Alternate dispute resolution practices have been in existence in India for a long time. Having a mechanism along with the conventional system has been in practice in India that makes the judicial process less laborious and more effective. Although the Arbitration (Protocol and Convention) Act, 1937 and Foreign Awards (Recognition and Enforcement) Act, 1961 were enacted in India to ratify, recognize and enforce Arbitral Awards emanating from international commercial arbitration, the Arbitration Act of 1940 became a subject of allurement for various commentators who mostly offered their views on law relating to domestic arbitration.

With technology advancing exponentially, the world’s growing smaller. Anything and almost everything can be reached with the press of a few keys. While cross-border trade has become much easier than ever before, the participation of parties from significantly distinct backgrounds in modern-day trade has given rise to more complex disputes. India with its evolving global ambitions is certainly not exclusive to this phenomenon.

Therefore, the Arbitration and Conciliation Act of 1996 (hereinafter referred to as ‘the Act’) was adopted in consonance with the Model Law[1] framed by the United Nations Commission on International Trade Law (UNCITRAL) as its guide with a view to deal with domestic as well as international arbitration. While introducing the Arbitration and Conciliation Bill of 1995, the Minister of Law submitted different reasons and objectives among which, provisions for an expedite, fair and efficient means of alternate dispute resolution were paramount.

[1] UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW (https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/arb-rules.pdf)

Although the entire Act was formulated while keeping the UNCITRAL provisions in mind, Section 11 (6)[1] was incorporated into the Act as an insurance against the failure of the arbitration agreement and it stands in a slight deviation from the Model Law, wherein the appointment of Arbitrators in Article 6 of the Model Law was substituted by ‘Chief Justice’. The substitution has not only caused inconvenience to the parties but also given rise to difficulties in seeking remedies against the order of the Chief Justice or the person or institution designated by him.[2] After the passage of some years, a larger Bench of Supreme Court in SBP and Co. vs. Patel Engineering g. Ltd.[3] while overruling the Konkan Railway Corporation case held that the power to appoint an Arbitrator under Section 11 is a judicial power and not merely an administrative power.

In April 2022 the Hon’ble Supreme Court observed that many applications under Sections 11(5) and 11(6) of the Arbitration Act remain pending, while for more than a year in   many   High Courts, applications for appointment   of arbitrator(s) are pending for more than four to five years. The Apex Court further expressed that if the arbitrators are not appointed on time and if the applications remain pending for a number of years, it defeats the object and purpose of the enactment of the Act and it may eventually lose the significance of an expeditious alternate dispute resolution mechanism.

With that in view, the Hon’ble Supreme Court in its recent judgment[4] while expressing its dissent over such overwhelming pendency of cases has ordered the High Courts to ensure that all pending applications under Sections   11(5)   and   11(6)   of   the  Act   and/ or any   other applications   either   for   substitution   of   arbitrator   and/ or   change of arbitrator, which are pending for more than one year from the date of filing, must be decided within six months from the date of the passing of the order. It further directed that the Chief Justices of the High Courts shall partake 

[1] THE ARBITRATION AND CONCILIATION ACT, 1996 (https://indiankanoon.org/doc/1841764/)

[2]Konkan Railway. Corporation. V. Rani Construction. (P) Ltd. (2002) 2 SCC 388
[3] (2005) 8 SCC 618
[4]M/s Shree Vishnu Constructions v. The Engineer in Chief, Military Engineering Service & Ors.

all endeavours to decide and dispose of the applications under Sections 11(5) and 11(6) of the Act and/ or any other like application at the earliest and preferably within a period of six months from the date of filing of the application.

While different countries are opting for expedited arbitration because of its expeditious nature and reduced cost, the law in India is aiming to provide for a similar fast track mechanism under Section 29B of the Act to effectively utilise the provisions of the Act and to comply with the time frame as prescribed under Section 29A, various measures have been taken.

The pendency of applications under Section 11(5) & 11(6) stands antithetical with the efforts made towards making arbitration proceedings more efficient. The Supreme Court has conclusively observed the pattern of delay caused by howsoever limited judicial intervention there might be and has addressed it for the benefit of the parties involved. The measures taken by the Supreme Court may not only promote domestic arbitration but are an attempt to fix buckling under the roof. 

