VHVK Law Bulletin April 2018

April 2018
Volume II Issue 2

VHVK Law Bulletin

Welcome to the second issue of VHVK Law Bulletin 2018. In this issue, we bring you some important developments in law on tradenames (passing off and trademark infringement), capital markets (design of new financial products in commodities derivatives exchanges) insolvency and bankruptcy (remedies against guarantors in insolvency proceedings), impact of insolvency proceedings on against creditors’ rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act), modernizing small savings sector (chit funds) and anti-money laundering (inclusion of corporate frauds in “proceeds of crime”).

Trademark action by foreign entities

In Toyota v Prius Auto Industries,1 the Supreme Court of India considered whether “Prius” tradename used by the respondents since 2001 infringed the rights of Toyota. It was argued for Toyota that the company had sold “Prius” cars in several countries since the late 1990s and in India from 2010. On the other hand, the respondents had registered in India Prius as a trademark in 2002-03, several years before Toyota attempted to obtain registration for the same name in 2009. Relying, among other things, on the prior ownership of the trademark by the respondents, the Supreme Court dismissed Toyota’s claims for a permanent injunction to restrain the respondents from using the Prius tradename and damages for passing off their products as those of Toyota.

Both the parties were in the automobile business, which complicated things. But the sequence of dates was an important consideration for the Supreme Court to decide in favour of the respondents, Prius Auto Industries. As noted, the respondents started their business in 2001 with the “Prius” tradename and obtained trademark registration for the name in 2002-03. Toyota launched its Prius hybrid car in Japan in 1997 and in several other countries in the following years. However, the launch of Toyota Prius happened in India only in 2010 after the car was displayed at a trade show in 2009. Around the same time, when Toyota sought registration of the Prius name as a trademark in India, it discovered that a trademark had already been registered with this name by the respondents. On these facts, the Supreme Court rejected Toyota’s prayer for a permanent injunction to stop respondents’ use of the Prius tradename.

Regulation of new products in commodities exchanges

To streamline financial products traded in commodities derivatives exchanges, the Securities and Exchange Board of India (SEBI) took an early step in 2015 with a broad prescription that commodities exchanges must have oversight committees chaired by a public interest director.2 Two years on, SEBI recently came out with clearer guidance on the procedure for the design of new products in the commodities derivatives markets. SEBI delineates the process of creating new products and provides a more detailed procedure for oversight by board committees.3

The SEBI procedure treats the design or creation of a new financial product and the board oversight of the same as distinctive processes. Commodities exchanges are free to develop new products but they must report to the oversight committee of the board, in addition to the Managing Director or CEO. With this procedure, the SEBI circular provides a dual, concurrent oversight process for new product development. Presumably, CEO oversight will be more from a business perspective. The oversight committee of the board chaired by a public interest director, on the other hand, would play a quasi-regulatory function. This is evident from the following tasks assigned to the committee.

  • Oversee new product design and modification of existing products
  • Oversee SEBI inspection on product design issues
  • Estimate adequacy of resources for product design and related matters

The SEBI circular carries forward the agency’s agenda to professionalize Indian capital markets and introduce self-regulatory mechanisms where possible.

Insolvency & Bankruptcy – lenders’ rights both against borrowers and sureties

In ICICI Bank v Ritu Rastogi,4 the Principal Bench (New Delhi) of the National Company Law Tribunal dealt with a situation in which the borrower in default and its corporate surety were both parties to separate insolvency resolution processes. NCLT permitted ICICI Bank, the lender that had initiated insolvency resolution process against the borrower (Educomp Solutions Limited) to also participate in the proceedings involving the borrower’s surety/affiliate, Edusmart Services Private Limited. This is obviously both logical and reasonable, as it would allow lenders in insolvency proceedings to assert their claims more effectively and promote more consistent outcomes.

In the Educomp case, while initiating insolvency proceedings for default in repayment, ICICI Bank also invoked the corporate guarantee provided by its affiliate, Edusmart Services. There have been a variety of decisions on lenders’ rights in insolvency proceedings against sureties and the rulings have turned upon the factual variations in individual cases. With Educomp, as noted, both the borrower and surety were subjects of separate insolvency resolution processes.

ICICI, as the lender to Educomp, asserted that it should be able to participate in the proceedings against the surety and it must have voting in the Committee of Creditors of the surety, in proportion to its claim against the principal debtor (Educomp). The corporate guarantee issued by the surety enabled ICICI to treat the surety on par with the principal debtor in the matter of recovery. Relying on this and section 128 of the Indian Contract Act, 1872, which preserves contractual freedom in guarantees, NCLT accepted ICICI’s plea to participate in the insolvency resolution process of the surety in the same manner as a direct lender.

Insolvency & Bankruptcy Code and SARFRAESI Act – surety’s position

Cross proceedings under different statutes produced a significant outcome in State Bank of India v Ramakrishnan,5 in the National Company Law Appellate Tribunal (NCLAT). State Bank initiated proceedings against a corporate debtor under the Insolvency and Bankruptcy Code, 2016 (I&B Code) and a separate proceeding against a surety under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). Under the SARFRAESI Act, lenders can summarily proceed against the assets and properties of sureties. Considering the pendency of an insolvency resolution plan for the principal debtor, which was a company and the moratorium operating in its favour under the I&B Code (section 14), the Appellate Tribunal ruled that it would be unjust to proceed against the personal property of the surety when the insolvency resolution plan was pending.

