Comparative analysis of ADR methods with focus on their pros and cons

By

-

May 24, 2023

This article has been written by Adil Rashid Bhat, pursuing Diploma in Corporate Litigation and has been edited by Oishika Banerji (Team Lawsikho).

It has been published by Rachit Garg.

Introduction

Alternative Disputes Redressal Methods (ADRM) are the possibilities found and utilised for redressal of disputes, contract breach, problems faced and other related issues of the business between Partners, Third Parties, Financers, Employees, Share Holders, etc, Alternative Disputes Redressal Methods usually are utilised to avoid direct court proceedings which are time consuming taking years of litigation process and also the information which has to be exchanged between. There are various ADR methods that are put to use from time to time on the basis of the circumstances. This article is a comparative analysis of the same with focus resting on pros and cons of each method.

Types of alternative dispute redressal methods

Types of alternative disputes redressal methods are:

Arbitration

Arbitration can be defined as a measure to settle the dispute between the parties by any third party involvement. Usually, an odd number of persons is present as arbitrators for settlement of any dispute, arising out of breach of contract, outside the courts. The same happens in a time bound manner without disclosing the facts and sensitive or critical information in front of the general public or competitors of business and solving the disputes in private. Arbitration clauses for resolution through any alternate remedy, can be part and parcel of the already existing agreement or can be mutually decided by the parties to the agreement to settle the matter through alternate remedy.

Ad hoc arbitration

Ad hoc arbitration is when there is no predefined arbitration clause in the agreement or if there is no agreement at all and therefore a procedure is laid down by the parties themselves to solve the dispute without insight to the arbitral institution at their own mutual understanding.

Institutional arbitration

Institutional arbitration is when arbitration is carried out by rules and regulations defined and a framework given for settlement of disputes between the parties by any arbitrational institution under proper assistance from the arbitrational institution and then the disputes are settled between the parties, the same is referred to as Intuitional Arbitration.

Domestic and international arbitration

Domestic arbitration

Domestic arbitration is an centuries old tradition of India, which has developed to the level, which level is referred to as Panchayat. Nowadays, Panchayats are governed by their own act and separate law has been formulated for meeting international standards of developing countries, in which councils of elected or selected people from any village, etc are being given recognition by law or by people of the area. The council consists of few members and a head who will settle any type of dispute outside the court without interference of the court of law and their decisions are bound upon the parties to the dispute and their heirs, representatives and successors.

International arbitration

India is a democratic country and is committed to its growth and development through concrete policies with respect to other countries law, As per Article 51(c) of Constitution of India, India shall try hard to achieve:

Encourage the development of respect for international law,
Treaty obligations in the dealings of organised peoples with one another; and
Encourage settlement of international disputes by arbitration.

Mediation

Mediation is a process wherein a person who is not the party to the dispute mediates between the parties to dispute and help them to reach a mutually agreed upon decision, mediator who takes the mediation process is a neutral person who only assists the parties to reach a solution to resolve the dispute. Mediation is a very fast and cost effective method to resolve the disputes by the parties even if the relationships between the parties after the mediation process does not come to an end but can be preserved even sometimes the bond can be stronger than the existing one between the parties to dispute.

Mediation process being a non binding and non coercive one in nature is a very confidential process which is not governed by any set rules to follow but can be done to secure the interests of individual parties through their own free will and choice, beside mediation is taking place in private without disclosing the facts and critical information before general people, a basic framework has been given in Part-3^rd of Arbitration and Conciliation Act, 1996.

Conciliation

A conciliator is the main person in the conciliation process, conciliator utilises his expertise to make parties to the dispute to come to a settlement for which the conciliator takes individual efforts to meet all the parties to the disputes on one on one basis or together. The conciliator’s main role remains to motivate the parties to the dispute to settle the dispute amicably after improving communications or utilising other tools or methods to come out of the situation which has pushed the parties into the dispute and sour their relations. Conciliation like mediation is also a non-binding process upon all the parties to the dispute and also the process is a risk free process and very flexible as per convenience of the parties.

Negotiation

Negotiation is also a dispute resolution method used to negotiate between the parties and make them agree to resolve the dispute through the process of negotiation in which the third person who negotiates between the parties is called as negotiator who tries and implements different styles, methods and techniques to agree the parties to come on table of negotiation and settle the dispute amicable without involvement of court of law, it is also confidential process and parties and process of negotiation is not binding on the parties but they are at their liberty to file a case before any court of law.

Comparison between ADR methods

Comparison between different types of Alternative Disputes Redressal Methods:


S.No	Arbitration	Mediation	Conciliation	Negotiation
01	Proceedings are conducted by an Arbitrator	Proceedings are conducted by a Mediator/ Facilitator	Proceedings are conducted by a Facilitator/ Evaluator	Proceedings are conducted by a Facilitator
02	Award of compensation is binding upon parties to the dispute	Proceedings are not binding on Parties	Proceedings are not binding on Parties	Proceedings are not binding on Parties
03	Fixed time framefor proceedings	No fixed time Frame	No fixed time frame	No fixed time frame
04	Formal proceedings are taking place under proper rules	No formal proceedings will take place	Informal proceedings	Informal proceedings
05	Proceedings in private	Proceedings in private	Proceedings in private	Proceedings in private
06	Confident sharing of details and proceedings as per law	Trust-based confidentiality of proceedings	Confident sharing of details and proceedings as per law	Trust-based confidentiality of proceedings
07	Fruitful outcome of proceedings	No fruitful outcome	No fruitful outcome	No fruitful outcome

Pros and cons of ADR methods

Pros of the arbitration process

Arbitration process is very flexible in nature.
Arbitrator is mutually selected by the parties to the dispute.
There is a fixed time frame as compared to courts.
Proceedings are confidential in nature, and
Award of compensation is binding upon the parties.

Cons of the arbitration process

Aggrieved parties cannot approach court directly if arbitration clause is present in the agreement,
Scope of appeal is very low,
There is no scope for interim applications for any interlocutory orders,
Judicial sanction is required for execution of the award.

Pros of the mediation process

Settlements are done as per wishes of the parties,
Parties have control over the process of the mediation and its steps,
Proceedings are private and confidential,
Relationships are secured during mediation due to amicable settled guidelines

Cons of the mediation process:

Due to control of parties over proceedings, settlements may be hard to achieve.
No judicial support for its applicable, because settlement is not enforceable.
No formal proceedings will occur but parties will decide the procedure.
Main issue may not be resolved due to non revealing of critical information before the mediator.

Pros of the conciliation process

Process is informal and flexible in nature,
Conciliator sometimes may be an expert of the dispute matter which has be raised,
Very economical process as compared to other methods.
If parties are not satisfied with the proceedings, any party can approach the court of law for redressal of the disputes.

Cons of the conciliation process

No proceedings are binding upon their parties.
Sometimes parties may not arrive at any settlement of the dispute.
No settlement is enforceable by law nor there is any provision of appeal.

Pros of the negotiation process

Process is flexible and very much informal in nature,
Healthy relations can be maintained and enhanced between the parties to dispute,
Very flexible and confidential processes,
It is a very quick process as compared to other ADR methods.

Cons of the negotiation process:

Very less chances of settlement.
Not enforceable before any court of law.
Parties can protect their rights resulting in no settlement or no negotiation.

Conclusion

ADR methods are very useful tools for resolving disputes without direct or no interference from the courts at all. These methods are very economical in nature and should be adopted to resolve maximum disputes arising from breaches or contracts or otherwise. Alternative methods of dispute resolution are playing a great role in society by providing flexible, cost-effective, time bound procedures, and also decreasing the load of the courts and also helping businesses to maintain healthy relations thereby saving money and time and getting back to business as soon as possible.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

American Arbitration Association : an analysis

By

Sneha Mahawar

-

May 24, 2023

0

This article has been written by Adil Rashid Bhat, pursuing Diploma in Corporate Litigation and has been edited by Oishika Banerji (Team Lawsikho).

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

American Arbitration Association also referred to as AAA or Association is a private Not for Profit Association (NPO) with a mission to provide, arrange and give judgments on awards. It also facilitates mediation through alternative redressal of disputes arising out of common commercial contracts, breaches, business agreements, employee agreements, etc, whose award is binding on parties to the dispute. Association provides its services to interested individuals and Associations or businesses who are interested in amicable settlement of their disputes outside the courtroom. This article provides a discussion surrounding the American Arbitration Association for its readers to understand.

Background of the American Arbitration Association

Association was established in 1926 by the merger of the Arbitration Society Of America and the Arbitration Foundation under the Federal Arbitration Act with its headquarters in New York and has offices throughout the United States of America.
American Arbitration Association also started its International Centre for Dispute Resolution in 1996 to provide its services outside the United States as a global component in about more than eighty countries for which Association has recruited and trained its staff in more than twelve globally recognized languages.
The association is providing the solution to the parties in a time-bound manner which is usually within a maximum period of 288 days from the filing of the arbitration application till the disposal of arbitration matters or till the mediation is carried on between the parties and matters settled amicably.

Aim of the Association

The aim of the Association is to provide cost-effective solutions to businesses and also to save businesses. It is also believed that 63% of the matters filed for arbitration come to end up with a solution without going through the entire process of arbitration and besides about 40% of filed matters settled down without paying any compensation to the arbitrator. The nominal fee payable for initiation of arbitration or mediation process and settlement fee is given on the website of the Association which is www.adr.org which can be accessed by any party wishing to file an application form for arbitration and can have a clear idea about the expenses and costs of the arbitration process.

Mission of American Arbitration Association

Three P’s (Public, Process, Party)

The Association is a private body and the world’s largest alternative dispute resolution provider besides being an NPO has vast responsibility. Hence has put three P’s on motion, namely, Public, Process and Parties. The Association provides financial assistance to people affected by national disasters, educating people about disputes and how to not involve themselves in the disputes by having good knowledge and also by providing fast, effective, fair and timely solutions to disputes arising out of contracts, etc.

Three E’s (Ethics, Efficiency, Experience)

The Association helps businesses to get back to business after providing solutions through arbitration and mediation under transparent, fair and cost-effective services and through a huge number of arbitrators by the mutual choice of the parties within a prescribed time limit wherein it has been seen that 63% of the matters filed for arbitration comes to end up with a solution without going through the entire process of arbitration and besides it is also believed that about 40% of filed matters settled down without paying any compensation to the arbitrator, this way Association following ethical practice and with the experience and efficiency of the arbitrators and mediators who are mostly retired judges, leaders of legal or business communities and the disputes are solved without the involvement of courts and by saving time and money also.

Reducing the burden of courts

The Association by providing cost-effective resolution to disputes through alternative means under a fair, impartial and transparent environment is reducing the burden of courts throughout the globe and also saving money and time of the parties and helping them to go back to business as earliest as possible besides helping them to keep their sensitive information within their domains.

How does the American Arbitration Association work

Case filing and invitation

The Association has framed its procedure to file the case to them for which either of the parties interested in arbitration through the Association to resolve the dispute shall file an application form duly prescribed by the Association demanding arbitration.

Along with this, a copy of the agreement or contract having a provision for arbitration through AAA or through mutual decision along with the application fee in the case the name of the Association is not already mentioned in the contract needs to be provided.

The Association after receiving acknowledgment from all the necessary parties to the dispute sets a deadline for filing of the response from the parties to the dispute. This filing of an application for want of arbitration along with the initial application fee dependents upon the Claim amount in the arbitration application. which is initially payable as 925 USD up to a claim amount of 75000 USD, claim amount is payable by the party who files in the claim application or the party who files the counterclaim, all this process is done within a time span of 1-15 days.

Selection of arbitrator

Once the parties have shown their response to the application and interest in initiation of arbitration proceedings, parties also demand what should be the qualifications of an arbitrator appointed by the Association who is selected by the Association from the National Roster of Arbitrators and provides their resume to the parties to obtain their consent, in the case either of the party is not willing to give its consent for the appointment of arbitrator prescribed by the Association, a deadline is fixed by the Association to the parties to mention its preferences from the list itself, all this process is undertaken between 15th to 44th day.

Preliminary hearing starts

Once the arbitrator is selected and has been assigned the case, preliminary hearings start which is the 3rd phase of the process carried out by the Association, In this, the arbitrator and the parties to the dispute discuss the matter and exchange information. They also provide a list of witnesses, dates, etc., and carry this out through a conference call where sharing of information and other things acts as a roadmap to the parties and allows them to prepare the case and this process can take between 44th to 85th day.

Exchange of information and preparation of case presentation

The 4th step of the process is carried out between the 85th to 222nd day during which information is shared between the parties and the case is presented by all the parties before the arbitrator. The arbitrator also makes sure that the necessary information is shared properly as per need and requirement between the parties, all this process happens in private without exposing the sensitive information of businesses to any other third party.

Mediation or amicable settlement of the issue

In case the claim or counterclaim amount exceeds $75000, the arbitrator assists the parties to reach out any settlement through mediation as per the rules without paying any further fee.

Hearing of testimony

Proper hearing of the dispute before the arbitrator takes place between the 222nd day to 223rd day wherein parties produce and exhibit their evidence and testimonials.

Submissions to the arbitrator after the case hearing

Parties to the dispute may be allowed to produce further evidence or documents in support of their claims and counterclaims, all these exercises can be done with prior approval of the arbitrator and all the submissions can be done between the 223rd to 258th day from the date of application for arbitration.

