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veyrahlaw · 5 years ago

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CONSIDERING LITIGATION IN INDIA | PART I – BEWARE OF WHAT YOU WISH FOR!

It is a common view among members of the business community that engaging in litigation is a time consuming and distracting exercise. It takes away precious resources from the business and management, which can instead be productively deployed in enhancing business value. But, sometimes litigation is inevitable. From an Indian context, in many cases, it is unavoidable. However, it should ideally only be a means to achieve a larger commercial objective. But, all foreign investors and businesses should bear in mind that the realities of enforcement in India are very different from a developed market. The Indian judicial system is agonizingly slow and eventually if one does obtain a final decision from the first level courts, they may still have to contest the verdict through multiple appellate levels. The World Bank’s 2019 report for “Doing Business” ranks India at 163 out of 190 countries for enforcement of contracts. On an average, it takes 1,445 days to enforce a contract in India! But, that is just an average. In reality, commercial disputes depending on their complexity can meander within the judicial system for much longer. In this backdrop, it is important for all parties to approach disputes in India from a resolution standpoint as opposed to a ‘winner takes all’ approach.

This write up is part of a series through which we will discuss the dispute scenario in India, examples of pain points within the system and some practical recommendations to navigate the system. This is of course for those people who are not accustomed to the realities and nuances of the judicial system in India. Usually, apart from large domestic corporations, most businesses in India or foreign businesses operating in India have seldom encountered a commercial litigation with the Indian judicial system.

Present Day Challenges

But, before we delve into navigating the challenges within the system, it may be useful for domestic and foreign business persons to firstly understand the present challenges.

Structure of litigation practices: Litigation practice in India is usually separated from the transactional or advisory side of legal practice. Hence, litigators normally have only a peripheral knowledge of the workings of a transaction and the processes involved in concluding it. For instance, when a dispute does arise from a concluded M&A deal, it is not just the final agreements that matter. But many a times the dispute could involve aspects from while the deal was being structured. The documents that were reviewed in the due diligence process could provide vital clues in an M&A litigation. A detailed understanding of the transactional side can offer invaluable insights in a litigation scenario; to ask the right questions and probably raise the relevant issues. But, litigation teams rarely combine the expertise of transaction teams who could provide such assistance during the planning stages of a litigation.

General approach to litigation: Most litigation practices across India handle commercial litigation under the general civil litigation area of practice. While many commercial disputes are contractual disputes on property or supply of goods or services, the nature of the commercial dispute is becoming more nuanced. Complex disputes around specialized sectors have been reaching the judicial system and the lack of sectoral specialization at a trial level is evident.

Counsels are not invested in the outcome: Another challenge is the current compensation structure for litigation. Unlike some developed markets where litigation financing and success-based fee structures are common, Indian litigators are paid for their appearances in court. They are rarely engaged while formulating a strategy when the dispute arises. More often than not, litigators are given a mandate by clients only once the matter is about to reach the judiciary. The litigation solicitors would mostly chalk out the litigation strategy and would have themselves been involved only when a court case becomes imminent. Commercial litigation in India, unlike other forms of litigation, should be approached from a standpoint of attempting to drive the best possible settlement for the litigating parties. Of course, each client may have a different objective which needs to be borne in mind. But, when the counsels handling the litigation are unaware of the commercial aspects and rationale, it becomes a challenge to provide a holistic view keeping the commercial objective in sight.

Clients need to be apprised on the merits of the dispute: Clients need to understand that no lawyer can guarantee the outcome of a case in court. But, a reasonably competent lawyer should be able to review the facts of the case and provide a fair assessment regarding the merits of a commercial dispute. This brings us back to the importance of chalking out a strategy for the litigation before jumping into it headlong. Clients must be sensitized on the costs involved and actual duration for any possible outcomes. This would allow clients to make an informed decision to pursue the best course of action. But, given the incentive structure for litigation, the task at hand can become counterproductive for litigation lawyers.

