Lifting The Corporate Veil – Provisions under the Companies Act, 2013

August 11, 2017

In this article, Ashwini Gehlot of Institute of Law, Nirma University and Anjana Reghunath, University of Kerala, pursuing a Diploma in Business Laws from LawSikho. They discuss Lifting of The Corporate Veil.

Introduction

Incorporation of an organization by registration was presented in 1844 and the precept of limited liability of an organization followed in 1855. In this manner in 1897 in Salomon v. Salomon and Company, the House of Lords influenced these establishments and solidified into English law the twin ideas of limited liability and corporate entity. All things considered, the pinnacle Court set out the rule that an organization is a distinct legitimate person altogether not the same as the members of that organization. This guideline is alluded to as the ‘veil of incorporation’.

The main preferred standpoint of incorporation from which all others follow is the separate entity of the organization. As a general rule, be that as it may, the matter of the legitimate person is constantly carried on by, and for the advantage of, a few people. In a definitive investigation, some individuals are the real beneficiaries of the corporate preferences, “for while, by the fiction of law, an enterprise is an unmistakable distinct entity, yet in all actuality, it is a relationship of people who are in certainty the beneficial proprietors of all the corporate property.

“And what the Salomon case decided is that ‘in questions of property and limit, of acts done and rights gained or, liabilities expected in this manner… the personalities of the natural persons who are the organizations’ corporators are to be overlooked”.

This hypothesis of corporate, entity is, in fact, the essential guideline on which the entire law of corporation is based. The cases are not few in which the Courts have effectively opposed the compulsion to get through the corporate shroud.

However, the hypothesis can’t be pushed as far as possible. “There are circumstances where the Court will lift the veil of incorporation keeping in mind the end goal to analyze the “realities” which lay behind. Now and again this is explicitly approved by statute… and sometimes the Court will lift its own particular volition”.

Dynamic developments in the economy have laid the basis for various benefits in the private sector. Yet this has also led to a substantial increase in the recurrence of criminal activity, insider trading and other illicit actions that have a direct effect on the business world. The identity of the company is distinct from that of its board members, and the corporate personality of the company is often misused by such directors, promoters and other members as a veil to cover when engaged in illegal activities. In such situations, it is important to bring out individuals who are hiding under the veil of corporate personality and keep them accountable for their conduct, and to that end, the corporate veil is lifted. The goal of this article is to discuss various aspects of the concept of lifting of the corporate veil.

Meaning of lifting or piercing of the Corporate Veil

Corporate veil is a legal term which distinguishes a company from its shareholder. According to it the individual members shall not be personally responsible for the debts and obligations of the company. However, they began to abuse it as a mask for fraud and unethical conduct. It is therefore necessary for the courts to break through the corporate shell and look behind the corporate body as if there is no independent existence of the organization from its members.

Thus where a fraudulent use is made of the business entity, the individuals concerned will not be allowed to be protected under its corporate personality. Furthermore, if found guilty of any wrongdoing, members can be held responsible for the acts of the company, including any unpaid debts. This is termed as the lifting of the corporate veil.

There are two principles on lifting of corporate veil namely the “alter-ego” theory and “instrumentality” theory. The alter ego theory takes into account whether the boundaries between the company and its shareholders are distinctive in nature. On the other hand, the theory of instrumentality explores the use of a business by its owners in ways that favour the owner instead of the company. It is up to the court to determine which principle to enforce or merge the two doctrines with one another.

The human resourcefulness, however, began utilizing the veil of corporate personality explicitly as a shroud for misrepresentation or despicable direct. In this way, it ended up noticeably important for the Courts to get through or lift the corporate veil and take a gander at the people behind the organization who are the real beneficiaries of the corporate fiction.

The lifting of the corporate veil implies neglecting the corporate personality and looking for the genuine individual who is in the control of the organization. At the end of the day, where a false and deceptive utilize is made of the legitimate entity, the people concerned won’t be permitted to take shield behind the corporate personality. In this respects, the court will get through the corporate shell and apply the guideline of what is known as “lifting or piercing the corporate veil.” And while by the fiction of law an organization is an unmistakable element, yet truly it is an association of people who are in reality the beneficial proprietors of all the corporate property. In United States V. Milwaukee Refrigerator Co., the position was summed up as follows:

“An organization will be looked upon as a lawful entity as a general rule…… however when the idea of the legitimate element is utilized to vanquish public convenience, defend crime or protect fraud, justify wrong, the law will view the enterprise as a relationship of people.”

In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, it was observed that:

“\The regulation set down in Salomon v. Salomon and Salomon Co.Ltd must deliberately be observed. It has frequently should cast a veil over the personality of a limited liability organization through which the Courts can’t see. In any case, that is not valid. The Courts can and generally it does draw aside the veil. They can and often do, pull off the cover. They hope to perceive what truly lies behind”.

Separate Legal Entity

Section 9 of the Companies Act, 2013 provides that a company enjoys a separate identity from its shareholders. A firm’s corporate legal existence requires it to function like a legal individual. It specifies that it is independent from the identity of owners, directors, promoters, etc. In simpler terms, the definition of a separate legal entity means that the responsibility of a member is limited to the liability sustained by the company’s actions. This is also known as the principle of limited liability or the limited liability doctrine. In addition, under normal circumstances, the responsibility of a shareholder is limited to its outstanding shares and cannot be held liable for the company’s actions. The Doctrine of lifting of corporate veil is an exception to the principle of limited liability or separate legal entity.

History

The doctrine of lifting of corporate veil was established in the case of Salomon V. Salomon in 1897. It has been pursued since then, but the way the Doctrine of Corporate Veil is implemented has taken various approaches over the years.

In this case , Mr. Solomon was involved in the shoe and boot manufacturing industry. ‘The Salomon & Co. Ltd. ‘was incorporated by Solomon with seven subscribers, including himself, his wife, his daughter, and four sons. All of the shareholders owned shares of UK Pound 1 each. The company acquired the business of Salomon for 39000 pounds, the purchase consideration was charged in respect of 10000 pounds of debits conferring a fee on the assets of the company, 20,000 pounds in a completely paid share of 1 pound each and the balance in cash. The company had experienced problems in less than one year and liquidation proceedings had begun. The assets of the company were not even sufficient to discharge the debts (entirely held by Salomon) and nothing was left to the insured creditors. The House of Lords unanimously held that the company had been validly constituted, because the Act allowed only seven members to hold at least one share each and that Solomon was distinct from Solomon & Co. Ltd.

Doctrine of lifting of corporate veil has been pursued since then, but the way the Doctrine of Corporate Veil is implemented has taken various approaches over the years. It was called the era of early experimentation from 1897 to 1966, in which the courts experimented with various approaches to the doctrine. The various approaches were attempted to bear in mind the decision of the House of Lords in the case of Salomon. From 1966 to 1989, in Salomon’s case, the laws of the House of Lords were updated and the raising of the veil was encouraged. In Littlewoods Mailstores v IRC, Lord Denning stated that the principle laid down in the case of Salomon must be watched very carefully. It was also meant to throw a curtain over a limited company’s identity through which the courts would not see, but that is not valid. The courts can, and sometimes do, take the mask off. From 1989 to the present day, the Doctrine of the Lift of the Corporate Veil began to be disliked by the courts. The classic case that began the trend of disapproving the doctrine is Woolfsan v. Strathclyde Regional Council, in which Lord Keith argued that the only condition where a corporate veil could be lifted was when exceptional circumstances exist suggesting that the company is only a disguise to cover the true facts.

Judicial provisions or grounds for lifting The Corporate Veil

Fraud Or Improper Conduct

The Courts have been more than arranged to pierce the corporate veil when it feels that fraud is or could be executed behind the veil. The Courts won’t enable the Salomon standard to be utilized as an engine of fraud. The two great instances of the fraud exception are Gilford Motor Company Ltd v. Horne and Jones v. Lipman. In the main case, Mr. Horne was an ex-worker of The Gilford engine organization and his business contract gave that he couldn’t solicit the clients of the organization. With a specific end goal to crush this, he incorporated a limited organization in his better half’s name and solicited the clients of the organization. The organization brought an action against him. The Court of appeal was of the view that “the organization was shaped as a gadget, a stratagem, keeping in mind the end goal to veil the viable carrying on of the business of Mr. Horne” for this situation obviously the primary reason for incorporating the new organization was to execute fraud. Along these lines, the Court of appeal viewed it as a negligible sham to shroud his wrongdoings.

In the second instance of Jones v. Lipman, a man contracted to offer his territory and after that point altered his opinion with a specific end goal to keep away from an order of specific performance, he transferred his property to an organization. The court, in this case, held that the organization here was “a veil which (Mr. Lipman) holds before his face trying to maintain a strategic distance from acknowledgment by the eye of equity” Therefore the court ordered for specific performance both against Mr.Lipman and the organization.

For Benefit Of Revenue

“The Court has the ability to ignore corporate substance in the event that it is utilized for tax evasion or to dodge tax commitments. A reasonable outline is Dinshaw Maneckjee Petit, Re;

The assessee was a rich man enjoying gigantic profit and interest income. He formed four privately owned businesses and concurred with each to hold a piece of speculation as an operator for it. Income received was credited in the accounts of the organization however the organization gave back the sum to him as a pretended loan. Along these lines, he separated his income into four sections in an offer to lessen his tax liability.

It was held that “the organization was formed by the assessee absolutely and basically as a method for maintaining a strategic distance from super tax and the organization was just the assessee himself. It did no business, yet was made basically as a legitimate entity to apparently get the profits and interests and to hand them over to the assessee as pretended loans”.

Enemy Character

An organization may expect a foe character when people in true control of its affairs are occupants in an enemy nation. In such a case, the Court may analyze the character of people in genuine control of the organization, and announce the organization to be an adversary organization. In Daimler Co.Ltd V. Mainland Tire And Rubber Co.Ltd, An organization was incorporated in England with the end goal of selling in England, tires made in Germany by a German organization which held the majority of shares in the English organization. The holders of the rest of the shares, aside from one, and every one of the chiefs was Germans, living in Germany. Amid the First World War, the English organization commenced an action for the recuperation of a trade debt. Held, the organization was an outsider organization and the payment of debt to it would add up to trading with the foe, and in this manner, the organization was not permitted to continue with the activity.

Where The Company Is A Sham

The Courts additionally lift the veil where an organization is a minor cloak or sham (lie).

Company Avoiding Legal Obligations

Where the utilization of an incorporated organization is being made to maintain a strategic distance from legitimate commitments, the Court may dismiss the lawful personality of the organization and continue on the presumption as though no organization existed.

Single Economic Entity

Now and again on account of the meeting of endeavors, the Salomon principle may not be clung to and the Court may lift the veil to take a gander at the financial realities of the group itself. On account of D.H.N.food items Ltd. V. Tower Hamlets, it has been said that the Courts may neglect Salomon’s case at whatever point it is just and impartial to do so. In the previously mentioned case, the Court of claim suspected that the present case was one which was appropriate for lifting the corporate veil. Here the three auxiliary organizations were dealt with as a part of the same financial entity or group and were qualified to pay compensation.

Agency Or Trust

Where an organization is going about as agent for its investor, the investors will be obligated for the acts of the organization. It is an issue of facts for each situation whether the organization is going about as an agent for its investors. There might be an Express consent to this impact or an agreement might be suggested from the conditions of every specific case. In the case of F.G.Films ltd, An American organization financed the creation of a film in India in the name of a British organization. The leader of the American organization held 90% of the capital of the British organization. The Board of exchange of Great Britain declined to register the film as a British film. Held, the decision was substantial in perspective of the way that British organization acted only as the nominee of the American Company.

Avoidance Of Welfare Legislation

Avoidance of welfare enactment is as normal as avoidance of tax collection and the approach of the Courts in considering issues emerging out of such evasion is, for the most part, the same as avoidance of tax assessment. It is the obligation of the Courts for each situation where ingenuity is used to maintain a strategic distance from welfare enactment to get behind the smoke screen and find the genuine state of affairs.

Public Interest

The Courts may lift the veil to ensure open strategy and prevent exchanges in opposition to public policy. The Courts will depend on this ground while lifting the veil is the most “just” result, however, there is no particular justification for lifting the veil. Consequently, where there is a contention with public policy, the Courts disregard the form and consider the substance.

Tax Evasion

The Court has the right to ignore a corporate body if it is used for tax evasion or the avoidance of tax obligations. If the company was founded by the assesse solely and simply as a means of escaping a super-tax and the company was nothing more than the assesse himself. It did not do business, but was merely created as a legal entity to obviously collect dividends and interest and hand them over to the assesse as planned loans.

Statutory Provisions For Lifting The Corporate Veil

Reduction Of Number Of Members

Under Section 45 of The Indian Companies Act, 1956, if an organization carries on business for over a half year after the number of its members has been diminished to seven if there should arise an occurrence of a public company and two in the event of a privately owned business, each individual who knows this fact and is a member during the time that the organization so carries on business after the half year, becomes liable severally and jointly with the organization for the payment of debts contracted following a half year. It is just that part who stays after a half year who can be sued.

Fraudulent Trading

Under Section 542 of The Indian Companies Act, 1956, if any business of an organization is gone ahead with the aim to defraud creditors of the organization or creditors of some other individual or for any deceitful reason, who was intentionally a party to the carrying on of the business in that way is subject to imprisonment or fine or both. This applies regardless of whether the organization has been or is in course of being twisted up. This was upheld in Delhi Development Authority v. Captain Constructions Co. Ltd. (1997).

Misdescription Of The Company

Section 147(4) of The Indian Companies Act, 1956, gives that if any officer of the organization or other individual acting on its benefit signs or approves/authorized to be signed by the organization any promissory note, bill of exchange, order or cheque for money or goods, endorsement in which the organization’s name is not specified in readable letters, he is obligated to fine and he is personally liable to the holder of the instrument unless the organization has effectively paid the sum.

Failure To Refund Application Money

As indicated by Section 69(5) of The Indian Companies Act, 1956, the executives of an organization are mutually and severally at risk to reimburse the application cash with premium if the organization neglects to refund the cash within 130 days of the date of issue of the prospectus.

Holding and Subsidiary Companies

In the eyes of law, the holding organization and its subsidiaries are separate legitimate entities.

However, in the accompanying two cases, the subsidiary may lose its different entity-

Where toward the end of its monetary year, the organization has subsidiaries, it must lay before its members in meeting not only its own particular accounts but also append therewith yearly accounts of each of its auxiliaries along with copy of the board’s and examiner’s report and a statement of the holding organization’s interest in the subsidiary.
The Court may, on the facts of a case, regard a subsidiary as simply a branch or division of one expensive endeavor claimed by the holding organization.

Furnishing false statements

Under Section 448 of the Act, if, in any return, report, certificate, financial declaration, prospectus, statement or other document necessary, any person makes false or wrong statements or conceals any relevant or material evidence, that person is liable under Section 447 of the Act.

Repeated Offence

Pursuant to Section 449 of the Act, if a company or an officer of a company commits an offense punishable by a fine or imprisonment and that offense is committed again within a period of three years, the company and the officer shall pay twice the penalty for that offence, in addition to any imprisonment for that offence.

Recent Developments

In India with the recent development of the Companies Act 2013, the Ministry of Corporate Affairs has amended the Companies (Significant Beneficial Owners) Rules, 2018 for companies. The Companies (Significant Beneficial Owners) Amendments Rules, 2019 are introduced in February 8th, 2019 in order to create a more reformed and unmistakable regulatory structure, making it easier for corporations to have their headquarters outside the country. The rules are simple, specific and “all forms of control” that may be exercised in the affairs of a corporation are recorded.

