Top 10 Legal Challenges for International Business Expansion

Top 10 Legal Challenges for International Business Expansion

Top 10 Legal Challenges for International Business Expansion

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

 

Expanding a business into international markets offers immense growth potential, but it also introduces a myriad of legal complexities that require careful consideration. From trade regulations to intellectual property protection, understanding and addressing these legal considerations are essential for a successful and compliant global expansion.

 

10 Major Legal Challenges for International Business Expansion

Regulatory Compliance and Market Entry:

Navigating foreign regulatory frameworks is a crucial starting point. Each country has its own set of laws governing business operations, trade, and market entry. Ensuring compliance with these regulations is vital to avoid legal roadblocks and penalties. Airbnb had to navigate a patchwork of regulations and laws as it expanded globally. In Barcelona, Spain, the company faced strict regulations on short-term rentals, leading to legal battles and hefty fines. 

Trade Regulations and Tariffs: 

Understanding trade regulations and tariffs is essential, especially for industries with high import and export components. Businesses need to grasp the intricacies of import duties, quotas, and trade agreements to plan their operations effectively. The ongoing trade dispute between the United States and China saw tit-for-tat tariffs imposed on various goods. Apple, heavily reliant on manufacturing in China, faced uncertainty due to changing trade regulations, impacting its global supply chain and pricing strategy. 

Tax Implications: 

International expansion often comes with complex tax implications. Businesses need to be aware of local tax laws, transfer pricing regulations, and potential double taxation treaties to optimize tax planning. Starbucks faced criticism for its tax practices in the UK, as it reported minimal profits and paid relatively low taxes. This raised questions about international tax avoidance and highlighted the significance of understanding local tax laws to optimize tax planning. 

Intellectual Property Protection: 

Protecting intellectual property (IP) rights is critical when expanding internationally. Companies must understand how to safeguard trademarks, patents, copyrights, and trade secrets in each new market. Tech giant Apple has been actively protecting its intellectual property worldwide. In China, it faced challenges with counterfeit Apple stores and knock-off 

products. Apple’s legal actions in China demonstrated the importance of safeguarding IP rights across borders. 

Contract Negotiations and International Contracts: 

Negotiating contracts across borders requires a deep understanding of contract law and cultural nuances. International contracts must account for language differences, dispute resolution mechanisms, and enforceability across jurisdictions. The failed merger between Renault and Fiat Chrysler (FCA) illustrates the complexities of international contracts. The deal fell apart due to concerns from the French government and other factors, showing how cross-border negotiations can be impacted by diverse legal and cultural considerations. 

Employment and Labor Laws: 

Complying with employment and labor laws is essential to avoid legal disputes in a foreign country. Understanding regulations related to hiring, termination, benefits, and working conditions is crucial. Uber faced legal battles regarding driver classification in various countries, including the UK. In the UK Supreme Court ruling, drivers were classified as workers entitled to benefits, highlighting the necessity of understanding and complying with foreign labor laws. 

Foreign Investment Regulations: 

Many countries have specific regulations regarding foreign direct investment (FDI). Businesses must be aware of these regulations and obtain necessary approvals before establishing a presence in a new market. Walmart’s entry into India involved compliance with strict foreign investment regulations. To navigate these regulations, Walmart entered into a joint venture with a local partner to establish its presence and adhere to India’s FDI norms. 

Cultural Awareness: 

Cultural differences can impact business operations and negotiations. Being culturally aware and sensitive ensures smoother interactions and fosters better relationships with local partners and stakeholders. McDonald’s adapts its menu to cater to local tastes and cultural preferences. For instance, McDonald’s outlets in India offer a range of vegetarian options to cater to the largely vegetarian population, showcasing the importance of cultural awareness in business operations. 

Licensing and Permits: 

Certain industries require licenses or permits to operate in foreign markets. Identifying the required licenses and navigating the application process is essential to avoid delays. Tesla’s entry into China required securing the necessary licenses and permits for its Shanghai Gigafactory. Navigating China’s regulatory landscape was crucial for Tesla’s operations and manufacturing expansion in the country. 

Risk Management: 

Risk assessment and mitigation strategies play a pivotal role in international expansion. Businesses should be prepared for unforeseen legal challenges and have plans in place to address them. BP’s Deepwater Horizon oil spill disaster serves as a sobering reminder of risk management in international operations. The incident led to extensive legal battles, environmental damage, and financial liabilities, highlighting the significance of robust risk mitigation strategies. 

