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COMPARATIVE NOTE – LABOUR LAW CODES

On November 21, 2025, India implemented four new Labour Codes: Code on Wages, 2019 Industrial Relations Code, 2020 Code on Social Security, 2020 Occupational Safety, Health & Working Conditions (OSHWC) Code, 2020. These four codes now replace 29 older central labour laws and are in effect from November 21, 2025.

A comparative analysis of each code, along with the changes, is detailed hereinbelow:

1. CODE ON WAGES, 2019

Amalgamates, simplifies and rationalises the relevant provisions of the following four central labour enactments relating to wages, namely— (a) the Payment of Wages Act, 1936 (repealed); (b) the Minimum Wages Act, 1948 (repealed); (c) the Payment of Bonus Act, 1965 (repealed); and (d) the Equal Remuneration Act, 1976 (repealed).

The particulars and highlights of the code are as follows:

Wage Definition

  • Provision under current laws – There were different definitions of wages across laws.
  • Provision under the Code- Single definition of wages applicable for PF, bonus, gratuity, maternity benefit, employee state insurance etc. 

Action Point – Employers must ensure and consider this definition of wage for calculation of wages for the employees.

Applicability of Minimum Wage

  • Provision under current laws – Minimum wages were applied to certain type of employments as categorized under the schedule of Minimum Wages Act, 1948. 
  • Provision under the Code- Applies to all employees without any categorization specified. For the purpose of this code:

“Employee” includes any person who has been employed on wages to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward.

“Employer” means a person who employs, whether directly or through any person, or on his behalf or on behalf of any person, one or more employees in his establishment.

Action point – Employers to ensure all employees are paid minimum wages as per the notification of the government.

National Floor Wage   

  • Provision under current laws – No minimum floor wages were set by the central government under Minimum Wages Act, 1948. The minimum wages were set by state governments in their sole discretion.
  • Provision under the Code- Section 9 -The concept of floor wages has been introduced wherein the Central government will set a national minimum wage taking into account the minimum standard of living of workers, which will be standard for all states. The State government cannot fix wages below such amount prescribed by the central government.

Equality for all genders          

  • Provision under current laws – Recognized equal pay for opposite genders i.e. male and female and prohibits discrimination on the basis of gender during recruitment for same or work of similar nature.
  • Provision under the Code- Section 3- Recognizes equality amongst genders and prohibits discrimination on grounds of sex during recruitment for same or work of similar nature.

Wage period and time limit for payment 

  • Provision under current laws- The time frame for payment of wages was calculated based on the number of employees in the establishment i.e. in any factory industrial or other establishment in which less than one thousand persons are employed, the wages were to be paid before the expiry of the seventh day. However, in other establishments the wages shall be paid before the expiry of the tenth day.
  • Provision under the Code- Section 17- Under the new code, the employer shall fix the wage period for employees either as daily or weekly or fortnightly or monthly. The time limit for payment for employees falling under each such category has been provided for in the code i.e. (i) for employees engaged on daily basis – at the end of the shift; (ii) for employees engaged on weekly basis- on last working day of the week; (iii) Fortnightly basis – before expiry of the seventh day after end of the fortnight; (iv) monthly basis – before the expiry of the seventh day of the succeeding month.

Action Point – Employers to adjust payment timelines in accordance with the timelines mentioned in the act to avoid penalties.

Wages for Overtime Work    

  • Provision under current laws- Employee works overtime i.e. in excess of the number of hours constituting a normal working day, employer to pay for every hour or part of an hour of excess hour at the rate fixed under this act or by state government.          
  • Provision under the Code- Section 14- For every hour or part of hour of overtime, the employer shall pay him for every hour or for part of an hour so worked in excess, at the overtime rate which shall not be less than twice the normal rate of wages.

Action Point –Employers to ensure that their internal overtime policy provides for payment at the rate that is equal to or more than twice the normal rate of wage.

Payment after Termination and Resignation       

  • Provision under current laws- The employer shall pay the due wages within 2 working days from the day his employment is terminated.   
  • Provision under the Code- Section 17- Now this timeline will apply in cases of resignation as well. The State government can provide other time limit.
  • Action point – The language of the provision is directive and does not provide carve out for timelines specified under specific contracts. Employers to ensure compliance unless state governments by notification provide for any other timeline.

Mode of Payment of Wages

  • Provision under current laws- All wages shall be paid in current coin or currency notes or by cheque or by crediting the wages in the bank account of the employee.
  • Provision under the Code- Section 15- Explicitly recognizes electronic payments as a mode of payment of wages.

Deductions from Wages        

  • Provision under current laws- The total deductions which may be made under section 7 of payment of wages act 1936, in any wage-period from the wages of any employed person shall not exceed 75% in case of deduction made to cooperative societies and shall not exceed 50% of such wages in other case.
  • Provision under the Code- Section 18 (sub-section 3) – The ceiling for cooperative societies has been removed, and it has been clarified that in no case deductions from the wages exceed 50% of such wages. As the definition of wages now clarifies wages to include basic pay, dearness allowance, and retaining allowance, the components other that these shall at all times be less or equal to 50% of the wages.

Action Point– Employers to restructure the salary packages of employees to in accordance with the new wages definition and ensure that other components of the salary does not cross the mark of 50% of the total CTC.

Disqualification for Bonus     

  • Provision under current laws- An employee shall be disqualified from receiving bonus under this Code, if he is dismissed from service for— (a) fraud; or (b) riotous or violent behaviour while on the premises of the establishment; or (c) theft, misappropriation or sabotage of any property of the establishment.
  • Provision under the Code- Section 29 – Conviction for sexual harassment has been added as the fourth ground.

Action Point – Employers to include disqualification for bonus on grounds of conviction for sexual harassment in relevant policies.

Claim Period      

  • Provision under current laws- Under Payment of Wages Act, 1936 claims in relation to unlawful deductions could be filed within 12 months from the date of the deduction. However, application may be admitted after the said period of twelve months if the applicant satisfies the authority that he had sufficient cause for not making the application within such period.
  • Provision under the Code- Section 45- The period of limitation for filing of claims by a worker has been enhanced to 3 years from the date on which such claim arises subject to sufficient cause being shown by the applicant for such delay.

Note – As per 61 of the wages code 2019, the provisions contained in the code have effect notwithstanding inconsistent contained in any other law time being in force or in the terms of any award, agreement, settlement or contract of service. Therefore, the code has an overriding effect.

2. CODE ON SOCIAL SECURITY, 2020 

Consolidates 9 acts particularly (i) Employee’s Compensation Act, 1923; (ii) Employees’ State Insurance Act, 1948; (iii) Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (iv) Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959 (v) Maternity Benefit Act, 1961 (vi) Payment of Gratuity Act, 1972 (vii) Cine-Workers Welfare Fund Act, 1981 (viii) Building and Other Construction Workers’ Welfare Cess Act, 1996 (ix) Unorganised Workers’ Social Security Act, 2008.

Status of the laws – All laws that have been consolidated are repealed. However, the Employees’ Provident Funds Scheme, 1952, the Employees’ Deposit Linked Insurance Scheme, 1976, the Employees’ Pension Scheme, 1995 and the Tribunal (Procedure) Rules, 1997 framed or made under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the rules, regulations and schemes made or framed under the Employees’ State Insurance Act, 1948 shall remain in force, to the extent they are not inconsistent with the provisions of this Code for a period of one year from the date of commencement of this Code.

Aggregator         

  • Provision under current laws- Not defined.
  • Provision under the Code- Section 2(2) – “aggregator” means a digital intermediary or a marketplace for a buyer or user of a service to connect with the seller or the service provider.

Gig–Workers      

  • Provision under current laws- Not defined.
  • Provision under the Code- Section 2(35) – “gig worker” means a person who performs work or participates in a work arrangement and earns from such activities outside of traditional employer-employee relationship.