In addition to clearly categorizing whether an individual or an organization has substantial beneficial ownership, the revised rules also make it necessary for businesses to provide the Ministry with more comprehensive descriptions and information on the entity.

In addition, the amendment will be beneficial in eliminating the principle of proportional calculation and seeking to remove the corporate veil. Changes are put in place to identify and eradicate illicit fund flows on behalf of corporate entities and to identify and have the authority to govern entities controlled from somewhere else by either companies or individuals who are not on the radar. Lately, the Ministry has deregistered companies for not operating the business for a significant period of time.

Conclusion

The doctrine of piercing the corporate veil is not subject to any specific rule; it is usually based on the facts and circumstances of each matter. All matters are decided by taking into account the gravity of the issues involved in the matter.

In this manner, it is bounteously certain that incorporation does not cut off individual liability consistently and in all conditions. “Honest enterprise, by methods for organizations, is permitted; however people, in general, are ensured against kitting and humbuggery”. The holiness of a different entity is maintained just in so far as the entity is consonant with the fundamental approaches which give it life.

Along these lines, the individuals who enjoy the advantages of the machinery of incorporation need to guarantee a capital structure satisfactory to the size of the enterprise. They should not pull back the corporate assets or blend their own individual accounts with those of the corporation. The Courts have now and again seized upon these realities as evidence to legitimize the burden of liability upon the investors.

The demonstration of piercing the corporate veil up to this point says a standout amongst the most disputable subjects in corporate law. There are categories, for example, agency, fraud, facade or sham, group enterprises, and unfairness, which are accepted to be the most curious premise under which the Law Courts would pierce the corporate veil. However, these categories are simple rules and in no way, means far from exhaustive.

References

Lawteacher.net. (n.d.). Lifting Of The Corporate Veil | Law Teacher. [online] Available at: https://www.lawteacher.net/free-law-essays/business-law/article-on-lifting-of-the-law-essays.php [Accessed 3 Aug. 2017].

Majithia, V. and Rajora, Y. (2015). Lifting Of Corporate Veil – Academike (ISSN: 2349-9796). [online] Academike (ISSN: 2349-9796). Available at: https://www.lawctopus.com/academike/corporate-veil-2/ [Accessed 3 Aug. 2017].

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All you need to know about Apprentices Act 1961

Anubhav Pandey

August 11, 2017

In this article, Shant Kumar Kurbur pursuing M.A, in Business Law from NUJS, Kolkata discusses all you need to know about Apprentices Act 1961.

Introduction

The National Apprenticeship Act was launched in the year 1959 at first on voluntary cause. The Apprentices Act 1961 was presented in the Parliament during 1961 and came into effect from 1st January 1963. The act was eventually amended in 1973 and 1986. In the starting, the Act was meant for the training of trade apprentices.

The onus of administering the Apprentices Act, 1961 in relation to Trade Apprentices under Central Government and Departments lies with the Central Apprenticeship Adviser/Director of Apprenticeship Training in the DGE&T, Ministry of Labour and Employment with the help of six Regional Directorates of Apprenticeship Training (RDATs).

Primary Objective of the Act

The main objective of the Apprentices Act, 1961 is to meet the rising need for proficient craftsman. Giving experimental training to the people who’re specialized in their crafts is the primary aim of the Apprentice Act. Candidates holding Diploma and Engineering Graduates can likewise benefit from this plan. As per the announcement of Central Government any industry or any area the provisions of the act are applicable. It is assumed by means of the Government, to use, the infrastructure, space and provisions to be had for instruction of apprentices and to ensure that their preparation is concurring with a ponder program. With the progressive advancement of industries, different question initiated to manifest between the businesses and the students and to recoup from them. This Act should control and screen the preparation of students in exchanges and issues related with them.

The act envisages clarifying the connection between the various employers and apprentices. The apprentices aren’t dealt with as employees. This Act endeavours to make provisions for the health, protection, welfare and many others for the apprentices. It additionally includes provisions for settling disputes bobbing up out of the agreement between the employers and the apprentices.

Scheme of the Act

There are 38 Sections in generally and Schedule. This Schedule is in regards to the adjustments in the Workmen’s Compensation Act, 1923 with reference to its application to students under the Apprentices Act, 1961.

Who are Apprentices

An apprentice is someone who takes training in some company to master the competencies and crafts of a specific craft. The Apprenticeship Act explains apprentices to be the ones who receive apprenticeship or practical training under an apprenticeship scheme for a specified duration. The main requisites for a person to receive an apprentice training are that he/she should have attained an age of 14 years and for the trades where safety issues are concerned to the apprentice should have attained 18 years. Other than the above-prescribed qualification, extra qualifications may be prescribed for special trades and special categories of apprentices.

The phrases and conditions of an apprenticeship are mandated with the aid of an apprenticeship agreement. The agreement is entered into among a business enterprise and an apprentice. In case, an apprentice hired is a minor, his/her mother or father could enter right into a settlement with the company.

The terms and conditions which are mentioned in the agreement/contract should be mutually agreed to with the help of the parties for settlement. In any case, those phrases and conditions can’t be detracted under this Act or be varying with the provisions of this Act.

Applicability

As per the Apprentice Act 1961, for the industries and trades which were informed by the Central Government in the Official Gazette, the act is applicable. The date of application may follow those particular circulars. Almost all the industries fall under the purview of the act. The Apprentice Act moreover may not be applicable to the special Apprenticeship programs of the government unless and until informed by the Central Government in the Official Gazette. For clearing the doubts, this act applies to those categories of apprenticeship where the practical education is necessary to the trade. ‘Internships’ are not covered under this act.

What is the Duration of Apprenticeship Training

The duration of apprenticeship training, which shall be clearly mentioned in the agreement of apprenticeship, will be as follows:-

The apprentices related to any trade who, having gone through institutional schooling in a school or any institution-affiliated by the National Council, have cleared the trade exam or any examinations conducted that particular Council or by means of any institute affiliated with that particular Council, the period of apprenticeship training will be which include can be determined via that Council or via an group recognized through that Council.
In an event any apprentices who have received training through any institute or school or college or other group affiliated to or recognized by using a Board or State Council of Technical Education or every other authority which the Central Government may via notification in the Official Gazette specify in this behalf, have cleared the trade exams or tests organized by that Board or State Council or authority, the period of apprenticeship education shall be along with can be prescribed.
In an event of other apprentices, the length of apprenticeship training will be along with may be prescribed.
The period/duration of the apprenticeship training shall be all inclusive and may be prescribed for graduate engineer trainee or technician apprentices or any vocational apprentices.
Duration of the training period and the ratio of apprentices to skilled employees for distinctive trades have been prescribed in Apprenticeship Rules, 1991. Duration of Apprenticeship may be from six months to four years depending on the alternate, as prescribed in Rules. Period of training is decided via National Council for Education in Vocational Trades (hooked up through Government of India).

What are the Duties of an Apprentice

An apprentice must master the selected trade with utmost attentiveness and awareness. He ought to strive exceptionally to qualify himself as a skilled person in the related trade for the period of apprenticeship.
He has to attend all the practical and instructional sessions given by the employer or someone particular on his behalf on a normal basis.
An apprentice must obey all lawful orders of the employer and other superiors in the organization.
An apprentice should work for duration as specified by the employer which might be subject matter to the prescribed period of the training period.
He should carry out all of the responsibilities which are mentioned in the apprenticeship agreement.
The apprentice’s behaviour and the knowledge or skills will be assessed with the help of the person who set the guidelines and regulations that practice to corresponding employees in an establishment.

What are the Responsibilities of an Employer

An employing company is obligated to deliver a duplicate of every apprenticeship agreement that he enters into within 30 days from the date of entering to the Apprenticeship marketing consultant. Once a portal internet site is made with the aid of the imperative government for this reason, then the business enterprise would possibly send the info of contracts within seven days from the date of entering.
He shall reserve training locations for apprentices who belong to Scheduled Castes, Scheduled Tribes, and other backwards categories. The size of places reserved for these classes must as per the provisions prescribed by the government, keeping in mind the population of every category in the country.
The apprentices ought to be furnished with sufficient training in lines with the provisions of the act and also by means of the terms of the apprenticeship agreement. For this purpose, an enterprise must make good enough preparations for the cause of providing practical schooling.
Good enough Instructors should be appointed for the purpose of training if the employer is not in a position of training the apprentices himself. The team of workers so appointed ought to have prescribed qualifications for the purpose of training the apprentice practically and theoretically to ease the trade test of the apprentices.
The organization might be liable to compensate for any non-public accidents that an apprentice may suffer during the duration of apprenticeship. The compensation should paid as per the provisions of the Workmen’s Act 1923 as applicable.
The organisation is obligated to pay the prescribed minimum wages to every apprentice or the prescribed minimum wages
The provisions of the Manufacturing Unit’s Act, 1948 and Mines Act, 1952 shall apply to apprentices running in factories and mines, respectively, insofar because the matters relating to fitness, safety and welfare of the apprentices is concerned.
An employer cannot compel apprentice to work overtime until and unless he has a due permission from the concerned Apprenticeship Advisor, who shall not permit until he is contented that an apprentice should work time beyond the prescribed time in his own interest or public interest.
An apprentice must be allowed by the organisation to take leaves or vacations weekly as per the company’s policy.

Contract with Apprentice

Apprentice appointed has to execute a contract of apprenticeship with the employer. The agreement must be registered with Apprenticeship Adviser. If an apprentice is minor, an agreement has to be signed via his father or mother. Apprentice is eligible for a Casual leave of 12 days, Medical Leave of 15 days and other leaves of 10 days in 12 months.

Legal Role of Apprentices

An apprentice is not a workman throughout the apprentice training program. Statutory benefits like Bonus, PF, ESI Act, Gratuity, Industrial Disputes Act and so forth aren’t applicable to the apprentice trainee.
However, provisions of Factories Act concerning fitness, safety and welfare are applicable to the trainee. Apprentice is also entitled to get compensation from the employer for any kind of injuries happens during the period of employment.
An employer is not obliged to employ the apprentice after of completion of apprenticeship.

Settlement of Disputes

Any argument or dispute which could rise under the apprenticeship agreement shall be raised to the Apprenticeship Advisor for resolution.

If any party to the apprenticeship agreement isn’t pleased with the decision of the Apprenticeship Advisor, then it is can approach the Apprenticeship Council which shall employ a Committee for the purpose of listening to the plead of the parties for resolving the issue. The decision made by the council would be deemed as final.

Novation of the Contract of Apprenticeship

In case an enterprise with whom the contract of apprenticeship has been signed, is not able to keep its promise under the agreement and with Apprenticeship Advisor’s consent it is accepted by the apprentice, company and apprentice’s guardian and any other company that the candidate shall be appointed as apprentice under the company for the portion of apprenticeship which is not expired. The agreement after registration with Apprenticeship Advisor, shall be considered as the contract apprenticeship among the apprentice or his/her guardian and any other company, and at the time of registration, the agreement with the previous employer shall be dissolved or terminated and no responsibility under the agreement or contract shall be applicable at the instance of any party to the agreement or contract opposite the other party thereto.

Conducting the Test and Grant of Certificate and Conclusion of Training

After successful completion of the apprenticeship training, every apprentice shall appear for an exam held by the National Council to evaluate his/her capabilities in related trade in which he/she has taken an apprenticeship training.

As per the sub-section (1), every apprentice who clears the apprentice test shall be awarded a certificate of skillfulness in the trade by the National Council.
The employer will evaluate the development of every Graduate or Technician apprentice, or Vocational apprentice periodically.
After successful completion of the apprenticeship training, each graduate or technician apprentice or Vocational Apprentice will be awarded a proficiency certificate by the regional board.

On successful completion of the apprenticeship training, the apprentice shall serve the employer despite whatever mentioned in sub-section (1), where there is a clause in the contract/ agreement. The employer is responsible for offering a suitable job to the apprentice and the apprentice is bound to work for the employer in that ability for that duration and on the remuneration which is specified in the agreement/contract. The Apprenticeship Advisor should find the remuneration and duration reasonable; If not reasonable he may revise the duration and remuneration. The revised duration and remuneration shall be assumed to be the duration or remuneration accepted by both the employer and the apprentice.

What is the Commencement Date of Apprenticeship Training

The date on which the apprenticeship contract/agreement is executed is considered as the date of start of apprenticeship training program.

Registration

The employer should send a copy of the apprenticeship contract to the apprenticeship advisor for registration within three months from the date of its execution.
The employer should get the contract registered by the concerned Apprenticeship Advisor. The apprenticeship advisor approves the contract once satisfied that the described apprentice candidate is well qualified as per the act.

Termination of Contract

On completion of the duration of the apprenticeship training, the contract shall be terminated. The employer or The Apprentice can send the application for the termination of the contact to the concerned Apprenticeship Advisor and afterwards, can send a copy of the application to the other party.

On completion of the period of apprenticeship training, the contract/agreement of apprenticeship training shall terminate. Either party can apply for the termination of the contract to the concerned Apprenticeship Adviser and thereafter send a copy of the same to the other party. The Apprentice Advisor once satisfied that both employer and apprentice have failed to abide by the terms and conditions of the contract and it is desired by both the parties to terminate the contract, will register the same. Nevertheless, the employer shall pay the stipulated amount of compensation to the apprentice if the employer breaches the contract. In case the contract is the apprentice breaches the contract, he or his guardian shall refund the cost incurred on the training to the employer.

Common Misuses of Apprentice Act

Some employers are engaging the apprentices who are not qualified enough for hiring and also failing to execute the terms and conditions of a contract/agreement of apprenticeship or breach the provisions of the Act regarding the number of apprentices which he is supposed to hire as per the provisions of the act.
The Employer is supposed to make appropriate arrangements in his workshop for offering the practical training to the apprentice in compliance with the apprentice act. Most of the employers do not adhere to it. They do not obtain permission from central and state Apprenticeship Advisor.
Sometimes apprentice is not allowed by the employer to learn the work related to their trade, which is mandatory as per the Section 10 of Apprentice Act, 1961. The employers may not treat the time spent by the apprentice in attending such kind of workshops as part of their paid period of work.
Most of the employers are not paying the stipend to the apprentice as per the Rule 11 of the Apprenticeship Rules, 1991.
The employers are violating the provisions of the act and are not paying the stipend for the month before the 10th day of the following month.
If an apprentice takes a casual leave or medical leave, some of the employers are deducting from the stipend, which is against the act.
Some companies are engaging the apprentices to work in night shifts between 10 p.m. to 6 a.m. without the permission of the Apprenticeship Adviser.
In some cases, the total number of hours per week is more than the prescribed hours i.e. 42 to 48 hours.
The employer may not allow the apprentices to take any leaves.
The employers are not allowing the apprentice any holidays which are followed in the establishment.
During apprenticeship training, if any apprentice meets with any accident or personal injury, the employer is responsible for paying the compensation to the apprentice as per the provisions of the Workmen’s Compensation Act.
An employer may not be concerned about health, safety and welfare of an apprentice as per the provisions of the Factories Act.
The employer may appoint an apprentice on any work which is not related or connected with the training of the apprentice.
The employer may not extend his cooperation to the concerned authority for visiting, inspecting, examining or inquiring.
The employer may pay to an apprentice on hourly work rate basis, which is in the provision of the act.
The employer may not encourage an apprentice to participate in any schemes like output bonus or incentive schemes.
The employer may not allow the Central Apprenticeship Advisor to enter the organization to check whether the training rendered to the apprentices is an approved program.
Some employers are employing apprentices who are untrained and not taken any training in any institute or school which is recognised or affiliated by the National Council or state council or any recognised board.
As per Section 3(A), employers aren’t reserving a training site for SC and ST apprentices for every assigned trade, training.