Conclusion: 

Expanding a business internationally is an exciting journey that presents both opportunities and challenges. Navigating the complex landscape of legal considerations is vital for a successful global expansion. By understanding and addressing regulatory compliance, trade regulations, taxation, IP protection, contract negotiations, employment laws, and cultural nuances, businesses can position themselves for growth while minimizing legal risks. Seeking expert legal counsel and being proactive in compliance efforts are key steps toward ensuring a smooth and legally sound international business expansion. Each case demonstrates how a deep understanding of regulatory compliance, trade regulations, taxation, IP protection, contract negotiations, employment laws, foreign investment regulations, cultural nuances, licensing, and risk management is essential for successful and sustainable global growth. 

We are well experienced in handling legal issues pertinent to tax filings and wealth management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation.

 

Understanding Non-Fungible Tokens/ NFT

Understanding Non-Fungible Tokens/ NFT

Understanding Non-Fungible Tokens/ NFT

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

 

Non fungible tokens (NFTs) are digital assets ranging from toilet papers and tacos to art and music.  These new assets are generally encoded with the same underlying software as many cryptocurrencies. Besides they are connected to the cryptocurrency because they’re bought and sold online using cryptocurrency. These started to work in 2014 but have gained much popularity now because people have now understood its usage and bought multiple artworks online. Once you’ve got your wallet set up, you can carry out this digital activity after your wallet is funded. After managing your wallet, there’s no shortage of NFT sites to shop. Currently, the largest NFT marketplaces are:

 

  1. i) Rarible. It is called a democratic and free marketplace that gives opportunities to the sellers and art creators to use NFT for their marketing. The RARI tokens are issued on this marketing platform

that enables the holders to weigh in on features like fees and community rules.

 

  1. ii) Foundation. This is a marketplace where artists receive “upvotes”. It is an invitation from fellow creators to post their art.

 

Glimpse on the present and future of NFTs

 

In November, GuradianLink.io had raised Series A of $12 million led by Kalaari Capital. It recently sold Bachchan’s NFT collection worth $966,000 (Rs 7.18 crore).

 

Regulating NFTs and their Cross-Border Transactions in India

As of today, there exists no explicit regulation or legislation by the Government of India that prohibits or restricts an Indian resident from buying and/or selling NFTs. This is partly due to the fact that the treatment of NFTs in the eyes of the law would depend on how the underlying digital or physical asset is classified. For now, NFTs may be regarded as a “digitally-signed certificate for the underlying asset”. 

 

However, the regulatory status of NFTs might potentially change with the introduction of the long-awaited cryptocurrency bill (“Cryptocurrency Bill”). The draft of the Cryptocurrency Bill of 2019 has been titled “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill” and Section 2(a) of the Cryptocurrency Bill defines “cryptocurrency” as: 

 

“Any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account…” 

 

The above definition of “cryptocurrency” might encompasses NFTs as NFTs could potentially “be considered to be both a representation of value that is exchanged on the basis of having an inherent value in business activity”. On the other hand, Section 3(3) of the Cryptocurrency Bill seemingly lays down a proviso to Section 2(a) as it stipulates that the use of Distributed Ledger Technology would be permissible in instances of “creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment.” Ultimately, there is still ambiguity as to whether NFTs would fall under the scope of ‘services’ as laid out in Section 3(3). Experts question whether NFTs are cryptocurrencies or virtual currencies, and if they would be affected by any future law restricting or prohibiting crypto-asset transactions? If an all-inclusive definition of cryptocurrencies and/or virtual currencies includes NFTs, it is argued that NFTs should be excluded from this all-inclusive definition as NFTs are non-fungible in contrast to both traditional and crypto currencies which are fungible in nature. Furthermore, crypto-assets like Bitcoin are primarily used as tradable assets and means of exchange whereas NFTs being unique are generally used to “collect” and retain specific digital or physical assets. 

 

Ambiguities in relation to the nature of NFTs might also arise under the Foreign Exchange Management Act, 1999 (“FEMA”). The treatment under the current FEMA regime would largely depend on the classification of the underlying asset, physical or digital, being exchanged via the NFT. In the currently operational Indian NFT marketplaces, it is observed that even though FEMA governs cross-border transactions vis-à-vis India, the country’s central bank, Reserve Bank of India (“RBI”) remains silent on the issues and ambiguities pertaining to digital assets such as NFTs and cryptocurrencies. Experts have stipulated that upon extrapolation of the provisions under the existing FEMA regime, crypto-assets and NFTs may be classified as intangible assets, for instance, like intellectual property.

