Dentons Link Legal

Dentons Link Legal represented Mr. Vijay Biyani, the Respondent Personal Guarantor in a Company Petition under Section 95 of the IBC, 2016 filed by Central Bank of India before the Hon’ble NCLT, Mumbai for seeking initiation of Personal Insolvency Resolution Process (“PIRP”). The Hon’ble NCLT vide its order dated 16th January, 2024, had appointed the Resolution Professional who had thereafter filed his report under section 99 of the IBC recommending for the admission of the Company Petition. The matter was argued finally on 29th April, 2024 when the Hon’ble NCLT was pleased to dismiss the Company Petition interalia on the grounds that the deeds of personal guarantee were never invoked prior to issuance of Form-B demand notice as the Financial Creditor has not called upon the Personal Guarantor to pay the debt in default under the guarantee and therefore, the Form-B Demand Notice was itself irregular. Reliance was placed on the judgement of the Hon’ble NCLAT in the case of State Bank of India Vs. Dipak Kumar Singhania [Company Appeal (AT) (Insolvency) No.191 of 2025]. Vide the judgement, the Hon’ble NCLT has affirmed the position that default shall arise on the part of guarantor only when demand notice is issued as contemplated in the deed of guarantee and that the absence of existence of default a Company Petition u/s 95 of IBC, 2016 is not maintainable. The team comprised of Ms. Petrushka Dasgupta (Partner), Ms. Krishna Baruah (Principal Associate) and Mr. Kewal Buddhdev (Associate).

Artificial Intelligence (AI) has brought within the realm of reality, what was once a mere figment of imagination – a page from a science fiction novel[1] or a scene from Star Wars! Of course, it is of little surprise that the impact of AI is most palpably felt in the entertainment industry where recent trends have posed before the lawmakers, the classic Collingridge Dillemma – whether to curb innovation in its nascent stages by the imposition of regulations, or to let innovation thrive at the cost of rights of specific sections of society (such as artists and musicians).[2] Speaking of regulations, the Copyright Act, 1957 (“the Act”) is the key legislation that governs and grants protection to authors of original musical work, for the intellectual property in the lyrics, composition and sound recording.  In the larger interest of promoting the creation and publication of original music, this law was intended to prevent original works from being copied, distributed, performed or reproduced without the author being credited and/or duly remunerated for the same.  However, with the recent turn of events, AI is being used (or perhaps, mis-used) to autonomously create musical works.  In a recent case, AI music generators, Udio and Suno were sued by international record labels including Universal Music, alleging copyright infringement in training their models on published music to which the record labels had exclusive rights, without a license to that effect. But why is the rights conundrum relevant here? AI models are trained on large volumes of existing data and is processed through neural networks into large language models in which it is contextualised. To create a large language model for music, an AI music generator will not only need access to phenomenal volumes of non-linear data (notations, sound recordings, lyrics, styles, voice, language, etc.) but will also consume a large amount of computation power, to generate any original output which will consequently entail heavy costs.  However, if one chooses to train existing large language models on specific and limited data sets, it would definitely be possible to “prompt” the system to generate new musical works, which would be new but not original.  The works so generated in this manner, would most certainly bear significant resemblance and can even be almost identical to songs, styles, and lyrics of popular artists, so much so, that a listener could easily be deceived to believe the song to be another version or derivative of the original work which forms the data set for training the model. Can the output really be protected as an independent and original work, or would it qualify as a derivative of the original? The Act grants protection in respect of the copyright in any original work only to the author or any person or entity to whom the author has assigned such rights in writing. In respect of a sound recording, it is only the copyright holder who is entitled to create other sound recordings embodying the lyrics or musical composition of the original work including storing of it in any medium by any means. Any other person who creates derivatives of the sound recordings i.e. creates and/ or publishes adaptations, translations or remixes of the sound recordings without a legitimate license from the holder of the copyright in the recordings, would be deemed to be infringing the said copyright, entitling the original holder to not only initiate legal proceedings but also to royalty from the monetisation of such derivatives. This leads us to another pertinent question of ethics and bias in the deployment of AI. The spirit of the Indian law gives the highest importance to ethical considerations of artists being attributed for their original work in case of reproduction of such works in any other mode, medium or format. This constitutes the moral rights of the author. Further, the Terms of Use of most publishing platforms carry caveats against unauthorised scraping, violation of which is tantamount to a breach of contract and monetisation of the proceeds may also warrant penal action under applicable law. Ethical biases of AI models is further challenged with Generative AI now giving way to Cognitive AI, the technology is trained to perform cognitive tasks in the same way as a natural human. We can therefore reasonably expect the lines of distinction between AI generated output and original work being further diluted in the foreseeable future, thereby making the ethics debate even more complex. An examination of the global judicial landscape – the war waged against Udio and Suno or the recent