The award is passed by the arbitrator

Once the arbitrator closes the evidence put on record by the parties, the arbitrator issues a decision within a period of 30 days herein referred to as an Award which is binding upon the parties and hence the arbitration proceedings are completed within a period of 288 days from the date of application for alternative disputes resolution and the businesses can be back to their business.

CSR (Corporate Social Responsibility)

Under Corporate Social Responsibility, the Association being a neutral Association in nature and a non for profit Association is providing disaster relief programs in collaboration with Governments and States. It also helps in settling the claims by its expert guiding measures and guides states to overcome the havoc caused due to natural disasters. The Association has a well-defined disaster relief module under which the Association is fulfilling its responsibility.

Conclusion

As we are near the end, what can be understood from what has been discussed above is that the Association started its journey some 96 years back and has done a tremendous job throughout its entire life span by reducing the burden of the courts through its alternate dispute resolution options in different fields of businesses. The Association has also succeeded in expanding its services in and around 80 countries which eases the overall burden of courts and also benefits businesses, employee organisations and states. The Association has resorted to alternate resolutions to solve the hardships and disputes faced by businesses which have expanded its scope throughout the world and benefitted millions of people till date and has contributed towards the betterment of economic situations throughout the globe.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Brief about foreign direct investment

By

Sneha Mahawar

-

May 24, 2023

0

This article has been written by Chaitali B. Memane, pursuing Diploma in Corporate Litigation ( FEB-01-2023 ) and has been edited by Oishika Banerji (Team Lawsikho).

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Foreign direct investment (FDI) is a major source of non-debt financial resources for economic development. It has allowed India to achieve some financial stability, growth, and development. It is done for a variety of reasons, namely, taking advantage of lower incomes in the region and special investment privileges such as tax exemptions provided by the country as an opportunity to obtain tax-free entry to the country’s markets. The present favourable policy regime and healthy business environment have ensured the continuous flow of foreign investments. The government has taken many initiatives in changing the FDI norms across all major sectors. India has liberalised its FDI policy regime considerably since 1991 besides opening new sectors to FDI, recently the govt. announced a consolidated policy in 2020. Moreover, many initiatives in recent years have been taken in relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, powers exchanges and stock exchanges. Though India has taken many steps for increasing FDI inflow, the same continues to be sluggish because foreign investors face major hurdles. All this made India a far less attractive investment destination for FDI than most of its competitors. This article discusses the impact of FDI on the Indian economy in detail.

Meaning and concept of FDI

Foreign Direct Investment (FDI) is defined as “investment made to acquire lasting interest in enterprises operating outside the economy of the investor.” When a company acquires controlling ownership of a business entity in another country, this is referred to as FDI. International companies that engage in FDI are directly involved in the day-to-day operations of the other country. It is a major source of non-debt financial resources for economic development. It is a process that enables one country to directly invest their funds in another country which enables them to exercise control over the investment in terms of production, management, distribution, effective decision-making, employment, etc.

Costs to the home country

The outflow of factors of production like skilled manpower, professionals, experts and capital can hinder the home country’s growth and development.
The BOP account of the home country also suffers on three counts:

Initial capital outflow.
If an MNE invests abroad to take advantage of low-cost locations and then sells the products manufactured in the foreign location back to the home country, the home country’s imports will rise.
If the foreign operation results in the substitution of domestic exports, then the decrease in the home country’s exports will again adversely affect the balance of payment.
If the MNE decides to conduct foreign operations with the intention of shutting down the home country’s operation, then the home country will suffer in terms of unemployment.

Benefits to the host country

FDI brings capital, advanced technologies, management skills, and experience to the host economy, accelerating the rate of economic growth and development. Furthermore, the host economy gains access to the home economy’s continued research and growth.
FDI also helps to generate employment opportunities in the host country. The employment of labour force in MNE results in increased income levels and increased demand. This in turn helps to create more jobs. MNEs also train the labour force which helps to create a pool of trained personnel in the host economy.

Costs to the host country

Foreign investment can damage a country’s balance of payments by causing income to be repatriated, dividends, interests, and royalties to be paid, and so on. If overseas activities necessitate the import of raw materials from the domestic economy, the balance of payments will suffer once more.
MNEs Because of their large scale, economic strength, and greater financial capital, will destroy competition, replace local producers, and curtail the growth of native industries. They are able to produce economies of scale that local manufacturers cannot compete with due to their activities being spread across countries and successful supply chains.

India’s policy towards Foreign Direct Investment

Policies of FDI : Pre & Post-Independence

Phase I (1948- 1966) was marked by a cautious approach and it was followed by Phase II (1967-1979) which was characterised by a restrictive regime. Phase III (1980-1990) exhibited a progressive reduction of regulations and Phase IV (1991-onwards) witnessed a liberal foreign investment environment.

International investment attitudes are expressed in India’s official policy against private foreign investment (PFI) and technology. Beginning with the Prime Minister’s policy statement on foreign capital in 1949, successive policy statements have acknowledged PFI’s technical and financial contribution to the economy. Foreign firms have been assured that there would be no restrictions on the repatriation of capital and remittances of profits and that there would be no nationalisation without compensation. Tax exemptions and tax concessions have also been given to foreign companies. Although the policy structure has not been friendly to foreign enterprise participation in general, PFI has been subject to a comprehensive collection of regulations governing its sectoral allocation and the scope of its participation. The regulatory system has influenced the composition and organisational structure of international business articulation in India.

New trends of MNCs in FDI

MNCs establishing research facilities in India represent one of the latest trends in foreign investment. In India, MNCs such as IBM, Microsoft, GE, Sony-Ericsson, and many others have established research facilities. This also makes use of cheaper labour, as scientists and professionals from India may receive pay that is lower than that of their colleagues from wealthy nations. It takes entire teams of scientists to conduct research, not just a single scientist. India is now recognised for having a large pool of highly qualified scientists and technologists. Many of the patents that have been purchased outside of India in the IT sector were created by MNC research centres in India that were established to tap into this supply. India’s knowledge-based industries, such as software and R&D, are where it is becoming more powerful, as evidenced by the rise in international investment in these fields. It is important to take note of the current trend in MNC activities in developing economies, the involvement of foreign capital in the establishment of research centres in India.

Another trend is witnessed in the shape of non-investment foreign-controlled Production. Foreign influences over the host country’s economic activities can well occur without any capital investment at all. This occurs in a country in a number of new forms of relationship – contracted manufacturing and farming, outsourcing of services, and franchising or licensing. One increasingly common form of global production is that of contracted production within global production networks (GPNs) or global value chains (GVCs).

Conclusion

It is more than two decades since India abolished its restrictive FDI regimes and replaced them with one of the most transparent and relaxed regimes in the world. However, the debate continues over how much more flexible India should be to FDI. FDI inflow into India has remained sluggish due to major roadblocks faced by foreign investors. All this made India a far less attractive investment destination for FDI than most of its competitors. Indian policymakers must weigh the reasons behind the low volume of FDI inflow.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

FTX crash – a lesson for the Indian crypto regime

By

Sneha Mahawar

-

May 23, 2023

0

cryptos-top-venture-capitalist-is-playing-the-long-game (1) — Image source- https://rb.gy/9tnezw

This article is written by Arka Biswas pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions). This article discusses how the FTX crash can be a lesson for the Indian crypto regime.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

On November 11, 2022, FTX, a significant cryptocurrency exchange, and FTX.US, its American subsidiary, filed for Chapter 11 bankruptcy. Sam Bankman-Fried, the company’s former founder and CEO, was detained on December 12 in the Bahamas and extradited to the United States. He was charged with eight crimes, including wire fraud and conspiracy to deceive investors. He later entered a not-guilty plea to all of them.

The Securities and Exchanges Commission (SEC) filed a lawsuit alleging that Bankman-Fried exploited client cash as a “personal piggy bank” to invest in real estate and contribute to political campaigns.

John J. Ray III, the previous CEO of FTX, oversaw the bankruptcy and liquidation of the famed energy conglomerate Enron roughly twenty years ago. Ray revealed the depth of FTX’s unclear financial situation in the bankruptcy declaration on November 17, noting a “complete failure of corporate controls” and a “complete absence of trustworthy financial information.”

The FTX crisis had wide-ranging effects on the whole cryptocurrency market as exchanges and cryptocurrencies with exposure to FTX or its native token, FTT, saw a decline in pricing and other financial difficulties.

What happened to FTX

Due to a lack of liquidity and poor money management, the US plummeted, which was followed by a significant amount of withdrawals from uneasy investors. FTT’s value fell, dragging other currencies down with it, including Ethereum and Bitcoin, which as of November 9, hit a two-year low. The FTX failure has impacted other exchanges, notably BlockFi, which declared bankruptcy on November 28.

Timeline

Initial reports and sales: November 2–November 8

Sam Bankman-Fried launched the now-defunct FTX cryptocurrency exchange in 2019. He presided as CEO from January 1 to November 11, 2019. By volume as of Nov. 9, the exchange, which had its own token called FTT, was the fourth-largest cryptocurrency exchange.

Alameda Research, a cryptocurrency trading company that Bankman-Fried also started, has a problematic balance sheet as of Nov. 2, according to CoinDesk. According to research, FTT is worth billions of dollars and is its biggest asset.

Changpeng Zhao, popularly known as CZ, the CEO of competing exchange Binance, tweeted on November 6 that he intended to sell out Binance’s stockpile of FTT due to “recent revelations that have come to light,” alluding to the CoinDesk article from November 2 about FTX and Alameda’s muddled money. The collapse of TerraUSD and LUNA in 2022, which wrecked the cryptocurrency market and lost investors billions of dollars, was likened to FTX’s predicament by the speaker. However, such actions usually are not made public.

Zhao’s revelation caused a sharp drop in the value of FTT during the next day as concerns developed that FTX lacked the liquidity required to support transactions and remain afloat. Other currencies, including BTC and ETH, also saw a dip in value as Bitcoin hit a two-year low. In a tweet on November 10, Bankman-Fried reported that $5 billion had been withdrawn from the platform on November 6.

Withdrawals freeze, a deal falls through: On Nov. 8–11

Zhao and Bankman-Fried agreed for Binance to buy the FTX branch outside of the United States. On November 8, the CEOs of the exchanges agreed to a non-binding statement of intent, basically pledging to save the faltering exchange and avert a further market catastrophe.

On November 8, FTX stopped all withdrawals from non-fiat customers. FTX’s liquidity problems were explained in a series of tweets by Bankman-Fried, who also promised greater openness.

Binance pulled out of the transaction. Zhao said on Twitter on November 9 that Binance has finished its “corporate due diligence” and will not be purchasing FTX. Zhao said in a tweet that his choice was influenced by news stories about “mishandled customer funds” and “alleged U.S. agency investigations.” In a mysterious tweet that ended with the words, “Well played; you won,” Bankman-Fried seemed to be alluding to Zhao’s impact on FTX’s decline.

Hacking and bankruptcy: November 11

On November 11, FTX made the voluntary Chapter 11 bankruptcy filing for FTX, FTX.US, and Alameda. In contrast to Chapter 7 bankruptcy, which involves liquidating assets, Chapter 11 bankruptcy enables businesses to restructure their debt and carry on with operations.

FTX.US briefly stopped accepting withdrawals on November 11, when FTX announced its bankruptcy, despite prior assurances that FTX.US was unaffected by FTX’s liquidity issues. Later, withdrawals were reopened. On the evening of November 11, there appeared to be a hack that emptied US wallets. According to CoinDesk, more than $600 million was stolen from the wallets. On its help page on the messaging app Telegram, FTX announced the attack, writing, “A hack was made on FTX. FTX applications include viruses. Take them out. The chat window is open. Avoid visiting the FTX website as it might download Trojans.” Trojan horses are malware that poses as trustworthy programmes.

Hackers were reportedly attempting to access FTX-related bank accounts, according to a Twitter user. The US Plaid, a company that links consumer bank accounts with financial apps, blocked FTX’s access to its products in response to “concerning public reports,” even though they could not see any evidence that their tools had been misused illegally. The same evening, FTX general counsel Ryne Miller announced on Twitter that due to the “unauthorised transactions” or suspected breach, the business would swiftly move any remaining assets to cold storage, which is inactive.

The fallout: On Nov. 14

The Financial Times released FTX’s balance sheet, which was dated Nov. 10 and showed $9 billion of liabilities and only $900 million in easily tradable assets. It had a jumble of entries, one of which was a “hidden, erroneously labelled ‘fiat@’ account” with a negative $8 billion balance.

In the Bahamas, where that exchange is situated, FTX is now the subject of a criminal investigation. According to CoinDesk, Bankman-Fried resided there with nine coworkers and intermittent romantic partners who assisted him in managing his enterprises. Former FTX workers who were questioned by CoinDesk said that only this tight circle was aware of the complicated financial situations involving the firms.

In a court document submitted to the District of Delaware’s U.S. Bankruptcy Court on November 17, FTX’s new CEO, Ray, gave a bleak picture of the company’s financial situation. According to him, FTX failed to maintain “appropriate books or records, or security controls, with respect to its digital assets.”

There is “credible evidence,” according to an emergency motion attached to the FTX bankruptcy filing on November 17 that Bahamian officials gave Bankman-Fried instructions to access FTX monies “unauthorizedly” and transfer them to the Bahamian government. These transfers would have taken place around the same time as the hack. Thus it is unknown if or when they occurred. These reports appear to be supported by a news statement from the Bahamas Securities Commission.

