Sunday, September 30, 2012

Paper on “Peel-Off” Law Firms in India


Professor Jayanth Krishnan at the Indiana University Maurer School of Law has posted a paper titled Peel-Off Lawyers: Legal Professionals in India's Corporate Law Firm Sector, which studies the phenomenon of lawyers leaving big law firms to set up their own practices. The paper is available on SSRN.
The abstract of the paper is as follows:
This study is about hierarchy within the legal profession – how it presents itself, how it is retained, and how it is combated. The socio-legal literature on this subject is rich, with many roots tracing back to Professor Marc Galanter’s famous early 1970s article on the ‘Haves’ and ‘Have-Nots.’ Galanter’s piece and the work of those influenced by him rightly suggest that resources – institutional, financial, and demographic – contribute to whether lawyers are, and remain as, part of the ‘Haves.’ Yet, while resources of course greatly matter, as this study will argue other forces are significant as well. One set, in particular, relates to what the social-psychology literature has termed mobbing – a phenomenon that contributes to the reinforcing of hierarchy through certain aggressive and passive tactics that those with power use to consolidate their reigns and hinder the upward mobility of the employees beneath them. In a legal professions setting, the result can be an environment where ‘Have-Not’ lawyers within an office are commonly left to feel insecure, powerless, and stuck in the legal employment positions in which they find themselves.

To evaluate how resources and mobbing interact, this study returns to the place from where Galanter’s original inspiration for the ‘Haves’ article came: India. The results of a multi-year ethnography are presented on the Indian corporate bar. Since India liberalized its economy in 1991, numerous Indian corporate law firms have thrived, even post-2008. But often steep professional pyramids exist within these firms – perpetuated by those with power exerting a combination of resource-advantages and mobbing-techniques – that can leave lower-level lawyers feeling excluded from this success. To combat this hierarchical status quo, unhappy lawyers are increasingly peeling-off to start their own new law firm enterprises. Peel-off lawyers are thus seeking to become the new ‘Haves.’ However, the goal for peel-off lawyers is not solely to earn higher incomes but also to create environments that are more democratic, transparent, and humane. As this study argues, such opportunities are now possible because of a more liberal, globalized economy, and given the commitment to greater egalitarian norms, this development is indeed welcome, especially as the next generation of corporate lawyers emerges within India.

Indian Journal of Arbitration Law


[The following announcement is posted on behalf of the Indian Journal of Arbitration Law]
The inaugural edition of the Indian Journal of Arbitration Law (IJAL) (http://www.ijal.in/?q=node/6) had been recently launched by Hon’ble Mr. Justice N.N. Mathur, Vice Chancellor, NLU Jodhpur & Chief Patron, IJAL on Thursday, September 27, 2012.
The IJAL is a biannual peer reviewed student run journal, under the aegis of the Centre for
Advanced Research & Training in Arbitration Law (CARTAL) of National Law University, Jodhpur. The mission of IJAL is to provide timely information, both practical and academic, on developments in the field of arbitration. It emphasises on publishing quality articles rapidly and making them freely available to researchers worldwide.

The Editorial Team of IJAL works under the guidance of an Advisory Board, which includes distinguished scholars like Mr. Fali S. Nariman, Prof. Martin J. Hunter, Mr. S K Dholakia, Mr. Gary B Born, Prof. Loukas Mistelis, Prof. Lakshmi Jambholkar & Mr. Promod Nair.
IJAL Website - http://www.ijal.in
Inaugural Edition Contributions - http://www.ijal.in/?q=node/6
The theme for the next issue will be released soon.

Thursday, September 27, 2012

VTB Capital: The Consequences of Lifting the Corporate Veil


The Court of Appeal earlier this year gave judgment on an important issue of corporate law: the consequence of lifting the corporate veil, and, in particular, whether the puppet is deemed to have become a party to contracts entered into in the puppeteer’s name (VTB Capital v Nutritek). The issue is of practical importance because an affirmative answer to this question would allow claims to be framed in contract which would otherwise be framed differently, and of conceptual importance because it reveals the nature of the remedy (ie, what courts mean when they “lift” the corporate veil). As we discuss below, the Bombay High Court and the Court of Appeal have given opposite answers to this question, and the UK Supreme Court is scheduled to hear the appeal against VTB Capital on 12 November.

