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Role of bureaucracy in policy formulation and policy implementation in developing countries

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This article is written by Komal Saloni from Jamnalal Bajaj School of Legal Studies, Banasthali Vidyapith, and Millia Dasgupta from OP Jindal Global Law School. This is an exhaustive article that deals with bureaucracy’s role in forming and implementing policy in developing countries like India.

Introduction

A policy makes our government run smoothly. Especially in today’s world where everything has been put in a system for it to run smoothly. When talking about policymaking, it would be a fallacy to ignore the contributions made to policymaking by the bureaucracy. Now, the bureaucracy does not have a good name and for good reasons, but it would be a mistake to ignore its influence. It was Alvin Toffler who stated that “You may bash a bureaucrat or ban bureaucracy, but you cannot do anything without bureaucracy, neither can you do away with bureaucracy, for bureaucracy has the stubborn survival capacity.”

In this article, the authors try to understand what bureaucracy is and the very valid reasons for its negativity. We also try to highlight why they play an important role in policymaking.

Bureaucracy 

What is bureaucracy?

Bureaucracy is the permanent and professional part of the executive wing of the government. It is neutral and is not affected by the change of political parties. They are made of trained professionals, mainly trained in the area of civil service. In modern times, the word ‘bureaucratic’ is usually used to describe the setup of the executive wing of any organization. 

The bureaucracy runs according to laws and policies enacted. Work is based on efficiency and rationalization. Individuals such as civil servants, those in civil service, government servants, those in government service, officials of the government, permanent executive and non-political executive are usually associated with bureaucracy. 

Features of bureaucracy 

Permanent character

Those who are bureaucrats hold permanent jobs till retirement. They do not change with the change of political parties. 

Hierarchical organization

There is a structure where work is delegated to various subunits. Various individuals overlook the work of many and within those units, some individuals look over the work of others. This forms a structure that is hierarchical where individuals not only have more responsibility but also have power over others within the organization.

Not political in nature

They are not involved in politics and their job is not jeopardized with the change in political parties. Despite the change in power, they must stay true to the work assigned to them and carry it out diligently. 

Professionally trained

Bureaucrats are professionally trained individuals who help the executive carry out functions. They get training before they are appointed and are given the job based on merit. 

Fixed salary

The members are given a fixed salary that is fixed when given the job and is increased on promotion. Their salary depends on their place in the hierarchical structure. 

Bound by rules and regulations

The bureaucratic structure is extremely efficient and thus those within the structure need to adhere to strict rules. When carrying out their work, these rules and laws must be adhered to. 

Functions of the bureaucracy

  • They must carry out and implement the rules and laws implemented by the government. Such laws can only be fulfilled to their best capabilities if they are carried out properly. 
  • They play an important role in policy formation. Despite the Executive (One of the main branches of the government) being the one who enacts the law, it is the bureaucracy that provides data to executives formulating the laws. They also play an important role in analyzing the draft of laws, providing merits, demerits and alternatives to the bills. 
  • While the executive enacts laws to guide the government, it is the bureaucrats who do the government’s actual work. 
  • Bureaucrats play a major role in advising political executives. Due to the permanent nature of the job and the fact that they are skilled professionals, they have the advantage of experience and skill over newly-elected ministers. Thus, they are good sources of advice and guidance to ministers. 
  • While it is the legislature that passes the law. It is the bureaucracy that drafts them. Thus, they play an important role in lawmaking. 
  • They also have semi-judicial roles to play. With administrative justice becoming more popular and with the increase of dispute resolution under the executive, bureaucrats perform the job of dispute resolution through the grant of permits, license, tax concessions, etc.
  • Bureaucrats play an important role in financial administration through various roles. They advise ministers on aspects such as financial planning and tax structure. They also play a vital role in budget and tax proposals and preparing them. They also carry out granting of financial benefits, tax reliefs and other concessions to citizens. 
  • They play an important role in record-keeping which is essential to the smooth running of the bureaucratic structure. 
  • They are agents that help the executive maintain good relations with the public. They communicate decisions of the government to the people and on the other hand communicate the needs, interests and concerns of the people to the government. 

Theorists and bureaucracy

Max Weber 

It was Max Weber who propounded ‘Max Weber’s Theory of Bureaucracy’ when he noticed that a new form of bureaucracy was emerging in the nineteenth century. Earlier, leadership was derived from charisma and tradition. The new form of bureaucracy was more ‘rational’ as compared to the previous system. In the case of charismatic authority, subjects followed their leaders out of loyalty, respect and even devotion. With regards to traditional authority, people simply obeyed the leader because of the leader’s historical power and that his lineage has been in a position of power for so long. According to Weber, the new bureaucracy was more rational as when they ruled, they ruled according to principles of rationality, logic and efficiency. This rule derived its power from rules and law and these laws were formulated keeping in mind the best possible outcome. This new bureaucracy was more efficient as it was immune to personal biases such as the effect of irrationality and emotion. 

According to him, there are three main features of the bureaucracy- 

  • A formal and unambiguous hierarchical structure of power and authority. 
  • An elaborate, rationally derived and systematic division of labour.
  • Individuals governed by a set of general, formal, explicit, exhaustive and largely stable rules that were impersonally applied in decision making. All decisions and communications are recorded in permanent files. 

He also noted that the bureaucrats are selected based on their qualifications and not because of nepotism and that they were appointed and not elected. They were also compensated with a remuneration. The end goal of bureaucracy was to maximize efficiency. 

Criticisms

Despite Weber’s praise for bureaucracy, nowadays, the word bureaucratic has a negative connotation to it. Today’s concept of bureaucracy is opposite to what Weber thought, which was an extremely efficient system. He was also aware of the downfalls of his ideas and recognized that bureaucracy tends to put excessive control on its employees and put them in an ‘iron cage’. He also admitted that if the bureaucracy becomes more powerful than the society, it will become self-serving instead of serving society. 

Other Scholars have also criticized Weber’s perception of bureaucracy. RK Merton believed that bureaucracy tended to foster goal displacement which is the strict adherence to rules and laws which prevents organizations from achieving the actual goal sought out. The obsession with rules leads organizations to even apply rules to undesirable situations, causing more harm than good. P Selznick stated that bureaucracies tended to sub-optimize which is extreme delegation of work to numerous sub-units of the organization which resulted in these subunits pursuing goals completely different from what is envisioned by the organization as a whole. Burns and Stalker stated that extremely bureaucratic organizations did not adapt well to change. Alvin Ward Gouldner stated that the obsession with rules led to members of the organization following the least possible rules to get by, thus fostering a culture where doing the bare minimum was accepted. Peter Blau stated that bureaucracy gave extreme power to those who knew how to ‘play by the rules, thus giving unprecedented power to those who were not the most deserving but those who know how to play the game the best. 

Michel Foucault

Foucault is one of the most well renowned modern-day thinkers and his perception of modern-day structures and bureaucracy has changed the way we see bureaucracy to this day. According to Michel Foucault, the modern-day structure of bureaucracy is not powerful because of the people who make it function, but because of the institution itself. It becomes more powerful than the individual and controls the way they act. To understand his concept he brings forth the concept of the “Panopticon”, a prison structure introduced by Bentham. The Panopticon was a prison structure where there was a tower in the middle and the cells were built around the tower and facing it. In this model, members of the cell did not interact with each other and were confronted with the towers 24/7.

When Bentham put forward this idea, he wanted to create a structure that was so efficient that it did not matter who operated it, the structure would always work. According to Foucault, our modern-day society is also structured like this where technological advancement and surveillance agencies follow our every move which forces us to act in a certain way. While the discussion of modern-day surveillance, internalization of rules and punishment is a whole other discussion, we shall talk about bureaucracy today. The Panopticon is similar to the idea of discipline within the bureaucratic structure and its strictness with rules. According to Foucault, bureaucracy contributes to the supremacy of the system and individuals who are a part of this must act according to the machine and not what they feel is best. For example, bureaucrats say they are just ‘doing their job’ or ‘they are just a cog in the machine’. Modern-day bureaucracy turns real people into paperwork and statistics. Also despite major revolutions and the need for change, the bureaucratic system stays the same. For example, after the fall of Nazi Germany, the general bureaucratic structure of the government that was operational during the times of the Nazi’s stayed the same.

Role of the bureaucrats and policy implementation 

Bureaucracy is the social instrument that could bridge the gap between legislative purpose and its accomplishment. Bureaucratic control over policy implementation is important whether extending from the virtual revocation of some legislation to the limited discretion involved in governing a comprehensive statute, still, discretion is involved in every case.

Public policies are established, implemented and assessed by public officials and governmental institutions duly authorized or specifically established to do so. The relationship between policy-makers (the legislature or the ministers), and policy implementers (the bureaucrats as well as governmental and non-governmental institutions) probably influences the policy implementation. 

The institutions established especially for policy implementation, namely, state departments, the courts and quasi-autonomous institutions, have greater contact with the public through their executive activities. The bureaucrats in this are recognized to be the agency of the government for providing the benefits of legislation to the public through the implementation of various policies, which are established by the governmental agencies timely. 

The bureaucrats play a very important role in policy implementation which helps build the credibility of political executives in the eyes of the common people. Implementing such a policy involves several steps. It is very important to study and analyze the statement of the policy which is going to be implemented and then decide whether executors should go ahead with the implementation or not, as prescribed. 

Implementation should be a problem-tracing and fact-finding exercise. The bureaucrats play a double act by performing the ‘output’ functions of executing policies and programmes and the ‘input’ functions, which relate not only to policy-making but also to influencing public attitude towards the government. 

The important duties of the bureaucrats are to: 

  1. Execute policies and orders, as prescribed by the government, 
  2. Maintain and follow the order of the overall administrative apparatus which falls within its official duty, and 
  3. To advise the political executive regarding rules and regulations of procedure, etc. 

Some relevant issues decided during the policy-making phase itself by the ministers and bureaucrats are:

  •  the problems that could be encountered in policy implementation, 
  • the resources that would be needed for execution, 
  • the work mechanism and nature of policy execution and agencies to be involved in. 

However, it can be said that the public policy legislation becomes important only when efficiently implemented, ordinarily by the bureaucrat. His actions or non-intervention can, consequently, seriously execute or prevent the success of a particular policy. Although the successful implementation of policy depends on the insight of the official. 

The decisions of the bureaucrats concerning policy implementation are limited to decisions that correspond to the political policy of the present government. Whatever the bureaucrats decide should, if possible, be in a manner which the minister would have taken if he were personally implementing the policy.

In other words, it can be said that the bureaucrats are expected to implement policies with the same goodwill as the minister and to perform services to provide results to the public irrespective of personal enmity or prejudices. 

Considering that the bureaucrats always administer their tasks in a political milieu, all their decisions are a mixture of political and administrative attentiveness, the bureaucrats cannot separate themselves from the political ideology of the government of the day; neither can they divide themselves from the policies incorporated in legislation. The exercise of discretionary power gives them a chance to examine the perusal of policy goals to which they are opposed. Hence, they are in a position to delay the implementation of policies, or only partly implement them.

The bureaucracy makes the policy objectives transparent to the citizens and encourages them to adhere to the policies. Such an attempt smoothens the task of policy implementation. While implementing policies, the bureaucrats have direct powers because of the complexities of the modern government and administration, they are conferred with the right to exercise discretion in the execution of policy. It is often found that both the political leadership and the citizens blame the permanent executive for the absence of proper execution of the policies. On the other hand, the bureaucrats feel that they do not get adequate support and assistance from the political executive. 

In practice, it is accepted that the bureaucrat is the instigator in policy implementation, while the final policy decisions are in the domain of the minister. The continued exposure of the bureaucrats to political matters and their expert knowledge of specific public issues, helps them, in due course, to learn to answer questions related to policy in such a way that the material they provide to their ministers can be advantageously used to defend a policy in Parliament and elsewhere. In practice, this means that the bureaucrats participate in defending the policy of the government, irrespective of the party in power. 

Thus, the bureaucrats have been referred to as permanent politicians, whose opinions are remarkably important in modern-day government, and as an expert, he is a co-ruler in the administration. This could lead to a position where the ministers rely on the bureaucrats, in that the minister is not fully conversant with all the aspects of policy either because of not taking cognizance of the results of policy monitoring or because of being new to the office.

Development and bureaucracy

Development means a defined stage of growth. It also means increased economic efficiency and extension of productive volumes. Although, when we discuss development, our main concern is economic development. But in a real sense development is a broad term. It includes social, cultural as well as political development. It has been found that when improvement in all these compasses takes place we call it development.

“Development is a multi-dimensional process that ordinarily connotes change from a less to a more desirable state.”

-Oxford Concise Dictionary of Politics

After World War II (1939-45) many countries of Asia and Africa succeeded in political independence. But only a few years after their independence, they discerned that this political freedom couldn’t ensure economic development. These states soon realized that even sufficient investment cannot bring about progress in the economic sector. Simultaneously, streamlining the administration is important; both investment and administration are equally accountable for development. When the question of administration comes into the light, bureaucracy invades into the picture.

Bureaucracy in developing countries like India

Bureaucracy is called the sovereign factor, manpower management, labour welfare management, personnel management in public administration. But bureaucracy has a deeper meaning; it deals with classification, promotion, recruitment, compensation, retirement benefits and discipline of the personnel in government.

Role of bureaucracy in developing countries like India

Implementation of policy 

It is the fundamental function of civil servants. They administer laws and policies to accomplish the welfare state goals: social, equitable and economic development, and so on.

Formulation of policy

Formulation of Policy is the function of the political executive. But civil servants have also come to perform a role in it. Political executives being laymen unable to understand the technical complexities of policies and hence depend upon the expert advice in which the civil servants aid and advise the ministers in policymaking.

Delegated Legislation

The aforementioned is a quasi-legislative function performed by the civil servants. Accordingly, the legislative body drafts laws and delegates power to the executive body to elaborate and expand the details because of the shortage of time, work pressure and increased complexities of the legislation. Hence, Civil servants present the sub-laws, rules and regulations, within the boundaries of the parent statutes enacted by the legislature. Delegated legislation is also understood as subordinate legislation or executive legislation.

Administrative Adjudication

In this, the civil servants resolve the disputes between the citizens and the state. For this purpose, the Administrative Tribunals are established where judges hold the power. The Income Tax Appellate Tribunal, Rent Tribunals, Industrial Tribunals and Railway Rates Tribunals are few examples of such tribunals in India. These tribunals are also in function but outside the ordinary courts.

Inadequacies of the bureaucracy in policymaking in developing Countries 

  1. Civil Servants face serious challenges in controlling the changing interfaces between Government and citizens. 
  2. Understanding between senior civil servants and politicians is inadequate, with frequent complicated issues and challenging circumstances, the inputs made by the professional’s (civil servants) are not qualified and the conflict arises with the top administrators.
  3. Rapid variations in states require more innovative ideas which are not sufficiently approaching from top civil servants.
  4. Changes in science and technology and their far-reaching connection to all aspects of society are raising issues that senior civil servants are quite incapable of understanding. 

Changing role of bureaucracy

Throughout the British regime, Indian Civil Service officers aggregated the main part of Indian bureaucracy and they were mainly concerned with the continuance of law and order. British rulers had no plan to make India economically efficient and independent. Generally, bureaucracy’s role in economic development during British rule was practically a non-issue.

It was greatly felt that besides the maintenance of law and order bureaucracy has another very important task and this is to reach targets of development. This is known as the changing role of bureaucracy. 

Multifaceted Role

Bureaucracy plays a major role in the development of a country and the role is multifaceted:

  1. Development needs continuity in efforts and administration. In case of a break, the development process and work will be affected. For this reason, it is stated that bureaucracy must furnish leadership for the development work. 
  2. It is significant to coordinate between the various departments of public administration and coordination between private and public administration for development. 
  3. To change the role of bureaucracy it is necessary to restructure society. 

Suggestion

Bureaucracy plays dynamic roles in the way they influence policymaking and despite one’s opinions on what type of influence they have, it would be a mistake to say that they have no influence. But despite this massive body working tirelessly to improve policy, it seems that in today’s day and age, government action is overturned by political bias and ideology. If you do not have a good power to back the policies you want to implement, then it does not matter how good they are, they will fail to be passed by the legislature. This is the opposite of what Webber wanted and what Foucault warned us of. The work of trained professional individuals is overpowered by the political leader. Thus, it is important to revamp the system so that bureaucrats get back their identity, which is of an impartial government-run, non-partisan body. Policies that they must abide by and they must help enact must not have the political colour it is being affected by in today’s times. 

Conclusion

It is concluded that bureaucracy has come under rising criticism over the last few years. Experts have pointed to inefficiency, corruption, delay, incompetence and inadequate standards of professionalism. Finally, it can be said that enhancement of the skills of senior civil servants does take time and is not a matter of development but of organizational settings, working arrangements etc., without political assistance and much active cooperation of top administrators, less can be done. 

References

 


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The conundrum surrounding entries in the balance sheet and acknowledgement of debt under the IBC : analysis and way forward

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This article is written by Sunkara Vishnu Ameya, pursuing Certificate Course in National Company Law Tribunal Litigation from LawSikho.