Authorities in the Bahamas detained Bankman-Fried on December 12 in response to a request from the United States government for his extradition because of eight criminal offences, including wire fraud and a conspiracy to deceive investors. The House Financial Services Committee had scheduled a hearing with Bankman-Fried for the next day.

Instead of Bankman-Fried, FTX CEO John J. Ray III gave testimony to the House committee on December 13. He stated to MPs that FTX had “absolutely no record-keeping.”

Federal prosecutors stated that on December 19, former Alameda Research CEO Caroline Ellison and co-founder of FTX Gary Wang entered pleas of guilty to “charges arising from their participation in schemes to defraud FTX’s customers and investors, and related crimes,” In the FTX case, the two are assisting the government.

Bankman-Fried appeared in a New York court on January 3 and entered a not-guilty plea to all of the accusations levelled against him. Due to Bankman-determination Fried’s to dispute the accusations, a criminal trial over the situation may take place.

Lehman Brothers’ Moment

The cryptocurrency market is infamous for its rapid turns, roller-coaster values, and fortunes that appear and go quickly. However, what occurred this week was insane, even by crypto standards. The news of FTX, one of the biggest cryptocurrency exchanges in the world, collapsing may seem dull or esoteric to people who do not follow the cryptocurrency market; they may be the kind of people who would happily scroll past the news in favour of reading about Elon Musk’s most recent Twitter outburst.

But among the cryptocurrency community, it is already being referred to as the sector’s “Lehman moment” in reference to the 2008 fall of Lehman Brothers, which sparked a worldwide financial crisis and made it plain to laypeople exactly how much danger Wall Street was in.

Is Lehman, however, the appropriate comparison after all? After all, the collapse of the illustrious investment bank affected the whole economy, not just a small portion of it. There is a scale issue. According to some estimates, FTX may have cost investors between $10 billion and $50 billion. Lehman, however, came to represent the subprime mortgage crisis, which the GAO estimates resulted in trillion-dollar economic losses.

“The demise of FTX may impact the cryptocurrency market, but it is not taking down the established financial system. In this regard, it reminds me more of Enron/Theranos/Madoff than Lehman”, Hanna Halaburda, Associate Professor at New York University’s Stern School of Business (Department of Technology, Operations and Statistics), said to Cointelegraph.

However, the term “Lehman moment”, as it is now used, may not signify “spillover” to the actual economy, according to Elvira Sojli, an associate professor of finance at the University of New South Wales.

What Yellen means when she refers to a “Lehman moment” is not that Wall Street would see a spillover effect onto Main Street. She is alluding to the Lehman Brothers collapse-related restructuring and increased regulation in the financial sector.

However, even this weaker Lehman analogy might not be valid. What if the FTX case is just one of outright fraud and not one of insufficient or inefficient regulation, as with Lehman Brothers? If so, it may resemble Enron’s bankruptcy in 2001, which was the biggest in American history at the time. In other words, the executives of FTX and Enron both knew what they were doing was unlawful and illegal, yet they nonetheless carried it through.

Lesson for India

For governments all across the world, including India, the FTX explosion’s wide blast radius is a sobering realisation. This sends the Indian government a loud and obvious message: regulate cryptocurrencies or outright outlaw them.

Let us examine why. With $1.9 billion in investor wealth under management, FTX was the second-largest cryptocurrency exchange in the world.

Investors cannot immediately get their money back, not even for a huge company like FTX operating in an established market with superior oversight. Investors in FTX might lose their money or face a protracted wait.

What if a similar incident occurs in a nation like India where the government’s ability to oversee such organisations or handle a crisis is in doubt?

At the time, there were no cryptocurrency-related laws in India. This makes it possible for cryptocurrency businesses to attract new investors. Despite the fact that the industry is unregulated, one of the biggest cryptocurrency exchanges in India claims that investing in cryptocurrencies is lawful. Such ambiguous statements are readily misleading to the ordinary investor.

Experts have repeatedly cautioned that, in the lack of government and Reserve Bank of India rules for these instruments, Indians investing in cryptocurrencies may be making a very hazardous gamble. A concerned RBI has advised investors to steer away from the cryptocurrency frenzy, and one of the deputy governors has even called for its outright prohibition. According to deputy governor T Rabi Sankar in February 2022, “Investors who have purchased these products have done so with their eyes fully open, at their own risk, and do not justify any regulatory dispensation.”

The RBI forbade all banks from conducting cryptocurrency business in 2018. However, following a petition from the Internet and Mobile Association of India, the Supreme Court reversed the restriction (IAMAI).

The SC ruled that while the RBI had the authority to regulate virtual currencies, the business of dealing in these currencies should be treated as a legitimate trade that is protected by the fundamental right to engage in any occupation, trade, or business under Article 19(1)(g) of the Constitution in the absence of any legislation. As a result, only the government is now able to remedy the issue by passing legislation that either limits activities or outright prohibits cryptocurrencies.

If the government decides to outlaw cryptocurrencies in India or if there is a significant collapse or scam like the FTX, investors in cryptocurrencies may be at severe risk because there is no regulatory certainty.

Future of cryptocurrencies vis-a-vis the abrupt collapse of FTX

What will happen to FTX’s clients and their funds first? Deposits on cryptocurrency exchanges are not government-insured, unlike deposits in conventional bank accounts, and it is unclear whether FTX has enough assets to compensate its surviving clients. Investors could be forced to battle for their money — or what is left of it — through the courts if the company declares bankruptcy, as cryptocurrency companies Voyager Digital and Celsius Network did this year.

Second, is the regulation of cryptocurrencies in jeopardy? After all, FTX was one of only a select few U.S. cryptocurrency companies that had extensively engaged in lobbying, and Mr. Bankman-Fried was regarded as a “white knight” with the best chance of convincing politicians who were dubious of the value of cryptocurrency. Now that such attempts seem to have, at best, stagnated, officials who wish to depict cryptocurrency as an unruly Wild West will have another example to cite. It was a “truly sickening news day- can not even begin to assess the potential damage our industry will have to face,” cryptocurrency investor Katherine Wu tweeted on Tuesday.

Third, would the fall of FTX trigger a wider market failure, as did the bankruptcy of Lehman Brothers in 2008?

The story has already spread to the rest of the cryptocurrency market. On Tuesday, the prices of Bitcoin, Ether, and Solana—a cryptocurrency that FTX has supported—all decreased. Solana’s price plummeted by almost 20%. Additionally, shares of publicly traded cryptocurrency firms like Coinbase fell. Sequoia Capital, Lightspeed Venture Partners, and SoftBank were among the investors in FTX, and it seems probable that they will lose most or all of their money. It could take some time before we fully understand the magnitude of the damage, considering how closely FTX was tied to the rest of the crypto ecosystem.

Of course, the expectation is that the consequences of FTX’s failure would mostly be confined to the cryptocurrency business, as opposed to 2008, when Wall Street’s collapse triggered a worldwide financial crisis that resulted in millions of Americans losing their jobs and homes. However, it is still too soon to know.

What will happen to Mr. Bankman-Fried, finally? He was the unquestioned king of cryptocurrency up until last week and, with his significant contributions to Democratic politicians and causes, a rising political force in America. Before the Binance sale, his fortune—which was pegged at more than $15 billion—had supported philanthropies, media outlets, and businesses both inside and outside of the cryptocurrency space.

Conclusion

In light of everything said above, it is evident that neither the underlying technology nor the industry as a whole could be seen as a driver, much less the cause, of FTX’s collapse. If the current allegations are true, the cause will seem to be fairly straightforward: massive misconduct on the part of a group of people in charge of the company who managed to allegedly break almost every rule and regulation that they were supposed to follow when offering services to their clients.

Having said that, responses from those in traditional finance who claim that “crypto cannot be trusted” and that this sort of thing was inevitable will be seen as rather malicious and inaccurate if one considers all the “hiccups” that the financial services industry has experienced in recent decades, from the collapse of Lehman Brothers to the countless scandals that the world’s largest investment banks always managed to survive.

While DeFi and self-custody may be ideal safe harbours for some groups of investors, the sector has to win greater public confidence in order to achieve broad acceptance. To make this happen, more credible centralised venues that can handle client assets in line with the stated terms of service and relevant laws and regulations must be demonstrated to the public. It goes without saying that a clearer regulatory environment in important jurisdictions that offers sufficient regulatory requirements on protecting and managing the assets of customers, along with appropriate regulatory enforcement and supervision of required entities, can play a crucial role in this process.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

295A IPC punishment

By

Rachit Garg

-

May 23, 2023

0

This article is written by Anjali Sinha, a legal professional. The article is all about the penalties and essentials of the offence being committed under Section 295-A of the Indian Penal Code of 1860. The provision is supported by landmark judgements, including the views of the court in cases relating to one of the most controversial provisions connected to religious sentiments in any class or community of society.

It has been published by Rachit Garg.

Table of Contents

Introduction

Since the introduction of Section 295A of the Indian Penal Code of 1860 in 1927, it has been a controversial provision. This provision is intended to criminalise any willful and malicious act that offends the religious sentiments of any class or community. It has been the subject of legal disputes and various controversies.

There has been much debate about the anatomization and implementation of Section 295A, with many stakeholders expressing concern about its scope and probability of misuse. The anatomization and implementation of the provisions of the Indian judicial system are very relevant in this context.

The duty of the Indian judiciary is to uphold the Constitution of India and ensure that the law is applied fairly. In this article, we will examine the role of the Indian judicial system in determining the scope of Section 295A and its impact on freedom of speech and freedom of religion.

Recently, Nupur Sharma had been suspended by the Bharatiya Janata Party (BJP) and summoned by the Thane police for her offensive remarks against Prophet Muhammad in a discussion on a news channel. The police have asked Nupur Sharma to appear in court on June 22 to record her statement. Cases have been registered against Nupur Sharma in Mumbra, Pydhuni, and Thane.

Nupur Sharma has been charged under Sections 153A, 153B, 295A, 298, and 505 of the Indian Penal Code. This means that Nupur Sharma has been accused of inciting hatred, inciting religious feelings, making statements intended to hurt the religious feelings of a person, insulting the religion or religious beliefs of a community, and intentionally offending the sentiments. In addition to this, other crimes were also prosecuted.

Also, comedian Munawwar Farooqui and four others have been charged under Section 295A for making offensive remarks about Hindu deities and Union Home Secretary Amit Shah at a New Year’s event in a cafe in Indore. The Supreme Court later granted him a remedy.

Madhya Pradesh Police had filed an FIR against two Netflix employees. A lawsuit has been filed for offending religious feelings when the kissing scene on the temple grounds was filmed in the web series- A Suitable Boy.

The creators of the Tandav web series also faced criminal charges under Sections 153A and 195 for offending religious feelings and insulting religion. A case has been registered against the web series in three places, namely Uttar Pradesh, Greater Noida, and Shahjahanpur. The cases were brought for inappropriate portrayals of Uttar Pradesh Police personnel, deities, and the character who played the role of Prime Minister in the series.

Crime defined under Section 295A IPC

A crime under Section 295A can be described as anyone who intentionally injures or offends the feelings or religious beliefs of any group by word, writing, symbol, or image representation and is said to have committed a punishable offence under the provisions of the Indian Penal Code.

History of Section 295A : a brief overview

Mahashe Rajpal published Rangila Rasul in 1927, a booklet containing some scandalous and derogatory statements about the Prophet Muhammad’s personal life. In an atmosphere of religious turbulence, he exacerbated community tensions, provoking protests from the Muslim community. The section already in effect, IPC Section 153A, could not be used because the statements were directed against a religious leader (outside the purview of Section 153A) rather than incitement to hatred between religious groups. As a result, the citizens demanded the creation of a new provision that would include such cases in its jurisdiction. As a result, Section 295A was added to the Indian Penal Code for the first time.

Essentials of crime under Section 295A IPC

The basic components of Section 295A of the Indian Penal Code 1860 are as follows:

The defendant must offend the religious feelings or religious beliefs of any class of citizens of India.
The defendant’s conduct must be intentional and malicious.
Offences against religious belief must be caused orally, or in writing, by sign or by visible expressions.

Punishment for a crime committed under Section 295A IPC

The offence under this Section is non-bailable and cognizable, and is punishable with a term of imprisonment that may be extended to three years, with a fine, or both. The offence is tried by the Judicial Magistrate of First Class.

We can better understand the incidents of abuse in this Section by looking at specific cases:

Infamous case laws on punishment for crimes under Section 295A

Case on Shah Rukh Khan on a scene from the movie Zero

In 2018, a case law was filed in the Bombay High Court against Shah Rukh Khan and the makers of the film ‘Zero’ over a scene that allegedly hurt the feelings of the Sikh community.

FIR lodged against Mahendra Singh Dhoni for a magazine cover

In 2017, an FIR was filed against Mahendra Singh Dhoni after he was depicted on a magazine cover as Lord Vishnu with the slogan “The God of Big Deals.”

The Kiku Sharda controversial impression

Kiku Sharda, a character in Comedy Nights with Kapil, was jailed in 2016 for impersonating Gurmeet Ram Rahim Singh, offending the religious feelings of his followers.

