Is It Clean Up or Witch-Hunting

Recent events have given rise to the necessity to visit the area of economic offences linked to politics. The Penal Code of the last century may not be adequate to meet the current situation.

In 1991 when Prime Minister P.V.Narasimha Rao and his Finance Minister, Dr.Manmohan Singh brought in the concept of Public-Private partnership as an avenue to revive the rural economy and thereby the economic health of the nation, the same was welcomed by people in India and outside, It was found that rural India was the most neglected in terms of infrastructure, education and employment opportunities. The new economic policy encouraged businessmen and industrialists to invest in rural India by establishing business and manufacturing units. These units led to better road, better infrastructure and employment opportunities in rural India.

In order to attract investment in rural India, the Governments of the day were obliged to offer attractive terms to the entrepreneurs so the terms included making land available at attractive prices, provide for supply of water and electricity at concessional rates and also offering tax rebates. Without these offers, no industrials or businessman would venture to invest in rural India and the Governments of the day were acclaimed and appreciated for bringing in capital investment into rural economy.

The policy if liberalisation was continued by successive Governments that led to a vast improvement in the infrastructure if rural India and if today sleepy towns like Eluru or Salem are vibrant cities thanks should go to the money invested by investors in rural India.

White collared crime generally denotes offences by persons who are not habitual offenders or those who commit offences out of necessity. Persons employed in Government or business establishments leading to a fairly comfortable life sometimes indulged in cries and these persons came to be designated as while collared criminals.

Of late every educated person is charged with a crime is sought to be labelled as white collared criminal. The tendency is more when transgressions are alleged in those in public or private employment.

In our culture, greeting friends and well-wishers on occasions like festivals or birthdays are common. One cannot find fault with a businessman if he offers a gift of flowers on a Diwali or new year day to his friends and well-wishers.

The concessions offered by the Governments for establishing industries and business in rural areas are considered as unethical practice indulged by those in power at that time. The development of rural India and the boost in rural economy cannot be lost sight of.

Successive Governments have taken up on themselves the task of probing through transactions of the past to fix a wrong doing on someone or other. Most of these times, the wrongs are notional. A businessman investing on the strength of the promise made by the Government of the day cannot be penalised by a successor

Government on the allegation that the earlier promises made were tainted. Such exercises have led to the launching of prosecution against businessman and administration and some politicians. An administrator who gives effect to the decision of the Government of the day does his duty and he cannot be faulted if the project fails or later appears to be tainted so long as the administrator performs his duty without offending the provisions of the Prevention of Corruption Act, that is to say not making a personal profit to himself. He should not be scandalised and prosecuted.

The definition of crime in the Penal Code does not appear to be apposite to the offences alleged against the administrators or businessmen. A businessman is under no obligation to question the motives of the Government which granted concessions for improvement of the economy. It is monstrous to accuse such businessmen of the offence of criminal breach of trust, the accusation and charge are relevant for the pre-trial stage. Invariably, the accused is arrested and bail denied for a fairly long period of time because of the gravity of the offence. It is no consolation to a businessman or administrator to be told that he would be ultimately acquitted if the charge is not proved. Invariably, before the case goes to trial, the person is put behind bars for more than 2 months or 2 years and his reputation is damaged by the media and the business and character ruined by adverse publicity. The law as of now does not provide  any remedy for such situation.

Therefore necessary to visit the area of social-political-economic offences, redefine the offences device means of effective and immediate trial and establish the truth.

The medical profession has now taken recourse to malpractice insurance scheme to save themselves from any claim by the patients for negligent treatment. There is no such insurance available to a businessman and even such insurance policy would not cover the period of his being behind bars.

The increase of corruption in politics and extreme coverage by media is leading to a situation of witch-hunting and judges who normally flow the rule of bail against jai prefer to led the person be in custody t avoid adverse publicity. When businessmen and administrators who are appreciated as best of their category at one time are painted in the darkest colors by a subsequent regime, the uncertainty in business and administration would seep in and course of time, the structure would collapse. It is time to think about means by which the businessmen and administrators would be saved from motivated prosecutions and incarcerations.

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Simultaneous Proceedings against the Borrower and the Guarantor in the DRT is Illegal

The scheme of Indian Contract Act, 1872 on the subject of a Contract of Guarantee may be summarized as follows:

(a) A contract of guarantee is a tripartite agreement which contemplates the principal debtor, the creditor and the surety {Punjab National Bank v. Sri Vikram Cotton Mills, (1970) 1 SCC 60; AIR 1970 SC 1973; (1970) 2 SCR 462; 40 Comp Cas 927}. The purpose of a guarantee being to secure the repayment of a debt, the existence of a recoverable debt is necessary. It is of the essence of a guarantee that there should be someone liable as a principal debtor and the surety undertakes to be liable on his default. If there is no principal debt, there can be no valid guarantee. This was so held by the House of Lords in the Scottish case of Swan v. Bank of Scotland {(1836) 10 Bligh NS 627} decided as early as 1836.

