vs. Sidco Leathers Ltd. and ignoring the mandate of Section 53, which has an overriding effect and was enacted subsequent to the aforesaid judgment, is erroneous and cannot be supported. The Hon’ble NCLAT therefore held that the order of the Adjudicating Authority holding that the inter-se priorities amongst the secured creditors will remain valid and prevail in the distribution of assets in liquidation cannot be sustained and the liquidator was directed to treat the secured creditors relinquishing the security interest as one class ranking equally for distribution of assets under Section 53(1)(b)(ii) of the Code and distribute the proceeds in accordance therewith.

 

Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021]

The aforesaid order passed by the Hon’ble NCLAT has been further challenged before the Hon’ble Supreme Court of India. The appeal is currently pending adjudication, but the Apex Court has stayed the operation of the impugned order dated 5th April passed by the Hon’ble NCLAT, by order dated 29th June, 2021 . The appeal has been last heard on April 29, 2022, wherein an order has been passed to list the matter after eight weeks. It would be interesting to see whether the Apex Court upholds the order of the Hon’ble NCLAT and disregards the inter se priority among creditors at the time of distribution of sale proceeds under Section 53 of the Code or upholds the validity of the same.

 

Oriental Bank of Commerce (now Punjab National Bank) vs Anil Anchalia & Anr. [Comp. App. (AT)(Ins) No. 547 of 2022 decided on 26th May, 2022 by the Hon’ble NCLAT]

  • In the instant case, the appellant, who was the first and exclusive charge holder with respect to the assets of the corporate debtor, had relinquished its security interest in the liquidation estate. The liquidator, however, distributed the sale proceeds on a pro rata basis under Section 53 of the Code. Being aggrieved by the said distribution, the Appellant filed an application [IA (IBC)/101(KB)2022] before the Hon’ble NCLT, Kolkata, which was rejected by an order dated March 4, 2022. Aggrieved by the same, the appellant preferred an appeal before the Hon’ble NCLAT.
  • One of the contentions raised by the Appellant in the instant case was that the order of the Hon’ble NCLAT in the case of Technology Development Board vs. Mr. Anil Goel & Ors. that secured creditors after having relinquished their security interest could not claim any amount realised from secured assets once they elected for relinquishment of security interest, and that they would be governed by the waterfall mechanism under Section 53 has been stayed by the Hon’ble Supreme Court of India and therefore the Appellant is entitled to receive the entire amount realised from its secured assets.
  • The Hon’ble NCLAT rejected the aforesaid contention and observed that in the light of the judgement passed by the Hon’ble Supreme Court in “India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. [2021 SC OnLine SC 409] and “Indian Bank vs. Charu Desai, Erstwhile Resolution Professional & Chairman of Monitoring Committee of GB Global Ltd. & Anr.[CA(AT)No. 644 of 2021] the issue is no more res integra. In the aforesaid two cases, a similar contention was raised by the Appellants that the dissenting financial creditors are entitled to receive payment as per their secured interest, wherein it was decided that “when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled”.
  • Since the issue is no more res integra and has been decided in the case of India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. by the Hon’ble Apex Court by its judgment dated 13.05.2021, the instant appeal was also dismissed.

 

Conclusion

 

Section 52 of the Code gives each secured creditor the option of relinquishing their right to the liquidation estate or realising their security interest on its own, subject to the Code’s requirements.

It can be possibly interpreted that once the secured creditor has relinquished its security interest in the liquidation estate, such a secured creditor exercises its option in favour of losing its priority rights over assets charged to it and joins the liquidation pool wherein the secured creditor is paid from the proceeds of the liquidation estate in accordance with Section 53 of the Code. The Code has provided the option to a secured creditor to enforce its first and exclusive charge by taking recourse to Section 52, whereby in the event it is unable to realise its entire dues, it would be ranked lower under Section 53 for realisation of the balance amount. A secured creditor cannot enjoy the fruits of both the provisions under Sections 52 and 53 of the Code at the same time. Once the secured creditor relinquishes its security interest to the common pool of the liquidation estate, it will be treated at par with all other creditors.

It can also be argued that the NCLAT has ignored the legislative intent clarified in the Insolvency Law Committee Report which after considering the decision of the Hon’ble Supreme Court in ICICI Bank vs Sidco Leathers Ltd. applied its principles to the issue under Section 53 of the Code and recommended that inter-se-priority among creditors was not disturbed by Section 53. Section 53 does not deal with inter-se-rights amongst creditors. It merely deals with the distribution of proceeds arising from the sale of assets to various stakeholders. The non-obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter-se-priorities amongst creditors/mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter-se-priorities between mortgagees have been dealt with in that Act. Therefore, there may not be any justification for excluding the applicability of the provisions of the Transfer of Property Act, 1882 relating to mortgages for payment of dues to creditors under Section 53. The absurd result of not providing inter-se-priority to creditors at the time of distribution of sale proceeds under Section 53 would be that every secured creditor holding the first charge on assets would encourage liquidation and realise its dues by selling assets itself by opting to not relinquish the assets to the liquidation pool under Section 52. The chance of selling the corporate debtor as a going concern would then absolutely be eradicated, which would be contrary to the object and spirit of the Code.

It is expected that the Supreme Court will finally rest the issue while deciding the appeal in the case of Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021 which is scheduled to appear for a hearing later this month.

Image Credits: Photo by Dennis Maliepaard on Unsplash

Section 53 does not deal with inter – se – rights amongst creditors. It merely deals with the distribution of proceeds arising out of sale of assets to various stakeholders. The non – obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter – se – priorities amongst creditors / mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter – se – priorities between mortgagees has been dealt with in that Act.

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CCPA Introduces New Guidelines to Ban Surrogate Advertising  

In the latest development in the advertising space, the Central Consumer Protection Authority (CCPA) under the Department of Consumer Affairs has introduced ‘Guidelines for Prevention of Misleading Advertisements and Endorsements for Misleading Advertisements, 2022’. These guidelines aim to curb misleading advertisements and endorsers by putting a complete ban on surrogate advertising effective June 09, 2022. These new guidelines will apply to all advertisements irrespective of the form, format, or platform. 

The Consumer Protection Act, 2019, provides for ‘misleading advertisements’ under Section 2(28).

Section 2(28): “Misleading advertisement” in relation to any product or service means an advertisement that— (i) falsely describes such product or service; or (ii) gives a false guarantee to or is likely to mislead the consumers as to the nature, substance, quantity or quality of such product or service; or (iii) conveys an express or implied representation which, if made by the manufacturer or seller or service provider thereof, would constitute an unfair trade practice; or (iv) deliberately conceals essential information.

The new guidelines touch upon each sub-section of section 2(28) and provide further definitions to include conditions for non-misleading and valid advertisements, definitions for bait and free-claim advertisements, and the complete ban on surrogate/indirect advertisements.

 

Salient Features  

 

Bait Advertising  

An advertisement in which goods, products or services are offered for sale at a low price to attract consumers. The guidelines lay down that:

  • The ad should not entice consumers to buy the goods or services without a reasonable prospect of selling them at a price offered in the advertisement.
  • There should be an adequate supply of the advertised goods or services to meet the demand created as a result of the advertisement.
  • The advertisement should state that the stock is limited; if the ad is to assess the demand, the same should be stated, and it should not omit restrictions regarding the availability of goods or services.

 

Free Claim Advertisement 

The advertisement should make clear the extent of commitment that a consumer shall make to take advantage of a free offer and should not use the term “free trial” to describe an offer that promises to pay the money back to the consumer in case of non-satisfaction if it requires the consumer to make a non-refundable purchase. Free claims should not be made in the advertisement –

  • If the consumers have to pay anything other than the unavoidable cost of responding to the ad or packing, handling or administration of free goods or services or if the price has been increased (except where such increase results from factors unrelated to the cost of promotion) or when the quality or quantity of goods or services has been reduced;
  • If an element of the package is included in the price, it should not be advertised as free.

 

Advertisements Targeting Children

In addition to taking measures to protect the general public from being misled, the CCPA has also laid down measures to protect the sensitive and impressionable minds of the younger generations.

  • It provides that advertisements that target or address children shall not condone or encourage activities that are dangerous for children or take advantage of their inexperience, and/or encourages practices that are detrimental to children’s wellbeing, etc.;
  • Advertisements should not be such as to develop negative body image in children or give any impression that such goods, product or service is better than the natural or traditional food which children may be consuming.
  • Advertisement for junk foods, including chips, carbonated beverages and such other snacks and drinks, should not be advertised during a program meant for children or on a channel meant exclusively for children.
  • The Guidelines also prohibit advertisers from featuring children and personalities from sports, music or cinema for products requiring  a health warning or for products children cannot purchase

 

Due Diligence Endorsers

The guidelines clearly state that the endorsements should reflect the genuine, reasonably current opinion of the endorser regarding their representation. Such endorsement must be based on adequate information or experience with the goods or services and must not be deceptive. Foreign professionals are barred from making endorsements in all circumstances where Indian professionals are barred.

If a connection between the trader/manufacturer and the endorser exists, such connection should be disclosed if such information is likely to affect the value or credibility of the endorsement and the audience does not reasonably expect the link.