Salman Khan on insulting Muslims

Salman Khan was accused of insulting the feelings of Muslims in 2014, and a complaint was filed against him under Section 295A of the Indian Penal Code.

The arrest of Ravi Shashtri on claiming he eats beef

Another example is the arrest of Ravi Shastri for allegedly hurting feelings by eating beef and claiming that although he is a Brahmin, he cannot stop himself from eating it.

Interestingly, all the accused in the aforementioned cases were acquitted after hearings. The above examples show how frivolous motives are used to book a person under the contested provision.

Judicial pronouncements under Section 295A

Ramji Lal Modi v. State of U.P. (1957)

One of the earliest and most significant cases pertaining to Section 295-A. The Hon’ble Supreme Court decided that Section 295-A only applies to actions and conduct that are carried out with deliberate and hateful intent in this case. Section 295-A does not penalise each and every act of offensive nature to or attempt to offend the religion or religious beliefs of a class of citizens; it penalises only those acts of offensive nature to or those varieties of attempts to insult the religion or religious beliefs of a class of citizens that are committed with the intention of outraging the religious feelings of that class, either by malicious intention or wilful conduct to offend such feelings.

This case establishes the principle that the intention behind an act is crucial in determining whether it falls within the purview of the section. Before this case, there was disarray in regards to the translation of Section 295-A and how it may be applied without abusing the basic right to speak freely of disclosure and articulation ensured under Article 19(1)(a) of the Constitution of India.

The Hon’ble Supreme Court clarified that Section 295A should be interpreted strictly to protect the right to free speech and expression. The court decided that legitimate criticism of religion or religious practises does not fall under the purview of Section 295-A and that the acts committed with the intention of causing offence to religious sentiments are punishable under this section.

The Hon’ble Court made it abundantly clear that the restrictions on free speech must be narrowly interpreted and should not be used as an excuse to suppress legitimate criticism.

Kedar Nath Singh v. State of Bihar (1962)

The right to freedom of speech and expression is guaranteed by the Constitution of India, subject to reasonable restrictions imposed for the sake of public order, decency, and morality.

In cases involving Section 295A, the judiciary has played a crucial role in anatomizing and implementing these restrictions.

In the landmark case, the Hon’ble Supreme Court ruled that criticism of religious beliefs or practices was protected by the right to freedom of speech and expression and that the legislation could only be used if there was a deliberate attempt to cause a public nuisance or public disorder. In a similar vein, the judicial system has been crucial in upholding religious tolerance in cases involving Section 295 A, which is a law that can be used to stifle legitimate criticism or dissent and is frequently invoked in cases involving religious sentiments.

The judiciary has played a crucial role in safeguarding these values and ensuring impartial and objective justice. However, in order to guarantee that these principles are upheld, the judiciary must remain vigilant and modify its procedures in response to shifting societal and political pressures.

Enhancing transparency and accountability, ensuring diversity and inclusion within the judiciary, and strengthening the judiciary’s independence and autonomy are some suggestions for how the judiciary can maintain these values. By doing so, the judiciary will be able to maintain its crucial role as a check on the excesses of the state and guarantee the protection of fundamental rights and freedoms.

Mahendra Singh Dhoni v. Yerraguntla Shyamsundar (2016)

The writ petitioner, an artist, had posted a Lord Krishna portrait that was on display at an auction house called Christie’s. Geet Govinda, Jaya Deva’s epic love poem, inspired the depiction of the intimate scene between Lord Krishna and Radha in the picture. The petitioner argued that the Facebook post by Akiyader Adda, a group of artists, could not be considered a violation of Section 295A of the Indian Penal Code 1860 and Section 67 of the Information Technology Act 2000.

It was argued that the complaint did not reveal a violation. The complainant had said that the post might hurt religious feelings and make people hate each other. The Court noted that the complaint does not appear to reveal any offence that could be considered cognizable. It is established by law that violators will be subject to the penalties outlined in Section 295 A of the Indian Penal Code if they intend to intentionally offend religious sentiments.

The Court believed that the filing of the FIR violated the petitioner’s freedom and the right to freedom of expression guaranteed by Article 19(1)(g) of the Constitution of India. The Court also said that the complaint was filed because it was worried that the post might hurt religious feelings, even though the picture is available to the public in art galleries and in different versions of Geet Govinda that are illustrated and translated.

The Court ruled that the image of Mahendra Singh Dhoni dressed as Lord Vishnu that was published in a magazine with the headline ‘God of Big Deals’ violated Section 295A of the Indian Penal Code and that any action would be considered an insult or attempt to insult the religion or religious beliefs of a class of citizens, dismissing the complaint that Dhoni had allegedly hurt people’s religious feelings. It only punishes acts or attempts to insult a particular class of citizens’ religion or religious belief that are committed with the inadvertent and irrational intention of causing offence to that class of citizens’ religious feelings.

Further elaborating, the three-judge bench of Dipak Mishra, A.M. Khanwilkar, and M.M. Shantanagoudar, J.J., stated that the Section does not apply to insults to religion that are made inadvertently, carelessly, or with no intention to offend the religious feelings of that class. The deliberate tendency of the aforementioned aggravated form of insult, as well as its potential to disrupt public order, have been emphasised in order to justify the penalty. The Court also urged the magistrates with authority to take cognizance and issue summons to carefully examine whether the allegations made in the complaint proceeding meet the essential elements of the offence, whether the territorial jurisdiction concept is met, and whether the accused must actually be summoned.

Amish Devgan v. Union of India (2020)

Criminality would not include insults to religion made accidentally, carelessly, or without deliberate or malicious intent to outrage religious feelings. The only way to aggravate an insult to religion is when it is done with the intention of outraging the religious feelings of that group.

Unless it can be demonstrated that the person had a deliberate and malicious intention of offending religious feelings, the mere use of a phrase that is considered derogatory by a particular community would not trigger liability under Section 295A. The Court likewise stressed the need to find some kind of harmony between the right to speak freely of discourse and articulation and the option to rehearse one’s religion.

The courts have consistently held that criticism of religion, regardless of how harsh the criticism is, does not constitute an offence under Section 295 A unless it is done with the deliberate and malicious intention to outrage religious feelings. This is one of the key principles that have emerged from these cases.

The significance of achieving a balance between religious tolerance and speech freedom is another important principle that has emerged. According to the courts, Section 295A must be interpreted in a way that strikes a balance between religious tolerance and freedom of speech because it is intended to safeguard the sentiments of all communities and religions.

Conclusion

Concluding, the Indian judiciary has been instrumental in defining the scope of Section 295-A and enforcing it in a manner that upholds constitutional principles like religious tolerance, freedom of speech, and the rule of law. The judiciary has demonstrated its commitment to these values through landmark judgements and ongoing efforts to balance competing interests, despite challenges and criticism along the way.

Pushing ahead, the legal executive should keep on assuming a functioning part in deciphering and implementing Section 295-A, while additionally staying cautious against likely maltreatment of the law. Even in the face of political pressure or shifting social norms, this will necessitate maintaining a commitment to impartiality, transparency, and adherence to constitutional principles.

It is impossible to overstate the significance of the Indian judiciary’s role in upholding constitutional values. The judiciary has the ability to contribute to ensuring that India will continue to be a diverse, tolerant, and democratic society for future generations by interpreting and enforcing laws like Section 295-A in a manner that reflects these values.

Frequently Asked Questions (FAQs)

Is Section 295A bailable?

It is a cognizable, non-bailable and non-compoundable offence.

Is blasphemy a religious crime?

It is an utterance that shows disrespect or insult to a deity or religious feelings. It is considered a religious crime or a speech crime.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Brief about hostile takeovers and defence strategies against them

By

Sneha Mahawar

-

May 22, 2023

0

This article is written by Arka Biswas pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions). This article discusses how to defend hostile takeovers in an analytical manner.

This article has been published by Sneha Mahawar.

Introduction

Takeover is an acquisition of shares including voting rights of a company and gaining control over the management of that company. The takeover may take place through either friendly negotiation or a hostile manner.

Every public listed company has a risk of getting targeted by an acquirer for a hostile takeover. Those companies prepare & exercise various strategies and make wise decisions to save themselves by discouraging the acquirer, preventing any hostile takeover or bargaining the highest possible price. Such strategies can be either ‘Proactive’ or ‘Reactive’.

Thus, when a company gets hostile takeover bids, i.e. against the will of that company, it does not stand helpless. The target company can adopt some wise moves and take defensive measures to prevent or discourage the acquirer from taking over the target company. Such defence strategies may also be used by the target company in negotiating higher offers.

Some of those defensive measures must be approved by the shareholders, while others are not. Some of those may have strict regulations in a specific jurisdiction. Most countries enacted strict laws to regulate such defences. The acquirer may challenge such defences in a court of law. So, while taking such defensive steps, it is necessary for the target company to keep in mind all the legal aspects, frameworks and regulations.

Factors that determine a takeover bid

The acquirer analyses several important factors before initiating a takeover. Those factors can determine the vulnerability of a company to be taken over. The major factors which can make a company vulnerable to a takeover bid are –

Affordable stock price with respect to replacement cost of assets or the earning potential;
Liquid balance sheet;
Excessive cash flow;
Valuable portfolio of securities;
Assets that can be sold off without affecting the cash flow;
Unused debt capacity.

A combination of such characteristics makes the target company very attractive for investment and also desirable for takeover by an acquirer.

Different proactive and reactive defence strategies against hostile takeovers

The Staggered Board

The acquirer tries to gain representation and voting power in the board of the target company in order to influence the shareholders to accept the bid. The target company can construct a staggered board which will make the process of gaining influence very time-consuming and costly for the acquirer. It is created by dividing the members into small groups. All members of the board are not re-elected annually. Rather, only a single group of members are re-elected every year. So, the acquirer will not be able to replace the entire board in a single year. Thus, it prevents the acquirer from gaining control over the board and resists hostile takeover.

It should be noted that the formation of a staggered board needs to be approved by the shareholders in a Shareholders’ Meeting.

Poison Pill

The target company offers and issues securities, preferred shares, and stock warrants to its shareholders at a lower price than the current market price. Usually, poison pills are adopted without the approval of the shareholders. And also, it is quickly alterable after the occurrence of the triggering event. But in some countries, it must be adopted through shareholders’ voting. Thus the acquirer’s share is diluted and prevents a takeover or enhances the opportunity to bargain a fair price.

A fill-in pill is where preferred shares are offered to the existing shareholders at a discounted price. And a fill-over pill is where rights are issued rather than preferred shares to existing shareholders. These rights are triggered only when a hundred percent of the company’s shares have been bought.

Shark Repellant

In this mechanism, few anti-takeover amendments are made in the corporate chart or Articles of Association. Before making such amendments, it is necessary to be voted and approved by the shareholders.

There are several types of anti-takeover amendments, such as –

Supermajority Amendment:- For the approval of any takeover, making any large decisions in the meeting require greater than fifty percent votes. But, the target company can implement a supermajority amendment which sets the percentage of votes needed for decision-making much higher. This amendment can be placed in the corporate chart only by the shareholders, not the board of directors. Thus, it makes it hard for the bidder to make a takeover proposal in the shareholders’ meeting and gain approval.

Fair Price Amendment:- This is a supermajority amendment with a board-out provision and an additional clause for waiving the supermajority requirement if a fair price is paid for acquiring the shares. Thus, it doesn’t completely prevent a takeover but helps to make a very good bargain on the transaction.

Authorisation of Preferred Stocks:- This amendment authorised the board to issue preferred stock with voting rights to a friendly firm. Thus, the hostile bidder will not be able to take over the majority of shares in the target company.

Attack the Logic of the Bid

The Board of the target company tries to influence its shareholders that the takeover will be harmful to the company and the stock price. It is a very effective and cost-effective strategy. This discourages the shareholders from approving such a takeover and convinces them to react against the hostile bidder.

Golden Parachutes

It announces some lucrative packages to the employees and managers who would lose their jobs in a change of control scenario; and distributes a lump sum amount to the board of directors of the target company. It is initiated when the acquirer has acquired a specific amount of shares. Golden Parachute strategy creates incentives for the shareholders and executives. So, it protects the interests of those who are risking their jobs in a hostile takeover.

Crown Jewel

When a hostile bid is initiated based on the target company’s valuable assets or the ongoing business, then the target company can use this Crown Jewel strategy. The target company sells the whole or some of the assets to make itself less attractive in the eyes of the acquirer. Thus, the acquirer is deprived of the primary intention behind the takeover.

But, this strategy is quite risky and may be self-destructive, which sometimes causes even worse situations than a takeover. Selling the most valuable assets may stop the entire business operation of the company. So, the target company needs to be very careful whether it can buy back those assets or run the business without having the assets.

In addition, it will send negative signals to the market. The market will have knowledge of the situation of that target company and may push the selling price of those assets to the lowest, even below the current market value. So, the benefit achieved as a result of the defensive strategy by the target company will be minimal. On the contrary, the stock price of the target company will skyrocket after the news of the possible takeover.

Also, if such an asset sale has generated excessive liquid cash, then it will be more attractive for a takeover by the acquirer.

Greenmail

It is used when the acquirer has already taken over a significant chunk of shares or when the bidder has only short-term goals. Greenmail is a comparatively simple process and also known as Goodbye Kiss. The target company repurchases or buys the shares back once the short-term goal of the acquirer has been achieved. It is a very costly process as the target company has to offer a premium at a high price to repurchase the shares. When the target company buys back the shares, then a standstill agreement is made, which restricts the acquirer from buying more shares for a long period of time.