VTB Capital was a dispute that arose out of a loan that was obtained fraudulently. VTB, a company incorporated in England and a subsidiary of a Russian company, was induced to give a loan of about $220 million to Russagroprom LLP [“RAP”] to fund the acquisition of certain dairy companies [“the Dairy Companies”] from Nutritek, a company incorporated in the British Virgin Islands [“Nutritek”]. The loan was made under a Facility Agreement to which the parties were VTB, Nutritek, RAP and RAP’s parent companies as guarantors. The parties to the Share Purchase Agreement (through which RAP bought the Dairy Companies) were RAP, Nutritek and Newblade (the company whose shares were transferred to RAP). The Facility Agreement stipulated that VTB would release funds only after receiving an independent valuation report.

Soon after the loan was made, RAP defaulted, and VTB was left with a considerable shortfall after realising its securities. VTB realised that it had been induced into entering into the Facility Agreement by two fraudulent misrepresentations: (i) that Nutritek and RAP were not under the ultimate control of the same person and (ii) a substantial and deliberate exaggeration of the value of the Dairy Companies, leading to a misleading valuation report. VTB initially brought a claim in contract against VTB, and in tort against Marcap BVI, Marcap Moscow and Mr Malofeev. The allegation was that Marcap BVI, which owned Marcap Moscow, had a substantial stake in Nutritek, and that Mr Malofeev was the controller of all three companies (this was the basis of (i) above). VTB then applied for leave to amend its Particulars of Claim to allege liability in contract against Marcap BVI, Marcap Moscow and Mr Malofeev, on the basis that, once RAP’s veil was pierced, those who controlled it became parties to the Facility Agreement. It is of interest to note that VTB ran this case purely for jurisdictional reasons: a claim in contract would have strengthened its attempt to establish the jurisdiction of the English courts with respect to sue Marcap BVI, Marcap Moscow and Mr Malofeev.

In VTB Capital, Mr Snowden QC argued that the legal consequence of lifting the corporate veil is that the controller is regarded as an additional party to contracts entered into in the name of the company he controls. This, it was argued, was not a matter of “discretion” or a “remedy” devised by the court to do justice, but simply the logical consequence of ignoring the fact that the puppet is a separate legal entity. The outstanding submissions of counsel and the Court’s equally outstanding analysis repay careful study, for these trace the development of the corporate veil as a remedy from the time it was devised to the way in which it is used today, and consider analogies, if any, with the law of undisclosed principals. What follows here is no more than a brief summary of this analysis. Burton, J, in two decisions (Antonio Gramsci and Alliance Bank), had accepted this argument, but Arnold, J, in the judgment under appeal, held that those cases were wrongly decided. Mr Snowden relied on the Court of Appeal’s well-known judgment in Gilford Motor Co v Horne [1933] Ch. 935. In that case, the claimant obtained an injunction restraining Mr Horne and JM Horne & Co from carrying on competing business. Mr Horne had entered into a contract which restrained him from doing this, but JM Horne & Co had not. Mr Snowden’s case in VTB was that no injunction could have been granted against JM Horne & Co except in support of an independent cause of action against it; that cause of action could have only been that JM Horne & Co was deemed, once the corporate veil was lifted, to have become a party to Mr Horne’s contracts. Lloyd LJ rejects this reading of Gilford, and holds that the Court of Appeal granted an injunction against the company only because it was “practically convenient” to do so; an injunction against Mr Horne alone would have sufficed, since there was a finding that he was in breach of the covenant through the company, but it was convenient to grant this remedy against the company as well. Jones v Lipman, Trustor and other cases were similarly explained.

It was also suggested that there is an analogy with the law of undisclosed principals, which allows a third party to sue the undisclosed principal even though he did not know of his existence when he entered into the contract; it was said that a case where a controller deceives a contracting party into thinking that the puppet is not a puppet is identical because it is also a case where the controller acts through another without the knowledge of the other party to the contract. Lloyd LJ rejected this submission because the third party is allowed to sue an undisclosed principal only if the agent entered into the contract within the scope of his actual authority, and, in a corporate veil case, the controller by definition does not authorise the puppet to enter into a contract on his behalf.

In the course of its careful review of the authorities, the Court of Appeal also made two other important points: first, “lifting the corporate veil” does not ignore the existence of the company, but allows the court to provide a remedy that would otherwise be available only against the company (as opposed to the controller, or vice versa); secondly, there is no requirement that the corporate veil can be lifted only if it is necessary to do so (ie, that there is no other remedy) and Dadourian and Hashem v Shayif, to the extent they suggested there is, are incorrect.