 

Disclaimers 

While laying down provisions for disclaimers in advertisements, the Guidelines state that a disclaimer may expand or clarify the main offer but cannot contradict or hide the material claim made in the advertisement or attempt to correct a misleading claim made in the ad. Further, it provides that a disclaimer should be in the same language and font as the claim made in the advertisement and that the placement of the disclaimer shall be at a prominent and visible place on the packaging (ideally be on the same panel). Also, if the claim is presented as a voiceover, the disclaimer shall be displayed in sync with the voiceover and at the same speed as the original claim made in the advertisement.

Apart from the features mentioned above, the guidelines also stipulate specific duties on the manufacturer, service provider, advertiser, or advertising agency to ensure compliance in advertisements, which primarily deals with the veracity of the information/claims made in the advertisements. These guidelines are to be read as part and parcel of the Consumer Protection Act, 2019, and the non-compliance with the provisions shall also invite penalization as provided in section 21 of the Act.

These guidelines will also apply to government advertisements issued by PSUs engaged in providing consumer services along with those issued by private agencies. Moreover, the advertising guidelines for self-regulation issued by the Advertising Standards Council of India (ASCI) will also apply simultaneously.

 

Conclusion 

In the last few years, the regulatory bodies have undertaken many reformations and measures to control how and what is advertised. As our country is moving towards digitization, the need of the hour is to closely monitor the content that is made available to the public, mainly on online social media platforms. The guidelines intend to protect the interests of consumers by introducing more transparency and coherence in the way advertisements are published so that consumers can make informed decisions.

 

 

You may read our blog post detailing surrogate advertising and its enforceability for a deeper understanding of the issues.  

Image Credits: Photo by Dennis Maliepaard on Unsplash

The guidelines also stipulate specific duties on the manufacturer, service provider, advertiser, or advertising agency to ensure compliance in advertisements, which primarily deals with the veracity of the information/claims made in the advertisements. These guidelines are to be read as part and parcel of the Consumer Protection Act, 2019, and the non-compliance with the provisions shall also invite penalization as provided in Section 21 of the Act.

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Failure to Obtain Occupancy Certificate a Deficiency in Service by Developer: A Note on the Supreme Court’s Decision

On January 11, 2022, the Supreme Court of India delivered a noteworthy decision in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd.,[i] by affirming that the failure of a developer to obtain an occupancy certificate would constitute a deficiency in service under the consumer protection law of India.

Relevance of Occupancy Certificate

 

Setting up one’s perfect abode for peaceful dwelling calls not only for a perfect finishes and a picturesque interior but also entails ensuring that all housing-related statutory requirements are fulfilled. One such indispensable compliance, the very mention of which causes flat owners to prick up their ears is an occupancy certificate. Under such an occupancy certificate, the local municipal authority permits the occupation of any building, as provided under local laws, which has provision for civic infrastructure such as water, sanitation and electricity.[ii]

However, a large number of flat owners across the country are far from having a perfect legally compliant abode given the failure of developers to obtain occupancy certificates in a timely manner. As a matter of practice, flat owners would take possession of their flats before obtaining the occupancy certificate and refurbishing the interiors, which, in some cases would result in a violation of statutory requirements and would further complicate the process of obtaining an occupancy certificate. In the case of old buildings, the developers are seldom approachable, and the residents are left helpless, in anticipation and burdened with extra costs for years.

 

Background of the Case

 

The flat owners in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd., had purchased flats from Mumbai Mahalaxmi Construction Pvt. Ltd. (“Respondent-Developer”) around the year 1993, were given possession of their flats around the year 1997, and had further constituted themselves into a co-operative housing society viz. ‘Samruddhi Co-operative Housing Society Limited’ (“Appellant-Society”). The Respondent-Developer failed to obtain the occupancy certificate for the buildings of the Appellant Society but went ahead and delivered possession of the flats. Consequently, the Appellant Society, being ineligible to obtain electricity and water supply services in the absence of the occupancy certificate, was burdened with extra taxes and charges payable to the local municipal authority, including payment of excess property tax at 25 per cent over and above the normal rate and water charges at 50 per cent over and above the normal rate.

In the year 1998, the Appellant-Society instituted a consumer complaint before the State Consumer Disputes Redressal Commission (“SCDRC”) seeking that the Respondent-Developer be directed to obtain the required occupancy certificate. The SCDRC not only issued a direction to the Respondent-Developer to obtain the required occupancy certificate within a period of 4 months but also directed the payment of INR 100,000/- towards reimbursement of the excess water charges paid by the Appellant-Society. Upon the failure of the Respondent-Developer to comply with the aforesaid directions of SCDRC, the Appellant-Society filed a complaint before the National Consumer Disputes Redressal Commission (“NCDRC”), the apex consumer dispute resolution forum in the country, in the year 2016.

The aforesaid complaint was filed on the statutory ground of ‘deficiency in service’ of the Respondent-Developer and the Appellant-Society sought payment of INR 26,073,475/- as reimbursement of excess charges and tax paid by the Appellant-Society and INR 2,000,000/- towards the mental agony and inconvenience caused to the members of the Appellant-Society. However, the NCDRC dismissed the aforesaid complaint on the grounds of being time-barred and the ineligibility of the Appellant Society to seek relief as a ‘consumer’ under Section 2(1)(d) of the governing statute i.e., the Consumer Protection Act, 1986 (“CP Act”). The Appellant-Society thereafter challenged the decision of the NCDRC before the Supreme Court.

 

Operating Law

 

In addition to dealing with the point of limitation as per the CP Act, the Supreme Court, in its analysis, considered the provision of the Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (“MOF Act”), which was introduced to curb malpractices by developers in relation to the sale of flats on an ownership basis.

Section 3 of the MOF Act prevents a developer from allowing a flat purchaser to take possession of a flat before the completion certificate, as may be required under law, is duly obtained by the developer from the local authorities.

Section 6 of the MOF Act obligates a developer to discharge payment of all outgoings, including municipal or other taxes and water charges, until the developer transfers the flats to the flat owners or organisation of flat owners. Further, the aforesaid provision clarifies that the developer will continue to be liable for payment of dues and penalties related to the outgoings which were collected from the flat owners prior to the transfer of the flats, even after such transfer is completed.

By a co-joint reading of Sections 3 and 6 of the MOF Act, the Supreme Court concluded that the Respondent-Developer was obligated to provide the Appellant-Society with the occupancy certificate and was also liable to discharge payment of all outgoings until such a certificate was provided. The Supreme Court further observed that the failure of the Respondent-Developer to do so was a continuing wrong and the Appellant-Society was entitled to claim compensation for such continuing wrong.

 

The Verdict

 

Following the above analysis, the single-judge bench of Justice Dhananjaya Y Chandrachud dealt with the findings of the NCDRC and overruled the decision of the NCDRC on the eligibility of the Appellant-Society as a consumer under Section 2(1)(d) of the CP Act. Based on precedent judgments of the Supreme Court, it was concluded that the failure of a developer to obtain an occupancy certificate or abide by contractual obligations would amount to a deficiency in service under the CP Act. The Supreme Court thus held that:

“In the present case, the respondent was responsible for transferring the title to the flats to the society along with the occupancy certificate. The failure of the respondent to obtain the occupation certificate is a deficiency in service for which the respondent is liable. Thus, the members of the appellant society are well within their rights as ‘consumers’ to pray for compensation as a recompense for the consequent liability (such as payment of higher taxes and water charges by the owners) arising from the lack of an occupancy certificate.”

Allowing the appeal, the Supreme Court thus, directed NCDRC to decide the complaint based on the observations made by the Supreme Court in deciding the appeal and dispose of the complaint within a period of 3 months from the date of the judgment therein.

 

Significance of the Judgment

 

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for regularisation of their flats.

In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of the MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.[iii] Hence, for buildings that are registered under the RER Act, the authority set up under the RER Act can be approached in case of delay by the developer to provide an occupancy certificate.

Thus, the instant matter also resounds an alarm bell for developers to ensure that the occupancy certificate requirements are complied with as a prime concern as flat purchasers may have recourse to multiple forums to seek relief in case of any delay in this regard.

References

[i]Civil Appeal No. 4000 of 2019 in the Supreme Court of India Civil Appellate Jurisdiction.

[ii]Real Estate (Regulation & Development) Act, 2016 (Act No. 16 of 2016), §2(zf).

[iii]Real Estate (Regulation & Development) Act, 2016, § 11(4)(b).

 

Image Credits: Photo by Tierra Mallorca on Unsplash

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for the regularisation of their flats. In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.

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Appointment of CoAs: A Hail Mary by Courts to Save Indian Sports? 

The Court’s appointment of a Committee of Administrators (“CoA“) to clean up the functioning of errant sports bodies is fast becoming the norm. In the past five months, table tennis, hockey and football federations have been brought under the ambit of the court-appointed Committee of Administrators, a move that critiques the state of affairs of these bodies. Additionally, most other federations face the probability of de-recognition for non-compliance with the Sports Code of 2011, which aims to establish a transparent and accountable governance scheme across the arena.