LegalPay is India's only third-party litigation funder and legal interim financing. LegalPay provides non-recourse funding in commercial legal claims in exchange for a share in the final recovery, implying that the litigant only has to pay only upon a successful realization of the claim. LegalPay is a VC-backed start-up with support from prominent names such as 9Unicorns, LetsVenture, VentureCatalysts and Amity Innovation Incubator.

 

When the claims of various creditors are verified by the IRP, a Committee of Creditors (CoC) is constituted. This CoC Comprises of financial creditors and is the decision-making body for the Corporate Debtor's administration. The Code and the regulations made confer various powers on the CoC, including appointing the IRP as the Resolution Professional (RP), supervising their functioning and conduct, and even replacing the RP if the RP's conduct is not satisfactory^[1].

It is agreed that the CD day-to-day operations are managed by the RP, however the CoC has the authority and responsibility to make decisions on all matters critical to the CD's operation. The Code^[2] has listed various acts that the RP can do but with the prior approval of the CoC, such as creating a security interest over the CD's assets, Appointment of the Valuers / Advocates /Transaction Auditors, raising interim finance etc. The CoC ensures that sensible actions are taken to preserve the entity's value.

One of the most important roles of the CoC's is to determine the viability of the CD's business, examine the feasibility of future operations, the costs and expenses, and according to its commercial wisdom resolve to either proceed with the CIR process, including the decision to extend the timeline, to liquidate the CD^[3] or to approve the Resolution plan (which is subjected to the final approval of Adjudicating Authority). Furthermore, an application of withdrawal of the insolvency application can only be filed before the Adjudicating Authority after the approval of 90 percent of the CoC's. 

The scope of the CoC's 'commercial wisdom' has always been a point of conflict, particularly in the context of judicial interference with the CoC's decision-making power.

Hon’ble Supreme Court in the case of K Shashidhar v. Indian Overseas Bank and Ors^[4] highlighted the importance of CoC and held that -

[1] Section 27 of the Insolvency and Bankruptcy Code,2016
[2] Section 28 of the Insolvency and Bankruptcy Code,2016
[3] Section 33 of the Insolvency and Bankruptcy Code,2016
[4] Civil Appeal No. 10673/2018, February 05, 2019.

“The Adjudicating Authority cannot interfere on merits with the commercial decision taken by the CoC, the limited judicial review available is to see that the CoC has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of”

Similarly, in State Bank of India v. Ushdev International Limited, the Mumbai Bench of the National Company Law Tribunal (NCLT) observed that where the CoC does not exercise commercial wisdom with caution, the "NCLT can disregard such an illogical, unreasoned, unfounded, and unsound decision of the CoC.”

The Supreme Court's decisions in Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta and Ors^[1] and Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India^[2] highlighted the CoC's role and responsibility, which includes, but is not limited to, assessing the feasibility and viability of a resolution plan, the eligibility of the resolution applicant (RA), all attempts to keep the CD as a going concern with liquidation as the last (OCs). Nevertheless, if the CoC's commercial decision contravenes the basic contours of the IBC, the NCLT would be justified in applying its judicial wisdom and rejecting the CoC's decision on approval or rejection of a resolution plan.

In yet another recent case, Ghanashyam Mishra & Sons Pvt Ltd through the Authorized Signatory v. Edelweiss Asset Reconstruction Co Ltd through the Director & Ors^[3], the Supreme Court referred to past decisions and reaffirmed that the commercial wisdom of the CoC is paramount and the scope of judicial review is limited to the extent provided by Sections 31 and 61(3) of the IBC.

It is significant to mention that the premise of commercial wisdom of CoC is based on the assumption that CoC is fully informed about the viability of the Corporate Debtor, the feasibility of the proposed Resolution Plan, and its impact on all stakeholders, and thus act in accordance with a thorough examination of the Resolution Plan. As a result, the CoC makes a collective decision based on this diligent assessment along with use of competent expertise.