Absence of costs & Penalty regime: Another pressing problem within the judicial process and especially for commercial disputes is the lack of a proper costs and penalty regime. Although recent amendments in the procedures for commercial courts have introduced the ‘costs to follow the event’ principle, the large number of courts and tribunals that decide on commercial disputes are not bound by any rules regarding costs. The judges have discretion to award costs in favour of the prevailing litigants, but it is rarely done. The lack of any costs on the party that has lost the case has a serious impact across the litigation process. This allows a free hand to the parties in a litigation to raise any number of frivolous issues bereft of any merit. This is also used as a strategy to delay the case by draining the resources or frustrating the party seeking a relief. The more the number of issues raised, the longer the trial and proceedings continue, to decide upon each of the points of dispute.

Low Threshold for Admission: Flowing from the above, is another troubling aspect that one encounters. There is a seemingly low threshold in most courts to admit a claim and initiate civil proceedings. While the law prescribes certain safeguards that a judge should adhere to before admitting a claim and commencing proceedings, judges rarely delve into great detail during the preliminary stages. They merely go by the arguments advanced by the appearing counsels and the semblance of a legitimate issue would admit the claim for proceedings at the first level courts. Further, the presence of a senior counsel arguing the merits of a case would enhance the chances of the matter being admitted for trial irrespective of the quality of evidence supporting the claims. This also creates a perverse incentive for litigants to make all sorts of unsubstantiated claims in proceedings just to get the matter admitted. To compound matters further, the offence of perjury (false statements before court) is not treated with the seriousness that it demands.

Perjury is not sufficiently penalised: Perjury is rarely penalised in Indian courts. The judge deciding upon an issue will rarely penalise a party who is found to have made incorrect or untrue statements in their affidavit submitted during the proceedings. The lack of a deterrent for such an offence means that litigating parties rarely worry about including conjectures and wild unsubstantiated claims in their court documents. Many a times, certain inaccurate statements are deliberately included to build a compelling case for admission and to commence trial. During or upon conclusion of the trial, the judge merely denies claims based on inaccurate statements but rarely ever penalises the concerned party.

Training at Trial Courts: Many of the judges and adjudicating officers appointed in the various trial courts and tribunals are not specialists in the field of subject they decide cases on. They usually tend to learn on the job. Unfortunately, as they gain experience over the years, they may end up being transferred to an entirely new area of judicial practice. This creates challenges within the system for continuity and lack of sectoral expertise to encounter the range of specialised issues brought up to them.

Tribunalisation of Justice: Another factor that warrants attention is the rampant tribunalisation of many areas of judicial discipline. While originally tribunals were set up to expedite the service of justice, the results of the tribunals have not matched the expectations. The tribunals are not necessarily bound by the conventional rules of procedure that govern Indian courts, but they are manned by the same cadre of judges trained within the conventional procedural system. Hence, they tend to continue to follow the rules of procedure practiced in general courts, albeit with certain relaxations. The other pressing concern with respect to the tribunals are the lack of sufficient infrastructure. The tribunals have poor infrastructure and severe shortage of manpower. They suffer from the usual infirmities that plague the general judicial system and have hence, just created an added layer of judicial process.

Procedural Challenges: The procedural rules followed in India were originally incorporated more than a 100 years ago and continue to be the bedrock on which justice is administered in the 21st century. This is an obvious concern and does not warrant further elaboration. One can only imagine the challenges faced by applying rules prescribed in 1900’s to the commercial realities of the 21st century.

Interim relief practice: Given the systemic deficiencies in achieving finality before Indian courts, litigation in India has developed a lucrative area of practice in the nature of interim reliefs. Interim reliefs are essentially special discretionary powers that a court has for awarding certain reliefs by way of orders pending final decision on the claim. Under Indian conditions, the utility of the interim relief is that it can determine the dispute midway, since the interim relief could be either temporary or permanent. Once a party has secured an interim relief that goes in its favour it can compel the other party for a settlement. This works as a strategy since finality of the dispute may take years in an Indian court.