(b) Implied promise to indemnify surety.—In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee (section 145).

(c) Rights of surety on payment or performance.—Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor (section 140). A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into (section 141).

(d) In essence, ultimately the debt is to be recovered from the principal debtor, either primarily by the creditor or finally by the surety. Certainly, there is no mandate of Contract Act that finally the principal debt is to be recovered from the surety.

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Brief Notes on Competition Law in India

Competition laws requires  economics cum legal mind. A lawyer for competition law should have thorough understanding about how the market operates, macro economics and foresightedness for end result of competition in the situation of discussion. A laws was needed in India which ensure the implementation of free economic policies and free flow of  resources which protect the fair competition and restrict the anti-competitive practices.  We have discussed here what is anti-competitive practices are? but in short it can be said that any practices or tactics of business houses to acquire a dominance in market and eliminate the competition  is some thing called anti-competitive.

Competition Act 2002 which further amended by amendment act 2007 and 2009, the modified version on an Act which we earlier use to know by the name of MRTP Act 1969. MRTP Act 1969 is repealed by the virtue of section 66 as amended through the act of 2007. MRTP commission wound up. The cases of unfair trade practices are already covered under consumer protection act, hence, same got transferred to relevant consumer court.  As per section 66 of CA act the MRTP commission shall continue the operations for another period of two years and thereafter all the cases will stand transferred to Appellate tribunal (CAT) constituted under the Act. It is business law which control the fair competition in the market. This law prohibits the practice of price fixing among market players which it termed as enterprise. This law ensure that a dominant player should not abuse its dominant position in the market . It disallow all the agreements with a are anticompetitive in nature. Further it has brought the concept of ‘combination’ where on person who own a competitor enterprise can not get merger/amalgamation in a way which adversely effect the competition. This law constitutes a statutory body competition commission of india (CCI) which is fully functional from May 2009. CCI has vide powers to enter into the matters of the Act even without any application to it.  This act is directly affect to the top management of the company. It assume that the pricing and trade associations are in knowledge of top management. It lays down heavy penalty of the offense under this act.  Appellate tribunal is constituted to file appeal against the order of competition commission.

Competition laws is equally applicable on written as well as oral agreement, arrangements between the enterprises.

Components of competition laws:

Anti-competitive agreement: Section 3 of The Competition Act 2002 deals with the anti-competitive agreements.

An agreement which adversely effect the competition. It includes but not limited to: -

1. Agreement which limit the production.

2. Agreement which limit the supply.

3. Agreement to allocate market.

4. Agreement to fix prices.

5. Agreement to collusive bidding.

6. Conditional purchase (Or tie-in-agreements)

7. Refusal to deal.

8. Exclusive supply agreement.

9. Exclusive distribution agreement.

10. Condition sale agreement to by second products as well compulsorily.

Following are not an Anti competitive agreements:

1. Agreement to Protect IPRs. Viz trademark, copyright or patent.

2. Agreement to protect geographical indications.

3. Agreement to Design Act.

4. Agreement to lay out designs for Act 2000.

5. Agreement to export goods (with certain conditions).

Types of agreement : Competition law indentifies two type of agreement. First Horizontal agreements which are among the enterprises who are or may compete within same business. Second is the vertical agreement  which are among independent enterprise.  Horizontal  agreement is presumed to be illegal agreement but rule of reasons would be applicable for vertical agreements.

Abuse of Dominant Position:

1. It is the misuse of an advantageous position by an enterprise to gain extra benefits but which resultantly damage the consumer interest and make it difficult other players to compete.

2. Section 4 of Competition Act deals with abuse of dominant position.

It includes:- 3. Imposition of unjust conditions.

4. Imposition of unfair pricing.

5. Predatory pricing.

6. Create hindrance in entry of new operators.

7. Abuse of market positing.

Predatory Pricing:

Predatory pricing is some thing called pricing below then the cost of the product. The objective of pricing to elemenate the competition and then create dominant position in the market and put the price so high to recover the earlier losses. It is sort of abuse of dominant position. There are some methods in economics to establish that whether a pricing is predatory pricing or not. Once the predatory pricing is fixed then the CCI can pass a order that enterprise has abuse its dominant position in contravention of the competition act and pass the penal order for it.

