By Pooja J. Punjabi, Chartered Accountant
1. Yenugu Krishna Murthy vs. UOI
W.P. Nos. 7819, 7820/2018 and 7821/2018 (GM-RES)
Date of Order: 26th February, 2018
Section 164(2) read with section 167 of the
Companies Act, 2013 – The said section is constitutionally valid – Validity of
provision of law cannot be questioned merely because it operates a little
harshly on the directors of defaulting company
FACTS
Y was a director under the
Companies Act, 2013. His DIN status appeared as “disqualified” on the website
of Ministry of Corporate Affairs. The reason for the same in brief was
“Violated Section 164(2)(a)”. Y admittedly, did not seek a copy of
the order from the Registrar Of Companies (“ROC”). Further neither had he approached
ROC nor was he served any show cause notice or adjudication order u/s. 164(2)
of Companies Act, 2013 (“the Act”).
Before the High Court, it
was urged that directors were put in a very piquant and irreparable situation
and even if, disqualification on account of non-filing of financial statements
and Annual Returns in one company does take place for which they may not be
personally liable, they incur the ‘disqualification’ u/s. 164(2)(a) of the Act
and they are deemed to have vacated the office of the director in other such
companies also as per section 167 of the Act.
HELD
The High Court held that
the writ petitions in the instant case were premature as the directors did not
even try to approach the appropriate authority under the Act, namely, the ROC,
seeking even a copy of the order u/s.164(2)(a) of the Act, which might have
been passed by it. In absence of adequate facts the High Court could not
conclude whether Y was at fault or not; whether he had brought the relevant
facts to the notice of the ROC or not.
If Y had approached the ROC
with the relevant facts, it would be duty bound to pass a reasoned and speaking
order. ROC has the quasi-judicial powers and an obligation under the Act to
pass such appropriate orders in the matter.
As far as constitutional
validity of sections were concerned, the High Court observed that provisions
could not be held to be illegal, unconstitutional or ultra vires merely
because they may operate harshly against the Directors of the defaulting
company. It observed that the academic questions or the legislative wisdom is
not the subject matter to be decided by the Courts of law unless such questions
are raised in properly instituted cases, based on proper factual foundation of
the case.
Accordingly, the writ
petitions were dismissed by the Court.
2. Dr. Reddy’s Research Foundation vs. Ministry of Corporate
Affairs
[2018] 142 CLA 351 (AP HC)
Date of Order: 6th October, 2017
Rule 14 of the Companies (Appointment and Qualification of
Directors) Rules, 2014 – There is a lacuna in the procedure that is required to
be followed by the Companies, which are defaulted in filing their annual
returns and the consequent disqualification of the Directors to rectify the
defect.
FACTS
D Co had failed to furnish
annual returns for the years 2011-12 to 2015-16 and financial statements for
the years 2012-13 to 2015-16. Consequently, the directors of the company were
disqualified to act as directors under the provisions of Companies Act, 2013.
Rule 14 of the Companies (Appointment
and Qualification of Directors) Rules, 2014, prima facie provides for
rectifying the defect by enabling the defaulting companies to file their
returns. The company will have to act through its Directors in order to do so.
However, as the directors are disqualified, they are not able to file these
returns because the e-platform through which this is required to be done cannot
be accessed owing to the disqualification.
D Co thus, approached the
High Court seeking remedy for the inherent inconsistency.
HELD
The High Court observed
that there is a lacuna in the procedure that is required to be followed by the
Companies, which are defaulted in filing their annual returns and the
consequent disqualification of the Directors to rectify the defect.
Taking a note of the
anomalous situation, the High Court directed that the DIN of the directors be
restored in respect of D Co so that they are able to submit the returns in
accordance with Rule 14.
3. Power Grid Corporation of India Ltd. vs. Jyoti Structures Ltd.
[2018] 142 CLA 285 (Del HC)
Date of Order: 11th December, 2017
Section 14 of the Insolvency & Bankruptcy Code, 2016 read with
section 34 of Arbitration And Conciliation Act, 1996 – Proceedings u/s. 34 of
Arbitration Act which are in favour of corporate debtor would not be stayed
even though a moratorium has been granted to such corporate debtor.
FACTS
Arbitral tribunal had given
an award dated 20.05.2016 which was in the nature of pure money decree in
favour of J Co. Counter claim of P Co had been rejected by the Arbitrator and
claim of J Co was upheld. During the pendency of these proceedings u/s. 34 of
the Arbitration And Conciliation Act, 1996, (“Arbitration Act”) an application
u/s. 7 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) was filed by a
financial creditor against J Co. Through an order dated 04.07.2017 the National
Company Law Tribunal (“NCLT”) admitted the application and declared a
moratorium in terms of section 14 of the Code.
P Co filed a petition u/s.
34 of the Arbitration Act claiming that proceedings under said section be kept
in abeyance in terms of embargo contained under section 14(1)(a) of the Code.
HELD
The High Court having read
the provisions of section 14(1) of the Code observed that the term ‘proceedings’
as is mentioned in section 14(1)(a) of the Code is not preceded by the word
‘all’ to indicate the moratorium provisions would apply to all the proceedings
against the corporate debtor. The High Court relied on the report of the
Bankruptcy Law Reforms Committee which demonstrated that moratorium is to apply
to recovery actions and filing of new claims against the corporate debtor and
the purpose behind moratorium is that there should be no additional stress on
the assets of the corporate debtor.
It was argued that once the
moratorium comes into effect, no proceedings against the corporate debtor may
continue. However, the High Court held that it was important to consider the
nature of these proceedings. Stay of
proceedings against an award in favour of the corporate debtor would rather be
stalking the debtor’s effort to recover its money and hence would not fall in
the embargo of section 14(1)(a) of the Code.
It was held that
proceedings would not be hit by section 14 of the Code due to following
reasons:
(a) “ ‘proceedings’ do not mean ‘all proceedings’;
(b) moratorium under section 14(1)(a) of the Code
is intended to prohibit debt recovery actions against the assets of corporate
debtor;
(c) continuation of proceedings under section 34
of the Arbitration Act which do not result in endangering, diminishing,
dissipating or adversely impacting the assets of corporate debtor are not
prohibited under section 14(1)(a) of the Code;
(d) the term ‘including’ is clarificatory of the
scope and ambit of the term ‘proceedings’;
(e) the term ‘proceeding’ would be restricted to
the nature of action that follows it i.e. debt recovery action against assets
of the corporate debtor;
(f) the use of narrower term “against the
corporate debtor” in section 14(1)(a) as opposed to the wider phase
“by or against the corporate debtor” used in section 33(5) of the
Code further makes it evident that section 14(1)(a) is intended to have
restrictive meaning and applicability;
(g) the Arbitration Act draws a distinction
between proceedings under section 34 (i.e. objections to the award) and under
section 36 (i.e. the enforceability and execution of the award). The
proceedings under section 34 are a step prior to the execution of an award.
Only after determination of objections under section 34, the party may move a
step forward to execute such award and in case the objections are settled
against the corporate debtor, its enforceability against the corporate debtor
then certainly shall be covered by moratorium of section 14(1)(a).”
Once the
moratorium is declared the decision to continue with the objections need to be
taken only by the Resolution Professional. The High Court observed that in the
peculiar circumstances of this case where a counter claims was preferred by the
objector, though rejected, it would be appropriate if the interim resolution
profession be made aware of the proceedings and he consents to its
continuation.
