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Huge ‘Haircut’ During Insolvency!

Insolvency and Bankruptcy code is being said to be very effective in terms of resolving Insolvency as compared to the previous mechanisms prevailing. According to Union Minister of State for Corporate Affairs, Shri Rao Inderjit Singh, he in a written reply to a question in Lok Sabha on Aug 02, 2021 stated, the total of 8 cases have been resolved, 65 have been settled/ withdrawn and 23 cases have been ordered for liquidation in the real state sector out of 212 Applicants.[1]

The Standing Committee on Finance (2020-21) shows the effectiveness of the Insolvency and Bankruptcy Code, 2016. It reflects that out of 4283 cases dealt, 3283 cases have been disposed of and 1000 cases is pending.[2]

According to the RBI report, 1,953 cases were referred to bankruptcy courts involving ₹2.32 trillion, of which ₹1.05 trillion was recovered during fiscal year 2020.[3]

As per the World bank’s Ease of Doing business Index, 2015[4], ranked India at number 135 out of 190 countries on the ease of resolving insolvency based on various indicia. Now India has jumped to 63rd position in the World bank’s Ease of Doing Business 2020 Report.[5]

On the other hand, Mr Sahoo stated that It is axiomatic that a company coming to the IBC does not have adequate assets to repay all its creditors. On an average, the companies, which have been rescued through the IBC till March 2021, had assets valued at 22% of the amount due to creditors when they entered the IBC. This means the creditors were staring at a haircut of 78% to start with. The IBC not only rescued these companies but also reduced the haircut to 61% for financial creditors.” Among other factors, he said, the recovery also critically hinges on at what stage of stress a company enters insolvency proceedings, “as much as at what stage a patient arrives in the hospital.

The haircut is the reduction which a bank makes in the original loan amount during a settlement, it ranges up to 90-95 percent in some cases, leaving only a pittance for the banks at the end of a long and tiring process. As per publicly available data, 240 corporate debtors that have been liquidated till December 2020, had outstanding claims of Rs 33,086 crore, with assets valued at Rs 1,099 crore.

A debate has been arisen, whether resolutions through the National Company Law Tribunal (NCLT) are turning into a loss-making exercise for banks. In Under IBC, the Banks have been seen to have taken a deep haircut, where the company is either acquired by a fresh promotor or the original promotor offers a settlement through one time deal after withdrawing the CIRP under section 12A.

As happened in the case of IDBI Bank- Sivasankaran deal on the settlement of Siva industries and Holdings Ltd (SIHL) loan is a prominent example. After resolution attempts failed, C Sivasankaran offered a one-time settlement (OTS) to banks under which he agreed to pay Rs. 500 crore to banks against a loan of Rs 5,000 crore.

Videocon Industries and its group companies had admitted claims of Rs 64,838.63 crore but banks agreed to hand over the company to new acquirer for a 95 percent haircut.

In the same manner, the Jalan -Kalrock consortium got the troubled Jet Airways for a haircut of 95 percent. In other words, banks don’t have much to show for at the end of long process.

[1] PIB Delhi (August 02,2021), https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1741629 (last visited Aug 08, 2021)

[2] Ministry of Corporate Affairs, Standing Committee on Finance Report (2020-2021)

[3] Reserve Bank of India, Report on Trend and Progress of banking in India (issued on 29th December, 2020)

[4] The World bank, Report on Ease of Doing Business, 2015

[5] The World bank, Report on Ease of Doing Business, 2020

Huge ‘Haircut’ During Insolvency! Read More »

Insolvency & Bankruptcy during COVID-19

Insolvency and Bankruptcy Regimes in India

The Economy across the globe has been adversely impacted as the result of the pandemic pertaining to COVID- 19 spread. The impact of the same is evident in India as well. India has been found to be contracted by more than 10.3 % by the International Monetary Fund, 9% by Asian Development Bank and 9.6% by the World Bank in 2020-21. Many big and small companies across the world have signed for insolvency proceedings.

It is natural for the companies or individuals to face a setback during the course of business. The same could be caused due to any internal or external factor and not every such case should result in liquidation. Insolvency and Bankruptcy resolution frameworks works to restore the dying business back to life. The frameworks gives a new lease of life to a company whose fate was earlier dependent upon a plethora of debt restructuring schemes introduced in the past, the failures of which often resulted in the company being relegated to winding up proceedings or being struck with a situation of sitting over unproductive assets whose value depreciated with time. India in the recent past has developed its own method to encounter and rescue corporates, through its Insolvency and Bankruptcy Code, 2016. And the same has been in constant modification and updation by trial and error.