Introduction

The Insolvency Bankruptcy Code, 2016 (IBC) undoubtedly brought a sea of change in the area of insolvency and bankruptcy from the erstwhile Sick Industrial Companies Act. The aim of IBC is to resolve and revive the corporate debtor in a timely mechanism and equitably balance the interests of all the stakeholders. However, the IBC being a special law prevails over other legislation which is repugnant to it. This has brought in many questions of law like the applicability of other laws like the Limitation Act, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Prevention of Money Laundering Act, 2002 (PMLA). Further, the Adjudicating Authorities (NCLT) under the IBC and the Companies Act, 2013 under the NCLT Rules are not bound by procedural laws like the CPC and the Limitation Act. 

Under Section 18 of the Limitation Act; when a repugnant acknowledgement of liability has been made in writing signed by the party against whom such property or right is claimed, a fresh period of limitation shall be computed from the time such an acknowledgement is made.

Under Section 129(1) of The Companies Act, 2013 all companies are bound to prepare financial statements which give a true and fair view of the financial affairs of the company including the profits, losses, assets and liabilities of the company. 

Since the financial statements are on record in writing and under the common seal of the company, the question arose whether the balance sheet being an acknowledgement of debt begins a fresh period of limitation under the Limitation Act. If yes, whether this extends to the IBC as well.

The present article would deal with the applicability of Section 18 of the Limitation Act, which pertains to the fresh period of limitation post acknowledgement of debt and the IBC. 

Early jurisprudence on balance sheet entries as an acknowledgement of debt

In the case of South Asia Industries (P) Ltd. vs. General Krishna Shamsher Bahadur Rana, ILR (1972) Del 712; the Delhi High Court ruled that “entries in the balance sheet amount to acknowledgement of debt if the balance sheet is duly signed unless a contrary proof is shown by the company”.

In the case of State Bank of India Vs. Hegde & Gollay Ltd., 1983 SCC Online Kar 80; the Karnataka High Court ruled that “the acknowledgement of debt in the Balance Sheet amounts to an acknowledgement of debt in writing for the purposes of S. 18 of The Limitation Act, 1963.”

The Supreme Court in the case of A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642 ruled that “if the amount borrowed by the respondent is shown in the balance sheet, it may amount to acknowledgement and the creditor might have a fresh period of limitation from the date on which the acknowledgement was made.”

As previously stated, acknowledgement of debt u/s 18 of Limitation Act is not confined to Balance Sheets alone. Certain conditions to be fulfilled in order to acknowledge the debt as follows:

  1. That the acknowledgement of debt must be in writing.
  2. Such acknowledgement must be made before the expiry of the limitation period.
  3. Such acknowledgement must be signed by the person or his authorized person admitting liability.
  4. Such acknowledgement must be unequivocal or unqualified as it saves the period of limitation but also gives a cause of action to the plaintiff to base its claim. However, if the limitation period has already expired, it would not revive such acknowledgement and it is not necessary that such acknowledgement must contain a promise to pay within the ambit of section 18 of the Limitation Act.

Section 238A of IBC vis-à-vis the Limitation Act

Section 238A was inserted into the IBC in the year 2018, w.e.f 06-06-2018. Under Section 238A of IBC, the Limitation Act shall, as far as may be, apply to proceedings and appeals under the NCLT, NCLAT, DRT and DRAT.

The basis for insertion of Section 238A into the IBC can be found in the  Report of the Insolvency Law Committee of March 2018; which observed that:

The intention of the Limitation Act, 1963 is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches”. The non-applicability of the Limitation Act could potentially lead to perverse consequences and the IBC could be potentially used as a means to circumvent the Limitation Act. Financial creditors and operational creditors can file applications for initiation of CIRP for time-barred debts or even file claims to the interim resolution professional for time-barred debts under the Limitation Act. It is pertinent to note that IBC is not just a mere debt recovery law, rather the entire edifice of IBC lies on reviving the corporate debtor and running the corporate debtor as a going concern. Prior to the insertion of Section 238A, there was nothing barring the filing of applications and claims for time-barred debts. This not only amounted to abusing the Limitation Act but also abusing the very object of IBC.

Further, the Supreme Court of India in the case of B.K Educational Services Pvt Ltd v. Parag Gupta and Associates (2019) 11 SCC 633, held that Article 137 of The Limitation Act applies when it comes to filing an application for initiating Corporate Insolvency Resolution Process (CIRP) on the occurrence of default. In the case of Sagar Sharma v. Phoenix ARC Civil Appeal No. 7673 of 2019, the Supreme Court ruled that the limitation period would commence from the date of default and not from the date of IBC coming into force. In the case of Jignesh Shah v. Union of India WRIT PETITION (CIVIL) NO.455 OF 2019, the Supreme Court of India ruled that “Time-barred debts are legally not enforceable.”

Analysis of varying decisions pertaining to the applicability of Section 18 of the Limitation Act to the IBC

Despite Supreme Court and High Court rulings pertaining to entries in the balance sheet amounting to an acknowledgement of debt for the purposes of Section 18 of the Limitation Act, there have been varying decisions regarding the same in the context of IBC.

In the case of Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund Company Appeal (AT) (Insolvency) No. 1097 of 2019, the Hon’ble NCLAT ruled that entries into the annual return and the balance sheet are mandated by law, thus made under a statutory compulsion. In this premise, the NCLAT further observed that as this is mandatory and any failure in doing so would attract penal action, the said entries cannot be said to be voluntary and an acknowledgement for the purposes of Section 18 of the Limitation Act.

In the case of V Padmakumar v. Stressed Assets Stabilisation Fund (SASF) & Anr. Company Appeal (AT) (Insolvency) No. 57 of 2020, it was contended by the corporate debtor that the application under Section 7 is barred by the Limitation Act, which is three years from the date of occurrence of default, which in the instant case had lapsed. However, the financial creditor’s contention was that a fresh period of limitation commenced every time the corporate debtor acknowledged the liability in writing in the balance sheet and in the annual report. The NCLAT dismissed the contention of the financial creditor on the ground that, firstly entries into the balance sheet and the annual report is a statutory requirement and cannot be regarded as an ‘Acknowledgement’ for the purposes of Section 18 of the Limitation Act. Secondly, companies file annual reports and balance sheets every year and if the balance sheet is treated as an acknowledgement of debt under Section 18 of the Limitation Act, there would practically be no limitation.

However, the minority judgement delivered by Justice Cheema observed that acknowledgement under Section 18 does not create any new right but only extends the period of limitation. The minority judgement relied on the case of Mahabir Cold Storage v. CIT AIR 1991 SC 1357, wherein the Supreme Court ruled that entries in books of accounts amount to an acknowledgement of liability u/s 18 of the Limitation Act thereby extending the period of limitation under Section 18. The judgement of L.C. Mills v. Aluminium Corpn. of India Ltd. 1971 SCC  (2) 623, was also noted where it was observed that the acknowledgement of debt under section 18 does not create a new right of action, but only extends the period of limitation. 

Final word of law

The recent decision of the Supreme Court of India in the case of Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd  CIVIL APPEAL NO.323 OF 2021, cleared the mist regarding Balance Sheet as an acknowledgement of debt for the purposes of S. 18 of The Limitation Act, 1963 and its applicability to IBC.  The issues before the Supreme Court were twofold namely:

  1. Whether Section 18 of the Limitation Act is applicable to the IBC.
  2. Whether an Entry made in the Balance Sheet of the Corporate Debtor amounts to an acknowledgement of debt.

Pertaining to the first issue, the Supreme Court observed that Section 238A was inserted to the IBC to make the Limitation Act applicable to proceedings under the IBC ‘as far as may be’. To this effect, the Supreme Court cited the recent judgement of Sesh Nath Singh (2021 SCC OnLine SC 244) and Laxmi Pat Surana (2021 SCC OnLine SC 267). Further, the Supreme Court observed that for the Balance Sheet to fall under the purview of Section 18 of the Limitation Act and IBC, the same must be duly audited and fulfil other requirements of Section 134 of the Companies Act like the annexation of Boards Report, approval by shareholders and notes to the financial statements. The Supreme Court even clarified that for the purposes of applicability Section 18 of the Limitation Act to proceedings under the IBC, the date shall be taken as the date of default and not the date of IBC coming into force. Entries into the balance sheets further extend the limitation period under Section 18.

Pertaining to the second issue, the Supreme Court observed that concurring with the catena of precedents, ruled that an entry made in the balance sheet of the corporate debtor does amount to an acknowledgement of debt. However, the Supreme Court with a slight note of caution observed that even a balance sheet entry has to be judged on a case-to-case basis to determine if that constitutes an ‘acknowledgement of liability’, per se. For this, the auditor’s report is to be referred. Therefore, in cases where an entry is disputed, the same may not be treated as an acknowledgement of liability. 

Conclusion and analysis

The decision of the Supreme Court in the case of referred Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd  CIVIL APPEAL NO.323 OF 2021 comes as a great clarification in light of conflicting judgements by the NCLAT and previous precedents propounded by the High Courts. The judgement of the NCLAT in V Padmakumar was focused solely on providing a speedy mechanism. The judgement in the case of Bishal Jaiswal would ensure that bona fide creditors can file for initiation of CIRP and for claims under CIRP and the balance sheet would be looked at as a whole and has to be judged on a case-to-case basis to determine if that constitutes an ‘acknowledgement of liability’, per se. 

References

  1. https://main.sci.gov.in/supremecourt/2021/2660/2660_2021_33_1502_27520_Judgement_15-Apr-2021.pdf
  2. https://nclat.nic.in/Useradmin/upload/7982247415e6a2b56e8bef.pdf
  3. https://www.mondaq.com/india/shareholders/1061862/balance-sheet-and-acknowledgement-of-debt-in-ibc-hanging-in-balance-no-more

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Case analysis : Landowners v. State

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This article is written by Akshat Sharma, pursuing Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.

Introduction

On July 3, 2021, the Bombay high court delivered a striking judgement in Bhagauji S/o Nathaji Maind and Ors v. The State of Maharashtra and Ors. case on the issue of construction of a national highway that abides the right to property as per Article 300A of the constitution which describes that a person should not be deprived of his property that has been saved by the authority of law. In this case, Petitioners held agricultural areas adjacent to a National Highway, as well as residential dwellings, wells, fruit trees, a bore-well, and other facilities, all of which were also near to the National Highway. Petitioners stated that they are not opposed to the projected road widening, but that the authority should procure their particular properties as per the due procedure of law. The crucial question upheld here is that whether under Article 300A Property Rights are considered as Human and Constitutional Rights?

The (Forty-fourth Amendment) Act of 1978 was intended to modify the right to property from a basic right to a legal one. This property right, guaranteed by Article 300-A, will be accessible against executive action rather than legislative action. It has been determined that it is both a human and a constitutional right. In this case analysis, we will see that under the guise of industrial growth, no welfare state has the right to expatriate a person and deprive him of his civil liberties.

Facts of the case

  • The road in question was small earlier and it came to be converted into State Highway without payment of any compensation to the petitioners while expansion of State Highway. The road was known as Jalna-Wadigodri.
  • The petitioners claim that the current road width is approximately 12 metres. The respondents just issued a letter of award and began expanding the road to 30 metres without having to acquire land.
  • While converting the small road into Highway No. 176, the authorities failed to initiate acquisition proceedings, depriving the owners of the seized lands of compensation. The respondents have begun a phase-by-phase upgrade of the route in question from Sillod to Wadigodri.
  • The petitioners are concerned about the Dhangar Pimpri to Wadigodri phase, for which the authorities are attempting to take ownership of their lands by force under the guise of a resolution about nearby road lands that do not require purchase. 
  • State officials, based on the current petitioners, cannot seize a landowner’s property without following correct legal procedures. Since all of the petitioners are in the same situation, the respondent authorities’ action in seizing forceful control of the petitioners’ property for road widening by invoking the Government Resolution breaches Article 300A.
  • The Central Authorities claim that they are rehabilitating existing highways with the same alignment and bringing them up to National Highway standards, rather than building new roads. The road’s upgrade to the National Highway standard will benefit local farmers by allowing them to transport agricultural produce from remote locations and rural areas to urban areas.
  • Petitioners are forbidden by the principles of delay and laches, according to the State Authorities. It is also subject to the statute of limitations. The roadwork has also begun and is nearing completion. The remaining work must be completed for the sake of the general public.

Issues raised in the case

The issues that were raised before the high court of Bombay are as follows:

  1. Whether the width of the National Highway No. 753-H is being enhanced by the authorities from 12 to 30 meters, without due process of law?
  2. Whether there is an obligation of compensation under article 300 A?

Issue 1

The State Highway should be 30 metres wide, according to rules. It was a District Road in question. The District Road’s standard width is 12 metres. In 1967, the road in question was designated as a State Highway by a notification dated April 19th. The question arises as to when District Road was designated as a State Highway. Now, let us return to the facts of the issue at hand. Certainly, the road measurement activity will take place in the presence of the petitioners and the respondents/authorities. If the above-mentioned villages’ roads are measured by an appropriate institution under the supervision of the District Collector, Jalna, the disagreement will be resolved. On the other hand, it would make it easier for both parties to reach an amicable agreement on the road’s width.

The bench stated that just supplying maps of specific villages and photocopies of road development plans may not be useful in reaching a decision and recording a decision to that effect, since it would be an error. The Bench additionally stated that the road width varied from 30 metres in some locations to less than 30 metres in others. The Constitution (Forty-Fourth Amendment) Act of 1978 made the right to property no longer a fundamental right, but it remained a human right in a welfare state and a constitutional right under Article 300 A. Article 300 A states that no one’s property can be taken away from them unless they have legal authorization to do so.

Issue 2

The High Court stated that, while the need to pay compensation is not clearly stated in Article 300 A, it could be inferred from it. Depriving people of their immovable property, the High Court ruled, was a blatant breach of Article 21 of the Constitution. It is a well-settled position of law that the right to property is a human right and a person cannot be deprived of his property save by authority of law. The Apex Court declared in Vidya Devi Vs. Himachal Pradesh and Ors (SLP No. 6066/1995) that in a democratic society controlled by the rule of law, the State should not strip a citizen of their property without legal sanction. The state, as a welfare state controlled by the rule of law, cannot bestow upon itself any status other than that which the Constitution grants. Under the guise of industrial growth, no welfare state has the right to uproot a person and deprive him of his fundamental/constitutional/human rights. There should be no arbitrariness in any choice in a society ruled by the rule of law. The High Court ruled that there was no conclusive evidence that the road width was 30 metres and that there was no question of taking petitioners’ estates.

Arguments presented by both parties

  1. It would not be legitimate for the State Government/Central Government Authority to take control of any landowner without following due process of law, according to the petitioners’ learned counsel. The action of the respondent authorities in taking forcible control of the petitioners’ lands to widen the road is a blatant violation of Article 300A of the Indian Constitution.
  2. They argued that under Article 300A of the Indian Constitution, the petitioners are entitled to just compensation. Simply changing the status of the road does not give the government authority to take possession of the nearby landowners’ property without first going through the legal process.
  3. The petitioners contend that the width of the road in question at respective villages is approximately 12 metres, whilst the respondents-authorities have said that the road’s width is approximately 30 metres.
  4. The petitioners’ learned counsel adamantly maintained that the work being done in their communities is aimed at improving the route. Under the guise of road improvement, the government is increasing the width of the road.
  5. Discovered submissions of National Highway and learned Standing Counsel for the Union of India Pleader of the Maharashtra State Government/State Authority, it is claimed that the authorities are not building a new road but rather renovating an existing one. It is the conversion of a state highway to a national highway.
  6. According to the road development plan, the road construction is within 30 metres. Because the road is being upgraded within 30 metres, there is no need for the petitioners to worry about land acquisition. They argued that the petitioners are attempting to recover compensation for property acquired long ago for the conversion of a road into a State Highway.

Summary of court decision and judgement

Based on the foregoing considerations and debate. Conclude that the authorities should provide specific directives to the authorities regarding the measuring of the road in question at respective villages in the presence of both sides. The respondents demographic shall, as soon as possible and preferably within four months, conduct measurements of National Highway No. 753-H (previously known as State Highway No. 176) at villages Shahapur, Dadegaon, Dhakalgaon, and Math Tanda through appropriate authority in the presence of both sides.

If the width of the road in the respective villages is found to be 30 metres at the moment of measurement, the petitioners’ adjacent lands will not be acquired. If the width of the road is less than 30 metres at the moment of measurement, the State and Central authorities must acquire the land under the legislation to the amount necessary by them. In order to avoid any misunderstanding, the road measurement exercise in the above-mentioned villages shall be carried out under the supervision of the District Collector, Jalna.

These writ petitions have been dismissed as a result of the above instruction.

The bench has clearly made the judgement that in a welfare state, statutory authorities are required not merely to provide adequate compensation, but also to rehabilitate those who have been wronged. Non-fulfilment of their obligations would compel the uprooted persons to become vagabonds or engage in anti-national activities, as such emotions would be fostered in them as a result of their mistreatment. This expression has clearly safeguard their civil rights. The Apex Court held in the case of Pradyumna Mukund Kokil vs. State of Maharashtra and others, reported in 2015 (4) All M.R. 983, that it would not be proper for a government body or any State authority to take possession of someone’s land without following due process of law, and that even if a citizen has given permission for his land to be used by the government authority, the authority should not do so.