Combination under Competition Act.:

Combination is legal concept of analyzing the merger, acquisition,  acquisition of an enterprise by a person having shares/ right to vote with the completion business enterprise. There are threshold limits are defined viz 1500 Cr. For individuals in India. If such combination, merger amalgamation create adverse impact on competition or consumer’s at large  then such combination it is prohibited by the competition law of India.

Notification: The desiring firm shall notify it is approval for combination to CCI within 30 days of such board resolution. CCI shall pass the order within 210 to give effect to such combination else it will deemed as approved after 210 days. In case such combination is not notified to CCI then CCI shall have powers to inquiry such combination within 1 years of merger.  Notification is pre-requisite else there will be risk from legal behavioral aspect and may attract investigation and objection.

Cartel:

Cartel is the group of enterprises which collectively make some agreement which adversely effect the competition. The agreement between the cartel may be explicit or implicit. But it is restricted by the competition law due the reasons of artificial price hike, collusive bidding,  competition law presumes the Cartel as injurious to competition. CCI has vide power to take the cartel in their cognizance and refer it to director general for investigation.  It further provides the penalty provision upto three times of yearly profit to the offenders.

Bid rigging:

Competition law provides on more legal concept and that is Bid rigging. This terms used for any manipulation, conspiracy, infiltration etc which adversely affect the biding. Any agreement or consent among the prospective bidder which affect the bidding process and causes or likely to cause losses to the purchaser, is termed as bid rigging. Competition law prohibits bid rigging and lays down provisions for penalty for such practices.

Rule of reasons:  It is the analysis of any activity under the challenge on the basis of business justification, competitive intent, market impact, impact on competition and on consumer. It is the logic behind the conclusion for any order.

Market Power: It is the power to control market pricing and restrict competition.

Competition Advocacy:

Competition advocacy is one of the most significant feature in the Act. It is the obligation of commission to create the awareness about the competition laws through non-enforcement measures. It also includes training programs, seminar, educational workshops.

Remedies  under the competition laws of India

Competition Commission of India is the statutory body to approach for unfair competition practices. The relevant Act is  Competition Act 2002 and its amendment act 2007. CCI has power to act suo-mot or on the reference from Government. Consumer can directly approach the CCI by filling an application with 5000/- prescribed fees in case of individual/huf/ngos. In case any case is made out then, on receipt of such application, the CCI shall refer it to Director General for opinion. Director General shall submit its report/finding to CCI for proper hearing and trial for the case.

About Fines & Penalty: The competition laws lays down heavy penalty of 10% of total turn over of preceding three years if any enterprises act or infringe the provision of competition act.

Snaps of Cases on  competition Act

1) Competition Commission of India Vs Steeal Authority of India, SC, 2010.

Order of investigation by CCI is not an appealable order under secton 53A(1). Commission has power to refer for investigation under section 26(1) of the Act. It may ask for the requisite details from the party or it may go ahead without asking for the same. It is the matter of discretion of commission.

2) The CCI is looking into the agreements of builders where they put the clause of 18% interest in delay in payments but lesser interest in delivery of possession.

3) The SAIL and Indian railway controversy settled by CCI on the basis of argument that they had previously settled arrangement way back in 2003 that SAIL would be the supplier for Indian railway.

4) CCI has suggested TRAI to consult them at the time of merger and acquisition of telecom service provider to ensure that any service provider should not abuse its market dominance. Same for the M&A for pharmaceutical companies.

5) Similarly the controversy of credit card banker’s acquisition got clearance from CCI due to the reasons that same does not cover under the definition of production, manufacture, distribution etc. defined in the Act.

6) Exclusive rights of a cricket game of a football tournaments to one media house was objected through the competition act in European continent and national court had found that such agreement would impact competition and consumer and thereafter intervened.

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India ready to host International Arbitration?

The Chennai High Court by a recent decision has held that the need to make India as a preferred seat for International Commercial Arbitration would benefit the economy of the country and that if foreign law firms or lawyers are not allowed to take part in arbitrations, it will have a counter productive effect on the aim of the Government to make India a hub of International Arbitration. But does the decision by itself promote international arbitrations. What are the pros and cons of making India the venue of International arbitration? IIAM is conducting a master conference to address the issues.

A recent judgment of the Chennai High Court has clarified the Indian legal provisions relating to the scope of foreign lawyers in practicing international arbitration in India. The Court held that having regard to the aim and object of the International Commercial Arbitration introduced in the Arbitration and Conciliation Act, 1996, foreign lawyers cannot be debarred to come to India and conduct arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration.