The Delhi High Court was the first to crack the whip on the Table Tennis Federation of India. Following the allegations of Manika Batra, a three-membered committee was constituted. On perusal of the committee’s report, gross discrepancies in the functioning of the federation were unveiled[1]. The Court opined that the conduct of the federation prima facie reveals that it functioned solely with the purpose of ‘feeding into the whims of its officials’ and ‘went out of their way to undermine the efforts of the sportspersons.’

The committee’s findings were enough to substantiate a breach of the Sports Code, 2011. The Court stated that it would be failing in discharging its duties, not only towards the sportsperson of the country but also towards the general public itself if it did not proceed to appoint CoA to anchor the federation in accomplishing its duties towards the well-being of the sportspersons and the sport.

Earlier, in April 2022, the Supreme Court ended the tenure of Praful Patel as the President of the All-India Football Federation[2], following complaints of major inconsistencies in the election of its members. In its order, the Apex Court observed that “the state of affairs is not in the best interest of the federation“, thereby appointing the CoA, headed by Mr. A R Dave, to look after the everyday functioning of the federation and facilitate the adoption of a new constitution in alignment with the Sports Code.

Recently, in May, the Delhi High Court also held the Hockey Federation accountable for functioning in violation of the Sports Code[3]. In line with the previously set precedents by the courts, it would not be surprising if the Indian Olympic Association faces the music following the recently levelled accusations against it for non-compliance with the Code[4].

The issues highlighted in these three organisations are not different from what the BCCI was charged with – administrators who held on to their positions and became so influential that the integrity and growth of the sport stood compromised. Even though the BCCI is an autonomous, self-sufficient body that does not rely on the government for grants, unlike these federations, it cannot be denied that the Supreme Court’s interference in that case did set a precedent in the sports industry.

Why is compliance with the Sports Code important for NSFs?

 

As per provisions 1.2, 3.17 and the Statement of Purpose of the Sports Code, it is clear that the National Sports Federations were envisaged to be autonomous bodies.[5] However, government recognition is important for these federations to represent the country on international platforms, avail funding to conduct sporting events and be entitled to tax and custom duty exemptions and special dispensation to remit funds abroad.

Further, in the case of the Indian Hockey Federation, Civil Writ Petition No.7868 of 2005 categorically held that”… international sporting events are an essential part of diplomatic relations between the nations, and several considerations like security concerns of players, apartheid, and perceived human rights violations have guided nations in decisions to participate or not to participate in sporting events in different countries. Therefore, political and diplomatic clearances are required by the Indian teams before participation in the international tournaments and forums.”

As per provision 3.6 of the Sports Code, 2011, National Sports Federations that fail to comply with the criteria for recognition and other government guidelines issued time-to-time:

  1. Shall be unable to select the national teams or represent India in any international event or forum.
  2. Shall not be allowed to use the word “India” in its name since the inclusion of the word “India” indicates patronage of the Government of India.
  3. Shall lose its “All India” status and may be unable to regulate and control the relevant sports discipline in the country.

It is also important to note that non-recognition of an NSF can also prove to be detrimental to the sportspersons associated with it in the following ways:

  1. Participation in national and international events organised by NSFs that the Government of India does not recognise in the Ministry of Youth Affairs and Sports shall not be considered for appointment to government jobs under the sports quota.
  2. Sportspersons of unrecognised NSFs may not be able to get admissions under the sports quota in schools and colleges.
  3. Sportspersons competing in national championships organised by NSFs not recognised by the Government of India in the Ministry of Youth Affairs and Sports are not eligible for railway or other concessions.

 

Impact- Appointment of CoAs and the Players 

 

Non-recognition of an NSF strips it of the power to regulate the sport nationally and gain access to government grants and incentives. It also prevents the federation from selecting teams and representing the sport at international events. This year, the Delhi High Court held that Taekwondo India is not a recognised federation for the sport in the country, thereby having no authority to hold trials for the selection of teams[6] for the upcoming Asian Championship. SAI (Sports Authority of India) was directed to step in[7], following which trials were notified to take place from May 22nd in Lucknow. However, World Taekwondo, the International Federation governing the sport, issued a letter stating that the world body shall not recognise the teams selected by SAI[8].

Intriguingly enough, the International Federation went on to specify that Taekwondo India was the only recognised authority as per its rules to select and dispatch teams for the international events. Teams selected by a non-member of World Taekwondo are not permitted to compete in the tournaments, nor are the players awarded ranking points.

Hence, amid administrative turmoil, players face the actual consequences of the non-competence of the authorities.

The same fate hit the Indian football players, with FIFA (International Federation of Association Football) issuing a ban on AIFF (All India Football Federation) due to “third-party intervention.”[9] FIFA had published a Manual on TPI (Third Party intervention)[10] to promote ‘integrity‘, ‘ethics‘ and ‘fair-play’ in the football sporting regime, all of which India clearly violates. The ban means that all the country’s football-related activities stand at a standstill. India shall lose the opportunity to host the Under-17 Women’s World Cup, which was scheduled for October this year. Further, the Indian team may also lose the chance to play in the AFC Cup Qualifier in 2023.

The fate of hockey and table tennis may play out in a similar fashion. The membership affiliation terms of the International Hockey Federation (FIH), under provision 6.1(d),[11] clearly state that a member shall remain affiliated only if it is the sole authority for the governance of hockey in the jurisdiction (in this case, India). Therefore, if the Indian Hockey Federation manages to get de-recognised, the sport and the teams will have to pay a heavy penalty. Even though FIH continues to have full trust in Hockey India’, it emphasises that the member countries must abide by the law of the land[12]. IFH’s stand on the issue is very lenient and accommodating compared to the other international sports federations.

However, the fate of the table tennis players may not be so convenient. The International Table Tennis Federation and World Table Tennis reserve the right to accept or reject an entry for international participation if it is not sent through the affiliate members. Further, per provision 1.2 of its rules, a body must be the sole authority to regulate the sport within its jurisdiction to be eligible for membership in the federation.[13] Currently, the Table Tennis Federation of India is suspended, and its operations are delegated to the CoA, who were made responsible for sending entries. The officials hope the international federation will keep the players’ interest at the forefront. Otherwise, the players will continue to remain the victimsof the incompetence of the governing bodies.

Further, in an embarrassing development for the sport, Diya Chitale (World Number 3) has filed a writ petition in the Delhi High Court seeking a stay on the Commonwealth Games 2022 Table Tennis selections, citing inconsistencies in the selection process[14], bringing the Indian table tennis regulatory body (at present, CoAs) into the spotlight for all the wrong reasons.

Conclusion

 

Following the orders of the Delhi High Court, the Ministry of Sports revealed that out of the fifty-nine recognised NSFs (National Sports Federations), forty-four submitted amended constitutions intending to comply with the Sports Code, out of which only six constitutions were found to be satisfactorily in line with the 2011 Code[15]. Hence, CoAs are instituted to allow these federations to get their ducks in a row without jeopardising their everyday functioning for the welfare of the respective players. In the absence of a strong legislative and political will to straighten things out within the NSFs, judicial intervention appears to be the only viable option. There is also an urgent need to outline guidelines that not only enumerate what the CoAs must do but also keep a check on what they are doing to ensure they don’t intensify the problems they were appointed to solve. This will not only expedite the process of streamlining the NSFs but also protect the players from the consequences of such administrative incompetence.

References: 

[1] http://164.100.68.118:8080/FreeText/temp/800777208_0.pdf#page=0

[2] https://www.livelaw.in/pdf_upload/naw25052022cw57032020183323-419281.pdf

[3] https://www.livelaw.in/pdf_upload/naw25052022cw57032020183323-419281.pdf

[4] https://www.newindianexpress.com/sport/other/2022/may/27/indian-olympic-association-batra-says-he-is-president-khanna-says-i-am-acting-president-2458356.html

[5] https://yas.nic.in/sites/default/files/File918.compressed.pdf

[6] https://indiankanoon.org/doc/39459597/

[7] http://delhihighcourt.nic.in/dhcqrydisp_o.asp?pn=161536&yr=2022

[8] https://www.tribuneindia.com/news/sports/world-taekwondo-calls-sai-selection-meet-unauthorised-394432

[9] https://www.republicworld.com/sports-news/football-news/aiff-row-explained-will-fifa-ban-india-in-consequence-of-third-party-intervention-articleshow.html

[10] https://digitalhub.fifa.com/m/6413cca6d9bc5032/original/MANUAL-ON-TPI-AND-TPO-IN-FOOTBALL-AGREEMENTS-Dec-2021-Update.pdf

[11] http://www.fih.ch/files/Sport/Coaching/FIH%20Statutes%20and%20Bylaws.pdf

[12] https://sportstar.thehindu.com/hockey/international-hockey-federation-hockey-india-delhi-high-court-narinder-batra-national-sports-code/article38501113.ece#:~:text=The%20International%20Hockey%20Federation’s%20statements,violated%20the%20National%20Sports%20Code.