 

Intellectual Property and NFTs

Legal professionals across India and throughout the world are contemplating the issues pertaining to intellectual property rights (“IPR”) and obligations in relation to NFTs. IPR protection strategies are needed to holistically secure the digital asset, inter alia, the licensing, assignment and transfer of holding rights of IPR of the digital asset. This new shift towards innovative IPR protection strategies is the result of the non-fungible nature or uniqueness of NFT technology. IPR professionals state that these strategies are pre-emptively necessary as they expect potential infringement issues to increase once third-party IPR are at a crossroads with the first creator of the NFT. Furthermore, it might be necessary to establish and develop a framework for the possession rights and first holding terms of NFTs as “the rights granted by an associate NFT marketer depend upon whether the rights were transferred via a license or an assignment, and these will vary with each NFT”.

 

Depending upon the underlying agreement, the mere ownership of the NFT may not grant the ownership of the underlying content/art or the associated IPR which would result in a scenario where the NFT “owner” may not be permitted to “breed, distribute copies, publicly perform, display, or build by-product works of the first work” as the owner of the copyright may exclusively retain such rights. The NFT industry might propose solutions pertaining to these issues, however, stakeholders have not settled on a standardized “best practice” making it difficult for buyers of NFTs to assess which NFTs safely store data in the long term.

 

NFTs and Taxation

It is a plausible contention that under India’s taxation system, the tax classification of NFTs would be based on the nature and characteristics of the underlying asset. For example, a NFT of digital art could potentially be classified as an “intangible asset” or “good” in terms of income tax and goods and services tax (“GST”). The cross-border and digital nature of transactions involving NFTs leads to the contention that there may exist additional tax issues along the way. For instance, sales of NFTs by offshore sellers through an offshore NFT marketplace to Indian buyers may be subject to a 2% equalization levy on the gross value of the NFT and the income of the marketplace from Indian customers. Furthermore, sales of NFTs by Indian resident sellers through foreign platforms may get excluded from the equalization levy and additional questions in relation to the platform’s income/commission exclusion in such scenarios are still unanswered.

 

The American Regime

Regulators, as of yet, have not provided explicit official guidance in relation to NFTs, however, there is a contention that it may be possible that NFT might be classified as a “commodity” under the Commodity Exchange Act (“CEA“), which defines the term to include several enumerated items and a catch-all for “all other goods and articles”. The Commodity Futures Trading Commission (“CFTC“) has also confirmed that the expression “commodity” includes cryptocurrencies, in addition to renewable energy credits, emission allowances, and other intangible items. technology. If NFTs are classified as commodities, the CEA may apply in one of two possible ways. Firstly, the CEA’s general prohibitions on deceptive and manipulative trading may apply to NFT transactions, which are affected on a “spot” basis, i.e., fully-funded, unleveraged transactions. However, if NFTs are offered on a margined or leveraged basis, additional requirements may apply which include the requirement to trade the NFT solely on registered derivatives exchange unless the transaction results in the “actual delivery” of the NFT within 28 days. 

 

It is argued by some that numerous NFTs available on the market may not be deemed as “securities” under the American Federal securities laws. NFTs may be considered as securities, “if it was designed to provide an expectation of profit to the buyer based on the efforts of others and were marketed as such”.  One potential example of such an arrangement could be a “fractional” NFT (“f-NFT”), where an investor would share a partial interest in an NFT with others. If an NFT (or f‑NFT) is considered a security, then the common securities law issues would exist including, the registration or exemption of the offerings, sellers, marketplace, the securities law liability for material omissions or misstatements and insider trading; the restrictions on short sales and market stabilization around an initial offering among others. 

 

The Financial Crimes Enforcement Network (“FinCEN“), the regulatory authority tasked with the responsibility of combating money laundering under the Bank Secrecy Act (“BSA“), is yet to issue guidance specific to NFTs and has only published general guidance with reference to virtual currencies (that may or may not apply to NFTs). It needs to be considered whether FinCEN sees NFTs as “value that substitutes for currency.” If this indeed is the view and NFTs are considered substitutes for currency, then the FinCEN may direct that NFTs shall be subject to the BSA and FinCEN regulations. Since many NFTs are more like digital representations of ownership in unique assets than a value that substitutes for currency, however, it seems that many NFTs available on the market should not be subject to FinCEN’s oversight. 