International arbitration is growing big time in India and in almost all the countries across the globe. India is a signatory to the World Trade Agreement, which has opened up the gates for many international business establishments based in different parts of the world to come and set up their respective businesses in India. Large number of Indian Companies have been reaching out to foreign destinations by mergers, acquisition or direct investments. As per the data released by the Reserve Bank of India during 2009, the total out ward investment fromIndia excluding that which was made by Banks, had increased 29.6% to U.S. Dollar 17.4 billion in 2007-08 and India is ranked third in global foreign direct investment. Overseas investments in joint ventures and wholly owned subsidiaries have been recognized as important avenues by Indian Entrepreneurs in terms of foreign exchange earning like dividend, loyalty, etc. India is the 7th largest, the second most populated country and the fourth largest economy in the world. Various economic reforms brought about have made India grow rapidly in the Asia-Pacific Region, and the Indian Private Sector has offered considerable scope for foreign direct investment, joint-venture and collaborations.
Therefore, when there is liberalization of economic policies, throwing the doors open to foreign investments, it cannot be denied that disputes and differences are bound to arise in such International contracts. When one of the contracting party is a foreign entity and there is a binding arbitration agreement between the parties and India is chosen as the seat of arbitration, it is but natural that the foreign contracting party would seek the assistance of their own solicitors or lawyers to advice them on the impact of the laws of their country on the said contract, and they may accompany their clients to visit India for the purpose of the Arbitration. Therefore, if a party to an International Commercial Arbitration engages a foreign lawyer and if such lawyers come to India to advice their clients on the foreign law, there could be no prohibition for such foreign lawyers to advise their clients on foreign law in India in the course of a International Commercial transaction or an International Commercial Arbitration or matters akin thereto.

The arbitration law in India is modeled on the lines of the UNCITRAL Model Law of Arbitration and makes a few departures from the principles enshrined therein. The Arbitration and Conciliation Act 1996, provides for international commercial arbitration where at least one of the parties is not an Indian National or Body corporate incorporated in India or a foreign Government. In the recent past, parties conducting International Commercial Arbitrations have chosen India as their destination.

These factors have weighed in the decision making process of the Court, The Court has observed, “to advocate a proposition that foreign lawyers or foreign law firms cannot come into India to advice their clients on foreign law would be a far fetched and dangerous proposition and in our opinion, would be to take a step backward, when India is becoming a preferred seat for arbitration in International Commercial Arbitrations. It cannot be denied that we have a comprehensive and progressive legal frame work to support International Arbitration and the 1996 Act, provides for maximum judicial support of arbitration and minimal intervention.” The Court found that the need to make India as a preferred seat for International Commercial Arbitration would benefit the economy of the country and that if foreign law firms are not allowed to take part in negotiations, for settling up documents and conduct arbitrations in India, it will have a counter productive effect on the aim of the Government to make India a hub of International Arbitration and against the national interest.

But the real question is, just by clearing the ambiguity of the legal position of foreign lawyers’ entry to conduct arbitrations in India and giving them a green signal will make India a hub of International Arbitrations? Are the ground realities favorable? What are the advantages and disadvantages of choosing India as a venue for international arbitrations?

The Indian Institute of Arbitration & Mediation (IIAM) is trying to find out the views and opinions of the various players in the field. IIAM is conducting a 2-day International Master Conference, titled, “New Frontiers in Dispute Management & Resolution in the Globalized World” on 31st May and 1st June 2012 at Bangalore, India.

Indian Institute Of Arbitration and Mediation: IIAM

IIAM is dedicated to promote the amicable and fair settlement of disputes. It aims to create an environment in which people can work together to find enduring solutions to conflicts and tensions. IIAM provides a triple level solution for total management of disputes.

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Can the Bank adopt unfair/illegal methods to recover its due?

Recovery of its due has been a hectic exercise for the Banks in the absence of a special legislation. ‘Non-performing Assets’ were growing and a need was felt to reduce the ‘Non-performing Assets’ of the Banks drastically. As the recovery through Courts was a difficult exercise for the Banks, initially, a special legislation called ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’ was enacted creating a Special Tribunal called ‘Debt Recovery Tribunal’. Under the Act, the Banks are entitled to approach the Tribunal by filing an ‘Original Application’ which is similar to filing a suit in Civil Court proceedings. However, unlike the ‘Civil Court’ which is supposed to follow the ‘Civil Procedure Code’, a special and simple procedure has been prescribed under ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’. At the end of adjudication, the Tribunal is supposed to grant a certificate called ‘Recovery Certificate’ infavour of the Bank crystallizing the amount to be recovered from the borrower and it is like a ‘Decree’ granted by a Civil Court. There was a mechanism attached to the Debt Recovery Tribunal to conduct execution proceedings pursuant to the grant of ‘Recovery Certificate’. Thus, with ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’, the Banks were enabled to recover their dues speedily through the proceedings before the Special Tribunal called ‘Debt Recovery Tribunal’.

