In this blog post, Hitender Sharma, a member of the Bar of the District Court Mandi Town, Himachal Pradesh and currently pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the Appellate Arbitral Rules In international commercial arbitration.

What is Arbitration?

Disputes are inevitable in business. It is very difficult to visualize and negotiate perfect terms and conditions for any business relationship. In the event of dispute, parties to the business/contract approach a court. However, getting a resolution of the dispute through the court is a very difficult, cumbersome, time consuming and costly process and one has to wait for years to get final resolution of the dispute. This situation has resulted in the evolution of various alternative dispute resolution mechanisms for speedy resolution of disputes which helps parties to avoid costly and time-consuming litigations. Instead, parties can agree on a dispute resolution method by a written contract which is agreeable to both parties. Law has been enacted to give legitimacy to these private dispute settlement proceedings. There are various alternative dispute resolution options having the force of law to resolve disputes privately through arbitration, conciliation, negotiation and mediation.  In most of business transactions and agreements, alternative dispute resolution clauses, specifically arbitration clauses, have become a common feature in India.

Arbitration is one of alternative dispute resolution mechanism used to resolve disputes between private entities, outside the Court.  Even the Government resorts to this mechanism in their commercial transactions. The process of arbitration, however, can be resorted to only if there is a written arbitration agreement between the parties to the disputes or an arbitration clause in an agreement governing the commercial relations between the parties. The arbitration proceedings are governed by the Arbitration and Conciliation Act, 1996 (A&C Act) as amended from time to time. According to the provisions of A&C Act, arbitration can resort to only if there is a written arbitration agreement between the parties to the disputes or an arbitration clause in an agreement governing the commercial relations between the parties. The dispute is referred for adjudication to one or more persons referred to as arbitrator(s). The decision of the arbitrator called an arbitral award, is similar to the judgment of the Court and is legally enforceable in the same manner as if it were a decree of the court.

Types of arbitration

Arbitrations are of two types i.e.  ad hoc or institutional.

Ad hoc arbitration

In an ad hoc arbitration, parties simply agree to the contract to resolve disputes by arbitration, without specifying any arbitral institution. Agreements/clause in the agreement only states that arbitration would resolve disputes regarding the Arbitration and Conciliation Act. The procedure for arbitration may be incorporated in the contract/arbitration agreement either at the time of entering into the contract or after a dispute has arisen. The parties are free to choose the arbitrators themselves. Sometimes, the number of the arbitrator(s) is specified. in an ad hoc arbitration,  If they fail to agree upon an arbitrator, an appointing authority is required to make the appointment. In India, the Chief Justice of the High Court concerned, or the Chief Justice of the Supreme Court (if one of the parties is a foreigner) is the appointing authority.

Institutional arbitration

In an institutional arbitration, the parties choose the  arbitral institution for conducting arbitration proceedings.  Arbitral institutions have a panel of qualified and experienced arbitrators, may be having the expertise of Law or some commercial area relating to disputes. The arbitral institution provides arbitrator(s), basic infrastructure and a framework of administrative procedures for conducting arbitration proceedings. London Court of International Arbitration (LCIA), International Chambers of Commerce (ICC), Singapore International Arbitration Centre (SIAC)   for conducting the arbitration, the Indian Council of Arbitration (ICA), the Indian Institute of Arbitration and Mediation (IIAM), and the International Centre for Alternate Dispute Resolution (ICADR) are arbitral institutions within and outside the country which conduct arbitration proceedings of the parties who choose them. These arbitral institutions have their rules and procedures for conducting arbitration proceedings to which parties to the dispute will have to abide by.

International Commercial Arbitration (ICA)

Section 2(1)(f) of the Act defines an international commercial arbitration as arbitration  arising from a legal relationship , considered commercial and  where either of the parties is a foreign national or resident or is a foreign body corporate or is a company, association or body of individuals whose central management or control is in foreign hands. Thus, under Indian law, an arbitration with a seat in India, but involving a foreign party will also be regarded as an international commercial arbitration, and hence subject to Part I of the Act. Where an international commercial arbitration is held outside India, Part I of the Act would not  apply to the parties (save the stand-alone provisions introduced by the Arbitration and Conciliation Amendment Act, 2015 unless excluded by the parties) but the parties would be subject to Part II of the Act. The Amendment Act has deleted the words ‘a company’ from the purview of the definition thereby restricting the definition of international commercial arbitration only to the body of individuals or association. Therefore, if a company has its place of incorporation as India, then central management  and control would be irrelevant as far as its determination of being an “international commercial arbitration” is concerned. The Supreme Court determined the scope of this section in the case of TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd., wherein, despite TDM Infrastructure Pvt. Ltd. having a foreign control, it was concluded that “a company incorporated in India can only have Indian nationality for the purpose of the Act.” Thus, though the Act recognizes companies controlled by foreign hands as a foreign body corporate, the Supreme Court has excluded its application to companies registered in India and having Indian nationality. Hence, in case a corporation has dual nationality, one based on foreign control and other based on registration in India, for the purpose of the Act, such corporation would not be regarded as a foreign corporation.

Appellate arbitral rules 

The A&C Act, 1996 does not provide for an appeal against an arbitral award. The aggrieved party (who must be a party to the arbitration agreement or a party’s legal representative) may approach a court to set aside the award on any of the grounds mentioned in Section 34(2) of the A&C Act. However, these grounds offer very limited scope for review of the arbitral award as compared to an appeal in litigation in the court. In an appeal, a superior court goes into the merits of the decision of the lower court, while in the case of setting aside an arbitral award; the court is only required to check if the award violated specific requirements. It may examine the clauses of the agreement to determine the validity of the award.