Amendment to the Apprentices Act – Significant Changes

To make sure that the Apprentice Act is implemented effectively, some changes were also made by the Apprentices (Amendment) Act, 2014 and it came into effect on 22 December 2014.
Below given are some of the main modifications which are brought about by the Amendment.
To include agency workers and contractual workers the definition of ‘worker’ has been widened. That is applicable because the number of employees in a status quo is one of the constituents which might be considered even as determining the number of apprentices to be appointed within the company.
The amendment to the apprentice Act has paved the way for the transformation of conventional methods of records to electronic records and information systems by launching a portal. The portal would allow certain activities like registering the apprenticeship contract, maintenance of records and filing the returns etc., which can be done online now.

Due to the amendment in the apprentice act, there is a change in the procedure of checking the strength of apprentices to be employed.
If anyone violates the Apprentice Act imprisonment is no more a penalty. Following the amendment, if anyone is not abiding the provisions of the Act payment of a fine is the only punishment.
The main objective behind these changes seems to make sure that employers employ more and more apprentices, and to encourage the organizations abide by the provisions of the Apprentices Act.

Why Should Employers Encourage Apprenticeship

By participating in apprenticeship schemes the organization or employer are getting skilled and trained employees, which serves as an investment in coming times. Employer’s participation in apprenticeship programs aids the organization in attracting top talent. The employer can hire competent and well-qualified employees, who are capable enough of progressing to more responsible and challenging positions. By participating in apprenticeship programs the employer can make sure that the training standards are met and are revamped. The cost incurred on training is also minimized and employee turnover also lessened.

Conclusion

The Apprenticeship Act helps in settlement of disputes between the employer and apprentice and the Apprenticeship Advisor is the judging authority. They should make an appeal before the committee formed by the council. The employer will be penalised if he is not abiding with the provision of the act. To protect the rights of the employer and safeguard the rights of apprentice the Apprentice Act, 1961 can be treated as an extensive law. The Apprentice act can be executed to safeguard the rights of the apprentice and succeed over the problems faced by the apprentice throughout the training period.

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References

www.dget.nic.in
itigurgaon.co.in
http://mhrd.gov.in/sites/upload_files/mhrd/files/upload_document/ApprenticeAct1961.
http://www.prsindia.org
https://www.slideshare.net/sushmitabelekar3/the-apprentices-act-1961
pdfwww.talimrojgar.gujarat.gov.in
http://www.indiacode.nic.in/acts2014/29_of_2014.pdf
http://www.apprenticeship.gov.in/
http://lawyerslaw.org/the-apprentice-act-1961/
http://www.mottaassociates.com/apprentices-act
http://www.yourarticlelibrary.com/business-management/what-was-the-primary-objective-of-apprentice-act-1961/257

Real Estate (Regulation and Development) General Rules, 2016

Anubhav Pandey

August 11, 2017

Real Estate (Regulation and Development) General Rules, 2016

In this article, Siddharth Kottiath pursuing M.A, in Business Law from NUJS, Kolkata discusses Real Estate (Regulation and Development) General Rules, 2016.

Shelter, food and clothing are one of the basic needs of human society. The need of shelter has been prevalent since the evolution of mankind who previously used to take shelter in caves and as society evolved different types of shelter were explored. The right of housing is one of the most basic rights which every human being should be administered with.

Even in the age of supercomputers, people die a painful death because of lack of infrastructure for housing, people are forced to sleep on the streets, die of cold, hygiene and other road accidents. It is one of the most important human rights which should be given utmost importance by almost every government.

“The first important document that codified the right to adequate housing is the Universal Declaration of Human Rights (UDHR) adopted by the UN General Assembly in 1948. Article 25 (1) states Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.“

Owning a house has its own sets of freedom some being, the security from being evicted, a property which has a face as well as a resaleable value, right to privacy and well being. Conflicts like war and riots have played a major role in displacing millions of human beings from their abode since decades. Inspite of having a place to stay people are forced to leave their houses in war stricken places and have to lead a dreadful life as refugees. Immigration also changes the entire demographics of a host country.

Natural disasters like the tsunami in India, also displaced a number of people in places like the Andaman and Nicobar island of Kamota, etc. The Indian government had taken initiatives in building shelters for the people who had been displaced during the natural calamity. Displacement of any kind needs to be counter effected by fulfilling the conditions of placing the displaced people properly. It is also pertinent to note that such facilities of housing should be made available to all the strata of the society irrespective of any gender bar or any other hurdles of caste, creed and colour.

Regardless the cause of such action, this is a major cause of infringing the basic human right of peaceful settlement. Though there is no obligation on the Government of countries to provide access to such settlement to each and every citizen of the country, government are endeavouring in providing assistance to citizens to build their own houses. In India, the right to housing, though not discussed directly has found a source in Article 21 of the Indian Constitution. There are matter of concerns which should be exercised while displacing indigenous tribes from their natural habitat, if there are events of development and industrialisation in interest of the State.

There are many programmes in India which have cropped up for providing shelter to the needy, to name a few

Bharat Nirman Programme
National Urban Housing & Habitat Policy
Jawaharlal Nehru National Urban Renewal Mission

Human settlements have evolved down the years. Previously families used to stay in joint families in one house, with the advent of nuclear families people have started to move into private flats or individual houses. The changing economic scenario has also added to the scope of investments in the form of real estate. Real estate can be defined as the land and anything which is permanently attached to it.

In India, the real estate sector has been into a roller coaster ride with its share of ups and down. This sector witnessed growth with the liberalization of the economy. The rising economic changes have led to such growth.

The real estate sector can be broadly divided into the following sections – retail, hospitality, housing and commercial. It is one of the most influential sector responsible in propelling the economic capabilities of the country. The housing arena has witnessed a steady growth while the commercial sectors have seen additional growth in terms of office spaces, wherein many Multinational companies and other domestic companies have been spreading their wings in the growing Indian economy. Banking policies have also played a major role in boosting the sector, lower interest in home loans, have aided in the growth of the demand of first time home buyers.

Inspite of the boom, there have been instances wherein the consumers of this sector have faced harrowing experiences. One of the most articulate problems faced by the consumer is the delay in projects, these can be due to manifold issues like land clearance, financing issues and problems created by the builders.

Though the builders are not always on fault, they have their own set of problems which they have to regulate. Red tapism in the government, lack of approvals from the government departments, land acquisition problems, high rate of taxation, labour problems, material costs, syndicate problems, environmental issues are amongst a few. The main reason for such problems is that this industry was mostly unregulated and it was uncharted territory on which initiatives and actions were being taken.

This sector has the potential to attract a lot of Foreign Direct Investments, but there needs to be a symbiotic relation with the investors and the government. Transparency in the process, improved financing can lead to build low cost projects for the masses.

To counter these problems, The Real Estate (Regulation and Development) Bill, 2013 was introduced principally to regulate the real estate sector so as to protect the interests of the consumers and buyers and to provide a forum for grievance redressal. The Real Estate (Regulation and Development) Act, 2016, has been passed with the intent to bring transparency and safety in the market for consumers of residential and commercial projects by introducing a sectoral regulatory mechanism. It received the assent of the President on 25th March, 2016.

The Act has been notified and sections relating to Definition, Constitution and Powers of RERA, Constitution of Central Advisory Council, Appellate Authority, Appointment of Judicial Officers for calculating Compensation, Finance Accounts & Audit of RERA and other Miscellaneous Provisions relating to the formation of the Authority have come into force from 1st May, 2016 and all the States have been advised to form Rules under the Act by 31st October 2016 and establish Authorities by 30th April, 2017.

The Act contains several provisions to address the lacunae in the real estate market, essentially by way of establishing a disclosure framework and setting strict liabilities for promoter irregularities. Under the new RERA Act, Projects cannot be advertised, marketed, booked or sold in any form by any Promoter prior to registration and obtaining the necessary construction approvals. The Act provides that it is applicable to all ongoing projects where the completion certificate has not yet been obtained, thereby making it is partly retrospective in effect. The promoter of such projects shall make an application to the Authority for registration of the project within a period of three months from the date of establishment of the Authority, as per the relevant provisions of the Act.

The Authority may, direct the promoter of projects which are developed beyond the planning area but with the requisite permission of the local authority, to register such project with the Authority.

The Act requires mandatory registration of real estate projects with the RERA where the total area of land proposed to be developed exceeds 500 sq. mts. or where more than eight apartments (inclusive of all phases) are proposed to be developed. However, the Appropriate government may reduce this threshold limit.

The registration is not required for projects which has already received completion certificate prior to the commencement of the Act. Also, it is not obligatory for the purpose of renovation or repair or re-development which does not involve marketing, advertising, selling, or new allotment of any apartment, plot or building.

The promoter shall file an application for registration of the project in such form and manner as may be prescribed. Documents to be enclosed with the application are – a brief detail of the Promoter’s enterprise, a brief detail of the projects launched by him in the past five years, whether already completed or being developed, including current status of the said projects, any delay in completion, details of cases pending, details of type of land and payments pending, authenticated copy of the approvals and commencement certificate from the competent authorities as may be applicable for the projects mentioned hereinabove.

The plan of development works to be carried out in the proposed project and the proposed facilities to be provided thereof including fire fighting facilities, drinking facilities, emergency evacuation services, use of renewable energy, the location details of the project, with clear demarcation, Proforma of the allotment letter, agreement for sale and conveyance deed proposed to be signed with the allottees, Publicly accessible disclosures of the project and promoter details, along with a self-declared timeline within which the promoter is required to complete the project is compulsory. Promoters must park 70% of all project receivables in a separate account. Drawdown from such account is permitted for land and construction costs only, in proportion to the percentage of completion of project (as certified by an architect, an engineer and a CA).

A promoter shall not accept a sum more than ten per cent of the cost of the apartment as an advance payment or an application fee, from a person without first entering into a written agreement for sale with such person and register the said agreement for sale, under any law for the time being in force.

“The promoter shall transfer or assign his majority rights and liabilities in respect of a real estate project to a third party after obtaining prior written consent from RERA and two-third allottees, except the promoter. Provided that such transfer or assignment shall not affect the allotment or sale of the apartments, in the real estate project made by the erstwhile promoter.

On the transfer or assignment being permitted by the allottees and the Authority the intending promoter shall be required to independently comply with all the pending obligations under the provisions of the Act and the pending obligations as per the agreement for sale entered into by the erstwhile promoter with the allottees.” However, this shall not result in extension of time to the intending promoter to complete the real estate.

The promoter shall execute a registered conveyance deed in favour of the allottee and hand over the physical possession of the apartment to the allottees and the common areas to the association of the allottees or the competent authority, as the case may be, in a real estate project, and the other title documents pertaining thereto within specified period as per sanctioned plans as provided under the local laws. Provided that, in the absence of any local law, it shall be carried out by the promoter within three months from date of issue of occupancy certificate.

It shall be the responsibility of the promoter to handover the necessary documents and plans, including common areas, to the association of the allottees or the competent authority, as the case may be, as per the local laws. Provided that, in the absence of any local law, it shall be done within thirty days after obtaining the occupancy certificate.

In case the Promoter fails to complete or is unable to give possession in accordance of the terms or due to discontinuance of his business, he shall be liable to return the amount received from the allottee, along with interest. The Promoter shall compensate the allottees in case of loss caused to him due to defective title of the land. (Such claim shall not be barred by limitation). The promoter shall be liable to compensate the allottees in case of any other failure to discharge his duties in the manner as provided under the Act.

Apart from the RERA Act, the Real Estate (Regulation and Development) (General) rules have been enacted for the five Union Territories. Some of the highlights of such rules are the following

Regarding ongoing projects

In respect of the ongoing projects that have not received completion certificate in specified time, developers will have to make public the original sanctioned plans with specifications and changes made later, total amount collected from allottees, money used, original timeline for completion and the time period within which the developer undertakes to complete the project, duly certified by an Engineer/Architect/practicing Chartered Accountant. Promoter shall also declare size of the apartment based on carpet area even if it was earlier sold on any other basis.

The developer, within three months of applying for registration of a project with the Real Estate Regulatory Authority shall deposit in a separate bank account, 70% of the amount collected and unused for ensuring completion of ongoing projects.

Registration of projects

For registration of projects with the authorities, developers will be required to submit authenticated copy of PAN Card, annual report comprising audited profit and loss account, balance sheet, cash flow statement and auditors report of the promoter for the immediate three preceding years, authenticated copy of legal title deed, copy of collaboration agreement if the promoter is not the owner of the plot. Promoter also has to declare information regarding the number of open and closed parking areas in the project.

Promoter shall upload on the webpage of the project, within 15 days of expiry of each quarter information regarding number and type of apartments or plots, garages booked, status of the project with photographs floor-wise, status of construction of internal infrastructure and common areas with photos, status of approvals received and expected date of receipt, modifications in sanctioned plans and specifications approved by the competent authority.

Registration fees

To incentivize registration of projects and Real Estate Agents with Regulatory Authorities, fee for the same has been reduced by half based on suggestions from promoters for reduction of fee. For registration of projects, the fee has been reduced to Rs.5 per sq.mt for up to 1,000 sq.mt area and Rs.10 per sq.mt beyond this limit subject to a maximum of Rs.5.00 lakh per project. For commercial and mixed development projects, it will be Rs.10 and Rs.15 per sq.mt subject to a maximum of Rs.7.00 lakh. For commercial projects, it will be Rs.20 and Rs.25 subject to a cap of Rs.10 lakh per project. For plotted development, it is Rs.5 per sq.mt with a ceiling of Rs.2.00 lakhs.

A cap has been placed on the total amount of registration fee based on the suggestion of real estate bodies.

Fee for renewing registration of projects with the Regulatory Authorities would be half of the registration fees.

Interest to be paid in case of delay

Developers will be required to refund or pay compensation to the allottees with an Interest Rate of SBI’s highest Marginal Cost of Lending Rate plus 2%.

Fee for appeals and complaints

For every appeal to be made to the Real Estate Appellate Tribunal, fee proposed is Rs.5,000. For every complaint to be made to Regulatory Authorities and Adjudicating Officers, fee proposed is Rs.1,000.

Compounding of punishment

Rules provide for compounding of punishment with imprisonment for violation of the orders of Real Estate Appellate Tribunal against payment of 10% of project cost in case of developers and 10% of the cost of property purchased in case of allottees and agents. Compliance with reasons for punishment shall comply within 30 days of compounding.

Under the Rules, Adjudicating Officers, Real Estate Authorities and Appellate Tribunals shall dispose of complaints within 60 days.”

The interesting thing which lies is how effective RERA and the rules would be in ironing out the lacunae in this sector. The watertight compartments issued by the regulator would be a difficult situation, from which the promoters and builders, would find difficult in wriggling out of the situation. Further, the demonetisation drive might have affected the builders and promoters, causing a dent in their finances. Previously, it was almost a rule amongst the promoters and developers that a major chunk of the price of the real estate property would be dealt in black money and the balance in white. A clarity is expected in this after the new rules have stepped in.