Analysis of the judgment

  • The government or state authorities cannot seize a landowner’s property without following proper legal procedures. Article 300A of the Constitution states that no one’s property can be taken away from them unless they have legal authorization to do so. The action taken by the respondent authorities in taking forced control of the petitioners’ lands for road widening by demonstrating the Government Resolution is in violation of Article 300A.
  • The Constitution (Forty-Fourth Amendment) Act of 1978 made the right to property no longer a fundamental right, although it remained a human right in a welfare state and a constitutional right under Article 300A of the Constitution. Article 300A states that no one’s property can be taken away from them unless they have legal authorization to do so. The state cannot take a citizen’s property unless it follows the legal procedure.
  • When and how the delay originated, as well as the breach of fundamental right and the remedy sought. It’s not that the courts can’t exercise their powers under Article 226 after a certain amount of time has passed, nor that there can never be a circumstance where the courts can’t intervene in a matter after a particular amount of time has passed. In some cases, the desire for justice may be so strong that the High court is compelled to intervene notwithstanding the delay. Finally, it would be a matter for the court’s discretion, which must be applied honestly and justly in order to promote justice rather than to thwart it.
  • The respondents/authorities are undoubtedly bound to conform to the rule of law. In a society regulated by rule of law, there should not be arbitrariness in any decision. In relevant instances, the courts must employ their extraordinary writ jurisdiction under the Indian Constitution to prevent the State Authorities from acting arbitrarily.

Conclusion

It can be concluded that there should be no arbitrariness in any decision in a society governed by the rule of law. There was no conclusive evidence in this case that the road width was 30 meters, and there was no discussion of acquiring petitioners’ lands. They are expected to be model litigants, respecting petitioners’ rights and following proper legal procedures when the property is likely to be acquired. It would be improper for a government body or any state authority to take possession of someone’s land without following due process of law, and even if a citizen has given permission for his land to be used by the government authority, the authority should not take undue advantage of that permission when compensating the citizen when the land is acquired.

References

  1. https://bombayhighcourt.nic.in
  2. https://www.scconline.com
  3. https://indiankanoon.org

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Analysing Norway’s foreign investment regime

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This article is written by Srishti Pareek, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Introduction

Norway is a first world country, rich in growth and development and has a small but strong economy. Norway is a high-income nation with a vibrant private sector. The per capita income is the highest amount amongst the other developed countries. The discovery of oil and gas in the 1960s gave an edge to the country in terms of economic growth and today Norway is one of the world’s leading suppliers of petroleum. Norway GDP is greatly accentuated by its strong presence in the oil and gas sector and other advanced industries like shipping, shipbuilding, paper and pulp and aquaculture. These industries are supported by highly intellectual, qualified and hard-working professional industries which include information technology, finance, legal, R&D, which are also backed by fintech, biotech, medtech industries, thereby creating a separate area of growth. Norway is the perfect country for the expansion and establishment of the business as the government welcomes foreign investment. In 2020, Norway Secured an 82.6 score in ease of doing business. The ease of doing business in Norway increased from 81.8 scores in 2016 to 82.6 scores in 2020 growing at an average annual rate of 0.24%. Norway is ranked 9th place in the index of World Bank doing business. Norway’s economic freedom is having 73.4 scores making it the 28th freest economy as per the 2021 index. Norway comes under the world’s least corrupt nation as per Transparency International’s 2019 Corruption Perceptions Index. The highest rate of income tax is 47.8 percent as well as the corporate tax rate is 22 percent. 

Legal regime for foreign investment

Generally, the investment regime in Norway is more flexible and liberal as compared to other nations and the government of Norway encourages foreign investment in the nation. To ensure maximum flexibility in terms of foreign investment and to give legal colour to the same, on 1st January, 2019 a National Securities Act was enacted. The main aim for the introduction of such legislation was to curve the growing concerns related to national security which were raised in relation to the investment and transaction in the companies. Chapter 10 of the act titled Ownership Control provides regulations, rules and approval of investment in and transactions relating to companies that are engaged in activities of crucial importance for the purpose of national security. Norway followed the same investment security route that other nations like Finland, the USA, France, Canada followed to review, regulate and approve mergers and acquisitions for the purpose of national security. The provisions under the Chapter Ownership Control are of non-discriminatory nature, it provides that foreign investment and domestic investment shall be treated equally if the acquisition or investment transaction concerns an undertaking that attracts or comes within the applicability or scope of the Security Act. Each Ministry decides, within their responsibility, which businesses are subject to the Act. 

The Norwegian Security Act contains a limited form of investment mechanism from foreign players and countries. If a foreign actor desires to acquire a company in Norway in part or in full, the Norwegian government is vested with the power to either approve or reject such an acquisition when national security comes into question. 

If a company has been bought within the scope of the Security Act, an acquirer is obliged to inform the concerned ministry. The purpose of the same is to review the acquirer nature when the acquirer had acquired a qualified ownership interest. Qualified Ownership Interest for the purpose of this act means that the acquisition whether directly or indirectly will result in the acquirer achieving:

  • At least one-third of the share capital, shares and voting rights in the business.
  • Right to become the owner of at least one third share capital or shares.
  • Significant control and influence over the management of the company through other means. 

The provisions on the ownership control of the Security Act, have not been made to address any particular sector but have been made as a result of tensions arising from the increased foreign investment, especially in the infrastructure projects. The government recognised these early signs that were posing national security threats in various countries. Thus, for a company to be covered by the provisions of ownership in the Securities Act, the concerned ministry must issue an administrative decision for that effect. Each ministry is responsible for the sector they are assigned with on the basis of this the administrative decision will be taken, for example,  the Ministry of Petroleum and Energy for an electric grid company. 

There are no specific distinctions between the foreign state-owned enterprises (SOE’s) or other specific categories of investors, the provisions of the act relating to ownership are common to both categories regardless of the acquirer nationality and of the fact as to who is the owner. 

Screening of foreign investment in Norway

By abandoning its traditional neutrality [European Union (EU)], Norway became a member of the NATO in the year 1949 as well as of the European Economic Area (EEA; including Iceland and Liechtenstein) with admittance to the EU single market’s development of people, merchandise, administrations and capital. The Government of Norway (GON) keeps on changing its foreign investment enactments determined to adjust as per the EU guidelines and has cut administrative guidelines throughout the last decade to make investment simpler. While not a member of the EU, as an EEA signatory, Norway continues to liberalise its foreign investment legislation to conform more closely to EU standards. Foreign direct interest in Norway remained at USD 140 billion toward the finish of 2018 and has dramatically increased in the course of the last decade. There are around 7,395 unfamiliar possessed organizations in Norway, and more than 700 U.S. organizations have a presence in the nation, utilizing in excess of 45,000 individuals. 

The government of Norway in the period 1999 allowed the establishment of foreign banks thereby increasing investment in the country. The Ministry of Finance of Norway on the recommendation of the Norges Bank’s Monetary Policy and Financial Stability Committee decided to reduce the Countercyclical Capital Buffer from 2.5 to 1.0 (in March 2020).  This decision was taken to counter the impact of covid-19 due to which the economy has suffered a huge downfall. The Countercyclical Capital Buffer is as a rule is set between 0 and 2.5 per cent of a bank’s risk-weighted asset, but maybe set at higher per cent under exceptional circumstances. A lower buffer rate reduced the risk of stringent lending standards, which could have amplified the downturn that resulted from the COVID-19 pandemic. The  Ministry has also decided to keep the buffer rate unchanged i.e., 1.0 for the year 2021, the decision to increase the buffer rate shall be taken gradually stepwise in the course of 2021.

Key indicators

Measures

Year

Index/Rank

Reference 

Transparency International’s Corporation Perceptions Index

2020

7 out of 180 

http://www.transparency.org/
research/cpi/overview

World Banks Doing Business Report 

2020

9 out of 190 

http://www.doingbusiness.org/en/rankings

Global Innovation Index 

2019

19 out of 129 

https://www.globalinnovationindex.org/
analysis-indicator

U.S. FDI in the partner country ($M USD, historical stock positions)

2018

USD 80,610

http://data.worldbank.org/ indicator/NY.GNP.PCAP.CD

Regulatory efficiency 

Business freedom 

85.5

Labour freedom

57.8

Monetary freedom 

75.4 

For the year 2021 Norway’s Business freedom has been at a higher level as compared to other countries that are achieving the standard at a faster pace. The government has provided one year of paid parental leave and the unemployment benefits are expected to extend up to 104 weeks. The government also funds subsidies for electric vehicles, agriculture, and certain other sectors as well.

Open market

Trade freedom 

84.0

Investment freedom

75.0

Financial freedom 

60.0

Norway currently has 30 trade agreements in force. In the year 2020, the French Credit Insurer COFACE entered into an agreement with the Norway government in order to acquire the Norwegian Guarantee Institute for Export Credit (GIEC), a central government body responsible for providing export credit and investment guarantees. This acquisition was planned with an intention to strengthen the market position of COFACE in the Nordic Region. This transaction would combine the broad range of services offered by COFACE and its vast international network to enhance the support to Norwegian exporters and contribute to the economic development of the country. The trade-weighted average of Norway is 3 per cent, Norway’s economy is free and open as a result of this the country is able to attract more foreign investment despite the presence of national ownership restrictions in certain sectors. 

Limits on foreign investment

Norway’s Investment Regime is generally based on the principle of national treatment but is slightly affected by the ownership restrictions present in certain sectors which are specifically related to natural resources but also includes railways, road transport, maritime etc. state ownership on companies is used as a mean of ensuring Norwegian ownership and domicile for these firms. 

Monopolistic sector

Norway welcomes lesser foreign investment in certain sectors which includes postal services, railways, domestic production and retail sale of alcohol, however,  the restriction on postal service was slightly reduced by allowing foreign players to invest in postal service. 

Real estate 

In general, foreign investors are not subject to any limitation on the acquisition of property. The only requirement that is needed to be fulfilled is that the potential purchaser from any nationality, intending to purchase the property must obtain a concession to acquire rights to purchase or use various kinds of real estate property which includes forest, mines, titled land, and waterfalls. This is a formal requirement that allows the purchaser to claim or obtain ownership over the land. Two of the major laws governing concession are the Act of December 14, 1917, and the Act of May 31, 1974. In the year 2019 real estate sector received a foreign direct investment of NOK 15 billion and was ranked amongst the sectors that received the highest FDI in the period.

Manufacturing

In the year 1995 Norway executed legislation for national treatment to foreign investors in the manufacturing sector. The legislation was repealed in 2002 as it formally required both foreign and domestic investors to notify the government and in some cases, it required them to file lengthy reports to the Ministry of Industry and Trade in case they are holding equity that exceeds the threshold level. This had become burdensome for the authorities. Currently, foreign investors are not required to obtain any government authorization prior to the purchase of shares in the Norwegian corporation. 

Petroleum sector

The petroleum sector is the key contributor to the Norwegian economy; it is the country’s single largest industry. The industry plays a vital role in the growth of the Norwegian economy and the financing of the Norwegian welfare sector. The oil and gas industry is one of the largest in terms of value addition, revenues generation, investments and export. The management and expansion of the industry indicate the long-term perspective of the government which has resulted in the futuristic development of the country. This has been the key factor in enhancing the financial and developing the legal framework of the country. 

The Petroleum Act of November 1996 (superseding the 1985 Petroleum Act) was enacted to create a legal framework for the determination of petroleum exploration rights, production and follow up activity. The act set forth no discrimination standards that are to be adopted at the time of assignment of the award and licensing related to petroleum exploration and production of blocks. While not a member of the EU, as an EEA signatory, Norway continues to liberalise its foreign investment legislation to conform more closely with  EU standards and the same has been followed while deciding the regulatory and legal framework for the petroleum sector. Equal treatment of EEA oil and gas companies has also been implemented by the Norwegian government. The Norwegian offshore concession system follows the EU directives 94/33/EU of May 1994, which governs the mechanism of award and hydrocarbon development. Since 1970’s the petroleum activities have contributed to around NOK 16,000 billion in current NOK to Norway’s GDP. 

There are two kinds of licensing rounds on the NCS; the numbered licensing rounds and the awards in predefined areas (APA). The numbered licensing rounds are normally held every other year and include frontier parts of the NCS.  APA rounds are announced every year and comprise the mature parts of the NCS, with better-known geology and more developed infrastructure.  Companies that want to become an operator or licensee on the NCS must be pre-qualified.

In June 2020, the Norwegian Ministry of Petroleum and Energy announced a new licensing round for APA 2020. The Ministry’s objective is to award new production licenses in the announced areas at the beginning of 2021.  (More information on the APA 2020 announcement can be found on the Norwegian Petroleum Directorate’s website:  APA 2020)

The expected net cash flow from the petroleum activities

2020

2021

Taxes

28.4

46.4

Environmental taxes and area fees 

7

7.5

Net cash flow from SDFI

56.4

91.4

Equinor Dividend

15

8.7

Net government Cash Flow

106.8

154

Green Norway 

In recent years, there has been a great focus on the idea of a green economy. Thus, to achieve the status of a green economy, Norway is trying to make its industries as clean as possible. The country is going forward to use land-based green hydropower in order to electrify its oil and gas industries. This would ultimately help the country to achieve the national climate target and would allow its profitable industries to pump fossil fuel for centuries. But most of the emission comes from the oil and gas sector in the form of burning of fuel, it is to be noted that the process of extraction does not result in any emission of pollutants; it all happens at the consumption or conversion stage. So, the initiative would have a little rein on pollution globally. 

Norway oil and gas industry contributes to 14 million tonnes of greenhouse gases from its facilities as per the data collected by Statistic Norway in 2019, which is almost 28 per cent of the country’s total, thereby making the industry a clear target for the nation to reduce its emission by 40 per cent by the end of the year 2030. 

Conclusion

Norway is the world’s most advanced nation with a good GDP  (the mainland real GDP is projected to grow by 3.4% in 2021 and 3.7% in 2022). The country is prospering in all its sectors and is creating a futuristic path for the entire world by adopting the concept of a green economy. The country attracts foreign direct investment in its various sectors with open hands and is a perfect nation for foreign players to come and expand their business. But with that, the country has also made certain restrictions to safeguard their national security which sometimes is affected by certain cross border deals. The step of the introduction of the Security Act is to curb the predatorial acts of certain countries like China. Foreign direct investment has been carved into the structure of the Norwegian economy in such a manner that it is a  matter of law and is not a policy anymore. 

References 


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Role of the stockholder representative during a merger or acquisition

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This article is written by Romit Nandan, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Who is a stockholder representative?

The foremost impetus to understand the role of a stockholder representative in an M&A deal is by understanding who exactly is a stockholder representative. After the closing of an M&A deal, the old shareholders/owners of the target company move out and hand over the company to the acquirer or the buyer. And while the transaction has culminated, there still might be some disputes or issues that may arise between the old shareholders and the acquirers either due to discoveries that were missed during the pre-closing phase or any claims or issues that may have developed post-closing like unpaid tax notices etc. Often such issues involve discussions and negotiations at great length, and the buyer might just find the necessity to deal with various former shareholders individually a cumbersome process.

Thus, for the sake of convenience, a stockholder or shareholder representative is put in place as a general practice who would be representing as-well-as acting on behalf of the old shareholders to put forth their interests and defend them in any disputes that may arise with the new shareholders/acquirers post-closing. A stockholder representative is a person designated and appointed to act on behalf of the former/seller shareholders to negotiate and deal with crucial matters and disputes post-closing of the M&A deal to safeguard the interests of the selling shareholders. (You can find the sample clause definition of a stockholder representative here). They are appointed by the seller shareholders, but a buyer might also have an interest in who becomes a representative due to concerns over confidentiality and to ensure that the designated person will work professionally with the buyers with efficiency.

Role of the stockholder representative in M&A deals

As mentioned before, a stockholder representative’s major role is in the post-closing phase, generally tasked to be ready to handle disputes and claims before they arise and to ascertain the actual expenses to be borne and the amount to be received by the old shareholders. A well-rounded list of functions that are typically shouldered by a shareholder representative are:

Post-closing communication

A shareholder representative acts as the bridge between the old shareholders and the new owners of the target company. They are the focal point of any and all communication between the two. They keep tabs on the balance of the escrow account, the expenses to be paid, the progress towards the earn-outs and any receivable amount from it and regularly provide this status report to all the old shareholders. Besides communication, they also undertake negotiations on behalf of the old shareholders with the acquirers in regards to the escrow account, expenses, earn-outs etc. 

Negotiating purchase price adjustment

Typically, the time window between when the parties agree on a purchase price and the time when the actual closing takes place, there are certain fluctuations in the assets and liabilities of the target company due to operations on a going concern basis, and thus, after closing, there are certain adjustments made to the purchase price. A shareholder representative is expected to review the financial statements and the working capital calculation prior to the closing and after the closing and negotiate the purchase price adjustment taking into account any seasonal fluctuations or unusual nonrecurring events and growth in business.