White Knight and White Squire

These strategies involve a third party. When the target company approaches a friendly firm that can acquire a majority of stakes, that firm is called White Knight. Under the friendly white knight, the target company operates independently and the target company slips away from the hostile bidder. It is generally done because of friendly intention; the belief of better competence, better synergies; belief of not dismissing the existing employees and managers. After the hostile bid expires, the target company can repurchase its shares from the white knight. But, mostly it gets acquired by the white knight.

In the white squire process, the third party acquires a small portion of shares instead of large chunks; but enough to keep the hostile bidder from taking majority stakes. It can be done through raising an investment, usually from hedge funds or banks.

Pac-man

If the acquirer is comparatively small and the target company has enough cash flow or liquid-able assets, then the target company reversely purchases the shares of the acquirer company.

Self-tender

After getting the news of a possible takeover, the target company can start buying back its shares from the existing shareholders to that extent, so it will be impossible for the hostile bidder to acquire a majority of shares. It is a very helpful and effective strategy.

Litigation

After receiving the hostile bid, the target company can challenge the bid and sue the acquirer. Litigation often includes seeking injunctions, filing antitrust suits or restructuring orders. During the litigation process, the target company can adopt other defence measures and initiate a fantastic bargain in exchange for dropping the litigation. The litigation also pressurises the bidder to disclose its intention and post-acquisition plans which immensely helps the target company to make decisions. The litigation also can be used to drive shareholders’ opinions and make them react against the bidder in any meeting.

Statutory aspects in India

A takeover is a well-established and essential strategy for corporate growth. After Bhagwati Committee’s recommendations, the SEBI takeover regulations came into force. While applying the takeover defences, it is necessary for the target company to follow the takeover regulations and statutory aspects regarding the obligations of the target company.

Crown Jewel’s strategy is not so easy to implement. The board of directors cannot sell the whole or part of the company’s undertakings without voting and getting approval in a general meeting. However, selling a single immovable asset that does not form any undertakings are excluded from this provision.

SEBI (Substantial acquisitions and takeover) regulations restrict the target company from selling, transferring or disposing of its assets after the acquirer has made a public announcement. So, the Crown Jewel defence is to be exercised only before the acquirer makes a public announcement about his intention to initiate a takeover.

While exercising the Self-tender or buyback strategy, the company has to disclose the reason for initiating a buyback. Also, the company cannot issue shares for the next one year after the buyback or cannot issue shares to fund the buyback. If the buyback is initiated during a public offering, it has to comply with the prescribed competitive offer. Also, once the offer to buyback is made, it cannot be withdrawn. Even if the possible acquirer withdraws his bid, the target company cannot withdraw its offer of buyback. So, this strategy may be quite risky and costly.

As per these provisions, the compensation for loss of office in the Golden Parachute contract is allowed only for managing and whole-time directors. Hence, a Golden Parachute contract with the whole senior management is not applicable in India.

The payment of compensation is prohibited for the director who is resigning as a consequence of corporate restructuring or takeover.

In the Shark Repellant strategy, the company derives the right to alter its articles of association. Such an amendment shall not have retrospective effect. The amendment must not violate any provisions of the Companies Act, 2013 and the amendment has to be in accordance with the Memorandum of Association. Alteration of articles related to the management of the company is allowed, but not the basic nature or the constitution of the company. And the alteration should not cause fraud on minorities.

Case Studies

Gillette and Revlon Corporation

The President of Revlon Corporation attempted to take over the famous blade producer – Gillette for 4.12 billion USD. The bidder had 9.2 billion shares of Gillette and wanted to acquire the rest of the company by offering a super attractive premium to the shareholders of Gillette. They offered 65 USD for each share against the current market price of 58.25 USD.

Gillette exercised the Greenmail strategy and defended the hostile takeover by entering into a standstill agreement. The target company decided to buy back its own shares from the acquirer at the price of 558 billion USD; which provided the bidder a net profit of 43 million USD. In return, the hostile bidder agreed not to buy out the shares of Gillette without obtaining the consent of the board of directors of the target company.

Gillette also paid 1.75 billion USD to the bank representing the Revlon Corporation in consideration of not undertaking any possible potential takeovers of Gillette in the future. Because Gillette was quite aware of its weaknesses which could easily attract another bidder. Gillette took several steps to prevent future takeovers as well. They formed a staggered board.

Mittal and Arcelor

Mittal Steel announced a hostile bid to the target company, Arcelor, at a price of 18.6 Euros. Mittal Steel offered 28.21 Euros per share which was very lucrative as it provided a 27% premium per share. The merger would result in a new company that will operate in both the steel and automotive industries.

Arcelor used the strategy of attacking the logic of the bid to defend the hostile takeover. The board of Arcelor declared that the merger proposal didn’t make any Industrial sense as the two companies didn’t share the same strategy, vision, mission and business model. Arcelor argued that Mittal Steel had no strong corporate governance and management.

Arcelor developed a communication plan, “Tiger Project”, in order to prove the incompetence of the bidder and convince the shareholders that Arcelor was better off being independent without getting merged with Mittal Steel.

Arcelor approached Severstal Company with a €13.8 billion merger proposal. Severstal bought each share of Arcelor at the price of 44 Euros which was far more attractive than the offer of Mittal Steel as it gave a 100% premium per share on the closing share price of Arcelor.

Lundin Mining Corporation and Equinox Minerals Ltd

Lundin Mining Corporation received a hostile takeover bid from Equinox at a price of 4.8 Canadian Dollars. It offered 26% premium to the closing price of 6.45 Canadian Dollars per share.

Lundin took the defence of attacking the logic of the bid and convinced its shareholders to reject the offer of Equinox. The board of Lundin argued that Equinox undervalued the assets, paying inadequate premium for shares. They also declared that they didn’t see any strategic gains for the shareholders of Lundin. Lundin also adopted Poison Pill to defend the hostile takeover.

Conclusion

It is not possible to be totally certain about the possibility of future takeovers. So, it has become very crucial for any company to develop these kinds of defence strategies and make decisions wisely with extreme caution to have a smooth transaction.

If the majority of shareholders have cleared their position by voting that they are against any takeover, it will be the most favourable scenario because, in that case, there will be no limit on the combination of strategies to be exercised in order to make the acquirer cancel the bid.

The most advisable & easiest combination will be prepared with a well-established proactive defence strategy and some reactive alternative actions in hand.

References

Thakur, Jayant M; Takeover of Companies: Law, Practice and Procedure (1995), p-357
Ryngaert, Effects of Poison Pill Securities on Shareholder Wealth, Journal of Financial Economics, (Vol 20, 1988, page – 246)
A.S Dalal, Analysis of Takeover Defences and Hostile Takeover, NALSAR Law Review (Vol. 6, page – 87)

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Punishment for adultery in India

By

Rachit Garg

-

May 22, 2023

0

This article is written by Lavanya Gupta, a student at University School of Law and Legal Studies, GGSIPU, Delhi. This article seeks to analyse the offence of adultery and its repercussions in the Indian legal system.

It has been published by Rachit Garg.

Table of Contents

Introduction

The offence of adultery constitutes an offence against marriage. In layman’s terms, adultery is having intercourse with a person outside one’s marriage, i.e., with someone other than one’s spouse.

Earlier, the commission of adultery made one criminally liable under Section 497 of the Indian Penal Code, 1860, but the constitutionality of the same was challenged in the case of Joseph Shine v. Union of India (2018), where the Supreme Court declared this Section unconstitutional and struck it down.

Presently, adultery is a ground for divorce under family law. The offence of adultery, however, is dealt with differently in cases where one’s spouse happens to be a member of the armed forces and carries a liability with it.

The concept of adultery under the IPC

Section 497 of the Indian Penal Code, 1860, defines the offence of adultery. This provision covers both the ingredients as well as the punishment for adultery.

Ingredients of the offence of adultery

This offence covers sexual intercourse by a man with the wife of another man. The mens rea under this offence is signified when the man knows or has a reason to believe that the woman is married.

Exceptions to the offence of adultery

The man would not be liable for the offence of adultery if the act was done with the consent or connivance of the husband.

If the intercourse occurs without the consent of the woman and therefore amounts to rape, then such intercourse would not fall under the offence of adultery. The Section specifies that the wife would not be liable as an abettor.

Punishment for the offence of adultery

The punishment given under Section 497 is imprisonment for a term extending to five years, a fine, or both. However, as mentioned above, this Section was struck down by the Supreme Court of India in the landmark case of Joseph Shine v. Union of India (2018) and is therefore not applicable today. This case has been discussed in detail below.

The history and evolution of adultery laws in India

The adultery law in India was formally laid down as a part of the Indian Penal Code, 1860, under Section 497 during British rule, and it was carried forward as a part of the IPC post-independence.

In 1837, the offence of adultery was not included in the first draft of the Indian Penal Code by the Law Commission of India because, according to its principle initiator, Lord Macaulay, it was better dealt with by the community. The second law commission, observing the state of women in our country, decided to add the offence of adultery in an attempt to provide security to married women.

It was in the 20th century that this Section was questioned on the basis of its containing elements of gender discrimination. The basic ideology of this law was rooted in the patriarchal concept that a woman was her husband’s property and that it was the husband alone who could be a victim of adultery. It can be deduced clearly from the language of the Section that the role of a wife in an adulterous relationship was not given much importance. Women at the time of enactment of the law on adultery were not given any rights separate from their husbands in a marriage and were treated as the property of their husbands, the offence of adultery was essentially the stealing of the ‘husband’s property’ from him and therefore a crime against the husband.

This raised two questions: first, would the wife be punished for committing an act of adultery? And second, will the wife have a criminal remedy against her adulterous husband?

Landmark judgements on punishment for adultery in India

Smt. Sowmithri Vishnu v. Union of India (1985)

This Section was first challenged before the Supreme Court in the case of Smt. Sowmithri Vishnu v. Union of India in 1985. In this case, the petitioner was accused of adultery by her husband during their divorce. The Section was challenged by the petitioner on the grounds that it is violative of Article 14, i.e., the right to equality, of the Constitution of India, as it makes an unjustified distinction between men and women by allowing the husband certain rights that the wife cannot exercise. Further, it was contended that this Section did not allow the wife to prosecute an adulterer, whereas the husband is free to prosecute the adulterer, and that the Section does not allow the wife to take any action against a husband committing adultery. Specifically, in cases where the husband has an adulterous relationship with an unmarried woman, he basically faces no punishment and therefore gets a free licence to have the extramarital affair.

This Section was also challenged on the grounds of Article 21, i.e., the right to life, as the wife has a right to reputation, and this Section, by not considering the wife as a necessary party, disallows the wife to plead her case and therefore takes away her right to be heard.

The Court, however, rejected this petition on the contention that diluting the adultery laws would be against the sanctity of the institution of marriage.

Joseph Shine v. Union of India (2018)

The case that actually led to the decriminalisation of adultery was the 2018 case of Joseph Shine v. Union of India.

The petition filed in this case challenged both Section 497 of the IPC and Section 198(2) of the Criminal Procedure Code, 1973, before a five-judge bench of the Supreme Court.

Section 198(2) of the CrPC states that ‘no person except for the husband of the woman will be the aggrieved party under Section 497 or 498 of the Indian Penal Code. If the husband is not available but has left his wife in the care of someone, then the person who had the care of the wife can file a complaint on behalf of the husband with the leave of the court.

The Court held that Section 497 was unconstitutional and violated Article 14 (right to equality), Article 15 (prohibition of discrimination on the grounds of religion, race, caste, sex, place of birth, or any of them), and Article 21 (right to life). It was also held that Section 497 took away the autonomy of women and their right to privacy and dignity. The Court reaffirmed that sexual privacy was a natural right of a woman and that this Section placed undue importance on the role of a husband in the context of adultery, essentially resulting in the subordination of the wife.

It was further held that Section 497 disregarded the concept of equality and implied that women were not equal partners in a marriage and were not capable of giving their consent independently to sexual activity, therefore making them the property of their husband.

The Government contended that dilution of adultery in any form would impact the sanctity of the marriage, to which the Court stated that adultery would remain within the ambit of family law and therefore a civil wrong because essentially criminal wrongs are those committed against society at large. Criminalising adultery signifies a crossover of personal rights in the public domain, which should be kept separate. Therefore, the law on adultery will not get diluted, it would simply become a remedy equally available to both parties in marriage.

Current position of adultery in India

Under the civil laws

The act of adultery is a ground for dissolution of marriage through divorce and can also result in the wife getting less or no maintenance from the husband if she is the guilty party.

Under Hindu law

As per Section 13(1) of the Hindu Marriage Act, 1955, adultery is a ground for divorce. According to this Section, adultery is voluntary sexual intercourse outside one’s marriage. Earlier, the grounds for divorce and judicial separation were different, the ground for adultery was not a ground for divorce; however, the Marriage Laws (Amendment) Act (1976). included adultery as a ground for divorce. Before the amendment, adultery was a ground for judicial separation as per Section 10 of the Hindu Marriage Act, 1955.

