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Corporate

Lock ins, ROFRs, tag alongs, drag alongs – understand the four types of transfer restrictions

Drafting_for_Business_Deepa_Mookerjee.jpgShareholders agreements, we all know, list the rights and obligations of the shareholders in a company and contain clauses that are vital for any M&A transaction. We have already discussed one such clause, the conditions precedent clause. Let us now study another set of clauses – commonly grouped under the term, ‘transfer restrictions’.

Consider the case of a foreign investor who intends to purchase 26 per cent of the shares of a company and has all the know-how and expertise to run the business. This investor’s participation is critical to the business and its Indian partner in the business would prefer that it does not exit the company. Even the foreign investor, mindful of its faith in the Indian partner, would not want the Indian partner to exit the company. The shareholders agreement therefore, would contain clauses that restrict the foreign investor and the Indian partner from transferring their shares to a third party.  A ‘transfer restriction’, simply put, restricts shareholders from transferring their shares in the company.

All doubts about the legality of transfer restrictions under the Companies Act, 1956 has been cleared by the proviso to Section 58(2) in the Companies Act, 2013. It clearly states that “any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract”.

While there is no formal clarification from the Ministry of Corporate Affairs regarding this insertion, it appears that that this provision is an attempt to codify the principles laid down in the judgment of the Bombay High Court in the case of Messer Holdings Limited v. Shyam Madanmohan Ruia and Others, [2010] 104 SCL 293 (Bom). The Court held that it is open to shareholders to enter into consensual agreements in relation to the specific shares held by them, provided such agreements are not in conflict with the articles of association of the company, the Companies Act, 1956, and its rules. Such agreements can be enforced like any other agreement and does not impede the free transferability of shares.

The Companies Act, 2013 has also recognised the position that a share is the property of the shareholder. The shareholder is free to transfer his or her property, provided that it is not in conflict with the articles of the company and other provisions of company law.

Let us now focus on a few common transfer restrictions.

Lock-in period

By a specifying a period during which a party is prohibited from transferring or selling its shares in the company, a shareholder is ‘locked in’ to the company. This restriction can apply to one, some, or all the shareholders of in the company.

There is no specified time period applicable to all transactions. Parties determine the time period for the lock-in depending on commercial considerations such as the nature of the business. Sometimes, the time period may differ among shareholders.

The Indian party in our earlier example may feel that five years is sufficient time to absorb all the foreign investor’s know how and then run the business independently. In such a case, the Indian party would probably be content with a lock-in period of five years applicable to the foreign investor.

Right of first refusal

Sometimes, a shareholder who intends to sell its shares to a third party can only do so after first offering them to the other shareholders and only if they refuse to purchase these shares. The price at which the shares are sold to the third party must be equal to or higher than the price at which they were offered to the other shareholders. This gives the other shareholders in the company a right of first refusal, that is, a right to purchase shares which helps consolidate their own shareholding in the company and also prevent the entry of an undesirable purchaser.

Tag along right

A right is some times granted to a minority shareholder to require the majority shareholder to sell its shares along with those of the majority shareholder, to the same third party. This gives a minority shareholder, the right to exit the company if it does not want to continue in the company with a new majority shareholder.

Drag along right

While a tag along right is granted to a minority shareholder, a drag along right is typically granted to a majority shareholder. A majority shareholder will have the right, while selling its own shares, to require the minority shareholder to sell its shares as well. The majority shareholder can thus drag the minority shareholder along while making a sale.

This right is important from the perspective of a new investor. Consider the case of an investor who is about to purchase 95 per cent of the shares of a company from one party in which another party holds the remaining five per cent shares. Since a new investor would prefer to own all the shares and take full control of the company, the majority shareholder would prefer to exercise a drag along right and force the minority shareholder to sell its five per cent to the same new investor.

The key point to remember while drafting any of these clauses is that your clients (whether a majority or minority shareholder) would like to maximise their investment while exiting the company. Therefore, determining the price at which shares are sold is critical.

Say for instance, your client has a drag along right. While drafting this clause, it may be best to lay down certain principles as to how the share price will be determined to ensure that there is no dispute at a later stage. Generally, the minority shareholder sells his or her shares at the same or higher price than that which is offered by the third party for the shares of the majority shareholder.