[13] https://documents.ittf.sport/sites/default/files/public/2022-02/ITTF_HB_2022_clean_v1_0.pdf

[14] https://timesofindia.indiatimes.com/sports/more-sports/others/ttfi-mess-india-no-3-diya-chitale-files-writ-petition-in-delhi-hc-after-being-overlooked-for-cwg/articleshow/91992473.cms

[15] https://www.hindustantimes.com/sports/others/sports-code-time-running-out-for-federations-101654106060299.html

 

 

Image Credits: Photo by Ichigo121212 from Pixabay 

In the absence of a strong legislative and political will to straighten the affairs within the NSFs, judicial intervention seems the only logical strategy. There is also an urgent need to outline guidelines that not only enumerate what the CoAs must do but also keep in check of what they are doing to ensure they don’t intensify the problems they were appointed to solve.

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Layoffs, Contracts and Lawyers: Connecting the Dots

In recent weeks, there has been a lot of news about startups laying off employees. Edtech companies like UnAcademy and Vedantu, used car sales companies like Cars 24 and E-commerce players like Meesho have all reportedly laid off people. As many as 8000 people have been laid off in the first four months of 2022. The irony is that this is happening even as the startup ecosystem raised more than US$10 Billion in capital during the Jan-March 2022 quarter. IVCA-EY data indicates that in April 2022, the capital raised was around US$1.6 Billion- less than half the sum in the corresponding period in 2021. Last year saw a record number of Indian unicorns emerge.

It is not that there is a sudden scarcity of risk capital. What is happening is that VC funds and other investors are taking a long hard look at business models and valuations. Cash burn rates and unit economics, which were always important elements of valuation, have become front and centre again, after a prolonged period of time that saw some investors take their eyes off the ball as they frenetically looked for ventures to invest in. This long bull run for startups also encouraged many executives to throw their hats into the ring; they relied on their personal expertise and experience to attract investors.

There are also external factors whose unfortunate confluence in the last couple of months has contributed to this situation and exacerbated the stressors. The Ukraine invasion has undoubtedly impacted energy prices; the lockdown of large Chinese cities including Shanghai and Beijing has further disrupted global supply chains that were already affected due to the pandemic. These have thrown unit economics out of gear. Inflation rates around the world have soared- in some countries, the prevailing inflation is at the highest level in over a decade or even longer. In response, central banks around the world have raised interest rates; in India too, the RBI raised interest rates more than anticipated and ahead of when such action was expected. Further increases in interest rates are expected, as central banks seek to suck out the money supply to cool inflation. This means that in the short term, growth expectations will need to be moderated. This affects valuations (something that is also visible in how stock prices of listed companies are fluctuating).

Investors and company managements are therefore looking for ways to cut costs. Rationalizing the workforce is one way to achieve this goal. During a euphoric phase, businesses tend to hire more than they need, often at higher compensation levels than are sustainable. Many companies that have laid off their people continue to advertise extensively on national television. Logically, cutting down on TVCs and using lower-cost digital marketing will be another cost-cutting lever. As the market tightens, business plans will need to be revised. Growth will moderate, and high valuations will get harder to defend. The lack of clarity surrounding when various events will be resolved adds to the uncertainty around when an economic rebound will occur and what the new operating environment will look like. Indeed, Y Combinator, the highly successful Silicon Valley accelerator has advised founders of the companies in its portfolio to “plan for the worst” and focus all efforts in the next month on extending their runway. They are advising ventures to ensure survival even if fresh funds cannot be raised for 24 months.

Sometimes, there are contractual constraints on implementing cost-cutting actions. While some of these clauses may be legitimate and the result of deliberate negotiations between the parties, I have also seen “cut-paste” clauses in contracts; these are taken directly from other contracts downloaded from the internet or obtained in other ways. Many entrepreneurs succumb to taking this shortcut because it saves them the lawyer’s fees for drafting customized contracts. While some money can be saved, doing so creates risk because the business context in which a contract is drafted varies- and blindly lifting clauses can render the entire contract meaningless, hard to implement or leave entities open to expensive litigation.

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. Lawyers and Business Advisors who understand business- especially in the world of startups- can guide entrepreneurs so that they don’t pay a high price later, since a stitch in time saves nine!

Image Credits: Photo by aymane jdidi from Pixabay 

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. 

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The Ins and Outs: Mines and Minerals Development and Regulation

India is well endowed with natural resources, particularly minerals, which serve as raw materials for many industries, paving the way for rapid industrialisation and infrastructural development. This, in turn, is set to facilitate the economy’s ascent along the road of sustained growth and a five trillion-dollar economy. In order to realise the mineral wealth of the country, extensive amendments have been made to the Mines and Minerals (Development and Amendment) Act, 1957 (‘MMDR Act’) by the MMDR Amendment Act, 2021 and the corresponding Rules with the objectives of generating employment and investment in the mining sector, increasing revenue to the States, improving the production and time-bound operationalisation of mines, etc. 

Further, to facilitate State Governments in identifying more blocks for auction and increase the availability of minerals across the country, the Ministry of Mines had introduced a series of amendments to ramp up the auction of mineral blocks for composite licencing.  To this effect, recently, the Government notified the Mineral (Auction) Amendment Rules, 2022 that allowed global positioning system for the identification and demarcation of the area where a composite licence is proposed to be granted. The Union Cabinet had also approved the amendment to the Second Schedule of the MMDR Act in March, 2022 to specify the royalty rates of certain minerals, including potash, emerald and platinum group of metals to ensure better participation in the auction of Mines.

This Article studies the series of amendments made to the MMDR Act and related Rules while analysing their impact on the developmental activities of the sector.

Analysis of the Amendments

 

Removal of the Distinction Between Captive and Non-captive Mines

Earlier, the Act empowered the central government to reserve any mine (other than coal, lignite, and atomic minerals) as a captive mine which would be used for a specific purpose only. The present Amendment removes this distinction between captive and non-captive mines. Now, the mines will not be limited to just a specific purpose/industry/sector. Thus, no mine will be reserved for a particular end-use. All future auctions will be without any end-use restrictions. The amendment would “facilitate an increase in production and supply of minerals, ensure economies of scale in mineral production, stabilise prices of ore in the market and bring additional revenue to the States…

 

Sale of Minerals by Captive Mines

Earlier, as per the Act, the ores extracted from captive mines were only used by captive industries. The present Amendment provides that captive mines (other than atomic minerals) may sell up to 50% of their annual mineral production in the open market after meeting their own needs. The central government may increase this threshold through a notification. The lessee will have to pay additional charges for minerals sold in the open market. The sale of minerals by captive plants will aid and expedite growth in mineral production and supply, leading to commercial viability in mineral production and, as a result, additional revenue for the states. 

Transfer of Statutory Clearances

Earlier, the Act provided that upon expiry of a mining lease (other than coal, lignite, and atomic minerals), mines are leased to new parties through auction. The statutory clearances issued to the previous lessee are transferred to the new lessee for a period of two years. The new lessee is required to obtain fresh clearances within two years. The present Amendment replaces this provision and instead provides that transferred statutory clearances will be valid throughout the lease period of the new lessee. This amendment ensures continuity of mining operations, even with the change of the lessee and helps to avoid the repetitive process of obtaining clearances again for the same mine, which would facilitate the early commencement of the mining operations. 

 

Auction by the Central Government in Certain Cases

Under the Act, states conduct the auction of mineral concessions (other than coal, lignite, and atomic minerals). Mineral concessions include mining leases and prospecting license-cum-mining leases. The present Amendment empowers the central government to specify a time period for completion of the auction process in consultation with the state government. If the state government is unable to complete the auction process within this period, the auctions may be conducted by the central government. This amendment ensures that no mine is left idle and increases mining in the country.

 

Allocation of Mines with Expired Leases

The Amendment adds that mines (other than coal, lignite, and atomic minerals) whose lease has expired may be allocated to a government company in certain cases. This will be applicable if the auction process for granting a new lease has not been completed, or the new lease has been terminated within a year of the auction. The state government may grant a lease for such a mine to a government company for a period of up to 10 years or until the selection of a new lessee, whichever is earlier. This Amendment increases revenue for the states.

 

Lapse and Extension of Mining Lease

The erstwhile Act provided that where the mining operation is not commenced by the lessee within 2 years of the grant of a lease or the mining operation has been discontinued for two years, the mining lease shall be deemed to have expired for such period. The new amendment substituted the earlier provisions of Section 4A with a new provision stating that the mining lease will not lapse at the end of the said period if a concession is granted by the State Government upon an application by the lessee. It also provides for the extension of the mining lease by declaring that the State Government can extend the threshold period of lapse of the lease only once and up to one year. This ensures continuity in mining operations.

 

Removal of Non-Exclusive License Regime

In the earlier act, companies had a non-exclusive licence for the reconnaissance of the area to find out mineral potential. The amendment removes the non-exclusive licence permit.

 

Simplification of Exploration Regime

As per the new amendment:

  • Mineral Blocks for Composite Licences can be auctioned at the G4 level of exploration instead of the G3 level as per the earlier standard.
  • Mineral Blocks for surficial minerals can be auctioned for the grant of a mining lease at G3 level instead of G2 level.
  • Private entities may be notified under Section 4(1) of the Act to conduct exploration.

 

Transfer of Mineral Concessions

Restrictions on the transfer of mineral concessions have been removed and now mineral concessions can be transferred without any transfer charge.