The Bombay High Court, in a case we have discussed on this blog, cited Burton J’s judgment in Gramsci for the proposition that a contract may be enforced against the puppet as well as the puppeteer. Unfortunately, the Court did not consider this issue in detail, or the arguments against Burton J.’s interpretation of Gilford Motor Co. This case is now before the Supreme Court.

There is no doubt that this is a difficult issue as to which there is more than one reasonable view. The strongest argument in favour of the appellants in VTB Capital appears to be the reasoning in Gilford Motor Co v Horne. The strongest argument to the contrary is that (as the Court of Appeal points out) it is difficult to reconcile this proposition with the principle that a contract, construed objectively, creates rights and obligations only between parties (subject to certain exceptions that are irrelevant here). Another difficulty with the argument is that the controller will be deemed to have become a party to the puppet’s contracts even if the fraud he perpetrated was not that the puppet was not controlled by him. In VTB, this issue did not arise because the allegation (assumed to be true) was that Mr Malofeev had fraudulently represented that Nutritek and RAP were controlled by different entities.

The Supreme Court’s decision in VTB Capital is keenly awaited.

Sunday, September 23, 2012

Erroneous Legal Opinions and Criminal Liability


The Supreme Court has recently decided on the nature and extent of criminal liability that may be imposed on a lawyer who issues a legal opinion that is found to be erroneous. In what might be a matter of some relief to the legal fraternity, the court has set very high standards to be satisfied by the prosecution to charge a lawyer for the crime of conspiracy in defrauding a bank.
In Central Bureau of Investigation,Hyderabad v. K. Narayana Rao, the lawyer concerned, being a panel advocate representing a bank, delivered a series of legal opinions relating to the title to several properties. The bank lent monies on the strength of the legal opinions, which were found to be erroneous. The lending transaction was found to be part of a larger scheme by several persons to defraud the bank by inducing it to lend monies that caused wrongful loss to the bank. The Central Bureau of Investigation (CBI), after investigation, filed charges against the lawyer. These charges were quashed by the Andhra Pradesh High Court, against which the CBI appealed to the Supreme Court.
In its judgment, the Supreme Court considered the legal position on two counts. First, it determined whether the High Court has the requisite powers to quash charges under section 482 of the Criminal Procedure Code, a matter that falls squarely within the domain of criminal law and procedure. Second, the court also considered the role of a lawyer issuing a title opinion on behalf of the bank, and the responsibility of such lawyer, particularly under criminal law. It is with the second aspect that we are concerned.
In the present case, the lawyer issued a customary title opinion after considering all the documents provided by the parties. The opinion provided conclusions on whether the owner possessed the necessary title to the property to be able to convey the same to the purchaser. It was specifically found that a substantial part of the opinion was based on photocopies of documents, and few originals were provided. After considering the available evidence, the court concluded that there was insufficient material to conclude that the lawyer was acting as a conspirator so as to be charged for the offence to defraud the bank.
The Supreme Court sought to lay down the standards of lawyers in such circumstances:
22. ... In the banking sector in particular, rendering of legal opinion for granting of loans has become an important component of an advocate’s work. In the law of negligence, professionals such as lawyers, doctors, architects and others are included in the category of persons professing some special skills.
23. ... The only assurance which such a professional can give or can be given by implication is that he is possessed of the requisite skill in that branch of professional which he is practising and while undertaking the performance of the task entrusted to him, he would be exercising his skill with reasonable competence. This is what the person approaching the professional can expect. Judged by this standard, a professional may be held liable for negligence on one of the two findings, viz., either he was not possessed of the requisite skill which he professed to have possessed, or, he did not exercise, with reasonable competence in the given case, the skill which he did possess.
...
25. ... Mere negligence unaccompanied by any moral delinquency on the part of a legal practitioner in the exercise of his profession does not amount to professional misconduct.
26. Therefore, the liability against an opining advocate arises only when the lawyer was an active participant in a plan to defraud the Bank. In the given case, there is no evidence to prove that [the lawyer] was abetting or aiding the original conspirators.
27. However, it is beyond doubt that a lawyer owes an “unremitting loyalty” to the interests of the client and it is the lawyer’s responsibility to act in a manner that would best advance the interest of the client. Merely because his opinion may not be acceptable, he cannot be mulcted with the criminal prosecution, particularly, in the absence of tangible evidence that he associated with other conspirators. At the most,  he may be liable for gross negligence or professional misconduct if it is established by acceptable evidence ...
While this may seem to exonerate lawyers from criminal liability for erroneous opinions, the ruling must be read in its specific context. What was in question in that case was the charge of criminal conspiracy, which now seems to be difficult to establish against erring lawyers. To that extent, it may stated that the risk to lawyers is somewhat contained. However, this decision does not deal with the specific issue of liability for gross negligence or professional misconduct, on which the court has left the door open. Moreover, this decision is specifically in the context of criminal liability for conspiracy to defraud, and does not touch upon the issues if civil liability for professional negligence or misconduct, which might continue to operate if circumstances so justify.
Although not directly addressed by the court, the context of this decision also underscores the difficulties in the real estate sector in India where the determination of title to property with any level of certainty is a daunting task. 