Contract Labour

  • Provision under current laws- Not defined.
  • Provision under the Code- Section 2(19) – Contract labour” means a worker who is hired through a contractor to work for or in connection with the work of an establishment—even if the principal employer is not aware of the hiring. It also includes inter-State migrant workers supplied by a contractor. However, they are not included within the scope contract labour:

A worker who is a regular, permanent employee of the contractor (not a part-time worker), working for the contractor’s own business, and who receives regular pay increments, social security benefits (like PF, ESI, etc.), and other legally required welfare benefits.

Such a person is treated as the contractor’s own employee, not contract labour for the principal employer.

Employee

  • Provision under current laws- Different under different acts.
  • Provision under the Code- Section 2(26) – The definition of “employee” now includes contract workers.

Action Point– Employers to ensure that workers hired through contractors also receive the same treatment as their other employees.

Platform Work  

  • Provision under current laws- Not defined.
  • Provision under the Code- Section 2(60) – “platform worker” means a work arrangement outside of a traditional employer employee relationship in which organisations or individuals use an online platform to access other organisations or individuals to solve specific problems or to provide specific services or any such other activities which may be notified by the Central Government, in exchange for payment.

         A person engaged in platform work is a “platform worker”.

Fixed Term Employment                    

  • Provision under current laws- Not defined.
  • Provision under the Code- Section 2 (34) – “fixed term employment” means the engagement of an employee on the basis of a written contract of employment for a fixed period: Provided that— (a) his hours of work, wages, allowances and other benefits shall not be less than that of a permanent employee doing the same work or work of a similar nature; and (b) he shall be eligible for all benefits, under any law for the time being in force, available to a permanent employee proportionately according to the period of service rendered by him even if his period of employment does not extend to the required qualifying period of employment.

Action Point – Benefits of fixed term employee to be evaluated and made similar to those of permanent employees.

Registration of an Establishment under the Code         

  • Provision under current laws- Different for different acts.            
  • Provision under the Code– Section 3 – Mandatory registration under the code, however if establishment is already registered under any existing central labour law, it shall not be required to obtain registration again under the Code. Such existing registration shall be deemed to be registration for the purposes of the SS Code.

Action Point – Establishments not already registered to be registered under the new code.

Social Security Schemes for Gig and Platform Workers                  

  • Provision under current laws- No specific schemes were implemented for gig workers and platform workers.     
  • Provision under the Code– Section 114 – Scheme for matters pertaining to (a) life and disability cover; (b) accident insurance; (c) health and maternity benefits; (d) old age protection; (e) crèche; and (f) any other benefit as may be determined by the Central Government.

The scheme may be wholly or partly funded by central government or state government or both, or may be funded entirely by the contributions of the aggregators. For such purpose, the contributions shall be 1%-2% of the annual turnover of the aggregator subject to such contribution not exceeding 5% of the amount paid or payable by an aggregator to gig workers and platform workers.

Action Point – Awaiting rules and more information regarding setting up of the scheme.

ESIC and PF – Voluntary Applicability and Opt Out       

  • Provision under current laws-

ESIC Applicability – It shall apply, in the first instance, to all factories (including factories belonging to the Government other than seasonal factories.

EPF Applicability – to every establishment which is a factory engaged in any industry specified in Schedule I and in which twenty or more persons are employed, and to any other establishment employing twenty or more persons.

  • Provision under the Code–

Schedule 1 – Applicability threshold to ESIC- Every establishment in which ten or more persons are employed other than a seasonal factory. However mandatory if even one worker handles hazardous work.

EPF – Every establishment in which twenty or more employees are employed.

Section 1(5) and 1(7) – establishments where the employer and majority of employees agree that the provisions shall apply to such establishment can apply PF and ESI related chapters.

Similarly, Employer can apply to opt out of such voluntary application, if there is an agreement in this respect with majority of employees, complying with applicable conditions imposed by relevant authorities.

Gratuity for fixed term employees

  • Provision under current laws- No provision           
  • Provision under the Code– Section 53- Gratuity to be paid to fixed term employees irrespective of their length of service on pro-rata basis.

Action Point – Employers to gratuity benefits to fixed term employees and ensure change in establishment’s policy. 

3. OCCUPATIONAL SAFETY, HEALTH AND WORKING CONDITIONS CODE, 2020

Consolidates 13 acts including but not limited to the Factories Act, 1948; The Plantations Labour Act, 1951; The Mines Act, 1952; The Motor Transport Workers Act, 1961; The Contract Labour (Regulation and Abolition) Act, 1970; 9. The Sales Promotion Employees (Condition of Service) Act, 1976.

     Status of the consolidated laws – All laws that have been consolidated are repealed.

Definition of Establishment  

  • Provision under current laws- Different under different laws.
  • Provision under the Code– Section 2(v) – “establishment” means a place where any industry, trade, business, manufacturing or occupation is carried on in which ten or more workers are employed.

Definition of Workers

  • Provision under current laws- Different under different laws.
  • Provision under the Code– However, under the Contract Labour (Regulation and Abolition) Act 1970, the definition excluded such person, being employed in a supervisory capacity draws wages exceeding five hundred rupees per month.     Section (zl) – A person employed in any establishment to do any manual, unskilled, skilled, technical, operational, clerical, or supervisory work for hire or reward, whether the terms of employment be express or implied. The definition excludes the following:

(i)      Employed mainly in a managerial or administrative capacity;

(ii)     Employed in a supervisory capacity drawing wage exceeding INR 18,000 per month or an amount as may be notified by the Central Government from time to time.

Action Point – Applicability to extend to such workers who earn less than 18,000 if employed in a supervisory capacity.

Definition of Factory   

  • Provision under current laws- Under Factories Act, 1948, “factory” included a precinct wherein a manufacturing process is carried on and which engages (i) ten or more workers in the preceding 12 months with the aid of power or (ii) twenty or more workers on any day of the preceding twelve months without the aid of power.         
  • Provision under the Code– Section 2(w) – Under the new code, the thresholds have changed to 20 in case of a precinct wherein manufacturing process is carried with power and 40 in case of a precinct wherein manufacturing process is carried without power respectively.

Contract Labour obligations

  • Provision under current laws- Applicable to establishments, contractors who employ 20 or more workman under the Contract Labour (Regulation and Abolition) Act, 1970.
  • Provision under the Code– Section 45- Applicable to establishments which employ at least 50 contract labourers in the preceding 12 months. Furthermore, manpower supply contractors who employ at least 50 contract labour in the preceding 12 months will also be covered under relevant provisions.

Please note for the purpose of this code the definition of contract labour is same as that mentioned above in the social security code.

Working hours and other rights of workers        

  • Provision under current laws- Under the Factories Act, 1948:

a)   No adult worker shall be required or allowed to work in a factory for more than 9 hours in a day.

b)   No adult worker shall be required or allowed to work in a factory on the first day of the week.

c)   Extra wages for overtime at twice the rate of wages, no consent requirements.

  • Provision under the Code–

a)    Section 25- Maximum 8 working hours in a day

b)   Section 26- No worker to be allowed to work more than six days a week.

c)    Section 27- Extra wages for overtime at twice the rate of wages, to be calculated on weekly or daily basis and subject to consent of the worker.

Annual Leave with wages      

  • Provision under current laws- Eligibility – Worker who has worked for 240 days or more in a calendar year.

One day for every twenty days of work performed by him during the previous calendar year.

  • Provision under the Code– Section 32- Eligibility – Worker who has worked for 180 days or more in a calendar year same as before.

Action Point – Leave policies of company to be revised.

Annual leave encashment     

  • Provision under current laws- Leave encashment only in cases of dismissal from service or quits his employment or is superannuated or dies while in service, during the course of the calendar year.     
  • Provision under the Code– Section 32 (ix) – In addition to avail leave encashment in case of dismissal, resignation or death, workers may request leave encashment at the end of each calendar year for any accrued leave exceeding the 30 days carry forward limit.