 

Conclusion

 

Keeping in view the regulation of NFTs in the global marketplace, it can be argued that NFTs are here to stay as considering that the current transfer of real estate ownership is labor-intensive and expensive, it is likely that NFTs will be applied to solve these transfers. The concept of “tokenizing” property rights will facilitate the sale and maintenance of NFTs in the long run. In the Indian context, laws and regulatory authorities such as RBI will need to address the issues in relation to permitting fungible and non-fungible digital assets to provide censorship resistance, worldwide participation, and the elimination of trusted third parties within the decentralized ecosystem. Furthermore, it is stated that as the system matures, the underlying blockchain infrastructure applied to NFTs will provide “performant, inexpensive transactions/settlement, immutability of contracts, and execution of smart contracts to handle ownership, authenticity, certification, governance, royalty payments, and a host of other ecosystem functionality”. The decentralized ecosystem transparency would support and provide for price and market efficiency. Furthermore, decentralization will grow via the network effect, as the rise of innovation, performance and resulting participation will elevate a vibrant global ecosystem of applications. However, the negative associations such as the climate controversies with respect to NFTs still remain unanswered. 

 

Lastly, it is suggested that the legal challenges in relation to NFTs are likely to become more pronounced over the coming months or years as the regulators and media increasingly focus and divert their attention into the fintech space. It is important to understand that the NFT or even digital assets regulatory framework is in its fetal stages and is to evolve and mature over time. As the number of Indian buyers and sellers of NFTs increases over the years, the legal regime addressing the myriad issues (discussed above) including anti-money laundering regulations, tax implications, financial regulations, intellectual property issues, etc. shall gradually emerge. India can take learnings from the evolving legal regimes pertaining to NFTs in countries like US, UK, China, etc. while drafting its own set of regulations for the same. For e.g., introduction of licensing obligations for services related to NFTs as done under the current German Banking Act classification of NFTs (like in Russia and UK) in various categories on a case-by-case basis to analyze the related regulatory, legal and tax implications; protection of investors from multiple originals of a work by modifying the copyright laws and supplementing the contracts with suitable clauses specifically drafted for NFTs, etc. can make NFTs more secure and regulated.

We are well experienced in handling legal issues pertinent to tax filings and wealth management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation.

 

Future of Cryptocurrency and Implications of a National ban(India)

Future of Cryptocurrency and Implications of a National ban(India)

Future of Cryptocurrency and Implications of a National ban(India)

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law,

Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal
advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your

business needs).

An overview of the proposed legislation in India
In July, a Committee set up by the Ministry of Finance to study issues related to virtual currencies,
submitted its report. The Committee recommended that all private cryptocurrencies should be
banned in India. Correspondingly, the Committee proposed a draft Bill banning cryptocurrency
in the country. In this blog, we explain cryptocurrencies and how they are used, recommendations
of the Committee with respect to cryptocurrencies and the regulatory framework for
cryptocurrencies in India and other countries.
What are virtual currencies and what is their use?
Virtual currency is a digitally tradable form of value, which can be used as a medium of exchange,
or a stored value which can be utilised later. It does not have the status of a legal tender. A legal
tender is guaranteed by the central government and all parties are legally bound to accept it as a
mode of payment.
Cryptocurrency is a specific type of virtual currency, which is decentralised and protected by
cryptographic encryption techniques. Bitcoin, Ethereum, Ripple are a few notable examples of
cryptocurrencies. Decentralisation implies that there is no central authority where records of
transactions are maintained. Instead, anyone can create a transaction.
Key Regulatory Concerns

  • Investor protections: Investor protection has been a top priority for Indian regulators.
    Crypto assets are seen as high-risk, speculative assets. Investor education, guidelines
    against mis-selling and other safeguards are needed.
  • Crypto assets are now better understood as digital assets, instead of as digital currencies.
  • Regulating them like commodities and clarifying their tax treatment is a win-win. The
    government’s tax revenues can go up.
  • It can also increase the number of tax filers (only 64 million in FY20) and the number of
    taxpayers (14 million).
  • Sidestepping current regulations: Some crypto assets may allow individuals to bypass
    securities issuance laws. That’s a potential risk to economic stability.
  • If crypto holders have to declare their holdings above a particular level in their tax forms,
    such concerns can be mitigated.
  • Illicit transfers: Anonymous transfers of crypto assets may weaken anti-money laundering
    laws or combating the financing of terrorism rules. That’s a potential national security
    issue.
    What are the present regulations in India with respect to Cryptocurrencies?
    In the last few years, the Reserve Bank of India (RBI) has notified the potential financial,
    operational, legal and security risks related to cryptocurrencies on multiple occasions (December
    2013, February 2017 and December 2017). In December 2017, the Ministry of Finance issued a
    statement which clarified that virtual currencies are not legal tender and do not have any regulatory
    permission or protection in India. Further, the investors and participants dealing with them are
    doing so entirely at their risk and should best avoid participating. In the 2018-19 budget speech,
    the Finance Minister announced that the government does not consider cryptocurrencies as legal
    tender and will take all measures to eliminate their use in financing illegitimate activities or as a
    part of payment system. In April 2018, RBI notified that entities regulated by it should not deal
    in virtual currencies or provide services for facilitating any person or entity in dealing with or
    settling virtual currencies.
    How does the draft Bill proposed by the Committee change these regulations?