cease-and-desist notice issued by Tupac Shakur’s estate against Drake for the latter’s release of the song “Taylor Made Freestyle” which was allegedly created using AI and bore significant resemblance to Shakur’s prior work – is indicative of the potential legislative intervention that can be expected in the space. The copyright statutes of most countries, including India, attribute authorship to human creators and not technology. Irrespective of whether the attribution should be to the human who created the work or the machine, the resemblance to existing and copyrighted work cannot be overlooked or undone. Though the decisions of these matters are eagerly awaited by the music fraternity, one can reasonably expect ownership of copyright to be attributed to the first author or assignee thereof and for unauthorised production of derivatives to be challenged in court. When speaking of ethical considerations, a common defence taken in matters of data scraping is the “fair use” doctrine – an exception to the mandate for procurement of a license to use copyright work in the event it is being used for “fair dealing” and is not a computer program. Whilst dealing in the work for personal use or for research and educational purposes or for the purpose of reporting, news, or critique should not constitute infringement. Pertinently however, in cases of scraping of published music to generate works using AI that substantially match the original, the claim of fair use would be a stretch. While the matters referred above have been filed in the courts of the US, AI is definitely making the World flat – Indian courts could also be expected to adopt a similar trail of thought. Regulation by way of a licensing regime integrating human and AI generated content with specific thresholds seems to be the need of the hour. However given the pace of technological evolution, the task sure does seem like an uphill battle for regulators who are bound by due process even in the drafting of laws. But is AI really the Frankenstein it is being portrayed to be – a weapon of mass destruction and obliteration of the human mind? Can it not be leveraged in the interest of creators? Indeed – with new forms of music properties coming to the fore combining cinematography, live performances, competitions and freebies in a package with a sound recording and composition, the rights matrix involves a lot more entities. Even in a project commissioned by a platform or a brand, the rights in the master are assigned whereas the underlying rights may often need to be divided between the artists in the proportion of their contribution. For a human resource to count the number of words in the lyrics or notations in the composition and attribute them to individual artists might be a tedious task. However, with the classification models developed in AI, it can be used to accurately bifurcate different types of data and make the necessary calculations for attribution of rights. Classification models can also be used to bifurcate the deliverable of each stakeholder in the music property (eg. lyrics, editing, composition, performance, etc.) and divide the royalties accordingly configured by way of preset rules emanating from legal provisions. Similarly, for ease of acquisition of music properties, document intelligence tools can be taught to scan the contracts of each stakeholder against specific parameters for a quick risk assessment. With music properties becoming high value assets, it is critical to assess the rights being transferred in an acquisition or distribution deal and save the platform or record label a significant amount of money. The advent of AI has undoubtedly created a lot of fear and insecurity amidst every section of society. Redundancy of human labour and loss of employment are the core fears underlying all movement against AI and are by no means misplaced. However, let us also acknowledge that the capability of AI is limited to the extent of data currently available as at any given point of time. It does not account for new forms of data that are yet to be generated, at least not with any reasonable accuracy. Therefore, to keep AI alive and retain the novelty of its usage, human creativity must go on. Authors: Nusrat Hassan and Nayona Roy Footnotes [1] Kyet234, “Exploring the Boundless Potential of Home Automation: A Futuristic Integration of Technology and Convenience”, Nov. 29, 2023. Exploring the Boundless Potential of Home Automation: A Futuristic Integration of Technology and Convenience - Kyet234 [2] Krisna Ravi Srinivas, “Two Reasons AI Is Hard To Regulate: the Pacing Problem and the Collingridge Dilemma”, May 02, 2023 and Updated July 4, 2024. Two reasons AI is hard to regulate: the pacing problem and the Collingridge dilemma - The Hindu

Introduction: The Hon'ble Delhi High Court (“Delhi HC”), in a recent judgment titled Lily Packers Private Limited Vs. Vaishnavi Vijay Umak and connected matters [1] delivered an interesting opinion on the arbitrability of employment disputes pertaining to negative covenants in employment agreements.The Judgement validated the legality of the lock-in period and other negative covenants during employment. The Delhi HC also held that employment disputes pertaining to negative covenants are arbitrable under Indian laws. Brief Facts: The Petitioner (“Company”) and the Respondent (“Employees”) have entered into an employment agreement during 2021-2022. The employment agreement contained a lock-in period clause which stipulated that after the successful completion of the probation period, the Employees would be on a lock-in period for three years with the Company from the date of joining, and the Employees would not be entitled to terminate the employment within this lock-in period. Besides this lock-in period clause, the employment agreement also contained various other negative covenants such as non-compete, non-solicitation, protection of confidential information and trade secrets, etc. Further, the employment agreement also provided for a dispute resolution clause, which stipulates that in case of any dispute arising out of the employment