Saturday, September 22, 2012

FDI Reforms Take Effect


We had earlier discussed the key aspects of the FDI reforms proposed by the Government. Unlike the previous occasion where the Government had to keep the FDI reforms in the retail sector in suspended animation, this time it was quick to notify the reforms that have now taken legal effect, as follows:
Press Note No. 4 (2012 series): FDI in single-brand product retail trading;
Press Note No. 5 (2012 series): FDI in multi-brand retail trading;
Press Note No. 6 (2012 series): FDI in the civil aviation sector;
Press Note No. 7 (2012 series): FDI in the broadcasting sector; and
Press Note No. 8 (2012 series): FDI in power exchanges.
These changes have taken into effect from September 20, 2012.

Saturday, September 15, 2012

A Comment on the New FDI Reforms


The Government has attempted to stem the trend of economic policy paralysis by announcing a slew of measures yesterday with a view to enhancing foreign direct investment (FDI), including in some sensitive sectors which had witnessed political deadlock over the last year or so. The new measures relate to multi-brand retail, single-brand retail, civil aviation, power trading exchanges and broadcasting.
Multi-brand Retail
The most prominent (and even emotive) sector relates to multi-brand retail. After the Government had to call of its proposed opening of the sector to FDI last November, it has sought to resuscitate its policies, this time with some modifications in an apparent effort to cushion its impact and to enhance its acceptability to various stakeholders. However, given this is a political hot-potato, the extent to which it receives acceptances remains to be seen.
The Government’s new proposal is contained in its press release. First, the Government’s balancing act is evident from that fact the states are provided significant powers. Multi-brand FDI can be carried out in specific states only if that is permitted by the relevant state governments. This is driven by both legal and political compulsions. The legal compulsion, which is expressly stated by the Government, is that the retail sector is regulated under the Shop & Establishments Act, which is essentially within the domain of the states. This legislation touches upon governing the working conditions of personnel employed within the sector. From a political standpoint, this involves some tight-rope walking so as to initiate FDI in states which are amenable to this policy, without confronting those that are against. While some states have taken a liberal view on the issues, several states continue to oppose FDI in the sector. The Times of India lists out the approaches adopted by some of the key states on the issue.
Second, the retail outlets must be set up in urban agglomerations with a population of more than 10 lakhs. In states with no such cities, specific dispensations have been made. This is to ensure that the impact of the proposal can be contained to urban areas, without any impact on the rural areas.
Third, a minimum of 50% of the FDI is to be utilised in “backend infrastructure”, which includes “capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc.” This is a significant condition as it generally well-accepted that there is a dire need for funding to develop such backend infrastructure in India. The arguments in favour of liberalisation of FDI in the multi-brand sector have been premised on the need for such funding. Specifically, the press release also states that land cost and rentals will not be counted towards that purpose.
In all, while this move is expected to please the markets and demonstrate the Government’s aim to create a more conducive investment environment, a lot will depend on the acceptability of such a policy to the states. To that extent, while the Government’s policy is merely enabling, the ball now lies in the individual states’ court.
Single-brand Retail
The Government’s approach on single-brand retail has been bolder. The effort has been unequivocal in terms of reducing the burden on foreign players in being able to meet with investment conditions. When the Government allowed 100% FDI in single-brand retail earlier this year, it imposed several conditions, including the requirement for local sourcing from micro, small and medium enterprises (MSME). However, this was considered to be restrictive, and many single-brand retailers including Ikea made representations to the Government to ease the process. The Government, in its new proposal, agreed to relax two significant conditions.
The first relaxation pertains to the condition that the foreign investor must be the owner of the brand. It was felt that this does not recognise group holding structures whereby for reasons of commercial exigency the entity that makes the investments into the Indian company may be different from the entity that holds the brand. Therefore, the new condition simply provides that any non-resident entity, “whether owner of the brand or otherwise”, may make the investment. A protective measure, however, has been introduced to state that only one investment will be permitted for a specific brand. This change is understandable, and can at best be said to be procedural rather than any substantial overhaul.