Currently, only the entities regulated by the central bank are prohibited from dealing in, or
providing services for dealing in virtual currencies. The draft Bill prohibits any form of mining
(creating cryptocurrency), issuing, buying, holding, selling or dealing in cryptocurrency in the
country. Further, it provides that cryptocurrency should not be used as legal tender or currency in
India. The Bill allows for the use of technology or processes underlying cryptocurrency for the
purpose of experiment, research or teaching.
The Bill also provides for offences and punishments for the contravention of its provisions. For
instance, it states that mining, holding, selling, issuing or using cryptocurrency is punishable with
a fine, or imprisonment up to 10 years, or both. For individuals who might be in possession of
cryptocurrencies, the Bill provides for a transition period of 90 days from the commencement of
the Act, during which a person may dispose of any cryptocurrency in their possession, as per the
notified rules.
Cryptocurrencies as Property in the United States of America
One of the most critical legal considerations for any cryptocurrency investor has to do with the
way that central authorities view cryptocurrency holdings. In the U.S., the IRS has defined
cryptocurrencies as property rather than currencies. This means that individual investors are
beholden to capital gains tax laws when it comes to reporting their cryptocurrency expenses and
profits on their annual tax returns, regardless of where they purchased digital coins.
This aspect of the Cryptocurrency space adds layers of confusion and complexity for U.S.
taxpayers, but the difficulty does not end there. Indeed, it remains unclear whether digital currency
investors who have purchased their holdings on foreign exchanges must face additional reporting
measures come tax time. According to a report by CNBC, “anyone with more than $10,000 abroad
usually needs to fill out the Report of Foreign Bank and Financial Accounts (FBAR)… with the
Treasury Department each year. Another law—the Foreign Account Tax Compliance Act, or
FATCA—requires certain U.S. taxpayers to describe their overseas accounts on Form 8938, when
they file their taxes with the IRS.
The Way Forward

• Regulation is the Solution: Regulation is needed to prevent serious problems, to ensure that
cryptocurrencies are not misused, and to protect unsuspecting investors from excessive
market volatility and possible scams. The regulation needs to be clear, transparent, coherent
and animated by a vision of what it seeks to achieve.
• Clarity on Crypto-currency definition: A legal and regulatory framework must first define
crypto-currencies as securities or other financial instruments under the relevant national
laws and identify the regulatory authority in charge.

• Strong KYC Norms: Instead of a complete prohibition on cryptocurrencies, the government
shall rather regulate the trading of cryptocurrencies by including stringent KYC norms,
reporting and taxability.

• Ensuring Transparency: Record keeping, inspections, independent audits, investor
grievance redressal and dispute resolution may also be considered to address concerns
around transparency, information availability and consumer protection.

• Igniting the Entrepreneurial Wave: Cryptocurrencies and Blockchain technology can
reignite the entrepreneurial wave in India’s startup ecosystem and create job opportunities
across different levels, from blockchain developers to designers, project managers,
business analysts, promoters and marketers.
Conclusion
In summary, a smart regulatory approach should consider both the potential upside and downside.
It fosters financial innovation, safeguards investors and unshackles the Indian crypto ecosystem.
However, one quick look on the description may give us the initial impression that all may not be
well:
“To create a facilitative framework for creation of the official digital currency to be issued by the
Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India,
however, it allows for certain exceptions to promote the underlying technology of cryptocurrency
and its uses.”

In this momentous occasion, we could ask which side would the Government of India swing
We are well experienced in handling legal issues pertinent to tax filings and wealth
management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding
of your legal issues or if you wish to set up a free consultation.

Plugging Loopholes in Insolvency and Banking Code

Plugging Loopholes in Insolvency and Banking Code

Plugging Loopholes in Insolvency and Banking Code

 

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

Why is the Amendment to Insolvency Code in news?