 

District Mineral Foundation (DMF)

It is a non-profit body established to work for the interest and benefit of people and areas affected by mining or mining-related operations. State governments were tasked with establishing DMFs in each mining district of their respective states, as well as prescribing the composition and operation of DMFs, including the use of funds. The new Amendment Act, 2021, empowers the Central Government to direct the composition and utilisation of the funds from the District Mineral Foundation. This ensures the optimization of funds for the development of mining areas. 

 

Conclusion 

Present amendments in the Mines and Minerals (Development and Amendment) Act, 1957 (‘MMDR Act’) and the corresponding Rules do nullify several restrictive and covert provisions that existed in the erstwhile Act of 1957. The new regime will be instrumental in increasing mineral production, improving the ease of doing business in the country, and increasing mineral production’s contribution to GDP.

The amendments have also successfully capacitated the State governments to notify 40 mineral blocks of G4 level of exploration for grant of composite license, out of which 6 mineral blocks have been successfully auctioned, as of April 2022.  [1]

However, like any other public policy and legislation, implementation of the Act and Rules with proper coordination among central and state governments is the key to achieving reforms in the mining sector and sustainable development. 

References: 

[1] https://pib.gov.in/PressReleasePage.aspx?PRID=1814233#:~:text=The%20Mineral%20(Auction)%20Amendment%20Rules%2C%202022%20were%20notified%20on,to%20be%20granted%20through%20auction.

 

Image Credits: Image by Анатолий Стафичук from Pixabay

Present amendments in the Mines and Minerals (Development and Amendment) Act, 1957 and the corresponding Rules do nullify several restrictive and covert provisions that existed in the erstwhile Act of 1957. The new regime shall be instrumental in boosting mineral production, improving the ease of doing business in the country and increasing contribution of mineral production to Gross Domestic Product (GDP).

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Claims Settlement Proceedings Under MSME Act 2006

In the month of February, the Government of India released the Draft National Micro Small Medium Enterprises (MSME) Policy, to promote competitiveness, technology up-gradation, infrastructure, cluster development, dedicated credit, procurement of products & financial assistance to MSME. The Policy was issued with the objective of fostering a conducive business ecosystem to enable ease of doing business for MSMEs and to develop appropriate dispute resolution mechanisms. One of the key observations made in the policy was that the dispute resolution mechanism for the sector was not ‘industry-friendly.’

 

The Micro, Small, and Medium Enterprises (MSME) Development Act was notified in 2006 to address different issues affecting MSMEs, inter alia, the coverage and investment ceiling of the sector. The MSME Act seeks to facilitate the development of these enterprises and also enhance their competitiveness. It provides the legal framework for recognition of the concept of “enterprise”, which comprises both manufacturing and service entities. It defines medium enterprises for the first time and seeks to integrate the three tiers of these enterprises, namely, Micro, Small and Medium. It empowers the Central Government to undertake programmes and issue guidelines and instructions to develop and enhance the competitiveness of MSMEs.

Definitions of Micro, Small & Medium Enterprises

In India, the enterprises are classified broadly into two categories: (i) Manufacturing and (ii) Services. These categories of enterprises have been further classified into Micro, Small and Medium enterprises under Section 7 of the MSME Act as follows:

Enterprise Category

Investment in Plant & Machinery

Not Exceeding

Annual Turnover

Not Exceeding

Micro

INR 1 Crore

INR 5 Crore

Small

INR 10 Crore

INR 50 Crore

Medium

INR 50 Crore

INR 250 Crore

 

Registration of MSME/Memorandum of MSME

Any micro, small and medium enterprise, before starting an enterprise, may file a Udyog Aadhaar Memorandum (the “UAM” or “Memorandum”) in Form-I. The UAM may be filed online on the website of the Ministry of Micro, Small and Medium Enterprises, Government of India at http://udyogaadhaar.gov.in in order to instantly get a unique Udyog Aadhaar Number (UAN); or a hard copy of the duly filled Form I, shall be submitted to the concerned District Industries Centre (DIC) or to the Office of the Micro, Small and Medium Enterprise-Development Institute (MSME-DI) under the Development Commissioner, MSME. Consequent thereto, a Udyog Aadhaar Registration Certificate in Form II will be generated and mailed to the email address of the enterprise as provided in the UAM. 

The existing MSMEs have to file the Memorandum within One Hundred and Twenty (120) days from the commencement of the Act. UAM/MEMORANDUM is a one-page online registration system for MSMEs based on self – certification. This is a path-breaking step to promote ease-of-doing-business for MSMEs in India as the UAM replaces the filing of Entrepreneurs’ Memorandum (EM part-I & II).

While examining the purpose and intent of the MSME Act, the Andhra Pradesh High Court vide common order in P. Nos. 27670, 27673, 27691, 27693, 27826, 27829, 28010, 28034 of 2021 and 4721, 6249 and 7616 of 2022 observed inter alia, an ‘Enterprise’ is one by whatever name called, which is engaged in the manufacture or production of goods in any manner pertaining to any industry specified in the first schedule of Act 65 of 1951 or engaged in providing or rendering of any services.

Additionally, a supplier, as per the definition of the Act, should be engaged in selling goods “produced by micro or small enterprises and rendering services that are provided by such enterprises.” Here, the emphasis has also been placed on services required for the purpose of selling etc. goods produced by micro or small enterprises. “The conjunction ‘and’ used in section 2(n) (iii) makes it clear that the services that are rendered are services related to the goods that are produced by micro and small enterprises. The legislature used the conjunction and therefore, in the opinion of this Court, the services which are rendered are those pertaining to the goods manufactured and produced by the enterprises.”

The High Court firmly observed that the services that are referred to under the said Act cannot be treated as every service that is rendered. The services referred to must have a direct connection with the manufacture and production of goods.  

Provisions Dealing with Claim Settlement Proceedings Under MSME Act

 

Sections 15-24 of the Micro, Small and Medium Enterprises Development (MSME) Act, 2006 deal with the issues relating to the Delayed Payments to Micro and Small Enterprises (MSEs) by the Buyers to the MSE supplier. As per Section 15 of the MSME Act, the Buyer shall make payment to the Supplier as per their commercial understanding. However, the same shall not exceed forty-five (45) days from the day of acceptance or deemed acceptance of goods and services. Further, under Section 16 of the MSME Act, delayed payment to Supplier units, attracts compound interest with monthly interests at three times the bank rate notified by the Reserve Bank. In the event of any dispute with regard to any amount due, the procedure stipulated in Section 18 has to be followed, which is enumerated hereunder. Any case/reference under Section 18 of the MSME Act has to be decided in ninety (90) days.  Further, in case, the Buyer decides to challenge the award or decree passed, then as per Section 19 of the MSME Act, the Buyer has to deposit 75% of the amount in terms of the decree, award or order of the court, as the case may be.

MSME Samadhaan is a Portal created by the Office of DC(MSME), Ministry of Micro, Small and Medium Enterprises (MSME), where Micro and Small Enterprises (MSEs) can file their applications online regarding delayed payments. The portal gives information about individual CPSEs/Central Ministries, State Governments, etc. and other Buyers regarding the payments pending with them in respect of the MSEs. The said portal also facilitates MSEs to file their delayed payments related complaints online. These will be viewed by MSEFC Council for their actions. These will also be visible to Concerned Central Ministries, Departments, CPSEs, State governments, etc. for pro-active actions. The portal was established with a vision to facilitate the monitoring of delayed payments in an efficient manner as disputes over delayed payments were a primary concern amongst the Sellers across the sector. The information on this portal is made available in the public domain to exert moral pressure on the defaulting parties. The MSMEs can also access the portal and monitor their cases.

The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of Delayed Payment to Micro and Small Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments (Section 20 and 21).

What are the Prerequisites for Making a Claim before MSEFC?

 

To file a complaint with the MSEFC, the concerned enterprise must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration prior to the dispute or contract with the Supplier. Secondly, the MSME should have a valid and strong claim against the Buyer. A well-founded claim comprises a written purchase agreement and a valid invoice post-UAM or Udyam registration. Additionally, it is also crucial that the statutory duration (45 days) from the date of acceptance or deemed acceptance of the goods/service, within which the payment should have been made, stands lapsed.

While examining the requisites to invoke the jurisdiction of the Facilitation Council, the Hon’ble High Court of Andhra Pradesh vide Common Order in P.Nos.27670, 27673, 27691, 27693, 27826, 27829, 28010, 28034 of 2021 and 4721, 6249 and 7616 of 2022 – held inter alia, “this Court has to hold that unless the ‘memorandum’ is filed under section 8 of Act 27 of 2006 and the contract is a pure and simple supply contract, a party cannot move the facilitation council nor can the council entertain and decide any dispute. 

The Hon’ble Court relied on the observations made by the Hon’ble Supreme Court in the case of Silpi Industries, which stated that, “………………. In our view, to seek the benefit of provisions under MSME Act, the seller should have registered under the provisions of the Act, as on the date of entering into the contract. In any event, for the supplies pursuant to the contract made before the registration of the unit under provisions of the MSME Act, no benefit can be sought by such entity, as contemplated under MSME Act. ………………… The appellant cannot become micro or small enterprise or supplier, to claim the benefits within the meaning of MSME Act 2006, by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services. If any registration is obtained, same will be prospective and applies for supply of goods and services subsequent to registration but cannot operate retrospectively. Any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party not intended by legislation.”