Night shifts for woman          

  • Provision under current laws- Factories Act, 1948 prohibited engagement of women employees between 7 pm and 6 am.
  • Provision under the Code– Section 43- Women can now be employed, subject to their consent before 6 a.m. and beyond 7 p.m. subject to such conditions relating to safety, holidays and working hours or any other condition to be observed by the employer as may be prescribed by the appropriate Government.

Appointment Letter    

  • Provision under current laws- No provision.
  • Provision under the Code– Section 6- Issue a letter of appointment to every employee on his appointment in the establishment, with such information and in such form as may be prescribed by the appropriate Government and where an employee has not been issued such appointment letter on or before the commencement of this Code, he shall, within three months of such commencement, be issued such appointment letter. 

Safety officers   

  • Provision under current laws- As per the factories Act, 1948, Safety officers were to be appointed in every factory, — wherein one thousand or more workers are ordinarily employed, or (ii) wherein, in the opinion of the State Government, any manufacturing process or operation is carried on, which process or operation involves any risk of bodily injury, poisoning or disease, or any other hazard to health, to the persons employed in the factory.    
  • Provision under the Code– Section 22 – The employer to appoint a safety officer in (a) factory wherein five hundred workers or more; or (b) factory carrying on hazardous process wherein two hundred fifty workers or more; or (c) building or other construction work wherein two hundred fifty workers or more shall appoint safety officers.

4. INDUSTRIAL RELATIONS CODE, 2020

Consolidates (i) Industrial Disputes Act, 1947 (ii) Industrial Employment (Standing Orders) Act, 1946 and (iii) Trade Unions Act, 1926.

Status of the consolidated laws – All three are repealed.

Grievance redressal committee

  • Provision under current laws- Every industrial establishment employing twenty or more workmen shall have one or more Grievance Redressal Committee for the resolution of disputes arising out of individual grievances. However, this section was not applicable to the workmen for whom there is an established Grievance Redressal Mechanism in the establishment concerned.
  • Provision under the Code– Section 4- Threshold remains the same however it has become mandatory notwithstanding that Grievance Redressal Mechanism is already established.

Negotiating council for Trade Unions        

  • Provision under current laws- No provision.          
  • Provision under the Code– Section 14 – In case of Industrial establishment having a registered trade union, there shall be negotiating union or council for negotiation purposes, in the event there is only one registered trade union, such union will be the negotiating union. However, in case there are multiple registered trade unions, the code provides for the manner in which the negotiating union shall be recognized.

Standing Orders and concept of deemed certificate    

  • Provision under current laws- Applicable to establishments with 100 or more employees.        
  • Provision under the Code– Section 29 and 30 – Applicable to every industrial establishment having 300 or more employees. Such establishment must draft their Standing Orders within 6 months from the commencement of the code however if such an establishment simply adopts the model standing order issued by the central government, in which case they will be treated as already certified.

Worker’s Reskilling Fund       

  • Provision under current laws- No provision.
  • Provision under the Code– Section 83 – Fund to be set up by appropriate government and the fund shall consist of the contribution of the employer of an industrial establishment an amount equal to fifteen days wages last drawn by the worker immediately before the retrenchment.

The fund shall be utilized by crediting fifteen days wages last drawn by the worker to his account who is retrenched, within forty-five days of such retrenchment, in such manner as may be prescribed.

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SEBI’S Approach to Artificial Intelligence and Machine Learning: Exploring SEBI’S AI/ML Consultation Paper

The Securities and Exchange Board of India (“SEBI”) has released a consultation paper dated June 20, 2025, titled “Guidelines for Responsible Usage of AI/ML in Indian Securities Markets” (“Paper”), proposing a regulatory framework for the responsible usage of Artificial Intelligence (“AI”) and Machine Learning (“ML”) tools in the Indian securities markets. While AI/ML has the potential to enhance productivity, efficiency, and outcomes, it also introduces risks that could impact market integrity and investor interests. The Paper represents SEBI’s proactive and forward-looking approach to addressing the ethical, legal, and operational challenges associated with emerging technologies associated with AI/ML.

Regulatory Approach

The Paper makes reference to the September 2021 report issued by the International Organization of Securities Commissions (IOSCO) on the use of AI (“Report”). Drawing from the principles outlined in the Report, the Paper suggests framing guidelines on model governance, investor protection and disclosure, testing, fairness and bias, data privacy, and cyber security.

Following six key measures were proposed in the Report:

  • Regulators should ensure that firms have designated senior management responsible for overseeing all aspects of AI/ML usage. This should include a documented internal governance framework with clear lines of accountability.
  • Firms must continuously test and monitor AI/ML algorithms to validate performance and ensure stability.
  • Firms should have sufficient skills, expertise, and experience in-house to develop, deploy, monitor, and control the AI/ML tools they use.
  • Firms must manage their reliance on third-party AI/ML service providers, including ongoing monitoring and oversight of performance.
  • Firms should disclose meaningful information to customers and clients about the use of AI/ML, especially when it impacts client outcomes. Regulators should also require firms to furnish necessary information to ensure oversight.
  • Firms must have appropriate controls to ensure high-quality, unbiased, and diverse datasets that support the effective application of AI/ML.

Usage Of AI/ML in the Indian Securities Market

AI/ML technologies are already being employed in various capacities across the Indian securities ecosystem:

  • Exchanges are using AI/ML for market surveillance, cybersecurity, chatbot-based member support, automated compliance functions, social media analytics, and pattern recognition.
  • Brokers are applying AI/ML tools for KYC/document verification, product recommendations, chatbots, digital account opening, transaction monitoring, surveillance, Anti-Money Laundering (AML), order execution, and mutual fund selection.
  •  Mutual Funds are leveraging AI/ML for customer service including deploying chatbots, surveillance, cybersecurity, and customer segmentation.

Recommendations of the Working Group

The Paper emphasizes the importance of firms developing internal capabilities to manage the AI/ML lifecycle, including performance monitoring, model security, interpretability, and ethical deployment. The working group’s recommendations aim to ensure robust governance, risk mitigation, and responsible innovation through continuous oversight and ‘human-in-the-loop’ decision-making processes.

The guidelines are built on five core principles :

Model Governance

Market participants deploying AI/ML models must:

  • maintain internal teams with adequate technical skills to oversee model development and performance throughout the lifecycle;
  • implement risk control measures and robust governance, especially under stressed market conditions;
  • establish procedures for exception and error handling;
  • appoint senior management personnel with relevant technical knowledge to be responsible for oversight;
  • carefully manage relationships with AI/ML vendors and third-party providers; and
  • ensure compliance with applicable legal and regulatory frameworks.

Investor Protection and Disclosure

When AI/ML models directly affect clients or investors, firms should:

  • clearly disclose the purpose, features, limitations, accuracy, and potential risks associated with such models;
  • communicate information in simple language, including the quality and completeness of the data used such that the customers/clients are able to make informed decisions; and
  • specify any applicable fees and maintain transparency to foster trust and accountability.

Testing Framework

Firms should:

  • continuously test and validate AI/ML outputs and model performance;
  • maintain thorough documentation, storing all input/output data for at least 5 (five) years;
  • move beyond conventional testing methods for traditional algorithms and adopt enhanced monitoring protocols tailored to the evolving nature of AI/ML.

Fairness and Bias

To ensure ethical outcomes:

  • AI/ML systems must not discriminate against or favour particular groups of clients;
  • firms should implement mechanisms to identify and mitigate bias within datasets; and
  • data used should be of high quality, sufficiently diverse, and representative.

Data Privacy and Cyber Security

As AI/ML systems heavily depend on data, firms must:

  • have comprehensive policies for data privacy, cybersecurity, and protection of personal investor information;
  • ensure compliance with applicable laws relating to data processing, breach reporting, and cyber risk mitigation; and
  • promptly notify SEBI and other relevant authorities of any data breaches, system glitches, or security lapses.

For the purpose of managing the risk arising from usage of AI/ML models, possible control measures are mentioned in the Annexure B of Paper. The possible control measures for the given risk are as follows:

  • Malicious usage leading to market manipulation and/or misinformation:

By watermarking and provenance tracking, suspicious activity reporting and public awareness campaigns, the risk of price manipulation and market instability by creating fraudulent financial statement, misleading news articles, or deepfake content can be reduced.