Under Section 34 of the Act, a party can challenge the arbitral award on the following grounds:-

• the parties to the agreement are under some incapacity;
• the agreement is void
• the award contains decisions on matters beyond the scope of the arbitration agreement;
• the composition of the arbitral authority or the arbitral procedure was not in accordance with the arbitration agreement;
• the award has been set aside or suspended by a competent authority of the country in which it was made;
• arbitration under Indian law can not settle the subject matter of dispute;
• the enforcement of the award would be contrary to Indian public policy. The Amendment Act has added an explanation to Section 34 of the Act. In the explanation, public policy of India has been clarified to mean only if: (a) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or 81, or (b) it is in contravention of the fundamental policy of Indian law; or (c) it is in contravention with the most basic notions of the morality or justice.
• A new section has been inserted in the amended Act providing that the award may be set aside if the court finds it vitiated by patent illegality which appears on the face of the award. For international commercial arbitrations seated in India, ‘patent illegality’ has been kept outside the purview of the arbitral challenge;
• In the amended A &C Act it is provided that an award will not be set aside by the court merely on an erroneous application of law or by re-appreciation of evidence. Further, a court will not review the merits of the dispute in deciding whether the award is in contravention of the fundamental policy of Indian law.

Section 34 also provides for the manner for the challenge of the arbitral award. The period for the challenge is before the expiry of 3 months from the date of receipt of the arbitral award (and a further period of 30 days is allowed on sufficient cause being shown for condonation of delay). If that period expires, the award holder can apply for execution of the arbitral award as a decree of the court. But as long as this period has not elapsed, enforcement is not possible. In the amended Act, a new sub-section (6) of Section 34 has been inserted which provide a period of one year for disposal of an application for setting aside an arbitral award.

Challenge to appointment of arbitrator

An arbitrator is expected to be independent and impartial.

If there are circumstances due to which his independence or impartiality can be challenged, he must disclose the circumstances before his appointment.

Appointment of an arbitrator can be challenged only if –

1. Circumstances exist that give rise to justifiable doubts as to his independence or impartiality; or,
2. He does not possess the qualifications agreed upon by the parties.

In blog post, Divya Kathuria, a student of Raffles University, Neemrana, discusses conciliation as a process to resolve business disputes.

“An ounce of conciliation/mediation is worth a pound of arbitration and a ton of litigation!”- Joseph Gyrnbaum [1]

In all types of Businesses, some or other kinds of problems are bound to arise. Some or many of them can easily be solved through common sense while some may become a dispute, the resolution of which requires a great understanding and therefore, it becomes important to resolve such disputes amicably as well as speedily as lurking on it forever would bring the Business to a standstill.

The regular process of litigation can be costly as well as cumbersome for all the parties involved in the dispute. Also, it would lead to a huge backlog in the Courts. Another important factor to be noted is that if dispute resolution process becomes cumbersome, people will be least interested in any kind of business in our country thus, lowering down the ease of doing a business level or say, it becomes difficult to run such a business.

So, we discuss through this article an alternative method of dispute resolution- Conciliation.

What is Conciliation?

As per Oxford Dictionary, conciliation means; ‘The action of stopping someone from being angry.’ As mentioned above, it is important to solve Business disputes while maintaining the cordial relation between the parties involved.

It has been derived from the word ‘concile.’ Conciliate and reconcile are both employed in the sense of uniting men’s affections but under different circumstances.

Conciliation means ‘bringing of opposing parties or individuals into harmony to settle the dispute.’[2]

Conciliation can easily solve the following types of disputes: commercial, financial, family, real estate, employment, intellectual property, insolvency, insurance, service, partnerships, environmental and product liability. Apart from commercial transactions, the mechanism of conciliation is also adopted for settling various types of disputes such as labor disputes, service matters, antitrust matters, consumer protection, taxation, excise, etc

It is a confidential, voluntary and private dispute resolution process in which a neutral person helps the parties to reach a negotiated settlement. This method provides the parties with an opportunity to negotiate, converse and explore options aided by a neutral third party, the conciliator, to exhaustively determine if a settlement is possible.[3]

Conciliator

Conciliator, also called conciliating officer tries to resolve the dispute between parties by lowering down the tensions between them or say, in a way, calms both the parties by talking to them separately. They try to improve communications between both by interpreting the key issues that caused the conflict and encourage them to explore the solutions which are beneficial to all the parties involved, that is, he tries to create a win-win situation and arrive at a mutually acceptable outcome.

However, the conciliator does not have any power to impose the settlement arrived at. All he does is to try to break the deadlock and encourage the parties to reach an amicable settlement by acting as a conduit for communication, filtering out the disturbing elements and allowing the parties to focus on the underlying core objectives.[4] In all, conciliator doesn’t decide; he just helps the parties to arrive at a decision.

Conciliation as process to resolve disputes

It is the fastest growing alternate dispute resolution (ADR) mechanism in today’s world and is commonly used in the U.S., U.K. and Europe as an effective way of settling disputes, be it commercial, contractual or personal.

However, it is not necessary to have a prior conciliation clause in the agreement to refer the dispute to resolution. Cases may be referred for conciliation with the consent of both the parties. The process is risk-free, and parties are not bound by it till they arrive at and sign the agreement. Once a solution is reached between the disputing parties before a conciliator and signed by them, the agreement has an effect of the arbitration award and is legally enforceable in any court in the country.

India is already familiar with the system of panchayats where the panchs usually try to solve the dispute in a friendly manner between the parties. So, it is slowly gaining ground and awareness of its merits is developing in India. However, ADR is still in the experimental stages in India.

Legislations on Conciliation in India

The Arbitration & Conciliation Act, 1996

This Act consolidates and brings the law relating to Arbitration in India by bringing it under one statute when the various provisions relating to arbitration were spread over three separate Acts. It was drafted as per the UNCITRAL Model Arbitration Law and the UNCITRAL Conciliation Rules and for the first time statutorily recognized conciliation by providing elaborate rules of engagement.