Further, it could also have a negative impact, as a lot of fund has to be kept in escrow accounts. The end result would be that previously the price of flats and other real estate properties which were negotiable earlier, would have to be sold at a premium or at fixed rates, because there would not be much circulation of money, increase in cost of labour and other variables will also add up to the price increase. It is worthwhile to think, that soon the builders and promoters would take the advantage of using more substandard raw materials, in order to reduce the cost of construction and further increase their profit margin. An additional legislation or a set of standards should be laid in the forthcoming period or retrospective effect, on the use of materials to be used in such real estate projects, so that the consumers can expect the same thing which they are paying for. While, this legislation is more towards the interest of the consumers, the builders can also protect themselves from errant consumers, who hold back the legitimate dues for no reason at all and also customers who make untimely payments.

On the other hand, it would be helpful for the consumers. Though they will have to cough up additional money, it would really aid them in case the promoters or the developers try to cheat them. They would pay for the exact carpet area, instead of getting into the complexities of super built area, which used to be deceitful and inaccurate in nature. Instead of going from pillar to post in case of deceit, default by such promoters and builders resulting in entangling themselves under various others acts, they now have a one stop redressal forum. This was really needed, as this sector was never properly regulated as it was mostly a unorganised one.

The sense of commitment should be infused totally into business practices so that the margin of error and quality of property should be at par, with the strict quality controls applicable in international projects. Further, it would also reduce the number of middle men in the arena. If there is clarity between the end consumer and the developers or the promoters there would no need of middlemen and brokers. It is a matter of time to understand, that how RERA would benefit the sector.

Ten factors to consider before deciding seat of Arbitration

Anubhav Pandey

August 10, 2017

In this article, Suraj G Badrayan pursuing M.A, in Business Law from NUJS, Kolkata discusses Ten factors to consider before deciding seat of Arbitration.

Introduction

Over the years, arbitration has grown to be one of the most preferred dispute resolution mechanisms between parties, particularly in the areas of international business. Arbitration is a form of alternate dispute resolution for the settlement of disputes where an independent third party makes a decision that is binding[1]. There is considerable time spent in negotiating, selecting and drafting arbitration clauses to enable an effective arbitral process and adjudication in the event of any dispute. Arbitration is generally a voluntary and consensual process, it is very important to take into account all the key factors that generally affect an arbitral process. In this regard, one of the key factors that underlie in any arbitral agreement is selecting the seat of arbitration.

The “seat” or place of arbitration has been defined as the geographical location to which the arbitration is ultimately tried and which in the absence of the agreement otherwise prescribes the procedural law of the arbitration[2]. Hence, it means that the seat of arbitration is the jurisdiction where the parties intend the law of arbitration to apply in their arbitration agreement or the applicable procedural law of the arbitration.

Since arbitration is a voluntary process, the parties to an arbitration are free to agree on the seat at anytime. Usually, it is agreed in the arbitration agreement. If not, it might be agreed later. The freedom to choose the seat of arbitration is one of the bedrock principles on which arbitration is based on. The jurisdiction of the seat is not necessarily the same as the governing law of the contract. For example, the governing law of the contract can be the law of India but the seat of arbitration can be in Singapore, i.e the procedural law of the arbitration will be governed by the Singapore law while substantive law of contract to be analysed by the Arbitral Tribunal is governed by Indian laws.

As highlighted since arbitration agreement is voluntary and based on consensus between the parties, deciding the seat of arbitration is very important in the context of effective arbitral dispute resolution. Hence, in the preceding sections, ten factors to be considered before deciding the seat of the arbitration are discussed.

Seat of Arbitration

One of the most important factors to be considered before deciding the seat of arbitration is the national arbitration law of the seat. Since, the seat of arbitration decides the procedural law of the arbitration which governs the process of arbitration. Although the UNCITRAL model law exists to assist States in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration, the model law is not binding on the States. It just reflects worldwide consensus on key aspects of international arbitration which have been accepted by States of all regions and the different legal or economic systems of the world. Hence, there are variations in procedural laws between different States.

The procedural law of arbitration of a State is a body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the regulation and conduct of the arbitration. It comprises rules governing interim measures, rules for supportive measures by the court, and rules for courts to exert judicial review which will be explained separately[3].

Some of key issues to consider in procedural arbitration law that one should consider are:

Need to be party to the New York Convention or Geneva Convention
Desired level of judicial interference and control
Appointment of Arbitrators and legal representatives

Some examples include, local lawyer requirements hence impairing ability to choose their own legal representatives and their own arbitrators.

Challenge to appointment of arbitrators
Power to grant interim orders:

For example, under French law an arbitrator has the power to impose penalties on parties that refuse to comply with his/her interim orders – no such power is found in most other arbitration legislation.

Enforcement of Awards
Power of judicial review
Local laws may impose a particular choice of law, law of limitations on arbitrators.
Process of adducing evidence and discovery

For example, if the key evidence is in one party’s hands and that party does not want such evidence to be available to the other side, it may choose an arbitral institution without full discovery. Another example includes if a party initiated discovery is desired, the arbitration can be held in United states or England, however is discovery is to be avoided it can be any civil law jurisdiction.

Enforcement of Foreign Arbitral Awards

The New York Convention requires that, the states that have ratified it to recognize and enforce international arbitration agreements and foreign arbitral awards issued in other contracting states, subject to certain limited exceptions. These provisions of the New York Convention, together with a large number of contracting states, have created an international legal regime that significantly favours the enforcement of international arbitration agreements and awards.

Once the arbitral tribunal has passed an order, the interim or final order has to be enforced in a Country where it is required to be enforced. While selecting the seat of arbitration, it is very important to determine whether any international arbitral award can be enforced in the jurisdiction of any particular state. While most of the countries which are signatories to New York Convention recognise the interim arbitral awards and final arbitration awards it is important to have reciprocal arrangement between the countries. Even in enforcing such awards, the court interpretation with regard to Public policy or other grounds on which the enforcing court can refuse enforcement, matters a lot. For example, the state where the forum of arbitration is, or the state which is supposed to enforce a foreign award, may not be a member of 1958 New York Convention.

Jurisdiction neutrality and impartiality

Another aspect to consider is the forum neutrality of the State designated as the seat of arbitration. Neutrality is in the sense denotes that none of the parties have any interest or stake in that particular jurisdiction. It also covers the aspect that no party has any place of business or residence in the country designated as seat of arbitration. Generally, all Courts historically favour the local party, and also the neutrality of arbitrators adjudicating in the case comes into question. Hence, the concept of forum neutrality not only refers to the ability of the parties to select a neutral arbitral seat, rather it refers as well to their ability to select neutral arbitrator. This avoids local party bias as foreign parties perceive such partiality and hence and impediment to fair and just resolution of the dispute. Both courts and arbitrators should not only be neutral, impartial and independent but deemed to be neutral as well.

Challenge to Arbitral award – Extent of Judicial Review

The Courts within the seat of arbitration have supervisory powers of judicial review and powers to review any challenge to the arbitral award. Although the national law of the seat and the signatory to the New York convention are discussed. It is much more important to understand on what grounds the arbitral award can be challenged and extent of judicial review of the seat based on statutory laws and analysing previous judicial verdicts on the same is important.

The important considerations as highlighted in major statutory laws are: violation of principle of natural justice by the arbitrator, evidence of corruption by the arbitrators, the agreement not valid under law of the land, and on grounds of public policy. The important aspect is the treatment of national courts under the garb of judicial review and analysing the trend. The Courts may have special public policy concerns, such as political or religious factors, and set aside the arbitral award at issue.

Convenience for the parties and Arbitrators

It is also important that issues such as availability of appropriate venues and a supportive arbitral infrastructure are also important to allow the arbitration to run smoothly. In this regard, another important factor to consider is the convenience for the parties and arbitrators during the process of arbitration. The seat of arbitration should be geographically convenient for most people who will be involved in the arbitration like parties, witnesses, arbitrators and lawyers. It is also important is that there are international flights and facilities such as appropriate hotels and rooms for conducting the arbitration hearings and also presence of good communication infrastructure. Another important aspect is the local language of the arbitral tribunal/arbitrators. It is important that both the parties and the arbitrators converse and fairly conduct proceedings in a common lingua franca. Other factors to consider include, the Location of records and evidence (both material and immovable), place of residence of the chairperson of the arbitral tribunal or the sole arbitrator, and place of previous court action.

Fixed by the Arbitral Tribunal

If the parties in the arbitration agreement do not make an express choice of the place of arbitration, the choice will have to be made for them, either by the express mention of the law of the State where the agreement was made, by the arbitral tribunal itself or by the arbitration institution. Hence, it is very important to unequivocally state the seat of arbitration leaving no scope for ambiguity. Generally, on express mention of the seat of arbitration, courts do not interfere, but in case of ambiguity, or for the sake of convenience the arbitral tribunal itself can decide of the seat of arbitration. The relevant UNCITRAL rules states that:

“Unless the parties have agreed upon the place where the arbitration is to be held, such place shall be determined by the arbitral tribunal, having regard to the circumstances of the arbitration[4]”

Cost of Arbitration

Another important aspect that is necessary to consider before deciding the seat of arbitration is the cost of arbitration. The cost of the arbitration can be divided into two main categories:

The ‘arbitration costs’ which include the arbitrators fees and expenses and the administrative charges of any arbitral institution, as well as charges for any other assistance required by the arbitral tribunal; and
The ‘party costs’, which include legal costs and other expenses incurred by a party for the arbitration, including the fees and expenses of outside counsel, party-appointed experts, witnesses, translators, etc.

From the above discussion, we see that, the main cost factor is usually the legal fees. A study conducted by the International Chamber of Commerce analysing the proportion between the two cost categories as discussed above in recent ICC final awards showed that the party costs accounted for more than 80 per cent of the total costs of the arbitration.[5]

The ‘party cost’ varies depending on the seat of arbitration and the local lawyers appointed to represent the interests of the parties. One should also consider, the arbitration costs and draw a balance between the cost of arbitration and the cost of dispute settled by judicial means. The party costs are decided by the national cost rules applicable at the place of arbitration is considered for legal fees and in line with market practice.

There are costs incurred due to witness testimony, expert witness and support systems costs. Another factor to be considered, is in case, the arbitrator is not the local arbitrator of the seat, then there are costs incurred for paying the arbitrator to travel from his place of residence to the seat.

Quality of Judiciary, Court System and Political Stability

In international commercial arbitration, quicker, reliable resolution of dispute is of great importance. Hence, the quality of judiciary, the court system and political stability becomes a very important factor in deciding the seat of arbitration. If it becomes necessary during arbitration proceedings to approach a court for assistance, it is necessary to analyse if that court be able to deal with the matter quickly, efficiently and predictably. The courts must be experienced in dealing with complex commercial matters in an independent and objective manner. Although States may have adopted the UNCITRAL model law, there is difference and one must distinguish between formal legislation and actual practice in real cases. That practice can be demonstrates only over time, and many States are in this transition period.

Another dimension to this point is the lack of Supportive infrastructure and experience of local courts in judicial assistance in cases where appointment of arbitrators and arbitral forum is difficult for the parties to finalize. Further political situation of a country also plays a role, for example choosing Hong Kong as a seat of arbitration in Asia is unadvisable because of concerns regarding neutrality and independence.

Choosing Arbitration organisation directly

It is favourable in many cases to select the seat of arbitration directly by naming it or indirectly delegating the choice to an arbitration organization. Each of these organizations has a different set of rules and provides a neutral forum and has set rules for governing the process of arbitration. The various such organisations include:

The International Court of Arbitration of the International Chamber of Commerce (ICC): The ICC, which is based in Paris, was established in 1923. It is regarded the best known international commercial arbitration institution.
The London Court of International Arbitration (LCIA): The LCIA, which is based in London, was established in 1892. It is Europe’s second leading international arbitration institution (after the ICC) and is very well known internationally. The LCIA has affiliated arbitral institutions in Dubai (DIFC-LCIA), India (LCIA India) and Mauritius (LCIA-MIAC).
The International Centre for Dispute Resolution (“ICDR”): The ICDR is a part of the American Arbitration Association (AAA), which was established in 1926, and is the best known arbitral institution in the US. The AAA administers a large number of domestic disputes through its network of US offices. The ICDR administers international arbitrations (pursuant to its International Arbitration Rules).

The rules of the ICC, LCIA and ICDR are all suitable for use around the world and for arbitrations conducted in various languages and under various governing laws. In each case, it is for the arbitrators to resolve the dispute, with the institutions simply administering the arbitrations. In this capacity, the ICC, LCIA and ICDR each receive and distribute the parties’ initial submissions, assist with the appointment of the tribunal (with or without party-nominations) and resolve any challenges that a party may make against an arbitrator.

The choice of which arbitration institution to choose can also depend on its rules. For example, the ICC procedure is more actively administered, involving two additional steps:

The preparation of Terms of Reference, a document which defines the scope of the arbitration by setting out the basic claims and defences, the relief sought and the issues to be addressed; and
The scrutiny of draft awards, especially as regards issues which might affect their enforceability, by the ICC Court before the final awards can be issued to the parties[6].

The value of these supervisory functions must be weighed up against the likely additional time and cost to be devoted to them. In contrast, the procedures under the LCIA and ICDR Rules are lightly administered, with the role of the LCIA and the ICDR in each case being primarily concerned with the appointment of (and challenges to) the tribunal. There is no formal requirement for Terms of Reference or the scrutiny of draft awards.

Requirement of experienced Arbitrators regarding specialise matters in a dispute

Disputes regarding specialised matters such as intellectual property with complex technology, many complex commercial transactions etc. require experienced and sophisticated arbitrators to handle the dispute. Many matters involve laws of more than one country; they are complex and counterintuitive and vary from country to country. The facts relevant to the dispute often involve scientific, technical data, and extensive accounts and calculations.

The advantage in arbitration over judicial intervention is that in arbitration it is possible to obtain arbitrators with expertise in a given subject matter. For example, in Intellectual Property dispute, it is possible to obtain arbitrators that is experienced both in intellectual property and if a particular technology is involved with it as well. Hence, choosing a seat of arbitration where there is availability of such specialized arbitrator is important. Further, choosing the arbitral institution based on the subject matter of dispute can be considered.

For example arbitration in World Intellectual Property Organisation. JAMS in USA, for example, is well-known for having retired judges to handle sophisticated disputes (among other things), and AAA is known for having excellent construction arbitrators to handle multi-faceted disputes (among other things). Also, if it is an international dispute involving a treaty, one can choose international organization, like ICC, CPR, or AAA[7].

CASE LAWS

In this section we will discuss two cases that illustrate the importance of the seat of arbitration.

Gouvernement du Pakistan – Ministère des Affaires Religieuses v. Dallah Real Estate and Tourism Holding Company[8]

The Paris Court of Appeal, in this case, rejected an application by the Government of Pakistan to set aside ICC awards delivered in Paris, holding that the tribunal was correct in finding that it had jurisdiction over the Pakistani Government, despite not signing the arbitration agreement. The facts of the case is that: Dallah – a Saudi trading group had initially entered into a memorandum of understanding with the Pakistani Government in relation to the construction of housing for Pakistani Pilgrims visiting holy sites within Saudi Arabia. Following this, Dallah entered into a contract with the Awami Hajj Trust created by a Pakistani presidential Ordinance to move forward with the housing project. Said project never came to fruition and, following a change of government in Pakistan, the Trust ceased to exist as a legal entity. The contract contained an arbitration agreement, under which all disputes were to be referred to the ICC. On analysis, the Paris Court of Appeal took into account the surrounding context of the contract (including pre-contractual negotiations) and ruled the tribunal was correct. However, curiously in a similar case the UK Supreme Court ruled that the Tribunal does not have jurisdiction as it framed the issues notions of privity of contract and separate legal personality. Hence, this case illustrates how the selection of seat affects the outcome of the arbitration proceedings.

