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Chapter 12 Cross Border Insolvency – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Cross Border Insolvency – CS Professional Insolvency Law and Practice Study Material

Question 1.
‘Insolvency and Bankruptcy Code also regulates cross border transactions’ Elucidate the relevant provisions of Insolvency and Bankruptcy Code, 2016. (June 2019, 6 marks)
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency. Agreements with foreign countries: Section 234 of the Code empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency. Section 234 of the Code provides that the Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [Section 234(1)]
The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)]
Letter of request to a country outside India in certain cases: Section 235 of the Code lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [Section 235(1)]
The Adjudicating Authority on receipt of an application under sub-section(l) and, on being satisfied that evidence or action relating to assets under sub- section(1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to court or an authority of such country competent to deal with such request. [Section 235(2)]
The current cross border insolvency framework in India is dependent on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus, it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 2.
“A domestic business may have foreign branches or subsidiaries, or a foreign business may have domestic branches or subsidiaries. Foreign creditors may have valid claims in domestic bankruptcy cases, and domestic creditors may have valid claims in foreign bankruptcy cases”.
Elucidate with reference to the objectives and scope of Model Law developed in this regard? (Dec 2019, 6 marks)
Answer:
The Preamble to UNCITRAL Model Law on Cross-Border Insolvency provides that:
The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
(a) Co-operation between the courts and other competent authorities of this State and Foreign States involved in cases of Cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of Cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
(d) Protection and maximization of the value of the debtor’s assets; and
(e) Facilitation of the rescue of financially troubled business, thereby protecting investment and preserving employment.

UNCITRAL Model Law on Cross-Border Insolvency applies where:

• Assistance is sought in this State by a foreign court or a foreign representative in connection with foreign proceeding; or
• Assistance is sought in a foreign State in connection with a proceeding under [identify laws of the enacting State relating to insolvency]; or
• A foreign proceeding and a proceeding under (identify laws of the enacting State relating to insolvency) in respect of the same debtor are taking place concurrently; or
• Creditors or other interested persons in a foreign State have an interest in requesting the commencement of or participating in a proceeding under (identify laws of the enacting State relating to insolvency).

UNCITRAL Model Law on Cross-Border Insolvency does not apply to a proceeding concerning (designate any types of entities, such as Banks or Insurance Companies, that are subject to a special Insolvency regime in this State and that this State wishes to exclude from this Law).
The acceptance of the cross border insolvency norms was observed in the CIRP of Jet Airways Limited where the NCLAT has allowed Dutch Administrator to attend the meeting of the Committee of Creditors, however, with limited or no power to participate directly.

Question 3.
The United Nations Commission on International Trade Law’s. Model Law on Cross Border Insolvency do not lead to harmonization of Insolvency Laws enacted by the individual Countries’. Do you agree with this statement? Explain. (Dec 2020, 6 marks)
Answer:
No, we do not agree with the said statement. In fact the UNCITRAL Model Law on Cross Border Insolvency do harmonize the Insolvency Laws enacted by the individual countries.
Globally, cross-border insolvency laws are based on one country providing assistance to the other in taking control of the assets and eventual disposition of such assets of the debtor company. Such aims are achieved by the mutual recognition of each country’s insolvency regime.
Some countries have adopted the UN Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency, adopted in 1997. The model law is designed to provide a harmonized approach to the treatment of cross-border insolvency proceedings, facilitate cooperation between the courts and office holders involved in the insolvency in different jurisdictions, and provide forthe mutual recognition of judgements and direct access of foreign representatives to the courts of the enacting state.
The Legislative Guide on Insolvency Law is intended to be used as a reference by national authorities and legislative bodies when preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.
The UNCITRAL Model Law on Cross-Border Insolvency, is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency. Those instances include cases where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.

Question 4.
Whether a foreign company can merge into an Indian company or vice versa? Discuss the relevant provisions of the Insolvency and Bankruptcy Code, 2016. (Dec 2021, 6 marks)
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency. Agreements with foreign countries : Section 234 empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency. Section 234 of the Code provides that: The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [(Section 234(1)].
The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)].
Letter of request to a country outside India in certain cases : Section 235 of the Insolvency and Bankruptcy Code, 2016 lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [(Section 235(1)]
The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with, such request. [Section 235(2)]
The current cross border insolvency framework in India is dependent on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 5.
UN Commission on International Trade Law on cross-border insolvency, was adopted in 1997. Since then the subject was deliberated in various statutes in India and abroad and finally as per the Banking Law Reforms Committee (BLRC) Report, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted which contains the provisions relating to the question of cross-border insolvency. In this context describe the provisions of cross-border insolvency as contained in the IBC. (June 2022, 6 marks)

Question 6.
What is cross border insolvency?
Answer:

• Cross-border insolvency (sometimes called international insolvency) regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country.
• In recent times, the number of cross-border insolvency cases has increased significantly.

Question 7.
What should be the objective of effective and efficient insolvency law?
Answer:
An effective and efficient insolvency regime should aim to achieve the following key objectives in a balanced manner:

• Maximization of value of assets.
• Ensuring equitable treatment of similarly situated creditors
• Provision for timely, efficient and impartial resolution of insolvency
• Preservation of the insolvency estate to allow equitable distribution to creditors
• Ensuring a transparent and predictable insolvency law that contains incentives for gathering and dispensing information
• Recognition of existing creditor rights and establishment of clear rules for ranking of priority claims
• Establishment of a framework for cross-border insolvency.

Question 8.
What is “The United Nations Commission on International Trade (UNCITRAL)”?
Answer:

• The United Nations Commission on Internationa Trade Law (UNCITRAL) is a subsidiary body of the General Assembly.
• The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966.
• The Commission carries out its work at annual sessions.
• The United Nations Commission on International Trade Law prepares international legislative texts for use by States in modernizing commercial law and non-legislative texts for use by commercial parties in negotiating transactions.

Question 9.
Explain the key provisions of UNCITRAL Legislative guide on Insolvency Laws.
Answer:

• The Legislative Guide on Insolvency Law was prepared by the United Nations Commission on International’Trade Law (UNCITRAL).
• The Legislative Guide is divided into four parts.
• Part one discusses the key objectives of an insolvency law, structural issues such as the relationship between insolvency law and other law, the types of mechanisms available for resolving a debtor’s financial difficulties and the institutional framework required to support an effective insolvency regime.
• Part two deals with core features of an effective insolvency law, various stages of an insolvency proceeding from their commencement to discharge of the debtor and closure of the proceedings.
• Part three addresses the treatment of enterprise groups in insolvency, both nationally and internationally. In terms of the international treatment of groups, part three focuses on cooperation and coordination.
• Part four focuses on the obligations that might be imposed upon those responsible for making decisions with respect to the management of an enterprise when that enterprise faces imminent insolvency or insolvency becomes unavoidable. The aim is to protect the legitimate interests of creditors and other stakeholders.

Question 10.
State the key differences between UNCITRAL Legislative Guide on Insolvency Law vis-a-vis UNCITRAL Model Law on Cross-Border Insolvency.
Answer:

• There are differences between UNCITRAL Legislative Guide on Insolvency Law vis-a-vis UNCITRAL Model Law on Cross-Border Insolvency.
• A model law generally is used differently than a legislative guide.
• Specifically, a model law is a legislative text recommended to States for enactment as part of national law, with or without modification. As such, model laws generally propose a comprehensive set of legislative solutions to address a particular topic and the language employed supports direct incorporation of the provisions of the model law into a national law.
• The focus of a legislative guide, on the other hand, is upon providing guidance to legislators and other users and for that reason guides generally include a substantial commentary discussing and analysing relevant issues. It is not intended that the recommendations of a legislative guide be enacted as part of national law as such. Rather, they outline the core issues that it would be desirable to address in that law, with some recommendations providing specific guidance on how certain legislative provisions might be drafted.