The Insolvency and Bankruptcy Code, 2016 considers that CoC plays an integral role in running CIRP and it sets the highest levels of conduct and performance. It is the most appropriate body to attempt to revive and rehabilitate distressed CDs both commercially and prudently. However, it is important to consider steps that could be taken to further strengthen the framework of CoC under the Code, which can be done if India frames a code of conduct for the CoC, which would define the guiding principles for the CoC's conduct and ensure that its commercial wisdom is within the four walls of these guiding principles, with any deviations necessitating reasonable explanation or attracting legal implications.

[1] Civil Appeal Nos. 9402-9405 of 2018, October 04, 2018
[2] (2019) 4 SCC 17, January 25, 2019.
[3] 2021 SCC Online SC 313

The introduction of code of conduct could significantly strengthen the CIRP and maximise value for LegalPay is India’s first tech-driven fintech that specializes in legal and fund insolvency financing. Insolvency financing also widely known as interim financing, acts as oxygen to companies under distress and help companies under insolvency to run as a going concern and maximise the value of assets to protect the interest of stakeholders involved.

LegalPay provides funds to corporate debtors who are in need of Interim Finance that ranges from Rs. 30 Lakhs to 20 Crores. LegalPay is backed by a strong team comprising Company Secretaries, Lawyers (Alumni of India’s top-ranking college), MBA, Economists, and Charted Accountants. r all stakeholders through high levels of process conduct. 

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Each Alternative Investment Fund scheme (other than angel funds) must have a minimum corpus of twenty crore rupees. For an angel fund, the corpus must be at least ten crore rupees.

 

Any sophisticated investor, whether Indian, foreigner or non-resident Indian, who is willing to take on the risk of investing in largely unlisted or illiquid assets, may contribute money to an AIF. AIF (other than an angel fund) cannot accept investments from investors worth less than one crore rupees. The minimum amount of investment for investors who are AIF employees, directors of the AIF, Manager employees, or directors, shall be Rs. 25 lakhs [4].

“Don't put all your eggs in one basket”- Warren Buffet
Anyone with a decent experience in financial planning and investments would believe in the above quote to diversify their portfolios. Taking it a step further, alternative investment funds provide us with an opportunity to invest in an asset class which is completely unhinged upon the dynamics of stock markets. Thus, making them less volatile even during times of economic distress.

2. Tax Benefits:

Alternative investments provide tax benefits depending on the size and the asset the funds are invested in. You keep more of your profit thanks to the structure of many alternative investments. In many private alternative investments, you should be a member of the fund or syndicate, and the tax advantages are transferred straight to you. Pass-through depreciation and long-term capital gains treatment are the two major tax benefits.

3. Passive Investment Opportunities:

The majority of busy investors place a high value on their time, and actively managing an asset or portfolio requires considerable work. Hence these alternative investment funds like Real Estate funds are highly attractive options that provide an opportunity to passively invest in diverse asset classes, across suitable time horizons.

4. Customizable:

An AIF's structure can be modified to suit a particular investment approach, such as sector exposure or asset class diversification, and moreover, the investor has the comfort to choose the product based on the time horizon for the investment.

 

Although the term "alternative assets" is relatively new, investing in these kinds of assets is not a recent development and can be traced back to the Industrial Revolution in the 1800s. During the 20th century, alternative investments gained popularity, notably after the World Wars when many nations started to rebuild. Venture capital at this time evolved into the driving force behind achievement in the private markets. Due to the way that technology is altering many industries, venture capitalist investment in emerging technologies and business prospects has grown quickly. 

 

The alternative assets industry has continued to grow in recent years and is now a mainstay of the modern investment landscape. The industry AUM is expected to reach $17.2 Trillion by 2025 with a CAGR of 9.8% from 2020. [2]

 

According to the SEBI data, the assets of the AIF business in India have increased by 42% in the financial year 2021-22, as more rich investors used these funds to minimise risk and maximise returns in their portfolios. From assets of Rs 80,000 crore, the industry has increased by more than 7 times in the last five years, with Category II funds dominating the field by contributing 80% of the AIF industry's assets. According to the Association of Alternative Investment Funds, over the next five years, AIFs might experience 3x growth and reach Rs 1.7 trillion in assets under management in India [3].  