Under Muslim law

Under Muslim law, the concept of adultery is dealt with under the concept of lian. The concept of lian does not deal directly with adultery but rather with the concept of allegations of adultery. If the husband alleges that his wife committed adultery, he has two options, as per the Dissolution of Muslim Marriage Act, 1939, which allows the husband to withdraw his allegations, but if it is proved in court that the allegations were false, the wife is entitled to get a decree of lian. The Muslim law deals with adultery, though not in those exact terms, under Section 2(viii)(b) of the Dissolution of Muslim Marriage Act, 1939, which states that a wife can sue her husband on the ground of cruelty if he leads an ill famed life or associates himself with a woman of evil repute, which may cover adultery in its purview. Cruelty, as per Section 2 of this Act, is a ground for divorce.

Under Christian law

Under Christian law, there are two methods of dealing with adultery. In the first, the aggrieved spouse can file for a judicial separation under Section 22 of the Indian Divorce Act, 1869. Whereas, in the second method given under Section 11 of this Act, the wife can apply to the courts after obtaining an annulment from the church where the marriage was performed and make the adulterer a co-respondent in the case; however, the wife is supposed to prove a ground in addition to adultery, for example, cruelty, along with it, whereas it is sufficient for a husband to just prove adultery on the part of his wife.

The Bombay High Court in the case of Pragati Varghese v. Cyril Georg (1997) allowed adultery to be the independent ground to obtain a divorce for a woman.

As per Section 27 of the Special Marriage Act, 1954, adultery is an independent ground for obtaining a divorce. As per subsection 4 of Section 125 of the Criminal Procedure Code, 1973, which covers the maintenance of wives, children, and parents, the wife would not be entitled to receive an allowance if it is proved that she is living in adultery. The concept of granting divorce in India is based on the fault theory, and by not allowing the wrongdoer, in this case a wife committing adultery, to take maintenance from the husband, it can be construed as a financial repercussion for the act committed.

In the case of military personnel

The offence of adultery was decriminalised in 2018, and after this verdict, the Central Government approached the Supreme Court on November 5, 2020, seeking clarification on whether this judgement exempted the armed forces from its purview.

In the armed forces, adultery is covered under Section 45 and Section 46 of the Army Act, 1950. Section 45 deals with the actions of the armed officer unbecoming of the position being served by him, i.e., conduct not expected from a person of his station, as the officers are supposed to be disciplined and respectable in their conduct to maintain the sanctity of their position. According to Section 45, such a person can be cashiered, i.e., dismissed from service on the charges of misdemeanour, and if he is a junior officer or a warrant officer, he is liable to be dismissed. Whereas, Section 46 of the Army Act makes the officer liable for imprisonment up to 7 years due to disgraceful conduct of an indecent nature as given under clause (a), which may include committing adultery.

Though these sections deal indirectly with the offence, in the armed forces, the act of adultery is known as ‘stealing the affections of the wife of a brother’. The army relies on ideals of strict moral character and discipline as essentials to its service and to be upheld by anyone who is a part of the army; therefore, to prevent dissent among the unit and foster a feeling of unity among comrades, it views adultery as disgraceful conduct and punishes it accordingly.

The present stand of the Supreme Court with respect to adultery laws in the army is that this aspect has not come up before the court as of now. The Joseph Shine judgement of 2018 only dealt with the decriminalisation of adultery for civilians and therefore did not include the defence forces in its purview.

Therefore, the army law will remain as it is unless it is challenged by an army officer, allowing the court to consider the question of adultery being criminally punishable under the Army Act, 1950. As of now, the army can take action against a person committing adultery.

Conclusion

In conclusion, it can be said that Section 497, which covered adultery, which was a criminal offence earlier, has now been declared unconstitutional by the Supreme Court in the Joseph Shine judgement. This leaves a person who is aggrieved by adultery with only the option of civil recourses, like using it as a ground for divorce or judicial separation as per the family laws, and for the reduction of maintenance to be paid under Section 125 of the CrPC.

This position is, however, not uniform throughout the country because the army still holds the power to criminally punish its officers for committing adultery.

The Supreme Court, while responding to the clarification sought by the government, mentioned that the question of adultery laws and their applicability in the armed forces is a topic that was not analysed in the Joseph Shine case, and the status of adultery laws in the army will remain as is but is open to being challenged in the future.

It must, however, be noted that the army punishes both male and female officers for adultery, thereby making this law equally applicable to both genders; therefore, the grounds invoked in the Joseph Shine case are more or less not applicable to army adultery laws.

The 2018 verdict of the Supreme Court was considered a win for gender equality laws and a step in the direction of truly recognising the principle of equality as enshrined in Article 14 of the Constitution.

Frequently asked questions (FAQs)

Is adultery a criminal offence in India?

It is decriminalised only for civilians and not for army personnel, who are dealt with by army marshals and courts.

How can adultery be proved in court in India?

Circumstantial evidence can be used as proof of adultery, such as the spouse getting pregnant when the husband had no access to her or the spouse contracting a venereal disease.

Are there any types of adultery?

Yes, adultery is of two types, if done with an unmarried person, it is single adultery, and if done with a married person, it is double adultery as it now carries two counts of adultery.

What is the definition of adultery now?

After the 2018 verdict, it is left to be seen whether the definition of adultery as given in Section 497 will be used as a reference, which only involves intercourse, or if the definition can be widened to involve other acts of a sexual nature as well. As of now, only intercourse is considered under the definition of adultery.

What action can be taken if a husband lives with another woman without divorcing his first wife?

The first wife can file an application for divorce before the family court on the grounds of adultery and desertion.

Does adultery amount to mental cruelty?

Even though the Supreme Court in the case of K.V. Prakash Babu v. State of Karnataka (2016) held that extramarital relationships per se would not amount to cruelty, the Madras High Court in the case of Dhananchezhiyan v. the State of Tamil Nadu (2020) held that in the light of facts and circumstances, extramarital affairs can amount to mental cruelty on a case to case basis, and the husband can be punished for the same under Section 498A of the Indian Penal Code, 1860.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Origin and development of PIL in India

By

Rachit Garg

-

May 21, 2023

0

This article has been written by Siddiqua Abdullah, pursuing a SEBI Grade A Legal Officers’ Test Prep Course and has been edited by Oishika Banerji (Team Lawsikho).

It has been published by Rachit Garg.

Table of Contents

Introduction

PIL or Public Interest Litigation signifies a chief instrument through which the concept of judicial activism is established as it facilitates exercising of writ jurisdiction by high courts or the Supreme Court of India to safeguard the fundamental and legal rights of the citizens of India at large. The concept of PIL emerged in the United States of America for the first time. But as far as India is concerned, it emerged in the 1980s and its pioneers are J. PN Bhagwati and J. Krishna Iyer. As the name of the litigation suggests, the same is meant for safeguarding public interest which gets affected by pollution, terrorism, road safety, etc. One of the prime necessities of a PIL is the party filing the same has to do so in public interest and has to satisfy the court on similar grounds as well. This article is meant for discussing the origin and development of PIL in India.

Significance of PIL in India

There are many reasons why PIL was introduced in India but its main purpose is to make justice available to people who are poor and marginalised. It has become a very important tool as it provides justice to those who cannot file petitions on their own because of many reasons like illiteracy, illegal detention, poverty etc. Because of the concept of public interest litigation, the Indian judicial system has become more active. It has also increased the interdependence of the judiciary because even the courts can suo moto initiate a matter in the court of law. PIL not only provides justice to a single person but to a class of aggrieved persons. Also the cases of public interest litigation are given preference over other ordinary cases as these cases are related to a large number of people.

Evolution of PIL through judicial precedents

As PIL is a procedural concept, understanding the same cannot be limited to subjective discussions only. Therefore in order to understand the origin and growth of PIL in India, a look to the judicial precedents need to be made.

Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai [1976 AIR 1455, 1976 SCR (3) 591]

This case is considered to be one of the most important cases of PIL. In the 1960s there was a union of workers in Maharashtra known as Mumbai Kamgar Sabha. The business organisation for which the workers worked was owned by Abdulbhai and Faizullabhai. From 1965 the business organisation stopped the yearly bonus of the workers. The Mumbai Kamgar Sabha filed a petition on behalf of the workers against the organisation. Justice K. Iyer had held that as the matter had affected a number of people from the weaker section, the Union was eligible to file a petition on behalf of the aggrieved class. Hence, the principle of locus standi was relaxed for the first time thereby leading to the origin of PIL in this country.

Hussainara Khatoon & Ors v. Home Secretary, Bihar [1979 AIR 1369, 1979 SCR (3) 532]

In 1979, an article about Bihar’s undertrial prisoners was published in the newspaper. They were in jail for a long time and were going through lots of hardships. Some prisoners had committed very minor offences for which they were in jail for a long time and some had to even exceed the time in detention, in comparison to what the court had ordered. There were 17 undertrial prisoners and Hussainara Khatoon was one of them. Advocate Hingorani represented under-trial prisoners. She filed the writ petition on behalf of the victims against the State of Bihar. The State was directed to present the list of undertrial prisoners before the Apex Court.

The bench in this case consisted of J. P N Bhagwati, J. R S Pathak and J. A D Koshal, who delivered the judgement in favour of the petitioner. The court ordered to release the prisoners whose names were mentioned in the petitioner’s list and held that their imprisonment was illegal and violative of fundamental right under Article 21 of the Constitution. Thus, the right to speedy trial was included under Article 21 thereby widening the scope of the same in the Indian Constitution.

Fertilizer Corporation Kamgar v. Union Of India & Ors [1981 AIR 344]

Until 1981, though courts had dealt with the concept of PIL, it was in Fertilizer Corporation Kamgar vs Union Of India & Ors [1981], where the court of law first explained the term “Public Interest Litigation”. The Hon’ble Supreme Court had observed, that law as is conceived as a social auditor and audit function can be put into action only when someone with real public interest ignites the jurisdiction. It was further observed that PIL is a part of participatory justice and must have liberal reception at the judicial doorsteps, which means the relationship between the parties is not hostile like other traditional cases.

Pt. Parmanand Katara v. Union Of India & Ors [1989 AIR 2039]

On the basis of a newspaper report the petitioner, who was a social activist, filed petition on behalf of a person who met with an accident but later died because the nearest hospitals refused to admit him and referred him to a hospital located around 20 km away, which had the authority to handle medico-legal cases.

The court observed that it is the duty of the State under Article 21 to protect the lives of people. Also legal professionals and people who are related should keep a check that any medical professional is not being troubled or put into problems in any way. The law or State’s action should not interfere in the proceedings of hospitals and allow the medical professionals to do their duty without any interruption. The laws which are an obstacle in carrying out the duties of doctors and people concerned with it, should not be followed. This case is an example of participatory justice that is where all the entities cooperate with each other for the welfare of the public.

S.P Gupta v. Union Of India & Anr [1989 AIR 149]

It was held that any person acting pro bono public and who is not a meddlesome interloper can approach the Honourable high courts and the Supreme Court directly in any case if the constitutional or fundamental rights of a class of people is violated. So, in this case the petition filed by the advocates of different courts was admitted because the advocates are an integral part of the Indian judicial system. Until S.P Gupta case, courts had been exercising their discretionary powers and relaxing locus standi on case to case basis. By this judgement, relaxation of locus standi in PIL was fully established and wherever there was legal injury PIL was used to seek justice and thus, it became an important tool for seeking justice.

Criticism of Public Interest Litigation

Although the concept of public interest litigation is of great importance, as the time passed people started to exploit it. Many frivolous petitions were and are filed in the name of public interest litigation creating further delay and hindrance in the legal proceedings. People use PIL for publicity which wastes the precious time of the court. Even if the court dismisses such frivolous petitions then also it wastes the court’s time and effort. Sometimes the advocates also use PIL to come into limelight and even political parties use it to fulfil their political agendas. All this leads to the abuse of the concept of Public interest litigation which ultimately increases the burden of our judicial system.

Conclusion

We know that since the 1970s the concept of PIL has been evolving. Even a letter was considered as PIL in cases like Mrs. Veena Sethi vs State Of Bihar & Ors. [AIR 1983 SC 339]. Ever since then the scope of PIL has been widening. As the objective of PIL is to give equal access to justice to everyone in society, the rigid or traditional view of locus standi has been relaxed to great extent . Due to this, any person acting pro bono publico has the right to file a PIL on behalf of the aggrieved class. Even the court can suo moto initiate a PIL, the recent example of this is the Gujarat Morbi Bridge Tragedy. In this case when one of the judges of Gujarat read about the incident in a newspaper, he suo moto initiated the matter in court of law. The process of filing PIL is quite simple and cheap which makes it easier for anyone to file it leading to the accumulation of frivolous petitions in the court. So, in order to avoid this exploitation of PIL the courts must be very cautious while admitting a petition. Judges should make sure that the petition is of public interest and not of personal interest.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Decriminalization of corporate offences

By

Sneha Mahawar

-

May 20, 2023

0

This article has been written by Bhoomi Shekhar, pursuing Diploma in Corporate Litigation and has been edited by Oishika Banerji (Team Lawsikho).

