By Pooja J. Punjabi, Chartered Accountant
1.
Bhagavan Das Dhananjaya Das vs. Union of India [2018] 96 taxmann.com 189
(Madras)
W.P. NOS. 25455 OF 2017 AND 25456, 25729,
26654, 16903, 16970, 16995, 16999, 17151, 17161 of 2018 & Oths.
Date of Order: 3rd August, 2018
Section 164(2) of the Companies Act, 2013 –
Disqualification of directors – The provision which came into effect on
01.04.2014 cannot be given a retrospective effect especially when the
disqualification clause did not trigger in the previous regime
FACTS
B was a
director of B Co a private limited company incorporated under the Companies
Act, 1956 (“1956 Act”). He was also a director in other company S Co which was
also a private limited company incorporated under the 1956 Act. B Co had no
operations and was lying dormant till the year 2012.
In the year
2012, the directors planned to revive the company and there was infusion of
additional share capital as well as introduction of three new members to the
Board of B Co (one of them being Mr. B). The revival plan did not fructify and
B Co continued to remain a dormant company. B Co did not file its annual
returns from financial year 2012-13. The last annual return filed was in
respect of financial year 2011-12.
Registrar Of Companies (“ROC”) on 18.03.2017
issued a show cause notice for striking off the name of B Co. There being no
plans to revive the company, B Co issued a no objection letter to the ROC for
striking off. On 08.09.2017 ROC issued a list of directors disqualified u/s.
164(2)(a) of Companies Act, 2013 (“2013 Act”) which included name of B as well.
Accordingly, B would be prohibited from acting as a director in any other
company for a period of 5 years.
Aggrieved, B filed a writ petition before
the Hon’ble Madras High Court. B contended that provisions of section 164(2)(a)
came into effect from 01.04.2014. Applicability of the section would commence
in respect of financial years commencing from 01.04.2014 and should not apply
in respect of offences committed prior to that date.
HELD
The High Court examined the provisions of
section 274(1)(g) of 1956 Act and section 164 (2)(a) of the 2013 Act. The
former section only disqualified a director from being appointed as a director
in any “public” company for a period of 5 years which was broadened under the
2013 Act to any company. The High Court observed that section 164(2)(a) was
made effective from 1.4.2014, as per section 2(41) of the 2013 Act, the first
financial year for the purpose of section 164 of the 2013 Act would be
31.3.2015 i.e., from 1.4.2014 to 31.3.2015. ROC thus wrongly applied section
164(2)(a) from financial year 01.04.2013.
The High Court further held that the
disqualification of directors of a private company could get triggered only on
or after 30.10.2017, hence, the list of disqualified directors published on the
website of the first respondent in September, 2017 had no legal legs to stand
up to the scrutiny of the Court under Article 226 of the Constitution of India.
It was observed that General Circular
No.08/14 dated 4.4.2014 also has made it clear that in respect of the financial
year commencing on or after 01.04.2014, the provisions of the new Act shall
apply, the first financial year for the purpose of section 164(2)(a) shall be
1.4.2014 to 31.3.2015 and the second and third financial years would be from
1.4.2015 to 31.3.2016 and from 1.4.2016 to 31.3.2017 respectively.
The High Court observed that by virtue of
the first proviso to section 96(1) of the 2013 Act, Annual General Meeting for the
year ending on 31.3.2017 can be held within six months from the closing of
financial year i.e., 30.9.2017, additionally in the light of section 164(2)(a)
referring to “annual return” and “financial statement”, the
time limit to file annual return u/s. 92(4) of 2013 Act is sixty days from
Annual General Meeting or the last date on which Annual General Meeting ought
to have been held, hence, the time limit to file balance sheet u/s. 137(1) of
the 2013 Act is again thirty days from Annual General Meeting. The
disqualification could get triggered off only on or after 30.10.2017 only, if
any company fails to file annual forms for three financial years. Even beyond
that time limit, additional time limit of 270 days was available by virtue of
the then first proviso to Section 403.