 

 

In its truest form, the AIF structure serves as the model for dynamic asset management that exposes workers to high-calibre work. Working in such environments gives youngsters the opportunity to learn about the economy, markets, asset classes, and fostering business relationships. With growing financial literacy amongst Indian investors, the alternative assets classes are gaining traction for their low volatility and flexible investment options. Initial tax complications and concerns regarding the pass-through status of trusts pestered the growth of AIF when they were first launched in 2012, however, all of it has been fixed today. These lucrative funds are now all set to be characterised as the mainstream investment opportunity in India as well.

 

[1] Tax Guru

[2] Preqin

[3] Business Standard

[4] SEBI Regulations 2012

 

With their complicated nature and high degree of risk, most alternative investments are owned by institutional investors or high-net-worth individuals. Compared to mutual funds and exchange-traded funds, many alternative investments have higher minimum investments and fees (ETFs). These investments, on the other hand, don't have as much chance to publicise their results and attract new investors.

With emergence of alternative investments one opportunity to look forward to, is the legal and debt asset classes. The legal and debt assets hold a high value of ROI and are not affected my external market factors but based on strategic and diligent investing. In India, litigation financing is becoming more popular. People and companies worldwide turn to litigation finance as a well-established sector for help paying for their legal battles. Claims are financed by third-party financiers, who provide the money to the plaintiff so that they may present their arguments in court or before an arbitration panel. The return on investment for the financier is a specified percentage of the monetary relief the claimant obtains due to the legal or settlement procedure.

To understand how these investments work, one needs to know that the outcome of the investment is not based on the dynamic economic environment but is based on the due diligence done by the funder. This due diligence and risk assessment is a multi-level process in which the case's viability is checked based on legal merits, financial potentiality, and operational costs. Once the case fulfils all the pre requisites, it is deemed fit to be funded. Litigation in India is costly, and only institutional investors can afford to invest. 

To invite retail investors in investing into such an asset class has emerged LegalPay. Legalpay is an alternative investment platform for retail and institutional investors who want to invest their money in legal and debt assets. The company is involved in third party financing, where it allocates funds in financing commercial litigations and arbitrations cases that are found to be funded and take pre-determined fees on successful litigation.

One other tangent of such asset class is investing in interim finance. It is nothing but a short-term, highly secured loan of six to twelve months issued to enterprises experiencing insolvency and is used to cover urgent operating expenditures, such as payments to professionals, staff, security personnel and so on. Legalpay made its first and highly successful exit from financing Yashomati Hospital which was facing insolvency. Interim finance was provided by Legalpay for bearing the operational costs, which kept things running until the resolution of insolvency. This exit came with the revival of the hospital and high returns for the investors.

Investing in such kind of alternate investments helps in the protection of portfolios. One can protect their investments by diversifying their investment into various alternatives to mitigate the risk of losing money. Third party financing has turned out to be a great success in the European market where funders are not only thriving but competing in maximising their returns. India is on the emerge to observe the potentiality of the legal and debt asset class, what it holds in the future and why it is a great way of investing. 

 

 

 

Litigation finance is infamous for furnishing financial backers with uncommonly high benefits. Therefore, venture banks and other huge financial institutions have been attracted to this area of study. Mutual funds, for instance, have as of late communicated an interest in claim supporting too. You can take help from Legal Pay for legal and debt financing.

 

 

Litigation funding is a phenomenal venture for financial backers since it isn't attached to any one monetary cycle. Subsequently, litigation funding appears to be unaffected by a decrease in the worth of different resources during a slump.

 

Litigation funding is great information for the overall population's admittance to the legal framework. Litigation funding guarantees that everybody can have a fair preliminary.

India has acquired a reputation of an expensive legal system. For perspective, India’s GDP in 1991 was $266 Billion and is expected to cross $5 Trillion by 2025. Such growth in the economy runs parallel to growing legal complexity. India’s booming unicorn landscape has been a catalyst for a higher than ever investor & founder disputes. Debt and equity financing, private equity, mergers and acquisitions and venture capitalists are some areas that are witnessing increased commercial cases and arbitrations. This spectacular economic growth will fuel the Indian market for legal expenses as well. 