PT Garuda Indonesia v Birgen Air[9]

The Singapore Court of Appeal held that the seat of an arbitration does not change simply by virtue of the tribunal holding hearings or other meetings at a location other than the seat. The facts of the case are as follows: the parties’ arbitration agreement had expressly designated Indonesia as the seat of arbitration. It was subsequently decided as the result of political unrest in Indonesia the hearings should be conducted in Singapore as the situation was not right in Indonesia. The court held that Indonesia had remained the seat of arbitration throughout the arbitration, as a result, the Singapore courts did not have jurisdiction to entertain an application to have the award set aside. In the words of the court,

“There is a distinction between ‘place of arbitration’ and the place where the arbitral tribunal carries on hearing witnesses, experts or the parties, namely, the ‘venue of hearing’. The place of arbitration is a matter to be agreed by the parties. Where they have so agreed, the place of arbitration does not change even though the tribunal may meet to hear witnesses or do any other things in relation to the arbitration at a location other than the place of arbitration.”

CONCLUSION

The consensual nature of arbitration is extremely useful for parties who during agreement can mould the arbitration clause based on various requirements in consideration of various factors. As highlighted, the parties have the freedom to decide on law governing the arbitration agreement. But, the parties must be circumspect and care must be taken to select the seat of arbitration carefully. Each of the factors discussed above must be weighed carefully during negotiations before signing of the arbitration agreement. Then, the parties can truly utilize the convenience that arbitration as an alternate dispute resolution provides.

References

[1] http://www.ciarb.org/dispute-appointment-service/arbitration/what-is-arbitration, last accessed on 25^th June 2017.

[2] Russell on Arbitration 2003, para 2-209

[3]https://singaporeinternationalarbitration.com/2012/06/26/the-laws-governing-an-arbitration/, last accessed on 27^th June 2017.

[4] UNCITRAL Arbitration Rules, Art. 16(1)

[5] See the 2015 ICC Report on Decisions on Costs, para. 2

[6]https://www.lw.com/thoughtleadership/guide-to-international-arbitration-2014, last accessed on 26^th June 2017.

[7]http://www.insidecounsel.com/2016/02/18/arbitration-101-choosing-the-right-forum-for-dispu, last accessed on 26^th June 2017.

[8] Case No. 09/28533, dated 17^th February 2011.

[9] [2002] 5 LRC 560.

Is corporate corruption (where no government/public official is involved) punishable in India? What laws can be used to curb it?

Anubhav Pandey

August 10, 2017

In this article, Sonu Surana pursuing M.A, in Business Law from NUJS, Kolkata discusses Is corporate corruption (where no government/public official is involved and also talks of the laws which can be used to curb it.

Corruption misrepresents markets and creates unfair competition. Companies often pay bribes or fix up bids to win various public/private procurement contracts. Many companies hide corrupt acts behind secret deals and arrangements. they seek to pressure political decision-making in wrong manner. Also many companies exploit tax laws to evade taxes, wok under cartels or misuse legal loopholes. Private companies have huge influence in many public spheres. So it’s easy to see how corruption in private sector businesses harms taxpayers’ interests, consumers benefits and in effect paralyses the whole system.

Today, businesses are operating in extremely challenging, the fact that executives and their teams are under increasing pressure to deliver unrealistic results in difficult markets. Managers in their companies are under tremendous pressure to deliver exception financial results over the next fiscal years. Thus, they indulge in corrupt practices next time to win businesses.

India in recent times the public and private partnership system has been put under the microscope and it has been found to be actively working in partnership with politicos and bureaucrats to perpetrate large-scale corruption. Also, private sector is involved in corruption internally which involves top management of the companies to mislead the shareholders or public in large or involves the middle and lower tier of the company to fool the top management or the consumers to gain extra monetary benefit.The same has been noticed in the Central Vigilance Commission (CVC) report by Transparency International India (TII) that documents this unholy nexus. The report makes scathing observations on the decay in the private sector against the backdrop of the various scams, in which major private players are in the dock for colluding with the system execute India’s biggest corruption scandals.

The private sector cannot be considered as a victim of corruption in India. Instead, it is instrumental in effecting it too and may be it is hands-in-glove with public/private officers. The government is trying to install some strong deterrent tool to curb corruption in the private sector. India’s drive against corruption is perceived to be hampered by the general weakness of the country’s anti-corruption institutions. However, India’s Supreme Court is regarded as one of the key institutions which has been effective in fighting corruption. This decision is consistent with this view, notwithstanding any misgivings about the judicial activism required to reach the decision.

Few big corruption and fraud scams which have unearthed in private sector in recent times are:

Satyam scam: It was about corporate governance issues and fraudulent auditing practices allegedly in collusion with auditors. The company distorted its accounts to its board, stock exchanges, regulators, investors and all other stakeholders. Finally it misled the market and other stakeholders by lying about the company’s financial health. All the basic facts and figures such as revenues, operating profits, financial liabilities and cash and bank balances were grossly inflated to show the company position in good health.

NSEL case: The NSEL (National spot Exchange Ltd) scandal or NSEL fraud was a methodical and planned corruption perpetrated in the commodity market on Jignesh Shah owned National Spot Exchange (NSEL) which is based in Mumbai, India. The NSEL was a company promoted by Financial Technologies India Ltd and the National Agricultural Cooperative Marketing Federation. This scam was a Ponzi scheme and is estimated to be a Rs. 5600 crore fraud that came out to light after the National Spot Exchange failed to pay its investors in commodity contracts after 31 July 2013. Thirteen thousand investors from India lost about Rupees Five Thousand Six Hundred Crores when the fraud was discovered and it was found that NSEL had neither the money nor the stocks to pay them back.

Bank NPA defaults: Loan malaise has been plaguing the Indian banking system, both public and private sector banks which roughly have 70% market share in assets.

Various other private sector corruption scams of recent memories are:

Indian Premier League Scam – Allegedly involving top officials of BCCI
Harshad Mehta stock market scam
Kingfisher Airlines

These numerous scams which have surfaced in India in recent times has made the enforcement agencies increasingly proactive and vigilant in terms of monitoring compliance under relevant anti-corruption and bribery laws and taking action against violations thereof. For example, the Central Vigilance Commission (CVC) in 2015 initiated an inquiry against a private company for the first time, amidst allegations that the company had bribed public servants in order to obtain certain clearances and permits in India. The Serious Fraud Investigation Office (SFIO) , an investigative arm of the Ministry of Corporate Affairs) has also investigated cases of alleged fraud in various companies in the past many years, of which many investigations have concluded to an logical end.

Besides the monetarily losing out, businesses that are victims of corruption also suffer long-term negative impact on their brand reputation. In current times, market reputation of some of the large corporate organisations have been mauled by a series of instances relating to frauds/corrupt practices including corruption and bribery. There are concerns about the financial losses that businesses suffer as a result of these frauds. Intentional corrupt and misguided financial reporting, information manipulation, theft of stock, etc are among the common types of misconducts or corrupt practices that can result in financial losses for private companies. Further, the cost of employing additional internal compliance controls/ remedial measures to combat frauds/corruption leads to financial impact and also waste of managerial time in complying to these. This shows that irrespective of the impact of frauds on private sector businesses, a number of organisations remain averse to implementing a comprehensive anti-fraud system to work on these, detect, prevent and remediate fraud risks.

The above instances are indicating that India’s business situation provides a fertile ground for corruption, frauds and manipulations. There is an urgent need for companies/corporates to put in place robust deterrents, hold constant vigilance and identify alerts at the earliest hint of any corrupt instances. With an overall awareness about corruption situations and the unique ways being adopted by fraudsters, expansion in the scope of corruption mitigation plans, workshops and reconsideration of their existing governance standards, private sector can actively manage their risks. Further, strict law enforcement and rigorous penal provisions prosecutions by courts and law regulatory agencies will help in transparency and accountability across the Board, both in the government and corporate sectors.

The Supreme Court (“SC“) in Central Bureau of Investigation, Bank Securities and Fraud Cell and Others v. Ramesh Gelli and Others (Criminal Appeal Nos. 1077-1081 of 2013 and W.P. (Crl.) No. 167 of 2015) has held officers of private banks to be public servants under Prevention of Corruption Act, 1988 (“PCA“)

Parliament of India recently passed:

The Whistleblowers’ Protection (Amendment) Bill 2015 (pending presidential assent).
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015; and
The Lokpal and Lokayukta (Amendment) Act 2016;

The Prevention of Corruption (Amendment) Bill 2013, which is pending parliamentary approval, seeks to amend the Prevention of Corruption Act 1988 by setting out specific provisions for the prosecution of bribe givers; explicitly bringing commercial organisations within the ambit of the definition of ‘bribe giver’; and prescribing a specific time limit for completing trials.

The Prevention of Corruption (Amendment) Bill criminalises the acceptance of gratification (pecuniary or otherwise) other than the acceptance of legal remuneration by private sector persons which is paid by their employers in connection with the performance of their duties. Aiding and abetting the commission of bribery is also an offence, such that any person, who bribes or attempts to bribe a public servant or acts as a middleman for such bribing may also be held liable. Further, the law creates an adverse presumption if a public servant’s assets are disproportionate in value to his or her income and cannot be satisfactorily accounted for. The provisions of the law apply regardless of the location or jurisdiction of the commission of an offence, as long as the same is committed by a ‘public servant’ as defined under it. Judicial decisions have also interpreted the term ‘public servant’ in the laws to include a wide variety of persons, such as bank employees in both private and government owned banks

However, despite several emerging issues, India, has responded back by enacting several pieces of Legislations. One piece of Legislation that stood out recently is the Companies Act, 2013 (the ‘Act’). The Act has raised the bar of how Indian companies need to evaluate themselves and aims to increase corporate transparency. The other anti-corruption Legislations, Regulations, Guidance, include the following:

(a) Prevention of Corruption Act(1988)

(b) Whistle Blowers Protection Act

(d) Central Vigilance Commission Act, 2003

(e) Indian Contract Act, 1872

(f) Indian Penal Code, 1860

(g) Listing Agreements

(h) CARO 2006

(i) Income Tax Act, 1961

(j) Right to Information Act, 2005

For instance, the Companies Act, 2013 which replaced the Companies Act 1956 has several measures to deal with corporate corruptions. One of such measure is the formation of a financial reporting body called the “National Financial Reporting Authority (NFRA)” for better monitoring of Corporate Financial Management. This body will have quasi-judicial powers to order investigation, levy penalty and bar professionals from practice in case of their indulgence in professional or other misconduct.

Such authority has the mandate to ensure scrutiny and compliance of Accounting and Auditing Standards. It will also ascertain the quality of service of professionals associated with compliance. The new Act provides more fangs to Serious Corruptions Investigation office (SFIO).The SFIO is a multi-disciplinary organization under the Ministry of Corporate Affairs,consisting of experts in the field of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution of corruptions, and has enforcement powers, including arrests; focus on protection of investors with recognition of class action suits and provision for nomination of Directors by small shareholders and stricter role for auditors including rotation.

The major gridlock of occurrence of regulatory overlap with more than one agency entitled to investigate an event of corporate crime has been overcome with the Companies Act, 2013 and designating SFIO as the agency to investigate corporate corruption. Currently under various regulations like Clause 49 of the Listing Agreement, the CEO and CFO of a company, in their certification have to confirm that there are, to the best of their knowledge and belief, no corruption /illegal / fraudulent transactions entered into by the company during the year. Also, as per Companies (Auditor’s Report) Order (CARO) 2006, the auditor has to report whether any corruption by or on the company was noticed or reported along with its nature and amount.

Section 447 of the new Companies Act, 2013 provides for the definition of fraud and also the punishment for committing fraud. Fraud is defined inclusively as under: “Fraud in relation to affairs of a company or any body corporate includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.”

It is clear from the definition that not all acts, omissions, concealment of fact or abuse of position will lead to fraud or corruption . In order to fall within the meaning of ‘fraud/corruption’ these actions, omissions, concealment of fact or abuse should be done with an intent to deceive or to gain undue advantage or to injure the interest of the company or its shareholders or creditors or any other person. Therefore, this brings in the concept of mensrea.

Further, it would still constitute fraud or corruption whether or not such acts, omissions, concealment of fact or abuse of position results in ‘wrongful gain’ or ‘wrongful loss’ i.e. commission of crime with that intent is important not the results thereof. ‘Wrongful gain’ has been defined to mean gain by unlawful means of property to which the person gaining is not legally entitled.

Similarly, “wrongful loss” has been defined to mean loss by unlawful means of property to which the person losing is legally entitled. Therefore, to fall within the meaning of fraud or corruption, the following should have happened:

(a) acts, omissions, concealment of fact or abuse of position should have taken place;

(b) such acts, omissions, concealment of fact or abuse of position should have essence of mens-rea in them; and

(c) irrespective of the fact whether or not they resulted in ‘wrongful gain’ or ‘wrongful loss’. The definition of the term fraud uses the term ‘person’ which gives it a very wide coverage.

Thus, it just doesn’t only mean and cover certain officers, directors or employees of the company, instead it covers any person in relation to the affairs of the company. So irrespective who that person is, as long as that person in the context of the affairs of the company falls within the ambit of the definition of fraud, he will be guilty of committing fraud or corruption.

Various Domestic law The key laws pertaining to corruption and bribery in India are as follows:

The Indian Penal Code is the penal law of India and puts in place various provisions that are interpreted to cover bribery, corruption and fraud matters, including those committed even in the private sector. Its provisions include offences relating to cheating and dishonestly inducing delivery of property and criminal breach of trust.
The Prevention of Corruption Act 1988, is the main anti-corruption law of the country. It punishes the offences committed by public officials. However, recently private persons have also been included under its ambit and thus is one of the guiding anti-corruption laws of the country.
The Whistleblowers’ Protection Act 2011, is mainly intended to protect whistleblowers, one who initiated or bring to the public any bribe or corruption event, with respect to disclosure of acts of corruption, any wilful abuse of power, wilful abuse of discretion etc.
The Whistleblower Protection Act, 2011 (the “Whistleblowers Act”l) also aims to promote and protect the interest of whistleblowers. It has been approved in both the Lok Sabha and Rajya Sabha, both houses of the Parliament, and has received Presidential assent. Under the Whistleblowers Act, any public servant or any other person including a non-governmental organisation may make a public interest disclosure to the CVC or the State Vigilance Commission or the High Court, including disclosures in relation to the commission of, or an attempt to commit, an offence under the PCA. The Whistleblowers Act, further seeks to establish a mechanism to receive complaints relating to disclosure on allegations of corruption, misuse of power against any public servant or private officials, to inquire into such disclosure and provide safeguards against the victimisation of the complainant.
The Foreign Contribution (Regulation) Act 2010 controls the acceptance and use of foreign contributions by corporate entities and individuals. Receipt of foreign contributions needs prior registration with or approval of the Ministry of Home Affairs. In the lack of such registration or approvals, any receipt of foreign contributions may be considered illegal and punishable under the Indian laws.
The Prevention of Money Laundering Act 2002 forms the core of the legal framework put in place by India to fight money laundering. It came into force in 2005. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.

