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Karnataka HC Quashes Criminal Proceedings Against QNET

On 05th July 2018 a landmark judgment in the case of Naresh Balasubramaniam and State of Karnataka (CRIMINAL PETITION No.9308 OF 2016) was passed, that will change the way Direct Selling and Multi-level marketing companies are perceived, the Karnataka High Court has quashed all allegations made against QNET’s Malaysia based executive. Pronouncing the judgement in a case filed against Naresh Balasubramaniam the honourable High Court has made some very strong and relevant observations that are likely to clear the air around the business model of QNET that has been going through harried times, thanks to completely misconstrued facts about its business model.

Pronouncing the judgment the Honourable HC clearly stated that there is no case where any over act in inducing the complainant from parting with any money or influencing her in doing so was observed. Only because Subramaniam was the Managing Consultant of QNET India did not in any way provide grounds for his name to be included in the charge sheet said the order.

"It is not shown that the petitioner is associated with the latter. This circumstance alone would render the proceedings initiated against the petitioner had in law" read the order. Another significant factor that went in favour of Subramaniam is that he is a resident of Malaysia in the Charge sheet, "that is yet another factor that would dilute the case against the petitioner." the order read.

What is more interesting are the observations that the HC has made on the overall allegations against QNET and its sub-franchisee Vihaan. QNET, is said to be engaged in multi-level marketing or direct marketing. According to the HC "the police appear to proceed on the basis that the activities of a multi-level marketing company is illegal and arbitrary. There is a suspicion created about the business in some circles while there are others who vouch for it as a sound business model. The doubts and strong words employed by the Bombay High court in denigrating the business itself, is a case in point."

The HC has very clearly stated in no uncertain terms that "it is evident that 'Direct Selling' has emerged as a global industry. A report prepared by the Federation of Indian Chambers of Commerce and Industry discloses that direct and multi-level marketing in India is estimated to be to the tune of several hundred crores of rupees. And that it has emerged as an independent industry."

The FICCI report as quoted by the Honourable HC also states that direct selling and multi-level marketing are forms of economic activity that could play a very important role in a country like India, as it envisages low transactional cost mechanisms for sale of consumer products without the need for large marketing infrastructure. This is a very important observation as it helps clear the pollution spread by unwanted and probably self-interested elements around the business model of direct selling companies.

The HC has held that business models of multi-level marketing companies where the benefit is a result of sale of goods or services for subscribers, is not illegal.

As per the HC "Activities of QNET and Vihan i.e., the multilevel marketing companies, do not constitute offences under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978." According to the judgement, the activities of the company do not fall within the definition of ‘Money Circulations Scheme’ under Section 2(c) of the act, nor does it fall within the definition of 'Prize chit' under Section 2(e) of the Act.

Concluding on the applicability of the Act, the HC observed that "when the activities of these companies do not constitute either Money Circulation Scheme or Prize Chit, the offences under Sections 4 and 5 of the Act, do not even remotely apply to such activities and consequently charging the accused for such offences is unsustainable."

Quoting the FICCI report the HC has observed that "absence of a clear legislation and regulatory framework for multilevel marketing companies, have led to severe problems for such companies operating in the country. Legislation such as the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, which do not even remotely apply to the activities of multilevel marketing companies, are applied by the investigating authorities leading to disastrous results."

There is no way that criminal prosecution can be initiated under the provisions of the IPC and the best possible course of action would be to initiate proceedings under the Consumer Protection Act, 1886 in cases which have been filed against QNET or its stakeholders.

Cases registered in the QNET case are typically those where criminal legislation which are not even remotely applicable to the circumstances of the case have been invoked to substantiate the charges. "The dispute, if at all, is between a consumer and a direct seller and ought to be adjudicated under the provisions of the Consumer Protection Act, 1986." says the HC.

Bankruptcy Board Amends Norms, Notifies Procedures for Homebuyers Under IBC

On 03rd July 2018, The Insolvency and Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) (Third Amendment) Regulations, 2018 (No. IBBI/2018-19/GN/REG031) was issued by the IBBI to revise the norms to initiate insolvency resolution process, paving way for homebuyers to seek relief as financial creditors and allowing conditional withdrawal of insolvency applications, among other key changes.

The regulator put in place time frames to be adopted by resolution professionals (RPs) and stipulated that an RP should assess whether a corporate debtor had indeed indulged in fraudulent transactions within a time-line during the resolution process.

The changes to the IBBI (Insolvency Resolution Process for Corporate Persons) regulations were necessitated after the government had issued an ordinance last month amending the Insolvency and Bankruptcy Code (IBC). The changes will provide more clarity on procedural requirements for various classes of creditors, including homebuyers.

"Wherever the corporate debtor has classes of creditors having at least ten creditors in the class, the interim resolution professional shall offer a choice of three insolvency professionals… to act as the authorised representative of creditors in each class.

"… The insolvency professional, who is the choice of the highest number of creditors in the class, shall be appointed as the authorised representative of creditors of the respective class," an official release said.

Where the interest rate has not been agreed upon between the parties, the voting share of such a creditor would be in proportion to the financial debt that also includes an annual 8% interest rate. This will apply to cases like those of homebuyers, as the norms now provide clarity on the calculation of total financial debt that would influence their voting rights.

As for time frames, RPs have to publish an invitation for expression of interest (EoI) by the 75th day from the insolvency commencement date. RPs have to publish a provisional list of prospective applicants within 10 days from the EoI submission deadline.

"The resolution professional shall issue the information memorandum, the evaluation matrix and the request for resolution plans (RFRP) within five days of issue of the provisional list to the prospective resolution applicants and allow at least 30 days for submission of resolution plans," the release said. The resolution plan will also have to show that it addresses the cause of default and that the applicant has the ability to implement the plan, among other issues.

An application seeking withdrawal of insolvency proceedings will be accepted if it has been cleared by the committee of creditors (CoC) with a 90% voting share. Once the CoC's nod is in place, the resolution professional has to submit the application to the adjudicating authority on behalf of the applicant within three days of such an approval.

"A meeting of the CoC shall be called by giving not less than five days' notice in writing to every participant. The CoC may, however, reduce the notice period from five days to such other period of not less than forty-eight hours where there is any authorised representative and to twenty-four hours in all other cases," the release said.

5 July 2018
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