Question 11.
Write a note on UNCITRAL Model Law on Cross-Border Insolvency.
Answer:

• The UNCITRAL Model Law on Cross-Border Insolvency, adopted in 1997, is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency.
• The Model Law is designed to assist States to equip their insolvency laws with a modern legal framework to more effectively address cross-border insolvency proceedings concerning debtors experiencing severe financial distress or insolvency.
• It focuses on authorizing and encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws.
• For the purposes of the Model Law, a cross-border insolvency is one where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.

Question 12.
Explain the key provisions /elements of UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
The Model Law focuses on four elements identified as key to the conduct of cross-border insolvency cases:
1. Access:
These provisions give representatives of foreign insolvency proceedings and creditors a right of access to the courts of an enacting State to seek assistance and authorize representatives of local proceedings being conducted in the enacting State to seek assistance elsewhere.

2. Recognition:

• One of the key objectives of the Model Law is to establish simplified procedures for recognition of qualifying foreign proceedings in order to avoid time-consuming legalization or other processes that often apply and to provide certainty with respect to the decision to recognize.
• These core provisions accord recognition to orders issued by foreign courts commencing qualifying foreign proceedings and appointing the foreign representative of those proceedings.
• Recognition of foreign proceedings under the Model Law has several effects – principal amongst them is the relief accorded to assist the foreign proceeding.

3. Relief

• A basic principle of the Model Law is that the relief considered necessary for the orderly and fair conduct of cross-border insolvencies should be available to assist foreign proceedings.
• Key elements of the relief available include interim relief at the discretion of the court between the making of an application for recognition and the decision on that application, an automatic stay upon recognition of main proceedings and relief at the discretion of the court for both main and non-main proceedings following recognition.

4. Cooperation and coordination

• These provisions address cooperation among the courts of States where the debtor’s assets are located and coordination of concurrent proceedings concerning that debtor.
• The Model Law expressly empowers courts to cooperate in the
  areas governed by the Model Law and to communicate directly with foreign counterparts.
• Cooperation between courts and foreign representatives and between representatives, both foreign and local, is also authorized.
• The provisions addressing coordination of concurrent proceedings aim to foster decisions that would best achieve the objectives of both proceedings, whether local and foreign proceedings or multiple foreign proceedings.

Question 13.
Explain the purpose of UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency are as under:

•  Cooperation between the courts and other competent authorities of this State and foreign States involved in cases of cross-border insolvency;
• Greater legal certainty for trade and investment;
• Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
• Protection and maximization of the value of the debtor’s assets; and
• Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

Question 14.
Explain the cases where UNCITRAL Model Law on Cross-Border Insolvency applies.
Answer:
UNCITRAL Model Law on Cross-Border Insolvency applies where:

• Assistance is sought in this State by a foreign court or a foreign representative in connection with a foreign proceeding; or
• Assistance is sought in a foreign State in connection with a proceeding under laws of the enacting State relating to insolvency; or
• A foreign proceeding and a proceeding under laws of the enacting State relating to insolvency in respect of the same debtor are taking place concurrently; or
• Creditors or other interested persons in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under laws of the enacting State relating to insolvency
  UNCITRAL Model Law on Cross-Border Insolvency does not apply to a proceeding concerning [designate any types of entities, such as banks or insurance companies, that are subject to a special insolvency regime in this State and that this State wishes to exclude from this Law].

Question 15.
Explain the Principle of Supremacy of International Obligations as per UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
Article 3 provides that to the extent the Model Law conflicts with an obligation of the State enacting the Model Law arising out of any treaty or other form of agreement to which it is a party with one or more other States, the requirements of the treaty or agreement prevail.

Question 16.
Explain the following key terms as per UNCITRAL Model Law on Cross-Border Insolvency.
(a) Foreign proceeding
(b) Foreign representative
(c) Foreign court
Answer:
(a) Foreign proceeding: “Foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation;
(b) Foreign representative: “Foreign representative” means a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding
(c) Foreign court: “Foreign court” means a judicial or other authority competent to control or supervise a foreign proceeding.

Question 17.
Explain the legal provisions related to filing of application by foreign representative to commence a proceeding as per Model Law.
Answer:

• According to Article 11, a foreign representative is entitled to apply to commence a proceeding under the laws of the enacting State relating to insolvency, if the conditions for commencing such proceeding otherwise met.
• A foreign representative has this right without prior recognition of the foreign proceeding because the commencement of an insolvency proceeding might be crucial in cases of urgent need for preserving the assets of the debtor.
• The Model Law avoids the need to rely on cumbersome and time-consuming letters rogatory or other forms of diplomatic or consular communications that might otherwise have to be used.
• This facilitates a coordinated, cooperative approach to cross-border insolvency and makes fast action possible.
• The Model Law provides that the foreign representative has procedural standing for commencing an insolvency proceeding in the enacting State (under the conditions applicable in the enacting State) and that the foreign representative may participate in an insolvency proceeding in the enacting State
• Upon recognition of a foreign proceeding, the foreign representative is entitled to participate in a proceeding regarding the debtor under the laws of the enacting State relating to insolvency (Article 12).

Question 18.
Explain the legal provisions related to recognition of foreign proceedings as per Model Law.
Answer:

• Article 15 defines the core procedural requirements for an application by a foreign representative for recognition.
• A foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed.
• An application for recognition shall be accompanied by:
  (a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or
  (b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or
  (c) In the absence of evidence referred to in subparagraphs (a) and (b) above, any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative.
• An application for recognition shall also be accompanied by a statement identifying all foreign proceedings in respect of the debtorthat are known to the foreign representative.
• As per Article 17 of Model Law, a foreign proceeding shall be recognized if:
  (a) The foreign proceeding is a proceeding within the meaning as defined under Article 2;
  (b) The foreign representative applying for recognition is a person or body within the meaning as defined in Model Law
  (c) The application meets the requirements of Article 15; and
  (d) The application has been submitted to the court.
• The foreign proceeding shall be recognized as a foreign main proceeding if it is taking place in the State where the debtor has the centre of its main interests; or as a foreign non-main proceeding if the debtor has an establishment within the meaning of subparagraph (f) of Article 2 in the foreign State.

Question 19.
What are the reliefs that may be granted upon recognition of a foreign proceeding?
Answer:
According to Article 21, upon recognition of a foreign proceeding, whether main or non-main, where it is necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including:
(a) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities, to the extent they have not been stayed under Article 20;
(b) Staying execution against the debtor’s assets to the extent it has not been stayed under Article 20;
(c) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under Article 20;
(d) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities;
(e) Entrusting the administration or realization of all or part of the debtor’s assets located in this State to the foreign representative or another person designated by the court;
(f) Extending relief granted under Article 19; and
(g) Granting any additional relief that may be available to a person or body administering a reorganization or liquidation under the law of the enacting State under the laws of that State.