agreement or any communication, transaction, or dealing with the Company, its division, or its management shall be adjudicated through arbitration. The Employees went on leave and never returned to work and practically worked only for one year and two months, as opposed to the lock-in period of three years, which led to disputes between the parties. In 2023, the Company issued a notice to the Employees to invoke arbitration as per the dispute resolution clause in the employment agreement. In reply, the Employees did not agree to submit the dispute to arbitration. Aggrieved by the replies of the Employees, the Company moved to the Delhi HC under section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”). Submissions of the Parties: The Company submitted before the Delhi HC that the disputes in the present petitions arise out of the Employees not abiding by the respective employment agreements. Further, the Petitioner company submitted that the employment agreement contains a dispute resolution clause, as per which any dispute that arises between the parties to the said agreements ought to have been referred to arbitration. On the other hand, the Employees submitted that the present dispute is not arbitrable, because the lock-in clause prohibiting the employee from terminating the employment before three years of joining is violative of the fundamental right to life and employment of the employees, as provided under Article 19, and 21 of the Constitution of India. In support of their arguments, the Employees placed reliance upon various Supreme Court judgments, including Lombardi Engineering Limited Vs. Uttarakhand Jal Vidyut Nigam Limited [2], and Kaushal Kishore Vs. State of Uttar Pradesh & Ors.[3] Hon’ble Delhi High Court’s Observation: The two core questions before the Delhi HC in the present matter were: Whether a lock-in period in employment contracts is valid in law, or does it violate the fundamental rights enshrined in the Constitution of India? Whether disputes relating to a lock-in period in employment contracts are arbitrable in terms of the Act, 1996? To answer the first question, the Delhi HC referred to an 1885 judgment of Calcutta Civil Appellate Court by the name of The Brahmaputra Tea Co. Ltd Vs. Scarth [4], wherein it was held that restricting an employee to pick a new employment post termination of employment is void, however, such exclusive employment covenants during employment are valid. Delhi High Court further referred to a 2006 judgement of the Hon’ble Supreme Court titled Niranjan Shankar Golikari Vs. Century Spinning And Manufacturing Co.,[5] which is based on the judgment in Brahmaputra (above), herein too, the Supreme Court had observed that a negative covenant providing for exclusive service during the course of employment are generally not contrary to law. Further, similar observations were also made in the judgement of Percept D’ Mark (India) (P) Ltd. Vs. Zaheer Khan & Anr.[6] Furthermore, the Delhi High Court relied on Affle Holdings Pvt. Limited Vs. Saurabh Singh [7] wherein it was held that a covenant prohibiting employment or competition post termination of employment is unenforceable. Based on the above rulings, the Delhi HC held that a three-year lock-in period would not constitute a restraint on the employment of the respondent employees and did not violate any fundamental rights of the Respondent employees. To answer the second question, the Delhi HC had put reliance upon a 2008 ruling of Delhi HC titled BLB Institute of Financial Markets Ltd. v. Ramakar Jha [8] wherein, there was a lock-in clause of 3 years in the employment agreement, and the employee left the employment only after just one year of service. The court has held that negative covenants during employment are valid, and thus, any employment dispute arising out of such negative covenant shall be arbitrable. Based on all referred judgments, the Delhi HC finally concluded that negative covenants during the term of employment are valid and enforceable, and any dispute arising out of such covenants shall be arbitrable if the employment agreement provides for arbitration. The court further observed: “In the present cases, this Court holds that reasonable lock-in periods in employment contracts that apply during the term of employment are valid in law and do not violate Fundamental Rights as enshrined in the Constitution of India. Hence, in the opinion of this Court, disputes relating to lock-in periods that apply during the subsistence of employment contracts, are arbitrable in terms of the Act, 1996.” Considering the above discussion, the Delhi HC allowed the petition and appointed a sole arbitrator to arbitrate the dispute between the parties. Future Implications for Employers: The Hon’ble Delhi HC has opened a new avenue of discussion for all employers by upholding the arbitrability of employment disputes arising out of negative covenants such as lock-in periods. The judgement is in line with some other High Court rulings, including Weiss Technik India Private Limited  Vs. Ms. Bollupalli Madhavilata,[9] wherein the Telangana High Court has held that where a valid arbitration clause exists in an employment agreement or as a separate agreement which encompasses all disputes arising out of the employment agreement, it shall be referred to an arbitrator, and it will not be permissible to retract from arbitration. The judgement will not only protect employers against the financial burden as a result of training costs of new employees but will also encourage employers to choose arbitration over the labour courts for adjudication of employment dispute resolution. Going Forward: Considering this judgement, it becomes pertinent for employers to draft reasonable and robust negative covenant and arbitration clauses in the employment agreement that protect the business interest of the employers. Authors: Gyanendra Mishra and Maruti Nandan Footnotes [1] MANU/DE/4537/2024 [2] (2023) SCC OnLine SC 1422 [3] (2023) 4 SCC 1 [4] MANU/WB/0175/1885 [5] AIR 1967 SC (1098) [6] (2006) 4 SCC 227 [7] MANU/DE/0152/2015 [8] (2008) SCC OnLine Del 1075 [9] MANU/TL/0403/2021