Always be very clear while drafting these clauses. You should choose your words and terms carefully and ensure there is no ambiguity while interpreting the nature of the restriction. Remember that these clauses are primarily contractual in nature and will always change depending upon the nature of the transaction. Never cut and paste a clause from another agreement without applying your mind to the facts of your transaction. In short, put in time and effort in understanding the transaction and only then draft a clause to suit the requirements of your client.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

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Corporate Uncategorized

After Satyam – how a scandal changed corporate governance law in India

VeraShrivastavThe Satyam scandal of 2009 gave Indian corporate stakeholders a cataclysmic jolt. Ramalinga Raju, who was recently sentenced to seven years in jail, was the chairman of Satyam Computer Services who committed financial fraud to the tune of Rs. 7000 crore. Shockingly, the company’s auditors, PricewaterhouseCoopers, did not notice it. The scale of the scandal and the auditing firm’s neglect brought to light glaring loopholes in the regulatory and legal framework dealing with the directors and the auditors of companies. Eventually, it led to changes in the law.

Before Satyam

Before the scandal, the erstwhile Companies Act, 1956, the primary legislation dealing with the conduct of corporations in India, did not contain any provision for independent directors or impose any stringent obligations on auditors. The report of the Kumar Manglam Birla Committee in 1999 recommended improvements to the function and structure of the board of directors of a company and emphasised disclosures to shareholders. Clause 49 of SEBI’s Listing Agreement (applicable to listed companies only) became a reflection of these recommendations. In 2002, the Naresh Chandra Committee on corporate audit and governance, drawing from the Sarbanes-Oxley Act in the United States, suggested various reforms relating to the appointment of auditors, audit fee, and the certification of accounts. In 2003, the Narayana Murthy committee analysed the role of independent directors, related parties, and financial disclosures. Clause 49 was amended to incorporate its recommendations with respect to the requirement of independent directors on corporate boards and audit committees and the compulsory disclosures that listed companies had to make to its shareholders.

After Satyam

After the scandal, the Confederation of Indian Industries set up a task force to suggest reforms and the National Association of Software and Services Companies established a corporate governance and ethics committee headed by Narayana Murthy. The report of the latter addressed reforms relating to audit committees, shareholder rights, and whistleblower policy. SEBI’s committee on
disclosure and accounting standards issued a discussion paper in 2009 to deliberate on (i) the voluntary adoption of international financial reporting standards; (ii) the appointment of chief financial officers by audit committees based on qualifications, experience, and background; and (iii) the rotation of auditors every five years so that familiarity does not lead to corporate malpractice and mismanagement. In 2010, SEBI amended the Listing Agreement to include the provision dealing with the appointment of a chief financial officer but it did not insist on the compulsory rotation of auditors.

In 2009, the Ministry of Corporate Affairs also released a set of voluntary guidelines for corporate governance, dealing with the independence of directors, the roles and responsibilities of audit committees and the boards of companies, whistleblower policies, the separation of the offices of the chairman and the CEO to ensure independence and a system of checks and balances, and various other provisions relating to directors such as their tenures, remuneration, evaluation, the issuance of a formal letter of appointment, and placing limits on the number of companies in which an individual can be a director.


March2015 APCCLP banner

A new company law – independent directors, accountable auditors, additional disclosures

India’s 2013 company law incorporated many provisions and reforms suggested by the various committees and organisations during the past decade. It clearly established the responsibility and accountability of independent directors and auditors. It provided for the compulsory rotation of auditors and audit firms. In fact, it even prescribed a statutory cooling off period of five years following one term as an auditor.

Under the Companies Act, 2013 (“the Act”), an auditor cannot perform non-audit services for the company and its holding and subsidiary companies. This provision seeks to ensure that there is no conflict of interest, which is likely to arise if an auditor performs several diverse functions for the same company such as accounting and investment consultancy services. Auditors also have the duty to report fraudulent acts noticed by them during the performance of their duties.

Ramalinga Raju

Ramalinga Raju

The new law also insisted on companies having independent directors, that is, directors who do not have a material or pecuniary relationship with a company. The requirement under Clause 49 of the Listing Agreement, which applied only to listed companies, would thus apply to many more companies. Independent directors have been prohibited from receiving stock options and are not entitled to receive remuneration for their services, except for reimbursement. At least one-third of the board of a company has to consist of independent directors. Even the audit committee has to feature a majority of independent directors. One independent director is required to be a member of the remuneration committee as well.