Recently, the government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha. The Bill is set to replace the Insolvency and Bankruptcy Code Amendment Ordinance 2021 promulgated in April 2021.

It introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP). In March 2021 a sub-committee of the Insolvency Law Committee (ILC) recommended a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code (IBC), 2016.

History of the Insolvency and Bankruptcy Code

The IBC is a reform enacted in 2016 which amalgamates various laws relating to the insolvency resolution of business firms. It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy. Some keywords worth keeping in mind:-

    • Insolvency: is a situation where individuals or companies are unable to repay their outstanding debt.

    • Bankruptcy: is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts.

What are these newly changed ‘Major Provisions’?

Distressed Corporate Debtors (CDs) are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.

    • The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 % of their outstanding dues.

    • A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.

Knowing more about PIRP and their need at present

A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process. This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.

Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors. Unlike in the case of Corporate Insolvency Resolution Process (CIRP), debtors remain in control of their distressed firm during the PIRP. Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

CIRP is a time taking resolution. At the end of December 2020, over 86% of the 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold. Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings. One of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.

Key Features and benefits of Pre-Packs:

    • Insolvency Practitioner:

Pre-Pack usually requires services of an insolvency practitioner to assist the stakeholders in the conduct of the process. The extent of authority of the practitioner varies across jurisdictions.

    • Consensual Process:

It envisages a consensual process – prior understanding among or approval by stakeholders about the course of action to address stress of a CD, before invoking the formal part of the process.

    • No requirement of Court Approval:

It does not always require approval of a court. Wherever it requires approval, the courts often get guided by commercial wisdom of the parties. Outcome of the pre-pack process, where approved by the court, is binding on all stakeholders.

    • Quick resolution:

It is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT. Besides offering a way for MSMEs to restructure their debts, the pre-pack scheme could also reduce the burden on benches of the NCLT by offering a faster resolution mechanism than ordinary CIRPs.

    • Minimises Disruptions to the Business:

Existing management retains control in the case of pre-packs rather than resolution professionals in CIRP, hence avoids the cost of disruption of business and continues to retain employees, suppliers, customers, and investors.

    • Addresses the entire liability side:

PIRP will help CD to enter into consensual restructuring with lenders and address the entire liability side of the company.

What Challenges lie ahead for PIRP?

    • Raising additional capital:

Initially CDs may not raise additional capital or debt from Investors or Banks, because of the risk involved in recovering the money being provided by these Investors and lenders.

    • Small timeline:

Resolution Plan under PIRP is 90 days with an additional 30 days to AA (Adjudicating Authority) for support of the scheme. It is challenging for CoC (Committee of Creditors) members to decide on the Base resolution Plan within this short period without any broad parameters on which the Resolution Plan be approved.

Remarks and way forward 

While the PIRP is a timely effort to protect viable MSMEs, it is likely that operationalizing it only for MSMEs now may just be the first step towards a sound Pre-pack and will lead to a much wider coverage in the future which, like the IBC, is expected to evolve with time and jurisprudence. The government should consider setting up specific benches of the NCLT to deal with pre-pack resolution plans to ensure that they are implemented in a time-bound manner.

We are well experienced in handling legal issues relating to insolvency proceedings and disputes. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation.

A guide to understanding One person company under Indian Company Law

A guide to understanding One person company under Indian Company Law

A guide to understanding One person company under Indian Company Law

 

By Harshvardhan Tripathi, for Legal Corner LLP. Harshvardhan is a fifth year student of NALSAR University of Law and will be graduating in 2022.

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you are planning to consider incorporate or expand your existing business in the US so as to get legal advice that is specific to your business needs

As per the Ministry of Corporate Affairs, there were 34,235 One Person Companies out of a total number of about 1.3 million active companies in India, as of 31 December 2020.

What is one person company?

Section 2 of the Indian Companies Act, 2013 defines a one-person company as a company that only has one person as a member. The members of a company are nothing but subscribers to its Memorandum of Association (MoA), or its shareholders. These companies get all the benefits of a private company such as they too have access to credits, bank loans, limited liability, legal protection, etc.

What are the advantages of a one-person company?

    1. Legal status

 The OPC receives a separate legal entity status from the member. The separate legal entity of the OPC gives protection to the single individual who has incorporated it. The liability of the member is limited to his/her shares, and he/she is not personally liable for the loss of the company.  Thus, the creditors can sue the OPC and not the member or director.