The above issues are not an exhaustive list of the challenges that affect the Indian judicial system, but are meant to offer an insight into the various bottlenecks that one should be mindful of when pursuing litigation in India. Also, these are not issues that the Indian government is unaware of. Multiple law commission reports have been generated by various committees highlighting many of the above detailed pitfalls with recommendations for reform. The entire judicial system and the litigation set up in India requires radical overhaul and sustained efforts to transform itself into a modern, efficient judicial system that can deliver on the ideals of justice for all. Successive governments have taken steps to try and improve the system; but like with all things in India, they are too few and too slow. Therefore, for people and businesses looking to avail of Indian courts to secure reliefs, they must learn to navigate the existing system and opt for the best course to achieve desired objectives.

In the next part of this series, we will offer certain practical solutions to try and work within the system and achieve the desired objective. As mentioned at the outset of this article, one should not seek to litigate a commercial claim in India with an aim to achieve a final outcome. It would at best end up becoming a self-defeating victory or at worst, years of time and precious resources spent with no tangible outcome. Litigation in India as on date can at best be used as one of the means to achieve a commercial objective and should not be considered the sole means to address commercial grievances. Parties to commercial disputes in India must always seek to achieve the most plausible form of settlement possible, rather than squander each other’s resources and time within Indian courts.

Ajay Joseph | Partner, Veyrah Law; Anshu Bhanot | Of Counsel, Veyrah Law

#Litigation #Litigation India #Challenges in Litigation #Dispute #Dispute Resolution #Business in India #Settlement Strategy

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veyrahlaw · 5 years ago

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STUCK IN AN ‘ASSURED RETURN’ REAL ESTATE SCHEME? THE INSOLVENCY CODE COULD HELP YOU

The builder community has for long been engaging in an ingenious mechanism of financing construction projects, by offering the public attractive ‘assured return’ schemes as flat / commercial real estate purchases. There are multiple cases of builders having raised large amounts of capital from buyers on the pretext of providing them such assured returns and subsequently being unable to meet repayment obligations. In this context, the Insolvency and Bankruptcy Code, 2016 (IBC) has been a real game changer.

The IBC is a forum meant to revive unviable borrower enterprises by allowing the market / lenders to redistribute the assets and resources of such businesses to other financially solvent businesses. In this regard, a builder who has raised funds from public (or causing them to take home loans to be used by the builder) by assuring them an attractive return under a real estate investment scheme will become a debtor to such people. Such buyers would qualify as financial creditors under the IBC since they would have essentially provided money to the builder at a fixed rate of interest, payable on monthly or annual terms or for an assured sum repayable within a certain time frame. The inability of a builder to repay such a buyer would make the builder a defaulting debtor under the IBC. The concerned judicial forum under the IBC has upheld this principle in multiple such cases in the recent past. Further, the recent amendments to the IBC that cover homer buyers within the definition of a financial creditor has also added to the protection to buyers in such assured return schemes.

Buyers in real estate projects who qualify as financial creditors can avail the options under the IBC to ensure that their funds are safeguarded, and amounts recovered to the extent possible. But, prior to initiating any action for default, they should ensure that they have the following in order:

all the relevant agreements and paperwork documenting the legal obligation of the builder to provide them the assured return on a regular basis;

proof of payments made to the builder entity undertaking the project;

the bank account to which funds were transferred was under the name of the builder entity executing the project;

clarity regarding the exact dates on which builder was due to make payments and dates of default by the builder (amount should be in excess of INR one lakh);

identify if builder has undertaken any large financing from institutional lenders for its project.