Additional disclosure norms such as the formal evaluation of the performance of the board of directors, filing returns with the Registrar of Companies with respect to any change in the shareholding positions of promoters and the top ten shareholders, were also mandated. After Satyam, aggrieved Satyam stakeholders in the United States were able to initiate class action suits against the company and its auditors for damages. The same remedy is now available to Indian stakeholders.

(Vera Shrivastav is an Associate at LegaLogic law firm and is a part time researcher and writer.)

 

 

Categories
Corporate

Three points to remember while drafting conditions precedent clauses

Drafting_for_Business_Deepa_Mookerjee.jpgA shareholders’ agreement is a contract that contains the rights and obligations of the shareholders in a company. It typically supplements either a share purchase agreement or a share subscription agreement. You can read more about them in my post on the documents that you will come across during M&A transactions.

Almost every shareholders agreement looks similar. You will see a title, a table of contents, a recital clause, an interpretation clause, and introductory clauses describing the transaction. These clauses have been discussed in detail in myLaw.net’s course on Advanced Commercial Contracts. In this post, I will explain the conditions precedent clause, which is typically seen in all shareholders agreements.

A condition precedent is usually a legal term describing a condition or event that must occur before a contract is considered in effect or any obligations are expected of either party. Here are a few examples.

A is purchasing 100% of the shares in a company whose main business is selling computers to the public. The company does not manufacture computers itself but sells the computers it receives from different distributors. From A’s perspective, the company’s relationship with its distributors is key because if the distributors don’t provide computers to the company, it will have nothing to sell. Many of the distributors’ contracts with the company require their prior approval before a 100% transfer of shares takes place. A would only want his obligation (to purchase shares and pay consideration for them) to be triggered once the company receives these approvals. The receipt of these approvals therefore, is a condition precedent that must be fulfilled by the company before the transaction is effective.

ConditionPrecedentClause

Take another example. B, a non-resident investor who has an investment in an IT company in Mumbai, wants to invest in an IT company in New Delhi. One of the terms of the transaction is that B must sell his interest in the Mumbai-based company before making the investment. So, the sale of those shares in the Mumbai-based company is a condition precedent that B must fulfill before he can invest in the Delhi-based company.

If these conditions are not fulfilled, there will be no deal. Common conditions precedent in M&A transactions include those in relation to obtaining approvals from the regulators, firing or hiring particular employees, ensuring that sufficient cash is available in the company, obtaining approvals from third parties, and ensuring that lease agreements are in place.

On whom is the obligation cast?

Let’s take a closer look at the examples above. You will see that the obligation to fulfill the condition precedent in the examples is cast on different parties. In the first example, the obligation to obtain approvals from distributors is cast on the investee company, that is, the company in which the investment is being made. In the second example, it is cast on the foreign investor. Conditions precedent can thus differ on the basis of the party on which the obligation to fulfill it, is cast. Some obligations can be cast on the investee company, some on the investor, and some jointly on the investee company and its shareholders.

For instance, C is a foreign investor who wants to invest in a company operating in a sector where the approval of the Reserve Bank of India is required for any foreign investment. Typically, the burden of obtaining this approval is cast jointly on all parties because each party’s cooperation is required for obtaining this approval.

While drafting a conditions precedent clause, you must take care to identify the party on whom the obligation to fulfill a particular condition is imposed. This is vital as each party is responsible to fulfill its own obligations in relation to the conditions precedent. While casting an obligation on the investee company, you should examine whether it is also useful to cast the obligation on its shareholders (or at least the majority shareholders) if they control the operations of the company.

The right to waive a condition precedent

Another point vital to this discussion is whether conditions precedent can be waived. Look at the first example. Assume that the investee company has only obtained approvals from fifty percent of its distributors. A, the investor, would really want the deal to go through and should be happy with approvals from these distributors if they are the major ones and would want to waive the condition that approvals must be obtained from all the distributors. Once A has waived the fulfillment of this condition, the deal can go through. The right to waive the fulfillment of a condition precedent is very important in all M&A transactions. Always include this right when you are drafting a condition precedent. The important point to keep in mind is that the person who has the right to waive the condition must be different from the person who is obliged to fulfill the condition.