Question 20.
Cooperation is the key for effective implementation of Model Law on Cross-Border Insolvency. Comment.
Answer:
Cooperation is the key for effective implementation of Model Law on Cross-Border Insolvency.
Cooperation with Foreign Courts and Foreign Representatives:

• Chapter IV (Articles 25-27), on cross-border cooperation, is a core element of the Model Law. Its objective is to enable courts and insolvency administrators from two or more countries to be efficient and achieve optimal results.
• Articles 25 and 26 not only authorize ctoss-border cooperation, they also mandate it by providing that the court and the insolvency administrator “shall cooperate to the maximum extent possible”.
• The Articles are designed to overcome the widespread problem of national laws lacking rules providing a legal basis for cooperation by local courts with foreign courts in dealing with cross-border insolvencies.
• The enactment of Articles 25-27 offers an opportunity for making that principle more concrete and adaptable to the particular circumstances of cross-border insolvencies.
  Cooperation and direct communication between courts or foreign representatives (Article 25):
• The court is entitled to communicate directly with, or to request information or assistance directly from, foreign courts or foreign representatives.
• The ability of courts, with appropriate involvement of the parties, to communicate “directly” and to request information and assistance “directly” from foreign courts or foreign representatives is intended to avoid the use of time-consuming procedures traditionally in use, such as letters rogatory.
  Cooperation and direct communication between a person or body administering a reorganization or liquidation under the law of the enacting State and foreign courts or foreign representatives (Article 26):
• Article 26 on international cooperation between persons who are appointed to administer assets of insolvent debtors reflects the important role that such persons can play in devising and implementing cooperative arrangements, within the parameters of their authority.
• The provision makes it clear that an insolvency administrator acts under the overall supervision of the competent court.
  According to Article 27, Cooperation may be implemented by any appropriate means, including:
• Appointment of a person or body to act at the direction of the court;
• Communication of information by any means considered appropriate by the court;
• Coordination of the administration and supervision of the debtor’s assets and affairs;
• Approval or implementation by courts of agreements concerning the coordination of proceedings
• Coordination of concurrent proceedings regarding the same debtor;
• The enacting State may wish to list additional forms or examples of cooperation.

Question 21.
The World Bank Principles have been designed as a broad-spectrum assessment tool to assist countries in their efforts to evaluate and improve core aspects of their commercial law systems. Comment.
Answer:

• The World Bank Principles have been designed as a broad-spectrum assessment tool to assist countries in their efforts to evaluate and improve core aspects of their commercial law systems that are fundamental to a sound investment climate, and to promote commerce and economic growth.
• Efficient, reliable and transparent creditor rights and insolvency systems are of key importance for reallocation of productive resources in the corporate sector, for investor confidence and forward-looking corporate restructuring.
• The Principles emphasize contextual, integrated solutions and the policy choices involved in developing those solutions.
• The Principles highlight the relationship between the cost and flow of credit (including secured credit) and the laws and institutions that recognize and enforce credit agreements (Part A).
• The Principles also outline key features and policy choices relating to the legal framework for risk management and informal corporate workout systems (Part B), formal commercial insolvency law frameworks (Part C) and the implementation of these systems through sound institutional and regulatory frameworks (Part D).
• The principles have broader application beyond corporate insolvency regimes and creditor rights. The Principles are designed to be flexible in their application, and do not offer detailed prescriptions for national systems.
• The Principles embrace practices that have been widely recognized and accepted as good practices internationally.

Question 22.
Discuss the key elements of the World Bank Principles for effective insolvency and creditor rights system.
Answer:
Key elements of the World Bank Principles for effective insolvency and creditor rights systems is given below:
1. Credit Environment:

• Compatible credit and enforcement systems : A regularized system of credit should be supported by mechanisms that provide efficient, transparent and reliable methods for recovering debt, including seizure and sale of immovable and movable assets and sale or collection of intangible assets, such as debt owed to the debtor by third parties. An efficient system for enforcing debt claims is crucial to a functioning credit system
• Collateral systems : One of the pillars of a modern credit economy is the ability to own and freely transfer ownership interests in property, and to grant a security interest to credit providers with respect to such interests and rights as a means of gaining access to credit at more affordable prices. The legal framework for secured lending addresses the fundamental features and elements for the creation, recognition and enforcement of security interests in all types of assets, movable and immovable, tangible and intangible, including inventories, receivables, proceeds and future property, and on a global basis, including both possessory and non-possessory interests.
• Enforcement systems: A modern, credit-based economy requires predictable, transparent and affordable enforcement of both unsecured and secured credit claims by efficient mechanisms outside of insolvency, as well as a sound insolvency system. These systems must be designed to work in harmony.
• Credit information systems: A modern credit-based economy requires access to complete, accurate and reliable information concerning borrowers’ payment histories. This process should take place in a legal environment that provides the framework for the creation and operation of effective credit information systems. Privacy concerns should also be addressed
• Informal corporate workouts: Corporate workouts should be supported by an environment that encourages participants to restore an enterprise to financial viability. Informal workouts are negotiated in the “shadow of the law.” Accordingly, the enabling environment must include clear laws and procedures that require disclosure of or access to timely and accurate financial information on the distressed enterprise; encourage lending to, investment in or recapitalization of viable distressed enterprises; support a broad range of restructuring activities, such as debt write-offs, restructurings and debt-equity conversions; and provide favourable or neutral tax treatment for restructurings.

2. Insolvency Law Systems:
Effective insolvency systems have a number of aims and objectives.
Systems should aspire to:

• integrate with a country’s broader legal and commercial systems;
• maximize the value of a firm’s assets and recoveries by creditors;
• provide for both efficient liquidation of nonviable businesses and those where liquidation is likely to produce a greater return to creditors and reorganization of viable businesses;
• strike a careful balance between liquidation and reorganization, allowing for easy conversion of proceedings from one proceeding to another;
• provide for equitable treatment of similarly situated creditors, including similarly situated foreign and domestic creditors;
• provide for timely, efficient and impartial resolution of insolvencies;
• prevent the improper use of the insolvency system;
• prevent the premature dismemberment of a debtor’s assets by individual creditors seeking quick judgments;
• provide a transparent procedure that contains, and consistently applies, clear risk allocation rules and incentives for gathering and dispensing information;
• recognize existing creditor rights and respect the priority of claims with a predictable and established process; and
• establish a framework for cross-border insolvencies, with recognition of foreign proceedings.
  Where an enterprise is not viable, the main thrust of the law should be swift and efficient liquidation to maximize recoveries for the benefit of creditors.

3. Implementation: Institutional and Regulatory Frameworks:
Strong institutions and regulations are crucial to an effective insolvency system. The institutional framework has three main elements: the institutions responsible for insolvency proceedings, the operational system through which cases and decisions are processed and the requirements needed to preserve the integrity of those institutions— recognizing that the integrity of the insolvency system is the linchpin for its success.

4. Overarching considerations of sound investment climates:

• Transparency, accountability and corporate governance :
  Minimum standards of transparency and corporate governance should be established to foster communication and cooperation. Disclosure of basic information – including financial statements, operating statistics and detailed cash flows – is recommended for sound risk assessment. Accounting and auditing standards should be compatible with international best practices so that creditors can assess credit risk and monitora debtor’s financial viability. Corporate law and regulation should guide the conduct of the borrower’s shareholders. A corporation’s board of directors should be responsible, accountable and independent of management, subject to best practices on corporate governance.
• Transparency and Corporate Governance: Transparency and good corporate governance are the cornerstones of a strong lending system and corporate sector. Transparency and corporate governance are especially important in emerging markets, which are more sensitive to volatility from external factors. Without transparency, there is a greater likelihood that loan pricing will not reflect underlying risks, leading to higher interest rates and other charges. Transparency and strong corporate governance are needed in both domestic and cross-border transactions and at all phases of investment-at the inception when making a loan, when managing exposure while the loan is outstanding, and especially once a borrower’s financial difficulties become apparent and the lender is seeking to exit the loan. Transparency increases confidence in decision.
• Predictability: Investment in emerging markets is discouraged by the lack of well-defined and predictable risk allocation rules and by the inconsistent application of written laws. Moreover, during systemic crises investors often demand uncertainty risk premiums too onerous to permit markets to clear. Some investors may avoid emerging markets entirely despite expected returns that far outweigh known risks. Rational lenders will demand risk premiums to compensate for systemic uncertainty in making, managing and collecting investments in emerging markets.