The High Court observed that ROC although
sent a show cause notice to B Co before striking off its name, it did not give
any such notice to B before disqualifying him as a director.
A company can be struck off if that company
has not been carrying on any business for a period of two financial years and
if their directors had not filed the financial statements or annual returns for
any continuous period of three financial years, they shall be, no doubt,
disqualified to be reappointed as a director of that company for a period of
five years from the date on which the said company fails to do so, whereas for
disqualification of the directors u/s. 164(2)(a), there must be a default for
not filing the financial statement or annual return for a continuous period of
three financial years.
The ROC should have sent a notice to B
before taking any action, as it affects its right to continue as directors in
other companies which are complying with the provisions of law.
The High Court however clarified that the
mischief of removal of the names of the companies by the Registrar of Companies
and the disqualification of the directors in the defaulting company will go
together, as it is inseparable, and the ROC need not give fresh notice to the directors
for their disqualification from the dormant company, if there is a failure to
file the financial statement or annual return for any continuous period of
three financial years as per section 164(2)(a).
The High Court thus set aside the order and
allowed the writ petitions filed before it.
2.
Dinesh Kumar Bhasin vs. Batliboi Impex Ltd.[2018] 96 taxmann.com 94
(NCL-AT)
COMPANY APPEAL (AT) (INSOLVENCY) NO. 318 of
2018
Date of Order: 29th June, 2018
Section 9 of Insolvency and Bankruptcy
Code, 2016 – NCLT admitted the petition against the corporate debtor which was
filed by the operational creditor for default in payment of certain sum – A
shareholder of the corporate debtor challenged the admission on the ground that
the same was passed without hearing the corporate debtor – The order of the
NCLT was set aside – The dispute was already settled and hence, the same was
not remanded back to NCLT
FACTS
B Co filed an application u/s. 9 of the
Insolvency and Bankruptcy Code, 2016 (“the Code”) for initiating corporate
insolvency resolution process against T Co (“Corporate debtor”). National
Company Law Tribunal (“NCLT”) admitted the application, passed order of
‘Moratorium’ and pursuant to proceeding, an ‘Interim Resolution Professional’
was appointed.
Mr. D, a shareholder of T Co, objected to
the order of the NCLT on the grounds that an opportunity of being heard was not
afforded to B Co. Had B Co been heard, it could have pointed out the grounds
for rejection and in case of non-acceptance, it could have settled the dispute.
It was submitted to the NCLAT that T Co and
B Co had arrived at a settlement.
HELD
NCLAT held that the order of the NCLT was
passed without giving the corporate debtor an opportunity of being heard.
Accordingly, the same was liable to be set aside.
However, as the parties had already come to
a settlement, the same could not be remanded back to NCLT.
B Co was further ordered to bear the cost of
resolution professional appointed through the order of NCLT.
3.
[2018] 96 taxmann.com 271 (SC)
State Bank of India vs. V. Ramakrishnan
CIVIL APPEAL NOS. 3595 & 4553 of 2018
Date of Order: 14th August, 2018
Section 14 of the Insolvency and Bankruptcy
Code, 2016 – Moratorium for limited period mentioned in the Code would not
apply to personal guarantor of a corporate debtor – Amendment to section 14(3)
was clarificatory in nature and accordingly would have a retrospective
application
FACTS
V was the Managing Director of corporate
debtor and also its personal guarantor in respect of credit facilities availed
from State Bank of India (“SBI”). The guarantee agreement is dated 22.02.2014.
Owing to non-payment of debt, account of the corporate debtor was classified as
a non-performing asset on 26.07.2015 and proceedings under SARFAESI Act were
initiated.
On 20.05.2017 corporate debtor filed a
petition to initiate corporate insolvency resolution process against itself
which was admitted on 19.06.2017 and moratorium was statutorily imposed in
terms of section 14 of the Insolvency and Bankruptcy Code, 2016 (“the Code”).