Resolving disputes

If any disputes arise between the buyer and the seller post-closing, it is the responsibility of the stockholder representative to advise the old shareholders, strategize the best procedure and overall manage the entire dispute resolution process from inception till the end either amicably or through litigation. 

Minimizing indemnification claims

A stockholder representative also handles any, and all of the indemnifications claims that may be raised by the buyer post-closing and tries to preserve the Escrow Funds as best as he can.

Earn-out management

A stockholder representative also undertakes audits and reviews of relevant accounting and financial data of the target company post-closing to assess the probability of achievement of an earn-out and intimate the progress made so far to the old shareholders.

Tax returns and claims

A stockholder representative also, based on the present taxation scheme, prepares and files tax returns, if any, on behalf of the old shareholders post-closing. If the acquirer has received any tax returns, it is the stockholder representative’s responsibility to ascertain how much and to ensure that the tax return proceeds get to the old shareholders. There are also tax claims which at the time of the deal could not be foreseen, like municipal taxes or sales tax; a stockholder representative will have to weigh the merits of the claim and pay off the claims as needed on behalf of the old shareholders. 

Logistics for distribution of proceeds

A stockholder representative receives any and all proceeds or amounts post-closing from the acquirer on behalf of the old shareholders. And it is the duty of the stockholder representative to distribute these proceeds to the old shareholders as per their share or agreed manner of distribution. The entire process can become difficult if there are several shareholders or a distribution waterfall involved (disproportionate distribution).

Dealing with sandbagging claims

Sandbagging claims are those breaches or claims that the buyer already knew about in pre-closing but nevertheless did not raise it and waited for the closing of the deal and then sought damages. As a stockholder representative, you would be required to undertake a comprehensive background check and technical analysis of the entire deal to find out what the exact facts were and if they were known to the buyer to ascertain if there has been any breach of warranty or representation.

Third-party patent issues

Often the issue with M&A deals for businesses on a going concern basis is that there might be some infringement that might trigger. As a stockholder representative, you would have to work with both the acquirers and the buyer to work around the third party claiming the license of a patent that is now the acquirer’s property. 

Correcting financial misstatements

In an M&A deal, it is very common for certain financial misstatements to go unseen for it to only pop up later after the closing. As a stockholder representative, you would not only have to undertake the correction of the errors in the financial statements and even calculate damages that would be payable for the misstatements.

It is quite evident that a stockholder representative serves a wide and extensive role and shoulder a wide gamut of responsibilities. The above-mentioned functions are a broad spectrum of duties; in any given M&A deal, a stockholder representative may or may not perform all of the above duties, it all depends upon who the stockholder representative is, what are his skills and qualifications and most importantly, what are the terms of the relationship between the shareholders and the stockholder representative. It is good advice that shareholders understand their stockholder representative and engage his services in matters that he or she has the requisite calibre to deal in as any mistake may make the entire scenario leave behind a wounding scar on every shareholder. Thus, it is best to not confine all the post-closing matters to only a stockholder representative and rather engage services of professional litigants, accountants etc., in pair with the stockholder representative. 

Is a stockholder representative mandatory in M&A deals? 

While a stockholder representative is in no way mandatory but due to the growing complexities as well as the consideration involved over the past few years, M&A deals from the last decade have witnessed an astounding increase in claims and disputes post-closing, issues like working-capital adjustment, earn-outs, escrow, indemnification claims etc. All such issues involve long-hours of dialogue and negotiations which would be impossible when there are several shareholders.

Because of this, the buyers usually requires the sellers to designate a person as a stockholder representative to act and negotiate on behalf of the old shareholders in the post-closing matters. It makes the process of communication and negotiation far easier and speedier, as there no longer is the need to round all the shareholders together and then move forward with the negotiations and get their approvals individually. It is this administrative convenience in negotiations and decision-making because of which stockholder representatives are nowadays sought mandatorily by the buyer in any M&A deal.

Do I need a third-party/professional stockholder representative?

Traditionally, the founders or the senior officer like the CEO or the majority investor like a representative from a Venture Capital or private equity firm of the target company used to be appointed as a stockholder representative. 

So, while there seemingly is no requirement to get a third-party as a stockholder representative but today, many parties are engaging their counsels and professional shareholder service providers as the designated representatives. There are few reasons why, as a Seller, one should consider getting a professional:

Limited skills or expertise

As a CEO or an investor, you might lack the needed expertise to deal with the post-closing issues. Often these issues are very technical that requires a professional’s touch to better deal with them. Post-closing witnesses a plethora of highly complex issues (you can learn more about the post-closing issues here) that not just contemplate but also expect dexterity in accounting, taxation, auditing and litigation, to name a few. Any wrong move might have an adverse impact on not just your liability but the liability of your other shareholders as well.

Conflict of interest

There is also a possibility that one may run into a conflict of interest. Often the acquirers ask the founders and other executive officers to stay back in the acquired company as they are the ones who created the company and know it well. So, if you as a founder or senior officer are not only the stockholder representative but also an employee of the acquired company, you may be in an awkward position where you would have to argue on behalf of your former shareholders against your new employer, in such a situation, it is best to hire a third-party professional.

Higher costs

A stockholder representative is required to devote significant a huge chunk of time and effort in dealing with disputes, negotiating the claims, communicating back and forth with the old shareholders and the new owners. Nowadays, post-closings are witnessing an increase in earn-outs and other such revenue offers that lapse from anywhere between one year to more than four years after closing. As a founder, if you become a stockholder representative, you would be exhausting your attention and resources in managing your disputes which could have rather been utilized in your other and new ventures and businesses.

Legal risk

A stockholder representative can be held responsible in case of negligence or mistakes (discussed in detail later); usually, there are notices which the representative fails to reply in 30 days they are deemed to be accepted. In such scenarios, legal action may be taken against the representative. If you, as a CEO or investor, are a stockholder representative, it might work out to your disadvantage as you could be denied employment or to carry out any other transaction if there is any lawsuit pending against you. You might even pass on the risk to your other partners if you are in a partnership.

Thus, as sage advice, a competent third-party professional stockholder representative is recommended. Another very pertinent question to answer is ‘What if my deal is very small, should I still get a Professional Stockholder Representative?’

As discussed above, the main reason why buyers impose the requirement of a stockholder representative is because of the fact that there is a large number of shareholders. And so, one would assume that if your deal is small or doesn’t have that many shareholders, you won’t have to splurge for a professional stockholder representative. But it is irrelevant to assume so because, after all, it is not the number of shareholders that determines the need for a professional stockholder representative but rather the buyers and their disputes that necessitates a professional touch. So, while the requirement of a stockholder representative is driven by the buyer when there are a considerable number of shareholders, the need for a professional stockholder representative is completely separate and not correlated with the number of shareholders that exist.

In fact, the need for a professional stockholder representative is all the more felt when there are few shareholders or the consideration is not that much or both because of two counts. Firstly, a smaller number of shareholders means there is a greater share in the liability or claims in case something goes wrong; the liability or risks involved in a haywire post-closing won’t get diluted amongst a small number of shareholders. Secondly, if the consideration amount is less, it still does not mean that the expenses or claims would be less too; who’s to say that the damages won’t be more than the deal itself if something goes wrong. Moreover, any single claim or dispute raised by the buyer could ensure huge delays in the payback of any earn-outs or escrow to you, the seller! thereby frustrating what would have been a small and quick deal. So, the need to get a professional on board is a deliberate choice based on a multitude of factors that needs to be carefully weighed by the seller.

Advantages of a professional stockholder representative

Better suited

A professional stockholder representative has a greater degree of skill, experience and training to deal with the technicality of post-closing matters and the kind of transactions involved in them. They are far better equipped to deal with them and to get the right people on board to address them whenever needed.

Better devotion

A professional would have far more time and resources to put in the post-closing matters than a seller. The professional does this as a matter of employment and thus can provide better attention to the issues than a seller doing it out of compulsion. 

Long-term availability

With M&A post-closing matters spanning up to 5 years, it is impossible to expect a seller to have that kind of commitment. But a professional has the capability to be available for the entire duration of the post-closing period.

Better communication

With post-closing issues, the potential receipt of revenues are attached in the form of earn-outs or escrow, and it is natural for many former shareholders to have questions regarding the same. A professional who has the knowledge and the time to monitor the progress regularly will be in a better position to answer these queries and also communicate about the likelihood of receiving them better than a seller shareholder acting as a representative.

Authority of a stockholder representative 

It is commonly asked whenever one comprehends hiring a third-party stockholder representative that whether ‘I will lose control of the Decision Making in the Post-Closing or not?’ 

To give a straightforward answer, NO! A shareholder representative will not reduce or take away any of your control or decision-making in the post-closing and probably might improve and give you more control. This can be understood through two instances:

  1. Whenever you engage a professional stockholder representative, you only delegate the execution of the ideas to the stockholder representative. As a shareholder, you continue remaining in control; you continue making material decisions as to what is to be done or how it’s to be done.
  2. The next thing is that professional stockholder representatives work with the shareholders as an advisor, they advise them on the best course of action thereby giving more choices, and they don’t do anything without the proper authorization or consent of the shareholders.

Thus, it is nothing but a myth that a professional stockholder representative will take away your decision making.

Liability of a stockholder representative 

So, the very next question that would come to your mind is ‘Is the stockholder representative relationship with the shareholders one of principal and agent?’

And it would be right to think that it is one of principal and agent; after all, they act almost identical to any other professional like a lawyer or doctor who is deemed to be agents of their clients. But interestingly, this is not the case for a stockholder representative, at least not per-se; I’ll break it down for you. In a 2014 Massachusetts case of Mercury Systems v. Shareholder Representative Services LLC, a class-action lawsuit was brought against the defendant shareholders in lieu of some claims, and along with the shareholder, the stockholder representative was added as a co-defendant. The court, however, held that a stockholder representative is only appointed as a helping hand in resolving post-closing disputes, they are nowhere engaged to act expressly on behalf of the shareholders on their own authority, and thus there is no principal-agent relationship between them. They are a mere representative only.

If the relationship of a stockholder representative is not that of a principal-agent, what is the liability of a stockholder representative, if any at all. A stockholder representative acts as an advisor and on behalf of the shareholders only as a matter of administrative convenience, and so they do not have any liability in any actions taken by them nor do they share any obligation to act without the authority of the shareholders even if it is for a minuscule matter. Their liability only arises if they do anything with malicious intent or without the authority or knowledge of the shareholders; otherwise, they share no cent in the liability. 

A stockholder representative is for this reason considered a ‘Limited Party’ to the M&A Agreement as they are there only to perform the basic administrative functions. But if the shareholders were to initiate stockholder representative to see through litigation or arbitration or act as an accountant, then their relationship would be as that of their counterpart professional for only that concerning matter only. Thus, as long as the stockholder representative is performing basic administrative and advisory functions like communication, negotiation, status check etc., they are not an agent but a mere Representative and do not have any liability so attached.

Key points to keep in mind while drafting the terms of appointment of a stockholder representative

  • Outlining their scope in the main agreement

The first thing to ensure is that the mother agreement or the main M&A Agreement specifically provides a clause that establishes the role of a stockholder representative even if you think you won’t need one. Or, at best, there should be a clause specifically stating that it would be the shareholders that would be deciding and outlining the scope and role of the stockholder representative as an addendum to the M&A Agreement. This would act as a contingency; in the event should you be required to either serve as a stockholder representative or to hire one, their actions would not be bound by the normal clauses of the main agreement that usually apply to third parties that are generally engaged in any M&A deal. Because the scope and powers of a stockholder representative widely differ from the other third parties that are generally engaged like lawyers and merchant bankers, valuers etc. (You can find a few samples of stockholder representative appointment clauses here).

  • Matters to be dealt

It is also a good idea to define what matters will the representative be dealing with. The former shareholders should consider this based on the knowledge and proficiency of the representative. Do not give them powers in all matters but rather in only the post-closing matters. The common post-closing matters are investigation, negotiation, dispute resolution, intellectual property, taxation, accounting, employment issues and so forth.

  • Defining the power of the stockholder representative in the ambit of the M&A deal

A stockholder representative affects the sellers and its shareholders more than that of the buyers; thus, typically, a buyer would always want that the stockholder representative has the broadest powers. Thus, as a seller, it is important that in terms of the appointment, you curtail their powers and explicitly state that the stockholder representative does not have any power to deal with the buyer alone, that they require the approval of the shareholders in all decisions, that all communications must flow through the representative to all the shareholders and that they cannot materially change the terms of the M&A deal after closing. Otherwise, there is nothing preventing a representative to solely act with the buyer and execute settlements that might have adversity on or may not be the intention of the sellers and are difficult to undo without litigation.

  • Proper latitude information sharing

A buyer would not want a stockholder representative to be privy to certain information that it considers confidential. The buyer may also not want the communication to be to all the shareholders as it would make the process cumbersome, and a buyer often wants quick decision making. But without proper communication, the right and proper decisions cannot be taken. So, it is a good idea to negotiate the terms of communication with the buyer and ensure that communication should be to all the shareholders and be limited only if certain information by its nature needs to be communicated to a few shareholders it is intimated to them only and that the entire communication is bound by the terms of confidentiality. It is also important to make all exchanges of information, advice, and any discussions between the former shareholders and the stockholder representative are bound by confidentiality so that the buyer cannot use them against you.

  • Extension of representation to all interested parties

Often the post-closing matters are not the sole concern of the former shareholders but also of third parties like former employees, option-holders etc. It is a good idea to ensure that the stockholder representative has the authority to deal with all post-closing matters related to even the concerned third parties to ensure that all matters relating to the escrow, earn-outs etc., are covered within the scope of the representative.

  • Indemnification of stockholder representative

Often stockholder representatives engage other persons for advice and sound decision making; it is not uncommon for them to ask for the opinion of a lawyer or an accountant in matters that are best suited to them. If you are a stockholder representative, it is a good idea to also ensure that along with you, any advisory committee that you may refer to is also indemnified and free of incurring any liability.

  • Removal of stockholder representative

As a seller, you must clearly retain the absolute power to remove the stockholder representative at any time. In case of death or incapacitation of the representative, a new representative must be designated once more with the approval of the former shareholders. And as a stockholder representative, you must ensure that you have the ability to resign anytime you want. (You can find drafts of more such clauses here.)


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Deciphering climate change litigation in India : application of common law principle

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Image source - https://bit.ly/3l8jOCx

This article is written by Shloka Shailesh Rasal.

 

“Climate change is a terrible problem, and it absolutely needs to be solved. It deserves to be a huge priority” – Bill Gates

Introduction

The rudimentary notion of ‘Climate change’ pursuant to Intergovernmental Panel on Climate Change (IPCC) refers to proportionate change in the climatic condition due to human activity or natural viability. However, the usage differs as per the definition prescribed by the United Nations Framework Convention on Climate Change (UNFCCC), wherein attribution of climate change is from direct or indirect human activity accruing cumulative effect on the composite global atmosphere. Albeit being cognizant of the fundamental framework on how the GHGs and carbon dioxide warm the planet since decades, climate change only transpired as a vibrant international agenda post Stockholm Conference of 1972. The thriving economy of India and steadily rising emissions have made India the third largest country to emit Greenhouse gases ensuing India to be one of the vivacious players of climate change. Thus, pursuant to India’s demography, topography and incongruent level of economic development, India is awfully vulnerable due to the impact of climate change endangering agriculture, natural resources, environment, ecology, economy, ecosystem, water availability, biodiversity and social well-being. 

In 2008, the Indian government launched the National Action Plan on Climate Change (NAPCC), which adopted “co-benefits approach”— environment that integrates objectives of India’s development simultaneously tackling climate change meritoriously leading to the birth of national climate change policy in India. Many regulations also discuss various facets of global warming, causes and effects in particular, and include the potential hooks for climate lawsuits. But in India, there is no comprehensive climate change legislation. Over the past several decades, the Indian judiciary the National Green Tribunal (NGT), the Supreme Court and the High Courts have played a pivotal role in India’s environmental governance. Public interest litigation has been embraced as a tool for enhancing innovation to the judicial proceedings.

In of Om Dutt Singh v. State of Uttar Pradesh, the respondents challenged the construction of an enormous irrigation project on the ground of submergence of huge tracts of forest resulting to methane emission. However, NGT rejected the complaint by stating that sealing the project would violate public interest ensuing massive waste of public money. In Sukhdev Vihar Resident’s Welfare Association v. Union of India the applicants contended that the waste-to-energy plant situated in their residential area incinerated the unsegregated waste that resulted in emission of Greenhouse gases. However, NGT declared the project to be Clean Development Mechanism (CDM) project which ultimately met the Precautionary principle. In Sudarsan Das v. State of West Bengal the core issue was that the Subarnarekha river was changing its course resulting in susceptible flooding every monsoon endangering the lives of villagers due to illegal san mining wherein ground water was permitted to seep into evacuation of 40 to 50 feet pumping away disposal. This case observed a vibrant violation of Public Trust Doctrine and Precautionary Principle.