Question 23.
Discuss the key provisions of United States Bankruptcy Code.
Answer:
In the United States of America, all bankruptcy cases are handled in federal courts under rules outlined in the “Bankruptcy Code”, a federal law. It is a uniform federal law that governs all bankruptcy cases in America. The Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act, 1978 and is codified as title 11 of the United States Code. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (Bankruptcy Rules).
Six basic types of bankruptcy cases are provided for under the Bankruptcy Code.

1. Chapter 7 titled “Liquidation”. In Chapter 7 Bankruptcy, a court-appointed trustee or administrator takes possession of non-exempt assets, liquidates these assets and then uses the proceeds to pay creditors.
2. Chapter 9 titled “Adjustment of Debts of a Municipality”. Chapter 9 Bankruptcy proceedings provides for reorganization which is available to municipalities. In Chapter 9 Bankruptcy proceedings a municipality (which includes cities, towns, villages, counties, taxing districts, municipal utilities, and school districts) get protection from creditors and a municipality can pay back debt through a confirmed payment plan.
3. Chapter 11 titled “Reorganization”. Unlike Chapter 7 where the business ceases operations and a trustee sells all of its assets, under Chapter 11 the debtor remains in control of its business operations and repay creditors concurrently through a court-approved reorganization plan.
4. Chapter 12 was added to the Bankruptcy Code in 1986. It allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
5. Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts.
6. Chapter 15 was added to the Bankruptcy Code in 2005. It provides mechanism for dealing with insolvency cases involving debtors, claimants and other interested parties involving more than one country. Under Chapter 15 a representative of a corporate bankruptcy proceeding outside the country can get access to the United States courts.

Question 24.
Write a note on the provisions for cross border transactions under Insolvency and Bankruptcy Code, 2016.
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency.
Section 234: Agreements with foreign countries

• Section 234 empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency.
• Section 234 of the Code provides that the Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [Section 234(1)]
• The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)]
  Section 235: Letter of request to a country outside India in certain cases
• Section 235 of the Code lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [Section 235(1)]
• The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with such request. [Section 235(2)]
• The current cross border insolvency framework in India is dependant on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 25.
Write a note on the Insolvency Law Committee (ILC) on Cross Border Insolvency.
Answer:
Insolvency Law Committee (ILC) on Cross Border Insolvency:

• The Ministry of Corporate Affairs has constituted the Insolvency Law Committee (ILC) to recommend amendments to the Insolvency and Bankruptcy Code of India, 2016.
• The Committee has submitted its 2nd Report to the Government on 16 October 2018 recommending amendments in the Insolvency and Bankruptcy Code, 2016 with respect to cross-border insolvency.
• The necessity of having Cross Border Insolvency Framework under the Insolvency and Bankruptcy Code arises from the fact that many Indian companies have a global presence and many foreign companies have presence in India.
• Inclusion of comprehensive legal framework dealing with cross border insolvency will be a major step forward and will bring Indian Insolvency Law on a par with that of matured jurisdictions.
• The Committee proposed a draft ‘Part Z’ in the Insolvency and Bankruptcy Code, 2016, based on an analysis of the UNCITRAL Model Law. The Committee has also recommended a few carve outs to ensure that there is no inconsistency between the domestic insolvency framework and the proposed Cross Border Insolvency Framework.
• The UNCITRAL Model Law has been adopted in as many as 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues.
• The advantages of the Model Law are the precedence given to domestic proceedings and protection of public interest.
• The other advantages include greater confidence generation among foreign investors, adequate flexibility for seamless integration with the domestic Insolvency Law and a robust mechanism for international cooperation.

Question 26.
Write a note on the recommendations of the Insolvency Law Committee (ILC) on Cross Border Insolvency.
Answer:
Key recommendations of the Committee are as under:
1. Applicability: The Committee recommended that at present, draft Part Z should be extended to corporate debtors only.

2. Duplicity of regimes: The Committee noted that currently the Companies Act, 2013 contains provisions to deal with insolvency of foreign companies. It observed that once Part Z is enacted, it will result in a dual regime to handle insolvency of foreign companies. It recommended that the Ministry of Corporate Affairs undertake a study of such provisions in the Companies Act, 2013 to assess whether to retain them.

3. Reciprocity: The Committee recommended that the Model Law may be adopted initially on a reciprocity basis. This may be diluted subsequently upon re-examination. Reciprocity indicates that a domestic court will recognise and enforce a foreign court’s judgment only if the foreign country has adopted similar legislation to the domestic country.

4. Access to Foreign Representatives: The Model Law allows foreign insolvency professionals and foreign creditors access to domestic courts to seek remedies directly. Direct access with regards to foreign creditors is envisaged under the Code even presently. With respect to access by foreign insolvency professionals to Indian courts, the Committee recommended that the Central Government be empowered to devise a mechanism that is practicable in the current Indian legal framework.

5. Centre of Main Interests (COMI): The Model Law allows recognition of foreign proceedings and provides relief based on this recognition. Relief may be provided if the foreign proceeding is a main proceeding or non-main proceeding. If the domestic courts determine that the debtor has its COMI in a foreign country, such foreign proceedings will be recognised as the main proceedings. This recognition will result in certain automatic relief, such as allowing foreign representatives greater powers in handling the debtor’s estate. For non-main proceedings, such relief is at the discretion of the domestic court. The Committee recommended that a list of indicative .factors comprising COMI may be inserted through rule-making powers. Such factors may include location of the debtor’s books and records, and location of financing.

6. Cooperation: The Model Law lays down the basic framework for cooperation between domestic and foreign courts, and domestic and foreign insolvency professionals. Given that the infrastructure of adjudicating authorities under the Code is still evolving, the cooperation between Adjudicating Authorities and foreign courts is proposed to be subject to guidelines to be notified by the Central Government.

7. Concurrent Proceedings: The Model Law provides a framework for commencement of domestic insolvency proceedings, when a foreign insolvency proceeding has already commenced or vice versa. It also provides for coordination of two or more concurrent insolvency proceedings in different countries by encouraging cooperation between courts. The Committee recommended adopting provisions in relation to these in draft Part Z.

8. Public policy considerations: Part Z provides that the Adjudicating Authority may refuse to take action under the Code if it is contrary to public policy. The Committee recommended that in proceedings where the Authority is of the opinion that a violation of public policy may be involved, a notice must be issued to the Central Government. If the Authority does not issue notice, the Central Government may be empowered to apply to it directly.

Chapter 1 Overview of Business Valuation – CS Professional Valuations and Business Modelling Study Material is designed strictly as per the latest syllabus and exam pattern.

Overview of Business Valuation – CS Professional Valuations and Business Modelling Study Material

Question 1.
(b) What are the misconceptions about Valuation? (June 2013, 5 marks) [CMA Final]
(c) How do you minimize Valuation bias? (5 marks) [CMA Final]
Answer:
(b) There are a number of misconceptions about valuation. Some of the misconceptions are as under:

1. A valuation is an objective search for true value
2. A good valuation provides a precise estimate of value
3. The more quantitative, the better the valuation
4. Valuing a private business should be done only when the business is ready to be sold
5. Business in an industry always sell for ‘X’ times the annual revenue. So why should valuation of the business be done by external valuer
6. The business should be at least worth equivalent to what a competitor sold his business recently
7. The business loses money, so it is not worth much.