In coming to its decision in favour of the surety, the Appellate Tribunal relied on section 30 of the I&B Code that governs resolution plans for corporate debtors. Under the I&B Code, on approval of a resolution plan for a corporate debtor by the Committee of Creditors and the adjudicating authority, the plan would bind not just the debtor, but equally its “employees, members, creditors, guarantors and other stakeholders.”

When a resolution plan for a corporate debtor is pending consideration and the goal is to achieve a turnaround for the ailing company, summary proceedings against sureties can produce harsh, possibly irreversible outcomes (for example, sale of dwelling houses). The ruling of the Appellate Tribunal in State Bank v Ramakrishnan seeks to avoid such outcomes and is more aligned with the remedial principle of the I&B Code. The appellate ruling also overcomes the strict approach applied by the Mumbai Bench of the National Company Law Tribunal in Schweitzer Systemek v Phoenix ARC.6 In Schweitzer, NCLT (Mumbai) restricted the moratorium under the I&B Code (section 14) to just the corporate debtor and excluded sureties from interim protection.

Modernizing micro-finance – amendments proposed to the Chit Funds Act, 1982

Following the recommendations made by the Key Advisory Group setup by the Government of India and those of the Parliamentary Standing Committee on Finance in its twenty-first report, the Government of India recently introduced the Chit Funds (Amendment) Bill, 2018.7 Chit funds and similar instruments – such as kuris and chittis – are a longstanding and popular feature in the informal/micro-finance landscape of India. The chit fund sector was brought under regulation in the early 1980s under the Chit Funds Act, 1982. The present proposals seek to modernize and strengthen chit fund activities.

The registration/licensing requirements introduced for the chit fund sector some decades back reflected the need to regulate the activity that served, mainly, families and economically weaker sections in promoting savings and thrift. Obviously, the amendments currently proposed for the Chit Funds Act, 1982 aim incremental progress and are not radical in any sense. The approach is quite appropriate considering the reasonable stability that informs the chit fund sector and the absence, mercifully, of major failures or scandals. The following changes are now proposed to the law on chit funds.

  • “Fraternity funds” are included as a new category of chit funds and they would require registration under the legislation.
  • The rule that draw of chits must happen in the presence of members is modified and it would be possible to have video conferencing and electronic meetings. This reflects the new reality of the access many people have to modern technology – the Internet, Skype and the like – and introduces flexibility in chit operations.
  • In keeping with the trend of rising incomes, the statutory limit on foreman’s commission will be increased from 5 to 7 percent of chit amount.
  • The provision exempting chits with the value of up to Rs. 100 from the registration and other requirements under the Chit Funds Act, 1982 is dropped. It is now left to state governments to specify the maximum amount up to which chit funds will not be subject to regulation.

Anti-money laundering rules strengthened, corporate frauds included

Amendments made to the Prevention of Money-Laundering Act, 2002 through the Finance Act, 20188 considerably strengthen and streamline the anti-money laundering regime. Major changes include:

  • Extension of property confiscation to offenders’ properties located outside India
  • Inclusion of corporate frauds in the offences that trigger the anti-money laundering regime
  • In appropriate cases, enabling restoration of property under confiscation to persons with legitimate interest in the property, before completion of trial

Extending the anti-money laundering regime to corporate frauds is a significant move. Companies Act, 2013, a path-breaking legislation in many respects, introduced the concept of corporate frauds. With a broad definition, fraud can include any type of misconduct or abusive practice by corporate directors and executives. For those guilty of corporate fraud, the Companies Act provides for imprisonment and also punitive fines up to three times the amount involved in the fraudulent act/omission.

Bringing corporate frauds under the anti-money laundering legislation further strengthens the remedy against unethical business practices. This effort is complemented by the extension of property confiscation under the Prevention of Money-Laundering Act, to offenders’ properties located outside India. The new rule is consistent with the globalizing of the Indian economy and it recognizes the strong connections India now has with other countries.

 VHVK Law Bulletin is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.

1. Civil Appeal Nos. 5375-5377 OF 2017 decided on 14 Dec 2017
2. SEBI Circular CIR/CDMRD/DEA/03/2015 dated 26 Nov 2015
3. Circular SEBI/HO/CDMRD/DMP/CIR/P/2018/12 dated 22 Jan 2018
4. CA 366 (PB)/2017 connected with IB 102 (PB)/2017 decided on 23 Jan 2018
5. Company Appeal (AT) (Insolvency) No. 213 of 2017 decided on 28 Feb 2018
6. TCP 1059/I&BP/NCLT/MB/MAH/2017, decided on 30 Jul 2017
7. Bill No. 72 of 2018, introduced in the Lok Sabha on 12 Mar 2018
8. Pursuant to the Finance Bill, 2018 (Bill No. 4 of 2018), Clause 205