The Code of Civil Procedure (CPC)

For the past several decades, India’s court system has suffered from an overwhelming backlog of cases. An average civil case takes almost a decade to be adjudicated. In 1996, the Indian Legislature recognized that to lessen the burden on the courts by introducing a more efficient case management system, mediation/conciliation would have to be integrated as a dispute resolution option in appropriate civil and commercial matters. As a consequence, in 2002, the CPC was amended to make ADR an integral part of the judicial process. Regarding the newly inserted section 89 of CPC, if it appears to the court that there exist elements, which may be acceptable to the parties, the court may formulate the terms of a possible settlement and refer the same for arbitration, conciliation, mediation or judicial settlement.

Conciliation procedure

The first step is to decide unanimously between the parties that they want to resolve their dispute through conciliation. Next step is to choose a conciliator as agreed by the parties together and he must be neutral to the parties involved.
Initially, in the first session, a decision is taken as to who will attend the conciliation and what will be the cost. The cost is shared equally between both the parties. The process is explained to both parties, and the conciliator is introduced. Ground rules of courtesy and propriety are laid down and scrupulously followed.

In the next session, parties explain their case and not just the legal aspect of it but, also their feelings. At this stage, the conciliator will only listen for the purpose of identifying the key issues. These sessions are private and confidential and at a time, only one party is there.

After this, a deliberation session follows, and creative solutions are explored. Joint sessions further follow this. If parties are reluctant to disclose certain information in joint sessions, the conciliator may request them to join him/her in a private session. In this, the conciliator will skillfully draw out relevant information. This can also be kept confidential, should the party wish so. The final stage is when the parties reach a consensus which is usually a win-win situation for both, and a written agreement is drafted to be signed by both the parties. Monitoring and reviewing the case is very important in the end.

Advantages

• Conciliation offers a more flexible alternative to arbitration as well as litigation, for resolution of disputes in the widest range of contractual relationships, as it is an entirely voluntary process.
• In conciliation proceedings, the parties are free to withdraw from conciliation, without prejudice to their legal position, at any stage of the proceedings.
• The matter is settled at the threshold of the dispute, avoiding protracted litigation efforts at the courts. As conciliation can be scheduled at an early stage in the dispute, a settlement can be reached much more quickly than in litigation.
• Parties are directly engaged in negotiating a settlement.
• The conciliator, as a neutral third party, can view the dispute objectively and can assist the parties in exploring alternatives which they might not have considered on their own.
• Parties save money by cutting back on unproductive costs such as traveling to court, legal costs of retaining counsels and litigation and staff time.
• The parties may carefully choose conciliators for their knowledge and experience.
• Conciliation enhances the likelihood of the parties continuing their amicable business relationship during and after the proceedings.
• Creative solutions to special needs of the parties can become a part of the settlement.
• Confidentiality is maintained throughout the proceedings on information exchanged, the offers and counter offers of solutions made and the settlement arrived at. Also, information disclosed at a conciliation meeting may not be divulged as evidence in any arbitral, judicial or another proceeding.[5]

Conclusion

It is more important to be able to execute a law than to keep on enacting a plethora of legislations and that is the main problem with Indian Legislations. Though, we have the law that is, ADR Act but still, is not very popular for commercial disputes in India when developed countries like Japan can use it for almost all kinds of civil disputes.

We have the law, but machinery is still not effective and perfect that the business community can trust it. Also, it is not as popular as normal litigation. When we see the backlog of crores of cases in Indian courts today, it is not just essential for commercial disputes but also for civil disputes which take 10-20 years to reach their destiny. This is one kind of urgent judicial reform that is needed today in India. Not only this, but it will also ease the doing of business in India for it’ll attract investors to invest in our country. ADR can be the monosyllabic solution for many economic problems for India and at the same time is necessary to curb the menace of the backlog of cases which the foremost concern and worry of Indian judiciary today.

Footnotes:

[1] Principal Mediator and Engineer, Mediation Resolution Int’l, LLC

[2] P Ramanatha Aiyar’s Concise Law Dictionary, 4^th edition, 2012; LexisNexis Butterworths Wadhwa, page no. 247

[3] http://www.ficci-arbitration.com/htm/whatisconcialation.htm

[4] Ibid

[5] Id

In this blog post, Tusharika Bhattacharya, who is pursuing her Company Secretary Finals from Institute of Company Secretaries of India and is also pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, differentiates and describes the various models of corporate governance across the globe. 

In this blog post, Rashi Chandoke, an Associate with ANA Law Group, Mumbai, and a student, pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discuss the circumstances when a Director is not held responsible for the actions of the Company.  

In this blog post, Kunal Bhargava, a student of New Law College, Bharti Vidyapeeth University, Pune, who is currently pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the role and functioning of Audit Committee with respect to Related Party Transactions under Companies Act, 2013 and various recent developments by way of amendments.

Introduction

The Companies Act, 2013 can be called the Act of disclosures, declarations, and compliances. It conveys the intent to radically raise the bar on corporate governance in India and meeting the global standards. It makes a paradigm shift; from a control based regime to a trust based regime.

Under the Companies Act, 2013, the Audit Committee has been given a significant role and responsibility to regulate and determine the Related Party Transaction and to design the control procedure of the company internally. The role of the committee has been sharpened with specific responsibility and onuses relating to pre-approvals, modifications and non-compliances of related party transactions apart from general valuation and other financial responsibilities.

This article will help the readers to understand the role and functioning of Audit Committee with respect to Related Party Transactions under Companies Act 2013 and various recent developments by way of amendments.

What is a Related Party Transaction?