  • Concentration Risk:

Any dominant AI system/model’s provider in the financial market are subject to enhanced monitoring such as more frequent reporting of performance results and audit filing. Market participants are encouraged to used multiple suppliers and required to report the names to their providers so that the regulator could monitor any build-up of concentration. This ensures that the market participant does not have reliance on limited number of Gen AI providers that could lead to systemic risks in times of failure or impairment.

  • Hearding and Collusive Behaviour:

Market Participant should use varied AI architectures and proprietary databases and stock exchanges monitors the potential herding behaviour arising from the similar AI-driven strategies to prevent the potential impact on financial markets due to widespread use of common models and databases. 

  • Lack of explainability:

Market participants should maintain detailed AI process documentation and use such interpretable AI models or explainability tools which can explain working of AI model so that the Gen AI models are not difficult to comprehend and not impede supervision and regulatory oversight.

  • Model failure / runaway AI behaviour:

Extreme scenarios are simulated to do stress testing to assess the AI performance and to prevent the over reliance on AI systems, participants can keep human involved in decision making so that the flaws in the Gen AI system could not spread across market, leading to financial stability. 

  • Lack of Accountability and Regulatory Non-Compliance:

Testing of the AI systems in controlled environments is done to ensure that they do not result in regulatory breaches to prevent compliance lapses, regulatory infractions, and investors losses particularly if their outputs are not effectively monitored. Human-in-the-loop mechanism can also be implemented to prevent over reliance on AI systems.

SEBI’s Paper is a significant and timely initiative aimed at building a responsible AI/ML regulatory framework in the Indian securities market. As the use of AI/ML becomes increasingly prevalent in financial systems, it is crucial to balance innovation with investor protection, transparency, and accountability. This consultation process invites stakeholder feedback and is expected to shape the final regulatory framework, aligning India’s capital markets with global best practices in AI governance.

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Validity of the ‘Group of Companies’ Doctrine in the Jurisprudence of Indian Arbitration

Introduction:

The ‘Group of Companies’ doctrine provides that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates, if the circumstances are such that they demonstrate the mutual intention of the parties to bind both signatories and non-signatories. This doctrine has been questioned purportedly on the ground that it interferes with the established legal principles such as party autonomy, privity of contract, and separate legal personality.

In the recent case of ‘Cox and Kings Ltd. Vs. SAP India Pvt. Ltd. and Ors.’a reference was made to thelarger bench of the Hon’ble Supreme Court, to clarify the issues regarding the interpretation of the phrase “claiming through or under” appearing in sections 8, 35 and 45 of the Arbitration & Conciliation Act, 1996 (“Act”).

Relevant Provisions of the Act:

Section 2(1)(h) of the Act defines a “party” to mean “a party to an arbitration agreement“. An “arbitration agreement” is defined under section 2(1)(b) to mean “an agreement referred to in Section 7“. Section 7 lays down the essential elements of a valid and binding arbitration agreement, as an agreement by the parties to submit to arbitration all or certain disputes which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not. Section 7(5) further stipulates that the reference in a contract to a document containing an arbitration Clause constitutes an arbitration agreement if two conditions are satisfied, i) that the contract is in writing; and ii) that the reference is such as to make the arbitration clause part of the contract.

Generally, a party to an arbitration agreement is determined on the basis of persons or entities who are signatories to the arbitration agreement or the underlying contract containing the arbitration agreement. However, over the past two decades the law on joinder of non-signatory parties has evolved substantially. This evolution can roughly be classified into two stages: Before Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. and After Chloro Controls (P) Ltd. v. Severn Trent Water Purification Inc.

Pre Chloro Controls Era:

Some of the significant decisions of this era were given in the cases of Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, Sumitomo Corporation v. CDC Financial Services (Mauritius) Ltd., and Indowind Energy Ltd. v. Wescare (I) Ltd.

In the pre Chloro Controls era, the Hon’ble Supreme Court construed “parties” by limiting it only to the signatories to the arbitration agreement and this position was characterized by three underlying precepts:

  • arbitration could be invoked at the instance of a signatory to the arbitration agreement only in respect to disputes with another signatory party;
  • the court would adopt a strict interpretation of the provisions of the Arbitration Act, particularly the unamended Section 8 which only allowed reference of “parties” to an arbitration agreement; and
  • there was an emphasis on formal consent of the parties, thereby excluding any scope for implied consent of the non-signatories to be bound by an arbitration agreement.

This position of law underwent a significant change when the Bench of three Judges of the Hon’ble Supreme Court in Chloro Controls (supra) allowed joinder of non-signatory parties to the arbitration agreement on the basis of the ‘Group of Companies’ doctrine.

The Chloro Controls Case:

In Chloro Controls (supra) the Supreme Court was called upon to determine an arbitral reference in case of multi-party agreements where performance of the ancillary agreements was substantially dependent upon effective execution of the principal agreement. In that case, a foreign entity and an Indian entity incorporated a joint venture company to market and distribute chlorination equipment. With respect to the joint venture, the related companies of both the Indian and foreign entity were also involved. Consequently, the parties concluded several ancillary agreements such as a Shareholders’ Agreement which contained an arbitration clause. All the contracting parties were not signatories to all the agreements, including the Shareholders’ Agreement. When disputes arose between the parties, the foreign entities sought to terminate the joint venture. The primary issue that came up for consideration before the Apex Court pertained to the ambit and scope of Section 45 of the Act. The Court framed the issue in the following terms:

“Whether in a case where multiple agreements are signed between different parties and where some contain an arbitration Clause and others do not and further the parties are not identically common in proceedings before the court (in a suit) and the arbitration agreement, a reference of disputes as a whole or in part can be made to the Arbitral Tribunal, more particularly, where the parties to an action are claiming under or through a party to the arbitration agreement.”

In view of the language of Section 45 of the Act, the Court held that the expression “any person” reflects a legislative intent of enlarging the scope beyond “parties” who are signatories to the arbitration agreement to include non-signatories. However, the court noted that such non-signatory parties are required to claim “through or under the signatory party.” Thus, the Supreme Court accepted that arbitration is possible between a signatory to an arbitration agreement and a third party or non-signatory claiming through a party.

The next issue before the Court was then to determine whether there was any legal relationship between the signatory and the non-signatory for the latter to ‘claim through or under’ the former. The court noted that the ‘Group of Companies’ doctrine has been developed by courts and tribunals in the international context to bind a non-signatory affiliate or sister concern within the same corporate group as the signatory party, to an arbitration agreement provided there was a mutual intention of all the parties. The Court emphasized that the “intention of the parties” is the underlying principle for the application of the Group of Companies doctrine. The court thus held that a non-signatory could be subjected to arbitration ‘without their prior consent’ in ‘exceptional cases’ on the basis of four determinative factors:

  • A direct relationship to the party which is a signatory to the arbitration agreement;
  • A direct commonality of the subject-matter and the agreement between the parties being a composite transaction;
  • The transaction being of a composite nature where performance of the mother agreement may not be feasible without the aid, execution, and performance of supplementary or ancillary agreements for achieving the common object and collectively have a bearing on the dispute; and
  • A composite reference of such parties will serve the ends of justice.

The case of Chloro Controls (supra) was dealing with a situation where the success of the joint venture agreement was dependent upon the fulfilment of all the ancillary agreements. In this context, the Supreme Court observed that all the ancillary agreements were relatable to the parent agreement and the ancillary agreements were intrinsically linked with each other, to the extent that they could not be severed. This in the view of the court indicated the intention of the parties to refer all disputes arising out of the parent agreement and ancillary agreements to the arbitral tribunal. The phrase ‘legal relationship’ was explained as being part of the same corporate group, the interests of the non-signatory companies were not averse to the interest of the principal company and the joint venture company.