India has witnessed 193 deaths in 2020 due to illegal mining. During last five years Gujrat has perceived 38,100 cases with a surge of 2.16% in filing of FIR on illegal mining whereas Maharashtra reports 712 cases in 2018 seizing 1,39,000 vehicles carrying illegal mining. Whilst analysing emission of GHG, India ranks 12th in the world with an overall high score rating (28.39 score) whereas in the Energy consumption Sector, India ranks 10th with an overall high rating (14.77 scores). Therefore, the current Climate Change Performance Index (CCPI) 2021 placed India among top 10 countries that need to undertake substantial measures to mitigate climate change.

Therefore, in India stringent laws pertaining to Climate Change is the need of the hour. Hence, the author canvases the constitutional provisions that protect the environmental rights of the citizens. The paper pledges a debate by streaking the surge in climate change litigation worldwide along with its conceivable potentiality and future in India by comparing it with the United States of America. These prominent countries reliant on ethics of prominent democracy have magnificent potential to shape the world’s legal ideas. The study on this phenomenon will create an awareness in the society elucidating every person’s duty to mitigate individual consumption of GHGs until a stringent law on climate change is enforced in India. 

Judicial interpretation of climate change litigation

A considerable legislative scrimmage against Ecological pollution commenced in independent India with prohibitive provisions of public nuisance prescribed under The Indian Penal Code. Currently in India their lack of legislation safeguarding the environment against pollution by maintaining ecological balance. One of the extensive statues for environmental protection is the Environment (Protection) Act, 1968.  To Improvise and protect the environment is a Constitutional mandate. It is a pledge towards a world accustomed to welfare state principles. While under chapters of Directive Principles of State Policy and Fundamental Duties, the Constitution of India defines various provisions for environmental conservation. Judicial activism has triggered the absence of a clear constitutional provision acknowledging the fundamental right to a safe and healthy climate.

  • Article 14

If the Contractor and the Government recognize that the Petroleum Operations will pose an ecological impact within the Contract Area then, the Contractor must perform its operations pursuant to the conservation of natural resources and shall:

  1. Implement standard modem oilfield and petroleum industry practices encompassing advanced practices, techniques and methods of operation to prevent catastrophic environmental damage.
  2. If an adverse impact on Environment is unavoidable the Contractor must mitigate the damage that would lead to consequential effects on the citizens and property.
  3. Ensure mediocre compensation for damage or injury caused to property or persons due to the petroleum operations.
  4. A critical study on the environmental impact must be made available to the employee and Contractor or Subcontractors to endeavour awareness of the methods and measures to be adopted to protect the ecology. The contracts consented into between the parties must comply with the reasonable requirements of the Government and relevant laws from time to time.
  5. Preparation and submission for a review by the Government Contingency plans pertaining to fires, accident oil spills, and emergencies is a condition precedent for any drilling activities to accomplish rapid and efficient emergency responses. In such events, the contractor must forthwith notify the Government and prudently conduct restoration as may be essential pursuant to the standard petroleum industry practices. 

If the Contractor does not comply with the above provisions of Article 14 or contravenes any relevant law, and such contravention or failure causes ecological damage, the contractor must compensate for the damage caused to the environment. If the Government thinks that the erection of installations by the contractor are imposing danger on the flora and fauna, endangering the residents, and cause pollution then if the Government deems the operation to be unacceptable require the Contractor to undertake necessary remedial measure to restore the environment within reasonable period or discontinue the Petroleum operations in whole or in part until the remedial measures have been undertaken by the Contractor. On the expiration of the contract the Contractor must demolish or remove the installation erected in the Contract area.

  • M.C Mehta v Kamal Nath

In Himachal Pradesh, Span Motel owned by members of Shri Kamal Nath, diverted the course of River Beas to beautify the Motel along with encroaching upon some Forest land. The apex court ordered the Motel to hand over the forest land to the Government of Himachal Pradesh and imposed a fine of 10,00,000 as exemplary damages. The Apex court utilized Polluter Pays Principle and recognized Public Trust Doctrine for the first time.

  • Residents of Asha Nagar V. State of Maharashtra

Small scale industries located in Nandanvan Industrial Estate at Asha Nagar, Mulund (West), Mumbai according to the Maharashtra State Pollution Control Board caused industrial pollution by damaging the ecology. NGT ordered MSPCB to undertake necessary steps to recover compensation and monitor compliance of air and water quality norms by industries.

  • Students Of Shah Badduruddin High school V. State Of Assam

Mr. Hussain Ahmed was carrying illegal mining activities for more almost two years without obtaining valid Environment clearance documents. Such activity caused dust pollution in the villages endangering the health of the villagers. States PCB was ordered to recover ecological damages which is still pending which picturises the State PCB as inefficient.

  • Article 19(1)(G) and Article 21

All the citizens have a Fundamental right to carry out any profession, or to carry on any occupation, trade or business within the geographical limit of India. Apart from the restriction conferred under Article 301, by Article 47, 302, 303, 304 and Article 19(6). While considering Article 19(1)(g) the aforesaid articles are read together not conferring Article 19(1)(g) an absolute right. The vital objective of imposing restrictions is that one cannot harm the ecology to carry out business or profession and such practice must be detrimental to the interests of the public. Article 21 states that “no person shall be deprived of his life and personal liberty except according to procedure established by law”. Article 21 manifests constitutional value is of supreme importance within a democratic society. Justice Iyer has demarcated Article 21 as ‘the procedural magna carta protective of life and liberty.

  • Tamil Nadu Pollution Control Board vs Sterlite Industries (I) Ltd.

On 23 March, 2013 enormous leak of So2 from the factories sulphuric acid plant affected residents of Thoothukudi causing 20 women of the neighbouring industries to get hospitalised. For years Vedanta CEO Pankaj Kumar appealed in NGT Delhi and Tamil Nadu. This agitated the public to get on the street to protect their environmental rights. However, on 28 March, 2018 the Madras High Court dismissed all the appeals and as per the Article 19(1)(g) passed the orders of TPCB and for the fifth time shut and sealed the plant due to the vital leak of S02.

Madras authorities laid emphasis on Article 19(6) and ordered to shut down the plant in 2013 and subsequently in 2018 on the grounds of violation of license conditions. This hearing was remarkable as it was different from any of the proceedings in Sterlite’ s history. The Madras Government and TNCB were blamed for their inefficiency in not delivering the verdict before 22 years. In the case of Kendra v. State of UP (Dehradun quarrying case), the Supreme court was of the opinion that the ecological pollution caused by the quarries has impacted the health and safety of people adversely, hence it is infringing Article 12. This was the first case where the right to environment was made a subject to right to life and personal liberty guaranteed under Article 21. Anything impairing or endangering the quality of life in contravention of law, a citizen can file a writ before the Supreme Court under Article 32.

  • Article 48(A) and Article 51(A)(g)

The state is empowered to improvise and safeguard the environment along with safeguarding the forests and wildlife of India. The Parliament by 42nd Amendment, incorporated it in Article 51A to sensitise the citizens of India of their responsibility to improve and protect and the environment encompassing wildlife, lakes, forests. Therefore, Article 48(A) and Article 51(A)(g) are foundation stones of environmental jurisprudence. In Sher Singh v State of HP, the court held that citizens are granted fundamental rights to a wholesome, decent and clean environment. Article 48(a) obligates the States to improve and protect and the wildlife, forest and environment.

  • Lt. Col. Sarvadaman Singh Oberoi Vs Union of India 

The court held that whenever the State utilizes natural resources ‘Public Trust Doctrine’ will prevail over all the Principles and fundamental rights. Therefore, the Court thought it prudent under Public Trust Doctrine, the State to act as a trustee of all the water bodies to safeguard for public utility.

  • Suo- Moto vs Principal Sec. Dept. Of Animal Husbandry

The Supreme Court held that it is the duty of the state to undertake appropriate measures to safeguard not only the ecology but also the migratory birds (Kurja) that fly to and fro in the state of Rajasthan.

  • Article 253

This article empowers the Parliament to enact any law for the whole or any part of the territory of India for the purpose of implementation of any agreement, treaty or convention with any other country or to make decisions at international conferences, association or other body.

Probability and potentiality of: climate change litigation

Litigation over climate change has its origins in civil liability lawsuits as the Society is bemoaning the fact that human activities and emissions are contributing to global warming. Releasing these greenhouse gases into the atmosphere may have disastrous consequences on health, property and environment. It paves the way to potential legal action against governments or enterprises that indulge in commercial activities. When a lawsuit is filed, it brings with it a whole new set of legal issues for both plaintiffs and defendants. Litigation concerning climate change can stem from a variety of channels, such as:

  1. course of action centred (nuisance or negligence) on the grounds of climate change as a contributing factor, resulting in litigation issues;
  2. administrative lawsuit filed against a public body for any omission, action. ultra vires to legislative obligation, or other failure of authority’s to adequately control greenhouse gas emissions;
  3. certain legal grounds of action arising via increased public awareness of climate change issues, such as alleged violations of advertising standards and regulations with in course of developing climate change claims, alleging failure of corporations, or their representatives or their officers to appropriately report climate changes and environmental that have a significant effect.

The first two alternatives are being prosecuted in India, but in very separate environmental ways but not as part of climate change lawsuits. In particular, a citizen of India has the following options for seeking remedy in the event of a breach of his or her environmental rights:

  1. Civil suit can be filed against the polluter, (nuisance and negligence);
  2. Writ petition to induce existing environmental regulations and reclaim clean-up damages from the polluter; or 
  3. Redress under plethora of environmental statutes, such as the Water (Prevention and Control of Pollution) Act of 1974, the Environment (Protection) Act of 1986, and the Air (Prevention and Control of Pollution) Act of 1974 etc;
  4. In the case of injury caused by a hazardous industry disaster, compensation under the National Environment Tribunal Act of 1995 or the Public Liability Insurance Act, 1991.

In India Whenever it comes to preventing environmental emissions in the present predicament, action of nuisance and neglect are very common. However, none of them have been used solely to involve climate lawsuits so far. Nuisance can be classified as either private or public. If someone uses their land in a way that damages the property interests of others, this is known as a private nuisance. In theory, a corporation will be held liable under private nuisance if it utilises its land in a manner wherein it damages others’ rights over their property that result in global warming. Climate change, on the other hand, is a far broader problem that in no way relates with defendants’ use of their land rather entails much less direct “annoyance” with “neighbours.” As a result, private nuisance does not seem to be a viable defence in climate change litigation. In climate change events, public nuisance is a better solution.

Drawing influence via affluence: will the model work for us?

The number of cases concerning climate change has significantly risen over the past decade. Several lawsuits have been filed in global and subnational tribunals all over the country. This type of lawsuit has become increasingly common in the United States. Massachusetts v. EPA was one such lawsuit, and the United States Verdict on that has drastically altered government policy and reshaped the litigation environment. The Supreme Court’s majority ruled that there was a sufficient correlation between GHG emission from the US transportation sector and injury to Massachusetts induced by rising sea levels and ocean acidification to justify the state’s claim to representation. Upon this merits of Massachusetts’ contention that the EPA was obligated to regulate GHG emissions from motor vehicles under Section 202(a)(1) of the Clean Air Act, the Supreme Court majority held that the EPA should only refuse to do so if it really determines that greenhouse gases do not contribute to climate change or even if it provides a reasonable justification as to why it cannot or would not do so.”

The decision is reminiscent of a judgement policy centred on the precautionary principle, an environmental scriptural interpretation that is a central aspect of environmental legislation in many countries and the European Union, but not (explicitly) in the United States. The principle was therefore prominently featured in international legal frameworks such as the Rio Declaration on Environment and Development (in which it is stated as principle 15) and the United Nations Framework Convention on Climate Change (where it is stated as one of the guiding principles that “Parties should take precautionary measures to mitigate, prevent, the effects of global warming and potential impact of climate change”). 

In Juliana et al. v. United States of America the youth claimants participating in the lawsuit against the US government are advancing public confidence charges once again, but this time they are accompanied by allegations that the defendants’ conduct violate the petitioners’ fundamental rights to due process to life, liberty, and land, as guaranteed by the US Constitution. The plaintiffs are demanding a judgement that their public trust rights and constitutional were violated, as well as an injunction prohibiting the defendants from violating those rights and compelling them to implement a strategy to minimise CO2 emissions.

The court held that a petition for a claim alleging that governmental conduct is explicitly or implicitly disrupting the climate system in a manner that would cause human deaths, shorten human lifespans, result in widespread property destruction, endanger human food supplies, and drastically alter the planet’s environment states violation of human rights. In Third Runway at Vienna Re International Airport case the rights regulations contended before Austria’s Federal Administrative Court (Bundesverwaltungsgericht) comprised Article 37 of the Charter of Fundamental Rights of the European Union (CFREU), which demands for a “high degree of environmental protection and enhancement of the quality of the environment” to be incorporated into EU policies and according to the Principles of sustainable development.

In determining upon runway application, the Court evaluated possible public interests (including accommodation of airlines, fostering economic development, and creating jobs) against the public interest in curbing negative consequences, such as ecological harm and a rise in greenhouse gas emissions that contribute to climate change. Climate change is now unfolding in Austria, according to the Court, and it would have far-reaching consequences for humans, wildlife, plants, and the whole world. Finally, it was decided that the construction and implementation of a new runway at Vienna International Airport would be detrimental to the public interest in environmental security, including climate protection.

Uncultivated environmental jurisprudence: laws as they prevail

Environmental jurisprudence of India is indeed an ambiguous combination of reluctance to protect the natural environment and lack of environmental consciousness, excessive regulatory efforts and shoddy implementation mechanism, perpetual massive infringement of basic human rights and extreme protest by claimants and stakeholders. These legal diametrically opposed, democratic and socialist ideologies, paint a hazy image of Indian environmental law. Ever since the dawn of environmentalism on Indian soil more than two decades ago, the India judiciary had stood bystander to environmental desecration. It was only in the 1980s that it eventually took proactive measures influenced by innovative rulings passed by the Indian Courts. 

Locus Standi is necessary for the commencement of court proceedings. The development of Public Interest Litigation (PIL) in India liberalised the locus standi, allowing any institution or individual negotiating in uberrima fidei to petition the Supreme Court (Article 32) and High Courts (Article 226) for judicial remedy on the grounds of encroachment of environmental rights which broaden the spectrum of PIL to include environmental protection. The court has already incorporated a right to a healthy environment with nascent yet evolving international environmental principles such as the precautionary principle, the principle of sustainable growth, polluter pays principle, the principle of intergenerational justice, and the notion of the state as a trustee of all-natural capital. 

Further, it is well established that public nuisance emerges from unreasonable intervention with the public’s general right. As a result, every citizen has right to be heard for public nuisance. In India, public nuisance has previously contained challenges such as sewer cleaning issues, brick grinding processes, hazardous waste disposal, and factory effluent discharges. However, climate change is indeed a mystery. The description of public nuisance is found in Section 268 of the Indian Penal Code, 1860, “A individual is liable of a public nuisance if he or she commits any act or renders any unlawful omission that causes some common damage, or nuisance to the public or to the people in general who live or inhabit property in the neighbourhood, or which may inevitably cause injury, obstacle, hazard, or annoyance to persons who may have reason to use any public right.”

This, nevertheless, is less appealing since the penalty is just Rs. 200, making it unnecessary for a citizen to file a lawsuit with a magistrate under Section 268 of the Indian Penal Code, 1860. However, Section 133 of the Code of Criminal Procedure, 1973 grants an improved remedy wherein Magistrate can issue conditional warrants on the ground of nuisance. The decision of the Magistrate can be based upon police investigation or a public complaint. This section gives you an autonomous, fast, and simple way to dispose of a public nuisance. 

Furthermore, after reviewing some environmental laws, I believe there are some provisions that the plaintiff in climate change litigation might make effective use out of. For example, Section 2(a) of the Environment (Protection) Act of 1986, an umbrella law designed to provide a mechanism for Central Government regulation of the action of different state and central authorities established under existing regulations, namely the Water (Prevention and Control of Pollution) Act of 1974 and the Air (Prevention and Control of Pollution) Act of 1981.Environment has been defined as “water, air, including land, as well as the interrelationships that exist within as well as between water, air, and land and human beings, other living organisms, plants, microorganisms, and property” in Section 2 (“Any solid, fluid, or vaporised material present in such concentration as may be, or appear to be, injurious to the environment,”) according to Section 2(b) of the Act.

Environmental pollution is described as “the existence in the environment of any environmental pollutant” under Sec 2(c) ‘Any solid, fluid, or vaporised material present in such concentration as may be, or appear to be, injurious to the environment,’ according to Section 2(b) of the Act. ‘Environmental pollution’ is described as “the existence in the environment of any environmental pollutant” under Sec 2(c). The Air (Prevention and Control of Pollution) Act of 1981 is indeed the principal legislation that alleviates India’s air pollution epidemic.  

Furthermore, if the court examines the current pollution norms for different geographical locations set by the government under various environmental statutes, establishing a causal link between harm and industry emissions would have been much simpler.