A Related Party Transaction is a transaction between a company with its related party/parties. The Companies Act, 2013 has expanded the scope of transactions of Company with related parties that can be treated as Related Party Transactions. Following transactions are included within the ambit of related party transaction:

• Sale, purchase or supply of any goods or materials;
• Selling or otherwise disposing of, or buying, property of any kind;
• Leasing of property of any kind;
• Availing or rendering of any services;
• Appointment of any agent for purchase or sale of goods, materials, services or property;
• Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
• Underwriting the subscription of any securities or derivatives thereof, of the company.

The following transactions are exception to related party transactions:

• Transactions undertaken in ordinary course of business
• Transactions arising out of restructuring, mergers or acquisition.
• Transactions entered between holding and its wholly owned subsidiary company duly approved by shareholders.
• Transactions in case of private holding companies and its subsidiaries and associates.

Audit Committee and its Composition

An Audit Committee is a committee established by and amongst the Board of Directors of the Company. The purpose of establishing such committee is overseeing the financial position of the Company. Effective oversight of financial reporting process is fundamental to preserving the integrity of markets.

Under the provisions of Section 177 of Companies Act, 2013 it becomes mandatory for constituting the Audit Committee for every Listed Company, and every unlisted public company which satisfies the following conditions:

• paid up capital of Rs.10 Crores or more, or
• turnover of Rs.100 Crores or more, or
• aggregate outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores.

The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for this rule.

The Audit Committee shall comprise of the following:

• Minimum 3 directors with the majority being independent directors (in the case of companies registered under Section 8, the requirement of independent director has been done away with. (Notification G.S.R. 466(E) dated 05.06.2015).
• The majority of members of Audit Committee including its Chairperson shall be persons with the ability to read and understand financial statements.

Role of Audit Committee in Related Party Transaction (RPT)

The functioning and the role of Audit Committee for dealing with Related Parties Transactions of the Company are provided under the provisions of Section 188 of the Companies Act, 2013 read with Companies (Meetings of Board and its Powers) Rules, 2014. It mandates for certain compliance requirements for Audit Committee approval for the related parties transactions.

As per Companies Act, 2013 read with the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015, as notified by the MCA on 14th December 2015 each and every RPTs shall be placed to the Audit Committee and require prior approval of Audit Committee.

• Audit Committee proves significant in Related Party Transactions. It is responsible for assessing the modifications in the Accounting Policies and practices adopted by the Company.
• It must monitor Company’s policies that are not in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India and the reasons for their inconsistency with such standards.
• Audit Committee may grant omnibus approval for related party transactions subject to the following conditions:

(l) The Audit Committee shall after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely:-

(a) the maximum value of the transactions, in the aggregate, which can be allowed  in a year;

(b) maximum value per transaction which can be allowed;

(c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

(d) review, at such intervals as the Audit Committee may deem fit; related party transaction entered into by the company under each of approval made;

(e) transactions which cannot be subject to the Omnibus by the approval Audit Committee.

(2) The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –

(a) Repetitiveness of the transactions (in past or future);

(b) the justification for the need of omnibus approval.

(3) The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature, and that such approval is in the interest of the company.

(4) The omnibus approval shall contain or indicate the following: –

(a) name of the related parties:

(b) nature and duration of the transaction;

(c) the maximum amount of transaction that can be entered into;

(d) indicative base price or current contracted price and the formula for variation in the price, and

(e) other information relevant or important for the Audit Committee to take a decision on the proposed transaction:

Provided that where the need for related party transaction cannot be foreseen and details above are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding Rupees One Crore per transaction.

(5) Omnibus approval shall be valid for one financial year and shall require fresh approval after the expiry of such financial year.

6) No Omnibus approval for transactions of selling or disposing of the undertaking of the company.

(7) Any other conditions as the Audit Committee may deem fit.

• It shall review the statement of significant related party transactions, submitted by the management. Audit Committee must ensure the disclosure of materially significant related party transactions that may have potential conflict with the interests of the company at large.

Conclusion

The role of the Audit Committee in 2013 Act has been expanded in comparison with 1956 Act, and it further seems the scope is going to increase by the proposed Companies Amendment Bill 2016.The proposed Companies Amendment Bill 2016, will make the role of Audit Committee clearer, if implemented, it will clear the Recommendatory Role of Audit Committee. The proposed amendment mandates the Audit Committee to scrutinize all related party transitions whether or not it covers under Section 188. However, if transactions with Related Parties which are not coming under Section 188, and the Audit Committee does not approve it, then it shall make its recommendations to the Board. Thus the position and role of Audit Committee will be more specific and defined.

In this blog post, Ashutosh Singh, a student of Department of Law, University Of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the intricacies of arbitration and its different types.

Before we get into the intricacies of arbitration and its different types, we must have a clear idea as to what is meant by arbitration in the international sense of the term. WIPO’S website defines arbitration as the process by which parties agree to submit a dispute to one or more arbitrators, who make a binding decision on the dispute. In choosing arbitration, the parties opt for an alternate method rather than going to court. Here, it must be kept in mind that arbitration is the mere replacement of litigation, it does not replace the judicial system in totality but rather it co-exists with it.

The purpose behind arbitration is to provide impartial and fair dispute resolution without the unnecessary delay and exorbitant costs. Subject to certain principles of public policy, arbitration allows parties to resolve a matter as per their conditions. Arbitration has become a very popular method of dispute resolution in modern times. Almost all commercial contracts, even the most simplest of them today contain an arbitration clause which the parties to the contract can evoke based on happening or not happening of certain conditions present in the contract itself.