Post Chloro Controls Era:

In 2016, the legislature amended Section 8 of the Act to bring it in line with Section 45 of the Arbitration Act. The amended Section 8(1) provided that “a party to an arbitration agreement or any person claiming through or under him” could seek a reference to arbitration. However, the legislature did not bring about any change in the language of Section 2(1)(h) or Section 7 of the Act. Since the Chloro Controls (supra) and the amendment to Section 8, subsequent decisions of the Supreme Court have referred to the ‘Group of Companies’ doctrine to join non-signatory persons or entities to arbitration agreements.

The decision in Cheran Properties Ltd. v. Kasturi and Sons Ltd. held that the ‘Group of Companies’ doctrine is applied to bind a non-signatory party upon a construction of the arbitration agreement, circumstances which exist at the time of entering into the contract, and the performance of the underlying contract. Nevertheless, it must be noted that Cheran Properties (supra) did not apply the ‘Group of Companies’ doctrine to make the non-signatory a party to the arbitration agreement. Rather, this Court made the arbitral award binding on a non- signatory under Section 35[1] on the ground that it was claiming under a party which was a signatory to the arbitration agreement.

Over time, the Supreme Court identified certain additional factors for the invocation of the ‘Group of Companies’ doctrine. In Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India, it was held that the non-signatory party, even though a constituent part of the corporate group, did not have any causal connection with the process of negotiations preceding the agreement or the execution thereof, whatsoever. Thus, the participation of the non-signatory party in the negotiation and performance of the underlying contract was held to be the key determinant of the intention of the parties to be bound by an arbitration agreement.

In Mahanagar Telephone Nigam Ltd. v. Canara Bank, the Supreme Court emphasized that the Group of Companies doctrine could be invoked on the basis of the principle of “single economic unit“. The Court noted that the doctrine could also be invoked “in cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality.”

The last in the series of decisions dealing with the Group of Companies doctrine is a three-Judge Bench decision of this Court in Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. The Court held that in addition to the cumulative factors laid down in Chloro Controls (supra), the performance of the contract was also an essential factor to be considered by the courts and tribunals to bind a non-signatory to the arbitration agreement. In this case the Court refined and clarified the cumulative factors that the courts and tribunals should consider in deciding whether a company within a ‘Group of Companies’ is bound by the arbitration agreement:

  • The mutual intent of the parties;
  • The relationship of a non-signatory to a party which is a signatory to the agreement;
  • The commonality of the subject-matter;
  • The composite nature of the transactions; and
  • The performance of the contract.

Finality on the issue in Cox and Kings:

In view of the above decisions and discussions in respect thereto, the Hon’ble Supreme Court arrived at the following conclusions in Cox and Kings (supra):

  • The definition of “parties” under Section 2(1)(h) read with Section 7 of the Act includes both the signatory as well as non-signatory parties;
  • Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement;
  • The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties;
  • Under the Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement;
  • The underlying basis for the application of the ‘Group of Companies’ doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non- signatory party to the arbitration agreement;
  • The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the Group of Companies doctrine;
  • The Group of Companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act;
  • To apply the Group of Companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). Resultantly, the principle of single economic unit cannot be the sole basis for invoking the Group of Companies doctrine;
  • The persons “claiming through or under” can only assert a right in a derivative capacity;
  • The approach in Chloro Controls (supra) to the extent that it traced the Group of Companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law;
  • The Group of Companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements;
  • At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and
  • In the course of this judgment, any authoritative determination given by this Court pertaining to the Group of Companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

[1] Finality of arbitral awards. – Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively.

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Law Commission Proposes Bill Codifying the Law Relating to Trade Secrets

TRIPS & Intellectual Property:

The treaty that internationally governs intellectual property laws is commonly referred to as the ‘TRIPS Agreement’, formally known as the Trade-Related Aspects of Intellectual Property Rights Agreement[1]. TRIPS is comprehensive multi-lateral agreement that lays down the minimum protection requirement of intellectual properties globally. TRIPS identifies seven categories of intellectual property rights viz.

  • copyright and related rights;
  • trademarks;
  • geographical indication;
  • industrial design;
  • patent;
  • layout design (topography) of integrated circuits; and
  • undisclosed information.

Undisclosed Information or Trade Secrets:

Unlike previous international instruments like the Paris Convention for Protection of Industrial Property, the TRIPS Agreement is the first international instrument that recognizes ‘undisclosed information or trade secrets’ as an intellectual property.

Under the TRIPS Agreement, undisclosed information is included in the ambit of intellectual properties to ensure effective protection against anti-competitive practices and unfair commercial use of any protected information. However, the protection accorded to undisclosed information under TRIPS is unlike the traditional intellectual properties. Article 39 of TRIPS defines undisclosed information as any information that:

  • “is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
  • has commercial value because it is secret; and
  • has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”

Additionally, the protection accorded to the undisclosed information is not constrained by a specific duration but is rather considered to be in perpetuity. Any individual or legal entity has the capacity to be the proprietor of undisclosed information and is entitled to rights of “…preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices.”

Undisclosed Test Data & Disclosure for Public Good:

Paragraph 3 of Article 39 of the TRIPS Agreement pertaining to undisclosed test data puts an obligation on the countries that mandate organizations to submit undisclosed test data for the approval of new agricultural or pharmaceutical products. It states that such countries shall ensure the protection of the undisclosed test data from unfair commercial exploitation. Para 3 of this Article further lays down an exception, it states that disclosure of undisclosed test data shall not be considered misappropriation of trade secrets in cases where such disclosure is for the public good.

A reading of Article 39 showcases that concept of “disclosure for public good” does not arise in protection granted to undisclosed information unless such undisclosed information is a test data which utilizes new chemical entities in the pharmaceutical or agricultural industry. In contrast to traditional intellectual properties addressed within the TRIPS framework, undisclosed information does not entail a trade-off between grant of exclusive rights for a limited period and public disclosure.

Protection of Trade Secrets Globally:

In line with the minimum requirement laid down in TRIPS, globally, trade secrets are protected either through specific legislations like in Germany, China, South Korea, etc, or through equity or under common law. Pursuant to the TRIPS and discussions between member states, India, as a country, has always taken a strong stance against inclusion of trade secret under the ambit of intellectual property rights[2]. In India, trade secrets are protected by a spectrum of laws and common law practices including the Indian Contract Act, 1872; Specific Relief Act, 1963; Indian Penal Code, 1870 and the Information Technology Act, 2000.  

289th Law Commission Report & The Protection of Trade Secrets Bill, 2024

Recently, the 22nd Law Commission headed by Justice Ritu Raj Awasthi dealt with the concept of trade secrets and its implications in the current knowledge-based economy of countries. The Law Commission of India in its 289th Report dated March 05, 2024, recommended that a special law should be devised to ensure protection of trade secrets in India.

This bill was proposed by the Law Commission with an intent of protecting trade secrets against misappropriation, to encourage innovation and competition. The bill draws upon Article 39 of the TRIPS Agreement and lays down a definition of trade secrets consistent with the definition outlined in TRIPS. A trade secrets holder is defined as a natural or legal person having lawful control on a trade secret. Further, a trade secrets holder under the proposed bill has the right to license the trade secret. The significant difference between the minimal requirement laid down in TRIPS and the proposed bill is that the proposed bill tries to bring trade secrets under the traditional concept of intellectual property.

Section 5 of the proposed bill lays down certain acts which do not amount to misappropriation of trade secrets. This includes disclosure of trade secret “in good faith to protect public interest”. Further, Section 6 lays down provisions for compulsory licensing, and grants the Central Government the right to mandate the holder of a trade secret to issue a compulsory license for its utilization by third parties or the Government.

Analysis of the Bill:

The proposed bill fails to address the potential ramifications of compulsory licensing of trade secrets on competitive markets within the knowledge economy. Further, identifying the scenarios warranting such compulsory licensing in case of trade secrets shall be challenging. Additionally, the bill includes a provision for instances where disclosure is deemed necessary for the “public good“. However, such a provision fails to differentiate between “undisclosed information” and “undisclosed test data“, since trade secrets in general business parlance typically involve proprietary commercial information which is unrelated to public welfare.