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Indian billionaire businessman and the head of the Godrej Family once said “Corporate governance should be done more through principles than rules”. The manner, method and mode by which companies are directed and controlled is termed as corporate governance. The Companies Act, 2013 provides a robust framework for corporate governance. In order to promote better corporate compliance, facilitate ease of doing business, reduce encumbrance on the criminal justice system, avoid the backlog of cases, strict vigilance over grave offences and in addition to this, motivate corporate institutions to adopt neat and transparent business practices, maintain a balance between the companies’ interest and the public interest and also to reduce the compliance costs. The Ministry of Corporate Affairs (MCA) decriminalized various offences under the Companies Act, 2013 with the introduction of the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act 2020 with the belief that this will ultimately increase FDI and will motivate Indian businesses to flourish in India. As such, decriminalization will put a bar on the preconceived notion that the regulatory landscape of India is fluctuant, erratic and onerous. The Coronavirus pandemic brutally worsened the already parlous Indian economy. To cope with the economic hardships and to revive economic growth, decriminalisation of certain corporate offences was deemed to be one of the best options. This article discusses the need to decriminalize corporate offences owing to smoother facilitation of corporate governance.

An overview of changes introduced for governing corporate offences

In July 2018, a committee was set up by the MCA to review offences.
In August 2018, the committee submitted its report and recommended that the offences that are technical and procedural should adopt an in-house adjudication mechanism.
In July 2019, Amendments were made accordingly and as a result, The Companies (Amendment) Act, 2019 was passed.
In September 2019, the Government still felt the need to make the penal provisions lenient. Therefore, the Company Law Committee (CLC) was constituted.
In November 2019, CLC released its report and marked the recommendations for further recategorization. The report was submitted to MCA.
In March 2020, the Ministry of Finance introduced the Companies (Amendment) Bill 2020 proposing extensive and exhaustive amendments to the Companies Act, 2013.
In September 2020, the bill was passed in both houses. Eventually, The Companies (Amendment) Act, 2020 received the assent of the President of India.

“For such business and economic legislations which fall within the domain of arbitration or civil courts, the government should consider decriminalising the laws, unless there is an intent of fraud or misdoings.”

-CII President Vikram Kirloskar

The identity and existence of a company are distinct from that of its members. Both have separate legal identities. However, with the lens of qui facit per alium facit per se, the corporation could be held liable for the acts of its employees.

The four facets or the prime principles underlying corporate offences

The four facets of decriminalisation as stated in the Amended Act are –

1. Re-categorisation of offences from compoundable offences to an in-house adjudication framework

The Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020 reorganised offences and eventually shifted 23 offences from compounding mechanism to in-house adjudication mechanism (IAM) and the committee further recategorized these offences into different categories, A-H namely. 16 offences had already been decriminalised after the Amendment Act of 2019.

Category A: This category covers offences dealing with defiance of the order of authorities. Here the liability of penalty would amount to twenty thousand rupees and further, in case of continuity, it would be additional one thousand rupees for each day, subject to a maximum of three lakh rupees.

Section 232 (8) – If a company fails to comply with (5) of the Merger and amalgamation of companies’ continuity.
Section 405 (4) – If a company fails to comply with the orders of the Central Government.

Category B: This category cover defaults concerning the maintenance of:-

Section 56 (6) –Transfer and transmission of securities, the liability of penalty would amount to fifty thousand rupees.
Section 88 (5) – Register of Members, the liability of penalty would amount to fifty thousand rupees and further, in case of continuity, it would be additional two hundred rupees for each day, subject to a maximum of five lakh rupees.
Section 90 (11) – Register of significant beneficial owners in a company, liability would amount to one lakh rupees and further, in case of continuity, it would be five hundred rupees for each day, subject to a maximum of five lakh rupees and every OID shall be liable to pay rupees twenty-five thousand as a penalty and further penalty in case of continuing failure would be two hundred rupees for each day subject to a maximum of one lakh rupees.

Category C: This category cover cases dealing with default in the declaration:-

Section 90 (10) – By a significant beneficial owner, here liability of penalty would amount to fifty thousand rupees and further, in case of continuity, it would be additional one thousand rupees for each day, subject to a maximum of two lakh rupees.

Section 89 (5) – In respect of a beneficial interest in any share, here liability of penalty would amount to fifty thousand rupees and further, in case of continuity, it would be additional two hundred rupees for each day, subject to a maximum of five lakh rupees.
Section 184 (4) – About disclosure of interest by a director, here liability of penalty would amount to one lakh rupees.

Category D: This category deals with the defaults concerning corporate governance and such offences have been transferred already.
Category E: This category deals with the defaults concerning:-

Section 86 (1) – registration of charges, here the company would be liable to pay five lakh rupees and in case of OID liability would amount to fifty thousand rupees.
Section 89 (7) – filing a return, here the liability would arise of rupees one thousand in case of continuing failure, subject to a maximum of rupees five lakhs in case of a company and rupees two lakhs in case of every OID.

Category F: This category deals with defaults affecting the company’s going concern value or impact on public interest or stakeholder’s interest.

Section 92(6) – Incomplete or wrong certification of annual return by the CS, a penalty of rupees two lacs would arise.
Section 105(5) – When a company is acting as an agent in appointing the proxy, a penalty of rupees fifty thousand would arise.
Section 124(7) – Essentials regarding the transfer of shares and dividends to Investor Education and PFA, here liability of penalty would amount to one lakh rupees and further, in case of continuity, it would be additional five hundred rupees for each day, subject to a maximum of ten lakh rupees. And in the case of OID, the liability of penalty would amount to twenty-five thousand rupees and further, in case of continuity, it would be additional one hundred rupees for each day, subject to a maximum of two lakh rupees
Section 134(8) – Non – Fulfilment of substantial companies, the liability of a company would amount to three lakh rupees and in case of OID liability would amount to fifty thousand rupees.
Section 143(15) – The auditor failed to report fraud and relatedly section 147(2) was also amended. Liability would arise of rupees five lakhs in the case of a listed company and a penalty of one lakh rupees in the case of any other company.
Section 178(8) – Constitution of various committees, here the company would be liable to pay five lakh rupees and in case of OID liability would amount to one lakh rupees.

Section 187(4) – when investments are not held in the name of the company, here the company would be liable to pay five lakh rupees and in case of OID liability would amount to fifty thousand rupees.
Section 188(5) – related party transactions that are not made in compliance with the section, Liability would arise of rupees twenty-five lakh in the case of a listed company and a penalty of five lakh rupees in the case of any other company.
Section 204(4) – Secretarial audit for prescribed companies, liability would arise of rupees two lakhs.

Category G: This category covers defaults concerning liquidation proceedings. Although none of the offences was transferred from this category to IAM.
Category H: Defaults that are

Section 172 – related to the appointment and qualifications of directors and are not specifically punished under the act, in such cases the liability would arise of rupees fifty thousand and in continuing failure, it’d be a penalty of five hundred rupees for each day, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an OID.
Section 450 – not explicitly made punishable under the act but punishable outside the ambit of the Companies Act, 2013 (an omnibus clause). Here the liability would arise of rupees ten thousand and in continuing failure, it’d be a penalty of one thousand rupees for each day, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an OID.

Section 441 and Section 454 of the Companies Act explicitly covers the concept of compounding and in-house adjudication. Here, the former is a settlement mechanism in which the felon is given the option to settle the matter by monetary payment and in the second-mentioned concept, an Adjudication Officer holds the authority to settle the offences by charging reasonable and relevant penalty from the defaulting party.

2. Eliminating imprisonment under listed sections and subjecting them to fines alone

Punishment of imprisonment was removed from a few of the sections but offenders are still liable to pay a fine if they committed these offences.

S.No.	Section	Offence	Omission of punishment with imprisonment	Fine
	8(11) When the companies are formed with the intent of social welfare or charity	Default in complying with the requirements	Up to 3 years	10,00,000 – 1,00,00,000(company)250000 – 25,00,000 (OID)
	26(9) Areas to be discussed in the prospectus	Contravention of related provisions	Up to 3 years	50,000 – 3,00,000
	40(5) Stock Exchange Securities	Default in complying with the related provisions	Up to 1 year	5,00,000 – 50,00,000 (company)50,000 – 3,00,000 (OID)
	68(11) Company’s power to purchase its securities	Default in complying with the related provisions or any regulation made by SEBI	Up to 3 years	1,00,000 – 3,00,000
	128(6) Relevant books and papers and financial statements to be kept by the company	Contravention of related provisions by MD, WTD in charge of finance, CFO or any other person of a company	Up to 1 year	50,000 – 5,00,000
	147(1) Punishment for contravention	Contravention of provisions of sections 139 to 146 (related to audit and auditors)	Up to 1 year	25000 – 5,00,000 (company)10,000 – 1,00,000 (OID)
	167(2) When the office of a director becomes vacant	If a person functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified.	Up to 1 year	1,00,000 – 5,00,000
	242(8) powers of tribunal	Contravention of the order of NCLT relating to alterations in MOA or AOA	Up to 6 months	1,00,000 – 25,00,000 (company)25,000 – 1,00,000 (OID)
	243(2) Consequence of termination or modification of certain agreements	Any person or director who knowingly acts as an M.D. or other director or manager of a company in contravention of 243 (1) (b) or 243 (1A)	Up to 6 months	Up to 5,00,000
	347(4) Disposal of books and papers of the company in case of winding up and dissolution of the affairs of the company	Contravention of any rule framed or an order made by the central government under 347 (3)	Up to 6 months	Up to 50,000
	392 Punishment for contravention	Contravention of the provisions of Chapter XXII: COMPANIES INCORPORATED OUTSIDE INDIA by a foreign company	Up to 6 months	1,00,000 – 3,00,000 + 50,000 (company)25,000 – 5,00,000 (OID)

3. Reduction in penalty

The number of penalties on a Company and officers in default (OID) was also altered to a greater extent.

S.No.	Section	Penalty in case of a company	Penalty on every OID
	64 (2): When the company files a notice to the registrar regarding alteration of share capital and fails to comply with the requisites mentioned in sub-section (1) like prescribed format, specific period etc.	Rs. 500 to 1,00,000	Rs. 500 to 1,00,000
	92 (5): Failure in filing a copy of the annual return to a registrar before the expiry of the period under sub-section (4)	10,000 + 100 but the maximum of Rs. 2,00,000	10,000 + 100 but the maximum of Rs. 50,000
	117 (2): Failure in filing resolution or agreement following the requisites stated in sub-section (1) such as annexures, specific timeline, etc.	10,000 + 100 but the maximum of Rs. 2,00,000	10,000 + 100 but the maximum of Rs. 50,000
	137 (3): Failure in filing a copy of the financial statement under sub-section (1) or (2)	10,000 + 100 but the maximum of Rs. 2,00,000	10,000 + 100 but the maximum of Rs. 50,000
	140 (3): The auditor who has resigned from the company failed to comply with the requisites mentioned under sub-section (2) such as filing a statement to the company and the registrar etc.	Rs. 50,000 or the amount equal to the remuneration of the auditor, whichever is less + 500 but the maximum of Rs. 2,00,000
	165 (6): If a person accepts a designation of a director in violation of the parent section	Rs. 1000 but the maximum of Rs. 2,00,000
	446B: If the penalty is payable for non-compliance with any of the provisions of this act by a One Person Company, start-up company, small company, producer company	One-half of a penalty specified but upto a maximum of 2,00,000 rupees	Maximum of 1,00,000 rupees

4. Omission of penal provisions from particular sections and provision of an alternate mechanism

After the brainstorming sessions, Sections 48 (5), 59 (5), 66(11), 71 (11), and 342 (6) have been omitted where the aforementioned sections talked about the variation of shareholders’ rights, the rectification of register of members, reduction of share capital, debentures and prosecution of delinquent officers and members of the company respectively. Now, National Company Law Tribunal (NCLT) would exercise its competent jurisdiction in case of non-compliances in these sections. Along with these, information as to pending liquidations, Sections 348 (6) and 348 (7) were omitted and other relevant laws would be applied in case of any non-compliances.

An alternative framework was made available in the following sections-

Section 16(3), The company is in default in following the directions provided for the registration of a company– A new name will be given to the company by the central government and the Registrar will carry out necessary changes in the place of the old name.
Section 284(2). If the person (promoters, directors, officers and employees) fails to assist or cooperate with the company liquidator – The company’s liquidator can now approach NCLT for directions.
Section 302 (3). Dissolution of company by Tribunal – NCLT will now provide instructions to the liquidator regarding forwarding a copy of its order to the registrar of companies.
Section 356 (2). Powers of the tribunal to declare dissolution of company void – NCLT will now provide instructions to the liquidator regarding forwarding a copy of its order to the registrar of companies.

Two sides of decriminalization of corporate offences

Advantages

Apart from the already mentioned positive consequences, a few more benefits arising out of Decriminalisation are: –

As the defaults are now being handled by IAM, the burden on special courts has been substantially reduced.
This a stepping stone towards the accomplishment of ‘Sabka Saath, Sabka Vikas and Sabka Vishwas’.
The focus of criminal courts is now more inclined towards serious offences. Various branches of NCLT have also been alleviated with work; now, the seriousness, time and urgency can be devoted to major offences.
Motivate budding entrepreneurs by easing their way for the conduct of the business. Because every entrepreneur before taking the first step thinks twice about the idea due to lengthy procedures and wealthy costs.
Hike in Foreign Direct Investment, by providing civil liability for the majority of offences, the Indian Companies Act has aligned itself to corporate law provisions prevailing in several other countries.
Drawing companies towards social consciousness and making them public-spirited.