We are concerned with ad hoc and institutional arbitration, their advantages over each other and which form suits a party to a contract in a particular situation. Both these forms have been discussed hereinafter-

1. Ad Hoc Arbitration –

This method of arbitration is such in which the procedure to be followed in the arbitration is not determined by any institution, the parties themselves decide the manner in which the arbitration shall take place. In the case of ad hoc proceedings, the parties themselves decide a lot of the details like the selection of the arbitrators, the place or better known in legal parlance as the seat of arbitration, applicable law, and the procedure and administration. There is a sense of cooperation between the parties in case of ad hoc proceedings and as a result of this, the process is more flexible, cheap and better administered. The mere absence of administrative fees in this case considerably brings down the cost of the entire process. The agreement containing the arbitration clause may simply state that “disputes arising between parties shall be arbitrated.” All unresolved question as to the appointment of the arbitration tribunal, the seat of arbitration, enforcement of the arbitral award, etc. if not mentioned in detail in the arbitration clause shall be governed by the local laws of the place. Further, the parties can any time during the proceedings, engage an institution to enter the arbitration.

An area of concern in this form of arbitration is that the parties formulate all the rules based on the future arrival of such complexities but it they during the time of the drafting of the arbitration clause fail to address all such issues, and one of them subsequently crops up then the parties would be in great difficulty. Another common practice is to copy the contract from certain institutional arbitrator but again here it would fail to cater to each and every need of the concerned parties, and it would often be enforceable in a different set of laws in case of international arbitration.

2. Institutional Arbitration –

This form of arbitration includes a permanent institution which assumes the administration of the arbitral process and it is then regulated by the rules of this institution. It must here be made clear that the institution does not arbitrate but the arbitrators which undertake the arbitration. Often, the contract between the parties may contain the name of the institution to which the arbitration is to be referred if the administrative costs are not very high then this form of arbitration is highly preferred. The common problems faced under this form of arbitration are that-

• The administrative costs very high sometimes they become even higher than the actual amount of the monetary dispute.
• Many institutions have bureaucracy and red tapism which further adds to the costs.

• The time frames allocated for the filing of replies are in some cases unrealistic.

The parties have to look into the institution which they have to choose for arbitration based on the nature and commercial value of the dispute, rules of the institution and record of such institution regarding the settlement of such disputes. There are over 1200 of such institutions, some of them are The London Court of International Arbitration, The Chartered Institute of Arbitrators, The International Court of Arbitration (Paris). So to choose an institution which caters perfectly to the needs of a party is a cumbersome exercise.

Now we come to the benefits which this form of arbitration offers. Basically, it provides with a pre-established method of arbitration together with well-drafted rules and regulations which give the impression if the arbitration meeting its purpose, administrative assistance with the necessary infrastructure is another benefit most of the institutions have proper courtrooms to assist the parties in arbitration, they also have proven arbitrators on board which makes the establishment of the arbitral tribunal a comparatively easier process and finally looking at their proven track record even reluctant parties become ready to undergo arbitration.

Another point of importance in cases of institutional arbitration is that they allow review and scrutiny of the draft award before the final arbitral awards are made. It is a well-known principle in arbitration that once the arbitral award is declared it can’t be appealed against, hence a simple mistake may cost the party substantial losses thus this facility of review allows them a second chance to make proper submissions before the Tribunal and this sometimes can change the very course of an arbitral award. This facility is not present in the case of ad hoc arbitration. Moreover, national courts also pay importance to the awards granted by these institutions as most of them have a lot of experience and are headed by experts.

Conclusion

Now, arbitration is based on the premise of freedom of the parties to settle disputes among themselves but what happens in the case of institutional arbitration is not arbitration in the strict sense of the term. Thus, ad hoc arbitration may be preferred in case of domestic disputes of lesser valuation, which provides the parties with freedom to operate among them, and moreover, the cost being less in ad hoc arbitration further provides an incentive to smaller players to step in these forms of dispute resolution. On the other side, when a lot of money is at stake, parties to a contract prefer institutional arbitration based on the fact that such arbitration involves specialized institutions and industry experts, so risks associated with ad hoc arbitration are minimized. Finally, it can be concluded that both ad hoc and institutional arbitration are efficient and whether a party may prefer one over the solely depends upon the specific needs of the parties to a contract.

In this blog post, Rebecca Furtado, an Instructional Analyst and a Lawyer who is currently pursuing her MA from Indira Gandhi National Open University, New Delhi and a Diploma in Entrepreneurship Administration and Business laws from NUJS, Kolkata, discusses the process of calling a board meeting under the Companies Act, 2013. 

Introduction

We witness the whole idea of a meeting or meetings in our everyday life. This may be an informal get together with a close friend, or a meeting for an interview, or simply a Society Annual General Meeting. The basic idea underlying the concept of a meeting is coming together to raise a common consensus for a matter or a particular cause.

A meeting as defined by the Miriam Webster dictionary as “a gathering of people for a particular purpose.” This purpose may be social business or a corporate business deal. A meeting is held with a specific purpose, that is, to debate upon certain related issues or to take decisions. Meetings are held specifically for an end game purpose at a pre-defined place, time and with a specific agenda in mind.

In a corporate set-up, a meeting is an important aspect in the running of the company. A meeting in this context is important not only because important resolutions are discussed and taken, but other matters pertaining to the running of the company and management are discussed herein. These meetings are classified into two main categories, i.e., organizational meetings and operational meetings. While the former deals with matters dealing with shareholders and the management, the latter involves meetings with the management and employees of different committees like the sales, marketing, etc.

Meetings are an important element in the running of a corporate set-up, and this is made evident through the laws set up under the Companies Act, 2013.

Calling a Board Meeting

A Board meeting is called by the directors of the committee. The company directors exercise their powers collectively at a Board Meeting. As per the old Companies Act, 1956, a board meeting had to be held once in three months with at least four meetings in a year. Under Section 285 of the Companies Act, 2013, every company must hold a board meeting at least once in every three months and at least four such meetings should be held every year[1].  If a meeting is called within the given period, then it would not amount to a violation, though it could not be held due to want of a quorum[2].

This meeting should be held within 30 days from the date of incorporation with a 120 days’ gap between two board meetings. The meeting can be held in person or through video conferencing. In Smith v. Paringa Mines Ltd[3]., it was held that a meeting held in the passageway outside the director’s office is valid and also constitutes a meeting.