Hence, to adjure the provisions of the MSME Act, 2006 and to move to the facilitation council for grievance redressal, an Entrepreneurs Memorandum as envisaged under Section 8 has to be filed by the Micro, Small and Medium Enterprise before the authorities specified by the Central Government.

What is the Process for Filing a Complaint through the Samadhaan Portal?

 

As per Section 18 of the MSME Act, in the case of delay in payment beyond 45 days from the day of acceptance or deemed acceptance, MSEs Suppliers may approach the Micro and Small Enterprises Facilitation Council (MSEFC) constituted under the Act in all State/UTs.

At present, the MSME Samadhaan portal enables Micro and Small Enterprises (MSEs) to file their applications online regarding delayed payments. Application in the prescribed form under the provisions of the MSME Act can be filed online on the Samadhaan Portal, which can be accessed at https://MSME.gov.in/. The Applicant shall furnish all the details as specified in the Act in the Application. The application process mandates intensive scrutiny of relevant documents such as the purchase agreements, invoices, notices served, etc. Hence, it is important to attach all the required documents along with the Application in the prescribed form. The application, once filed, is forwarded automatically online to the concerned Micro and Small Enterprise Facilitation Council (MSEFC) established by the State/UTs as per the provisions of the MSME Act 2006. After 15 days of online filing of the case, it is registered by the MSEFC concerned and action on the applications regarding delayed payment is taken by the concerned MSEFC only.

Following acceptance of the application in the prescribed form, the relevant MSEFC sends a notice to the buyer demanding immediate payment of the due amount within a specified time frame. If no payment is initiated by the Buyer within the stipulated time mentioned in the notice, the MSME can proceed with the filing of an application for the default in payment by annexing the requisite documents on the portal as per provisions of the Act.

Once a reference application for a dispute under Section 17 (Recovery of delayed payments) has been made under Section 18 of the MSME Act, the Council shall either conduct conciliation in the matter by itself or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre. It is imperative to note that, for conducting such conciliation, the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of the 1996 Act.

Furthermore, if conciliation is unsuccessful and the parties are unable to reach an agreement, the Council shall either take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration, and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration was conducted in accordance with an arbitration agreement referred to in the arbitration agreement.

In the case of Jharkhand Urja Vikas Nigam Limited Vs State of Rajasthan & Ors. [Civil Appeal No. 2899 of 2021] the Hon’ble Supreme Court observed that the conciliation and arbitration proceedings under the MSME Act cannot be clubbed if the appellant did not submit a response during the conciliation stage. As per the legislative mandate, the Council is under the obligation to initiate an arbitration procedure if the conciliation procedure fails.

While observing fundamental differences between the two processes, the Apex Court in this case held that; “In conciliation, the conciliator assists the parties to arrive at an amicable settlement, in an impartial and independent manner. In arbitration, the Arbitral Tribunal/ arbitrator adjudicates the disputes between the parties. The claim has to be proved before the arbitrator, if necessary, by adducing evidence, even though the rules of the Civil Procedure Code or the Indian Evidence Act may not apply. Unless otherwise agreed, oral hearings are to be held.

Further, while placing reliance on Section 18(3) of the MSME Act, it was also maintained that, “The said Section itself makes it clear that when arbitration is initiated all the provisions of the Arbitration and Conciliation Act, 1996 will apply, as if arbitration were in pursuance of an arbitration agreement referred to under sub-section (1) of Section 7 of the said Act”

According to Section 18 of the MSME Act 2006, the arbitrator has to adjudicate upon the dispute and conclude the proceedings within the statutory period of ninety days from making such reference. 

Pre-deposit of Award Amount

 

The provisions of section 19 state, “No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court.”

Hence, in case the Buyer goes for an appeal against the award/decree, they have to deposit 75% of the award amount. The requirement was held to be mandatory in nature by the Supreme Court in the case of Gujarat State Disaster Management Authority Vs. Aska Equipments Limited (2022) 1 SCC 61

The Apex Court observed that “On a plain/fair reading of Section 19 of the MSME Act, 2006, reproduced hereinabove, at the time/before entertaining the application for setting aside the award made under Section 34 of the Arbitration & Conciliation Act, the applicant/appellant has to deposit 75% of the amount in terms of the award as a pre-deposit. The requirement of a deposit of 75% of the amount in terms of the award as a pre-deposit is mandatory. However, at the same time, considering the hardship which may be projected before the appellate court, if the appellate court is satisfied that there shall be undue hardship caused to the appellant/applicant to deposit 75% of the awarded amount as a pre-deposit at a time, the court may allow the pre-deposit to be made in instalments.”

Further, the Delhi High Court in AVR Enterprises vs Union of India observed that “Section 19 of the MSME Act would apply only to proceedings initiated under section 18 of the MSME Act and would not apply to an award published by an arbitrator appointed by the parties otherwise than in accordance with section 18 of the MSME Act.”

Under Section 20, the MSME Act states that the respective State Governments are duty-bound to establish Micro and Small Enterprises Facilitation Councils while also laying down their jurisdictions. These Councils shall have the jurisdiction to adjudicate upon disputes that are between the Suppliers (within their jurisdiction as specified by the State Government) and Buyers from anywhere in India.

As per the provisions of Section 21, the Council shall consist of a minimum of three and a maximum of five members. The members of the Council must be appointed from amongst the following categories:

  • Chairman: Director of Industries or any other officer not below the rank of such Director, who is having administrative control of small-scale industries.
  • Member: One or more office-bearers or representatives of Associations of micro and small industries.
  • Member: One or more representatives from Banks and financial institutions, who are lending to micro, small or medium enterprises.
  • Member: One or more persons having special knowledge in the field of industry, finance, law, trade, or commerce.

 

Overriding Effect of Claim Settlement Proceedings Under MSME Act over Arbitration and other Applicable Laws

 

It is relevant to note that as per Section 24, the provisions of sections 15 to 23 of the MSME Act have an overriding effect over the provisions of the Arbitration Act and the said section has undergone intensive judicial scrutiny.

In the case of Principal Chief Engineer M/s. Manibhai and Bros (Sleeper) [Diary 16845/2017], the Hon’ble Supreme Court upheld the judgement of the Gujarat High Court in the matter of interpretation of Section 18. The Gujarat High Court opined that since the MSME Act is special legislation, it has an overriding effect and the parties governed by it are bound to follow the mechanism provided under Section 18 of the Act.

Similarly, in M/s. Porwal Sales M/s. Flame Control Industries [Arbitration Petition No. 77 of 2017], the Bombay High Court held that Section 18 (1) should be read with sub-section (4). Section 18 is only attracted when the jurisdiction of the Council is invoked by a party for an amount due under Section 17. The jurisdiction clause of Section 18(4) does not create a bar on the appointment of an arbitrator under Section 11 of the Arbitration Act. Further, since under Section 18(1) the word “may” has been used, it is not mandatory for the Supplier or Buyer to initiate proceedings under Section 18. However, the Court also opined that if a reference has already been made to the Council in a case, the application for the appointment of an arbitrator should not be maintainable.

The Delhi High Court in the case of AVR Enterprises vs Union of India [CM APPL. 27219/2018], observed inter alia that if the arbitration proceedings are initiated by the parties as per the arbitration agreement and no proceedings have been initiated per Section 18, then the statutory provisions of the MSME Act shall not come into force.

Further, with respect to the contention of whether the Facilitation Council can act as both Arbitrator and Conciliator under Section 18; the High Court of Bombay in the case of Gujarat State Petronet Ltd MSEFC [WRIT PETITION NO.5459 OF 2015] opined that by virtue of sub-sections (2) and (3) of Section 18, Section 80 of the Arbitration Act (which bars a conciliator from acting as an arbitrator in the same dispute), it is applicable to the proceedings initiated under Section 18. Hence, on a harmonious interpretation of both these provisions, the Council cannot act as both and may refer the matter to any centre or institution that provides alternate dispute resolution services. 

However, in the case of Best Towers Private Limited v. Reliance Communications Limited [C.W.J.C. No. 8086 of 2018], the Patna High Court was of the view that the overriding effect extended to Section 18(3) with respect to Section 24 of the Act, which clearly overrides any bar under Section 80 of the Arbitration Act. 

The Legislature clearly intended that the Council be able to act as an arbitrator and conciliator. Differing from the observations of the Court in the abovementioned case, in the case of M/S Cummins Technologies India Private Limited v. Micro and Small Enterprises Facilitation Council [C No. 7785 of 2020], the Allahabad High Court was of the opinion that the bar under Section 80 is subject to the existence of a contrary agreement between the parties, therefore it is not absolute in nature. 

Further, given the jurisdiction of the Council under Section 18(4) and its overriding effect under Section 24, the Court held that the Council can act as both. The Court also observed that the object behind introducing such a prohibition was to eliminate incidences of personal bias in the Arbitral Tribunal. However, since the Council is a statutory body, comprising of three to five members, the incidents of such bias or prejudice are absent, ergo, eliminating the requirement of the bar under Section 80 of the Arbitration Act.