The anti-corruption laws do not differentiate between the penalties to be imposed for offences committed by an individual and those committed by a company or organisation; therefore, the relevant penalties apply to both. However, where the penalty for a given offence involves imprisonment and a fine, the courts will impose only the fine on the company or organisation (as the penalty of imprisonment cannot be imposed on a legal person), although persons in charge of the company or responsible for the conduct of its business when the offence was committed may be liable to imprisonment.

While conceptually the Indian industry has expressed its desire and keenness for adopting measures which would be effective deter and helpful tools in curbing corruption, however, it has, in the same breath, expressed its concerns that it would be necessary to ensure that the amended law does not cause undue harassment to businessmen and women in the country and in a sense curb their freedom of ease of doing business. It would be open for any police officer, irrespective of rank, to initiate criminal proceedings against a private sector business official for violation of the proposed law. No prior permission from any authority whatsoever would be required for the said purpose.

India is witnessing a sea change in its approach to the issue of corruption. Given the spate of recent scams and public outcry on the issue, it is clear that public displeasure about the level of corruption has reached alarming proportions. This socio-cultural development must be seen and understood in the political and legal context which requires adherence to international standards for combating corruption as envisaged by the United Nations Convention Against Corruption (UNCAC), ratified by India in 2011.

While new laws, as envisaged, may take some time to be incorporated into existing statutes or new statutes, companies doing business in India – both foreign as well as Indian – must step up their own ethical standards, compliance and the overall standard of corporate governance to deter corruption. There is indeed strong need to build a clean corporate environment in which standards and values are central to the private company’s growth strategy just as much, if not more as economic objectives. Companies doing business in India must relook at their Ethics & Compliance policies, make them more strong, and ensure their effective implementation. This alone would ensure compliance with existing as well as imminent laws as well as the norms of good governance and would lead to check and deter corrupt practices.

The What, Why, Who and How of Recovery and Resolution Planning in the Indian context

KShah

August 10, 2017

In this blog post, Komal Shah, Company Secretary, explains aspects of Recovery and Resolution planning done in large sized financial institutions.

What are recovery and resolution plans?

Simply put, recovery and resolution plans, also called living wills, are a plan of what a financial institution needs to do in the event it is about to collapse.

Though the terms recovery plans and resolution plans are often used together in one breath, there is a fine line of difference. Recovery planning would be used when restoring the viability of the financial institution (recovery) still seems possible, while resolution planning would be used when the collapse seems inevitable.

Why were these plans born?

One would think as to why a financial institution would predict itself to collapse? Why not function in such a way so that there would never be a situation of failing? However, the shattering of the belief that it was possible for a financial institution to function in such a manner so that it never fails, is precisely what led to the birth of recovery and resolution planning.

When a financial institution which is sizeable enough to impact the economy of a country fails, it is very likely to have implications on other institutions (or for that matter, even other countries), which would be unpredicted, just like aftershocks to an earthquake. What seemed like a sound and profitable business judgment a few years ago, would then seem like an insane decision, in the economical earthquake scenario.

This very realization of the fact that an economic earthquake is possible, as it started with the collapse of Lehmann Brothers in 2008, is what led to the setting up of the Financial Stability Board (FSB) by the G20 countries, and ultimately, recovery and resolution planning.

Indian Context

It’s not like we haven’t had our share of failure of market-affecting financial institutions before 2008 – the US 64 of the Unit Trust of India being a point in case. And there have been legislative responses to such instances, such as the repeal of the UTI Act.

Then, there is something called the ‘Prompt Corrective Action’ which can be initiated by the Reserve Bank of India (RBI) once the set trigger points of a regulated financial entity show a serious threat to solvency.

But the requirement for preparing systematic recovery plans by the entity itself did not exist before being filtered down from ‘key attributes’ agreed upon by the G20 countries after the 2008 economic crisis.

Who needs to prepare these plans?

These plans were initially required to be prepared by global systemically important financial institutions (G-SIFIs) and other institutions which, in the belief of the national authorities had impact on financial stability, if they failed.

Per the Dodd Frank Wall Street Reform and Consumer Protection Act, bank holding companies with total consolidated assets of $50 billion or more and other financial companies designated for supervision by the Federal Reserve need to submit the resolution plans to the Federal Reserve and the Federal Deposit Insurance Corporation.

Indian Context

In India, ‘specified banks’ (meaning specified by the RBI as such) need to prepare recovery plans and these should be integrated within their overall risk management systems (like fire extinguishers in a building) so that if need arises, they can be acted upon immediately. The plans have to be submitted to the RBI.

Interesting to note that plans to be submitted to the Fed are ‘resolution’ plans while those to be submitted to the RBI are ‘recovery’ plans.

How do these plans need to be prepared?

Per the guidance issued from the FSB, some of the important factors for developing resolution strategies are:

Sufficient Loss absorbing capacity (LAC): This basically means that the financial institution should have enough LAC to be able to stand up back again with additional capital or to properly wind down. This can be maintained through equity or debt, but needs to come from entities who can themselves absorb losses without adverse effects. The guidance also specifies considering the creditor hierarchy vis a vis the LAC.
Legal and operational structure & continuity: The structure of the financial institution should enable critical functions to continue while it is being orderly wound up.
Enforceability of ‘bail in’: The institution needs to be legally able to ask the creditors / depositors to take a loss rather than the government and taxpayers (bail – out).
Funding arrangements: The institution needs to plan how and from where it will bring in the funding to meet temporary liquidity requirements.
Approvals or authorizations needed to implement the strategy: The institution must consider how the approvals or authorizations necessary to implement the resolution plans will be obtained.

Other important factors to be considered include treatment of business contracts during the resolution, cross border cooperation agreements, managing the data and information systems, fall back options in case the preferred resolution plan does not work, and the post resolution strategies.

Indian Context

The RBI has clearly specified the structure of the recovery plans with the main ingredients being as under:

Integration: Since the RBI believes in prevention rather than cure, the first element is to explain how the plan has been integrated within the bank’s risk management framework;
Stress Scenarios: This basically involves checking the bank’s capacity to withstand extreme economic movements and their effects on the bank’s capital adequacy;
Trigger framework and identification of triggers, early warning indicators: What will be the triggers which will start the implementation of the bank’s recovery plan, how to decide triggers which would have both qualitative and quantitative factors, what are the early warning indicators even before the triggers are reached;
Recovery plan options: Summary, details and impact of each recovery plan option and the credibility of each option;
Issues: Possible issues in the execution of the recovery plan and ways to overcome these issues;
Accessing Central Bank’s facilities: Plans in the event the bank is going to require to access the Reserve Bank of India’s or overseas banks’ liquidity facilities;
Radical options: Detailing radical options such as selling off part or whole of banking business in extreme stress events;
List of executives: List of key executives / officials who will be involved in initiating / implementing recovery actions and their roles and responsibilities.

Need to know about recovery and resolution planning

For anyone working with a large bank, particularly in finance, legal or compliance departments, recovery and resolution planning will affect their everyday work since these will be ingrained within the risk management framework of the bank, and hence, the need to know what it means and entails. For large sized private clients of a bank, it helps to know that the bank does have the appropriate planning in place.

References

http://www.fsb.org/wp-content/uploads/r_121102.pdf?page_moved=1

http://www.fsb.org/wp-content/uploads/r_130716b.pdf?page_moved=1

https://www.federalreserve.gov/supervisionreg/resolution-plans.htm

https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=781

Ten things the Government should do to make Mediation effective in India

Anubhav Pandey

August 10, 2017

In this article, Nikhil Mukund Borkar Ransingh pursuing M.A, in Business Law from NUJS, Kolkata discusses Ten things the Government should do to make Mediation effective in India.

As a young republic, India and Indians have stepped up to the challenge and have successfully come within sniffing distance of setting up all the essential and necessary infrastructure that one has accustomed to associate with a modern, economic superpower of the 21st century.

The transformational process of being known as a former British colony to a self-sufficient, vibrant democracy wasn’t always going to be easy. The lack of resources in terms of skilled labor and technical expertise has been putting incremental strain on the framework. This has lead to a gradual slowing down of the efficacy of various institutions of strategic national importance.

The Indian Legal System is a prime example of an elegant framework burdened with a Herculean task of providing equitable and impartial ear and resolves disputes.

The general perception is that people tend to trust institutionalized mechanisms, especially those established in the public sphere for dispute resolution. There exists a widespread feeling that the judicial system is on the verge of collapse because of acute strain on resources. The existing crisis in the judicial system calls for a more widespread adoption of alternate means of dispute resolution like mediation and arbitration under skillful and unbiased oversight of ex-judges, experienced lawyers and government officials with special domain knowledge to cover a wide gamut of industries and nature of dispute.

Before Diving into Mediation, Let us first examine the various Archetype of Disputes Determination

As problems are diverse and the nature of disputes varied, varied models have evolved for resolving them. These models are categorized mainly into four types: rights-based, power-based, interest-based and legislative. The models promise results either on a win-lose or win-win paradigm.

The rights-based approach is adopted in litigation. Disputing parties contest on claims of ‘rights’ and the final decision are considered to be a vindication of the party whose rights were aggrieved. This model creates winners and losers.

In the legislative model, rules or laws are made by the competent authority to solve a logjam. The rules can either provide a process through which disputes could be settled or determine the issue itself. This also would result in winner-loser situation or both the parties may find themselves at the losing end.

The power-based model is a model in which one party is imposingly positioned over the other, and their relative positions determine the outcome of the disputes. This also creates a win – lose situation. This model is typically used independently or in combination with litigation.

The interest-based approach is the one that accommodates the interests of the parties involved in a dispute. Rather than an endorsement of one’s right through adjudication, the conflict is sought to be resolved by varied methods of intermediation. This method is designed to engineer a win-win situation. This model is based on a consensual scheme where parties in disputes, themselves would be responsible for the outcome.

We can clearly see how interest based approaches like meditation is intuitively better and a more holistic way to approach and resolve disputes quickly and reducing the burden of pending cases on the legal system.

Let us now Understand What Exactly Mediation is

Mediation is the process in which a neutral third party, a Mediator helps the disputing parties to harmoniously resolve their disputes using creative methods. A skillful Mediator typically is expected to use specialized communication skills and negotiation techniques to facilitate disputing parties resolve their differences and find a solution mutually acceptable to both.

Mediation can be initiated at any stage of a dispute – prior to litigation, i.e. when differences of opinions arise or even during the trial.

Let us Take a Look at the Different Types of Mediation

1. Statutory

There are some types of cases that are required by law to go through the mediation process. Labor disputes and domestic (Family Law) disputes are two prime examples. In India, however, this type of mandatory mediation is rare.

2. Contractual

The parties to a contract, as part of the terms of their agreement, may include a mediation clause as a mechanism to resolve disputes. Although binding arbitration is a much more common contractual term since it will always result in a resolution, mediation can be an effective tool to resolve contractual disputes before they blossom into a protracted battle. The selections of the mediator, as well as the conditions of the mediation, are usually stated in the contract. If the mediation is successful, the results can be enforced as a judgment of a court.

3. Court Ordered

Most jurisdictions in India require some form of alternative dispute resolution before a case may be resolved through the traditional judicial process. As soon as a case is filed, the parties are provided a number of ADR options. They must, unless exempted by the Court, select and pursue one of these options. Included, as an option is mediation. The Court maintains a list of mediators—skilled and experienced attorneys selected by the Court — who are available to the parties. For parties who elect this option, the Court will appoint a mediator and designate a date by which the mediation must be completed. The results of the mediation are confidential — the Court will not know what occurred at the mediation, unless of course, an agreement (or partial agreement) is reached. If an agreement is reached, that agreement is enforceable as a judgment of the Court.

4. Voluntary

The parties to a dispute may decide to seek mediation without being compelled by law, court order, or contract. They may choose to mediate their dispute at any time: as the dispute is developing, before initiating legal action, or even while legal action is pending. The conditions of the mediation— e.g., who will be the mediator, when the mediation will occur, the rules of the mediation— are controlled by the parties.

Why opt for Mediation instead of Trial

Casual and Voluntary

Informal process that isn’t bound by rules of evidence and procedure.
Parties have freedom to choose their own Mediator.
It can be opted for at any time — before or during adjudication.
Allows parties and counsel to communicate their views directly, informally, and confidentially without fear of adverse repercussions.
Party’s’ prerogative to opt for the mediation process.
Parties can choose to terminate the process at any time without assigning any reason.
Mediation is scheduled according to the parties’ convenience.
Interconnected issues can be brought in for discussion and settlement.

Customized advisory

Tailor-made solutions and procedures and creative resolution is possible since it is the disputing parties and not a Judge or Arbitrator who determines the outcome of the case.
Terms of settlement isn’t restricted to factors such as claims made in Court, positions taken etc., thus, allowing for expanded permutations and combinations of outcomes.

Secure

It’s a closed-door process that is open only to the disputing parties and individuals chosen by the disputing parties.
Confidential information revealed to a Mediator during the mediation process cannot be disclosed unless allowed by the parties. Statements made during mediation or documents produced or prepared for mediation remain confidential.

Self Determined

Parties determine the terms of settlement and the outcome of mediation.

Win-Win

Settlement terms are reached only when it’s agreed by both the parties.

Closure

Once the terms of a mediated settlement is written and signed by both the parties involved, it becomes binding, the settlement terms are filed in Court and a decree is passed, which is final and non-appealable. A mediated settlement tends to have a high rate of compliance as it is mutually agreed to by the parties.

Symbiotic Process

Mediation is a symbiotic process that reduces animosity between parties by offering an opportunity to restore and preserve business and personal relationships.
Avoids damage to important ongoing relationships, which often results from the adversarial process.

Cost-effective and Quick

Mediation is conducted in an informal and comfortable setting and parties are central to the process. A few sessions has the potential to bring the dispute to a resolution unlike litigation which involves lengthy pleadings, detailed evidence, extensive arguments and several appeals which could extend to many years.
Separates the people from the problem.
Shifts the focus of the dispute from right and wrong to resolution.

Mediation Procedure can be Divided into Six Steps, Each of Which Represents a Particular Stage of the Mediation Process. These Stages have been Outlined below

a. Initiating Process and Primary Arrangements

The process of initiating the mediation is perhaps the most difficult and challenging part of the process. It often entails the coming together of parties who do not want to negotiate, or between whom relations are strained to such an extent that they may not want to negotiate.

b.Mediation introduction and setting down the ground rules for mediation

The mediator in the second stage has to explain the mediation procedure which will be followed throughout the course of the mediation. The mediator should also inform the parties about tactics and conditions that can potentially lower the possibility of success of the mediation.

c. Statements by Representatives, Followed by a Summarization of the Problem by the Mediator

In this stage, the mediator would open the line of communication and seek statements from the representatives. This is a very important stage as it is in this stage that the parties honestly articulate their views, so that the other party to the dispute can understand exactly what they want. This is particularly important if the parties, before the mediation, weren’t cordial or on speaking terms. In addition to getting to know each other’s stance, the parties can better understand the core interests underlying the party’s positions and factors that are driving the discord.