Notice for the Board Meeting

Before the beginning of the Board Meeting, a notice for the same should be given to every Director in the Company. A failure to give notice for the meeting would invalidate the meeting and the matters debated or approved upon in the meeting would be null and void. Section 286 of the Act states that there is a penalty imposed on the concerned officer if the notice for the meeting is not given[4]. The Act does not give any period for the length of such a notice. In Brown v. La Trinidad[5], it was held that even a few minutes notice would amount to notice given.

There is no note about the form in which a notice is to be given, nor the mode of service to be used while delivering a notice. In A. Chettiar v. Kaleeswarar Mills Ltd.[6], the Court held that if the Directors are told in advance about the time of the meeting on a particular day of every month, this will amount to compliance with the law.

Agenda for the Board Meeting

It is wise to send the agenda of the meeting before the meeting so that the Directors’ can ponder and jot down their notes before the meeting. The Act does not lay down any provision that the Agenda of the Meeting should be sent to the Directors’ attending the meeting before the start of the meeting as mentioned above. Other matters apart from the agenda items can also be discussed in the meeting. However, it would be a matter of wisdom if the extra items to be discussed are also added to the agenda list.

Quorum for the Board Meeting

The quorum for a Board Meeting is one-third of the total number of the directors of the company or two directors, whichever is higher. If the quorum is not present then, the meeting will be adjourned to the same time and place on the same day in the following week. As seen in Hood Sailmakers Ltd. v. Axford BCLC[7], it’s pertinent to note that a “meeting” where one director is present irrespective of the number of the people present is not a valid meeting.

Conducting a Board Meeting

The Articles of Association of a Company provides for the manner or procedure in which an item or business has to be conducted at a Board Meeting. A majority of votes resolves all debates, questions, or resolutions and if a consensus is not obtained than the Chairman of the Board of Directors has the casting vote in case of an equality of votes.

Recording of the Proceedings of the Meeting

The proceedings of the meeting are to be recorded within thirty days from the conclusion of the meeting in a Minutes book. The minutes of the meeting should contain the names of the Directors attending the meeting, resolutions taken in the meeting, dissent on any issue, solution for the issue, etc. It should provide a fair and accurate summary of the meeting and contain evidence of every issue discussed at the meeting. It should contain the assent of the Chairman of the Board as well as details of the next meeting.

Resolution of the Meeting

Section 289[8] States that a resolution can be passed either at the meeting of the Board of Directors or by Circulation. If a resolution has to be passed through circulation, then a draft of the resolution along with the necessary papers should be given to each and every director. The resolution by circulation should be approved by a majority of the directors on the board.

Under Section 292, the following six powers can be exercised by the Board of Directors, with regards to passing of resolutions in a Board Meeting and not by Circulation:

• Make calls on shareholders in respect to money which is unpaid on their shares.
• Authorize buy-back of the shares of the Company (the Buy-back should be less than 10% of the total paid-up equity capital and free reserves of the company.
• Issuance of debentures.
• Borrowing of Money other than on debentures.
• Investing funds of the company.
• Make loans.

Conclusion

A meeting of the Board of Directors on a periodic basis is always the wisest thing as it not only exponentially reduces the time taken on passing resolutions but also clears the air in case of disputes. It also paves the way for substantive dialogue when dealing with issues that are vital for the growth of the company. It ensures the upkeep of the company as well as improves relations between the Board of Directors. No one is kept in the dark about the day-to-day dealings of the Company.

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Footnotes:

[1] Section 285, of the Companies Act, 2013.

[2] Section 288, of the Companies Act, 2013.

[3] Smith v. Paringa Mines Ltd., 1906 2 Ch. D. 193

[4] Section 286, of the Companies Act, 2013.

[5] Brown v. La. Trinidad, (1887) 37 Ch. D. 1

[6] A. Chettiar v. Kaleeswarar Mills Ltd., AIR 1957 Mad 309

[7]  Hood Sailmakers Ltd. v. Axford, BCLC (1997) 1Q. B. D. 721

[8] Section 289, of the Companies Act, 2013.

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In this blog post, Supallab Chakravorty, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the concept of insider training.

Insider trading is trading in company’s securities and bonds by those individuals who have access to price-sensitive confidential information which is otherwise not available to public about the company.  It is against the principles of fiduciary duty which an individual has undertaken in lieu of his duty and has in consonance of that duty got privileged access. A company is mandatorily required to annually report trading of stocks by corporate officers, directors, or other members of the company who are having access to privileged information to the Securities and Exchange Board of India (“SEBI”) and are duty-bound to disclose such information publicly.[1]

Problems are not restricted to insiders only, it extends to insiders “tipping” related persons and friends about such price sensitive information which will have the effect of influencing the price of publicly-traded shares/securities.  However, problem arose while prosecuting such individuals because friends or relative do not satisfy the definition of an insider. Presently, any person who is receiving is expected to abide by the same duty as an insider would be liable to.  Simply put, no person should take advantage of privileged information while trading in shares.  Thus, the scope of defining an insider has increased, and anyone trading in securities should be careful about not engaging due to the influence of price sensitive information. However, the person should have done so with knowledge of using price sensitive information is a pertinent pre-requisite to being prosecuted and convicted under insider trading laws.