V took up a plea that moratorium would apply
to the personal guarantor as well and as a consequence the proceedings against
personal guarantor ought to be stayed. National Company Law Tribunal (“NCLT”)
admitted the plea and restrained SBI from moving against V.
An appeal filed by SBI against the order of
NCLT before the NCLAT was also dismissed. The reasoning was that since the
personal guarantor can also be proceeded against, and forms part of a
Resolution Plan which is binding on him, he is very much part of the insolvency
process against the corporate debtor, and that, therefore, the moratorium
imposed u/s. 14 should apply to the personal guarantor as well.
HELD
Supreme Court examined various provisions of
the Code.
Section 2(e) as substituted by the Amendment Act, 2018 which came into effect
from 23.11.2017 specifically provides that provisions of the Code shall apply
to personal guarantors to corporate debtors. It was observed that Part III of
the Code titled “Insolvency Resolution and Bankruptcy for Individuals and
Partnership Firms” was not yet been brought into force. The repealing
provision, namely section 243, which repeals the Presidency Towns Insolvency
Act, 1909 and the Provincial Insolvency Act, 1920, was also not been brought
into force. Section 249, which amends the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, so that the Debt Recovery Tribunals under
that Act can exercise the jurisdiction of the Adjudicating Authority conferred
by the Code, was also not been brought into force.
Supreme Court observed that on a plain
reading, moratorium referred to in section 14 can have no manner of application
to personal guarantors of a corporate debtor. It was observed that so far as
personal guarantors were concerned, Part III has not been brought into force,
and neither has section 243, which repeals the Presidency-Towns Insolvency Act,
1909 and the Provincial Insolvency Act, 1920. The net result of this was that
so far as individual personal guarantors were concerned, they will continue to
be proceeded against under the aforesaid two Insolvency Acts and not under the
Code. It was further observed that use of the word “bankruptcy” in section
60(2) of the Code would not include SARFAESI proceedings but only to the two
Insolvency Acts referred to above.
It was observed that the scheme of section
60(2) and (3) was thus clear – the moment there was a proceeding against the
corporate debtor pending under the Code, any bankruptcy proceeding against the
individual personal guarantor would, if already initiated before the proceeding
against the corporate debtor, be transferred to the NCLT or, if initiated after
such proceedings had been commenced against the corporate debtor, be filed only
in the NCLT. However, NCLT would decide such proceedings only in accordance
with the Presidency-Towns Insolvency Act, 1909 or the Provincial Insolvency
Act, 1920, as the case may be.
Section 31 which was relied upon by V, only
stated that once a Resolution Plan, as approved by the Committee of Creditors,
takes effect, it shall be binding on the corporate debtor as well as the
guarantor. Supreme Court observed that this was for the reason that otherwise,
u/s. 133 of the Indian Contract Act, 1872, any change made to the debt owed by
the corporate debtor, without the surety’s consent, would relieve the guarantor
from payment. Section 31(1), in fact, makes it clear that the guarantor cannot
escape payment as the Resolution Plan, which has been approved, may well
include provisions as to payments to be made by such guarantor.
It was further observed that sections 96 and
101, when contrasted with section 14, would show that section 14 cannot
possibly apply to a personal guarantor. It was open for the Supreme Court to
mark the difference in language between sections 14 and 96 and 101, even though
sections 96 and 101 were not yet been brought into force. This was for the
reason that a law ‘made’ by the Legislature is a law on the statute book even
though it may not have been brought into force.
Upon examining the history of the Code and
previous enactments, the Court observed that Parliament, specifically did not
provide for any moratorium along the lines of section 22 of the Sick Industrial
Companies (Special Provisions) Act, 1985 in section 14 of the Code.
It was observed that Amendment of 2018,
which makes it clear that section 14(3), is now substituted to read that the
provisions of section 14(1) shall not apply to a surety in a contract of
guarantee for corporate debtor. It was held that object of the Amendment was to
clarify an overbroad interpretation of section 14 and such the same was a
clarificatory amendment which would be retrospective in nature.
The order of the NCLT was thus set aside.
