Corporate Law Corner

10. Kediya Ceramics, In re

[2017] 86 taxmann.com 166 (NCLT – Ahd.)                               
Date of Order: 22^nd September, 2017

Sections 230 to 232 of Companies Act, 2013 – Partnership firm
which is not registered under the provisions of Companies Act, 2013 is a body
corporate but not a company – The firm cannot participate in the amalgamation
proceedings under sections 230 to 232 of the Companies Act, 2013.

K Co
(the applicant) was a partnership firm, registered under the Indian Partnership
Act, 1932 and was formed on 05.02.2015. The Applicant along with six other
companies sought to amalgamate with a company under a scheme of amalgamation
filed before the NCLT.

The
primary issue before the Tribunal was whether a registered partnership firm,
being a body corporate, could be treated as a “company” for the
purpose of sections 230-232 of the Companies Act, 2013.

The
Applicant put forth the following contentions before the Tribunal:

1.  Section 2(11) read with section 2(95) of
Companies Act, 2013 (the Act) indicates that a firm is a body corporate and
therefore, entitled to proceed u/s. 232 of the Act for an amalgamation.

2.  Section 366 of the Act which deals with
entities authorised to register as a “company” includes any
partnership firm. It was also stated that Explanation (b) to section 375(4)
stipulates that the expression “unregistered company” shall include
any partnership firm consisting of more than seven members.

3.  Reference was drawn to section 394(4)(b) of
Companies Act, 1956 which stipulates that transferee company does not include
any company other than a company within the meaning of the Act, whereas a
transferor company includes any body corporate within the meaning of the said
Act or not.

4.  It was further contended that section 234(2)
of the Companies Act, 2013 provides for merger of a foreign company (whether a
company or a body corporate) into a company registered under the Act or vice-versa.

5.  Reliance was placed on judgments of Bombay
High Court in Philip J. vs. Ashapura Minechem Ltd. [2016] 66 taxmann.com
328/134 SCL 416, Kerala High Court in Co. Pet. No. 30/2014 in the matter of
Manjilas Agro Foods (P.) Ltd. and High Court of Calcutta in the matter of
Rossell Industries Ltd., In re [1995] 6 SCL 79 (Cal.)           

The
Tribunal examined the various arguments that were put forth by the Applicant.
It was observed that section 2(20) defines a company as a company incorporated
under the provisions of the Act or under any previous company law. The
Applicant is not a company incorporated under the Companies Act, 2013 or under
any other previous Companies Act that was in force on the date of the
registration of the firm; and consequently not a “company” as defined under section
2(20) of the Act.

It was
held that the Applicant, being a partnership firm was “body corporate” within
the meaning of section 2(11) of the Act. Regarding the first two contentions,
the Tribunal observed that section 2(95) applied only when the phrase used has
not been defined under the Act. Since the word company has been defined,
recourse cannot be taken to provisions of section 2(95). Further, section 366
only contemplates which entities are authorised to be registered as a company
under the Companies Act. Thus, the Tribunal was of the view that a partnership
firm unless registered under the Companies Act by making use of section 366 of
the Companies Act cannot be included as a company.

The
Tribunal examined the provisions of section 394(4)(b) of Companies Act, 1956
which permitted a scheme of amalgamation between a transferor company
registered as a partnership firm and a transferee company, but not vice-versa.
It was held that there was no similar provision in sections 230 and 232 of the
Act. In the absence of such specific provision in the Companies Act, 2013
relating to amalgamation, it could not be said that even a body corporate can
participate in the scheme of amalgamation.

The
Tribunal further observed that section 234 had no application in the case of a
body corporate incorporated in India.

Lastly,
the Tribunal distinguished the cases relied upon by the Applicant and proceeded
to hold that the applicant, being a registered partnership firm and a body
corporate, is not a company within the meaning of the Companies Act, 2013 and,
therefore, it cannot participate in the amalgamation proceedings that are
initiated under the provisions of sections 230 to 232 of the Act.

I Co
is a non-profit company and filed a public interest litigation for strict
enforcement of Investor Education and Protection Fund Authority (Accounting,
Audit, Transfer and Refund) Rules, 2016 (“the 2016 Rules”) by every
company transferring shares to the Investor Education and Protection Fund (“the
Fund”). Companies Act, 2013 (the Act) provides that unpaid dividends accruing
in a company are to be transferred to an Unpaid dividend account (UDA). The Act
also provides for transfer of funds from UDA to the Fund, if no payout were
made for seven years. New section 124(6) has been introduced which further
provides that shares which yield dividends that remain unpaid for over seven
(7) years, would be transferred to the Fund.

The
petition describes the scheme of the Rules framed on 05.07.2016. It was
submitted that an impractical procedure was devised, which the authorities
realised and therefore, amended the Rules on 28.02.2017 (“first
amendment”) and later, on 13.10.2017 (“second amendment”). Rule
6.

It was
argued that there was complete lack of clarity with respect to the three month
period to be given to shareholders for the purpose of applying to claim their
shares from the respective companies before their vesting to the Fund.