The concerned buyers should be mindful that lack of appropriate paper work could jeopardise their ability to recover or protect their investments. Once the above basic diligence is completed, the buyer can file an application before the concerned National Company Law Tribunal (NCLT) in whose jurisdiction the builder entity has its registered office. The application is essentially to declare the builder entity as insolvent i.e., being unable to repay its debts to the buyers. The effectiveness of the IBC in such situations comes from the fact that the promoters / management of the builder entity in question would lose control of the entity and the specific project, once the NCLT admits the application against the builder entity. Under the IBC an independent professional, selected by the concerned buyer, is required to take control of the errant builder’s company and project. Thereafter, a committee of the financial creditors, including the concerned buyer, would decide the fate of the builder’s business and project. The potential threat of losing control over the business or likely distressed sale of the business would certainly ensure that a wilfully defaulting builder will resolve the repayment concerns of the buyers. It is important to note that the IBC is not a forum for recovery of disputed claims or amounts. But, it is certainly the best forum to address repayment concerns of buyers arising due to wilfully defaulting, but otherwise financially solvent, builder entities.

Ajay Joseph

Partner, Veyrah Law

This article was first published in DNA Property. Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.

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veyrahlaw · 5 years ago

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VEYRAH LAW ADVISES OLX ON ITS ACQUISITION OF AASAANJOBS

Naspers-funded OLX Group has acquired Aasaanjobs to strengthen its jobs classifieds vertical in India for an undisclosed amount. The deal was completed through a combination of a primary investment and secondary share purchase.

Veyrah Law advised OLX, led by partner Ajay Joseph; associates Anshul Pandey and Priyanka Zaveri. The Veyrah Law team assisted OLX with structuring, due diligence, negotiating and signing the transaction documents and closing.

Shardul Amarchand Mangaldas advised Aasaanjobs, its founders and the existing investors IDG Ventures, Pandara Trust. Inventus and Asapada, led by a team of partner Amit Khansaheb, partner Vishruta Kaul, and senior associate Pratyush Singh.

OLX Group is a global product and tech group which operates a network of market-leading trading platforms in over 40 countries under market-leading brands such as Avito, dubizzle, letgo, OLX, Stradia, Storia, and more.

Aasaanjobs was founded in 2014 and is a recruitment marketplace for blue and grey-collar jobs in India. It uses advanced technology through its platform, to enable end to end recruitment via a two-way matchmaking algorithm that filters and connects candidates whose profiles and job expectations best match employers’ requirements.

The deal was completed on December 25, 2018 and announced on January 7, 2019.

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veyrahlaw · 5 years ago

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DOUBTFUL RECEIVABLES IN INDIA: THE INSOLVENCY CODE SOLUTION

The Insolvency and Bankruptcy Code, 2016 (Code) was legislated with the intent to resolve the banking crisis that had engulfed the Indian economy. While the Code provides banks and other financial creditors a theoretically faster mechanism to resolve their bad debts, the infrastructural and procedural aspects surrounding the resolution process are leading to delays. The National Company Law Tribunals (Tribunal) which are the adjudicating authorities under the Code, are understaffed to deal with the vast number of cases being filed. Faster resolution of debts has further been complicated by frequent amendments to the Code. The jury is still out on whether the Code and related enforcement mechanisms have rendered substantial benefits to the banking industry.

However, a welcome beneficiary of the Code has been the domestic and/or foreign vendor supplying goods or rendering services (Suppliers) to businesses in India. Until the introduction of the Code, Suppliers were dependent on the cash flow situation or the discretion of their customers for receiving payments. It is common knowledge that most Indian businesses rarely pay their vendors on time and quite often business losses are passed onto vendors. This severely impacts businesses by causing working capital challenges due to delayed payment cycles.

But, with the commencement of the Code, Suppliers have been empowered significantly as they can utilise the Code to their benefit to recover erstwhile bad debts. This shift of powers, in an Indian context, was demonstrated best by the recent case of Reliance Communications settling Ericsson SA’s outstanding dues of approximately USD 67.42 million. Ericsson SA was a Supplier to Reliance Communications and had initiated the process under the Code as an operational creditor to recover unpaid dues. Under the Code, Suppliers are categorised as operational creditors.