(c) Valuation bias exists and no valuation is completely objective or ‘true’. The effort can be made to minimize the direction (i.e. over or under valuation) and magnitude(how much is the variation) of the bias. Bias may be introduced due to personal views of valuer, source of data, assumptions made, which party has commissioned the valuation (buyer or seller) etc.
Bias can’t be regulated or legislated out of existence, However, there are ways in which we can mitigate the-effects of bias on valuation: –

Reduce institutional Pressures
A significant portion of bias can be attributed to pressures Institutional factors. Equity-research analysts in the 1990s, for instance, in addition to dealing with all of the standard sources of bias had to grapple with the demand from their employers that they bring in investment banking business. Institutions that want honest sell-side equity research should protect their equity research analysts from such bias.

De-link valuations from reward/punishment
Any valuation process where the reward or punishment is conditioned on the outcome of the valuation will result in biased valuations. In other words, if we want acquisition valuations to be unbiased, we have to separate the deal analysis from the deal making to reduce bias.

No pre-commitments
Decision makers should avoid taking strong public positions on the value of a firm before the valuation is complete: An acquiring firm that comes up with a price prior to the valuation of a target firm has put analysts in an untenable position, where they are-called upon to justify this price. In far too many cases, the decision on whether a firm is under or overvalued precedes the actual valuation, leading to seriously biased analyses.

Self-Awareness The best antidote to bias is awareness. An analyst who is aware of the biases he or she brings to the valuation process can either actively try to confront these biases when making input choices or open the process up to more objective points of view about a company’s future.

Honest reporting
In Bayesian statistics, analysts are required to reveal their priors (biases) before they present their results from an analysis. Thus, an environmentalist will have to reveal that he or she strongly believes that there is a hole In the ozone layer before presenting empirical evidence to that effect. The person reviewing the study can then factor that bias in while looking at the conclusions. Valuations would be much more useful if analysts revealed their biases up front. While we cannot eliminate bias in valuations, we can try to minimize its impact by designing valuation processes that are more protected from overt outside influences and by report our biases with our estimated values.

Question 2.
What are the uncertainties in business valuation? (Dec 2013, 4 marks) [CMA Final]
Answer:

• Starting early in life, we are taught that if we do things right, we will get the right answers. In other words, the precision of the answer is used as a measure of the quality of the process that yielded the answer.
• While this may be appropriate in mathematics or physics, it is a poor measure of quality in valuation.
• Barring a very small subset of assets, there will always be uncertainty associated with valuations, and even the best valuations come with a substantial margin for error.
• This arises due to the sources of uncertainty which have an effect on the valuation.
• The value of a business is not a static figure. It depends on change in purpose or circumstances.

There are a number of uncertainties involved in the valuation process which if not handled appropriately, would lead to an absurd value. We may design complex financial models with several inputs to handle uncertainties but that does not mean that the value derived is reasonable or the process is sound. What we need to understand is the impact of each input on the value.

The following factors are crucial:

1. The macro economic factors.
2. The business.
3. Its growth potential in the industry in which it operates.
4. How is the business positioned?
5. Who are competitors?
6. What is the quality and stability of the company’s management?

Question 3.
What are the misconceptions about valuation? (Dec 2014, 5 marks) [CMA Final]
Answer:
There are a number of misconceptions about valuation. Some of the misconceptions are as under:

1. A valuation is an objective search for true value.
2. A good valuation provides a precise estimate of value.
3. The more quantitative, the better the valuation.
4. Valuing a private business should be done only when the business is ready to be sold.
5. Business in an industry always sells for ‘x’ times the annual revenue. So why should valuation of the business be done by external valuer.
6. The business should be at least worth equivalent to what a competitor sold his business recently.
7. The business loses money, so it is not worth much.

Question 4.
There are a number of factors both macro economic and micro economic which have an impact on business. Valuation of a business involves making forecasts for the future. Comment on the sources of uncertainties in business valuation in the light of the above. (June 2015, 5 marks) [CMA Final]
Answer:
Sources of uncertainties:
Uncertainty is part and parcel of the valuation process, both at the point in time that we value a business and in how that value evolves over time as we get new information that impacts the valuation. That information can be specific to the firm being valued, more generally about the sector in which the firm operates or even be general market information (about interest rates and the economy).

When valuing an asset at any point in time, we make forecasts for the future. Since none of us possess crystal balls we have to make our best estimates, give the information that we have at the time of the valuation. Our estimates of value can be wrong for a number of reasons, and we can categorize these reasons into three groups.

Estimation Uncertainty: Even if our information sources are impeccable, we have to convert raw information into inputs and use these inputs in models. Any mistakes or mis-assessments that we make at either stage of this process will cause estimation error.

Firm-specific Uncertainty: The path that we envision for a firm can prove to be hopelessly wrong. The firm may do much better or much worse than we expected it to perform and the resulting earnings and cash flows will be very different from our estimates.

Macroeconomic Uncertainty: Even if a firm evolves exactly the way we expected it to, the macroeconomic environment can change in unpredictable ways. Interest rates can go up or down and the economy can do much better or worse than expected. These macroeconomic changes will affect value.

Question 5.
(a) “There are a number of factors both macro- economic and micro-economic which have an impact on business. Valuation of a business involves making forecasts for the future”.
Comment on the sources of uncertainties in business valuation in the light of the above. (5 marks)
(b) State under what conditions/assumptions the following statements are true (state only one important condition/assumption for each):
(i) Fair Value of an asset is always equal to its Market Value. (June 2019, 5 marks)
Answer:
(a) Sources of Uncertainties: Uncertainty is part and parcel of the valuation process both at the point of time when-the valuation is made and also on basis of how the business evolves over time. The valuation involves a process where the valuer has to make various forecasts about the future both in terms of general economic conditions as well as how the firm will perform individually.

Valuation uncertainty is defined as – ‘The possibility that the estimate value may differ from the price that could be obtained in a transfer of the same asset or liability taking place at the same time under the same terms and within the same market environment’.

It is important to note that a valuation is not a fact; it is an estimate of the most probable of a range of possible outcomes based on the assumptions made in the valuation process. Market valuations are estimates of the most probable price that would be paid in a transaction on the valuation date.

However, even where assets are identical and exchanged in contemporaneous transactions, fluctuations in the prices agreed between different transactions can often be observed. These fluctuations can be caused by factors such as differences in the objectives, knowledge or motivation of the parties. Consequently, an element of uncertainty is inherent in most market valuations as there is rarely a single price with which the valuation can be compared.

The valuation involves a process where the valuer has to make forecasts about the future both in terms of general economic conditions as well as how the firm will perform individually.

Uncertainties caused by these various conditions and factors can be broadly categorized into the following three groups based on the reasons/sources of these uncertainties.

Estimated/Model/Input Uncertainty: Even if our information sources are impeccable, we have to convert raw information into inputs and use these inputs in models. Any mistakes or mis-assessment that we make at either stage of this process will cause estimation error.

Further, uncertainty arises from characteristics of either the valuation model, or method, used. For certain asset types, more than one method may be customarily used to estimate value. However, those models may not always produce the same outcome and therefore the selection of the most appropriate method may of itself be a source of uncertainty.