Summarily, insider trading is dealing in stocks and securities of a public/private listed company by a member of the organisation, directors, workers or employees who have access to inside information or any other person such as an internal auditor, legal or financial advisor, consultant, data analyst etc., who have the knowledge or are in potential position to gain access to inside information of price sensitive nature which is otherwise not available to public in general. Exchange Commission all over the globe considers preventing such transactions as an essential obligation to regulate the capital market system because insider trading challenges the confidence of investor in the fairness and integrity of the securities markets.[2]

SEBI (Insider Trading) Regulations, 1992 were initially framed under Section 11 of SEBI Act, 1992, which was enacted with an intention to prevent and curb the menace of insider trading in securities and stock of companies. The Companies Act, 2013 also attempted to incorporate the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992 as amended but SEBI has notified the SEBI (Prohibition of Insider Trading) Regulations, 2015(“Insider Trading Regulations”), which changes the law on insider trading considerably. Thus, Section 195 of the Companies Act, 2013, although late, attempts to bring private companies, public companies, and listed companies under its purview.

Who is an Insider?

Insider has not been defined in either of the Companies Act. However, the definition of an insider under Indian legal system is derived from a collective reading of three definitions under Insider Trading Regulations. Under the regulation, insider is defined as any person who is: i) a connected person; or ii) in possession of or having access to “unpublished price sensitive information.[3] As we delve into the definition of connected person, we can see that from an objective kind of definition the regulation is narrowing it down to a more subjective definition giving away a list of person who will be considered to hold the same duty of care as an insider.

(i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by  reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.

(ii) Without prejudice to the generality of the preceding, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established, –

(a) an immediate relative of connected persons specified in clause (i); or

(b) a holding company or associate company or subsidiary company; or

(c) an intermediary as specified in section 12 of the Act or an employee or director thereof; or

(d) an investment company, trustee company, asset management company or an employee or director thereof; or

(e) an official of a stock exchange or clearing house or corporation; or

(f) a member of the board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or

(g) a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or

(h).an official or an employee of a self-regulatory organization recognized or authorized by the Board; or

(i).a banker of the company; or

(j).a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest;[4]

However, the definition takes help of rebuttable presumption of law in order to bring those people, like immediate relatives or those specified above within the ambit of duty of care, who may seemingly not occupy a position in the company but are in regular touch with the company and are also getting ready access to company’s operation and price-sensitive information. The act seems to close in on that person only who have access unpublished price sensitive information thus the final definition that should be collectively read is unpublished price sensitive information which is defined by the regulation as any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: –

(i) financial results;

(ii) dividends;

(iii) change in capital structure;

(iv) mergers, demergers, acquisitions, delistings, disposals and expansion of business and such other transactions;

(v) changes in key managerial personnel; and

(vi) material events in accordance with the listing agreement.

Apart from the definition so provided by Indian statute, for a deeper understanding of the term it is useful to look into the American jurisprudence of the term because much of what we see today of insider trading regulation is actually derived from U.S. The first country to fight illegalities of insider trading was U.S. vide its exchange controller called Securities and Exchange Commission. It is empowered under the Insider Trading Sanctions Act, 1984 (“Sanction Act”) to impose civil and criminal liabilities of penal nature over and above criminal proceedings on people engaging in menace relating to insider trading.

Sanction Act defines “insider” as a company’s officers, directors, or someone in control of at least 10% of a company’s equity securities.  The nexus of criminalizing an insider is for using non-public information that violates the fiduciary duty with which the company has entrusted the person. The definition for determining an insider provided by the Sanction Act is quantitative, whereas definition provided by the decisions of the court is subjective in nature and holds all the people who are in possession of price-sensitive information responsible under Sanction Act.

U.S. Supreme Court gave a landmark decision while delivering the judgment of Dirks v. SEC[5] on insider trading wherein the Hon’ble Court held that a prosecutor could charge even tip recipients with liability under breach of insider trading laws if the recipient had reason to believe that disclosure of such information violated another’s fiduciary duty and if the tip recipient personally gained from acting upon the information. The case also gave birth to the constructive insider rule, which includes professionals working with a corporation on a regular basis as insiders if they come into contact with non-public information.

The recent emergence of the misappropriation theory of insider trading has given effect to press note on “Trading “by” material non-public information in insider trading cases”[6] which permits criminal liability to be imposed on individuals who deals on any stock based upon the misappropriated information.  Previously, the prosecution was restricted to insiders and only if the stock of the insider’s company had been traded.  However, the judgment and the press not has given a wider definition to violators of insider trading policy. Although gathering proof of insider trading can be difficult, the SEC actively monitors trading, by being on watch out for suspicious activity.[7] But a defendant can take the defense of an affirmative pre- planned trade.

The U.S. Supreme Court cases expounded on 10(b) in a number of cases like in Tellabs, Inc. v. Makor Issues & Rights, Ltd[8]  where the court decided that the required specification whilst alleging fraud the prosecutor needs to draw a strong inference that the defendant acted with the required state of mind.  By “strong inference”, the Hon’ble Court means a showing of “cogent and compelling evidence.” [9]

Conclusion

The key take away from this essay is that while dealing with stocks and securities of a company, one must be reasonably careful so as not to fall false of any insider trading laws. Because, given the growing ambit of the meaning of insider, any person which includes a corporation and its directors can get entangled in litigation proceedings unnecessarily. Proving one’s way out of such proceedings is even more difficult in such cases.

Footnotes:

[1] Disclosure to the Exchange by the listed company in terms of Regulation 13(6) of SEBI (Prohibition of Insider Trading) Regulations, 1992
Disclosure to the Exchange by any person who is a director or officer of a listed company in terms of Regulation 13(4) of SEBI (Prohibition of Insider Trading) Regulations, 1992. Disclosure to the Exchange by any person who is a promoter or part of the promoter group of a listed company in terms of Regulation 13(4A) of SEBI (Prohibition of Insider Trading) Regulations, 1992.