The second relates to the domestic sourcing condition, which was found to be onerous. The previous condition stipulated that where the FDI were to be in excess of 51%, then a mandatory domestic sourcing was required to the extent of 30% of the value of products sold, and such sourcing was to be from small industries (which were defined as industries where investment in plant and machinery did not exceed US$ 1 million). Representations were made to the Government that this was not practicable for high value goods, and that even where industries may have satisfied the requirement as the commencement of supply to the single-brand retailer, they would soon outgrow their “small” industry status. The Government has favourably addressed these concerns by removing the mandatory nature of the local sourcing norms. The new requirement states that single brand retailers may source their needs locally, and “preferably” from MSMEs, village and cottage industries, craftsmen and artisans “where it is feasible”. The only mandatory part relates to geographical element, i.e. the fact that 30% of the sourcing must be done locally, from India. The rest of the requirement seems to be merely a “good faith” effort on the part of the retailers, and there appears to be no immediate attempt to enforce this so as to invite legal consequences upon retailers who may not source from MSMEs or the village or cottage sectors.
Aviation
The liberalisation of FDI in the aviation sector, although not unexpected, is interesting for different reasons. In case of the retail sector, there has been significant pressure from the multinational players to open up the sector. However, in the aviation sector, the trigger appears to have emerged from within, due to the domestic circumstances. Foreign airlines have been seeking a share of the domestic aviation pie for over a decade now. But, the Government has been steadfast in its resolve not to open up the sector for foreign strategic players. However, the recent economic fractures in the domestic aviation industry have necessitated a change in approach. With the domestic industry being competitive, and with several players facing dire financial circumstances, the new FDI measures appear to be a way of preventing further downturn in the domestic sector in the hope that foreign airlines would be interested in infusing the much needed funds into the domestic aviation sector.
Under the new dispensation, foreign airlines will be permitted to invest in “scheduled and non-scheduled air transport services” that were hitherto out of bounds for them. The investment will be allowed under the Government (approval) route up to a maximum of 49%. The investment cap and other related measures are to ensure that control of the domestic company remains in Indian hands. The proposal also addresses some of the security concerns involved in the industry.
Others
In the broadcasting sector, changes have been made to bring the key services within the scope of FDI to the extent of 74%, so as to confer similar treatment as the telecom sector. Separate regimes continue for cable networks and news (and current affairs) broadcasting services. A limit of 49% has been set for FDI in power trading exchanges.
In a related move, the Cabinet has also announced disinvestments in some key public sector undertaking, which may in turn boost the capital markets.

To conclude, these proposals appear to be an attempt to boost the economy and address the concerns of policy paralysis that have afflicted the country more recently. While it will certainly have the effect of altering the perceptions among investors in the markets, it might be too early to determine the impact of these reforms on the ground. The FDI in multi-brand retail is left to be determined by the states, many of whom continue to reject the idea. Moreover, there could also be a political backlash from the opposition and other regional parties to the idea of liberalisation in that sector, the effect of which will be known only in the coming days and weeks. From a technical standpoint, the current decisions have been taken by the Cabinet, but there appears to be no formalisation in terms of changes to the FDI Policy, which might soon follow nevertheless. But, until these formal legal changes are effected, concrete steps towards investment may have to wait. That would be a prudent approach considering the previous experience where the proposal to open up the multi-brand retail sector last November generated great enthusiasm, only to be soon followed by the proverbial “slip between the cup and the lip”. 

Thursday, September 13, 2012

IICA’s Legal Compliance Manual


I just came across a Legal Compliance Manual put together by the Indian Institute of Corporate Affairs (IICA). It contains a list of compliances required to be carried out on the part of businesses that arise under various central and state legislation. Areas addressed include corporate law, environmental law, labour law, tax law and other general laws.
It is indeed a useful tool for practitioners and businesses given the plethora of legal compliance required on their part while operating in India.