In the first example, the right to waive the fulfillment of the condition in relation to obtaining consents from distributors must be with A and not the investee company. The investee company can never have the right to waive fulfillment of a condition that it is obliged to fulfill. Similarly, in the second example, the right to waive the condition in relation to withdrawal from the Mumbai-based IT company is on the investee company and not B, the investor.

Since these are all contractual rights, it is up to the parties to decide whether they would like to waive the conditions in part or in full. As a lawyer, your duty is to ask these questions from your client before you start drafting so that you can use the words that are appropriate to your client’s interests.

When should the conditions precedent be met?

Finally, always insert a date by which all the conditions precedent must be met. This is typically called the ‘long stop date’ and is important to ensure that there is no undue delay in the performance of the contract or the fulfillment of the conditions. Parties know that they must fulfill the conditions precedent by a specific date. While drafting this clause however, always include the following or similar words:

The Conditions Precedent must be satisfied by April 20, 2015 or any date as may be mutually agreed between the Parties.

The words in plain text above give the parties to a contract the right to mutually agree and extend the time for the fulfillment of the conditions. If, for example, regulatory approval — a condition precedent for a particular deal — takes longer than anticipated, the parties should have the right to extend the long stop date if they feel the need to do so. This is also important because if conditions precedent are not satisfied, the transaction is terminated, and parties must have the flexibility to prevent this.

As you start drafting conditions precedent, you will realise that there are many nuances to the manner in which you draft these conditions. For instance, you may use the words ‘use all reasonable efforts’ to dilute the obligation on a party. In such cases, that party only has to show that it has used all reasonable efforts to fulfill the condition and that will be enough (even if the condition has not been fulfilled).

Keep drafting and with practice, you will get better at drafting conditions precedent clauses.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Categories
Corporate

Securities regulators in India and US move to ease capital access for startups

SuryaKumarGedaThe lack of sufficient funding has been cited as an important reason for the failure of many Indian startups. The case of redbus.in is a classic example of the high handedness of venture capitalists (“VCs”) that have traditionally been the main source of funding. All this may change soon because of regulatory developments in the United States and in India aimed at making it easier for startups to access capital from the securities markets.

Last week, the Securities Exchange Commission of the United States (“SEC”) released Regulation A+ to implement Title IV of the Jumpstart Our Business Startups Act, 2012 (“JOBS Act”) and SEBI released a discussion paper proposing an alternate platform for raising capital for startups. Though there are many parallels between the two frameworks, Regulation A+ is the SEC’s second attempt to meet the funding requirements of startups. For India, the question is whether the SEBI will get it right in its first attempt.

High compliance costs under Regulation A

Under a previous avatar known as Regulation A, small and medium sized companies in the United States could raise upto USD 5 million in a year without registering with the SEC. Companies however, still had to file prospectus with the SEC and comply with the registration requirements of the applicable state securities laws, known as “blue sky laws”. The USD 5 million limit on the size of the offering, along with the cost of compliance, made the offers unattractive. Regulation A+ has now increased the offer size to USD 50 million and with the JOBS Act authorising the SEC to preempt blue sky laws by framing new regulations, reduced the cost of compliance.

IPOs on the ITP

Both the Securities and Exchanges Commission and the SEBI have moved recently to ease access to capital for startups.

Both the Securities and Exchanges Commission and the SEBI have moved recently to ease access to capital for startups.

In October, 2013, SEBI launched the Institutional Trading Platform (“ITP”) where small and medium-size enterprises and startups could list their securities without bringing an IPO and by complying with Regulation 106Y of the Issue of Capital and Disclosure Regulations, 2009. Till now, companies listed on the ITP could raise funds only through private placements and rights issues of their securities. Now, SEBI has proposed a new route through which professionally managed startups having innovative business models and belonging to the knowledge-based technology sector can bring an IPO for listing on the ITP.

Interests of retail investors

Capital markets regulators are sentinels for the interests of retail investors and they need to be sensitive to the risks associated with the high rate of failure associated with the startups.