    1. Easy to obtain funds 

Since OPC is a private company, it is easy to go for fundraising through venture capitals, angel investors, incubators etc. The Banks and the Financial Institutions prefer to grant loans to a company rather than a proprietorship firm. Thus, it becomes easy to obtain funds.

    1. Less compliances 

The Companies Act, 2013 provides certain exemptions to the OPC with relation to compliances. The OPC need not prepare the cash flow statement. The company secretary need not sign the books of accounts and annual returns and be signed only by the director.

    1. Easy incorporation 

 It is easy to incorporate OPC as only one member and one nominee is required for its incorporation. The member can be the director also. The minimum authorised capital for incorporating OPC is Rs.1 lakh but there is no minimum paid-up capital requirement. Thus, it is easy to incorporate as compared to the other forms of company.

    1. Easy to manage 

Since a single person can establish and run the OPC, it becomes easy to manage its affairs. It is easy to make decisions, and the decision-making process is quick. The ordinary and special resolutions can be passed by the member easily by entering them into the minute book and signed by the sole member. Thus, running and managing the company is easy as there won’t be any conflict or delay within the company.

    1. Perpetual succession 

The OPC has the feature of perpetual succession even when there is only one member. While incorporating the OPC, the single-member needs to appoint a nominee. Upon the member’s death, the nominee will run the company in the member’s place.

    1. Suitable for only small business 

OPC is suitable for small business structure. The maximum number of members the OPC can have is one at all times. More members or shareholders cannot be added to OPC to raise further capital. Thus, with the expansion and growth of the business, more members cannot be added.

What are the disadvantages of one person company?

    1. Restriction of business activities 

The OPC cannot carry out Non-Banking Financial Investment activities, including the investments in securities of anybody corporates. It cannot be converted to a company with charitable objects mentioned under Section 8 of the Companies Act, 2013.

    1. Ownership and management

Since the sole member can also be the director of the company, there will not be a clear distinction between ownership and management. The sole member can take and approve all decisions. The line between ownership and control is blurred, which might result in unethical business practices.

How to incorporate such a company?

Section 3 provides for incorporating such a company. It mentions that a company may be formed for any lawful purpose by one person. The memorandum of the one-person company has to state the name of some other person with his prior written consent in the prescribed form who will become the member of the company in the event of death of the person forming the one-person company or in case of his incapacity to contract.

The written consent of such person has to be filed with the registrar at the time of incorporation of the company. Such a person may also withdraw his/her consent in the prescribed manner. The one person member of the company may at any time substitute such person with another person by giving notice in the prescribed manner.

It is the duty of the member of one person Company to inform the company of the change of the other person nominated by him by indicating in the memorandum or otherwise within a specified time and manner as may be prescribed. The company has to inform the registrar of any such changes in the prescribed time and manner. However, any such change does not to amount to an ‘alteration’ of the memorandum.

Position of directors in OPC

Only one director is compulsory for such a one-person company. As per Section 149, the requirements that every company has to have at least one director state in India for a total period of not less than 182 days in the previous calendar year, would have to be complied with by the one person himself. Alternatively, he may have to keep another person as a director for such compliance. An individual who is a member is deemed to be the first director of the one person company till such time that subsequent director or directors are appointed in accordance with the provision of the act.

Requirement of meetings for OPC

In the case of one person company, a small company, and a dormant company the requirement of two meetings is deemed to have been complied with if at least one meeting of board has been conducted in half a calendar year and the gap between the two meetings is not less than 90 days. The provisions of section 174 which concerns the quorum of the meeting will also not apply to one person company.

Determination of Joint Employer Status Under the NLRA

Determination of Joint Employer Status Under the NLRA

Determination of Joint Employer Status Under the NLRA

By Shreya Kalidindi, for Legal Corner LLP. Shreya is a fourth-year student of NALSAR University of Law and will be graduating in 2022.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you need assistance with incorporation of your entity in the US so as to get legal advice that is specific to your business needs).

What is Joint Employment?

Joint Employment is a scenario where there are two entities acting as a person’s employer. These entities are collectively known as Joint Employers, and usually comprise of a direct employer who has a say in all matters relating to the control and supervision of the employee, and one or more secondary employers who have the power to exercise some – if not the same – degree of control and supervision.

However, it is important to note that there is more than one way to legally define Joint Employment. This depends on the purpose for which the Joint Employment relationship is sought to be determined (i.e., the claim being made).