However, the object of reducing ‘Non-performing Assets’ could not be achieved even after enacting ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’ and as a result, another legislation on the similar field was enacted and it is ‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Called ‘SARFAESI Act’ in short)’. Under SARFAESI Act, 2002, the Bank can determine the outstanding due after noting the objections from the borrower/guarantor if any and can proceed against the ‘secured asset’ by taking physical possession of the same and initiating auction proceedings in accordance with the provisions and the SARFAESI rules. Under SARFAESI Act, the Bank need not approach the Courts for getting the due crystallized as it will do everything on its own and the only occasion for the Bank to approach Court is under Section 14 of the Act seeking police assistance etc. while taking physical possession of the ‘Secured Asset’. The borrower or any person aggrieved is provided with a right to question the action of the Bank under SARFAESI Act, 2002 by filing an appeal to the Debt Recovery Tribunal under Section 17 of the Act. On different provisions of SARFAESI Act, 2002, the Courts have passed some land-mark judgments making good balance between the object of SARFAESI Act, 2002 and the interests of the borrower.

Few brief points, pursuant to the judgments of Constitutional Courts on SARFAESI Act, 2002, are as follows:

1. While upholding the constitutional validity of ‘SARFAESI Act, 2002’, Courts have made it very clear that the Bank is supposed to apply its mind to the objections raised by the Bank and the reply to the Borrower has been made as ‘mandatory’ and subsequent to the intervention of direction from the Court, section 13 (3A) was inserted.

Criticism: While appreciating the concern of the Courts in the interests of the borrowers, many also continuously criticize as to how the Banks follow the directions or implement the provisions. There are critics arguing that the it is very difficult to know as to whether the Bank has applied its mind or not while replying the objections raised by the borrower under section 13 (3). There is also a criticism that the reply from the Bank may not have any value, though the object is good theoretically. Because, the reply from the Bank to the borrower, will not enable the borrower to question the same in any Court unless the Bank issues a notice to the borrower under Section 13 (4) which is normally referred as ‘Possession Notice’.

2. The Courts have made it very clear that the borrower can raise all his objections before the Debt Recovery Tribunal in an appeal under section 17 of the Act. The scope of enquiry has literally been expanded by the Courts and the ‘Debt Recovery Tribunal’ can not confine its enquiry only to the procedural issue as to whether the Bank is right in following the procedure. Consequent to the expansion of scope of enquiry, the scope of powers of ‘Debt Recovery Tribunal’ were also expanded to some extent.

3. Courts have come very heavily, from time to time, on procedural irregularities committed by the Bank as each provision was backed with certain object. This is very laudable.

4. Initially, it is understood that the Borrower can only question the possession notice issued by the Bank under Section 13 (4) of the Act. However, the Courts have consistently held that all measures taken by the Bank under Section 13 (4) of the Act are appeallable before the Tribunal. This is very important issue and Bank is in no way gets prejudiced if the borrower is given a right to question all measures taken by the Bank. In the absence of such a provision pursuant to Court’s intervention, the borrower is left with no remedy when his property worth 1 crore is sold for a meager sum of 10 lakhs by the Bank. In no stretch of imagination, it can be said that the Bank always acts fairly as it is a Public Sector Undertaking and which may not have any motives.

The most important thing to be discussed is as to whether the Bank can act unfairly or illegally in the course its recovery of money. It may be true in some cases where the borrower tries to trouble the Bank in getting or recovering the outstanding due. No action of the borrower can trouble the Bank if it holds a right over ‘Secured Asset’ and if there is ‘Secured Asset’. Banks are provided with a special legislative set-up, though drastic, to recover its dues. Banks can not complain at the special legislation enabling it to recover its due and the borrower keep complaining at this special legislation and they keep calling it as ‘draconian’.

With this back-ground, the Banks are not entitled to act unfairly or illegally in the course of recovery of money. The delay tactics, at times, adopted by the borrower is no excuse for the Banks as to why it has not acted fairly as every Public Sector Bank is supposed to act fairly and strictly in accordance with law.

I would like to give an example as to how the Banks too can trouble the borrowers using the stringent provisions of SARFAESI Act, 2002 and it is as follows:

Facts:

A borrower avails various loan facilities including an agricultural loan from a Bank and the various loan facilities are extended to many family members. Only one member of the family oversees all these credit facilities from the Bank. It was a ‘secured loan’. The sole member/borrower who has maintained all the loan accounts from the Bank has expired and other family members are not aware of the loan facilities granted by the Bank fully. However, the family members came to know about the existence of loans with the Bank. The Bank has also sent demand notices under section 13 (2) while main borrower was alive. The family has also realized that the ‘secured asset’ was already transferred or sold without any knowledge to the Bank. The family members have conveyed all facts to the Bank and wanted to settle all ‘loan accounts’ and they have requested the Bank for a ‘One-Time Settlement’. The Bank has agreed for a ‘One-Time Settlement’ and receives the full amount under OTS. After the receipt of money from the borrowers, the Bank sends a communication to the borrowers saying that the ‘OTS acceptance’ is cancelled as the OTS was not in accordance with the regulations.