Discussion and analysis

Founded on my analysis of Supreme Court, NGT, and High Court, judgments wherein parties’ to the suit addressed climate change concerns and circumstances wherein the acknowledgement of global warming and climate change as well as the international negotiating mechanisms are not merely coincidental, I have classified judgements, in the first category either the petitioner or the court has referred to the ecological impact due to government’s inability of regulating illegal activities- in Society for Protection of Climate and Biodiversity v. Union of India, notice issued with a pollution control approval precluding the construction sector that accounted 22% of India’s annual GHG emissions was found to be illegal by NGT. The exemption, according to the Tribunal, was in violation of India’s commitments under the Paris Agreement and the Rio Declaration. Deforestation’s environmental impacts in the light of unlawful tree felling of trees and rampant illegal construction.

In such cases the Tribunal mentioned carbon sink depletion, carbon dioxide pollution from forest degradation, and localised warming effects of small-scale deforestation in both cases. Second category encompasses where petitioners have approached the court to seek appropriate implementation of governmental policies. In, Gaurav Bansal v. UOI, the Tribunal did not explicitly decide on its authority over the enforcement of the NAPCC in its final order, but it later clarified that particular cases involving violations of the NAPCC, impact, or repercussions brought before it in the future. Furthermore, the Tribunal ordered states to draft their respective state and have them authorised by the Ministry of Environment, Forest and Climate Change (MoEFCC) as soon as possible. The courts used environment terminology to justify conclusions reached for other purposes in the third category-two study. The Kerala High Court noted that the Kyoto Protocol “did remind the country to strive for policies and interventions to mitigate adverse effects on climate change and to encourage sustainable ways of agriculture in light of climate change circumstances,” while guiding the states to devise policy on the utilisation of agricultural land for mining operations. 

So far, Indian cases have yielded a few preliminary lessons. Climate litigation incorporates economic, moral, scientific, economic, along with other facets of the era. Lawyers are responsible for notifying their clients about how climate change (anthropogenic global warming) can affect their legal rights. In about the same time, we as individuals have our own obligations. We must be more cognizant of intergenerational justice and our current and future socioeconomic, and legal responsibilities, that may decide the possible winners and losers of a climate change lawsuit.

In this respect, my combination of the United States, Australia and India aims at providing an intriguing and contrasting social context. The United States, as a staunch defender of democracy, wants its courts to be consistent and reliable and conform to democracy and human rights. There is no doubt there is some scepticism about the extension of democratic values to environmental problems, especially climate litigation. There is indeed a lot of speculation about who can make decisions about climate change there. Could it be the court ‘s responsibility to determine who has certain rights and obligations? Should they delegate all decision-making authority to Congress?  Will citizens be permitted to sue the government if they conflict with its own actions or inaction via the Court of Law? 

India, on the other hand, remains silent on the subject, as I previously said the current movement in the United States might well be classified as a nascent type of environmentalism, tackling more nuanced and controversial environmental issues such as climate change for future generations. This is inevitable, given that nowhere is the triumph of environmentalism more clearly expressed in the legislation it has overturned, passed, or changed than in the United States and Australia. It’s been described a “post-materialistic movement” by political scientist Richard Inglehart. Whereas in India, unfair trade, poverty, and population development have a big impact on how people respond to environmental degradation. Climate change, as a relatively new phenomenon, has yet to be addressed in mainstream litigation in this country.

It is unavoidable that India’s environmental judicial advocacy has had a significant impact on environmental law, and it owes that to dynamic social movements. It may be because, despite the potential, the nuisance, neglect, or others have yet to include climate change in them. While interpreting regulatory requirements, Indian environmental judgments always refer to international environmental law, but judicial rationale in such cases is not necessarily valid, and the interaction can seem shallow at times. In the light of climate statements, courts refer to the UN Framework Convention on Climate Change, the Kyoto Protocol, the Paris Agreement, and India’s Nationally Determined Contributions (NDCs). Judiciary emphases on these frameworks, as in other jurisdictions, is not necessarily supported by clear judicial rationale explaining how India has breached/obliged to comply with international agreement. On 22nd April, 2021 Prime Minister Narendra Modi asserted that India would need a “High-speed, large scale concrete action to combat climate change and would partner with U.S for the same. It clearly elucidates that India is yet to establish green strategies to accomplish the objectives set in the Paris Agreement.

Conclusion and suggestions

Since Stockholm, India’s egotistical propaganda about urgent need for advancement has stayed consistent. None of us would contend desire for environmental jurisprudence was unreasonable thirty, or even just fifteen years ago. However, it is easy to pose one self-evaluation question now: did everything change in 37 years? India is one of the global economy’s hotspots in an age of free trade and expanding markets. India’s consumer society is quickly expanding, as is the country’s population, outpacing economic gains. Knowing one’s environmental rights is critical, particularly in a world where rapid human activity produces new and complicated ecological problems almost every day. Therefore, I suggest that the Government must establish a causal nexus between a country’s GHG emissions or deficiencies in adaptation strategies and particular impact of climate change that damage human rights.

Extraterritorially extending rights guarantees to actions that arise outside the state(s) where the consequences are more acute; then by using potential climate change effects the judiciary must establish cases of human rights abuses, which are usually identified after real harm has occurred. My suggestions have proved to be contradictory after examining Tamil Nadu Governments recent order delivered on 23rd April, 2021 on reopening of Sterlite’s plant amid oxygen shortage. I support my view by humbly stating that post shooting incident of the plant that led to 13 deaths the reopening of the plant will once again avenge the citizens leading them to protest on the streets once again amidst the pandemic. This has raised to a serious question to create law and order predicaments and thus, the plant shouldn’t reopen. I nowhere consent the Governments view because plant which polluted the oxygen per se should not be permitted to produce oxygen. Therefore, the States should now understand the importance of Public Interest and human rights prior to passing an order.

The objective of this study was to deliver a comprehensive synopsis of the potential of climate change litigation in India. While the approaches addressed are by no means exhaustive, they will serve as a starting point for further debate. The future sustainability of the country is entirely dependent on the general public’s advanced awareness and the development of fool proof risk management methodology. Both the parties must understand the relevance of scientific data in judicial schemes in the midst of the locus standi debate. Indeed, given the increasing value of research, the parties, prosecutors, and judges must create a more strictly delineated standing doctrine in order to establish public nuisance or negligence.

References

  • Ronald G. Peresich, Climate Change Litigation, 45 Brief 28 (2015), https://heinonline.org/HOL/Page?handle=hein.journals/tbrief45&id=234&div=46&collection=journals.
  • Noriko Okubo, Climate Change Litigation:: A Global Tendency, in Climate Change: International Law and Global Governance 741–758 (Oliver C. Ruppel, Christian Roschmann, & Katharina Ruppel-Schlichting eds., 1 ed. 2013), https://www.jstor.org/stable/j.ctv941w8s.28 (last visited Feb 20, 2021).
  • Himanshu Kulkarni, Mihir Shah & P.S. Vijay Shankar, Shaping the contours of groundwater governance in India, 4 JOURNALS OF HYDROLOGY: REGIONAL STUDIES 172–192 (2015), https://linkinghub.elsevier.com/retrieve/pii/S2214581814000469 (last visited Feb 23, 2021).
  • Roda Verheyen & Cathrin Zengerling, International Climate Change Cases, in CLIMATE CHANGE: INTERNATIONAL LAW AND GLOBAL GOVERNANCE 759–804 (Oliver C. Ruppel, Christian Roschmann, & Katharina Ruppel-Schlichting eds., 1 ed. 2013), https://www.jstor.org/stable/j.ctv941w8s.29 (last visited Feb 23, 2021).
  • Lavanya Rajamani, Addressing Loss and Damage from Climate Change Impacts, 50 ECONOMIC AND POLITICAL WEEKLY 17–21 (2015), https://www.jstor.org/stable/24481965 (last visited Apr 24, 2021).
  • Siri Gloppen & Asuncion Clair, Climate Change Lawfare, 79 SOCIAL RESEARCH: AN INTERNATIONAL QUARTERLY 899–930 (2012).
  • Climate change: international law and global governance, (Oliver Christian Ruppel et al. eds., 1. Edition ed. 2013).
  • Jacqueline Peel, Issues in Climate Change Litigation (2012), https://papers.ssrn.com/abstract=2060696 (last visited Apr 24, 2021).

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Impact on insider trading during COVID-19

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This article is written by Mehreen Garg.

Introduction

As the World Health Organisation (WHO), on 11th March 2020 announced the COVID-19 crisis to be a global pandemic, there has been a high alert worldwide in order to contain the widespread of the disease. The unprecedented disruptions caused globally due to the Coronavirus outbreak (COVID-19), not only affected our social environment but also our political and economic environment. According to Aljazeera, over 188 countries have been confirmed to have been massively affected by the outbreak. Like these affected countries, India has been far from untouched by this pandemic.

At the time of writing in June 2021, COVID-19 has had its second lethal wave wreaked havoc worldwide with over 17.8 crore confirmed cases and approximately 38.5 lakh deaths. The outbreak has unquestionably been unnerving for not just human life but also global economics. Due to this tragedy, a massive number of countries have suffered through a lockdown period where most of the social life and economic activities in the country were brought to a halt in order to prevent a community spread of the disease. India too was shut down due to this spread through the government’s Notification No. 40-3/2020-DM-I(A) as passed on 24th of March 2020. The halt of social and economic activities worldwide subsequently had a direct effect on companies in almost every economic sector. This global lockdown (or also called the Great Lockdown) has not just affected global commerce chains but has also led to a collapse in the financial markets and commodity prices worldwide.

Businesses over the last few months have had to resort to making extremely tough financial decisions as they suffered the impact of this unforeseen calamity. The pandemic has proven difficult the profit earning capacity whereas with regards to numerous companies, even the mere survival of most businesses to be of utmost difficulty. This crisis has led to massive disruption in the daily workings and activities of enterprises, from setting up remote operations reorganizing supply chains which has led to the contractual parties failing to meet their obligations. During this period of economic instability, the likelihood of engaging in COVID-19-related financial crimes has risen dramatically. It presents a lucrative opportunity for speculators, particularly those with knowledge of the implications of the current state of affairs on publicly traded companies. Such knowledge regarding essential performance standards, such as monetary operations, security breaches, material contracts, mergers or acquisitions, etc would enable an individual who is an active participant in such a structure to recognise and predict unlawful financial advantages, allowing them to plan their trading decisions more efficiently.

Insider Trading

The Securities and Exchange Board of India (SEBI) (Prohibition of Insider Trading) Regulations, 1992 define an insider as “any individual who has access to unpublished price sensitive information on a company’s securities.” Insider trading is defined as dealing in a company’s securities by anyone who has access to price sensitive information prior to its availability to the general public. Insider trading, according to section 195 of the Companies Act 2013, is defined as the act of buying, selling, subscribing, or agreeing to subscribe in a company’s securities directly or indirectly by key management personnel or a company director who is expected to have access to unpublished price sensitive information with regard to the company’s securities.

Insider trading can be understood as an act of purchasing and selling stocks of a company by an individual with the company’s unpublished price sensitive information before it is available to the general public with the goal of generating abnormal profits and avoiding losses. Legal insider trading occurs when a business insider trades while conforming to all regulations, and the infringement of any of the regulations prescribed by SEBI is considered criminal or illegal insider trading. As a result, they must promptly declare their legitimate trades to SEBI in order to swiftly detect insider trading operations. Business insiders are permitted to trade in the shares of their own company.

However, it is mandatory for them to report these operations in order to prevent the exploitation of price sensitive information yet unavailable to the general public. To promote the confidence of the investors and in order to ensure transparency in securities trading, SEBI has enacted a number of insider disclosure requirements. The goal of mandatorily disclosing all information with regards to these transactions is to create a fair play for all those participants involved in the market. To safeguard themselves from a SEBI inquiry with regards to insider trading or any disciplinary actions, companies should evaluate their security protocols and revise the insider trading regulations they follow, ensuring that all these policy decisions clearly define the restriction of trading on unpublished price sensitive information given the increase in opportunity for the same which has been provided by the pandemic. 

Insider Trading during the Pandemic

Several governmental authorities have issued decrees restricting and granting assistance to businesses and individuals in an effort to both lessen the impact of the pandemic and ease its impacts. Combined, such prohibitions and countermeasures have greatly enhanced both the potential and the motivation for persons to trade on substantial confidential financial knowledge, raising the danger of government investigations or SEBI disciplinary actions linked to COVID-19 insider trading. Companies all across the world are grappling with the financial consequences of COVID-19, as some have been forced to abandon their business for extended periods of time or dramatically adjust their business strategies to fall in line with governmental measures aimed at limiting the virus’s transmission. In view of the existing business practices with regards to the pandemic and COVID-19, corporations have had to alter their other related policies.

Additionally, given that the securities market regulatory body has issued such aggressive, thorough guidelines, it will be fascinating to see if this sets the bar for expected market behaviour. SEBI has taken into account the interests of both investors and stakeholders and has relaxed some of the strict insider trading restrictions in the context of COVID-19, making it simpler for companies to increase capital using the market. The regulatory body, on the other hand, has ordered the corporations to keep a systematic record of all unpublished price sensitive information and the identities of those who are privy to its access. 

SEBI, in June 2020, released a circular providing details regarding the relaxation in timelines for compliance with regulatory requirements. One of the relaxations that were provided via this circular was relaxation in the processing of the Demat request form by the issuer/ participant. This also involved submission of half-yearly Internal Audit Report (IAR) by DPs for the half-year ended on 31st March 2020, the redressal of investor grievances and transmission of securities, along with the closing of a Demat account. This was done by declaring a 15-day time period after July 31, 2020 is allowed to Depository/ DPs, to clear the backlog.

U.S.A

Just like India, the pandemic and the virus sent a severe shock down the United States of America that not just made the country suffer a severe impact on its economy but also on the country’s life toll. In order the determine the significance and consequences that the pandemic has had on the corporation’s finances and public ordeals, the Securities and Exchange Commission (SEC) has issued an exemption order giving public businesses an extension of a 45-day period to file regular public disclosure reports, such as Forms 10-K and 10-Q, which were normally (pre-covid times) expected to be filed between March 1 and July 1. Although beneficial to many businesses, the SEC’s 45-day filing extension, along with COVID-19’s large impact on most enterprises, provides a climate conducive to conduct insider trading and other anti-fraud offences.

Individuals engage in insider trading when they acquire or sell stock depending on the substantive potentially sensitive corporate information. Business insiders may likely have access to—along with the ability to trade on—price sensitive corporate information for an extended period of time before it is made accessible to shareholders for public corporations that take full advantage of the SEC’s filing delay. Furthermore, firm insiders are likely to have confidential information not only about how COVID-19 may affect their own financial reports, but also about how the pandemic would affect other parties, such as clients, suppliers, as well as other intermediaries with whom their businesses regularly interact. COVID-19 has had such a significant impact on practically every industry that much of the confidential price sensitive information about it is likely to be relevant.

These elements combine to produce one-of-a-kind and extraordinary possibilities for insider trading. Beyond the opportunity afforded by the SEC’s latest filing extension, pandemic restrictions have resulted in more opportunities for insider trading. Remote working also gives unique chances for transmitting material nonpublic information, whether intentionally or inadvertently.

Conclusion

The COVID-19 pandemic has established an atmosphere where, tragically, people may have a higher desire to profit from material nonpublic information, in addition to creating unprecedented potential for insider trading. Corporations and people are feeling the economic burden as they navigate harsh government restrictions, including the mandated closure of numerous “non-essential” businesses. 

Big businesses have gone out of business, and unemployment claims have hit record highs. Although the impact of the COVID-19 pandemic on the international economy is still unknown, several companies and retirement investments are anticipated to be wiped out. Businesses must also keep track of their employees’ adherence to these regulations, ensuring that everyone is aware of and following the company’s insider trading policies. Companies might consider sending clear advisory communications to their employees to remind them of their commitment not to share or trade significant price sensitive information unavailable for the eyes of the public learned via their occupation. Due to the ease through which information can spread between many friends and family in a confinement situation, company directors, officers, and employees should all be reminded of the significant risks involved with insider trading, as well as best practises for maintaining privacy while in isolation. This involves alerting these persons that sensitive price sensitive information should only be communicated in private and that electronic devices exhibiting such data should not be accessible to non-insiders.

Corporations must carefully evaluate the implications of COVID-19 and other associated government limitations on their enterprises before making mandatory disclosures, and directors, officers, and personnel should be reminded not to trade on important information until these disclosures are publicly disclosed.


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Judicial Intervention and the Arbitration and Conciliation Act, 1996

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Arbitration and Conciliation Act

This article is written by Millia Dasgupta, from OP Jindal Global University. This article goes into the history of judicial intervention and arbitration, Section 34, and the new 2021 Amendment. 

Introduction 

The whole point of Arbitration is to settle disputes outside the purview of the courts. Arbitration can be defined as “a process of settlement of the dispute, between two or more parties, the intent of which is conveyed, either through a contract or agreement, and the parties agree to resolve their disputes, by the means of mediation or conciliation.” When parties consent to have their disagreement or dispute handled by a third party with authority and that decision is to be made binding on the parties, it is said that arbitration has taken place. An ‘award’ is the decision by an Arbitration Tribunal which is considered to be as important and binding as a decision given by a court of law. 

But despite the entire point of Arbitration is to settle disputes outside the purview of the courts, there are some instances where the court needs to intervene. It is hard to pinpoint the exact areas where the judiciary can intervene due to the fact that arbitration law is continuously evolving. 