Regardless, if two or employers are deemed to be joint under a legally recognized standard, then these employers can be potentially held jointly liable for unfair labor practices committed only by one of them. This could include, for instance, an employee being able to sue a staffing agency as well as the corporation they work for in a claim related to unpaid wages.

Change in the Standard of Determination 

While there are different standards to determine Joint Employership, it is pertinent to discuss the one utilized by the National Labor Relations Board (NLRB) for businesses and employees under the National Labor Relations Act (NLRA), seeing as it has been recently altered.

Purported as the ‘Final Rule on the Joint Employer Standard’, the now altered standard seeks to narrow down the domain of the Joint Employer definition from that previously applicable, and has been in effect since April 27th, 2020.

Departure from the Browning-Ferris Standard 

Prior to the Final Rule, the standard to be followed was laid down in Browning-Ferris Industries of California, Inc., a 2015 decision. Here, the NLRB built upon the previous standard and expanded it to include companies which had a degree of indirect control or potential to exercise the same, regardless of whether it was actually utilized or not.

Owing to the expansive ambit of the standard afforded by the NLRB, it became possible to hold more companies jointly and severally liable for claims under the NLRA as Joint Employers. While this was hailed by some for being a welcome change owing to the fact that it now allowed for entities such as franchisors to be held liable as Joint Employers for concerns relating to wages and working hours (for instance), it was criticized by others for bringing about several detrimental effects due to its scope being too wide.

Efforts were made by the NLRB to return to the pre-Browning standard through the courts, but in vain. Hence, the focus was shifted towards rulemaking and the “greater precision, clarity and detail” that it allows for.

Final Standard of Determination 

According to the NLRB, in order to be a Joint Employer under the Final Rule, a business must possess and exercise substantial, direct and immediate control over one or more of the essential terms and conditions of employment of another employer’s employees. These terms have been expounded upon under the rule itself.

Possess and Exercise – Unlike the Browning-Ferris standard, it must now be demonstrated that the employer who has the power to exert control over the employee has actually done so in the situation at hand. Mere possession of power will not suffice.

Essential Terms and Conditions – The Final Rule earmarks certain aspects of employment as the essential terms and conditions, and puts forth that only the control exerted over one or more of these aspects shall be taken into account to determine Joint Employership. Other factors apart from these cannot be used to prove a Joint Employer relationship.

The 8 essentials are: wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction.

Substantial, Direct and Immediate Control – The degree of control is defined differently depending on which of the essential terms and conditions it is associated with.

For instance, in order to satisfy the requirements for disciplinary control, the potential Joint Employer must make an actual decision to suspend or disciple by other means; a mere misconduct report provided to the other employer will not suffice.

Another example is one relating to the hours of work. For the control to be seen as substantial, direct and immediate, the Joint Employer must set the work schedules, determine the standards for overtime work, etc. It is not enough if they merely establish operating hours or calendars.

However, regardless of which essential term or condition(s) is in question, it is important to show consistency. Control, as envisioned in the rule, must be exercised regularly, and not sporadically or in passing. The burden of proving that such conditions exist is placed on those who seek to prove that Joint Employership exists.

Changes to the Definition in Other Domains 

The Final Rule is limited only to liability determination for the purposes of the NLRB. Under Federal Law (the Fair Labor Standards Act, or FLSA), it is the United States Department of Labor (DOL) which is responsible for defining Joint Employership. While the DOL also sought to amend its definition and make it more attune to that of the NLRB, this move has been struck down by the judiciary.

The Equal Employment Opportunity Commission (EEOC) is expected to make similar changes as well, although this move is expected to be significantly delayed. If amended, the new standard of Joint Employment will govern federal discrimination claims.

Joint Employers and ICE Audits 

If Immigration and Customs Enforcement (ICE) conducts an audit of the employer, they tend to request the I-9 (employment eligibility verification) forms of all the individuals on the employer’s payroll, regardless of whether they are classified as employees or independent contractors. Therefore, in cases of Joint Employment, abundant caution must be exercised to ensure that I-9 forms are filled only when needed. In cases where an independent contractor is not subjected to the full extent of the aforementioned standards of determination, they are not required to complete an I-9 form. This could include situations where the independent contractors make their services available to the public beyond the employer, and where the independent contractor is liable only for the results of their labor and supplies their own equipment. It is important to make such a distinction, seeing as a completed I-9 form strongly indicates the presence of an employee status, and thus would have a bearing on whether someone is considered to be in a Joint Employment relationship.

If you have any questions regarding the incorporation process, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.