An ‘operational creditor’ can initiate an insolvency process against a defaulting corporate for unpaid dues. “Operational Creditor” means a person (either foreign or domestic) to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. “Operational Debt” would include a claim from a domestic or foreign vendor for supply of goods or services. Most domestic and foreign Suppliers would be covered within the definition of the term ‘operational creditor’.

Under the Code a defaulting customer (Corporate Debtor) will suffer severe consequences if an operational creditor’s claim is admitted by the Tribunal. Once the operational creditor’s claim is admitted, the controlling persons of the Corporate Debtor lose control of the business!The control of such a defaulting customer is immediately entrusted with a professional called the Interim Resolution Professional / Resolution Professional (Resolution Professional). The Resolution Professional is then required to either remedy the defaulting customer’s business by way of a third party take over or liquidate the business assets. Either of the options are meant to ensure that all creditors of the Corporate Debtor receive their unpaid dues to the extent possible.

Below, we have explained the steps for a Supplier to file a proceeding with the Tribunal and its advantages over conventional civil remedies in India.

WHEN CAN A SUPPLIER BECOME ELIGIBLE TO PROCEED UNDER THE CODE AGAINST A DEFAULTING CUSTOMER?

Before initiating any steps under the Code, the Supplier should check certain important points to avoid the claim from being rejected by the Tribunal.

The unpaid amounts should be with respect to supply of services or goods.

The unpaid amount should be in excess of INR 1,00,000 (approx. USD 1,400).

The unpaid amount should have become due and payable to the Supplier either by way of a contract or express acknowledgement by the defaulting customer for payment on a particular date.

The defaulting customer (client or consumer) should not have raised any dispute on the Supplier regarding the invoice, goods or services in question before the formal notice under the Code is sent. Existence of a genuine dispute prior to sending the formal notice will lead to rejection of the claim by the Tribunal.

The debt in question should not be older than 3 years.

The validity of a Supplier’s claim will be dependent on the facts and circumstances of each matter. But, a positive confirmation on the above points will ensure a higher degree of success in sustaining the claim.

CAN ALL DEFAULTING CUSTOMERS BE MADE ACCOUNTABLE UNDER THE CODE?

The provisions that are currently operative, can be used only against companies, limited liability partnerships (LLP) and other body corporates. Body corporates would include any other statutory organizations or entity which is different from its stake holders. If a Supplier has unpaid dues against a partnership firm, proprietorship firm or such other unincorporated association of persons, they cannot initiate action against them under the currently operative provisions of the Code.

HOW LONG DOES THE RECOVERY PROCESS TAKE?

Practically, if the Supplier has a legitimate undisputed debt, the defaulting customer would approach the Supplier to settle the outstanding dues, once an application is filed with the Tribunal. However, many Indian businesses attempt to defend the proceedings before the Tribunal and the matter could proceed for anytime from 2 months to 6 months until the settlement of the claim / admission of insolvency application. Settlement of the claim even within a year, is also a significant advantage compared to the timelines under any other conventional civil action in India. Enforcement in India is notoriously slow and conventional methods rarely offer any advantage to an unpaid Supplier.

WHAT IS THE PROCESS FOR RECOVERY?

The first step to initiate proceedings under the Code against a Corporate Debtor is to issue a statutory notice to the defaulting Corporate Debtor in a format prescribed under the Code. Within 10 days if the Corporate Debtor does not repay the dues, the Supplier can initiate proceedings by filing an application with the Tribunal for resolution of the debt. A significant advantage of the process under the Code is that any frivolous counter claim or dispute raised by the Corporate Debtor after receipt of the statutory notice is usually disregarded by the Tribunal.

WHICH TRIBUNAL SHOULD A SUPPLIER FILE HIS CLAIM IN?

The Supplier should file the application before the Tribunal which has jurisdiction over the area in which the Corporate Debtor’s registered office is located. The jurisdiction of all the Tribunal benches is listed on the website of the Ministry of Corporate Affairs in India. For e.g. the Tribunal in Mumbai has the jurisdiction to hear proceedings against all companies / LLPs which have their registered office in the states of Maharashtra & Goa.