Taking into consideration the need for fair competition in a knowledge-based economy, the bill is a welcome change showcasing an effort to codify the trade secret law in India. It is noted that there is a necessity for a sui generis legislation governing trade secrets to acknowledge the commercial significance of safeguarding such proprietary information. Despite the gaps in the proposed bill, it stands out as the inaugural proposal codifying recourses in case of trade secret misappropriation. The bill encompasses provisions for confidentiality proceedings and, if enacted, will serve as an additional remedy for trade secret holders in India.

[1] TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights (April 15, 1994).

[2] Law Commission of India, Trade Secrets and Economic Espionage, Report No. 289 (March 05, 2024), accessed at, https://lawcommissionofindia.nic.in/report_twentysecond/.                                        

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Fate of Secured Creditor(s): IBC v. SARFAESI Act

Introduction

The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”) was brought into effect to regulate the process of recovery of debts through enforcement of security interest, in the event of default by the borrower(s), and to further regulate the securitisation and reconstruction of financial assets of a borrower in distress. The SARFAESI Act enables the creditors like banks and other financial institutions to recoup the delinquent debts by selling the collateral in an auction, without the requisite of contesting its claim before a court of law.

While the SARFAESI Act is more focused on recovery of financial debt in favor of the banks and other financial institutions than insolvency; the Insolvency and Bankruptcy Code, 2016 (“IBC”) primarily focuses on the reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, and to promote entrepreneurship and availability of credit as well as ensure balancing of interests of all the stakeholders, and for matters connected therewith or incidental thereto.

The Tussle Between IBC & SARFAESI Act:

In Encore Asset Reconstruction Company Pvt. Ltd. v. Ms. Charu Sandeep Desai[1], it was confirmed by the National Company Law Appellate Tribunal, (“NCLAT”) that, section 238 of the IBC has a non-obstante provision that states that IBC shall take precedence over any act in force at the time.

IBC is a special code and thus, its provisions apply regardless of anything that is in conflict with the same in any other law(s) that is/are in force or any instruments that are in force because of any such law(s) including the SARFAESI Act.

Period of Limitation for Initiation of Corporate Insolvency Resolution Process (“CIRP”) in lieu of pending SARFAESI Act proceedings:

The NCLAT in Bimal Kumar v. Bank of India[2] held that the period of limitation to initiate proceedings under IBC would not be extended in lieu of the proceedings pending under SARFAESI Act before the debt recovery tribunal(s) (“DRT”). The NCLAT, relied on the decision of the Hon’ble Supreme Court in B.K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates[3], wherein it was ruled that the initiation or pending of proceedings before DRT under the SARFAESI Act, 2002, or the RDDBFI Act, 1993, could not be regarded as an extension of the limitation period under the IBC and that the limitation period for proceedings under sections 7 and 9 of the IBC were governed by Article 137 of the Limitation Act, 1963.

Moratorium’s Impact on SARFAESI Proceedings:

Moratorium in terms of IBC means a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor. 

CIRP is a time bound process and the relief of moratorium is available to the Corporate Debtor only during the CIRP period i.e. for a period of 180 days which can further be extended to 90 days but not thereafter and even the period of 180 days is also not absolute because the Committee of Creditors (“CoC“) anytime within such period may conclude to liquidate the Corporate Debtor and the moratorium will cease to have its effect.

The Hon’ble Supreme Court in its judgment dated May 18, 2022, in the matter of Indian Overseas Bank v. M/s RCM Infrastructure Limited and Anr.[4] observed that, “any action to foreclose, collect, or enforce any security interest generated by the Corporate Debtor in respect of its property, including any action under the SARFAESI Act, is suspended when the CIRP is launched……..The words “including any action under the SARFAESI Act” are significant.  The legislative aim is obvious in prohibiting any proceedings, including those taken under the SARFAESI Act to foreclose, collect, or enforce any security interest, once the CIRP has been started”.

Taking Charge/Possession of Properties of Corporate Debtor- SARFAESI v. IBC:

In the peculiar facts of the case of Encore Asset Reconstruction Company Pvt. Ltd. vs. Ms. Charu Sandeep Desai & Ors.[5], before the NCLAT, an appeal was preferred by the Appellant against the order passed by National Company Law Tribunal (“NCLT”) Mumbai Bench, in the matter of State Bank of India Vs. Calyx Chemicals & Pharmaceuticals Ltd., whereby ‘Dena Bank’ was directed to handover the possession of the mortgaged property to the IRP. In the proceedings before the NCLT, ‘Dena Bank’ pleaded that the ‘Corporate Debtor’ had availed a loan against creation of a charge by way of exclusive mortgage of an unencumbered property held in the name of the borrower to be treated as a security against the loan. Since the loan had become bad and was declared as a “non-performing asset”, Dena Bank initiated proceedings under Section 13(4) of the SARFAESI Act and took physical possession before the date of commencement of ‘moratorium’. Encore Asset Reconstruction Company Pvt. Ltd. was an assignee of the Dena Bank.

In view of the aforesaid facts, and submissions on behalf of the parties, NCLAT observed that from the explanation below Section 18 of IBC, it is clear that the term ‘assets’ does not include the assets owned by a third party in possession of the ‘Corporate Debtor’, but includes the assets over which the Corporate Debtor has ‘ownership rights’, as stated in the balance sheet of the Corporate Debtor, including the assets that the Corporate Debtor which may or may not be in its possession. Further, it was not the case of the Appellant that the title of the assets had already been transferred or that they had been sold in terms of Section 13(4) of the SARFAESI Act. Furthermore, in case the assets owned by the Corporate Debtor are not in possession of the ‘Corporate Debtor’, a person who is in possession of the same, including the Dena Bank or Encore Asset Reconstruction Company Pvt. Ltd. is bound to hand over the same to the ‘Resolution Professional’, when the title still vests with the ‘Corporate Debtor’.

The NCLAT clarified that the ruling in M/s. Transcore v. Union of India & Anr. was different since it was given before the coming of IBC and that pursuant to Section 238 of IBC, IBC takes precedence over the provisions of SARFAESI Act. In the aforesaid background, the bench held that Section 18 of the IBC will prevail over Section 13(4) of the SARFAESI Act, and the Dena Bank/Encore Asset Reconstruction Company Pvt. Ltd. cannot retain the possession of the property in question of which the ‘Corporate Debtor’ was the owner.

Hence, it is settled that the Corporate Debtor’s assets including the property and other assets pledged as security are to be gathered into one pile for further consideration by a Resolution Applicant or for the purposes of liquidation. These assets are a component of a pool of assets that can be used in any way in accordance with a resolution plan that has the necessary majority of the CoC’s approval (which includes both secured and unsecured Financial Creditors).

Realisation of Security by Creditor(s) under IBC:

A secured creditor can enforce its secured asset(s) in accordance with Section 52 of the IBC only after the CIRP fails, and the process of liquidation kickstarts. The process of realization of security interest by a secured creditor is laid down under Regulation No. 37 of the Insolvency And Bankruptcy Board of India (Liquidation Process) Regulations, 2016. A secured creditor can enforce its security interest in accordance with the provisions as laid down under the said Regulation No. 37 or under the provisions of SARFAESI Act or RDDBFI Act, in which case the provisions of the aforesaid Regulation shall not apply.