Also uncertainty arises where there are a number of equally reasonable or feasible inputs or assumptions that can be used from the degrees of veracity that can be attached to the data inputs used in the valuation and their impact on the outcome.

Firm-specific Uncertainty: The specific risks associated with the firms Business, Modus Operandi may also add to uncertainty in the business valuation. The firm may do much better or much worse than we expected it to perform, and the resulting earnings and cash flows will be very different from our estimates.

Macroeconomic Uncertainty/Market Uncertainty: Even if a firm evolves exactly the way we expected it to, the macroeconomic environment can change in unpredictable ways. Interest rates can go up or down and the economy can do much better or worse than expected. These macro-economic changes will affect value.
Further, uncertainty arises when a market is disrupted at the valuation date by current or very recent events such as sudden economic or political crises.

The disruption can manifest itself in a number of ways, for example, either through panic buying or selling or by a loss of liquidity due to disinclination by market participants to trade. An outbreak of sudden trading activity in response to a crises may cause rapid price changes that are not necessarily representative of those that would be agreed between parties acting “knowledgeably and prudently”. Conversely, a loss of liquidity will mean fewer contemporaneous or relevant recent transactions which may impact on the reliability on the valuation.

(b)
(i) Fair value of an asset is always equal to its Market Value, when markets are efficient.

Question 6.
Everest, Manufacturing Industrial Limited started 4 years ago, is expected to grow at a higher rate of 4 years in the coming years and thereafter the growth rate will fall and stabilize at a lower level. The following information has been made available to you for your analysis:

With above information background, answer the following questions of the Management:

(i) What is the Cost of Capital and Weighted Average Cost of Capital (WACC) for the high growth phase and for the stable growth phase. (Dec 2019, 10 marks)
(ii) What is the Value of the Firm? (Dec 2019, 10 marks)
(iii) What will be the Cost of Capital and WACC for the high growth phase and for the stable growth phase, if the debt-equity ratio is 1:2 during high growth phase and 3:2 in the stable growth phase? Will this change impact the Value of the Firm? If yes, what will be the value of the Firm with revised debt equity ratio? (Dec 2019, 10 marks)
(iv) Comparing the given case, discuss on the advantages and disadvantages of the Dividend Discount Models. (Dec 2019, 10 marks)

Question 7.
A listed Company has a beta of 1.5 and the riskless rate for one-year Treasury bills is 5.2% and the expected return for the market is 13.5%. What is the company’s capitalization rate? Suppose the company has expected earnings of ₹ 6.80 per share that have been growing at a rate of 5.5%. The Company retains 25%. What should be the company’s share price using a capitalization of earnings approach? (Dec 2019, 5 marks)

(b) Abishek Powers Ltd. has a constant dividend growth rate of 5% per annum for perpetuity. This year the company has given a dividend of ₹ 6 per share. Further, the required rate of return for the company is 10% per annum. Then, what should be the purchase price for a share of Abishek Powers Ltd. ? (Dec 2019, 5 marks)

Chapter 1 Constitution and Labour Laws – CS Professional Labour Laws and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Constitution and Labour Laws – CS Professional Labour Laws and Practice Study Material

Question 1.
State the specific directions issued by Supreme Court to the State Government in case of Bandhua Mukti Morcha Versus Union of India. (Dec 2019, 6 marks)
Answer:
In the case of Bandhua Mukti Morcha versus Union of India AIR 1984 SC 802, the Supreme Court issued directions to the Central Government, the government of Haryana and various authorities as:
The Central Government and State Government will immediately ensure that mine lessees and stone crusher owners start supplying pure drinking water to the workmen on a scale of at least 2 litres for every workmen at conveniently accessible points, in clean and hygienic conditions. In case of default, action to be taken against defaulter.

The mine owners and stone crusher owners are to obtain water from unpolluted sources and transport it by tankers to the work site with sufficient frequency so as to keep the vessels filled up for supply of clean drinking water for workmen.

The State Government must ensure that conservancy facilities in the shape of latrines and urinals in accordance with the Section 20 of the Mines Act 1952 and Rules 33 to 36 of the Mines Rules, 1955 were to be provided at the latest by 15th February 1984.

To ensure that appropriate and adequate medical and first aid facilities are provided to workmen as required by Section 21 of the Mines Act 1952 and Rules 40 to 45-A of the Mines Rules 1955.

To ensure that every workmen who is required to carry out blasting with explosives is trained under the Mines Vocational Training Rules, 1966 and also holds first aid qualifications and carries a first aid outfit while on duty.

To ensure that the mine lessees and owners of stone crushers provide proper and adequate medical treatment to the workmen and their families free of cost.

The Central Government and the Government of Haryana will ensure that payment of wages is made directly to the workmen by the mine lessees and stone crusher owners or at any rate in the presence of a representative of the mine lesseses or stone crusher owners and the inspecting officers of the Central Government as also of the Government of Haryana shall carry out periodic checks in order to ensure that the payment of the stipulated wage is made to the workmen.

Question 2.
“The concept of Social Justice is so innate and demonstrated in the Industrial Laws of our country”. Explain the statement. (Aug 2021, 3 marks)
Answer:
The concept of social justice is so innate and demonstrated in the industrial laws of our country. As proclaimed in the Preamble of the Constitution and the Directive Principles of State Policy, the industrial jurisprudence of the country is founded on the basic idea of socio-economic equality and its aim is to assist the removal of socio-economic disparities and inequalities. The laws particularly the Industrial Laws of the country revolve on this basic philosophy of the Constitution.

The concept of social justice is though not limited to any particular branch of legislation although it is more prominent and conspicuous in industrial laws and relations. Its scope is comprehensive and is founded to the basic ideals of social economic equality and it aims at assisting the removal of social economic disparities and inequalities of birth and the competing claims especially between the employers and workers by finding a just fair and equitable solution to their human relation problem, so that peace, harmony and collection of the highest order prevails among them which may further the growth and progress of nations. (Mahesh Chandra, ‘Industrial Jurisprudence’ (1976. P.47).

Question 3.
List the various Articles of the Constitution having a bearing on the Labour rights enjoyed by the citizens of India.
Answer:
Following are the Articles under Fundamental Rights and Directive Principles of State Policy of the Constitution tha impact the Labour rights:

Question 4.
Industrial laws are socio-economic justice oriented Comment.
Answer:

1. The Preamble to the constitution of India spells “SCOAL ECONOMIC JUSTICE “ as one of the prime objective of the State.
2. Article 38 of the Constitution provides that the State shall strive to promote the welfare of the people by securing and protecting, as effectively as it may, social order in which justice, social, economic and political shall inform all institutions of the national life.
3. Article 39 states that it shall be the duty of the State to apply certain principles of social justice in making laws.
4. In the economic sphere, social justice means opportunities in greater measure to the poor and the needy for the betterment of their social and economic conditions.
5. It does not mean making rich man poor in order to make poor men rich. It does not mean that all wealth should be shared equally provision of basic minimum to all in response to life and living facilities for promoting one’s own values and manner worth are the essential contents of social justice.
6. As a result, the Industrial Laws are framed on the foundation of social economic justice.
7. The laws strive to remove social economic disparities and inequalities of birth and competing claims (especially between employers and workers) by provide just, fair and equitable solution to human relation problem in order to maintain peace and accelerate growth of the country.