Regulation A+ envisages two tiers. In the first, companies can raise in a year, up to USD 20 million and in the second, USD 50 million. The first tier requires SEC qualification along with state approval. The second requires only SEC approval. Unaccredited investors can invest in Tier 2 offerings up to ten percent of their annual income or net worth, whichever is greater. They will need to provide representations and warranties about their income or net worth to ensure compliance with these limits, thereby freeing issuers from extensive documentation reviews and verification procedures. There is no such limitation on the investment of unaccredited investors under Tier 1. Since Tier 1 is subject to blue sky laws, unaccredited investors are protected by the respective state laws. Companies can raise funds on the basis of reviewed financial statements under Tier 1, but Tier 2 requires audited financial statements.

SEBI’s proposed framework bars retail individual investors from investing in the offers for listing on the ITP. Only qualified institutional buyers (“QIBs”) and non-institutional investors (“NIIs”) would be eligible. The minimum application size for the offers has been proposed at 10 lakh rupees. These provisions ensure that only high net-worth individuals can participate.

Eligible issuers

Only professionally managed startups with innovative business models and belonging to the knowledge-based technology sector will be eligible issuers under the SEBI proposal. Only startups in which no person (individually or collectively) holds 25 per cent or more of the pre-issue share capital will be considered professionally managed. Often, after many rounds of funding, the holding of promoters in startups falls below 25 per cent.

Regulation A+, on the other hand, does not restrict the issuers only to the knowledge-based technology sector. All development stage companies with a specific plan or purpose are eligible.

Lock-in requirements

Lock-in requirements intertwine the fortunes of the promoters with the success of the company. Under the ICDR Regulations, 20 per cent of post-issue capital should be locked in for three years. Lock-in requirements do not ordinarily apply to venture capital investors in regular IPOs. Under the new framework, SEBI has proposed that the entire pre-issue share capital should be locked in for six months. This requirement will apply uniformly to all shareholders. This proposal bars venture capitalists from selling their stake at the time of the offer. They will only be able to sell their stake after the cooling off period of six months, which is enough time to settle the frenzy surrounding the offer.

Under Regulation A+, existing shareholders can sell securities worth not more than USD 6 million under Tier 1, and not more than USD 15 million under Tier 2 during the first and second years (See, pages 34 and 35). However, in second year, the limitation applies only on affiliates shareholders.

While SEBI has ensured that the proceedings from an offer should only result in capital for the startup companies by locking-in the entire pre-issue share capital for six months, the SEC has allowed existing shareholders to make secondary sales of securities during a Regulation A+ offering. The SEC also has ensured that promoters remain invested for at least two years.

Disclosure requirements

SEBI has also proposed that the prospectus should be in compliance with the various ICDR Regulations subject to exemptions that align with the the needs of startups and to ensure that prospective investors make informed decisions. Startups do not need to outline the objects of the issue in greater detail as required in a regular IPO. Rather, they can indicate general corporate purposes. The proposed framework gives greater autonomy to startups in pricing their issue, except that there cannot be any forward looking statement while disclosing the basis of the pricing.

Offers under Regulation A+ need to file Form 1-A with the SEC for its approval. This form contains itemised information similar to Form S-1 for registered IPOs, but is scaled back. It has three parts: notification, offering circular, and exhibits. Companies cannot use an offering circular without the SEC’s approval.

Surya Kumar Geda is a student in his final year at the Faculty of Law, New Delhi.

Categories
Corporate Litigation

How the proposed commercial courts will speedily resolve disputes in high-value commercial transactions

PraptiPatelIn 2014, the World Bank ranked India 142nd out of the 189 countries investigated for the Ease of Doing Business Report, slipping further from the 2013 rank of 134. One of the biggest factors behind India’s reputation as a bad place to invest is the length and cost of litigation in the country and the proposal to introduce “commercial courts” has therefore been amongst the most important. These commerical courts or commercial divisions in high courts would be fast-track courts with hi-tech infrastructure for compulsory e-filing, digitising of documents, and case-management conferences. They would resolve disputes in high-value commercial transactions in a speedy and efficient manner.

History of the commercial courts proposal

In 2003, the Law Commission of India’s Proposals for Constitution of Hi-Tech Fast Track Commercial Divisions in High Courts were accepted by the Union Cabinet and introduced in the Parliament as the Commercial Divisions of High Courts Bill, 2009. It was approved by the Lok Sabha and the Rajya Sabha’s Select Committee made changes, but the then Union Law Minister felt the need for further changes and referred it back to the Law Commission. Later, the 20th Law Commission prepared two discussion papers and after circulation in the Expert Committee, in January this year, prepared the Commercial Divisions and Commercial Appellate Divisions in High Courts and Commercial Courts Bill, 2015 (“the Bill”) and released it in the form of its 253rd Recommendation.