Disadvantages

The Adjudicating Authority is a non–judicial body that also covers the offices which are directly under the supervision of the Central Government. The power is now vested in civil servants that are synonymous with Red Tapism, bureaucracy, corruption and political influence. And sometimes lack of judicial exposure can also become a reason for weak judgements.
The financial penalties imposed may not be a sufficient deterrence and may just be seen as a “cost of doing business”. Penalties imposed would impact each firm differently, depending upon their financial status.

Conclusion

As per data collected from the Registrars of Companies, more than 1,000 company law default cases have already been disposed of by the Adjudicating Officers (Registrars of Companies) during the last three financial years (2018-19, 2019-20 and 2020-21) in a summary manner. More than 1,000 default cases were decided post-reform without resorting to court cases. Companies Fresh Start Scheme 2020 was further launched, for companies to rectify old defaults without any extra fees. More than 4,00,000 companies used the Companies Fresh Start Scheme to rectify filing defaults and avoid penalties under the Companies Act. More than 1,55,000 companies were registered in India in the financial year 2020-21 which is almost 3 times more than the average number of companies registered annually, seven years ago. The perfect balance can be seen between decriminalising certain offences and leaving a few untouched. The corporate regime has evolved in a liberal direction. The businesses can concentrate on their core business operations while also lowering their compliance expenditures. Apart from easing the burden on the judiciary, it has improved the efficiency, effectiveness and speed of businesses. Thus ease of doing business and ease of living must exist simultaneously.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Section 17 of the Arbitration and Conciliation Act

By

Vanshika Kapoor

-

May 20, 2023

0

This article has been written by Sarthak Mittal, a student at the Vivekananda Institute of Professional Studies of Indraprastha University, Delhi. This article elucidates upon the interim orders passed by the arbitral tribunal.

it has been published by Rachit Garg.

Introduction

Arbitration tribunals are not like other tribunals where the statutes constitute the adjudicating authority; rather, in the arbitration process, it is the parties who consent to the arbitrator. Providing powers for granting interim orders seems reasonable when it is an authority constituted by a statute, but is it safe to grant such wide powers to any random person to whom the parties consent to be an arbitrator?

In the case of Srei Infrastructure Finance Ltd. v. Tuff Drilling Pvt. Ltd. (2018), the Supreme Court of India held that there may be some leeway provided to the parties in the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act” for brevity) are provided with some leeway to select the arbitrator, however, the functioning of an arbitral tribunal always remains in strict adherence to the Act and thereby, statutory tribunals and arbitral tribunals are to be seen in the same This article aims to expound upon the powers of the arbitral tribunal to pass interim measures, the scope of such powers, the rationale behind the widening of such powers through recent amendments, and the considerations that guide the use of such powers. The main purpose behind the enactment of the Arbitration and Conciliation Act, 1996 is to have an efficacious, efficient, and equitable legal framework for domestic and international commercial arbitration. The Act has been based on the United Nations Commission on International Trade Law (UNCITRAL) as per the recommendations of the United Nations General Assembly.

Powers of interim measures under Section 17 of the Act

Powers to grant interim measures

Arbitration is a process where parties come to a consensus with respect to the arbitrators who constitute the arbitration tribunal, and parties simultaneously agree through an arbitration agreement to accept the binding nature of the tribunal’s decision. This Arbitration Tribunal has been conferred powers under Section 17 of the Act to pass interim orders during the arbitral proceedings.

Section 17 and Section 9 of the Act deal with matters of interim measures, whereby a party seeking to get an interim order passed in his favour can file an application with the court under Section 9 and apply to the tribunal under Section 17. The purpose behind interim measures in such cases is to preserve, examine, inspect, sell, and detain the subject matter of the proceedings. All the interim orders come to an end on final adjudication by the tribunal or the court. Some of the interim measures that can be taken by the arbitral tribunal are as follows:-

Appointment of guardian for a party suffering from any legal disability.
The subject matter is to be when preserved, kept in interim custody, or had to be sold.
Depositing of the amount in court with respect to which dispute has arisen.
Detention, preservation, and inspection of any immovable property.
Allow any person to enter upon any land or building in possession of any party for collection of samples, conducting experiments, or making observations.
Interim injunctions.
Appointment of receiver.

The following list of measures is not exhaustive, as Section 17(1)(e) provides for a residuary clause whereby the tribunal can order any other interim measures in relation to the proceedings. Further, Section 17(2) carves out a legal fiction whereby, all the interim orders passed by the tribunal are deemed to be orders of the court and should be made enforceable in the same way through the Code of Civil Procedure, 1908.

When to file an application

The next question that arises is when an application can be filed by the party. It is pertinent to note that an application can be filed before a court under Section 9 before arbitration proceedings and also after the award has been passed by the tribunal, given that the award shouldn’t have been enforced. Through the 2015 amendment, it was made mandatory that the arbitration proceedings be initiated within a period of 90 days from the date of such order or within the time provided by the court when an interim order has been passed by the court before the initiation of arbitral proceedings. This was done in order to prevent delay by unscrupulous litigants after getting an interim order in their favour. An application can also be filed before an arbitration tribunal during the arbitration proceedings.

Further, it is important to understand that for the effective functioning of the tribunals, the supervisory role of the courts is to be reduced, and the same is the case with arbitration tribunals. Even the legislature has tried time and again with amendments to reduce the supervisory role of the courts, and even Section 5 of the Act provides for minimal judicial intervention. It is essential to make the arbitration proceedings expeditious. This is the reason that the legislature, through the 2016 amendment, provided that an application during the pendency of arbitration proceedings will be filed before the civil court only when the court is of the opinion that the provisions of Section 17 may not be effective enough to remedy the situation and not otherwise. Thereby, the courts still have jurisdiction to pass the interim orders during the arbitration proceedings, but only if the applicant is able to prove that remedies under Section 17 fall short of doing complete justice. The intent was to stop parties from delaying the arbitration proceedings by filing applications for interim measures before the court. The civil courts still have the jurisdiction to pass interim orders, but they will be reluctant.

Appeal against interim orders

Section 37(2)(b) provides for the provision of the first appeal from the order of the arbitration tribunal passed under Section 17 of the Act. The right to a second appeal is, however, contradicted by Section 17(3). The issue that arose was whether the appellant could further appeal to the High Court under Articles 227 and 226 from the order of the first appeal. In the case of Deep Industries Ltd. v. ONGC (2020), the Hon’ble Supreme Court has held that if the following proposition is allowed, it will be used to delay the arbitration proceedings, and the purpose of arbitration will be defeated, which is to have expeditious proceedings. However, the court also remained cognizant of the fact that Section 5 cannot circumvent the powers of the High Court provided under Articles 226 and 227. Thereby, the Supreme Court held that appeals can be allowed under Articles 227 and 226. However, the High Court will be reluctant to entertain the appeal before it unless there is a case of patently inherent lack of jurisdiction.

Amendments to Section 17

2015 Amendment Act

The 2015 amendment substituted the entire Section 17, which had made the powers of the tribunal to pass interim orders equivalent to those of civil courts in Section 9. Also, the powers are better well-defined now and can be enforced by their own independent force. Earlier, the powers were only limited to ordering deposits of security, but now tribunals have wide powers, which have been supplemented by the use of the residuary clause in the provision, which provides the tribunal with the power to pass all such orders that appear to the tribunal to be just and convenient.

The amendment of 2015 also amended the provisions of Section 9 so as to reduce the supervisory role of the courts and make the arbitration proceedings more expeditious. The parties are now obligated to file the application for seeking interim reliefs during the proceedings to the arbitral tribunal only. This has made the proceedings of arbitration smooth, as they do not get hampered by various adjournments that were to be granted to wait for the adjudication of the court on the application for interim relief. However, the right of the parties to approach courts during the pendency of arbitration proceedings has not been curbed completely, as the parties can still approach courts if they prove that the arbitral tribunal is bereft of powers to provide the proper and adequate remedy in the case.

2019 Amendment Act

Before the Amendment of 2019, the tribunal could have passed an interim order even after the passing of the award but before the enforcement of the award, however, the same power was restricted as the tribunal became functus officio after the passing of the award, which means that an adjudicating authority cannot review its own order once it has been passed. Thereby, now the interim orders can be passed by the tribunal only on an application made by the party during the pendency of proceedings.

Principle for granting interim measures

Interim injunctions

It is pertinent to note that all the adjudicating authorities are governed by the same principles when granting interim relief in a civil case. The statutes might change, but the principles that are to be considered for interim measures are pari materia to all such statutes.

The Supreme Court, in Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd. (2007), held that in Sections 9 and 17 of the Act, the legislature cannot have intended to ignore the well-defined principles for the grant of injunctions and the appointment of receivers during the adjudication of matters. The principles talked about in the following judgement have been expounded in the case of Gujarat Bottling Co. Ltd. v. Coca-Cola Co., (1995) where the Hon’ble Supreme Court held that while granting an interlocutory order the court is going to consider that:-

Whether the applicant has a prima facie case or not,
Whether the applicant has the balance of convenience in his favour or not, and
Whether any irreparable damage will be caused to the applicant if the interlocutory order is not passed in his favour.

The Court also in the following cases provided that the court in such cases has to be cognizant of the fact that the party claiming the interim relief had not acted negligently or in a mala fide manner and without any latches or delay. While deciding upon the issue of interim relief, the court is not to go into the merits of the case but has to adjudicate upon what it can gather from a prima facie understanding. Thereby, the same principles are to be followed by the civil court and arbitration tribunal while adjudicating the issue of the granting of an interim injunction.

Depositing of security

Further, in order to understand the extent of powers of the courts or arbitral tribunal to grant interim reliefs within Section 9 or 17 of the Act we have to also understand that what are the principles of granting interim measures in the Code of Civil Procedure, 1908 as the same principles are to be followed under Section 9 and 17 of the Act, the same proposition of law has been held in the case of DLF Ltd. v. Leighton India Contractors Private Ltd., (2021) wherein, in the matter of passing an interim order with respect to the furnishing of security under Section 9 of the Act considered the principles enunciated in Order XVIII Rule 5 of the Civil Procedure Code, 1908 which again deals with the furnishing of security where there is an apprehension that the defendant may harm the subject matter.

Another interesting question arose in the case of Evergreen Land Mark (P) Ltd. v. John Tinson & Co. (P) Ltd., 2022), wherein the issue was whether the Tribunal can pass an interim order under Section 17 regarding the deposit of security before adjudicating the applicability of a force majeure clause in the contract, which would absolve the depositor of such an order completely from his liability. The Supreme Court in the following case held that such an order cannot be passed by the Tribunal as it is one of the major issues in the case and it would be erroneous to pass such an order before adjudication of the issue on its merits.

In the following case, the Court also relied on the case of Dorab Cawasji Warden v. Coomi Sorab Warden, (1990) wherein, the apex court held that the main objective behind granting interim relief is to restore the status quo, whereby if there has been an act done by a party that could not have been done legally, the court can remedy the situation by passing interim orders, wherein the court has to make sure that the party who has suffered any loss is restored to his original position.

Decision on merits of the case by the court

Furthermore, in the case of National Highways Authority of India v. Bhubaneswar Expressway Private Limited (2021), the Supreme Court held that in the case of Section 9, the court should not consider the legal merits of the arguments while granting interim relief as it would be a disservice to the parties who have agreed to get their dispute settled by an arbitration tribunal, and apart from that, there can be chances that the decision of the court on the basis of the merits may prejudice the tribunal.

Exercise of powers to enforce interim measures

Enforcement of order

Section 17(2) of the Act provides that the order of the Arbitration Tribunal is enforceable in the same way as if it had been an order of the court, which means that it can be enforced by the Civil Procedure Code, 1908. Before the 2016 amendment, the interim orders of the court were not enforceable by their independent force, but the arbitration tribunal had to approach the courts under Section 27(5) of the Act for the initiation of contempt proceedings against the party, to get the order enforced. This led to an unnecessary delay in the culmination of such proceedings. However, now that legal fiction has been carved, all the consequences will follow axiomatically as they do in the case of disobedience of the order of the civil court, which can be like proceedings under the Contempt of Courts Act, 1971, or an application being filed under Order XXXIX Rule 2A in the case of non-compliance with an injunction order.

Order against a third party

Further, it is pertinent to note that the arbitration tribunal cannot pass an interim order against any third party who is not subject to the arbitration proceedings while adjudicating the claim between the parties. The same proposition of law has been held in the case of the SBI v. Ericsson (India) (P) Ltd. (2018) wherein the Hon’ble Supreme Court held that in a case where an arbitration dispute is between the unsecured creditors and debtors, no interim orders can be passed in order to effect the rights of the secured creditors.

Conclusion

The passing of interim measures is an important power that lies with any authority during the adjudication of disputes as it helps in safeguarding the interests of the party during the pendency of proceedings by the preservation of the subject matter property or by even providing immediate relief to the applicant so as to restore him back to his original position. Section 17 of the Act has helped in making arbitration proceedings more convenient and expeditious as now the tribunal in itself is able to remedy any exigent situation which may arise during the pendency of the proceedings with as much ease as any other civil court and also whilst following the same principles of law. The supervisory role of the court, which used to prolong the arbitral proceedings, is also curtailed by the legislative amendments in Sections 9 and 17 and also by various well-articulated judgments of the Supreme Court.

References

https://www.mondaq.com/india/arbitration-dispute-resolution/1029922/a-temporary-sigh-of-relief-section-17-of-the-arbitration-conciliation-act-1996-
Avtar Singh, Law of Arbitration and conciliation (11th Edition)

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.