After canceling the OTS, the Bank issues notices under section 13 (4) of the Act clubbing all loan facilities, however, splitting all loan facilities, into two sets.

The family members of the borrowers are literally shocked. Now, the Bank proceeds under section 13 (4) without referring anything as to what has happened in-between and balance outstanding is claimed under section 13 (4).

Analysis:

1. Bank is supposed to take every-care while accepting the OTS and it can not cancel the OTS after receipt of substantial money from the borrower. Its an unfair practice unless the facts are such that the OTS cancellation is justified.

2. Bank will be clubbing all loan facilities, but issue notices as it likes. Sometimes, there can be one notice and there can be separate notices also despite the fact that the ‘Secured Asset’ is one and the same. When it issues ‘separate notices’, the borrower will be finding it extremely difficult while approaching the Courts or the Tribunal and they may be asking the borrower to file different Appeals or Cases though the entire transaction is same in substance.

3. The object of giving demand notice and seeking objections from the borrower is in line with the principles of natural justice and fair play. If much water is flown in between the notice under section 13 (2) and section 13 (4), the Bank is supposed to start the proceedings again under section 13 (2) and so that the borrower can raise his objections. But, this remains a complicated issue again.

4. The Borrower is entitled to ask for a ‘Specific Performance’ of OTS terms, however, it can be done in Civil Courts. DRT can say that it is not concerned with the OTS issues and even the High Court may ask the borrower to approach the Tribunal under section 17.

Like-wise, the borrower may also be facing lot of difficulties if the Bank misuses the provisions of the SARFAESI Act or intends to trouble the borrower. Irrespective of the object of SARFAESI Act, there is no justification whatsoever for the Banks or Public Sector Banks to act unfairly or act in a manner which is prejudicial to the borrower.

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Anti-Competitive Contracts-Per Se Illegal Agreements

Case-Story

Robust Shoes,a giant Multinational, is world-leader in Sports-shoes,It set up its shop in India about 25 years ago and soon carved a niche for itself in premium Sports shoes market in India. However, for the past many years, Robust Shoes was not growing as expected by the company. The reason was tough competition from Indian manufacturers and cheap imports from Nepal, East Asia, Singapore etc.

In order to expand in the market, Robust Shoes decides to enter the lower-end market in India. Its business strategists recommended entry through mergers & acquisitions, instead of starting from scratch. Under this strategy, the sights of their business-managers fell on a company called Runner Shoes Ltd. Runner shoes was a private limited company controlled by a Shahni family. The family was in sports/field shoes business for the past fifty years and had an impressive market share of 45%.

Getting convinced that Runner Shoes is the best buy, Robust Shoes gave a lucrative offer to the Shahni Family which it could not refuse. However, Robust Shoes was worried that what if after some years, the Shahni Family re-enters the Sports Shoes business and become their competitor. To foreclose this possibility, Robust Shoes further sweetened their deal with the condition that the Shahni family will not re-enter Sports Shoes business for the next 25 years without the written permission of Robust Shoes. Shahni Family pondered over this condition and decided to agree. It was because ,the family was finding itself caught between a rock and a hard place. On the higher end of the market, there were several multinational companies operating, the quality of which Runner Shoes could not match. At the lower end, intense competition from cheap imports sold through the road-side was eating into their margins. The family ws afraid that this way, they could be knocked out from the business altogether in the near future.

Keeping this in view, the Shahni family decided to quit the Sports Shoes business and enter Sports-apparel business which was under nacent stage in the country. The deal with Robust Shoes was thus signed, stamped and sealed.

Ten years had passed and Shahni Family established itself in Sports apparel business. The next eneration of the family i.e. Ranjit, Vikram and Dhruv had taken-over the business. In order to expand in the market by value-addition, the trio decided to re-enter Sports Shoes business. However, their lawyers reminded them of the agreement their predessors had signed with Robust Shoes that the family will not re-enter the Sports Shoes business for the next 25 years.

Getting stuck-up in their plans, the Shahni Brothers decided to challenge the agreement in the Court of Law under Article 19 of the Constitution that the agreement infringes upon their fundamental right of profession and carrying out business and therefore is null and void. Their Lawyers,however,advised them to challenge the agreement under the Competition Act,2002.