Constitution and jurisdiction of commercial courts

The constitution and jurisdiction of the proposed commercial courts in India is slightly complicated. Since the aim is to ensure that commercial disputes are quickly resolved, the commercial division of each high court in the country would need to be the court of first instance for such disputes and must necessarily enjoy ordinary original civil jurisdiction. However, only 5 of the 24 high courts, that is, the High Courts of Bombay, Madras, Calcutta, Delhi, and Himachal Pradesh, possess ordinary original civil jurisdiction. When the High Court of Judicature at Hyderabad is not invested with ordinary original civil jurisdiction therefore, the commercial division of the High Court will be able to exercise such jurisdiction.

Justice (Retd.) A.P. Shah is the Chairman of the Law Commission of India.

Justice (Retd.) A.P. Shah is the Chairman of the Law Commission of India.

Due to such differences in jurisdiction, the Bill proposes to constitute a commercial division for those high courts which possess ordinary original civil jurisdiction and for those without the requisite jurisdiction, to constitute commercial courts in that state or union territory.

The other issue is that pecuniary jurisdictions differ among the high courts. The proposal is for all commercial disputes with a value of over Rs. 1 crore to be heard by the commercial divisions of high courts or the commercial courts. The pecuniary jurisdiction of the Bombay and Calcutta High Courts is 1 crore. In the Madras High Court, it is Rs. 25 lakhs, in Delhi, it is Rs. 20 lakhs, and it is Rs.10 lakhs in Himachal Pradesh. In order to maintain uniformity and more importantly, to pass the constitutional test of non-discrimination, the Bill proposes to raise the pecuniary jurisdiction of the Himachal Pradesh, Madras, and Delhi High Courts to Rs. 1 crore and only then constitute a commercial division within them. In other states and union territories, commercial courts will be constituted with the requisite pecuniary jurisdiction.

Appointment and training of judges

Judges in the commercial divisions of high courts and in commercial courts are proposed to be nominated by the chief justice of the respective high court, having regard to their expertise and experience in commercial litigation. Since commercial disputes, for instance, those relating to intellectual property laws, are highly technical in nature and require specialist knowledge on the subject, the Law Commission also recommended that such judges be regularly trained to impart knowledge on the latest trends and global good practices in commercial transactions.

Role of judges

While the introduction of commercial courts in India is a positive step for reducing the backlog of cases and ensuring the speedy redressal of disputes, there is a need for a more fundamental modification to the litigation culture in India. At present, adjournments are granted without any consequences, litigants regularly indulge in delaying tactics, and judges take far too long to deliver judgments after arguments have ended. The pace and intensity of litigation is decided by the litigants, which is a dangerous practice because it means that the country’s dispute resolution is litigant-controlled, instead of judge-controlled.

With the institution of the commercial divisions and commercial courts, judges must take a more active role in the resolution of the dispute; they can no longer be playing the role of a supervisor, rather they must be the manager or moderator. In this regard, an important provision in the Bill is that of “case-management hearings”.

Recommended by the Law Commission after examining the practice of holding “pre-trial conferences” in Singapore, case management hearings are held within four weeks of the institution of the suit to examine the possibility of a settlement and to ensure smooth conduct by litigants. For this purpose, the judge may frame the issues for and between the parties, fix dates for evidence to be recorded, and set time limits on the oral arguments of the parties.

Another provision is to award judges with the power to order an increase in court fees as a result of an increase in the number of hearings taken up, or the number of adjournments asked for, by the parties. This also widens the control that the judge has over the proceedings, besides ensuring the quick redressal of the dispute.

Definition and monetary value of “commercial dispute”

The definition of a “commercial dispute” in the Bill is very wide with enough scope for future additions. It covers more or less every kind of commercial transaction of interest to foreign and Indian investors.

As discussed before, the value of a dispute must be not less than Rs. 1 crore to qualify as a commercial dispute for the purposes of the Bill and in order to be tried in the commercial divisions and commercial courts.

Procedure

The Bill also provides for amendments to the Code of Civil Procedure, 1908 to apply to the commercial divisions and commercial courts in India and make the resolution of commercial disputes faster and more efficient. These include directions for filing written statements and documents within a specified time period, a stricter court fees and costs regime, time bound oral arguments and delivery of judgments, and a new procedure of “summary judgment”.