Corporate Insolvency Resolution Process as called in India is the resolution framework for a Corporate Debtor facing a crisis. It is based on Creditor in Control Model, that is the control of the company is shifted to the Committee of Creditors. It aims to restrain premature liquidation of livable businesses. The minimum threshold for Applying for CIRP has been revised from 1 lac rupees to 1 Crore. The change has been made in the view of large number of stressed corporates and very rigid resolution mechanism.

To deal with the complexity of CIRP and large number of Debts, a new framework has been introduced, making it flexible and relaxed. It has been termed as Pre-packed Insolvency Resolution Process (PPIRP). It is based on Debtor in possession model, in which the control stays with the same management. As small companies and MSMEs mainly works on individual relations.

Corporate Insolvency Resolution Process (CIRP)

CIRP was introduced through the Insolvency and Bankruptcy Code, 2016 replacing the previous debt recovery mechanism under Sick Industries Companies Act (SICA, 1985). CIRP is a benchmark for debt recovery and highly effective mechanism for treating the stress in the time bound manner. It has different modus operandi for different types of stresses. It has a wider scope giving space for not just credit failure but also allows operational failure and restructuring. It is a blend of debt recovery mechanisms in practice around the globe.

CIRP can be initiated through making an application to the Adjudicating Authority. It can be initiated by Corporate Debtor, Financial Creditors or Operational Creditors. CIRP can be initiated as soon as the default occurs in borrower entity’s account with any lender – singly or jointly – shall initiate steps to cure the default. An Interim Insolvency Resolution Professional is appointed, who manages the business in collaboration with Committee of Creditors. The Resolution Professional constitutes CoC in around next 30 days considering claims of creditors. A resolution Plan is prepared by the CoC and presented before the Adjudicating Authority. If the AA is satisfied by the Resolution Plan as approved by the committee of Creditors under Section 30, it shall by order approve the resolution plan which shall be binding on the CD. Around 330 days are provided for CIRP as per Section 12(3), proviso 1. The Resolution Professional will be liable and responsible for all compliances during a CIRP. As the outcome of the CIRP either the Resolution plan is approved or the debtor is proceeded for Liquidation. The minimum threshold for CIRP was 1 lac as per IBC, 2016, wide its notification dated 24th March 2020, the threshold was increased to 1 crore. For the Debts less than 1 Crore a new PPIRP has been introduced vide Ordinance dated 04.04.2021. The minimum bar being Rupees 10 lacs.

Pre- packaged insolvency Resolution Process (PPIRP)

PPRIP has the main focus on the Micro, Small and Medium Enterprises (MSMEs) whose debts are between 10 lacs to rupees 1 crore. In Indian context, most of the organisations are largely promotors driven and presently IBC under Section 29A bars the company management and its related parties, responsible for pushing the company into insolvency, to regain control over the business of such companies. This results in creating a situation of imbalance which can be best addressed through Pre- Pack schemes.

PPIP can be initiated by the Corporate Debtor only, falling under MSME and eligible under section 54A. (has approval from not less than 66% of the FCs of the CD after providing the FCs with the declaration of filing Application within 90 days). PPIRP can be initiated when an account becomes SMA-0. One cannot initiate prepack till it is classified as SMA-2. RP has a critical responsibility of oversight of the process to ensure that no stakeholder is short-changed, and all dealings are fair and transparent during the PPIRP. His presence instils confidence of the stakeholders who trust him for his professionalism, independence, and integrity. He guides the CD in all tasks prior to initiation and assists the stakeholders in the formulation and approval of a resolution plan. While at the stage of PPIRP, the control over the Corporate Debtor (“CD”) shall be exercised by the Partners or the BoD and they shall take all the decisions and that it is the duty of such BoD or the Partners that while they are controlling the CD, at PPIRP stage, they shall try to protect the property of CD. RP would constitute CoC comprising of unrelated FCs (unrelated OCs where the CD does not have any unrelated FC) within seven days of the prepack commencement date. The CD shall continue to be liable for all compliances under Pre-pack.

For the purpose of PPIRP, Swiss Challenge Model is used. It may entail two rounds of bidding for a distressed company or its assets. It allows a seller to mix-and-match the features of both an open auction and a closed tender to discover the best price for an asset. The total of 120 days are provided with no extension as per section 54D during the PPIRP. The Hybrid of both Informal (out-of-court) resolutions and Formal (Judicial) Insolvency proceedings are done as a part of PPIRP. As the outcome of PPIRP either Approval of Resolution plan takes place or Closure of the process happens. PPIRP can be terminated by the NCLT at any time before the approval of the resolution plan by the CoC, provided the CoC may have the liberty to close the process with 66% of those who are present. To convert the process into CIRP, the CoC, after the commencement of PPIRP but before a Plan is approved under Sub-section (4) or (12), may pass a Resolution, by a minimum 66% vote, deciding to initiate CIRP, if the CD is so eligible under Chapter II of the IBC.