According to the Legal Services Authorities Act, 1987 (Government of India), Legal Service includes the rendering of any service in the conduct of any case or other legal proceeding before any court or other authority or tribunal and the giving of advice on any legal matter. 

In FY 2020, legal expenses rose 9% to 38754 crores. It has been observed that when the economy doubles, the legal expenses triple. They are forecasted to be over 1 lakh crore by 2025 and 3 lakh crores by 2030. Increased FDI and shifting tax regimes have also contributed to increasing legal costs. For instance, Amazon spent Rs 8,546 crore ($1.2 Billion) in legal expenses during 2018-2020 to maintain its presence in India. Around 20% of Amazon’s revenue was being spent on lawyer fees. The rise in demand for more sophisticated legal services was followed by rise in the supply as well. Despite that, the expenses kept soaring.

In FY2021, the pharmaceutical industry marked the highest legal spending at an aggregate of nearly Rs. 7595 crores while the telecom industry marked the highest spike in its legal expenses at a whopping 48.88% YoY change. The pharma sector was followed by Infotech, banks, finance and capital goods in terms of highest spenders. Out-of-court settlements are becoming more commonly practiced as companies try to save both time and money. The total legal spending of all the listed companies on Indian exchanges may sound big, but it is minuscule at just 0.47% of their total revenue and 0.59% of total expenditure. However, the recent trends suggest that this percentage is going to skyrocket later in this decade.

At a global level, In the last decade, the size of the market for legal services has nearly doubled where US companies spent 166% more on legal services than its counterparts. This is due to its complex corporate landscape and varying tax laws and other regulations in different states. Similarly, as India continues to adopt globalization, disputes with respect to finance, corporate restructuring, and governance such as ESG and intellectual property rights will demand that corporates increase their overall legal spending. This would exponentially expand the country’s share in global legal expenses.  While the growth of the legal industry portrays a promising story for the country, the harsh reality of the associated expenses being borne by the litigants also needs to be addressed.

“Let a lawsuit enter a household and rest assured, even the one who wins shall have lost everything.” is a saying that has held true throughout generations. Today, fighting a case in a court of law is even more expensive than a decade ago. On 25^th November National Law Day, the then-president of India Ram Nath Kovid said, “A relatively poor person cannot reach the doors of justice for a fair hearing only because of financial or similar constraints while it’s in our constitutional values and republic ethics. It is a burden on our collective conscience.” The factors behind litigation costs reaching heights are both direct and indirect. The courts are currently facing the mammoth task of clearing up a colossal number of pending cases. The longer previous cases are pending, the more expensive it becomes to pursue new cases. Some of the other factors include legal ignorance, improper framing of charges, lack of laws regulating the fees of professionals and so on. Despite the government initiatives to make legal battles a level-playing field, the ground reality remains that lack of funds significantly affects your ability to contest.

As per a survey by DAKSH, 90% of Indian litigants earn less than 3 lakh per annum and the median cost for this group is around Rs.16,000. As per Prashant Bhushan, a renowned public interest lawyer in the Supreme Court of India, 80% of our country is shut out of the judicial system as they cannot access lawyers in the first place and the quality of legal aid available to them is extremely poor. The Supreme Court is well aware of the problem. In Vinod Seth vs Devinder Bajaj, the apex court had observed: “Under no circumstances, costs should be a deterrent to a citizen with a genuine or bona fide claim, or to any person belonging to the weaker sections whose rights have been affected, from approaching the courts.” 

Just 1% of the respondents of the DAKSH survey were utilizing free legal services provided to the weaker sections who otherwise can’t afford to pursue a litigation. It’s not just the access to courts which is limited by financial barriers. Lack of funds is also the main reason why individuals do not meet the conditions for bail. While large conglomerates are building in-house capabilities by hiring veteran lawyers, smaller organizations are building systems and processes that can help them keep the spiralling costs in check. Apart from the exorbitant fees, complicated judicial process also makes it less accessible to ordinary citizens and smaller companies. Not everybody can afford to go through the process because the process is itself a punishing one. For a cash-strapped start-up, it becomes nearly unviable to go against a larger institution given the fact that the course of the litigation itself will drain all their financial resources with zero guarantee of a favourable judgement. The 240th Report of the Law Commission states: “A litigant, who starts the litigation, after some time, being unable to bear the delay and mounting costs, gives up and surrenders to the other side or agrees to settlement which is something akin to creditor who is not able to recover the debt, writing off the debt. This happens when the costs keep mounting and he realises that even if he succeeds, he will not recover the actual costs. Moreover, external recourse funding in the form of loans often come at high interest rates and thus, act as catalysts to the financial nightmare of litigation.