Taking a similar view, the Madras High Court in the case of Ved Prakash vs. P Ponram [Original Side Appeal No.231 of 2019] held that the Council is not barred from proceeding to arbitration under Section 18(3) after conducting conciliation under Section 18(2). It must, however, ensure that the same member, who served as the conciliator in the previous conciliation proceeding does not serve as an arbitrator unless the relevant parties agree otherwise.        

Applicability of the Limitation Act to Disputes/Claim Settlement Proceedings Under the MSME Act 2006

 

The deliberation of the applicability of the Limitation Act on the proceedings under Section 18 of the MSME Act has always been a grey area. However, the Hon’ble Supreme Court of India in the recent case of Silpi Industries and Ors. Vs. Kerala State Road Transport Corporation and Ors. 2021(224) AIC 18 has afforded clarity to the discussion. The Court noted that if the dispute arises under Section 17 of the MSME Act, a reference shall be made to the Council. The parties will then be referred to conciliation by the Council. If the Conciliation process fails, the Council shall refer the case for arbitration (either administered by itself or by any institution or centre deemed fit by the Council) per the provisions of Section 18 of the MSME. 

Further, while keeping reliance on the case of Andhra Pradesh Power Coordination Committee & Ors. v. Lanco Kondapalli Power Ltd. & Ors., (2016) 3 SCC 468, the Supreme Court held that Section 43 of the Limitation Act clearly applies to arbitrations and that the provisions of the 1996 Act similarly apply to arbitrations initiated under the MSME Act as if an agreement between the parties under Section 7(1) of the 1996 Act exists. In light of the same, it was unequivocally held that the provisions of the Limitation Act apply to arbitration proceedings initiated under Section 18 of the MSME Act.

Structured Dispute Resolution Process

 

Filing complaints on the MSME Samadhaan Portal requires mandated document verification, such as work orders, agreements, invoices, etc. However, a significant number of MSMEs fail to keep a record of these requisite documents. Further, as of December 2021, only 20% of all applications filed have either been disposed of or mutually settled with Buyers, while nearly 39% of applications are yet to be addressed by the relevant authorities. Another 27% of total applications are currently under consideration[1]. This indicates that a significant number of cases have to wait for admission and then get approval to proceed further.

Conclusion

 

The observations made in the Draft National MSME Policy with respect to the inadequacy relating to the current dispute resolution mechanism catering to the needs of the MSME industry are hence confirmed by the statistics highlighted above. Hence, it has suggested a move towards establishing more facilitation councils, preferably at district levels to fast-track and aid the existing structure. Other relevant steps to establish a ‘vibrant ecosystem for the rapid growth of the MSME sector have also been envisaged to be undertaken in the near future, a development both necessary and noteworthy.

To file a complaint with the MSEFC, the concerned enterprise must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration prior to the dispute or contract with the Supplier. Secondly, the MSME should have a valid and strong claim against the Buyer. A well-founded claim comprises of a written purchase agreement and a valid invoice post-UAM or Udyam registration. Additionally, it is also crucial that the statutory duration (45 days) from the date of acceptance or deemed acceptance of the goods/service, within which the payment should have been made, stands lapsed.

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Demystifying the Inventorship Rights of an AI System in India

In this age of technological advancement, Artificial Intelligence (AI) has taken a giant leap from undertaking more straightforward tasks to originating marvellous inventions. Can an AI system be considered an inventor? This question has been beguiling jurisprudence across the globe for a considerable time. However, through the recent decision of Thaler v. Commissioner of Patents, the Australian Federal Court has forced jurisdictions across the world to re-think the inventive capacity and the role of AI in the contemporary ecosystem of innovation.

Through this article, we have tried to determine the implications of the Thaler decision and examine the position of the Indian legislation on the inventorship rights of an AI.

Factual Matrix

Dr. Stephen Thaler designed the Device for Autonomous Bootstrapping of Unified Sentience (DABUS). DABUS is an artificial intelligence system that pioneered the creation of an optimised beverage container and a flashing light for use in emergency circumstances. In the persistence of such a creation, Dr. Thaler filled patent applications worldwide, including in Australia, Canada, China, Europe, Germany, India, Israel, Japan, South Africa, the United Kingdom, and the United States.

“The Deputy Commissioner” rejected Dr. Thaler’s patent application in Australia, which named DABUS as the inventor. The matter was contested and finally, the Federal Court of Australia determined that the AI could be recognised as an inventor under the Australian Patent Act. According to the Court, the patent would be owned by Dr. Thaler, the developer, owner, and controller of DABUS. The Court determined that the legislative intent was to encourage innovation and that nothing in the Patent Act expressly or implicitly forbids AI from being named as an inventor.

Indian Stance: Inventorship Rights of an AI

In India, recently, the Controller General of Patents recorded objections to recognising an AI as an inventor in the matter of patent application numbered 202017019068, citing the provisions under Section 2 and Section 6 of the Patents Act 1970 (“Act”). The term “inventor” has not been defined under the Act. However, Section 6 states that, among other things, a patent application can be filed by any person claiming to be the true and first inventor of an invention.[1]

A bare reading of the provisions indicates that a natural person is distinguished from others. One can also observe that anyone other than a natural person will be unable to claim inventorship. Consequently, a natural person who is true and first to invent, and who contributes his originality, skill, or technical knowledge to the innovation meets the criteria to be acknowledged as an inventor in India.

In the case of V.B. Mohammed Ibrahim v. Alfred Schafranek, AIR 1960 Mysore 173, it was held that a financing partner cannot be an inventor, nor can a corporation be the sole applicant that claims to be an inventor. The Court, through this decision, emphasised that only a natural person (who is neither a financing partner nor a corporation) who genuinely contributes their skill or technical knowledge towards the invention shall qualify to claim inventorship under the Act.

In the light of this judgement, it can be perceived that an AI can also contribute its skill or technical knowledge to an invention and become an inventor. However, a reference to Som Prakash Rekhi vs Union of India & Anr, AIR 1981 SC 212, clarifies the qualification of a legal ‘person’ under Indian law. The Supreme Court observed that ‘personality’ is the sole attribution of a legal person. Such a ‘personality’ is an entity that has the right to sue or can be sued by another entity. An AI is not capable of using such rights, nor can it perform the required duties of any juristic personality independently. For instance, it cannot enter into an agreement or transfer or acquire patent/patent application rights. It would also be impossible for an AI to oppose or revoke a patent application. Hence, an AI falls short of the standards for being deemed an inventor in India.

Furthermore, the legislative intent behind the Indian Patent Act as found in the Ayyangar Committee report of 1959[2] suggests that inventors are mentioned in a patent application as a matter of right. Whether or not the actual deviser has a proprietary claim on the innovation, he has a moral right to be acknowledged as the inventor. This confers reputation and boosts the economic worth of the inventor. The inventor may give up his ownership interest in a particular patent due to a contract/agreement in law, but he retains his moral right.

An examination of legislative purpose and current public policy reveals a desire to protect the rights of the inventor/natural person who creates IP and can use his moral rights. On the other hand, AI cannot be granted moral rights nor appear to enjoy the benefits intended by legislation or public policy. Given this, designating AI as an inventor/co-inventor under current Indian rules seems impossible until explicit revisions are made.

Role of AI and Economic Growth in India

The Parliamentary Standing Committee “(“Committee“”) constituted under the Dept. of Commerce, analysed the current landscape of the IPR regime in India and observed its contribution to promoting innovation and entrepreneurship in the country in its report titled “Report 161: Review of the Intellectual Property Rights Regime in India” presented in the Rajya Sabha on  July 23rd, 2021. In particular, it examined the challenges that exist in the current legislative structure including the inventorship rights of an AI.

The Committee acknowledged the relevance and utility of AI-based cutting edge technology and machine learning, particularly in current times, significantly affected by the pandemic, in which digital technology proved to be instrumental in responding to the global crisis. Further, the Committee placed reliance on a report released by Accenture titled “How AI Boosts Industry Profits and Innovation” which estimated AI to inject US $ 957 Billion into the Indian Economy by 2035, if used optimally, to understand further the impact and role of AI and technology in the contemporary landscape and its relationship with Intellectual Property. 

Therefore, the Committee recommended a review of the relevant provisions of the Indian Patents Act, 1970 [Section 3(k)] and the Copyrights Act, 1957 on a priority basis to afford inventorship rights to AI in India. The Report also stated that “The Committee recommends the Department that the approach in linking the mathematical methods or algorithms to a tangible technical device or a practical application should be adopted in India for facilitating their patents as being done in the EU and U.S. Hence, the conversion of mathematical methods and algorithms to a process in this way would make it easier to protect them as patents“. Thereby including algorithms and mathematical processes under the ambit of patent law.

The Committee concluded that the legislative framework amendments would protect the works of an AI (either autonomously or with assistance/inputs from a human), incentivize pioneering inventions and R&D in the country, and maintain an enabling ecosystem for the protection of human intelligence innovations. The Committee maintained that the embargo placed on the inventorship rights of an AI would dissuade significant investments in the sector since such AI induced innovations would not be protected in the country.