For the purpose of liquidation, the CoC may decide with 75% of voting power to liquidate the CD at any time during the pre-pack process, where the conduct of the CD is not above Board, the CD does not have a viable business, or for any other reason. Termination of PPIRP may also lead to liquidation.

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Infringement of Unregistered Trademark and defence of ‘Prior Use’

Research Note on Infringement of unregistered trademark

  • Under the Lanham Act, the PTO administers a federal registration system for trademarks. See 15 U. S. C. §§1051, 1052. Registration of a mark is not mandatory. The owner of an unregistered mark may still use it in commerce and enforce it against infringers.
  • In our jurisdiction(Malaysia), if the proprietor of common law or unregistered trade mark does not wish to file for registration under the Act, which he is entitled to, his common law right to the mark is nevertheless preserved by section 82(2) of the Act which provides “… notwithstanding sub-section (1) nothing in this Act shall be deemed to affect the right of action against any person for passing off goods or services as those of another person or the remedies in respect of thereof”.[1]
  • An Administrative Panel has in an earlier case (WIPO Case No. D2001-1401) considered the scope of protection for unregistered trademarks under the German Trademark Act. According to Article 3, item 1. of that Act trademarks are: “Any signs, particularly words, including personal names, designs, letters, numerals, sound marks, three-dimensional configurations, including the shape of goods or their wrapping as well as other packaging, including colors or combinations of colors, which are capable of distinguishing the goods or services of one undertaking from those of another undertaking….”
  • In the case at hand, in light of the evidence provided by the Complainant and also of the information available online on the use of the name “Gregor Fisken” in connection with the trade of historic cars, the Panel finds that the Complainant has reached a sufficient level of goodwill at least within the classic automobile industry and has thus established common law trademark rights in the unregistered trademark GREGOR FISKEN.

In view of the above, the Panel finds that the Complainant has proven that the Domain Name is identical to the unregistered trademark in which the Complainant has rights in accordance with paragraph 4(a)(i) of the Policy.[2]

  • A. Identical or Confusingly Similar

To prove this element, Complainant must first establish that there is a trademark or service mark in which it has rights. To prove this element, Complainant must first establish that there is a trademark or service mark in which it has rights.

B. Rights or Legitimate Interests

Under paragraph 4(a)(ii) of the Policy, Complainant has the burden of establishing that Respondent has no rights or legitimate interests in respect of the Disputed Domain Name.

It is established case law under the Policy that it is sufficient for Complainant to make a prima facie showing that Respondent has no rights or legitimate interests in the Disputed Domain Name in order to place the burden of rebuttal on Respondent (see Champion Innovations, Ltd. v. Udo Dussling (45FHH), WIPO Case No. D2005-1094; Croatia Airlines d.d. v. Modern Empire Internet Ltd., WIPO Case No. D2003-0455; Belupo d.d. v. WACHEM d.o.o., WIPO Case No. D2004-0110).

C. Registered and Used in Bad Faith

Complainant must prove on the balance of probabilities both that the Disputed Domain Name was registered in bad faith and that it is being used in bad faith (see e.g., Telstra Corporation Limited v. Nuclear Marshmallow, WIPO Case No. D2000-0003; Control Techniques Limited v. Lektronix Ltd, WIPO Case No. D2006-1052).[3]

Indian Cases

  • In Satyam Infoway Ltd. case [4]it was held that to establish an action of passing off three elements are needed to be established. They are as follows: (SCC pp. 150-51, paras 13-15)

(a) The first element in an action for passing off, as the phrase ‘passing off itself suggests, is to restrain the defendant from passing off its goods or services to the public as that of the plaintiff’s. It is an action not only to preserve the reputation of the plaintiff but also to safeguard the public. The defendant must have sold its goods or offered its services in a manner which has deceived or would be likely to deceive the public into thinking that the defendant’s goods or services are the plaintiff’s.

(b) The second element that must be established by the plaintiff is misrepresentation by the defendant to the public and what has to be established is the likelihood of confusion in the minds of the public that the goods or services offered by the defendant are the goods or the services of the plaintiff. In assessing the likelihood of such confusion the courts must allow for the imperfect recollection of a person of ordinary memory.

(c) The third element of a passing-off action is loss or the likelihood of it.