The concept of litigation expenses has been existing for decades now in the western parts of the world. However, it is still at its nascent stage in India. LegalPay offers non-recourse funding to litigants who do have a strong case but lack the financial means to pursue it in order to get a settlement. Litigation funding creates a win-win situation by generating high returns from a cut of that settlement amount for the investors and by allowing the litigant to pursue the case at zero cost and zero risk. Due to the funding being non-recourse in nature, the litigant shall not be required to pay LegalPay anything in case the judgement is not in their favour. Even if the experienced professionals at LegalPay review the case using data-driven analytical tools and decide not to fund it, it would be indicative of the odds being stacked against them. in the case. 90% of applicants who LegalPay did not fund, decided not to pursue the case as it failed the preliminary test of meritocracy, thereby saving significant money which would otherwise have been spent on legal fees.  

Shifting the burden of a litigation to a third-party funder is not just a powerful tool for risk mitigation, but would also play an instrumental role in contributing to the nation’s GDP by allowing growth-oriented businesses to utilize their resources in expanding operations and innovating instead of getting them locked up in a legal case. 

 

Thus, litigation has been an expensive affair since the very beginning. In the past few decades, many jurisdictions have introduced the concept of third-party litigation funding to ease this burden. Third-party litigation funding companies supply the capital to litigators in exchange for a portion of the settlement or other remedies. This funding is non-recourse which means that if the lawsuit fails, the funded party is not required to pay the funder after the case. The funders provide capital to businesses and business owners to help them protect and enforce their commercial rights and interests and strengthen their legal positions. On the ‘demand side’, companies with legitimate commercial claims can increasingly access third-party litigation funding which can be thought of as a type of hedge against the uncertainty of a legal outcome.

A bank’s loan comes with a high-interest rate and also a compulsory liability to pay back even if the litigant loses the case. This is not the case with litigation finance as it is non-recourse, i.e., a return is collected only if the case is successful. Also, the business will not have the obligation to pay the principal and the interest amount and it will be protected from inflating interest rates as well. The funder can be paid from the claim amount received by the litigant.

In addition to reducing risk, using litigation finance rather than self-funding legal disputes provides accounting benefits to the business. Loans add to operating expenses and thus, reduce profits. Whereas, litigation funding removes that expense and may, in some circumstances, even be treated as revenue, immediately boosting the financial picture of the business.

Litigation funding is a flexible mode of financing legal expenses as it is non-recourse in nature. Litigation funding also allows lawyers, litigants, and businesses the flexibility to take up small offers on meritorious claims and enhances the probability of the dispute being resolved on the basis of the merit of the claim and not the financial position of the parties involved. 

Litigation Funding also provides benefits like:

a)   Hiring better lawyers that the Litigant otherwise could not have been able to afford.

b)   Increased Liquidity- It allows businesses to retain cash for immediate business needs and release capital of the business for other priorities.

c)    Potentially turn a company’s legal department into a revenue source instead of a fees and expenses center.

d)   Positive P&L impact – Litigation funding keeps ongoing litigation costs off a business’s profit and loss as the expense is borne by the funder;

The Funder also assesses the merit of the case and acts as a project manager, collaborating with the law firm to give an expert opinion on the case.

The diligence that the funder undertakes provides assurance of the strength of the case as a funder’s legal team undertakes thorough due diligence prior to funding to ensure the claim has merit.

With the recent pandemic affecting every walk of life, the preservation of the cash flow by businesses is critical to ensure survival. Litigation funding can help businesses to reduce risk without writing off potential upside. This option of conversion of legal liabilities into potential assets can provide businesses with the required security and certainty.

 

Litigation funding, also known as third-party funding (TPF), has become a vital tool for businesses of all sizes to manage the financial risks associated with legal disputes.