The
High Court observed that the crux of controversy was operationalisation of
section 124(6) which statutorily transfers shares to the Fund in the
eventuality of dividends lying unclaimed for over seven years. Such shares are
merely transferred for safekeeping by the Fund and do not become the property
nor do they vest in the Central Government. Thus, the shareholder continues to
retain title but loses agency.

The
Court held that the sum and substance of the Rules was that the companies were
mandated to follow two crucial steps – one, inform the shareholders about the
manner of vesting of shares and in that regard provide three clear months
before the date of statutory transfer and two, ensure that the further
conditions and changes introduced by the first and second amendments, granting
relief to certain classes of shareholders who might have either in the interim
encashed dividends or approached them to reclaim the shares, were protected.

The
due date of transfer was an unclear concept under the old Rules – originally
notified on 05.09.2016, the Rules were modified and the date of transfer
shifted to 31.10.2017. However, several instances of non-compliance of three
months notice period were highlighted by the Applicant. The Court, however,
held that it could not go into specific violations and non-compliances in this
PIL.

The
Court held that section 124(6) did not result in a statutory vesting of any
property; it merely transferred (through transmission of) shares in companies
which have yielded dividends for seven years that have not been claimed to the
Fund which then holds them as a custodian. The Court directed the Central
Government to devise appropriate procedures to enable shareholders to reclaim
their property in the shares, by an appropriate procedure.

For
the duration of transfer of the shares, the companies could   not  
issue  bonus shares or add
anything prohibited u/s.126.
The Rules, especially the first and second amendments, had the effect of giving
companies adequate time to notify and comply with the three month public notice
period to their shareholders about the event of transfer. The Court also
observed that the transfer of such shares is not a one-time measure but an
ongoing event given the obligation of each company to identity such shares
after the holding of every Annual General Meeting.

K Co
rendered certain services to M Co, the payment for which was to be made by M
Co. There was a non-disclosure agreement signed between K Co and M Co in
respect of these services; the terms of which were allegedly breached by K Co.
Since the services were rendered, K Co raised the invoices to M Co. M Co
refused to make these payments as there was a breach of terms contained in the
NDA K Co filed a petition in NCLT Mumbai initiating insolvency resolution
process against M Co. The Tribunal dismissed the application citing that there
existed a dispute and the case was hit by section 9(5)(ii)(d) of the Insolvency
and Bankruptcy Code, 2016 (the Act).

K Co
filed an appeal before the NCLAT Mumbai which held that NCLT should have
considered what constituted ‘dispute’ and in the facts of this case, defence
claiming dispute was not a bonafide one. Accordingly, it directed NCLT to
consider the application if it was a complete one.

M Co
filed a statutory appeal before the Supreme Court against the order of
Appellate Tribunal.

The
Supreme Court examined the history of the legislation as also the existing
framework of the legislation. The Supreme Court also went on to observe the
evolution in language of definition of the word ‘dispute’ as used in draft of
the Insolvency and Bankruptcy Code submitted by the Bankruptcy Law Reform
Committee in November 2015 (the “BLRC Draft”) vis-a-vis the definition
placed on record of the statute. The original definition of “dispute” has now
become an inclusive definition and the word “bona fide” before “suit or
arbitration proceedings” stands deleted.

The
Supreme Court examined the scheme of Act. Under section 8(1) of the Act, an
operational creditor, may, on the occurrence of a default (i.e., on non-payment
of a debt, any part whereof has become due and payable and has not been
repaid), deliver a demand notice of such unpaid operational debt or deliver the
copy of an invoice demanding payment of such amount to the corporate debtor in
certain specified form. Under section 8(2)(a), the corporate debtor, within a
period of 10 days of the aforesaid receipt must bring to the notice of the
operational creditor the existence of a dispute and/or the record of the
pendency of a suit or arbitration proceeding filed before the receipt of such
notice or invoice in relation to such dispute. It was observed that the
existence of the dispute and/or the suit or arbitration proceeding must be
pre-existing – i.e. it must exist before the receipt of the demand notice or
invoice, as the case may be.

The
Supreme Court, taking into account the importance of the term ‘existence’
occurring before the word ‘dispute’ under sections 8(2)(a) and 9(5)(ii)(d) of
the Act, laid down a checklist for the adjudicating authority to consider
admission or rejection of application u/s. 9 of the Act for initiating the
insolvency resolution process. It proceeded to state that the word ‘and’ used
in section 8(2) was to be read as ‘or’.

The
Court held that word ‘bonafide’ could not be read into the present framework.
All that the adjudicating authority is to consider is whether there is a
plausible contention which requires further investigation and that the
“dispute” is not a patently feeble legal argument or an assertion of fact
unsupported by evidence. Principles laid down in Madhusudan Gordhandas vs.
Madhu Woollen Industries Pvt. Ltd. [(1972) 2 SCR 201] are inapplicable to
the Act.

Examining
the contentions raised by the counsels, the Supreme Court came to a conclusion
that the dispute in relation to the NDA did in fact exist and therefore,
Appellate Tribunal was incorrect in characterising the defense as vague, got-up
and motivated to evade liability.

The order
passed by NCLAT was thus set aside. _