[2] Samir C Arora v.  SEBI, SEBI Cases 83 /2004

[3]” Regulation 2(g), SEBI Insider Trading Regulation, 2015

[4] Regulation 2(d), SEBI Insider Trading Regulation, 2015

[5] Dirks v. SEC, 463 U.S. 646 (1983)

[6] Preliminary Note to § 240.10b5-1

[7] United States v. O’Hagan. 10b5-1

[8] Tellabs, Inc. v. Makor Issues & Rights, Ltd. 437 F. 3d 588(2007)

[9] Stoneridge v. Scientific-Atlanta, 443 F. 3d 987 (2008)

In this blog post, Shruti Sharma, a Legal Associate at BetterPlace Safety Solutions Pvt. Ltd. who is currently pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about audit accountability and the responsibilities of an auditors.

With the advent of “New companies Act 2013,” the new era of corporate governance emerged where the accountability of auditors enhanced.

The role of auditors is like gatekeepers of corporate governance. They uphold the integrity of financial information. Moreover, investors, regulators and other stakeholders pose faith in auditors.

Appointment of auditors:

The term of appointment of an auditor has been changed to 5 years as against the earlier Companies Act, 1956. Moreover, shareholders shall be required to ratify the appointment of an auditor at every AGM (Annual General Meeting), and if audit committee has been constituted then, their recommendation is also required before appointing any auditor.

If in any case appointment is not ratified, then the board is required to appoint another auditor.

Rotation of auditors:

To enhance the audit accountability, the listed companies and certain other companies require rotating their auditors at regular intervals. Moreover, in the case of an individual auditor, he has to rotate after the expiration of his term of appointment whereas, in an audit firm, the auditor can serve maximum upto two consecutive terms, i.e., 10 years.

Removal of auditor:

The company can remove an auditor before the completion of his term and the steps involved in the removal are as follows:

• Pass a Board Resolution
• Apply to Central Government (within 30 days )
• On receipt of approval from Central Government, pass a special resolution of shareholders (within 60 days).

Resignation by auditor:

An auditor needs to provide reason for resignation to the ROC (Registrar of Companies). In the prescribed format, i.e. Form no. ADT-3 “Notice of resignation by the auditor.”

Bar on number of audits:

New Companies Act, 2013 has reduced the number of audits to be conducted by the auditors (whether individual or audit firm).

The limits are provided as under:

1. As per new Companies Act, 2013 in the case of private companies a maximum number of the audit to be done by an auditor cannot exceed 20, unlike old Act where any maximum threshold was provided for the private companies.
2. In the case of Public Companies having paid-up share capital of Rs 25 lacs or more the maximum threshold is 20.
3. But regarding Public Companies having paid up share capital less than Rs, 25 lacs remain same i.e. 20.

The major change in the provisions above is regarding private companies, which were not covered under the limits earlier. Moreover, it may have huge implications for large audit firms having multiple clients which are private companies.

Prohibited services:

An auditor is not allowed to provide certain services directly or indirectly to the company or any of its affiliates or subsidiaries. It seems that the services are prohibited to avoid any self-review threat and independence threat. The prohibited services are as provided:

1. Management services
2. Investment banking services
3. Actuarial science
4. Accounting and bookkeeping services etc.

Fraud committed by an auditor:

If an auditor (whether directly or indirectly) has acted in a fraudulent manner or abetted or colluded in any fraud by to the company/ its directors/ officers, the Tribunal is empowered to direct the company to change its auditors. In such a case, the auditor will be debarred for 5 years and liable for appropriate actions under the Act. However, it may be worthwhile to note that among other disqualifications of an auditor, a person who has been convicted by a court of an offense involving fraud is disqualified for being appointed as an auditor for 10 years.

As per the Companies Act, 2013, the audit firm is also jointly and severally liable for civil as well as criminal liability for fraud committed by partner(s), along with the partner(s) concerned.

Comptroller and Auditor General of India:

CAG is responsible for seeing the financial soundness of public sectors.

So, CAG as per section 619 of Companies Act appoints a statutory auditor. Moreover, CAG has further taken steps to ensure the independence of auditors:

1. Statutory auditors are prohibited from accepting any non-audit assignments for the year of audit and one year after he ceases to be the statutory auditor of a company.
2. Rotationof auditors after every 4 years.

Duties of an auditor:

1. Report to members

The auditor needs to make a report for the member of the company regarding the following issues as per section 227(2)

• Whether Profit or loss account is showing the true and fair view of the profit or loss.
• Whether the state of affairs of a business is properly shown by drawing a proper Balance sheet for the company.
• Whether all the requisite items of audit has been obtained by him.
• Whether the Profit or loss account and Balance sheet of a company are in consonance with the books of accounts and returns.
• Whether proper books of account is maintained by the company.

2. Section 227 (1-A)

Auditor’s duties to Inquiry are as follows:

• Whether the company has sold any shares or debenturesor other securities at a lower price if the company is not an investment bank or a banking company.
• Whether the loans/advances made by a company have not shown as deposits.
• Whether any misuse of revenue accounts being done in the veilof personal expenses by the persons directly or indirectly having control of the affairs of a company.

3. Section 229:

• Auditors need to sign the audit report prepared by him. Moreover, it is his duty as well as right.

4. Section 165 (4)

• When the directors certify that the statutory report is correct, then the auditor needs to certify its correctness related to some shares allotted by a company, cash inflow related to such allotted shares, receipts, and payments of a company.

 Liabilities of an auditor:

An auditor is liable for both: civil as well as criminal liabilities.

1. Civil liabilities are as under:

• An auditor works as an agent of the shareholders and shall be liable for his negligence if no reasonable case and diligence shown in the performance of the duties.
• An auditor may also be liable for Misfeasance which means a breach of duty.If an auditor doesnot perform his duties properly resulting financial loss to the company,may be held liable for misfeasance.

2. Criminal liabilities:

• Auditor can criminally liable also under the following sections:
  Section 233, section 240, section 242, section 539, section 545, section 628, section 447.

In this blog post, Poonam Sharma, an Advocate in Bangalore and a student pursuing aDiploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, provides an overview of the Stakeholder Relationship Committee.