WHAT ARE THE STATUTORY COSTS INVOLVED?

The Supplier does not have to incur significant statutory costs to initiate an application under the Code. The statutory fee payable for filing the application is INR 2,000 (approx. USD 30). Apart from this, a Supplier will have to incur costs for the professionals it engages to represent itself before the Tribunal and other general expenses for stamp duty, notarisation etc. Miscellaneous expenses other than professional fees could be in the range of INR 10,000 (approx. USD 145)

WHAT SUPPORTING DOCUMENTS ARE REQUIRED TO BE FILED IN SUPPORT OF THE SUPPLIER’S CLAIM?

The Supplier in support of its claim must file the documents listed below (among others) to prove the existence of the debt and it being due and payable:

a signed contract with Corporate Debtor for the supply of goods and/or services;

last paid invoice / proof of last payment by Corporate Debtor;

copy of unpaid invoice and/or statutory demand notice delivered to Corporate Debtor; and

certificate from the banker of the Supplier that payment has not been received from the Corporate Debtor.

IS IT MANDATORY FOR THE SUPPLIER TO APPOINT A RESOLUTION PROFESSIONAL?

No, it is not mandatory for a Supplier to appoint a Resolution Professional. The Resolution Professional for all Supplier / operational creditor applications will be appointed by the Tribunal, if not proposed by the applicant Supplier. The fees for such Resolution Professional are to be borne by the Corporate Debtor.

WHAT SHOULD BE THE OBJECTIVE OF THE UNPAID SUPPLIER?

The Supplier should seek to settle the dues if the customer / Corporate Debtor is willing to discuss and offer a settlement. They could at the least seek to recover a negotiated amount that would allow them to offset the expenses incurred for pursuing the claim along with 75-80% (if not 100%) of their written off debt.

OTHER USEFUL STRATEGIC CONSIDERATIONS

It may not be a useful strategy to file a proceeding before the Tribunal in every situation, even though, in theory, a Supplier may have a good case to file against the Corporate Debtor. Outlined below are some practical points, among others, to consider before initiating any action:

What is the Corporate Debtor’s turnover, assets and net worth?

If the Corporate Debtor in question is already an insolvent entity, it would be a waste of time to attempt a recovery against such an entity. The chances of compelling a settlement are significant if the defaulter in question is a solvent company and has proportionately material net worth, business assets and turnover.

Have other creditors (banks or other lenders) initiated proceedings against the Corporate Debtor? Has the Corporate Debtor already been categorised as a defaulter by banks?

If other creditors have initiated proceedings against the Corporate Debtor in question, it would be more useful to file one’s claim with the already appointed Resolution Professional as opposed to initiating separate applications against the Corporate Debtor.

Is the Supplier’s debt extremely significant in comparison to the Corporate Debtor’s net worth or turnover?

If the Supplier’s debt is a significant portion of the overall debt of the Corporate Debtor, the chances of recovery get reduced. On the contrary, if the Supplier’s debt is of a proportionately low value compared to other bank and formal debt incurred by the defaulting customer, it would be a good case to pursue.

CONCLUSION

The Code is an empowering tool in the hands of both domestic and foreign Suppliers and can be used effectively depending on a Supplier’s fact pattern. It is a boon for businesses who were previously frustrated without a practical remedy against a defaulting customer, given the delays and costs involved in litigating before normal civil courts in India.

Most importantly the provisions of the Code will act as a disciplining tool for businesses in India, ensuring that vendor / supplier payments are managed efficiently. This will in turn prevent locking up precious working capital in all stages of the economy and allow better cash flow across businesses.

Lastly, Suppliers must bear in mind that the Code and Tribunal are beneficial only for acknowledged and undisputed debts and are not meant to be a substitute for other contract dispute resolution forums.

Ajay Joseph (Partner, Veyrah Law) and Anshu Bhanot (Of Counsel, Veyrah Law)

Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.

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