Is it a sound legal advice?

Now,let us analyse the case from judicial point of view.

Hitherto, the judicial jurisprudence had been limited to enforcement of the contractual obligations on the contracting parties provided the contract is for a lawful activity and has not been signed under duress, coercion etc. In such a situation, the Shahni Brothers stand little or no chance in the Court of Law because their predecessors had signed the contract willingly and they were paid additional consideration for the condition that the family will not re-enter the Sports Shoes for the next twenty-five years. Though, the predecessors had infringed upon the rights of the next generation of the family, but no way the other party i.e. Robust Shoe could be made to suffer from that infringement.

In general way, the Courts would leave the matter to the Robust Shoes and the Shahni Bros to mutually decide the matter because in the original contract, the right to refuse the permission had been vested with Robust Shoes.

However, in the recent times, another dimension has been added to the judicial jurisprudence which is called “Public-interest”. In many agreements, the Courts are also required to look into the “Public-interest” aspect of the contract and if the contract is contrary to the “public-interest’, the contract can be termed as null and void, though it may be perfectly sound legally.

Though the “Public-interest” has not been defined clearly in the Law-books, however, the “public-interest” means “anything which is beneficial to the public at large”. In the trade & commerce, anything or any act by anyone which tends to control or restrict the factors like availability, prices, choice or technological development of goods and services is contrary to the public interest. In order to empower the Courts to set-aside the agreements which tend to control or restrict the markets in any way, the Competition Acts have been enacted by various countries.

The very first Competition Act was promulgated in the USA which is called the Sherman Act. It was enacted in 1890 and states that “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”

In India, the Competition Law has been put in place with the enactment of The Competition Act, 2002 and according to Section-3 of the Act:

(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

(2) Any agreement entered into in contravention of the provisions contained in sub-section (1) shall be void.

(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which-

(a) directly or indirectly determines purchase or sale prices;

(b) limits or controls production, supply, markets, technical development, investment or provision of services;

(c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;

(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition:

The Competition Act,2002 provides for the establishment of a Competition Commission of India “CCI” to prevent practices having adverse effect on competition, to promote and sustain competition in arkets, to protect interests of consumers and to ensure freedom of trade carried on by other participants in markets. The CCI prohibits enterprises to enter into anti-competitive agreements, abusing their dominant position and forming combinations. However, Any person aggrieved by any decision or order of CCI may file an appeal to the Supreme Court within 60 days from the date of the communication of the decision or order.

Whether any contract or agreement is anti-competitive in nature is determined through the conditions as laid down in Section 3(3) of the Act as mentioned above.  However, the Courts also apply two rules to determine whether an agreement is anti-competitive in nature. These rules are referred as “Per-se Illegal Agreements” and “Rule of Reasoning”. “Per-se Illegal agreements are those are agreements which anti-competitive on the face. “Rule of Reasoning” is applied to those contracts which do not appear to be anti-competitive on the face but have have an indirect bearing on the competition. For example, a Company supplying its goods to some favored firms at a discounted price than the rest is not per se illegal agreement but by “rule of reasoning” it can be judged that such agreements with favored firms are anti-competitive in nature.

So we can conclude that the legal advice given by the Lawyers to Runners Shoes i.e. to challenge the agreement under the Competition Act,2002 is perfectly sound. Because the agreement is ‘Per Se Illegal Agreement” which is anti-competitive in nature therefore it will be termed as void and set aside by the Courts.

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Getting relief from DRT under SARFAESI Act, 2002?

It would be clueless for the professionals at times in answering the queries of the borrowers facing proceedings under ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’. If the Bank initiates proceedings under the provisions of SARFAESI Act, 2002, then, in view of section 34, no Civil Court shall have jurisdiction to entertain any suit or legal proceeding in respect of the same subject matter.  Though there can not be any such restriction in any act when it comes to High Court exercising jurisdiction under Article 226 of Constitution of India, the High Courts too may hesitate to look into the infirmities committed by the Bank under SARFAESI Act, 2002 and the Court may lay emphasis on the availability of ‘alternative remedy’ to the borrowers under section 17 of the SARFAESI Act, 2002.  Section 34 of the Act is as follows:

“34. Civil Court not to have jurisdiction.- No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).”