Question 5.
What will be the outcome in case labour laws enacted to enforce Directive Principles infringes Fundamental Rights?
Answer:

• The Fundamental Rights are not an end in themselves but are the means to an end. The end is specified in Directive Principles.
• Also, the goals set out in Directive Principles are to be achieved without abrogating the Fundamental Rights.
• Thus, Fundamental Rights and Directive Principles should go hand in hand and together constitute the core of our constitution .
• Directive Principles have mostly been used to broaden, and to give depth to some Fundamental Rights and to imply more rights to the general masses over and above what are expressly stated in the Fundamental Rights.

Question 6.
What does PIL and SAL stands for and how are they useful in enforcing labour rights?
Answer:

• PIL is the acronym for Public Interest Litigation while SAL stands for Social Action Litigation
• The general law in India is that legal process can be initiated in a court of law at the instance of an aggrieved person.
• A third party generally does not have the capacity to initiate proceedings against others.
• However, the Court now permits Public Interest Litigation (PIL) or Social Action Litigation (SAL) at the instance of ‘public spirited citizens’ for the enforcement of Constitutional and other legal rights.
• PIL is enabled to be initiated by a third party for any person /group of persons who were not in a position to approach Court because of their socially or economically disadvantaged status.
• Public Interest Litigation is part of the process of participative justice.
• Once the fundamental rights of labourers are infringed they can approach the Court for relief under Article 32 and if any other legal right is also infringed for relief under Article 226.

Question 7.
What are the Principles of State Policy as per Article 39 of the Constitution?
Answer:

• Article 39 of the constitution provides that the State should direct its policy towards securing:
  • That all citizens, irrespective of sex, equally have the right to an adequate means of livelihood.
  • That the ownership and control of the material resources of the community are so distributed as best to subserve the common good
  • That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.
  • That there is equal work for both men and women
  • That the health and strength of workers, men and women, and tender age of children are not abused and that citizens are not forced by economic necessity to enter avocations unsuited to their age or strength.
  • That children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and that childhood and youth are protected against exploitation and against moral and material abandonment.
• It is the result of these Directive Principles that laws such as Equal Remuneration, Minimum Wages, Child Labour (Regulation and Abolition) Act were passed.

Question 8.
What are Social security related provisions contained in Article 41 of the Constitution and which all labour laws help in accomplishing the same?
Answer:

• Article 41 of the Constitution provides that the State should direct its policy:
• To make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.
• Social security is guaranteed in our Constitution under Articles 39, 41 and 43.
• The Employees’ State Insurance Act, 1948 is a pioneering piece of legislation in the field of social insurance.
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 aims at providing substantial security and timely monetary assistance to industrial employees and their families.
• The Maternity Benefit Act provides maternity leave with full wages and security of employment.
• The object of the Payment of Gratuity Act, 1972 is to provide a scheme for the payment of gratuity to employees.
• The Apprentices Act, 1961 was enacted to supplement the programme of institutional training by on-the-job training and to regulate the training arrangements in industry.
• The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1969 has made it obligatory on the employers to notify vacancies occurring in their establishments to the prescribed employment exchanges before they are filled.

Question 9.
Explain the concept of’ living wage’ and how does it differentiates from ‘minimum wage’ and ‘fair wage’?
Answer:

• A ‘living wage’ is such wage as enables the male earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter, but includes education for children, protection against ill-health, requirements of essential social needs, and a measure of insurance against the more important misfortunes including old age.
• A ‘minimum wage’, on the other hand, is just enough to cover the bare physical needs of a worker and his family. Minimum wage is to be fixed in an industry irrespective of its capacity to pay.
• A ‘fair wage’ is a mean between ‘living wage’ and ‘minimum wage’. ‘Living’ and ‘fair’ wages have to be fixed keeping in view the capacity of the industry to pay.

Question 10.
What is meant by Workers Participation in Management?
Answer:

• Workers’ participation in management implies mental and emotional involvement of workers in the management of any enterprise.
• It is process by which subordinate employees, either individually or collectively, become involved in one or more aspects of organizational decision making within the enterprises in which they work.
• ILO has been encouraging member nations to promote the scheme of Workers’ Participation in Management.

Question 11.
List the ways of Workers Participation in Management prevalent in India.
Answer:
The various forms of Workers Participation in Management prevalent in India are as follows:

• Suggestion Schemes
• Works Committee
• Joint Management council
• Work directors
• Co-partnership
• Joint Councils
• Shop Councils

Question 12.
Narrate the impact of various Fundamental Rights on industrial laws and industrial relations.
Answer:
Below is the impact of various Fundamental Rights on industrial laws and industrial relations:
Article 14 : Equality before Law
Impact on Labour Laws:

• Equality before law prohibits discrimination.
• The concept of ‘equal protection of the laws’ requires the State to give special treatment to persons in different situations in order to establish equality amongst all.

Article 16 : Equality of opportunity
Impact on Labour Laws:

• Equality of opportunity provides equality in matters of public employment and prevents the State from any sort of discrimination on the grounds of religion, race, caste, sex, descent, place of birth, residence or any of them.
• Also provides the autonomy to the State to grant special provisions for the backward classes, under¬represented States, SC & ST for posts under the State.
  Article 19 Right to form associations or union – Article 19(1) (c) gives right to citizen to form associations and unions.
• It thus includes the right to form companies, societies, partnership, trade union and political parties.
• The right guaranteed is not merely the right to form association but also to continue with the association as such.
• The freedom to form association implies also the freedom to form or not to form, to join or not to join, an association or union.

Article 21 : Right to Life
Impact on Labour Laws:

• Article 21 assures every person right to life and personal liberty.
• The right to life enshrined in Article 21 has been liberally interpreted so as to mean something more than mere survival and mere existence or animal existence.
• It therefore includes all those aspects of life which go to make a man’s life meaningful, complete and worth living.
• Article 21 facilitated the enacted of Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 on December 9, 2013 which seeks to protect women from sexual harassment at their place of work.

Article 23 : Prohibition of trafficking and forced labour
Impact on Labour Laws:

• Article 23(1 prohibits three unsocial practices:
  • beggar
  • traffic in human beings
  • forced labour
• The term ‘begar’ means compulsory work without any payment. Begar is labour or service which a person is forced to give without receiving any remuneration for it. Withholding of pay of a government employee as a punishment has been held to be invalid and is prohibited.
• The term ‘trafficking in human beings,’ refers to the buying and selling of human beings, the same has been constitutionally abolished.
• Forced labour violates human dignity and is contrary to the basic human values. Article 23 intends to abolish every form of forced labour even if it has origin in a contract.

Article 24 : Prohibition of child labour under the age of 14 years .
Impact on Labour Laws:

• Article 24 provides for prohibition against the employment of children below the age of fourteen years in any factory or mine or any other hazardous employment.
• This is also in consonance with Articles 39(e) and (f) of the Constitution which emphasizes the need to protect the health and strength of workers, and also to protect children against exploitation.
• The Child Labour (Prohibition and Regulation) Act, 1986 was enacted as a result of this underlying Fundamental right and prohibits the employment of children in certain industries deemed to be hazardous and provides the scope for extending such prohibition to other sectors.

Question 13.
Narrate in detail various Directive Principles which have bearing on industrial laws and industrial relations.
Answer:
Below are the set of Directive Principles having a bearing on industrial laws and industrial relations:

Article 38 : Promote the welfare of the people
Impact on Labour Laws:

• Article 38 of the constitution directs State to secure a social order for the promotion of welfare of the people
• The State shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life
• The State shall, in particular, strive to minimize the inequalities in income, and endeavor to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations
• Various labour laws enacted have been based on this foundation stone itself.