The mediator would then summarize the point of contention and the reason of discord from the vantage points of the parties involved. This requires a lot of tact and skill on the part of the mediator to summarize the dispute while not appearing biased in the phrasing of the summary.

d. Agenda and Timeline Setting for the Mediation

While setting the agenda, the mediator would set the dates and the venue for the negotiation sessions that are in agreement to both the parties. The mediator will also list out the issues which have to be discussed by them in sequence, to remove ambiguity and uncertainty from the mediation process. This demystification of the mediation process not only helps the mediator in assisting the parties to reach a settlement, but also the parties as they now have a benchmark against which they can evaluate individually the progress of their negotiations.

e. Facilitating the Mediation

Here the mediator may strategically work towards creating various work-around to the dispute as he now has an intimate understanding of the underlying factors that caused aggravation. The creation of options for conflict resolution shouldn’t be seen as interference on part of the mediator in reaching the final settlement. The mediator mustn’t interfere by insisting that the parties reach a final settlement; the rules formulated by the Delhi High Court prohibit the mediator from forcing the parties to reach a settlement.

e. Reaching to an Acceptable Settlement

The final stage of the mediation procedure is a collection of two steps, firstly it entails reaching to a mutually agreeable settlement. Next, it requires the summation of the settlement agreement. After these two stages get completed successfully, the implementation process of the agreed settlement begins.

Now that we are familiar with the Mediation Process, let us look at the Challenges and Roadblocks the Discipline of Mediation faces in India.

1.Confusion Caused by Multiple Terms (Mediation, Arbitration, Conciliation)

By looking at the multiple available statutes in the Indian context, it becomes clear that there are primarily four Alternative Dispute Resolution (“ADR”) processes, which may be classified as Mediation, Conciliation, Arbitration and an ambiguously defined mechanism known as Judicial Settlement through Lok Adalat.

As there are no formal legislative principles relating to mediation and settlement as there are for Arbitration and conciliation, it leads to confusion amongst practitioners who would’ve intended to opt for one method but erroneously chose the other method of ADR. Hence, caution must be exercised so that people within the ADR ecosystem are knowledgeable about the types of ADR processes and the mechanisms that are involved in each variant.

2. Lack of Clear Distinction in Laws Pertaining to Arbitration, Mediation and Conciliation

The Mediation and Conciliation Rules, 2004 was brought into effect from 11th August, 2005. A cursory look at these rules and other rules pertaining to the ADR realm would reveal that the Mediation and Conciliation Rules, 2005 aren’t adequately framed and they do not cover the entire spectrum of the mediation process.

Practitioners of ADR methods have noted that the Mediation and Conciliation Rules, 2004 cover more or less the same provisions that are covered in the Arbitration and Conciliation Act, 1996. Hence, this lack of clear distinction and absence of specific statutes leads to a lack of confidence and a feeling of vagueness in the mediation process.

3. Low Success Rate of Mediation Mandated by the Courts

It’s observed that there exists uncertainty in the minds of the parties involved in court mandated mediation regarding the impartiality of the mediator. Even if the mediator’s mandate could be regulated with a specific statute, the parties involved are jittery about whether the statute would intrinsically limit the mediator’s ability to act in an unbiased manner.

4. Absence of Mediation Culture

A big roadblock in way of successful adoption of median is the lack of attitude of peaceful settlement. A wider implementation of mediation and other ADR tools is also restricted by the affinity towards a simplistic binary result rather than a nuanced, sophisticated approach which requires communication, tact and creativity in equal parts.

5. Reluctance of the Advocates

The core reason that stands out is the perception among legal professionals that the ADR adoption at scale would lead to them losing out on potential clients with gainful litigation revenue opportunities. Also, the option of ADR in the Indian legal landscape remains to be on the more expensive side of the spectrum. There are no fixed financial costs that are specified. This leaves the mediator and the institute offering mediation services to fix rates arbitrarily. Unfortunately, the cost of litigation is lower than that of pre-litigation mediation.

6. Lack of reputed and credible mediation institutions

There is a distinct lack of dedicated mediation institutes with professionals trained in the trade-craft of mediation.

7. Lack of Public Awareness

The scarcity of publicly available information regarding ADR mechanisms and its benefits deviates them from potentially resolving them through mediation, and instead opt for litigation. This immediately puts the parties in disagreement in adversarial positions which doesn’t allow them to retract from their stands unless done via judicial or other form of settlement.

Having recognized the Roadblocks in the way of successful and effective adoption of Mediation and other ADR techniques. Let us now discuss the ways in which the Government can make Mediation effective in India.

1. Clear and Distinct Definitions for Various ADR Processes

The government must strive to come up with succinct, lucid and intuitive definitions and explanation for the various ADR processes and attempt to clear the confusion related to what ADR constitutes.

2. Distinct Legal Framework for Laws Pertaining to Arbitration, Mediation, Conciliation

The government must come up with clear, distinct statutes that would provide a framework that can be identified with the specific ADR processes. This would greatly help the practitioners in structuring the mediation process on a more solid footing and a strong underlying legal principle.

3. Improve Success Rate of Court Mandated Mediation

The government must incentivise parties to seek mediation to resolve disputes by being more accommodative of their concerns about the impartiality of mediators. The government must make efforts to take all the concerned stakeholders in confidence and work out a roadmap to ensure statutes specific to mediation is intrinsically unbiased.

4. Encourage Mediation Culture

The government must promote a culture of resolving disputes amicably and not burden the traditional litigation channels for ironing out disputes. The adversarial stance that the parties to a dispute take ends up being counter-productive even in a court mandated ADR process.

5. Penalize Litigation Culture

The government must try to discourage parties wanting to opt for the litigation process by making the litigation process more expensive than ADR. This would prompt parties to approach ADR institutes as the first mode or step of conflict resolution. This would also reduce the burden on the courts.

6. Set ADR Targets for Bar Associations

The government must set a minimum percentage of new cases in each financial year that must be solved via any of the ADR processes. This would prompt them to train and upskill member advocates in the field of ADR and start developing a gainful practice in ADR.

7. Develop a Framework for Accreditation of ADR Professionals

The government must come up with a mechanism to have a directory of all the ADR professionals that meet a minimum benchmark and are well versed with specific a body of knowledge pertaining to ADR practice, much like the insolvency professionals.

8. Include ADR Concepts to Make Law School Curriculum More Holistic

The government must recognize that most legal practitioners build their foundations in law schools, the curriculum of which is largely focused on training students for litigation oriented practice. Students aren’t conditioned to recognize which cases are appropriate for immediate settlement through ADR methods such as mediation and which cases are suitable for litigation.

It has been observed that even practitioners aren’t fully adept at distinguishing the two distinct classes of dispute cases. Hence, as a result, cases that could be solved by ADR processes are sent for litigation, which in turn burdens the courts.

There is a dire need for the students to be trained and taught the distinction between the cases fit for litigation and the ones fit for ADR. If this distinction isn’t taught, they would be an inherently biased towards litigation and may not be able to adapt to a role of the mediator when the occasion arrives.

9. Setup Reputable Institutions for Mediation

The government must take the initiative and set up mediation institutions along the lines of ICC, LCIA, SIAC etc; that have come up with specific framework for mediation. These institutions must also provide clear training and continuous professional development workshops for interested people.

10. Mediator Liability

In order to protect the ADR ecosystem from scrupulous and/or under trained mediators, the government must hold the mediators to a global standard of accountability. The government must clarify if professional indemnity insurance can be made available to accredited mediators without diluting their key accountability and deliverables. There should also be a strict disciplinary mechanism to deter bad conduct and poor performance on the mediator’s part.

References

https://www.ibanet.org/Document/Default.aspx?DocumentUid=B705AE33-0AF0-4DA2-9C93-7421D28D2767
https://gettingthedealthrough.com/area/54/jurisdiction/13/mediation-2017-india/
https://vakilsearch.wordpress.com/2011/01/15/procedure-to-be-followed-during-a-mediation/
http://lawcommissionofindia.nic.in/adr_conf/sriram17.pdf
https://blog.ipleaders.in/indian-should-know-about-mediation/
http://mediationbhc.gov.in/PDF/concept_and_process.pdf
http://campmediation.in/mediators-mediation-specialists
https://static1.squarespace.com/static/551ea026e4b0adba21a8f9df/t/579ee7be5016e10ca2ae66 f0/1470031920694/Interim+Report_Strengthening+Mediation+in+India.pdf

How to compute short term capital gain ?

Anubhav Pandey

August 10, 2017

In this article, Shreshthi Golchha pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses ways of computing short term capital gain.

Introduction

Capital Gain is any profit made on the sale of a capital asset such as house, car, stock, bond, etc. Capital gain can be classified into two categories- long term capital gain and short term capital gain. A long term capital gain arises when the asset is held for a period exceeding 36 months. A short term capital gain is said to arise when the asset is held for a period not exceeding 36 months. The computation of these capital gains is essential to evaluate tax which varies with different gains.

Capital Asset

Capital asset is any asset which usually lasts a long period of time and is not consumed or sold in the normal course of the business. For example, X is a government employee and he purchased a house in May 2017. This will be considered a capital gain. Capital asset can be of two types, on property and securities. Property is any real estate owned by an individual regardless of whether it is related to his/her business or profession. Securities are investments held by an FII as per regulations under the SEBI Act of 1992.

If the transfer of an immovable asset takes place within 24 months of acquiring the asset, it attracts short term capital gain tax. The provision before 2017 required three years of acquisition or purchase of the property which has been brought down to two years since March 2017. For example, X is a government employee. He purchased gold in April 2017 and sold it back on July 2017. Since he sold it within a period of two years, it will be considered a short term capital gain.

Short term capital gain on securities

The sale of securities takes place at a frequent rate than property. Therefore, the transfer of stocks, shares or bonds held within twelve months attracts short term capital gain tax. But this rule is only applicable to certain securities. The unlisted or over-the-counter securities are taxed as short term capital gain only after its trading within 24 months. The former category includes shares (equity or preference) which are listed in a recognised stock exchange in India, units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds. For example, X is a government employee. He purchased equity shares of SBI Ltd. (listed in BSE) in April 2017 and sold the same in June 2017. The shares are capital assets since Mr. X held them for a period of less than 12 months.

Computation of Short-Term Capital Gains

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows :

Meaning of Terminologies

Full value of consideration: Full value of consideration is the value of the asset that the assessor received as consideration for the sale of the property. It may be in cash or in kind.
Expenditure on Transfer: Expenditure incurred wholly and exclusively in connection with transfer of capital asset such as advertisement, brokerage, commission, stamp duty, registration fees, legal expenses, etc.
Net Sale Consideration: Net Sale Consideration would be expenditure incurred deducted from full value of consideration.
Cost of acquisition: Cost of acquisition is the amount at which the asset was acquired or purchased.
Cost of improvement: Cost of improvement includes post purchases capital expenses on improvement of capital asset.

Illustration: Mr. X is a government employee. In the month of December, 2015 he purchased gold worth Rs. 8,40,000 and sold the same in August, 2016 for Rs. 9,00,000. At the time of sale of gold, he paid brokerage of Rs. 10,000. What is the amount of taxable capital gain?

Gold was purchased in December, 2015 and sold in August, 2016, i.e., sold after holding it for a period of less than 36 months and, hence, the gain will be short-term capital gain.

The gain will be computed as follows:

Full value of consideration 9,00,000

Less: Expenditure incurred on transfer 10,000

Net sale consideration 8,90,000

Less: Cost of acquisition 8,40,000

Less: Cost of improvement Nil

Short-Term Capital Gains 50,000

Short term capital gain on securities

Section 111A is applicable in case of short term capital gain arising on transfer of equity shares or units of equity oriented mutual-funds or units of business trust, which are:

transferred on or after 1-10-2004 through a recognised stock exchange and
such transaction is liable to securities transaction tax (STT) i.e. the transaction took place through a registered stock exchange.

When Section 111A is applicable, the gain is charged to tax at15% (plus surcharge and cess as applicable).

Illustration: Mr. X is a government employee. In the month of December, 2015 he purchased 100 equity shares of X Ltd. @ Rs. 1,400 per share from Bombay Stock Exchange. These shares were sold in BSE in August, 2016 @ Rs. 2,000 per share (securities transaction tax was paid at the time of sale). What will be the nature of capital gain in this case?

Shares were purchased in December, 2015 and were sold in August, 2016, i.e., sold after holding them for a period of less than 12 months and, hence, the gain will be short term capital gain. Section 111A is applicable in case of STCG arising on transfer of equity shares or units of equity oriented mutual-funds or units of business trust which are transferred on or after 1-10-2004 through a recognised stock exchange and such transaction is liable to securities transaction tax.

In the given case shares were sold after holding them for less than 12 months, shares were sold through a recognised stock exchange and the transaction was liable to STT, hence, the STCG can be termed as STCG covered under section 111A. Such STCG will be charged to tax at15% (plus surcharge and cess as applicable).

Short Term Capital Gain Exemption

Deductions/exemptions on short term capital gains can be claimed under Sections 80C to 80U of the Income Tax Act. However, the short term capital gains which fall under section 111A cannot claim deduction.

Illustration: Mr. X (age 57 years and resident) is a retired person. He purchased a piece of land worth Rs. 8,84,000 in March, 2016 and sold the same in August, 2016 for Rs. 12,84,000. Apart from gain on sale of land he is not having any other income. He deposited Rs. 1,00,000 in Public Provident Fund (PPF) and Rs.50,000 in NSC . He wants to claim deduction under section 80C on account of Rs. 1,50,000 deposited in PPF and NSC. Can he do so?

Deduction under section 80C to 80U can be claimed on short-term capital gains other than STCG covered under Section 111A. In this case, the gain is on sale of land and, hence, is not covered under section 111A. Hence, Mr. X can claim deduction under Section 80C of Rs. 1,50,000 from STCG of Rs. 4,00,000. The taxable income of Mr. X will be computed as follows :

Short term capital gain on property

For example, X is a government employee. He purchased gold in April 2017 and sold it back on July 2017. Since he sold it within a period of two years, it will be considered a short term capital gain.2.2 Short term capital gain on securities. The sale of securities takes place at a frequent rate than property.

Therefore, the transfer of stocks, shares or bonds held within twelve months attracts short term capital gain tax. But this rule is only applicable to certain securities. The unlisted or over-the-counter securities are taxed as short term capital gain only after its trading within 24 months.

The provision before 2017 required three years of acquisition or purchase of the property which has been brought down to two years since March 2017. For example, X is a government employee. He purchased gold in April 2017 and sold it back on July 2017. Since he sold it within a period of two years, it will be considered a short term capital gain

How to improve your contract drafting skills?

Anubhav Pandey

August 10, 2017

In this article, Priya Ashok Agrawal pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses How to improve your contract drafting skills.

Introduction

Writing is an art and the same could be or should be developed only by self- practice, and it cannot be accomplished only by reading books. Hence, the importance of contract drafting is not only great but also very very great. For the purpose of having, at least, some command on contract drafting, one has to make sincere efforts to master it.

What is drafting?

Drafting means to draft or to draw up. It is the process of converting the underlying intention of the party or parties into a written document.

The importance of contract drafting

As the Sun needs no introduction, the importance of the study of law need not be explained. It is said that Law is the King of the Kings. It is, therefore, most powerful and rigid, too. At this background, we have to consider the fact that if Law is the King of the Kings, drafting of pleadings, contracts and conveyancing is undoubtedly the Queen of that King.

“Lawyers have two common failings. One is that they do not write well and the other is that they think they do”.

(Carl Felsenfeld, ‘The Plain English Movement in the United States,’ Canadian Business Law Journal, vol.6, 1981-82)

Aim of drafting a contract

As a general rule, a drafter should give effect to its client’s intentions by ensuring that his/her document is:

accurate and in-tune: aim to understand the transaction and embody the client’s instructions;
complete: aim to deal with all eventualities that ought to be covered;
precise: aim to avoid ambiguity;
clear: aim to draft in a style that is readily comprehensible;
contemporary: aim to use words only in modern usage and delete archaic expressions; and
short and simple.