Relief before DRT under section 17:

Initially, it is held by the Courts and followed by the Debt Recovery Tribunals that the Tribunal, under section 17, can only see as to whether there is any procedural irregularity in the action initiated by the Bank.  However, now, it is settled, atleast as a legal principle, that the Debt Recovery Tribunal can look into all allegations or issues while entertaining an Appeal under section 17 and it extends to the issue of looking at the correctness of the amount/outstanding amount demanded by the Bank in its notice under section 13 (2). Courts have further held that the DRT has the power to restore the possession of the ‘secured asset’ back to the borrowers in appropriate cases.  It all may appear good as a principle of law, but, the reality is different. If the borrower files any appeal under section 17, then, the DRT will look at the outstanding amount in the notice under section 13 (2) and insists for the deposit of 20 or 30% of the outstanding before granting any interim relief and this interim relief can only be for some time or till the disposal of the Appeal in some cases.  It is alleged that the DRT emphasis on the amount demanded by the Bank rather the grievance of the borrower or borrowers.

What if borrower succeeds?

Again, even if borrower succeeds in his Appeal under section 17 of the SARFAESI Act, 2002, the borrower may not be happy. It is interesting. Because, the borrower might have clearly alleged or established that the Bank was at fault in adhering to the terms and conditions of the sanction and might have wanted the DRT to force the Bank to act upon the agreed terms. But, it will not happen and the DRT may simply set-aside the possession notice issued by the Bank under section 13 (4) of the Act and the Bank impliedly have an opportunity to start the proceedings afresh. There may not be any difficulty for a Public Sector Bank or the officers of the Bank to initiate proceedings against the borrower again and again.  Like-wise, on some technical grounds, the borrower may succeed in his Appeal under section 17 of the SARFAESI Act, 2002, but, it would be interesting to understand as to what that means. That may be nothing at times unless the borrower is interested only in getting some time to repay the outstanding amount. It is felt that the Debt Recovery Tribunal can grant no relief to the borrowers under section 17 except asking the Bank to start the proceedings afresh.

High Court/Civil Court’s jurisdiction:

In view of the Bar under section 34 of SARFAESI Act, 2002 and in view of the composition of Tribunal, the Tribunal should have all powers to adjudicate the claim and to issue suitable directions to the Bank or suitable relief to the borrowers.  The High Court can be issuing various directions to the Bank in a SARFAESI proceeding if it chooses to entertain any Writ Petition under Article 226 of Constitution of India.  Why can’t it be done by the Tribunal also? In view of the settled practice, as many say, before the Debt Recovery Tribunals and in view of the fact that the borrower needs a forum to agitate his grievance, it is impossible according to me to say that ‘no civil court shall have jurisdiction’ or impossible to confine the jurisdiction of Civil Court in cases only when there exists ‘fraud’ etc. Civil Court shall have jurisdiction in deciding disputes between the Bank and the borrower unless there exists an ‘Arbitration Clause’. Just because, the Bank initiates the proceedings under the provisions of SARFAESI Act, 2002, it can not be a Bar on the Civil Court or the High Court under Article 226 and it all depends upon the facts and circumstances of the case.

Why there can’t be suitable compensation:

There exists a provision in the SARFAESI Act, 2002 that the borrower should be compensated if it is proved that the Bank is at fault in a proceeding under the provisions of SARFAESI Act, 2002. While section 19 of the Act deals with the issue of payment of costs and compensation to the borrowers; section 32 of the Act protects the action taken in good faith.  Section 19 and section 32 of the Act are as follows:

19. Right of borrower to receive compensation and costs in certain cases. – If the Debt Recovery Tribunal or the Court of District Judge, on an application made under section 17 of section 17A or the Appellate Tribunal or the High Court on an appeal preferred under section 18 or section 18A, holds that the possession of secured assets by the secured creditor is not in accordance with the provisions of this Act and rules made thereunder and directs the secured creditors to return such secured assets to the concerned borrowers, such borrower shall be entitled to the payment of such compensation and costs as may be determined by such Tribunal or Court of District Judge or Appellate Tribunal or the High Court referred to in section 18B.

32. Protection of Action taken in Good Faith- No suit, prosecution or other legal proceeding shall lie against any secured creditor or any of his officers or manager exercising any of the rights of the secured creditors or borrower for anything done or omitted to be done in good faith under this Act.

When there exists a fault on the part of the Bank, the borrower should suitably be compensated under section 19, but, in reality, it is not happening and it should happen.

Courts to the rescue of borrowers: 

While resisting to entertain the Writ Petitions under Article 226 and 227 in respect of SARFAESI matters as many believe, the Courts have always tried to make the proceedings before the Debt Recovery Tribunal meaningful. The Courts made it clear that the Bank should apply its mind in disposing of the objections raised by the borrower under section 13 (3). The Courts have held that the DRT has all powers under section 17 and the DRT can entertain appeals challenging any proceeding of the Bank pursuant to the issuance of notice under section 13 (4) of the Act. Thus, Courts have done its best to make the Debt Recovery Tribunals really effective.

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