Conclusion:  A Way Forward for Inventorship Rights of an AI System 

The decision would have a favourable impact on the holder of an AI. However, commentators have expressed concerns regarding the difficulties that may arise due to the extending of patent protection to AI-generated concepts, such as:

  • Impact on the Copyright law: A result of such a decision may lead the courts to re-examine the subject of AI authorship and regard AI as a creator of AI-generated works, which will open a Pandora’s box of judicial conflicts.[3]
  • It could potentially raise the bar for innovation or fundamentally alter the definition of a ‘person skilled in the art,’ making it more difficult for human innovators to obtain patent protection.
  • Accepting inventorship to include AI systems would elevate AI to the status of a legal person, allowing it to hold and exercise property rights.
  • It raises concerns about who has the right to use or own the AI-created product. As the AI system is not a legal body, it cannot enter into agreements allowing it to transfer its inventorship rights.

The ability of an AI to be an inventor under patent law will be determined by the specific language in each jurisdiction’s patent laws. To explicitly incorporate and recognise AI-generated ideas, legislative changes and amendments may be required in nations where plain statutory wording needs an inventor to be a natural person. In places where the statutory language is less explicit, such as Australia, the courts may have additional freedom to consider purposeful statutory interpretation and policy considerations.[4] We anticipate that all IP offices adopt a unified approach to successfully address the emerging difficulties posed by inventions by AI.

References: 

[1] Section 6, the Patents Act, 1970.

[2] Shri Justice N. Rajagopala Ayyangar, Report on the revision of the patents law, 1989.

[3] Rita Matulionyte, Australian court says that AI can be an inventor: what does it mean for authors? Kluwer Copyright Blog (September 2021).

[4] Lam Rui Rong, Can Artificial Intelligence Be an Inventor Under Patent Law? Australian Federal Court Says ‘Yes’ but U.S. District Judge Says ‘No’, SKRINE (September 2021).

Image Credits: Photo by Gerd Altmann from Pixabay 

The ability of an AI to be an inventor under patent law will be determined by the specific language in each jurisdiction’s patent laws. To explicitly incorporate and recognise AI-generated ideas, legislative changes and amendments may be required in nations where plain statutory wording needs an inventor to be a natural person. In places where the statutory language is less explicit, such as Australia, the courts may have additional freedom to consider purposeful statutory interpretation and policy considerations.

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Voluntary Liquidation Process Under IBC: An Update

The Insolvency and Bankruptcy Code, 2016 read with, the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2020, establish a procedure for the voluntary liquidation of solvent corporate persons.

However, in practice, it can be observed that the majority of voluntary liquidation processes are getting delayed. As per the Discussion Paper released by IBBI, as on December 31st, 2021, 1105 voluntary liquidation processes have been initiated. Of which, the liquidators have submitted final reports to the Adjudicating Authority (AA) in 546 cases only. In other words, more than 50% (i.e., 559 cases) of the voluntary liquidation processes are still ongoing. On closer perusal of the ongoing cases, it is found that 293 cases (around 52%) of them have crossed the one-year time mark. In this background, the Voluntary Liquidation Process (Amendment) Regulations, 2022 have been introduced on April 5th 2022 by the IBBI.

Brief Analysis of the Voluntary Liquidation Process Amendments

The new changes seek to complete the voluntary liquidation process in a quick and efficient manner and ensure that the company does not lose value on its remaining assets since the asset value falls drastically with time. Further, the amendment seeks to clarify the date of the commencement of the liquidation process.  Now, the liquidator shall complete the liquidation process and ensure the submission of final reports within 270 days, 90 days earlier as compared to the statutory time period of 12 months. As per the Discussion Paper released by IBBI, Voluntary Liquidation, being non-adversarial in nature, can be completed in 270 days. Further, the liquidator is directed to distribute the proceeds from realization within 30 days from the receipt of the amount to the stakeholders, as compared to the earlier mandated time period of 6 months.

For the past few years, the government has been promoting several initiatives focusing on “ease of doing business” for corporates. However, it is essential to observe that “ease of doing business” does not only include ensuring a seamless start of a business but also includes a quick and easy structure for the exit.

In this backdrop, in the Union Budget 2022-2023, the Honourable Finance Minister announced that “Now the Centre for Processing Accelerated Corporate Exit (C-PACE) with process re-engineering, will be established to facilitate and speed up the voluntary winding-up of these companies from the currently required 2 years to less than 6 months[1].”

Further, in a Discussion Paper released in February 2022[2], IBBI identified the following problems plaguing the voluntary insolvency process:

  1. It was pointed out that the values of assets fall drastically, and hence a quick and efficient liquidation process is pertinent. However, the Code has failed to stipulate a time limit for such a voluntary liquidation process.
  2. It was also observed that more than 50% of the voluntary liquidation cases had been ongoing as per the data presented to the Board (as of December 31st, 2022). Further, 52% of the ongoing cases had crossed the one-year mark.

The relevant stakeholders also observed that one of the aspects that prolong the voluntary liquidation process is the practise of seeking a ‘No Objection Certificate’ (NOC) or ‘No Dues Certificate’ (NDC) from the Income Tax Department by liquidators during the process, even though the Code and the Voluntary Liquidation Regulations have not mandated the issuance of NOC/NDC. In this regard, the Board issued a Circular in November 2021, clarifying that “an insolvency professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.”[3]

In alignment with the intention of the legislation, the Board has introduced the following amendments to optimize the voluntary insolvency process:

Section 10 (2) (r): Corporate Debtor shall be substituted by Corporate person

The amendment states that the liquidator shall maintain such other registers or books as may be necessary to account for transactions entered by the corporate debtor with the corporate person. This ensures holistic coverage of all financial transactions of the corporate debtor for the purpose of liquidation.

Section 30 (2): timeline for preparation of the list of stakeholders in case where no claims are received is reduced

 

Section 30 (2) requires the liquidator to compile a list of stakeholders within 45 days from the last date for receipt of claims. The amendment inserts the following provision; “Provided that where no claim from creditors has been received till the last date for receipt of claims, the liquidator shall prepare the list of stakeholders within fifteen days from the last date for receipt of claims.”

Previously, no differentiation between the timelines was prescribed in cases where there were no claims from creditors. This timeline was introduced because if no such claims were received till the last date, then it must not take much time for the preparation of a list of stakeholders as the list of shareholders/partners is available with the liquidator at the time of commencement.

Section 35: Timeline for distribution of the proceeds from realization reduced

The amendment reduces the period for distribution of proceeds from realisation to the relevant stakeholders to a period of thirty days from the receipt of the amount, from the earlier mandated six months.

The reason for the reduction of this timeline is that the liquidator remains in close contact with the corporate person and hence should be able to distribute the proceeds quickly.

Further, in cases where there are creditors, since the resolution regarding the commencement of the process is approved by the creditors representing two-thirds of the value of the debt of the corporate person, distribution to the creditors should also take much less time than is currently stipulated.

Section 5(2): Timeline for intimation of appointment as liquidator to the Board enhanced.

5(2) provides that an insolvency professional shall notify the Board about his appointment as liquidator within 3 days of such appointment.  As per the amendment, the regulation has changed the timeline for the intimation from 3 days to 7 days.

Section 37: Timeline to complete the liquidation process reduced.  

The amended provides that if the creditors approve the resolution, the liquidator shall complete the liquidation process and submit the final report to the registrar, board, and adjudicating authority within 270 days from the date of the commencement of the liquidation and within 90 days from the liquidation commencement date in all other cases (where there are no creditors for the company). Previously, the time period for completion of liquidation was one year and no such bifurcation of the time period for completion of liquidation on the basis of the presence or absence of creditors was enumerated. The reason for this reduction in the timeline for completion is that the liquidation estate of the corporate person undergoing the voluntary liquidation process is non-adversarial and also generally straightforward both in terms of the size and heterogeneity of the assets involved. Therefore, the realisation of the assets involved during the voluntary liquidation process takes less time as compared to the liquidation process.

Section 38(3): Final Report and Compliance certificate shall be submitted in Form-H.

Section 38 directs the liquidator to submit the final report to the adjudicating authority along with the application. The amendment has specified Form H for submission of the final report. Such specifications were not provided previously. A compliance certificate provides a summary of actions taken by the liquidator during the voluntary liquidation process. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

Section 39(3): Form H substitutes Form I

As per the amended Rules, Section 39 (3), the stakeholder claiming entitlement to any amount deposited into the Corporate Voluntary Liquidation Account, may apply for an order for withdrawal of the amount to the Board on Form H and not Form I.

Date of Commencement of Liquidation

The amendment clarified that for the corporate person who has creditors representing two-thirds of the debt of the corporate person, the date of liquidation commencement is the date on which such creditors approve the declaration passed for the initiation of the liquidation.

Note: In order to curb delays in liquidation, the Board had recently issued a circular clarifying that an Insolvency Professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.

Conclusion

The amendments effectually fall in line with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived as an initiative in the right direction. The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining a No-Objection Certificate from the Income Tax office) may ensure the early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person. Further, the proposed reduction in the time taken for distribution of proceeds would result in an early distribution to the stakeholders and thereby, promote entrepreneurship and the availability of credit. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

The amendments effectually fall in alignment with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived an initiative in the right direction.  The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining No-Objection Certificate from the Income Tax office) may ensure early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person.

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