Laws in place

Arbitration Act, 1940

The Arbitration Act, 1940 was based on the English and Welsh Act of 1934. It was Section 30 of the Arbitration Act of 1940 that governed setting aside awards and judicial intervention. This Section was highly disputed and was severely criticized. In Guru Nanak Foundation v. Rattan Singh (1981), the court criticized how complex and tedious proceedings were under the act and how there is always a legal trap waiting for the unwary parties. All proceedings would be challenged in court and such a provision made “lawyers laugh and legal philosophers weep”.

Arbitration and Conciliation Act, 1996 – liberalization of the Indian economy

There was a dire need to revamp India’s dispute resolution if India wanted other countries to do business with them when they opened up their economy. Thus, the legislature in order to modernize the legal framework repealed the act of 1940 and replaced it with the Arbitration and Conciliation Act 1996. The act was based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, and one of the main focuses of this Act was to reduce judicial intervention. 

Section 5 defines the extent to which judicial intervention can happen. Judicial intervention can happen before, during, and after arbitration. Sections such as Section 8 (Power to refer parties to arbitration) and Section 27 (Assistance in taking evidence) provide clarity on how judicial intervention can happen. Section 34 of the Act talks about how the courts can intervene when a tribunal has given a decision and how to put aside an award from an Arbitration Tribunal. 

Section 34 of the Arbitration and Conciliation Act, 1996

Pre-2015 Amendment – public policy is an unruly horse

Section 34 of the Act sets the procedure for setting aside an arbitration award. The grounds on which an award could be set aside were stated in Section 34(2)(a) prior to the 2015 amendment. Some of the grounds on which awards could be set aside were parties under some incapacity or the tribunal was not composed according to the parties. Section 34(2)(b) of the 1996 Act prior to the 2015 amendment gave grounds for setting aside awards if the matter could not be settled through means of arbitration or the award conflicted with public policy.

Section 34(2)(a) was precise and there was no scope for courts to widen the interpretation. On the other hand, Section 34(2)(b) included very wide terms such as ‘public policy’ which could be interpreted in many ways. Public policy in simple terms means the overall good and interests of the public good. Thus, from this definition, it is easy for the courts to interpret awards as being in conflict with ‘public good’, thus widening their scope for intervention. 

Public policy was not defined anywhere in the Act or in any other law. Justice Burrough defined public policy as an unruly horse because it was difficult to define. Indian courts have also called it an unruly horse. In cases such as Renusagar and Saw Pipes, Indian courts tried to give public policy some sort of structure. 

Renusagar Power Co. Ltd. v. General Electric Co

In Renusagar (1993), the courts held that awards that violate provisions under the Foreign Exchange Regulation Act 1973 shall be considered against public policy. This is because the Act was enacted in the interest of national security and economic benefit. The court also stated that public policy is limited to the fundamental policy of Indian law, the interest of India, and the principles of justice or morality. 

Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd – widening the scope of public policy

In Saw Pipes (2003), the court held that with regards to Section 34 the judiciary was similar to an appellate court or in other words a court of revision. The court also added another ground to public policy which was patent illegality. Patent illegality can be defined as a decision by the arbitrator that is so perverse and irrational that no reasonable person would reach it.

Such an interpretation opened up the floodgates to litigation as courts had more grounds on which they could intervene in Arbitration Awards. Many courts recognized the faults with saw pipes judgment but still had to abide by it because of the principle of stare decisis. Many critiqued Saw Pipes as a step backwards as it went against the main reason why the 1966 Act was drafted in the first place. 

Oil & Natural Gas Corpn.Ltd v. Western Geco International Ltd- Wider Interpretation 

In ONGC (2014), the court while citing the Saw pipes case stated that there was no decided meaning of “Fundamental policy of Law”. They state that the Fundamental policy of law should include three heads. 

  • Duty to adopt a judicial approach.
  • Adhering to the principles of natural justice.
  • A perverse decision that no reasonable person would have arrived at the same.

Thus the ONGC case not only widened the scope of public policy but gave the judiciary more grounds to intervene. The court also held that if the decision of the arbitration tribunal resulted in a miscarriage of justice, the award could be set aside or even modified. By further widening the scope of judicial intervention, the courts had defeated the purpose of arbitration by reducing its impact. 

Associate Builders v. Delhi Development Authority

In Associate Builders (2014), the court while relying on judgments such as Renusagar, Saw Pipes, and ONGC, the court stated that it was important that courts give due weightage to the arbitration awards before setting them aside. They upheld the criteria that would result in the violation of public policy (as stated in the ONGC case), i.e-

  • Contrary to the fundamental policy of Indian law;
  • Contrary to the interests of India;
  • Contrary to justice and morality; or
  • Patently illegal

With regards to a fundamental policy of Indian law, they stated that this aspect of public policy would be violated if a fundamental policy of India was violated. Such as the Foreign Exchange Legislature or orders from a superior court. 

With regards to the interests of India, the court stated that this ground “concerns itself with India as a member of the world community in its relations with foreign powers“.

With regards to justice and morality, the courts can only set aside an award on this ground if it “shocks the conscience of the court”. They further explained by stating that such an award wouldn’t necessarily be illegal but should “not be enforced given the prevailing environment of the day”. 

With regards to patent illegality, the court stated that the court could put aside an award on the following grounds. 

  • Contravenes substantive law of India. The illegal matter should not be of a trivial nature. 
  • Contravenes the Arbitration Act itself.
  • The tribunal fails to decide the dispute in accordance with the contract. 

While this case inspired courts to pass more pro-arbitration decisions, there was still scope for overreaching judicial intervention. Such as in cases where factual errors in the award would prove that the arbitrator’s award was whimsical and could be thus set aside on the grounds of patently illegal.  

2015 Amendment 

The 2015 amendment made major changes to the scope of judicial intervention, especially Section 34. These changes were based on the suggestions made in the 246th Report of the Law Commission of India on Amendments to the Arbitration and Conciliation Act, 1996. The Law Commission had considered the negative outcomes of the ONGC and Associated Builders case. They stated that the following cases eroded faith in arbitration proceedings, reduced India’s popularity as a destination for commercial arbitration, increased investor concern to the efficiency and speed of arbitration, and increased judicial backlog. In their eyes, there needed to be serious amendments. 

The Amendment added Explanation 2 [Section 34(2)] as well as Section 2(a). Explanation 2 of Section 34 stated that if the courts wish to set an award aside on the grounds of ‘violation of the fundamental policy of Indian Law”, it can not review the merits of the dispute. Bypassing this amendment, the law set down by ONGC v Western GECO was curtailed and courts could no longer interfere with a decision passed by an arbitrator. 

Similarly, Section 2(a) curtails the law set down by ONGC v Saw Pipes with regards to “patently illegal”. The Section lays down that the award may be set aside if the court finds a prima facie patent illegality in the award. The court can not set aside the awards merely because of an erroneous application of law or by reappreciation of evidence. Thus, awards can no longer be set aside on the basis that the arbitrator made errors when dealing with evidence. The amendment made no changes to the interpretation of justice and morality set out in Associate Builders. 

Ssangyong Engineering & Construction Co. Ltd. v. National Highway Authority of India Limited

Ssangyong Engineering (2019) is an important case post the 2015 amendment. The case confirmed that the broad definition of ‘fundamental policy of Indian law’ given in Western GECO does not hold true under Section 34 after the 2015 amendment. They relied on the 246th Report of the Law Commission of India and the supplement. The documents made suggestions on how the previous Act can be amended to ensure that “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” would not be widely construed. They defined the grounds of public policy as follows:

  • Contravenes Fundamental Policy of Indian Law –  The award should not be in contravention of factors such as laws protecting the national interest, disregard for orders from superior courts, and disregard for principles of natural justice. 
  • Contravenes Morality and Justice- Upheld the ratio in the case of Associate Builders where the award should shock the conscience of the court in order to contravene morality and justice. But while deciding its validity, the courts should look at the prevailing environment of morality. 
  • Patent illegality- It is the illegality that affects the root of the matter. But it should not include issues such as erroneous application of the law by the arbitration tribunal. However, this ground can be invoked if
    • No reasons are given for the reward.
    • The arbitrator did not give the reward in compliance with the contract. 
    • The arbitrator decides questions beyond a contract or his terms of reference.
    • A perverse award is given based on no evidence, or overlooking vital evidence, or based on documents taken in as evidence without informing the parties. 

2021 Amendment 

The 2021 amendment has added Section 36(3) of the Act which pertains to the enforcement of the arbitral award. It has given courts the power to grant an unconditional stay on awards if the award is induced by fraud or corruption or the making of the award was made through fraud or corruption. 

Criticisms of the Amendment

Critiques state that this has undone the work done by the 2015 amendment. The implementation could lead to excessive judicial interference. This is opposite to what the Indian legislature has envisioned for arbitration in India in the past. This provision can also put more strain on courts and increase pending cases. The amendment can also be used as a tool for harassing the other parties and to delay arbitration proceedings. There was no need for such addition as there were already provisions in the act to deal with awards induced and made through fraud and corruption. 

Fraud and corruption in the agreement 

According to the 2015 amendment, the proper forum to file a complaint of fraud and corruption was the arbitration tribunal. The tribunal was competent to evaluate comprehensive and voluminous evidence and conduct an in-depth analysis of the agreement and the contract. If the parties were not happy with the decision of the tribunal, they could file an application to set aside the award under Section 34. If they were not happy with the decision of the court, they could file an appeal under Section 37(1)(c) of the Act. Thus, there was no need for this amendment.

Fraud and corruption in the making of the award

Section 34(2)(b) was placed to set aside an award by the court if the award was induced by corruption under the condition that if the award was against public policy. If they were unsatisfied with the decision, they could appeal against it under Section 37(1)(c) of the Act. The previous Act laid out grounds under which parties could move under Section 34 but the new amendment does not seem to layout any such grounds. Thus the amendment merely puts an additional layer of judicial supervision without any adequate safeguards. 

Conclusion 

The main aim of arbitration is to make sure there is as little judicial intervention as possible. With evolving jurisprudence, we can see that the courts have many times tried their best to reduce judicial intervention. But it seems with the new amendment, the courts have taken a few steps back. In the following case laws and discussions, the article puts forth sets down in what scenarios the judiciary has the power to intervene and when they do not. 

References 

 

 


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All You Need to Know About – eBay Acquisition of Skype

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This article is written by Milendra Jain who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions)  from Lawsikho.

Introduction

Have you ever given a thought to, “Why do companies enter into Mergers & Acquisitions (the “M&A”)? or “What factors influence M&A?”. Answer to these questions lies behind the underlying synergies, sustainable growth and value creation through these transactions. M&A is also attractively because it can close swiftly and efficiently without much interrupting current operations. 

However, there have been several cases where M&A deals didn’t work out and the main evil behind such failure is that the companies are unable to meet post-closing integrations, therefore, not able to achieve and ascertain synergies, sustainable growth and value creation, which usually motivates M&A. Therefore, this article tries to analysis the failure of the deal between eBay and Skype.       

Why Merger and Acquisitions?

Globalization has deeply impacted the business landscape over a few decades. This resulted in a more strategic M&A as no company can expand its business through organic growth by enhancing sales internally and increasing output. Therefore, in order to achieve growth, various companies started strengthening their business through inorganic growth strategies. 

M&A are the transactions in which various companies are either consolidated or their ownership is transferred to another company. One of the basic reasons behind such transactions is creating an additional value called “Synergy Value” combined with various strategic reasons. The Synergy Value combines the power or value of the two companies involved in a transaction to leverage the positions of the companies involved. 

The benefits of M&A include, among others:

  • Diversification of the business.
  • Value Creation
  • Acquiring new technology and expertise.
  • Larger share in the market.
  • Increasing capabilities.
  • Financial benefits. 
  • Eliminating competition. 

Background of the Deal – eBay and Skype

eBay is a commerce company founded in 1998 in California, with the aim to connects sellers and buyers around the world through an online platform. Skype Technologies (the “Skype”) is a technology company that enables a person to make free video and phone calls through a voice over internet protocol (the “VOIP”).

In 2005, an online e-commerce company eBay acquired Skype Technologies, a European VOIP provider for USD 2.6 Billion. This deal becomes one of the talking points at that time as the price on which Skype was purchased was extremely high, given that skype manages to produce USD 7 Million in revenue.   

The rationale behind this deal was to promote the synergies between the company and to integrate the technology of both companies in order to increase and expand user growth engine asset and eBays alliances. 

However, eBay had been successful with dealing with PayPal in past, as PayPal was acquired by eBay in 2002 for USD 1.5 Billion which was another most expensive investment made by eBay. However, by the end of 2004, eBay succeeded to integrate PayPal into its business model. In 2005, with the same vision in mind, as to expand its business operations via means of VOIP communication, eBay approached Skype to fulfil its vision and acquired Skype in a high price auction

Aims of the Deal – eBay and Skype

Following are the aims of the deal:

  1. eBay saw Skype as a means to increase the numbers of members into eBay’s business structure as Skype has tens of million active users.
  2. As Skype emerged as a popular means of communication through VOIP, eBay saw this technology as it can bring many new members into its domain and such means can act as a strong method of communication between its members for buying and selling. 
  3. eBay aimed to integrate Skype into its commerce world with an objective to enhance online users experience as a quick way of communication.
  4. Skype was bought for eBay’s users as this would help in generating more customer loyalty and would increase the velocity of the trade among its users.   

The outcome of the Deal?

The users of eBay rejected the Skype technology as a mode of communication and considered as unnecessary for communication between its users. EBay was unable to integrate Skype into its business structure. Post acquiring the Skype, eBay does not chalk out a plan to utilize the Skype, as there was no information with the users how to utilize the Skype, except for the option to contact through Skype and the Skype users have no knowledge that Skype and eBay were connected. The Synergy which was depicted by eBay unfortunately never happened. 

Further, two tears after acquisition i.e., in 2007, due to the failure of the deal, eBay came up with an option to write down the value of Skype by USD 1.4 Billion. However,  Skype continues to perform alone as its revenue increase to USD 170 Million with a growth of 25% and added more than 37 million users in its VOIP technology reaching to 480.5 million registered users. 

Further in 2009, eBay Board roll out the intention to divest Skype because of the lack of synergies between the eBays and Skype and to focus on its core business. A meanwhile the Skype was also facing various challenges and Ip litigation. eBay was able to sell the majority of the stake in Skype to an investor group for a transaction value amounting to USD 2.75 billion and eBay retains a significant minority stake in Skype. Further, in 2011, eBay sold its remaining 30% stake in Skype to Microsoft for USD 8.5 billion and realised a net gain of more than USD 1.3 billion on its original investment in Skype.

Why eBay-Skype Deal fail?

M&A has been always considered as an inorganic strategy that creates synergies between the companies aimed to achieve growth that is much faster than organic growth. However, it always brings a great amount of risk and it can lead to the failure of such a deal and destroying the shareholder value. Similarly, the deal between eBay and Skype failed because eBay was unable to integrate Skype into its business. As, eBay has overestimated the synergies and the purchase price for Skype was extremely high, comparing its revenue only amounts to USD 7 million. Furthermore, the cultural differences between the two companies were too different to align into one culture.  

Moreover, the following are the reasons which lead to failure of the deal:

  1. Overpaying.
  2. Insufficient due diligence.
  3. Overestimating synergies.
  4. Cultural differences.
  5. Poor integration.
  6. Lack of management involved.
  7. External factors.
  8. Lack of a strategic plan.
  9. Misunderstanding the target company.

Considerations for Post M&A Integration

Often, the non-integration of the businesses often leads to the failure of the deal. Post-M&A integration of the business is a critical process wherein businesses are aligned with an aim to maximize potential synergies. Therefore, the following are some key points that are required to be considered for a successful post-M&A integration: 

  1. Tailoring the actions in such a way is in line up with the nature of the deal.
  2. Resolving the power and people issues quickly and appointing the Post-Acquisition Integration Team.
  3. Developing an overall integration plan.
  4. Establishing Communication Strategy.
  5. Starting integration at the time of announce of the deal.
  6. Committing to one culture or Cultural Alignment. 
  7. Value construction:
    1. Identification of cost and revenue synergies.
    2. Cost and revenue goals.
    3. Customer transition plan.
  8. Fulfilling Compliance, Regulatory and Antitrust issues. 

Conclusion

The most basic objective of the M&A deal is to leverage the synergies created through the combination of two companies. However, sometimes M&A could break or make a company because of the risks associated with such inorganic growth. Therefore, if the company fails to integrate both companies then M&A will fail. eBay had invested in Skype in order to leverage the use of the technology of Skype for increasing its commerce business, however, eBay was unable to integrate both businesses which resulted in a massive write-down of the value of the Skype. Therefore, it is essential to chalk out the integration plan and creating a strategy that can mitigate the risks associated with the M&A deals. Thus, various factors must be considered while entering into a deal and developing a constructive strategy to integrate the business. 


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All you need to know about the law of contract within the ambit of Private International Law

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Private International Law
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This article is written by Jannat, from Chandigarh University, Mohali. The article explains the law of contract in the light of Private International Law.