Article 39 : Equal pay for equal work
Impact on Labour Laws:

• Article 39 of the constitution provides that the State should direct its policy towards securing:
  • That all citizens, irrespective of sex, equally have the right to an adequate means of livelihood
  • That the ownership and control of the material resources of the community are so distributed as best to subserve the common good
  • That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment
  • That there is equal work for both men and women
  • That the health and strength of workers, men and women, and tender age of children are not abused and that citizens are not forced by economic necessity to enter avocations unsuited to their age or strength
  • That children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and that childhood and youth are protected against exploitation and against moral and material abandonment.
• It is the result of these Directive Principles that laws such as Equal Remuneration , Minimum Wages , Child Labour (Regulation and Abolition) Act were passed.

Article 41 : Right to work, to education and to public assistance in certain cases
Impact on Labour Laws:

• Article 41 of the constitution provides that the State should direct its policy:
• To make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.
• The Employees’ State Insurance Act, 1948, The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, The Maternity Benefit Act Payment of Gratuity Act, 1972, The Apprentices Act, 1961, The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1969 were enacted keeping in mind this very Directive Principle of the Constitution.

Article 42 : Provision for just and humane conditions of work
Impact on Labour Laws:

• Requires the state to make provision for securing just and humane conditions of work and for maternity relief.
• “Right to live with human dignity” was included in Article 21 as a result of Article 42.
• Provisions contained in Factories Act, 1948 and Contract Labour (Regulation and Abolition) Act of 1970 have been made in line with facilitation of provisions of Article 42.

Article 43 : Living wage, etc, for workers
Impact on Labour Laws:

• Article 43 imposes an obligation towards ensuring the provision of a ‘living wage’ in all sectors as well as acceptable conditions of work.
• A ‘living wage’ is such wage as enables the male earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter, but includes education for children, protection against ill-health, requirements of essential social needs, and a measure of insurance against the more important misfortunes including old age.
• A ‘minimum wage’, on the other hand, is just sufficient to cover the bare physical needs of a worker and his family. Minimum wage is to be fixed in an industry irrespective of its capacity to pay.
• Minimum Wages, Payment of Bonus are means of attaining goals enshrined in Article 43.

Article 43A : Participation of workers in management
Impact on Labour Laws:
Article 43-A provides that the State shall take steps by suitable legislation or any other means to secure the participation of workers in the management of industrial establishments.

Industrial Disputes Act, 1947 (containing dual provisions of prevention and settlement of industrial disputes) and The Industrial Policy Resolution, 1948 advocated Workers Participation in Management by suggesting that labour should be in all matters concerning industrial production. The First Five-Year Plan and the successive plans emphasised the need for workers’ participation in management.

Question 14.
Discuss briefly forms of Workers Participation in Management in India.
Answer:
Various forms of workers’ participation in management prevalent in India are:
Suggestion schemes:

• Participation of workers can take place through suggestion scheme.
• Under this method workers are invited and encouraged to offer suggestions for improving the working of the enterprise.
• A suggestion box is installed and any worker can write his suggestions and drop them in the box.
• Periodically all the suggestions are scrutinized by the suggestion committee or suggestion screening committee.
• The committee is constituted by equal representation from the management and the workers.
• The committee screens various suggestions received from the workers. Good suggestions are accepted for implementation and suitable awards are given to the concerned workers.
• Suggestion schemes encourage workers’ interest in the functioning of an enterprise.

Works Committee:

• Under the Industrial Disputes Act, 1947, every establishment employing 100 or more workers is required to constitute a works committee.
• Such a committee consists of equal number of representatives from the employer and the employees.
  • The main purpose of this committee is to provide measures for securing and preserving amity and good relations between the employer and the employees.

Joint Management Councils:

• Under this system Joint Management Councils are constituted at the plant level.
• These councils consist of equal number of representatives of the employers and employees, not exceeding 12 at the plant level.
• The plant should employ at least 500 workers.
• The council discusses various matters relating to the working of the industry like welfare measures, supervision of safety and health schemes, scheduling of working hours, rewards for suggestions etc..

Work directors:

• Under this method, one or two representatives of workers are nominated or elected to the Board of Directors.
• This is the full-edged and highest form of workers’ participation in management.

Co-partnership:

• Co-partnership involves employees’ participation in the share capital of a company in which they are employed. By virtue of their being shareholders, they have the right to participate in the management of the company.
• Shares of the company can be acquired by workers making cash payment or by way of stock options scheme.
• The basic objective of stock options is not to pass on control in the hands of employees but providing better financial incentives for industrial productivity. But in developed countries, WPM through co-partnership is limited.

Joint Councils:

• The joint councils are constituted where 500 or more workers are employed in an industrial unit

Shop councils:

• Shop Council is constituted in every Industrial establishment employing 500 or more workmen.
• Shop council represents each department or a shop in a unit.
• Each shop council consists of an equal number of representatives from both employer and employees.
• Shop Council aim to assist management in achieving monthly production targets, improving production, productivity and efficiency and also to enable proper flow of communication between employer and employees.

Constitution and Labour Laws Notes

Constitution and Labour Laws

• The basic document containing fundamental law of the land and which acts as a guiding book for the Government is called the Constitution.
• The Constitution is the supreme law of the country and it contains laws in relation to the government and its relationships with the people.
• As per the Indian Constitution, Labour is a subject in the Concurrent List.
• Concurrent List of the constitution refers to those sets of matters wherein both the Central and the State Governments are competent to enact legislations.
• Labour welfare connotes a condition of well-being, happiness, satisfaction, conservation and development of human resource.

Constitution and Labour Rights
Fundamental Rights
Article 14 : Equality before Law
Article 16 : Equality of opportunity
Article 19 : Right to form associations or union
Article 21 : Right to Life
Article 23 : Prohibition of trafficking and forced labour
Article 24 : Prohibition of child labour under the age of 14 years

Directive Principles and Labour Laws

Article 38 (Promote the welfare of the people)

• • Directs State to secure a social order for the promotion of welfare of the people.
  • Various labour laws enacted have been based on this foundation stone itself.

Article 39 (Equal pay for equal work)

• • Provides that the State should direct its policy towards securing all citizens, irrespective of sex, right to an adequate means of livelihood
  • It is the result of these Directive Principles that laws such as Equal Remuneration, Minimum Wages, Child Labour (Regulation and Abolition) Act were passed.

Article 41 (Right to work, to education and to public assistance in certain cases)

• • Provides that the State should direct its policy to make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.
  • The Employees’ State Insurance Act, 1948, The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, The Maternity Benefit Act, Payment of Gratuity Act, 1972, The Apprentices Act, 1961, The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1969 were enacted keeping in mind this very Directive Principle of the Constitution.

Article 42 (Provision for just and humane conditions of work)

• • Requires the state to make provision for securing just and humane conditions of work and for maternity relief.
  • Provisions contained in Factories Act, 1948 and Contract Labour (Regulation and Abolition) Act of 1970 have been made in line with facilitation of provisions of Article 42.

Article 43 (Living wage, etc, for workers)

• • Imposes an obligation towards ensuring the provision of a ‘living wage’ in all sectors as well as acceptable conditions of work.
  • Minimum Wages, Payment of Bonus are means of attaining goals enshrined in Article 43.

Article 43A (Participation of workers in management)

• • Provides that the State shall take steps by suitable legislation or any other means to secure the participation of workers in the management of industrial establishments.
  • Industrial Disputes Act, 1947 (containing dual provisions of prevention and settlement of industrial disputes) and The Industrial Policy Resolution, 1948 advocated Workers Participation in Management by suggesting that labour should be in all matters concerning industrial production.