  • In Cadila Health Care Ltd. v. Cadila Pharmaceuticals Ltd.[5] this Court laid down certain factors in order to decide an action of passing off on the basis of unregistered trademark. It has held that factors like nature of the marks i.e. whether the marks are word marks or label marks, the degree of resemblance between the marks phonetically similar and hence similar in idea, the nature of the goods in respect of which they are used as trademarks, the similarity in the nature, character and performance of the goods of rival traders, the class of purchasers who are likely to buy the goods bearing the marks they require, the mode of purchasing the goods or placing orders for the goods and any other surrounding circumstances which may be relevant in the extent of dissimilarity between the competing marks are to be considered.
  • Learned Advocate for the petitioner next refers to Section 34 of the Trademarks Act which provides that nothing in this Act shall entitle the registered proprietor or registered user to interfere with the rights of prior user. He also draws my attention to Sections 27, 28 and 29 of the Trademarks Act and submits that the scheme of the Act is such that the rights of prior user are recognized superior than that of the registration and even the registered proprietor cannot disturb/interfere with the rights of prior user. He further submits that passing off in common law is considered to be a right for protection of goodwill in the business against misrepresentation caused in course of trade and for prevention of restraint damage on account of the said misrepresentation. In support of his contention, he refers to a decision of the Hon’ble Supreme Court in S. Syed Mohideen v. P. Sulochana Bai reported in (2016) 2 SCC 683. It was held by the Hon’ble Supreme Court in the aforesaid report that the passing off action is essentially an action in deceit where the common law rule is that no person is entitled to carry on his or her business on pretext that the said business is that of another.[6]
  • Sub Section (1) of Section 27 of the Trade Marks Act, 1999 mandates that no person shall be entitled to institute any proceeding to prevent or recover damages for the infringement of an unregistered trademark. However, sub-section (2) thereof saves the right to take action against any person for passing off his goods or services as the goods and services of the applicant and preserves the remedies to prevent passing off actions. Since our client does not have a registered trademark, it can have the case base on the action of passing off.[7]
  • If two or more persons are registered proprietors of the trademarks which are identical with or nearly resemble each other, they shall not have exclusive rights of any of those trademarks to the exclusion of the persons whose identical marks are registered. However, the person who is having registered trademark will have the same right as against the other persons whose marks are not registered, as he would have if he were the sole registered proprietor. It is, thus, clear that the plaintiffs herein may not be entitled to an order of injunction against the persons who are having similar or identical trademarks with that of the plaintiffs and whose trademarks are registered. However, the plaintiffs would be entitled to enforce their rights against the persons whose marks are not registered as if the plaintiffs are the sole proprietor of their registered trademark. It can, thus, clearly be seen that since Plaintiffs’ mark is registered trademark and the defendants’ mark is not a registered one, the contention of the defendants in that regard is without any substance.[8]
  • 11. In the case of N.R. Dongre v. Whirlpool Corporation reported in 1996 PTC 583 as cited by Mr. Chatterjee the Supreme Court upheld the decision of the Division Bench of Delhi High Court which held that Registration of the trade mark by the defendant was of no consequence in a passing off action and further that a trader needs protection of his right of prior user of a trademark, as the benefit of the name and reputation earned by him cannot be derived by a traders by illegal adoption of much known earlier mark followed by registration.[9]

14. In a decision of the Delhi High Court reported in 1997 PTC 347 in the case of Bimal Govindji Shah v. Panna Lal Chandu Lal the effect of Section 28 sub-sections (1) and (2) of the said Act have been explained and it has been held amongst others that, “in other words registration of trade mark does not provide a defence to the proceeding for passing off as provided for under Section 27(2) of the said Act the prior user of a trademark is entitled to maintain an action against a subsequent user of identical trademark including register user thereof.”

[1] Mesuma Sports Sdn Bhd v. Majlis Sukan Negara Malaysia, 2015 SCC OnLine MYFC 26

[2] Gregor Fisken Limited v. Private Registrations Aktien Gesellschaft CNR of Granby & Sharpe St., 2009 SCC OnLine WIPO 1120

[3] ETH Zürich (Swiss Federal Institute of Technology in Zurich) v. John Shao, 2016 SCC OnLine WIPO 106

[4] Satyam Infoway Ltd. Case, 2 (2004) 6 SCC 145

[5] Cadila Health Care Ltd. v. Cadila Pharmaceuticals Ltd., 3 (2001) 5 SCC 73

[6] SRMB Srijan Private Ltd. v. Super Smelters Ltd., 2019 SCC OnLine Cal 2444

[7] Cutis Biotech Sole v. Serum Institute of India Pvt. Ltd., 2021 SCC OnLine Bom 616

[8] SMS Formulations Pvt. Ltd. v. Sahib Singh Agencies (Bom.) Ltd., 2012 SCC OnLine Bom 1167

[9] EMCEE Pharmaceuticals Pvt. Ltd. v. Centaur Laboratories Pvt. Ltd., 2002 SCC OnLine Cal 617

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