Introduction

Private International Law is the branch of law in each legal system that governs cases involving a foreign element. The nature of this foreign element will differ, but its presence is required before the rules of Private International Law can be applied. When all elements of a case are linked to Scotland, the rules of Private International Law are null and void, and the case is resolved according to the domestic Scots law. However, once this foreign element is present, whether as a result of the parties themselves or the subject matter of the dispute, the rules of Private International Law will apply. Private International Law has three main goals: (1) determining jurisdiction, (2) identifying applicable law, and (3) making foreign judgments more easily recognized and enforced. In recent years, there has been a significant trend toward harmonization of Private International Law, owing primarily to the work of the Hague Conference on Private International Law and the European Union.

From the dawn of time until 1991, the common law established the rules of Private International Law in respect of contractual obligations. It was bifurcated into two parts:-

  1. The common law doctrine of characterization determined what was within the choice of law rule or rules for contracts, and 
  2. The common-law rules for choice of law determined the law that applied to them

All of that came to an end when European legislation supplanted common law and established consistent European criteria for choosing the law applicable to contractual obligations originating in civil and commercial affairs. The legislation outlined the region in which it was to be implemented, as well as the procedures for the choice of law when such an issue occurred within it. In the Rome Convention, the law applicable to contractual obligations before 1980 was implemented into law by the Contracts (Applicable Law) Act 1990, which contains the choice of law rules for contractual obligations in civil and commercial disputes originating from contracts executed after 1 April 1991. For the then-member states of the European Union, the Rome Convention standardized the choice of law provisions for contractual obligations in civil and commercial affairs. 

The Rome Convention was always intended to be a transitory step in a larger endeavor to harmonize member states’ choice-of-law standards. In 2007, the Rome II Regulation, which controls the choice of law for non-contractual obligations, was adopted. Parallel talks to convert the Rome Convention into Rome I Regulation proceeded at a slower pace. Perhaps this was owing, in part, to a desire to widen the scope of the existing Convention to include certain complex areas that had previously been omitted. The Rome I Regulation, however, was enacted in 2008, and it went into force on December 17, 2009, and it applies to contracts made after that date. As a result, the Rome I and Rome II Regulations control the choice of law for duties in civil and commercial issues, subject to the date on which the question must be handled.

Scope

The scope of the Rome I Regulation has been established affirmatively in its  Article 1(1), which states that it shall apply to contractual obligations in civil and commercial affairs in situations involving a conflict of laws. Although the similar Article of the 1980 Rome Convention has a somewhat different language, there appears to be no significant difference between the two articles. The Regulation’s scope is likewise limited by Article 1(1), which states that it does not apply to tax, customs, or administrative issues. The stated exclusion of certain things as described in Articles 1(2) & Article 1(3) further limits the scope of the regulation. Article 2 stipulates that the regulation’s law will be enforced regardless of whether it is a member state’s law. The regulation, like the Convention before it, does not discriminate in its selection of relevant legislation, and the law of a non-EU member state is regarded in the same way as the law of an EU Member State.

Law applicable by choice

“The parties’ right to select the appropriate law shall be one of the pillars of the system of conflict-of-law rules in areas of contractual obligations,” explains Recital (11) of the Rome I Regulation. The importance of party sovereignty is shown in Article 3(1), which states: “A contract should be regulated by the law decided by the parties. “The decision must be made openly or plainly proven by the contract provisions or the facts of the case.” It’s worth noting that whether a governing law is chosen expressly or implicitly, parties are completely free to do so, and there’s no requirement that the law has any existing connection to the parties or the contract, i.e., parties are free to choose a completely neutral law that has nothing to do with their circumstances.

Express Choice 

Parties can specifically pick the law that will govern their contract by including a phrase in the contract that states that the deal will be regulated by the law of a specific nation. The ruling legislation can only be the legislation of a certain nation. Each geographical unit of a composite state shall be treated as a nation to determine the relevant legislation (Article 22(1)). A religious law, such as Sharia law, may not be used to control a contract (Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC003).

Implied Choice

In many circumstances, a contract may not have an express choice of law clause, but it is apparent that the parties anticipated or intended that the law of a certain nation would govern their agreement. If the implicit option can be “clearly proved by the provisions of the contract or the circumstances of the case,” it will be honored. The option must be “demonstrated with reasonable confidence,” according to the Convention’s corresponding requirement. A choice of a specific law, even if not stated, must be just that–a decision–and a court cannot infer a choice of law that it feels the parties would have made if they had put their thoughts to the issue.

Professors Mario Giuliano and Paul Lagarde’s report on the Convention on the law applicable to contractual obligations, popularly known as the Giuliano–Lagarde Report, provides guidance on the criteria to consider when assessing whether the parties have made an implicit choice of law. This advice is not exhaustive, but it covers topics such as reliance on a standard form governed by a specific system of law, a previous course of dealing between the parties under contracts governed by an express choice of law, an express choice of law made in related transactions between the parties, and the choice of a location where disputes will be settled by arbitration. For example, in the case of Egon Oldendorff v Libera Corp (1996), it was held, based on the terms of the Giuliano–Lagarde report, that where an international contract between a German and a Japanese company expressly provided for arbitration in London and was governed by a well-known English standard form of the charter party, the parties had immunized themselves from the application of English law in the absence of an express choice of law.

Division or change in the governing law

“By their decision, the parties can pick the law applicable to the whole or to a portion of the contract,” reads the last clause of Article 3(1). This permits dépeçage or the division of the relevant legislation. This option is constrained by the fact that it must be logically coherent since each distinct choice of law must correspond to a provision of a contract that may be controlled by a different law without creating inconsistencies. If there is a discrepancy, the parties have no effective option and must turn to the requirements of Article 4 to determine the appropriate legislation. Parties may modify the governing law of the contract at any moment, either by changing a previously agreed-upon decision or by making a decision that they had not previously made (Article 3(2)). Any change in the relevant legislation that occurs after the contract is signed should not jeopardize its formal legality or infringe on the rights of third parties.

Freedom of choice and mandatory rules

The freedom granted to parties under Article 3(1) to pick the law relevant to their contract is not absolute; rather, Article 3(3) serves to prohibit parties from evading the necessary norms of the legal system with which the contract and the parties are otherwise inextricably linked. “Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the parties’ choice shall not prejudice the application of provisions of that other country’s law which cannot be derogated from by agreement,” according to Article 3(3). 

For example, if all of the elements relevant to the situation are in Scotland, the parties will be unable to escape the mandatory rules of Scots law by choosing to have the contract governed by French law. While this option will be recognized, and French law will be the controlling law, it will be administered according to the obligatory rules of Scots law. Article 3(3) applies only where all necessary aspects to the situation are located in a single nation other than the designated nation. If an element may be found elsewhere, Article 3(3) does not apply. In the case of Emeraldian Ltd Partnership v Wellmix Shipping Ltd (2010), it was held that Article 3(3) of the Convention applies only when all elements relevant to the situation are located in a single country.

Similar to Article 3(3), Article 3(4) prevents parties from avoiding the application of mandatory Union law by choosing the law of a third state, stating that “where all other relevant elements to the situation at the time of the choice are located in one or more member states, parties choice of applicable law other than that of a member state shall not prejudice the application of provisions of Community law, where appropriate as implemented in the member state of a forum, which can’t be derogated by agreement” It is crucial to note that Article 3(4) has a broader reach since it applies even when the elements are situated in separate countries, as long as those nations are all member states and the law of a third state is chosen.

Law applicable in the absence of choice

In the absence of a choice by the parties, Article 4 of both the Convention and the Regulation establishes the law applicable to contracts. “If the relevant legislation to the contract has not been chosen in line with Article 3, the contract must be regulated by the law of the nation with which it is most closely connected,” it says. The applicability of dépeçage is addressed in the second clause. According to Article 4(2), the contract is most closely associated with the country in which the party who is to carry out the contract’s characteristic performance has his habitual residence, or, in the case of a body corporate or unincorporated, its central administration, at the time of the contract’s conclusion. Where the contract’s subject matter is a right in immovable property or a right to use immovable property, Article 4(3) gives a particular assertion; when the contract is for the transportation of goods, Article 4(4) gives a particular assertion. In Caledonia Subsea Ltd v Micoperi Srl (2003) it was held that the Article 4(2) presumption of the Convention should only be displaced under Article 4(5) when there is a clear preponderance of factors showing a closer connection with another country.

Specific contract

The Rome I Regulation includes rules for determining the appropriate law in 

Carriage contracts (Article 5)

Article 4(4) of the Rome Convention of 1980 establishes a specific presumption that applies to contracts for the carriage of goods. A similar provision can be found in Article 5 of the Regulation, which also governs passenger carriage contracts. In the case of contracts for the carriage of goods, Article 5(1) of the Regulation states that, in the absence of a choice, the law applicable to such contracts shall be the law of the carrier’s habitual residence, provided that the consignor’s place of receipt, place of delivery, or habitual residence is also located in that country. In the absence of this, the applicable law will be the law of the agreed-upon delivery location. 

Article 5(3) states that if the parties have not made a choice and it is clear from the circumstances of the case that the contract is more closely linked to a country other than those mentioned in Article 5(1) or Article(2), the law of that other country will apply.

Consumer contracts (Article 6)

When a consumer contract is entered into under any of the situations mentioned in Article 5(1), it is covered by Article 5 of the Convention (2). The customer will be covered in one of two respects in such circumstances. First, if the parties have decided on applicable law, that option will remain the contract’s underlying law, but the buyer will still be covered by the necessary rules of the law of the country in which he has his habitual residence (Article 5(2)). Second, if the parties cannot agree on an appropriate statute, the presumptions and rules of Art 4 will be replaced by the law of the country where the consumer has his or her place of business.

The Rome I Regulation updated these special security laws, which are now included in Article 6. Article 6(1) specifies the types of consumer contracts to which its provisions relate, namely contracts signed by a natural person (the consumer) for a reason that can be considered beyond his trade or profession with another person acting in the exercise of his trade or profession (the professional).

Insurance contracts (Article 7)

Insurance policies were not subject to special coverage under the Rome Convention, which only applied to contracts of insurance where the risk was located outside of the EU’s Member States (Article 1(3)). The Convention did, however, extend to all reinsurance contracts (Article 1(4)). Art 7 of the Rome I Regulation, on the other hand, gives insurance contracts special consideration.

Article 7 applies to insurance contracts that cover a “large danger” (as specified in Article 7(2)), whether or not the risk is located in a Member State, as well as all other insurance contracts that cover risks within a Member State’s territory. The terms of these bespoke clauses do not apply to reinsurance contracts. The law chosen by the parties in compliance with Article 3 governs an insurance policy covering a significant risk. The insurance policy would be regulated by the law of the country where the insurer has his habitual residence if the parties have not agreed on a law.

Individual employment contracts (Article 8)

Individual employment contracts are governed by particular rules set out in Article 6 of the Convention and Article 8 of the Regulation. Even though the provisions are not identical, they are rather similar and will be interpreted similarly (Koelzsch v Luxembourg (2012)). The default rule under Art. 8(1) is that an individual employment contract is regulated by the law selected by the parties. This option is limited, however, by the fact that it cannot deprive the employee of the security provided by conditions that cannot be waived by an agreement under the law that would have applied elsewhere in the absence of choice under Article 8.

The basis for these special provisions may be found in Recital (23) where it is indicated that when contracts are formed with weaker parties, those parties should be protected by the conflict of law principles that are more favourable to their interests than the general standards.

Consent and material validity

The law that would apply if the contract or term were legitimate under the appropriate instrument determines the existence and validity of a contract or any term of a contract, according to Article 8(1) of the Convention and Article 10(1) of the Regulation. The putative relevant law is a term used to describe this situation. According to the Giuliano–Lagarde report (p 28), this provision was meant to encompass all aspects of contract formation “other than general validity,”. This phrase is recognized to mean that each instrument’s respective article is intended to cover any matter relating to the formation of the contract that is not governed by the other provisions of the relevant instrument, i.e. those issues referred to as matters of essential validity under common law.

Article 10(2) of the Regulation goes on to say that a party may rely on the law of the country in which he has his habitual residence to establish that he did not consent if it appears from the circumstances that determining the effect of his conduct according to the law specified in Article 10 would be unreasonable. Article 8(2) of the Convention contains a similar provision, although with somewhat different language.

The introduction of this discretionary authority is intended to address the problem that in certain legal systems, the offeree’s silence is seen as acceptance (Giuliano–Lagarde Report, p 28). Ex-Judge Mance remarked in Egon Oldendorff v Libera Corp (1995) that implementation of Article 8(2) of the Convention should have a “dispassionate, globally-minded attitude”.

Formal validity

Article 11 of the Regulation, which is analogous to Article 9 of the Convention, governs issues of formal validity. The Giuliano–Lagarde report (p 29) defines “form” as “any outward manifestation necessary on the part of a person expressing the intent to be legally bound, and without which such expression of will would not be completely effective”. Article 11 promotes formal validity by outlining a variety of laws that may be used to evaluate it; compliance with any of these criteria will ensure formal validity.

The main rule of Article 11(1) is that a contract is officially legitimate if it meets the formal criteria of the legislation that regulates it in substance under the Regulation, or the law of the country where it is concluded.

Article 11(2) states that a contract concluded between persons who, or their agents, are in different countries at the time of its conclusion is formally valid if it meets the formal requirements of the law that governs it in substance under the Regulation, or the law of either of the countries where either of the parties or their agent is present at the time of conclusion, or the law of the country where either of the parties or their agent is present at the time of conclusion, or the law of the country where either of the parties or their agent is present.

Article 11(3) covers “unilateral activities” intended to have legal effect in connection with a current or future contract.

Article 11(4) states that the law of the nation where the consumer has his usual abode governs the formal validity of consumer contracts. 

Article 11(5) specifies a particular norm for the formal validity of contracts involving immovable property.

Capacity

Article 1(2)(a) excludes questions of natural people’s legal capacity from the Regulation’s reach, however, this is declared to be without prejudice to Article 13. “In a contract concluded between persons who are in the same country, a natural person who would have the capacity under the law of that country may invoke his incapacity resulting from the law of another country only if the other party to the contract was aware of that incapacity at the time of the contract,” says this article, which is almost identical to the earlier Article 11 of the Convention.

This rule is quite limited in scope, particularly because it only applies to natural people and only when those individuals contract in the same nation. The reference to an inability coming from the legislation of “another nation” is less explicit, with no further direction as to how this other legislation should be determined.

Nature of law applicable

The applicable law identified by the Regulation governs, in particular, 

  • matters of interpretation (Article 12(1)(a)); 
  • performance (Article 12(1)(b)); 
  • the consequences of a total or partial breach of obligations (Article 12(1)(c)); 
  • the various ways of extinguishing obligations, as well as prescription and limitation of actions (Article 12(1)(d)); and 
  • the consequences of nullity of contravention (Article 12(1)(e)). 

The terms of Article 12(1) are nearly identical to the Convention’s comparable Article 10(1). Article 12(2) (Article 10(2) of the Convention) states, “regard shall be given to the legislation of the country in which performance takes place in regards to the mode of performance and the procedures to be taken in the event of faulty performance.”

Restrictions on the applicable law

Overriding mandatory provisions 

Overriding mandatory provisions are those that a country considers essential for safeguarding its public interests, including its political, social, or economic organization, to the point where they apply to any situation falling within their scope, regardless of the law that would otherwise apply to the contract under the Regulation (Article 9(1)). The notion of overriding mandatory provisions is the same in both agreements, they are provisions that a legal system believes so vital that they should be enforced regardless of the prevailing law under its Private International Law norms.

According to Article 9(2) of the Regulation, “nothing in this Regulation shall limit the implementation of the overriding mandatory provisions of the law of the forum.” Article 7(2) of the Convention achieves the same purpose, though in a different way. This means that the forum is free to apply the overriding required elements of its law regardless of whether another law applies to the contract.

Article 9(3) states that the overriding required provisions of the law of the nation where the contract’s duties must or have been executed may be given effect since those overriding mandatory laws render contract performance unlawful.

The public policy of the forum

According to Article 21 of the Regulation, “the implementation of a provision of any country’s law named by this Regulation may be rejected only if such application is clearly incompatible with the public policy of the forum.” This is nearly identical to the wording of its predecessor in Article 16 of the Convention. It is not the foreign provision in general that is opposed to Article 21’s application, but its application in the specific matter before the court.

Article 16 of the Convention was cited in Duarte v Black & Decker Corp (2007) to overturn a restrictive covenant governed by Maryland law in circumstances where the employee was working in England at the time he signed the covenant, the job he wanted to take was based in England, and the covenant would be unenforceable under English law.

Conclusion

While the Private International Law of obligations (jurisdiction and choice of law) has been largely transferred to European Private International Law, the process is far from complete, and some problems of choice of law in the context of the law of obligations are still left to the common law. The common law’s methodologies are not completely foreign to European Private International Law, which was established on the foundations of national laws, including English law; and, above all, the common law of Private International Law is how the subject was formed and polished in English courts. Its techniques offer a useful alternative to the new framework of Private International Law being established by European Union institutions; however, knowing them shows why they have no position in the European law field of Private International Law.

References


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