Appeals

The 2009 Bill provided for appeals from the commercial divisions and the commercial courts to be heard by the Supreme Court of India, but the Law Commission found this provision to be ill-advised. Turning the Supreme Court into the court of first appeal for every commercial dispute will only add to the already existing backlog of cases as every party involved in a transaction valuing 1 crore or more will necessarily have the means to appeal. As such, the overall time taken to resolve the dispute will increase, defeating the very purpose of the Bill.

Instead, the Law Commission has recommended the constitution of commercial appellate divisions within the high courts, which will be empowered to hear appeals from orders of the commercial divisions and the commercial courts.

Infrastructure

iLaw_InternationalCoursesThe Law Commission has also recommended that when constituting the commercial divisions of high courts, they should be situated, wherever possible, in the same building as the high court itself. The states and union territories which will establish commercial courts may do so in buildings different from that of the high court of the state.

Once established, the courts must be equipped with facilities supporting video-conferencing, e-filing, computerisation of evidence and audio-visual recording of proceedings, among other global best practices. This will ensure that the evidence is well-managed and the general conduct of proceedings is regulated.

Commercial courts in other countries

England and Wales: There are two established commercial courts in England and Wales – the Commercial Court and the Technology and Construction Court, both of which are divisions of the Queen’s Bench Division of the high courts in the country.

In order to dispose cases expeditiously and efficiently, the procedural law in the country includes the provision of “overriding objective.” This gives the courts the power to initiate settlements, issue directions regarding the timely production of evidence and completion of arguments, and order either party to pay costs to the other, if it has breached procedural rules or taken undue advantage of the court’s time and resources.

France: In France, commercial disputes are heard in the Tribunal de Commerce or TDC; a court specialised in commercial litigation. Judges of the TDC are normally lay judges, but have extensive training in the law relating to their respective fields.

In order to maintain efficiency, if a dispute is one of great urgency, or there is danger of irreparable harm, or the issues of facts and law are clearly in favour of the moving party, an expedited proceeding or référé may take place in the TDC. In such a proceeding, a judgment may be obtained in a matter of days or a couple of weeks. The French judicial system also does not award large-scale punitive damages or allow class-action suits, both of which limit the exposure to liability of companies doing business in the country.

However, the lack of strict case-management practices means that despite hearing only commercial disputes, the TDC takes on an average 1-2 years to dispose off a case.

Germany: The citizens of Germany repose great confidence in their judicial system, mainly because of the Advisory Council’s many efforts to make the system quick, efficient, and modern. The country does not have specialised commercial courts; the judicial system constitutes three separate court systems: the ordinary courts, the specialised courts, and the constitutional courts and within the ordinary court system, the Landgericht courts serve as the court of first instance for commercial cases above DM 10,000. The judges in the Langericht courts usually comprise of a professional judge and two lay judges nominated from the private sector.

These courts have been successful in contributing to the swift clearance of cases, mostly because of the strict enforcement of procedural time limits.

Singapore: With the advent of new institutions and judicial procedures over the last few decades, Singapore has quickly emerged as a dispute resolution hub. A unique legal culture exists in Singapore which the Law Commission’s 253rd Recommendation has very rightly taken inspiration from: the right to bring a legal action in court carries with it the strict duty of respecting court procedure and time.

In 2002, specialist commercial courts were set up in Singapore: the Admiralty Court and the Intellectual Property Court, which are presided over by judges with expertise in maritime law and intellectual property law respectively. Singapore also established the Singapore International Commercial Court in 2015 to cater to high-stakes, cross-border commercial transactions in the region and the rest of the world. These courts, combined with a practice of strict case management, make Singapore a haven for international and domestic dispute resolution.

The new government of India has promised to make India an attractive place to invest and one of the ways to do so is to set up robust infrastructure for the disposal of commercial disputes. While it is clear that the Indian judicial system can only benefit from instituting separate commercial divisions and commercial courts, they must be backed by a more fundamental change to the litigation culture, strong case-management practices, and a commitment by the litigants and judges alike, to deliver disputes in an efficient and time-bound manner.

(Prapti Patel is a student of the Indian Law Society’s Law College in Pune.)