Drafting skills

To achieve the abovementioned aims, several drafting skills are required. These include:

Effective communication with the client when taking instructions. This involves finding out all the relevant facts, the background in which the document is to operate, the client’s stated intentions and, when appropriate, further questioning to determine a client’s underlying aims;
The ability to think clearly through the whole transaction, to recognize the potential problems and advise the client in relation to matters he or she has not yet considered but which may arise;
The ability to negotiate with any other parties to the transaction and their legal advisers;
An awareness of the possible audience – for example, judges, real estate agents, and accountants- who may interpret the document;
A sound knowledge of the relevant principles of the law – that is, the law relevant to the transaction in which the lawyer is engaged and to the construction of documents. This is the most important skill, as without it none of the other skills can be effectively exercised; and
A good understanding of the correct use of English.

Guidelines for improving contract drafting skills:

Clear thinking on paper:

Good writing is clear thinking on paper. It has its foundation in thinking, planning, and organization. Planning and organizing material will force one to address difficulties at an early stage, save considerable revision time and produce a clearer, more readable document.

Before you start writing, you should consider:

your aims;
your readers;
how you plan to organize your writing;
the layout and other conventions you will adopt.

Summarize and seek information

The cause of many negligence claims can be traced to a failure in communication. If any matter remains unclear, you should always seek clarification. Make a careful note of the meeting or telephone call and place it on file. Once you have a good enough grasp of the essentials, summarize them in writing for your client to verify.

Use gender-neutral language

Using non-sexist language is important. The removal of sexist language is far from a trivial matter, though it is sometimes represented as such by those who do not understand the issue. Many of us have grown up using sexist language unconsciously, and are not really aware of the alternatives. Language perpetuates the prejudices and values of the society in which that language evolves, through most of its history, the English language has evolved in a patriarchal or male-dominated society. You must take special care to avoid sexist language.

Terms required by statute

Perhaps the most obvious step in preparing a contract is to identify the provisions it ought to contain. The statutory provisions relevant to your contract will naturally vary from one field of law to another, but you need to be sure that you have identified anything that may affect the validity or applicability of your contract.

Sometimes an Act or other provision may have the effect of requiring a further step to be undertaken if a particular term is included, for example, The Competition Act, 1998 requires registration of certain restrictive agreements.

Terms required by Common Law

Common Law requirements are generally better known and on the whole, much less onerous than statutory requirements. Nevertheless, it is surprising how often lawyers become more entranced with particular statutory or other requirements that they seem to forget the most basic principles, for example, a past consideration will not support a promise as a binding contractual obligation.

Make sure that you are clear on the differences at common law between terms, representations, and indemnities. Keep in mind the possibility of things going wrong.

If your client wishes to make provision for liquidated damages, make sure that you know the principles surrounding penalty clauses and the difference between a liquidated damages clause that operates on breach and a clause that merely operates on termination (and is unaffected by the penalties doctrine).

Standard protective terms – Boilerplate

One of the skills to be acquired is the ability to analyze a transaction and be able to imagine all the things that could go wrong. You will then be in a position to anticipate problems by ensuring that your client is properly protected. You will usually find standard protective terms in precedents. These terms are often referred to as ‘boilerplate.’

Boilerplate terms are terms that do not have to be included in a contract for it to be valid and effective but are normally included for the protection of one or other party. For example, an entire agreement clause, a force majeure clause, a further assurance clause, a ‘time of the essence’ clause, etc. A solicitor who fails without good reason to include such terms in an appropriate case could be exposed to a negligence claim.

Draw up a list of the terms you think you will need at the start of the planning process and tick them off as you draft the document.

Traps and Pitfalls Checklists

Traps

Tax – What are the tax implications of the transaction?
Registers– Are there any registers which should be searched or in which the transaction should be recorded?
Authority– Have all parties to the transaction the necessary authority?
Periods– Have you carefully noted all relevant time periods?
Standard terms– Does the contract contain all the usual standard protective terms or ‘boilerplate’?

Pitfalls

Practicalities– Have you thought about how the transaction will work and any practical difficulties there may be?
Insolvency– What would happen if a party became insolvent?
Termination– In what circumstances will the effect of the document come to an end?
Failures– What is the machinery and how is it to operate if things go wrong?
Attendance note– Have you recorded in an attendance note and placed on file for further reference (and for your protection) any important item of information communicated orally?
Liquidated damages, penalties, and termination payments– Do you wish to provide for pre-estimated losses and, if so, are they to be payable as a result of a breach or following exercise of a specific right to terminate?
Limitation and exclusion clauses– Exercise extra care to ensure that these clauses are unambiguous and that they are not likely to be rendered invalid by the Unfair Contract Terms Act, 1977 or other statutory or common law rules.
Specific performance– Are you confident that you know the principles and the circumstances in which specific performance would be available in your transaction? This may be crucial in cases of default or insolvency.

Planning before drafting

Plan the contract as a logical structure. Having gained a sound understanding of the transaction, perhaps having drawn up an outline, and identified the terms your contract should contain, you should group them under broad headings set out in a logical and natural order. Start with major headings and once you have the essential structure for your contract, expand the headings into clauses and sub-clauses.

Definitions are among the most challenging provisions to draft and benefit from careful planning. Allocate a separate sheet for a plan of the words and expressions you will need to define and draft provisional definitions.

If you follow this procedure, provisions relating to a particular topic will be properly grouped together and not scattered at random throughout the contract. Further, this process will not only provide you with a structure with which to work but may also indicate gaps of which you were previously unaware.

Conclusion

The goal of drafting is to memorialize a transaction in a manner that is concise, precise, direct, consistent, user-friendly (usually), and to a reasonable degree, complete. Of course, all these must be balanced with practical realities, budgets, and other needs of the client. These principles should remain in the back of one’s mind at all times while drafting any contract.

Comparison of Indian Domestic Arbitration with the Arbitration Laws operating in the European Union

Anubhav Pandey

August 9, 2017

In this article, Rohit Gehlot pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, does a comparison of Indian Domestic Arbitration with the laws governing Arbitration in EU.

Dictionary meaning of “Arbitration” is the use of an arbitrator (an independent person or body officially appointed to settle a dispute) to settle a dispute.

The Indian Constitution, under Article 51 clauses (c) and (d) provides that the state shall endeavour to (c) foster respect for international law and treaty obligations in the dealings of organised peoples with one country and (d) encourage settlement of international disputes by arbitration. In this constitutional sense, the President of India promulgated the Indian Arbitration and Conciliation Act, 1996. This act covers domestic arbitration as well as international commercial arbitration.

Arbitration, in a legal sense, is a method of adjudication of disputes between the parties by non-judicial process wherein the arbitrator is appointed by the parties themselves under a contract. That means the 1996 act in itself does not give any right to any party unless parties have entered into an arbitration agreement for adjudication of disputes by way of arbitration.

Indian Domestic Arbitration

Domestic arbitration takes place when the arbitration proceedings, the subject matter of the contract and the merits of the dispute all are governed by the Indian Law, or where the parties to the contracts are subject to Indian jurisdiction or when the cause of action for the dispute arises wholly in India.

Essentials of Indian Domestic Arbitration

Arbitration to take place in India;
The subject matter of contract in India;
The merits of the dispute are governed by the Indian law;
The procedure of arbitration is also to be governed by the Indian Law

Section 2(1)(a) of the act says that arbitration means any arbitration whether or not administered by permanent arbitral institution. Thus, the act recognizes every type of arbitration whether institutional (arbitration conducted by the institution) or non–institutional (where arbitration process conducted by an arbitral tribunal other than the institute).

Section 2(1)(h) party means a party to an arbitration agreement. The party here means a person competent to enter into a contract as per Indian Contract Act.

Section 2(1)(e) of the act defines arbitral tribunal. It says “Arbitral Tribunal means a sole arbitrator or a panel of arbitrators.” The parties are free to determine the number of arbitrators in the arbitral tribunal provided that such number shall not be an even number.

To be an arbitrator no formal qualification has been prescibed in the act. Even nationality is no bar. Parties have been given full authority to determine the qualification of the arbitrator. Priority has also been given to the parties to appoint the arbitrator(s) under section 11(2) of the act.

After the appointment of arbitrator, he should inform the parties to the arbitration about his appointment. The procedure for written communication is given in Section 3.

Arbitration and Conciliation act also imposes certain responsibilities upon arbitral tribunal so that the independence and impartiality of the tribunal can be maintained. The party to the arbitration can also challenge the appointment of arbitrator if party becomes aware about the circumstances that give rise to justifiable doubts regarding the independence or impartiality of the arbitrator. The party has only recourse to it is, to challenge the appointment of arbitrator(s) before the arbitrator itself. According to Section 13(1) the parties are free to agree on a procedure for challenging an arbitrator.

The 1996 act also imposes some mandatory obligations on arbitral tribunal to follow and give due respect to the contents of the arbitration agreement for e.g. documents to be used as evidence, place of arbitration, language to be used in arbitration proceedings, mode of communications to be used, arbitral tribunal is bound to follow all such contents of the agreement. The main reason of enacting the act is to remove technical difficulties faced by the parties in the court proceedings and that’s why Section 19(1) says that arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872.

Section 16

Arbitral Tribunal is also given the full competency to rule its own jurisdiction under Section 16 of the act subjected to the courts supervision.

Section 17

Interim measures ordered by the arbitral tribunal.

(1) Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order a party to take any interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject-matter of the dispute.

(2) The arbitral tribunal may require a party to provide appropriate security in connection with a measure ordered under sub-section (1).

Arbitration in EU

A common distinction in arbitration law is the one between domestic and international arbitration. Whenever an international legal relationship is involved, parties often choose to resort to arbitration, as the involvement of national State courts could be undesirable for several reasons, such as local protectionism. Arbitration in EU.

In Europe, different States take different approaches as to the distinction between domestic and international arbitration. The majority of States does not distinguish between the two types of proceedings: Austria, Belgium, Czech Republic, Denmark, England and Wales, Estonia, Finland, Germany, Hungary, Ireland, Italy, Latvia, Lithuania, the Netherlands, Poland, Portugal, Scotland, Slovakia, Slovenia, Spain and Sweden follow this approach.

On the contrary, Bulgaria, Cyprus, France, Greece, Malta, Romania and Switzerland draw a distinction between international and domestic arbitration.

Scope of Application Commercial vs. Other

Not every dispute falling within the general limits of arbitrability shares the same nature; on the contrary, some cases are commercial in nature, whilst others cannot be qualified as commercial, although they involve economic interests. Although the specific definition of ‘commercial’ can change depending on the applicable substantive law, in general it is accepted that a relationship is commercial when it is based on a contract concluded between parties professionally operating on the market as merchants. On the other hand, a private law relationship does not usually qualify as commercial when is non-contractual in nature (for example, disputes on trusts) or when it is based on a contract concluded episodically by subjects not usually operating in that specific market.

The approach generally adopted by the European States is that all disputes falling within the national boundaries of arbitrability can be resolved through arbitration, irrespective of their commercial or non-commercial nature. There are, nonetheless, some exceptions to this trend.

In Bulgaria, the arbitration law applies to international arbitration of commercial disputes and to domestic arbitration of commercial or non-commercial disputes.

In Cyprus, the Arbitration Law applies only to international commercial arbitration, whilst for domestic cases, a separate regime is set forth.

In France, the international arbitration regime only applies to commercial cases.

In Hungary, arbitration is only possible where at least one of the parties is a person dealing professionally with an economic activity and the legal dispute is in connection with this activity.

Ad hoc vs Institutional Arbitration

Arbitration is a system of dispute resolution where adjudicative functions are performed by private subjects: arbitrators are not tenured, nor they are part of a public office. As a result, unlike civil litigation, arbitration can exist without any permanent institutional framework.

This basic form of arbitration, in which two parties agree on arbitral tribunal to decide their dispute, without the involvement of any arbitral institution, is commonly referred to as ad hoc arbitration.

When parties include the appointment of an arbitral institution in their arbitration agreement, they do not only submit to arbitration, but they also provide for the application of the rules of the selected institution. Therefore, in this context the supporting services will generally not be performed by a State court but by the institution itself.

Arbitrability

Arbitration is a system of private adjudication substituting court litigation: although it is structurally similar to court proceedings, arbitrators are not State judges and they do not exert sovereign powers. Therefore, it is evident that arbitration cannot substitute any type of court proceedings.

The New York Convention deals with the problem of arbitrability in Article V(2)(a), according to which recognition and enforcement of an arbitral award can be refused if the subject matter of the dispute is not capable of settlement by arbitration. Therefore, the contents of national law relating to arbitrability are of extreme importance, not only because they determine what kind of disputes can be resolved through arbitration in a particular jurisdiction, but also because they can limit the international circulation of arbitral awards.

Form of the Agreement

Since arbitrators are private adjudicators, their jurisdiction generally derives from a free choice of the disputing parties. When parties conclude an arbitration agreement, they waive their right to resort to a State judge, in favour of a private adjudicator.

A tacit acceptance of arbitration can take place if, in the absence of a valid arbitration agreement in writing, one of the parties initiates arbitration proceedings and the other one participates in the arbitration without objecting to the arbitral tribunal’s jurisdiction.

Arbitrator’s Qualifications

Since arbitrators are private adjudicators, they are not tenured members of a judicial body, nor do they exert public authoritative powers. Parties entering an arbitration clause are largely left free to select the arbitrator(s) they deem most suitable for their dispute, and to reach an agreement on the particular characteristics and qualifications that their adjudicator(s) must have.

Independence and Impartiality

Since arbitrators perform adjudicatory functions, it is fundamental that they are independent and impartial: these duties are generally enshrined in all national arbitration laws.

“Independence” refers to the objective relationship between the arbitrator and the parties. “Impartiality”, on the other hand, focuses on the subjective mindset of the arbitrator with respect to the case pending before him. An arbitrator should always decide a case on its merits, without being influenced by the identities of the parties and without deciding any issues before the parties have been afforded an equal right to present their arguments.

The first approach is followed by the UNCITRAL Model Law and can therefore be found in countries adopting this instrument, such as Spain, Ireland, Belgium, Germany, Austria, Croatia, Hungary, Bulgaria, Poland and Lithuania. A similar solution is implemented in France.

On the contrary, in Romania, Italy and Sweden the grounds for challenge are specifically enumerated.

Competency

Arbitral tribunals derive their jurisdiction from the consent of the parties: through an arbitration agreement the litigants accept to refer their dispute to the decision of private adjudicators, instead of a State court.

There is no doubt that where a valid arbitration clause exists, the arbitral tribunal has jurisdiction to decide disputes arising out of the main contract and covered by that clause. However, it is possible that the respondent in the arbitration proceedings will raise objections relating not only to the main contract, but also to validity or scope of the arbitration agreement.

The competence-competence doctrine always produces a positive effect: it enables the arbitral tribunal to take decisions as to the validity of the arbitration agreement. In this regard, European jurisdictions adopt a fairly uniform approach.

Setting aside of awards

Finality is one of the primary benefits arbitral awards; the decision of the arbitrator(s) is binding on the parties and should not, in principle, be revisited. This is a major difference between arbitration and court litigation: unlike first instance court decisions, arbitral awards cannot generally be appealed even if they are demonstrably mistaken.

Conclusion

In many ways, Domestic Indian Arbitration Law is similar to the Arbitration Law in the European Union. But at the same time there are differences also. At the same time, there are also differences in the arbitration laws among various European Nations too.

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