In the case of State Bank of India v Anuj Bajpai[6],  the Appellant (State Bank of India) challenged the order of the NCLT, Mumbai Bench, whereby the bench had partly allowed the permission to the ‘secured creditors’ to opt out of the liquidation process under Section 52(1)(b) of the IBC but imposed bar on the ‘secured creditors’ to sell the assets of the ‘Corporate Debtor’ to disqualified persons under Section 29A of IBC. The NCLAT discussed the scope of the provision of Section 35(1)(f) whereby it was clear that the ‘Liquidator’ cannot sell the assets of the Corporate Debtor to the persons who are ineligible in terms of Section 29A of the IBC. Relying upon the decision of the Apex Court in Arcelor Mittal India Private Limited vs. Satish Kumar Gupta & Ors., the NCLAT held that even if Section 52(4) is silent relating to sale of secured assets to one or other persons, the Explanation below Section 35(1)(f) makes it clear that the assets cannot be sold to who are ineligible under Section 29A. If during the liquidation process assets cannot be sold to a person who is ineligible under Section 29A, the said provision is not only applicable to the ‘Liquidator’ but also to the ‘secured creditor’, who opts out of Section 53 to realise the claim in terms of Section 52(1)(b) read with Section 52(4) of the IBC.

In view of the above, clause (8) to Regulation No. 37 of the Insolvency And Bankruptcy Board of India (Liquidation Process) Regulations, 2016, was inserted w.e.f. January 6, 2020, barring a secured creditor to sell or transfer an asset to any person who is not eligible under IBC to submit a resolution plan for insolvency resolution of the Corporate Debtor.

Treatment of Secured Creditors in a Resolution Plan:

The position of secured creditors in CIRP has been affirmed in the recent decision of the Hon’ble Supreme Court in India Resurgent ARC Private Limited v Amit Metaliks[7], wherein it relied upon its former decision in Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors., that a dissenting Financial Creditor in respect of a Resolution Plan would receive the payment of the amount as per his entitlement; and that entitlement could also be satisfied by allowing him to enforce the security interest, however, only to the extent of the value receivable by him in terms of Section 53 of IBC. It has never been laid down that if a dissenting Financial Creditor is having a security available with him, he would be entitled to enforce the entire of security interest or to receive the entire value of the security available with him. It is but obvious that his dealing with the security interest, if occasion so arise, would be conditioned by the extent of value receivable by him. It has not been the intent of the legislature that a security interest available to a dissenting Financial Creditor over the assets of the Corporate Debtor gives him some right over and above other Financial Creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors. Thus, what amount is to be paid to different classes or sub- classes of creditors in accordance with provisions of IBC and the related Regulations, is essentially the commercial wisdom of the CoC; and a dissenting secured creditor cannot suggest a higher amount to be paid to it with reference to the value of the security interest.

The bench thus held that if the contentions on behalf of the Appellant were to be accepted, the result would be that rather than undergoing insolvency resolution and maximization of the value of assets of the Corporate Debtor, the processes would lead to more liquidations, with every secured Financial Creditor opting to stand on dissent. This would defeat the very purpose envisaged by IBC which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.

It is also pertinent to note that Regulation No. 38 of the Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 provides that one of the mandatory contents of a resolution plan as regards the amount payable under a resolution plan to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, is that they shall be paid in priority over financial creditors who voted in favour of the plan.

Therefore, in accordance with IBC, regardless of whether a lender’s debt is secured or not, a successful resolution plan must have a minimum of 66% of the CoC’s vote in its favour. However, it is the liquidation “waterfall” (i.e., the rules determining precedence in the distribution of a profit realization) which gives secured creditors higher priority in the pecking order if the CIRP doesn’t go through and the Corporate Debtor has to undergo liquidation.

Liquidation Process and the Waterfall Mechanism:

As a part of the liquidation process, the Corporate Debtor’s assets are distributed in accordance with section 53 of the IBC read with the Insolvency and Bankruptcy Board of India (liquidation Process) Regulations, 2016, often known as the “Waterfall Mechanism“. Under section 53 of IBC ‘the debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52 of IBC’ is ranked second along with workmen’s dues for the period of twenty-four months preceding the liquidation commencement date.

Issue of First Charge Holder/Subordination Agreements/Inter-Creditor Agreements:

In terms of the claims of the first charge-holder and the second charge-holder, the law is very clear that the first charge-claim holders shall prevail over the second charge-claim holders and that it shall be realised from the immovable property owned by the borrower entity. The amounts owed to the first charge-holder shall also be paid back prior to those owed to the second charge-holder.

According to a typical inter-creditor agreement between the first charge holder and the second charge holder, the second charge holder can only enforce the security with the first charge holder’s permission or departure. The first charge-holder will have a priority entitlement over the assets, even where the asset cover of the borrower is substantially higher than the amounts raised by it from the first and second lender, thereby making remedy of a second charge-holder redundant. Therefore, only one secured creditor can enforce his right for realization of its debt out of the secured assets as per section 52 of IBC.[8] Nonetheless, this may not be relevant in the case of relinquishment of security interest by the secured creditor under Section 53 of IBC.

The NCLAT in its recent landmark judgment in the case of Technology Development Board vs. Anil Goel, Liquidator of Gujarat Oleo Chem Limited (GOCL) & Ors.[9]  held that: “Whether the secured creditor holds a first charge, or second charge is material only if the secured creditor elects to realize its security interest. However, once a secured creditor opts to relinquish its security interest, the distribution of assets would be governed by Section 53(1)(b)(ii), which states that – all secured creditors who have renounced security interests rank equally.”

Joint Sale of property/assets under SARFAESI Act and IBC:

In the case of Ayan Mallick v. Pratime Bayal[10] a joint auction under IBC and SARFAESI Act was carried as part of the land on which the factory was built was owned by guarantors and without contiguous land sale, the liquidator was unable to sell the building. The guarantors challenged the joint auction notice before the Hon’ble NCLT, Kolkata and prayed for a stay. The Hon’ble NCLT rejected the prayer of the Guarantors. The Hon’ble NCLAT upheld the order of the NCLT observing that a joint sale would bring maximization of assets of the Corporate Debtor since the possession of the properties of the Guarantors had already been taken under SARFAESI Act. Therefore, both land and factory were needed to be sold together to maximize the value of the assets and thus, the bench found no substance to the fact that how the Appellant Guarantors were prejudiced in any manner and their appeal was thereby dismissed.

Conclusion The initial interplay of the provisions of SARFAESI Act and IBC was obscure and uncertain until the legal precedents interpreted and settled the supremacy of IBC over any other law in force including the SARFAESI Act. Eventually, the law as it stands today has been dealt and discussed in detail hereinabove. It is quite clear that the purpose of both the legislations is different and yet becomes overlapping when it comes to enforcement of security interest of a secured creditor. However, once the moratorium kicks in, the procedures and compliances of IBC shall prevail over all laws in force including the SARFAESI Act.

[1] Encore Asset Reconstruction Company Pvt. Ltd. v. Charu Sandeep Desai, 2019 SCC OnLine NCLAT 284.

[2] Company Appeal (AT) (Insolvency) No. 1166 of 2019.

[3] B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633.

[4] Indian Overseas Bank v. RCM Infrastructure Ltd., 2022 SCC OnLine SC 634.

[5] Company Appeal (AT) (Insolvency) No. 719 of 2018.

[6] Company Appeal (AT) (Insolvency) No. 509 of 2019) (Delhi Bench).

[7] Civil Appeal No. 1700 OF 2021.

[8] ICICI Bank Ltd. v SIDCO Leathers Ltd., (2006) 10 SCC 452.

[9] Company Appeal (AT) (Insolvency) No.731 of 2020.

[10] Company Appeal (AT) (Insolvency) No. 456 of 2022.

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Cyber Defamation In India

Ever wondered if you could be in trouble because of your opinion, feedback, review, statement, comment and/or post on any social media platform viz. LinkedIn, Facebook, Youtube, etc. By trouble, we mean posting malicious content that can harm the reputation of a person including an entity. This is known and termed as ‘Defamation’, which is an offence under the laws of India and worldwide. The race between technology and law can be termed as a ‘hare and tortoise’ race. As technology gallops, the law tries to keep pace. Publishing of defamatory material against any person in cyberspace or with the help of computers or the Internet tantamount to ‘Cyber Defamation’. The damage done on the internet is so widespread, inexhaustive and beyond geographical boundaries, that makes it difficult to assess the amount of pecuniary harm done to a person.  

Reputation is an integral and important part of the ‘dignity of an individual’ and the right to reputation is inherent amongst the rights guaranteed by Article 21 of the Constitution of India. Defamation in India is both a Civil and a Criminal offence. The remedy for civil defamation is covered under the law of torts and the person defamed can move court to claim damages in the form of monetary compensation from the accused. The remedy under Criminal Law lies under sections 499 and 500 of the Indian penal code, 1860 (“IPC”) whereby person found guilty can be imprisoned for a period of 2 years or punished with fine or both.

Defamation defined under the Indian Law:

Section 499 of the IPC defines defamation as words spoken or written, or signs or visible representations made or published with an intention of damaging the reputation of a person or a group of persons. Defamation may be bifurcated into two, Libel: A defamatory statement made in a writing and Slander: A defamatory statement made orally.

A defamatory statement made does not amount to commission of offence unless it is published and does not fall within one of the exceptions under section 499. However, this does not mean it has to be in print. Further, the imputation made must be with an intent to harm the reputation of a person in the eyes of others and to lower his/her moral and or intellectual character.

Cyber Defamation

The content in the form of audio, video or written text in the digital space i.e. the internet which tends to damage the reputation of a person/s constitutes online/cyber defamation. The provisions and definitions viz. device, computer network, computer resource, computer system and intermediary etc. under the Information Technology Act, 2000 (“Act”) are significant to appreciate and understand the concept of cyber defamation and its legal consequences.

Liability in such cases:

The liability in a case of cyber defamation is primarily that of the author/’originator’ (as defined under the Act) of the defamatory content and in certain circumstances, of the ‘intermediary’ (defined under the Act) which includes telecom service providers, network service providers, internet service providers, search engines, etc.

Section 79 of the Act provides protection and exemption to the intermediary from being liable for any third-party information, data or communication link made available or hosted by him. However, such protection cannot be availed and the intermediary may become liable in the circumstances that i) it has conspired or abetted or aided or induced in the commission of the unlawful act and/or ii) upon receiving actual knowledge, about the unlawful act, the intermediary fails to expeditiously remove or disable access to such material without vitiating the evidence in any manner.

The Hon’ble Supreme Court in the case of Shreya Singhal vs. Union of India[1] held that the intermediaries would be liable if they do not remove the content on being notified by the agency of the government or court and are not under an obligation to remove the defamatory material on mere intimation by the person defamed. This is for the reason that it would be very difficult for intermediaries like Google, Facebook, etc. to act when millions of requests are made to them and the intermediary is made to judge as to which of such requests are legitimate and which are not.

Until the year 2015, under section 66A of the Act a person could be held liable for circulating through computer resource or device any offensive material, which he knew to be false with the object of harming someone’s reputation or for criminal intimidation. However, in the supra case of Shreya Singhal, the Supreme Court held the section as invalid and struck it down for being ambiguous and open-ended, thereby posing threat and going beyond the “reasonable restrictions” to the freedom of speech and expression. The bench observed that, “Something may be grossly offensive and may annoy or be inconvenient to somebody without at all affecting his reputation”.

Relevant Decisions:

In the case of M/s Spentex Industries Ltd. & Anr. vs. Pulak Chowdhary[2], the Plaintiff had filed for a mandatory and prohibitory injunction along with recovery of damages for loss of reputation and business due to the defamatory emails sent by the Defendant to the International Finance Corporation, World Bank, & Ors. The case was filed in the year 2006 and was concluded in 2019 wherein the Hon’ble Delhi District Court observed that the impugned emails tended to lower the image of the company and its Managing Director in the eyes of the employees of the company and were therefore defamatory. The High Court thus passed an order and decree restraining the Defendant from making false and defamatory statements by any means and further awarded 1/10th of the cost to the Plaintiffs along with the cost of the suit to be borne by the Defendant.

The Hon’ble Delhi High Court in its recent decision in Swami Ramdev & Anr. v. Facebook Inc. & Ors.[3], passed an order to remove all defamatory content posted online against yoga guru ‘Baba Ramdev’, without any territorial limit, stating that if the content is uploaded from India or such content is located in India on a computer resource then the Courts in India should have international jurisdiction to pass worldwide injunctions. The Court opined that for an injunction order to be effective, the removal and disablement had to be complete in respect of the cause over which the Court has jurisdiction. It cannot be limited or partial in nature.

At present Facebook, has filed an appeal[4] against the said order before the division bench of the Hon’ble Delhi High Court, inter alia contending that global take down order is against national sovereignty and international comity, as it interferes with defamation laws of other countries. The same is pending before the Hon’ble Division Bench.

Remedy against Cyber Defamation:

As an immediate step one can register a complaint directly with the social media platform where the offence has been committed. Such platforms usually provide for a mode of making complaint in respect of activities against their privacy policies and community guidelines, on their platform. It is preferable that such an activity is reported at the earliest enabling the intermediary to take immediate steps for blocking such activity and dissemination of the same.

Register a cyber-crime FIR and in case of no access to cyber cell, a first information report (“FIR”) at the local police station. In case the same is not accepted, one can approach the Commissioner or Judicial Magistrate under sections 154 & 156 of Criminal Procedure Code, 1973 (“Cr.P.C.”), respectively.

In the present times of spoofing of identity, impersonation and anonymity maintained through fake and/or private profiles online, the biggest challenge faced in the digital space is identifying the person against whom the action should be initiated for defamation. The appropriate steps in such a case are two-fold, first, to initiate the proceeding for tracing the identity under section 200 of Cr.P.C. accompanied by an application under section 202 of Cr.P.C. with a request to court to direct the police to conduct inquiry to trace the identity of a person by locating the IP address or collecting the other relevant evidence from Internet, and thereafter, initiate the proceeding for criminal or civil defamation against the said person.

The first priority for the aggrieved party in such cases is to get the defamatory content removed from the Internet which is possible only through the order of the court. Therefore, recourse to civil remedy can be taken by filing a Suit against such offender/author/originator of the content along with the concerned intermediaries, and seek injunction against dissemination and broadcast of such content online at the interim stage and further, seek perpetual injunction if the content is found defamatory along with compensation for damages suffered due to the same, subject to proving it before the court of law.

Challenges in Seeking Remedy:

As discussed above spoofing of identity and anonymity online is the biggest challenge faced in the digital space. Another big challenge is to collect and preserve the digital evidence and to prove its authenticity. The compliance of conditions of section 65 B of the Indian Evidence Act, 1872 and getting the forensic examination done is necessary to prove the case beyond doubt which may incur time and cost of the aggrieved person. This makes the remedy in case of online defamation difficult and complicated. These remedies may not be effective and sufficient as by the time it could be enforced, the defamatory material in the form of audio, video or text would have achieved the desired impact of the offender(s). Further, the victim may only be able to make out a prima facie case of defamation, however, may not be able to produce all the evidence related to the source of the publication including the details of the publisher to be able to make him/her a party to the proceeding, since the same would require court’s order in this regard.  

Conclusion

In the present tech-savvy world, since most of the population has access to internet and social media, the indiscriminate use of the same for voicing their opinions and views often impinges upon the right(s) of another person. Thus, the effortless transfer of data and information over the internet has made it a critical hot-spot for defamation. Although, there are laws in place prohibiting such activity by people online, however, most people are not aware of the same or are too negligent to realize whether such content is defamatory or not. There is a dire need of a system which educates and makes people aware of the consequences of their indiscriminate actions. Further, the intermediaries have a responsibility to respect the integrity of all persons equally on its platform without the need for court’s order in this regard and without prioritizing their revenue and profits derived from engagement on such controversial content. Appropriate laws and their implementation against such users, is necessary to avoid repetition and frequency of such incidents in the future.

  • [1] AIR 2015 SC 1523
  • [2] Hon’ble Addl. District Judge, Dwarka Courts, New Delhi, Judgement dated 01.05.2019, CS No. 219/18
  • [3] 263 (2019) DLT 689
  • [4] Hon’ble High Court of Delhi, New Delhi, FAO(OS) 212/2019